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Tax Laws Amendment (2004 Measures No. 4) Bill 2004

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2002-2003-2004

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Tax laws amendment (2004 Measures No . 4) 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            Consolidation: providing greater flexibility.......................... 9

Chapter 2            Copyright collecting societies............................................ 49

Chapter 3            Simplified imputation system - consequential and

other amendments............................................................... 57

Chapter 4            Specific gift recipients........................................................ 67

Chapter 5            Debt and equity interests - at call loans........................... 73

Index                                                                                                                   75



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

Abbreviation

Definition

ACA

allocable cost amount

ATO

Australian Taxation Office

CGT

capital gains tax

Commissioner

Commissioner of Taxation

DGR

deductible gift recipient

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

MEC groups

multiple entry consolidated groups

SIS

simplified imputation system

TAA 1953

Taxation Administration Act 1953

tax cost

tax cost setting amount

 



Consolidation: providing greater flexibility

Schedule 1 to this bill provides greater flexibility, clarifies certain aspects of the consolidation regime and ensures that the regime interacts appropriately with other aspects of the income tax law.

Date of effect :  These amendments have retrospective effect to 1 July 2002, which is the date of commencement of the consolidation regime. The amendments clarify the operation of the consolidation regime and the interaction of the regime with other areas of the tax law and as such are beneficial to taxpayers and do not have the potential to act to the detriment of any persons.

Proposal announced :  All the amendments were foreshadowed in the Minister for Revenue and Assistant Treasurer’s Press Release No. C116/03 of 4 December 2003.

Financial impact :  Nil.

Compliance cost impact :  These amendments in this bill will provide taxpayers with additional flexibility in the transition to consolidation and are not expected to impact on compliance costs.

Copyright collecting societies

Schedule 2 to this bill amends the Income Tax Assessment Act 1997 , the  Income Tax (Transitional Provisions) Act 1997 and the Taxation Administration Act 1953 to:

·          ensure that copyright collecting societies are not taxed on any copyright income that they collect and hold on behalf of members, pending allocation to them;

·          minimise compliance costs for copyright collecting societies by ensuring that they are not taxed on the non-copyright income they derive, provided that the amount of non-copyright income derived falls within certain limits; and

·          ensure that any copyright and non-copyright income collected or derived by copyright collecting societies that is exempt from income tax in their hands, is included in the assessable income of members upon distribution.

Date of effect :  The amendments will generally apply from 1 July 2002. However, under a transitional option, societies may elect to have the amendments apply from 1 July 2004.

Proposal announced :  This measure was announced in the Minister for Revenue and Assistant Treasurer’s Press Release No. C081/02 of 1 August 2002.

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

Compliance cost impact :  The measure is expected to have a minimal effect on the compliance costs of copyright collecting societies.

Simplified imputation system - consequential and other amendments

Schedule 3 to this bill:

·          makes consequential amendments to the income tax laws which will:

-           replace references to the former imputation provisions in Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) to those of the simplified imputation system (SIS) in Part 3-6 of the Income Tax Assessment Act 1997 (ITAA 1997); and

-           update terminology of the former imputation system to equivalent terms of the SIS;

·          makes various technical amendments in relation to the SIS and other imputation related provisions; and

·          inserts into Division 207 of the ITAA 1997 anti-avoidance rules that apply in relation to certain tax exempt entities that are entitled to a refund of franking credits. These rules were previously in Division 7AA of Part IIIAA of the ITAA 1936.

Date of effect :  The amendments will generally apply to events occurring on or after 1 July 2002, the commencement date of the SIS.

The amendment to section 46FB of the ITAA 1936 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.

The amendments to re-insert the definition of ‘controller (for CGT purposes)’ will apply to assessments for the 2002-2003 income year and later income years.

For assessments for the 2002-2003 income year, section 109ZC of the ITAA 1936 has effect as if the references in subsection 109ZC(3) to amounts that are not assessable income and are not exempt income were instead a reference to income that is not exempt.

For the period starting 1 July 2002 and ending 30 June 2004 the following apply:

·          section 128TB of the ITAA 1936 has effect as if the reference to ‘general company tax rate’ in subsection 128TB(2) was amended to ‘corporate tax rate’; and

·          section 377 of the ITAA 1936 has effect as if the references in paragraph 377(1)(e) to the former imputation provisions were references to the SIS.

Proposal announced :  The consequential amendments form part of the SIS, which was announced as part of the Government’s business tax reform package. The proposal was announced in the Treasurer’s Press Release No. 058 of 21 September 1999. On 14 May 2002, the Minister for Revenue and Assistant Treasurer announced in Press Release No. C057/02 the Government’s program for delivering the next stage of business tax reform measures including the SIS.

Financial impact :  Nil.

Compliance cost impact :  The SIS is designed to reduce compliance costs incurred by business by providing simpler processes and increased flexibility.

Specific gift recipients

Schedule 4 to this bill amends the Income Tax Assessment Act 1997 to amend the lists of specifically-listed deductible gift recipients (DGRs).

Date of effect

Deductions for gifts to specifically-listed deductible gift recipients under Schedule 4:

·          the fire and emergency services authorities listed in Table 4.1 of Schedule 4 from 23 December 2004;

·          International Social Service - Australian Branch from 18 March 2004;

·          the Victorian Crime Stoppers Program from 23 April 2004;

·          the Australian Ex-Prisoners of War Memorial Fund from 20 October 2003 to 19 October 2005;

·          The Albert Coates Memorial Trust from 31 January 2004 to 30 January 2006;

·          the Coolgardie Honour Roll Committee Fund from 2 June 2004 to 2 June 2006;

·          the Tamworth Waler Memorial Fund from 20 April 2004 to 19 April 2006;

·          Australian Business Week Limited from 9 December 2003;

·          St Patrick’s Cathedral Parramatta Rebuilding Fund from 25 February 2004 to 30 June 2004; and

·          St Paul’s Cathedral Restoration Fund from 23 April 2004 to 22 April 2006.

Proposal announced :  The Government has advised these organisations that they have gained specific-listing as a DGR.

Financial impact :  These amendments in Schedule 4 have an unquantifiable, but insubstantial, cost to revenue.

Compliance cost impact :  Nil.

Debt and equity interests - at call loans

Schedule 5 to this bill amends the Income Tax Assessment Act 1997 so that the transitional period for at call loans under the debt/equity rules will extend to 30 June 2005.

Date of effect :  These amendments will commence on Royal Assent. They apply to loans entered into at any time on or before 30 June 2005.

Proposal announced :  This measure was announced in the Minister for Revenue and Assistant Treasurer’s Press Release No. C045/04 of 24 May 2004.

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

Compliance cost impact :  The amendments will give taxpayers extra time to assess existing loans and adjust their arrangements, if need be, in light of the Government’s decision to carve out certain small business at call loans from the debt/equity rules (the Minister for Revenue and Assistant Treasurer’s Press Release No. C045/04 of 24 May 2004). The amendments are expected to assist in reducing compliance costs.

 

 

 



C hapter 1  

Consolidation: providing greater flexibility

Outline of chapter

1.1          Schedule 1 to this bill contains the following modifications to the consolidation regime:

·          membership rules to ensure that when a member is in liquidation or under administration that member is not precluded from being a member of a consolidated group;

·          cost setting rules to ensure that entities which are subject to a finance lease and enter a consolidated group are provided an appropriate tax cost in order to obtain the appropriate deductions under the uniform capital allowance regime;

·          cost setting rules to ensure that appropriate allowance is given for expenditure relating to mining or quarrying activities;

·          cost setting rules to ensure that entities that have low-value pools and software development pools receive the appropriate tax costs to enable them to maintain their entitlement to deductions for those pools; and

·          inter-entity loss multiplication rules to alleviate notice requirements.

1.2          All references to legislative provisions in this chapter are references to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

1.3          Unless otherwise stated, a reference in this chapter to a consolidated group should be read as including a multiple entry consolidated group.

Context of amendments

1.4          With the introduction of the consolidation regime, a number of modifications (see paragraph 1.1), are being made to provide greater flexibility, further clarify certain aspects of the regime and to ensure that it interacts appropriately with other areas of the income tax law.

Summary of new law

Clarifying beneficial ownership for consolidation membership rules

1.5          Part 2 of Schedule 1 to this bill clarifies the meaning of beneficial ownership in section 703-30 for the purposes of the consolidation membership rules. The amendment ensures that entities under external administration will not be prevented from being or remaining members of consolidated groups.

Cost setting rules for assets subject to a finance lease

1.6          Part 3 of Schedule 1 to this bill provides special rules for setting the tax cost of assets where an entity that is subject to a finance lease becomes a member or ceases to be a member of a consolidated group. These rules ensure that the cost setting rules apply appropriately taking into account the different treatment of finance leases under accounting standards and the income tax law.

Application of cost setting rules to certain types of mining expenditure

1.7          Part 4 of Schedule 1 to this bill contains rules that clarify the operation of the cost setting rules and the inherited history rules for assets that have arisen from allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure.

Low-value development pools

1.8          Part 5 of Schedule 1 to this bill amends the income tax law dealing with low-value pools to ensure that the head company of a consolidated group receives the appropriate allowances for the decline in value of these pools. The rules also ensure that the head company and a leaving entity receive the appropriate allowances for the decline in value of the pools where the leaving entity takes part of the pool with it upon leaving the consolidated group.

Software development pools

1.9          This bill also amends the income tax law dealing with software development pools to ensure that the head company of a consolidated group receives the appropriate allowances for the decline in value of these pools. The rules also ensure that the head company and a leaving entity receive the appropriate allowances for the decline in value of the pools where the leaving entity takes part of the pool with it upon leaving the consolidated group.

Inter-entity loss multiplication rules

1.10        Part 6 of Schedule 1 to this bill amends the income tax law to alleviate the notice requirements under the inter entity loss multiplication rules during the consolidation transitional period for entities that are in the same consolidatable group. The amendments also give the Commissioner of Taxation (Commissioner) a discretion to extend the time for giving notices or to waive the notice requirement in appropriate circumstances.

Comparison of key features of new law and current law

New law

Current law

Clarifying beneficial ownership for consolidation membership rules

Entities under external administration will not be prevented from being or remaining members of consolidated groups.

No equivalent.

Cost setting rules for assets subject to a finance lease

Special cost setting rules apply where an entity that becomes or ceases to be a member of a consolidated group is subject to a finance lease. These rules recognise the different treatment of finance leases under accounting standards and income tax law.

No equivalent.



 

New law

Current law

Application of cost setting rules to certain types of mining expenditure

Where a joining entity could or did deduct the cost of a depreciating asset under section 40-80, subsection 701-55(2) will apply as if the prime cost method for working out the decline in value of the asset applied just before the joining time. This will ensure that the rules in subsection 701-55(2) work appropriately in relation to the depreciating asset.

Section 40-80 allows a taxpayer a deduction for an asset’s cost if the asset is used for certain exploration and prospecting purposes. Section 40-80 does not specify whether the deduction is calculated under a prime cost or diminishing value method. Consequently, the rules in subsection 701-55(2) do not work correctly for depreciating assets whose cost was deducted under section 40-80.

Where a depreciating asset has resulted from allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure (regardless of whether this expenditure formed part of a notional asset as determined by section 40-35, 40-37, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997 ), its cost will be determined having regard to the amount of expenditure reasonably attributable to the depreciating asset.

Due to the operation of certain provisions in the Income Tax (Transitional Provisions) Act 1997 , such depreciating assets are deemed to have a cost of nil.

The adjustable value of a joining entity’s depreciating asset is increased by so much of the adjustable value of the joining entity’s notional asset that reasonably relates to the depreciating asset.

Due to the operation of certain provisions in the Income Tax (Transitional Provisions) Act 1997 the adjustable value of such depreciating assets was deemed to be nil.

Where a joining entity has deducted or could deduct amounts in relation to the cost of the depreciating asset cost, these deductions will be taken to have been deductions for the decline in value of the depreciating asset.

Deductions for the decline in value of a notional asset under section 40-35, 40-37, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997 and deductions for expenditure under Subdivision 330-A, 330-C or 330-H of the ITAA 1997 (or a corresponding previous law), were not treated as deductions for decline in value of the depreciating asset.



 

New law

Current law

Application of cost setting rules to certain types of mining expenditure

The effective life of a depreciating asset (determined at the joining time) will be calculated by reference to the remaining effective life of the related notional asset, the remaining effective life of the depreciating asset and any other relevant factors.

The depreciating asset’s effective life was not required to be determined. Instead, the effective life of the notional asset was determined at 1 July 2001 under section 40-35, 40-37, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997 . Alternatively, Subdivision 330-A, 330-C or 330-H of the ITAA 1997 (or a corresponding previous law) applied to determine the period over which deductions for expenditure could be claimed (but did not set any effective life for the depreciating asset).

A head company will be able to choose to reduce the tax cost setting amount (hereafter referred to as ‘tax cost’) of the depreciating asset to its terminating value in order to preserve any entitlement that the joining entity had to concessional rates of depreciation for allowable capital expenditure or transport capital expenditure that were available prior to it joining the consolidated group.

No equivalent.

Where a depreciating asset has its tax cost reset at the joining time, the adjustable value of the head company’s notional asset will be reduced by an amount that reasonably relates to the depreciating asset.

No equivalent.

Where an entity leaves the consolidated group and the exit history rule treats the leaving entity as holding a notional asset (that arose because of section 40-35, 40-37, 40-38, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997 ), the adjustable value of the head company’s notional asset is reduced.

No equivalent.



 

New law

Current law

Low-value and software development pools

The head company and leaving entity receive appropriate allowances for the decline in value of low-value pools where an entity with such a pool joins or a leaving entity takes part of a pool with it.

No equivalent.

The head company and leaving entity receive appropriate allowances for the decline in value of software development pools where an entity with such a pool joins or a leaving entity takes part of a pool with it.

No equivalent.

Inter-entity loss multiplication rules

The notice requirements will be modified where the notifying entity and recipient entity are members of the same consolidatable group so that:

·          a notice will not be required to be given if the notifying entity and the recipient entity become members of the same consolidated group before 1 July 2004; or

·          a notice must be given within six months after the date of Royal Assent if the notifying entity and the recipient entity do not become members of the same consolidated group before 1 July 2004.

In addition, the Commissioner will have a discretion to extend the time for giving notices or to waive the notice requirement in other circumstances.

Subdivision 165-CD prevents inter entity loss multiplication by reducing tax attributes for significant equity and debt interests in a loss company that has an alteration. Broadly, an alteration arises if there is a change in the company’s ownership or control or a liquidator declares that the company’s shares are worthless.

Depending on the circumstances, an entity that has a controlling stake in the loss company, or the loss company itself, must give a notice to associates that have a relevant interest in the loss company.

The notice must be given within six months of the alteration time. However, if the alteration time was before 24 October 2002, the notice was not required to be given until 24 April 2003.

Detailed explanation of new law

Clarifying beneficial ownership for consolidation membership rules

1.11        The meaning of ‘beneficial ownership’ in section 703-30 is clarified for the purposes of the consolidation membership rules. The amendment ensures that entities under external administration will not be prevented from being or remaining members of consolidated groups. [Schedule 1, item 2, subsection 703-30(3)]

1.12        Section 703-30 outlines when an entity is a wholly-owned subsidiary of another entity. A fundamental requirement is that all the membership interests of that subsidiary be ‘beneficially owned’ by:

·          the holding entity;

·          one or more wholly-owned subsidiaries of the holding entity; or

·          the holding entity and one or more wholly-owned subsidiaries of the holding entity.

1.13        The terms ‘beneficially owned’ and ‘beneficial ownership’ are not defined terms for the purposes of the ITAA 1997. Therefore, they have their ordinary meaning.

1.14        Provisions in the Corporations Act 2001 may have the effect of vesting the property of an externally administered entity in the person undertaking the external administration (e.g. section 474 of the Corporations Act 2001 ). Where such provisions operate it may be arguable that ownership of the beneficial interest and the legal interest in the property of the insolvent entity are potentially alterable.

1.15        Case law has considered beneficial ownership as meaning the real owner of the property and, in a case where the legal and equitable ownership is divided, the owner of the property in equity.

1.16        While Santow J in Mineral & Chemical Traders Pty Ltd v T Tymczyszyn Pty Ltd (1995) 13 ACLC 40 held that the appointment of a liquidator did not operate to divest the insolvent company of its assets, later cases have referred to the line of reasoning first espoused in Re Oriental Inland Steam Company (1874) LR9 ChApp 557 that there is a notional vesting of the beneficial ownership of property in the liquidator.

1.17        The intent of this amendment is to ensure that the appointment of an external administrator will not force the exit of the entity from the consolidated group. In Review of Business Taxation: A Platform for Consultation Discussion Paper 2: Building on a strong foundation Volume II it was contemplated that members of consolidated groups could enter liquidation without causing changes to the membership of the group. Consolidation is intended to ease corporate restructures by allowing a company to be liquidated without triggering a deemed dividend, or a capital gain or loss.

1.18        This amendment operates to ensure that beneficial ownership is not affected by a member of a consolidated group being or becoming an externally administered body corporate, or having similar status under a foreign law.

1.19        ‘Externally-administered body corporate’ is defined in section 9 of the Corporations Act 2001 to mean a body corporate:

·          that is being wound up, whether voluntarily or by court order;

·          with property to which a receiver, or a receiver and manager, has been appointed (whether or not by a court) and is acting;

·          that is under administration;

·          that has executed a deed of company arrangement that has not yet terminated; or

·          that has entered into a compromise or arrangement with another person the administration of which has not been concluded.

1.20        This means that where a subsidiary entity is, for example, being wound up, it will remain a wholly-owned subsidiary of another entity. The effect of this is that the entity remains a member of the consolidated group and is not forced to deconsolidate.

1.21        The amendment also extends to non resident entities who may wholly-own membership interests in members of consolidated or multiple entry consolidated (MEC) groups, such as top companies of MEC groups or interposed non resident entities. [Schedule 1, item 2, paragraph 703-30(3)(b)]

1.22        The amendment clarifies the meaning of ‘beneficial ownership’ for the consolidation membership rules only and not for any other purposes. The concept of beneficial ownership is used elsewhere in the tax laws however, this amendment does not imply that beneficial ownership has any meaning other than its ordinary meaning where it is used elsewhere in the tax law. This amendment is not intended to impact on the meanings associated with those concepts.

Cost setting rules for assets subject to a finance lease

1.23        Part 3 of Schedule 1 to this bill amends the cost setting rules to enable the lessor and lessee, that are subject to a finance lease recognised under accounting standards, to determine which assets and liabilities are recognised and which assets are not recognised for cost setting purposes.

1.24        The interaction of the treatment of finance leases under the accounting standards and its treatment under the income tax law raised a number of issues for the operation of the cost setting rules in Division 705. These issues arise because the tax law, depending on the circumstances, may provide that either the lessor or lessee of an asset that is subject to a finance lease is entitled to deductions for the decline in value of the asset. Under the accounting standards, the lessee under a finance lease recognises the leased asset not the lessor.

1.25        An asset, for the purposes of the cost setting rules, represents anything of economic value, which is brought into a consolidated group when an entity becomes a subsidiary member of a consolidated group. In working out the amount of tax cost to allocate to the assets of the joining entity, step 2 of the calculation of the allocable cost amount (ACA) adds amounts that can or must be recognised as liabilities in accordance with the accounting standards.

1.26        Under Accounting Standard AASB 1008 (Leases) and AAS 17 (Accounting for Leases), a lessor of an item of plant which is leased under a finance lease is effectively treated as having sold the plant to the lessee and provided finance for the acquisition. The lessor does not, therefore, recognise the plant as an asset but rather, recognises it as an asset consisting of the right to receive lease payments equal to the aggregate of the present value of the minimum lease payments and the present value of any unguaranteed residual value.

1.27        For income tax purposes, deductions for the decline in value of a depreciating asset are only available to the person who ‘holds’ the depreciating asset for the purposes of Division 40. The general rule for depreciating assets that are subject to a lease is that the owner is the ‘holder of the asset’ (i.e. the lessor) under certain items in the table in section 40-40. However, the lessee can also be the ‘holder of the asset’ under other items in the table in section 40-40.

What happens when the joining entity is the lessor or lessee and ‘holds’ the asset under Division 40?

1.28        Where an entity that is a lessor or lessee, under a finance lease, joins a consolidated group there was uncertainty as to what assets they have for cost setting purposes. In relation to the lessor, does the lessor, in determining the tax cost, have two assets (being the actual plant and the right to receive lease payments). In relation to the lessee, it was uncertain whether the lessee should have an amount included in step 2 of the ACA calculation in respect of the lease liability, as recognised under accounting standards, and whether the lessee also has an asset recognised under the finance lease to which the ACA needs to be allocated. Amendments are made to Division 705 (the general cost setting rules) to ensure that they apply appropriately where the joining entity is a lessor or lessee subject to a finance lease. Amendments are also made to the calculation of the ACA where a subsidiary member that is a party to a finance lease ceases to be a member of a consolidated group.

1.29        These rules ensure that the cost setting rules apply appropriately to an entity that is either the lessor or lessee under a finance lease by specifying which:

·          assets in relation to the lessor or lessee will have their tax cost set when the entity joins a consolidated group;

·          liabilities arising from a finance lease will be taken into account in step 2 of the ACA calculation; and

·          tax cost is applied when the leaving entity is a lessor or lessee.

[Schedule 1, item 5, section 705-56]

1.30        The rules contained in this bill do not deal with how assets subject to an operating lease should be treated under the cost setting rules. It is limited to assets subject to a finance lease in accordance with accounting standards.

What happens when an entity that is subject to a finance lease joins a consolidated group?

1.31        The object of the amendments is to clarify how the tax cost setting amount is calculated for certain types of assets that are subject to a finance lease. How this is achieved depends on whether at the joining time, the joining entity is:

·          a lessor who is the holder of the asset; or

·          a lessee who is the holder of the asset.

[Schedule 1, item 5, subsections 705-56(2) to (4)]

1.32        Subsection 705-56(1) ensures that the amendments only apply to underlying assets subject to a finance lease which give rise to deductions for decline in value under Division 40. This then ensures that an entity which holds the underlying asset for the purposes of Division 40 is able to allocate the ACA to the underlying asset. [Schedule 1, item 5, subsection 705-56(1)]

1.33        This subsection is also consistent with paragraph 5.1 of Accounting Standard AASB 1008 which states that a lease must be classified either as an operating lease or as a finance lease at the inception of the lease. The new rules will also cover arrangements subject to Division 240 in circumstances where the hire purchase agreement is also a finance lease. [Schedule 1, item 5, subsection 705-56(1)]

Modifications where the joining entity is a lessor

Where a lessor ‘holds’ a depreciating asset

1.34        Where a lessor ‘holds’ a depreciating asset, that is subject to a finance lease for Division 40 purposes, the underlying asset (i.e. depreciating asset) will be recognised for cost setting purposes. ACA will be allocated to the underlying asset and the asset consisting of the right to receive lease payments is not taken into account in setting the tax cost of assets and is taken to have a tax cost of nil. [Schedule 1, item 5, subsections 705-56(2) and (5)]

1.35        The asset that is the joining entity’s right to receive lease payments under the finance lease reflects paragraph 12.1 of Accounting Standard AASB 1008 which requires that “where a lease is classified by the lessor as a direct financing lease, the lessor must recognise, as at the beginning of the lease term, an asset (lease receivable) at an amount equal to the aggregate of the present value of the minimum lease payments and the present value of any unguaranteed residual value expected to accrue to the benefit of the lessor at the end of the lease term”. The amendments provide a consistent treatment.

Example 1.1

Assume a joining entity (Lessor Co) that has entered into a finance lease has two assets which consist of plant and right to receive lease payments, which it brings into a consolidated group. The head company of the consolidated group will recognise for cost setting purposes the underlying asset of plant because it ‘holds’ the asset for Division 40 purposes. However the right to receive lease payments will not be recognised for cost setting purposes.

Where a lessor does not ‘hold’ a depreciating asset

1.36        Where a joining entity that is a lessor does not hold a depreciating asset, for Division 40 purposes, that is subject to a finance lease at joining time, there is no recognition of the underlying asset under subsection 705-56(5). However, there is recognition of the asset consisting of the right to receive lease payments. The tax cost for the right to receive lease payments is set equal to its market value. [Schedule 1, item 5, subsections 705-56(3) and (5)]

Example 1.2

Assume a joining entity (Lessor Co) that has entered into a finance lease has two assets consisting of plant and the right to receive lease payments, which it brings into a consolidated group. The head company (Head Co) will not recognise for cost setting purposes the underlying asset (plant) because it no longer holds the asset for Division 40 purposes. However, Head Co is required to allocate the ACA to the right to receive lease payments. The tax cost for the right to receive lease payments will be its market value.

1.37        Paragraph 705-56(3)(b) ensures consistency between the tax cost of the right to receive lease payments when the lessor joins the group, and the tax cost for the right to receive lease payments at their market value when a lessor exits a group under subsection 711-30(3). [Schedule 1, item 5, paragraphs 705-56(3)(a) and (b); item 6, section 711-30]

1.38        A note is inserted into subsection 705-25(5) to alert the reader that a right to receive lease payments under a finance lease may, in some circumstances, be treated as a retained cost base asset. [Schedule 1, items 3 and 4]

Modifications where the joining entity is the lessee

Where the lessee ‘holds’ the depreciating asset

1.39        Where the lessee holds a depreciating asset that is subject to a finance lease the lessee will, for cost setting purposes, recognise the underlying asset (as an asset that has its tax cost set) and the obligation to make lease payments will be a liability for the purposes of step 2 in working out the ACA. The obligation to make lease payments under a finance lease is a liability that is recognised in accordance with Accounting Standard AASB 1008 or AAS 17. [Schedule 1, item 5, paragraphs 705-56(3)(a) and (b)]

Example 1.3

Assume a joining entity (Lessee Co) that has entered into a finance lease has an asset consisting of plant together with an obligation to make lease payments, which it brings into the consolidated group. The head company (Head Co) of the consolidated group will recognise for cost setting purposes the underlying asset of plant as it holds the asset for the purposes of Division 40. Head Co will add at step 2 of the ACA calculation an amount for the liability to make lease payments. Head Co will allocate ACA to the plant.

Where the lessee does not ‘hold’ the depreciating asset

1.40        Where the lessee does not hold the depreciating asset that is subject to a finance lease the lessee will not recognise the underlying asset for tax cost setting purposes and the liability to make lease payments is not taken into account under step 2 in working out the ACA. [Schedule 1, item 5, subsections 705-56(3) and (4)]

Example 1.4

Assume, a joining entity (Lessee Co) that has entered into a finance lease has an asset which consist of, plant and an obligation to make lease payments, which it brings into the consolidated group. The head company (Head Co) of the consolidated group will not recognise for cost setting purposes the underlying asset of plant because it does not hold the depreciating asset for the purposes of Division 40, and will not recognise the obligation to make lease payments.

What happens when an entity that is subject to a finance lease leaves a consolidated group?

Modifications where the leaving entity is the lessor

1.41        Section 711-30 specifies how to work out the head company’s ‘terminating value’ for any asset a leaving entity takes with it when it ceases to be a subsidiary member of a consolidated group. In circumstances where paragraph 705-56(3)(b) has applied subsection 711-30(3) ensures that if an entity does not ‘hold’ an underlying asset, that is the subject of a finance lease, the cost base of the right to receive lease payments is set at their market value when the entity exits. This is because when the entity leaves, some payments may already have been received and it would no longer be appropriate to use the original tax cost for the right to receive lease payments that was set when the entity joined the group. [Schedule 1, item 6, subsection 711-30(3)]

Modifications where the leaving entity is the lessee

1.42        Subsection 711-45(2) ensures that a liability consisting of an obligation to make lease payments, in certain circumstances, is not included in step 4 in working out the old group’s ACA. Section 711-45 reduces the old group’s ACA by the amount of liabilities which an entity takes with it when it leaves a consolidated group. In the circumstances where subsection 705-56(4) has applied, an issue arises on exit because the liability under the finance lease will be taken into account in reducing the old group’s ACA. This is because the liability under the lease will be recognised for accounting purposes and therefore is included in subsection 711-45(1). However, there is no corresponding asset that will be taken into account under step 1 of the old group’s ACA calculation on leaving (in relation to the corresponding asset of the entity under the lease) because this asset did not have its tax cost set due to paragraph 705-56(4)(b). [Schedule 1, item 7, section 711-45]

Application of cost setting rules to certain types of mining expenditure

1.43        Part 4 of Schedule 1 to this bill contains rules that clarify the operation of the cost setting rules and the inherited history rule for assets that have arisen from allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure. Specifically, the rules will:

·          determine the cost, adjustable value and terminating value of an asset created from allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure to enable its tax cost to be set appropriately;

·          determine the remaining effective life of such a depreciating asset;

·          deem any previous deductions in relation to the cost of such an asset to have been calculated under the prime cost method;

·          deem any previous deductions in relation to the cost of such an asset to be deductions for the decline in value of the depreciating asset;

·          allow the head company to choose to reduce the tax cost of an allowable capital expenditure, transport capital expenditure or exploration and prospecting asset to an amount equal to its terminating value in order to retain the concessional rates of depreciation previously available to the joining entity in respect of the asset;

·          reduce the adjustable value of the head company’s notional asset if that notional asset has resulted in a depreciating asset that has had its tax cost reset; and

·          reduce the adjustable value of the head company’s notional asset if a leaving entity takes with it some or all of a notional asset relating to ‘other property’.

Prime cost method for working out decline in value of certain exploration and prospecting assets

1.44        Subject to satisfying certain criteria, section 40-80 allows a deduction for the decline in value of an asset, that is used for exploration and prospecting, equal to the asset’s cost.

1.45        Where an entity joins a consolidated group, the cost setting rules apply such that the head company is taken to have purchased, at the joining time, all of the joining entity’s depreciating assets for their tax cost.

1.46        Section 701-55 applies to set out for the head company a depreciating asset’s tax cost, effective life and method for working out its decline in value. In order for paragraphs 701-55(2)(c) to (e) to work appropriately, the joining entity would have used either the prime cost method or diminishing value method to calculate the asset’s decline in value before the joining time. As section 40-80 does not require a taxpayer to choose a method for calculating the decline in value of the asset, it could be argued that no method applied for working out the asset’s decline in value before the joining time.

1.47        Section 716-300 ensures that, where an asset’s decline in value was deducted under section 40-80, section 701-55 applies as if the joining entity had applied the prime cost method for working out the decline in value of the asset just before the joining time [Schedule 1, item 8, section 716-300] . This means that, depending on whether the asset’s tax cost exceeds its terminating value at the joining time, paragraph 701-55(2)(c) or (d) apply to these assets to set their effective life. Further, paragraph 701-55(2)(b) will operate so that the prime cost method applies for working out any future deductions for the decline in value of such assets.

1.48        Section 716-300 only applies to assets whose decline in value is deducted under section 40-80. Therefore, if a joining entity deducted the decline in value of an exploration or prospecting asset under any other part of Subdivision 40-B (such as section 40-70 or 40-75), section 716-300 does not override the method previously used under that section. Section 716-300 is only intended to apply where section 40-80 did not require the joining entity to apply a particular method. [Schedule 1, item 8, paragraph 716-300(2)(c)]

Allowable capital expenditure, transport capital expenditure and exploration and prospecting assets - tax cost setting amount

Background

1.49        Prior to 1 July 2001, expenditure formerly known as allowable capital expenditure and transport capital expenditure was previously deducted through a pooling mechanism under Division 330, and prior to this under Divisions 10, 10AA and 10AAA of the Income Tax Assessment Act 1936 (ITAA 1936). For expenditure incurred after 30 June 2001, allowable capital expenditure (now known as mining capital expenditure) and transport capital expenditure are now deducted under Division 40 of the ITAA 1997.

1.50        Allowable capital expenditure and transport capital expenditure may have resulted in the creation or acquisition of assets, such as roads, fixtures, plant and equipment. Alternatively, the expenditure may have related to other capital advantages that are not such assets.

1.51        To facilitate the transition from Division 330 to Division 40 (which commenced on 1 July 2001), each ‘pool’ of expenditure was deemed to be a depreciating asset (called a ‘notional’ asset). The adjustable value of the notional asset is deemed to be equivalent to the undeducted allowable capital expenditure or transport capital expenditure as at 30 June 2001 and deductions for the decline in value of the notional asset are claimed under Division 40 (based on the concessional write off period available under Division 330, which was either 10 or 20 years). Additionally, any ‘depreciating’ assets that are reflected in the allowable capital expenditure or transport capital expenditure (e.g. roads, fixtures) are deemed to have a cost and adjustable value of nil.

1.52        Expenditure on exploration and prospecting assets incurred after 30 June 2001 is immediately deductible under Division 40 (regardless of whether the expenditure is capital or revenue). However, prior to 1 July 2001, such expenditure was immediately deductible under Division 330 and prior to this under Division 10 or 10AA of the ITAA 1936. If the expenditure related to depreciable plant, and the taxpayer elected, the asset could have been depreciated under Division 42 (for expenditure incurred between 1 July 1997 and 30 June 2001).

1.53        Since expenditure on exploration and prospecting assets was immediately deductible under the former Division 330 (or its predecessor provisions), there was no need to transition this expenditure into Division 40. However, in order to ensure that expenditure incurred after 30 June 2001 on exploration and prospecting assets held at 1 July 2001 continued to be immediately deductible, transitional provisions were introduced. These transitional provisions also have the effect of setting the cost and adjustable value of such exploration and prospecting assets at zero (this is to ensure that the correct balancing adjustments can be calculated for these assets).

1.54        Sections 70-40, 70-50 and 70-57 require a joining entity to adjust the tax cost of a reset cost base asset where certain conditions are satisfied. However, in order for these sections to apply, the reset cost base asset must have a cost, adjustable value and terminating value greater than nil. Additionally, section 705-50 will only apply if an entity has claimed deductions for the decline in value in respect of the depreciating asset.

1.55        To ensure that these provisions operate as intended with respect to the depreciating assets created from allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure, it is necessary to determine the cost, adjustable value and terminating value of these assets (which are deemed, under the transitional provisions, to be nil). It is also necessary to deem deductions for allowable capital expenditure, transport capital expenditure and exploration and prospecting expenditure that relate to a depreciating asset to be deductions for the decline in value of that asset. By giving the depreciating assets these attributes, the rules in sections 70-40, 70-50 and 70-57 apply appropriately to the depreciating assets.

1.56        In addition to determining the cost, adjustable value, terminating value and decline in value of the depreciating asset, the new rules will also determine the effective life and method of depreciation for the depreciating assets. The rules ensure that subsection 701-5(2) operates appropriately with respect to the depreciating assets. The new rules also allow a head company to retain the concessional rates of depreciation available to the joining entity prior to it consolidating in respect of allowable capital expenditure, transport capital expenditure and exploration and prospecting assets, provided the tax cost of the depreciating asset does not exceed its terminating value. This aligns the treatment of allowable capital expenditure, transport capital expenditure and exploration and prospecting assets with that available to other accelerated depreciation assets whose tax cost does not exceed its terminating value.

1.57        When a leaving entity ceases to be a subsidiary member of a consolidated group and, as a consequence of the exit history rule, takes with it some or all of the head company’s notional asset, the new rule in Subdivision 712-E requires the head company to reduce the adjustable value of its notional asset by the adjustable value of the leaving entity’s notional asset. This rule ensures that only one entity (the leaving entity) gets a deduction for the notional asset that leaves the old group.

Application and object of Subdivision 705-E

1.58        The rules in Subdivision 705-E of the Income Tax (Transitional Provisions) Act 1997 apply to a joining entity to which section 40-75 of the Income Tax (Transitional Provisions) Act 1997 applied [Schedule 1, item 9, subsection 705-300(1)] . This means that, if a joining entity has incurred expenditure on an asset and that expenditure was, or could have been deducted under Division 330 as allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure (assuming it had been incurred prior to 1 July 2001), the rules in new Subdivision 705 E of the Income Tax (Transitional Provisions) Act 1997 will apply (regardless of when the expenditure was actually incurred). Examples of such expenditure include (but are not limited to):

·          expenditure on a depreciating asset deducted under Divisions 10, 10AA and 10AAA that would have been deductible under Division 330 as either allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure;

·          expenditure on the depreciating asset that was actually deducted under Division 330 as allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure; and

·          expenditure on the depreciating asset that was deducted under Subdivision 40-B as part of a ‘notional asset’ created under section 40-35, 40-37, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 199 7.

1.59        The main object of Subdivision 705-E is to:

·          clarify the interaction between the cost setting rules and the inherited history rules with respect to depreciating assets and any related notional assets arising from allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure;

·          ensure that the rules in sections 705-40, 705-50 and 705-57 apply appropriately to depreciating assets; and

·          ensure that the treatment of a joining entity’s depreciating assets is aligned, where appropriate, with other depreciable assets.

[Schedule 1, item 9, subsection 705-300(2)]

Consequences for the head company of recognising depreciating allowable capital expenditure, transport capital expenditure and exploration and prospecting assets

1.60        The main object of section 705-305 is to:

·          provide rules to set the cost, adjustable value and terminating value of a depreciating asset that has resulted from allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure;

·          provide rules to set the effective life of a depreciating asset, which may allow a head company to maintain the concessional rates of depreciation available to the joining entity prior to it joining the consolidated group;

·          provide a method of depreciation for a depreciating asset; and

·          ensure that the adjustable value of a head company’s notional asset is reduced by an appropriate amount if a depreciating asset has resulted from the notional asset.

[Schedule 1, item 9, subsection 705-305(1)]

Working out the cost of a depreciating asset

1.61        As discussed above, under the transitional provisions, the cost of any depreciating asset that arose from pre 1 July 2001 allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure was deemed to be nil. Therefore, in order for the tax cost to apply appropriately to these depreciating assets, a ‘cost’ must be determined for these assets.

1.62        Subsection 705-305(5) provides that, if the joining entity incurred expenditure that would have been included in the cost of the depreciating asset under Division 40, assuming it was incurred just before the joining time, this expenditure increases the cost of the depreciating asset. In order to apply this section, the joining entity is assumed to have incurred the expenditure after 30 June 2001 under a contract entered into after 30 June 2001, regardless of when the expenditure was actually incurred. However, if the expenditure was already included in the asset’s cost, it is not included under this section again. [Schedule 1, item 9, subsection 705-305(5)]

1.63        It may be the case that a joining entity has incurred expenditure under a number of different provisions in respect of the one depreciating asset. Further, it may be the case that any such expenditure has been fully deducted prior to the joining time. In either case, if the expenditure reasonably relates to the depreciating asset, it will increase the depreciating asset’s cost.

Example 1.5:  Amounts to be included in the cost of a depreciating asset

The original expenditure may have given rise to deductions for different income years under different provisions of the ITAA 1997 and the ITAA 1936. For example, allowable capital expenditure incurred in the 1995-1996 income year may have given rise to deductions:

·          for the 1995-1996 and 1996-1997 income years under section 122DG of the ITAA 1936;

·          for the 1997-1998, 1998-1999, 1999-2000 and 2000-2001 income years under former section 330-80 of the ITAA 1997; and

·          for the 2001-2002 and 2002-2003 income years under section 40-35 of the Income Tax (Transitional Provisions) Act 1997 (because of a notional asset arising from the amount of the original allowable capital expenditure that had not been recouped by the end of 30 June 2001).

1.64        It is important to note that, in order to test whether expenditure is included in the cost of the depreciating asset, the test time is just before the joining time, not the time the expenditure was actually incurred. This means that, even if at the time the expenditure was actually incurred it did not relate to a depreciating asset, it can still be included in the cost of a depreciating asset, provided it would be able to be included in the cost under Division 40 if it was incurred just before the joining time. This is particularly relevant for expenditure that forms part of a notional asset under sections 40-37 and 40-43 of the Income Tax (Transitional Provisions) Act 1997 , as those sections do not apply to expenditure on a depreciating asset. It is recognised that expenditure deducted under these sections may relate to a depreciating asset, even though at the time of the deduction there was no such asset.

Working out the adjustable value of a depreciating asset

1.65        As discussed above, in order for the tax cost to apply appropriately to depreciating assets created from allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure, an adjustable value and a terminating value must be established for the asset. Section 705-30 defines a depreciating asset’s terminating value to be equal to its adjustable value just before the joining time, therefore, it is only necessary to determine the depreciating asset’s adjustable value.

1.66        If the expenditure that gave rise to the depreciating asset has been fully deducted, then it follows that the adjustable value of the depreciating asset is nil. Therefore, a depreciating asset will only have an adjustable value greater than nil if there is still some amount of expenditure relating to the asset yet to be deducted by the joining entity. Accordingly, the adjustable value of the depreciating asset just before and at the joining time is increased by so much of any notional asset (that arose because of section 40-35, 40-37, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997 ) that the joining entity holds at the joining time that reasonably relates to the depreciating asset. [Schedule 1, item 9, subsections 705-305(3) and (4)]

1.67        If a joining entity does not hold any notional asset(s) at the joining time, the adjustable value of any associated depreciating asset would be nil.

Earlier deductions for decline in value of a depreciating asset

1.68        Once the cost and adjustable value of an allowable capital expenditure, transport capital expenditure or exploration and prospecting asset have been calculated, subsection 705-305(6) is necessary so that any deductions claimed by the joining entity, prior to joining, that were in relation to the asset’s cost, are taken to be deductions for the decline in value of the depreciating asset [Schedule 1, item 9, subsection 705-305(6)] . This is to ensure that the tax cost setting rules, in particular section 705-50 (the over depreciation adjustment) apply appropriately to the depreciating asset.

1.69        Examples of deductions for expenditure claimed by the joining entity that would be covered by this section include:

·          deductions under former Subdivision 330-A, 330-C or 330-H of the ITAA 1997, or a corresponding previous law, for the expenditure; and

·          deductions under Subdivision 40-B for the decline in value of a notional asset that arose under section 40-35, 40-37, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997 .

Prime cost method of working out decline in value of a depreciating asset

1.70        In order to apply subsection 701-55(2), it is necessary for the joining entity to have been applying either the prime cost method or diminishing value method immediately before the joining time in respect of a depreciating asset. There may be circumstances because of the way deductions are claimed for expenditure on allowable capital expenditure, transport capital expenditure and exploration and prospecting assets, the joining entity may not have applied either the prime cost or diminishing value method prior to the joining time. Consequently, subsection 705-305(2) deems the prime cost method to have applied just before the joining time to the depreciating assets that have arisen from allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure [Schedule 1, item 9, subsection 705-305(2)] . As a result, subsection 701-55(2) will apply appropriately to these depreciating assets and any future deductions will be calculated based on the prime cost method.

Effective life of a depreciating asset

1.71        In order to ensure that the rules in subsection 705-55(2) work correctly and to allow a head company the ability to retain the concessional rates of depreciation available to the joining entity in respect of allowable capital expenditure, transport capital expenditure and exploration and prospecting assets prior to consolidating (where appropriate), an effective life must be set for the depreciating asset.

1.72        If the tax cost of an allowable capital expenditure, transport capital expenditure or exploration and prospecting asset is greater than its terminating value (as determined under subsections 705-305(3) and (4)), the head company will be required to determine an effective life for the asset at the joining time in accordance with subsections 40-95(1) and (3). This is the same as any other depreciating asset.

1.73        If the tax cost of an allowable capital expenditure, transport capital expenditure or exploration and prospecting asset is equal to or less than its terminating value, the head company is required to choose an effective life for the asset equal to the remainder of the effective life of the asset just before the joining time. However, as discussed above, allowable capital expenditure, transport capital expenditure and exploration and prospecting assets will not have a ‘remaining effective life’ as these assets were never depreciated in the ‘normal’ way (instead, the expenditure that gave rise to them was deducted over a period of 10 or 20 years).

1.74        Subsection 705-305(7) sets the effective life of the depreciating asset as being such a period as is reasonable having regard to:

·          the remainder of the effective life of the depreciating asset just before the joining time;

·          the remainder of the effective life of any related notional asset; and

·          any other relevant factors.

[Schedule 1, item 9, subsection 705-305(7)]

1.75        The intention of this subsection is to allow the head company the ability to maintain the same effective life for the depreciating asset as that which would have applied to the asset prior to the joining entity joining the consolidated group. This ensures that allowable capital expenditure, transport capital expenditure and exploration and prospecting assets receive the same treatment as other depreciating assets in this respect.

Choosing to reduce the tax cost setting amount of a depreciating asset

1.76        In order to preserve accelerated depreciation, a head company has the ability under section 705-45 to choose to reduce the tax cost of an asset to equal its terminating value (any tax cost ‘foregone’ is not reallocated to other reset cost base assets). A similar rule is required for allowable capital expenditure, transport capital expenditure and exploration and prospecting assets so that a head company has the ability to maintain the concessional write-off period (either 10 or 20 years) available to the joining entity for these assets prior to consolidation.

1.77        Subsection 705-305(8) is the allowable capital expenditure, transport capital expenditure and exploration and prospecting asset equivalent of section 705-45. This rule allows the head company to reduce the tax cost of the allowable capital expenditure, transport capital expenditure or exploration and prospecting asset to equal its terminating value (as determined under subsection 705-305(3)) [Schedule 1, item 9, subsection 705-305(8)] . As a result, the head company can apply subsection 705-305(7) which allows the head company to maintain the effective life of the depreciating asset that would have applied to the joining entity had it not joined the consolidated group. However, as for the rule for accelerated depreciation assets, any tax cost that is foregone is not reallocated to other reset cost base assets.

1.78        Subsection 705-305(9) has been inserted so that the ordering rule in section 705-55 works appropriately. Subsection 705-305(9) has the effect of including subsection 705-305(8) in section 705-45, and therefore including it within section 705-55. [Schedule 1, item 9, subsection 705-305(9)]

Adjustable value of head company’s notional asset on entry

1.79        In order to ensure that a consolidated group only deducts an appropriate amount in respect of expenditure incurred on an allowable capital expenditure, transport capital expenditure or exploration and prospecting asset, section 705-310 reduces the adjustable value of the head company’s notional asset by an amount that is reasonably attributable to the depreciating asset [Schedule 1, item 9, subsection 705-310(3)] . The amount of the adjustment under this subsection is equal to the increase in the depreciating asset’s adjustable value determined under subsection 705-305(3).

1.80        This section will only apply if the joining entity holds a notional asset at the joining time that arose under section 40-35, 40-37, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997 and, as a consequence, the head company is taken to hold such an asset (because of the entry history rule). [Schedule 1, item 9, subsection 705-310(2)]

1.81        The intention of section 705-310 is to prevent a head company from deducting both the tax cost of the allowable capital expenditure, transport capital expenditure or exploration and prospecting asset as well as the related notional asset. [Schedule 1, item 9, section 705-310]

Adjustable value of head company’s notional asset on exit

1.82        Where an entity (the leaving entity) leaves a consolidated group, it is possible for the leaving entity to take with it allowable capital expenditure, transport capital expenditure and exploration and prospecting assets. As these assets have had their tax costs set on entry and have subsequently been depreciated under Division 40, the exit rules in Division 711 will apply appropriately to these assets and no modifications are required.

1.83        It is also possible for a leaving entity to take with it ‘other property’ that was part of the head company’s notional asset. These are assets that are not depreciating assets but were part of the notional asset that arose because of section 40-35, 40-7, 40-40 or 40-43 of the Income Tax (Transitional Provisions) Act 1997 .

1.84        If a leaving entity takes with it any of the ‘other property’ when it exits the group and, as a consequence, some or all of the head company’s notional asset relating to the other property also leaves, the adjustable value of the head company’s notional asset is reduced  [Schedule 1, item 10, section 712-305] . This ensures that the head company and the leaving entity both do not get a deduction for the same notional asset.

Low-value pools - background

1.85        Pooling of depreciating assets was first introduced to reduce compliance costs in the 1997-1998 income year. The current low-value pools were introduced as part of the uniform capital allowances regime, which started on 1 July 2001.

1.86        In order to reduce compliance costs companies can elect to form a low-value pool for depreciating assets whose cost is less than $1,000. Once a company elects to form a low-value pool, it must allocate each asset that costs less than $1,000 to the pool. The pool is then effectively ‘written off’ for tax purposes at a particular rate. Compliance costs are reduced because once an asset goes into the pool, the entity is no longer required to track the asset for tax purposes, it simply tracks the pool balance from year to year in order to depreciate the pooled assets. Each year the pool balance will vary to reflect the addition of new assets, deductions for decline in value and disposal of assets that were in the pool.

1.87        Generally, when an entity joins a consolidated group, it is required to reset the tax cost of each of its assets. Without these amendments contained in this bill, companies would be required to pull apart their low-value pools when they join a consolidated group and set the tax cost for each asset in the pool. This would undo the compliance savings that these pools were designed to achieve. In order to maintain the policy underlying low-value pools, the entire low-value pool of a joining entity will be treated as a single ‘hypothetical asset’ for cost setting purposes.

1.88        These amendments also ensure an appropriate cost setting outcome when low-value assets leave a consolidated group. This is achieved by amending the law in order to remove the potential for both the head company and the leaving entity to claim deductions for the decline in pool value in the leaving year.

1.89        This could happen in the leaving year because the head company can deduct an amount for assets that have been purchased in the leaving year that subsequently leave with the leaving entity (because the amount of the head company’s deduction is not based on assets being ‘on hand’ at the end of the year). The leaving entity may also be able to claim a deduction for any assets it takes with it (despite the fact that the head company has also included these assets when calculating its own deduction). In this regard, there is no balancing adjustment event in relation to assets that cease to be in a head company’s low-value pool because an entity ceases to be a subsidiary member.

1.90        The amendments change the cost setting rules so that only the head company can claim a deduction in the leaving year in respect of the leaving assets that were purchased by the group in the leaving year. The leaving entity will, however, be entitled to deductions for assets it purchases after the leaving time. The leaving entity will then be entitled to deductions as normal in future years.

Low-value pools - entry

Setting the tax cost setting amount of assets in low-value pools

1.91        The operation of certain cost setting provisions are modified where an entity becomes a subsidiary member of a consolidated group after having allocated a depreciating asset (a ‘previous pool asset’) to its low-value pool. Compliance costs associated with setting the tax cost of these assets are reduced by treating all the previous pool assets in the joining entity’s low-value pool as a single depreciating asset (the hypothetical asset). The hypothetical asset is also used to simplify how the head company’s deductions for the decline in value of the pooled assets are worked out. [Schedule 1, item 11, subsections 716-330(1) and (2)]

1.92        Sections 701-10 and 701-60 and Division 705 operate as if all the previous pool assets are combined to form the single hypothetical asset. Section 701-10 sets the head company’s tax cost for assets that a joining subsidiary brings with it into the group. Section 701-60 determines how the asset’s tax cost is worked out. Broadly, Division 705 sets the tax cost of assets where entities become subsidiary members of consolidated groups. Modifications are made to sections 705-40 and 705-57 within Division 705 in order to apply appropriately to the hypothetical asset. These sections are about reducing an asset’s tax cost to an amount that may be affected by the joining entity’s terminating value for the asset.

1.93        Specifically, the operation of sections 705-40 and 705-57 are modified depending on when the joining time occurs. If the joining time is the first day of an income year of the joining entity, sections 705-40 and 705-57 operate as if the joining entity’s terminating value for the hypothetical asset were the closing pool balance for the joining entity’s low-value pool for the previous income year. Where the joining time is not the first day, sections 705-40 and 705-57 operate as if the joining entity’s terminating value for the hypothetical asset were the closing pool balance for the joining entity’s low-value pool for the non membership period described in section 701-30 that ends just before the joining time. [Schedule 1, item 11, subsections 716-330(7) and (8)]

1.94        To reduce the cost of compliance, no adjustments need to be made for over-depreciation in setting the tax cost for the assets in the low-value pool. [Schedule 1, item 11, subsection 716-330(9)]

Allocating assets to the head company’s low-value pool

1.95        The previous pool assets are allocated to a low-value pool in the head company’s income year in which the joining time occurs for the purpose of allocating depreciating assets to a low-value pool and in working out the decline in value of assets allocated to a low-value pool. This will occur in both situations where the head company already has an existing low-value pool and where the head company must create a low-value pool if one does not exist. At any one time the head company can only operate one low-value pool.

1.96        Treating the assets in the low-value pool as a hypothetical asset is designed to reduce compliance costs on setting the tax cost of assets. However, each asset is then recognised and allocated to the low-value pool at the joining time in order to work out the decline in value of the pool and the closing pool balance. Each asset is treated as being allocated to the head company’s low-value pool at the joining time (not when the asset was originally allocated to the joining entity’s pool). [Schedule 1, item 11, subsection 716-330(3)]

1.97        When an asset is allocated to the low-value pool a reasonable estimate of the percentage of taxable use must be made for each asset as set out under section 40-435. This percentage affects the amount allocated to the pool and consequently the decline in value for the pool under the method statement in subsection 40-440(1). In determining the taxable use percentage for each asset in a low-value pool on entry it would be appropriate, having regard to compliance costs, to make an estimate for each asset based on a reasonable estimate of the taxable use of the pool of assets. This taxable use percentage (i.e. for the pool of assets) is required for the purposes of applying the method statement in subsection 40-440(1).

1.98        The requirement to allocate all low-cost assets to the pool once the taxpayer chooses to allocate one low-cost asset to the pool is not limited by the hypothetical asset. Each low-cost asset that the head company starts to hold in the joining or later income years are allocated to a low-value pool whether or not the asset is the hypothetical asset and whether or not the head company began to hold the asset because of the single entity rule. Low cost assets are added to the low-value pool going forward regardless of whether or not they arise on the first day of an income year of the joining entity as either a low-cost or a low-value asset. [Schedule 1, item 11, subsection 716-330(4)]

Determining the decline in value deductions

1.99        To determine the decline in value deductions the operation of section 40-440 is modified depending on when the joining entity joins the consolidated group.

1.100      If the joining time is the first day of an income year of the joining entity, section 40-440 operates as if all the previous pool assets were low-value assets and the sum of their opening adjustable values at the joining time equalled the tax cost for the hypothetical asset. Where the joining time is the first day of an income year these modifications allow the head company to depreciate the hypothetical asset at 37.5% in the first and subsequent income years. [Schedule 1, item 11, subsection 716-330(5)]

1.101      If the joining time is not the first day of the joining entity’s income year section 40-440 operates as if all the previous pool assets were low-value assets and the sum of their costs equalled the total of the tax cost for the hypothetical asset and any expenditure incurred after the joining time (but in the income year that includes that time) and included in the second element of the costs of the previous pool assets. Where the joining time is not the first day of an income year these modifications allow the hypothetical asset to be depreciated at 18.75% in the first year and 37.5% in later years. The lower percentage in the first year is a simple way of apportioning the first year’s deduction given that it is not a full income year. [Schedule 1, item 11, subsection 716-330(6)]

Low-value pools - exit

An asset leaving the head company’s low-value pool when an entity leaves the group

1.102      Where an entity disposes of an asset that was part of a low-value pool, the value of the pool is reduced by the asset’s terminating value. However, where an entity leaves a consolidated group and takes with it assets that were part of the head company’s low-value pool special rules apply. These special rules affect the head company and the leaving entity of a consolidated group at the leaving time if a depreciating asset becomes an asset of the leaving entity at that time because the single entity rule ceases to apply and where the asset was in the head company’s low-value pool. [Schedule 1, item 11, subsection 716-335(1)]

1.103      The special rules are required to ensure that the decline in value of assets in the head company’s and leaving entity’s low-value pools are worked out so that:

·          for the leaving year, the depreciating asset is only taken into account in working out the decline in value of assets in the head company’s low-value pool; and

·          for later income years, the depreciating asset is only taken into account in working out the decline in value of assets in the leaving entity’s low-value pool.

The adjustable value of the depreciating assets just before the leaving time is specified in order to perform the push-up process within the leaving entity. [Schedule 1, item 11, subsection 716-335(2)]

Consequences for the head company of assets leaving the low-value pool

1.104      In working out the cost to the head company of membership interests in an entity that leaves the group, the adjustable value (as discussed in the next paragraph) of the leaving assets just before and at the leaving time, is the amount of the reduction to the head company’s closing pool balance for the leaving year reduced to reflect the taxable use percentage estimated for the depreciating asset by the head company under section 40-435. For each membership interest the head company holds in the leaving entity, the interest’s tax cost is set just before the leaving time at the interest’s tax cost by reference to the head company’s terminating value of the asset. This is worked out by reference to the adjustable value of the asset for the head company just before the leaving time. The adjustable value of the asset for the leaving entity at the leaving time is the same as the adjustable value of the asset for the head company under section 701-40. [Schedule 1, item 11, subsection 716-335(5)]

1.105      Where an asset, that had been allocated a taxable use percentage of less than 100%, leaves a low-value pool in a leaving entity that asset will be allocated its full value upon pushing-up the asset’s tax cost in setting the tax cost for the interests in the leaving entity. For example, an asset with a tax cost of $100 is purchased by a consolidated group and allocated a taxable use percentage of 80%. The next day the asset leaves the group with a leaving entity, the push up value will be $100 for the purposes of setting the tax cost for interests held by the consolidated group in the leaving entity.

1.106      In order to achieve a tax neutral consequence for the head company when reducing the low-value pool balance where a leaving entity takes assets from the pool, an amount that reasonably relates to the leaving assets will be deducted from the closing pool balance. The head company may take into account the leaving assets in working out deductions for the decline in value of the low-value pool in the leaving year (rather than the leaving entity). This means that the head company’s low-value pool deductions will not be reduced until the next year to reflect the assets which have left the pool. In doing this, companies will work out the decline in value of assets in the head company’s low-value pool, in later years, as if the closing pool balance for the leaving year were reduced by an amount that reasonably relates to the depreciated asset. [Schedule 1, item 11, subsection 716-335(4)]

Consequences for the leaving entity of assets leaving the low-value pool

1.107      As a result of each asset being recognised in the pool under subsection 716-330(3), leaving entities will receive an adjustable value via the exit history rule (section 701-40) for the purposes of working out the cost to the entity upon leaving the consolidated group.

1.108      A leaving entity cannot deduct an amount for the leaving year for the assets it is taken to have allocated to the low-value pool that it brought from the head company’s pool. The leaving entity may take the leaving asset into consideration in later income years for the purpose of working out the decline in value of its low-value pool. The leaving entity may also deduct any second elements of cost incurred after the leaving time in respect of the assets it brought from the head company’s pool.

1.109      The leaving entity may also deduct the decline in value of new assets purchased after the leaving time in the leaving year. The exit history rule gives the leaving entity the information needed to continue depreciating the leaving assets. This occurs because the leaving assets were allocated the same cost, taxable use percentage and prior depreciation deductions as they had for the head company. For example, the exit history rule treats the asset as having been allocated to the leaving entity’s low-value pool, with the taxable use percentage estimated by the head company, for the income year for which the head company allocated the asset to the head company’s low-value pool. [Schedule 1, item 11, subsection 716-335(3)]

1.110      Where the leaving entity immediately joins another consolidated group the above mentioned entry rules will apply, including the hypothetical asset provisions in such a way so that the acquiring consolidated group would depreciate its hypothetical asset at 18.75% in the first year and 37.5% in later years.

Software development pools

Depreciating assets arising from expenditure in the joining entity’s software development pool

1.111      Part 5 of Schedule 1 to this bill ensures that the operation of certain consolidation cost setting provisions and certain capital allowance provisions operate correctly so that the head company of a consolidated group can deduct an appropriate amount for assets arising from expenditure on in-house software development.

1.112      Under Subdivision 40-E of the uniform capital allowance regime, an entity may elect to allocate amounts of expenditure on in-house software to a software development pool where that expenditure relates to developing, or having another entity develop, computer software. The entity is entitled to deductions for the expenditure over a period of three years following the year in which the expenditure is made. A separate pool is created for each income year in which the expenditure is made.

Modifications where an entity that has a software development pool joins a consolidated group

1.113      Certain consolidation cost setting provisions and certain capital allowance provisions relevant to software development are modified if:

·          an entity had incurred expenditure which it allocated to a software development pool;

·          that entity becomes a subsidiary member of a consolidated group at the joining time; and

·          some or all of the expenditure reasonably relates to the in-house software asset that became an asset of the head company at the joining time because of the single entity rule.

[Schedule 1, item 11, subsection 716-340(1)]

1.114      The modified provisions are:

·          Subdivision 40-B provides for deductions for the decline in value of depreciating assets;

·          section 40-455 provides for the deduction of expenditure allocated to a software development pool;

·          section 701-10 provides that, for each asset the joining entity has at the joining time, the asset’s tax cost is set at the joining time;

·          section 701-55, amongst other things, specifies how to work out the head company’s deductions for the decline in value of depreciating assets that became assets of the head company;

·          section 701-60 defines the ‘tax cost’ of an asset; and

·          Division 705 works out the tax cost for assets that a subsidiary member brings into a consolidated group.

1.115      Where an entity that has at least one software development pool joins a consolidated group, the head company will be entitled to continue to deduct the remaining pool balances as a result of the entry history rule (section 701-5).

1.116      The amendments will ensure that to the extent that the expenditure has resulted in the creation of in-house software assets then those assets will have their tax cost set on becoming assets of the head company and the balance of the software development pools will be reduced to the extent that the expenditure in the pools relates to those in-house software assets. In setting the tax cost for the in-house software assets, regard is also had to deductions for the expenditure on the asset that were allowed under the pool to ensure that the over depreciation adjustment in section 705-50 is able to apply.

Setting the tax cost setting amount for in-house software assets

1.117      In-house software assets arising from expenditure in a software development pool are given a tax cost under Division 705 upon becoming assets of the head company of a consolidated group. Paragraph 701-55(2)(a) deems the in-house software to have been acquired at the joining time for a payment equal to its tax cost.

1.118      The tax cost is calculated to take account of deductions for the period before the joining time for the expenditure reasonably related to the in-house software. Previously, the head company’s deductions would have been worked out under section 40-455 on the basis of the entry history rule treating the expenditure on the software as being the head company’s expenditure. [Schedule 1, item 11, subsection 716-340(2)]

1.119      In applying certain cost setting provisions, it is necessary to determine the cost and deductions for the decline in value in relation to certain depreciating assets. Subsections 716-340(6) to (8) ensure that appropriate amounts are worked out in relation to in-house software assets. For the purposes of doing these calculations, the cost of the in-house software asset is equal to the total amount of the joining entity’s expenditure that reasonably relates to the software and that was allocated to a software development pool. A reasonable approach will be accepted in determining the amount of expenditure that relates to an in-house software asset. This recognises the fact that the expenditure may have been allocated to separate software development pools over a number of years. [Schedule 1, item 11, subsections 716-340(6) to (8)]

1.120      In order for sections 705-40, 705-50 and 705-57 to apply appropriately to an in-house software asset, the joining entity must have claimed deductions for the decline in value of the asset. Due to the nature of software development pools, any deductions associated with the pool are not deductions for the ‘decline in value’ of the pool, but are instead deductions for ‘expenditure allocated to the pool’. Therefore, without amendment, sections 705-40, 705-50 and 705-57 will not apply appropriately to in-house software assets.

1.121      It is therefore necessary to determine the decline in value and deductions for the decline in value of in-house software assets for a period before the joining time. This is done having regard to the amount of deductions available under section 40-455 that reasonably relate to the software. Given that these amounts may arise from a number of software development pools, it may be necessary to add up the relevant amounts from each pool. This calculation is required to enable such things as the terminating value of the software to be determined (via the application of section 40-85 to work out the adjustable value of the asset).

Working out the decline in value of in-house software assets for the head company

1.122      The head company will work out deductions for in-house software under Subdivision 40-B based on the reset cost for the depreciating assets. Subsection 716-340(4) assumes the prime cost method is used. Therefore, paragraphs 701-55(2)(c) and (d) will specify how deductions are to be determined. In working out the deductions for decline in value of the in-house software, an effective life for the in-house software equal to the period specified for in-house software in subsection 40-95(7) is to be used. [Schedule 1, item 11, subsections 716-340(4) and (5)]

Working out deductions for the remaining software development pool balance

1.123      The amount of the inherited software development expenditure is reduced by the amount that reasonably relates to the in-house software. This prevents a deduction being claimed for the decline in value of the software development expenditure pool in addition to the decline in value of the in-house software. This does not prevent the head company from deducting under section 40-455 expenditure that is not reasonably related to the in-house software and that the head company is treated by section 701-5 as having incurred and allocated the expenditure to a software development pool. [Schedule 1, item 11, subsection 716-340(3)]

Modifications where an entity that leaves a consolidated group takes with it a software development pool

1.124      Where an entity (the leaving entity) exits a consolidated group and, because of the exit history rule, is taken to have allocated expenditure to a software development pool (at the same time that the head company allocated such expenditure), rules have been inserted that affect both the leaving entity’s deduction for its software development pool in the leaving year and the head company’s deduction for its software development pool for income years after the leaving year. [Schedule 1, item 11, subsection 716-345(1)]

1.125      For the leaving year, the leaving entity cannot deduct amounts for expenditure that have been allocated to a software development pool [Schedule 1, item 11, subsection 716-345(3)] . Instead, the head company is entitled to these deductions in the leaving year. This ensures that a deduction is only available to the head company of the consolidated group and not to both the head company and the leaving entity in the leaving year.

1.126      For income years after the leaving year, the leaving entity can continue to deduct amounts for expenditure in its software development pool(s) in the usual manner. However, the head company will no longer be entitled to deduct an amount for the software development pool that leaves with a leaving entity for income years after the leaving year. The head company is treated as if it never incurred these deductions. [Schedule 1, item 11, subsection 716-345(2)]

Inter-entity loss multiplication rules

1.127      Subdivision 165-CD prevents inter entity loss multiplication by reducing tax attributes (i.e. cost bases, reduced cost bases or allowable deductions) for significant equity and debt interests in a loss company that has an alteration. Broadly, an alteration arises if there is a change in the company’s ownership or control or a liquidator declares that the company’s shares are worthless.

1.128      Depending on the circumstances, subsections 165-115ZC(4) and (5) require an entity that has a controlling stake in the loss company, or the loss company itself, to give a notice to associates that have a relevant interest in the loss company. The notice must contain information on the nature and extent of the loss company’s losses. Failure to give the notice is a criminal offence.

1.129      Currently, the notice must be given within six months of the alteration time. However, if the alteration time was before 24 October 2002, the notice was not required to be given until 24 April 2003.

1.130      The purpose of the notice is to ensure that recipients have sufficient information to comply with their obligations under Subdivision 165-CD. The recipient entity is required to comply with Subdivision 165-CD even though it does not receive the notice.

Notice requirement waived or notice period extended for members of the same consolidatable group

1.131      A key feature of consolidation is that transactions between entities within a consolidated group are ignored for income tax purposes. When an entity joins a consolidated group, the cost bases and reduced cost bases of its assets are generally reset. In these circumstances, the notice requirements under Subdivision 165-CD are unnecessary and impose significant compliance costs.

1.132      Therefore, the notice requirements will be alleviated during the consolidation transitional period for entities that are in the same consolidatable group. That is, the notice requirements in subsections 165-115ZC(4) and (5) will be modified if:

·          the alteration time is between 31 December 2001 and 1 July 2004;

·          apart from these amendments, an entity (the notifying entity) would be required to give a notice to another entity (the receiving entity) in relation to the alteration time; and

·          just before the alteration time, the notifying entity and the receiving entity were members of the same consolidatable group.

[Schedule 1, item 21, subsection 165-115ZC(4) of the Income Tax (Transitional Provisions) Act 1997]

1.133      The notice requirements will not apply if the notifying entity and the receiving entity become members of the same consolidated group before 1 July 2004. [Schedule 1, item 21, subsection 165-115ZC(5) of the Income Tax (Transitional Provisions) Act 1997]

1.134      If the notifying entity and the receiving entity do not become members of the same consolidated group before 1 July 2004, a notice must be given before the end of six months after the date of Royal Assent of this bill. [Schedule 1, item 21, subsection 165-115ZC(6) of the Income Tax (Transitional Provisions) Act 1997]

1.135      The amendments will also insert a note at the end of subsection 165-ZC(1) to guide readers to these modifications to the notice requirements in the Income Tax (Transitional Provisions) Act 1997 . [Schedule 1, item 14, subsection 165-115ZC(1)]

Commissioner of Taxation’s discretion to extend the notice period or waive the notice requirement

1.136      The notice that is required to be given under subsection 165-115ZC(4) or (5) is essentially an administrative mechanism for providing information to affected taxpayers. Failure to give the notice within the specified time period is a criminal offence.

1.137      Unforeseen or unusual circumstances might arise where the notice requirements cannot be reasonably complied with. For example, the notifying entity may be having particular difficulty in obtaining the required information to complete the notice within the specified time frame due to circumstances beyond its control (such as a fire or other unforeseen event that destroys or damages the necessary records). Currently in these circumstances, failure to provide the notice within the specified time period will result in the notifying entity being subject to a criminal penalty.

1.138      In addition, there may be some circumstances when the information required to be given in the notice is already known by the intended recipient. In these circumstances, to avoid a criminal penalty, a notice must still be given even though it serves no useful purpose.

1.139      Therefore, to allow some flexibility in relation to the notice requirements, the Commissioner may:

·          extend the period within which a notice must be given by specifying, in writing, a later time than the alteration time as the start of the six month period within which the notice is required to be given; or

·          by written declaration, waive the notice requirement in relation to a particular alteration time.

[Schedule 1, items 15 to 19, subsections 165-115ZC(4), (5), (7A) and (7B)]

1.140      In making a decision, the Commissioner must consider the consequences of extending the period for giving a notice or of waiving the notice requirement for both the notifying entity and the receiving entity and any other factors that are relevant. [Schedule 1, item 19, subsection 165-115ZC(7C)]

1.141      The Commissioner’s decision to extend the notice period or waive the notice requirement is not subject to review by the Administrative Appeals Tribunal. The information contained in the notice is required to assist the receiving entity to meet its taxation obligations. It is not directly connected to the imposition of tax on either the notifying entity or the receiving entity. A taxpayer who is dissatisfied with the Commissioner’s decision can pursue any complaint through the Australian Taxation Office’s internal dispute handling process or by taking the matter up with the Commonwealth Ombudsman.

Application and transitional provisions

1.142      The amendments discussed in this chapter will take effect on 1 July 2002 (being the commencement date of the consolidation regime).

1.143      The amendments relating to the notice requirements under the inter entity loss multiplication rules will apply to notices in relation to alteration times that happen after 31 December 2001. This will ensure that amendments apply to any notice required under those rules. [Schedule 1, item 20]

Software development pools

Modifications where expenditure incurred before 1 July 2001

1.144      The amendments that this bill makes under sections 716-340 and 716-345 operate in relation to the former software development pool provisions in the same way that they operate for the provisions in Subdivision 40-E. Former section 46-90 that dealt with calculating deductions for pooled expenditure on software operated in a similar manner to the current section 40-455. The former provisions that created a software pool, determined what expenditure would go into a software pool, and calculated deductions for pooled expenditure on software which are within former Subdivision 46-D operate in the same way as under sections 716-340 and 716-345. [Schedule 1, item 13, section 716-340 of the Income Tax (Transitional Provisions) Act 1997]

 



C hapter 2  

Copyright collecting societies

Outline of chapter

2.1          Schedule 2 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997), the Income Tax (Transitional Provisions) Act 1997 and the Taxation Administration Act 1953 (TAA 1953) to modify the tax treatment of copyright collecting societies and their members.

Context of amendments

2.2          Copyright collecting societies are organisations that administer certain rights of copyright on behalf of copyright owners (including authors and composers) who generally become members of the societies. Income received in relation to copyrights is held by societies pending identification of, and allocation to, the appropriate copyright owners.

2.3          In response to recommendations of the Simpson Report into Copyright Collecting Societies (1995), the Australian Taxation Office (ATO) conducted a review of the tax treatment of such societies. The ATO concluded that, due to the nature of the arrangements in place for the collection, administration and distribution of royalties and licence fees, and the fact that the societies have the power to deal with their members’ funds, a trust relationship exists between the societies and their members. Accordingly, the societies are considered discretionary trusts for income tax purposes, the trustees of which are the directors of the societies and the beneficiaries of which are the members/copyright owners. The ATO determined that the societies would be taxed as discretionary trusts from 1 July 2002.

2.4          Under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936), where there is a part of the net income of a trust estate to which no beneficiary has been made presently entitled, the trustee is assessed and is liable to pay tax on that income at the top personal tax rate. As a matter of administrative practice, Taxation Ruling IT 328 generally allows until two months after the end of the income year for a beneficiary to be made presently entitled to a share of the trust income. Due to practical difficulties in matching payments to members, a significant percentage of income derived by copyright collecting societies is generally not allocated within this time frame. Therefore, in the absence of legislative amendments, a substantial proportion of the income of copyright collecting societies would face tax at the top personal tax rate.

2.5          On 1 August 2002, the Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, announced that the tax law would be amended, effective from 1 July 2002, to ensure that copyright collecting societies are not taxed on income they collect on behalf of copyright owners. Amendments to give effect to this announcement, contained in this bill, have been developed in consultation with representatives of the copyright collecting societies.

Summary of new law

2.6          These amendments will:

·          ensure that copyright collecting societies are not taxed on any copyright income that they collect and hold on behalf of members, pending allocation to them;

·          minimise compliance costs for copyright collecting societies by ensuring that they are not taxed on the non-copyright income they derive, provided that the amount of non-copyright income derived falls within certain limits; and

·          ensure that any copyright and non-copyright income collected or derived by copyright collecting societies that is exempt from income tax in their hands, is included in the assessable income of members upon distribution.

Comparison of key features of new law and current law

New law

Current law

Copyright collecting societies are exempt from income tax on all copyright income, and non-copyright income to the extent it does not exceed the de minimis threshold.

Copyright income and non-copyright income of copyright collecting societies are dealt with under the trust provisions in Division 6 of the ITAA 1936.

Payments made to members of copyright collecting societies are included in their assessable income to the extent that the payments have not already been assessed to the directors of the societies, as trustees, under section 98, 99 or 99A of the ITAA 1936.

The tax treatment of members of copyright collecting societies is dealt with under the trust provisions in Division 6 of the ITAA 1936.

Detailed explanation of new law

Exemption for certain types of income of copyright collecting societies

2.7          Certain types of income collected or derived by copyright collecting societies that are operating under a trust relationship with their members will be exempt from income tax at the society level. The definition of a ‘copyright collecting society’ is discussed in paragraphs 2.20 and 2.21.

Exemption for copyright income

2.8          ‘Copyright income’ collected or derived by a copyright collecting society to which the trust provisions in the ITAA 1936 apply will be exempt from income tax at the society level. [Schedule 2, item 5, paragraph 51-43(2)(a)]

2.9          Copyright income is defined to mean ordinary or statutory income of the following kinds: royalties and interest on royalties collected or derived by the society; and such other amounts relating to copyright that are derived by the society as are prescribed by the regulations. [Schedule 2, item 8 and the definition of ‘copyright income’ in subsection 995-1(1)]

2.10        The term ‘royalty’ is already defined in subsection 995-1(1) of the ITAA 1997, by reference to the definition in the ITAA 1936. This definition is broad, and encompasses equitable remuneration collected by societies under statutory licences, as this is in effect remuneration received as consideration for the use of copyright.

Exemption for certain non-copyright income

2.11        ‘Non-copyright income’ means any income derived by a copyright collecting society other than copyright income [Schedule 2, item 10 and the definition of ‘non-copyright income’ in subsection 995-1(1)] . Examples of non-copyright income would include consulting fees, fees received for the provision of administrative services to smaller societies and grant income.

2.12        Non-copyright income derived by a copyright collecting society to which the trust provisions in the ITAA 1936 apply will also be exempt from income tax, to the extent that this non-copyright income does not exceed the lesser of:

·          five per cent of the total amount of the copyright collecting society’s copyright income and non-copyright income for the income year; and

·          $5 million or such other amount as is prescribed by the regulations (no other amount has been prescribed at this time).

[Schedule 2, item 5, paragraph 51-43(2)(b)]

2.13        This de minimis rule is designed to minimise compliance costs for collecting societies by exempting relatively small amounts of non-copyright income ancillary to the copyright collecting business. Currently, societies distribute non-copyright income to members in conjunction with distributions of copyright income. In the absence of the exemption, societies wanting to avoid tax at the top personal income tax rate would be required to incur considerable costs in revising their existing systems for distributing non-copyright income to members. Non-copyright income exempt at the collecting society level will be included in the assessable income of members when it is distributed.

2.14        Any non-copyright income that a society derives in excess of the de minimis threshold will be subject to the normal provisions applying to trusts in Division 6 of the ITAA 1936. This means, for example, that any non-copyright income above the de minimis threshold will be assessed to the directors of the societies, as trustees, under section 99A, if no members of the society are made presently entitled to it within two months of the end of the income year.

Example 2.1

A copyright collecting society collects $84 million of copyright income and derives $6 million of non-copyright income in an income year. The $84 million of copyright income will be exempt from income tax in the hands of the copyright collecting society.

The total income of the society is $90 million. Five per cent of $90 million is $4.5 million. As this is less than $5 million, only $4.5 million of non-copyright income is exempt from tax. The remaining $1.5 million of non-copyright income will be dealt with under the trust provisions in Division 6 of the ITAA 1936.

Assessable income of members of copyright collecting societies

2.15        When a copyright collecting society makes a payment of certain amounts of copyright and non-copyright income to a member of the society, the amount of the payment is included in the member’s assessable income except to the extent that it represents an amount on which the directors of the society, as trustees, are assessed, or have been assessed, and are liable to pay tax under sections 98, 99 or 99A of the ITAA 1936. This ensures that there is no double taxation on any amounts of income collected or derived by copyright collecting societies [Schedule 2, item 4, section 15-22] . This provision applies instead of the provisions contained in Division 6 of the ITAA 1936 [Schedule 2, item 4, subsection 15-22(1)] .

2.16           Where this provision applies, section 15-20 of the ITAA 1997, which would ordinarily include payments of royalties in the assessable income of members, will not apply. [Schedule 2, item 3, subsection 15-20(2)]

2.17        A member of a copyright collecting society is defined as any person who has been admitted as a member under the society’s constitution or any person who has authorised the society to license the use of his or her copyright material. [Schedule 2, item 9 and the definition of ‘member’ in subsection 995-1(1)]

Notice of payment to members

2.18        To assist members of societies to determine how much of a payment to include in their assessable income, societies are required to provide notices to members each time they make a payment to them. The notice must be in writing and set out:

·          the name of the society and the member;

·          the total amount of the payment;

·          that amount of the payment on which the directors of the society, as trustees, are or have been assessed and are therefore liable to pay tax under sections 98, 99 and 99A of the ITAA 1936; and

·          the amount of the payment which the member has to include in his or her assessable income.

[Schedule 2, item 6, section 410-5]

2.19        Failure to provide a notice, or to provide a notice in the manner required, will result in an administrative penalty of 20 penalty points. [Schedule 2, item 12, section 288-75]

Definition of a copyright collecting society

2.20        A copyright collecting society may be declared under the Copyright Act 1968 to have the statutory right to collect copyright income under schemes that fall within that Act. Alternatively, societies may be voluntarily established to assist certain groups of copyright holders to manage their rights (i.e. non-declared societies).

2.21        For income tax purposes, a copyright collecting society is defined to include both declared and non-declared societies, subject to certain conditions. The conditions ensure that, to be eligible for the income tax exemptions discussed in paragraphs 2.8 and 2.12, non-declared societies must broadly meet the same requirements that declared societies must meet under the Copyright Act 1968 . In addition, the definition provides additional integrity in relation to the way societies distribute income to members. In particular, no member can direct a society to pay them an amount of income at a particular time, and societies must distribute amounts of income as soon as is reasonably possible to members once amounts have been allocated to them. These conditions ensure that the timing of payments cannot be manipulated to achieve tax advantages and that tax cannot be indefinitely deferred by societies retaining tax exempt amounts for significant periods of time. [Schedule 2, item 7 and the definition of ‘copyright collecting society’ in subsection 995-1(1)]

Application and transitional provisions

2.22        The amendments apply from 1 July 2002 to all copyright and non-copyright income collected or derived by copyright collecting societies, and to all payments of copyright and non-copyright income made by copyright collecting societies to members.

2.23        Due to the possibility of some societies being disadvantaged by the retrospective operation of the amendments, societies may elect to defer entry into the new taxation regime until 1 July 2004. In order for such an election to be valid, it will need to be made to the Commissioner of Taxation in writing within 28 days of this bill receiving Royal Assent. Societies making a valid election will only be exempt on relevant copyright and non-copyright income collected or derived on or after 1 July 2004. [Schedule 2, item 11, section 410-1]

2.24        To avoid imposing retrospective obligations on copyright collecting societies, the requirement for societies to provide a notice to members outlining details of payments (see paragraph 2.18) will only apply from the income year following the income year in which this bill receives Royal Assent. [Schedule 2, item 13]

 



C hapter 3  

Simplified imputation system - consequential and other amendments

Outline of chapter

3.1          Schedule 3 to this bill makes consequential amendments to the income tax laws which:

·          replaces references to the former imputation provisions in Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) with those of the simplified imputation system (SIS) in Part 3-6 of the Income Tax Assessment Act 1997 (ITAA 1997); and

·          updates terminology of the former imputation system to equivalent terms of the SIS.

3.2          This Schedule also makes various technical amendments to the SIS and other imputation related provisions.

3.3          In addition, this Schedule inserts into Division 207 of Part 3-6 of the ITAA 1997 anti-avoidance rules that apply in relation to certain tax exempt entities that are entitled to a refund of imputation credits. These rules were previously in Division 7AA of Part IIIAA of the ITAA 1936.

3.4          All subsequent legislative references are to the ITAA 1997 unless otherwise stated.

Context of amendments

3.5          The implementation of the SIS arose out of a recommendation of the Review of Business Taxation . The Treasurer’s Press Release No. 058 of 21 September 1999 announced the Government’s proposal to implement the SIS which aims to reduce compliance costs incurred by business by providing simpler processes and increased flexibility. The Minister for Revenue and Assistant Treasurer’s Press Release No. C057/02 of 14 May 2002 announced that the SIS would commence on 1 July 2002. The SIS replaced the former imputation system in Part IIIAA of the ITAA 1936.

3.6          As a result of the introduction of the SIS, a number of consequential amendments are required to other areas of the income tax law. The income tax laws that need to be updated are:

·          the ITAA 1997;

·          the ITAA 1936 (including the Schedules); and

·          the Taxation Administration Act 1953 (TAA 1953).

3.7          The amendments will ensure the correct operation of the tax system following the commencement of the SIS from 1 July 2002.

3.8          The Schedule will also make various technical amendments to the SIS and other imputation related provisions.

3.9          Division 207 is part of the core SIS rules introduced in the New Business Tax System (Imputation) Act 2002 which deals with the tax effect of receiving a franked distribution.

Summary of new law

3.10        The new law will make consequential amendments to the income tax laws to:

·          replace references to the former imputation system with those of the SIS; and

·          update terminology of the former imputation provisions to equivalent terms of the SIS.

3.11        The technical amendments will ensure that the various provisions operate as intended.

Detailed explanation of new law

Technical amendments to the simplified imputation system

Amendment to section 46FB of the Income Tax Assessment Act 1936

3.12        Section 46FA of the ITAA 1936 provides for a deduction for on-payments of unfranked (or partly franked) dividends made by a resident company to its wholly-owned foreign parent. The deduction was inadvertently made inoperative with the removal of the intercorporate dividend rebate under sections 46 and 46A of the ITAA 1936 for unfranked dividends paid within wholly-owned groups generally after 30 June 2003. This defect is to be rectified by amendments in the Tax Laws Amendment (2004 Measures No. 1) Bill 2004.

3.13        Section 46FB provides that a resident company may establish an unfranked non-portfolio dividend account in order to track the amount of unfranked non-portfolio dividends available for on-going distribution. In order to receive the deduction under section 46FA, an amount must be paid out of this account.

3.14         The Tax Laws Amendment (2004 Measures No. 1) Bill 2004 did not include similar amendments to paragraph 46FB(4)(c). Paragraph 46FA(1)(c) is now amended to ensure that a resident company can credit its unfranked non-portfolio dividend account to the extent that it has received an unfranked non-portfolio dividend. This will then entitle the company to a deduction for any amounts paid out of this account to its wholly-owned foreign parent under section 46FA. [Schedule 3, Part 2, item 26, paragraph 46FB(4)(c)]

Amendments to exempting entity rules

3.15        Division 208 contains rules designed to prevent franking credit trading for entities with controlling shareholders for whom franking credits have limited or no value (i.e. non-residents and tax exempt entities). Under these rules, dividends paid by these entities (known as exempting entities) to resident shareholders are generally treated as unfranked dividends. When an exempting entity becomes a former exempting entity (e.g. when the entity ceases to be more than 95% owned by non-residents and tax exempt shareholders), the exempting account is quarantined so that distributions franked with exempting credits only confer a franking benefit for eligible continuing substantial shareholders or under an employee share scheme as referred to in those provisions.

Consequential amendment to paragraph 128B(3)(ga) of the Income Tax Assessment Act 1936

3.16        Subsection 160AFQA(4) of the former imputation rules in Part IIIAA of the ITAA 1936 contained the requirement that a dividend is only taken to be franked with an exempting credit if it is paid to an eligible continuing substantial shareholder or an employee to whom a dividend has been paid on a share acquired under an eligible employee share scheme. This requirement was not replicated under the SIS. To ensure an equivalent outcome is achieved, paragraph 128B(3)(ga) of the ITAA 1936 is amended by providing that a dividend franked with an exempting credit is exempt from dividend withholding tax to the extent that it is paid to a non-resident that is either:

·          an eligible continuing substantial member (i.e. the SIS equivalent of an eligible continuing substantial shareholder); or

·          a shareholder to whom the dividend had been paid on a share acquired under an employee share scheme.

[Schedule 3, Part 2, item 43, paragraph 128B(3)(ga)]

Amendment to sections 208-165 and 208-170

3.17        Sections 208-165 and 208-170 are amended by including an additional formula to ensure that the correct amount of franking credits arises in the case where an exempting entity makes a distribution franked with franking credits to another exempting entity. Currently, these provisions only provide for the correct outcome in the case where the recipient receives a distribution franked with exempting credits paid by a former exempting entity. The existing formula in section 208-170 is also amended to include an appropriate reference to a recipient of the distribution. [Schedule 3, Part 2, items 93 to 97, sections 208-165 and 208-170]

3.18        As a result of these changes, the references to sections 208-165 and 208-170 in the table in sections 208-115 and 208-130 are updated to the relevant subsection in amended sections 208-165 and 208-170. [Schedule 3, Part 2, items 87 to 92; items 2 and 3 in the table in section 208-115; items 2, 3, 5 and 6 in the table in section 208-130]

Amendment to section 67-30

3.19        Section 67-30 is amended to ensure that the priority rule for refundable tax offsets interacts properly with the franking deficit tax offset rules. [Schedule 3, Part 2, items 80 and 110, section 67-30]

Amendment to section 210-170

3.20        Section 210-170 sets out the conditions that a recipient of a distribution franked with venture capital credits must satisfy before they are entitled to a tax offset. Under the current law, one of these conditions is that the recipient is not a qualified person in relation to the distribution for the purposes of Division 1A of Part IIIAA of the ITAA 1936. It was intended that the person be a qualified person (i.e. broadly, a person who is not a party to a franking credit trading arrangement). To ensure that this is the case an amendment is made to paragraph 210-170(1)(e) to remove the word ‘not’. [Schedule 3, Part 2, item 98, paragraph 210-170(1)(e)]

Consequential amendments to the simplified imputation system

3.21        The consequential amendments made in this Schedule are summarised in Table 3.1.

Table 3.1:  Consequential amendments

Item

Provision

Amendment

ITAA 1936

items 14 to 25, 27 to 42 and 44 to 58

subsection 6(1), sections 43A, 102AAM, 102AAU, 105A, 108, 109B, 109Y, 109ZC, 121AT, 121EG, 128TD, 128TE, 159GZZZQ, 160AN, 170BA, 276, 365, 389, 402 and 436

Updates references and terminology to ensure consistency with the SIS.

Subsection 128TE(2) is repealed because section 160ARY of the ITAA 1997 was not replicated as part of the SIS.

[Schedule 3, Part 2, items 1 to 25, 27 to 42 and 44 to 58]

Schedules to the ITAA 1936

items 59 to 70

Schedule 2D, section 57-120

Updates references and terminology to ensure consistency with the SIS. [Schedule 3, Part 2, items 59 to 70]

items 71 to 74

Schedule 2H, sections 326-120, 326-130 and 326-170

Updates references and terminology to ensure consistency with the SIS. [Schedule 3, Part 2, items 71 to 74]

ITAA 1997

items 75 to 79

sections 10-5, 12-5, 13-1

Updates lists of assessable income, deductions and tax offsets to SIS references [Schedule 3, Part 2, items 75 to 79]



 

Item

Provision

Amendment

ITAA 1997

item 81

item 1 in the table in section 70-45

Deletes outdated reference. [Schedule 3, Part 2, item 81]

items 82 to 85

sections 110-55, 110-60 and 118-20

 

Update 110-55(7) and (8) and 118-20(1B)(b) to ensure consistency with the SIS.

Repeal 110-60(5) and (6) as the circumstances these provisions are intended to cover are dealt with by 110-55(7) and (8). [Schedule 3, Part 2, items 82 to 85]

items 99 to 102

subsection 995-1(1)

Division 976 contains definitions for franked and unfranked parts of a distribution and also parts that are franked with an exempting credit or venture capital credit. There are no definitions for these terms in the dictionary in subsection 995-(1). These terms are now included in the dictionary. [Schedule 3, Part 2, items 99 to 102]

TAA 1953

item 103

section 14ZAAA

Updates ‘income tax law’ to include franking deficit tax, venture capital deficit tax and over-franking tax. [ Schedule 3, Part 2, item 103]

item 104

section 14ZW

Updates provisions to ensure consistency with the SIS.

The reference to section 160AQQ is repealed because, under the SIS, franking deficit tax is a tax offset and the normal objection rights apply. [Schedule 3, Part 2, item 104]

item 105

Schedule 1, section 12-165

Updates references and terminology to ensure consistency with the SIS. [Schedule 3, Part 2, item 105]

items 106 and 107

Schedule 1, section 360-85

Updates item 15 in table in section 360-85 to ensure consistency with the SIS. [Schedule 3, Part 2, items 106 and 107]

items 108 and 109

Schedule 1, section 360-115

Updates item 5 in the table in section 360-115 to ensure consistency with the SIS. [Schedule 3, Part 2, item 108]

Anti-avoidance rules

3.22        Section 207-125 (to be renumbered as section 207-110 when the Tax Laws Amendment (2004 Measures No. 2) Bill 2004 receives Royal Assent) entitles certain income tax exempt charities and deductible gift recipients to a tax offset making them eligible for a refundable tax offset under Division 67.

3.23        The allowance of a tax offset to these exempt institutions is subject to anti-avoidance rules which may apply to deny the tax offset where this concession is abused. The details outlining when these rules apply are explained in the explanatory memorandum to the New Business Tax System (Miscellaneous) Act (No. 1) 2000 (Act No. 79 of 2000).

3.24        These anti-avoidance rules, included in new Subdivision 207-E, will replicate the outcomes provided for under the former rules with two minor changes that will:

·          correct a technical defect in the former provisions to ensure that the maximum amount the Commissioner of Taxation (Commissioner) may recover from the exempt entity and the controller(s) of the exempt entity does not exceed the amount that the exempt entity is liable to pay in respect of the incorrectly claimed refund of imputation credits; and

·          ensure that all decisions made by the Commissioner under the anti-avoidance rules are reviewable under Part IVC of the TAA 1953.

[Schedule 3, Part 1, item 4, sections 207-119, 207-120, 207-122, 207-124, 207-126, 207-128, 207-130, 207-132, 207-134 and 207-136]

3.25        As part of this replication, the definition of ‘controller (for capital gains tax (CGT) purposes)’ is re-inserted in the ITAA 1997 into Subdivision 975-A. This amendment is necessary because the definition of ‘controller (for imputation purposes)’ in proposed section 207-130 relies on the definition of a ‘controller (for CGT purposes)’ in section 140-20. However, Division 140 was repealed from 24 October 2002 as part of the introduction of the new general value shifting regime. [Schedule 3, Part 1, item 5, sections 976-155 and 976-160]

3.26        The concepts defined in Subdivision 207-E are cross-referenced in the dictionary in subsection 995-1(1). [Schedule 3, Part 1, items 6 to 13, subsection 995-1(1)]

3.27        Table 3.2 cross-references the former provisions in the ITAA 1936 to the new provisions incorporated into the SIS.

Table 3.2:  Equivalent anti-avoidance provisions in the Income Tax Assessment Act 1936

Provisions

ITAA 1936 reference

ITAA 1997 reference

What is a related transaction?

subsection 160ARDAA(1)

A distribution event in subsection 207-120(5).

What is a notional trust amount?

subsection 160ARDAA(1) -related transaction

Trust share amount in subsection 207-120(4).

Controller of an exempt institution that is a company.

subsection 160ARDAA(2)

subsection 207-128(6)

Controller of an exempt institution other than a company.

subsection 160ARDAA(2)

subsection 207-128(7)

Groups in relation to an entity.

subsection 160ARDAA(4)

subsection 207-128(8)

Deemed absence of control.

subsections 160ARDAA(5) and (6)

subsections 208-128(9) and (10)

Tax offset denied where there is a related transaction which reduces the value of the distribution.

subsections 160ARDAC(2) and (3)

paragraphs 207-120(2)(b) and (c) and subsection 207-120(3)

Tax offset denied where there is a related transaction and the exempt institution suffers a detriment.

subsection 160ARDAC(4)

paragraph 207-120(2)(a)

Tax offset denied where the entity making the distribution obtains a benefit because of a related transaction.

subsection 160ARDAC(5)

paragraph 207-120(2)(d)

Tax offset denied where distribution comprises property other than money and the in specie distribution does not pass immediately and absolutely to the exempt institution.

subsection 160ARDAC(6)

subsection 207-122(1)

Tax offset denied if the exempt institution acquires property in association with a distribution from the entity making the distribution as part of an arrangement.

subsection 160ARDAC(9)

subsection 207-122(1)

Acquisition of property as part of an arrangement.

subsection 160ARDAC(10)

subsection 207-122(4)

Notional trust amount does not match distribution.

subsections 160ARDAC(7) and (8)

subsection 207-124(6)

Reinvestment exception.

subsection 160ARDAC(11)

subsection 207-126(8)

Vested and indefeasible interest.

subsections 160ARDAC(12) to (15)

subsections 207-126(2) to (5)

Controller’s liability.

section 160ARDAD

section 207-130

Treatment of benefits provided by an exempt institution to controller.

section 160AARDAE

section 207-132

Present entitlement to be disregarded.

section 160ARDAF

section 207-134

Application and transitional provisions

3.28        The consequential amendments and the anti-avoidance provisions will generally apply to events on or after 1 July 2002, the commencement date of the SIS. [Schedule 3, Part 3, subitems 111(1) and (3)]

3.29        The amendments to re-insert the definition of ‘controller (for CGT purposes)’ will apply to assessments for the 2002-2003 income year and later income years. This will ensure that there is a definition for this concept for the purposes of the anti-avoidance rules from when the value shifting rules in Division 140 were repealed. [Schedule 3, Part 3, subitem 111(2)]

3.30        The amendment to paragraph 46FB(4)(c) 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 3, Part 3, subitems 111(4) and (5)]

3.31        For assessments for the 2002-2003 income year, section 109ZC of the ITAA 1936 has effect as if the references in subsection 109ZC(3) to amounts that are not assessable income and are not exempt income were instead a reference to income that is not exempt. This is needed because these new concepts of income were not introduced until the 2003-2004 income year and later income years. [Schedule 3, Part 3, item 112]

3.32        For the period starting 1 July 2002 and ending 30 June 2004, section 128TB of the ITAA 1936 has effect as if the reference to ‘general company tax rate’ in subsection 128TB(2) was amended to ‘corporate tax rate’. This modified application provision is necessary because section 128TB is being repealed from 1 July 2004 by the New International Tax Arrangements (Participation Exemption and Other Measures) Bill 2004 if this bill passed. [Schedule 3, Part 3, item 113]

3.33        For the period starting 1 July 2002 and ending 30 June 2004, section 377 of the ITAA 1936 has effect as if the references in paragraph 377(1)(e) to the former imputation provisions were references to the SIS. Again, this modified application provision is necessary because section 377 is being repealed from 1 July 2004 by the same bill that repeals section 128TB. [Schedule 3, Part 3, item 114]

 



C hapter 4  

Specific gift recipients

Outline of chapter

4.1          Schedule 4 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to update the lists of specifically-listed deductible gift recipients (DGRs) .

Context of amendments

4.2          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.

4.3          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

4.4          Part 1 of Schedule 4 adds certain fire and emergency services bodies as specifically-listed DGRs.

4.5          The Government announced in the Treasurer’s Press Release No. 114 of 23 December 2003 that it would legislate to ensure that the Country Fire Authority, the Victoria State Emergency Service and equivalent co-ordinating bodies in other States and Territories could benefit from being able to receive tax deductible gifts.

4.6          The amendments will allow income tax deductions for certain gifts to the value of $2 or more, made on or after 23 December 2003, to the fire and emergency services recipients listed in Table 4.1 .

Table 4.1

Name of Authority or institution

Established under legislation of the following State or Territory

Country Fire Authority

Victoria

Victoria State Emergency Service

Victoria

Queensland Fire and Rescue Service

Queensland

State Emergency Service

Queensland

Fire and Emergency Services Authority of Western Australia

Western Australia

State Emergency Service South Australia

South Australia

Tasmania Fire Service

Tasmania

State Emergency Service

Tasmania

Rural Firefighting Service

Australian Capital Territory

ACT Emergency Service

Australian Capital Territory

4.7          Part 2 of Schedule 4 adds certain other organisations as specifically-listed DGRs.

4.8          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 4.2 from, and including, the date of effect.

Table 4.2

Name of fund

Date of effect

Special conditions

International Social Service - Australian Branch

18 March 2004

None

the Victorian Crime Stoppers Program

23 April 2004

None

the Coolgardie Honour Roll Committee Fund

2 June 2004

The gift must be made before 2 June 2006

the Tamworth Waler Memorial Fund

20 April 2004

The gift must be made before 20 April 2006

Australian Business Week Limited

9 December 2003

None

4.9          The amendments also extend the period for which deductions are allowed for gifts to certain funds and organisations. These funds and organisations had time-limited DGR status, which is now being extended.

4.10        Gifts to the Australian Ex-Prisoners of War Memorial Fund will now be deductible where they are made before 20 October 2004. Deductibility of gifts to The Albert Coates Memorial Trust will be extended to gifts made before 31 January 2006. Gifts to the St Patrick’s Cathedral Parramatta Rebuilding Fund will be deductible where they are made before 1 July 2004. Gifts to the St Paul’s Cathedral Restoration Fund will be deductible where they are made before 23 April 2006.

Detailed explanation of new law

4.11        The authorities, institutions and funds discussed in paragraphs 4.6 to 4.10 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.

4.12        Part 1 of Schedule 4 lists the co-ordinating bodies for fire and emergency services in the States and Territories as DGRs [Schedule 4, items 1 to 9] . Some of these organisations had previously been endorsed by the Commissioner of Taxation (Commissioner) as a DGR by virtue of being a public benevolent institution. The Commissioner has now determined that these organisations are government bodies and so cannot be public benevolent institutions. It is a well-established principle of the existing common law that a government body is not a public benevolent institution. The amendments will ensure that these co-ordinating bodies can continue to receive tax deductible gifts.

4.13        An organisation is generally specifically-listed only after it has satisfied the Commissioner that it meets certain integrity standards, known as the public fund requirements, which are set down in Taxation Ruling 95/27 Income Tax:  Public Funds. The co-ordinating bodies that have met the public fund requirements are being specifically-listed in this bill. Further legislation will be introduced to specifically-list any co-ordinating bodies which meet the public fund requirements at a later date.

4.14        Part 2 of Schedule 4 lists various organisations as DGRs, and extends the period for which deductions are allowed for gifts to certain organisations which had time-limited DGR status.

4.15        International Social Service - Australian Branch is a non-government, not-for-profit organisation offering professional social work services to people in Australia and overseas. The organisation offers assistance to those with social or socio-legal problems arising from migration. [Schedule 4, items 10 and 19]

4.16        The Victorian Crime Stoppers Program encourages community involvement in the apprehension and conviction of criminals, and the reduction in crime by the provision of information to the proper authorities. [Schedule 4, items 10 and 21]

4.17        The Coolgardie Honour Roll Committee was established to erect the Honour Roll Memorial to remember the men and women of Coolgardie who fought for Australia in all wars. [Schedule 4, items 13 and 18]

4.18        The Tamworth Waler Memorial Fund was established to erect the Waler War Memorial to recognise the important contribution of the stock horse to Australia’s military commitment in the Boer War and the Great War, along with the men who rode them. [Schedule 4, items 13 and 20]

4.19        Australian Business Week Limited has the principal objective of educating Australian students to foster interest in entrepreneurial and enterprise development. [Schedule 4, items 14 and 17]

Extending end dates to deductibility

4.20        The ITAA 1997 is amended so that the period for which deductions are allowed for gifts to the Australian Ex-Prisoners of War Memorial Fund is extended to gifts made before 20 October 2005. The Memorial was built to pay tribute to the sacrifice and service of approximately 35,000 Australian prisoners of war since Federation, and also serves as a place of remembrance for the families and friends of Australians who have died in captivity. [Schedule 4, item 11]

4.21        The period for which deductions are allowed for gifts to The Albert Coates Memorial Trust will also be extended. Gifts made before 31 January 2006 will be deductible. The Albert Coates Memorial Trust raises funds to establish ‘living memorials’ to honour Sir Albert Coates who served in two World Wars with distinction. Among other activities, the Trust funds scholarships each year to medical graduates and to students in the Ballarat community. [Schedule 4, item 12]

4.22        The amendments also extend the period for which deductions are allowed for gifts to the St Patrick’s Cathedral Parramatta Rebuilding Fund. Gifts made before 1 July 2004 will be deductible. The Fund assists the Parramatta community to rebuild St Patrick’s Cathedral which was destroyed by fire on 19 February 1996. [Schedule 4, item 15]

4.23        The period for which deductions are allowed for gifts to the St Paul’s Cathedral Restoration Fund will also be extended. Gifts made before 23 April 2006 will be deductible. The Fund assists St Paul’s Anglican Cathedral in Melbourne to raise money for restoration, refurbishment and repair work to the Cathedral building. [Schedule 4, item   16]

Application and transitional provisions

4.24        The amendments to include the organisations listed in Table 4.1 in the gift provisions of the ITAA 1997 apply after 22 December 2004 .

4.25        The amendments to include the organisations listed in Table 4.2 in the gift provisions of the ITAA 1997 apply from the date of effect shown in Table 4.2.



C hapter 5  

Debt and equity interests - at call loans

Outline of chapter

5.1          Schedule 5 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997) so that the transitional period for at call loans under the debt/equity rules will extend to 30 June 2005.

Context of amendments

5.2          The debt/equity rules in Division 974 of the ITAA 1997 set out what is debt and what is equity for various income tax purposes. These rules can apply from 1 July 2001.

5.3          A transitional rule deems certain related party at call loans entered into on or after 21 February 2001, and on or before 31 December 2002, to be a debt interest. These are typically loans by small business owners to their business, have no fixed term and are repayable on demand.

5.4          The Minister for Revenue and Assistant Treasurer announced that the Government would extend this transitional period to 30 June 2004 (Press Release No. C131/02 of 16 December 2002) and later announced a further extension to 30 June 2005 (Press Release No. C045/04 of 24 May 2004).

Summary of new law

5.5          At call loans made to a company by a connected entity of the company and entered into on or before 30 June 2005 will be treated as debt interests under the debt/equity rules.

Comparison of key features of new law and current law

New law

Current law

At call loans entered into on or before 30 June 2005 will be treated as debt interests.

At call loans entered into on or after 21 February 2001 and on or before 30 December 2002 are treated as debt interests.

Detailed explanation of new law

5.6          A financing arrangement entered into on or before 30 June 2005 will be treated as a debt interest when:

·          it takes the form of a loan to a company by a connected entity;

·          it has no fixed term; and

·          it is repayable on demand.

[Schedule 5, item 3, subsection 974-75(4)]

5.7          This applies even if the arrangement was entered into before 21 February 2001. [Schedule 5, item 2, paragraph 974-75(4)(d)]

5.8          ‘Connected entity’ is a defined term in the income tax law: broadly, it is an associate or member of the same corporate group.

5.9          The purpose of these amendments is to give taxpayers extra time to assess existing loans and adjust their arrangements, if need be, in light of the Government’s decision to carve out certain small business at call loans from the debt/equity rules (the Minister for Revenue and Assistant Treasurer’s Press Release No. C045/04 of 24 May 2004).

Consequential amendments

5.10        To assist readers, this bill will amend the heading of the relevant provisions to reflect the changes to the law. [Schedule 5, item 1, paragraph 974-75(4)(d)]

 



I ndex         

Schedule 1: Consolidation

Bill reference

Paragraph number

Item 2, subsection 703-30(3)

1.11

Item 2, paragraph 703-30(3)(b)

1.21

Items 3 and 4

1.38

Item 5, section 705-56

1.29

Item 5, subsection 705-56(1)

1.32, 1.33

Item 5, subsections 705-56 (2) to (4)

1.31

Item 5, subsections 705-56(2) and (5)

1.34

Item 5, subsections 705-56(3) and (5)

1.36

Item 5, paragraphs 705-56(3)(a) and (b)

1.37, 1.39

Item 5, subsections 705-56(3) and (4)

1.40

Item 6, section 711-30

1.37

Item 6, subsection 711-30(3)

1.41

Item 7, section 711-45

1.42

Item 8, section 716-300

1.47

Item 8, paragraph 716-300(2)(c)

1.48

Item 9, subsection 705-300(1)

1.58

Item 9, subsection 705-300(2)

1.59

Item 9, subsection 705-305(1)

1.60

Item 9, subsection 705-305(2)

1.70

Item 9, subsections 705-305(3) and (4)

1.66

Item 9, subsection 705-305(5)

1.62

Item 9, subsection 705-305(6)

1.68

Item 9, subsection 705-305(7)

1.74

Item 9, subsection 705-305(8)

1.77

Item 9, subsection 705-305(9)

1.78

Item 9, section 705-310

1.81

Item 9, subsection 705-310(2)

1.80

Item 9, subsection 705-310(3)

1.79

Item 9, section 712-310

1.84

Item 11, subsections 716-330(1) and (2)

1.91

Item 11, subsection 716-330(3)

1.96

Item 11, subsection 716-330(4)

1.98

Item 11, subsection 716-330(5)

1.100

Item 11, subsection 716-330(6)

1.101

Item 11, subsections 716-330(7) and (8)

1.93

Item 11, subsection 716-330(9)

1.94

Item 11, subsection 716-335(1)

1.102

Item 11, subsection 716-335(2)

1.103

Item 11, subsection 716-335(3)

1.109

Item 11, subsection 716-335(4)

1.106

Item 11, subsection 716-335(5)

1.104

Item 11, subsection 716-340(1)

1.113

Item 11, subsection 716-340(2)

1.118

Item 11, subsection 716-340(3)

1.123

Item 11, subsections 716-340(4) and (5)

1.122

Item 11, subsections 716-340(6) to (8)

1.119

Item 11, subsection 716-345(1)

1.124

Item 11, subsection 716-345(2)

1.126

Item 11, subsection 716-345(3)

1.125

Item 13, section 716-340 of the Income Tax (Transitional Provisions) Act 1997

1.144

Item 14, subsection 165-115ZC(1)

1.135

Items 15 to 19, subsections 165-115ZC(4), (5), (7A) and (7B)

1.139

Item 19, subsection 165-115ZC(7C)

1.140

Item 20

1.143

Item 21, subsection 165-115ZC(4) of the Income Tax (Transitional Provisions) Act 1997

1.132

Item 21, subsection 165-115ZC(5) of the Income Tax (Transitional Provisions) Act 1997

1.133

Item 21, subsection 165-115ZC(6) of the Income Tax (Transitional Provisions) Act 1997

1.134

Schedule 2: Copyright collecting societies

Bill reference

Paragraph number

Item 3, subsection 15-20(2)

2.16

Item 4, section 15-22

2.15

Item 4, subsection 15-22(1)

2.15

Item 5, paragraph 51-43(2)(a)

2.8

Item 5, paragraph 51-43(2)(b)

2.12

Item 6, section 410-5

2.18

Item 7 and the definition of ‘copyright collecting society’ in subsection 995-1(1)

2.21

Item 8 and the definition of ‘copyright income’ in subsection 995-1(1)

2.9

Item 9 and the definition of ‘member’ in subsection 995-1(1)

2.17

Item 10 and the definition of ‘non-copyright income’ in subsection 995-1(1)

2.11

Item 11, section 410-1

2.23

Item 12, section 288-75

2.19

Item 13

2.24

Schedule 3: Simplified Imputation System

Bill reference

Paragraph number

Part 1, item 4, sections 207-119, 207-120, 207-122, 207-124, 207-126, 207-128, 207-130, 207-132, 207-134 and 207-136

3.24

Part 1, item 5, sections 976-155 and 976-160

3.25

Part 1, items 6 to 13, subsection 995-1(1)

3.26

Part 2, items 1 to 25, 27 to 42 and 44 to 58

Table 3.1

Part 2, item 26, paragraph 46FB(4)(c)

3.14

Part 2, item 43, paragraph 128B(3)(ga)

3.16

Part 2, items 59 to 70

Table 3.1

Part 2, items 71 to 74

Table 3.1

Part 2, items 75 to 79

Table 3.1

Part 2, items 80 and 110, section 67-30

3.19

Part 2, item 81

Table 3.1

Part 2, items 82 to 85

Table 3.1

Part 2, items 87 to 92; items 2 and 3 in the table in section 208-115; items 2, 3, 5 and 6 in the table in section 208-130

3.18

Part 2, items 93 to 97, sections 208-165 and 208-170

3.17

Part 2, item 98, paragraph 210-170(1)(e)

3.20

Part 2, items 99 to 102

Table 3.1

Part 2, item 103

Table 3.1

Part 2, item 104

Table 3.1

Part 2, item 105

Table 3.1

Part 2, items 106 and 107

Table 3.1

Part 2, item 108

Table 3.1

Part 3, subitems 111(1) and (3)

3.28

Part 3, subitem 111(2)

3.29

Part 3, subitems 111(4) and (5)

3.30

Part 3, item 112

3.31

Part 3, item 113

3.32

Part 3, item 114

3.33

Schedule 4: Specific gift recipients

Bill reference

Paragraph number

Items 1 to 9

4.12

Item 10

4.15, 4.16

Item 11

4.20

Item 12

4.21

Item 13

4.17, 4.18

Items 14 and 17

4.19

Item 15

4.22

Item 16

4.23

Item 18

4.17

Item 19

4.15

Item 20

4.18

Item 21

4.16

Schedule 5: Debt and equity interests

Bill reference

Paragraph number

Item 1, paragraph 974-75(4)(d)

5.10

Item 2, paragraph 974-75(4)(d)

5.7

Item 3, subsection 974-75(4)

5.6