CHAPTER 2
THE BILL
Background
2.1 The major amendments contained in the Bill relate to:
- Australia as a regional finance centre;
- Commercial debt forgiveness;
- the treatment of assets for depreciation purposes when a tax exempt
entity becomes subject to tax;
- franking credits, franking debits and the intercorporate dividend
rebate;
- franking of dividends by exempting companies and former exempting
companies;
- deductions for gifts; and
- distributions to beneficiaries and partners that are equivalent to
interest.
Overview of the Taxation Laws Amendment Bill (No.4) 1998
2.2 The second reading speech to the Taxation Laws Amendment Bill (No.
4) 1998 states that “the bill gives effect to some of the measures
announced in the 1997-98 budget and in other government statements”.
The bill also contains other amendments to the Income Tax Assessment Act.
Schedule 1 – Australia as a Regional Financial Centre
2.3 The purpose of these amendments is to further support the development
of the funds management and corporate debt markets and to promote a more
effective and competitive offshore banking regime. The measures will accommodate
the integration of Australian financial markets into global markets.
2.4 The amendment to the thin capitalisation provisions will make it
easier for a foreign bank branch operating in Australia to access loan
funds that are exempt from Interest Withholding Tax (IWT) under section
128F. The amendment is required as a result of the interaction between
Australia's thin capitalisation regime and IWT regime.
Schedule 2 - Commercial Debt Forgiveness
2.5 Schedule 2 of the Bill will amend the commercial debt
forgiveness provisions in the Income Tax Assessment Act 1936 (ITAA 1936)
to ensure that amounts of commercial debt that are forgiven will be applied,
where relevant, in reduction of a debtor's prior year net capital losses
in respect of all years before the forgiveness year of income, rather
than the immediately preceding year of income.
2.6 The Bill will also amend the capital gains tax (CGT) provisions to
provide that, where a taxpayer incurs a net capital loss in a year of
income earlier than the forgiveness year of income, and the loss is reduced
by the operation of the debt forgiveness provisions, then the loss will
also be reduced for the purposes of the CGT provisions.
2.7 Both of these amendments are consequential upon amendments contained
in Taxation Laws Amendment Act (No. 2) Act 1997 (the No. 2 Act).
.
Schedule 3 - Depreciation of plant Previously Owned by an Exempt Body
2.8 Schedule 3 to the Bill will insert a new Division
58 into the Income Tax Assessment Act 1997 (ITAA 1997)
to change the way that depreciation is to be calculated on plant previously
owned by an exempt entity when that plant enters the tax net. Consequential
amendments will also be made to the ITAA 1997, the Income Tax Assessment
Act 1936 (ITAA 1936) and to the Income Tax (Transitional Provisions)
Act 1997. These amendments will integrate the new measures into the
income tax law.
2.9 The measures contained in new Division 58 were announced
in the Treasurer's Press Release No. 84 dated 4 August 1997. This announcement
was the subject of further clarification in the Treasurer's Press Release
No. 2 dated 14 January 1998. Draft legislation and an accompanying explanatory
statement were released on 10 February 1998, as announced by the Treasurer's
Press Release No. 9 on that day.
2.10 New Division 58 sets out special rules that
apply in calculating depreciation deductions and balancing adjustments
in respect of plant previously owned or quasi-owned by an exempt entity
if the plant:
- continues to be owned or quasi-owned by that entity after the entity
becomes taxable (entity sale); or
- is acquired, or quasi-ownership of it is acquired, from that entity,
in connection with the acquisition of a business, by a purchaser that
is a taxable entity (asset sale).
2.11 Quasi-ownership under Subdivision 42-I extends the availability
of depreciation deductions.
2.12 The depreciation deductions available to such entities will be limited
to a choice between the notional written down value of the plant at the
time it enters the tax net and its undeducted pre-existing audited book
value at that time.
Schedule 4 - Franking credit and dividend streaming
2.13 The purpose of the amendments is to protect the revenue by introducing
a holding period rule and related payments rule for shares to curb the
unintended usage of franking credits and misuse of the intercorporate
dividend rebate by persons who are not effectively owners of shares or
who are only very briefly owners of shares. This will counter certain
tax avoidance schemes under which franking credits or the intercorporate
dividend rebate are made available to such persons.
2.14 Schedule 4 to the Bill will amend Part IIIAA of the Income
Tax Assessment Act 1936 (ITAA 1936) to prevent franking credit trading
and misuse of the intercorporate dividend rebate. The amendments will
introduce:
- the holding period rule which, subject to certain exceptions, requires
taxpayers to hold shares at-risk for more than 45 days in order to qualify
for a franking benefit or intercorporate dividend rebate from a dividend,
or, in the case of certain preference shares, more than 90 days; and
- the related payments rule which requires taxpayers who are under an
obligation to make a related payment with respect to a dividend paid
on shares to hold the relevant shares at-risk for more than 45 days
(or 90 days for preference shares) during the relevant qualification
period in order to qualify for a franking benefit or intercorporate
dividend rebate from the dividend.
Schedule 5 – Franking of Dividends by Exempt Companies and former
Exempting Companies
2.15 The purpose of the amendments is to protect the revenue by introducing
a measure which limits the source of franking credits available for trading
to curb the unintended usage of franking credits through franking credit
trading schemes.
2.16 Schedule 5 to the Bill will amend Part IIIAA of the
Income Tax Assessment Act 1936 (ITAA 1936) to prevent franking
credit trading. The amendments will limit the source of franking credits
available for trading by:
- prescribing that franked dividends paid by companies which are effectively
wholly-owned by non-residents or tax exempt entities will provide franking
benefits to resident shareholders in limited circumstances only; and
- quarantining the franking surpluses of companies which were formerly
effectively wholly-owned by non-residents or tax exempt entities.
2.17 The measures will also ensure that non-resident shareholders in
receipt of franked dividends from affected companies will continue to
be exempt from dividend withholding tax.
Schedule 6 - Deductions for gifts
2.18 Schedule 6 to the Bill amends the Income Tax Assessment
Act 1997 (ITAA 97) to allow income tax deductions for gifts made to
the Menzies Research Centre Public Fund.
2.19 Items 1 and 2 of Schedule 7 to the Bill amend the
ITAA 97 to allow deductions for gifts of $2 or more made to the Menzies
Research Centre Public Fund after 2 April 1998. This is the date
after which this measure was intended to operate when it was first introduced
into the previous Parliament.
Schedule7 – Distributions to Beneficiaries and Partners that are
Equivalent to Interest
2.20 The purpose of the amendments is to ensure that certain trust or
partnership distributions which consist of dividends, but are effectively
in the nature of interest, do not inappropriately carry franking benefits
or receive the inter-corporate dividend rebate. The amendments will apply
to taxpayers who hold a debt-like interest in shares indirectly through
a trust or partnership; that is, to taxpayers who, under a trust or partnership,
are effectively creditors rather than share owners.
2.21 The amendments will curb the unintended usage of franking benefits
and the inter-corporate dividend rebate by preventing the holders of indirect
interests in shares from receiving those benefits for trust or partnership
distributions consisting of dividends in the same circumstances in which
direct holders of shares are denied those benefits for dividends. This
will make the taxation treatment of such distributions consistent with
the treatment of debt-dividends under existing section 46D of the ITAA
1936
2.22 Schedule 7 of the Bill inserts new section 45ZA to
deny the intercorporate dividend rebate in certain circumstances. Broadly
speaking, this provision applies if a distribution is made to a taxpayer
in respect of an interest in a trust or partnership, or under a finance
arrangement, and, having regard to the way in which the amount was calculated,
the conditions applying to the payment of the amount and any other relevant
matters, that amount may reasonably be regarded as equivalent to the payment
(or crediting or application) of interest on a loan.