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
* 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.
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).
Family 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.
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.
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.
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.
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.
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.
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.
The Government has reviewed the method for setting the levels of the beneficiary rebate. For 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.
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 employee share schemes. These changes are outlined in the relevant press release issued with the 1996-97 Budget.
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.
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.
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.
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.
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 in 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.
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 legislation will continue to take effect from 7.30 pm EST on 9 May 1995.
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 relevant press release issued with the 1996-97 Budget.
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.
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.
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 in Budget Statement 4, Appendix C and in a press release issued with the 1996-97 Budget.
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 withholding 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.
The Government intends to introduce legislation to counter tax avoidance through the use of tax-exempt bodies distributing funds offshore.
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.
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 country. 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.
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.
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.
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.
From 1997-98, the Government 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.
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.
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.
The standard contribution limit allows an employer, who has ten or more 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.
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 assets, 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.
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.
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.
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.
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.
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.
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.
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.
The income tax law will be amended 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 affect transfer agreements only where the year of transfer is the 1996-97 year of income (or a subsequent year).
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.
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.
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.
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 cancellation 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.
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.
The Government will move to end 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.
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).
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.
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.
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.
The Government has decided it will continue to receive dividends from AIDC prior to its sale.
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.
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 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 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.
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.
Citizenship application fees will be increased from $55 to $80 on 1 October 1996 to improve cost recovery for the processing of citizenship applications.
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.
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.
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.
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.
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.
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.
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.
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 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 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.
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.
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.
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.