Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
tax laws amendment (2008 Measures no. 5) bill 2008
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary 5
General outline and financial impact 7
Chapter 1 GST and the sale of real property - integrity measure 11
Chapter 2 Thin capitalisation - modification of the rules in relation to
application of accounting standards 33
Chapter 3 Interest withholding tax - extension of eligibility for
exemption to state government bonds 47
Chapter 4 Fringe benefits tax - jointly held assets 51
Chapter 5 Managed funds: changes to the eligible investment business
rules 57
Index 69
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|ADIs |authorised deposit-taking |
| |institutions |
|AEST |Australian Eastern Standard |
| |Time |
|AIFRS |Australian equivalents to |
| |International Financial |
| |Reporting Standards |
|Commissioner |Commissioner of Taxation |
|Corporations Act |Corporations Act 2001 |
|FBT |fringe benefits tax |
|FBTAA 1986 |Fringe Benefits Tax |
| |Assessment Act 1986 |
|GST |goods and services tax |
|GST Act |A New Tax System (Goods and |
| |Services Tax) Act 1999 |
|ITAA 1936 |Income Tax Assessment Act |
| |1936 |
|ITAA 1997 |Income Tax Assessment Act |
| |1997 |
|IWT |interest withholding tax |
|NAB case |National Australia Bank Ltd v|
| |FC of T 93 ATC 4914 |
General outline and financial impact
GST and the sale of real property - integrity measure
Schedule 1 to this Bill amends the A New Tax System (Goods and
Services Tax) Act 1999 (GST Act) to maintain the integrity of the
goods and services tax (GST) tax base by ensuring that the
interaction between the margin scheme provisions (refer Chapter 1,
paragraph 1.4) and the going concern, farmland and associates
provisions does not allow property sales to be structured in a way
that results in GST not applying to the value added to real
property on or after 1 July 2000 by an entity registered or
required to be registered for GST.
These amendments:
. ensures that where the margin scheme is used after certain
GST-free or non-taxable supplies, the value added by the
registered entity which made that supply is included in
determining the GST subsequently payable under the margin
scheme;
. ensures that eligibility to use the margin scheme cannot
be reinstated by interposing a GST-free or non-taxable
supply; and
. confirms that the GST general anti-avoidance provisions
can apply to contrived arrangements entered into to avoid
GST.
Date of effect: This measure has effect from the date of Royal
Assent.
Proposal announced: This measure was announced in the 2008-
09 Budget.
Financial impact: This measure has the following revenue
implications:
|2007-08 |2008-09 |2009-10 |2010-11 |2011-12 |
|Nil |$43m |$135m |$160m |$185m |
The revenue impact has been revised since the 2008-09 Budget due to
a change in the commencement date of the measure from 1 July 2008
to 1 January 2009, and an update of the base data used in the
costing model.
Compliance cost impact: Low. This measure will result in a small
increase in ongoing compliance costs as there may be additional
information requirements for entities that purchase real property
as a GST-free going concern or farmland and then subsequently
decide to sell under the margin scheme.
Thin capitalisation - modification of the rules in relation to application
of accounting standards
Schedule 2 to this Bill modifies the thin capitalisation regime
contained within Division 820 of the Income Tax Assessment Act 1997
in relation to the use of accounting standards for identifying and
valuing an entity's assets, liabilities and equity capital. It
aims to adjust for certain impacts of the 2005 adoption of
Australian equivalents to International Financial Reporting
Standards on the thin capitalisation position of complying
entities. The amendments will, in specified circumstances:
. prohibit entities from recognising:
- defined benefit plan assets and liabilities; and
- tax deferred assets and liabilities; and
. permit entities to:
- recognise internally generated intangible assets; and
- revalue intangible assets, where this is currently
prohibited due to the absence of an active market.
Date of effect: The amendments will apply to assessments for each
income year commencing on or after the date of Royal Assent.
Proposal announced: The Treasurer and the Assistant Treasurer and
Minister for Competition Policy and Consumer Affairs jointly
announced the amendments in Media Release No. 053 of 13 May 2008.
Financial impact: Unquantifiable.
Compliance cost impact: Minimal.
Interest withholding tax - extension of eligibility for exemption to state
government bonds
Schedule 3 to this Bill amends section 128F of the Income Tax
Assessment Act 1936 to extend eligibility for exemption from
interest withholding tax to bonds issued in Australia by state and
territory central borrowing authorities.
Date of effect: This amendment applies to interest paid on or
after the date of Royal Assent.
Proposal announced: This measure was announced in the Treasurer's
Media Release No. 058 of 20 May 2008.
Financial impact: This measure has the following revenue
implications:
|2007-08 |2008-09 |2009-10 |2010-11 |2011-12 |
|Nil |-$7m |-$17m |-$19m |-$21m |
Compliance cost impact: Nil.
Fringe benefits tax - jointly held assets
Schedule 4 to this Bill amends the Fringe Benefits Tax Assessment
Act 1986 to ensure that the 'otherwise deductible rule' applies
appropriately to benefits provided in relation to investments that
the employee holds jointly with a third party.
Date of effect: These amendments will apply from 7:30 pm
Australian Eastern Standard Time (AEST) on 13 May 2008.
For employees who have entered into a salary sacrifice arrangement
with their employer before 7:30 pm (AEST) on 13 May 2008 and which
involves an expense payment fringe benefit related to the
investment, the existing treatment continues to apply to benefits
provided until 1 April 2009.
For employees who have entered into a loan arrangement before
7:30 pm (AEST) on 13 May 2008, the existing treatment that
currently applies to the loan benefit continues to apply to
benefits provided until 1 April 2009.
Proposal announced: This measure was announced in the 2008-
09 Budget and in the Treasurer's Media Release No. 048 of
13 May 2008.
Financial impact: This measure has these revenue implications:
|2007-08 |2008-09 |2009-10 |2010-11 |2011-12 |
|Nil |$4m |$15m |$15m |$15m |
Compliance cost impact: Minimal.
Managed funds - changes to the eligible investment business rules
Schedule 5 to this Bill amends Division 6C of the Income Tax
Assessment Act 1936 to streamline and modernise the eligible
investment business rules for managed funds.
These amendments will:
. clarify the scope and meaning of investing in land for the
purpose of deriving rent;
. introduce a 25 per cent safe harbour allowance for non-
rental, non-trading income from investments in land;
. expand the range of financial instruments that a managed
fund may invest in or trade; and
. provide a 2 per cent safe harbour allowance at the whole
of trust level for non-trading income.
Date of effect: This measure will apply to the income year of
Royal Assent and later income years.
Proposal announced: This measure was announced in the 2008-
09 Budget.
Financial impact: This measure has an unquantifiable revenue cost
impact that is not expected to be significant.
Compliance cost impact: This measure is expected to impose a small
increase in compliance costs in the transitional year. Ongoing
compliance costs are expected to be reduced.
Chapter 1
GST and the sale of real property - integrity measure
Outline of chapter
1. Schedule 1 to this Bill amends the A New Tax System (Goods and
Services Tax) Act 1999 (GST Act) to maintain the integrity of the
goods and services tax (GST) tax base by ensuring that the
interaction between the margin scheme provisions (see paragraph
1.4) and the going concern, farmland and associates provisions does
not allow property sales to be structured in a way that results in
GST not applying to the value added to real property on or after 1
July 2000 by an entity registered or required to be registered for
GST.
2. These amendments:
. ensure that where the margin scheme is used after certain
GST-free or non-taxable supplies, the value added by the
registered entity which made that supply is included in
determining the GST subsequently payable under the margin
scheme;
. ensure that eligibility to use the margin scheme cannot be
reinstated by interposing a GST-free or non-taxable
supply; and
. confirm that the GST general anti-avoidance provisions can
apply to contrived arrangements entered into to avoid GST.
Context of amendments
3. GST is intended to be payable on the value added, including capital
appreciation, to real property on or after 1 July 2000 (the date
that GST commenced) by an entity registered for GST.
4. For real property, special rules exist that allow taxpayers an
alternative means of calculating GST. These rules are known as the
margin scheme.
5. As a result, under the GST Act, registered businesses can calculate
GST payable on supplies of new residential property or commercial
property under the basic rules (GST is 1/11th of the GST-inclusive
price) or, subject to certain conditions, under the margin scheme
(GST is 1/11th of the margin).
6. The margin scheme was designed to ensure that GST is payable only
on the incremental value added to land by each registered party in
a series of transactions. The margin scheme is generally used for
new residential property developments.
7. Under the margin scheme GST is generally payable only on the value
added to property on or after 1 July 2000. It levies GST only on
the margin by which the value of the property increases each time
it is sold by a registered entity on or after 1 July 2000.
8. Ordinarily, the margin is calculated as the difference between the
sale price of the property, and the consideration paid for its
acquisition. However, where the property was acquired before
1 July 2000, an approved valuation as at 1 July 2000 may be used.
This ensures that the property's value prior to the introduction of
the GST is not taxed.
9. Purchasers of real property supplied under the margin scheme are
not entitled to claim input tax credits for GST remitted by the
supplier. This ensures that each registered supplier in a series
of transactions remits the GST applicable to the value added by
them. To ensure that the full amount of GST is payable, the margin
scheme does not apply where the property has been acquired under
the basic rules for the calculation of tax payable, as an input tax
credit would generally have been claimed on the purchase of the
property (and GST would effectively not have been collected).
10. However, an entity that would otherwise be prevented from applying
the margin scheme, on the basis that it acquired the property as a
taxable supply under the basic rules, can reinstate eligibility for
the margin scheme by interposing certain GST-free or non-taxable
supplies prior to selling the property under the margin scheme.
11. This arises generally where property has been acquired as a GST-
free or non-taxable supply and the margin scheme is available to
calculate the GST payable on a subsequent supply of the property.
In these circumstances there is no requirement to take into account
whether the sale before the GST-free or non-taxable supply would
have been eligible for the margin scheme.
12. These amendments aim to ensure that an otherwise ineligible supply
cannot become 're-eligible' for supply under the margin scheme as a
result of interposing certain GST-free or non-taxable supplies.
13. The interaction of the margin scheme provisions (Division 75) of
the GST Act with certain other provisions - such as the going
concern (Subdivision 38-J) and farmland (Subdivision 38-O)
provisions - has resulted in GST not being applied to the full
margin of value added to real property within the GST system.
Similarly, GST is not calculated on the full margin of value added
when real property has been acquired from an associate for no
consideration.
14. This occurs because, under the margin scheme provisions, GST is
only paid on the value added by the supplier of a taxable supply of
real property. However, real property may be acquired GST-free
under the going concern or farmland provisions, or acquired from a
registered associate without consideration. When it is later sold
under the margin scheme, GST would not have been applied to the
full value added while the property was in the GST system.
15. The GST-free treatment assigned to going concerns (under section 38-
325) and farmland (under section 38-480) is not granted with a view
to removing value added by the supplier from the tax base. Rather
it is to relieve the recipient of the burden of obtaining
additional funds to cover the GST included in the price of a going
concern, when ordinarily they would be able to claim an input tax
credit.
16. However, where such a GST-free supply includes real property that
is later sold under the margin scheme, the effect is that the value
added to the real property before the GST-free supply is excluded
for GST purposes. This is contrary to the policy intent that GST
be collected on the value added to real property by registered
owners on or after 1 July 2000. This deficiency arises
irrespective of whether an entity is motivated by a desire to avoid
tax.
17. These amendments aim to ensure the appropriate amount of GST is
collected on supplies of real property consistent with the policy
intent of the GST system.
18. These amendments will also remove an unintended outcome that was
created by the Tax Laws Amendment (2005 Measures No. 2) Act 2005.
A technical deficiency in this amendment allowed an entity to
eliminate or substantially reduce the amount of GST payable on a
sale of real property it intended to make to a third party, by
first supplying the property to a registered associate for no
consideration. This supply would not attract any GST. The
associated entity would then supply the property to a third party
under the margin scheme, paying GST on a margin that would be much
less than the margin that the original entity would have faced.
19. The general anti-avoidance provisions in the GST law provide the
Commissioner of Taxation (Commissioner) with broad powers to cancel
GST benefits that arise from contrived schemes.
20. The GST general anti-avoidance provisions may only operate if the
GST benefit obtained from a scheme is not attributable to the
making of a choice, election, application or agreement that is
expressly provided by the GST law. These amendments will ensure
that a GST benefit is not attributable to the making of a choice,
election, application or agreement if the scheme was entered into
for the sole or dominant purpose of creating a circumstance or
state of affairs necessary to enable the choice, election,
application or agreement to be made.
21. This measure will apply prospectively so that arrangements already
entered into will not be impacted.
Summary of new law
22. Schedule 1 ensures that a supply that is ineligible for the margin
scheme continues to be ineligible for the margin scheme after it is
supplied as part of a GST-free sale of a going concern, as GST-free
farmland, or it is supplied to a registered associate for no
consideration.
23. This is achieved by specifying that a supply is ineligible for the
margin scheme if the previous supplier acquired the entire interest
through a taxable supply on which the GST was worked out without
applying the margin scheme. This limited eligibility applies to
supplies that are supplies of things that the supplier acquired
through a new supply to the supplier.
24. This Schedule also provides that where real property is acquired
GST-free as part of a going concern, GST-free farmland, or from a
registered associate for no consideration, the calculation of GST
on the subsequent sale of that property under the margin scheme
should also account for the value added by the previous owner. The
new calculation rules apply to supplies that are supplies of things
that the supplier acquired through a new supply to the supplier.
25. New supplies are supplies made on or after the commencement of this
Bill and are not made under a written agreement entered into before
commencement or pursuant to a right or option granted before
commencement, where consideration or a way of working out the
consideration is specified.
26. Finally, this Schedule amends the GST general anti-avoidance
provisions to avoid any doubt that those provisions can apply to
schemes that were entered into with the sole or dominant purpose of
creating a circumstance or state of affairs that enable a choice,
election application or agreement to be made that gives rise to a
GST benefit.
27. This provision brings the GST general anti-avoidance provisions
into line with similar provisions for income tax. These amendments
apply to a choice, election, application or agreement made on or
after the commencement of this Bill.
Comparison of key features of new law and current law
|New law |Current law |
|A supply of real property|Eligibility to sell a |
|continues to be |property under the margin|
|ineligible for the margin|scheme can be reinstated |
|scheme if the previous |by interposing a GST-free|
|supplier acquired the |supply of a going concern|
|entire interest through a|or farmland or a supply |
|supply that was |from an associate for no |
|ineligible for the margin|consideration prior to |
|scheme. |selling the property |
| |under the margin scheme. |
|A registered entity that |A registered entity that |
|supplies real property in|supplies real property as|
|the course or furtherance|part of a GST-free going |
|of its enterprise, as |concern, as GST-free |
|part of a GST-free going |farmland, or as a |
|concern, as GST-free |non-taxable supply to a |
|farmland, or as a |registered associate for |
|non-taxable supply to a |no consideration does not|
|registered associate for |pay GST on its value |
|no consideration does not|added. If the entity |
|pay GST on its value |that acquires the real |
|added. However, if the |property later sells it |
|entity that acquires the |under the margin scheme, |
|real property later sells|it only pays GST on its |
|it under the margin |own value added in these |
|scheme, it pays GST both |circumstances. The value|
|on its own value added, |added by the entity from |
|and the value added to |which it acquired the |
|the property by the |property is not taxed. |
|registered entity from | |
|which it acquired the | |
|property. | |
|New law |Current law |
|A GST benefit is not |The GST general |
|attributable to the |anti-avoidance provisions|
|making of a choice, |may only operate if the |
|election, application or |GST benefit obtained from|
|agreement if the scheme |a scheme is not |
|was entered into for the |attributable to the |
|sole or dominant purpose |making of a choice, |
|of creating a |election, application or |
|circumstance or state of |agreement that is |
|affairs necessary to |expressly provided by the|
|enable the choice, |GST law. |
|election, application or | |
|agreement to be made. | |
Detailed explanation of new law
28. GST cannot be minimised by interposing certain GST-free or non-
taxable supplies prior to a sale under the margin scheme. It is
necessary to look through certain GST-free sales or non-taxable
supplies when determining how to apply the margin scheme.
Eligibility for the margin scheme
29. A supply is ineligible for the margin scheme if it was purchased
under the basic rules (ie, not using the margin scheme). This is
because the purchaser would already have been entitled to claim an
input tax credit, and should not be entitled to further relief
under the margin scheme. This principle should apply whether or
not there has been an interposed GST-free sale or non-taxable
supply (of the kind to which these amendments apply).
30. A supply of real property that would have been ineligible for the
margin scheme, cannot become re-eligible for the margin scheme
because it was acquired as part of a GST-free going concern or as
GST-free farmland or from an associate for no consideration.
[Schedule 1, item 2]
31. This reflects the same treatment that applies to real property that
has been inherited from a deceased person (paragraph 75-5(3)(b) of
the GST Act), supplied from a member of a GST group (paragraph 75-
5(3)(c) of the GST Act) or from a joint venture partner (paragraph
75-5(3)(d) of the GST Act). However, one main difference between
the new eligibility provisions and the current provisions is that
the new provisions only require an entity to look back through one
transaction to determine eligibility.
32. It is recognised that limiting the look through test to determine
eligibility to the preceding acquisition may enable eligibility for
the margin scheme to be reinstated in instances where a sale of
property made under the basic rules is followed by two or more
interposed GST-free sales of a going concern or farmland or two or
more interposed sales from an associate for no consideration.
However, limiting the requirement to look through one transaction
seeks to achieve a balance between the risks to revenue and the
complexity and compliance costs that would be involved in tracing
back through a number of transactions between unrelated parties.
33. The general anti-avoidance provisions may be applied to contrived
arrangements that seek to benefit from the opportunity to reinstate
eligibility for the margin scheme by, for example, artificially
interposing two or more GST-free sales before a supply under the
margin scheme.
34. It is also recognised that an acquisition from an associate may not
be by means of a supply, for example, some acquisitions
by government entities may be made without a supply.
New subsection 75-5(3A) specifies that the requirements in
subparagraphs 75-5(g)(iii) and (iv) will not apply where the
acquisition by an associate for no consideration is not by means of
a supply. This means that new paragraph 75-5(3)(g) will also apply
where property is acquired for no consideration from an associate
regardless of whether the associate makes a supply. [Schedule 1,
item 3]
1. : Ineligibility for the margin scheme following supply of going
concern
A is registered for GST, and held vacant land before 1 July
2000. A sells the property to B, a property developer who
is also registered for GST. This sale is made under the
basic rules. A and B do not use the margin scheme, because
B wishes to be eligible to claim an input tax credit on the
purchase.
B begins construction of a unit complex on the vacant land.
Before completing construction, B sells the partly
constructed unit development to C, along with the necessary
arrangements for C to carry on its construction. B and C
have agreed that this is a supply of a going concern.
Therefore B does not remit GST, nor is C entitled to an
input tax credit.
C finishes the development, and sells a unit to D, who is a
private individual not registered for GST. This is a
taxable supply of new residential premises. C cannot make
the sale to D under the margin scheme, because B acquired
the property under the basic rules, and would therefore also
have been ineligible to apply the margin scheme.
This example can also be followed using this diagram:
[pic]
If B had purchased the property under the margin scheme then
the margin scheme could have been applied to C's sale to D.
2. : Ineligibility for the margin scheme following supply to a
registered associate for no consideration
Kit Holdings is registered for GST. It acquires land in
Sandy Bay under the basic rules. Later, Kit Holdings
transfers the land for no consideration to an associated
company, Kit Homes. When Kit Homes sells the land, it will
be ineligible to use the margin scheme.
Alternatively, if Kit Holdings had acquired the land under
the margin scheme, then the GST payable on the sale by Kit
Homes could have been calculated under the basic rules or
under the margin scheme.
Eligibility and partial supplies
35. Under existing subsection 75-5(2), where real property is acquired
partly through a supply that is ineligible for the margin scheme,
and partly through a supply that is eligible for the margin scheme,
the margin scheme can be used for the subsequent supply. However,
in these circumstances, the existing section 75-22 requires an
increasing adjustment, reflecting the input tax credit entitlement
for that part of the acquisition that is ineligible for the margin
scheme.
36. Subsection 75-22(1) does not apply in relation to the scenarios
described in new paragraphs 75-5(3)(e) to (g) as the supplier in
these circumstances is not entitled to an input tax credit for the
acquisition. Instead, it is the previous supplier that had the
input tax credit entitlement.
37. Similarly, subsection 75-22(1) does not apply where property is
supplied GST-free as part of a going concern or GST-free farmland
or as a non-taxable supply to a registered associate for no
consideration, where the entity making the GST-free or non-taxable
supply acquired part of the property through a supply that was
ineligible for the margin scheme.
38. For an increasing adjustment to apply in these circumstances, new
subsections 75-22(3) and (4) have been inserted. [Schedule 1,
item 10]
39. New subsection 75-22(5) specifies the amount of the increasing
adjustment. In recognition that there may be difficulties for the
supplier in obtaining the information to determine the input tax
credits to which the previous supplier was entitled, the provision
allows an adjustment to be calculated using an approved valuation.
40. Where an entity chooses to use an approved valuation, the amount of
the increasing adjustment is equal to 1/11th of an approved
valuation of the part of the real property that either, was
ineligible for the margin scheme, or would have been ineligible for
the margin scheme at the time of the previous supplier's
acquisition. Alternatively, the increasing adjustment will be
1/11th of the consideration provided by the previous supplier to
acquire that part of the real property. [Schedule 1, item 10]
Calculating the margin for a supply of real property after certain GST-free
or non-taxable supplies
41. Where property has been supplied GST-free as part of a going
concern, as GST-free farmland, or as a non-taxable supply to a
registered associate for no consideration, the entity making the
GST-free or non-taxable supply does not have a GST liability for
the value they have added to the property. Instead, the
calculation of the margin on a subsequent sale of such properties
under the margin scheme only takes into account the value added by
the supplier under the margin scheme.
42. The approach is to look through the prior GST-free sale or non-
taxable supply in order to calculate the margin for supplies of
property under the margin scheme. The margin is based on the
consideration paid by the previous entity for their acquisition, or
on a valuation of the property when the previous entity acquired
the property or first become registered on or after 1 July 2000.
In this way, the overall GST liability cannot be reduced by
resetting the margin by way of a GST-free supply or a non-taxable
supply to a registered associate for no consideration. [Schedule
1, item 4]
43. As stated, a valuation of a property may be required in order to
calculate the margin. In particular, where an entity acquired land
before 1 July 2000 and was required to be registered for GST at the
commencement of GST, a 1 July 2000 valuation applies for the
purposes of determining the margin.
44. Where an entity acquired real property on or after 1 July 2000 and
was registered at the time of acquisition, a valuation of the
property at the time of acquisition or the consideration for the
acquisition may be used for the purposes of determining the margin.
45. Where real property is acquired by an entity on or after
1 July 2000 and the entity was not registered or required to be
registered for GST at the time of acquisition, the value of the
property at the time that the entity is first registered or
required to be registered applies for the purposes of determining
the margin.
46. New subsection 75-11(6A) recognises that an acquisition from an
associate may not be by means of a supply, for example some
acquisitions by government entities may be made without a supply.
1. : Calculation of the margin following a GST-free sale
A is registered for GST, and held land before 1 July 2000
valued at $110,000. A sells the land to B for $165,000.
The margin scheme is applied to this sale. A's GST
liability is based on A's value added.
B begins operating an enterprise of construction and sale of
a unit complex, and later sells the construction site as
part of a going concern to C. Because B and C agree to
treat the supply as a GST-free going concern, B pays no GST
on the sale price of $440,000 for the site.
By interposing a GST-free sale, the tax on B's value added
becomes payable on C's sale. This potential tax liability
was contemplated by the parties when they negotiated the GST-
free sale price. At the time of the GST-free sale, C could
ensure that the necessary documentation evidencing B's
acquisition price of the real property was obtained.
C completes the construction and sells it to D for $495,000,
applying the margin scheme. In calculating the margin for
the sale, C subtracts B's acquisition price of $165,000 from
C's final sale price of $495,000. This results in a margin
of $330,000 for this supply. C pays $30,000 in GST to the
Australian Taxation Office.
This is equivalent to the outcome that would have been
obtained had B sold the property to C under the margin
scheme. In this case B would have paid GST of $25,000,
based on B's margin of $275,000 ($440,000 - $165,000). C
would have paid $5,000 GST, based on C's margin of $55,000
($495,000 - $440,000). The total GST collection from B
and C would still have been $30,000.
This example can also be followed using this diagram:
[pic]
2. : Calculation of the margin following supply to a registered
associate for no consideration
A is registered for GST, and held land before 1 July 2000
valued at $110,000. A begins construction of a unit complex
on the land. The property is transferred to its associate
B, for no consideration. A is not liable to pay any GST on
the transfer because B is registered for GST and acquires
the property solely for a creditable purpose. The market
value of the property at the time of the transfer is
$440,000.
B completes construction, and sells new residential premises
to C for $495,000, under the margin scheme. The margin for
this sale includes the value added by B of $55,000 ($495,000
- $440,000) as well as the value added by A on or after 1
July 2000 of $330,000
($440,000 - $110,000). The total margin is therefore
$385,000 ($495,000 - $110,000), upon which $35,000 GST is
payable.
This is equivalent to the outcome that would have been
obtained had A sold the property to B under the margin
scheme for its market value of $440,000. In this case A
would have paid GST of $30,000, being 1/11th of A's value
added of $330,000. B would then have paid only $5,000 GST
based on B's value added of $55,000. The total GST
collection would still have been $35,000.
This example can also be followed using this diagram:
[pic]
3. : GST-free farmland
Jack is a farmer who is registered for GST. Jack owned
property near Bendigo valued at $440,000 on 1 July 2000.
Jack farms sheep on this land until 2010, when he sells the
land to Toby for $550,000, another farmer who is registered
for GST. Because Toby intends that a farming business be
carried on, on the land Jack's supply to Toby is GST-free.
Toby is later approached by a developer that offers to buy
the land in order to build residential premises. If Toby
sells the property under the margin scheme, the margin would
be the difference between the sale price and the value of
the property as at 1 July 2000. Toby would have to remit
GST on this margin, but the purchaser would not be entitled
to an input tax credit.
4. : Land acquired on or after 1 July 2000 by an unregistered entity,
that later becomes registered for GST
Land is acquired in 2002 by an unregistered entity. In
2010, the entity becomes registered for GST. In 2012, the
property is supplied as GST-free farmland, then later sold
under the margin scheme. The margin for the later sale is
based on an approved valuation or the GST-inclusive market
value of the property when the entity became registered in
2010, not the consideration paid for the property in 2002.
Supplies between associates for no consideration
47. Division 75 applies to the sale of a freehold interest in land, a
stratum unit or granting or selling a long term lease. As a
result, under the current law, Division 75 does not apply in
relation to supplies between associates for no consideration.
48. To ensure that Division 75 can apply, new subsection 75-5(1B)
specifies that a supply of real property to an entity who is your
associate is taken to be a sale to your associate whether or not
the supply is for consideration. [Schedule 1, item 1]
49. Existing section 75-13 applies in relation to working out the
margin for a supply to an associate. A consequential amendment is
made to section 75-13 to ensure that it applies where there is a
supply between associates for no consideration. [Schedule 1, item
8]
Calculating the margin for the supply of real property acquired through
several acquisitions
50. There may be circumstances where more than one of the following
provisions applies to the calculation of the margin for the taxable
supply of real property; section 75-10 and subsections 75-11(1)
to (7). This may occur where there have been several acquisitions
of real property which may later be combined or amalgamated.
51. New section 75-16 specifies that where real property has been
acquired through two or more acquisitions (partial acquisitions)
the calculation of the margin under a particular provision is
determined only to the extent that the supply is connected to the
partial acquisition. [Schedule 1, item 9]
1. : The margin for supply of real property acquired through several
acquisitions
Bob acquired an interest as a GST-free supply of farmland.
Bob acquired a second interest from an unregistered vender.
The two interests are merged as part of a development and
sold under the margin scheme.
Section 75-16 provides that the calculation of the margin
under subsection 75-11(5) should only apply to the extent
that the interest was acquired pursuant to the GST-free
supply of farmland.
GST general anti-avoidance provisions
52. The general anti-avoidance provisions in Division 165 of the GST
Act apply to artificial or contrived schemes that are entered into
or carried out for the sole or dominant purpose of getting a GST
benefit. Through entering into or carrying out a scheme, an entity
may create a circumstance or state of affairs that is necessary to
make a choice, election, application or agreement allowed under the
GST Act. In this case, the GST benefit is not attributable to the
choice, election, application or agreement.
53. In particular, the provisions of this Schedule apply to tax the
value added to real property by looking back through certain GST-
free or non-taxable supplies. However, in order to minimize
complexity and record-keeping requirements for taxpayers, the
taxpayer is required only to look back through one GST-free sale or
non-taxable supply. Taxpayers attempting to circumvent these
provisions by contriving a string of GST-free sales may be subject
to the application of the GST anti-avoidance provisions.
54. The reduction in the margin that arises because of the
interposition of a GST-free or non-taxable supply is not
attributable to, for instance, the agreement to apply the margin
scheme or that a supply is a supply of a going concern, but rather
to the overall arrangement, including the interposing of the
intermediate supply, of which the choice or agreement is but one
part.
55. Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936),
subparagraph 177C(2)(a)(ii) provides:
'...the scheme was not entered into or carried out by any
person for the purpose of creating any circumstance or state
of affairs the existence of which is necessary to enable the
declaration, agreement, election, selection, choice, notice
or option to be made, given or exercised, as the case may
be...'.
56. For the avoidance of doubt, new subsection 165-5(3) introduces into
the GST Act a concept that is already found in
subparagraph 177C(2)(a)(ii) of the ITAA 1936, so that if a GST
benefit is attributable to the making of a choice, election,
application or agreement, then consideration needs to be given to
the purpose of creating any circumstance or state of affairs which
enable such a choice, election, application or agreement.
[Schedule 1, item 11]
57. This exception is not limited to schemes involving real property
and the margin scheme and applies to other schemes to which the GST
general anti-avoidance provisions may apply.
58. Division 165 is intended to apply to artificial or contrived
schemes and not, for example, where parties merely take advantage
of concessions, such as the margin scheme and grouping provisions
in accordance with the objects of the provision.
1. : When Division 165 will not apply
A vendor and purchaser initially instruct their solicitors
to draft a contract of sale for a taxable supply. Prior to
the contract being executed the parties instruct their
solicitors to amend the contract to reflect their agreement
that the supply is of a going concern.
In amending the contract, the parties have not entered into
an artificial or contrived arrangement to obtain an
unintended benefit contrary to the object of the GST Act.
They have merely taken advantage of the concession for a
supply of a going concern. There is no additional benefit
involved. Thus Division 165 does not apply.
59. However, where entities take steps to create a circumstance where a
statutory choice may be exercised, as part of an artificial or
contrived scheme to defeat the object of the GST Act or particular
provisions of the Act - such as schemes that seek to use multiple
applications of the going concern concession to avoid GST on the
value added by registered entities - the new provision may be
relevant to the application of Division 165.
60. This new provision requires a conclusion to be drawn as to the
purpose of creating the requisite circumstance or state of affairs
consistent with the exception contained in Part IVA of the ITAA
1936. The purpose must be the sole or dominant purpose. This
standard limits the potential application of the provision to those
arrangements that are artificial or contrived in nature. [Schedule
1, item 11]
1. : A string of going concern sales
A is registered for GST and acquires real property on 1 July
2008 for $660,000. The property is acquired under the
margin scheme. A partly completes a residential development
on the property. On 17 June 2009 the market value of the
property is $3.3 million. If A were to sell this property
under the margin scheme at its market value of $3.3 million,
the GST payable would be $240,000, based on A's margin of
$2.64 million.
Instead, A transfers the property to B, as part of a GST-
free going concern for $3.3 million. If B were to sell the
property under the margin scheme for the same amount, the
GST payable would still be $240,000, as B is also required
to account for the value added prior to A's supply as a GST-
free going concern.
A has arranged with B to transfer the property back to them
on 18 June 2009. The property is still valued at $3.3
million. However, A is later able to sell the property to C
under the margin scheme for $3.4 million. Because A had
acquired the property from B as part of a GST-free going
concern, A calculates the margin based on the difference
between the final sale price ($3.4 million) and B's
acquisition cost ($3.3 million). However, A is not required
to look back further, hence A's original margin of $2.64
million is not taxed.
This transaction is brought to the attention of the
Commissioner, who seeks to apply the GST general anti-
avoidance provisions. Although the agreement to make a GST-
free supply of a going concern is expressly provided for by
Subdivision 38-J of the GST Act, this does not mean that any
GST benefit received by A was attributable to the agreement,
because the agreement was but one step in the arrangement.
Also, under the amendments, the exclusion of GST benefits
attributable to agreements provided for under the Act does
not apply as the creation of the circumstances or state of
affairs was for the purpose of enabling the agreement to be
made.
Application and transitional provisions
61. The amendments to Division 75 relating to eligibility to apply the
margin scheme and dealing with the calculation of the margin for a
sale under the margin scheme apply in relation to supplies that are
supplies of things that the supplier acquired through a new supply
to the supplier. New supplies are supplies made on or after the
commencement of this Bill and are not made under a written
agreement entered into before commencement or pursuant to a right
or option granted before commencement, where consideration or a way
of working out the consideration is specified.
62. If a supply is made under a written agreement prior to the
commencement of this Schedule, the supply of real property under
that written agreement is not affected. This means that where
parties have already entered into a written agreement that
specifically identifies the supply and identifies the consideration
in money or a way of working out the consideration in money for the
supply of real property, the law as it stood prior to these
amendments continues to stand.
63. The new rules apply only to parties entering into written
agreements on or after the commencement of this Bill. This ensures
that when negotiating the terms of a supply of real property, the
parties have the opportunity to negotiate the contract price based
on any potential liability under these provisions, and have the
opportunity to obtain evidence of consideration paid or relevant
valuations.
64. The sale of a property that was acquired as part of a going
concern, or from an associate, prior to the date of commencement
will be subject to the existing rules. This is illustrated in
Diagram 1.1.
1. : Application of Schedule 1 to the calculation of the margin
[pic]
If B had purchased the property from A under a written
agreement entered into before commencement, that specified
in writing the consideration or a way of working out the
consideration, the existing rules would apply. If B had
similarly purchased the property from A under a right or
option granted, that specified in writing the consideration
or a way of working out the consideration for the supply
before commencement, the existing rules would apply.
65. The amendments to the GST anti-avoidance provisions apply to a
choice, election, application or agreement made on or after the
commencement of this Bill. [Schedule 1, item 13]
Consequential amendments
66. There are also amendments reorganising assorted headings, notes and
other things that need to be removed or changed because of the
introduction of the new provisions. [Schedule 1, items 5 to 7 and
item 12]
Chapter 2
Thin capitalisation - modification of the rules in relation to application
of accounting standards
Outline of chapter
1. Schedule 2 to this Bill modifies the thin capitalisation regime
contained within Division 820 of the Income Tax Assessment Act 1997
(ITAA 1997) in relation to the use of accounting standards for
identifying and valuing an entity's assets, liabilities and equity
capital.
2. This measure aims to adjust for certain impacts of the 2005
adoption of the Australian equivalents to International Financial
Reporting Standards (AIFRS) on an entity's thin capitalisation
position. It does this by providing for the accounting standard
treatment of specified assets and liabilities to be disregarded in
certain circumstances.
3. This chapter outlines the circumstances in which certain assets and
liabilities are not permitted to be recognised by particular
entities for thin capitalisation purposes. This relates to
deferred tax assets and liabilities, within the scope of Australian
accounting standard AASB 112 Income Taxes, and assets and
liabilities arising from defined benefit plans, within the scope of
Australian accounting standard AASB 119 Employment Benefits.
4. It also outlines those circumstances in which particular entities
may choose to recognise or revalue certain intangible assets,
contrary to the relevant accounting standard. This primarily
relates to intangible assets within the scope of Australian
accounting standard AASB 138 Intangible Assets.
5. This chapter identifies that those entities using the authorised
deposit-taking institutions' (ADIs) thin capitalisation rules are
excluded from the scope of this measure.
6. All references to legislative provisions in this chapter are
references to the ITAA 1997 unless otherwise stated.
Context of amendments
67. The thin capitalisation regime in Division 820 of the ITAA 1997 is
designed to ensure that Australian and foreign-owned multinational
entities do not allocate an excessive amount of debt to their
Australian operations. It does this by disallowing a proportion of
otherwise deductible finance expenses (eg, interest) where the debt
used to fund the Australian operations exceeds certain limits.
68. Accounting standards are required to be used as the basis for the
identification and valuation (including revaluation) of assets,
liabilities and equity capital for thin capitalisation purposes.
69. This measure implements the joint announcement of the Treasurer and
the Assistant Treasurer and Minister for Competition Policy and
Consumer Affairs in Media Release No. 053 of 13 May 2008 that the
Government will amend the thin capitalisation regime to accommodate
certain impacts arising from the 1 January 2005 adoption of new
accounting standards known as AIFRS.
70. These standards replaced the previous Australian Generally Accepted
Accounting Principles. The adoption of AIFRS is regarded as
aligning Australia more closely with international accounting
practice. These standards generally take a more conservative
approach to the recognition and valuation of assets and
liabilities.
71. The Government announced amendments to allow entities subject to
the thin capitalisation regime to depart from current accounting
treatment in relation to certain intangible assets and exclude
deferred tax assets and liabilities and surpluses and deficits in
defined benefit superannuation funds in undertaking necessary
calculations.
72. These amendments adjust for certain differences in treatment from
the previous accounting standards, where the treatment under the
new standards disregards the economic value attached to certain
assets or would introduce volatility to thin capitalisation
calculations. They are intended to provide a sounder economic base
from which to undertake thin capitalisation calculations, rather
than introduce more concessionary arrangements.
73. Prior to the new accounting standards, defined benefit plan assets
and liabilities were not required to be recognised on balance
sheets. These items are potentially volatile, consequent on
changes in underlying actuarial assumptions. Further, it has been
put forward that the new accounting requirements for income taxes
has introduced volatility into the year-to-year thin capitalisation
positions of entities. This means future investment planning is
conducted in a less certain environment. It was concluded that
exclusion was the best means of neutralising this volatility,
without establishing an environment whereby taxpayers include such
items only when it is favourable to do so. This latter position
would be inconsistent with the tax system integrity role performed
by the thin capitalisation regime.
74. It is also accepted that certain intangible assets may have an
economic value greater than that permitted to be recognised by the
new accounting standards. For example, monopoly distribution
rights, despite the absence of an active market for such rights,
could reasonably be expected to have a value over time that differs
from the historic acquisition cost. The approach adopted in the
accounting standards recognises uncertainty exists as to what that
value may be. These amendments provide a framework to ensure a
considered and fair value is recognised, which is as consistent as
possible with the requirements embedded in the accounting
standards.
75. This measure does not reflect an intention to neutralise all
differences in outcome between the previous and current accounting
standards, reflecting the obvious realignment of Australian
financial reporting requirements with international practice and
the key integrity role played by the thin capitalisation regime.
It is not intended to provide entities with scope to artificially
inflate their asset base to support higher gearing levels
inconsistent with the broader intent of this regime.
76. These amendments effectively establish the framework to apply on
expiration of the current transitional arrangements. The
transitional arrangements enable entities to elect to apply the
accounting standards as they existed at 31 December 2004 (rather
than the current accounting standards) for a period of four income
years commencing on or after 1 January 2005. These arrangements
are set out in section 820-45 of the Income Tax (Transitional
Provisions) Act 1997.
Summary of new law
77. For income years commencing on or after the date this Bill receives
Royal Assent, entities will be able to deviate from the accounting
standard treatment of certain assets and liabilities.
78. Entities will not be permitted to recognise deferred tax assets or
liabilities, or amounts arising from defined benefit plans that are
required to be recognised as assets or liabilities.
79. Entities will be able to choose to recognise an intangible asset as
an internally generated intangible asset, where recognition is
currently prohibited under accounting standard AASB 138 Intangible
Assets on the basis the asset cannot be reliably costed, provided
other recognition requirements within the standard can be met.
This relates primarily to internally generated brands, mastheads,
publishing titles, customer lists and items similar in substance.
Accounting standard requirements must then be complied with to the
maximum extent possible (as if recognition were permitted). A
choice may be revoked prospectively.
80. Entities will also be able to choose to revalue an intangible asset
that is subject to the measurement requirements in AASB 138
Intangible Assets but is unable to use the revaluation method under
that standard due to the absence of an active market. The revalued
amount must be determined in accordance with the established rules,
which include a requirement for the amount to be determined in
compliance with the relevant accounting standards and for the
valuation to be undertaken by an independent valuer or by an
internal expert, using a valuation methodology endorsed by an
external expert. A choice may be revoked prospectively.
81. These amendments will apply for all purposes under Division 820,
other than for entities using the ADI inward and outward investing
entities thin capitalisation rules or for the purposes of
section 820-960, which establishes record-keeping obligations for
Australian permanent establishments.
Comparison of key features of new law and current law
|New law |Current law |
|Certain entities must not|Entities must recognise |
|recognise for thin |for thin capitalisation |
|capitalisation purposes |purposes assets and |
|assets or liabilities |liabilities as required |
|arising from defined |by the accounting |
|benefit plans. |standards. |
|Certain entities must not|Entities must recognise |
|recognise for thin |for thin capitalisation |
|capitalisation purposes |purposes assets and |
|deferred tax assets or |liabilities as required |
|deferred tax liabilities.|by the accounting |
| |standards. |
|New law |Current law |
|Certain entities may |Entities must recognise |
|choose, in writing, to |for thin capitalisation |
|recognise for thin |purposes assets and |
|capitalisation purposes |liabilities as required |
|one or more internally |by the accounting |
|generated intangible |standards. |
|assets that are | |
|determined not to meet | |
|the recognition criteria | |
|under accounting standard| |
|AASB 138 Intangible | |
|Assets as they cannot be | |
|reliably costed, where | |
|they satisfy the other | |
|recognition requirements.| |
|Certain entities may |Entities must recognise |
|choose, in writing, to |for thin capitalisation |
|revalue for thin |purposes assets and |
|capitalisation purposes |liabilities as required |
|one or more intangible |by the accounting |
|assets that are unable to|standards. |
|be revalued under | |
|accounting standard AASB | |
|138 Intangible Assets due| |
|to the absence of an | |
|active market. | |
|Such revaluations must be|No equivalent. |
|undertaken in compliance | |
|with existing subsections| |
|820-680(2) and (2A). | |
|Recognition and |No equivalent. |
|revaluation under the | |
|above provisions must, to| |
|the maximum extent | |
|possible, comply with the| |
|accounting standards as | |
|if recognition or | |
|revaluation were | |
|permitted under the | |
|standard. | |
|The above amendments do |No equivalent. |
|not apply for the | |
|purposes of the | |
|Australian permanent | |
|establishment | |
|record-keeping | |
|requirements identified | |
|in section 820-960. | |
|The above amendments do |No equivalent. |
|not apply to entities | |
|subject to or electing to| |
|use the ADI inward or | |
|outward investing | |
|entities rules. | |
Detailed explanation of new law
82. Subsection 820-680(1) establishes that an entity must comply with
the accounting standards in determining what are its assets and
liabilities and in calculating the value of its assets, liabilities
and equity capital when undertaking its thin capitalisation
calculations. Subsection 820-680(1A) further states that an entity
has an asset or liability at a particular time only if the
accounting standard provides that the asset or liability can or
must be recognised at that time. Accounting standards has the same
meaning as in the Corporations Act 2001.
Certain assets and liabilities not to be recognised for most thin
capitalisation purposes
83. The amendments provide that certain assets and liabilities that
would be required to be recognised for thin capitalisation purposes
under the above provisions must not be recognised.
Deferred tax liabilities and assets not to be recognised
84. An entity must not recognise deferred tax liabilities or deferred
tax assets for thin capitalisation purposes [Schedule 2, item 5,
subsection 820-682(1)]. Recognition would, otherwise, be required
as a consequence of Australian accounting standard AASB 112 Income
Taxes.
85. This exclusion has application for all purposes under Division 820,
other than:
. in relation to entities using the thin capitalisation
rules for ADI inward or outward investing entities
- Subdivisions 820-D and 820-E [Schedule 2, item 5,
subsection 820-682(3)]; and
. the record-keeping requirements applying to Australian
permanent establishments in section 820-960 [Schedule 2,
item 5, subsection 820-682(4)].
86. The basis for the carve-out for entities using the ADI rules
identified above reflects the different basis on which thin
capitalisation calculations are undertaken for such entities, and
the uncertain and potentially adverse impact these amendments may
have for their thin capitalisation positions. This carve-out would
apply to entities that elect to use the ADI rules under Subdivision
820-EA, but not to those entities that elect out of these rules
under section 820-588.
87. The section 820-960 carve-out from the exclusion reflects the wider
role performed by this record-keeping requirement, which makes it
inappropriate for these records to reflect adjustments specific to
thin capitalisation calculations. For example, these records are
used for the purposes of Part IIIB of the Income Tax Assessment Act
1936 relating to Australian branches of foreign banks and other
financial entities.
Defined benefit plan liabilities and assets not to be recognised
88. An entity must not recognise an amount arising from a defined
benefit plan as an asset or liability for thin capitalisation
purposes [Schedule 2, item 5, subsection 820-682(2)]. This would,
otherwise, be required as a consequence of Australian accounting
standard AASB 119 Employee Benefits.
89. This exclusion is intended to cover those circumstances in which an
entity is required to recognise as assets or liabilities amounts
arising from defined benefit plans provided as a direct consequence
of its role as an employer providing post-employment benefits to
employees or where such liabilities or assets are recognised by an
entity on behalf of another member of a group.
90. This exclusion has application for all relevant purposes under
Division 820, other than:
. in relation to entities using the thin capitalisation
rules for ADI inward or outward investing entities
- Subdivisions 820-D and 820-E [Schedule 2, item 5,
subsection 820-682(3)]; and
. the record-keeping requirements applying to Australian
permanent establishments in section 820-960 [Schedule 2,
item 5, subsection 820-682(4)].
91. The basis for these carve-outs from the general exclusion is
discussed in paragraphs 2.26 and 2.27.
An entity may choose to recognise certain internally generated intangible
assets
92. Certain assets within the scope of Australian accounting standard
AASB 138 Intangible Assets are prohibited from recognition as
internally generated intangible assets under that standard. The
basis for this exclusion is the determination within the standard
that the expenditure on these items cannot be distinguished from
the cost of developing the business as a whole (implying they
cannot be reliably costed).
93. This relates to internally generated brands, mastheads, publishing
titles, customer lists and items similar in substance
(see paragraph 63 of AASB 138 Intangible Assets (compiled
25 October 2007)).
94. These amendments provide that an entity may choose to recognise,
for a period relevant for thin capitalisation purposes, assets
specified in this standard that are deemed to fail to meet the
requirements to be recognised as internally generated intangible
assets on the basis they cannot be reliably costed (as described in
paragraphs 2.32 and 2.33), provided these assets meet the remaining
recognition requirements in the standard [Schedule 2, item 5,
subsections 820-683(1) and (2)]. For example, the prohibition
within the standard on recognising expense incurred in the research
phase would be applicable.
95. The relevant period would be all or part of an income year relevant
for thin capitalisation purposes. This enables recognition of
assets at all valuation points within that period, as identified in
the average value methods identified in Subdivision 820-G.
96. Items recognised under these amendments must not amount to
internally generated goodwill [Schedule 2, item 5, subsection 820-
683(1)]. The distinction between internally generated goodwill and
internally generated assets for accounting purposes is evident from
paragraph 49 of AASB 138 Intangible Assets (compiled 25 October
2007), which provides that goodwill is not an identifiable
resource. That is, it is neither separable (able to be sold,
transferred, licensed etc) nor does it arise from contractual or
other legal rights. Therefore, for an asset to be recognised (or
revalued as described in paragraphs 2.43 to 2.55) under these
provisions it must meet the identifiability criteria outlined in
paragraph 12 of AASB 138 Intangible Assets.
97. A choice must be made, in writing, prior to the due date for
lodging an entity's income tax return for the income year that
contains the relevant period for thin capitalisation purposes. A
choice may relate to one or more assets. The choice covers both
the initial and future periods. However, once a choice has been
made, it is irrevocable for periods for which the relevant income
tax return lodgment due date has passed, for so long as the entity
recognises that asset as an asset of the entity. [Schedule 2, item
5, subsection 820-683(3)]
98. A choice may be revoked in relation to future periods, provided
this occurs, in writing, before the due date for lodging an
entity's income tax return for the income year of the relevant next
period for thin capitalisation purposes [Schedule 2, item 5,
subsection 820-683(4)]. A decision to revoke a choice in relation
to an asset does not mean that choice cannot be made again.
99. Once a choice has been made in relation to an asset, the
requirements of the relevant accounting standards apply as if the
asset had been able to be recognised under AASB 138 Intangible
Assets [Schedule 2, item 5, subsection 820-683(5)]. For example,
the measurement requirements applying at and following recognition
will apply in determining the appropriate carrying amount to be
used for thin capitalisation purposes. Similarly, the impairment
testing requirements established within that standard would need to
be satisfied.
100. As a natural outcome of this approach, where an asset is unable to
be revalued under the above accounting standard due to the absence
of an active market, the revaluation mechanism (see paragraphs 2.43
to 2.55) will be available to the entity in relation to that asset.
[Schedule 2, item 5, subsection 820-683(5)]
1. : Interaction of the recognition and revaluation provisions
Maher Co manufactures an extremely popular range of branded
products. It has developed its brand internally over an
extended period.
While identifiable as an intangible asset under AASB 138
Intangible Assets, the brand is not able to be recognised as
an asset in the company's financial reports. Maher Co has,
consequently, expensed the costs associated with its
development.
However, Maher Co is satisfied the brand is an intangible
asset, there is an identifiable stream of expected future
economic benefit that will flow to the company that is
attributable to the asset and associated expenses do not
relate to a research phase.
As a result, Maher Co chooses, in writing, to recognise the
brand as an asset for thin capitalisation calculation
purposes.
Maher Co then looks to the measurement and related
requirements of AASB 138 and other relevant accounting
standards as if the asset had been recognisable under that
standard.
Maher Co determines this asset would not be able to use the
revaluation model within AASB 138, due to the absence of an
active market. It then chooses, in writing, to use the
revaluation provisions within the thin capitalisation rules.
Maher Co has the masthead revalued by an independent expert.
Having had regard, as far as practical, to the valuation
requirements of the relevant accounting standards, the
expert values the brand at $100.
7. The choice detailed above has application for all relevant purposes
under Division 820 other than:
. in relation to entities using the thin capitalisation
rules for ADI inward or outward investing entities
- Subdivisions 820-D and 820-E [Schedule 2, item 5,
subsection 820-683(6)]; and
. the record-keeping requirements applying to Australian
permanent establishments in section 820-960 [Schedule 2,
item 5, subsection 820-683(2)].
8. The basis for these carve-outs from the general exclusion is
discussed in paragraphs 2.26 and 2.27.
An entity may elect to revalue certain intangible assets
9. In complying with Australian accounting standard AASB 138
Intangible Assets, intangible assets are unable to use the
revaluation model within that standard where there is no active
market. An active market is defined within the standard as a
market in which all of the following conditions exist:
. the items traded in the market are homogeneous;
. willing buyers and sellers can normally be found at any
time; and
. prices are available to the public.
(The existence of an active market is the most reliable way of
determining the fair value of an asset. However, the fair value of
an asset is more broadly defined in the accounting standards to be
the amount for which an asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction.)
10. In the above circumstance, an entity will be able to choose to
revalue, consistent with the requirements established by these
amendments, one or more of these assets for the relevant period
(being all or part of an income year) [Schedule 2, item 5,
subsections 820-684(1) and (2)]. This covers all relevant
valuation points within that period, as identified in the average
value methods in Subdivision 820-G. For example, where an entity
has decided to use the opening and closing balances method for a
period (see section 820-635), a revalued amount could be determined
as the value for the first day of the period and for the last day
of the period.
11. A choice to revalue an intangible asset under these provisions may
be made in relation to any intangible asset required to comply with
AASB 138 Intangible Assets in relation to measurement at, or
following, recognition of that asset.
12. A choice must be made in writing, and may cover one or more assets,
including assets recognised under new section 820-683 [Schedule 2,
item 5, paragraph 820-684(3)(a)]. This choice must be made prior
to an entity's due date for lodgment of its income tax return for a
particular income year, and has effect for future periods [Schedule
2, item 5, paragraphs 820-684(3)(b) and (c)]. Once a choice is
made in relation to an asset, it is irrevocable for periods for
which the relevant income tax return lodgment date has passed. A
decision to revoke the choice must be made, in writing, prior to
the lodgment date for the entity's income tax return for a relevant
period [Schedule 2, item 5, subsection 820-684(4)]. This does not
imply the revaluation amount cannot be amended.
13. A decision to revoke a choice in relation to an asset does not mean
that a choice cannot be made again.
14. Revaluations are required to be undertaken in a manner consistent
with existing subsections 820-680(2) and (2B) [Schedule 2, item 5,
subsection 820-684(5)]. These subsections, in essence, establish
that revaluations must be undertaken either by an independent
expert or by an internal expert, consistent with a valuation
methodology that has been endorsed by an external expert. The
carve-out from the requirement to satisfy subsection 820-680(2)
embodied in subsection 820-680(2A) would be expected to have no
practical application in these circumstances.
15. The revalued amount arising from this process must comply to the
maximum extent possible with the requirements of the relevant
accounting standards. That is, the carrying amount recognised for
thin capitalisation purposes must reflect the accounting standard
requirements that would have applied were revaluation permitted
under accounting standard AASB 138 Intangible Assets. This
includes incorporating impairment and amortisation adjustments,
where applicable. [Schedule 2, item 5, subsection 820-684(6)]
16. The frequency of revaluation of an asset would be determined by
reference to the general requirements of the accounting standards
in relation to the revalued intangible asset. For example, AASB
138 Intangible Assets requires revaluations to be made with such
regularity that at the reporting date the carrying amount of the
asset does not differ materially from its fair value. For the
purposes of these provisions, fair value would have its broader
meaning (ie, without the requirement for it to be referenced to an
active market). The impairment testing requirements and outcomes
in Australian accounting standard AASB 136 Impairment of Assets
apply.
17. The decision to permit a revaluation choice under these provisions
to be revoked will allow entities to avoid unnecessary compliance
costs associated with revaluation obligations, should these prove
unwarranted in the future. The likelihood entities would switch
between these provisions and accounting standard treatment to avoid
the requirement to reflect a significantly reduced revalued amount,
which is not the intent of these amendments, is minimised by
Australian accounting standard AASB 136 Impairment of Assets. This
standard requires, for example, the annual impairment testing of
intangible assets with indefinite useful lives (to compare the
carrying amount of the asset with its recoverable amount). This
implies significant downward adjustments of a revalued amount are
likely to be mimicked by a requirement to reduce the carrying
amount under a cost model.
18. This approach seeks to ensure consistency with the valuation
requirements applying to other assets and to minimise the scope for
arbitrary outcomes that do not reflect valuation norms reflected in
international accounting practice.
19. Existing record-keeping requirements in relation to revaluations
and the independence of the valuer will apply to revaluations
undertaken which are consistent with subsection 820-684(2). These
record-keeping requirements are currently contained in section 820-
985. [Schedule 2, items 7 and 8, subsections 820-985(1) and (3)]
20. The choice detailed above has application for all relevant purposes
under Division 820, other than:
. in relation to entities using the thin capitalisation
rules for ADI inward or outward investing entities
- Subdivisions 820-D and 820-E [Schedule 2, item 5,
subsection 820-684(7)]; and
. the record-keeping requirements applying to Australian
permanent establishments in section 820-960 [Schedule 2,
item 5, subsection 820-684(2)].
21. The basis for these carve-outs from the general exclusion is
discussed in paragraphs 2.26 and 2.27.
Commissioner of Taxation's power to substitute a value
22. The Commissioner of Taxation's (Commissioner) power to substitute
one value for another in certain circumstances will include values
included in an entity's thin capitalisation schedule in relation to
assets recognised or revalued under these amendments. [Schedule 2,
item 6, section 820-960]
23. This power is modified to reflect the choices to recognise or
revalue assets provided for under these amendments. The intention
is that the Commissioner would not be able to substitute a value
simply as a result of the exercise of such a choice, on the basis
the outcome is inconsistent with the accounting standards.
However, the Commissioner would be able to have regard to general
valuation concepts within those standards in considering an
appropriate carrying amount.
Application and transitional provisions
24. These amendments will apply to assessments for each income year
commencing on or after the date this Bill receives Royal Assent.
There may be a period of overlap for certain entities between the
date of effect of these amendments and the application of the
existing transitional provisions (see section 820-45 of the Income
Tax (Transitional Provisions) Act 1997). In these circumstances,
an entity that chooses not to use the transitional provisions will
have immediate access to these provisions. An entity that has
chosen to use the transitional provisions for one last year would
theoretically have access to these provisions, but there is not
expected to be any practical effect due to the differences between
the old and new accounting standards in these areas. [Schedule 2,
item 9]
Consequential amendments
25. Consequential amendments are made to insert notes advising
modifications have been made to the general applicability of
accounting standards for the identification and valuation of assets
and liabilities for thin capitalisation purposes and in relation to
the application of the existing independent valuation requirements.
[Schedule 2, items 1 to 4, subsections 820-680(1), (1A), (2) and
(2B)]
Chapter 3
Interest withholding tax - extension of eligibility for exemption to state
government bonds
Outline of chapter
101. Schedule 3 to this Bill amends section 128F of the Income Tax
Assessment Act 1936 (ITAA 1936) to allow bonds issued in Australia
by state and territory central borrowing authorities to be eligible
for exemption from interest withholding tax (IWT).
102. Unless otherwise stated, all legislative references are to the ITAA
1936.
103. States means the States and Territories unless otherwise indicated.
Context of amendment
104. IWT is imposed on the payment of interest from Australia to non-
residents, at a rate of 10 per cent of the gross amount of
interest. The obligation for collecting (withholding) the IWT is
on the person making the payment (ie, the borrower).
105. Section 128F of the ITAA 1936 provides that where an Australian
resident company, or a non-resident company carrying on business at
or through a permanent establishment in Australia, issues a
debenture or certain specified debt interests and the issue
satisfies the public offer test, an exemption from IWT will apply.
106. In 1999, the requirement that these debentures be issued outside
Australia was removed for most borrowers. However, the
liberalisation was not extended to the state central borrowing
authorities. As a consequence, the interest paid to non-residents
on bonds issued in Australia by state central borrowing authorities
is liable to IWT (unless exempt under a treaty or another
arrangement).
107. Consequently, the state central borrowing authorities have
continued to issue their bonds offshore to remove the liability to
IWT and attract non-resident investors.
108. Reflecting state central borrowing authorities' concerns that this
practice results in a segmented market, reduced liquidity and
efficiency, and hampers the role the state government bond market
performs in ensuring the stable operation of Australia's financial
markets, the Federal Government announced its decision to extend
eligibility for exemption from IWT to domestically issued state
government bonds.
109. This is expected to result in the state central borrowing
authorities unifying their bond issuances into one pool of funds,
improving depth and liquidity in the market and broadening the
potential investor base. Ultimately, this should lead to a lower
cost of capital (and hence financing costs) for state
infrastructure projects.
110. Further, it is anticipated that by making state government bonds
more attractive to foreign investors, some of the pressures facing
the Commonwealth Government Securities market will be eased.
111. This measure will also define 'bond' for the purposes of this
amendment, to provide greater certainty to market participants as
to which instruments are eligible for exemption. The intention is
to ensure that a narrow, technical meaning of bond is not
potentially adopted, for example, that a 'bond' must be issued by a
company under its corporate seal or be labelled as a bond, that is
inconsistent with the generally understood concept of a state
government bond in the market place.
112. This amendment is principally intended to focus on the core debt
issuances of state central borrowing authorities (typically issued
as inscribed stock) that would be regarded as more closely
duplicating the role of Commonwealth Government Securities in
supporting the effective operation of Australia's financial
markets.
Summary of new law
113. Schedule 3 removes the prohibition preventing bonds (as defined)
issued in Australia by state central borrowing authorities from
being eligible for the section 128F exemption from IWT. This
amendment will apply to interest payments made on or after the date
of Royal Assent.
Comparison of key features of new law and current law
|New law |Current law |
|Bonds issued by |Bonds issued by state central|
|state central |borrowing authorities in |
|borrowing |Australia are not eligible |
|authorities are |for exemption from IWT under |
|eligible for |section 128F. |
|exemption from IWT | |
|under section 128F. | |
Detailed explanation of new law
114. This amendment makes it clear that bonds issued in Australia by
state central borrowing authorities will be eligible for the
exemption from IWT under section 128F of the ITAA 1936. [Schedule
3, item 1]
115. However, the exemption will only be available in respect of bonds,
as defined for the purposes of new subsection 128F(5B).
[Schedule 3, item 1]
116. The requirements of the public offer test will continue to apply to
bonds (as defined) issued by the state central borrowing
authorities as it applies to debentures and certain specified debt
interests issued by other entities that use the section 128F
exemption.
117. Accordingly, the exemption will only arise for interest payments on
current bond issues where the issue would have satisfied the public
offer test when it was made.
118. The legislation makes no provision for deeming current bond issues
to have satisfied the public offer test. This position is
reinforced by the Federal Government's announcement that state
government bonds will be eligible for exemption, and not simply
exempt.
Definition of 'bond'
119. For the purposes of subsection 128F(5B) a bond, in relation to a
state central borrowing authorities is defined as including
debenture stock and notes. [Schedule 3, item 1]
120. It is intended that defining 'bond' in this manner will provide
market participants with certainty around which instruments are
affected by subsection 128F(5B) and, hence, eligible for exemption
from IWT.
121. It is intended to avoid disrupting the common usage and
understanding of the term for participants in the state government
bond market, whilst ensuring that the changes remain consistent
with the Federal Government's intention and underlying policy
rationale for this amendment.
Application and transitional provisions
122. This amendment will apply to interest paid on or after the date of
Royal Assent. [Schedule 3, item 2]
123. Chapter 4
Fringe benefits tax - jointly held assets
Outline of chapter
124. Schedule 4 to this Bill amends the Fringe Benefits Tax Assessment
Act 1986 (FBTAA 1986) to ensure that where a fringe benefit is
provided jointly to an employee and their associate, the employer's
fringe benefits tax (FBT) liability on the taxable value of the
fringe benefit will only be reduced to the extent the employee's
share of the fringe benefit is used for income producing purposes.
Context of amendments
125. Subsection 138(3) of the FBTAA 1986 deems a benefit provided
jointly to an employee and one or more associates of the employee,
to be provided solely to the employee. This is to prevent the
double counting of fringe benefits.
126. The 'otherwise deductible' rule is an important design feature of
the FBT system and operates so that an employer can reduce the
taxable value of certain fringe benefits, when, if the employee
had incurred the expenses themself, the employee could have claimed
a personal tax deduction. For example, if an employer provides an
employee with a low interest loan to purchase an investment
property, the employee can reduce the taxable value of the loan
fringe benefit to the extent the interest would have been
'otherwise deductible' to the employee, had the employee incurred
additional interest equal to the net value of the loan fringe
benefit.
127. The operation of subsection 138(3) and the otherwise deductible
rule was considered by the Federal Court of Australia in National
Australia Bank Ltd v FC of T 93 ATC 4914 (NAB case). In the NAB
case, an employer provided low interest loans jointly to the
employee husband and his wife which were invested in a jointly held
investment property (a loan fringe benefit).
128. The Federal Court held that as a result of subsection 138(3), the
employee was the sole recipient of the loan fringe benefit. It
further held that as sole recipient of the loan and sole investor
of the proceeds, if the employee husband had incurred and paid
unreimbursed interest on the loan, he would have been entitled to a
deduction for the expense. Thus, under the otherwise deductible
rule in section 19 of the FBTAA 1986, the taxable value of the loan
fringe benefit is reduced to nil so that the employer had no FBT
liability arising from the loan fringe benefit provided to both the
employee and his spouse.
129. This outcome is inconsistent with the operation of the otherwise
deductible rule as it would apply where a benefit is provided
solely to an associate. In these cases, the otherwise deductible
rule does not apply to reduce the employer's FBT liability for the
fringe benefit, as the otherwise deductible rule does not apply
where fringe benefits are provided to a spouse (associate).
130. This outcome is also in conflict with the income tax position as
determined by the courts that income and deductions arising from
jointly owned rental property should be allocated between joint
owners in accordance with their interest in the property (eg, joint
tenants in a rental property would include 50 per cent of the
rental income in their assessable income and claim 50 per cent of
the rental property expenses).
131. The anomaly has also led to arrangements involving expense payment
fringe benefits where a spouse on a higher marginal tax rate salary
sacrifices their income by an amount equivalent to the joint rental
expenses. This allows the spouse on the higher marginal tax rate
through a salary reduction to effectively claim a deduction for the
entirety of the rental expenses despite owning only a share in the
property.
1.
Paul's income is subject to the top rate of taxation. Paul
and his wife Tracy jointly own a rental property, each with
a 50 per cent interest. Paul is the main income earner.
The rental income derived from the property is $20,000 and
the associated deductible expenses are $10,000.
Paul's employer reimburses Paul and Tracey $10,000 for the
rent expenses. Paul's employer has no FBT liability on the
fringe benefit because the 'otherwise deductible rule'
operates to reduce the taxable value to nil. This includes
Tracy's share of the expenses because, as a result of
subsection 138(3) of the FBTAA 1986, Paul is taken to be the
sole recipient of the fringe benefit.
Paul can effectively pay 100 per cent of the expenses out of
pre-tax income. The tax saving from the arrangement is
$4,650.
Another couple, Tony and Fiona also have a 50 per cent
interest in a rental property and have the same incomes as
Paul and Tracy. Tony can claim a tax deduction for 50 per
cent of the rental expenses. Although the two couples are
in similar financial circumstances, Tony is not able to
enter into a salary sacrifice arrangement. Tony's tax
saving is half that of Paul's.
Comparison of key features of new law and current law
|New law |Current law |
|An employer must adjust |As a result of the NAB |
|the taxable value of a |case an employer can |
|fringe benefit (loan |reduce the taxable value |
|fringe benefit, expense |of a fringe benefit |
|payment fringe benefit, |provided jointly to an |
|property fringe benefit |employee and their |
|and residual fringe |associate in relation to |
|benefit) provided jointly|an income earning asset |
|in relation to an income |owned by both the |
|earning asset jointly |employee and their |
|owned by an employee and |associate. |
|their associate, so that | |
|the taxable value of the | |
|fringe benefit is reduced| |
|only by the employee's | |
|percentage of interest in| |
|the asset. | |
Detailed explanation of new law
132. Schedule 4 inserts a new provision into the otherwise deductible
rule for loan fringe benefits, expense payment fringe benefits,
property fringe benefits and residual fringe benefits in
subsections 19(1), 24(1), 44(1) and 52(1) of the FBTAA 1986 which
will provide a different calculation for the application of the
otherwise deductible rule where because of subsection 138(3) of the
FBTAA 1986 a fringe benefit is provided jointly to an employee and
their associate and is deemed to be provided solely to the
employee. [Schedule 4, items 7, 17, 30 and 39]
133. The change to the otherwise deductible rule in these circumstances
operates to make a final adjustment to the notional deduction (ND)
component in the formula (TV - ND) where TV is the taxable value.
The adjustment reduces the unadjusted notional deduction by the
employee's percentage of interest in the income producing asset or
thing (whether tangible or intangible) to which the benefit
relates. This adjustment ensures that the taxable value of the
benefit is only reduced by the employee's share of the benefit.
[Schedule 4, items 8, 22, 31 and 40]
1.
Neena and her husband Marek are jointly provided with a
$100,000 low interest loan by Neena's employer which they
use to acquire shares. The loan fringe benefit has a
taxable value of $10,000. Neena and Marek use the loan to
purchase $100,000 of shares which they will hold jointly
with a 50 per cent interest each. Neena and Marek return 50
per cent of the dividends derived from the shares as
assessable income in each of their income tax returns.
Under the current law (and as a result of the NAB case) the
otherwise deductible rule would apply to reduce the taxable
value of the loan fringe benefit ($10,000) (ie, in respect
of both Neena and Marek's share of the benefit) to nil and
consequently the employer would have no FBT liability.
As a result of new paragraph 19(1)(i) and new subsection
19(5) the notional deduction of $10,000 is reduced by
Neena's percentage of interest in the shares (ie, 50 per
cent so that the taxable value of the loan fringe benefit of
$10,000 is reduced by $5,000). The employer has an FBT
liability on $5,000 which reflects the share of the loan
fringe benefit that was provided to Marek.
134. The calculation used to adjust the notional deduction will also
apply to reduce the taxable value of a loan, expense payment,
property or residual fringe benefit in circumstances where the
fringe benefit is applied only partly for income producing
purposes, where more than one income producing asset is held or
where there is a change, in the FBT year, of the employee's
percentage of interest in the income producing asset.
1.
Same as in Example 5.2 except Neena and Marek only use 50
per cent of the $100,000 loan for acquiring shares. They
use the other 50 per cent ($50,000) for a private overseas
holiday. The taxable value of the loan fringe benefit that
relates to that part of the loan used for private purposes
($5,000) is not deductible to either Neena or Marek so the
otherwise deductible rule does not apply to reduce that part
of the loan fringe benefit.
The taxable value of the loan fringe benefit that arises on
that part of the loan that is used for acquiring shares can
be reduced by Neena's share of the benefit (ie, $2,500).
The employer can reduce the taxable value of the loan fringe
benefit ($10,000) by $2,500. The taxable value of the loan
fringe benefit provided to Neena and Marek that will be
subject to FBT is $7,500 ($10,000 - $2,500).
135. Consequential amendments are made to the otherwise deductible rules
in sections 19, 24, 44 and 52 to ensure that the new provisions are
linked appropriately with the existing rules. [Schedule 4, items 1
to 6, 10 to 16, 18 to 21, 24 to 29 and 33 to 38]
Application and transitional provisions
136. The amendments apply to benefits provided from 7:30 pm Australian
Eastern Standard Time (AEST) on 13 May 2008. [Schedule 4, subitems
9(1) and 23(1), items 32 and 41]
137. For loans entered into before 7:30 pm (AEST) on 13 May 2008, the
existing law will continue to apply to loan benefits provided
before 1 April 2009. [Schedule 4, subitem 9(2)]
138. For expense payment benefits, property benefits and residual
benefits provided under a salary sacrifice arrangement, the changes
will apply to agreements entered into after 7:30 pm (AEST) on 13
May 2008. For agreements entered into before this time, employees
will be able to utilise the current law until 1 April 2009.
[Schedule 4, subitem 23(2)]
Technical corrections
139. Part 2 of Schedule 4 to this Bill also makes some minor technical
corrections to the FBT law. The amendments will correct certain
cross references and in line with current drafting practice,
improve the readability of these provisions. [Schedule 4, Part 2,
items 42 to 75]
Chapter 5
Managed funds: changes to the eligible investment business rules
Outline of chapter
140. Schedule 5 to this Bill amends Division 6C of the Income Tax
Assessment Act 1936 (ITAA 1936) to streamline and modernise the
eligible investment business rules for managed funds.
141. These amendments will:
. clarify the scope and meaning of investing in land for the
purpose of deriving rent;
. introduce a 25 per cent safe harbour allowance for non-
rental, non-trading income from investments in land;
. expand the range of financial instruments that a managed
fund may invest in or trade; and
. provide a 2 per cent safe harbour allowance at the whole
of trust level for non-trading income.
142. The introduction of these amendments will make it easier for
managed funds, in particular property trusts, to comply with the
law by reducing the scope for them to inadvertently breach Division
6C.
143. All references to legislative provisions in this chapter are
references to the ITAA 1936 unless otherwise stated.
Context of amendments
144. Division 6C applies to tax the income of certain 'public unit
trusts' and their equity holders like companies and their
shareholders if the trust is a 'public trading trust'. A public
unit trust is a public trading trust if at any time during an
income year it operates, or controls operations of an entity that
carries on activity that is not an eligible investment business.
An eligible investment business is defined in section 102M of
Division 6C as any, or any combination of:
. investing in land (including the acquisition and
development of land) for the purpose or primarily for the
purpose of deriving rent; or
. investing or trading in any, or any combination of, the
financial instruments as listed in the definition in
section 102M, paragraph (b).
145. Consistent with the Government's pre-election commitment, the
Assistant Treasurer and Minister for Competition Policy and
Consumer Affairs announced in Media Release No. 010 of 22 February
2008 that the Board of Taxation would examine options for the
introduction of a specific tax regime for managed funds. The
review is also to include an examination of Division 6C. The
review is a key part of the Government's commitment to enhance the
competitiveness of Australian managed funds. The Government also
announced that pending the outcome of the review certain changes
would be made in the interim to Division 6C to streamline and
clarify the application of the eligible investment business rules.
Summary of new law
146. These amendments will clarify the scope and meaning of investing in
land for the purpose of deriving rent by ensuring that investing in
land, including an interest in land, for the purpose of deriving
rent is taken to include investing in fixtures on the land and
investing in movable property (ie, chattels) customarily supplied,
incidental and relevant to the renting of the land and ancillary to
the ownership and utilisation of the land.
147. These amendments will introduce a 25 per cent safe harbour
allowance for non-rental, non-trading income from investments in
land. The allowance for non-rental, non-trading income from land
is to operate as a safe harbour in conjunction with the existing
rental purpose tests on an overall land portfolio basis. If a
trust does not meet this safe harbour, it can assess whether it is
investing in land for the purpose, or primarily for the purpose of
deriving rent under the existing law (ie, paragraph (a) of the
definition of 'eligible investment business' in section 102M).
148. These amendments will expand the range of permitted financial
instruments that a managed fund may invest in or trade by extending
the scope of financial instruments covered by the eligible
investment rules to include financial instruments that are not
already covered by paragraph (b) of the definition of 'eligible
investment business' in section 102M that arise under financial
arrangements in the Income Tax Assessment Act 1997 (ITAA 1997),
other than certain excepted arrangements. However, as per the note
under subsection 102MA(1), nothing in paragraph (c) affects an
activity that meets paragraph (a) of the definition of 'eligible
investment business' in section 102M.
149. These amendments will provide a 2 per cent safe harbour allowance
at the whole of trust level for non-trading income to reduce the
scope for inadvertent minor breaches of the Division 6C eligible
investment business rules. The trustee of a unit trust will not be
treated as carrying on a trading business if not more than 2 per
cent of the gross revenue of the unit trust in an income year is
not from eligible investment business and that income is not from
carrying on a business that is not incidental and relevant to the
eligible investment business.
150. The allowance is to provide for situations where the trustee
derives some income that is not income from an eligible business
investment and it is not from a separate business activity (ie,
income from directors' fees received from positions on company
boards, certain guarantee or option fees, or income from an
investment in a non-financial arrangement).
151. These amendments will apply to the income year of Royal Assent and
later income years.
Comparison of key features of new law and current law
|New law |Current law |
|Investing in land is |No equivalent. |
|taken to include | |
|investing in fixtures on | |
|land and investing in | |
|movable property that is | |
|incidental and relevant | |
|to the renting of the | |
|land, customarily | |
|supplied or provided in | |
|connection with the | |
|renting of the land, and | |
|ancillary to the | |
|ownership and use of the | |
|land. | |
|New law |Current law |
|Financial instruments |Financial instruments are|
|include additional |limited to those listed |
|financial instruments |in Division 6C. |
|that arise under | |
|financial arrangements | |
|other than certain | |
|excluded arrangements. | |
|Shares in a company are | |
|to include shares in | |
|certain foreign hybrid | |
|companies. | |
|A 25 per cent safe |No equivalent. |
|harbour allowance for | |
|non-rental income where | |
|that income is not from | |
|the carrying on of a | |
|business that is not | |
|ancillary and incidental | |
|to the renting of the | |
|land or excluded rent | |
|(ie, certain profit based| |
|rents). | |
|A 2 per cent of gross |No equivalent. |
|income safe harbour | |
|allowance for | |
|non-eligible investment | |
|business income. | |
Detailed explanation of new law
Eligible investment business: investments in land for the purpose, or
primarily for the purpose, of deriving rent
152. Under the current law there is some uncertainty about the scope of
the term investing in land. These amendments clarify the meaning
of investment in land by introducing into the law specific
references to:
. fixtures on land [Schedule 5, item 7, section 102M]; and
. moveable property that is incidental and relevant to the
renting of the land, customarily supplied or provided in
connection with the renting of the land, and ancillary to
the ownership and use of the land [Schedule 5, item 8,
subsection 102MB(1)].
1.
A public unit trust invests in land used as a shopping
centre. The property includes some fittings and moveable
furnishings in the common areas that are for use by centre
customers. The investment in the fittings and moveable
property are included as part of the investment in land.
Safe harbour allowance for non-rental, non-trading income from investments
in land
153. A public unit trust is not characterised as a public trading trust
in relation to investing in land so long as the public unit trust
is investing in land for the purpose, or primarily for the purpose,
of deriving rent. While this test allows a degree of flexibility
in its application, for certain taxpayers it may not necessarily
provide the level of certainty they require.
154. In order to provide taxpayers with increased certainty while
retaining the flexibility of the existing test, these amendments
introduce a safe harbour allowance for non-rental, non-trading
income from land. The allowance is to operate on an overall land
portfolio basis in conjunction with the existing rental purpose
tests.
155. The safe harbour allowance for the rental purpose test in relation
to investments in land is taken to be satisfied if:
. at least 75 per cent of the gross revenue from eligible
investments in land is rent that is not excluded rent; and
. none of the remaining non-rental gross revenue is excluded
rent or is from carrying on a business that is not
incidental and relevant to the renting of the land.
156. In working out the gross revenue for the purposes of the rent and
other income safe harbour test:
. capital gains and capital losses arising from disposals or
other realisations of the ownership of land (including an
interest in land) held for purposes of deriving rent are
to be disregarded;
. rent for the land includes payments for provision of
services that are incidental and relevant to the renting
of the land and ancillary to the ownership and use of the
land [Schedule 5, item 8, subsection 102MB(3)]; and
. revenue must not include rent based on profits or receipts
under an arrangement that is designed (to be objectively
determined) to result in all, or substantially all, of
what would otherwise be profits being transferred to
another party to the arrangement [Schedule 5, item 5,
section 102M].
The words 'or other realisations' in the first dot point cover
cases akin to a disposal. An example would be where a statutory
lease is in effect transferred to another entity. They would not
extend to cases such as granting a sublease for a premium, except
if it gives rise to a disposal of the land.
1.
A public unit trust earns $250 million in gross revenue in
an income year from its investments in land. Each of the
trust's investments has a purpose of deriving rent. The
revenue comprises:
|Rent of the properties |$200m |
|Billboards and advertising on|$25m |
|the properties | |
|Mobile phone towers on the |$25m |
|properties | |
|Excluded rent |Nil |
The trust would satisfy the 25 per cent safe harbour test as
80 per cent of its gross revenue from the properties is rent
and the remaining revenue is not from carrying on a business
that is not incidental and relevant to the renting of the
land.
2.
A public unit trust owns and rents out a shopping centre
that includes a car park for shopping centre customers. To
deter use by non-customers long-stay users are charged fees.
The revenue from car parking fees would be incidental to
the rental of the land and would be non-rental income for
the purposes of the safe harbour rule. The income from the
car park is not from carrying on a business that is not
incidental and relevant to the renting of the land.
3.
A public unit trust acquires land and buildings which
comprise of office accommodation for rent and parking for
the tenants. The trust subsequently decides not to make the
parking available primarily for tenants but to run a car
parking operation on the property. The income from the car
parking operation would not fall within the 25 per cent safe
harbour as it is income from carrying on a business that is
not incidental and relevant to the renting of the land. The
trust would be carrying on a trading business.
Eligible investment business: financial instruments
157. Since the introduction of Division 6C in 1985 the number and
variety of financial instruments available for investment has
increased significantly. In recognition of this change, these
amendments amend the list of financial instruments in section 102M
to include financial instruments that arise under 'financial
arrangements' as defined in the ITAA 1997 other than certain
excepted arrangements. [Schedule 5, item 4, section 102M]
158. This amendment is to include certain financial instruments not
already included in the existing list of financial instruments in
the definition of 'eligible investment business'. The meaning of a
financial instrument is discussed in the Australian Accounting
Standards AASB 132 Financial Instruments: Disclosure and
Presentation and AASB 139 Financial Instruments: Recognition and
Measurement.
Excepted arrangements
Leasing or property arrangements
159. Most leasing arrangements will not be financial arrangements, as
under such an arrangement the taxpayer will not have insignificant
non-cash settlable rights or obligations (the lessee's right to use
the relevant property being leased, and the lessor's obligation to
allow, and be deprived of, such use). However, to the extent that
particular leasing arrangements do satisfy the definition of a
'financial arrangement', the leasing or property arrangement
exception will apply to exclude a right or obligation arising
under:
. a luxury car lease under Division 42A in Schedule 2E to
the ITAA 1936 [Schedule 5, item 8, paragraph 102MA(2)(a)];
. arrangements to which Division 240 of the ITAA 1997 apply
[Schedule 5, item 8, paragraph 102MA(2)(b)];
. a financial arrangement in the form of a loan that is
taken to exist by subsection 250-155(1) of the ITAA 1997
[Schedule 5, item 8, paragraph 102MA(2)(c)]; or
. an arrangement that:
- is a licence to use an asset [Schedule 5, item 8,
paragraphs 102MA(2)(d) and (e)];
- in substance or effect, depends on the use of a specific
asset, and gives a right to control the use of that
specific asset [Schedule 5, item 8,
paragraphs 102MA(2)(d) and (e)]; or
- where that asset is goods or a personal chattel (other
than money or a money equivalent), real property, or
intellectual property [Schedule 5, item 8,
paragraphs 102MA(2)(d) and (e)].
160. A luxury car lease within the meaning of Division 42A of Schedule
2E to the ITAA 1936 excludes hire purchase agreements and short-
term hiring arrangements. The leases that are subject to this
Division are taxed as a notional sale (generally for the cost of
the vehicle) and a loan transaction.
161. Division 240 of the ITAA 1997 operates to tax some arrangements
(such as hire purchase agreements), as a sale of property combined
with a loan by the notional seller to the notional buyer to finance
the purchase price. Among other things, this Division determines
the notional interest on this notional loan and how it is treated
for tax purposes.
162. The third category under this exclusion broadly covers licences and
leases over goods (other than money or a money equivalent), real
property, and intellectual property.
163. Goods, personal chattels and real and intellectual property take
their ordinary meaning, and so in a broad sense cover personal
property (other than money or a money equivalent), land, and
interests in land and rights in respect of creative and
intellectual effort (including copyright, registered designs,
patents and trademarks).
Interest in a partnership or a trust estate
164. A right that is carried by an interest in a partnership or a trust
(or a corresponding obligation) will be subject to an exception if
there is an interest or interests in the partnership or the trust
estate, or the interest is an equity interest in the partnership or
the trust. The reference to an equity interest in the context of a
partnership or a trust takes its meaning from section 820-930 of
the ITAA 1997. [Schedule 5, item 8, subsection 102MA(3)]
165. The exception also applies to a right that is carried by an
interest in a trust estate (or a corresponding obligation) where
that trust is managed by a funds manager or a custodian, or a
responsible entity of a registered scheme. [Schedule 5, item 8,
paragraph 102MA(3)(c)]
166. What is meant by the reference to a funds manager and a custodian
takes on its ordinary commercial meaning. A responsible entity of
a registered scheme draws its meaning from the Corporations Act
2001 (Corporations Act). It is the company named in the Australian
Securities and Investments Commission's record of the scheme's
registration as the responsible entity or temporary responsible
entity of a managed investment scheme registered under section
601EB of the Corporations Act. In a general sense, a managed
investment scheme as defined under the Corporations Act covers
(subject to certain exceptions) a scheme where the contribution
made by members to acquire interests in the scheme are pooled and
used to produce benefits for members, where the members do not have
day-to-day control of the operation of the scheme (see section 9 of
the Corporations Act).
General insurance policies
167. A right or obligation under a general insurance policy is subject
to an exception, except where the policy is a derivative financial
arrangement and the taxpayer is not a general insurance company as
defined by the ITAA 1997. [Schedule 5, item 8, subsection
102MA(4)]
168. This exception ensures that eligible investment business does not
include rights and obligations under those general insurance
policies that are subject to taxation under Division 321 of
Schedule 2J to the ITAA 1936.
169. A general insurance policy is defined in subsection 995-1(1) of the
ITAA 1997 to mean a policy of insurance that is not a life
insurance policy or an annuity instrument. The term policy of
insurance is not defined and is intended to take its ordinary
meaning. It may include a policy of reinsurance. Examples of
general insurance policies include fire, theft, injury, accidental
damage, negligence, storm and professional indemnity insurance.
170. The activities of a general insurance business can be split into
underwriting and investment activities. Rights or obligations from
underwriting activities of a general insurance company will usually
be the subject of this exception and would therefore be excluded.
171. The exception does not affect the public unit trust's ability to
invest or trade in life assurance policies under paragraph (b) of
the definition of 'eligible investment business' in section 102M,
paragraph (b) of the ITAA 1936. Nor does it preclude the trust
insuring its rental properties, which is an activity that is
incidental to investing in land for the purpose of deriving rent.
Certain guarantees and indemnities
172. A right or obligation under a guarantee or indemnity will be
subject to an exception unless:
. the guarantee or indemnity is of a financial arrangement
that is a derivative financial arrangement for any income
year [Schedule 5, item 8, paragraph 102MA(5)(a)]; or
. the actual guarantee or indemnity is given or entered into
in relation to a financial arrangement [Schedule 5, item
8, paragraph 102MA(5)(b)].
173. What is meant by a guarantee or an indemnity takes on its ordinary
meaning to include a promise to answer for the debt or default of
another, or to make good a loss suffered by a third party.
1.
A public unit trust provides a guarantee in respect of
performance of a loan agreement that is a financial
arrangement. Such a guarantee would not be an excepted
arrangement.
Superannuation and pension income
174. A right to receive, or an obligation to provide, financial benefits
will be subject to an exception if that right or obligation arises
from a person's membership of a superannuation or a pension scheme.
This may include a right of a dependant of a member to receive
financial benefits (or the corresponding obligation to provide
financial benefits to that dependant). It may also include a right
or obligation arising from an interest in a complying or non-
complying superannuation fund, a pooled superannuation trust or an
approved deposit fund. [Schedule 5, item 8, subsection 102MA(6)]
Retirement village residence contracts
175. A right or obligation arising under a contract that gives rise to a
right to occupy 'residential premises' in a 'retirement village' is
the subject of an exception. [Schedule 5, item 8, subsection
102MA(7)]
176. These terms take their meaning from section 195-1 of the A New Tax
System (Goods and Services) Act 1999 (GST Act). That definition
provides that a residential premises in a retirement village exists
if:
. the premises are occupied by one or more persons as a main
residence;
. accommodation in the premises is intended to be for
persons who are at least the age of 55 years or older; and
. the premises include communal facilities for use by the
residents of the premises; but excludes:
- premises used, or intended to be used, for the provision
of residential care (within the meaning of the Aged Care
Act 1997) by an 'approved provider' (within the meaning
of that Act); and
- 'commercial residential premises' as defined in
section 195-1 of the GST Act.
Retirement village services contracts
177. A right or obligation arising under a contract under which a
retirement village resident is provided with general or personal
services in the retirement village is the subject of an exception.
[Schedule 5, item 8, paragraph 102MA(7)(b)]
A trading business
178. Division 6C applies to tax the income of certain public unit trusts
like companies if the trust is a public trading trust. A public
unit trust is a public trading trust if it does not carry on an
eligible investment business. Under the current law even minor
breaches of the eligible investment business rules therefore have
significant consequences for a public unit trust.
179. These amendments introduce an allowance designed to reduce the
scope for inadvertent minor breaches of the Division 6C eligible
investment business rules, which would otherwise trigger company
taxation for a trust. This allowance is to provide for situations
where the trustee derives some income that is not income from an
eligible business investment and it is not from a separate business
activity (eg, income from directors' fees received from positions
on company boards, certain guarantee or option fees, or income from
an investment in a non-financial arrangement). This allowance does
not affect the operation of the control test in section 102N. That
is, it does not allow the trustee of the trust to own or control
entities carrying on active trading businesses.
180. Under these amendments an entity will be taken not to carry on a
trading business in a year, if no more than 2 per cent of the gross
revenue of the unit trust for the income year was income from other
than eligible investment business, provided none of the revenue was
not income from carrying on a business that is not incidental and
relevant to the eligible investment business. [Schedule 5, item 8,
section 102MC]
1.
In an income year a public unit trust earned $100 million
gross revenue from eligible investment business and earned
gross revenue from directors' fees of $1 million and $0.5
million gross non-trading revenue from non-eligible
investment business and no other revenue was earned. The
unit trust will not be taken to be carrying on a trading
business in that income year.
Application and transitional provisions
181. These amendments apply from the income year of Royal Assent.
182. The 25 per cent safe harbour allowance for non-rental, non-trading
income from land investment and the 2 per cent safe harbour
allowance for revenue from activities other than eligible
investment business income do not apply for the income year of
Royal Assent if the trustee of the unit trust chooses that those
provisions are not to apply to that income year. This provision is
intended to deal with situations where the safe harbour rules would
convert a public trading trust into a Division 6 trust and the
trust wished to continue to be taxed like a company under Division
6C. [Schedule 5, items 9 and 10]
Index
Schedule 1: Goods and services tax and real property
|Bill reference |Paragraph |
| |number |
|Item 1 |1.48 |
|Item 2 |1.30 |
|Item 3 |1.34 |
|Item 4 |1.42 |
|Items 5 to 7 |1.66 |
|Item 8 |1.49 |
|Item 9 |1.51 |
|Item 10 |1.38, 1.40 |
|Item 11 |1.56, 1.60 |
|Item 12 |1.66 |
|Item 13 |1.65 |
Schedule 2: Thin capitalisation and international financial reporting
standards
|Bill reference |Paragraph |
| |number |
|Items 1 to 4, subsections 820-680(1), (1A), |2.59 |
|(2) and (2B) | |
|Item 5, subsection 820-682(1) |2.24 |
|Item 5, subsection 820-682(2) |2.28 |
|Item 5, subsections 820-682(3) and (4) |2.25, 2.30 |
|Item 5, subsection 820-683(1) |2.36 |
|Item 5, subsections 820-683(1) and (2 ) |2.34 |
|Item 5, subsection 820-683(2) |2.41 |
|Item 5, subsection 820-683(3) |2.37 |
|Item 5, subsection 820-683(4) |2.38 |
|Item 5, subsection 820-683(5) |2.39, 2.40 |
|Item 5, subsection 820-683(6) |2.41 |
|Item 5, subsections 820-684(1) and (2) |2.44 |
|Item 5, subsection 820-684(2) |2.54 |
|Item 5, paragraph 820-684(3)(a) |2.46 |
|Item 5, paragraphs 820-684(3)(b) and (c) |2.46 |
|Item 5, subsection 820-684(4) |2.46 |
|Item 5, subsection 820-684(5) |2.48 |
|Item 5, subsection 820-684(6) |2.49 |
|Item 5, subsection 820-684(7) |2.54 |
|Item 6, section 820-960 |2.56 |
|Items 7 and 8, subsections 820-985(1) and |2.53 |
|(3) | |
|Item 9 |2.58 |
Schedule 3: Interest withholding tax and state government bonds
|Bill reference |Paragraph |
| |number |
|Item 1 |3.14, 3.15, |
| |3.19 |
|Item 2 |3.22 |
Schedule 4: Fringe benefits tax
|Bill reference |Paragraph |
| |number |
|Items 1 to 6, 10 to 16, 18 to 21, 24 to 29 |4.12 |
|and 33 to 38 | |
|Items 7, 17, 30 and 39 |4.9 |
|Items 8, 22, 31 and 40 |4.10 |
|Part 2, items 42 to 75 |4.16 |
|Subitems 9(1) and 23(1), items 32 and 41 |4.13 |
|Subitem 9(2) |4.14 |
|Subitem 23(2) |4.15 |
Schedule 5: Eligible investment business rules
|Bill reference |Paragraph |
| |number |
|Item 4, section 102M |5.18 |
|Item 5, section 102M |5.17 |
|Item 7, section 102M |5.13 |
|Item 8, subsection 102MB(1) |5.13 |
|Item 8, subsection 102MB(3) |5.17 |
|Item 8, paragraph 102MA(2)(a) |5.20 |
|Item 8, paragraph 102MA(2)(b) |5.20 |
|Item 8, paragraph 102MA(2)(c) |5.20 |
|Item 8, paragraphs 102MA(2)(d) and (e) |5.20 |
|Item 8, subsection 102MA(3) |5.25 |
|Item 8, paragraph 102MA(3)(c) |5.26 |
|Item 8, subsection 102MA(4) |5.28 |
|Item 8, paragraph 102MA(5)(a) |5.33 |
|Item 8, paragraph 102MA(5)(b) |5.33 |
|Item 8, subsection 102MA(6) |5.35 |
|Item 8, subsection 102MA(7) |5.36 |
|Item 8, paragraph 102MA(7)(b) |5.38 |
|Item 8, section 102MC |5.41 |
|Items 9 and 10 |5.43 |