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Tax Laws Amendment (2011 Measures No. 4) Bill 2011



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ISSN 1328-8091

Parliament of Australia Departmentof Parliamentary Services

Contents

Purpose .................................................................................................................................................... 2

Financial implications ............................................................................................................................... 2

Key provisions .......................................................................................................................................... 3

Schedule 1—Reduction in 2011-12 PAYG instalments ...................................................................... 3

Schedule 2—Low-income taxpayer rebate ......................................................................................... 4

Schedule 3—Disability superannuation benefits ................................................................................ 5

Part 1, Division 1 ............................................................................................................................ 5

Part 1, Division 2 ............................................................................................................................ 6

Part 2, Division 1 ............................................................................................................................ 6

Schedule 4—Reportable employer superannuation contributions .................................................... 7

BILLS DIGEST NO. 139, 2010-11 20 June 2011

Tax Laws Amendment (2011 Measures No. 4) Bill 2011

John Murray Law and Bills Digest Section

2 Tax Laws Amendment (2011 Measures No. 4) Bill 2011

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.

Tax Laws Amendment (2011 Measures No. 4) Bill 2011

Date introduced: 26 May 2011

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1-4, on the day of the Royal Assent; Schedule 1, Part 1, and Schedule 1, Part 3, on the day after the Royal Assent; Schedule 1, Part 2 on 1 July 2016; Schedule 2, Schedule 3, Part 2, Division 1 and Schedule 4, the day of the Royal Assent; Schedule 3, Part 2, Division 2, 1 January 2017.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/bills/. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose

The Bill contains four Schedules, each with a different purpose:

• to amend the quarterly income tax instalment provisions of the Taxation Administration Act 1953

(the TAA 1953) in order to improve cash flow for taxpayers (especially small business owners) whose instalments are adjusted for previous years’ gross domestic product growth (Schedule 1) • to amend the rebate provisions of the Income Tax Assessment Act 1936 (the ITAA 1936) to

remove the ability of minors to claim the low-income tax offset in relation to unearned income (Schedule 2) • to amend the Income Tax Assessment Act 1997 (the ITAA 1997) and the Income Tax (Transitional

Provisions) Act 1997 (the Transitional Provisions Act) in order to streamline the process by which superannuation funds claim deductions for certain insurance premiums (Schedule 3), and • to amend the TAA 1953 in order to modify the definition of reportable employer superannuation

contribution (Schedule 4).

Financial implications

According to the Explanatory Memorandum, the Bill has the following financial implications

• Schedule 1: nil net impact over the forward estimates period

• Schedule 2: $740 million increase in revenue over the forward estimates period

• Schedule 3: nil, and

Tax Laws Amendment (2011 Measures No. 4) Bill 2011 3

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• Schedule 4: nil. 1

Key provisions

Schedule 1—Reduction in 2011-12 PAYG instalments

The Gillard Government announced the measure contained in Schedule 1 on 10 May 2011 as part of the 2011-12 Federal Budget.2

Taxpayers earning business or investment income are required to submit half-yearly or quarterly pay-as-you-go (PAYG) income tax instalments. One of the methods for calculating the amount of the instalment is the GDP adjustment method, contained in subdivision 45-L of Schedule 1 to the TAA 1953. Under this method, the amount of the instalment is adjusted upwards to take into account GDP growth during the income year. The method is available to a variety of taxpayers including small business entities, individuals and companies with income of less than $2 million for the base year.3

Generally, the amount of the adjustment is calculated using a formula contained in section 45-405(3). For the 2009-10 and 2010-11 income years, however, the adjustment is set at 2 per cent.4

For the 2011-12 income year, the adjustment calculated using the formula contained in section 45-403(3) would be 8 per cent.5 The amendments contained in the schedule set the adjustment at 4 per cent for the 2011-12 income year in order to reduce the adjustment from one income year to the next.

Item 2 inserts proposed subparagraph 45-405(3)(aa) which sets the adjustment for the current year at 4 per cent.

Item 4 inserts a note advising that the paragraph will be repealed on 1 July 2016 (under Part 2 of Schedule 1 to the Bill)

Items 5 to 8 amend Schedule 1 to the Tax Laws Amendment (2009 Measures No. 3) Act 2009, which provides for the sunsetting of the 2 per cent adjustment for 2009-10 on 1 July 2014. The

1. Explanatory Memorandum, Tax Laws Amendment (2011 Measures No. 4) Bill 2011, pp. 3-5. 2. W Swan (Deputy Prime Minister and Treasurer), B Shorten (Assistant Treasurer) and N Sherry (Minister for Small Business), More help for Australian small businesses, media release, 10 May 2011, viewed 8 June 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F762460%22

3. Under section 45-130 of Schedule 1 to the TAA 1953. 4. This figure was set to provide tax relief during the global financial crisis by the Tax Laws Amendment (2009 Measures No. 3) Act 2009. 5. Explanatory Memorandum, p. 8.

4 Tax Laws Amendment (2011 Measures No. 4) Bill 2011

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amendments will ensure that the sunsetting provisions remain effective despite the addition of the 4 per cent adjustment for 2011-12.

Items 9 to 11 (which commence on 1 July 2016) amend the TAA 1953 so that the 4 per cent adjustment for 2011-12 will sunset on 1 July 2016.

Item 12 contains an application provision for the 4 per cent adjustment for 2011-12, which will apply to instalments becoming due after the commencement of the item and where the taxpayer’s income year starts on or after 1 April 2011.

Schedule 2—Low-income taxpayer rebate

The Gillard Government announced the measure contained in Schedule 2 on 10 May 2011 as part of the 2011-12 Federal Budget.6

Under section 159N of the ITAA 1936, taxpayers whose taxable income is less than $67 500 in a given income year are entitled to a $1500 rebate, reduced by 4 cents for every dollar earned above $30 000 (the low-income rebate).

Item 3 of Schedule 2 inserts proposed subsections 159N(3), (4) and (5). The amendments provide that if a taxpayer is a prescribed person (that is, a person under the age of 18)7, the low-income rebate cannot be applied against that person’s basic income tax liability that is attributable to his or her eligible taxable income. Under Division 6AA of Part III of the ITAA 1936, eligible taxable income is unearned income such as dividends, royalties and interest payments. Unearned income of minors over a certain level ($1308 for resident taxpayers; $733 for foreign resident minors) is taxed at the highest marginal rate of tax (that is, 45 per cent). Taxpayers under the age of 18 can still use the low-income tax offset to reduce tax payable on earned income. Under proposed subsection 159N(5), if the taxpayer is entitled to a pensioner tax offset that offset can still be used to reduce tax on unearned income.

Section 63-10 of the ITAA 1997 contains priority rules for determining the order in which tax offsets are to be applied against income. Item 4 of the Schedule inserts a new table item 17 into the table in subsection 63-10(1) of the ITAA 1997. The effect of the amendment is that any low-income tax offset is applied before most tax offsets, and cannot be transferred to another taxpayer or carried forward to a later income year.

Item 6 applies the amendments to assessments from the 2011-12 income year and later income years.

6. B Shorten (Assistant Treasurer and Minister for Financial Services and Superannuation), Changes to the low income tax offset for non-work income of minors, media release, 10 May 2011, viewed 8 June 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F757679%22

7. Under section 102AC of the ITAA 1936, a taxpayer who is under the age of 18 on the last day of the income year is a prescribed person for the purposes of the rebate.

Tax Laws Amendment (2011 Measures No. 4) Bill 2011 5

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Schedule 3—Disability superannuation benefits

Superannuation funds may claim deductions for premiums for insurance against liability to pay total and permanent disability (TPD) benefits. The need for the amendments arose when the deduction provisions were rewritten and transferred from the ITAA 1936 to the ITAA 1997.8 Industry practice under the ITAA 1936 was to fully deduct the cost of all insurance policies which insured against any form of TPD.9 The ITAA 1997 specified a narrower class of TPD benefits for which deductions are available. Amendments made by the Superannuation Legislation Amendment Act 2010 to the ITAA 1997 currently require a fund to obtain an actuary’s certificate in order to determine the proportion of a premium for insurance against liability for TPD that can be claimed as a deduction.

The amendments in the schedule simplify the rules to allow a superannuation fund to claim a percentage specified in regulations rather than a percentage determined by an actuary. The percentage is to be determined by the Government in consultation with industry.10

The amendments supersede transitional arrangements which applied between 2004-05 and 2010-11.11

Part 1, Division 1

Under section 295-465(1) of the ITAA 1997, complying superannuation funds12 can claim deductions for premiums on insurance against liability to pay benefits for TPD, but only for that portion of the policy which is attributable to liability for superannuation death benefits, disability benefits and some temporary unemployment benefits (as specified in section 295-460).13

Item 2 inserts proposed subsections 295-465(1A) and (1B). Under the proposed subsections, complying superannuation funds will be able to claim deductions for a proportion, specified in regulations, of premiums for TPD insurance policies which cover a broader range of benefits than those specified in section 295-460. Funds will retain a discretion to deduct a proportion other than that specified in the regulations but must obtain an actuary’s certificate under subsection 295-465(3).

8. With the enactment of the Tax Laws Amendment (Simplified Superannuation) Act 2007. 9. Explanatory Memorandum p. 16. 10. D Bradbury, ‘Second reading speech: Tax Laws Amendment (2011 Measures No. 4) Bill 2011’, House of Representatives, Debates, 31 May 2011, p. 52, viewed 15 June 2011,

http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F2011-05-31%2F0090%22 11. Under the Superannuation Legislation Amendment Act 2010. See L Nielsen, Superannuation Legislation Amendment Bill 2010, Bills Digest, no. 9, 2010-11, Parliamentary Library, Canberra, 15 October 2010,

http://www.aph.gov.au/library/pubs/bd/2010-11/11bd009.pdf 12. Complying superannuation fund is defined (in section 995 of the ITAA 1997) as a fund which has received a notice under the Superannuation Industry (Supervision) Act 1993 stating that the fund is a complying superannuation fund

for the purposes of the ITAA 1936 and ITAA 1997. 13. The types of benefits for which deductions are available are listed in section 295-460 of the ITAA 1997.

6 Tax Laws Amendment (2011 Measures No. 4) Bill 2011

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Item 3 inserts proposed subsection 295-465(3A), which removes a requirement for an actuary’s certificate where a fund claims deductions under proposed subsection 295-465(1B).

Item 4 applies the amendments contained in the proposed Division to premiums paid in the 2011-12 and later income years.

Part 1, Division 2

Subsection 295-465(2) allows a self-insuring fund access to the same deductions as a fund which obtains insurance from a third party by allowing a fund to deduct an amount which it could reasonably be expected to pay, but has not in fact paid, for insurance against liability to pay TPD benefits.

Item 6 inserts proposed subsections 295-465(2A) and (2B). The proposed subsections provide for the regulations to specify the proportion which is deductible under subsection 295-465(2), and to specify the policies for which premiums are deductible.

Item 7 applies the amendments contained in the proposed Division to premiums paid in the 2011-12 and later income years.

Part 2, Division 1

Part 2, Division 1 contains transitional arrangements for self-insuring funds for premium deductions during the 2004-05 to 2010-11 income tax years.

Item 8 contains stand-alone provisions (provisions which are not amendments to any existing legislation). The provisions allow a fund to deduct premiums for insurance against liability for death and disability benefits incurred in the 2004-05 to 2006-07 income tax years. The disability to which the insurance relates must be described as a permanent disability in regulations made for the purpose of proposed section 295-466 of the Transitional Provisions Act (see discussion of item 11 below).14

An exposure draft of the provisions contained in item 8 was released by Treasury in mid-2010. Submissions on the exposure draft were generally supportive, and the provisions as presented are identical to those in the exposure draft.15

14. Exposure Draft regulations are available at: http://www.treasury.gov.au/contentitem.asp?NavId=&ContentID=1894 (viewed 15 June 2011) 15. Treasury, ‘Transitional relief in respect of income tax deductibility of total and permanent disability (TPD) insurance premiums by superannuation funds’, Treasury website, 6 May 2010, viewed 9 June 2011,

http://www.treasury.gov.au/contentitem.asp?ContentID=1799&NavID=

Tax Laws Amendment (2011 Measures No. 4) Bill 2011 7

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Item 11 inserts proposed section 295-466 into the Transitional Provisions Act. The section contains deduction rules for the 2007-08 to 2010-11 income tax years. Under proposed subsections 295-467(2) and (3), for the purposes of obtaining a deduction for insurance premiums under section 295-465 of the ITAA 1997 for benefit liability for the 2007-08 to 2010-11 income tax years, the disability must be described in the regulations as a permanent disability.

Proposed section 295-467(4) applies to allow funds to amend income tax assessments made before commencement of the amendments, and within 2 years after commencement of the section.

Item 12 (the sole item in Part 2, Division 2) repeals proposed section 295-466 on 1 January 2017.

Schedule 4—Reportable employer superannuation contributions

Schedule 4 contains amendments to the TAA 1953 to ensure additional employer contributions required by an industrial agreement or the rules of a particular superannuation fund are not treated as reportable employer superannuation contributions.

Subsection 16-182(1) of Schedule 1 to the TAA 1953 defines reportable employer superannuation contribution (reportable contribution). A reportable contribution is an employer contribution to a superannuation fund, over and above the compulsory 9 per cent contribution, where the individual concerned has some influence over the contribution. Reportable contributions are counted as income for the purpose of assessing eligibility for a variety of means-tested assistance programs including child care and family assistance benefits.16

The measure was announced on 30 June 2010, after the Government became aware that certain contributions prescribed by regulation were being treated by the Australian Taxation Office as falling within the definition of reportable contribution, contrary the Government’s intention. 17

Item 4 inserts proposed subsection 16-182(5). The effect of the amendment is that where any employer is required to contribute an amount to a superannuation or retirement savings account by an industrial instrument18 or the rules of a superannuation fund, the employee is deemed to not have the capacity to influence the amount of the contribution. Such a contribution then falls outside the definition of reportable contribution in section 16-182(1) and is not counted as income for the purpose of means-tested assistance programs.

16. For a full list of these programs, see: http://www.fahcsia.gov.au/guides_acts/fag/faguide-3/faguide-3.2/faguide-3.2.9.html 17. C Bowen (then Minister for Financial Services, Superannuation and Corporate Law), Reportable Employer Superannuation Contributions, media release, no. 80, 30 June 2010, viewed 6 June 2011,

http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2FL56X6%22 18. Section 995-1 of the ITAA 1997 defines industrial instrument as an Australian law, or an award, order determination of industrial agreement in force under Australian law.

8 Tax Laws Amendment (2011 Measures No. 4) Bill 2011

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Item 5 applies the amendments to income years starting on or after 1 July 2009, the date when the reportable contribution provisions commenced.19

19. The reportable contribution provisions were inserted into the TAA 1953 by the Tax Laws Amendment (2009 Measures No. 1) Act 2009.

Tax Laws Amendment (2011 Measures No. 4) Bill 2011 9

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© Commonwealth of Australia 2011

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