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  1. Measures Announced in the 1996-97 Budget 4-8


  1. 1995-96 Outcomes 4-29
  2. 1996-97 Estimates 4-31


  1. Revenue Estimates and the Economic Cycle 4-45


   THE 1995-96 BUDGET  4-49


  1. Overview 4-63
  2. Aggregate Tax Expenditures 4-64
  3. Tax Expenditures by Functional Categories 4-64


APPENDIX D: REVENUE STATISTICS — 1985-86 TO 1996-97  4-75








Table 1 provides revenue estimates and outcomes for 1995-96 and estimates for 1996-97 , by broad classification.

Table 1: Revenue by Broad Classification


(a) Includes impact of classification changes.


Revenue collections in 1995-96 were $2740 million, or 2.2 per cent, lower than last year’s budget estimate. The shortfall in the revenue estimate is accounted for by lower than expected collections of sales tax, PAYE and other individuals income tax, superannuation funds tax and customs duty, partly offset by higher than expected collections of company tax, withholding tax and fringe benefits tax.

Revenue in 1996-97 is estimated to increase by 4.0 per cent in real terms and to represent 25.3 per cent of GDP, marginally higher than in 1995-96 but 2.6 percentage points below the peak recorded in 1986-87. The growth in expected collections in 1996-97 reflects:

·  reasonably strong forecast growth in employment, wage and salary incomes, company income and private consumption;

·  the impact of the increase in the company tax rate announced in the 1995-96 Budget; and

·  the impact of measures announced since the election, including in this Budget.

The measur es with largest impact on 1996-97 revenues are:

·  the guns levy, withholding tax avoidance measures and changes to the tariff concession system, which add to revenue; partly offset by

·  the family tax initiative and lowering of the provisional tax uplift factor, which decrease revenue.

Table 2 illustrates changes in revenue estimates since the 1995-96 Budget.

Table 2: Reconciliation of Budget and Forward Estimates of Revenue in Aggregate


(a) Estimates adjusted for reclassification (-$48 million in 1995-96, -$49 million in 1996-97, and -$4 million in 1997-98 and 1998-99).


Part II summarises revenue measures announced in the 1996-97 Budget, and Appen dix A summarises other measures announced since the 1995-96 Budget. Part III details revenue outcomes for 1995-96 and estimates for 1996-97.

Forward estimates of revenue for the period from 1997-98 to 1999-2000 are presented in Part IV. Medium-term trends are discussed in Part V.

Appendix B discusses tax expenditures, Appendix C contains background information on the history and operation of the research and development tax concession and Appendix D tabulates revenue information from 1985-86 to 1996-97.


Part II: measures

Table 3 sets out the estimated revenue impact from 1995-96 to 1999-2000 of measures announced in the 1996-97 Budget and measures announced since the 1995-96 Budget.

Table 3: Revenue Measures



Table 3: Revenue Measures — continued


Table 3: Revenue Measures — continued


* The nature of the measure is such that a reliable estimate cannot be provided.

(a) This refers only to the tax component of the Family Tax Initiative. It does not include outlays assistance through the Family Tax Payment.

(b) This refers only to the tax component of the private health insurance incentives. It does not include outlays assistance.

(c) Revenue estimate excludes certain technical amendments for which it is not possible to provide a reliable estimate.

(d) Additional running cost resources of $9.7 million in 1996-97 and $9.5 million in 1997-98 have been provided to the Australian Taxation Office for the development of administrative and legislative responses, on a progressive and ongoing basis, to address aggressive tax planning and minimisation arrangements used by some high wealth individuals. The annual revenue at risk from these arrangements has been estimated by the Australian Taxation Office and the Treasury at $800 million, but until specific measures have been developed, reliable revenue estimates cannot be provided for 1998-99 and 1999-2000.

(e) This measure was originally announced in the 1995-96 Budget and the revenue figures have already been included in the forward estimates.

(f) This is an aggregate of six measures described under this heading in Budget Statement 4, Part II: Measures . The revenue estimates relate to the prior year capital losses measure only. Estimates for the other components of this aggregate cannot be reliably estimated.

(g) This measure was announced by the former Government but not proceeded with by the Government.

(h) This amount reflects the net effect of refunds and collections after 30 June 1996, with respect to the levy increase for the 1996-97 income year.

(i) The additional revenue from excluding bonuses received from friendly societies or insurance companies from provisional tax is unquantifiable but is expected to be small.

(j) This measure confirms the former Government’s announcement of 6 December 1995. The budgetary impact of this measure (see Pre-election Measures ) was already incorporated in the forward estimates of revenue at the time of the election.

(k) The impact upon outyears is not provided, as this excise rate is adjusted on an annual basis to fund certain aviation services and aviation safety regulation.

Measures announced in the 1996-97 Budget

Income tax

Family Tax Initiative

The Family Tax Initiative to provide tax assistance (Family Tax Assistance) for families with children, will consist of:

·  a $1000 income tax free threshold increase for one member of a couple or for a sole parent, for each dependent child up to the age of 16 or secondary student up to the age of 18 years, where family taxable income is less than $70000 (with this income limit increased by $3000 for each additional child after the first child); and

·  a $2500 tax free threshold increase for single income families (including sole parents) where at least one child is under the age of 5 years and the breadwinner’s taxable income is less than $65000 (with this income limit increased by $3000 per child after the first child) and, for couples, the income of the other partner is less than the income cut off for basic Parenting Allowance (currently $4535 per annum).

Famil y Tax Assistance will be available to taxpayers, from 1 January 1997, by way of half the above threshold increases in respect of the 1996-97 income year. It will be provided through the PAYE and provisional tax systems or claimable on assessment.

Equivalent fortnightly cash assistance, to be known as Family Tax Payment , will be available as an alternative for low income families. See also Budget Statement 3 .

Incentives for Private Health Insurance

The Government will be providing income-tested incentives to families and individuals with private health insurance .

The incentives will be available to single people with a taxable income of less than $35000 and to couples, and families with a dependent child, with a combined taxable income of less than $70000. The family income threshold increases by $3000 for each additional dependent child.

Those with hospital cover only will receive $100 per annum if they are single, $200 for a couple or $350 for a family. Those with ancillary cover will receive an additional $25 if they are single, $50 for a couple or $100 for a family.

The incentives will be available from 1 July 1997. Recipients will have the choice of claiming the incentives through their health insurance fund in the form of reduced premiums (with the health funds being reimbursed by the Government) or as an income tax rebate claimable after the end of the income year. See also Budget Statement 3 .

Medicare Levy — Surcharge for Higher Income Earners Without Private Health Insurance

A Medicare levy surcharge of one percentage point is to be introduced from 1 July 1997 for single individuals with taxable incomes in excess of $50000 and couples and families with combined taxable incomes in excess of $100000 who do not have private hospital cover through private health insurance. There will be no matching increase in the Fringe Benefits Tax rate.

Medicare Levy — Low Income Thresholds

The Medicare levy low income thresholds ensure that low income families and individuals are exempt from the levy. The Medicare levy low income thresholds for 1996-97 will be increased to $13127 for individuals and $22152 for couples and sole parents. The additional threshold for each child will be $2100.

Medical Expenses Rebate — Increased Threshold

The threshold for eligible net medical expenses above which taxpayers are entitled to a rebate (at a rate of 20 cents in the dollar) under section 159P of the Income Tax Assessment Act 1936 is to be increased from $1000 to $1430 in respect of the 1996-97 income year (a pro-rata increase) and to $1500 in respect of the 1997-98 and subsequent income years.

PAYE Arrangements and Personal Services Income

In last year’s Budget, the former Government announced that the pay-as-you-earn (PAYE) provisions of the income tax law that cover payments for the labour of certain individual contractors would be amended. These amendments were included in Taxation Laws Amendment Bill (No. 5) 1995 , which lapsed with the calling of the election. It also announced its intention to release a discussion paper outlining proposals to counter the use of interposed entities (such as companies) to receive and alienate income generated from the personal services of an individual.

The Government has decided not to proceed with either of these proposals. It has received representations raising concerns that the PAYE amendments could, in some circumstances, result in unintended consequences by bringing payments to independent contractors within the PAYE provisions and similar provisions in related laws. The Commissioner of Taxation has indicated that he will continue to take all appropriate steps to safeguard the intended operation of these areas of the law, including, where necessary, testing the law in the courts.

The Government has asked the Commissioner of Taxation to ensure that he continues to apply the existing provisions of the tax law including the general anti-avoidance provisions so that tax payable on personal services income is not avoided through the use of interposed entities. Longstanding income tax rulings issued by the Commissioner of Taxation deal in some detail with this issue.

Gift Deductibility — Community Medical Scholarship Schemes

The Government will be implementing its election commitment to allow tax deductibility of donations to a limited number of Community Medical Scholarship Schemes. These schemes are designed to assist young persons from rural areas to undertake medical study, with the aim that such persons will return to rural communities to work as doctors.

Beneficiary Rebate

The Government has reviewed the method for setti ng the levels of the beneficiary rebate. F or the 1996-97 income year and subsequent years, the rebate will be calculated to offset the tax liability on the amounts of AUSTUDY and relevant beneficiary allowances actually paid during the year, rather than being based on the tax liability on notional, full-year, full-rate allowances. Allowance recipients with no non-allowance income during the year will continue to have no tax liability under these arrangements.

Employee Share Schemes

The income tax provisions for employee share schemes will be amended, with effect from 1 July 1996 to give effect to the following election commitments:

·  to increase the value of shares or rights that can be tax-exempt under a qualifying employee share scheme, from $500 to $1000 a year, per employee; and

·  to ease employee participation conditions for a qualifying employee share scheme, from three-quarters to two-thirds of permanent employees for shares under the tax deferral concession and for shares and rights under the exemption concession.

The Government will also make certain other technical amendments to the income tax provisions for employ ee share schemes. These changes are outlined in the relevant press release issued with the 1996-97 Budget.

Australian Defence Force Personnel

The Government will not be proceeding with the proposal of the previous Government to increase the level of the Overseas Defence Force rebate under section 79B of the Income Tax Assessment Act 1936 . The Government considers that the existing level of rebate is adequate, that is, equivalent to the Zone A rebate. The former Government’s proposal is described in Appendix A: Measures announced since the 1995-96 Budget, Pre-election Measures .

Tax Rebate for Low Income Aged Persons

A tax rebate (equivalent to the level of the existing pensioner tax rebate) is to be provided to all persons who are at or above age pension age, considered to be residents for age pension purposes, and with incomes below the pensioner rebate cut-out threshold. As a transitional measure, the rebate for 1996-97 will be at a level equivalent to half the pensioner rebate for 1996-97. Those low income aged persons who qualify for the rebate will receive their full rebate entitlement with respect to the 1997-98 income year. Eligibility for the rebate will be determined on the basis of family income as is the case for a pensioner couple. The rebate will be transferable between partners, provided both partners meet the pension income, age and residency criteria.

Exemption of Income Derived by Bona Fide Prospectors

The Government has decided to repeal paragraph 23(pa) of the Income Tax Assessment Act 1936 . The tax exemption provided by this provision will no longer be available in respect of income derived under contracts entered into after 7.30 pm EST 20 August 1996.

Paragraph 23(pa) exempts income derived by bona fide prospectors from the sale, transfer or assignment of rights to mine for gold or for any other prescribed metal or mineral. The exemption is not available to all prospectors and does not cover all metals and minerals.

Luxury Car Leasing

The Government will introduce amendments to the Income Tax Assessment Act 1936 so that lease arrangements involving luxury cars are treated as if they were loan transactions. This measure will apply to all luxury car leases entered into after 7.30 pm EST 20 August 1996 other than genuine short-term hire arrangements.

These changes mean that for taxation purposes the lessee, and not the lessor, of a luxury car will be treated as the owner of the car. As a result, the effect of the depreciation limit on the after-tax cost of a leased luxury car to its end user will be comparable to the effect of the limit on the after-tax cost of buying, or otherwise financing, the car.

The proposed amendments to the income tax law have become necessary because of the widespread use of luxury car leasing arrangements involving offshore lessors, tax-exempt lessors, or tax-preferred lessors — such as superannuation funds — to circumvent the intended effect of the luxury car depreciation limit, which has been a part of the law since 1979-80.

High Wealth Individuals

The Government has decided to provide the Australian Taxation Office (ATO) with additional funds in 1996-97 and 1997-98 to enable a special taskforce investigation into the tax minimisation practices of some high wealth individuals i n order to improve high wealth individuals’ compliance with the tax laws and to develop administrative responses and recommendations for legislative change on a progressive and ongoing basis.

The revenue at risk from aggressive tax planning and minimisation arrangements used by some high wealth individuals has been estimated at $800 million a year. Treasury and the ATO caution that this estimate is subject to uncertainties about wealth data, remedial measures, utilisation of losses and behavioural responses by affected taxpayers. This figure should be seen as an order of magnitude estimate of the ‘revenue potentially at risk’ rather than as the ‘sum of gains from particular measures’. Taskforce investigation will first identify the nature of the problem and mechanisms used, then design counter measures expected to generate revenue beyond 1997-98. However, early improvements in compliance, both voluntary and through enforcement of existing law, are expected as a result of the investigations, which will generate revenue in 1997-98 in the order of $100 million.

Trust and Company Losses
Trust Losses

The previous Government announced in the 1995-96 Budget that measures would be introduced to restrict the recoupment of current year and carry forward losses of trusts with effect from the Budget time, 7.30 pm EST on 9 May 1995. The measures were subsequently drafted and introduced into the Parliament in September 1995 as part of the Taxation Laws Amendment Bill (No. 4) 1995 but were not passed.

The Government is committed to introducing amendments to the income tax law to prevent transfers of the benefit of trust losses. However, a significant number of changes will be made to the previous Government’s provisions having regard to representations received by the Government, Treasury and the Australian Taxation Office. These changes are outlined in the relevant press release issued with the 1996-97 Budget.

The re-drafted measures will be released shortly as an exposure draft for public comment prior to their introduction into the Parliament. The legis lation will continue to take effect from 7.30 pm EST on 9 May 1995.

Company Loss Provisions

The company loss provisions of the income tax law will be amended to apply special rules for companies whose shares are owned by the trustee of a discretionary trust . The amendments will allow companies to operate under some of the special rules contained in the proposed trust loss measures so that:

(i) where the relevant interests in a company are held by a family trust, the trustee of the family trust will be taken to beneficially own the interests as an individual; and

(ii) where 50 per cent or more of the relevant interests in a company are held by a discretionary trust that is not a family trust, losses can be deducted by the company provided certain conditions are met.

These changes will apply to losses, and bad debts, incurred in the 1996-97 or later years of income. Details of the proposals are contained in the rel evant press release issued with the 1996-97 Budget.

Infrastructure Borrowings — Prevention of Schemes to Increase the Value of Tax Benefits

The Government has endorsed changes announced by the previous Government, by press release on 30 October 1995, to the legislation relating to the Infrastructure Borrowings concession. The proposed changes are designed to prevent certain schemes from undermining the integrity of the programme. If allowed to proceed, such schemes would substantially increase the value of tax benefits to those involved and the cost to revenue, without a commensurate increase in the funding for private sector infrastructure projects. The measures will be effective from 30 October 1995, as announced by the former Government.

Deductions Allowable to a Co-operative Company for the Repayment of Government Loans

The Government has decided to repeal paragraph 120(1)(c) of the Income Tax Assessment Act 1936 with application to government loans to marketing co-operatives entered into after 7.30 pm EST 20 August 1996, and to existing loans only where their terms are altered after this time.

Paragraph 120(1)(c) allows eligible co-operatives double deductions for the cost of relevant assets. The net effect is that if the asset and the loan come through government, a marketing co-operative can claim an effective 200 per cent tax deduction for capital expenditure ¾ full write-off of the cost of an asset and deductions for capital repayments.

Repeal of the paragraph is consistent with competitive neutrality principles and the Government’s policy of removing anomalies from the tax system, as there is evidence that the provision is being exploited by some government-owned financial institutions to gain a commercial advantage over private sector lenders.

Reduction in the Premium Rate of Deduction for R&D Expenditure to 125 per cent

The Government has decided to reduce the premium rate for deductions under the research and development (R&D) tax concession from 150 per cent to a maximum of 125 per cent. This measure will apply to expenditure incurred after 7.30 pm EST 20 August 1996 except where the expenditure was required to be incurred by a contract (other than a contract of service) entered into before that time.

The R&D tax concession remains concessionary, especially with respect to capital expenditures, where the concession brings forward deductibility (compared to normal tax treatment of such items) as well as providing a premium. Further details are provided i n Budget Statement 4, Appendix C and in a press release issued with the 1996-97 Budget.

Withholding Tax Avoidance

The general anti-avoidance provisions of the Income Tax Assessment Act 1936 (the Act) — Part IVA — will apply to non-resident interest, dividend and royalty withholding tax in order to effectively counter withholding tax avoidance schemes in a comprehensive way.

Other amendments to the withholding tax provisions will further assist in preventing abuse. The definition of 'interest' will be amended to address arrangements which attempt to convert an interest income stream into a form which it is argued is not 'interest' or 'in the nature of interest'.

Amendments will also ensure that withholding tax is payable where:

·  royalties are derived by a resident in similar circumstances to those in which interest is subjected to withholding tax under subsection 128B(2A) of the Act;

·  tax-exempt bodies are interposed between an Australian resident payer and a non-resident recipient; or

·  dividends consist of bonus shares issued from asset revaluation reserves.

These measures do not signal any change in the Government’s policy on withhold ing taxes, but are intended to give effect to existing policy by addressing tax avoidance. All measures will apply from 7.30 pm EST 20 August 1996.

Measures to Address Tax Avoidance Through Tax-exempt Entities Distributing Funds Offshore

The Government in tends to introduce legislation to counter tax avoidance through the use of tax-exempt bodies distributing funds offshore.

Charitable Trusts — Restriction on Distributions to Overseas Organisations

The Government has decided that it will maintain the current tax exemption for genuine charities, but will introduce legislative amendments foreshadowed by the previous government to counter tax avoidance arrangements (previously highlighted by two parliamentary inquiries). The Income Tax Assessment Act 1936 will be amended so that a charitable trust will only be allowed to distribute its funds, without losing its income tax exemption, to any charity in Australia (whether or not the charity has tax deductibility under section 78, but including overseas aid funds operating under section 78). In addition, the charitable trust will be allowed to use its funds for charitable purposes undertaken directly by the trust in Australia in accordance with its trust deed. Charitable trusts established by will before 7.30 pm EST 20 August 1996 will not be affected by the measure.

Transitional arrangements will be provided to enable charitable trusts with trust deeds which permit other distributions (for example, to overseas organisations) to change their trust deeds before 1 July 1998 and retain their income tax exemption, provided they do not make non-approved distributions in that time.

Consistent with the announcement by the previous Government, the measure will take effect after the commencement of charitable trusts’ 1996-97 year of income. The Government will release an exposure draft of the legislation as a priority, and will undertake consultations before introducing the legislation into the Parliament to ensure that bona fide charitable organisations are not detrimentally affected.

Removal of Tax Exemption for Certain Overseas Organisations Earning Income in Australia

Certain organisations located overseas are exempt from income tax on their Australian sourced income. This exemption can result in the transfer of revenue from Australia to a foreign treasury and can facilitate tax avoidance through the use of tax-exempt entities to distribute funds offshore. Furthermore, some overseas organisations are also exempt from Australian withholding tax under certain conditions.

The affected organisations currently rely upon a number of exemptions under section 23 of the Income Tax Assessment Act 1936 .

To complement the measure to restrict distributions by charitable trusts to overseas organisations, the income tax law will be amended to remove the tax-exempt status for these organisations, irrespective of whether they are subject to tax in their home co untry. The measure will not impact on any entity which is a resident for Australian tax purposes. Furthermore, the section 128B(3) exemption for these overseas organisations from withholding tax (in cases where the non-resident is exempt from income tax in the foreign country) will also be removed.

The measure will apply from 7.30 pm EST 20 August 1996. The Government will release an exposure draft of the legislation as a priority, and will undertake consultations before introducing the legislation into the Parliament to ensure that bona fide charitable organisations are not detrimentally affected. Details of the proposals are outlined in the relevant press release issued with the 1996-97 Budget.

Thin Capitalisation

The general ratio for related party debt to equity will be reduced from 3:1 to 2:1. However, the ratio for financial institutions will remain unchanged at 6:1.

The definition of foreign debt for companies that are not financial institutions will be extended to foreign debt for which a legally enforceable guarantee has been provided by foreign controllers or their non-resident associates, as well as foreign debt secured against the assets of foreign controllers or their non-resident associates.

The definition of foreign equity for fixed trusts will be calculated on the basis of their foreign controllers' interests in the capital or income of the trust. For partnerships, the foreign equity will be based on the interest that the foreign partners have in the partnership capital.

Discretionary trusts will be denied an income tax deduction for interest paid to offshore parties who are in a position to control the trust and their non-resident associates.

The asset revaluation rules for trusts and partnerships will limit any revaluations so that they cannot exceed the market value of the assets and require the revaluations to take place before the commencement of a year of income.

The thin capitalisation anti-avoidance rules will also be strengthened .

These measures will apply from the 1997-98 year of income. Details of the proposals are outlined in the relevant press release issued with the 1996-97 Budget.

Foreign Companies Claiming Australian Residence

Australia generally taxes resident companies on their world-wide income, but its taxing rights over the Australian source income of non-residents are limited by double taxation agreements (DTAs). It is possible for companies to be concurrently resident under Australian law (which qualifies them for various tax concessions and exemption from various anti-avoidance measures) and non-resident under a DTA (which limits Australia’s taxing rights over Australian source income and generally denies a taxing right over foreign source income). Such companies thereby qualify for certain domestic taxation benefits, without being fully subject to Australian tax.

To address this anomaly, such companies, if they are non-residents solely for the purposes of a DTA, will be deemed to be non-residents for the purposes of the group loss transfer, capital gains rollover and intercorporate dividend rebate provisions and certain anti-avoidance provisions of the Income Tax Assessment Act 1936 . Those measures are Division 16F on thin capitalisation; Division 16G on debt creation; section 159GT(6), which denies deductions for accrued liabilities on securities held by offshore associates; and section 221YRA, which denies deductions for interest and royalties paid to non-residents until withholding tax has been paid.

It is also possible for a company to be a resident of Australia solely under the ‘central management and control’ test in Australian law and, at the same time, resident of another jurisdiction. These companies will be deemed to be non-residents for the purposes of the group loss transfer, capital gains rollover and intercorporate dividend rebate provisions and the anti-avoidance measures listed above. This amendment will apply only to cases where residence has to be determined solely under the central management and control test. Thus, a company will maintain its Australian resident status for the purposes of the provisions outlined above if it is also a resident of Australia under the incorporation or voting power tests.

These measures will also apply to other non-individual entities that are treated as companies such as public unit trusts and corporate limited partnerships. The measures will have effect on and from 1 July 1997.

Superannuation Contributions

Superannuation Contributions Surcharge for Higher Income Earners

A surcharge on deductible superannuation contributions (made by employers and self employed individuals) will apply effective from 7.30 pm EST 20 August 1996, at the rate of 15 per cent for individuals whose total income, defined to include their taxable income and total tax deducted superannuation contributions, is at or above $85000 per annum. This surcharge will be phased in over the income range $70000 to $85000, with the rate effectively increasing by one percentage point for each $1000 of total income above $70000.

The surcharge will not affect already accrued superannuation benefits, including all past contributions and earnings, or any benefits that might be paid from an unfunded scheme in relation to service before 7.30 pm EST 20 August 1996.

The surcharge will apply to tax deductible contributions made to any superannuation fund, including defined benefit funds, unfunded superannuation schemes and, prospectively, Retirement Savings Accounts, by or on behalf of high income earners.

An Actuarial Advisory Committee will be established to advise the Government on the technical details of the application of this measure to defined benefit funds and unfunded and Constitutionally protected schemes, including any transitional arrangements.

Further details of this measure are contained in the superannuation press release issued with the 1996-97 Budget.

Opting Out of the Superannuation Guarantee System

From 1997-98, the Go vernment will allow employees earning between $450 and $900 per month from an employer, the opportunity to negotiate the payment of additional wages or salary in lieu of Superannuation Guarantee (SG) contributions.

Superannuation Low Income Spouse Rebate

From 1997-98, there is to be a rebate of 18 per cent for superannuation contributions of up to $3000 per annum made by income earning individuals to the superannuation fund or retirement savings account of a non-income earning or working spouse with an income below $10800 a year. The contributions rules for superannuation will also be amended to allow such contributions.

Superannuation Contributions by Persons Aged 65 and Over

Effective 1 July 1997, individuals are to be allowed to continue contributing to a regulated superannuation fund up to age 70, provided they maintain a bona fide link with the paid workforce (that is, they are gainfully employed for at least 10 hours per week over the year). The exemption age for the Superannuation Guarantee arrangements will also be increased from 65 to 70.

Abolition of the Superannuation Standard Contribution Limit

The standard contribution limit allows an employer, who has ten or mo re employees, to elect to deduct superannuation contributions from assessable income using a standard limit per employee (currently $27170). This limit is to be abolished from 7.30 pm EST 20 August 1996. From that time a deduction will not be allowed for that part of employer contributions that will take the total employer contributions applicable to an employee over the age based limits for the 1996-97 or subsequent income years.

Capital Gains Tax

Rollover Relief for Small Business

The Government will be implementing its election commitment to provide capital gains tax (CGT) rollover relief to small business owners.

Rollover relief will be available where assets of a small business are sold and the proceeds are re-invested in assets in the same or another like business within 12 months of the sale date. The test for determining what constitutes a like kind business will be ‘Would a reasonable person be satisfied that the newly acquired asset is to be used in a business which is substantially of the same kind as the taxpayer’s current business?’ A ‘like kind’ test will not generally apply asset by asset.

Rollover relief will be confined to the disposal and acquisition of active assets. An ‘active asset’ is one which is used directly by a taxpayer to generate income from a trading business. To qualify for rollover relief a taxpayer’s total net business asse ts, including both passive and active assets, must not exceed $5 million. Taxpayers benefiting from rollover relief will be required to deduct the deferred capital gain from the cost base of newly acquired assets. Taxpayers may benefit from either the existing goodwill exemption or rollover relief, but not both.

The measure will apply to capital gains made on the disposal of assets on or after 1 July 1997. Legislation will be prepared in consultation with the representatives of professional bodies on the CGT Sub-committee of the Commissioner of Taxation’s Tax Liaison Group. Further design details of the policy are outlined in the relevant press release issued with the 1996-97 Budget.

Capital Gains Tax Exemption on the Sale of a Small Business for Retirement

Individuals will be able to claim an exemption from capital gains tax (CGT) on the sale of a small business, where the proceeds are used for retirement. This measure will operate in a manner consistent with the Government’s commitment to provide CGT rollover relief for small business and will apply to the disposal of assets on or after 1 July 1997.

To be eligible for the exemption, a taxpayer’s total net business assets, including both passive and active assets, must not exceed $5 million. The exemption will be restricted to businesses not wholly engaged in passive investment and will only apply where a direct interest in business assets is sold. That is, the exemption will not apply where an indirect interest in business assets, for example a share portfolio, is sold. Taxpayers who claim the CGT exemption on the disposal of an asset will not be allowed also to claim CGT small business rollover relief.

Individuals will be allowed to claim the CGT exemption on up to a maximum capital gain of $500000. The relief can be claimed by a person aged 55 or older, or by younger people if the proceeds are rolled over to a superannuation fund or an Approved Deposit Fund to be preserved until the superannuation preservation age (currently age 55). Amounts exempt from CGT will not attract a further deduction, nor will they be subject to superannuation contributions tax, when rolled over to a fund. Such amounts will not be subject to Eligible Termination Payment tax when taken directly for retirement on or after age 55. Amounts exempt from CGT will be subject to the Reasonable Benefit Limits.

Extending the Principal Residence Exemption

The Government has decided to amend the operation of the capital gains tax (CGT) principal residence exemption — section 160ZZQ of the Income Tax Assessment Act 1936 . The amendments deliver the Government’s election commitment to extend the qualifying period for CGT exemption on disposal of an inherited house and help to reduce the compliance cost burden of CGT on taxpayers.

The amendments will:

·  extend the qualifying period from 12 months to 24 months for a CGT exemption on disposal after 7.30 pm EST 20 August 1996 of an inherited dwelling as long as at least part of the dwelling was a principal residence of the deceased;

·  extend the same qualifying period to the disposal of a dwelling after 7.30 pm EST 20 August 1996 by a trustee of a deceased estate under the same circumstances;

·  require the use of market value where a principal residence is first used for income producing purposes after 7.30 pm EST 20 August 1996 as the cost base of the dwelling in calculating any taxable gain or loss;

·  deem a beneficiary or trustee who acquires a dwelling as a result of death, after 7.30 pm EST 20 August 1996, to have acquired the dwelling at its market value on the date of death if the dwelling was, or was deemed to be, wholly the principal residence of the deceased at that date;

·  provide a beneficiary who disposes of a dwelling after 7.30 pm EST 20 August 1996 with a partial CGT exemption where the deceased never used the house as a principal residence but it became the principal residence of the beneficiary; and

·  require that exemption to be pro-rated, on the basis of the time and extent the dwelling was used as a principal residence of the beneficiary, over the time the dwelling was owned by the deceased and the beneficiary.

Equity Investments in Small and Medium Enterprises

The Government has endorsed changes announced by the former Government to amend the Income Tax Assessment Act 1936 so that equity investments in small or medium enterprises (SMEs) made by lending institutions from 1 July 1996 may be taxed under the capital gains provisions.

This concessional capital gains tax treatment will apply to a lending institution's equity investment where:

·  the SME has total assets of $50 million or less;

·  the investment consists of newly issued ordinary shares which do not constitute trading stock of the lending institution; and

·  the lending institution holds at least 10 per cent of the SME's paid up capital once the investment is made.

Modified Application of Section 160ZZS

The Government has decided to amend section 160ZZS of the Income Tax Assessment Act 1936 to require public entities (ie, public companies, publicly traded unit trusts and mutual insurance organisations) to test whether there has in fact been a change in a majority of underlying interests in assets of the entity since 20 September 1985 as at 20 September 1996 and every five years thereafter (or earlier if there is unusual trading in their shares or units). The amendments will defer the date at which assets lose their pre-CGT status from the date when the majority underlying ownership changed to when the test of underlying ownership is required to be conducted.

The measure will produce a small increase in short-term bring forward of tax revenue as public entities will know the status of their post-CGT assets earlier. The measure is consistent with the Government’s objective of reducing compliance costs and increasing the efficiency of the capital gains tax system.

Capital Gains Tax and Company Revenue Provisions — Anomalies

The Government has decided to remove some anomalies in the capital gains tax (CGT) provisions dealing with the recoupment, carry forward and transfer of capital losses by companies. Amendments will also be made to remove some anomalies in the interaction of the CGT provisions with other provisions of the income tax law.

Prior Year Capital Losses

The income tax law will be amended to ensure that the mechanism by which capital losses are carried forward to subsequent years does not allow those losses to be reincurred (or refreshed) in each subsequent year. Capital losses will attach to the year of income in which they are incurred and they must be recouped in the order in which they are incurred. This amendment will apply from the commencement of the 1996-97 year of income. Losses for years of income up to the 1995-96 year of income will attach to the 1995-96 year of income.

Current Year Capital Losses

The income tax law will be amended to ensure that companies can utilise capital losses to offset capital gains realised in the same year in similar circumstances as revenue losses can be offset against revenue of the same year. The same business test will be modified accordingly. Capital losses will still only be able to be offset against capital gains. This amendment will apply from the commencement of the 1996-97 year of income.

Group Loss Transfers

The income tax law will be ame nded to ensure that a capital loss will not be available for transfer within a company group if the loss could not have been recouped by the loss company in the year of the transfer, because of a failure of the loss company to satisfy the recoupment tests (for example, the ownership test and the same business test).

In addition, the gain company must satisfy the same recoupment tests applying to the loss company.

Where a capital loss is transferred to a gain company and it is later found that the gain company cannot use the loss, the loss will revert to the loss company. Other aspects of the group loss transfer provisions remain unchanged. These measures will affec t transfer agreements only where the year of transfer is the 1996-97 year of income (or a subsequent year).

Subvention Payments

The law will be amended to ensure that subvention payments made in connection with the transfer of a capital or revenue loss will not result in a capital gain to the payee or a capital loss to the payer. Broadly, a subvention payment is one which is made by a group company to obtain another group company’s tax loss. This amendment will apply from the commencement of the 1996-97 year of income.

Meaning of Certain Terms

The income tax law will be amended to ensure that terms used in recoupment/deductibility tests in the revenue loss provisions, capital loss provisions and the bad debt write-off provisions clearly include CGT concepts. For example, the amendment will make it clear that references to 'income' will include references to 'capital gains', 'net capital gains' and 'assessable income'. These amendments will apply from the commencement of the 1996-97 year of income.

Same Business Test — Manipulation of a Business

The same business test in the capital loss provisions will be amended to include safeguards to prevent manipulation of the scope of a business (for example, restructuring the business prior to a change in ownership) in order to benefit from the same business test relief. The safeguards will be similar to those currently contained in the revenue loss provisions.

This measure will apply to manipulations affecting the scope of a company's business activities that occur after 7.30 pm EST 20 August 1996.

Liquidation of a Group Company

The Government has decided to remove the possibility of the duplication of gains or losses in group company reorganisations involving in specie distributions. This measure is needed to remove an anomaly that only arises in the liquidation of a group company where an asset(s) is transferred in specie rather than being sold and the proceeds transferred as an intercorporate dividend.

The CGT provisions of the Income Tax Assessment Act 1936 will be amended so that where:

·  a CGT rollover applies on the transfer of an asset between group companies; and

·  as a result of the transfer a capital gain is realised on the disposal of the shares in the company being liquidated;

the CGT provisions will apply so that any capital gain (or loss) arising as a consequence of the cance llation of the shares will be reduced to the extent that a capital gain (or loss) would have arisen on the asset transfer had a rollover not been made.

It is intended that this change will apply to company dissolutions occurring after 7.30 pm EST 20 August 1996.

Fringe Benefits Tax

Remote Area Housing

The Government will be implementing its election commitment to exempt remote area housing for employees in the primary production sector (as defined in the Income Tax Assessment Act 1936) from Fringe Benefits Tax (FBT) from 1 April 1997.

The exemption will have the same geographical coverage as the existing 50 per cent FBT housing concession for remote area employers. Other conditions that apply to the existing remote area housing concession will also apply: including that it is necessary for an employer to provide housing to an employee.

Wholesale Sales Tax

Personal Computers and Related Goods

The Government will move to en d wholesale sales tax fraud involving personal computers and related goods. Fraud in this area has reduced tax revenue and placed tax evaders at a competitive advantage compared to honest businesses.

The Australian Taxation Office will consult with the computer industry and others to determine ways of altering the existing sales tax system to overcome the fraudulent activity. While the Government recognises that measures taken to deal with the fraud may impact on business arrangements, the consultation process will seek to ensure that any impact is minimised and that the most practical way of dealing with the problem is developed and implemented with industry assistance and support.

The Government has received numerous representations from genuine operators in the industry who have suffered considerable commercial disadvantage as a result of the fraudulent activities. The Government is committed to implementing appropriate measures to ensure this situation is remedied.

One option could be to postpone the ability of persons or bodies to obtain the goods free of tax until after the goods are on-sold or purchased by the final user. If this was adopted, it could be given effect to by suspending existing quoting arrangements so that computer manufacturers and wholesalers would account for tax on their sales and would be entitled to a credit for tax paid in relation to the goods sold. Always exempt organisations such as public benevolent institutions, non profit schools, government bodies etc who are entitled to sales tax exemption on computer equipment purchases would be able to obtain a refund of tax paid within 28 days.

These changes will not affect the exemption status of always exempt organisations. However, the changes would operate to tighten up the refunding process while the fraudulent activity is being dealt with.

Customs and Excise Duty

Taxation of Alcoholic Beverages

The Government will not be proceeding with the introduction of excise on certain ‘ready to drink’ alcoholic beverages from 1 January 1997, as announced by the previous Government.

This is in keeping with the Government’s election commitment to maintain the current taxation arrangements for wine, non-grape fruit wines and wine cocktails (such as cider, mead, vermouth and marsala).

Other Measures

Aircraft Noise Levy

The Government has decided to extend the period for which the Aircraft Noise Levy will apply from 10 years to 12 years to recover the additional compensation costs associated with the reopening of the East-West runway at Sydney Airport.

Airservices Australia Dividend Increase

The Government has decided to contract out the functions performed by the Airservices Australia (AA) flying unit, which is responsible for calibrating radio navigation aids. The efficiencies generated by this measure will enable AA to pay the Government increased dividends from 1996-97.

Cost Recovery of Import Related Services Delivered by the Australian Customs Service

Legislation will be introduced for the cost-recovery of elements of Customs’ commercial activities directly or indirectly required to process import transactions, including import entries and cargo reporting. Costs to be recovered do not include export transaction costs, investigation costs or the costs of ‘public benefit’ functions, such as cargo examination for drug enforcement purposes. A charging regime will be established to spread fairly the burden of cost recovery. The Minister for Industry, Science and Tourism will introduce legislation by November 1996 with the intention of having the charges commence on 1 January 1997.

Dividend Payments from the Australian Industry Development Corporation (AIDC)

The Government has decided it will continue to receive dividends from AIDC prior to its sale.

Dividend Payments from the Export Finance and Insurance Corporation (EFIC)

In recent years, EFIC’s yearly surplus has been retained and transferred to reserves to increase its capital base. This measure involves payment to the Government of all of EFIC’s anticipated yearly surplus for the 1995-96 financial year. In subsequent years it involves dividend payments of 50 per cent of the anticipated surplus.

Increase in Cost Recovery for Insolvency and Trustee Service, Australia (ITSA)

As foreshadowed in Meeting Our Commitments , fees have been increased for the bankruptcy and insolvency services that ITSA provides to reflect more closely the cost of providing those services. The fee increases will involve: an increase in the initial flagfall fee for estates administered by the Official Trustee from $2000 to $4000; a charge of 8 per cent on realisations of all bankrupt estates to replace existing fees on realisations; and the payment of interest earned on realisations by private Registered Trustees to the Commonwealth. It is expected that the new fees will not take effect before 1 October 1996.

Fees in Commonwealth Courts and Tribunals

Fees in Commonwealth Courts and Tribunals have been reviewed and the fee structures changed to bring them back into line with the level of cost recovery in the States.

Passport Application Fees

Passport application fees will increase in real terms from 1996-97 to cover processing costs associated with an expected significant increase in application numbers as 10 year passports begin to be renewed.

Increased Migration, Residence and Student Application Cost Recovery

Migration application fees will be increased from $560 to $600 on 1 October 1996 and then to $900 on 1 January 1997, except for certain sub-classes where the fees will remain at $600. Onshore residence application fees will be increased from the current levels of $415 and $875, to $600 and $1200 on 1 October 1996, with a further increase from $600 to $1200 for some visa sub-classes on 1 January 1997. Student visa application fees will be increased from $145 to $250 on 1 October 1996.

Increased Citizenship Application Cost Recovery

Citizenship application fees will be increased from $55 to $80 on 1 October 1996 to improve cost recovery for the processing of citizenship applications.

Changes to the Migration Programme

A reduction in the size, and changes to the composition, of the Migration Programme, together with more rigorous screening of spouse/fiance applications and the extension of assurances of support and the Migrant Health Services Charge to more elements of the Preferential Family category, are expected to result in a net gain to revenue. Much of the increase comes from the extension of the Migrant Health Services Charge, together with an increase in certain migration fees to meet the increased costs associated with more rigorous screening and with the extension of assurances of support.

Increased Cost Recovery in the Adult Migrant English Program (AMEP)

AMEP fees will be increased to full cost recovery for migrants in categories which were previously charged concessional rates. The only categories which will remain fully exempt are the preferential migration entrants category and the humanitarian migration entrants category. AMEP fees will increase for all other migrant categories.

Dividend Payments from the Defence Housing Authority (DHA)

The DHA will pay an annual dividend to the Government commencing in 1996-97. The dividend payments will be based on the previous year’s profits, which will include abnormals, and will be at the Government Business Enterprise benchmark rate of 60 per cent. In 1988, the former Government decided that the DHA be exempt from dividend payments until completion of a 10 year $750 million housing improvement program which ended on 30 June 1996.

Environmental Assessment of Sydney’s Second Airport

Consistent with its election commitment, the Government has decided to take direct responsibility from the Federal Airports Corporation for the environmental assessment and management of Badgery’s Creek, a potential site for Sydney’s second airport. As a consequence of this decision, rental income from properties on the Badgery’s Creek site will accrue to the Budget from 1996-97.

Australian Quarantine and Inspection Service (AQIS) — Increase in Cost Recovery

The Government has reviewed AQIS’ Community Service Obligations and decided that a number of these activities benefit specific industry and other users and their costs will be fully recovered from these users, starting from later this year.

Recover Australia’s Contribution to the International Telecommunications Union (ITU)

The ITU is the major global body concerned with international cooperation in the use of telecommunications and the radiofrequency spectrum. As a member country, Australia’s contribution to the ITU of about $5.8 million per annum is currently partly met by the Government. This measure will involve the transfer to industry of the full cost of the contribution. The extra amount involved of $1.9 million per year comprises $0.9 million in additional telecommunications licence fees, and $1 million in additional radiocommunication fees.

Numbering Plan

Under current arrangements telephone numbers are issued by AUSTEL at no charge to the telecommunications carriers. This measure will involve imposing charges on the carriers for the allocation of numbers including ‘1800’ and ‘13’ numbers. The application of charges recognises that the numbers are a scarce resource and therefore should attract a fee for use.

Provider Registration Fee

The maintenance of the Commonwealth Register of Institutions and Courses and the associated strategies and systems has until now been undertaken by the Commonwealth Government at no cost to the listed providers. The Government has decided to introduce a Provider Registration Fee as a cost recovery measure. The fee will be applied on a sliding scale from 1 January 1997.

Student Visa Application Fee

Student visa application fees will be increased by $30 on 1 January 1997 to recover the costs of the provision of information on Australian education and training opportunities and living conditions.

CSIRO Efficiency Gains and Asset Rationalisation

CSIRO will be expected to make efficiency gains in its operations and to rationalise underutilised property and assets over the forward estimates period. CSIRO has agreed to return some of the proceeds to the Commonwealth.

Increased Industry Contributions for Therapeutic Goods Administration (TGA) Activities

The rate of cost recovery by the TGA is to be increased from 50 per cent of its operating costs to 75 per cent in 1998-99 (58 per cent in 1996-97 and 67 per cent in 1997-98). Increases in fees and charges will be implemented over the next three years via amendments to the Therapeutic Goods Regulations and Therapeutic Goods (Charges) Regulations. The industry is expected to benefit through, inter alia , reduced evaluation times over a three year period.

Wildlife Protection Fees

A range of fees administered under the Wildlife Protection (Regulation of Exports and Imports) Act 1982 will be increased with the aim of doubling the current recovery of costs from the Wildlife Protection Authority. The fee increases will not be uniform and are expected to occur during the financial year 1997-98.

Royal Australian Mint and Coinage Trust Account — Monies in Excess of Requirements

Payments from the Royal Australian Mint are expected to increase by $1.2 million per annum, as a result of reduced staffing costs and other efficiencies following a major restructuring. In 1996-97 and 1997-98 these revenue gains will be offset by costs associated with redundancies.



Table  4 shows the revenue estimates for 1995-96 prepared at the time of the 1995-96 Budget, outcomes for 1995-96 and the revenue estimates for 1996-97 .

Table 4: Revenue Estimates


(a) Includes tax on realised capital gains.

(b) Includes Child Support Trust Account receipts ($362 million in 1995-96 (actual) and $416 million in 1996-97).

(c) Includes revenue and compliance impact of the Reportable Payments System.

(d) Includes refunds of Child Support Trust Account receipts ($8 million in 1995-96 (actual) and $10 million in 1996-97).

(e) Includes impact of classification changes.

1995-96 OUTCOMES

Revenue collections in 1995-96 were $ 2740 million or 2.2 per cent below the 1995-96 Budget estimate, largely because of lower growth in nominal income and consumption aggregates than forecast at the time of the 1995-96 Budget. As shown in Table 5, the largest shortfall was in respect of sales tax. The very strong capital gains tax collections in 1994-95 were not repeated in 1995-96 to the extent anticipated at Budget time (details are shown in Table 6). There were also substantial shortfalls from gross collections of other individuals tax (mainly provisional tax payments), gross PAYE collections, superannuation funds tax, customs duty, Medicare levy collections and petroleum resource rent tax. Refunds of individuals income tax were also higher than forecast. Partly offsetting these shortfalls were stronger than estimated collections of company tax, withholding tax, fringe benefits tax and from the prescribed payments system.

The shortfall in sales tax revenue was primarily because of lower than expected growth in consumption of taxable goods, particularly motor vehicles. The Senate rejection of the sales tax measure for building materials accounted for $215 million of the shor tfall.

The shortfall in gross other individuals collections reflected a number of factors: particularly the lower than expected (at the time of the last budget) outcome for 1994-95 reducing the base for 1995-96 collections; and lower than expected collections of capital gains tax.

The shortfall in gross PAYE collections also reflected several factors. The 1994-95 outcome, which was not available at the time of the 1995-96 Budget, was $272 million lower than estimated resulting in a smaller than anticipated base for 1995-96. Employment growth was also lower, by ¾ percentage points, than estimated at the time of the 1995-96 Budget.

The higher than expected outcome for refunds reflected in part a stronger than anticipated level of deductions and rebates claimed on assessment.

The shortfall in superannuation funds tax collections mainly resulted from an unanticipated fall in the level of capital gains realised by superannuation funds.

The higher than expected collections of fringe benefits tax reflected a higher than expected increase in the level of benefits provided per employer and increased compliance and audit activity.

The higher than expected company tax outcome resulted from higher than expected growth in companies’ taxable incomes, with some of the unexpected growth coming from previously non-taxable companies moving into a taxpaying position.

The reasons for deviations from the 1995-96 Budget estimates for individual revenue items are summarised in Table 5.


Table 5: Major Deviations from Budget


(a) The increase in refunds reduces revenue.




Capital Gains Tax (CGT) is not a separate revenue item but is collected under other individuals income tax, companies and superannuation funds revenue items. Table 6 shows the sharp decline in CGT collections in 1995-96.

Table 6: Capital Gains Tax

image (a) Data for 1995-96 are preliminary.


Total revenue in 1996-97 is expected to increase by 7.0 per cent over the previous year, with the ratio of revenue to GDP increasing to 25.3 per cent. Total taxation revenue is expected to increase by 7.5 per cent in 1996-97, compared with an increase of 10.1 per cent in 1995-96. Total taxation revenue as a share of GDP is expected to rise to 24.3 per cent, compared with 23.9 per cent in 1995-96. In real terms taxation revenue is expected to increase by 4.5 per cent.

The net effect of the revenue measures announced since the election and in this Budget as outlined in Part II of this Statement will be a revenue increase in 1996-97 of $979 million.

The forecasts for the major economic variables affecting revenue in 1996-97 are:

·   average earnings (National Accounts basis excluding superannuation and redundancies) growth of approximately 4½ per cent;

·   growth in wage and salary employment of 1¼ per cent;

·   a rise in 1995-96 company income of 3 per cent;

·   growth in nominal GDP(I) of 6 per cent; and

·   an increase in nominal private consumption of 5½ per cent.

The forecast continued steady growth in revenue in 1996-97 reflects the sustained pace o f economic activity and the net contribution to revenue from measures announced in this Budget and previously. For example, the increase in the company tax rate announced in the 1995-96 Budget has a large impact on company tax collections in 1996-97.

The increase in taxation revenue will partly be offset by the decline in non-tax revenue, down 3.2 per cent in 1996-97. This is mainly the result of lower interest revenue from the declining stock of State debt owed to the Commonwealth and to the loss of the CBA dividend, largely offset by a higher dividend payment from the RBA.

Taxation Revenue

Individuals Income Tax

The 1995-96 outcomes and 1996-97 estimates for the major categories of individuals income tax are shown in Table 7.

Table 7: Individuals Income Tax


(a) Includes tax on realised capital gains.

(b) Includes Child Support Trust Account receipts ($362 million in 1995-96 and $416 million in 1996-97).

(c) Includes Reportable Payments System payments by individuals ($1 million in 1995-96 and $1 million in 1996-97).

(d) Includes refunds of Child Support Trust Account receipts ($8 million in 1995-96 and $10 million in 1996-97).

Pay As You Earn (PAYE) Instalment Deductions

Wage and salary earners pay income tax on a pay as you earn (PAYE) basis through tax instalment deductions made by their employers.

Gross PAYE collections (net of the Medicare levy) are expected to rise by 8.3 per cent in 1996-97 as a result of:

·  forecast growth in average earnings (National Accounts basis excluding superannuation and redundancies) of 4½ per cent;

·  forecast growth in wage and salary employment of 1¼ per cent; offset by

·  some allowance for redundancy payments at the Commonwealth level (redundancy payments are, on average, taxed at a lower rate than ordinary earnings); and

·  the tax reductions of the family tax initiative.

Other Individuals

This category of revenue comprises provisional taxpayers and debit assessments on income tax returns (ie where tax credits are insufficient to meet the tax assessed on income). Other individuals income taxpayers may have income receipts from various sources including salary and wages, business and property income and capital gains, and may pay individuals income tax through the PAYE system and PPS system, through provisional tax arrangements, or simply on assessment. The ‘other individuals’ category includes all collections of individuals income tax other than those made through the PAYE and PPS systems.

The provisional tax system is designed to align the timing of tax payments broadly with that of PAYE taxpayers though it leaves provisional tax payers in a preferred position. Current year provisional tax liability is generally determined after increasing the previous year's assessed income by a provisional tax uplift factor. Taxpayers expecting their income to be lower than this may elect to lodge a provisional tax variation to reduce provisional payments (upward variations in income are largely deferred by taxpayers to the following year). The resultant amount is then combined with any balance on assessment from the previous year's tax liability to determine current year tax.

The main factors underlying the expected increase of 7.9 per cent in gross other individuals collections in 1996-97 are:

·   1995-96 income growth leading to higher assessed income for that year, which feeds through to higher provisional tax assessments and higher debit on assessment; partly offset by

·  the revenue loss from the provisional tax uplift factor being reduced to 6 per cent, down from 8 per cent in the previous year.

Prescribed Payments System (PPS)

PPS collections are the withholding, at source, of taxation on payments for prescribed labour and services in specific industries — including building and construction and road transport — where those payments are not covered by the PAYE system.

Revenue from PPS collections is estimated to increase by 6.9 per cent in 1996-97 reflecting estimated income growth based on the following indicators:

·  expected growth in the nominal value of non-residential construction of 18¼ per cent; partly offset by

·  an expected decline of 1½ per cent in the nominal value of dwelling investment.

Medicare Levy

The Medicare levy has been increased from 1.5 to 1.7 per cent of taxable income for the period from 1 July 1996 to 30 June 1997 to fund the guns buy-back scheme. The levy is paid by individuals earning incomes above specific thresholds. Table 7 shows the expected composition of Medicare levy collections from the different individual income tax groups.

The 21.2 per cent growth in Medicare levy collections estimated for 1996-97 mainly reflects the levy increase.

Individuals Income Tax Refunds

A final assessment of tax liability for individual taxpayers is made on the basis of returns lodged after the end of the financial year. Refunds are made where tax payments exceed the final assessment. Where tax credits are insufficient to meet the tax liability, taxpayers make an additional payment, which is recorded under the other individuals income tax item.

Refunds are forecast to increase by 6.1 per cent in 1996-97 largely because of:

·  growth in gross individual incomes tends to lead to growth in the level of refunds; partly offset by

·  an expected decline in the refund rate based on past relationships with the stage of the business cycle.

Company and Other Income Tax

Table 8 contains outcomes for 1995-96 and estimates for 1996-97 for company and other income tax items.

Table 8: Company and Other Income Tax


(a) Includes tax on realised capital gains.

Company Income Tax

A company’s tax liability is assessed as a flat percentage of its taxable income. The statutory tax rate has been 36 per cent since the 1995-96 income year, although different rates apply to certain income of life assurance companies, registered organisations, pooled development funds and credit unions. Changed payment arrangements were introduced over the 1994-95 and 1995-96 income years requiring one or two quarterly payments (depending on the size of the company’s estimated tax liability) to be made in the year income is earned, with the remainder paid in the following financial year or substituted accounting period. Capital gains tax as it affects companies is also collected under this item.

Company income tax is forecast to rise by 7.9 per cent in 1996-97 because of:

·  expected increases in company income of 3 per cent in 1995-96 and 7 per cent in 1996-97;

·  the full-year impact in 1996-97 of the company tax rate increase announced in the 1995-96 Budget; and

·  the impact of changes to research and development tax concessions.

Superannuation Funds Tax

Superannuation funds are generally taxed at the concessional rate of 15 per cent in relation to investment income and certain contributions received. Payments are made according to the same arrangements applying for company income tax.

The expected increase in collections in 1996-97 of 10.1 per cent is attributable to:

·  higher earnings by superannuation funds during 1995-96; and

·  growth in contributions to superannuation funds.

Withholding Tax

Withholding taxes are levied on:

·  income payments to residents who, when making an investment, do not supply the investment body with a tax file number;

·  certain interest, dividend and royalty payments to non-residents; and

·  payments made to Aboriginal groups for the use of Aboriginal land for mineral exploration and mining.

The expected decrease of 13.3 per cent in with holding tax revenue is attributable to a single large payment of interest withholding tax received in 1995-96 that will not be repeated in 1996-97. This is partly offset by expected increases in dividend and royalty withholding taxes and by the effect of withholding tax avoidance measures introduced in this Budget.

Petroleum Resource Rent Tax (PRRT)

PRRT applies to offshore areas under the Commonwealth's Petroleum (Submerged Lands) Act 1967 , other than the North West Shelf production licence areas and associated exploration permit areas, which are subject to excise and royalty arrangements. PRRT is levied at the rate of 40 per cent of taxable profit from a petroleum project.

PRRT revenue in 1996-97 is expected to increase by 6.3 per cent on the amount raised in 1995-96 .

Fringe Benefits Tax (FBT)

FBT applies to a range of benefits provided by employers to their employees or associates of their employees.

FBT collections are expected to increase by 4.9 per cent in 1996-97, in line with estimated growth in the value of fringe benefits provided to employees.

Indirect Tax

A summary of the 1995-96 outcomes and estimated revenue for 1996-97 for components of indirect tax is contained in Table 9.

Table 9: Indirect Tax


(a) Includes aviation gasoline, aviation turbine fuel, fuel oil, heating oil and kerosene and refunds/drawbacks relating to petroleum products excise.

Wholesale Sales Tax

WST is imposed on a range of goods destined for consumption in Australia and is levied at the last wholesale or import point on the wholesale sales value of taxable goods. In 1996-97 taxable goods will continue to be subject to tax rates of either 12, 22, 26, 32 or 45 per cent, depending on the classification of the goods involved.

The expected increase in WST revenue of 7.2 per cent reflects:

·  forecast growth in nominal demand for taxable goods; and

·  the measures relating to prevention of abuse of the tax system in respect of the WST exemption for government motor vehicles provided for private use and WST on personal computers and related goods.

Excise Duty

Petroleum products, crude oil and LPG excise is predominantly made up of excise on petroleum products, including motor spirit (petrol), diesel fuel, aviation gasoline, aviation turbine fuel, fuel oil, heating oil and kerosene. It is imposed at fixed rates per litre of product. Crude oil and LPG excise collected from fields in the North West Shelf production licence areas not subject to PRRT is also recorded under this revenue item.

Excise revenue from total petroleum products is expected to increase by 4.4 per cent in 1996-97 reflecting an expected increase in consumption of diesel fuel and unleaded petrol and the indexation of excise rates. The decline in excise collections from leaded petrol reflects a continuing decline in leaded petrol sales.

Other excise is derived from beer, potable spirits and tobacco products. It is imposed at a fixed rate per kilogram on tobacco products and on the alcoholic content of beer in excess of 1.15 per cent and the alcoholic content of potable spirits. Beer with an alcoholic content below 1.15 per cent is exempt from duty.

Excise revenue from these products is expected to fall by 0.1 per cent in 1996-97 reflecting indexation of excise rates offset by falling or static product volumes. Tobacco product and brandy volumes are expected to continue to decline, while other volumes are expected to remain around 1995-96 levels.

Excise Indexation

The rates of duty for excisable commodities (with the exception of crude oil and LPG) are adjusted each August and February in line with half-yearly CPI movements. If the change in the CPI is negative, the excise rate is not reduced but instead the decline is carried forward to be offset against the next positive CPI movement.

All revenue from the excise duty on aviation gasoline and aviation turbine fuel is appropriated to the Civil Aviation Safety Authority and Airservices Australia as a contribution to cost recovery. The excise rates applying to these fuels are adjusted as necessary according to the funding requirements of those agencies, in addition to the changes from indexation described above.

Rate changes since the 1995-96 Budget are shown in Table 10.

Table 10: Excise Rates


(a) The rebate rates applying to different users of diesel products under  the Diesel Fuel Rebate Scheme can be found under 10. Agriculture, Forestry, and Fishing and 11.1 Mining and Mineral Resources in Statement 3.

(b) The excise rate applying to aviation gasoline was set to $0.19080 per litre on 1 July 1995 as a cost recovery measure and then reduced to $0.18116 per litre on 28 November 1995 after Senate rejection of the cost recovery measure.

(c) The excise rate applying to aviation turbine fuel was set to $0.02380 per litre on 1 July 1995 as a cost recovery measure.

Customs Duty on Imports

Ad valorem tariffs are applied to many categories of imports. Customs duty revenue is affected by the $A value of imports, the level of the statutory tariff rates applied to imports and the composition of imports between high and low tariff rates. Around 70 per cent of total imports by value enter duty free.

The expected decrease in customs duty revenue of 3.6 per cent in 1996-97 reflects the continuing tariff rate reductions, partly offset by a forecast rise in the total value of imports and changes to the tariff concession system and policy by-law system.

Other Taxes, Fees and Fines

The 1995-96 outcomes and 1996-97 estimates of other taxes, fees and fines are shown in Table 11.

The 9.1 per cent increase in other taxes, fees and fines reflects a number of budget measures (see Part II and Appendix A), including:

·  a rise in the level of immigration fees and charges, such as applications for student visas , Australian citizenship and residency ;

·  cost recovery of import related services delivered by the Australian Customs Service; and

·  obtaining revenue from the allocation of reserved telephone numbers.

These factors are partly offset by lower collections of primary industry levies resulting from lower volumes of wool production and the abolition of the debt component of the wool tax from 1 July 1996.

Table 11: Other Taxes, Fees and Fines


(a) Includes Telecommunications Act Carrier Licence Fees, Quarantine Service Fees and the Interstate Road Services Charge.


Non-Taxation Revenue

The 1995-96 outcomes and 1996-97 estimates of non-tax revenue are shown in Table 12.

Table 12: Non-Taxation Revenue


(a) Comprises Telstra Corporation and Australian Postal Corporation.

(b) Comprises the Federal Airports Corporation , Airservices Australia and (in respect of 1995-96) the Australian Maritime Safety Authority .

(c) Comprises the Reserve Bank of Australia and (in respect of 1995-96) the Commonwealth Bank of Australia .

(d) Comprises the Export Finance and Insurance Corporation , Commonwealth Funds Management Ltd , Housing Loans Insurance Corporation , the Australian Industry Development Corporation , Australian Defence Industries Ltd , Defence Housing Authority , the Pipeline Authority and other non-tax revenue.


Non-tax revenue is expected to decline by 3.2 per cent in 1996-97.

Interest Revenue
Interest Revenue from the States, NT and ACT

The Commonwealth receives interest payments from the States in respect of its borrowings made on behalf of the States under the State Governments' Loan Council Programme and from the Northern Territory in respect of advances made under similar general purpose capital assistance arrangements. Payments relating to these advances are made in turn by the Commonwealth to bondholders. The Commonwealth also receives interest on advances made under Commonwealth-State Housing Agreements, States (Works and Housing) Assistance Acts, Northern Territory Housing Advances and from the ACT on debts assumed upon self-government.

Interest revenue from the States is declining as a result of the June 1990 Loan Council decision that the States make additional payments to the Debt Retirement Revenue Trust Account (with analogous payments from the Territories) each year, to facilitate the redemption of all maturing Commonwealth securities issued on their behalf. The reduction in interest received from the States and Territories is matched by a reduction in public debt interest outlays.

Interest revenue is expected to be considerably lower in 1996-97 compared to 1995-96, mainly because of Queensland’s and Victoria’s large repayments of outstanding debt to the Commonwealth in 1995-96.

Interest from Telstra
As foreshadowed in the 1995-96 Budget, Telstra repaid its outstanding debt to the Commonwealth in 1995-96.
Dividends and Other
Government Business Enterprises (GBE) Dividends

Dividends from communications GBEs are expected to rise by 2.7 per cent as a result of improved profit performances by both Telstra and Australia Post .

Financial Enterprises (Bank) Dividends

This item comprises dividends paid by the Reserve Bank of Australia (RBA) and, in 1995-96, the Commonwealth Bank of Australia (CBA). From 1996-97 the item relates solely to dividends paid by the RBA following the sale of the Commonwealth’s remaining interest in the CBA.

The Reserve Bank Act 1959 requires the RBA to pay its net earnings to the Commonwealth after contingencies and appropriations to reserves.

The slightly lower dividend estimate in 1996-97 reflects the fact that no further dividends will be received from the CBA, largely offset by an increase in RBA dividends because of an increase in RBA profits for the 1995-96 year.

Royal Australian Mint

Revenue from the Royal Australian Mint relates predominantly to seigniorage on circulating coin production. The demand for circulating coinage was slightly higher than expected in 1995-96, although still substantially lower than in 1994-95. Demand is expected to fall slightly in 1996-97.

Petroleum Royalties

Collections of petroleum royalties are expected to increase by 45.8 per cent in 1996-97 because of higher production levels on the North West Shelf project and increases in forecast petroleum prices. This is expected to be partly offset by slightly lower production in some oil fields off the coast of WA.


This item comprises dividends from (non-bank) financial enterprises and defence a uthorities as well as rent and other non-tax revenue. Other income is expected to rise by 27.9 per cent in 1996-97 largely reflecting the receipt of dividends from the Defence Housing Authority (DHA) for the first time. DHA’s special exemption from paying dividends, under the $750 million defence housing improvement programme, expired in June 1996 when the programme was completed.

Estimation Issues

The revenue estimates are highly sensitive to variations in economic conditions and forecasts, though the relationships are far from precise. The presence of tax expenditures also creates uncertainties for revenue forecasts. The shortfall in the revenue outcome for 1995-96 compared to the 1995-96 Budget estimate was 2.2 per cent.

Different revenue items are affected by movements in different economic parameters or different combinations of economic parameters. These relationships are discussed in the following paragraphs. It is also possible to relate average movements in revenue, roughly, to changes in nominal GDP: such relationships are necessarily less precise than those relating revenue items to specific parameters.

Sensitivities to Economic Parameters

Estimates of revenue sensitivities to increases in forecast economic variables are illustrated in Table 13. This table shows the estimated impact on revenue of a one percentage point change in certain economic variables in 1996-97. The impacts are shown for the budget year and following year. Differences in impact over the two years reflect:

·  the full year effect of variations in the CPI on excise indexation arrangements occurring in the following year;

·  the effect on collections of variations in company and other individuals income occurring largely in the year following receipt of income. The lag will diminish somewhat after new company tax payment arrangements take full effect but will vary from year to year during the implementation period (see the previous section, ‘Taxation Revenue’, for a brief explanation of the payment arrangements for these taxes); and

·  for most economic variables, the flow through effect of a higher base in 1996-97 on 1997-98 collections.

Table 13: Effect on Collections of a One Percentage Point Increase in Nominal Parameters in 1996-97 (a)


(a) Direct impact on revenue. Estimates assume in each case that all other parameters are unchanged. Additional impacts in 1997-98 reflect the effect of assumed parameter growth for 1997-98 operating on the higher base derived from 1996-97.

(b) National accounts basis excluding superannuation.

(c) Impact on sales tax and excise revenue, assuming uniform percentage change in all components of the tax base.

(d) Impact on excise duty collections.



Estimates of the major categories of revenue, for 1996-97 to 1999-2000, are shown in Table 14.

Table 14: Revenue Estimates



The main determinants of the forward estimates of revenue are the projected growth rates of key economic variables, outlined in Statement 1, and the revenue measures announced in this Budget.

Considerable uncertainty surrounds any projection of economic conditions some years into the future. Changes in economic circumstances tend to impact more heavily on revenue than outlays estimates. Taxation revenue is highly sensitive to changes in the underlying level of income or production, whereas outlays for many programmes are influenced by price changes but not by changes in other economic conditions.

Revenue is expected to grow steadily in the years to 1999-2000, on the basis of projected economic growth over this period. However, both in nominal terms and as a proportion of GDP, revenue is expected to be slightly lower in each of the years from 1996-97 to 1998-99, than was projected in the 1995-96 Budget. This reflects:

·  a lower 1995-96 base — total revenue in 1995-96 was $121.7 billion (25.0 per cent of GDP) compared to the 1995-96 Budget estimate of $124.4 billion (25.3 per cent of GDP);

·  weaker projected growth in the major economic parameters underlying the revenue estimates in 1996-97 and 1997-98 (which also have an effect on revenue in the outyears); partly offset by

·  the positive revenue effect of measures announced in this Budget. The most important of these are:

— the reduction in the premium rate of deduction for R&D expenditure to 125 per cent; and

— the increase in superannuation contributions tax for higher income earners.

Revenue growth in 1996-97 reflects the full year impact of 1995-96 Budget measures such as the increase in the company tax rate from 33 per cent to 36 per cent from the 1995-96 income year. Revenue growth slows in 1997-98, after having been temporarily bu oyed up by the bring forward of company tax payments over 1995-96 and 1996-97.

Revenue estimates and the Economic cycle

Chart 1 shows actual revenue growth in both real and nominal terms, for the period fro m 1984-85 to 1995-96, and estimated growth for the years 1996-97 to 1999-2000.

Chart 1: Growth in total revenue


Projected nominal revenue growth in the budget year is somewhat lower than in 1987-88, a broadly similar stage in th e economic cycle of the 1980s, because inflation in the late 1980s was higher than is expected in 1996-97. In real terms, estimated revenue growth for 1996-97 is broadly comparable to that at a similar stage of the last cycle. The dip in estimated revenue growth in 1997-98 largely reflects the end of the bring forward of company tax arising from changed collection arrangements.


Part V: Medium Term Trends

This part discusses trends in revenue collections over the period from 1984-85 to 1995-96, and projected trends from 1996-97 onwards. The discussion focuses on movements in tax collections relative to GDP and on the role of policy decisions in maintaining the overall tax base over that period.

Chart 2 shows aggregate revenue and the major revenue categories as a percentage of GDP, for the period 1984-85 to 1999-2000. Total revenue as a proportion of GDP is expected to continue to recover from the trough experienced in 1993-94. In the forward estimates period, the ratio is expected to change little from the level reached in 1995-96. Income tax as a proportion of GDP is expected to rise through the forward estimates period reflecting growth in collections of individuals income tax of between 8 and 9 per cent in each of the forward estimates years.

Chart 2: Revenue as a percentage of GDP


For a discussion of medium term trends in key revenue items since 1983-84 readers are referred to Statement 4 in the 1995-96 Budget papers.

Chart 3 shows the full year impact on revenue collections of decisions taken in each year from 1984-85 to 1996-97 expressed as a percentage of GDP. The chart is based on figures published in budget documents of the time. The actual impacts of the measures may have differed from the estimates, substantially so in the case of many tax expenditures.

In allocating the ‘full-year’ impact of revenue measures to the year in which the decision was announced, the information in Chart 3 focuses on the ‘policy effort’ contained in the budget and other decision making processes in each particular year. For example the full impact of a change in the company tax rate is attributed to the year in which the measure was announced, rather than the year in which it first applies or the year in which the revenue is actually received. The estimates are presented both including and excluding individuals income tax cuts. Such tax cuts represent a discretionary reduction in revenue at the time they are given. However, from a longer term perspective, in the absence of tax cuts, the interaction of higher nominal wages and salaries and the progressive income tax system would lead to continually increasing personal income tax as a percentage of GDP. Such a situation would be unsustainable in the long term so there is some case for treating personal income tax cuts as an (imperfect) substitute for automatic indexation of the personal income tax scales.

Chart 3: Full Year Revenue Effect of decisions 
taken each year


Chart 4 shows collections, as a share of taxation revenue, of three relatively new taxes, FBT , CGT and superannuation funds tax, which were introduced in the 1980s. Since superannuation funds pay CGT, the CGT collected from superannuation funds has been excluded from total superannuation funds tax collections in Chart 4. Chart 4 illustrates revenue items which have grown strongly in recent years and made an increasing contribution to total revenue collections.



(a) From 1 April 1994 FBT was subject to ‘grossing up’ and became tax deductible or subject to a rebate for employers.


CGT and FBT were introduced primarily to bring into the tax base income components which previously escaped tax, thus improving the efficiency and equity of the tax system. Similarly , superannuation funds tax was introduced to reduce the exemption or deferral of tax on certain superannuation contributions and fund earnings.


Appendix A: Revenue Measures Announced Since the 1995-96 Budget


Income Tax

Medicare Levy — Gun Buyback Scheme

The Government has increased the Medicare levy, for 1996-97 only, from 1.5 per cent to 1.7 per cent to fund the costs associated with the gun buyback scheme. Any surplus after the costs associated with the gun buyback scheme will be r eturned to taxpayers through the Medicare levy system.

Tax Exemption for Gun Compensation

On 24 July 1996, the Government issued a statement that gun owners would incur no taxation liability in respect of payments received under the gun buyback arrangemen ts.

Extending the Reportable Payments System

The Reportable Payments System (RPS) is a Tax File Number based payment reporting system which currently applies to certain payments in the fishing, clothing and smash repair industries.

The Government has endo rsed a proposal of the previous Government during the election campaign to extend the RPS to the fruit and vegetable industry. In light of this, the Australian Taxation Office has commenced consultation with the industry with a view to negotiating appropriate implementation arrangements, including identifying the specific transactions to be covered. It is anticipated that this measure will be implemented during the first half of the 1997 calendar year.

Tax Treatment of Building and Construction Industry Award Transport Payments

The Government announced on 2 May 1996 that it would not be proceeding with the proposal of the previous Government to provide a tax exemption for award transport payments received by on-site workers in the building and construction i ndustry (refer below in Pre-election Measures ).

Under guidelines issued by the Commissioner of Taxation to apply for the 1995-96 income year, employees in the building and construction industry who claimed deductions for transport expenses in their 1994-95 tax returns, on the basis that they considered their work was itinerant, can do the same in their 1995-96 returns.


Deductibility of Gifts

The Government affirmed the announcement of the former Government that gifts of $2 or more to the following bodies would qualify as deductible donations as indicat ed below:

·  from 1 July 1995 to 30 June 1999, The Shrine of Remembrance Restoration and Development Trust;

·  from 30 July 1995 to 29 July 1997, The Sandakan Memorials Trust Fund;

·  from 7 September 1995, The Polly Farmer Foundation (Inc);

·  from 7 September 1995, The Australian Games Uniform Company Ltd;

·  from 19 October 1995 to 18 October 1997, Cobram and District War Memorial Incorporated Fund;

·  from 23 December 1995 to 22 December 1997, The Central Synagogue Restoration Fund; and

·  from 23 December 1995 to 22 December 1997, The Borneo Memorials Trust Fund.

On 10 July 1996 the Government announced it had given in principle approval for donations to the Australia Foundation for Culture and the Humanities to be tax deductible.

In addition, since the 1995-96 Budget, there have been 131 admissions to the Register of Cultural Organisations and 37 deletions. Of these, 10 additions and 10 deletions were in response to changes to names of registered organisations. There have been 42 admissions to the Register of Environmental Organisations.

Provisional Tax Exemption for Pensioners

Pensioners will not be li able for 1996-97 provisional tax where:

·  the 1995-96 taxable income of a single pensioner is less than $20441;

·  the combined taxable income for 1995-96 is less than $31730 for a pensioner couple receiving the married rate pension; or

·  the combined taxable income for 1995-96 is less than $39244 for a pensioner couple receiving the separated rate pension (where the pensioners live apart as a result of illness or infirmity).

This means tha t pensioners who qualify for a full or partial pensioner rebate in 1995-96 will be exempt from 1996-97 provisional tax.

For the purpose of determining whether a pensioner is eligible for a provisional tax exemption, bonuses received from friendly societies or insurance companies are excluded from taxable income.

Provisional Tax Uplift Factor

The Government has implemented its election commitment to set the provisional tax uplift factor at 6 per cent for 1996-97. Unless Parliament decides otherwise, in futur e years the uplift factor will be determined by reference to the nominal increase in gross domestic product for the twelve months ending 31 December immediately before the relevant year of income, as published by the Australian Statistician.

Pooled Superannuation Trusts

Legislation currently before Parliament will allow complying superannuation funds and complying approved deposit funds to claim deductions for expenses relating to investments in pooled superannuation trusts and life insurance policies issue d by life assurance companies or registered organisations.

Commutation of Annuities

The Government has announced that from 14 June 1996 it will no longer allow non-rebatable annuities to be converted into rebatable eligible termination payment annuities o r rebatable superannuation pensions.

Research and Development Tax Concession

The Government announced substantial reforms of the research and development (R&D) tax concession which will reduce tax expenditures, and ensure that those expenditures are targ eted at new R&D.

The Government released a statement on 3 June 1996 affirming (subject to minor modifications) the 6 December 1995 announcements by the previous Government. The following measures take effect from the 6 December 1995 announcement:

·  apply the measures on the basis of a year of income rather than a financial year. This is the basis of registration under the current law and is practical for different tax accounting periods;

·  allow time for registration for expenditures incurred in the 1993-94, 1994-95 and subsequent income years to apply on the basis of application for registration and not actual registration. That is

— in respect of years of income ending after 6 December 1995, taxpayers may lodge applications up to six months following the income year in which the expenditure was incurred;

— taxpayers may also lodge applications for registration in respect of the 1993-94 and 1994-95 transitional years of income at any time before 7 June 1996 (within six months following the former Government’s Innovation Statement announcement); and

·  an application cannot be amended after the lodgement time for the application has expired.

On 23 July 1996 the Government announced major changes to the R&D tax concession effective from that date:

·  closure of registration for those R&D partnerships (‘R&D syndicates’) without ‘advance approval’

— ‘advance approval’ is an approval provided by the IR&D Board in response to an application for an advanced ruling on the eligibility of each of the R&D activities and the finance scheme;

·  companies to be limited to a period of four years in which they can amend their income tax assessments in respect of claims for R&D;

·  interest on debt to finance R&D to be deductible only at 100 per cent;

·  the 150 per cent concession for feedstock to be allowed only to the extent of net costs of R&D activities. This is to be achieved by subtracting the market value of product produced by an eligible R&D activity from the expenditure on feedstock used in that activity;

·  pilot plant deductions to be allowed only over the useful life of the plant;

·  the deductible value of core technology per annum to be limited to one third of the value of R&D per annum, where the R&D expenditure is limited to that potentially claimable at 150 per cent under the Income Tax Assessment Act 1936 (ITAA) . This will take effect from 23 July 1996 except for those registered under section 39P of the IR&D Act; and

·  the definition of research and development activities for the purposes of deductions under the concession to be tightened.

— The terms ‘innovation’, ‘technical risk’ and ‘systematic and experimental and investigative’ are to be clarified. The definition of R&D activities in section 73B of the ITAA is to be amended to require ‘innovation or high levels of technical risk’. Innovation is to require an appreciable element of novelty. Technical risk is to address the principle of uncertainty. Technical risk requires that the probability of obtaining a given technical outcome cannot be known or determined in advance on the basis of current knowledge or experience. The technical or scientific uncertainty can only be removed through a program of systematic and investigative experimental activities. Systematic and investigative and experimental activities mean activities in which scientific method has been applied, in a systematic progression of work from hypothesis to experiment, observation and evaluation, followed by logical conclusions. In addition work will have been based upon principles of physical, biological, chemical, medical, engineering or computer sciences.

The Government also announced a review of all expense items in the category ‘other expenditure’ of the R&D tax concession that were not includ ed in the specific changes announced on 23 July 1996.

Enabling legislation will be introduced into Parliament during the Budget session.

Infrastructure Borrowings — Urban Roads

On 24 June 1996 the Treasurer announced that the Government will not be procee ding with the previous Government’s plans to remove urban road projects from eligibility for the Infrastructure Borrowings concession (refer below in Pre-election Measures ). Since the previous Government had not introduced legislation to enact these plans, the effect of this decision is that urban road projects have never been excluded from the Infrastructure Borrowings concession.

Accelerated Depreciation for Shipping

The Government has decided to repeal section 57AM of the Income Tax Assessment Act 1936. The decision was made on the basis that transitional arrangements will enable those ships in respect of which a construction contract has been signed, and which are eligible for the concession through the operation of the Ships (Capital Grants) Act 1987 , to qualify for the tax concession if they continue to comply with the criteria set out in the Ships (Capital Grants) Act 1987 . This includes delivery to the shipowner and registration in Australia before 1 July 1997. Enabling legislation will be introduced into Parliament during the Budget session.

Income Tax Compensation for the Full Privatisation of State-owned Enterprises

The Government announced on 30 May 1996 its decision to end the former Government's policy of case-by-case consideration of individual claims for income tax compensation upon the full privatisation of State-owned enterprises. In taking this decision, the Government noted that State and Territory governments are fully compensated for all the income they forgo on the sale of their assets in the sale price they receive upon privatisation.

Dividend Imputation: Class C Franking Account

On 31 July 1996 the Government announced amendments to the dividend imputation provisions. The amendments relate to the class C franking account (which records company tax paid at 36 per cent) and are ap plicable from the start of a company’s 1995-96 franking year.

The amendments allow companies to delay conversion of prior franking accounts to the class C franking account after they are paid a class C franked dividend by electing to treat the dividend as:

·  not having been franked for the purposes of determining whether a class C franking credit arose to the company; or

·  having been paid up to fourteen days (or such longer period as the Commissioner allows) after actual payment for the purposes of determining when a class C franking credit arose to the company.

The amendments also prevent an unintended dual liability to class A franking deficit tax from arising. This dual liability could have arisen if a compan y with a class A franking deficit at the time of conversion to the class C franking account subsequently paid a class A franked dividend.

Taxation Treatment of Leased Chattels and Fixtures

The Government announced on 11 June 1996 that it would remedy an in consistency under the present law in the taxation treatment of leased chattels and fixtures. These amendments will remove the considerable uncertainty that has existed for a number of years in relation to the taxation treatment of leased plant and equipment.

The amendments will ensure that taxpayers who derive assessable income by leasing depreciable plant and equipment to others are not denied taxation depreciation deductions for the reason that the plant and equipment is a fixture attached to another person's land.

The amendments are to apply to relevant depreciable plant and equipment that is first used, or installed ready for use, on or after 1 July 1996, for the purpose of producing assessable income of the lessor. They will not apply to fixtures that have been depreciated or used previously by the lessee and sold to the lessor and leased back to the lessee.

Relevant industry and professional bodies are being consulted on the detailed implementation of the proposed amendments which are to be introduced into the Parliament later this year.

Development Allowance and Project Restructures

On 7 June 1996, the Government endorsed the previous Government’s amendments to remove certain restrictions on the restructuring of ownership of projects eligible for the D evelopment Allowance. Legislation giving effect to the amendments was subsequently introduced into the Parliament. On 28 June 1996, the Senate insisted on amendments to the Bill which were unacceptable to the Government and on the same day the House of Representatives agreed that the Bill be laid aside.

Offshore Banking Units

The Government announced changes to the offshore banking unit (OBU) measures on 25 June 1996. The changes are designed to increase the level of offshore funds managed by Australian b anks and enhance the development of Australia as a financial centre in the Asia-Pacific region.

The new measures will allow OBUs that provide funds management activities to invest in Australian assets, subject to a 10 per cent limit (by value) on the Australian asset component of each non-resident’s investment portfolio. The Government considered this level appropriate to meet the requirements of most global fund managers by enabling them to offer more balanced global portfolios with a small component of Australian assets.

The Government has also decided that fees earned by OBUs from gold borrowing and lending be exempt from interest withholding tax, to permit borrowing and lending in Australian dollars between related OBUs in Australia, and to make it clear that where an OBU is eligible for a foreign tax credit it is not also eligible for a tax deduction.

The amendments apply from the commencement of the OBU’s 1996-97 year of income.

Interest Withholding Tax

On 25 June 1996, the Government announced changes to section 128F of the Income Tax Assessment Act 1936 (ITAA) which provides an exemption for interest withholding tax (IWT). These changes increase competitive pressures in lending for home buyers and consumers and make the exemption more administrable by reflecting current market practice.

The two main changes were to remove the restrictions on funds raised under section 128F to allow them to be used for any purpose in Australia, and to replace the ‘wide distribution’ test with a ‘public offer’ test to better reflect the way capital markets operate and ensure that overseas lenders can compete more vigorously and openly for Australian business. The new test can be satisfied if borrowers issue debentures using electronic media or approach at least 10 overseas lenders. A further change, consistent with self assessment, removes the requirement for borrowers to obtain an exemption certificate from the Commissioner of Taxation. The new exemption is restricted to Australian resident companies.

In addition, under changes to the IWT collection procedures, borrowers that do not deduct IWT from interest payments to non-residents are denied a deduction for the interest costs. Section 126 of the ITAA will also be amended to exclude its application to overseas interest payments for bearer debentures issued offshore. Such payments will instead be subject to IWT.

The amendments to section 126 will apply from the date the legislation receives Royal Assent and the other measures are effective from 1 January 1996.

Repeal of Section 261

The Government announced on 27 June 1996 its decision to repeal section 261 of the Income Tax Assessment Act 1936 . Section 261 effectively increases the costs involved in negotiating secured offshore lending agreements and hinders the development of Australia as a major financial centre in the Asia-Pacific region. The repeal applies to mortgages entered into from 27 June 1996.

Fringe Benefits Tax (FBT)

Minor Benefits

The Government has already introduced legislation to implement its election committment to exempt minor benefits of less than $100 from FBT, where they meet the other conditions of the minor benefits exemption in section 58P of the Fringe Benefits Tax Assessment Act 1986 . This change will have effect from the date the legislation receives Royal Assent.

Wholesale Sales Tax (WST)

Government Bodies and Motor Vehicles

At the 1996 Premier s’ Conference on 14 June 1996, the Commonwealth, State and Territory Governments agreed that WST exemptions would be removed in respect of the purchase of motor vehicles and motor vehicle parts which are provided wholly or partly for the private use of employees as part of their remuneration. A Bill containing this measure has been introduced into the Parliament. The measure takes effect from 3.15 pm, 11 June 1996.

Customs and Excise Duty

Tariff Concession System and Policy By-Law System

The Government in troduced legislation to implement changes (refer to Pre-election Measures above) to the Tariff Concession System (TCS) and the Policy By-Law System (PBL) which was enacted during the winter sittings of Parliament. From 15 July 1996, Tariff Concession Orders (TCOs) will be issued only where there is not a local manufacturer of substitute goods. Prior to 15 July 1996, a TCO may have also been issued where there was a local substitute, provided the duty free importation was not likely to have a significant adverse effect on the domestic market (the market test).

The Government introduced further changes to the TCS and the PBL, also to take effect from 15 July 1996. The TCS changes affect imported business inputs which are now subject to a 3 per cent concessional rate of duty. Eligible consumer goods will continue to enter duty free. The PBL was changed to contain costs and streamline its administration. PBL Items 45, 46 and 56 are now subject to a $10 million capital equipment threshold.

Other Measures

Sale of Commonwealth Development Bank

The Government announced its intention to sell its remaining 8.1 per cent shareholding in the Commonwealth Development Bank (CDB) on 4 June 1996. The sale was completed on 24 July 1996. As a consequence, there will be no dividend payments from the CDB in 1 996-97 or subsequent years.

Sale of Commonwealth Funds Management Ltd (CFM)

CFM is both a wholesale and retail funds manager whose major clients include the main superannuation schemes for Commonwealth public servants. On 7 May 1996 the Government announce d its intention to offer CFM for sale, subject to the results of a scoping study to determine the extent of commercial interest. The sale of CFM would have the effect of ending dividend payments that would otherwise have been expected.

Amendments to the Financial Corporations (Transfer of Assets and Liabilities) Act 1993

On 14 August 1996, the Treasurer announced proposed amendments to the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 . These amendments will extend, by two years, the deadlines by which foreign bank subsidiaries or money market corporations can apply for, and convert to, branch banking status and qualify for the concessional taxation and other treatment provided for under the Act. The changes have only very minor revenue implications, the most likely effect being to defer conversions, rather than to generate additional conversions.


Income Tax

Australian Defence Force (ADF) Personnel

ADF personnel serving in Haiti with the multi-national force were m ade eligible for the Overseas Defence Force rebate under section 79B of the Income Tax Assessment Act 1936, with effect from 17 September 1994.

The previous Government also announced on 10 December 1995 that the Overseas Defence Force rebate would be increased from $338 plus 50 per cent of actual and notional dependent rebates to at least $1173 plus 50 per cent of actual and notional dependent rebates. However, the legislation was not amended and the incoming Government has announced in this Budget that it will not be endorsing that proposal (see Budget Statement 4, Part II: Measures ).

Australian Federal Police (AFP)

The former Government provided an income tax rebate under section 23AB of the Income Tax Assessment Act 1936 for AFP members who served overseas with the United Nations operation in Mozambique between 27 March 1994 and 10 December 1994.

Tax Treatment of Building and Construction Industry Award Transport Payments

On 4 December 1995, the previous Government announced that it intended to introduce amendments to the income tax law to exempt from tax award transport payments (up to a level of $7.60 per day) paid to on-site workers under a building and construction industry industrial instrument which provided for a transport payment as at 29 October 1986. However, no legislation was introduced. Further details are provided above in Post-election Measures .

Research and Development Tax Concession: Amendments to 1995-96 Budget Measures

The previous Government announced in the 1995-96 Budget that it would introduce amendments to the Income Tax Assessment Act 1936 to ensure that investors could not claim the research and development (R&D) concession for expenditure incurred after 9 May 1995 to private sector tax exempt bodies unless the investors are fully at risk for that expenditure.

On 4 July 1995, the previous Government extended the deadlines of the implementation arrangements to allow for the period of uncertainty concerning the validity of Industry Research and Development Board (IR&D Board) approvals.

Those arrangements allowed all investors to claim the R&D concession for expenditures to a private sector tax exempt body which were:

·  within the terms of finance schemes approved by the IR&D Board by 9 May 1995 as each was originally approved;

·  incurred through documented contractual arrangements in place by 3 August 1995; and

·  incurred by members of syndicates which register, or lodge an application for registration, with the IR&D Board by 3 August 1995.

Infrastructure Borrowings — Urban Roads

On 15 December 1995 the former Government announced that, effective immediately, the Federal Government would no longer offer tax benefits in the form of Infrastructure Borrowings for urban roads. Legislation was never enacted to give effect to this decision, and the Government has announced it will not proceed with this measure. Further details are provided above in Post-election Measures .

Infrastructure Borrowings — Prevention of Schemes to Increase the Value of Tax Benefits

The former Government foreshadowed changes to the legislation relating to the Infrastructure Borrowings concession, with effect from 30 October 1995, in order to preven t certain schemes from undermining the integrity of the program. No legislation was introduced. However, the Government has endorsed the proposed changes in this Budget. Further details are provided in Budget Statement 4, Part II: Measures .

Employee Share Schemes

On 28 March 1995, the previous Government announced changes to the taxation arrangements for employee share schemes. Under the arrangements that were enacted, taxation on shares or rights could be deferred for up to 10 years if certain conditions were met, including that the shares or rights were employer company shares or rights. The tax deferral was made available for shares only where at least 75 per cent of all permanent employees of the employer were, or had been, entitled to acquire employer company shares or rights. As an alternative, a tax exemption was made available for up to $500 of employer company shares or rights per employee per year, where certain conditions were met, including that shares or rights have been made available to at least 75 per cent of permanent employees on a non-discriminatory basis. The Government will be making further amendments to these provisions (see Budget Statement 4, Part II: Measures )

Innovate Australia Statement Measures

On 6 December 1995 the former Govern ment announced, in the Innovate Australia Statement, that the following measures would be enacted.

Research and Development Tax Concession

The previous Government announced measures to improve the accessibility, management and administration of the 150 pe r cent R&D tax concession with effect from 6 December 1995.

On 3 June 1996, the Government endorsed these measures with a number of minor modifications, with the same date of effect. Further details are provided above in Post-election Measures .

Equity Investments in Small and Medium Enterprises

The previous Government announced that the Income Tax Assessment Act 1936 would be amended to give capital gains tax treatment to equity investments of banks and similar lending institutions in small and medium sized enterprises.

The Government has decided to implement this measure with minor modifications. Further details are set out in Budget Statement 4, Part II: Measures .

Offshore Banking Units

The previous Government announced a decision to modify the Offshore Banking Unit regime to increase Australia’s attractiveness as a regional services centre.

The Government has already announced its intention to implement this measure. Further details are provided above in Post-election Measures .

Interest Withholding Tax

The previous Government announced a decision to amend the section 128F exemption to encourage the efficient access to overseas capital markets by Australian corporate borrowers.

The Government has already announced its intention to implement this measure. Further details are set out above in Post-election Measures .

Tax Treatment of Exempt Entities Entering the Tax Net

On 3 July 1995 the previous Government announced a 'rule the books' approach to entities in transition from tax-exempt to taxable status. Th e arrangements were designed to ensure that gains, losses, income and expenditure were, and were only, taken into account so far as they related to the period after the entity becomes taxable.

Legislation to implement this announcement was introduced in Taxation Laws Amendment Bill (No.5) 1995 with effect from 3 July 1995. The Bill lapsed following the proroguing of Parliament.

The Government intends making an announcement on these measures shortly after the Budget.

Development Allowance and Project Restructures

On 13 July 1995, the previous Government announced amendments to the Development Allowance Authority Act 1992 to remove certain restrictions on the restructuring of ownership of projects eligible for the Development Allowance. Legislation introduced into the Parliament on 21 November 1995 lapsed following the proroguing of Parliament.

Wholesale Sales Tax

Building Materials

Tax-exempt builders’ hardware and building materials used mainly in the completion of buildings were to have been taxed at the rate of 12 per cent from 1 July 1995. The proposal was subsequently withdrawn by the the n Government.

Rice Milk

The sales tax law was amended with effect from 28 September 1995 to allow an exemption for unflavoured rice milk, and a concessional tax rate to flavoured rice milk. The new exemption ensures that the taxation of rice milk is the same as for dairy and soy milk. The measure is also of significant benefit to those who are intolerant of both dairy and soy milk products.

Sales Tax Exemption for Imported Flight Simulator Equipment

The previous Government announced it would amend the sa les tax legislation to provide a wholesale sales tax exemption for second hand imported flight simulation equipment. No legislation was enacted to give effect to this announcement.

Customs and Excise Duty

Aviation Gasoline

On Budget night last year, the then Treasurer announced an increase in duty on aviation gasoline resulting in a rate of $0.19080 per litre, operative from 1 July 1995. Following amendment by Parliament of the proposed change to the legislation, the rate of duty applying to aviation gasoline became $0.18116 per litre from 28 November 1995.

Concessional Arrangements for Certain Petroleum Products

The relevant regulations were amended before the election to provide the following concessional duty arrangements for certain petroleum products.

·  Remissions of duty on fuel oil used as a chemical reactant in the calcination part of the Bayer process for refining bauxite into alumina at places not supplied by natural gas or where natural gas is not readily available.

·  Remission or refund of excise duty where certain petroleum products, including topped crude petroleum oils, are used as fuels otherwise than in an internal combustion engine.

·  Partial remission of excise duty on diesel fuel manufactured by the process of refining waste oils.

Tariff Concession System and Policy By-Law System

On 6 December 1995, the then Government announced changes to the provisions for importing goods under the Tariff Concession System (TCS) and P olicy By-Law System (PBL), as well as changes to improve the administration of the TCS and PBL. These changes were not enacted in legislation prior to the election. Following the election, the new Government introduced legislation to implement the changes which was enacted during the winter sittings of Parliament. Further details are set out above in Post-election Measures .

Taxation of Alcoholic Beverages

In response to the Final Report of the Committee of Inquiry into the Winegrape and Wine Industry, the previous Government announced on 2 November 1995 that it would not increase the taxation of wine. The previous Government also announced that, from 1 July 1996, all alcoholic products not currently excised or classified as a wine or wine product under National Food Standards Code P4 would be subject to excise at the same rate applicable to beer and subject to the standard rate of wholesale sales tax.

On 5 February 1996, the then Government revised its decision such that pure cider and fruit wines would remain exempt from the changes to the excise regime for alcohol, and as a result would continue to be taxed at the sales tax rate of 26 per cent applying to grape wines. All previously announced changes to excise arrangements were postponed, for introduction from 1 January 1997.

The Government has decided that the 1 January 1997 measures will not proceed. Further details are set out in Budget Statement 4, Part II: Measures .

Other Measures

Statement of Policy Intent

Legislation implementing the Commonwealth’s commitment under the Statement of Policy Intent to exempt State entities from income tax and wholesale sales tax received Royal Assent in December 1995.

Adult Migrant English Program

From 29 August 1995, religious workers (for example priests, nuns, rabbi s, monks) were granted an exemption from fees for the Adult Migrant English Program by the former Government.

Loan to Papua New Guinea

On 5 July 1995, the former Government provided a loan to Papua New Guinea as a form of balance of payments support. The loan principal is due to be repaid in 1997-98. Until then, the outstanding balance of the loan will earn intere st.


Appendix B: Tax Expenditures


This Appendix discusses the revenue impacts associated with concessional taxation treatment of specific groups and/or activities.

Individuals and businesses derive financial benefits from taxation concessions of various kinds. These concessions are usually delivered by tax exemptions, deductions, rebates or reduced rates. They can either reduce or delay the collection of taxation revenue. The benefits provided by the concessions could equally be delivered in the form of direct expenditures (outlays). The Government can use taxation concessions to allocate resources to different activities in much the same way that it can use direct expenditure programmes. For this reason, and noting their direct impact on the underlying budget deficit, these concessions are generally called ‘tax expenditures’.

The National Commission of Audit (NCA) identified a number of problems with the use of tax expenditures. The NCA argued that tax expenditures were less visible than outlays programmes and therefore likely to be less critically assessed and reviewed than outlays programmes. They also noted that tax expenditures are generally uncapped, open-ended and are susceptible to cost blowouts.

In the light of these problems, the NCA recommended that the Government should comprehensively review all existing tax expenditure programmes against general principles for government involvement and examine the scope for converting tax concessions to outlay programmes. Additionally, the Commission proposed that all tax expenditures should be treated as much as possible like outlays programmes in all published fiscal reports and statements and in all budgetary processes.

To allow for a more transparent and complete assessment of public funding, consistent with the NCA proposal, information is being presented in this Appendix about the magnitude of public assistance that is provided via concessional taxation treatment, and the sectors to which the assistance is provided. These figures provide information on the cost of tax concessions and hence on the level of assistance provided to various groups. Detail on the cost of individual tax expenditures is contained in the Tax Expenditures Statement published annually by the Treasury. 1

The Government intends to review all existing tax expenditures to ascertain the extent to which they are contributing towards the achievement of the its policy goals, and whether some tax expenditures might be converted to outlays programmes to achieve a better outcome. In relation to new tax expenditure proposals, the Government will consider whether assistance can be more effectively provided through outlays programmes.

Aggregate Tax Expenditures

Table B1 shows the estimated cost to revenue of those tax expenditures that have been identified and costed in the 1995 Tax Expenditures Statement (TES). These figures understate the total cost to revenue of tax expenditures as the TES does not provide a comprehensive listing of tax expenditures. Forward projections of the cost to revenue of tax expenditures are provided here for the first time.

Table B1: Aggregate Tax Expenditures and Direct Outlays 1989-90 to 1999-00 (a)(b)


(a) The estimates reflect the measures taken in the 1996-97 Budget, and for the outyears have been derived by extrapolating historical growth or have been based on expected change in the relevant economic parameters.

(b) The data contained in this table have been revised since the publication of the 1995 TES, in particular with respect to superannuation. In addition, tax expenditures of a purely timing nature, such as accelerated depreciation, have been removed from the aggregates as forward projections of the revenue gain following termination of 5/3 accelerated depreciation are not available. This prevents the presentation of a complete picture of the budgetary impact of accelerated depreciation.

(c)  Estimates relating to superannuation are very volatile, particularly in relation to realised capital gains.


Table B1 indicates that, while outlays account for a large part of policy, over the past decade the Government has provided approximately 10- 15 per cent additional funding through the set of costed concessional taxation arrangements. Reflecting uncosted concessions, actual tax expenditures would have been larger still. Just under 40 per cent of the measured cost to revenue is from the concessional treatment afforded superannuation.

The aggregate projections should be treated with considerable caution and should only be used to provide a broad indication of the possible future growth path of the cost of the concessions.

Tax Expenditures by Functional Categories

In Table B2 tax expenditures for 1995-96 (the latest year for which reliable information on tax expenditures is available) are classified into the same functional categories as for spending in Budget Statement 3 .

A number of tax concessions do not lend themselves to easy categorisation and, as such, the figures provide an approximation only. For example, a general industry assistance measure would apply to all industries and it would not be possible to determine precisely which industry sectors had accessed the concession.

Table B2 indicates that the Budget outlays figures significantly understate the amount of Government assistance provided to general research, social security and welfare, the mining and manufacturing sectors and labour and employment programmes. For example, the measured level of financial assistance provided to the mining and manufacturing sectors is 52 per cent larger than the $1651 million listed as a budget outlay.

Table B2: Tax Expenditures and Budget Outlays Classified by Functional Category 1995-96


(a) The tax expenditure associated with government superannuation is not easily disaggregated from the general superannuation tax concessions, and is included in the category ‘Social Security and Welfare’.

(b) This measure of tax expenditures includes the superannuation concession.

(c) Numbers do not sum to total due to rounding.


Appendix C: Budget Support for Research and Development and the R&D Tax Concession

Substantial government assistan ce is provided to Australian research and development (R&D) through both tax expenditure and outlays programs. As part of the 1996-97 Budget processes, the Government has reviewed the scope and composition of those programs, and has affirmed the importance of such assistance for promoting Australian R&D. To increase the effectiveness of R&D assistance, the Government is focusing that assistance towards increased outlays on R&D and away from taxation expenditures. It will also be introducing a new program of specifically targeted loans and grants, while retaining concessional tax arrangements.

R&D Tax Concession

Tax concessions for R&D were introduced by the former Government with effect from 1 July 1985. They allowed eligible taxpayers to deduct qualifying e xpenditure incurred on R&D activities, including R&D carried out on their behalf, against taxable income at highly concessional rates of up to 150 per cent.

These tax arrangements have been subject to extensive amendments. In particular, in 1987 the then Government introduced a concession to allow companies to undertake eligible R&D in partnership. This concession was aimed at R&D projects too large or too risky for a single company to undertake. In practice, the provisions spawned various methods to give R&D tax deductions to investors through partnership structures known as syndication.

In reviewing the tax arrangements in the broader context of overall assistance to R&D, the Government decided, effective from 23 July 1996:

·  to abolish the concessions for R&D syndicates and the underlying partnership provisions;

·  to make significant amendments with respect to deductions for pilot plant, feedstock for processes where the output is sold, interest expense and core technology; and

·  to limit the time in which a registered company can amend its tax return to claim research and development expenditure.

As part of its Budget measures on research and development, the Government has decided to reduce the maximum concessional rate of deduction from 150 to 125 per cent, for expenditure incurred after 7.30 pm EST 20 August 1996, except where the expenditure wa s required to be incurred by a contract (other than a contract of service) entered into before the announcement.

Operation of the Tax Concession

The main features of the general R&D concession, following the measures announced in the Budget, are:

(a) Annual eligible R&D expenditure must exceed $20000 to obtain the full 125 per cent deduction. Eligible expenditure includes:

—  wages, salaries, and other labour costs: deductible at 125 per cent;

—  core technology used for R&D expenditure: deductible at a rate of 100 per cent, for example, a company may acquire rights to use a particular technology that is currently available to undertake R&D activities and obtain immediate amortisation of this capital expenditure;

— qualifying expenditure on plant and on pilot plant : deductible at the rate of 125 per cent over three years from the year the plant is first used exclusively for R&D;

—  interest : deductible at a rate of 100 per cent; and

— capital expenditure on constructing or reconstructing buildings (or parts of buildings) used for R&D: deductible in the same way as similar capital expenditure on buildings used for income producing purposes (generally the expenditure is written off over a forty year period).

(b) For an R&D project to be eligible for the concession, it must be based on 'core' R&D activity that involves either:

— innovation — having an appreciable degree of novelty; or

— high levels of technical risk — technical risk requires that the probability of obtaining a given technical outcome cannot be known or determined in advance on the basis of current knowledge or experience. The technical or scientific uncertainty can only be removed through a program of systematic and investigative experimental activities. Systematic and investigative experimental activities mean activities in which scientific method has been applied, in a systematic progress of work from hypothesis to experiment, observation and evaluation, followed by logical conclusion. In addition, work will have been based on principles of physical, biological, chemical, medical, engineering or computer sciences.

(c) The R&D must be carried out for the company claiming the expenditure. The greater part of eligible R&D activity must generally be carried out in Australia; the R&D activity must have adequate Australian content; and the results of the R&D must be exploited on normal commercial terms and for the benefit of the Australian economy.

(d) If companies incur expenditure on having R&D done for them by relevant registered research agencies, such as CSIRO, the expenditure threshold is waived.

Studies of Australian Government Support for Research and Development

Comparisons of R&D tax-based instruments indicate that Australia provides one of the most generous R&D tax incentives in the world. 2 The generosity of this concession has meant that the proportion of business expenditure on R&D funded by government in Australia is among the highest of OECD countries. 2

The R&D tax concession is provided to eligible companies whether or not they would have undertaken R&D without it, thereby implying a high transfer component — that part of the cost of the concession which supports R&D that would have taken place in the absence of the concession. The high transfer component was one of the major criticisms of the concession in reports by the Bureau of Industry Economics and the Industry Commission.

·  The Bureau of Industry Economics found that the amount of additional R&D expenditure encouraged in recent years by the tax concession might lie in the range of 10 to 17 per cent of eligible R&D expenditure. 3

International Comparison of Tax Concessions for Research and Development

Few countries provide deduction rates of over 100 per cent for any kind of R&D expenditure. In many of those countries that do, only a smaller range of R&D expenditures qualify for concessionary treatment. Capital expenditures are often deductible only und er ordinary depreciation or other effective life provisions.

Malaysia and Singapore are often cited as having R&D tax concessions competitive with Australia’s. Overall, the Australian tax concession compares favourably, because of its substantially wider scope and entitlement basis, even at its revised deduction top rate of 125 per cent (see Table C1).

Whilst Malaysia and Singapore have attractive headline deductions (at 200 per cent) for expenditure on R&D, the concessions in these countries are far more restrictive than those available in Australia. Many research projects which qualify for the R&D tax concession in Australia would not qualify for the concession in those countries. Most expenditures claimed under the Australian R&D tax concession would receive less concessionary treatment in Singapore and Malaysia.

The premium concessions are at the discretion of the relevant Ministers in both Singapore and Malaysia. In Australia the concession is entitlement based.

Capital expenditure of various kinds (which comprises the bulk of R&D expenditure in Australia) is more concessionally treated in Australia than in Singapore or Malaysia.

Table C1: Comparison of Tax Treatment of R&D Expenditures Across Australia, Singapore and Malaysia.





Manpower, materials expended in qualifying R&D activities

125 per cent deduction available to companies registered under the Industry Research and Development Act 1986.

200 per cent deduction for manufacturing companies and some service companies . R&D must have approval of Minister who may, at his discretion, specify amount of expenditure and period for which deduction may be allowed.

200 per cent deduction. Tighter definition of R&D than Australia. R&D must have approval of Minister.

Buildings u sed in R&D

Ordinary provisions.

Ordinary provisions.

Qualifies for industrial building allowance.

Plant and machinery used in R&D; and pilot plant, under R&D development

Deductible at up to 125 per cent over three years. Pilot plant may be taken over lif e of plant.

Deductible at 100 per cent over three years. Heavy capital expenditure may receive investment allowances of up to 50 per cent fully at discretion of Minister.

Normal depreciation only if used in a business of research, or if used on research approved by Minister: otherwise no depreciation.

Rights to use technology necessary for R&D

100 per cent immediate deduction for purchases of core technology for R&D.

Ordinary provisions for capital payments to acquire ‘know how’: amortisation over five ye ars, if for use in taxpayer’s own manufacturing trade or business.

Undeductible capital expenditure.

Development of technology for patent

Deductible at up to 125 per cent if part of R&D.

Ordinary provisions for ‘know how’ as above.

Undeductible capital ex penditure.

Formally registering a patent over results of R&D

100 per cent deduction for all registration costs if not eligible for R&D deductions at higher rates.

Ordinary provisions for ‘know how’ as above.

Undeductible capital expenditure.


Eligible R &D in Singapore and Malaysia is limited to systematic or intensive study carried out in the field of science or technology, the results of which are to be used for the production or improvement of products, produce or processes. The Australian concession allows seeking of new knowledge, whether or not of immediate or practical application. Singapore and Malaysia exclude the same items from R&D tax treatment as the Australian concession, and also expressly exclude quality control.

Where R&D expenditure receives special treatment elsewhere in the world, it commonly receives earlier deductibility than for comparable expenditure that is not on R&D, an advance tax deduction clawed back in following years, an additional deduction based on increased R&D compared to earlier years, or some combination of these.

What is Concessional Treatment of R&D Expenditure?

The tax concession for eligible R&D would be concessional even with a top rate of deduction of 100 per cent. The concession allows immediate deduction or rapid amortisation of expenditures which would othe rwise be either undeductible or amortised over a longer period. The 125 per cent deduction for R&D is more concessional than the tax concession for Australian films: 100 per cent immediate deduction of capital expenditure on film production.

The bulk of Australian R&D expenditures are of a capital nature: without a specific concession they would be deductible over long periods (if at all). Without specific concessions for R&D, the whole of any expenditures of any kind on R&D would be undeductible capital expenditure for many taxpayers. For those taxpayers whose business included carrying out R&D for the purpose of profit, some expenditures might be of a revenue nature and deductible; for instance salaries and wages, or interest. For example:

·  Expenditure on R&D plant would only be deductible according to the same broad-banded rates as other plant.

·  Expenditure on pilot plant might not be deductible at all.

·  Expenditure on core technology, needed to properly develop and use new R&D, would normally be deductible over its whole effective life.

Tax concessions greater than 100 per cent for items not consumed in use raise serious possibilities for tax abuse. A deduction greater than 100 per ce nt allows an item to be transferred from taxpayer to taxpayer creating net deductions on each sale. This possibility makes necessary complex cross compliance procedures.

Who Benefits from the Tax Concession?

The benefits from the R&D tax concession go disp roportionately to large companies. In 1993-94, 2828 companies claimed the concession. The total expenditure claimed was approximately $2 billion. The top ten company groups to make claims accounted for more than half of these claims, over $1 billion. One public company (which does not describe itself as a research company) made claims for more than $200 million. In 1994-95 there was a 25 per cent increase in R&D claims by companies claiming more than $5 million in R&D expenditure.

At the other end of the spectrum the R&D concessions (particularly the partnership provisions) have been associated with some businesses achieving very low levels of tax. For example, in 1993-94 there were 29157 private companies with taxable incomes (after deductions, including R&D deductions) between $1 and $1999. Of these, only 33 claimed the R&D tax concession, and they claimed an average of almost $100000 each. Very large claims relative to taxable income are the norm amongst the small number of private companies with taxable incomes below $100000 which claim the concession.

Outlays Support for Research and Development

In addition to taxation measures significant support for research and development is provided through outlay programs. The main source of funding for research is through grants to universities. The Government’s initiatives in this area are covered in the Ministerial Statement on Higher Education . Other outlays measures are summarised below. More detail on Budget measures is contained in the 1996-97 Science and Technology Statement .

Ongoing Programs

Direct Support to Industry R&D

The existing Competitive Grants for Research and Development are focused specifically on smaller projects. The Industry Research and Development (IR&D) Board will be given greater flexibilit y in determining the size of grants and funding will be about $53 million in 1996 - 97 and $40 million in each of 1997 - 98 and 1998 - 99. The grants assist small businesses unable to fully use the R&D tax concession. The grants support collaborative R&D projects between businesses and public sector researchers, trial and demonstration activities between technology developers and potential customers, and company specific R&D projects involving the employment of a graduate student.

The Concessional Loans for Commercialisation of Technological Innovation Program is aimed at supporting small high technology oriented businesses in the early stages of commercialisation. Funding will rise from about $10 million in 1995 - 96 to $13 million in 1996 - 97.

Technology Support Centres assist small and medium sized enterprises with technical advice, access to research and development facilities and skills training they need to improve their international competitiveness. The program enables businesses to unders tand, evaluate and adopt technology appropriate to their needs. Funding will be maintained at about $7 million in 1996 - 97.

AusIndustry is a Federal and State Government initiative which aims to help businesses become more internationally competitive. Through a national delivery network, it provides industry with accurate and high - quality information and referral services. AusIndustry provides Australian business with advice and assistance in areas including research and development, commercialisation and business development.

Science Agencies

CSIRO is a multidisciplinary research organisation, serving Australia through excellence in research and technological development. Its research priorities cover a wide range of activities having regard to anticipated r eturns to identified socio - economic objectives including the competitiveness and sustainability of Australian industry. In recent years it has increased its focus on links with industry and developing research results. The Government has honoured its election commitment to restore CSIRO’s funding base and has provided an additional $115 million over the next four years. Funding for CSIRO in 1996 - 97 is estimated to be $444 million rising to $509 million in 1999-2000.

The Australian Nuclear Science and Technology Organisation (ANSTO) is Australia’s premier nuclear research organisation, conducting research at the Lucas Heights nuclear facility. The Government has decided to maintain ANSTO’s funding base, which is expected to rise from $64 million in 1995 - 96 to $71 million in 1999 - 2000.

The Australian Institute of Marine Science (AIMS) undertakes research and development to generate new knowledge in marine science and technology, promotes its application to industry, government and ecosystem management and undertakes collaborative activities with industry and government. Funding for AIMS will be maintained at about $17 million a year.

The Defence Science and Technology Organisation (DSTO) provides important research services for the defence community which can provide spinoffs to the private sector. Funding for DSTO will be maintained at about $230 million a year.

Cooperative Research Centres (CRC)

The CRC program provides support for long term collaborative ventures linking research and research users from univer sities, Commonwealth and State funded research organisations and business enterprises. The program promotes high quality cooperative research and education programs through centres of research concentration, strengthening the links between research and its commercial and other applications. CRCs are jointly funded by the Commonwealth and various partners. Commonwealth funding will be maintained at $145 million in 1996 - 97 rising to $148 million in 1998 - 99.

Currently 64 CRCs are funded for a 5 to 7 year period at the end of which they are expected either to be completely self - funding or to compete for renewal of Commonwealth funding. This will enable the Commonwealth’s contribution to be used to develop new CRCs. CRCs are established in six broad fields of research: manufacturing technology, information and communication technology, mining and energy, agriculture and rural - based manufacturing, environment, and medical science and technology.

National Health and Medical Research Council (NH&MRC)

The NH&MRC advis es the Australian community on the achievement and maintenance of the highest practicable standards of individual and public health and fosters research directed at improving these standards. The Council provides funding for over 1600 research projects as well as block funding for five major research centres and institutes. The Government will maintain funding for NH&MRC at $150 million in 1996 - 97.

Strategic Assistance for Research and Development (START) Program

Following consultations with industry and re searchers, the Government has reconfirmed its commitment to encourage industry R&D by establishing the new Strategic Assistance for Research and Development (START) Program.

Under the program, the Government will provide a flexible package of assistance totalling $340 million over the next four years to encourage large projects containing highly innovative, technically risky R&D that has strong support for commercialisation fr om the private sector. The program will be administered by AusIndustry with the IR&D Board responsible for determining who receives funding.

The new program will:

·  provide a new contestable R&D replacement program for R&D syndication for large projects;

·  provide a mix of grants, loans and interest subsidies; and

·  provide the flexibility for the development of any new market - based measures over time.

Grants and loans will be provided for large R&D projects which have clear economic spillovers, which would not gain the full financial benefit of the tax concession and which would not otherwise proceed. Additional long term loans will also be provided where private sector finance cannot be induced. The degree of support will be related to the degree of demonstrable additionality and broader economic benefit, with greatest support for high risk projects involving collaboration between several businesses.

Rural Research and Development

The Budg et has honoured the Coalition’s commitment on funding of rural research through Rural Research and Development Corporations (RDCs), as outlined in the Primary Industry Statement Reviving the Heartland . It ensures that, over the next four years, the Commonwealth will continue to match rural industry contributions to R&D on a dollar - for - dollar basis, up to 0.5 per cent of the gross value of production of an industry. In meeting this commitment, the Commonwealth will provide funding of $106 million in 1996 - 97 to the rural sector, based on current industry levy contribution rates. The Government funding will be higher if the industry increases its levy contributions.

These RDCs commission and manage research activities. This system of rural RDCs, and the joint industry/government funding arrangements that support them, have played a critical role in increasing rural investment in R&D, so essential to ongoing rural productivity growth. In 1984 - 85, the industry contributed $26.5 million to rural R&D. In 1995 - 96, the industry contribution was $99 million, an increase of 126 per cent over that period, after allowing for inflation. Some 2600 researchers are supported by the RDCs, as well as about 430 postgraduate students.

The rural sector also benefits from CSIRO’s substantial rural research activities and research done in universities. CSIRO is estimated to devote about half of its expenditures to research of a rural nature. Excluding research commissioned by the RDCs, that ratio is estimated to be close to 40 per cent.

Table C2: Major Programs — Science and Innovation







$m (est)

Australian Research Council(a)




Other Higher Education R&D




Cooperative Research Centres




Industry R&D

1 32.0



START Programme(b)




Rural R&D




National Health & Medical Research Centre




Other Health R&D




Other R&D Grants(c)








Defence Science and Te chnology Organisation




Other R&D Agencies




Total Commonwealth Outlays




150 per cent Tax Concession(e)




Total Commonwealth Support




(a) Represents total of Budget and Higher Education Funding Act 1988 funding.

(b) Funding under this new programme rises to $100 million in each of the years 1997-98, 1998-99 and 1999-2000.

(c) Australian Biological Resources Study, Greenhouse research grants, Energy R&D and Australian Road Research Board.

(d) Includes funding through DPIE for Australian Animal Health Laboratories. Note that $20 million from the 1995-96 allocation was borrowed in 1994-95. In addition to the budget funding shown, CSIRO expects to earn over $262 million from external sources in 1996-97.

(e) Tax concession numbers based on taxpayer year of income. These numbers represent Government commitment to R&D through the tax concession, not Budget bottom-line effect. The Budget bottom-line effect arises when taxpayer liabilities fall due. For some liabilities this occurs in the following financial year. Reporting tax expenditures by year of income is not consistent with Table B1: Aggregate Tax Expenditures and Direct Outlays 1989-90 to 1999-2000, in Appendix B: Tax Expenditures. Both Appendix B and the Tax Expenditure Statement report tax expenditures in the year in which the impact on revenue occurs.

Appendix D: Revenue Statistics — 1985-86 to 1996-97

Table D1: Commonwealth Government Budget Revenue ($m) (a)



Table D1: Commonwealth Government Budget Revenue ($m) — continued


Table D1: Commonwealth Government Budget Revenue ($m) — continued

image (a) Figures for all past years have been revised for classification changes.

(b) Estimate.


Table D2: Real Rate of Change in Commonwealth Government Budget Revenue Items (per cent) (a)


Table D2: Real Rate of Change in Commonwealth Government Budget Revenue Items (per cent) — continued


Table D2: Real Rate of Change in Commonwealth Government Budget Revenue Items (per cent) — continued

image (a) Nominal increases deflated by movements in non-farm GDP deflator.

(b) Estimate.

(c) na denotes change from zero to positive values.


Table D3: Major Categories of Revenue as a Proportion of Gross Domestic Product (per cent)


(a) The totals for these categories include Medicare levy collections.

(b) The total for the individuals category includes Medicare levy collections and refunds.

(c) The total for the income tax category also includes refunds, Medicare levy collections, collections from superanuuation funds, PRRT and withholding tax.

(d) The ‘other’ category includes excise from beer, potable spirits and tobacco. A more detailed composition - for 1995-96 and 1996-97 and by value of collections - is shown in Table 9 of this Statement.

(e) As well as excises, sales tax and customs duty, ‘other taxation revenue’ includes other taxes, fees and fines.

(f) Estimate.


Table D4: Major Categories of Revenue as Proportions of Total Revenue


(a) The totals for these categories include Medicare levy collections.

(b) The total for the individuals category includes Medicare levy collections and refunds.

(c) The total for the income tax category also includes refunds, Medicare levy collections, collections from superannuation funds, PRRT and withholding tax.

(d) The ‘other’ category includes excise from beer, potable spirits and tobacco. A more detailed decomposition - for 1995-96 and 1996-97 and by value of collections - is shown in Table 9 of this Statement.

(e) As well as excises, sales tax and customs duty, ‘other taxation revenue’ includes other taxes, fees and fines.

(f) Estimate.

1  See, for example, Department of the Treasury, Tax Expenditures Statement , AGPS, Canberra, November 1995.

2  Industry Commission, Research and Development , Report No. 44, 1995, D.25.

2  Industry Commission, ibid , D.19.

3  Bureau of Industry Economics, R&D, Innovation and Competitiveness , Research Report 50, 1993, p xi.