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Purpose The Bill will amend a number of areas of taxation law, the main amendments relating to: * the introduction of new, accelerated rates of depreciation; * an increase in the proportion of any capital gain that will be discounted due to the sale of goodwill; * the extension of capital gains tax relief to transfers of property on certain breakdowns of de- facto relationships; * the exclusion of certain dividends from the operation of the foreign source income system; * the deferal of the initial company tax payment for small taxpayers; and * the exemption of pay and allowances for members of the Defence Forces serving in Cambodia.
Background As there is no central theme to the Bill, the implications of each amendment will be noted below.
Main Provisions For a detailed analysis of the clauses of the Bill, refer to the Explanatory Memorandum.
Depreciation Section 55 of the Income Tax Assessment Act 1936 (the Principal Act) deals with the effective life of property subject to depreciation, and provides for the Commissioner to make an estimate of the effective life of units of property. It is currently proposed to amend the depreciation rules to introduce self- assessment and to introduce new rates of depreciation. These amendments are contained in Taxation Laws Amendment Bill (No. 4) 1991 (Tax 4), which has yet to become law. New, accelerated rates of depreciation were announced in the One Nation statement made in February 1992. The amendments contained in this Bill will combine the amendments contained in Taxation Laws Amendment Bill (No. 4) 1991 and those announced in the One Nation statement.
Clause 7 of this Bill will repeal section 55 of the Principal Act and substitute a new section. The general rates of depreciation using the diminishing value method of calculating depreciation will be:
Years of effective life Annual depreciation percentage Rate applicable before 26 February
3 - 5
60
60
5 - 6.666
40
36
6.666 - 10
30
27
10 - 13
25
18
13 - 30
20
13.5 9 for 20 30
30 or more
10
9 or 4.5
Taxation Laws Amendment Bill (No. 2) 1992
There are a number of special cases, depending on the cost and nature of the property:
* Where the property subject to depreciation has a cost of $300 or less, an effective life of less than three tears and the taxpayer has not elected otherwise, the rate of depreciation will be 100%. If this does not apply and the property is used for scientific research, has an effective life of less than five years or is an eligible motor vehicle or artwork and an election is not made to have a depreciation rate of less than 50%, the rate will be 50%.
* Where the property is used to provide first- aid rooms, meal facilities, clothing cupboards, rest rooms or recreational facilities for employees or their children, and the effective life is five years or more, or the property is an eligible motor vehicle or artwork, the rate of depreciation will be 50% unless the taxpayer nominates a lower percentage.
* The rate of depreciation for eligible artworks (i.e. paintings, sculptures etc) where none of the above apply, will be (1.8 divided by the effective life) multiplied by 100.
* Where the property is an eligible motor vehicle and none of the above apply, the following rates will apply:
Years in effective life Annual depreciation percentage
3 - 5
50
5 - 6.666
30
6.666 - 10
22.5
10 - 13
15
13 - 20
11.25
20 - 40
7.5
40 or more
3.75 N.B. The definition of effective life is contained in proposed section 54A which will be inserted into the Principal Act by Tax 4 and is discussed in the Digest for that Bill.
Clause 8 will amend section 56 of the Principal Act to provide for the reduction of the rates of depreciation contained in proposed section 55 where the prime cost method of calculating the value of the property is used.
The rate of depreciation for pooled property is contained in proposed section 62AAP, which appears in Tax 4. The rate is calculated by multiplying the opening balance by the pool percentage and then multiplying this by 1.5. Clause 11 will amend this provision to omit the 1.5 component. This reflects the use of diminishing value rates in proposed section 55.
The new rules will apply to property acquired after 26 February 1992 (clause 66).
Capital Gains Tax The amendments to the capital gains tax (CGT) provisions relating to goodwill are contained in clauses 45 and 46. Currently, section 160ZZR provides that where a business is sold, and the goodwill associated with the business is also sold, for less than $1 million, any capital gain arising will be reduced by 20% to take account of the sale of the goodwill. Clause 45 will amend section 45 to provide that the amount of reduction in capital gain will be increased to 50% and the $1 million threshold will be replaced by the exemption threshold. This will be $2 million for 1993- 4 and this amount indexed for any increases in the CPI for later years (clause 46). The amendments will apply to disposals after 26 February 1992 (sub- clause 67(10)).
Section 160Y provides that a provision deeming that death does not constitute a disposal,of an asset for the purposes of the CGT does not apply where the disposal is to a tax- advantaged person (i.e. a tax exempt person, a complying superannuation fund or approved deposit fund). In such cases there will be a deemed disposal on death. Clause 26 will include in the operation of 160Y disposal where the person died after 2 April 1992, the asset was acquired after the introduction of the CGT, the beneficiary is a non- resident and the asset is not a taxable Australian asset.
Clause 33 will insert a new section 160ZYJA into the Principal Act dealing with the application of the CGT to employee share trusts. Under such schemes, the difference, if any, between the value of the share and the amount paid for it are included in the income of the taxpayer acquiring the share. Under the amendment, where this occurs, and the amount paid for the share was less than the indexed cost base of the share to the trustee, the CGT will not apply to the trustee on the disposal of the share. A similar amendment will apply to the acquisition of a right to acquire a share in these circumstances. This will prevent a capital loss arising to the trustee.
Generally, the CGT does not apply to the transfer of property on the breakdown of a marriage where the transfer is ordered or approved by a court. Amendments contained in clauses 37 and 38 will extend this exemption to the breakdown of de- facto relationships.
Section 160ZZQ of the Principal Act deals with the treatment of the principal place of residence. Clause 44 will insert a new sub- section in to this provision that will provide that where an agreement is entered into for the acquisition or disposal of such a property and the legal ownership does not pass until a later time, the ownership of the land will be based on the legal ownership.
Foreign Source Income Australian companies with income derived from a controlled foreign company (CFC) include in their income a proportion of the income from the CFC based on their direct and indirect attributable interest in the CFC. Certain income of the CFC is excluded from the calculation of the attributable interest and therefore from the income. Currently, this includes dividends related to widely distributed finance shares. Clauses 56 to 59 will include in this exemption income from transitional finance shares. This is defined in clause 56 by reference to a number of criteria, but basically refers to certain shares that were funded by the issue of widely distributed financial shares. Basically, the amendment excludes dividend income from such shares from the income that is attributed to the Australian taxpayer.
Division 8 of the Principal Act provides for exempt income and income from eligible non- resident policies to be excluded from the calculation of the taxable income of life assurance companies. The main amendment to this provision is contained in clause 21 and exempts income attributable to policies issued by foreign permanent establishments. Where income is derived from assets included in the statutory assets of the fund that are described in the accounts as assets of a permanent establishment in a foreign country, and the income is derived in a foreign country, a proportion of income will be excluded from the income of the life assurance company. This will be calculated in accordance with the formula contained in clause 21, which is based on the proportion of such liabilities in respect of non- resident policies to total liabilities relating to the foreign permanent establishment (i.e. to be excluded the income must relate to the liabilities of a foreign permanent establishment).
Company Tax for 1991- 2 Part 3 of the Bill deals with the deferral of company tax payments for 1991- 2, as announced in the One Nation statement. Clause 77 provides that where a companies tax liability is less than $400 000, the initial payment of tax will be deferred from the 28th day of the month after balancing to the 28th day of the third month after balancing. Clause 78 provides that where a company, other than a life assurance company, defers their initial tax payment, the franking deficit tax will also be postponed. For life assurance companies, the basic rule will be that the franking deficits tax will be postponed. Clauses 80 to 84 provide that the operation of the franking system will not be effected by the deferral of tax.
Pay and Allowances of Members of the Defence Forces Serving in Cambodia Section 23AC of the Principal Act provides for the pay and allowances of members of the Defence Forces to be exempt from tax when they are serving in operational areas. Clause 5 will amend this section to provide that Cambodia will be taken to have been an operational area from 20 October 1991.
Superannuation Taxpayers are allowed deductions for superannuation contributions for employees in respect of contributions to a maximum of two funds (section 82AAC). Clause 16 will amend this provision to provide that this rule will be taken never to have applied if the contributions in respect of an employee are made to a maximum of three funds where one of the funds is established by a law of a Commonwealth, State or Territory and existed before 1 July 1990.
Medicare Levy Clauses 52 and 53 will amend sections 251R and 251U of the principal Act to clarify who is exempt, or partially exempt, from the Medicare levy. The effect of the amendments will be to restrict the exemption from half the levy to blind pensioners and sickness allowance beneficaries. The amendment is necessary due to previous amendments that were intended to achieve this result by restricting the range of people eligible for the concession. However, those amendments restricted the concession to a narrower range of people. The amendments will operate from 1 July 1991 (sub- clauses 67 (9) and (10)).
Bills Digest Service Parliamentary Research Service For further information, if required, contact the Economics and Commerce Group on 06 2772460.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Commonwealth of Australia 1992
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Published by the Department of the Parliamentary Library, 1992.