Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
13808 CAT. NO. 97 2859 7 ISBN 0644 519096
1996-97-98
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TAXATION LAWS AMENDMENT BILL (NO. 4) 1998
EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon Peter Costello, MP)
1. Sales Tax (Exemptions and Classifications) Act 1992 11
2. Fringe benefits tax 19
3. Commercial debt forgiveness 39
4. New South Wales Police Integrity Commission 41
5. Deductions for gifts 43
6. Tax Law Improvement Project (TLIP) - technical corrections 45
7. Tax Law Improvement Project (TLIP) - update amendments 55
8. Depreciation of plant previously owned by an exempt entity 61
9. Arrangements treated as a sale and loan and limited recourse debt 103
10. Franking of dividends by exempting companies and former exempting companies 137
Amends Item 192 of the Sales Tax (Exemptions and Classifications) Act 1992 to ensure that sales tax exemption for goods incorporated into properties owned by, or leased to, always exempt persons (AEPs) or the government of a foreign country is only available for the purchase of goods principally for their own use or for use by organisations conducting the business of AEPs or the government of a foreign country.
The following types of property will also be ineligible for sales tax exemption:
_symbol 183 \f "Symbol" \s 10 \h__ shops and shopping centres
_symbol 183 \f "Symbol" \s 10 \h__ hotels
_symbol 183 \f "Symbol" \s 10 \h__ casinos
_symbol 183 \f "Symbol" \s 10 \h__ apartment blocks.
Date of effect: Any dealing from date of introduction into Parliament.
Proposal announced: Not previously announced.
Financial impact: Estimated gain in revenue of $10 million in
1997-98 and
$50 million in 1998-99 and subsequent years.
Compliance cost impact: The Compliance Cost Impact Statements are incorporated into the Regulation Impact Statements which appear at the end of Chapter 1 of the Explanatory Memorandum.
_symbol 183 \f "Symbol" \s 10 \h__ There is a deficiency in the sales tax law which allows a private entity who has a contract with an always exempt person (AEP) or a government of a foreign country (foreign government) to obtain the benefit of a sales tax exemption for certain goods incorporated into properties owned by, or leased to, that AEP or foreign government. That deficiency can only be overcome by making an amendment to the Act.
_symbol 183 \f "Symbol" \s 10 \h__ The amendment will have the effect that private entities who have contracts with AEPs or foreign governments will no longer be entitled to the sales tax exemption for goods attached to land owned by, or leased to, AEPs or foreign governments, where the land is not used by the AEP or foreign government but used by a private entity as, eg, a casino, shopping centre or other commercial development.
_symbol 183 \f "Symbol" \s 10 \h__ The amendment facilitates competitive neutrality:
- between entities operating on properties owned by or leased to an AEP or foreign government and entities who conduct a similar business on other properties without access to sales tax free goods; and
- between functions performed directly by AEPs or foreign governments and functions carried out by a private entity on behalf of an AEP or foreign government.
_symbol 183 \f "Symbol" \s 10 \h__ This measure will result in an estimated gain to revenue of $10 million in 1997-98 and $50 million in 1998-99. The compliance costs for this measure cannot be reliably quantified because it is uncertain how many people have structured their arrangements to gain the unintended access to the sales tax exemption. The administrative costs to the ATO of this change relate mainly to advising clients on the application of the proposed amendments to various construction projects. The compliance costs to taxpayers (including contractors and subcontractors involved in the construction or repair of properties belonging to or leased by an AEP or a foreign government) due to this change involve:
- learning about the change to the law; and
- incurring costs in obtaining professional advice as to their tax status.
_symbol 183 \f "Symbol" \s 10 \h__ The benefit of removing the unintended access to the exemption outweighs the costs of this measure. The ATO will monitor this measure as part of the whole taxation system on an ongoing basis, as well as obtaining feedback through consultation with professional, small business and other taxpayer consultation forums.
Amends the Fringe Benefits Tax Assessment Act 1986 to:
_symbol 183 \f "Symbol" \s 10 \h__ exempt certain employers from keeping records for fringe benefits tax (FBT) purposes and, providing certain conditions are met, allow those employers to calculate their FBT liability for an FBT year on the basis of fringe benefits provided in a previous FBT year; and
_symbol 183 \f "Symbol" \s 10 \h__ exempt certain benefits consisting of places in student exchange programs from FBT.
The record keeping exemption arrangements will complete the Government's response to the FBT recommendations made by the Small Business Deregulation Task Force in November 1996. The other FBT measures, for which legislation has already been introduced, deal with taxi travel, car parking and the arranger provisions. Together these measures will reduce FBT compliance costs for most employers and, in particular, for small businesses.
Date of effect: Eligible employers will have their FBT liability for the 1998/99 FBT year and later FBT years calculated by reference to a base year. The exemption from keeping FBT records for eligible employers will apply to benefits provided from the day that Royal Assent is received. A special transitional provision is also proposed to enable employers to use either the 1996/97 or 1997/98 FBT year as their first base year.
The exemption relating to student exchange programs will apply for the FBT year commencing on 1 April 1996 and all later FBT years.
Proposal announced: The record keeping exemption arrangements were announced in the Prime Minister’s statement More Time for Business on 24 March 1997. The exemption relating to student exchange programs was not previously announced.
Financial impact: The record keeping exemption arrangements (RKEA) are expected to result in a loss to revenue of $5 million in the 1998/99 financial year, $25 million in 1999/2000 and $20 million in 2000/2001 and 2001/2002. The cost to the revenue of the exemption relating to student exchange programs is not expected to be significant.
Compliance cost impact: The Compliance Cost Impact Statement for the RKEA is incorporated into the Regulation Impact Statement which appears at the end of Chapter 2.
_symbol 183 \f "Symbol" \s 10 \h__ compliance costs will be reduced for those employers who provide the same kinds and value of benefits each year;
_symbol 183 \f "Symbol" \s 10 \h__ a reduction in compliance costs will arise because of the time and other resources saved in preparing, storing and accessing FBT records;
_symbol 183 \f "Symbol" \s 10 \h__ while approximately 30,000 small business employers could have access to the RKEA, it is difficult to estimate the number of employers who will use the RKEA;
_symbol 183 \f "Symbol" \s 10 \h__ employers will still have to retain records for benefits provided by associates; and
_symbol 183 \f "Symbol" \s 10 \h__ employers will need to recommence record keeping when there is a material variation in the value of fringe benefits being provided.
Amends the Income Tax Assessment Act 1936 to require that:
_symbol 183 \f "Symbol" \s 10 \h__ the forgiven amount of a debt be applied, where relevant, to reduce unrecouped net capital losses in respect of all years of income before the forgiveness year of income, rather than the immediately preceding year of income;
_symbol 183 \f "Symbol" \s 10 \h__ where a taxpayer incurs a net capital loss in a year of income earlier than the forgiveness year of income, and the loss is reduced by the operation of the debt forgiveness provisions, the loss will also be reduced for the purposes of the capital gains tax provisions.
Date of effect: The amendments will apply to the debts forgiven after the date of introduction. [Item 3 of Schedule 3]
Proposal announced: Not previously announced.
Financial impact: There should be no significant impact on revenue as the amendments merely ensure the debt forgiveness rules operate as intended.
Compliance cost impact: There should be no impact on compliance costs as taxpayers have to keep records of prior year net capital losses under the existing law.
Amends the Taxation Administration Act 1953 to include the NSW Police Integrity Commission within the definition of 'law enforcement agency' for the purpose of obtaining access to taxation information.
Date of effect: Date of Royal Assent.
Proposal announced: Not previously announced.
Financial impact: None.
Compliance cost impact: None.
Amends the Income Tax Assessment Act 1997 to allow income tax deductions for gifts made to the Menzies Research Centre Public Fund.
Date of effect: The amendments will apply to donations to the fund from the date of introduction of the Bill.
Proposal announced: Treasurer’s Press Release No. 102 of 10 October 1996.
Financial impact: The amendments do not have any significant impact on revenue.
Compliance cost impact: None.
Makes technical corrections to income tax and other legislation to correct minor errors made in the first two instalments of TLIP's rewrite of the Income Tax Assessment Act 1936.
Date of effect: Applies to assessments for the 1997-98 and later income years.
Proposal announced: Not previously announced.
Financial impact: Nil.
Compliance cost impact: None.
Amend income tax legislation to ensure that the rewrite of the income tax law reflects recent legislation. This will comprise a rewrite of the 1936 Act provisions that exempt certain education and training payments as amended by Taxation Laws Amendment Act (No.1) 1997 and as proposed to be amended by Social Security (Youth Allowance Consequential and Related Measures) Bill 1998.
Date of effect: Applies to assessments for the 1998-99 and later income years.
Proposal announced: Not previously announced.
Financial impact: Nil.
Compliance cost impact: None.
Inserts new Division 58 into the Income Tax Assessment Act 1997 to set a common base for the depreciation deductions for plant that can be claimed by exempt entities which become taxable and by taxable entities which purchase plant from an exempt entity in connection with the acquisition of a business. The depreciation deductions available to such entities will be taken from a base which is a choice between the notional written down value of the plant at the time it enters the tax net and its undeducted pre-existing audited book value at that time. The amendments include a safeguard measure designed to ensure that, where such plant is on-sold to a subsequent owner, a balancing amount is included in the assessable income or deductions of the first taxable owner to reflect the special depreciation base which applies to that owner and so as to compensate for the effect on the on-sale price of the special depreciation base not applying to the purchaser.
Date of effect: Applies to exempt entities which first become
taxable on or after
4 August 1997 and to acquisitions of plant by taxable
entities from an exempt entity on or after 4 August 1997.
Proposal announced: Treasurer's Press Release No. 84 of 4 August 1997.
Financial impact: No additional revenue is expected compared to current Budget estimates. However, failure to implement this measure poses a potentially significant threat to the revenue.
Compliance cost impact: There may be a minimal increase in compliance costs for affected entities.
_symbol 183 \f "Symbol" \s 10 \h__ This measure will affect purchasers of assets formerly owned by tax exempt entities and purchasers of formerly exempt entities.
_symbol 183 \f "Symbol" \s 10 \h__ The measures are designed to align the treatment of asset sales with the treatment of sales of shares in the entity.
Amends the income tax law to :
_symbol 183 \f "Symbol" \s 10 \h__ include an amount in the assessable income of a taxpayer where amounts are unpaid on the termination of a hire purchase or limited recourse debt arrangement. The adjustment will apply where capital expenditure has been financed by the hire purchase or limited recourse debt but, because amounts remain unpaid, deductions have been allowed that exceed deductions that would be allowable if based on actual outlays;
_symbol 183 \f "Symbol" \s 10 \h__ treat taxpayers who acquire capital assets by hire purchase or instalment sale as the owners of those assets for the purpose of determining eligibility for capital allowance deductions and relevant anti-avoidance provisions;
_symbol 183 \f "Symbol" \s 10 \h__ treat a hire purchase or instalment sale as though it were a loan transaction. If the asset is used for income producing purposes, the hire purchaser is able to deduct the finance charge component of the hire purchase payments, and the financier is taxed on that component of the payments, but not the payments themselves.
Date of effect: Adjustments to taxable income relating to
unpaid amounts under hire purchase and limited recourse debt arrangements apply
to such arrangements which terminate after 27 February 1998. The rules which
treat hire purchasers as the owners of assets under hire purchase, and a hire
purchase arrangement as a sale, loan and debt transaction, apply to relevant
transactions entered into after
27 February 1998.
Proposal announced: 1997-98 Budget, 13 May 1997 and by Treasurer's Press Release No 60 of 1997 and No 21 of 1998.
Financial impact: This measure will increase revenue by
approximately
$10 million in 1998-99, $30 million in 1999-2000, $25 million
in 2000-01,
$30 million in 2001-02 and $30 million in 2002-03.
Cost of compliance impact: The initial and recurrent compliance costs are estimated to be less than $1 million per annum.
A Regulation Impact Statement is included at the end of Chapter 9 of the Explanatory Memorandum.
To ensure that total deductions for allowable capital expenditure do not exceed the total amount actually expended by a taxpayer where the expenditure has been financed under hire purchase or limited recourse debt arrangements.
Option 1: Insert a 'capital expenditure adjustment rule' to apply on termination of the financial arrangement. The adjustment amount is the difference between the total net capital allowance deductions obtained and deductions that would be allowable on the basis of the capital amount actually expended by the taxpayer under the financing arrangement. The adjustment amount would be included in the borrower's assessable income.
Option 2: Incorporate a capital expenditure adjustment rule into existing adjustment calculations which apply on the disposal of property. This option would amend existing rules that apply to various capital allowance provisions. The amendment would ensure that any unpaid principal under the financial arrangement was included in the calculation of any adjustment rule on disposal of the relevant property.
_symbol 183 \f "Symbol" \s 10 \h__ This measure affects taxpayers claiming capital allowances on property financed by hire purchase or non-recourse debt and who do not discharge their payment obligations.
_symbol 183 \f "Symbol" \s 10 \h__ The number of private ruling requests will increase in the short term. This workload is expected to be dealt with within existing resources.
_symbol 183 \f "Symbol" \s 10 \h__ To the extent that proposed rules which treat a hire purchaser as the owner of the property for capital allowances will formalise the existing administrative practice, no significant additional compliance costs to taxpayers are expected.
_symbol 183 \f "Symbol" \s 10 \h__ Compliance costs are likely to be less under Option 1 because the adjustment rule would be common to all capital allowances.
_symbol 183 \f "Symbol" \s 10 \h__ The initial and recurrent compliance costs of this proposal are estimated to be less than $1 million per annum on the expectation that only a small percentage of taxpayers will terminate their hire purchase or non-recourse debt transactions while amounts are unpaid.
Option 1 is preferred. It requires less complex legislative drafting and its application on the termination of the relevant financial transaction eliminates any additional adjustments that may be necessary if the capital expenditure adjustment were to apply on disposal of the underlying asset.
Amends the Income Tax Assessment Act 1936 by introducing a rule that limits the source of franking credits available for trading by:
_symbol 183 \f "Symbol" \s 10 \h__ prescribing that franked dividends paid by companies which are effectively wholly owned by non-residents or tax-exempts will only provide franking benefits in limited circumstances; and
_symbol 183 \f "Symbol" \s 10 \h__ quarantining the franking surpluses of companies which were formerly wholly owned by non-residents or tax-exempts.
The measures will also ensure that non-resident shareholders in receipt of franked dividends from affected companies will continue to be exempt from dividend withholding tax.
Date of effect: Subject to the transitional measures explained in Chapter 10, the rule to limit the source of franking credits available for trading will apply to:
_symbol 183 \f "Symbol" \s 10 \h__ companies that are effectively wholly owned by non-residents or tax-exempts at 7.30 pm AEST, 13 May 1997;
_symbol 183 \f "Symbol" \s 10 \h__ companies that are effectively wholly owned by non-residents or tax-exempts at 7.30 pm AEST, 13 May 1997 and cease to be so owned; and
_symbol 183 \f "Symbol" \s 10 \h__ companies which become effectively wholly owned by non-residents or tax-exempts at a time after 7.30 pm AEST, 13 May 1997.
Proposal announced: 1997-98 Budget.
Financial impact: The amendments are part of a package of measures targeting franking credit trading and dividend streaming that will protect the revenue base. In the absence of the measures, to the extent that the revenue base would not be protected, there would be a significant revenue loss. The measures will result in unquantifiable revenue gains to the extent of existing tax minimisation.
Compliance cost impact: There is unlikely to be any significant compliance costs associated with the proposed measures. The rule will not apply to taxpayers unless they are wholly owned by non-residents to tax-exempts or have ceased to be so wholly owned.
The policy objective is to prevent franking credit trading by limiting the source of franking credits available for trading.
_symbol 183 \f "Symbol" \s 10 \h__ The measure will impact on companies and their tax advisers (e.g. members of the legal and accounting professions) who are effectively wholly owned, or have, since 13 May 1997, been effectively wholly owned by non-residents or tax-exempts.
_symbol 183 \f "Symbol" \s 10 \h__ The measure will also impact on the ATO (in administering the rule, for example, information campaigns), the Government (in that the revenue base will be protected) and non-residents and tax-exempt shareholders (who are no longer able to transfer franking credits).
_symbol 183 \f "Symbol" \s 10 \h__ The implementation option adopted avoids the need, for most companies, to create a separate account: this minimises compliance costs for those companies, as well as significantly limiting the number of amendments required to the tax laws.
_symbol 183 \f "Symbol" \s 10 \h__ The amendments to the income tax law to implement this option are based on existing provisions of the tax law which are familiar to companies.
_symbol 183 \f "Symbol" \s 10 \h__ The alternative option would involve greater compliance costs and complexity without any commensurate additional benefits.
1.1 This chapter deals with an amendment of the Sales Tax (Exemption and Classifications) Act 1992 (the Act). The measure deals with property owned or leased by always exempt bodies.
1.2 Item 1 of Schedule 2 to the Bill will remove the unintended access to sales tax exemption for certain goods used in the construction or repair of property owned by, or leased to, an always exempt person (AEP) or the government of a foreign country (foreign government) unless:
_symbol 183 \f "Symbol" \s 10 \h__ the property is principally occupied by the AEP or the foreign government; or
_symbol 183 \f "Symbol" \s 10 \h__ the occupant has a contract to provide services to the AEP or the foreign government and the property is used principally for the provision of those services.
1.3 Item 1 also provides details of properties which will be ineligible for the exemption regardless of the occupier or owner.
1.4 The amendment proposes to overcome a deficiency in the sales tax law which allows a private entity who has a contract with an AEP or foreign government to obtain the benefit of sales tax exemption for certain goods incorporated into properties owned by, or leased to, that AEP or foreign government.
1.5 The amendment will apply to any dealing after the date of introduction of the Bill into Parliament. [Item 2]
1.6 Item 192 in Schedule 1 to the Act provides a sales tax exemption for certain goods incorporated into any property owned or leased by an AEP or foreign government.
1.7 It is a condition of the exemption that a contract must exist between the AEP or foreign government and the person who incorporates the goods into the property. Alternatively, where the property is privately owned and leased by the AEP or foreign government, the contract would be between the lessor and the person carrying out the work. In the latter case the exemption only covers work that is required to be done under the lease with the AEP or foreign government.
1.8 This exemption is available regardless of whether the AEP or foreign government is ever to occupy the property, and regardless of whether the activity to be conducted from the property is related to the purposes of the AEP or foreign government.
1.9 The broad scope of Item 192 of the Act is being used for commercial development on land owned by, or leased to, an AEP or foreign government. In particular it is being used to ensure that at least part of the exemption is going to private sector commercial developments at the expense of the Commonwealth revenue. This provides unfair competitive advantages to these developments.
1.10 Examples of the types of private sector projects benefiting from the Item 192 exemption by taking advantage of being located on land leased from or owned by State and local governments include:
_symbol 183 \f "Symbol" \s 10 \h__ the building of residential apartments by private consortia;
_symbol 183 \f "Symbol" \s 10 \h__ the refurbishment of shopping centres;
_symbol 183 \f "Symbol" \s 10 \h__ the building and refurbishment of private sports facilities; and
_symbol 183 \f "Symbol" \s 10 \h__ the fitout of major hotels and casinos.
1.11 Item 1 provides that where exemption is currently available under the existing Item 192 of the Act, it will only continue to be available where:
_symbol 183 \f "Symbol" \s 10 \h__ the property constitutes housing which is provided by an AEP at a rate below market rate; or
(a) the property is
_symbol 183 \f "Symbol" \s 10 \h__ occupied principally by an AEP or foreign government; or
_symbol 183 \f "Symbol" \s 10 \h__ used by a service provider to an AEP or foreign government where the property is used principally for providing those services; and
(b) not ineligible Item 192 property.
1.12 The following properties are ineligible Item 192 properties:
_symbol 183 \f "Symbol" \s 10 \h__ shops and shopping centres;
_symbol 183 \f "Symbol" \s 10 \h__ hotels;
_symbol 183 \f "Symbol" \s 10 \h__ casinos;
_symbol 183 \f "Symbol" \s 10 \h__ apartment blocks;
_symbol 183 \f "Symbol" \s 10 \h__ any properties mainly consisting of a kind which are similar to the above type of properties; and
_symbol 183 \f "Symbol" \s 10 \h__ any properties of a type prescribed by regulation as ineligible Item 192 properties. [Item 1]
1.13 The application of Item 192 is illustrated by the following chart:
_embed MSDraw \* mergeformat ___
1.14 The policy objective of this measure is to remove unintended access to the sales tax exemption, under Item 192 of the Act, for goods used in the construction or repair of property owned by, or leased to an always exempt person or foreign government.
1.15 The objective can only be achieved by an amendment to the Act.
1.16 The following groups will be impacted by the proposed amendment:
_symbol 183 \f "Symbol" \s 10 \h__ some AEPs e.g. Public Benevolent Institutions, Commonwealth, State and local Governments, public and private non-profit hospitals, public and private non-profit schools and universities where these bodies own or construct properties that are unlikely to satisfy the new requirements of Item 192, exemption will no longer be available for goods used to construct or repair those properties;
_symbol 183 \f "Symbol" \s 10 \h__ some contractors and subcontractors who purchase goods for use in the building or refurbishment of properties for always exempt persons and foreign governments;
_symbol 183 \f "Symbol" \s 10 \h__ some private businesses currently receiving sales tax exemption for goods used in the construction or repair of properties on land belonging to, or leased by an AEP or foreign government, will lose that entitlement as a result of the proposed amendment;
_symbol 183 \f "Symbol" \s 10 \h__ the Australian Taxation Office (ATO); and
_symbol 183 \f "Symbol" \s 10 \h__ some private sector tax professionals.
1.18 The compliance costs to taxpayers due to this change involve:
_symbol 183 \f "Symbol" \s 10 \h__ learning about the change to the law; and
_symbol 183 \f "Symbol" \s 10 \h__ incurring costs in obtaining professional advice as to their tax status.
Other costs
1.19 The administrative costs to the ATO of this change relate mainly to advising clients on the application of the proposed amendments to various construction projects.
1.20 This measure will result in an estimated gain to revenue of $10 million in 1997-98 and $50 million in 1998-99.
Other benefits
1.21 The exemption was wide enough to provide a sales tax exemption for goods incorporated into properties owned by, or leased to, AEPs and foreign governments but used by people other than AEPs or foreign governments. However, some private sector firms have captured the benefit of this exemption for projects in a manner not envisaged by the Parliament e.g. casinos, shopping centres etc. The amendment will have the effect that private entities who have contracts with AEPs or foreign governments will no longer be entitled to the sales tax exemption for goods attached to land owned by, or leased to, AEPs or foreign governments but which are not used by the AEP or foreign government. The amendment will not apply where the private entity carries out the kind of function ordinarily performed by the AEP or foreign government on their behalf.
1.22 This amendment incorporates competitive neutrality between functions performed directly by AEPs or foreign governments and functions carried out by a private entity on behalf of an AEP or foreign government.
1.23 Entities operating on properties owned by or leased from an AEP or foreign government will no longer enjoy the competitive advantage of obtaining sales tax free goods compared to other parties who conduct similar business on other properties and do not enjoy access to sales tax free goods.
1.24 This measure is designed to remove unintended access to the sales tax exemption, under Item 192 of the Act, and as such it was not possible to engage in public consultation prior to the measure being introduced into the Parliament.
1.25 The benefit of removing unintended access to the exemption outweighs the costs of this measure. The ATO will monitor this measure, as part of the whole taxation system, on an ongoing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and small business associations and through other taxpayer consultation forums.
2.1 Schedules 2 and 12 of the Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to:
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ introduce new Part XIA containing the legislative provisions to govern the proposed new record keeping exemption arrangements (RKEA); [Schedule 12] and
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ exempt certain benefits relating to student exchange programs from fringe benefits tax (FBT). [Schedule 2]
2.2 The RKEA will provide that, if certain conditions are met:
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ employers will be exempt from keeping and retaining most of the records otherwise required for FBT purposes; and
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ those employers may have their FBT liability for a later year determined using the aggregate fringe benefits amount from an earlier base year for which FBT records were kept.
2.3 The RKEA are specifically targeted at those employers whose base year fringe benefits do not exceed a threshold amount ($5,000 for the 1996/97 FBT year). The RKEA will provide a reduction in compliance costs for small FBT payers who do not make a material change in the value and type of benefits provided each year.
2.4 The RKEA will complete the Government’s response to the FBT recommendations made by the Small Business Deregulation Task Force in November 1996. The other FBT measures, for which legislation has already been introduced, deal with taxi travel, car parking and the arranger provisions. All the measures are about reducing FBT compliance costs for employers.
2.5 The two FBT measures in the Bill are explained in the following sections of this Chapter:
Section 1 Record keeping exemption arrangements
Section 2 Regulation Impact Statement for the record keeping exemption arrangements
Section 3 Exemption from FBT for certain benefits relating to student exchange programs
2.6 Unless otherwise stated, section references throughout this Chapter are references to the FBTAA.
2.7 The proposed RKEA will reduce compliance costs by allowing certain employers:
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ not to keep FBT records for an FBT year; and
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ to have their FBT liability for that FBT year determined from the aggregate fringe benefits amount of an earlier base year in which FBT records were kept.
2.8 The record keeping exemption aspect of this measure will apply in relation to benefits provided from the day Royal Assent is received. The concessional liability aspect of the RKEA will apply in respect of the 1998/99 and later FBT years. [Clause 2 and item 4 of Schedule 12]
2.9 The general record keeping requirement is set out in section 132. An employer is required to keep records that explain all transactions and other acts that are relevant for ascertaining the employer’s FBT liability. An employer must retain those records for a period of 5 years after the completion of the transactions or acts to which they relate.
2.10 Where an associate of an employer provides benefits to the employer’s employees, the associate must keep and retain those records for a period of 5 years and provide a copy of those records to the employer, who must also retain those records for 5 years.
2.11 In addition, an employer is required under section 123 to retain substantiation records, called statutory evidentiary documents, that are required to support the substantiation rules. Where an employer fails to retain a statutory evidentiary document for 5 years, that document is deemed never to have been given to the employer. For example, an employer would be unable to reduce the taxable value of a fringe benefit under the otherwise deductible rule if the relevant substantiation records had not been retained.
2.12 An employer’s FBT liability for a year is determined from the ‘aggregate fringe benefits amount’ for the year. This amount is defined in subsection 136(1), broadly, as the sum of the taxable values of all fringe benefits provided by an employer during the FBT year. Section 66 imposes FBT in respect of an employer’s ‘fringe benefits taxable amount’. The fringe benefits taxable amount is defined in section 136AA, broadly, as the grossed up amount of the ‘aggregate fringe benefits amount’ of the employer.
2.13 All employers will be eligible for the RKEA except employers who are:
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ government bodies as defined in subsection 136(1); or
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ exempt from income tax on all of their income at any time during the year. [New paragraph 135E(2)(b) and section 135J]
2.14 Table 1 at the end of this section provides an overview of how the RKEA will operate. New Part XIA which contains the proposed RKEA provisions has 3 Divisions as follows:
2.15 To qualify for the RKEA for an FBT year (the current year), an employer must satisfy both conditions in new section 135B. The two conditions are that the employer must:
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ have established an FBT base year; and
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ not have been given a notice from the Commissioner of Taxation under new paragraph 135E(2)(c) during the FBT year immediately before the current year requiring the employer to resume record keeping.
2.16 A base year will be established for an employer in relation to the current year where either:
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ the FBT year immediately before the current year was a base year [new paragraph 135B(2)(a)]; or
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ an earlier FBT year was a base year and the employer’s FBT liability for every FBT year after that base year and before the current year was determined under new section 135G by using the employer’s aggregate fringe benefits amount for that earlier FBT year [new paragraph 135B(2)(b)].
2.17 If an employer who has qualified for the RKEA by establishing a base year chooses to have the FBT liability determined from the aggregate fringe benefits amount for the current year, the employer will not be able to rely on that base year in the year following the current year. This is because the continuity between the base year and the year following the current year would be broken. The employer would have to establish a new base year to qualify for the RKEA again. It should be noted that, in these circumstances, the current year could be a base year in relation to the following FBT year if the requirements in new section 135C (which are discussed below at paragraph 2.19) are satisfied.
2.18 As a transitional measure, employers will be able to use either the 1996/97 or the 1997/98 FBT year, or a later FBT year, as their first base year. An employer who wishes to qualify for the RKEA in the 1998/99 FBT year will only be able to use the 1996/97 FBT year as the base year if the aggregate fringe benefits amount in the 1997/98 FBT year is not more than 20% greater than the aggregate fringe benefits amount for the 1996/97 base year. This tolerance rule, which is set out in new section 135K, is explained below at paragraphs 2.32 - 2.42. [Item 5 of Schedule 12]
2.19 An FBT year will be a base year in relation to an employer if:
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ the employer has carried on business operations throughout the FBT year [new paragraph 135C(1)(a)];
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ the employer has lodged an FBT return for the FBT year [new paragraph 135C(1)(b)]. Some employers provide fringe benefits but the aggregate fringe benefits amount of the fringe benefits is nil, for example, because of employee contributions. These employers are not generally required to lodge returns. However, these employers would need to lodge an annual return to 'enter' the RKEA;
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ all the records for the FBT year have been kept and retained as required under section 132 [new paragraph 135C(1)(c)]. Employers who are relying on section 132A to obtain the necessary documentary evidence within a reasonable time are still able to treat a year as a base year where that documentary evidence is obtained;
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ the aggregate fringe benefits amount for the FBT year does not exceed the exemption threshold [new paragraph 135C(1)(d)]; and
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ the employer’s FBT liability for the FBT year is worked out from the aggregate fringe benefits amount for that year and not an earlier base year [new paragraph 135C(1)(e)]. This condition will ensure that a base year will continue to be relevant until an employer's FBT liability is determined from the aggregate fringe benefits amount for the current year. The FBT years following a base year will not become base years simply because the other requirements of new sections 135B and 135C are satisfied in relation to those years.
Chart 1 at the end of this section shows how to work out whether an FBT year is a base year.
2.20 The exemption threshold for the FBT year commencing on 1 April 1996 is $5,000. The threshold for a later FBT year will be the previous year's threshold as adjusted by a factor equal to the percentage increase, if any, in the Consumer Price Index for the year ending on the previous 31 December. The increase is worked out by dividing the sum of the index numbers for the four quarters ending 31 December by the sum of the corresponding index numbers for the previous year. The index number is to be calculated to three decimal places. [New subsections 135C(2) to (8)]
2.21 The increased threshold amounts for the 1997/98 and 1998/99 FBT years are $5,130 and $5,145 respectively. These amounts reflect CPI movement factors referred to in new subsection 135C(4) of 1.026 and 1.003 respectively for the years ending 31 December 1996 and 1997.
2.22 The second condition necessary to qualify for the RKEA for a current year is set out in new subsection 135B(3). The condition is that an employer must not have been given a notice from the Commissioner under new paragraph 135E(2)(c) requiring the employer to resume record keeping during the FBT year immediately before the current year. It is envisaged that the Commissioner would issue a notice when there is reason to suspect that the value of benefits provided by an employer had increased well above the limit allowed for remaining in the RKEA and an employer had insufficient records available to refute that position. On receipt of a new paragraph 135E(2)(c) notice, an employer would not be eligible to re-enter the RKEA until the employer had established a new base year.
2.23 The main consequences of qualifying for the RKEA for a current FBT year are that employers:
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ will not be required to keep or retain FBT records for that year in accordance with subsection 132(1), subject to certain exceptions [new section 135E]; and
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ may have their FBT liability for the current year determined under new section 135G from their aggregate fringe benefits amount from an earlier base year in which FBT records were kept.
2.24 New subsection 135E(2) describes the circumstances when employers, despite qualifying for the RKEA by satisfying the conditions in new section 135B, will still need to keep and retain FBT records. The circumstances include those described in:
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ new paragraph 135E(2)(a) which covers copies of records that an associate of the employer provides to the employer under subsection 132(2). These records relate to benefits provided by the associate to the employer’s employees;
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ new paragraph 135E(2)(b) which covers situations where an employer’s status changes to either an income tax exempt body or a government body. In such cases, records would be required to be kept from the day the employer’s status changed; and
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ new paragraph 135E(2)(c) which covers situations where an employer receives a notice from the Commissioner requiring the employer to recommence keeping and retaining records. This requirement will apply from the date the employer is given such a notice.
2.25 An employer will be required to keep records for a base year for a period of 5 years after the end of the last FBT year for which the base year is relevant in determining the employer’s liability. Examples of the operation of this rule are set out in Chart 2 at the end of this section. [New section 135F]
2.26 Subject to certain exceptions, an employer’s FBT liability for the current year will be worked out using the employer’s aggregate fringe benefits amount for the employer’s most recent base year instead of the current year. [New section 135G]
2.27 Employers who cease business during the current year will also be able to take advantage of the concessions available under the RKEA under new section 135L. Employers in these circumstances who do not wish to have their FBT liability determined using the aggregate fringe benefits amount for the current year will be able to pro rate their base year aggregate fringe benefits amount in accordance with the proportion of the current year during which they were in business. New section 135L is discussed in more detail at paragraph 2.43.
2.28 There are three exceptions which will result in an employer’s FBT liability for a current year being determined using the employer’s aggregate fringe benefits amount for the current year rather than the aggregate fringe benefits amount for the base year. These exceptions are provided in new sections 135H, 135J and 135K, which are discussed below at paragraphs 2.30 - 2.42.
2.29 There is an important consequence for employers where new sections 135H, 135J and 135K apply. While these employers will continue to be exempt from the record keeping requirement for the current year under subsection 132(1), they will not be exempt from the operation of section 123. They would need to obtain and retain any relevant substantiation records if they wish to rely on any exemptions or reductions in the taxable value of fringe benefits. Of course, employers in these circumstances are given some protection against the operation of section 123 by section 123B, under which the substantiation rules do not apply if an employer has alternative evidence that is acceptable to the Commissioner.
2.30 An employer may choose under new section 135H to use the aggregate fringe benefits amount for the current year rather than the aggregate fringe benefits amount for the base year. An employer might choose the current year aggregate fringe benefits amount when that amount is less than the base year amount.
2.31 An employer will not be able to use the aggregate fringe benefits amount for a base year where the employer is a government body or an income tax exempt body at any time during the current year. [New section 135J]
2.32 An employer will not be able to use the aggregate fringe benefits amount from a base year when the aggregate fringe benefits amount in the current year is more than 20% greater than the amount in the employer’s most recent base year. [New subsection 135K(1)]
2.33 A concession is provided for employers whose aggregate fringe benefits amount in the base year is less than $500. These employers will be able to exceed the 20% test in the current year and still have their current year FBT liability determined from their base year aggregate fringe benefits amount providing the difference between the aggregate fringe benefits amounts in the current and base year is $100 or less.
Example: The aggregate fringe benefits amount of an employer in the base year is $150. In the current year for which the employer has qualified for the RKEA, the aggregate fringe benefits amount is $200 (an increase of 33%). Although the increase of $50 represents more than 20%, it is less than $100. This employer would not be disqualified from remaining in the RKEA in the following year and could continue to use the same aggregate fringe benefits amount for determining the employer's FBT liability.
2.34 Given that employers who qualify for the RKEA are not required to keep FBT records, they may experience some difficulties in determining the aggregate fringe benefits amount in a current year for the purpose of applying the 20% tolerance test described above.
2.35 The RKEA are specifically targeted at employers whose fringe benefits do not significantly alter in amount each year. Further, the onus of proof will be on the employer to show that the level of benefits has remained within the 20% tolerance limit.
2.36 Against this background, special rules are proposed to assist employers in determining their aggregate fringe benefits amount for a current year even though FBT records may not have been kept. These rules, which deal with the retention of statutory evidentiary documents and the valuation of car fringe benefits, are discussed in more detail below. [New subsection 135K(2)]
2.37 Section 123 provides that these documents are deemed never to have been maintained where an employer fails to retain them for the required retention period. The effect of section 123 is to be disregarded for the purpose of determining the aggregate fringe benefits amount in the current year. This rule will ensure that the aggregate fringe benefits amount for a current year is not higher than it would have been had substantiation records been kept. [New subsection 135K(3)]
2.38 Special rules apply in calculating the taxable value of car fringe benefits under the statutory formula and cost basis methods to determine whether the aggregate fringe benefits amount in a current year has exceeded the 20% tolerance limit.
2.39 Where an employer used the statutory formula method under section 9 to determine the taxable value of a car fringe benefit, the annualised number of kilometres travelled by the car during that year is relevant in determining the appropriate statutory fraction under paragraph 9(2)(c).
2.40 When determining whether the aggregate fringe benefits amount for a current year is within the 20% tolerance allowed, the taxable value of the car may be determined by reference to the statutory fraction used in the first year that the car benefit is provided, which may be the base year, providing the annualised number of kilometres travelled in the current year is at least 80% of the annualised number of kilometres travelled in that first year that the car benefit is provided. This concession provides an additional safeguard when an employer is determining the aggregate fringe benefits for a current year. [New subsections 135K(4) & (6)]
Example: An employer provides only a car fringe benefit during the base year and uses the statutory formula method. The base value of the car is $25,000 and the car has travelled 15,500 km. The taxable value of the car fringe benefit would be $5,000 ($25,000 x 0.20). In a later year (the current year), for which the employer has qualified for the RKEA, the car travels 13,100 km.
But for this 80% margin, the taxable value of the car fringe benefit would be $6,500 ($25,000 x 0.26). However, as the number of kilometres travelled by the car (13,100 km) is at least 80% of the number of kilometres in the base year (80% x 15,500 = 12,400 km), the taxable value of the car fringe benefit is $5,000 for the purpose of determining whether the aggregate fringe benefits amount for the current year is within the tolerance limit.
2.41 Where an employer uses the cost basis method under section 10, a parallel concession will apply to the business use percentage under subsection 10(2).
2.42 When determining the aggregate fringe benefits amount for a current year, the employer may use the business use percentage for the first year that the car benefit is provided, which may be the base year, if the business use percentage for the current year is not more than 20 percentage points lower than the business use percentage for that first year that the car benefit is provided. [New subsections 135K(5) & (6)]
Example: An employer qualified for the RKEA in a base year when the business use percentage was 70%. In a later FBT year the actual business use percentage drops to 55%.
As the business use percentage has dropped by 15 percentage points (i.e., not more than 20 percentage points) in relation to the base year, the employer can use a business use percentage of 70% to determine the aggregate fringe benefits amount for the current year.
2.43 New section 135L will assist those employers who have qualified for the RKEA but who cease to carry on business operations during the current year. This provision is necessary to enable those employers to remain in the RKEA for part of an FBT year and have their liability determined from a proportion of the aggregate fringe benefits amount in the employer’s most recent base year. These employers would also be able to choose to have their FBT liability determined from the current (part) year aggregate fringe benefits amount using new section 135H.
Example: An employer has been using the RKEA for a few years and having the FBT liability determined using the base year aggregate fringe benefits amount of $4,800. The employer ceases business operations after 146 days of the current year. New section 135L will apply so that:
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ the 20% tolerance limit under new subsection 135K(1) for the purposes of comparing the aggregate fringe benefits for the current year with the base year amount will be $2,304 (146/365 x 4800 x 1.2); and
_σψμβολ 183 ∴φ ∀ψμβολ∀ ∴σ 10 ∴η__ providing the current year aggregate fringe benefits amount is not more than $2,304, the FBT liability under new section 135G will be determined assuming aggregate fringe benefits of benefits of $1,920 (146/365 x $4,800).
2.44 It is envisaged that employers who qualify for the RKEA with an earlier base year would, in the FBT return for the current year, be required to indicate the relevant base year, for which the conditions set out in new section 135B were satisfied; and confirm that new sections 135H, 135J and 135K did not apply for the current year.
2.45 Employers who qualified for the RKEA for the current year but who chose, or were required, to have their FBT liability determined from the aggregate fringe benefits amount for the current year would simply complete their FBT returns in relation to benefits provided in the normal way.
Employer satisfies Division 2 requirements in respect of a current year and ..._Record keeping requirements for the current year_FBT liability for the current year_Effect on eligibility status for the RKEA in the following year__... takes advantage of Division 3 by having the FBT liability determined using the aggregate fringe benefits amount for the most recent base year_Exempt from keeping FBT records, except for:
• copies of records provided by associates._Calculated using the aggregate fringe benefits amount for the most recent base year._No effect – the employer continues to be eligible for the RKEA.___New section 135E: see paragraphs 2.23 -2.25._New section 135G: see paragraph 2.26_New section 135B: paragraph 2.16.__... employer chooses to use aggregate fringe benefits amount of the current year_Exempt from keeping FBT records, except for:
• copies of records provided by associates._Calculated using the aggregate fringe benefits amount for the current year._Not eligible unless the current year is established as a new base year.___New section 135E: see paragraphs 2.23 -2.25._New section 135H: see paragraphs 2.28 - 2.30._New sections 135B & 135C: see paragraphs 2.17, 2.19 & 2.20.__Employer satisfies Division 2 requirements in respect of a current year and ..._Record keeping requirements for the current year_FBT liability for the current year _Effect on eligibility status for the RKEA in the following year__... aggregate fringe benefits amount for the current year increases above the 20% tolerance allowed_Exempt from keeping FBT records, except for:
• copies of records provided by associates._Calculated using the aggregate fringe benefits amount for the current year._Not eligible unless the current year is established as a new base year.___New section 135E: see paragraphs 2.23 - 2.25._New section 135K: see paragraphs 2.28, 2.29 and 2.32 - 2.42._New sections 135B & 135C: see paragraphs 2.19 & 2.20.__... ceases business part way through the year_Exempt from keeping FBT records, except for:
• copies of records provided by associates._Providing that the 20% tolerance test (pro-rated) is satisfied, the liability is calculated using a proportion of the aggregate fringe benefits amount of the base year. Otherwise the aggregate fringe benefits amount of the current year could be used._Not applicable.___New section 135E: see paragraphs 2.23 - 2.25._New sections 135H, 135K and 135L: see paragraphs 2.27 and 2.43.___... receives a Commissioner’s notice_Must resume keeping FBT records from receipt of notice from Commissioner._Calculated using the aggregate fringe benefits amount for the most recent base year._Not eligible.___New para. 135E(2)(c): see paragraph 2.24._New section 135G: see paragraph 2.26._Subsection 135B(3): see paragraphs 2.15 and 2.22.__
_embed Word.Document.8 \s \* mergeformat ___
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2.46 The policy objective of this measure is to reduce the compliance costs of record keeping for small business by exempting employers from the requirement to keep records for fringe benefits tax (FBT) purposes in certain circumstances.
2.47 The measure was announced in a statement by the Prime Minister entitled More Time for Business on 24 March 1997 in response to the recommendations of the Small Business Deregulation Task Force.
2.48 The general record keeping requirement is set out in section 132 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). An employer is required to keep records that explain all transactions and other acts that are relevant for ascertaining the employer’s liability to FBT. An employer must retain those records for a period of 5 years after the completion of the transactions or acts to which they relate.
2.49 Where an associate of an employer provides benefits to the employer’s employees, the associate must keep and retain those records for a period of 5 years and provide a copy of those records to the employer. The employer must retain those records for 5 years.
2.50 In addition, an employer is required under section 123 of the FBTAA to retain documents, called statutory evidentiary documents, to support the substantiation rules. Where an employer fails to retain a statutory evidentiary document in relation to a fringe benefit for 5 years, the document is deemed never to have been given to the employer (and hence the employer is unable to rely upon it when determining the taxable value of the fringe benefit). For example, the taxable value of a fringe benefit can be reduced under the otherwise deductible rule only if an employer has complied with the substantiation rules.
2.51 There is only one option for implementing this measure. That is to amend the FBTAA.
2.52 Employers, other than government bodies and tax exempt bodies, who provide fringe benefits with a total taxable value of $5,000 or less in a particular FBT year (the base year) will be able to elect not to keep FBT records for future FBT years. The amount of $5,000 will be adjusted annually for the 1997/98 FBT year and later FBT years in line with movements in the Consumer Price Index.
2.53 For an FBT year that the record keeping exemption arrangements (RKEA) apply, an employer’s FBT liability will generally be the same as the employer’s liability in the base year. However, if there is a material increase in the value of benefits provided during the year, the employer’s liability will be calculated in the normal way. A material increase in the value of benefits would be an increase in the total value of fringe benefits of more than 20% of the total value of the benefits provided in the base year (unless the increase is $100 or less).
2.54 This measure will apply from the day Royal Assent is received. An employer who qualifies for the RKEA will not be required to keep FBT records from the day that Royal Assent is received for the amending legislation. Further, an employer will be able to use either the 1996/97 FBT year or the 1997/98 FBT year as the first base year for the RKEA.
2.55 This measure will affect employers, other than government bodies and tax exempt bodies, who provide fringe benefits with a total taxable value of $5000 or less in a particular FBT year and maintain a similar level of benefits in later years.
2.56 Those employers who are eligible for the RKEA will be able to elect not to keep most FBT records in later years provided there is not a material change in the value of benefits provided. Employers would still have to retain records which they receive from associates in respect of benefits provided to their employees by those associates.
2.57 Around 30,000 small businesses lodging returns and paying FBT may fall within the exemption threshold. However, it is difficult to estimate the number of employers that will use the RKEA. Some employers may have the scope to reduce the level of fringe benefits they provide below the exemption threshold. Others providing fringe benefits may not lodge returns (for instance, because the value of the fringe benefits is reduced to nil by employee contributions).
2.58 Some employers who would be eligible for the RKEA may continue to keep records because they may not be certain that the value of benefits will fall within the limits of the exemption. Other eligible employers who currently do not lodge FBT returns may continue to keep records because they do not wish to start lodging FBT returns.
2.59 This measure will not have a significant impact on the Government. This measure will impact on tax agents and accountants to the extent that they will need to familiarise themselves with the measure and advise employers as to whether they should utilise the RKEA.
2.60 The Australian Taxation Office will have to make minor changes to forms and systems to administer the RKEA.
2.61 The compliance costs of employers who qualify for the RKEA as proposed will be reduced because of the reduction in reporting costs, for example, that would be incurred in obtaining and storing FBT substantiation records.
2.62 However, employers would need to recommence record keeping when there is a material variation in the value of the benefits being provided. In addition, employers would need to retain records relating to benefits provided by associates.
2.63 The reduction in compliance costs would mainly be for those employers who maintain the same type and level of benefits year after year.
2.64 There would be some additional costs to the extent that employers will need to learn about the changes to the law and determine whether they qualify for the RKEA. However, these additional costs would be more than offset by the time saved by employers in preparing, storing and accessing the fringe benefits source documents, as they are currently required to do for FBT purposes. Therefore, there will be an overall saving in compliance costs.
2.65 This measure is expected to result in a loss to revenue of $5 million in the 1998/99 financial year, $25 million in 1999/2000 and $20 million in 2000/2001 and 2001/2002.
2.66 This measure will reduce the compliance costs for employers who qualify for the record keeping exemption arrangements. The Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system, on an ongoing basis. Feedback can be provided on this measure through the Department of Treasury and the Australian Taxation Office in the usual manner.
2.67 The amendments in Schedule 2 of the Bill will provide an exemption from FBT for benefits consisting of places in a student exchange program where an employer does not select, or participate in the selection of, the recipient of the benefit.
2.68 The amendment will apply in relation to assessments for the FBT year commencing on 1 April 1996 and all later FBT years. [Item 2]
2.69 Some student exchange bodies invite employers to purchase places in student exchange programs for their employees or their children. Under the existing law, a fringe benefit arises where an employer provides a place in a student exchange scheme for an employee or an associate of an employee.
2.70 New section 58ZB is inserted in Division 13 of Part III of the FBTAA to exempt from FBT benefits consisting of places in student exchange programs where certain conditions are satisfied. [Item 1]
2.71 For a benefit consisting of a place in a student exchange program to be an exempt benefit, the conditions set out in new subsection 58ZB(1) must be satisfied. In particular, new paragraph 58ZB(1)(c) stipulates that an employer (or an associate of the employer) must not select, or take part in the selection of, the recipient of the benefit. An employer would be considered to have taken part in the selection process where the employer controlled or influenced the selection of the recipient. A benefit will qualify for exemption only where the recipient is selected independently by the student exchange body.
2.72 A further condition is that the student exchange program must be an approved student exchange program. An ‘approved student exchange program’ is defined in new subsection 58ZB(2) as a student exchange program run by a student exchange body registered with the relevant State or Territory body in accordance with the National Guidelines for Student Exchange. These guidelines are published by the National Co-ordinating Committee for International Secondary Student Exchange.
3.1 Schedule 3 of the Bill will amend the commercial debt forgiveness provisions in the Income Tax Assessment Act 1936 (the Act) to ensure that amounts of commercial debt that are forgiven will be applied, where relevant, in reduction of a debtor's prior net capital losses in respect of all years before the forgiveness year of income, rather than the immediately preceding year of income.
3.2 The Bill will also amend the capital gains tax (CGT) provisions to provide that, where a taxpayer incurs a net capital loss in a year of income earlier than the forgiveness year of income, and the loss is reduced by the operation of the debt forgiveness provisions, then the loss will also be reduced for the purposes of the CGT provisions.
3.3 Both of these amendments are consequential upon amendments contained in Taxation Laws Amendment Act (No.2) Act 1997 (the No.2 Act).
3.4 The amendments will apply to the debts forgiven after the date of introduction. [Item 3 of Schedule 3]
3.5 The commercial debt forgiveness provisions, contained in Schedule 2C of the Act, apply to taxpayers who have been forgiven the whole or part of a commercial debt. Under the provisions in the existing law, a net forgiven amount is to be applied, in order, in reduction of the taxpayer's revenue losses, net capital losses, deductible amounts and cost bases of assets.
3.6 Where a net capital loss incurred by a taxpayer in a year of income is reduced by a net forgiven amount, the CGT loss provisions provide that only the reduced amount of the net capital loss is able to be recouped against future capital gains.
3.7 The rules governing the calculation of net capital losses were amended by the No.2 Act so that net capital losses would attach to the year in which they are incurred. Previously, all prior year net capital losses lost their identity and were absorbed into the taxpayer's current year net capital loss.
3.8 Currently, subsection 245-105(6) of the commercial debt forgiveness provision, which deals with the reduction of net capital losses, provides that the forgiven amount of the debt will be applied in reduction of net capital losses 'in respect of the year of income immediately preceding the forgiveness year of income'.
3.9 Further, subsection 160ZC(4E) of the CGT provisions, which is intended to ensure that only the reduced amount of a net capital loss can be recouped, only applies to a net capital loss which was incurred by a taxpayer 'in the immediately preceding year of income'.
3.10 These provisions do not reflect the general treatment of net capital losses which has applied since the amendments made by the No.2 Act came into effect. The proposed amendments will bring the commercial debt forgiveness provisions into line with the general net capital loss rules.
3.11 Amended subsection 245-105(6) will provide that the forgiven amount of a debt is to be applied in reduction of unrecouped net capital losses in respect of all years of income before the forgiveness year of income. [Item 2 of Schedule 3]
3.12 Amended subsection 160ZC(4E) will provide that where a taxpayer incurs a net capital loss in a year of income earlier than the forgiveness year of income, and the loss is reduced by the operation of the commercial debt forgiveness provisions, the loss will also be reduced for the purposes of the CGT provisions. [Item 1 of Schedule 3]
3.13 These amendments will ensure that the debt forgiveness rules are consistent with the general net capital loss rules.
4.1 Schedule 4 of the Bill amends section 2 of the Taxation Administration Act 1953 (the Act) to include the New South Wales Police Integrity Commission (PIC) in the definition of 'law enforcement agency'.
4.2 The amendments allow the Commissioner of Taxation to provide the PIC with taxation information under section 3E of the Act.
4.3 The amendments will enable the Commissioner to disclose information acquired under a taxation law to the PIC.
4.4 The amendments apply from the date of Royal Assent.
4.5 Section 3E of the Act provides the Commissioner with the discretion to disclose information acquired under a taxation law to an authorised law enforcement officer. The law enforcement agencies to which information may be disclosed are specified in the definition of 'law enforcement agency' in section 2 of the Act. The PIC is not listed in the definition.
4.6 The proposed amendments will amend section 2 of the Act to include the PIC in the definition of 'law enforcement agency' [item 2, new paragraph dae] and the Commissioner for the PIC in the definition of 'head' [item 1, new paragraph dae].
4.7 These amendments will enable the Commissioner to disclose information to the PIC from the date of Royal Assent. [Clause 2]
5.1 Schedule 5 of the Bill amends the Income Tax Assessment Act 1997 to allow income tax deductions for gifts made to the Menzies Research Centre Public Fund.
5.2 Items 1 and 2 of Schedule 5 of the Bill amends the Income Tax Assessment Act 1997 to allow income tax deductions for gifts of $2 or more to the Menzies Research Centre Public Fund.
5.3 This will be done by listing the Menzies Research Centre Public Fund in the table to subsection 30-40(2) of the Income Tax Assessment Act 1997 from the date of introduction of the Bill. The index to the gift provisions, found in the table to subsection 30-315(2) of the Income Tax Assessment Act 1997, will also be amended by including the Menzies Research Centre Public Fund as topic number 72A.
5.4 This amendment will result in gifts to the Menzies Research Centre Public Fund being tax deductible as follows:
Item
3.2.4_Fund
New Listings
Menzies Research Centre Public Fund_Gifts made after
Date of introduction_Gifts made before
6.1 The amendments in Schedules 6, 7 and 8 of the Bill make technical corrections to the income tax and other laws rewritten by the Tax Law Improvement Project (TLIP).
6.2 These measures make miscellaneous amendments to the:
_symbol 183 \f "Symbol" \s 10 \h__ Income Tax Assessment Act 1997;
_symbol 183 \f "Symbol" \s 10 \h__ Income Tax Assessment Act 1936;
_symbol 183 \f "Symbol" \s 10 \h__ Airports (Transitional) Act 1996;
_symbol 183 \f "Symbol" \s 10 \h__ Income Tax (Transitional Provisions) Act 1997; and
_symbol 183 \f "Symbol" \s 10 \h__ Tax Law Improvement Act 1997.
6.3 Schedules 6, 7 and 8 will amend minor technical errors that have arisen from the rewrite of the income tax laws. The amendments make corrections to the Income Tax Assessment Act 1997 (the 1997 Act) to correct errors in translating the fine detail of provisions of the Income Tax Assessment Act 1936 (the 1936 Act). They also make additional consequential amendments to the 1936 Act and corrections to provisions of the Income Tax (Transitional Provisions) Act 1997 and other Acts.
6.4 The amendments discussed in this chapter will apply to assessments for the 1997-98 and later income years.
6.5 The Parliament has enacted the first two instalments of the rewrite of the 1936 Act. The first instalment comprises three Acts:
_symbol 183 \f "Symbol" \s 10 \h__ the Income Tax Assesment Act 1997;
_symbol 183 \f "Symbol" \s 10 \h__ the Income Tax (Transitional Provisions) Act 1997; and
_symbol 183 \f "Symbol" \s 10 \h__ the Income Tax (Consequential Amendments) Act 1997.
Those Acts received Royal Assent on 18 April 1997 and have effect for the 1997-98 income year.
6.6 The second instalment is the Tax Law Improvement Act 1997 (TLIA 1997) which received Royal Assent on 8 July 1997. That Act amends the 1997 Act and its provisions also have effect for the 1997-98 income year.
Provision being amended: Section 2-30, which explains the reason for the gaps that have been left in the numbering system used in the 1997 Act.
Amendment will: Insert a more complete explanation of the circumstances in which link notes will be used to tell readers where to find the next provision.
Provision being amended: Subsection 4-10(3) which sets out how to calculate the income tax payable for a financial year.
Amendments will:
• Amend step 4 of the calculation to explain that a tax offset can only give rise to a refund of tax if a provision of the Act specifically allows it.
• Insert an additional note to subsection 4-10(3) which will identify some provisions that allow a refund for some tax offsets.
Reason for amendment: Existing step 4 of subsection 4-10(3) states that a refund of tax cannot arise where the total tax offsets for an income year exceed the basic income tax payable. Although this statement is generally true there are exceptions and a refund can arise under both the 1936 Act and the 1997 Act. New step 4 will make that clear and the additional note will alert readers to specific examples.
Provision being amended: Section 20-20, which defines assessable recoupment. Subdivision 20-A includes certain amounts in assessable income if they are received as a recoupment of a deductible loss or outgoing.
Amendments will: Ensure that the definition of assessable recoupment covers amounts received in an income year prior to the year in which a deduction is allowed.
Reason for amendments: It is doubtful whether the existing definition of assessable recoupment covers a recoupment received in an income year prior to the year in which a deduction is allowed. But the operative rules, subsections 20-35(3) and 20-40(1), expressly apply in those cases. The amendments ensure that, as in the 1936 Act, the recoupment rules apply if an amount is recouped in an income year prior to when a deduction arises.
Provision being amended: Section 41-30, which deals with the roll-over relief that is available under Common rule 1 of the capital allowance common rules on the disposal of property for which a capital allowance deduction has been claimed. In particular, it explains the respective entitlements of the transferor and transferee to claim a deduction for the property.
Amendment will: Insert a new subsection 41-30(2A) which will clearly provide that if the transferee gains the entitlement to the deduction of the transferor, the transferee cannot also deduct any expenditure incurred in acquiring the property.
Reason for amendment: It has been suggested that where roll-over relief is given under the 1997 Act to a transferor of property, the transferee may be entitled to claim both the transferor’s deduction and a deduction based on the expenditure incurred in acquiring the property. It is clear under the 1936 Act that the expenditure incurred in acquiring the property is not deductible. This amendment clearly restates the effect of the 1936 Act.
Provision being amended: Section 42-315, which ensures that a taxpayer will continue to be the quasi-owner of plant when their quasi-ownership right over the land to which the plant is attached expires, is surrendered or is terminated and a new right is granted.
Amendments will: Insert a requirement that a quasi-ownership right be granted by an exempt or foreign government agency.
Reason for amendments: Under the 1936 Act the single concept of ‘Crown lease’ incorporated two elements - that a right over the land be granted and that the right must be granted by an exempt government agency. Under the 1997 Act the two elements are dealt with separately. Only one of the concepts, namely the grant of the right over the land, is mentioned in existing section 42-315. Both must be mentioned for the 1997 Act to correctly restate the 1936 Act.
Provision being amended: Section 50-25, which lists certain government entities whose ordinary and statutory income is exempt from tax.
Amendment will: Replace the reference in item 5.2 of section 50-25 to the defined term *Commonwealth law with a reference to the defined term *Australian law.
Reason for amendment: The existing use of the defined term *Commonwealth law in the 1997 Act restricts item 5.2 to authorities constituted under a Commonwealth law. The use of *Australian law correctly restates the position under paragraph 23(d) of the 1936 Act, which applies to public authorities constituted under any Commonwealth, State or Territory law.
Provision being amended: Division 70, which deals with the rules concerning trading stock.
Amendment will: Insert a heading before section 70-1 to indicate that the section is part of the guide to Division 70.
Provision being amended: Paragraph 70-100(10)(a). Section 70-100 treats a change in use of trading stock as a notional disposal of that stock.
Amendment will: Replace the incorrect reference in paragraph 70-100(10)(a) to transferee with a reference to transferor.
Provision being amended: Example 2 to section 70-110, which illustrates the effect of changing the use of an item of trading stock without disposing of it.
Amendment will: Add to the example an explanation of the impact of section 70-110 on the rewritten capital gains and losses provisions.
Reason for amendment: The existing example deals with the case of trading stock that is converted to use as plant and explains the interaction of the trading stock and depreciation provisions. To provide further assistance to readers, the example has been expanded to deal with the capital gains and losses implications.
Provision being amended: Section 385-5, which is part of the guide material for Division 385 dealing with special trading stock rules for primary producers.
Amendments will: Correct cross-referencing errors in items 1 and 2 of the table.
Provision being amended: Note 2 to subsection 387-305(1), which is a signpost highlighting the impact of Subdivision 20-A on a recoupment of expenditure incurred on the establishment of a grapevine.
Amendment will: Replace the existing note with a new note.
Reason for amendment: Subdivision 20-A can include a recoupment in the assessable income of both the person who originally incurred the grapevine establishment expenditure and the transferee of the deduction for that expenditure. The new note will accurately reflect Subdivision 20-A’s operation by referring more generally to a “recoupment of expenditure” instead of a “recoupment by you”.
Provision being amended: Note 1 to subsection 387-355(2), which refers readers to various provisions which may limit the deduction otherwise allowable under section 387-355 for expenditure on connecting power to land.
Amendment will: Replace an incorrect reference to “sections 387-370” with a reference to “section 387-370”.
Application: The amendments made by Schedule 6 apply to assessments for the 1997-98 and later income years.
Provision being amended: Section 75B, which provides a deduction for expenditure on measures to conserve water.
Amendment will: Correct a numbering error by inserting a new subsection 75B(3D).
Reason for amendment: This amendment corrects item 43 of Schedule 8 of TLIA 1997 which inserted a new subsection numbered 75B(3E) which should have been numbered 75B(3D). Item 12 of Schedule 8 of this Bill ensures that the earlier incorrect amendment is taken never to have commenced.
Provision being amended: Sections 82KH, 110, 116E and 399A.
Amendments will: Make various consequential amendments to insert references to section 25-40 or 25-35 of the 1997 Act instead of references to section 52 or 63 of the 1936 Act .
Reason for amendments: These amendments replace items 120, 125, 126, 128, 129, 134 and 135 of Schedule 4 of the TLIA 1997. They achieve the same outcome as those earlier amendments and also correct typing errors which caused sections 82KH, 110, 116E and 399A, as amended, to read “section section”. Item 11 of Schedule 8 of this Bill ensures that the TLIA 1997 amendments are taken never to have commenced.
Provisions being amended: Sections 122T, 123A, 123BD and 124AQ, each of which sets out the treatment of a recoupment of deductible expenditure under Divisions 10, 10AAA or 10AA.
Amendments will: Ensure that none of the provisions apply to a recoupment received in the 1997-98 or later income years.
Reason for amendments: These are additional consequential amendments which close off sections of the 1936 Act, rewritten in the 1997 Act, from the date of effect of the relevant rewritten provisions. The amendment at item 6 of Schedule 8 preserves the operation of these sections in so far as they apply to an entitlement to a recoupment arising prior to the 1997-98 income year.
Provision being amended: Subsection 160ZK(1A), which explains how the cost base of an asset used in calculating a capital loss is to be determined when a taxpayer has incurred heritage conservation expenditure.
Amendment will: Insert the omitted word “of”.
Reason for amendment: A consequential amendment made to subsection 160ZK(1A) by item 239 of Schedule 1 of the Income Tax (Consequential Amendments) Act 1997 omitted the word “of” in citing Part III of the 1936 Act.
Provision being amended: Section 413, which adjusts the cost base of certain non-taxable Australian assets where that cost base is used to calculate the capital gain or loss component of the attributable income of an eligible controlled foreign corporation.
Amendment will: Add a reference to Division 43 of the 1997 Act to the existing references to Division 10C or 10D of Part III of the 1936 Act in subsection 413(3).
Reason for amendment: This is a necessary consequential amendment to take account of the enactment of Division 43 of the 1997 Act.
Application: The amendments made by Schedule 7 apply to assessments for the 1997-98 and later income years.
Provision being amended: Section 49A, which will be inserted in the Airports (Transitional) Act 1996 by Taxation Laws Amendment Bill (No.5) 1997. It sets out special rules for depreciating the fixtures that are attached to land acquired by airport lessee companies.
Amendments will:
• Omit an incorrect cross-reference to subsection 42-310(2) of the 1997 Act in subparagraph 49A(2)(a)(ii).
• Replace incorrect cross-references to paragraph 42-310(2)(b) in paragraphs 49A(2)(d) and (3)(c).
Reason for amendments: Section 49A does not take account of an amendment made during the passage of TLIA 1997. Consequently, section 49A contains incorrect references to paragraphs of subsection 42-310(2) instead of to subsection 42-310(1).
Provision being amended: Section 49A, which will be inserted in the Airports (Transitional) Act 1996 by Taxation Laws Amendment Bill (No.5) 1997. It sets out special rules for depreciating the fixtures that are attached to land acquired by airport lessee companies.
Amendment will: Replace a reference to the “acquisition of the lease” in paragraph 49A(3)(e) with a reference to the “acquisition of the right”.
Reason for amendment: The amendment is needed to correct a cross-referencing error that occurred within the paragraph.
Application: The amendments made by items 1 to 4 of Schedule 8 apply to assessments for the 1997-98 income year and later income years.
Provision being amended: Section 20-5 of the Transitional Act, which ensures that certain 1936 Act provisions about recouping deductible expenses will continue to apply to assessments for the 1997-98 and later income years in relation to recoupments received prior to the 1997-98 income year.
Amendment will: Add references to additional provisions of the 1936 Act to the list of recoupment provisions which continue to apply for the 1997-98 and later income years.
Reason for amendment: This amendment complements the amendments at items 7, 8, 9 and 10 of Schedule 7. The amended section 20-5 clarifies the way in which taxpayers should apply the recoupment provisions of the 1936 Act and Subdivision 20-A of the 1997 Act in the transition to the 1997 Act.
Provision being amended: Subsection 42-2(2) of the Transitional Act, which explains that Division 42 of the 1997 Act (the rewritten depreciation provisions) does not apply to a ship to which section 57AM of the 1936 Act applies.
Amendment will: Substitute a new subsection 42-2(2) to ensure that the only aspects of Division 42 which do not apply to such a ship are those that go to the calculation of the allowable depreciation deduction.
Reason for amendment: The special deduction for trading ships has been retained in the 1936 Act as it has limited on-going application after 1 July 1997. The deduction is to be calculated and allowed under the 1936 Act but Division 42 of the 1997 Act applies for all other purposes, eg. calculating balancing adjustments. Section 42-2 of the Transitional Act and section 53I of the 1936 Act are intended to achieve this but they do not work correctly. For example, there may be no requirement to calculate a balancing adjustment on disposal of a ship if that ship is still being depreciated under the 1936 Act in the year of disposal.
Provision being amended: Section 330-75 of the Transitional Act, which explains how Common rule 1 (Roll-over relief for related entities) of the capital allowance common rules is modified in relation to the disposal of property for which deductions have been claimed under Division 330 (Mining and quarrying).
Amendments will: Update a cross-reference by repealing paragraph 330-75(1)(d) and replacing it with new subsection 330-75(1A).
Reason for amendment: Paragraph 330-75(1)(d) contains a reference to section 330-585 of the 1997 Act which has been repealed because its effect was incorporated into Subdivision 20-A (Recoupment for deductible expenses) of the 1997 Act. The new subsection 330-75(1A) will achieve the same outcome as the repealed paragraph 330-75(1)(d).
Application: The amendments made by items 6 to 9 of Schedule 8 apply to assessments for the 1997-98 and later income years.
Provision being amended: Items 120, 125, 126, 128, 129, 134 and 135 of Schedule 4 of TLIA 1997. These items made amendments to the 1936 Act consequential upon the rewrite of the deduction provisions in TLIA 1997.
Amendment will: Ensure that those consequential amendments are taken never to have commenced.
Reason for amendment: The consequential amendments were incorrectly expressed in that they resulted in the amended provisions reading “section section”. This item will ensure those items are taken never to have commenced. The TLIA 1997 amendments will be replaced by the amendments at items 2, 3, 4, 5, 6, 12 and 13 of Schedule 7 of this Bill.
Provision being amended: Item 43 of Schedule 8 of TLIA 1997. It made an amendment to section 75B of the 1936 Act consequential upon the rewrite of various recoupment provisions.
Amendment will: Ensure that the consequential amendment is taken never to have commenced.
Reason for amendment: Item 43 of Schedule 8 of TLIA 1997 inserted an incorrectly numbered subsection into the 1936 Act, ie. subsection 75B(3E). This item will ensure that item 43 is taken never to have commenced. It will be replaced by the amendment at item 1 of Schedule 7 of this Bill.
7.1 The amendments in Schedule 9 of the Bill make miscellaneous amendments to the:
_symbol 183 \f "Symbol" \s 10 \h__ Income Tax Assessment Act 1997; and
_symbol 183 \f "Symbol" \s 10 \h__ Income Tax Assessment Act 1936 (the 1936 Act).
7.2 They comprise a rewrite of the 1936 Act provisions that exempt certain education and training payments as amended by Taxation Laws Amendment Act (No.1) 1997 and as proposed to be amended by Social Security (Youth Allowance Consequential and Related Measures) Bill 1998.
7.3 The amendments in Schedule 9 will ensure that the rewrite of the income tax laws reflects recent legislation.
7.4 The amendments in Schedule 9 will apply to assessments for the 1998-99 and later income years.
7.5 The Parliament has enacted the first two instalments of the rewrite of the Income Tax Assessment Act 1936 (referred to as the 1936 Act throughout this chapter). The first instalment comprises three Acts:
_symbol 183 \f "Symbol" \s 10 \h__ the Income Tax Assessment Act 1997;
_symbol 183 \f "Symbol" \s 10 \h__ the Income Tax (Transitional Provisions) Act 1997; and
_symbol 183 \f "Symbol" \s 10 \h__ the Income Tax (Consequential Amendments) Act 1997.
They received Royal Assent on 18 April 1997 and have effect for the 1997-98 income year.
7.6 The second instalment is the Tax Law Improvement Act 1997 which received Royal Assent on 8 July 1997. That Act amends the Income Tax Assessment Act 1997 (the 1997 Act) by inserting among other things, a rewrite of the exempt income provisions. It also takes effect for the 1997-98 income year.
7.7 Taxation Laws Amendment Act (No.1) 1997 and Social Security (Youth Allowance Consequential and Related Measures) Bill 1998 amend the exempt income provisions of the 1936 Act in so far as they deal with certain Commonwealth education and training payments. The amendments discussed in this Chapter make corresponding amendments to the 1997 Act to ensure it restates the effect of the 1936 Act amendments.