Bills Digest No. 168 2004–05
Tax Laws Amendment (2005 Measures No. 3) Bill 2005
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Tax Laws Amendment (2005
Measures No. 3) Bill 2005
Date Introduced: 12 May 2005
House: House
of Representatives
Portfolio: Treasury
Commencement:
The measures contained in Schedule 1, 2 3 and 5 of the Tax Laws Amendment
(2005 Measures No. 3) Bill 2005 (Bill) will commence on Royal Assent.
The measures in Schedule 4 of the Bill will commence on 1 July 2005, immediately
after the commencement of the measures contained in Schedule 10 of the
Tax Laws Amendment (2004 Measures No. 1) Act 2004.
The Bill contains a variety of measures which aim to
make changes to:
-
the tax concessions available for philanthropy
-
the tax treatment of profits derived from international shipping
and airline operations
-
the secrecy provisions contained in the Taxation Administration
Act 1953
-
the availability of fringe benefit tax concessions for government
institutions endorsed as charitable institutions, and
-
the dependent child age criteria for certain tax offsets, including
offsets for housekeepers, Medicare levy or Medicare Levy Surcharge.
The proposed measures have different backgrounds which are briefly discussed
in relation to each individual measure below.
In the Bills Digest prepared in relation
to the Extension of Charitable Purpose Bill 2004, a previous digest, it
has been noted that:
Charities are important aspects of modern societies and
they often provide essential services to the community such as looking
after those in need. By assuming roles that have been Government responsibility,
charities provide financial relief to governments. By providing various
tax exemptions for charities as a form of subsidy, the Government has
acknowledged this particular function charities assume.(1)
Continuing this trend, the Bill proposes amendments to the tax law which
are the result of submissions
received by the Prime Minister’s Community Business Partnership (PMCBP).
The changes were announced by the former Minister for Revenue and Assistant
Treasurer, Senator Coonan, in Press
Release No 37 of 2004, dated 11 May 2004. These changes are outlined
below.
Under the current law, gifts and other contributions to deductible gift
recipients (DGRs) can be, in certain circumstances, tax deductible.(2)
However, under section 30-15(2) testamentary gifts and bequests, that
is gifts made under a will, are not tax deductible, unless the gift would
qualify as cultural or heritage gift under the Government’s Cultural Bequest
Program.(3) Further, under section 118-60 of the Income
Tax Amendment Act 1997 (ITAA 1997), testamentary gifts may be exempt
from capital gains tax (CGT) if certain requirements set out in section
30-15 ITAA 1997 are met. However, by virtue of section 30-15(2) of the
ITAA 1997, a CGT exemption will only be available to testamentary gifts
which were valued by the Commissioner for Taxation (Commissioner) at more
than $5000.
Item 20 of Schedule 1 proposes to introduce a new subsection
118-60(1A) into the ITAA 1997 which will deem any property with a
value less than $5000 as having been valued by the Commissioner at a value
of more than $5000 for the purposes of the CGT exemption. By virtue of
this deeming provision, property with a value of less then $5000 will
trigger the CGT exemption for testamentary gifts and bequests.
Currently, the income of certain charitable funds maybe exempt from income
tax if they provide money, property and/or other benefits either solely
to:
-
charities located in Australia which pursue their purposes in Australia,
or
-
charities which have been accepted and registered by the Australian
Tax Office (ATO) as DGRs.(4)
However, under the current regime it is not possible to claim an income
tax exemption if the charity distributes funds to a combination of both
types of charities.
The proposed changes will remove this problem. Item 13 of Schedule
1 will repeal the current subsections 50-60(c) and (d) of the ITAA
1997 in order to substitute new subsections 50-60(c) and (d).
These proposed new subsections will have the effect that the income tax
exemption will become available to charitable funds which make distributions
to a combination of funds, regardless of whether they are charities or
not.(5)
Entities which are accepted and registered by the ATO as DGRs may not
be endorsed as charities within the meaning of the law. Good examples
for DGRs which are not considered to be charitable are public ambulance
services. However, under the current tax regime, ancillary funds and prescribed
private funds, which are expressly prescribed in the Income Tax Assessment
Regulations 1997, are not able to claim an income tax exemption if they
distribute funds to DGRs which are not endorsed as charities. The proposed
changes aim at removing this anomaly.(6)
Item 7 of Schedule 1 will insert proposed new section
50-20 of the ITAA 1997 which, in effect, will permit ancillary and
prescribed private funds to have access to the income tax exemption regardless
of whether they distribute funds to DGRs which are endorsed as charities
or not.
Unlike prescribed charitable prescribed funds which are endorsed by the
ATO as an income-tax exempt charity, non-charitable prescribed private
funds are not automatically entitled to a refund of franking credits.
Items 21 and 22 of Schedule 1 will make changes to
the ITAA 1997 which will entitle non-charitable prescribed private funds
to the refund on the same basis as charitable prescribed private funds.
The financial impact and the compliance costs anticipated for this measure
will be, according to the Explanatory
Memorandum, insignificant.
The amendments will take effect with Royal Assent and become applicable
to the income year in which the Bill receives Royal Assent and each later
income year.
The proposed changes are technical amendments to the Income Tax Assessment
Act 1936 (ITAA 1936) which became necessary as the result of certain
tax measures enacted under the New International Tax Measures (Participation
Exemption and Other Measures) Act 2004.(7) These measures
had the unwanted effect that Australian companies which were involved
in the international operation of ships and aircraft escaped taxation:
these companies would neither be taxed in Australia nor in the country
in which the company operated.
The proposed measure was announced in the Minister for Revenue and Assistant
Treasurer’s Press
Release No. 4 of 2005. In this press release, the Minister was cited
saying:
Generally, under its tax treaties with other countries,
Australia has exclusive taxing rights over Australian companies in respect
of their profits from the operation of ships or aircraft in international
traffic. If such profits are not taxed in Australia, neither treaty
partner country would tax this income.
A change will be made to the tax law to ensure that the
expanded exemption for foreign branch income does not apply to companies
operating ships or aircraft in international traffic […] This will ensure
those amounts continue to be taxed in Australia, consistently with Australia’s
policy in negotiating its tax treaties.(8)
Most income and capital gains derived by a foreign branch of a resident
company after 1 July 2004 are exempt from income tax as they are treated
as non-assessable non-exempt income under section 23AH of the ITAA 1936.(9)
Item 2 of Schedule 2 will insert new subsections 23AH(14A)
and (14B) which will stipulate that this exemption will not
apply to income and capital gain or losses which were derived from the
operation of ships or aircraft in international traffic (proposed new
paragraph 23AH(14A)(a)) or things ancillary to the operation of such
aircraft and ships (proposed new paragraph 23AH(14A)(b)).
According to the Explanatory
Memorandum, the measure’s financial impact and anticipated compliance
costs will be nil.
The measure will come into force with Royal Assent given to the Bill,
but will have a retrospective application to transactions falling into
the income years starting on 1 July 2004. This is necessary to align this
measure with the measures implemented through the New International
Tax Measures (Participation Exemption and Other Measures) Act 2004.(10)
The proposed amendments are changes necessary to permit the disclosure
of information collected by the Commissioner to the newly established
Corruption and Crime Commission of Western Australia (WA Commission).
The WA Commission was established under the Western Australian Corruption
and Crime Commission Act 2003. According to the Explanatory
Memorandum, the WA Commission has all the powers and functions as
its predecessor, the Anti-Corruption Commission, plus the powers of the
Police Royal Commission.
This change in Western Australian law requires the amendment to existing
taxation legislation on Commonwealth level to allow the Commissioner under
section 3E of the Taxation Administration Act 1953 (TAA) to
provide the new WA Commission with relevant information where the
Commissioner is satisfied that the information is relevant to:
-
establishing whether a serious offence has been, or is being, committed;
or
-
the making, or proposed or possible making, of a proceeds of crime
order.
The proposed changes have not been announced previously.
Items 1 and 2 of Schedule 3 will make the relevant
changes to section 2(1) of the TAA by including the WA Commission as eligible
recipient of relevant information collected by the Commissioner.
It is anticipated that the measure’s financial impact as well as its
compliance costs will be nil.(11)
The provisions will become effective with the Bill receiving Royal Assent.
The measure will not apply retrospectively: item 3 of Schedule
3 expressly provides that the changes will only apply to disclosures
after the day the changes commence.
The amendments proposed in this Schedule aim at curtailing the scope
of a tax measure introduced in the Tax Laws Amendment (2004 Measures
No. 1) Act 2004.(12) With this Act, Parliament introduced
measures allowing the Commissioner to endorse, under certain circumstances,
charities, public benevolent institutions and health promotion charities
to gain fringe benefits tax rebatable employer status under subsection
65J(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).
Endorsed employers are currently able to claim a tax rebate of 48 cents
per dollar.
However, when introduced, the provisions were broad enough to allow Government
bodies of the Commonwealth, the states or territories to become eligible
for the rebate from 1 July 2005 onwards if they were accepted as a charity
at law.
The proposed measure will align the changes made by the Tax Laws Amendment
(2004 Measures No. 1) Act 2004 with established legal principle, namely
that institutions which can be characterised as an emanation of government
cannot fall within the established meaning of charity at law and will
continue to be unable to claim the rebate.(13)
The proposed measure has not been announced previously.
Item 1 of Schedule 4 will insert an express clarification
that charitable institution within the meaning of the FBTAA will not include
institutions of the Commonwealth, a state or a territory.
The Explanatory Memorandum notes that whilst the implementation of this
measure will have a financial impact of nil, the failure to implement
this measure would cost an estimated $80 to $90 million per annum over
the forward estimates period. Also, it is expected that there are no compliance
costs associated with this proposal.
The measure will become effective immediately after the commencement
of Schedule 10 of the Tax Laws Amendment (2004 Measures No. 1) Act
2004, that is on 1 July 2005.
The measure aims at harmonising the age criteria for dependent children.
This measure has been announced by the then Minister for Revenue and Assistant
Treasurer, The Hon. Senator Helen Coonan, in Press Release C36 of 2004,
dated 11 May 2004. In this release, the Minister explained that:
The Government will standardise the dependent child age
criteria used to determine a taxpayer’s entitlement to the housekeeper,
child-housekeeper, medical expenses and zone tax offsets, as well as
the Medicare levy and Medicare levy surcharge, […and further:] “Currently,
the dependent child age criteria vary across these entitlements. For
example, a taxpayer may be able to take a child into account when claiming
a medical expenses tax offset but not being [sic] able to take the same
child into account for the purposes of the Medicare levy and Medicare
levy surcharge,”[…].
The following table contains the currently applicable age criteria (white)
and the age criteria proposed in the Bill (light grey):
| Off
sets for: |
Age
criteria (not being a student) |
Age
criteria (full time student) |
Age
criteria (not being a student) |
Age
criteria (full time student) |
| Housekeeper,
child house keeper, zone and overseas defence forces |
16
years |
25
years |
21
years |
25
years |
| Medicare
levy and Medicare levy surcharge |
16
years |
25
years |
21
years |
25
years |
| Medical
expenses tax offset |
Child
of taxpayer: 21 years |
21 years |
25 years |
| Child:
16 years |
25
years |
| Family
tax benefit Part A |
21
years |
25
years |
21
years |
25
years |
The Bill proposes to make changes to the ITAA 1936. Items 1 to 3 of Schedule
5 propose to omit the age ‘16’ and to replace it with the age ‘21’ where
necessary to reflect the proposed changes.
According to the explanatory notes, the anticipated financial impact
of this measure will be:
| Financial year: |
2005-2006 |
2006-2007 |
2007-2008 |
| Financial impact |
Insignificant |
$3million |
$3million |
The compliance costs in relation to this measure are expected to be minimal.
The proposed amendments will commence applying to income tax assessments
for the 2005-2006 income year.
Overall, the financial impact of, and the compliance costs for, all proposed
measures is said to be minimal.
The proposed amendments contained in this Bill do not appear to be controversial.
Schedules 2, 3 and 4 will make amendments which clarify the law or rectify
unwanted results caused by previous amendments. Schedule 1 inserts a number
of measures which aim at providing more flexibility to the charitable
sector. Schedule 5 will provide more transparency for taxpayers in that
it is aimed at providing uniform age criteria for dependent children.
-
T. John, ‘Extension of Charitable Purpose Bill 2004’, Bills Digest,
No. 164, Department of Parliamentary Services, Canberra, 2003-2004,
p. 1.
-
See generally R. L. Deutsch, M. L. Friezer, I. G. Fullerton, M. M.
Gibson, P. J. Hanley, T. J. Snape, Australian Tax Handbook,
Thomson ATP, Sydney, 2005, pp. 521–522.
-
For details, especially the requirements for such gifts, see Deutsch
et al, ibid., p. 532.
-
The exemption can be invoked—by funds to property was added to a
pre-1 July 1997 by will or gift on or after 1 July 1997, and—by funds
established in Australia for public charitable purposes by will or
instrument of trust. Section 50-5, items 1.5A and 1.5B of the ITAA
1997.
-
Deutsch et al., op. cit., p. 259, which includes an overview of further
requirements before an income tax exemption may be available to a
fund referred to in footnote 4.
-
Explanatory
Memorandum to the Tax Laws Amendment (2005 Measures No. 3) Bill
2005, p. 10.
-
B. Pulle, ‘New International Tax Measures (Participation Exemption
and Other Measures) Bill 2004’, Bills Digest,
No. 133, Department of Parliamentary Services, Canberra, 2003-2004.
-
The Hon. M. Brough, Minister for Revenue and Assistant Treasurer,
Taxation of foreign branch amounts, press
release, 19 January 2005.
-
Deutsch et al., op. cit., p. 1390. The measures introduced with the
New International Tax Measures (Participation Exemption and Other
Measures) Act 2004 became effective on 1 July 2004.
-
Pulle, op. cit., p. 13.
-
Explanatory
Memorandum, op. cit., p. 4.
-
B. Pulle, ‘Tax Laws Amendment (2004 Measures No. 1) Bill 2004’, Bills
Digest, No. 117, Department of Parliamentary Services, Canberra,
2003-2004, pp. 13–14.
-
For an instructive discussion of this issue see: Ambulance Service
of NSW v Federal Commission of Taxation [2003] FCAFC 161.
Thomas John
1 June 2005
Bills Digest Service
Information and Research Services
This paper has been prepared to support the work of the Australian Parliament
using information available at the time of production. The views expressed
do not reflect an official position of the Information and Research Service,
nor do they constitute professional legal opinion.
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ISSN 1328-8091
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