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Taxation Laws Amendment Bill (No. 6) 1990



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House: House of Representatives

Portfolio: Treasury

Purpose

The main amendments in the Bill relate to:

* the recently introduced bereavement allowance;

* the extension of mining, quarrying and oil prospecting deductions to expenditure outside Australia;

* a reduction in the medical rebate of 1% to 20%;

* the calculation of franking credits and debits for life assurance companies;

* the capital gains tax treatment of assets transferred from a partnership to a company in certain situations;

* the capital gains tax treatment of a transferr of assets between companies under common ownership; and

* the reduction of the 20% marginal tax rate to 20%.

Background

The amendments are of a technical nature and contain no major policy initatives. As such there is no central background theme.

Main Provisions

Most social security payments are included in assessable income under the Income Tax Assessment Act 1936 (the Principal Act), although section 23AD contains a number of exemptions from this rule. Clause 10 will repeal sub-section 23AD(3)(e), which exempts the special temporary allowance, and substitutes new paragraphs. The amendments largely reflect recent changes to the Social Security Act 1947 which led to the replacement of the special temporary allowance with the berevement allowance. Basically, the amendments will provide for the amount received under the berevement allowance to be exempt for the period of payment of the allowance (seven days). The amendments also provide for the lump sum payable as a berevement allowance to be exempt. Similar arrangements will apply for those who receive a berevement allowance under the Veterans' Entitlement Act 1986.

Bad debts are generally allowable deductions under the Principal Act. Clause 14 will insert a new section 63D into the Principal Act which will limit the deductions for certain bad debts for ceratin money lenders. Where, during a period, possible income from the debt would not have been assessable, the deduction will be reduced to reflect the period in which the potential income would not have been assessable.

Capital expenditure on mining, quarrying and prospecting for oil are allowable deductions so long as the expenditure is incurred in Australia. Clauses 17 to 27 will amend various sections of the Principal Act to extend the deduction to expenditure outside Australia so long as it relates to income that would be assessable in Australia. This measure is estimated to cost approximately $15 million per year.

Division 10B of Part III of the Principal Act deals with the treatment of industrial property. This is currently defined to be certains rights existing in Australia. The definition of industrial property will be amended by clause 28 to include equivalent rights outside Australia. Similarly, section 124ZF, which deals with the treatment of research and development activities, will be amended by clause 29 to include such activities conducted outside Australia.

The rate of rebate for medical expenses in excess of $1000 will be reduced from 21% to 20% by clause 32. This will apply from 1 July 1991, the same date as the reduction in the rate of rebate to 21% was due to commence under the Taxation Laws Amendment (Rates and Provisional Tax) Act 1990.

Clause 36 will insert a new section 160APKA into the Principal Act. The effect of the proposed section will be that franking credits will not arise, after 21 August 1990, in respect of a mutual life assurance company or a SGIO (i.e. a public authority that conducts life assurance). In another amendment relating to life insurance, clause 37 will amend section 160APP of the Principal Act to provide that franking credits earned in respect to insurance funds, reduced by 80% of the normal amount, will be available to life assurance companies. Such credits are currently not frankable. (N.B. A distinction must be made between mutual life assurance companies and other life assurance companies. The differing definitions of the terms are contained in section 110 of the Principal Act.)

Clause 39 will insert a number of new sections into the Principal Act which deal with the calculation of franking deficits for life assurance companies. Basically, the Principal Act contains a number of provisions that provide for a franking debit to arise on the application of tax paid or the application of a tax credit. These amounts are subsequently reduced where there has been a refund or credit of any overpaid tax. The amendments will reduce, for life assurance companies, the amount of such franking debits that will arise. Section 160APYA of the Principal Act provides for a franking credit to arise on the initial payment of tax. Clause 39 will insert a new section 160APVA into the Principal Act which will provide, for life assurance companies, for offsetting credits to arise where a section 160APYA debit occurs. The franking credit will be related to 80% of the initial payment related to the percentage of the previous years tax that was not related to the non-fund component of the previous years tax. Similar provisions will apply in relation to franking debits that arise under section 160APYAA (which deals with subsequent payments of tax); and section 160APYB (which deals with certain refunds). A similar situation, with the credit to be calculated according to a different formula, which relates to 80% of the difference between the amount of reduction less the amount related to the non-fund component of that reduction, will arise in respect of section 160APZ debits (which deals with amended assessments); and section 160AQA debits (the allowance of foreign tax credits). The amendments reducing the franking debit available are mirrored by amendments contained in clause 42. These amendments will reduce the credits available where there has been an initial or subsequent payment of tax or a deemed assessment. The effect of the amendments contained in clauses 39 and 42 will be to limit the franking credits and debits that arise to so much of the tax that relates to fund earnings.

A new section 160ZZNA will be inserted into the principal Act by clause 58 and will clarify the situations where roll-over relief from the capital gains tax (CGT) will be available when the assets of a partnership are transferred to a wholly owned company. The effect of the provision will be to exempt such assets held before the introduction of the CGT even though there is a disposal to the company. To be eligible for the relief a number of conditions must be satisfied:

* all of the partners must dispose of their interests in the assets of the partnership to the company;

* the consideration for the disposal consists of non-redeemable shares and the value of the shares is substantially the same as the market value of the assets with adjustment for any additional liabilities incurred;

* all the shares are owned by the ex-partners and in the same proportion as the assets were held;

* certain residence requirements are satisfied, with one of the following applying:

(i) the person and the company are Australian residents; or

(ii) the company is a resident and the asset is a taxable Australian asset; or

(iii) the asset was a taxable Australian asset and immediately after disposal it is a taxable Australian asset of the company.

* if shares are held by a trustee, they are held on the same terms as the asset was held; and

* all of the ex-partners have elected that this provision apply.

If these requirements are satisfied the Part dealing with the CGT will not apply. The effect of the remainder of the proposed section is that a proportion of the shares in the same relation as the ratio of pre-September 1985 assets (i.e. assets to which the CGT does not apply) to post September 1985 assets will be exempt.

A new Division 19A, dealing with the transfer of assets between companies with common ownership, will be inserted into the Principal Act by clause 61. Companies will be taken to be under common ownership if they are group companies as defined in the Principal Act or the underlying share interest in the companies are held by the same people and each person holds non-finance shares in the companies in the same proportion (proposed section 160ZZRB).The proposed Division will apply where the asset is subject to the CGT; the transferer and transferor are under common ownership; and the consideration for the transfer is less than the lower of the indexed cost base on transfer and the market value (proposed section 160ZZRD). Where this occurs, and the share held in the transferor has been deemed to have been disposed of, the person who acquired the shares will be deemed, for purposes of the CGT, to have acquired the shares with a cost base reduced in proportion to the assets held that are free from CGT liability.

Clause 66 will amend section 324 of the principal Act which deals with liability under the foreign source income rules. The basic effect of the amendment will be that where an entity moves from a listed country that would not have imposed tax on a capital gain to one that does, the liability for tax on disposal will not be imposed on the gain acquired during the period in the listed country that did not impose such a tax.

Section 456 of the Principal Act, which deals with the attribution of income under the foreign source income rules. Basically, the amendment will provide that where an entity has an interest in another entity that is liable for the tax and the first entity is subject to an accruals tax, the foreign source income of the entity liable for the foreign source income tax will have its foreign source income reduced by a proportion that relates to the interest held.

The Income Tax Rates Act 1986 will be amended by clause 91 to reduce the lowest marginal rate of income tax to 20% from 21% from 1 July 1991. This is estimated to cost $1 billion in a full financial year.

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 1991

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Published by the Department of the Parliamentary Library, 1991.