Bills Digest No. 193 1997-98
Taxation Laws Amendment Bill (No. 4) 1998
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details
Passage History
Date Introduced: 2
April 1998
House: House of Representatives
Portfolio: Treasury
Commencement: The
measures contained in the Bill have various application dates. Except
as otherwise described in the Main Provisions section, the measures described
in this Digest commence on Royal Assent.
Purpose
The major amendments contained in the Bill relate to:
- the removal of sales tax exemption for goods used by an exempt entity
for commercial property purposes;
- changes to the record keeping requirements for small businesses for
fringe benefit tax purposes;
- the treatment of assets for depreciation purposes when a tax exempt
entity becomes subject to tax;
- extending the period for which forgiven commercial debts may be offset
against tax deductions and other tax reductions;
- allowing gifts to the Menzies Research Centre to be deductible; and
- limiting the deductions allowable in relation to hire purchase and
certain other transactions where they give rise to 'excessive' deductions.
Background
As there is no central theme to the Bill, the background
to the various measures will be discussed in the Main Provisions section.
Main Provisions
Sales Tax (Exemptions and Classifications) Act 1992
Item 1 of Schedule 1 of the Bill will amend this
Act to remove a means of possible avoidance of sales tax where it is intended
that the tax be payable. Item 192 of the Act provides that goods will
be exempt where they are incorporated into a property always owned or
leased by an exempt person/s or a foreign government/s. The reason for
the exemption is not to require people or foreign governments who are
not subject to sales tax for any transaction to pay the sales tax and
then apply for a refund. However, as the item currently stands it would
be possible for the exemption to be claimed by such people in respect
of commercial property, which could give those operations a commercial
advantage, which was not intended when the exemption was granted.
Item 1 of Schedule 1 will amend item 192 to provide
that it will only apply to housing provided by an always exempt person
at below market rates (eg. charitable accommodation); where the property
is occupied principally by the always exempt person or foreign government;
or it is used principally by a person providing services to an always
exempt person or foreign government for the purpose of providing those
services. Properties not eligible under item 192 are:
- shops and shopping centres;
- hotels;
- casinos;
- apartment blocks;
- properties mainly consisting of or similar to those listed above;
and
- prescribed properties.
The explanatory memorandum to the Bill estimates the
measure will raise $10 million in 1997-98 and $50 million in 1998-99 and
subsequent years.
Application: Dealings after 2 April 1998.
Fringe Benefits Tax Assessment Act 1986
The main change to Fringe Benefits Tax (FBT) contained
in the Bill relate to record keeping for small businesses and resulted
from the November 1996 Report of the Small Business Deregulation Task
Force. The Report contained a number of submissions from small business
groups. In relation to FBT, the Task Force made a number of recommendations
relating to matters such as the valuation of car benefits, the treatment
of meals, car parking and taxi travel.(1) The recommendations were made
on the basis that the tax law was complex and imposed a significant burden
on small businesses to conform with the rules. The Report commented:
Small businesses complain of acting as unpaid tax collectors
and an arm of governments.
The burden of managing complex, multiple taxation regimes
is particularly onerous. While a business could possibly cope with each
tax on its own, the administration of up to seven separate taxation
or taxation reporting regimes .... could be overwhelming.(2)
(However, it may also be noted that there are a number
of other compliance costs associated with the operation of a business,
such as occupational health and safety, industrial relations, compliance
with environmental requirements, superannuation - particularly when the
choice of fund regime comes into effect - and other State, Federal and
local requirements. A business, including a small business, would need
to factor all these matters into account in formulating a business plan.)
The government's response to the FBT compliance measures
were contained in the Prime Minister's statement More Time for Business,
and expanded on by the Treasurer in a Press Release dated 24 March 1997.
As noted in the second reading speech to the Bill, a number of the other
measures noted above, such as taxi travel and car parking, have already
been addressed by legislation.
A major measure announced in relation to FBT compliance
costs was that there would be an exemption from FBT record keeping where
the value of the fringe benefits provided was $5 000 or less in a base
year and thereafter does not significantly alter. A new base year will
be required to be documented if the amount of FBT payable in later years
increased or decreased by 20% or more over the current base year.
The explanatory memorandum to the Bill estimates the
cost to revenue to be $5 million in 1998-99, $25 million in 1999-2000
and $20 million in both 2000-01 and 2001-02.
Part XI of the Act contains miscellaneous provisions,
including section 132 which requires an employer to retain records relating
to FBT for 5 years. Proposed Part XIA, which will be inserted into the
Act by Schedule 12, will allow an exemption from section 132 in
certain situations. The two conditions that must be satisfied for the
exemption are:
- the immediately preceding year was a base year [ie. a year where the
employer carried on business for the whole of the year; a FBT return
was lodged in respect of the year; records have been kept for the year;
the amount of FBT payable did not exceed the threshold amount ($5 000
for 1996-97 and this amount indexed for later years) and the amount
of FBT for the year is not calculated by reference to a previous base
year]; or
- some other year before the current year was a base year and that base
year has been used to calculate FBT payable for every year between the
base and current years; and
- the employer has not received a notice requiring them to keep records
(proposed section 135C).
If the conditions are satisfied, the employer will generally
not have to keep records relating to FBT. However, records must still
be retained in relationship to records provided to the employer by an
associate and benefits provided when the employer was a government body
or an exempt taxpayer. The Commission will have power to issue a notice
requiring that records be kept again (proposed section 135E).
Records relating to the base year must be retained for
5 years after the last year that the base year was relied on (proposed
section 135F).
A person, other than a government body or a tax exempt
person, may choose to rely on the fringe benefits provided in the base
year rather than the current year to calculate the FBT payable for the
current year (proposed section 135G).
The exemption will not apply where the amount of fringe
benefits provided in a year is more than 20% greater than in the base
year (unless the difference is $100 or less). In relation to car benefits,
the same method of calculating the value of the benefit, ie. the statutory
or use methods, must continue to be used (proposed section 135K).
Where a business does not operate throughout the whole
of the current year, the value of the benefits in the base year will be
reduced in proportion to the period of the year in which the business
operated only for part of the year (proposed section 135L).
Application: For benefits provided in the FBT year commencing
on 1 April 1998 and later years. There are also transitional provisions
that will allow the 1996 FBT year to be used so long as the amount of
benefits provided in 1997 did not exceed the 1996 amount by more than
20%. This will allow the exemption to apply from the 1998 year.
The other amendment to this Act contained in the Bill
will exempt from FBT benefits provided where:
- the benefit is provided in respect of an employee in respect of an
approved student exchange program participated in by the employee or
an associate of the employee; and
- the employer or an associate did not select or participate in the
selection of, the participant.
Application: From tax years commencing on or after 1
April 1996.
Depreciation of Assets Disposed of by Exempt Entities
A number of organisations are tax exempt where they are
organised as non-profit institutions, although certain income of such
bodies may be subject to tax. Exempt entities fall into a number of categories,
including: Australian government agencies; charities; education science
and religious organisations; community service groups; non-profit friendly
societies; non-profit associations established to promote tourism; and
non-profit bodies established to promote sport, culture and recreation.
A number of difficulties arise when such bodies cease
to be tax exempt, usually due to a change in their structure where they
become subject to tax, such as a conversion to a public company. In relation
to depreciation of the assets held by the body, the general rule is that
the asset is to be taken to have always been used for the production of
income so that, for example, the first three years use by an exempt body
will be taken to have been for profit making purposes when calculating
the value of the plant when determining the depreciation available to
the now non-exempt body (so that the depreciable value will be lower than
had the purchase price been used in the calculation). Whichever depreciation
valuation is used, prime cost or depreciating value, the earlier use will
be taken into account to reduce the value of the asset.
The Treasurer's Press Release of 4 August 1997 notes
that these rules can be circumvented by the sale of assets to a purchaser
(including the new non-exempt body that is to 'take over' from the exempt
entity). In such a case, the asset will be sold by the exempt body at
a higher value than its depreciable value and the entity acquiring the
asset will than be able to claim depreciation on the higher purchase value
of the asset. The end result is that the entity acquiring the asset will
be able to claim a higher amount of depreciation on the asset than if
the asset was acquired at the depreciated price.
The Treasurer's Press Release announced that in such
cases the use of the sale value of the asset could no longer be used for
the future calculation of the depreciable value of the asset. Instead,
the greater of the 'notionally written down' depreciation value or the
pre-audited book value of the asset in the organisations audited annual
accounts could be used by the acquiring entity to determine the depreciable
value of the asset. Where the latter method is used, the value of the
asset must have been recorded in the books of the organisation prior to
1 July 1997 and where this value is more than 12 months old this amount
will be reduced by the notional tax depreciation that would apply to the
asset.
Item 7 of Schedule 10 will insert a new Division
58 into the Income Tax Assessment Act 1997 (the 1997 Act) dealing
with the depreciation of plant previously owned by an exempt entity.
A definition of pre-existing audited book value of plant
is contained in proposed section 58-10. This will be where an annual
balance sheet contains a value for the unit of plant and a final, unqualified
report by a qualified independent auditor has indicated that value. If
the balance sheet specifies a value for 2 or more units and one of those
is the unit under consideration, the value of the unit is to be so much
of the total value as is reasonably attributable to the unit (there is
no provision relating to how the reasonable value is to be calculated).
The entity that ceases to be exempt is to choose if the
value to be used for depreciation is to be the:
- notional written down value (NWDV) (basically the depreciable value
of the asset calculated under the normal depreciation rules less deductions
that have been allowed in respect of the unit and other amounts that
the entity ceasing to be an exempt entity can claim in the future);
or
- the undeducted pre-existing audited book value of the unit (basically
the pre-existing audited book value plus capital improvements less,
where the unit has been held for one or more years, any deductions claimed
in respect of the unit) (proposed section 58-20).
Where NWDV is used, current rules relating to the cost
of the unit to the entity disposing of it and the units effective life
will apply when calculating the depreciation available (proposed sections
58-40 and 58-45). As well, subject to certain modifications, the entity
may chose whether the diminishing rate or prime cost depreciation rates
should apply if no previous choice was made.
Similarly, where pre-existing audited book value is used,
modified current rules will apply to matters such as the nominated or
elected depreciation percentage to apply (proposed section 58-135).
Proposed Subdivision 58-C deals with cases where
plant is acquired from an exempt entity when acquiring the business. Plant
will be determined to have been acquired in connection with the business
from a tax exempt entity where:
- the unit was used by the exempt entity in the course of a business
and is used by the purchaser or another in the course of a business;
- the unit was used by the exempt entity for functions not in the course
of running a business and the purchaser or another uses the unit for
those functions in the course of business;
- the unit was acquired in connection with another unit, ownership of
the unit gives the purchaser or another a right or obligation to perform
functions in the carrying on of a business or confers a commercial advantage
or opportunity connected with performing those functions and the unit
is used for those functions or in taking the benefit or opportunity;
or
- the unit was acquired in connection with the acquisition of another
asset from the exempt entity or an associate, by the purchaser or an
associate and any of the above apply (proposed section 58-150).
Where the purchaser is taken to have acquired the asset
when acquiring the business, the purchaser must chose whether the NWDV
or per-existing audited book value is to be used. The depreciable value
of the unit will be determined as if the unit had been used by the exempt
entity for the purposes of business and depreciation claimed. The purchaser
will be able to make the choices that would otherwise have been available
to the exempt entity, such as effective life, choice of rates and the
nomination or election of the depreciation percentage. The result will
be that the depreciation rules will be the same regardless of how the
unit is acquired from the exempt entity.
Commercial Debt Forgiveness
The Income Tax Assessment Act 1936 (ITAA) provides
that where commercial debts are forgiven the amount of debt forgiven is
to be offset against deductions and other tax reductions that may be claimed
in the order of prior revenue losses, prior capital gains loses, certain
deductions and the cost base of assets. The reason for the offset is that
a deduction or capital loss may arise for the lender when the commercial
debt is forgiven, even though the debtor may also claim a deduction on
their liability to repay the debt even though it has been forgiven. Such
arrangements may allow both entities to claim deductions and therefore
could be used as a tax minimisation device. The rules described above
in relation to the offset of forgiven commercial debts against possible
deductions were introduced in 1996.
In relation to offsets against prior capital losses,
subsection 160ZC(4E) of the ITAA provides that the forgiven debt may be
used to reduce capital losses incurred in the immediately preceding year
of income. This subsection will be amended by item 1 of Schedule 3
to provide that the offset may be against any capital loss incurred in
a previous year of income, effectively allowing the offset to be made
against any accumulated capital losses.
The amendment is estimated in the explanatory memorandum
to have no significant revenue impact.
Application: Debts forgiven after 2 April 1998.
Gifts to the Menzies Research Centre
The Menzies Research Centre was established in 1995 to
provide research into economic, social, cultural and political policies
to enhance individual liberty, free speech, competitive enterprise and
democracy. In practice, the Centre could be classified as a Liberal Party
'think-tank'. It is broadly equivalent to the Evatt Foundation which was
established in 1979 and performs similar functions for the Labour Party.
The funding of organisations bearing the name of politicians
has a relatively long history, though it must be noted that most of the
bodies mentioned below perform a greater range of functions than purely
party research. The Menzies Foundation was established in 1978 and, it
is reported, that it subsequently received approximately $4.4 million
prior to the Liberal party losing government in 1983. In relation to the
Evatt Foundation, an initial grant of $250 000 was made in the 1984-85
Budget and this continued for eight years, comprising a total of $2 million.
Further indexed grants were made in later budgets, the reported total
contribution being approximately $3 million. There is also the Murphy
Foundation which was established in 1987 and reportedly received total
grants of approximately $1.2 million prior to the election of the current
government which ceased grants to the organisation. The reported totals
of the grants to foundations established in memory of these former politicians
is Menzies: $4.62 million; Evatt: $3.24 million; and Murphy: $1.17 million.(3)
On 9 October 1996 the Minister for Administrative Services
announced that annual grants would be made to the Menzies Research Centre
and the Evatt Foundation and that both organisations would receive $100
000 per year. The Press Release announcing the grants did not specify
if the grants were to be indexed or for how long they would continue.(4)
In relation to tax deductions for donations to such foundations,
which are dealt with by this Bill, the Treasurer announced on 10 October
1996 that donations to the Menzies Research Centre of $2 or more would
be deductible. Currently, donations of $2 or more are deductible if made
to the Menzies Foundation or the Evatt Foundation as philanthropic trusts,
while such donations to the Murphy Foundation are deductible as an education
body.
Schedule 5 provides that donations of $2 or more
to the Menzies Research Centre will be deductible if made after 2 April
1998. The Centre will be classified as a research recipient.
Hire Purchase and Limited Recourse Debt
It was announced in the 1997-98 Budget that certain adjustments
would be made in the calculation of amounts included in income where depreciation
and other measures have been used by a taxpayer to gain tax advantages
that are greater than the amount expended by the taxpayer. The measures
will apply in cases where hire purchase or non-recourse loans are involved
(non-recourse loans are defined in the Bill - see below).
The example given in the Treasurer's Press Release of
13 May 1997 is of a taxpayer who purchases plant under hire purchase for
$10 000 and which is repossessed after 2 years and payments of $4 000.
The taxpayer has been able to claim depreciation of $7 000 and on disposal
can claim a deduction for the difference between the depreciable value
on disposal ($3 000) and the disposal value ($0 as it was repossessed).
The taxpayer would therefore be able to claim total deductions of $10
000 for outlays of $4 000. It was proposed that the situation would be
rectified by including the unpaid amount under the hire purchase agreement
or non-recourse loan in the consideration deemed to have been received
on disposal.
Further refinements to the proposed scheme were announced
by the Treasurer in a Press Release dated 27 February 1998. The main changes
over the previously announced scheme are that it will apply whether the
relevant capital allowance provisions require a balancing adjustment on
disposal or not and, secondly, that the calculation would be made on the
termination of the hire purchase agreement or non-recourse loan. It was
also announced that the purchaser under a hire purchase agreement would
be treated as the owner of the good, so that the anti-avoidance provisions
relating to capital allowances could apply to the purchaser.
It is estimated in the explanatory memorandum to the
Bill that the measures 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.
Hire purchase arrangements are dealt with in proposed
subdivision 240-A of the 1997 Act which will be inserted by Schedule
11.
There will be created a notional buyer and seller in
relation to hire purchase arrangements (the purchaser being the notional
buyer) and a notional transfer of the property to the notional buyer (proposed
sections 240-17 and 240-20). There will be a notional loan from the
notional seller to buyer that will run for the length of the agreement
and the amount of consideration for the notional loan will be the arms
length value of the transaction (proposed section 240-25).
The treatment of the deemed loan for the seller are dealt
with in proposed subdivision 240-C. Principally, notional interest
is to be included in the seller's income (the calculation of notional
interest is contained in proposed section 240-60 and is to be determined
by reference to the value of the arrangement, any amount payable on termination
of the arrangement and the compound interest rate. If any of these amounts
are not know, a reasonable estimate of the amount is to be substituted).
Also included in the notional seller's income will be any profit on the
notional sale of the goods. A notional sale will occur when the agreement
is entered into. If there is a subsequent notional re-acquisition of the
goods at the end of the agreement then any profit made on the further
sale is also to be included in the income of the notional seller.
The buyer will be able to deduct notional interest payments
but not arrangement payments which are, basically, amounts above the notional
interest payment excluding penalty payments and amounts payable on the
termination of the agreement (ie. any amount paid by the notional buyer
to acquire the property, any payment to the seller for compensation due
to damage to the property or the value at the end of the arrangement).
If the agreement is extended, the end of the first agreement
will be taken to comprise a notional sale of the item and the new agreement
to be one based on the value of the goods in an arms length transaction.
If, after the end of the arrangement, the notional buyer
acquires the property from the notional seller, the transaction is largely
to be disregarded, with the amount paid not being included in the sellers
income or allowable as a deduction for the buyer, so that the rules relating
to the notional sale will apply.
Where the notional buyer ceases to have a right to use
the property, there will be a notional sale back to the notional seller
for the arms length transaction value of the property. Special rules apply
in relation to the disposal of cars to take account of the depreciated
value of the vehicle
Major operative provisions are contained in proposed
subdivision 240-G which deals with differences when the amount assessed
to the notional seller is less than the 'finance charge'. In regard to
the notional seller, where amounts paid to them exceed the notional loan
principal and the assessed notional interest, the excess will be included
in the assessable income of the notional seller. Similarly, where such
an amount has been included in the assessable income of the notional seller
or would have been included if the notional seller was subject to tax,
the notional buyer will be able to claim an equal amount as a deduction.
Proposed Division 243 deals with limited recourse
debts. A limited recourse debt is defined in proposed section 243-20
and is one where the right to repayment on default is limited to the debt
property, goods produced by the property or the debtors rights on the
loss or disposal of the property. Such a debt will also arise where it
is reasonable to conclude that rights of the debtor are limited to the
matters described above. There will also be a general power to consider
a debt to be a limited recourse debt where, having regard to the circumstances,
it is reasonable to assume that the right to recover the debt amount is
limited. Similarly, even though any of the above provisions may apply,
there is a power to determine that the debt is not a limited recourse
debt having regard to all the circumstances.
The proposed Division will apply where a limited recourse
debt is used to finance expenditure, the debt has not been repaid when
terminated and the debtor can deduct a capital allowance (other than a
development allowance or drought investment allowance) If the deduction
in respect of the capital allowance has not been excessive, no amount
is to be included in the debtor's assessable income (see below). Proposed
section 243-25 lists a number of circumstances when a debt arrangement
will be taken to have terminated, including:
- when it actually terminates;
- the obligation to repay the debt is waived or varied to reduce, transfer
or extinguish the debt or an agreement is entered into for his purpose;
- the creditor ceases to be entitled to recover the debt;
- the property is surrendered because the debtor has failed to pay all
or part of the debt; or
- the debt becomes a bad debt.
The next step is to determine if there has been an excessive
deduction. This will be calculated by determining the total deductions
allowed in respect of the capital item, less any amount included in assessable
income due to the operation of this proposed Division, and deducting from
this amount the deductions that are allowable under the proposed Division.
The later amount will be based on the earlier calculated amount less any
part of the debt that remains unpaid.
The assessable income of the debtor is to be increased
by the amount calculated above (proposed section 243-40). If the
debtor makes a payment in respect of the debt after the debt has been
terminated, the amount will be allowed as a deduction, although the amount
of the deduction is not to exceed the amount included in assessable income
due to operation of the proposed Division. Similarly, if the debt is re-financed
and a payment is made by the debtor, a deduction will be allowed (proposed
section 243-50).
Where the debtor is entitled to a capital allowance deduction,
proposed section 243-55 provides for the amount of the deduction to
be reduced by the amount worked out in the same manner as when determining
if there has been an excessive deduction.
Where an amount relating to the debt is included in assessable
in assessable income due to the operation of other provisions of the Act,
an adjustment is to be made to reduce the amount included in assessable
income under this proposed Division (proposed section 243-57).
The rules are to apply to partnerships and special rules
are to apply where the liability between the partners changes (proposed
sections 243-60 and 243-65).
Franking and Exempting Companies
The measures contained in the Bill form part of a package
aimed at reducing dividend streaming and trading in franking credits.
For more information on this area refer to the Digest for the Taxation
Laws Amendment Bill (No. 7) 1997. The amendments contained in the Bill
are largely of a technical nature aimed to address the situation where
franked dividends are transferred between closely inter-related companies.
An exempting company will be one which is effectively
owned by prescribed persons (proposed section 160APHBA of the ITAA).
A prescribed person will effectively own of a company if 95% of the accountable
shares, or interest in the shares, in the company are held either directly
or indirectly for the benefit of prescribed persons. The prescribed persons
will also have ownership if, having regard to the risks involved, it would
be reasonable to conclude that such a degree of control exists (proposed
section 160APHBB).
If an exempting company pays franked dividends to another
exempting company and the companies are members of a company group or
the first company holds a minimum of 5% of the receiving company and it
is reasonable to conclude, on the basis of the risk involved, that the
risks are borne by the first company, a franking credit will pass to the
second company. In such a case, no franking credit will arise for the
second company if the income is exempt (eg. where tax has already been
paid and the income is transferred without further tax being payable).
Also, if the income is partly exempt, a proportional reduction of franking
credits will occur.
Where an exempting company franked dividend is paid or
received, an account of the exempted franked dividend is to be established
and whether there is a surplus or deficit calculated. When a company ceases
to be an exempting company, a franking credit will exist for the company
if it's exempting credit account is in a surplus, or if the exempting
account is in deficit, a franking deficit will arise for the company.
There are also provisions dealing with the situation
where franked dividends are passed to a partnership or trust from an exempting
company. The amendments aim to ensure that the amount of franked dividends
past will only be in proportion to the income received from the company,
so that an exempting company will not be able to 'dividend stream' franking
credits through a partnership or trust.
Application: Dividends paid on or after 7.30 pm on 13
May 1997 (ie. Budget time) unless dividends were declared by a public
company before that time.
Endnotes
- Small Business Deregulation Task Force, Time for Business,
November 1996, 31.
- Ibid., 29.
- The Sydney Morning Herald, 4 April 1998.
- Minister for Administrative Services, Press Release, 9 October
1996.
Chris Field
8 May 1998
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
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