Chapter 3 - Issues in relation to Schedules 1, 2, 3 and 7
Schedule 1—Effective life provisions for mining rights
3.1
The committee received a submission from the Minerals Council of
Australia (MCA) relating to Schedule 1 of the bill. The MCA's submission claimed
a continuing 'level of uncertainty' in the determination of the period over
which mining rights are depreciated under the A New Tax System (Capital
Allowances) Act 2001 and 2003 amendments to section 40 of the Income Tax
Assessment Act (ITAA) 1997. The submission also noted the Council's
complaints to the Australian Taxation Office (ATO) and the Australian
Government concerning the 2006 draft ruling on the treatment of mining rights
under section 40-95(7) of the ITAA. Mr Anthony Portas, MCA's Head of Taxation, Asia
Pacific, told the committee:
Our main concerns were, firstly, that the proposed methodology
to determine the life of a mine was inaccurate and inconsistent with industry
practice, and, secondly, that there was a suggestion that taxpayers had to assess
the effective life of the mining right each year, which is actually not the
case for other depreciating assets.[1]
3.2
The MCA 'welcomed' Treasurer the Hon. Peter Costello's announcement in
May 2006 that the government would provide legislative amendments to restore
the intent of the draft ruling.[2]
Mr Portas told the committee that all members of the Minerals Council tax
committee are 'comfortable' with the proposed legislation.[3]
3.3
The MCA's submission provided several grounds of support for Schedule 1
of the bill. It noted that it:
- clarifies in statute the policy intent in relation to how mining
rights should be depreciated under the UCA (uniform capital allowance) regime;
- is consistent with Government's intent...and current industry
practice;
- is highly consistent with broader UCA principles and approaches;
- is a 'point in time' calculation which promotes certainty and
clarity (in terms of likely tax benefits) so as to encourage investment in new
mines;
- has been exhaustively debated by all key stakeholders over an
extended six year time period; and
- is administratively simple and equitable in terms of taxation
treatment.[4]
Schedule 2—Taxation of boating activities
3.4
As Chapter 2 mentioned, Schedule 2 of the bill relates to the deduction
of expenses for persons operating a private boat and receiving an income from
this activity, but who are not considered to be operating a business. The
current law denies any deductions despite compelling these persons to include
all income they generate from these activities for tax purposes. The new law
will allow deductions from the year of income following the year of income in
which these amendments receive Royal Assent and later years.
3.5
The committee received a submission from Ernst & Young which broadly
supports the amendments in Schedule 2. The submission states that the proposed
change is 'an appropriate rectification' of the current situation where tax is
paid in situations where private boat owners are operating at a commercial
loss. Ernst & Young supported the provisions of the bill, which protect these
private boat owners by ensuring they cannot be taxed on income received while
making a commercial loss.[5]
3.6
Ernst & Young's submission also commended the bill for correcting
the situation where private boat owners believe they are operating a business—deriving
assessable income—only to have the ATO rule otherwise. Under the new law, if
the operation is not classified as a 'business', losses can be offset against
the income derived in future years from letting the boat.[6]
Retrospectivity
3.7
Ernst & Young argued that the changes should be made retrospective.
Its submission notes that following a 2002 ruling, the ATO has audited many
private boat operators. The ATO audits have disputed these operators' business
plans and 'recast these in a way that produces a loss'. According to Ernst
& Young, the ATO concludes that the taxpayer is not conducting a business.
The boat owner is required to return all income without any deductions to
offset against the income.
3.8
Ernst & Young's submission proposes that, at a minimum, the ATO
should allow retrospective deductions equivalent to the income that has been
taxed. It states:
...we submit that this new legislation should be retrospective in
order to ensure taxpayers are not unfairly taxed on amounts that reflect
something that in the ordinary course, the Australian tax law should never
sought [sic] to tax.[7]
3.9
Mr Craig Jackson, Partner at Ernst & Young, told the committee that
he believed there would not be 'large numbers' seeking retrospective
deductions:
I would not think in terms of the
retrospectivity that there would be thousands but, depending on how many other
taxpayers have had a dispute with the tax office, there may be 50 or 100 would
be a guess, but purely a guess.[8]
3.10
Mr Gregory Pinder, Senior Adviser with the Treasury, told the
committee that the issue of retrospectivity is:
...a matter for government. When you
want the measure to start is really a policy decision. There are some issues that you would want to take into account.
Essentially, this existing law has applied for over 30 years—from 1974—so there
would be a question of how far back you want to go. You want to take into
account the administration costs and compliance costs involved in amending
assessments back that far. Some people may have entered into settlements with
the tax office and there would be a question about whether you would want to
undo settlements that have been entered into.[9]
3.11
Mr Pinder told the committee that Treasury had had no direct discussions
with Ernst & Young on the matter. He also noted that the revenue cost
'would probably be in the order of $4 million to $5 million a year for each
year that you went back'.[10]
Schedule 3—Expenditure on research and development activities
3.12
Under current legislation, a company must have increased its R&D
expenditure for the income year above its three year rolling average to access
the premium incremental concession of 175 per cent (Sections 73P to 73Z of the
ITAA). A company that is part of an R&D group must also have at
least one member of the group whose expenditure for the year is greater than
its R&D expenditure in the prior income year to access the premium. The
bill eliminates this additional criterion for a member of an R&D group.
Retrospectivity
3.13
The committee received submissions from PwC (PwC hereafter) and KPMG on
this issue. The PwC submission highlighted Items 19 and 20 of Schedule 3. Item
19 repeals Subsection 73X(1) of the ITAA 1997 and substitutes:
(1) The premium amount is distributed between each group member
(the increasing members) that increased its incremental expenditure incurred
during its group membership period for the Y0 year of income over the average
of its incremental expenditure incurred during its group membership period for
the Y-1, Y-2 and Y-3 years of income.
3.14
Item 20 states that the amendments made by Item 19 apply ‘to assessments
for the year of income following the year of income in which this Act receives
the Royal Assent and later years’. PwC argues that applying these changes to
section 73X only to prospective income years 'is unfair and...the changes should
operate retrospectively as they are aimed at correcting an acknowledged
technical drafting error in the original legislation'.[11]
3.15
PwC argues that the bill must compensate those companies that have been
entitled to, but unable to claim, the premium under the original legislation.
It pursues this claim on the argument that the purpose of the bill’s amendments
is to rectify two errors with the original legislation. First, it was not clear
whether a single company that had increased its R&D spend above its three
year average but not above its spend for the previous year would be entitled to
the premium incremental concession. Second, PwC argued that in the case of
group companies, there are ‘severe adverse effects’ when the largest company
had increased its R&D spend above its three year average but not above the
previous year. The PwC submission concludes:
It is our view that when a provision is acknowledged as being
flawed, amendments to that provision should apply retrospectively to ensure
that the original intent of the legislature is given effect from the original
time that the provision was introduced.[12]
3.16
Ms Sandra Mason, Partner at PwC, elaborated on the company's position at
the public hearing. She told the committee that in most cases, the total group
deductions under the 175 per cent concession will remain the same but will be
shared differently between the group members. Ms Mason identified a potential compliance
burden if all group 175 per cent claimants were required to reassess their
entitlements and tax deductions back to July 2001, and deductions were
reallocated among members in their group. Accordingly, she suggested that Item 20
of the Act be amended to ensure that retrospectivity applies only:
...if requested in writing by the 175 per cent claimants in a
particular group detailing the additional tax deductions the group would
receive under the new legislation's retrospective action.[13]
3.17
Mr Matthew Flavel, Manager of Treasury's Industry Tax Policy Unit, told
the committee that Budget Paper No. 2 classified the amendment to the
eligibility of the 175 per cent premium as an improvement, not an oversight or
an error in the 2001 legislation.[14]
As an improvement to the law, the expectation is that it should only apply prospectively.
3.18
Moreover, Mr Flavel told the committee that retrospectivity in applying
the law was something that Treasury tried to avoid. He noted two concerns with
the PwC proposal. First:
We have a particular concern about the idea of allowing an opting
in or elective basis to apply retrospectively. If it were to be applied
retrospectively, we could not see why it would not apply to all circumstances
rather than just simply allowing an election when it may be beneficial to
particular taxpayers.
And second:
...there would be circumstances in which
firms within a group would have different shareholders, and therefore the
retrospective application would mean that there would be some firms which would
potentially have a reallocation to another firm within the group. That could
obviously impact on shareholders or owners of those particular firms.[15]
3.19
Mr Garry Waugh, Lead Partner of National R&D at PwC, told the
committee that 'there are some circumstances where it is not simply a
reallocation of the premium within between parties within a group'. Specifically,
he highlighted single companies in groups that are not consolidated for tax
purposes as being disadvantaged by the proposed change to Item 19 in that they
miss out on the 175 per cent premium.[16]
Mr Flavel noted that even in circumstances where a large company and a small
company are grouped together, 'if they were separate firms they may not always
be...eligible for the 175 per cent concession'.[17]
3.20
KPMG also argued that the amendment to Section 73X(1) of the ITAA 1936
should be made retrospective. Its submission noted:
the deferral of the date of application of the intended
amendment until the year of income following the year of income in which this
amendment receives Royal Assent defeats the spirit of the policy objective of
rectifying this legislative anomaly...As these measures are a concession, they
should be retrospective to 1 July 2001 to reflect the policy intent outlined in
the Backing Australia’s Ability innovation measures.[18]
3.21
KPMG's submission adds that if this recommendation is not accepted, ‘at
a minimum, the amendment should apply to years of income ending on or after 9 May 2006, i.e. the date of the announcement of this amendment’.[19]
3.22
Treasury was strongly opposed to this suggestion. Mr Flavel explained to
the committee:
Choosing a date like the date of the budget provides a number of
issues, including the fact that it is part way through an income year. It is
also something that as only really been used when there has been a decision
which the government has wanted to apply specifically from that date so that
there is no adverse behaviour.[20]
Costing of retrospective changes
3.23
Ms Mason told the committee that PwC had not costed the impact of its
proposed retrospective deductions. She did note that Treasury's estimated
financial impact in the EM was $2.5 million per year and added, 'we
presume...that the impact would be in line with that'.[21]
Mr Waugh told the committee that:
The assumption could be that the cost to the revenue in respect
of earlier years is likely to be less than the current year because of the
four-year history requirement...plus the lower uptake that I mentioned in earlier
years.[22]
The consultative process for the bill's amendment to the
175 per cent premium
3.24
Ms Mason told the committee that the bill's changes to the 175 per cent
concession had been raised at a consultative forum with AusIndustry and the
Australian Taxation Office (among others) prior to the May 2006 federal budget.
Treasury told the committee it had only received direct notification of the
issue by the ATO.[23]
3.25
Mr Flavel emphasised to the committee that the majority of the bill's
amendments are technical amendments aimed at improving the ability of firms to
access R&D tax concessions.[24]
He noted that Treasury was 'aware that given they [the amendments] were all
improvements it was going to be highly unlikely that these were going to be
contentious ', other than the issue of retrospectivity.
3.26
Mr Waugh was asked why it had taken five years for the bill's proposed
changes to the 175 per cent concession to be publicly raised. He responded that
major groups had found it difficult to 'work their way through the complex
provisions' and that some of the problems 'have taken some time to come to
light'.[25]
Schedule 7—Technical amendments and corrections
3.27
The committee received submissions from the Sydney Opera House and the Powerhouse
Museum supporting Schedule 7 of the bill enabling cultural institutions that
are linked to Government to receive gifts from ancillary funds. The Acting
Chief Executive of the Sydney Opera House, Mr David Antaw, wrote in
his submission:
The amendments contained in the Tax Bill are the last step in
what has been a long process for entities such as the Sydney Opera House, the Powerhouse
Museum, the National Gallery of Victoria and many others, in creating an
environment where philanthropic gifts can be received from ancillary funds and
prescribed private funds (PPFs).[26]
3.28
Mr Antaw noted that amendments had been passed to New South Wales and
Victorian Charities law in late 2006 to deem gifts to cultural entities to be
charitable. However, he argued that the ATO must also recognise that these
gifts will not adversely affect the ancillary fund or PPF’s charitable status.
Accordingly, Mr Antaw urged that the Bill ‘be approved and legislated in
the near future’.[27]
The Director of the Powerhouse Museum, Dr Kevin Fewster, also endorsed the
proposed amendments in Schedule 7 noting that the current law disadvantages the
Museum.[28]
Committee comments
3.29
The committee supports the amendments in all seven Schedules of
the bill. It highlights the particular support received for the proposed
changes to depreciation of mining rights (Schedule 1) and receipt of gifts by
cultural institutions from ancillary funds (Schedule 7). The committee received
no evidence on Schedules 4, 5, 6 and 8 and on this basis, it appears that these
measures are uncontentious.
3.30
The committee notes that the main issues of contention with the
bill concern the timing of the proposed amendments in Schedules 2 and 3. On the
issue of tax deductibility for private boat operators and holders, the
committee highlights Treasury's evidence that retrospective claims may date
back more than 30 years and may therefore involve high administration
and compliance costs. This may also affect various settlements that have been
made with the ATO.[29]
3.31
On the issue of whether to give retrospective payments to companies
within a group that have been unable to claim the 175 per cent premium, the
committee acknowledges the proposals put by PwC and KPMG, however, it notes the
concerns with the situation post July 2001 do not appear to have been raised
until prior to the May 2006 Budget. Treasury has explained that as the
amendment to eligibility for the premium is an improvement—rather than
correction—to the 2001 legislation, it should not apply retrospectively. The
committee also notes Treasury's concerns that retrospective payments would
reallocate funds to other firms within the group, thereby impacting on
shareholders or owners of those firms. On principle and on administrative
grounds, therefore, the committee supports the timing of the amendments in
Schedule 3.
Recommendation 1
3.32
The committee recommends that the Senate pass the bill.
Senator the Hon Michael Ronaldson
Chair
Navigation: Previous Page | Contents | Next Page