Taxation Laws Amendment Bill (No. 8) 1999

Introduction

The Committee dealt with this bill in Alert Digest No. 11 of 1999, in which it made various comments. The Assistant Treasurer has responded to those comments in a letter dated 24 August 1999. A copy of the letter is attached to this report. An extract from the Alert Digest and relevant parts of the Assistant Treasurer's response are discussed below.

Extract from Alert Digest No. 11 of 1999

This bill was introduced into the House of Representatives on 30 June 1999 by the Parliamentary Secretary to the Minister for Finance and Administration. [Portfolio responsibility: Treasury]

The bill proposes to amend the following Acts:

Income Tax Assessment Act 1936 to remove anomalies preventing the intended Australian taxation of capital gains arising on deemed disposals of tainted assets of a controlled foreign company (CFC) where that CFC ceases to be a member of a group and has previously benefited from capital gains tax roll-over relief;

Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 to:

• exempt from income tax post-judgment interest received in personal injury compensation cases;
• allow an income tax deduction to certain funds, authorities and institutions and to political parties for a gift of property worth more than $5,000, regardless of when or how the property was acquired;
• provide a capital gains tax (CGT) exemption for testamentary gifts of property to certain funds, authorities and institutions and to political parties unless the property is reacquired by the estate, a beneficiary of the estate or an associate;
• provide a CGT exemption for gifts of property made under the Cultural Gifts Program unless the property is reacquired for less than market value by the donor or an associate;
• allow concessional taxation treatment for specified private funds which will not be required to seek donations from the public but will be subject to the other requirements applying to public funds;
• allow the apportionment of deductions for donations made under the Cultural Gifts Program over a period of up to five income years; and
• extend to companies two concessional tracing rules which are available to trusts under trust loss measures;

Income Tax Assessment Act 1936 and the Taxation Laws Amendment Act (No. 3) 1998 to:

• allow a deduction where franking rebates exceed the ceiling imposed under the benchmark portfolio ceiling method;
• treat shares and interests in shares held by a bare trust as if they were held by the beneficiaries of the trust;
• remove the restrictions on exempting credits for dividends paid by former exempting companies for natural persons where all the shares are owned by natural persons and there has been no change in ownership of the company; and
• extend the scope of a transitional concession for the general anti-avoidance rule and the specific anti-streaming rule;

Income Tax Assessment Act 1997 to:

• disallow a deduction for bribes made to foreign public officials; and
• make technical amendments;

Taxation (Deficit Reduction) Act (No.2) 1993 to maintain the rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations at 33% for the 1999-2000 income year;

Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997 and the Taxation Administration Act 1953 to:

• provide machinery provisions to collect untainting tax;
• ensure that distributions from share premium accounts are within the ambit of the capital streaming and dividend substitution rules;
• ensure that bonus shares deemed to be a dividend have a cost base of the dividend amount where the shares are held on revenue account; and
• make minor technical changes;

Income Tax Assessment Act 1936 and the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1997 to allow an extended period for making family trust elections and interposed entity elections.

Retrospective application

Schedule 1, Part 1

The amendments proposed by Part 1 of Schedule 1 are to apply from 13 May 1997 – the date of the 1997 Budget. While the Committee generally accepts the need for Budget announcements to apply from the date of the Budget, on this occasion it seems to have taken more than 2 years for these changes to take legislative form. The Committee, therefore, seeks the Treasurer's advice as to the reasons for such retrospectivity in these circumstances, and which taxpayers or categories of taxpayers will be disadvantaged by that retrospectivity.

Pending the Treasurer's advice, the Committee draws Senators' attention to the provisions, as they may be considered to trespass unduly on personal rights and liberties, in breach of principle 1(a)(i) of the Committee's terms of reference.

Relevant extract from the response from the Assistant Treasurer

Schedule 1, Part 1 - Controlled foreign companies and capital gains tax

It is intended that these measures, which were announced in the 1997-98 Budget, will apply after 7.30 pm by legal time in the Australian Capital Territory, on 13 May 1997. A press release issued at the time described the amendments and noted that since it was an anti-avoidance measure, the amendments would apply from the 1997-98 Budget night.

These measures are directed at closing off specific avoidance arrangements which take advantage of anomalies in the interaction between the controlled foreign companies measures and the capital gains tax provisions of the Australian tax law.

It is necessary for the measures to apply from the date of announcement, to ensure that the anomalies identified in the 1997-98 Budget are addressed, and to prevent taxpayers from taking advantage of the anomalies after the announcement. A further rationale for retaining the start date as introduced is to prevent taxpayers who may have acted in accordance with the announced measures from being disadvantaged as compared to taxpayers who ignored the announcement.

Taxpayers affected by the amendments: The measures are only likely to impact Australian based multinational companies seeking to take advantage of the anomalies in the tax law to avoid tax, where the companies undertake corporate reconstructions involving controlled foreign companies, and capital gains tax roll-over relief has been utilised in respect of certain assets.

In addition, the amendments will only apply if an Australian resident taxpayer has an attribution interest (generally a greater than 10% interest) in a controlled foreign company that has obtained capital gains tax roll-over relief for the inter-group transfer of tainted assets. The operation of the proposed measures is further targeted to disposals of tainted assets (assets held to derive tainted income such as interest or dividends) where the controlled foreign company is deemed to have disposed of the tainted assets when it ceased to be a member of a wholly-owned company group.

The Committee thanks the Assistant Treasurer for this response.

Retrospective application

Schedule 2

The amendments proposed by Schedule 2 to the bill are to apply from the 1992-93 year of income. These amendments exempt from income tax any post-judgment interest received as part of an award of compensation in a personal injury case where that interest relates to delays that have occurred while avenues of appeal are being pursued. The amendments are beneficial to taxpayers and, as such, would usually attract no further comment from the Committee.

However, given that the amendments are to apply from the 1992-93 income year the Committee seeks the Treasurer's advice on any action proposed to be taken to inform taxpayers of this legislation to enable them to apply for the amendment of assessments going back over 7 years. Without such action, amendments which set out to be beneficial to all taxpayers in a particular category may end up, somewhat capriciously, benefiting only some of those taxpayers.

Other than this, the Committee makes no further comment on these provisions.

Relevant extract from the response from the Assistant Treasurer

Schedule 2 - Post-judgment interest

The Committee has sought advice as to how taxpayers will be informed that these provisions will exempt post-judgment interest from the 1992-93 income year onwards, giving taxpayers the right to seek amendments of their assessments to exclude post-judgment interest for 1992-93 and later years.

Firstly, the Assistant Treasurer issued a press release (copy attached) in March 1999, announcing the proposed exemption for post-judgment interest, which noted that the changes would apply to the 1992-93 and later years of income.

Secondly, the Australian Taxation Office (ATO) has a wide range of programs to educate taxpayers about changes to the law:

• Tax agents will be advised of the new provisions and how they will affect their clients;
• Taxpayers will be advised of the new provisions through ATO publications, such as TaxPack;
• The ATO will have information outlining the new provisions located on its Internet site; and
• The ATO is anticipating sending information about the new provisions to insurance companies, since insurance companies are often responsible for making compensation payments.

The above measures will form part of an ongoing process by the ATO to inform taxpayers of the legislation and should ensure that all affected taxpayers will become aware of their entitlements in relation to the new exemption.

The Committee thanks the Assistant Treasurer for this response.

Barney Cooney

Chairman