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Tax Laws Amendment (2004 Measures No. 1) Bill 2004

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2002-2003-2004

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

tax laws amendment (2004 measures n o . 1) bill 2004

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Treasurer, the Hon Peter Costello, MP)

 



T able of contents

Glossary                                                                                                               1

General outline and financial impact............................................................ 3

Chapter 1            Medical expenses tax offset............................................. 11

Chapter 2            Deduction for transport between workplaces................ 15

Chapter 3            Small business capital gains tax relief and

discretionary trusts............................................................. 23

Chapter 4            Energy Grants (Credits) Scheme transitional arrangements          33

Chapter 5            Net input tax credits and capital gains tax..................... 37

Chapter 6            Confidentiality of Australian Business Number information          41

Chapter 7            Deductions for contributions relating to fund-raising events          45

Chapter 8            Distributions to certain entities......................................... 63

Chapter 9            Section 46FA - deductions for dividends on-paid to

non-resident owner............................................................ 73

Chapter 10         Endorsement of charities to access relevant tax concessions       77

Chapter 11         Specific gift recipients....................................................... 87

Index                                                                                                                  89



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

ABN

Australian Business Number

ABN Act

A New Tax System (Australian Business Number) Act 1999

ABN Regulations

A New Tax System (Australian Business Number) Regulations 1999

ABR

Australian Business Register

ATO

Australian Taxation Office

CBP

Prime Minister’s Community Business Partnership

CGT

capital gains tax

Commissioner

Commissioner of Taxation

DAFGS

Diesel and Alternative Fuels Grants Scheme

DGR

deductible gift recipient

DFRS

Diesel Fuel Rebates Scheme

EGCS

Energy Grants (Credits) Scheme

EGCS Act

Energy Grants (Credits) Scheme Act 2003

EGCS(CA) Act

Energy Grants (Credits) Scheme (Consequential Amendments) Act 2003

FBT

fringe benefits tax

FBT Act

Fringe Benefits Tax Assessment Act 1986

GST

goods and services tax

GST Act

A New Tax System (Goods and Services Tax) Act 1999

ITAA 1997

Income Tax Assessment Act 1997

ITAA 1936

Income Tax Assessment Act 1936

Myer Report

Report of the Contemporary Visual Arts and Craft Inquiry

Registrar

Registrar of the Australian Business Register

TAA 1953

Taxation Administration Act 1953

 



Medical expenses tax offset

Schedule 1 to this bill amends the ITAA 1936 to broaden the list of eligible medical expenses under the medical expenses tax offset to include payments made in maintaining properly trained dogs for guiding or assisting people with a disability.

Date of effect :  The amendment applies in relation to the 2002-2003 income year and later income years.

Proposal announced :  The measure was announced in Treasurer’s Press Release No. 44 of 13 May 2003.

Financial impact :  The cost to revenue of this measure is unquantifiable, but expected to be insignificant.

Compliance cost impact :  Taxpayers who become eligible to claim for maintaining a hearing or assistance dog will be required to keep evidence of their expenses. This is not expected to impose a significant compliance cost.

Deduction for transport between workplaces

Schedule 2 to this bill amends the income tax law to provide an income tax deduction for certain expenses incurred in travel between workplaces.

Date of effect :  The amendments apply to assessments for the 2001-2002 income year and later years.

Proposal announced :  The measure was announced in Treasurer’s Press Release No. 78 of 8 October 2001.

Financial impact :  Nil.

Compliance cost impact :  Nil.

Small business capital gains tax relief and discretionary trusts

Schedule 3 to this bill amends the ITAA 1997 to improve the operation of the test that is used to determine when an entity controls a discretionary trust for the purpose of applying the small business CGT concessions.

The modified test will ensure that, subject to transitional arrangements, an entity will be taken to control a discretionary trust only if, for any of the four income years before the income year for which access to the small business CGT concessions is sought:

·          the trustee paid to, or applied for the benefit of, the entity and/or its small business CGT affiliates any income or capital of the trust; and

·          the amount paid or applied to the entity and/or its small business CGT affiliates is at least 40% of the total amount of income or capital paid or applied by the trustee for that income year (subject to the Commissioner’s discretion where the amount paid or applied to the entity and/or its small business CGT affiliates is between 40% and 50%).

Distributions to exempt entities and deductible gift recipients (DGRs) will be ignored for the purposes of applying the new control test.

In addition, for an income year in which the discretionary trust has a tax loss and for which the trustee does not make any distribution of income or capital, the trustee may nominate up to four beneficiaries as being controllers of the trust.

Date of effect :  The amendments apply to CGT events happening after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999. Under a transitional rule, for CGT events that happen before 30 June 2004, taxpayers can choose to apply the existing control test for discretionary trusts.

Proposal announced :  The measure was announced in Minister for Revenue and Assistant Treasurer’s Press Release No. C097/03 of 16 October 2003.

Financial impact :  The measure is expected to have minimal revenue impact.

Compliance cost impact :  The measure will have minimal compliance costs.

Energy Grants (Credits) Scheme transitional arrangements

Schedule 4 to this bill amends the transitional arrangements of the Energy Grants (Credits) Scheme (EGCS), which deal with the treatment of claims for fuel purchased in the three years preceding the introduction of the scheme. The changes will rectify an anomaly that may have seen an unintended entitlement to concessional treatment created in certain circumstances under the EGCS that did not previously exist in the schemes that it replaces.

Date of effect :  Items 1 to 7 of Schedule 4 commence retrospectively on 1 July 2003, the date the existing provisions took effect. Item 8, which deals with the recovery of payments made for claims lodged before these amendments occurred but made ineligible by these amendments, takes effect on the day that this bill receives Royal Assent.

Proposal announced :  The measure has not been announced.

Financial impact :  There is no financial impact if the measure is implemented. However, a negative impact of up to approximately $11 million is possible if it is not implemented.

Compliance cost impact :  Nil.

Net input tax credits and capital gains tax

Schedule 5 to this bill amends the ITAA 1997 to ensure that GST net input tax credits are excluded from the cost base, reduced cost base and other relevant amounts used for the purposes of working out the amount of a capital gain or capital loss.

Date of effect :  The amendments apply to CGT events that happen after the day this bill is introduced into the Parliament.

Proposal announced :  The measure has not been announced.

Financial impact :  There is likely to be a small positive impact on revenue, although the extent of the impact is unquantifiable.

Compliance cost impact :  This measure is likely to have a minimal compliance cost impact.

Confidentiality of Australian Business Number information

Schedule 6 to this bill amends the A New Tax System (Australian Business Number) Act 1999 (ABN Act) to ensure that the law operates as intended.

The amendments put beyond doubt the scope of the purposes for which protected Australian Business Number (ABN) information is able to be disclosed to Commonwealth agency heads and States and Territories department heads. The disclosure extends the purposes of carrying out their agencies’ functions. This will make it easier for businesses to conduct their dealings with the Commonwealth, State and Territory Governments.

Date of effect :  The amendments apply to disclosures that occurred on or after 15 October 2001. The amendments will align the ABN Act with an amendment to the A New Tax System (Australian Business Number) Regulations 1999 (ABN Regulations) that was gazetted on that date.

Proposal announced :  The measure has not been announced.

Financial impact :  Nil.

Compliance cost impact :  Nil.

Deduction for contributions relating to fund-raising events

Schedule 7 to this bill amends the income tax law to provide an income tax deduction for contributions of cash or property to a deductible gift recipient (DGR), where a minor benefit is received in return.

Date of effect :  The amendments apply to contributions made on or after 1 July 2004.

Proposal announced :  The measure was announced in Prime Minister’s Press Release of 9 September 2003.

Financial impact :  Nil.

Compliance cost impact :  Nil.

Distributions to certain entities

Schedule 8 to this bill amends the ITAA 1936 to include a new Subdivision dealing with certain loans, payments and forgiven debts by a trustee to a shareholder (or their associate) of a private company.

The amendments are designed to ensure that a trustee cannot shelter trust income at the prevailing company tax rate by creating a present entitlement to a private company without paying it and then distributing the underlying cash to a shareholder of the company. The rules replace the former section 109UB of the ITAA 1936 that had a similar, but more limited, application.

Date of effect :  The amendments generally apply to payments, loans and debts forgiven on or after 12 December 2002.

Proposal announced :  The measure was announced in Treasurer’s Press Release No. 81 of 12 December 2002. Further details of the measure were announced in Treasurer’s Press Release No. 55 of 25 June 2003.

Financial impact :  The financial impact of the measure is expected to be negligible.

Compliance cost impact :  Nil.

Section 46FA - deductions for dividends on-paid to non-resident owner

Schedule 9 to this bill amends Part III of the ITAA 1936 to ensure that the section 46FA deduction, which allows certain resident companies a deduction for on-payments of certain unfranked or partly franked non-portfolio dividends to their wholly-owned foreign parents, continues to be available to taxpayers.

Date of effect :  The amendment will generally apply to dividends paid after 30 June 2003, subject to the transitional rule allowing groups to consolidate either before 30 June 2003 or on the first day of the first income year after 30 June 2003 and before 1 July 2004.

Other amendments to ensure consistency with other provisions in the income tax law, including the simplified imputation system, will apply to dividends paid on or after 1 July 2002.

Proposal announced :  The measure has not been announced.

Financial impact :  Nil.

Compliance cost impact :  Nil. The amendments merely ensure that the deduction continues to be available to taxpayers, subject to certain conditions being met.

Endorsement of charities to access relevant tax concessions

Schedule 10 to this bill requires charities, including public benevolent institutions and health promotion charities to be endorsed by the Commissioner in order to access all relevant taxation concessions.

Schedule 10 also requires any charity so endorsed to display their charitable status on the Australian Business Register (ABR).

These changes are part of the Government’s response to the Report of the Inquiry into the Definition of Charities and Related Organisations . It will allow greater scrutiny of the use of taxation concessions by charities and improve public confidence in the provision of taxation support to the charitable sector.

Date of effect :  1 July 2004.

Proposal announced :  The measure was announced in Treasurer’s Press Release No. 49 of 29 August 2002.

Financial impact :  This measure was announced as part of the Government’s response to the Report of the Inquiry into the Definition of Charities and Related Organisations , which involves a cost to revenue of $2 million in 2004-2005 and $4 million in 2005-2006.

Compliance cost impact :  The number of charities likely to seek endorsement is unknown. It is expected that additional compliance costs arising as a result of this measure will be low.

Specific gift recipients

Schedule 11 to this bill amends the ITAA 1997 to update the lists of specifically-listed deductible gift recipients (DGRs).

Date of effect

Deductions for gifts to specifically-listed DGRs under Schedule 11:

·          Dunn and Lewis Youth Development Foundation Limited from 10 November 2003 to 9 November 2005;

·          Crime Stoppers South Australia Limited from 19 September 2003;

·          Country Education Foundation of Australia Limited from 20 August 2003; and

·          Bowral Vietnam Memorial Walk Trust Incorporated from 16 August 2003 to 16 August 2005.

Proposal announced :  The new specifically-listed DGRs contained in Schedule 11 were announced in Minister for Revenue and Assistant Treasurer’s press releases during 2002 and 2003.

Financial impact :  The amendments in Schedule 11 have an unquantifiable, but insubstantial, cost to revenue.

Compliance cost impact :  Nil.

 



C hapter 1  

Medical expenses tax offset

Outline of chapter

1.1         Schedule 1 to this bill amends the ITAA 1936 to broaden the list of eligible medical expenses under the medical expenses tax offset to include payments made in maintaining a properly trained dog for guiding or assisting people with a disability.

Context of amendments

1.2         Payments for maintaining properly trained dogs for people who are blind can currently be claimed under the medical expenses tax offset.

1.3         This amendment will ensure that the same treatment is available for expenses incurred in maintaining properly trained dogs for guiding or assisting people with a disability.

Summary of new law

1.4         Under the amendment, expenses incurred in maintaining a dog for guiding or assisting a person with a disability will be qualifying medical expenses for the purposes of the medical expenses tax offset, where the Commissioner is satisfied that the dog is properly trained in the guidance or assistance of persons with disabilities.

Comparison of key features of new law and current law

New law

Current law

Payments incurred in maintaining a dog for guiding or assisting a person with a disability are qualifying medical expenses under the medical expenses tax offset where the Commissioner is satisfied that the dog is properly trained in the guidance or assistance of people with disabilities.

Payments incurred in maintaining a dog for guiding a person who is blind are qualifying medical expenses under the medical expenses tax offset where the Commissioner is satisfied that the dog is properly trained by a public institution in the guidance of people who are blind.

Detailed explanation of new law

1.5         Section 159P of the ITAA 1936 allows a tax offset at the rate of 20% of any net qualifying medical expenses (i.e. qualifying medical expenses less available reimbursements, such as Medicare and private health insurance refunds) above $1,500 in an income year. The tax offset may be claimed by a resident individual for expenses incurred in respect of himself/herself and/or resident dependants.

1.6         Subsection 159P(4) sets out those payments that qualify as medical expenses for the purposes of the medical expenses tax offset.

1.7         The law currently allows payments for the maintenance of a dog used for the guidance of a person who is blind, being a dog that the Commissioner is satisfied is properly trained by a public institution in the guidance of people who are blind. However, payments in respect of ‘hearing dogs’ or ‘service or assistance dogs’ cannot presently be claimed.

1.8         Typically, a ‘hearing dog’ assists a person who is deaf or hearing impaired by responding to a variety of auditory cues, such as a baby crying, a smoke alarm, an alarm clock, a door buzzer or bell or a ringing telephone. ‘Assistance dogs’ (or ‘service dogs’) typically provide assistance to people with physical disabilities by retrieving objects that are out of reach, pulling wheelchairs, opening and closing doors, turning light switches off and on or assisting ambulatory persons to walk by providing balance and counterbalance.

1.9         This bill amends subsection 159P(4) of the ITAA 1936 to broaden the list of eligible medical expenses to include payments incurred in maintaining a properly trained dog for people with disabilities. Consistent with the current provisions, the dog will need to be one that the Commissioner is satisfied is properly trained in guiding or assisting people with disabilities.

1.10       Without limiting the scope of the amendment, dogs that will typically become eligible are ‘hearing dogs’ and ‘service or assistance dogs’. However, this bill does not allow for claims relating to ‘social/therapy dogs’ (or similar). A ‘social/therapy dog’ is typically selected or trained to provide companionship to people in nursing homes, hospitals and other institutions.

Application and transitional provisions

1.11       The amendment applies in relation to the 2002-2003 income year and later income years.

 

 

 



C hapter 2  

Deduction for transport between workplaces

Outline of chapter

2.1         Schedule 2 to this bill amends the ITAA 1997 to allow an income tax deduction for transport expenses incurred in travel between workplaces.

Context of amendments

2.2         Expenses incurred in travelling are deductible expenses under section 8-1 of the ITAA 1997 (the general deduction provisions) where they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

2.3         In the decision known as Payne’s case (Commissioner of Taxation v Payne [2001] HCA 3) , the High Court held that expenses incurred in travelling between two places of unrelated income-earning activity were not deductible under the general deduction provisions. The Court held that the expenses were not incurred in the course of earning income from either activity but rather incurred in the interval between the two activities.

2.4         This decision overturned a long-standing interpretation of the income tax law, expressed in published taxation rulings and TaxPack , that expenses incurred in travelling directly between two places of unrelated income-earning activity were deductible under the general deduction provisions, where the taxpayer did not live at either of the places and the travel was undertaken for the purpose of enabling the taxpayer to engage in income-producing activities.

2.5         For example, a deduction had been allowed for the cost of travelling directly between two places of employment, such as travel directly from a full-time job during the day to a part-time job in the evening.

Summary of new law

2.6         The provision provides a specific deduction in the income tax law for transport expenses incurred in travel between workplaces.

2.7         The deduction is allowable where:

·          an individual incurs transport expenses in travelling directly between workplaces;

·          the purpose of the travel between workplaces is to earn assessable income at the second workplace; and

·          the individual does not reside at either place.

2.8         The provision ensures that the deductibility of expenses incurred in travelling directly between two places of unrelated income-earning activity, where the taxpayer does not reside at either place and the travel is undertaken for the purpose of engaging in income-earning activities, is maintained, consistent with published taxation rulings and TaxPack.

2.9          Transport expenses deductible under this provision include transport expenses incurred in travel between:

·          two places of employment;

·          two places of business; and

·          a place of employment and a place of business.

2.10       This amendment does not affect the deductibility of expenses incurred in the course of earning assessable income. Such expenses continue to be deductible under the general deduction provisions.

Comparison of key features of new law and current law

New law

Current law

Transport expenses incurred in travelling directly between workplaces are deductible.

Expenses incurred in travelling between two places of unrelated income-earning activity are not deductible.

Detailed explanation of new law

Income tax deduction

2.11       An income tax deduction for transport expenses incurred in travel between workplaces is allowable where:

·          an individual incurs transport expenses in travelling between workplaces;

·          the taxpayer engages in assessable income-earning activities at both workplaces;

·          the individual travels directly between workplaces;

·          the purpose of the travel between workplaces is to earn assessable income at the second workplace;

·          at the time of the travel between workplaces, the individual’s assessable income-earning activities at the first workplace have not permanently ceased;

·          the individual does not reside at either workplace; and

·          the transport expenses are not capital or of a capital nature.

[Schedule 2, item 3, section 25-100]

2.12       The deduction applies only to taxpayers who are individuals, including an individual who is also a partner in a partnership. It does not apply to taxpayers who are not individuals.

Transport expense

2.13       A transport expense is defined in section 900-225 of the ITAA 1997 as “a loss or outgoing to do with transport, including the decline in value of a depreciating asset used in connection with transport, but not including a loss or outgoing for accommodation or for food or drink, or expenditure incidental to transport.”

2.14       Transport expenses include:

·          car expenses;

·          expenses of other motor vehicles, of motor cycles and bicycles; and

·          public transport fares, such as bus and train fares.

2.15       Transport expenses do not include accommodation, meals and incidental expenses, or expenses incurred in being away from home for at least one night. These expenses may be deductible as travel expenses under the general deduction provisions in certain circumstances.

Travel between workplaces

2.16       For the purposes of this provision, a workplace is a place where an individual earns assessable income, provided that the individual does not reside there. A workplace includes:

·          a place where an individual earns assessable income as an employee;

·          a place where an individual earns assessable income in a capacity other than as an employee; and

·          a place where an individual earns assessable income by carrying on a business or business activities.

2.17       Travel between workplaces includes travel between two places of assessable income-earning activity, including:

·          travel between two places of employment;

·          travel between two places of business; and

·          travel between a place of employment and a place of business.

Example 2.1

Christine works as a shop assistant in a department store during the day, then travels by bus from the store directly to her second job as a waitress in a restaurant. The bus fares Christine incurs in travelling directly from the store (her first workplace) to the restaurant (her second workplace) are deductible under this provision.

Example 2.2

Marisa carries on two separate businesses in two locations. At one place, she carries on a business of a café. At another place, she carries on a business of a craft shop. Marisa does not reside at either place. Marisa drives her car directly between the two businesses every day. The car expenses Marisa incurs in travelling directly between the two businesses (her first and second workplaces) are deductible under this provision.

Example 2.3

Tim works as a public servant in a government department during the day, and also carries on a business as a martial arts teacher at a studio three days a week after work. The transport expenses Tim incurs in travelling from his office in the government department (his first workplace) directly to the studio (his second workplace) are deductible under this provision.

2.18       The deduction applies when an individual travels directly between two workplaces for the purpose of earning assessable income at the second workplace. That is, the individual completes assessable income-earning activities at the first workplace and then travels directly to the second workplace in order to commence assessable income-earning activities at the second workplace.

2.19       The deduction is not allowable if the individual does not travel directly from the first workplace to the second workplace, or performs an intervening private or domestic activity in the interval between completing assessable income-earning activities at the first workplace and commencing assessable income-earning activities at the second workplace.

Example 2 . 4

In the above examples, the transport expenses would not be deductible if Christine first returned home to change into her waitress’ uniform, or if Marisa went shopping during her travel between her two businesses, or if Tim stopped for a meal on the way to his studio.

Assessable income

2.20       The deduction applies where the individual earns assessable income at both workplaces. The deduction is not allowable if the individual earns exempt income or non-assessable non-exempt income at either of the workplaces.

2.21       The deduction applies where the individual is engaged in assessable income-earning activities at both workplaces on a continuing basis. For the purposes of this provision, travel between workplaces where, at the time of the travel, the individual has permanently ceased assessable income-earning activities at the first workplace, is not travel between workplaces.

2.22       For example, a deduction for transport expenses incurred in travel between workplaces is not allowable under this provision for expenses incurred in travelling directly between a former workplace and a new workplace. The travel is not travel between workplaces, as the assessable income-earning activities at the former workplace have ceased.

Example 2.5

Kim, a lawyer, is employed by a legal firm in Sydney. She obtains a new job with a different employer in Melbourne. Kim leaves her job in Sydney in the morning, flies to Melbourne and goes directly to her new job in Melbourne in the afternoon. Kim’s expenses incurred in travelling directly between her former workplace in Sydney and her new workplace in Melbourne are not deductible under this provision, as at the time of the travel her assessable income-earning activities at her former job in Sydney have ceased.

Residence

2.23       The deduction applies where the individual does not reside at either of the workplaces. For the purposes of this provision, travel between a workplace and a place where an individual resides is not travel between workplaces.

2.24       That is, a deduction for transport expenses incurred in travel between workplaces is not allowable under this provision where the individual resides at one of the places. This requirement is consistent with the general non-deductibility of the cost of travelling between an individual’s residence and workplace.

Example 2.6

Brian works at a music store during the day and also carries on a business as a music teacher from a room in his home at night. The expenses Brian incurs in travelling directly from the music store to his home are not deductible under this provision.

2.25       A place where an individual resides includes second residences, weekend or holiday homes and shared accommodation. The individual may reside at a place on a permanent or temporary basis.

Example 2.7

Carol maintains two residences, a residence in town where she resides during the week, and a farm in the country at which she carries on a business of primary production, where she resides on weekends. Carol travels directly from her place of employment to the farm on Friday night after work, returning directly to work on Monday morning. The expenses Carol incurs in travelling directly between work and the farm are not deductible under this provision.

2.26       A deduction for expenses incurred in travelling between a workplace and a residence may be allowable under the general deduction provisions in certain circumstances.

Capital expenditure

2.27       The deduction is not allowable to the extent that the transport expense is of a capital nature. This is consistent with the general deduction provisions, which exclude expenses to the extent that they are of a capital nature.

Substantiation

2.28       Transport expenses incurred in travel between workplaces are subject to the substantiation rules of Division 900 of the ITAA 1997. [Schedule 2, items 8 and 9, paragraph 900-30(7)(c)]

2.29       Transport expenses, other than car expenses, incurred in travel between workplaces are substantiated as a work expense under Subdivision 900-B of the ITAA 1997.

2.30       Transport expenses, which are car expenses, incurred in travel between workplaces are substantiated as car expenses under Subdivision 900-C of the ITAA 1997. An individual may use any of the four methods in Division 28 of the ITAA 1997 to calculate a deduction for car expenses incurred in travel between workplaces.

Application and transitional provisions

2.31       These amendments apply for the 2001-2002 and subsequent income years.

2.32       The amendments are retrospective so as to maintain the deductibility of transport expenses incurred in travel between workplaces before and after the High Court decision in Payne’s case. Taxpayers will not be adversely affected by the retrospective commencement of the amendments.

Consequential amendments

2.33       The provision is included in Division 12 of the ITAA 1997, which is a list of provisions about deductions. [Schedule 2, items 1 and 2, Division 12-5]

2.34       The definition of ‘business kilometres’ in Division 28 of the ITAA 1997 is amended to include travel between workplaces [Schedule 2, items 4 to 7, Division 28] . This amendment ensures that a deduction for transport expenses between workplaces, which are car expenses, can be calculated using one of the four methods outlined in Division 28.

2.35       A definition of ‘travel between workplaces’ is inserted into the Dictionary in Division 995 of the ITAA 1997. [Schedule 2, item 10, Division 995]

 



C hapter 3  

Small business capital gains tax relief and discretionary trusts

Outline of chapter

3.1         Schedule 3 to this bill amends the ITAA 1997 to improve the operation of the test that is used to determine when an entity controls a discretionary trust for the purpose of applying the small business CGT concessions.

3.2         The modified test will ensure that, subject to transitional arrangements, an entity will be taken to control a discretionary trust only if, for any of the four income years before the income year for which access to the small business CGT concessions is sought:

·          the trustee paid to, or applied for the benefit of, the entity and/or its small business CGT affiliates any income or capital of the trust; and

·          the amount paid or applied to the entity and/or its small business CGT affiliates is at least 40% of the total amount of income or capital paid or applied by the trustee for that income year (subject to the Commissioner’s discretion where the amount paid or applied to the entity and/or its small business CGT affiliates is between 40% and 50%).

3.3         Distributions to exempt entities and deductible gift recipients (DGRs) will be ignored for the purposes of applying the new control test .

3.4         In addition, for an income year in which the discretionary trust has a tax loss and for which the trustee does not make any distribution of income or capital, the trustee may nominate up to four beneficiaries as being controllers of the trust.

Context of amendments

3.5         The small business CGT concessions are:

·          the small business 15 year exemption;

·          the small business active asset reduction;

·          the small business retirement exemption; and

·          the small business roll-over.

3.6         A small business entity can access the small business CGT concessions only if it satisfies some basic conditions for relief. One of those basic conditions is the maximum net asset value test. To pass the maximum net asset value test, the entity (together with its small business CGT affiliates and any connected entities) must not own assets with a total net value of more than $5 million.

3.7         A small business CGT affiliate includes a taxpayer’s spouse, a child under 18 years of age, and any entity that acts or could reasonably be expected to act in accordance with the taxpayer’s directions or wishes or in concert with the taxpayer.

3.8         Broadly, an entity is connected with another entity if either entity controls the other, or both entities are controlled by the same third entity.

3.9         Currently, an entity is taken to control a discretionary trust if the entity and/or its small business CGT affiliates are the trustees of the trust or have the power to determine the manner in which the trustees exercise the power to make any payment of income or capital to or for the beneficiaries of the trust.

3.10       In addition, an entity is taken to control a discretionary trust if:

·          the trustee has the power to pay to, or apply for the benefit of, the entity and/or its small business CGT affiliates any of the income or capital of the trust; and

·          the amount that can be paid or applied in any income year is at least 40% of the total distributions of income or capital of the trust (subject to the Commissioner’s discretion where the potential distribution is between 40% and 50%).

3.11       The practical effect of the control test for a small business entity that operates through a discretionary trust is that the assets of all beneficiaries of the trust, whether potential or actual, are counted as assets of the entity for the purposes of applying the maximum net asset value test. The total net value of assets held by these actual and potential beneficiaries often exceeds $5 million. Consequentially, many small businesses that operate through a discretionary trust are technically unable to access the small business CGT concessions.

Summary of new law

3.12       Subject to transitional arrangements, an entity will be taken to control a discretionary trust under the small business CGT concessions if, for any of the four income years before the income year for which access to the small business CGT concessions is sought:

·          the trustee paid to, or applied for the benefit of, the entity and/or its small business CGT affiliates any income or capital of the trust; and

·          the amount paid or applied to the entity and/or its small business CGT affiliates is at least 40% of the total amount of income or capital paid or applied by the trustee for that income year (subject to the Commissioner’s discretion where the amount paid or applied to the entity and/or its small business CGT affiliates is between 40% and 50%).

3.13       Exempt entities and DGRs will not be treated as controlling a discretionary trust irrespective of the percentage of distributions made to them.

3.14       In addition, for an income year in which the discretionary trust has a tax loss and for which the trustee does not make any distribution of income or capital, the trustee may nominate up to four beneficiaries as being controllers of the trust.

Comparison of key features of new law and current law

New law

Current law

Subject to transitional arrangements, an entity will be taken to control a discretionary trust if, for any of the four income years before the income year for which access to the small business CGT concessions is sought:

·          the trustee paid to, or applied for the benefit of, the entity and/or its small business CGT affiliates any income or capital of the trust; and

·          the amount paid or applied to the entity and/or its small business CGT affiliates is at least 40% of the total amount of income or capital paid or applied by the trustee for that income year (subject to the Commissioner’s discretion where the amount paid or applied to the entity and/or its small business CGT affiliates is between 40% and 50%).

Exempt entities and DGRs will not be treated as controlling a discretionary trust irrespective of the percentage of distributions made to them.

In addition, for an income year in which the discretionary trust has a tax loss and for which the trustee does not make any distribution of income or capital, the trustee may nominate up to four beneficiaries as being controllers of the trust.

 

An entity is taken to control a discretionary trust if:

·          the trustee has the power to pay to, or apply for the benefit of, the entity and/or its small business CGT affiliates any of the income or capital of the trust; and

·          the amount that can be paid or applied to the entity and/or its small business CGT affiliates in any income year is at least 40% of the total distributions of income or capital of the trust (subject to the Commissioner’s discretion where the potential distribution to the entity and/or its small business CGT affiliates is between 40% and 50%).

 

 

Detailed explanation of new law

3.15       The control test for discretionary trusts under the small business CGT concessions will be modified.

3.16       An entity will still be taken to control a discretionary trust if the entity and/or its small business CGT affiliates are the trustees of the trust or have the power to determine the manner in which the trustees exercise the power to make any payment of income or capital to or for the beneficiaries of the trust. [Schedule 3, items 1 and 2, subsection 152-30(2)]

3.17       In addition, an entity (the first entity) will be taken to control a discretionary trust if, for any of the four income years before the income year for which access to the small business CGT concessions is sought:

·          the trustee paid any income or capital of the trust to or for the benefit of the first entity, one or more of the first entity’s small business CGT affiliates, or the first entity and one or more of its small business CGT affiliates; and

·          the amount paid or applied to the entity and/or its small business CGT affiliates is at least 40% (the control percentage) of the total amount of income or capital paid or applied by the trustee for that income year.

[Schedule 3, item 4, subsection 152-30(5)]

3.18       Consistent with the control test for other entities (such as companies and fixed trusts), where the control percentage is between 40% and 50%, the Commissioner will have a discretion to determine that the entity does not control the discretionary trust. However, if the control percentage is more than 50% in any of the four relevant income years, the Commissioner’s discretion does not apply. [Schedule 3, item 3, subsection 152-30(3)]

3.19       Amounts paid to, or applied for the benefit of, exempt entities (i.e. an entity that is exempt from tax) and DGRs (i.e. entities to which donations of $2 or more are tax deductible) will be ignored for the purposes of applying the new control test . [Schedule 3, item 4, subsection 152-30(6)]

3.20       Frequently distributions from trusts for an income year are made after the end of that income year. Consistent with the Commissioner’s long standing administrative practices, for the purpose of applying the new control test, distributions that are paid to or applied for the benefit of the entity within two months following the end of an income year will generally be taken to be paid or applied for that preceding income year.

3.21       If a discretionary trust has incurred a tax loss in an income year, the trustee typically cannot make distributions to its beneficiaries. The trustee of a discretionary trust in these circumstances can nominate up to four beneficiaries as being the controllers of the trust for that income year. The nomination must be in writing and signed by the trustee and by each nominated beneficiary. [Schedule 3, item 4, subsections 152-30(6A) to (6C)]

3.22       The trustee of a discretionary trust may wish to choose up to four beneficiaries to be controllers of the trust to ensure that the assets of the trust are active assets under the small business CGT concessions. In this regard, a CGT asset is an active asset if, among other things, the asset is used, or held ready for use, in the course or carrying on a business by the entity, a small business CGT affiliate or a connected entity (section 152-40).

3.23       The current control test for discretionary trusts is based on whether the trustee has the power to pay to, or apply for the benefit of, the entity and/or its small business CGT affiliates any of the income or capital of the trust. For these purposes, potential distributions to a public entity are disregarded if the trustee has the power to make the distribution to that public entity only because another beneficiary has an interest in the entity. Public entities are currently defined in subsection 152-30(6) to include, among other things, companies listed on a stock exchange and publicly traded unit trusts.

3.24       The new control test for discretionary trusts is based on actual distributions. Consistent with the control test for other entities (such as companies and fixed trusts), actual distributions to public entities should be taken into account for the purpose of applying the new control test for discretionary trusts.

3.25       The definition of ‘public entity’ is relevant for the purpose of determining when an entity has indirect control of an entity under the control test for the small business CGT concessions (subsections 152-30(7) and (8)). Therefore, as a consequential amendment, the definition of ‘public entity’ has been relocated and cross references to that definition are updated. [Schedule 3, items 5 and 6, subsections 152-30(8) and (9) and subsection 152-305(3)]

Application and transitional provisions

Application of the amendments

3.26       The amendments apply to relevant CGT events happening after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 - that is, from the date of application of the revised small business CGT concessions.

3.27       In this regard, the amendments will generally be beneficial to taxpayers. They have been actively sought by industry and will ensure that the small business CGT concessions operate as intended.

3.28       However, to ensure that taxpayers are not disadvantaged in relation to past transactions by the amendments, a transitional rule applies for CGT events that happen before the end of the 2003-2004 income year. Under the transitional rule, a taxpayer can choose to apply the existing control test for discretionary trusts (with the modification that assets of potential beneficiaries that are exempt entities or DGRs do not need to be taken into account). The choice to apply the transitional rule must be made by the latest of:

·          the day the entity lodges its income tax return for the income year in which the relevant CGT event happened;

·          12 months after the date of Royal Assent; or

·          a later day allowed by the Commissioner.

[Schedule 3, item 9]

3.29       The way in which the taxpayer prepares his or her income tax return is sufficient evidence of the making of this choice.

Modification of the new control test for the 2001-2002 and prior income years

3.30       The new control test for discretionary trusts is based on actual distributions made in any of the four income years before the income year for which access to the small business CGT concessions is sought.

3.31       As a transitional rule, to reduce compliance costs, the control test will be modified for the 1999-2000, 2000-2001 and 2001-2002 income years so that it is based on actual distributions made in the income year for which access to the small business CGT concessions is sought. [Schedule 3, subitem 8(2)]

Transitional extension of time periods

3.32       To ensure taxpayers are not disadvantaged, transitional rules will apply in relation to:

·          CGT events that happened before the date of Royal Assent; and

·          entities who become eligible to make a choice under the amended small business CGT concessions.

[Schedule 3, subitem 8(3)]

Time for making choices

3.33       The small business CGT concessions require taxpayers to make choices. For example, the small business retirement exemption and the small business roll-over are available only if the taxpayer chooses to obtain them. Section 103-25 requires any choices to be made by:

·          the day the entity lodges its income tax return for the income year in which the relevant CGT event happened; or

·          within a further time allowed by the Commissioner.

3.34       The transitional rule will allow for a choice to be made by the entity by the latest of:

·          the day the entity lodges its income tax return for the income year in which the relevant CGT event happened;

·          12 months after the date of Royal Assent; or

·          a later day allowed by the Commissioner.

[Schedule 3, subitem 8(4)]

Small business roll-over

3.35       To obtain the small business roll-over, the taxpayer must generally acquire a replacement asset within the period starting one year before and ending two years after the happening of the relevant CGT event (subsection 152-420(1)). This period can be extended in certain circumstances (subsection 152-420(2)).

3.36       In addition, the replacement asset must be an active asset when it is acquired, or by the end of two years after the happening of the relevant CGT event (subsection 152-420(4)).

3.37       The transitional rule will extend the period for acquiring the replacement asset and the period within which the asset must be an active asset to the latest of:

·          two years after the happening of the last CGT event in the income year for which the entity obtained the small business roll-over;

·          12 months after the date of Royal Assent; or

·          a later day allowed by the Commissioner.

[Schedule 3, subitems 8(5) and (6)]

 



C hapter 4  

Energy Grants (Credits) Scheme transitional arrangements

Outline of chapter

4.1         Schedule 4 to this bill amends the transitional arrangements of the Energy Grants (Credits) Scheme (EGCS), which deal with the treatment of claims for fuel purchased in the three years preceding the introduction of the scheme. The changes will rectify an anomaly that may have seen an unintended entitlement to concessional treatment created in certain circumstances under the EGCS that did not previously exist in the schemes that it replaces.

Context of amendments

4.2         The EGCS commenced on 1 July 2003, replacing the Diesel Fuel Rebates Scheme (DFRS) and the Diesel and Alternative Fuels Grants Scheme (DAFGS). It provides a credit for the use of diesel and specified alternative fuels in certain on and off-road activities.

4.3         For ease of administration, transitional arrangements were put in place with the introduction of the EGCS so that fuel purchases up to a maximum of three years prior to the introduction of the EGCS could be claimed under it, rather than under the previously existing schemes.

4.4          An unintended consequence of these arrangements has been the possible creation of entitlements under the EGCS that did not exist under the previous schemes.

4.5         For example, the use of diesel to generate electricity in a retail or hospitality business without access to grid power only became an eligible activity under the DFRS on 1 July 2002. However, the operation of the EGCS transitional provisions in the context of this activity may create an entitlement to an off-road credit under the EGCS back to 1 July 2000, an additional two year period prior to its introduction into the DFRS.

4.6         A similar situation exists for the fuels liquefied natural gas and biodiesel, which became specified on-road alternative fuels under the EGCS on 1 July 2003 and 18 September 2003 respectively. There is a significant possibility that the transitional provisions create an entitlement for an on-road credit for the use of these fuels in the three years prior to the commencement of the EGCS, an entitlement that did not exist under the DAFGS.

4.7         Should the ATO, before this legislation receives Royal Assent, pay any claims which would later be rendered ineligible by the passage of these amendments, then the Commissioner may not be able to recoup those payments as overpayments according to usual practice.

4.8         This is because the Commissioner’s current powers only extend to recovering payments made as a result of a mistaken assessment which was later amended by the ATO. But in this case, the payments would not have been made as a result of a mistaken assessment, but as a result of a legal entitlement to payment under the EGCS for an activity which was later rendered ineligible by amendments to the transitional provisions.

4.9         However, the amendments in this bill allow the Commissioner to recoup such payments by reducing other entitlements available to the claimant. The amendments identify those entitlements which the Commissioner may reduce, and the manner in which he may reduce them.

Summary of new law

4.10       These amendments rectify an anomaly that exists in Schedule 7 to the Energy Grants (Credits) Scheme (Consequential Amendments) Act 2003 (EGCS(CA) Act) which provides transitional arrangements for fuel purchases that occurred prior to the introduction of the EGCS. The anomaly is the possible creation of entitlements under the EGCS that did not previously exist under the schemes that the EGCS replaces.

4.11       As the amendments rectify an anomaly in the law, they will apply from 1 July 2003, the date when the existing provisions first applied.

Detailed explanation of new law

4.12       This bill inserts a new subitem 1(1A) into Schedule 7 to the EGCS(CA) Act which qualifies the coverage of the EGCS transitional arrangements as described in subitem 1(1). Subitem 1(1A) provides that the following are excluded from the scope of the EGCS transitional arrangements:

·          the on-road alternative fuels liquefied natural gas and biodiesel; and

·          off-road diesel fuel purchased or imported prior to 1 July 2002 for use in generating electricity in a retail or hospitality business without access to grid power.

[Schedule 4, items 1 and 4]

4.13       This bill revises subitem 1(2) of Schedule 7 to the EGCS(CA) Act to take account of the changes introduced by the amended subitem 1(1) and the new subitem 1(1A). [Schedule 4, item 4]

4.14       This bill amends Schedule 7 to the EGCS(CA) Act to make some of the terminology used more consistent with that used in the Energy Grants (Credits) Scheme Act  2003 (EGCS Act). The term “person” is replaced by the term “entity” wherever it occurs in Schedule 7. [Schedule 4, items 2, 5 and 6]

4.15       This bill also amends subitem 1(1) of Schedule 7 to the EGCS(CA) Act to clarify that the transitional arrangements apply for fuels and uses mentioned in that Act as in force on 1 July 2003, including as affected by regulations made under the EGCS Act commencing on that day. This is to ensure that any future additions or extensions to the EGCS do not automatically fall within the scope of the transitional arrangements, which were intended to apply only to entitlements being transitioned to the EGCS from the previously existing schemes. [Schedule 4, item 3]

4.16       This bill provides explicitly that no entitlement to an energy grant arises under Schedule 7 to the EGCS(CA) Act as it was in force before the commencement of the amendments outlined above. [Schedule 4, item 7]

4.17       This bill contains a provision making it clear that if a claim for an energy grant was assessed under the transitional arrangements prior to these amendments, and these amendments have the effect of reducing the claimant’s entitlement to a grant, then the Commissioner is not entitled to amend the assessment in order to reduce the entitlement.

4.18       Instead, the Commissioner may reduce any of the claimant’s other entitlements to grants and/or benefits under the Product Grants and Benefits Administration Act 2000 , until the Commissioner has recouped the total amount of the reduction. [Schedule 4, item 8]

Commencement

4.19       Items 1 to 7 of Schedule 4 commence retrospectively immediately after the commencement of the EGCS(CA) Act containing Schedule 7, and item 8 commences on the date that this bill receives Royal Assent.

 

 



C hapter 5  

Net input tax credits and capital gains tax

Outline of chapter

5.1         Schedule 5 to this bill amends the ITAA 1997 to ensure that GST net input tax credits are excluded from the cost base, reduced cost base and other relevant amounts used for the purposes of working out the amount of a capital gain or capital loss.

Context of amendments

5.2         Net capital gains for an income year are included in assessable income. Broadly, a net capital gain arises if a taxpayer’s capital gains for an income year exceed his or her capital losses.

5.3         Generally, a capital gain arises if the amount received upon disposal of a CGT asset exceeds the cost base of the asset. A capital loss arises if the reduced cost base of a CGT asset exceeds the amount received upon disposal of the asset.

5.4         Currently, GST net input tax credits are not excluded from all elements of the cost base or from any element of the reduced cost base.

5.5         This situation is inappropriate because taxpayers who make a capital gain on the disposal of a CGT asset in many circumstances can include GST net input tax credits in the cost base of the asset even though the relevant GST expenditure is effectively recouped. Consequently, the amount of capital gain on disposal of the asset is inappropriately reduced by the amount of the GST net input tax credits.

5.6         Similarly, taxpayers who make a capital loss on the disposal of a CGT asset can include GST net input tax credits in the reduced cost base of the asset even though the relevant GST expenditure is effectively recouped. Consequently, the amount of a capital loss on disposal of the asset is inappropriately inflated by the amount of the GST net input tax credits.

Summary of new law

5.7         For the purposes of working out the amount of any capital gain or capital loss:

·          GST net input tax credits will be excluded from the cost base and reduced cost base; and

·          if the capital gain or capital loss is worked out by reference to an amount other than the cost base or reduced cost base, GST net input tax credits will be excluded from that other amount.

Comparison of key features of new law and current law

New law

Current law

GST net input tax credits will be excluded from all elements of the cost base and reduced cost base regardless of when the CGT asset was acquired.

GST net input tax credits are excluded only from the first three elements of the cost base of a CGT asset acquired after 7.30 pm on 13 May 1997.

GST net input tax credits are not excluded from the reduced cost base in any circumstances.

If the capital gain or capital loss is worked out by reference to an amount other than the cost base or reduced cost base, GST net input tax credits will be excluded from that other amount.

If the capital gain or capital loss is worked out by reference to an amount other than the cost base or reduced cost base, GST net input tax credits are not excluded from that other amount.

Detailed explanation of new law

Reduction of the cost base, reduced cost base and other amounts by net input tax credits

5.8         Any amount that is used to calculate a capital gain or capital loss will be reduced by the amount of any GST net input tax credits in relation to that element. [Schedule 5, item 3, section 103-30]

5.9         Generally a capital gain arises if the amount received upon disposal of a CGT asset exceeds the cost base of the asset. A capital loss arises if the reduced cost base of a CGT asset exceeds the amount received upon disposal of the asset. Consequently, the amount that is used to calculate a capital gain or capital loss from a CGT event will generally be the cost base or reduced cost base. Therefore, to assist readers, notes referring to section 103-30 are inserted into the cost base and reduced cost base provisions. [Schedule 5, items 4, 5 and 8]

Example 5.1

Nick purchases a non-depreciating capital asset for use in his business. The cost is $1,100, including $100 GST. Nick claims an input tax credit of $100. He later disposes of the asset, triggering CGT event A1. The cost base of the asset is $1,000 - that is, $1,100 less the related input tax credit of $100.

5.10       For some CGT events the capital gain or capital loss is worked out by reference to an amount other than the cost base or reduced cost base. For example:

·          for CGT events C3, D2, D3, F1, F3, F5, and H1, the capital gain or capital loss is worked out by comparing the capital proceeds with relevant specified expenditure; and

·          for CGT events D1, E9 and H2, the capital gain or capital loss is worked out by comparing the capital proceeds with incidental costs.

5.11       Therefore, the amount that is used to calculate a capital gain or capital loss in relation to these CGT events will be the specified expenditure, incidental costs or other relevant amount.

Example 5.2

Louise grants an option to an entity for consideration of $10,000 and incurs $550 in legal fees, including $50 in GST. She claims an input tax credit of $50. CGT event D2 (section 104-40) applies to the transaction. In working out the capital gain or capital loss in relation to the CGT event, the expenditure incurred to grant the option will be $500 - that is, $550 reduced by the $50 input tax credit.

5.12       Consequential amendments remove subsections 110-45(3A) and 110-50(3A). Those provisions exclude GST input tax credits from the first three elements of the cost base of a CGT asset acquired after 7.30 pm on 13 May 1997. The provisions have been replaced by section 103-30. [Schedule 5, items 6 and 7]

Goods and services tax increasing and decreasing adjustments

5.13       The ‘net input tax credit’ for an acquisition or importation is defined in subsection 995-1(1) to mean, broadly, the amount of any input tax credit adjusted by any increasing and decreasing adjustments. If there is a decreasing adjustment for an acquisition, the net input tax credit increases. If there is an increasing adjustment, the net input tax credit decreases.

5.14       Section 17-10 includes certain decreasing adjustments in assessable income. Section 27-10 allows a deduction for certain increasing adjustments. To ensure that decreasing and increasing adjustments are only counted once for income tax purposes, sections 17-10 and 27-10 will not apply if the adjustments reduce an amount that is used in the calculation of a capital gain or capital loss. [Schedule 5, items 1 and 2, subsections 17-10(2) and 27-10(4)]

Application and transitional provisions

5.15       The amendments apply to CGT events that happen after the day this bill is introduced into the Parliament.

 



C hapter 6  

Confidentiality of Australian Business Number information

Outline of chapter

6.1         Schedule 6 to this bill amends the A New Tax System (Australian Business Number) Act 1999 (ABN Act) to clarify the circumstances in which the Registrar of the Australian Business Registrar (Register) can disclose protected Australian Business Number (ABN) information to Commonwealth agency heads and State and Territory department heads.

Context of amendments

6.2         Currently the ABN Act limits the disclosure of protected ABN information to circumstances where agency functions have a direct nexus with the agency’s legislation. Section 30 of the ABN Act protects the confidentiality of ABN information. In particular, paragraphs 30(3)(c) and (d) authorise the disclosure of information to particular persons for specific purposes:

·          subparagraphs 30(3)(c)(i) and 30(3)(d)(i) allow the disclosure of information to a Commonwealth Public Service Agency Head for the purposes of legislation administered by the Agency Minister; and

·          subparagraphs 30(3)(c)(vi) and 30(3)(d)(iv) allow disclosure to State and Territory Department heads for the purposes of legislation administered by the Minister responsible for that department.

6.3         However, many businesses have dealings with agencies not related to the agencies’ legislation. Before the amendment to the regulations, discussed below, businesses that provided services to various agencies were required to provide their ABN information to each agency with which they had dealings. As the main object of the ABN Act is to make it easier for businesses to conduct their dealings with the various Governments this requirement had to be changed.

6.4         As an interim measure, to overcome this burden on business the A New Tax System (Australian Business Number) Regulations 1999 (ABN Regulations) were amended with effect from 15 October 2001. The amendment extended the disclosure of protected ABN information to Commonwealth agency heads and State and Territory department heads in respect of all agency or department functions.

6.5         Although the amendment to the ABN Regulations was considered to have a reasonable legal basis there was a risk that a Court may find the amendment to the Regulations invalid on the basis that the regulation alters the scope of the ABN Act. To have waited for legislation to be prepared would have imposed an unnecessary burden on those businesses that had dealings with Commonwealth, State and Territory agencies. Accordingly, the amendment to the ABN Regulations was made despite the possibility of that amendment being later ruled invalid.

Summary of new law

6.6         The amendment to the ABN Act ensures that the Registrar of the Australian Business Register (ABR) can disclose protected ABN information to the heads of Commonwealth agencies and State and Territory departments. It will permit disclosure for the purposes of all functions of the agency or department.

Detailed explanation of new law

6.7         Schedule 6 will amend the ABN Act by:

·          omitting, in subparagraphs 30(3)(c)(i) and 30(3)(d)(i), the words after “the purposes of” and substituting “carrying out functions of the Agency (within the meaning of that Act); or” [Schedule 6, items 1 and 3] ; and

·          omitting, in subparagraphs 30(3)(c)(vi), and 30(3)(d)(iv), the words after “the purposes of” and substituting “carrying out functions of the Department; or” [Schedule 6, items 2 and 4] .

6.8         The ABN Act currently permits disclosure of protected ABN information to Commonwealth agency heads and State and Territory department heads only for the purposes of legislation administered by the Minister of the Agency or Department. Such legislation is broadly defined in the Administrative Arrangements Order which is authorised by the Governor-General, acting with the advice of the Federal Executive Council.

6.9         As the phrase “purposes of legislation administered by the Minister” was too restrictive, the ABN Regulations were amended to extend disclosure of protected ABN information to “functions of an Agency or a Department”. Examples of functions of an Agency or a Department include those that are connected with internal administration and commercial relationships with business such as purchasing and procurement activities.

6.10       Although the ABN Regulations already provide for such disclosure, there may be some doubt about the validity of the amendment to the Regulations that provided such disclosure. The amendment to the law will ensure that protected ABN details can be disclosed by the Registrar to agency heads in respect of purposes of carrying out functions of their Agency or Department. This is in line with the disclosure provided in the Regulations. Any doubts about the validity of the amendment to the Regulations will be removed.

6.11       The amendments to the ABN Act will clarify the scope of the relevant provision and ensure that the law operates with its original intention. The main object of the ABN Act, as stated in section 3 of the Act, is to “make it easier for businesses to conduct their dealings with the Australian Government”.

6.12       The amendments will have the effect of reducing the scope of the application of the existing criminal offence in section 30 of the ABN Act. The amendments will increase the disclosure allowed under the ABN Act to Commonwealth, State and Territory agency or department heads for purposes of carrying out functions by the relevant agency or department.

Application and transitional provisions

6.13       The amendments will commence on Royal Assent, but apply to disclosures of information that occurred on or after 15 October 2001.

6.14       The 15 October 2001 application date will align the ABN Act with the ABN Regulations that were gazetted on this date. This will ensure that any disclosures made in accordance with the ABN Regulations do not give rise to an offence in the event that the amendment to the ABN Regulations is ruled invalid. [Schedule 6, item 5]



C hapter 7  

Deductions for contributions relating to fund-raising events

Outline of chapter

7.1         Schedule 7 to this bill inserts items 7 and 8 to the table in section 30-15 and amends sections 30-212, 30-315, 30-228, 995-1 and subsection 30-125(4) of the ITAA 1997. The amendments provide a tax deduction to eligible contributions to deductible gift recipients (DGRs), where an associated minor benefit is received.

7.2         This Schedule also amends subsection 6(1) (items 11 and 12 in the Schedule) of the ITAA 1936.

Context of amendments

7.3         Concerns were raised with the Government through the Prime Minister’s Community Business Partnership (CBP) that fund-raising difficulties were being caused by the current tax law. In response to those concerns, the Government decided from 1 July 2004, to allow deductions for contributions of certain cash and property to DGRs, where a minor benefit is received in return.

7.4         The Report of the Contemporary Visual Arts and Craft Inquiry (Myer Report) also recommended inter alia that the tax law should be amended “to clearly state that an advantage or benefit received by donors does not prevent their ability to receive a tax deduction, provided the benefit does not exceed a specified limit” (Recommendation 20.6, p.342).

7.5         Currently, only those transfers to DGRs that are categorised as gifts give rise to personal deductions under Division 30 of the ITAA 1997. The meaning of ‘gift’ has been defined by the courts to include the following essential characteristics:

·          the property must be transferred voluntarily and not as a result of contractual obligation to transfer it;

·          no material advantage must be received by the transferor in return; and

·          a gift should be motivated by ‘detached and disinterested’ generosity with the aim of conferring benefaction on the recipient.

7.6         Section 78A of the ITAA 1936 provides that a deduction is not allowable under Division 30 of the ITAA 1997, if the gift is made under an arrangement whereby the true value of the gift does not equal the amount or value claimed as a deduction. That is, a deduction will be denied where inter alia , the donor receives a collateral benefit in connection with the gift (ATO Tax Ruling IT 2443).

7.7         The amendment is designed to encourage philanthropy by ameliorating some existing impediments to fund-raising by DGRs, identified by the Myer Report and the CBP.

7.8         A deduction under this amendment will be in addition to the deductions currently allowed for gifts. To differentiate from a gift, the term ‘contribution’ is used.

Summary of new law

7.9         The amendments will allow an individual to receive a deduction for eligible contributions to DGRs where the value of the contributions is more than $250, and the minor benefit received in return is no more than $100 or 10% of the value of the contribution, whichever is the less.

7.10       The amendment applies to contributions of money and property. Where the contribution is property, it must be valued at more than $250 and either purchased within 12 months of making the contribution; or owned by the contributor and valued by the Commissioner at more than $5,000.

7.11       The deductions are limited to individuals and cannot be claimed by companies using the fund-raising events of DGRs to entertain clients. Companies may be able to claim their contributions as an ordinary business deduction.

7.12       The deduction is limited to that part of the contribution that is in excess of the minor benefit received by the contributor. The DGR organising the fund-raising event will be responsible for both determining the market value of the minor benefit and, if issuing a receipt to the contributor, to indicate the total amount of the contribution, the value of the minor benefit and the deductible amount. For example, if the total amount of contribution made is $300, and the minor benefit received is $30, $270 would be the deductible amount.

7.13       The amendment applies to specific one-off fundraising ‘events’, which may include both attendance at charitable events or sale of goods and services at charitable auctions.

Comparison of key features of new law and current law

New law

Current law

From 1 July 2004, a deduction will be allowed where the donor receives a benefit in connection with the contribution, provided that certain conditions are met and the benefit does not exceed a specified limit.

Section 78A of the ITAA 1936 provides that a deduction will be denied where the donor receives a benefit in connection with the donation.

Detailed explanation of new law

7.14       This amendment applies to contributions made to a fund, authority or institution covered by an item in any of the tables in  Subdivision 30-B of Division 30 of the ITAA 1997 or to public funds or prescribed private funds as covered in item 2 of Subdivision 30-A of Division 30 of the ITAA 1997. [Schedule 7, item 1]

7.15       This amendment applies to contributions made to a DGR and does not include political parties. Fund-raising events held by political parties are ineligible for a deduction under this amendment. (Prime Minister’s Press Release of 9 September 2003.)

What kinds of contributions are eligible for income tax deduction?

7.16       Subject to certain conditions, this amendment allows deductions to be made for two separate types of contributions at a DGR fund-raising event in Australia:

·          contributions made in return for a right to participate in a fund-raising event (e.g. the purchase of a ticket to attend a charity ball, fete, dinner, performance or similar charitable fund-raising event); and

·          contributions made by way of consideration for the supply of goods and services for successful bidding at a charity auction that is conducted by a DGR.

[Schedule 7, item 2]

Cash and property over $250

7.17       The amendment provides an income tax deduction for contributions of cash and property over $250, where a minor benefit of no more than the lesser of $100 or 10% of the value of the contribution is received by the contributor in return.

7.18       The amendment applies to contributions of property valued at more than $250 and purchased during the 12 months before the contribution. For property owned more than 12 months before the contribution, the property must be greater than $5,000 and valued by the Commissioner. [Schedule 7, item 2]

7.19       The value of a contribution of property is assessed as on the day the contribution is made. The value of a contribution of property purchased during the 12 months before the contribution is the lesser of the market value of the property on the day that the contribution was made and the amount the contributor paid for the property. The value of property owned by the contributor and valued at more than $5,000 by the Commissioner is the value as determined by the Commissioner. [Schedule 7, item 2]

Eligible fund-raising events

7.20       The amendment applies to one-off fund-raising ‘events’ conducted in Australia and not to on-going fund-raising efforts. Events that form part of “a series or periodic, like or similar events” (subsection 40-165(4)) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), such as membership subscriptions, or the provision of newsletters in return for a subscription are excluded.

7.21       An eligible fund-raising event has the same meaning given in section 40-165 of the GST Act , except for subparagraph 40-165(1)(b)(i) of that Act. [Schedule 7, items 2 and 10]

What is deductible in respect of a contribution?

7.22       The amendment allows a deduction for the amount of the contribution less the ‘GST inclusive market value’ of the minor benefit received by the contributor in return for the contribution. The deduction is only allowed if the benefit received in return for making a contribution, is both nominally and relatively minor - that is, the maximum allowable benefit must not exceed $100 or 10% of the contribution, whichever is the less.

Example 7.1

Maria pays $260 to attend a charity golf game, hosted by a DGR. The market value of an 18-hole golf game is $20. Maria can claim $240 ($260 less $20) as the market value is less than $100 and 10% of the value of her contribution.

Example 7.2

Karen pays $260 for a ticket to a charity film screening organised by a DGR. The film is open to the public and ordinarily retails for $13 a ticket. As part of the charity screening, Karen is offered a glass of champagne and some finger food. The market value of the event is $25. Karen can claim a deduction for $235 ($260 less $25).

Example 7.3

Roberto buys a ticket to a gala performance organised by a DGR, for $400. The gala performance has a ticket price on the open market of $100. Roberto cannot claim any deduction as the market value of the performance - which is the benefit ($100) he receives in return for his contribution of $400 - is greater than 10% of the value of his contribution ($40), even though it is not greater than $100.

Example 7.4

Franca pays $1,300 to attend a gala dinner to mark the opening of a new art gallery. The market value of the event is $120. Franca cannot claim a deduction as the market value of the dinner - in this case, $120 which she receives in return for her contribution of $1,300 - is greater than $100, even though it is less than 10% of the value of her contribution.

7.23       A deduction is allowed for either a contribution of cash or property made in respect of a right to participate in a fund-raising event; and/or a contribution of cash for the purchase of goods and services at a fund-raising auction conducted by a DGR. To be eligible for the deduction, the fund-raising event must meet the criteria set out in section 40-165 of the GST Act (see paragraphs 7.20 and 7.21).

Example 7.5

Phillip pays $300 to attend a play hosted by a DGR, which is open to the public and costs $30 a ticket on the open market. Phillip can claim a deduction of $270 ($300 less $30).

Example 7.6

Natasha successfully bids $2,000 for a T-shirt at a DGR fund-raising auction. The T-shirt has a market value of $50. Natasha can claim a deduction of $1,950 ($2,000 less $50).

Example 7.7

Rebecca donates a crate of lobsters, which she purchased a few days before for $260 and which has a market value of $260, to a DGR to be sold at a fund-raising auction. In return for her generosity, she is given a ticket to attend the auction. The ticket to the auction has a market value of $20. At the auction, Rebecca successfully bids $2,000 for a chair with a market value of $90. She also bids $1,000 for a painting with a market value of $100. Rebecca can claim three separate deductions - one of $240 in respect of her contribution of the lobsters in return for the right to attend the auction; one of $1,910 for the purchase of the chair at auction: and a further $900 for the purchase of the painting.

Example 7.8

Christine pays $260 to attend a fund-raising luncheon organised by a political party. The luncheon is valued at $25. Christine cannot get a deduction even though the value of the minor benefit she received is less than $100 and 10% of the value of her contribution, because political parties are not DGRs and hence excluded from the operation of this amendment.

7.24       The ‘market value’ of the right to participate in a fund-raising event or of the goods and services purchased at a fund-raising auction is determined as at the day the contribution is made.

Example 7.9

Franca purchases a car for $20,000 and 11 months later contributes it to a DGR conducting a fund-raising event. At the time the car is contributed, it is valued at $15,000. In return for her generosity, the DGR gives her two tickets to the fund-raising gala performance, worth $100 per ticket. Franca cannot claim any deduction as the total value that she has received ($200  =  $100  ×  2 tickets) exceeds the $100 maximum benefit she is allowed to receive to claim a deduction under this amendment. However, if Franca accepts one ticket, instead of two, she can claim a deduction of $14,900, being the market value of the car at the time she made the contribution less the value of the benefit she received in return.

Example 7.10

Frances successfully bids at a charity auction organised by a DGR, $2,000 for a golf cap owned by a pop artist. The market value of the cap is assessed as no more than $100 at the time Frances purchased the item. However, a week after the purchase, the pop artist dies and the market value for similar items owned by the artist increases five-fold. Frances can still claim a $1,900 deduction ($2,000 less $100). Since the value of the cap has increased after the charity auction purchase, there is no effect on Frances’ entitlement to a $1,900 deduction.

Deduction for contributions of property   

7.25       The amendment only allows a deduction for contributions of property made in return for the right to participate at a fund-raising event. No deduction is allowed for contributions of property made by way of a consideration for the supply of goods or services at an auction sale.

7.26       A condition of the deduction requires that property that is contributed be either:

·          property owned by the contributor and valued by the Commissioner at more than $5,000; or

·          property purchased by the contributor and donated within 12 months of the purchase [Schedule 7, item 2] .

Property that is trading stock may qualify under either of these conditions.

7.27       The valuation of property for contribution purposes under this amendment is consistent with the valuation of gifts under Division 30 and the income tax assessment rules governing the valuation of property generally.

7.28       For property purchased during the 12 months before making the contribution, the value of the contribution for the purposes of this amendment, is the lesser of the market value of the property on the day the contribution was made and the amount paid for the property. For contributions of property valued at more than $5,000 and not purchased during the 12 months before the contribution is made, the value of the property must be assessed by the Commissioner. [Schedule 7, item 2]

Example 7.11

Jean-Luc makes a contribution of a painting for a fund-raising event organised by a DGR seven months after he bought it. He purchased the painting for $500. At the time he makes the contribution however, the painting has increased in value to $4,000. In return, the DGR provides a ticket to a fund-raising luncheon with a market value of $40. Jean-Luc can only claim a deduction based on the value of his property assessed as the price he paid for it ($500), less the value of the luncheon. His deduction is $460.

Example 7.12

Leonie purchases a painting of an unknown artist for $1,000. Five years later when she contributes the painting to a DGR in relation to a fund-raising event, the painting has increased in value to $10,000. In return, the DGR invites Leonie to a fundraising event - a cocktail function where Leonie receives a benefit with a market value of $100. Leonie can claim a deduction based on $10,000, being the value of the painting at the time the contribution is made, provided that the value of the painting is confirmed by the Commissioner. Leonie can claim a deduction of $9,900 ($10,000 less the $100 benefit she received). ( Leonie should be aware that she could be liable for CGT .)

GST inclusive market value

7.29       The valuation of the minor benefit derived by the contributor is to be calculated as the GST inclusive market value. The use of the GST inclusive market value in valuing a minor benefit is consistent with the valuation of gifts under Division 30 of the ITAA 1997. (The GST inclusive market value has the same meaning given in section 195-1 of the GST Act as section 995-1 of the ITAA 1997.)

Assessing the market value of a minor benefit 

7.30       The DGR is responsible for determining the market value of the minor benefit given in return for a contribution. The amendment requires that where the DGR issues a receipt to a contributor, it must state either, the ‘GST market value’ of the right to participate in a fund-raising event or where a successful bid at a charity auction has been made, the GST market value of the goods or services purchased by the contributor. [Schedule 7, item 7]  

7.31       An assessment of the market value of a ‘minor benefit’ involves making a reasonable estimate of what might be paid for the benefit in the open market ‘in an arm’s length transaction’. As a matter of practice, the process of determining a reasonable estimate of value may require the application of different valuation approaches, depending on the varying scenarios that may arise in the application of this amendment.

7.32       Evidence to support the reasonableness of the estimate may include:

·          comparisons of prices commercially charged for a good, service or event in the open market;

·          market comparisons derived from market observations by reference to similar or comparable goods, services or events offered in the market; or

·          an analysis of the market estimates of the costs associated with supplying the service or function using a cost based approach.

Estimate of the market value based on price or market comparisons

7.33       Price comparisons may be used to provide a reliable estimate of the value of a benefit where the benefit is a standard good, service or event that is commercially available in the local market. For example, the ticket price charged for events such as a concert, play, film screening, sporting match, a dinner show or similar event that is ordinarily open to the public, would provide an accurate estimate of the market value for such events.

Example 7.13

A DGR uses one evening’s performance of a play as a fund-raising event and charges $350 a ticket to the evening’s performance. The play is open to the public and ordinarily sells for $35 a ticket. The market value of that play is $35, being what a ticket to the performance would ordinarily fetch on the open market.

Example 7.14

A DGR hosts a fund-raising event at a restaurant involving a two-course charity luncheon. It charges $260 a head to attend the charity luncheon. The restaurant would ordinarily charge $22 per head for a two-course set lunch menu with a glass of wine and tea or coffee. The market value of the charity luncheon is hence $22.

7.34       Where the event is non-standard, not generally open to the public, or the market value of the event is not readily determined, a reasonable estimate of the market value can be made taking into account the market price that would be charged for similar transactions in the commercial sector. For example, in determining the value of a fund-raising event comprising a film screening with dinner included, where such an event has not been offered before in the local market, it may be possible to have regard to what would likely be charged on the open market for comparable entertainment such as a cabaret show or a concert performance with food and beverage included.

Example 7.15

A DGR wants to host, as a special fund-raising event, the opening night performance of a play, to be followed by cocktails and an opportunity to meet the performers. While the performance alone sells for $45 a ticket, the event (as a package with cocktails and meeting the performers) is not readily available on the open market and hence a price comparison may be difficult. A reasonable estimate of the ticket for the opening night’s performance package may be obtained by establishing what might be reasonably charged for cocktails in that local market - in this example, the theatre may be asked to quote on a ticket price with catering included. If celebrity performers are involved, an estimate base on what the celebrity performer would ordinarily charge on the open market for a ‘meet the performers’ event would also need to be factored into the cost of providing that event. See paragraphs 7.39 to 7.40.

7.35       Market observations could elicit a reasonable estimate of market value for a comparable event in the local market. However, this may not always be possible. Where market data in the local market is limited or unavailable, sale comparisons from a wider market (e.g. from other Australian capital cities) may be appropriate.

Example 7.16

A DGR wants to stage an event involving a three-course dinner plus cabaret performance to be held in Wagga Wagga. In establishing the market value for such an event, the DGR could contact venues, such as clubs that offer comparable entertainment shows with dinner to gauge the cost that could be charged for such events on the open market. If comparison with similar entertainment in Wagga Wagga is not possible, a reasonable estimate of market value may be derived by either (a) using price comparisons of comparable events in other towns or cities; or (b) the DGR could contact a local catering company to establish the likely market value of catering a three-course meal.

Note: that if (b) is used, the DGR would also need to establish the market value for other components of the entertainment package such as the show and the venue for the event using a cost-based approach to estimate the market value - refer to paragraphs 7.36 to 7.40. However, the benefits provided in this example would most likely take the value of the minor benefit beyond the 10% or $100 threshold rule that applies, in which case no deduction for the contribution is available.

Example 7.17

A DGR wants to stage a charity afternoon tea with a celebrity guest speaker. Given the uniqueness of the event, it would be difficult for the DGR to establish a market value based on a comparable event on the open market. A reasonable estimate of the market value of having that celebrity speak at an afternoon tea would entail establishing what the celebrity would ordinarily charge to attend such an event or what he or she would ordinarily charge for a couple of hours work.

Estimate of market value using a cost-based approach

7.36       Where a reasonable estimate of an event cannot be established using sale or price comparisons, an assessment of value using a cost-based approach may provide an alternative, for example, where the fund-raising event is unique or is not generally open to the public. In such cases it is difficult to establish a market value based on a market comparison - for example, a charity luncheon with a visiting member of the royal family or a literary or sporting celebrity.

7.37       A reasonable estimate of the market value of a benefit using a cost-based approach could involve a notional estimate of the costs of all the elements that would be required to stage an event on the open market. This could include a notional estimate of all input costs plus administrative costs including a component for insurance or contingency costs plus a profit element. The market value of the ticket price to the event, when calculated using this approach, is the sum of all associated costs divided by the estimated number of participants for the event.

Example 7.18

DGR A hosts a fund-raising luncheon with a celebrity sports star as a guest speaker. The costs associated with staging the event are:

Function costs

Guest speaker fees                  $  5,000

Venue hire                                 $  2,000

Food and beverage                                 $20,000

Catering staff                           $  2,000

Marketing costs

Invitation mail-out                  $  1,000

Printing invitations                  $  1,500

Menu and other promotional

material                                     $  1,000

Administration costs

Administration overheads     $     700

Insurance                                  $  2,000

Bump in/out costs                   $     500

Total costs                                                 $35,700

Profit                                                          $  1,900

Total costs plus profit                            $37,600

Unit cost per head (at 800 capacity)   $       47



Price charged per ticket                       $     500

Market value of the minor benefit    $       47

The market value of the fund-raising event is $47. An individual who purchases a ticket to the event can claim a net deduction of $453, that is, ticket price ($500) less $47.

7.38       A reasonable estimate of the notional input costs associated with staging a fund-raising event may be based on what would be paid for the inputs on the open market in an arm’s length transaction. This involves factoring all the true costs that would have to be incurred by the DGR on the open market to stage the fund-raising event, whether or not some or all of the inputs may have been donated to the DGR.

Example 7.19

DGR B hosts a fund-raising luncheon with a sports celebrity as a guest speaker. The DGR is able to secure a donation of all the function inputs to the event (representing a market value of $29,000), including the sports celebrity’s time donated to the event. An estimate of the market value using the cost-based approach would include both actual and notional costs associated with staging the event:

Function costs

Guest speaker fees                         $  5,000 - notional cost

Venue hire                                       $  2,000            “

Food and beverage                        $20,000            “

Catering staff                                 $  2,000            “

Marketing costs

Invitation mail-out                        $  1,000

Printing invitations                         $  1,500

Menu and other promotional

material                                           $  1,000

Administration costs

Administration overheads            $     700

Insurance                                        $  2,000

Bump In/Out costs                        $     500

Total costs                                       $35,700

Profit                                                $  1,900

Total costs plus profit                  $37,600

Unit cost per head (at 800 capacity)         $       47



Price charged per ticket                              $     500

Market value of the minor benefit            $       47

Notwithstanding the donation of $29,000 worth of inputs, the notional cost of staging the event would remain the same. The total costs (and hence unit cost per head) of staging the event would also remain unchanged. The market value of the fund-raising event remains $47. An individual who purchases a ticket to the event can claim a net deduction of $453, that is, ticket price ($500) less $47.

Assessing the cost of unique inputs

7.39       A reasonable estimate of the cost of certain inputs (e.g. the cost of a celebrity guest speaker or notable public figure), in a one-off event that is not open to the public, could involve establishing if the performer or celebrity would ordinarily charge a fee for the service on the open market. The fee or schedule of fees that a celebrity would ordinarily command on the open market for his/her services may be used to derive a reasonable estimate of the cost. Where no fee is ordinarily charged, this would reflect a zero notional cost in respect of the celebrity’s services.

Example 7.20

DGR C hosts a fund-raising luncheon with a sports celebrity as a guest speaker. The sports celebrity does not ordinarily charge for his attendance as a guest speaker. An estimate of the market value using the cost-based approach would include both actual and notional costs associated with staging the event:

Function costs

Guest speaker fees                  $ nil

Venue hire                                 $  2,000           

Food and beverage                                 $20,000           

Catering staff                           $  2,000           

Marketing costs

Invitation mail-out                  $  1,000

Printing invitations                  $  1,500

Menu and other promotional

material                                     $  1,000

Administration costs

Administration overheads                     $     700

Insurance                                                  $  2,000

Bump in/out costs                                   $     500

Total costs                                                 $30,700

Profit                                                          $  1,900

Total costs plus profit                           $32,600

Unit cost per head (at 800 capacity)   $       40.75



Price charged per ticket                       $     500

Market value of the minor benefit    $       40.75



As the celebrity guest speaker does not ordinarily charge a fee for attendance at luncheon events, the total cost to DGR C of staging the luncheon event is $30,700. The minor benefit associated with the event would hence have a market value of $40.75 and a deduction of $459.25 ($500 less $40.75) can be made.

7.40       The market value of the right to attend or participate in a fund-raising event is deemed to be the market value at the time that the contribution is made (i.e. when a ticket is purchased for the event), rather than when the event is held [Schedule 7, items 2 and 7] . Any reasonable estimate of the market value of the minor benefit associated with an event should include an estimate of the input costs as at the time contributions are likely to be made.

Example 7.21

At the time tickets were sold for a dinner performance at which celebrity A would perform, Celebrity A’s fees were $5,000. Before the event takes place but after tickets to the event are sold, Celebrity A’s demand as a performing artist skyrockets and his fee substantially increases to $20,000. In calculating the costs of staging the event, Celebrity A’s services still cost $5,000. Similarly, if unexpectedly on the day of the event, Celebrity A brings along a surprise guest - Celebrity B to co-host the performance, the cost of Celebrity B’s fees need not be reflected in the estimate of costs of staging that event.

Estimate of the value of goods and services successfully bid at auction   

7.41       The market value of the goods and services purchased in the course of a fund-raising auction is deemed to be the market value at the time that the contribution is made as consideration for the supply of the goods and services [Schedule 7, items 2 and 7] . Assessment of the market value of the goods and services purchased at an auction involves a reasonable estimate of what, would be charged for the goods and services in the open market in an arms length transaction.

7.42       Price comparisons may be used to provide a reasonable estimate of the value of standard market goods and services that are commercially available and have a transferable value on the open market. For example, the market value of a dinner for two, or a teapot purchased at auction, is the price that these items would normally fetch on the open market.

Example 7.22

Tim successfully bids $1,000 for a T-shirt that retails for $20. The value of the benefit of the T-shirt purchased at the auction, is the retail or market value of the item on the open market - $20. Tim can claim a deduction of $980 ($1,000 less $20).

7.43       Where the value of an item has been enhanced, for example a golf cap signed by a sports celebrity, or a T-shirt worn by a film star, a reasonable estimate of the market value of the good, will not be the original price of the item, but the amount it would reasonably achieve on the open market (e.g. at a specialist, curiosity or antique shop or a collectors internet site).

Example 7.23

Susan successfully bids $1,000 for a football signed by a high profile football team. The value of such an item fetches $550 on the sports memorabilia market. The value of the football is $550. Susan cannot claim a deduction under this amendment as the value of the benefit she received in return for her contribution exceeds both $100 and 10% of the value of her contribution.

Exam ple 7.24

Marisa successfully bids $1,000 for a football signed by the local football team, which has a market value of $90. The day after the auction, the team wins the national titles and the market value of the football owned by Marisa appreciates in value to $1,000. Marisa can still claim a deduction of $910 ($1,000 less $90) for the item. Since the value of the signed football has increased after the fund-raising auction, there is no effect on Marisa’s entitlement to the $910 deduction.

7.44       If, at the time of auction, the good or service has no alternative transferable value then it could be reasonably assumed that the market value would be nil. Examples of this would be the auction of a child’s drawing at a fete or the right to participate in charitable activities which would result in no personal financial gain.

Example 7.25

Kim successfully bids $300 for the right to camp overnight in a public city park. As the right has no transferable market value, its market value is nil. Kim can claim a deduction for the full amount of $300 under the gift provisions of the ITAA 1997, rather than a contribution under this amendment.

Example 7.26

Brian successfully bids $260 to have the head of his friend Tim shaved at a fund-raising event. As the right has no transferable market value, its market value is nil. Brian can claim a deduction for the full amount of $260 under the gift provisions of the ITAA 1997 

Special conditions that apply to deductions for contributions

7.45       The deduction under this amendment will only apply to individuals. An individual attending a fund-raising event may claim a maximum of two contributions (one for the individual and one for the individual’s partner or associate) in relation to the same fund-raising event. There is no limit to the number of deductions that may be claimed for the purchase of goods and services by way of successful bids at a fund-raising auction. An individual may claim a deduction for both a right to participate at a fund-raising event (e.g. a fund-raising dinner auction) as well as for the purchase of goods or services purchased at that fund-raising event. See Example 7.7. [Schedule 7, item 2]

7.46       The amendment is applicable where an individual has not obtained a deduction for a donation under the gift provisions of the ITAA 1997. [Schedule 7, item 2]

Maintaining deductible contributions fund

7.47       In addition to all other receipt of gifts, DGRs that conduct fund-raising events must include in the Gift Fund that it maintains, the gross contributions received. Expenses incurred in providing any minor benefits to a contributor must be accounted for in the Gift Fund. [Schedule 7, items 4 and 5] .

7.48       Where a fund has already been established by a DGR for the purpose of receiving gifts of cash or property, a separate fund for ‘deductible contributions’ will not be required.

7.49       The DGR is required to enter the whole amount of contributions (or the gross contributions) received relating to a fund-raising event into the ‘deductible contribution’ fund, including that part of the contribution that would have to be incurred by the DGR as an expense in providing the minor benefit in return for the contribution. [Schedule 7, item 5]

Content of receipt for deductible contributions

7.50       If a DGR issues a receipt in relation to contributions of property or cash received in relation to a fund-raising event, the receipt must include the following details:

·          the name and Australian Business Number (ABN) of the DGR;

·          the fact that the contribution is made in return for a right to attend a specified fund-raising event; or for the purchase of goods and services at a fund-raising auction;

·          the amount of the contribution - if the contribution is money; and

·          the value of the minor benefit (in respect of attendance at a fund-raising event and the purchase of goods and services at a fund-raising auction) provided by the DGR in return for the contribution, expressed in terms of the ‘GST inclusive market value’ of the minor benefit.

[Schedule 7, item 7]

Application and transitional provisions

7.51       The amendment applies to contributions made on or after 1 July 2004. [Schedule 7, item 13]

Consequential amendments

7.52       Subsection 30-15(3) of the ITAA 1997 which applies the definition of GST inclusive market value to the valuation of gifts of property, is amended to extend the provision to the valuation of contributions of property. [Schedule 7, item 3]

7.53       The existing requirement under subsection 30-125(4) of the ITAA 1997 is that a gift fund be maintained in respect of gifts of cash and property received. This is now extended to include the total ‘deductible contributions’ received as a result of fund-raising events. [Schedule 7, item 5]

7.54       Section 30-212 of the ITAA 1997 is amended to extend the current requirement for the Commissioner to determine the value of certain gifts of property under the Division 30 of the ITAA 1997 to certain contributions of property. [Schedule 7, item 6]

7.55       Section 30-228 of the ITAA 1997 is amended by extending the requirement for the issue of receipts by DGRs for donation of gifts, to the contributions of cash and property they receive. [Schedule 7, item 7]

7.56       The amendment is included in the index (section 30-315) in Division 30 of the ITAA 1997. [Schedule 7, item 8]  

7.57       The amendment is added to the definition of ‘apportionable deductions’ under section 995-1. [Schedule 7, item 9]

7.58       ‘Fund-raising event’ is to have the meaning given by section 40-165 of the GST Act, except for the omission of subparagraph 40-165(1)(b)(i) of that Act. Section 995-1 of the ITAA 1997 has been amended to reflect that definition of fund-raising event. [Schedule 7, item 10]  

7.59       The amendment is added to the ITAA 1936 by inclusion in the definition of ‘apportionable deductions’ under subsection 6(1) and paragraph 6AD(3)(c). [Schedule 7, items 11 and 12]  

 



C hapter 8  

Distributions to certain entities

Outline of chapter

8.1         Schedule 8 to this bill amends Division 7A of Part III of the ITAA 1936 by inserting new integrity rules that deem certain payments, loans and forgiven debts by a trustee to a shareholder (or their associate) of a private company to be an assessable dividend.

8.2         The rules are designed to ensure that a trustee cannot shelter trust income at the prevailing company tax rate by creating a present entitlement to a private company without paying it and then distributing the underlying cash to a shareholder of the company. The rules replace the former section 109UB of the ITAA 1936 that had a similar, but more limited, application.

Context of amendments

8.3         On 12 December 2002, the Treasurer announced that the Government would amend section 109UB of the ITAA 1936 dealing with distributions from trusts (Treasurer’s Press Release No. 081 of 12 December 2002). The press release explained that the amendments would address two problems identified by the Board of Taxation in its report Taxation of Discretionary Trusts concerning the effectiveness and fairness of the deemed dividend rules contained in Division 7A.

8.4         In its report, the Board recommended that the Government introduce measures to:

·          improve the effectiveness of the deemed dividend rules so as to more effectively prevent beneficiaries accessing trust income that has borne tax only at the company tax rate; and

·          remove the unfairness in the operation of section 109UB that is currently inducing some small and medium-sized business operators to establish arrangements that enable them to avoid the operation of the section completely.

Summary of new law

8.5         Broadly speaking, these amendments deem certain transactions undertaken by a trustee of a trust estate to be an assessable dividend in the hands of a shareholder of a private company (or their associate), where:

·          the private company is presently entitled to income of the trust but that income has not been paid; and

·          the trustee distributes the underlying cash to a shareholder (or their associate) of the company in the form of a payment, loan, or forgiven debt.

Comparison of key features of new law and current law

New law

Current law

The new provisions extend the operation of former section 109UB to cover distributions of the underlying cash that are in the form of a payment or forgiven debt in addition to loans.

Section 109UB prevents trust income being sheltered at the prevailing company tax rate in circumstances where a trustee creates a present entitlement to trust income to a private company without paying it and then distributes the underlying cash to a shareholder (or their associate) of the company in the form of a loan.

The new provisions allow loans provided by a trustee to a shareholder of a private company to be repaid or put on commercial footing and therefore avoid the operation of the deemed dividend rules.

Loans that attracted the operation of section 109UB were not capable of being repaid or put on commercial footing and therefore automatically attracted the operation of the deemed dividend rules.

Detailed explanation of new law

When does new Subdivision EA apply?

8.6         Broadly speaking, a deemed dividend will arise under new Subdivision EA where a private company is presently entitled to income of the trust but that income has not been paid and the trustee shifts value from the trust to a shareholder of a private company in the form of a payment, loan or forgiven debt.

Application to payments

8.7         New subsection 109XA(1) applies where:

·          a trustee makes a payment to a shareholder (or their associate) of a private company (other than to a shareholder or associate that is a company); and

·          the payment discharges or reduces a present entitlement of the shareholder (or their associate) to an amount that is an unrealised gain; and

·          the private company is, or becomes, presently entitled to an amount from the net income of the trust; and

·          all, or part, of the present entitlement remains unpaid before the earlier of the due date for lodgement and the date of lodgement of the trust’s return for the income year in which the actual payment takes place.

[Schedule 8, item 3, subsection 109XA(1); item 4, paragraph 109XA(1)(c)]

What is a payment?

8.8         The means by which a payment can be effected relies on the definition of that term in section 109C of the ITAA 1936. Section 109C defines ‘payment’ to include:

·          a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity; and

·          a credit of an amount to the extent that it is:

-           to the entity; or

-           on behalf of the entity; or

-           for the benefit of the entity; and

·          a transfer of property to the entity.

8.9         Furthermore, only payments that have the effect of reducing or discharging a present entitlement of the shareholder (or their associate) attract the operation of new rules. Therefore, the mere creation and/or recording of a present entitlement is not taken to be a payment for the purposes of these rules. [Schedule 8, item 3, paragraph 109XA(1)(b); item 3, subsection 109XA(6)]

8.10       This will mean that the conversion of a beneficiary’s entitlement into a loan back to the trust will be a payment, provided the terms in section 109C are satisfied, as the entitlement has been effectively discharged and replaced with a debt interest.

What are unrealised gains?

8.11       The rules only apply to payments that are wholly or partly attributable to an amount that is an unrealised gain. [Schedule 8, item 3, paragraph 109XA(1)(b)]

8.12       This ensures that only those payments that provide the means by which trustees distribute the underlying cash that has been sheltered at the company rate are caught by the rules.

8.13       The term ‘unrealised gain’ is intended to apply very broadly. It is defined to mean any unrealised gain whether of a capital or income nature. For the purposes of these rules, realisation will be taken to have occurred when a gain converts into a recoverable debt. [Schedule 8, item 3, subsection 109XA(7)]

8.14       However, not all unrealised gains attract the operation of these rules. Unrealised gains that have or will be included in the assessable income of the trust in:

·          an income year prior to the year when the actual payment was made; or

·          an income year in which the actual payment was made; or

·          the income year following that in which the actual payment was made,

are excluded. These rules ensure that unrealised gains that have already been assessed, or will be assessed in the near future, are not inappropriately caught by the amendments. A typical example would be an entitlement of a beneficiary generated from a transaction involving trading stock. [Schedule 8, item 3, subsection 109XA(7)]

8.15       In addition, the rules do not interfere with the outcome of a trustee’s decision as to how a payment might have been applied to reduce or discharge a beneficiary entitlement including cases where a single payment is made in respect of composite entitlements. Therefore, if a trustee determines that a payment is to be applied to reduce a beneficiary’s entitlement to a realised gain, the rules do not apply to the extent that the payment is applied to that entitlement.

8.16       However, if the trustee identifies the payment as reducing or discharging an entitlement to an unrealised gain, the rules will, subject to the other requirements in Division 7A, potentially apply. This could include the situation where the trustee is unable to identify the nature of the entitlement to which a payment is being applied, or where the trust’s financial records suggest that, as a result of the payment (and reduction or discharge of the beneficiary’s entitlement), the trust appears to have negative corpus.

8.17       This effect is achieved through subsection 109XA(5) which provides that to the extent that a discharge of, or reduction in, a present entitlement is only partly attributable to an amount that is an unrealised gain, the amount involved in the actual transaction is taken to be only the amount of the payment that was attributable to the unrealised gain. [Schedule 8, item 3, subsection 109XA(5)]

Example 8.1

A private company has a present entitlement to $1,000 of accounting income of a trust estate that remains unpaid.

The trustee creates an entitlement to an unrealised gain to a shareholder of the private company of $5,000.

The trustee makes a payment of $2,000 towards the beneficiary’s entitlement to the unrealised gain.

The payment will attract the operation of the new rules and, subject to the operation of the remainder of the rules contained in new Subdivision EA and Division 7A, a deemed dividend of $1,000 will arise in the hands of the shareholder.

Example 8.2

A private company has a present entitlement to $10,000 of accounting income of a trust estate that remains unpaid.

The trustee creates an entitlement to a shareholder of the private company comprising $7,000 of unrealised gains and $3,000 of realised gains.

The trustee then makes a payment of $5,000 towards the beneficiary’s entitlements. The trustee is permitted to determine the extent to which the payment is treated as a reduction in entitlements to realised or unrealised gains and determines that, of the $5,000 paid, the first $3,000 discharges the entitlement to the realised gain and the remaining $2,000 reduces the entitlement to the unrealised gain.

The payment will attract the operation of the new rules and, subject to the operation of the remainder of the rules contained in new Subdivision EA and Division 7A, a deemed dividend of $2,000 will arise in the hands of the shareholder.

Example 8.3

A private company has a present entitlement to $10,000 of accounting income of a trust estate that remains unpaid.

At the end of the income year the trustee creates an entitlement to a shareholder of the private company comprising $10,000. The entitlement is entirely attributable to interest income that has been accrued for accounting purposes, but is nonetheless an unrealised gain.

Shortly after the end of the income year, the trustee makes a payment of $10,000 towards the beneficiary’s entitlement. However, at the time the payment is made, the accrued interest has been received, converting the profit entitlement to an entitlement to a realised gain.

It is also noted that even if the interest is not regarded as realised at the time of payment, provided that the unrealised gain would be included in the assessable income of the trust no later than the year of income following the year in which the payment is made, the payment would also not attract the operation of the new rules.

Application to loans

8.18       New subsection 109XA(2) applies where:

·          a trustee makes a loan to a shareholder (or their associate) of a private company (other than to a shareholder or associate that is a company); and

·          the private company is, or becomes, presently entitled to an amount from the net income of the trust; and

·          all or part of that present entitlement remains unpaid before the earlier of the due date for lodgement and the date of lodgement of the trust’s return for the income year in which the loan takes place.

[Schedule 8, item 3, subsection 109XA(2); item 5, paragraph 109XA(2)(b)]

What is a loan?

8.19       The term ‘loan’ for the purposes of these rules takes the meaning provided in section 109D of the ITAA 1936. Section 109D defines ‘loan’ to include:

·          an advance of money; and

·          a provision of credit or any other form of financial accommodation; and

·          a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and

·          a transaction (whatever its terms or form) which in substance effects a loan of money.

Example 8.4

A private company has a present entitlement to $5,000 of accounting income of a trust estate that remains unpaid.

The trustee makes a non-commercial loan to a shareholder of the private company of $20,000. The loan is not repaid by the earlier of the due date for lodgement and the actual date of lodgement of the trustee’s return of income for the trust in the year in which the loan was made.

The loan will attract the operation of the new rules and, subject to the operation of the remainder of the rules contained in new Subdivision EA and Division 7A, a deemed dividend of $5,000 will arise in the hands of the shareholder.

Application to forgiven debts

8.20       New subsection 109XA(3) applies if:

·          all or part of a debt owed to a trustee by a shareholder (or their associate) of a private company is forgiven (other than to a shareholder or associate that is a company); and

·          the private company is, or becomes, presently entitled to an amount from the net income of the trust; and

·          all or part of that present entitlement remains unpaid before the earlier of the due date for lodgement and the date of lodgement of the trust’s return for the income year in which debt is forgiven.

[Schedule 8, item 3, subsection 109XA(3); item 6, paragraph 109XA(3)(b)]

What is a forgiven debt?

8.21       The phrase ‘forgiven debt’ for the purposes of these rules takes the meaning provided in section 109F of the ITAA 1936. Broadly speaking, subsection 109F(3), in conjunction with section 245-35, provides that a debt is forgiven if the debtor’s obligation to pay the debt is released or waived, or is otherwise extinguished.

What is the amount of the payment, loan, or forgiven debt?

8.22       The amount of a payment, loan or forgiven debt covered by subsection 109XA(1), (2) or (3) is calculated by reference to subsection 109XA(4). This subsection provides that the amount is the lesser of:

·          the amount actually involved in the transaction; and

·          the amount worked out using the following formula:

unpaid present entitlement - previous transactions

[Schedule 8, item 3, subsection 109XA(4)]

8.23       This calculation ensures that amounts that might have previously attracted the operation of former section 109UB or new Subdivision EA are not further subjected to the rules. The terms ‘unpaid present entitlement’ and ‘previous transactions’ are defined in subsection 109XA(4).

What are the consequences of Subdivision EA applying?

8.24       The broad scheme of the provisions is to treat the trust as a private company for the purposes of determining whether a deemed dividend arises in circumstances where the trustee has made a payment, loan, or forgiven a debt, of the kind covered by subsection 109XA(1), (2) or (3).

8.25       This is achieved through the hypothesis contained in section 109XB. Section 109XB provides that an amount is included in the assessable income (as a dividend) of the shareholder or associate if that amount, referred to as the ‘Division 7A amount’, would have been so included had:

·          the actual transaction (i.e. the payment, loan or forgiven debt provided by the trustee) been done by a private company; and

·          the shareholder (or their associate) been a shareholder of that company at the time of the actual transaction.

[Schedule 8, item 3, section 109XB]

8.26       In applying this hypothesis, certain modifications have been made to the operation of Division 7A as it applies to affected trusts, to take into account that Division 7A is ordinarily restricted to transactions involving companies and their shareholders and in other cases to reflect commercial trust practice.

8.27       The effect of these modifications will also allow loans provided by a trustee to a shareholder to be repaid or put on commercial footing (i.e. minimum repayments made and written loan agreements put in place) and therefore avoid the operation of the deemed dividend rules. This feature addresses the fairness problems identified by the Board of Taxation in respect of former section 109UB. These modifications are set out in Table 8.1:

Table 8.1: Summary of Division 7A modifications

Current law

Modification

General modifications to Division 7A

 

Division 7A

References in Division 7A to amounts paid to a company, the income year of a company, or the ordinary course of a company, take the equivalent meaning within the context of the trust or the trustee of the trust. [Schedule 8, item 3, subsection 109XC(2)]

Specific modifications to Division 7A

 

Section 109E

An amalgamated loan is taken to have been repaid at the end of the year if it is repaid by the earlier of the due date for lodgement and the date of lodgement of the trust’s return for the income year in which the actual payment takes place. [Schedule 8, item 3, subsection 109XC(3)]

Section 109J

Payments made in satisfaction of a present entitlement are not covered by section 109J. [Schedule 8, item 3, subsection 109XC(4)]

Section 109N

A valid written loan agreement will be taken to have been in place if it has been made by the earlier of lodgement or due date for lodgement of the trust’s return of income for the year in which the actual loan takes place. [Schedule 8, item 3, subsection 109XC(5)]

Section 109R

References to obtaining a loan from a private company, property transferred to a private company, or an amount paid by a private company take the equivalent reference within the context of the trust or the trustee of the trust. [Schedule 8, item 3, subsection 109XC(6)]

Section 109Y

The distributable surplus calculation is calculated by reference to the private company. [Schedule 8, item 3, subsection 109XC(7)]

Division 7A provisions which do not apply

 

Subsection 109D(1A), sections 109K, 109NA, 109NB, paragraphs 109R(3)(a),(b) and (ba)

Generally, these provisions do not apply as they have no application to trusts or, in the case of section 109K, the equivalent effect has been embodied in section 109XA. [Schedule 8, item 3, subsection 109XC(8); item 3, paragraphs 109XA(1)(a),(2)(a) and (3)(a)]

Application and transitional provisions

8.28       The amendments generally apply to payments, loans and debts forgiven on or after 12 December 2002.

8.29       However, in the event a private company becomes presently entitled to an amount from the net income of the trust after the actual transaction takes place (as opposed to before), and the other requirements of section 109XA are met, the amendments will have effect as from the date the bill is introduced into Parliament. [Schedule 8, item 9]

Consequential amendments

8.30       A minor consequential amendment has been made to section 109S to omit the reference to section 109UB.



C hapter 9  

Section 46FA - deductions for dividends on-paid to non-resident owner

Outline of chapter

9.1         Schedule 9 to this bill will amend Part III of the ITAA 1936 to ensure that the section 46FA deduction, which allows certain resident companies a deduction for on-payments of certain unfranked or partly franked non-portfolio dividends to their wholly-owned foreign parents, continues to be available to taxpayers.

9.2         This deduction was inadvertently made inoperative with the removal of the inter-corporate dividend rebate paid within wholly-owned companies applying generally after 30 June 2003.

Context of amendments

9.3         The income tax law was amended, with effect from 1 July 2000, to generally deny the inter-corporate dividend rebate under sections 46 and 46A of the ITAA 1936 on unfranked dividends received by all resident companies, except for dividends paid within a wholly-owned group.

9.4         However, it was recognised that the removal of the rebate may adversely affect non-residents investing indirectly in Australia through a resident subsidiary. As a result, the income tax law was amended by introducing a special deduction in section 46FA which allows certain resident companies, subject to certain conditions, a deduction for payments of unfranked or partly franked non-portfolio dividends on-paid to a wholly-owned foreign parent.

9.5         One of the conditions for the deduction is that the resident company would be entitled to the rebate under section 46 in respect of the unfranked amount of the dividend but for the rebate being denied.

9.6         However, this deduction was inadvertently made inoperative because as part of the introduction of the consolidation regime, the inter-corporate dividend rebate under sections 46 and 46A for unfranked dividends paid within company groups has been removed. As a result, the above condition that the resident company would otherwise be entitled to the rebate can no longer be satisfied.

9.7         The rebate has been removed for the unfranked part of a dividend paid after 30 June 2003, subject to the transitional rule in section 46AC.

Summary of new law

9.8         The new law will ensure that the deduction under section 46FA continues to be available to taxpayers.

Detailed explanation of new law

9.9         Subsections 46F(1), 46FA(11) and 46FB(6) have been amended to ensure the definition of group company continues to operate properly following the repeal of section 160AFE. The amendments will ensure that the definition of ‘group company’ defined in repealed section 160AFE will continue to have effect for the purposes of these subsections. Section 160AFE was changed as part of the removal of grouping rules following the introduction of the consolidation regime. [Schedule 9, items 1, 5 and 7, subsections 46F(1), 46FA(11) and 46FB(6)]

9.10       Paragraph 46FA(1)(c) is amended by adding after the words “but for”, the words “subsection 46AB(1) or 46AC(2) or”. This will ensure that, although the inter-corporate dividend rebate has been turned off for dividends paid within wholly-owned companies, the deduction will continue to be available to taxpayers. [Schedule 9, item 2, paragraph 46FA(1)(c)]

9.11       Subsection 46FA(5) is repealed and replaced with a provision that deems the unfranked part of a dividend on-paid to the foreign parent to be an unfrankable distribution within the meaning of section 202-45 of the ITAA 1997 if the deduction is allowed under this section in relation to that amount. [Schedule 9, item 3, subsection 46FA(5)]

9.12       This amendment will ensure that the penalties under the benchmark franking rules in Division 203 of the ITAA 1997 are not inappropriately triggered where the section 46FA deduction applies and the resident company pays another distribution during the same franking period with a franking percentage other than zero percent.

9.13       Items 4, 6 and 8 update the definitions in subsections 46FA(11) and 46FB(6) to ensure consistency with the terminology in the simplified imputation system. [Schedule 9, items 4, 6 and 8 subsections 46FA(11) and 46FB(6)]

Application and transitional provisions

9.14       The amendment made by item 2 will generally apply to dividends paid after 30 June 2003. For taxpayers that are subject to the provisions in section 46AC of the ITAA 1936, this amendment applies to dividends paid on or after the consolidation day referred to in that section. [Schedule 9, subitems 9(1) and 9(2)]

9.15       The tiered application date is needed because for some taxpayers, the sections 46 and 46A rebate is not turned off for the unfranked part of a dividend paid to the taxpayer until the consolidation day.

9.16       The amendments made by items 1 and 3 to 8 of Schedule 9 apply to dividends paid on or after 1 July 2002, that is, the start date of the simplified imputation system. [Schedule 9, subitem 9(3)]

 



C hapter 10

Endorsement of charities to access relevant tax concessions

Outline of chapter

10.1       Schedule 10 to this bill amends the ITAA 1997, the Fringe Benefits Tax Assessment Act 1986 (FBT Act), the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), and the Taxation Administration Act 1953 (TAA 1953) to require that charities, public benevolent institutions and health promotion charities, be endorsed by the Commissioner in order to access relevant taxation concessions.

10.2       Schedule 10 also amends the A New Tax System (Australian Business Number) Act 1999 (ABN Act) and the TAA 1953 to require the Registrar of the Australian Business Register (Registrar) to make entries in the Australian Business Register (ABR) citing the taxation concessions for which a charity (or public benevolent institution or health promotion charity) has been endorsed.

Context of amendments

10.3       As part of its response to the Report of the Inquiry into the Definition of Charities and Related Organisations , the Government decided that from 1 July 2004, charities, public benevolent institutions and health promotion charities will be required to be endorsed by the ATO in order to access all relevant taxation concessions.

10.4       An organisation endorsed to access these tax concessions will have its status attached to its Australian Business Number (ABN) and this status will be able to be publicly accessed through the ABR. This will allow greater scrutiny of the use of taxation concessions by charities (and public benevolent institutions and health promotion charities) and improve public confidence in the provision of taxation support to the charitable sector.

Summary of new law

10.5       The amendments extend the endorsement processes currently undertaken by the ATO to all the taxation concessions to which charities, public benevolent institutions and health promotion charities, are entitled. Where a charity can currently self-assess its eligibility for a taxation concession, from 1 July 2004, it will be required to satisfy the Commissioner that it is eligible for the taxation concession. Depending on the nature of the entity, the relevant concessions are the income tax exemption as a charity, refundable imputation credits, deductible gift recipient status, the fringe benefits tax (FBT) rebate, the $30,000 capped FBT exemption and GST concessions for charities.

10.6       There is no change to the requirements that charities, public benevolent institutions and health promotion charities have to fulfil to qualify for taxation concessions. The process for endorsement for each taxation concession will now be contained in the TAA 1953.

10.7       To be endorsed, entities must identify themselves to the Commissioner by applying for an ABN and applying for endorsement for tax concessions.

Comparison of key features of new law and current law

New law

Current law

Endorsement by the Commissioner is required by charities (and public benevolent institutions and health promotion charities) to access the income tax exemption, refundable imputation credits, DGR status, the FBT rebate, the $30,000 capped FBT exemption and the GST concessions for charities.

Subdivision 50-B of the ITAA 1997 requires that an entity must be endorsed by the Commissioner in order to access the income tax exemption for charities.

Subdivision 30-BA of the ITAA 1997 requires that certain entities must be endorsed to be DGRs.

Endorsed charities and DGRs can receive refundable imputation credits.

Charities (and public benevolent institutions and health promotion charities) self-assess for the purposes of claiming the FBT rebate, the $30,000 capped FBT exemption and the GST concessions for charities.

Detailed explanation of new law

Endorsement specific to the type of concession and charity

10.8       Endorsement will be required for each particular concession that a charity wishes to access [Schedule 10, item 38, section 426-5] . This enables the endorsement conditions to exactly mirror the existing conditions that must be met for an entity to be entitled to access a particular taxation concession.

10.9       There are five new categories under which an entity may be endorsed:

·          a charitable institution under subsection 176-1(1) of the GST Act;

·          a trustee of a charitable fund under subsection 176-5(1) of theGST Act;

·          a public benevolent institution under subsection 123C(1) of the FBT Act or for the operation of a public benevolent institution under subsection 123C(3) of the FBT Act;

·          a health promotion charity under subsection 123D(1) of the FBT Act; and

·          a charitable institution covered by paragraph 65J(1)(baa) of the FBT Act under subsection 123E(1) of that Act.

10.10     These five are in addition to the current categories of:

·          a DGR, or as a DGR for the operation of a fund, authority or institution, under section 30-120 of the ITAA 1997; and

·          a charity exempt from income tax under section 50-105 of the ITAA 1997.

10.11     The GST Act and the FBT Act are amended to ensure that the relevant FBT and GST taxation concessions apply only to endorsed entities. Apart from the endorsement requirement, the conditions for access to these concessions have not been changed. [Schedule 10, item 4, subsection 29-40(2); item 5, subsection 29-50(5); item 6, paragraph 38-250(1)(a); item 7, paragraph 38-250(2)(a); item 8, paragraph 38-255(a); item 9, paragraph 38-270(a); item 10, paragraph 40-160(a); item 12, paragraph 63-5(2)(a); item 13, paragraph 111-18(a); item 14, section 129-45; item 18, subsection 57A(1); item 19, subsection 57A(5); item 20, subsection 65J(1); item 21, paragraph 65J(1)(b)]

Requirement for endorsement

10.12     Charities (and public benevolent institutions and health promotion charities) will be required to be endorsed to access the income tax exemption as a charity, refundable imputation credits, DGR status, the FBT rebate, the $30,000 capped FBT exemption and GST concessions for charities. Subject to the qualification in paragraph 10.13, other types of entities that can access these concessions are not required to be endorsed. For example, a non-profit society established for the purpose of promoting the development of aviation may continue to self-assess its entitlement to the FBT rebate.

10.13     Where an entity qualifies for a concession as both a charity and another type of entity, the entity may only claim the concession if the entity is endorsed as a charity. This applies to the FBT rebate and GST concessions, which may be claimed by several types of entities. For example, where an entity is both a charitable institution and a non-profit society established for community service purposes, the entity must be endorsed as a charity for the entity to be entitled to access the FBT rebate. The entity may not bypass the requirement of charitable institutions to seek endorsement for the FBT rebate, by instead self-assessing their entitlement to the FBT rebate as a non-profit society established for community service purposes. [Schedule 10, item 4, subsection 29-40(2A); item 6, subsection 29-50(6); item 7, subsection 38-250(3); item 8, subsection 38-255(2); item 9, subsection 38-270(2); item 10, subsection 40-160(2); item 11, subsection 48-15(1); item 12, subsection 63-5(3); item 13, subsection 111-18(2); item 14, subsection 129-45(2); item 22, subsection 65J(1A)]

10.14     The Commissioner is required to endorse a specific entity for a specific taxation concession if it has applied for endorsement, has an ABN and is entitled to that endorsement [Schedule 10, item 15, section 176-1; item 22, sections 123C to 123E] . There is no change to the requirements a charity must meet in order to be entitled to a concession.

10.15     While an entity will have to meet specific conditions relating to each particular concession to be endorsed, the procedural provisions relating to application for endorsement and revocation of endorsement are the same for each category of endorsement. To avoid repetition in the legislation, procedural rules relating to endorsement for all relevant tax concessions are provided in Division 426 of Schedule 1 to the TAA 1953 rather than in each separate tax Act.

Process of endorsing

Applying for endorsement

10.16     In applying for endorsement, the entity must apply in a form approved by the Commissioner (signed or containing the entity’s electronic signature if lodged electronically). The application must be lodged at, or posted to, an office or facility designated by the Commissioner as a receiving centre for an application of that kind. [Schedule 10, item 38, section 426-15]

10.17     While endorsement is beneficial to charities (and public benevolent institutions and health promotion charities) as it allows them to access certain taxation concessions, it is possible that some entities may be entitled, but not wish to be endorsed. The requirement that an entity apply for endorsement preserves the right of the entity not to be endorsed if they so choose.

10.18     The process for endorsement may be streamlined by allowing the Commissioner to approve a single form that would cover applications for multiple endorsements. Entities may have the option of indicating on the form either the specific endorsement or endorsements they wish to apply for, or that they wish to apply for all of the endorsements without being required to separately identify each endorsement. [Schedule 10, item 38, subsection 426-15(3)]

10.19     The Commissioner must give the applicant written notice as to whether they are endorsed or refused endorsement. [Schedule 10, item 38, section 426-25]

10.20     The Commissioner must specify a date of effect of endorsement. The date may be any date including a date before the application for endorsement was made and a date before the applicant had an ABN. [Schedule 10, item 38, section 426-30]

Refusal of endorsement

10.21     The applicant may object against a refusal of endorsement in the manner set out in Part IVC of the TAA 1953 [Schedule 10, item 38, section 426-35] . Part IVC applies to taxation objections, reviews and appeals.

10.22     An applicant may treat their application as refused, by giving the Commissioner written notice of that fact, if the Commissioner has not given the applicant written notice of a decision by the later of:

·          the end of the 60 th day after the application was made; or

·          the end of the 28 th day after the last day on which the applicant gives the Commissioner further information or documentation as requested.

[Schedule 10, item 38, subsection 426-20(2)]

10.23     If the applicant gives such a notice, the review of refusal of endorsement operates as if the Commissioner had refused the application on the day on which the notice is given. [Schedule 10, item 38, subsection 426-20(4)]

Checking entitlement to endorsement

10.24     The Commissioner may require that an endorsed entity provide information relevant to its entitlement for continued endorsement. The entity must comply with that request [Schedule 10, item 38, section 426-40] . Failure in this obligation may attract prosecution under section 8C of the TAA 1953 and loss of endorsement [Schedule 10, item 38, paragraph 426-55(1)(b)] .

10.25     An entity must give the Commissioner written notice before, or as soon as practicable after, it is no longer entitled to be endorsed [Schedule 10, item 38, section 426-45] . Failure in this obligation may also attract prosecution under section 8C of the TAA 1953.

10.26     The Commissioner may revoke an entity’s endorsement if that entity:

·          is no longer entitled to be endorsed;

·          has not provided requested information relevant to its endorsement; or

·          has not ensured that the required things are stated on receipts issued for gifts (only relevant for DGRs).

[Schedule 10, item 38, section 426-55]

10.27     The Commissioner must give the entity written or electronic notice if its endorsement is revoked. The revocation date is the date specified by the Commissioner but cannot be before a date on which the entity first ceased to be entitled. [Schedule 10, item 38, section 426-55]

10.28     The entity may object if it is dissatisfied with the revocation of its endorsement. [Schedule 10, item 38, section 426-60]

Partnerships and unincorporated bodies

10.29     The obligations, mentioned above, to comply with the Commissioner’s request to provide information relevant to an entity’s entitlement to endorsement or informing the Commissioner when the entity has ceased to be entitled to be endorsed, are imposed on each partner in a partnership and each member of the committee of management of association. The obligation may be discharged by any of the partners or any of the members of the committee. [Schedule 10, item 38, subsections 426-50(1) and (2)]

10.30     Where the obligations are not met, there will be an offence under section 8C of the TAA 1953. However, this bill does not, on its own, create any offence. Nor does it reverse the onus of proof set out under section 8C. For example, it is still incumbent upon the Commissioner to prove that the person was capable of providing the required information.

10.31     Because of the need to extend the information obligations to cover each member of a partnership or each member of a management committee of an unincorporated association (to attach to the legal persons behind such entities), this bill provides an additional safeguard to those members. Essentially, the proposed defence provided by subsection 426-50(3) ensures that no offence will have occurred where the person proves that they did not knowingly fail to give information. Of course, this defence will not be necessary if the Commissioner cannot prove that the person was capable of providing the required information.

Government entities

10.32     Section 426-10 ensures that ‘government entities’ are treated like entities for the purpose of endorsement as a DGR.

Recording an endorsed entity on the Australian Business Registrar

10.33     Entities will have their endorsement displayed on the ABR. To facilitate this, it will be necessary for all endorsed entities to have an ABN. [Schedule 10, item 3, paragraph 26(3)(ga)]

10.34     The endorsed entity does not have to apply to be recorded on the ABR. The Registrar will enter a statement on the ABR that the entity is endorsed. [Schedule 10, item 38, section 426-65]

Application and transitional provisions

10.35     Items 39 and 40 provide a start date of 1 July 2004 for the amendments made by Schedule 10 to the GST Act and the FBT Act.

10.36     Most of the entities that are already endorsed as an income tax exempt charity or a DGR would likely have applied to be endorsed for all the concessions to which they were entitled had endorsement been required at the time they applied. The Commissioner will endorse such entities under any category to which they are entitled providing that the entity is already endorsed as an income tax exempt charity or DGR before 1 July 2004. Such entities need not apply to be endorsed, but may apply to the Commissioner if they do not wish to be automatically endorsed. [Schedule 10, item 360]

10.37     Item 42 provides a seamless transition to the new processes. For example, the TAA 1953 (as in force on and after the commencement of this item) applies as if:

·          an application made before the commencement of this item under section 30-130 or 50-115 of the ITAA 1997 was made under section 426-15 in Schedule 1 to the TAA 1953;

·          a request made before the commencement of this item under subsection 30-135(1) or 50-120(1) of the ITAA 1997 was made under subsection 426-20(1) in Schedule 1 to the TAA 1953;

·          a notice given before the commencement of this item under subsection 30-135(2) or 50-120(2) of the ITAA 1997 was given under subsection 426-20(2) in Schedule 1 to the TAA 1953;

·          a notice given before the commencement of this item under subsection 30-140(1) or 50-125(1) of the ITAA 1997 was given under subsection 426-25(1) in Schedule 1 to the TAA 1953;

·          an objection made before the commencement of this item in accordance with section 30-150 or 50-135 of the ITAA 1997 was made in accordance with section 426-35 in Schedule 1 to the TAA 1953;

·          a request made before the commencement of this item under subsection 30-155(1) or 50-140(1) of the ITAA 1997 was made under subsection 426-40(1) in Schedule 1 to the TAA 1953;

·          a revocation made before the commencement of this item under subsection 30-170(1) or 50-155(1) of the ITAA 1997 was made under subsection 426-55(1) in Schedule 1 to the TAA 1953;

·          a notice given before the commencement of this item under subsection 30-170(4) or 50-155(4) of the ITAA 1997 was given under subsection 426-55(4) in Schedule 1 to the TAA 1953; and

·          an objection made before the commencement of this item in accordance with section 30-175 or 50-140 of the ITAA 1997 was made in accordance with section 426-40 in Schedule 1 to the TAA 1953.

Consequential amendments

10.38     Consequential amendments relating to providing an entry in the ABR make it clear that section 426-65 requires the Registrar to make entries in the ABR about entities that are endorsed. [Schedule 10, item 3]

 

 

 



C hapter 11

Specific gift recipients

Outline of chapter

11.1       Schedule 11 to this bill amends the ITAA 1997 to update the lists of specifically-listed deductible gift recipients (DGRs) .

Context of amendments

11.2       I ncome tax law allows taxpayers to claim income tax deductions for certain gifts to DGRs. To be a DGR, an organisation must fall within a category of organisations set out in Division 30 of the ITAA 1997, or be specifically-listed under that Division.

11.3       The addition of organisations to the lists of specifically-listed DGRs will assist these organisations to attract public support for their activities .

Summary of new law

11.4       The amendments will allow income tax deductions for certain gifts to the value of $2 or more made to the funds and organisations listed in Table 11.1 from, and including, the date of effect.

Table 11.1

Name of fund

Minister for Revenue and Assistant Treasurer’s Press Release No.

Date of effect

Dunn and Lewis Youth Development Foundation Limited

C102/03

10 November 2003 to

9 November 2005

Crime Stoppers South Australia Incorporated

C090/03

19 September 2003

Country Education Foundation of Australia Limited

C081/03

20 August 2003

11.5       The ITAA 1997 is also amended so that the period for which deductions are allowed for gifts made to Bowral Vietnam Memorial Walk Trust Incorporated is extended for an additional two years from 16 August 2003.

Detailed explanation of new law

11.6       The funds, authorities and institutions discussed in paragraphs 11.8 to 11.10 have been included in the gift provisions of the ITAA 1997. Gifts of $2 or more to these organisations will allow a donor to claim the gift as an income tax deduction.

11.7       The Dunn and Lewis Youth Development Foundation Limited was established to build a complex to serve as a memorial, as a recreational outlet and as a vocational training centre to link young people in Ulladulla with traineeships and other employment opportunities. [Schedule 11, items 4 and 6]

11.8       Crime Stoppers South Australia Incorporated was established to encourage community involvement in the apprehension and conviction of criminals, and the reduction in crime by the provision of information to the proper authorities. [Schedule 11, items 2 and 5]

11.9       Country Education Foundation of Australia Limited was established to help provide grants to disadvantaged young school leavers to help them into further education and to improve their career opportunities. [Schedule 11, items 1 and 5]

Extending an end date to deductibility

11.10     The ITAA 1997 is amended so that the period for which deductions are allowed for gifts made to the Bowral Vietnam Memorial Walk Trust Incorporated is extended for an additional two years from 16 August 2003. The Bowral Vietnam Memorial Walk Trust Incorporated was established to raise funds to provide a memorial for the recognition, comfort and benefit of the veterans of the Vietnam War and their families. [Schedule 11, item 3]

Application and transitional provisions

11.11     The amendments to include organisations in the gift provisions of the ITAA 1997 apply from the date of effect shown in Table 11.1 .



I ndex         

Schedule 2: Deduction for transport between workplaces

Bill reference

Paragraph number

Items 1 and 2, Division 12-5

2.33

Item 3, section 25-100

2.11

Items 4 to 7, Division 28

2.34

Items 8 and 9, paragraph 900-30(7)(c)

2.28

Item 10, Division 995

2.35

Schedule 3: Small business CGT relief and discretionary trusts

Bill reference

Paragraph number

Items 1 and 2, subsection 152-30(2)

3.16

Item 3, subsection 152-30(3)

3.18

Item 4, subsection 152-30(5)

3.17

Item 4, subsection 152-30(6)

3.19

Item 4, subsections 152-30(6A) to (6C)

3.21

Items 5 and 6, subsections 152-30(8) and (9) and subsection 152-305(3)

3.25

Subitem 8(2)

3.31

Subitem 8(3)

3.32

Subitem 8(4)

3.34

Subitems 8(5) and (6)

3.37

Item 9

3.28

Schedule 4: Amendment of the Energy Grants (Credits) Scheme (Consequential Amendments) Act 2003

Bill reference

Paragraph number

Item 1

4.12

Item 2

4.14

Item 3

4.15

Item 4

4.12, 4.13

Items 5 and 6

4.14

Item 7

4.16

Item 8

4.18

Schedule 5: Net input tax credits and capital gains tax

Bill reference

Paragraph number

Item 1, subsection 17-10(2)

5.14

Item 2, subsection 27-10(4)

5.14

Item 3, section 103-30

5.8

Item 4

5.9

Item 5

5.9

Items 6 and 7

5.12

Item 8

5.9

Schedule 6: Confidentiality of ABN information

Bill reference

Paragraph number

Items 1 to 4

6.7

Item 5

6.14

Schedule 7: Deductions for contributions relating to fund-raising events

Bill reference

Paragraph number

Item 1

7.14

Item 2

7.16, 7.21, 7.26, 7.28, 7.40, 7.41, 7.45, 7.46

Item 3

7.52

Item 4

7.47

Item 5

7.47, 7.49, 7.53

Item 6

7.54

Item 7

7.30, 7.40, 7.41, 7.50, 7.55

Item 8

7.56

Item 9

7.57

Item 10

7.21, 7.58

Item 11

7.59

Item 12

7.59

Item 13

7.51

Schedule 8: Distributions to certain entities

Bill reference

Paragraph number

Item 3, subsection 109XA(1)

8.7

Item 3, paragraphs 109XA(1)(a),(2)(a) and (3)(a)

Table 8.1

Item 3, paragraph 109XA(1)(b)

8.9, 8.11

Item 3, subsection 109XA(2)

8.18

Item 3, subsection 109XA(3)

8.20

Item 3, subsection 109XA(4)

8.22

Item 3, subsection 109XA(5)

8.17

Item 3, subsection 109XA(6)

8.9

Item 3, subsection 109XA(7)

8.13, 8.14

Item 3, section 109XB

8.25

Item 3, subsection 109XC(2)

Table 8.1

Item 3, subsection 109XC(3)

Table 8.1

Item 3, subsection 109XC(4)

Table 8.1

Item 3, subsection 109XC(5)

Table 8.1

Item 3, subsection 109XC(6)

Table 8.1

Item 3, subsection 109XC(7)

Table 8.1

Item 3, subsection 109XC(8)

Table 8.1

Item 4, paragraph 109XA(1)(c)

8.7

Item 5, paragraph 109XA(2)(b)

8.18

Item 6, paragraph 109XA(3)(b)

8.20

Item 9

8.29

Schedule 9: Deductions for dividends on-paid to non-resident owners

Bill reference

Paragraph number

Items 1, 5 and 7, subsections 46F(1), 46FA(11) and 46FB(6)

9.9

Item 2, paragraph 46FA(1)(c)

9.10

Item 3, subsection 46FA(5)

9.11

Items 4, 6 and 8 subsections 46FA(11) and 46FB(6)

9.13

Subitems 9(1) and 9(2)

9.14

Subitem 9(3)

9.16

Schedule 10: Endorsement of charities

Bill reference

Paragraph number

Item 3

10.38

Item 3, paragraph 26(3)(ga)

10.33

Item 4, subsection 29-40(2)

10.11

Item 4, subsection 29-40(2A)

10.13

Item 5, subsection 29-50(5)

10.11

Item 6, subsection 29-50(6)

10.13

Item 6, paragraph 38-250(1)(a)

10.11

Item 7, paragraph 38-250(2)(a)

10.11

Item 7, subsection 38-250(3)

10.13

Item 8, paragraph 38-255(a)

10.11

Item 8, subsection 38-255(2)

10.13

Item 9, paragraph 38-270(a)

10.11

Item 9, subsection 38-270(2)

10.13

Item 10, paragraph 40-160(a)

10.11

Item 10, subsection 40-160(2)

10.13

Item 11, subsection 48-15(1)

10.13

Item 12, paragraph 63-5(2)(a)

10.11

Item 12, subsection 63-5(3)

10.13

Item 13, paragraph 111-18(a)

10.11

Item 13, subsection 111-18(2)

10.13

Item 14, section 129-45

10.11

Item 14, subsection 129-45(2)

10.13

Item 15, section 176-1

10.14

Item 18, subsection 57A(1)

10.11

Item 19, subsection 57A(5)

10.11

Item 20, subsection 65J(1)

10.11

Item 21, paragraph 65J(1)(b)

10.11

Item 22 sections 123C to 123E

10.14

Item 38, section 426-5

10.8

Item 38, section 426-15

10.16

Item 38, subsection 426-15(3)

10.18

Item 38, subsection 426-20(2)

10.22

Item 38, subsection 426-20(4)

10.23

Item 38, section 426-25

10.19

Item 38, section 426-30

10.20

Item 38, section 426-35

10.21

Item 38, section 426-40

10.24

Item 38, section 426-45

10.25

Item 38, subsections 426-50(1) and (2)

10.29

Item 38, section 426-55

10.26

Item 38, paragraph 426-55(1)(b)

10.24

Item 38, section 426-60

10.28

Item 38, section 426-65

10.34

Item 360

10.36

 

Schedule 11: Specific gift recipients

Bill reference

Paragraph number

Items 1 and 5

11.9

Items 2 and 5

11.8

Item 3

11.10

Items 4 and 6

11.7