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1998-99
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TAXATION LAWS AMENDMENT (POLITICAL DONATIONS) BILL 1999
EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon Peter Costello, MP)
ISBN: 0642 390754
The Bill will amend the Income Tax Assessment Act 1997 to allow taxpayers to make tax deductible contributions (including membership subscriptions) of $2 or more to political parties that are registered under the Commonwealth Electoral Act 1918 or under corresponding State or Territory legislation up to a maximum level of $1500 annually, and gifts to independent candidates and members, also up to a maximum level of $1500 annually.
The amendments will implement part of the Government's response to the Report of the Joint Standing Committee on Electoral Matters (JSCEM) on the 1996 Federal Election and will complement the arrangements for the public funding of elections under the Commonwealth Electoral Act 1918.
Date of effect: The amendments will apply to contributions and gifts made from 1 July 1998. [Item 18]
Proposal announced: 1998-1999 Budget, 12 May 1998, and Special Minister of State's Press Release of 8 April 1998.
Financial impact: The estimated cost to the revenue of the measure is $18 million in 1999-2000, $12 million in 2000-2001, and $15 million in 2001-2002.
Compliance cost impact: The Compliance Cost Impact Statement is incorporated into the Regulation Impact Statement which appears at the end of this Explanatory Memorandum.
Impact: Low
Main points:
• The only option that will allow the Government to implement recommendations 61 and 62 of the JSCEM Report, to raise the upper annual limit for tax deductible contributions to registered political parties to $1500, to remove the current exclusion that applies to contributions made by companies, and then to extend the new arrangements applying to political parties to independent candidates and members, is amendment of the Income Tax Assessment Act 1997.
• Implementation of recommendations 61 and 62 of the JSCEM Report would increase the number of Australians (including companies) in the democratic process and reduce a political party’s reliance on a small number of large donations. The measures complement the election funding of political parties and would provide an equivalence of treatment between contributions to political parties and gifts to independent candidates and members.
The compliance costs in relation to implementing these measures are estimated to be insignificant. The only effect on political parties involves learning about the change in the tax law, and making changes to established record keeping systems to take account of the increased threshold. The compliance costs for independent candidates and members involve establishing systems to provide receipts to taxpayers. The compliance costs to taxpayers wishing to make tax deductible donations involve learning about the change in the tax law, establishing the tax status of payments and including the deduction in their tax returns. The administrative costs to the Australian Taxation Office of this change are minimal and relate mainly to advising taxpayers on the tax status of payments and changing the income tax return form instructions.
1.1 Schedule 1 to the Bill will amend the income tax law to expand the arrangements applying to income tax deductions for contributions made to political parties and extend those arrangements to allow income tax deductions for gifts made to independent candidates and members.
1.2 Part 1 inserts new Subdivision 30-DA into the Income Tax Assessment Act 1997 (ITAA 1997) setting out rules in relation to deductions for donations (ie, contributions and gifts) to political parties and independent candidates and members. Parts 2 and 3 contain technical amendments to the ITAA 1997 and the Income Tax Assessment Act 1936 (ITAA 1936) that are consequential upon the enactment of new Subdivision 30-DA. Part 4 sets out the time from which the amendments are to apply.
1.3 To expand and extend the existing arrangements for tax deductibility of political contributions by:
• raising the upper tax deductibility ceiling from $100 to $1500 in an income year (there is a separate limit of $1500 for contributions to political parties and for gifts to independent candidates and members);
• allowing deductibility for donations made by companies;
• allowing deductibility for contributions made to political parties registered under State and Territory electoral legislation; and
• allowing deductibility for gifts to independent candidates and members.
1.4 The amendments will apply to contributions and gifts made from 1 July 1998. [Item 18]
1.5 Currently, item 3 of the table in section 30-15 of the ITAA 1997 allows a non-corporate taxpayer to deduct a contribution (which includes a membership subscription as well as a gift) of $2 or more to political parties registered under Part XI of the Commonwealth Electoral Act 1918, with the total deductions allowable to the taxpayer subject to a maximum level of $100 in an income year. Subsection 30-15(2) provides that a testamentary gift or contribution is not deductible under this provision.
1.6 Schedule 1 to the Bill will expand the existing provisions covering the tax deductibility of political contributions by:
raising the upper tax deductibility ceiling from $100 to $1500 in an income year;
allowing deductibility for donations made by companies;
allowing deductibility for contributions made to political parties registered under State and Territory electoral legislation; and
allowing deductibility for gifts to independent candidates and members. [New sections 30-242 and 30-243]
1.7 Item 3 of the table in section 30-15 of the ITAA 1997, which currently covers the tax deductibility of political contributions, will be repealed by item 12. The new provisions will be enacted in new Subdivision 30-DA which will also contain the rules for tax deductibility of gifts made to independent candidates and members. [Item 1]
1.8 The new provisions in relation to independent candidates and members are based on a principle of equivalence of treatment, ie, providing them with similar access to tax deductible donations as is available to political parties.
1.9 New section 30-242 in new Subdivision 30-DA will, subject to certain conditions being met, allow a tax deduction for:
a contribution to a political party that is registered under Part XI of the Commonwealth Electoral Act 1918 or under corresponding State or Territory electoral legislation [new paragraph 30-242(1)(a)];
a gift to a person who is an independent candidate for a Commonwealth, State, Northern Territory or Australian Capital Territory election [new paragraph 30-242(1)(b)]; and
a gift to a person who is, or was, an independent member of the Commonwealth Parliament, a State Parliament, the Legislative Assembly of the Northern Territory or the Legislative Assembly for the Australian Capital Territory [new paragraph 30-242(1)(c)].
1.10 Under the existing arrangements for tax deductibility of contributions to political parties, a deduction is allowed only for contributions to political parties registered under the Commonwealth Electoral Act 1918. However, not all parties whose members contest elections in the States, the Northern Territory and the Australian Capital Territory are registered under that Act.
1.11 In New South Wales, Victoria, Queensland, South Australia, Tasmania and the Australian Capital Territory, the relevant State or Territory electoral legislation requires a political party to be registered for the purposes of that legislation. In Western Australia and the Northern Territory there is no requirement that political parties be registered.
1.12 The new provisions will allow a tax deduction for contributions made to political parties registered under the relevant State or Territory electoral legislation. This is on the basis that the registration requirements enable some scrutiny of the commitment of political parties to the electoral process. As a result, a tax deduction will not be available for a contribution made to a political party in Western Australia or the Northern Territory if that party is not registered under the Commonwealth Electoral Act 1918 or under the electoral legislation of another State or Territory.
1.13 However, for the purposes of the tax deductibility rules, a person who contests an election for members of the Western Australian Parliament or the Legislative Assembly of the Northern Territory, as an endorsed candidate of an unregistered party will be regarded as an independent candidate and will be able to receive tax deductible gifts. Further, where a member of such a party is elected to the Western Australian Parliament or the Legislative Assembly of the Northern Territory, that person will be regarded as an independent member of that Parliament or Legislative Assembly for the purposes of the tax deductibility rules. It is anticipated that the number of active political parties which may be affected by this arrangement will be small.
1.14 The following conditions must be satisfied for a contribution or a gift to be tax deductible. The first three conditions currently apply to the existing arrangements for tax deductibility of contributions to political parties. Those conditions are that the contribution or gift:
• must either be of money, or of property that was purchased during the 12 months before the contribution or gift was made [new subsection 30-242(2)];
• must be $2 or more in value [new subsection 30-242(3)]; and
• is not a testamentary gift or contribution [new subsection 30-242(4)].
1.15 The remaining conditions in new section 30-242 concern gifts to an independent member of a Commonwealth or State Parliament or of the Legislative Assembly of the Northern Territory or the Legislative Assembly for the Australian Capital Territory. New paragraph 30-242(5)(a) provides that a contribution or gift must be made when the person is an independent member; that is, until the person ceases to be a member of the relevant Parliament or Territory Legislative Assembly. However, where a person ceases to be an independent member because:
• a Parliament, a House of Parliament or a Legislative Assembly is dissolved or has reached its maximum duration [new subparagraph 30-242(5)(b)(i)]; or
• the person comes up for election [new subparagraph 30-242(5)(b)(ii)];
a gift to that person will continue to be tax deductible if made after the time that they cease to be a member but before the time that candidates for the resulting election are declared or otherwise publicly announced by a person authorised under the relevant Commonwealth, State or Territory electoral legislation.
1.16 Under the Commonwealth Constitution and the Australian Capital Territory (Self-Government) Act 1988, the Commonwealth Parliament (or a House of that Parliament) and the Legislative Assembly for the Australian Capital Territory can be dissolved by the Governor-General. Similar powers may be found in some of the State Constitutions, although in these circumstances the powers are exercised by the relevant Governor. Further, the terms of the members of some Houses of Parliament and Territory Legislative Assemblies are determined by the maximum duration of that House or Legislative Assembly, subject to earlier dissolution where applicable. New subparagraph 30-242(5)(b)(i) covers these situations.
1.17 However, some Houses of Parliament are continuing institutions (subject to earlier dissolution where applicable) with members of those Houses retiring at fixed or identifiable intervals. New subparagraph 30-242(5)(b)(ii) covers the situation where such a member’s term has ended because the period for which they are elected has expired or because of a requirement in the relevant State or Commonwealth Constitution that a member’s seat be contested periodically.
1.18 The period of grace given under new paragraph 30-242(5)(b) gives the ‘former’ member the opportunity to consider whether to stand for re-election as well as providing a publicly known end point for tax deductibility in relation to gifts to that particular person.
1.19 New section 30-243 describes the criteria for determining how much of a contribution or gift is deductible. The first two criteria currently apply to the existing arrangements for tax deductibility of political contributions. The third and fourth criteria set the dollar limit for tax deductibility in respect of contributions or gifts. The criteria are:
• if the contribution or gift is money, then the amount of the deduction is the amount of the money [new subsection 30-243(1)];
• if the contribution or gift is property, then the amount of the deduction is the lesser of the market value of the property on the day that the contribution or gift was made and the amount that was paid by the taxpayer for the property [new subsection 30-243(2)];
• a taxpayer cannot deduct a total of more than $1500 in contributions to political parties in an income year [new subsection 30-243(3)]; and
• a taxpayer cannot deduct a total of more than $1500 in gifts to independent candidates or members in an income year [new subsection 30-243(4)].
A taxpayer (corporate or non-corporate) contributes $500 and $1500 respectively to two separate political parties during an income year. In the same income year the taxpayer gifts $200, $600 and $1100 respectively to two independent candidates and one independent member. Under new subsection 30-243(3), the taxpayer would be able to claim a tax deduction of $1500 in respect of the $2000 contributed to political parties. In addition, new subsection 30-243(4) will enable the taxpayer to claim a deduction of $1500 in respect of the $1900 gifted to the independent candidates and the independent member.
1.20 A person is an independent candidate under the new arrangements for political contributions and gifts if the person is not an endorsed candidate of a registered political party in an election for members of the Commonwealth Parliament, a State Parliament, or a Territory Legislative Assembly. The political party must be registered either under the Commonwealth Electoral Act 1918 or under corresponding State or Territory electoral legislation. [New subsection 30-244(1)]
1.21 To enable taxpayers to readily ascertain whether a tax deductible gift can be made to an independent candidate, the following start and end points for making a tax deductible gift are specified in new subsections 30-244(2) and (3):
from the time that the candidates for an election have been declared or otherwise publicly announced by a person authorised under the relevant Commonwealth, State or Territory electoral legislation;
to the time that the result of the election is declared or otherwise publicly announced by a person authorised under the relevant Commonwealth, State or Territory electoral legislation.
1.22 To ensure that a gift made to an independent candidate remains tax deductible to the taxpayer, new subsection 30-244(1) also covers the situation where a person is a candidate at an election which is subsequently found to be void. An election is void where, due to some defect, the election is found to be of no effect. For example, a Court of Disputed Returns has the power to declare an election void with the result that a new election must be held. Tax deductibility for gifts made to independent candidates for the new election will be covered under the general rules described above.
1.23 New subsection 30-244(4) covers the situation where an election is found to have wholly failed before the result of the election has been announced.
1.24 For example, in the Commonwealth, if a candidate who has been declared as such for an election to the House of Representatives dies before polling day, then the election is deemed to have wholly failed and a new election must be held immediately. There are similar provisions in the electoral legislation of most of the other States and Territories. As there is no election result, no end point for the tax deductibility of gifts to an independent candidate at that election can be ascertained.
1.25 New subsection 30-244(4) will extend the period for tax deductibility in relation to gifts to independent candidates affected by a wholly failed election to the time that the candidates for the new election are publicly announced by a person authorised under the relevant Commonwealth, State or Territory electoral legislation. If these affected candidates are announced as candidates for the new election then tax deductibility for gifts made to them will continue under the general rules for tax deductibility described above.
1.26 As void and wholly failed elections occur infrequently, it is expected that the provisions relating to void elections and wholly failed elections will apply in a limited number of cases.
1.27 A person is an independent member of the Commonwealth Parliament, a State Parliament, the Legislative Assembly of the Northern Territory or the Legislative Assembly for the Australian Capital Territory, if the person is a member of that Parliament or Assembly and the person is not a member of a political party that is registered under Part XI of the Commonwealth Electoral Act 1918 or under corresponding State or Territory electoral legislation. [New subsection 30-245(1)]
1.28 To ensure that the period from when a person stops being an independent candidate and starts being an independent member is continuous, a person is taken to start being an independent member when the result of the election that resulted in the person being a member is declared or otherwise publicly announced by a person authorised under the relevant Commonwealth, State or Territory electoral legislation. [New subsection 30-245(2)] Otherwise, where a person becomes a member of Parliament or Legislative Assembly other than as a result of an election (eg, a person chosen to fill a casual vacancy in the Senate), a taxpayer will be able to make a tax deductible gift to that person from the time the person becomes a member of the Parliament or Legislative Assembly.
1.29 A person will be able to make a gift to an independent until that person ceases to be a member, subject to the special rule in new subsection 30-242(5) applying to gifts made to an independent member after dissolution/expiration of the relevant Parliament or Legislative Assembly or after the expiry of the person's term as a member (see paragraph 1.14). Some of the circumstances where a person may cease to be an independent member are when that person retires, resigns, dies or is disqualified by a Court of Disputed Returns from sitting in the Parliament or Legislative Assembly. Tax deductibility for taxpayers making gifts to such an independent member will cease at the time such circumstances occur.
1.30 Minor consequential amendments are required to the ITAA 1936 and the ITAA 1997 following the introduction of new Subdivision 30-DA into Division 30 – Gifts or Contributions of the ITAA 1997.
1.31 The first group of consequential amendments are necessary to amend the references, notes and index in Division 30 associated with the current item 3 in the table in section 30-15 of the ITAA 1997 which covers tax deductibility of political contributions. This item is being repealed and new Subdivision 30-DA will cover both contributions to political parties and gifts to independent members and candidates. These amendments also ensure that a reader of the legislation seeking information on the deductibility of contributions to political parties and gifts to independent candidates and members is guided to those provisions. New definitions of “independent candidate” and “independent member” are inserted into subsection 995-1(1) to support the new provisions in new Subdivision 30-DA. [Items 2-16 of Part 2 of Schedule 1]
1.32 The second group of amendments is to section 78A of the ITAA 1936. Section 78A currently denies a deduction for a gift to a fund, authority or institution (the donee) where, by reason of the making of the gift or under any scheme or arrangement associated with the gift:
• the amount or value of the gift derived by the donee as a consequence of the gift is less than the amount or value of the property comprising the gift at the time it was made (reasonable expenses incurred by the donee in relation to the obtaining or soliciting of the gift are excluded in determining the amount or value of the gift);
• although the donee has no liability to make any payments (which would directly affect the amount or value of the gift), a fund, authority or institution other than the donee receiving the gift becomes liable to make a payment or to transfer property, or becomes liable to suffer some detriment, disadvantage, liability or obligation;
• the taxpayer or an associate obtains or may reasonably be expected to obtain, any benefit or advantage, right or privilege other than the benefit of the deduction; or
• the donee (or another fund, authority or institution) is to acquire property (other than the gift) from the taxpayer or an associate.
1.33 Section 78A was initially inserted into the ITAA 1936 to strengthen the conditions under which deductions for gifts are available and to render ineffective schemes developed to exploit the availability of those deductions. One kind of scheme contemplated by the provisions operated to reduce the benefit of the gift to a donee by subsequently reducing the value of the property comprising the gift. Under the scheme, for example, cash may be donated to the donee on condition that it is used to purchase property which is in turn lent to the donor or an associate of the donor. The provisions would also address the situation where a taxpayer may make a gift of property on condition that he retains the use and enjoyment of the property for a nominated period.
1.34 Section 78A currently applies to gifts to political parties. The amendments made by Part 3 of Schedule 1 extend its application to cover gifts to independent candidates and members. [Item 17]
1.35 To implement the Government’s acceptance of recommendations 61 and 62 of the Joint Standing Committee on Electoral Matters (JSCEM) Report by raising the annual threshold for tax deductible donations to registered political parties to $1500 annually, whether from an individual or a corporation (recommendation 61), and by providing tax deductibility for donations made to an independent candidate at a Commonwealth, State, Northern Territory or Australian Capital Territory election on a similar basis (recommendation 62).
1.36 The only option that will achieve the Government’s policy objective involves amending the ITAA 1997 to raise the upper annual limit for tax deductible donations to $1500, to remove the current exclusion that applies to donations made by companies, and then to extend the new arrangements applying to donations made to political parties to independent candidates at a Commonwealth, State, Northern Territory or Australian Capital Territory election on a similar basis.
1.37 An independent candidate will be able to receive tax deductible donations from the time that the person was declared as a candidate in accordance with the requirements under the Commonwealth Electoral Act 1918 or under corresponding State or Territory electoral legislation. An independent candidate who is elected to the Commonwealth Parliament, a State Parliament or a Territory Legislative Assembly will be able to receive tax deductible donations for the period that they are an independent member of that Parliament or Legislative Assembly. However, where an independent candidate is not elected, gifts to that person are tax deductible only if made before the declaration of the poll of the relevant election.
1.38 The groups affected by the changes to the arrangements for tax deductibility of political donations are:
• companies - who will now be able to make tax deductible donations to both political parties and independent candidates and members;
• non-corporate taxpayers - who will be able to make donations to both political parties and independents which are tax deductible up to an increased level of $1500 (currently for this group only donations to political parties are deductible and only up to a level of $100);
• political parties - who may receive an increased number of small to medium donations due to the increase in the threshold; and
• independent candidates and members - who will be eligible to receive, for the first time, small to medium tax deductible donations from the public.
1.39 It is difficult to estimate the cost to the revenue of changing the law because the provisions that now apply to political donations do not require political parties to distinguish in annual returns between donations and other receipts such as returns on investments. Also, the level of donations fluctuates from year to year, tending to be higher in election years. For instance (when reporting requirements were different), donations to political parties in 1992-93 (an election year) of $26.3 million were about 50% higher than donations of $17.7 million in 1993-94.
1.40 Based on data in these earlier periods, the revenue impact of recommendation 61 and recommendation 62 is estimated to be $15 million per annum on average. If the recommendations take effect from 1 July 1998, the first impact on revenue of the changes will be in the 1999-2000 income year after taxpayers have submitted their returns in respect of 1998-99.
1.41 Based upon past donations to political parties and the estimated number of people donating to political parties, both the initial and recurrent compliance costs in relation to recommendation 61 are estimated to be insignificant. The only impact to political parties involves learning about the change in the tax law, and making changes to established record keeping systems to take account of the increased threshold.
1.42 As the number of taxpayers donating to independent candidates is estimated to be very small, the initial and recurrent compliance costs in relation to recommendation 62 are estimated to be insignificant. The compliance costs of independent members involve establishing systems to provide receipts to taxpayers. The compliance costs to taxpayers wishing to make tax deductible donations involve learning about the change in the tax law, establishing the tax status of payments and including the deduction in their tax returns.
1.43 The administrative costs to the Australian Taxation Office of this change are minimal and relate mainly to advising taxpayers on the tax status of payments and changing the income tax return form instructions.
1.44 Political parties and independent candidates and members (for the first time) may benefit from increased numbers of donations from the Australian public due to the higher tax deductible threshold for those donations, thereby increasing the number of Australians involved in the democratic process and reducing reliance on a small number of large donations. In particular, companies will benefit from having access for the first time to tax deductibility for donations both to political parties and independent candidates and members.
1.45 These measures stem from recommendations made by the JSCEM following its inquiry into the conduct of the 1996 Federal Election. The JSCEM received submissions and held a number of hearings whilst it conducted its inquiry and formulated its recommendations to the Government.