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Tax Laws Amendment (Budget Measures) Bill 2008

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2008

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Tax laws amendment (budget measures) bill 2008

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the

Treasurer, the Hon Wayne Swan MP)

 



T able of contents

Glossary.............................................................................................................. 1

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

Chapter 1            Fringe benefits tax — meal cards and eligible work-related items            7

Chapter 2            Employee share schemes — election mechanism and removal of double taxation................................................................................ 17

Chapter 3            Depreciation of computer software — four year statutory effective life    25

Index................................................................................................................. 29

 



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

Abbreviation

Definition

AEST

Australian Eastern Standard Time

ATO

Australian Taxation Office

CGT

capital gains tax

Commissioner

Commissioner of Taxation

ESS

employee share scheme

FBT

fringe benefits tax

FBTAA 1986

Fringe Benefits Tax Assessment Act 1986

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997



Fringe benefits tax

Meal cards

Part 1 of Schedule 1 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to ensure food or drink provided as part of a salary sacrifice arrangement (eg, ‘meal card’ arrangement) is excluded from the fringe benefits tax (FBT) exemption in section 41 of the FBTAA 1986 that applies to property consumed on an employer’s premises.

Date of effect These amendments apply to food and drink provided after 7.30 pm Australian Eastern Standard Time (AEST), 13 May 2008.  Any food or drink that relates to an existing balance on a meal card at that time will not be subject to FBT if the food and drink is provided before 1 April 2009.  Any food or drink purchased with additional credits (‘top-ups’) that occur after 13 May 2008, will be subject to FBT.

Proposal announced This measure was announced in the 2008-09 Budget and in the Treasurer’s Press Release No. 048 of 13 May 2008.

Financial impact The revenue impact is $610 million over the forward estimates. 

Compliance cost impact :  Minimal.

Eligible work-related items

Part 1 of Schedule 1 to this Bill amends the FBTAA 1986 , the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 to:

•        restrict the FBT exemption for eligible work-related items in section 58X of the FBTAA 1986 to items that are used primarily for work-related purposes;

•        limit the exemption to one item per employee per FBT year unless the item is a replacement item and extend the exemption to apply to all work-related portable electronic devices;

•        deny ‘decline in value’ deductions under Division 40 for depreciable assets that are exempt under section 58X of the FBTAA 1986; and

•        ensure that an employee can continue to claim decline in value deductions for other depreciable assets provided as an expense payment fringe ben efit.

Date of effect :  The amendments to the FBT exemption for eligible

work-related items will apply to items acquired after 7.30 pm (AEST), 13 May 2008. 

Employees will be denied decline in value deductions for eligible

work-related items that are exempt under section 58X of the FBTAA 1986 for items purchased after 7.30 pm (AEST), 13 May 2008.  If the item was purchased before this date, depreciation will be allowed until 30 June 2008.

Proposal announced This measure was announced in the 2008-09 Budget and in the Treasurer’s Press Release No. 048 of 13 May 2008.

Financial impact :   The revenue impact is $530 million over the forward estimates. 

Compliance cost impact :  Minimal.

Employee share schemes

Election mechanism

Part 2 of Schedule 1 to this Bill amends Division 13A of the Income Tax Assessment Act 1936 so that an employee who wishes to be assessed on discounts on shares or rights received in the year of acquisition must make the election in the income tax return for the income year in which the shares or rights are acquired. 

Date of effect These amendments apply to assessments for the 2008-09 income year and later income years. 

Proposal announced This measure was announced in the 2008-09 Budget and in the Treasurer’s Press Release No. 044 of 13 May 2008.

Financial impact :  The revenue impact is $77 million over the forward estimates. 

Compliance cost impact :  Minimal.

Removal of double taxation

Part 2 of Schedule 1 to this Bill amends the capital gains provisions in the Income Tax Assessment Act 1997 to ensure a trustee or beneficiary of an employee share trust is not subject to capital gains tax (CGT) where an employee who exercises employee share scheme rights becomes absolutely entitled to the shares in the trust. 

Date of effect These amendments apply to CGT events occurring from 7.30 pm (Australian Eastern Standard Time), 13 May 2008. 

Proposal announced This measure was announced in the 2008-09 Budget and in the Treasurer’s Press Release No. 044 of 13 May 2008.

Financial impact :  Nil.

Compliance cost impact :  Nil.

Depreciation of computer software — four year statutory effective life

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to increase the period over which taxpayers write off for tax purposes depreciable in-house software, from 2½ years to four years. 

Date of effect :  The new statutory effective life applies from 7:30 pm (by legal time in the Australian Capital Territory) on 13 May 2008, in relation to newly held software assets .

Proposal announced This measure was announced in the 2008-09 Budget and in the Treasurer’s Press Release No. 049 of 13 May 2008.

Financial impact :  This measure has an ongoing gain to revenue, which is estimated at around $1.3 billion over the period 2007-08 to 2011-12, as set out in the table below:

2007-08

2008-09

2009-10

2010-11

2011-12

-

$15m

$300m

$681m

$318m

Compliance cost impact Low.  This measure involves a small change to the taxation treatment of in-house software



1     C hapter 1

Fringe benefits tax — meal cards and eligible work-related items

Outline of chapter

Fringe benefits tax

.1       Part 1 of Schedule 1 to this Bill amends the fringe benefits tax (FBT) law to ensure that:

2         food or drink provided as part of a salary sacrifice arrangement (eg, meal card arrangements) are excluded from the FBT exemption in section 41 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) which applies to property consumed on the employer’s premises on a working day; and

3         the FBT exemption in section 58X of the FBTAA 1986 for eligible work-related items is restricted to items that are used primarily for work-related purposes.  In addition:

.1       the exemption will be limited to one of each of the listed eligible work-related items per employee per FBT year unless the item is a replacement item; and

.2       the list of eligible work-related items will also be updated so that it is available to work-related portable electronic devices.

Income tax

.3       Part 1 of Schedule 1 to this Bill also amends the income tax law to ensure that:

4         there is no deduction available under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) for the decline in value of eligible work-related items that are exempt under section 58X of the FBTAA 1986; and

5         section 51AH, of the Income Tax Assessment Act 1936

(ITAA 1936) does not operate to deny decline in value deductions under Division 40 of the ITAA 1997. 

Context of amendments

Fringe benefits tax

Exempt property benefits — meal card arrangements

.1       Section 41 of the FBTAA 1986 currently provides an exemption for property benefits provided to employees and consumed by them on a working day on the employer’s business premises.  This includes food and drink.

.2       The original intent of the legislation was to ensure that a property fringe benefit would be subject to FBT where it was provided free or at a discount.  An exception was provided for goods supplied on a working day and consumed on the employer’s premises.  The limited nature of the intended benefit was illustrated in the explanatory memorandum to the original Bill by the example of ‘a daily ration of beer consumed at work by brewery workers would not be subject to tax’.

.3       Employers and employees have been accessing this FBT exemption where meals are provided to employees under salary sacrifice arrangements.  These arrangements include the use of ‘meal cards’.  Under such arrangements, an employer pays for an employee’s meals which have been provided by an independent caterer located on, or the independent caterer delivers to, the employer’s premises.  This allows an employee with a meal card to effectively purchase food and drink out of pre-tax income, whereas most employees must purchase their meals from after-tax income. 

.4       The use of meal cards in these circumstances is inconsistent with the original policy intent of the FBT exemption which was to provide an exemption for staff canteens and other modest benefits.  Therefore, the measure restores the original intent.

Exemption for eligible work-related items

.5       The FBT exemption for eligible work-related items in

section 58X of the FBTAA 1986 was introduced in 1995 as part of measures designed to reduce the cost of compliance for employers.  The measure was intended to remove the need for employers to obtain declarations stating the percentage of employment-related use in applying the ‘otherwise deductible’ rule (generally, the extent to which the employer could obtain a deduction in relation to the benefit, as the benefit would have been deductible to the employee). 

.6       With the exception of mobile phones, computer software and protective clothing, the current exemption provides that items will be exempt without any requirement that their use be work-related.  It was not anticipated that other benefits would be widely available for private purposes.

.7       Since the exemption was introduced in 1995, changes in technology have increased access to portable electronic items such as laptop computers.  Employees are able to acquire these items under a salary sacrifice arrangement for private purposes.  This allows them to acquire goods for private use out of pre-tax income.  This is inconsistent with the original policy intention that the exemption should only be available where personal use of a particular item is merely incidental to business use. 

.8       In addition, except for laptops or other portable computers, there is no restriction on the number of items for which the exemption can apply in an FBT year. 

.9       The list of exempt items has also become outdated because of changes in technology, for example, many portable electronic devices have more than one function and other work-related electronic devices have become available.  It is uncertain whether the FBT exemption applies to these items given their multiple functionality. 

Income tax

Decline in value deductions for items which are exempt under section 58X of the FBTAA 1986

.10     Employees are currently able to claim deductions for the decline in value of depreciating assets such as laptop computers to the extent they are used for a taxable purpose.  This is notwithstanding that the item may have effectively cost them less than the purchase price because, for example, it was provided as an expense payment fringe benefit (where the employee has effectively been reimbursed the cost by their employer) or as a property fringe benefit and the benefit is exempt from FBT under section 58X of the FBTAA 1986.  This is an inappropriate outcome as no FBT is payable and both the employee and employer can claim a tax deduction in respect of the item — even though the employee has effectively not incurred the cost of purchasing it. 

Section 51AH of the Income Tax Assessment Act 1997

.11     Section 51AH of the ITAA 1936 complements section 24 of the FBTAA 1986 which contains the ‘otherwise deductible’ rule as it applies to expense payment fringe benefits.  It operates to deny an employee a deduction for expenditure where that expenditure has been reimbursed by the employer as an expense payment fringe benefit.

.12     Under the existing Australian Taxation Office interpretation, section 51AH does not operate to deny deductions for decline in value of depreciating assets that are provided by way of expense payment fringe benefits. 

.13     As there is some doubt that this view is sustainable, the law is to be amended to ensure that section 51AH does not prevent a deduction for decline in value of depreciating assets that are subject to FBT.

Summary of new law

.14     These amendments:

6         ensure that the FBT exemption in section 41 of the FBTAA 1986 for property benefits consumed on the employer’s business premises on a working day, excludes food or drink which is provided to an employee under a salary sacrifice arrangement;

7         ensure that the FBT exemption for eligible work-related items under section 58X will now only be available for eligible work-related items where those items are used primarily for work purposes.  In addition:

.1       the exemption will be limited to one of each of the listed eligible work-related items per employee per year unless it is a replacement item; and

.2       the list of work-related items will also be updated to deal with changes in technology;

8         deny employees decline in value deductions for assets which are provided to the employee as either an expense payment fringe benefit or a property fringe benefit and the benefit is exempt under section 58X of the FBTAA 1986; and

9         ensure that section 51AH of the ITAA 1936 does not prevent decline in value deductions for depreciating assets that are subject to FBT.

Comparison of key features of new law and current law

New law

Current law

The exemption provided by section 41 of the FBTAA 1986 will no longer apply to food or drink provided to an employee as part of a salary sacrifice arrangement.

Section 41 of the FBTAA 1986 applies to provide an FBT exemption for property provided to an employee and consumed on the employer’s business premises on a working day.

Section 58X of the FBTAA 1986 will provide an FBT exemption for the following work-related items that are used primarily for use in the employee’s employment:

1          a portable electronic device;

2          an item of computer software;

3          an item of protective clothing;

4          a briefcase; and

5          a tool of trade.

The exemption applies to provide an exemption of one item per FBT year that has substantially identical functions unless the item is a replacement item.

 

Section 58X of the FBTAA 1986 applies to provide an FBT exemption for an expense payment, property or residual benefit that is an eligible work-related item including:

1          a mobile phone (that is primarily for use in the employee’s employment);

2          protective clothing (that is required for the employee’s employment);

3          a briefcase;

4          a calculator;

5          a tool of trade;

6          computer software (for use in the employee’s employment);

7          an electronic diary;

8          a laptop computer or similar portable computer; and

9          a portable printer.

A work-related requirement only applies to mobile phones, protective clothing and computer software. 

The FBT exemption for a laptop computer or similar portable computer is limited to the purchase or reimbursement of one computer per FBT year for each employee.

 

 

 

 

New law

Current law

Division 40 of the ITAA 1997 will deny a decline in value deduction for eligible work-related items that are depreciating assets and where the asset is provided as an expense payment fringe benefit or a property fringe benefit and the benefit is exempt under section 58X of the FBTAA 1986.

Division 40 of the ITAA 1997 allows a deduction for decline in value of depreciating assets. 

 

Section 51AH of the ITAA 1936 will not operate to deny an employee a decline in value deduction under Division 40.

There is some doubt whether or not section 51AH of the ITAA 1936 (which limits deductions to employees where their expenditure is reimbursed as an expense payment fringe benefit) operates to deny decline in value deductions under Division 40 of the ITAA 1997.

Detailed explanation of new law

Fringe benefits tax

Exempt property benefits — meal card arrangements

.1       This Schedule will amend section 41 of the FBTAA 1986 so that it will not apply to provide a FBT exemption for food or drink provided to an employee where:

2         an employee has agreed to receive the food or drink in return for a reduction in the employee’s entitlement to receive salary or wages and this would not have happened apart from the agreement; or

3         it is reasonable to conclude that the employee’s salary or wages would be greater if the food or drink were not provided as part of the employee’s remuneration package.

[Schedule 1, item 2, subsection 41(2)]

.1       The type of agreement or arrangement described in

subsection 41(2) is commonly referred to as a ‘salary sacrifice’ arrangement.  It includes ‘meal card’ arrangements whereby an employee forgoes salary and wages to have food and drink supplied to them on their employer’s premises.  The exclusion does not apply to a subsidised canteen which is available to all employees and which does not form part of a salary sacrifice arrangement. 

.1        

As an employee, Paul’s income is subject to the top rate of taxation.  There is a restaurant on the ground floor of Paul’s employer’s premises.  The employer has entered into an arrangement whereby the restaurant provides employees with a ‘swipe card’ (meal card) to purchase meals. 

Paul’s employer offers a salary sacrifice arrangement to its employees to acquire a ‘meal card’.  Paul enters into a salary sacrifice arrangement for $3,000 with his employer to obtain a meal card.  Paul orders his lunch each day (and occasionally dinner) and the restaurant delivers this to his office.

The provision of lunch consumed in his office is exempt from FBT under section 41 of the FBTAA 1986 so Paul’s employer has no FBT liability on the provision of the benefit.

Paul has reduced his tax by $1,350.

Karen, who works in the building across the street, earns the same income as Paul.  Karen’s employer, however, does not offer these arrangements.  Karen pays $1,350 more tax than Paul and has to buy her own lunch.

Exemption for eligible work-related items

.2       This Schedule will replace subsection 58X(2) of the FBTAA 1986 so that the following eligible work-related items will be exempt where the items are primarily for use in the employee’s employment:

4         a portable electronic device;

5         an item of computer software;

6         an item of protective clothing;

7         a briefcase; and

8         a tool of trade.

[Schedule 1, item 4, subsection 58X(2)]

.1        

Christine, Eva and Dean are friends from their school days.  They all work in the city and are all subject to the top rate of taxation.

Christine and Eva’s employers offer salary sacrifice arrangements.  Dean’s employer does not offer salary sacrifice arrangements for its staff.

Christine’s husband wants a laptop computer.  Christine’s employer already provides her with the use of a laptop as her employer recognises that she does a lot of work at home after hours and on weekends.

Christine goes to the local department store and purchases a laptop for her husband for $3,000.  Christine then provides the receipt to her employer and requests, under the salary sacrifice arrangement with her employer, that it be salary packaged and that she be reimbursed for the expense.  As the benefit is an exempt fringe benefit under section 58X the employer would not be liable for FBT in relation to the benefit.  Christine would have a reduction in her tax liability of $1,350.

Eva’s employer does not provide her with a laptop even though she also does a lot of work after hours and on weekends.  Eva purchases the same laptop as Christine for $3,000 and also asks her employer to reimburse her as part of a salary sacrifice arrangement.  As the benefit is an exempt benefit under section 58X, the employer would not be liable for FBT in relation to the benefit.  Eva also now has a reduction in her tax liability of $1,350.

Dean however, is not able to enter into a salary sacrifice arrangement to acquire a laptop for his wife who wants a laptop computer.  Dean simply purchases a laptop out of his after tax income.

These amendments restore the equity for arrangements similar to those entered into by Christine and Dean and where a laptop is purchased wholly for private purposes, that is, the use of salary sacrifice will  not put a person in a more favourable position compared to someone who does not salary sacrifice.

.2       The exemption for these items will be restricted to one item per year for items that have a substantially identical function.  [Schedule 1, item 4, subsection 58X(3)]

.1        

An employee acquires two laptop computers in an FBT year as a fringe benefit.  The second laptop computer has substantially identical functions to the first laptop computer.  The FBT exemption in section 58X is only available in respect of the first laptop computer.   

.3       The exemption is available in respect of an item that is a replacement of another item acquired earlier in the FBT year.  [Schedule 1, item 4, subsection 58X(4)]

.1        

An employee (Eva in Example 1.2) is provided with a second laptop by her employer during the FBT year because the first computer was stolen.  The FBT exemption in section 58X applies to exempt the second laptop computer from FBT.

Income tax

.4       Prior to this amendment, where a person used a laptop purely for work-related purposes and the laptop had been acquired by way of the provision of an exempt benefit under section 58X, the employee would be able to claim a deduction for the decline in value of the laptop.

.5       This Schedule amends section 40-45 of Division 40 of the ITAA 1997 to ensure that an employee is not able to claim a deduction for decline in value for eligible work-related items where the item is provided as an expense payment fringe benefit or a property fringe benefit and the benefit is exempt from FBT under section 58X of the FBTAA 1986.  [Schedule 1, item 8, subsection 40-45(2)]  

.6       This Schedule also amends section 51AH of the ITAA 1936 to ensure that an employee can claim decline in value deductions for depreciating assets that are provided as taxable fringe benefits.  [Schedule 1, item 6, subsection 51AH(3)]  

Application and transitional provisions

Fringe benefits tax

Exempt property benefits — meal card arrangements

.7       The amendment made by item 2 to section 41 of the FBTAA 1986 applies to food and drink provided after 7.30 pm Australian Eastern Standard Time (AEST) 13 May 2008.  [Schedule 1, subitem 3(1)]

.8       However, if an employee has entered into an agreement with their employer before 7.30 pm (AEST), 13 May 2008, any food or drink that relates to an existing balance at that time will not be subject to FBT if the food and drink is provided before 1 April 2009.  Any food or drink purchased with additional credits (‘top-ups’) that occur after 13 May 2008 will be subject to FBT.  [Schedule 1, subitem 3(2)]  

.1        

Following on from Example 1.1, if Paul had entered into the arrangement before 13 May 2008 and before this date an amount of $500 through payroll deduction had occurred by which a credit amount was available on the meal card, then Paul could continue to use the meal card after 13 May 2008 up to 31 March 2009 (end of the FBT year).  This simply means that in this circumstance the meal card can continue to be used until the balance on the card is exhausted on or by 31 March 2008.  Any food or drink provided from additional credits to the meal card after 13 May 2008 would be subject to FBT.

Exemption for eligible work-related items

.9       The amendment made by item 4 to section 58X of the FBTAA 1986 applies to eligible work-related items acquired after 7.30 pm (AEST), 13 May 2008 other than items acquired under a contract entered into at or before that time.  To avoid doubt, this applies to items substantially identical in function and replacement items.  [Schedule 1, item 5]

Income tax

.10     The amendment made by item 8 to section 40-45 of the ITAA 1997 to deny decline in value deductions for items in relation to which section 58X (of the FBTAA 1986) exempt benefits have been provided, applies to assets acquired after 7.30 pm (AEST), 13 May 2008 other than assets under a contract entered into at or before that time.  If the asset was acquired at or before that date, a decline in value deduction can be claimed for the 2007-08 income year, but not for later income years.  [Schedule 1, item 9]

 



9     C hapter 2

Employee share schemes — election mechanism and removal of double taxation

Outline of chapter

.1       Part 2 of Schedule 1 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) to:

10     restore the intent of the legislation by changing the method of making an election that allows a taxpayer to choose between two tax concessions available for qualifying shares or rights acquired under an employee share scheme (ESS) thereby ensuring that income is properly included in the taxpayer’s assessable income; and

11     remove double taxation that arises in relation to certain ESS that use an employee share trust. 

Context of amendments

.1       Division 13A of the ITAA 1936 provides for the taxation treatment of shares and rights acquired under ESS.  Any discount from the market price of the shares or rights is assessable income.  An employee participating in an ESS can, subject to certain conditions, choose one of two tax concessions on the discount they receive — the tax-upfront concession or the tax-deferred concession.

12     Under the tax-upfront concession, an employee is taxed on the discount received on shares and rights in the income year in which they are acquired.  If the shares and rights are acquired under an ESS that meets certain exemption conditions the taxpayer can disregard the first $1,000 of the discount.

13     Under the tax-deferred concession, an employee can defer paying tax on the discount received on shares or options until a cessation time.  A cessation time occurs at the earliest of:

.1       when restrictions on sale are lifted;

.2       an employee sells the shares or exercises the options;

.3       employment ceases; or

.4       ten years pass from the time the shares or rights were acquired. 

.5       There is a risk with the election mechanism whereby taxpayers may seek to manipulate when amount of the discount is included as assessable income and thereby reduce their liability for tax.  To address this risk, the law is being amended to ensure that taxpayers properly include ESS income in their tax return.

.6       Subdivision 130-D of the ITAA 1997 deals with the capital gains tax (CGT) consequences of an ESS which falls under Division 13A of the ITAA 1936.

14     For the tax-upfront concession, the cost base of the rights or shares is the market value of the shares or rights on acquisition.  The cost base of any shares acquired as a result of the exercise of rights includes the market value of the rights on acquisition and the exercise price paid plus brokerage fees and other costs.  The effect is that any gains or losses from the time of acquisition of the shares or rights will be dealt with under the CGT regime.

15     For the tax-deferred concession, the CGT consequences depend on whether the relevant CGT event happens to the shares or rights (or shares acquired as a result of the exercise of the rights) in an arm’s length transaction within 30 days of the ‘cessation time’.

.1       If the relevant CGT event happens to the shares or rights (or shares acquired from exercising a right) within 30 days of the cessation time any capital gain is disregarded.  This is because any gain that has arisen up to the cessation time will have been subject to income tax under Division 13A.

.2       If the relevant CGT event happens to the shares or rights (or shares acquired from exercising a right) outside 30 days of the cessation time, the cost base is the market value of the shares or rights at cessation time.  The effect is that any gains from the cessation time will be assessed as a capital gain.

.3       Subdivision 130-D of the ITAA 1997 provides CGT relief where the shares or rights are held by a trustee before being passed to an employee.  The relief is available for the tax-upfront concession and the tax-deferred concession.  The provisions ensure that the trustee or beneficiary will not be taxed on a capital gain that reflects either a discount that is assessed to the employee under Division 13A of the ITAA 1936 or a capital gain that arises later when a CGT event occurs in relation to the shares.

Making an election

.4       Where in a year of income a taxpayer acquires qualifying shares or rights and wishes to be taxed upfront, section 139E of the ITAA 1936 requires the taxpayer to make an election.  The election, which must be in writing, must be made before lodging the tax return for the year in which the shares or rights are acquired, or within such further time as the Commissioner of Taxation (Commissioner) allows.  The election is not required to be lodged with the tax return or otherwise provided to the Commissioner.

.5       There is a risk with the election requirements in relation to rights and options provided by an employer to an employee under an ESS.  If the value of shares or rights increases significantly, a taxpayer can substantially reduce their tax liability by claiming to have made an election to be assessed under the tax-upfront method and, through an oversight, omitted to include the discount in their income tax return in the earlier income year.  If the taxpayer makes this claim outside the two year amendment period, it may not be possible to include the discount in their assessable income via an amended assessment. 

.1        

Carlos works for a public company and is granted 500,000 options in May 2003.  The options are valued at 20 cents each and can be exercised after three years.  If he were to be taxed at grant he would be assessed on $100,000 (500,000  ×  20c) in his 2003 tax return, but he chooses not to — he makes no section 139E election — or makes the election but fails to include the income.

The company does very well in the current economic boom and by 2006 the options are worth $2 each.  Carlos exercises all the options in 2006 and his tax agent tells him he will be taxed on a total of $1 million in 2006.  Carlos regrets that he did not make an election back in 2003.  His tax agent advises him that elections are not provided to the Australian Taxation Office (ATO) and the Commissioner has no knowledge of whether a taxpayer has made an election.

Carlos writes to the ATO advising that he made an election before lodging his tax return but now realises that through an oversight he omitted the income in that year.  He requests an amendment to his 2003 tax return to include the $100,000, which is accepted under self assessment.

By claiming to have made an election for the 2003 year, Carlos avoids being assessed on $1 million income in 2006. [1]   If questioned, Carlos produces a document purporting to be an election prepared in 2003.  Forensic testing of the document provided generally will not provide the necessary evidence that the document was fabricated and is of little use. 

.6       To ensure the law operates as intended, requirements surrounding the making of an election will be tightened so amounts acquired under an ESS are appropriately returned. 

.7       Under the new arrangements an election to be taxed upfront on shares or rights is made under section 139E by making the election and including the amount of discount in the income tax return of the year of acquisition.

Double taxation

.8       Double taxation can arise in relation to certain ESS that use an employee share trust.  Under these schemes, an employee acquires shares from the trustee of an employee share trust on the exercise of rights that they acquired under an ESS.

.9       These ESS do not fall within the schemes to which the CGT relief applies.  This is because the CGT relief only applies where the shares or rights held by an employee share trust were acquired under an ESS.  The CGT relief does not extend to shares held in the trust that the employee acquires by exercising rights they acquired under an ESS [2]

.10     Under these arrangements double taxation can arise because the trustee cannot access the CGT relief available because the requirement that the share must have been acquired by the employee under an ESS cannot be satisfied.  In these circumstances, it is the right to the share and not the share itself which has been acquired under an ESS.

.11     The capital gain that arises to the trustee or beneficiary reflects wholly or partly:

16     the discount amount (being the difference between the market value of the right and the amount the employee paid for the right) on which the employee has been or will be taxed under the ESS provisions in Division 13A of the ITAA 1936; or

17     any capital gain arising later when a CGT event occurs in relation to the shares (such as a sale).

Comparison of key features of new law and current law

New law

Current law

An election to be taxed upfront in relation to shares or rights is made under section 139E by the taxpayer making the election.  The taxpayer must also include the amount of the discount in the income tax year of the year of acquisition.  This does not apply where the discount is below $1,000 and the shares or rights are acquired under an exempt scheme.

An election to be taxed upfront in relation to shares or rights is made under section 139E by making an election in writing before lodging the tax return for the year in which the shares or rights are acquired.  The election is not required to be lodged with the tax return or otherwise provided to the Commissioner.

Section 130-90 of the ITAA 1997 provides a trustee or beneficiary of an employee share trust relief from CGT when an employee becomes absolutely entitled to ESS shares or rights held in the trust and shares held to satisfy an exercise of rights held under an ESS.

Section 130-90 of the ITAA 1997 provides a trustee or beneficiary of an employee share trust relief from CGT when an employee becomes absolutely entitled to ESS shares or rights held in the trust. 

Detailed explanation of new law

Making an election

.1       Subsection 139E(2) of the ITAA 1936 is replaced with a new method of making an election to be assessed under the tax-upfront concession. 

.2       Under the changes, a taxpayer must make an election to be assessed under this concession by making the election and including the amount of the discount in the income tax year of the year of acquisition.  If the value of the discount is $1,000 or less and the taxpayer is eligible for the $1,000 exemption under subsection 139BA(2) of the ITAA 1936 because the exemption conditions under section 139CE of the ITAA 1936 are satisfied, the taxpayer will be taken to have made the election.  [Schedule 1, item 11]

.1        

Helena is a store manager on a salary of $85,000.  Helena’s employer has an ESS which is available for all staff to participate in.  Helena decides to participate and acquires 800 qualifying shares at $1 per share on 22 September 2009 where the exemption conditions in section 139CE of the ITAA 1936 are met.  The market value of the shares at that time was $2.00.  The discount Helena receives is valued at $800 (market value of $2  ×  800 shares  =  $1,600 less $800  -  the amount Helena paid for the shares).

Helena does not have to include the discount in her assessable income for the 2009-10 return as the discount is less than $1,000 and the exemption conditions in section 139CE of the ITAA 1936 are met.  Helena is taken to have made the election to be taxed upfront on the discount.

.2        

Assume the same details in Example 2.1 but the amount of the discount is more than $1,000.  In relation to the amount in excess of $1,000 Helena must indicate in her return that she has made an election and include the discounted amount in excess of the $1,000 in the year of acquisition.  If this is not done, Helena will be taken to have chosen the tax-deferred alternative.

.3       The Commissioner is currently provided with a discretion to allow additional time to make an election.  This discretion will continue.  A taxpayer seeking an extension of time must make the request in writing in an approved form.  [Schedule 1, item 11]

.4       Subsection 139E(4), which sets out how an election must be made for the purposes of subsection 139E(3), is also modified to reflect the new election mechanism contained in subsection 139E(3).  [Schedule 1, item 12]

Double taxation

.5       Subsection 130-90(3) of the ITAA 1997 describes the shares or rights for which a trustee or beneficiary of an employee share trust is able to access the CGT relief provided under section 130-90 of the ITAA 1997.  These amendments extend subsection 130-90(3) so that the relief also applies to the following shares:

2         shares which are acquired as a result of exercising a right acquired under an ESS; and

3         shares acquired as a result of exercising a right which was acquired as a result of a corporate takeover or restructure and section 139DQ of the ITAA 1936 applies to treat the right as a continuation of the right that existed before the corporate takeover or restructure.

[Schedule 1, item 14]

Application provisions

.1       The new election procedures under subsections 139E(2), (2A), (2B), (4) and (5) will take effect in relation to assessments for the 2008-09 income year and later income years.  [Schedule 1, item 13]

.2       The amendment to subsection 130-90(3) of the ITAA 1997 will apply to CGT events happening at or after 7.30 pm (Australian Eastern Standard Time) 13 May 2008.  [Schedule 1, item 15]

.



4     C hapter 3

Depreciation of computer software — four year statutory effective life

Outline of chapter

.1       Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to increase the period over which taxpayers write off for tax purposes depreciable in-house software from 2½ years to four years. 

.2       All references to legislative provisions in this chapter are references to the ITAA 1997.

Context of amendments

.3       For tax purposes, depreciable assets are generally written off over their effective lives.  The Commissioner of Taxation (Commissioner) has set ‘safe harbour’ effective life depreciation periods for a wide range of assets.  For example, the Commissioner’s safe harbour effective life for computers is four years.  Alternatively, taxpayers can self assess an effective life where they can demonstrate the basis for doing so.

.4       Certain intangible assets, including in-house software, have a statutory effective life.  In the case of in-house software, this effective life is currently 2½ years.

.5       In-house software is essentially software that is used in-house, rather than as trading stock, and that is a capital asset, rather than fully deductible in the year of purchase.  It includes software, or a right to use software, that the taxpayer has acquired, developed or has had another entity develop. 

.6       Extending the statutory effective life of software to four years aligns the write-off period with other computer equipment (hardware).

.7       Subsection 40-70(2) precludes certain intangible assets — including in-house software — from being depreciated using the diminishing value method.  This means that in-house software must be depreciated on a ‘straight line’ basis, under the prime cost method.

Summary of new law

.8       Schedule 2 to this Bill increases the statutory effective life for depreciable in-house software from 2½ years to four years. 

.9       A four year depreciation period for expenditure on in-house software is the same period as the Commissioner’s safe harbour effective life for computers generally.

.10     The new statutory effective life applies from 7:30 pm (by legal time in the Australian Capital Territory ) on 13 May 2008, in relation to newly held software assets.

Detailed explanation of new law

.11     Under section 995-1, in-house software is computer software, or a right to use computer software, that a taxpayer acquires, develops or has another entity develop: 

5         that is mainly for use in performing the functions for which the software was developed; and

6         that is not fully deductible in the year of purchase.

.1       Paragraph 40-30(2)(d) states that in-house software is an intangible depreciating asset if it is not trading stock. 

.2       Section 40-25 allows taxpayers to deduct an amount equal to the decline in value for an income year of a depreciating asset held for any time during the year. 

.3       In this manner, depreciating assets are generally ‘written off’ (ie, depreciated) for taxation purposes over their effective lives.

.4       The table at subsection 40-95(7) prescribes effective lives for certain intangible depreciating assets. 

.5       Item 8 of that table prescribes the effective life for in-house software as 2½ years.

.6       This measure changes the figure for that statutory effective life at item 8 from 2½ to four years.  [Schedule 2, item 1, subsection 40-95(7)]

.7       This means that in-house software will be depreciated over four years, rather than 2½ years, with a commensurately smaller deduction allowed each year. 

.8       In-house software will therefore be depreciated at the same rate as under the Commissioner’s safe harbour effective life for computers generally.

.9       The subsection 40-70(2) requirement that in-house software be depreciated using the prime cost method is unchanged. 

Application and transitional provisions

.10     T he new, longer statutory effective life of four years applies from 7:30 pm (by legal time in the Australian Capital Territory ) on 13 May 2008, in relation to newly held software assets.  That is, the four year write-off period applies to an in-house software asset that a taxpayer starts to:

7         hold under a contract after that time;

8         develop after that time; or

9         hold in some other way after that time.

[Schedule 2, item 2]

.1       For an in-house software asset held at that time, any further expenditure representing second element cost (in terms of section 40-190 of the ITAA 1997) is depreciated as part of that asset, under the current shorter statutory effective life.  In particular, upgrades to such software that do not create new or different depreciating assets will not be affected by this measure, even though that further expenditure occurs after 7:30 pm ( by legal time in the Australian Capital Territory ) on 13 May 2008. 

 



Schedule 1:  Fringe benefits tax and employee share schemes

Bill reference

Paragraph number

Item 2, subsection 41(2)

1.17

Item 4, subsection 58X(2)

1.19

Item 4, subsection 58X(3)

1.20

Item 4, subsection 58X(4)

1.21

Item 5

1.27

Item 6, subsection 51AH(3)

1.24

Item 8, subsection 40-45(2)

1.23

Item 9

1.28

Item 11

2.15, 2.16

Item 12

2.17

Item 13

2.19

Item 14

2.18

Item 15

2.20

Subitem 3(1)

1.25

Subitem 3(2)

1.26

Schedule 2:  In-house software

Bill reference

Paragraph number

Item 1, subsection 40-95(7)

3.17

Item 2

3.21

 




[1]     He will be assessable on a capital gain if and when he disposes of the shares, but this can benefit from discounting.  The taxation of the capital gain is also deferred to a time of his choosing.

[2]      Subsection 139C(4) of the ITAA 1936 provides that shares acquired by the employee as a result of exercising the rights are treated as not having been acquired under an ESS.