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TAXATION LAWS AMENDMENT BILL (NO. 7) 1997

Bills Digest No. 129   1997-98
Taxation Laws Amendment Bill (No. 7) 1997

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Passage History
Purpose Background
Main Provisions
Endnotes
Contact Officer and Copyright Details

Passage History

House: House of Representatives

Portfolio: Treasury

Commencement: Refer to the Main Provision section for the application dates of the various measures.

Purpose

The Bill implements a number of changes announced in the 1997-98 Budget. The main amendments relate to:

• choice of superannuation fund;
• measures to address 'dividend streaming' by the direction of franked dividends to certain classes of shares;
• the introduction of rules to prevent private companies using methods such as loans to shareholders and associates to prevent distributions being assessable income;
• alignment and alteration of the rules applying to certain remittances of deductions made from employees wages to the Australian Taxation Office; and
• the introduction of a savings tax offset (rebate) for savings and investment income.

As there is no central theme to the Bill the background to the various measures will be discussed below.

Currently, an employee rarely has a choice as to which superannuation fund their employer's compulsory superannuation contributions are distributed to. Compulsory employer superannuation can exist under either a Federal industrial award or under the superannuation guarantee charge (SGC) scheme. The distributions of the contributions vary under the two schemes and, generally, award superannuation must be contributed to an industry fund (with equal employer and union representation in the board of trustees) while the employer will have the choice of fund to which contributions are made under the SGC scheme (where the employer makes the contribution voluntarily rather than paying the SGC, as is the normal case). There are, of course, variations on these general principles such as where the employer and employee discuss to which fund contributions are to be made to and where SGC contributions are made to an industry fund. However, there are pressures on employers to seek the least administratively costly way of paying superannuation contributions which generally means that the employer will chose one fund for all employees so that they do not have to deal with more than one fund. The problem with dealing with more than one fund increases as the number of employees rises and the employer wishes to minimise the number of funds dealt with (this matter will be discussed below).

Under award superannuation, the fund to which contributions are to be made is specified in the award. Under SGC, superannuation contributions must be made to a complying fund, which is one which is certified by the Insurance and Superannuation Commission (ISC) under the Superannuation Industry (Supervision) Act 1993.

The proposal to enable employee choice of fund was announced in the 1997-98 Budget and detailed in the Treasurer's Press Release titled Savings, Choice and Incentive, dated 13 May 1997. The original proposals, which have subsequently been altered, had the following main points:

• employers would be required to offer a choice of a minimum of 5 complying funds or Retirement Savings Accounts (RSA) to chose from, including an industry fund (where one exists), a public offer fund, a RSA, a RSA provided by the institution receiving the employee's pay (if the institution offers RSAs) and, if it exists, an in-house superannuation fund;
• if the employee did not make a choice of fund within 28 days the employer could nominate the fund;
• the choice of fund was to apply to new employees from 1 July 1998 and to existing employees two years later;
• Federal awards relating to superannuation would be overridden by the legislation but this would not apply to superannuation payable under State awards due to Constitutional restrictions;
• agreements under the Workplace Relations Act 1996 could overrule the legislation; and
• the legislation would not apply to unfunded government schemes.

Following the release of the policy there was considerable employer concern regarding their potential liability if they failed to provide sufficient, or accurate, information regarding the various funds that their employees had to choose from. Employers feared that they may be held liable for any loss suffered by an employee if they provided insufficient, false or misleading information. Lobbying from various organisations, particularly employer groups, resulted in the proposals being changed and the changes were announced by the Assistant Treasurer in a Press Release dated 25 November 1997. Major changes related to:

• employers would not be liable where they have complied with the Bill;
• removing the requirement that employers had to offer a RSA from the institution that received the employee's pay, where such a RSA existed, so reducing the number of alternatives that had to be offered to 4;
• allowing employers to offer the employee unlimited choice of fund (where the onus will be on the employee to collect the relevant information and select the fund of their choice); and
• allowing the selection of the funds to be offered to be facilitated through one institution or service provider.

The choice of fund rules will be enforced by providing for a maximum increase of 25% in the SGC that would have been payable if no superannuation contributions had been made.

The reasons given for the introduction of the choice of fund rules is given in the Second Reading Speech to the Bill as:

The choice of fund arrangements are designed to give employees greater choice and control over their superannuation savings, which in turn will give them greater sense of ownership of these savings. The arrangements will increase competition and efficiency in the superannuation industry, leading to improved returns on superannuation savings.

While the proposal has received support from a range of areas, including acceptance from the Association of Superannuation Funds of Australia, the leading industry group, a number of concerns have been raised about the proposed scheme. One problem that has been anticipated is an increase in advertising for the various competing products, which could have the effect of increasing costs to funds and so reducing the return to members. Another potential problem is whether people will be able to understand the information provided or will spend the time understanding the information provided. The Insurance and Superannuation Commission (ISC) has issued proposed rules relating to the amount of information provided and a commentator has noted that the rules for public offer funds will be virtually the same as currently exist and that the information provided by a major public offer fund at present comprises 6 pages, 2 pages of attached figures and 16 further pages of additional information.(1) While the requirements for RSAs will be less, even the amount of information that will be provided if four options are presented will be substantial.

If the unlimited choice option is followed, the onus will be on the employee to research the available options. Another potential problem is the method in which funds are presented to employees and the likely emphasis on short term growth rather than longer term growth and stability. While previous returns may be used to advertise the performance of a fund, a trustee of the Australia Post superannuation scheme has noted: 'making investment decisions based on past performance data has been particularly unreliable as an investment strategy.'(2)

There is therefore the fear that employees may be offered advertising for a fund that promises a large return based on short term performance rather than the long term viability of the scheme and this 'headline' performance could be used to attract people to a fund where the potential member does not fully understand the risks associated with the investment strategy of the fund. The example often used relates to recent events in the UK where people were given a choice of pension fund. It has been reported that an inquiry into the new scheme found 570 000 cases of mis-selling worth approximately $10 billion.(3) There is also the possibility that employers, who will not be subject to any legal action if they fail to act prudently, will take little care in selecting the funds and RSA offered, instead accepting those that offer the employer the easiest administration when making the contributions.

Other concerns are that the regime could see a proliferation of accounts if, for example, people in itinerant industries accept the employers default fund. This may lead to a person having a number of small accounts rather than an account in an industry fund. There have also been concerns expressed that prior to making a choice of fund an employee could be without death or disability insurance.(4)

The final concern is not with the scheme itself, but with the proposed starting date of 1 July 1998 for new employees. It is reported that a recent GIO survey found that 78% of employees and 42% of employers were not aware of the choice of fund scheme.(5) Not only will the legislation have to be passed by Parliament by this date but there will also need to be a considerable education campaign to address people's lack of knowledge of the scheme.

Amendments to the Superannuation Guarantee (Administration) Act 1992

Item 28 of Schedule 5 of the Bill will insert the requirements that must be complied with to satisfy the choice of fund rules. Proposed section 32C provides that the requirements will be satisfied in a number of circumstances:

• where the employer contribution is made to a chosen fund (see below), a default fund (see below) or for a member of either of the Commonwealth schemes (CSS and PSS) - the contribution is made to an unfunded public sector scheme;
• the contribution is made under an Australian Workplace Agreement or a certified agreement;
• for people employed under State awards, the requirements will be taken to have been satisfied (in the Press Release announcing the measures it was argued that this was for Constitutional reasons and that the States would be asked to pass complimentary legislation. It may be noted that the SGC scheme as a whole applies to State employees as well as those employed under State awards and is based on the taxation power of the Commonwealth which also applies to State award employees); and
• contributions made before 1 July 1998 will satisfy the requirements, as will contributions to any fund made in respect of a person employed by the employer before 1 July 1998 if the contribution is made before 1 July 2000 and contributions to the PSS or CSS before 1 July 2000 (this is the phasing in provision for new and existing employees).

'Employee chosen fund' is defined in proposed sections 32D to 32F. A fund will be an employer offer chosen fund if the requirements of proposed Division 5 are satisfied. An employer must offer an employee a chose of funds within 28 days of the employee commencing or within 28 days of the employee requesting a choice, although there may only be one such request every 12 months. The employer must also offer a choice within 28 days of becoming aware that they cannot contribute to the chosen or default fund. As well, the employer may offer a choice at any time the employer choses (proposed section 32K). The limited choice option for the employer will be satisfied if the following choices are provided:

• at least one public offer fund;
• at least one RSA or other capital guaranteed fund;
• at least one employer sponsored fund if such a fund or funds exist; and
• at least one industry fund, if one exists.

If a fund falls into more than one of the above categories, it may only be taken to satisfy one and the employer may chose which category it satisfies. Also, the employee must be eligible to be a member of the fund for it to satisfy the criteria.

To satisfy the limited choice option, the employer must also provide certain information, including the names of the funds, the day by which a choice must be made (28 days although the employer may except a choice after this time), the name of the default fund or funds, information on the funds required under the regulations and, if the regulations require additional information to be made available, where that information may be accessed.

To be an unlimited choice offer, the following information must be provided to the employee:

• a statement that the employee may chose any complying fund or RSA;
• the day by which the offer must be accepted (generally 28 days);
• the name of the default fund; and
• information required to be provided under the regulations as described above.

As well as the employer offering limited or unlimited choice, the choice of fund rules will be satisfied if the employee has nominated a fund to the employer and the employer has accepted the fund (Note: there is no obligation on the employer to accept the employees choice of fund if it is not part of the limited choice funds proposed by the employer) (proposed section 32E).

A fund will cease to be a chosen fund if the employee choses another fund and has given the employer notice of the change; the employee has given the employer notice that they desire to make another choice and the employer has not responded within the required time (28 days); or if 'it is impossible for the employer to contribute ... to the chosen fund' (while the example given in the Bill is of a closed fund, it may take litigation to establish exactly the meaning of the employer not being possible to contribute to the fund. For example, would this include the employer not being able to finance the contributions?) (proposed section 32F).

Default Funds

A default fund will arise if for an employee who has not chosen a fund and who have been employed for less than 28 days; have been offered a choice of funds and have not replied within the allowed time or the time for the chosen fund becoming the fund of the employee (2 months) has not expired; or the employer have offered a choice of fund and the employee has not responded within the required time (28 days). Basically, the provisions cover the time between when the employee has been appointed and the time they make a choice of fund, the time for the selection of fund has expired or during the 2 months in which the employer has to connect the employee to the chosen fund. These measures largely address the problems of a lack of death or disability cover as outlined above) (proposed section 32G).

A fund will be a default fund where the employer has previously contributed to the fund for the employee under the choice of fund rules and the employer has not contributed to another fund while the choice was in force. If such a fund does not exist (as for example in the case of new employees) the employer will be able to choose a complying fund or RSA as the default fund. A fund or RSA will cease to be a default fund if the employer ceases to be able to contribute to the fund on behalf of the employee (proposed section 32H).

Proposed section 32U overrules Commonwealth and Territory industrial awards that deal with superannuation by providing that a contribution under the choice of fund rules will be taken to have been a contribution that satisfies the award. The main effect of this provision will be that where an award requires contributions to be made to an industry fund, a fairly common part of award superannuation, contributions to a chosen or default fund will be taken to have satisfied this requirement.

Employer's potential liability for damages will be addressed by proposed section 32V which provides that an employer will not be liable for anything done in complying with the choice of fund rules.

The penalty for failure to comply with the choice of funds requirements is contained in item 21 which will amend section 19 of the Act. The penalty will be 25% of the SGC that would have been payable had no contributions been made and will apply where a contribution is made to a fund in breach of the choice rules.

Division 2 of Part 18 of Schedule 5, which will amend the Superannuation Industry (Supervision) Act 1993, contains a number of provisions relating to the provision of information relating to superannuation products. Proposed section 148A provides that a trustee of a fund is not to intentionally or recklessly make a statement in a regulated document that the trustee knows to be false or misleading or in which there is a material omission of information. The maximum penalty for a breach of this requirement is imprisonment for 5 years. If a trustee has issued, or authorised the issue of, such a document they will also be liable for civil action from people who have suffered loss as a result of their action (proposed section 148B). A trustee of a fund is not to intentionally or recklessly issue or authorise to be issued a regulated document that contains a statement made by an 'expert' unless there is written authorisation to use the statement. The maximum penalty for a breach of this provision will be 6 months imprisonment. (Expert is defined in the SIS Act to be a person whose profession or reputation gives authority to the statement.) It will also be an offence not to keep a copy of the authorisation without reasonable excuse (maximum penalty is 10 penalty units - currently a penalty unit is $110) (proposed section 148C).

Proposed Division 3 provides for the issue of stop orders by the Insurance and Superannuation Commissioner where it appears to the Commissioner that there is a material statement in a regulated document that is false or misleading or that there is a material omission from the document. The stop order will direct that the entity to which it is issued is not to issue a superannuation interest while the order is in force and it will be an offence, with a maximum penalty of 2 years imprisonment, to breach such an order (proposed sections 148D to 148G).

Application: As noted above, the choice of fund rules will apply to new employees from 1 July 1998 and to existing employees from 1 July 2000.

Franking of dividends refers to the situation where a company has paid company tax and the amount of tax paid is credited to a franking account (or accounts). When dividends are paid, they can be franked, which means that the credits available from the franking account are distributed to the shareholders. These are then used to offset the amount of tax payable by the recipient of the dividends.

It was announced in the 1997-98 Budget that measures would be introduced to curtail certain schemes used to maximise the value of the franking credits to certain shareholders. Such schemes often involve the distribution of franking credits to those who own a certain class of shares and are designed to provide maximum franking credits to those on the highest marginal personal tax rate so that the value of the credits accredited to such people may exceed the actual rate of tax paid by the company (this can occur as the amount of tax paid is distributed only to a limited class of shareholders resulting in the credits available being higher than the rate of tax paid by the company which would apply had the credits been distributed to all shareholders). As with other schemes that benefit one class of people, the reverse side is that those who own shares other than those in the class favoured by the distribution of franking credits see a reduction in the credits provided to them. Such schemes are commonly known as dividend streaming.

In Press Releases dated 13 May 1997 (Budget night) the Treasurer announced a number of changes relating to franked dividends, including those relating to dividend streaming. Major announcements relate to:

• providing a specific anti-avoidance scheme for dividend streaming;
• ensuring that when the dividend payment is in lieu of an interest payment franking credits are not available;
• inserting a new definition of 'class of shares' so that for tax purposes shares with similar rights will have to treated the same for franking purposes; and
• measures to prevent trading in franking credits.

This Bill addresses the first three of the above items.

There has been little comment on the proposed rules, although it has been reported that certain groups are unhappy with the wording and potential effect of the legislation. In arguing that the measures contained in the Bill go further than the Budget announcement, the chief executive of the Corporate Tax Association is reported as stating: 'They are much wider than is necessary to address the perceived abuses or concerns held by government'. The same person also argued that the proposed rules will cover legitimate commercial arrangements, particularly in regard to the class of share rules, and that activities such as share buybacks would be affected. A tax manager of Ernest & Young is also reported as saying that the new rules would amount to an extension of the anti-avoidance rules contained in Part IVA of the Income Tax Assessment Act 1936 (ITAA). He is reported as saying: 'Sound commercial transactions that satisfy prescriptive areas of the law can now be subject to a new veto power of the Commissioner.'(6)

The explanatory memorandum to the Bill does not give a figure on the potential gain to revenue from the measures contained in the Bill, rather stating that the range of measures relating to dividend franking will protect the revenue from significant loss.

The definition of a class of shares is contained in section 160APE of the ITAA and currently depends on whether the shares have the same nominal value, although shares cannot be in the same class if they have differing rights regarding the receipt of dividends, distribution of capital or voting power. Item 3 of Schedule 8 will repeal the current definition and insert a new one where shares will be in the same class if they have the same, or substantially the same, rights.

The main operative provision regarding dividend streaming is proposed section 160AQCB which will be inserted into the ITAA by item 5 of Schedule 8. The proposed section will apply where a company streams the payment of dividends or other benefits in a way so that some shareholders derive a greater benefit from franking credits than other shareholders. In such a case, the Commissioner may determine that a franking debit arises for the company in respect of the dividends paid to the disadvantaged shareholders or that no franking credit benefit arises to the advantaged shareholders (it appears that the Commissioner can only make one or other of these determinations in respect of a particular distribution as the proposed subsection refers to the Commissioner making either of the determinations, not either or both). A taxpayer will be able to object to such a determination under the normal taxation objection provisions contained in the Taxation Administration Act 1953. Where the determination is that the company's franking account be debited, the debit will be calculated by deeming the disadvantaged shareholders' distribution to have been franked to the maximum extent that the advantaged shareholders' distributions had been franked. Apart from dividends, the other benefits subject to the rules are the issue of bonus shares, return of capital, forgiveness of debt and the payment of money or other property to the shareholder by the company. The amendments will apply to distributions made after 7.30 pm on 13 May 1997 except for dividends payable by public companies that declared the distribution before that time (item 9).

Anti-avoidance rules in relation to dividend streaming are contained in Part 2 of Schedule 8. The main provision is proposed section 177EA which will apply where:

• there is a scheme for the disposal of shares or an interest in shares;
• a frankable dividend or other distribution (ie. where there is a distribution of a partnership amount or a trust amount and this amount is included in a person's income or is allowed as a deduction) has been paid, is payable or is expected to be paid;
• the dividend or distribution was, or is expected to be, franked;
• except for these provisions, a person would receive, or could reasonably be expected to receive, franking credits; and
• having regard to the relevant circumstances (see below), it could be concluded that a person or person carried out the scheme for a purpose of enabling the person to obtain franking credits (NB. the purpose need not be the dominant purpose for entering into the scheme as in Part IVA).

The mere acquisition of shares or an interest in shares will not of itself warrant the conclusion that there is a scheme.

If a scheme is found, the Commissioner may determine that, if a company is involved in the scheme, that a franking debit arises to the company or that the benefits attached to the franking credits are of no effect. Taxpayers may object against a determination of the Commissioner under the Taxation Administration Act 1953.

The relevant circumstances that the Commissioner is to have regard to are listed in proposed sub-section 177AE(19) and include:

• the extent and duration of the chance for profit or loss borne by the people in the scheme and whether there has been a change in the risk of loss or opportunity for profit;
• would the taxpayer derive greater franking benefits than others who have shares or an interest in shares in the company;
• whether any consideration or gift given by the taxpayer was calculated by reference to the franking benefits to be gained;
• whether a deduction is allowable or a capital loss incurred in connection with the paying of the dividend or making the distribution; and
• whether the dividend or distribution is equivalent to a payment of interest.

Other provisions in Part 2 of Schedule 8 relate to the implementation of the above rules.

Application: The amendments will apply to dividends paid or distributions made after 7.30 pm on 13 May 1997 unless a dividend is paid by a public company and the dividend was declared before that time (item 26).

Distributions by Private Companies

It was announced in the 1997-98 Budget that new rules would be introduced to prevent various transactions by private companies being used to reduce the amount of tax payable when funds are distributed by the company. The primary situation to be addressed is where a company makes a loan to a shareholder that is not an 'arms length' transaction. Such loans may be used to distribute funds to a shareholder with the result that the funds received are not defined as income and so are not subject to income tax. The proposed measures were announced by the Treasurer in a Press Release dated 13 May 1997. The basis of the scheme is that a loan will be deemed to be a dividend unless it falls within the category of an excluded loan, which aims to include normal commercial loans. If a loan does not fall with the excluded loan category there will be a debit to the company's franking account but no franking credits will be available to the person in receipt of the funds to prevent dividend streaming as described above (in this way the amendments can be seen as complementing the measures described above which apply to public companies). There will also be a number of rules to prevent evasion of the rules relating to loans, for example to cover situations where a third party is interposed between the taxpayer to whom the loan is made and the company. The Press Release announcing the measures states that the measure 'is likely to impact on tax minimisation practices used by some high wealth individuals.' The Press Release also stated that the definition of excluded loan 'will be supported by detailed regulations'.

The explanatory memorandum to the Bill estimates that the measures will prevent revenue losses of $2 million in 1997-98, $50 million in 1998-99, $30 million in 1999-2000 and $30 million in 2000-1.

There has been minimal discussion of this issue with general acceptance of the need for the anti-avoidance legislation. Interestingly, the amendments will not apply from the date of the announcement as is usual with Budget measures and other changes to taxation laws which generally have effect from the date that the announcement is made.

A new Division 7A will be inserted into Part III of the ITAA by Schedule 9 of the Bill. Payments will be treated as dividends where the payment is made to an entity that is a shareholder in a private company or an associate of such an entity, or a reasonable person would concluded that the payment was made because the entity has been such a shareholder or associate at some time. The amount of the dividend will generally be the amount paid, although this will be capped at a maximum of the company's distributable surplus. A payment will be taken to have been made where there is an actual payment for the benefit of the entity; an amount is credited to the entity or for the benefit of the entity; or there has been a transfer of property to the entity (proposed section 109C).

Where a loan is to be treated as a dividend, the private company will be taken to have paid the dividend at the end of it's financial year if the loan is made during that financial year; has not been repaid during the year; proposed sub-division D (which exempts certain loans from the deeming rule) does not apply; and either the entity to which the loan is made is a shareholder in the company or an associate of such a shareholder or it is reasonable to conclude that the loan was made because the entity has been a shareholder or associate at some time. Loan will include the advance of money; provision of credit, payments for or on behalf of the entity where there is an obligation to repay the amount and any other transaction that, in substance, effects a loan of money. If a loan made before 4 December 1997 is varied after that date, it will be deemed to be a new loan on the new terms and conditions (proposed section 109D).

Where more than one loan has been made to the entity during the year, the loans have not been fully repaid and the amount repaid to the private company is less than the minimum yearly repayment, the loan will be taken to be a dividend. The minimum repayment rate will be based on the amount of the loan not repaid, the remaining term of the loan and the previous year's benchmark interest rate (this will be the amount determined under section 136 of the Fringe Benefits Tax Act 1986 and is basically the average of the variable home loan interest rate offered by the major banks). Where there is more than one loan, they will be amalgamated and the repayments will be treated as repayment against the total amount of the loans rather than being offset against individual loans.

Proposed section 109F provides that forgiven debts are to be treated as dividends in certain circumstances. The provision will apply where a private company forgives a debt in a year and the debtor was a shareholder in the company or an associate of a shareholder or a reasonable person would conclude that the debt was forgiven as the debtor was a shareholder or an associate of a shareholder at some stage. When a debt is forgiven is defined by reference to Division 245 of the ITAA, which includes where the obligation to pay is relieved and where, in certain circumstances, there is a debt for equity swap. A debt will also be taken to be forgiven if it is 'parked'. This is where the right to receive payment is assigned to an entity that is an associate of the debtor or to an entity that is party to an arrangement with the debtor regarding the assignment and a reasonable person would conclude that the new creditor will not exercise the right to payment. Forgiveness will also occur where a reasonable person would conclude that the private company will not insist on repayment.

A number of forgiven debts that are not to be treated as dividends are listed in proposed section 109G and are:

• where a private company forgives a debt owed to it by another private company;
• where a private company forgives a debt because the debtor becomes bankrupt or where the debt is forgiven under an arrangement with creditors under the Bankruptcy Act 1966;
• if a debt is forgiven and the loan that created the debt is treated as a dividend under previous sections of these amendments; and
• where the Commissioner is satisfied that the debt was forgiven as repayment would have caused financial hardship, the entity had the capacity to repay the debt when it was incurred and the debtor lost the ability to repay the debt as a result of circumstances beyond the debtor's control.

Proposed subdivision D contains a number of circumstances when payments and loans are not to be treated as dividends. They are:

• repayment of debt to the extent that the debt would have been had the parties been dealing at arm's length;
• payment or loan to another company;
• where the amount is treated as assessable income under other provisions of the ITAA;
• loans made at arms length in the ordinary course of business;
• loans that have an interest rate that equals or exceeds the bench make interest rate and the term of the loan does not exceed the maximum term (this is 25 years if the loan is secured by a mortgage over real property where when the loan is made the value of the property subject to the mortgage was at least 110% of the value of the loan at the time it was taken out, or in other cases 7 years - NB: it is also provided that the regulations may determine the maximum term of the loan, which raises the question of why there is a definition contained in the Bill that can be altered by regulation rather than simply providing for the maximum term to be fixed by regulation);
• the Commissioner will have power to declare that an amalgamated loan (see above) is not to be treated as a dividend where the repayment during the year is less than the amount calculated using the formula described above which includes the benchmark interest rate and the Commissioner is satisfied that the repayment was less than the minimum amount because of circumstances beyond the debtors control and that the entity would suffer financial hardship if the payment was to be deemed a dividend. In making such a decision the Commissioner is to take account of a number of matters listed in proposed sub-section 109Q(2) which principally relate to the financial status of the debtor.

Proposed subdivision E deals with loans made through interposed entities, which involve a scheme to evade the rules relating to direct loans or other transfers. A key provision is proposed section 109V which provides that where a 'target entity' is paid an amount from a privately owned company the payment is, for the purposes of the proposed rules, to be treated as a payment by the private company to the final recipient. Whether a payment is deemed to be directed through an interposed entity will depend on whether a reasonable person could conclude that the loan or payment was made to the interposed entity solely or mainly as part of an arrangement to direct the amount to the target entity and whether there was a final payment of the amount to the target entity (proposed section 109T)). Similarly, if a third party guarantees a loan by the private company in circumstances covered by proposed section 109T, this will be treated as a loan subject to the above provisions (proposed section 109U). The amount of the interposed loan will be the amount determined by the Commissioner having regard to the amount of the loan to the interposed entity and the amount paid to the target entity (proposed section 109W).

Item 5 of Part 1 of Schedule 9 provides that where there is a deemed dividend payment under the above rules, the franking accounts of the company will be debited by an amount equal to the deficit that would have occurred had the deemed dividend been paid as an actual dividend (this provides the second leg of the enforcement mechanism which denies the franking credit to the receiver of the deemed dividend and also imposes a charge on the company's franking accounts).

Application: Dividends, including deemed dividends under the above rules, paid after 4 December 1997.

Remittance to the Australian Taxation Office

Changes to the timing of the remittance of tax collected under the Pay As You Earn (PAYE), Prescribed Payments System (PPS) and Reportable Payments System (RPS) were announced in the 1997-98 Budget. (PPS applies to certain payments made for work or services in specified industries and requires the payer to withhold tax from the payment. The rate will generally be 20% if the payee presents a declaration form, or 48.7% if a declaration is not presented. RPS requires remitters in specified industries to declare all payments they have made to the ATO once per year which are then matched against the recipients by their tax file number. If the recipient has not supplied their TFN the payer is to withhold tax at the rate of 48.7%.)

Under the PAYE system, the time within which deductions must be remitted to the ATO depends on the size of the employer. If annual remittances exceed $1 million, the employer is required to remit once every two weeks. If remittances in the previous financial year were less than $10 000, or are expected to be in the current year, the Commissioner may allow them to be classified as a small employer and they will be required to remit 4 times per year. Other employers are required to remit monthly.

For PPS and RPS, remittance must be made within 14 days of the end of the month in which the payment was made.

The Budget proposals were outlined in a Press Release by the Treasurer dated 13 May 1997, the main features being:

• the remittance time for large taxpayers will be 7 days after the deduction was made, rather than the current 14 days. This is estimated to result in $830 million in collections being brought forward in 1998-99;
• large taxpayers will be required to remit electronically;
• the threshold for small taxpayers that remit quarterly will be increased to $25 000. This is estimated to allow another 133 000 employers to remit quarterly and is estimated to result in revenue deferral of $500 million in 1998-99;
• the time for remittance of PAYE, PPS and RPS will be aligned; and
• when calculating the category the employer falls into, total PAYE, PPS and RPS remittances will be combined. This is likely to result in some taxpayers whose current PAYE obligation does not put them in the large taxpayer category falling into that category when PAYE, PPS and RPS remittances are combined. No estimates are given of the number who could be affected by this move.

The amendments relating to remittance are contained in Schedule 4 of the Bill, which will insert a new Division 1AAA into Part VI of the ITAA. A large remitter will be one who: deducted more than $1 million in combined PAYE, PPS and RPS deductions in the year ended 30 June 1997; was a member of a company group and the group deducted more than $1 million in their 1996-97 financial year; total deductions in a financial year ending after 30 June 1998 exceeded $1 million; where in a year ending after 30 June 1998 a remitter is a member of a company group and the total deductions by the group exceed $1 million in such a year; or the Commissioner has made a determination under proposed section 220AAC (see below). A person cannot be a large remitter under the new rules before July 1998.

Proposed section 220AAC allows the Commissioner to determine that a person who would otherwise be a small or medium remitter will be deemed to be a large remitter either for a particular future month, or for a particular future month and all later months. The Commissioner will be able to revoke or vary a determination. In making such a determination the Commissioner may have regard to the matters listed in the proposed section, which include any avoidance arrangement entered into; the extent to which the person makes payments that were previously made by another; and any other matters the Commissioner considers relevant.

The time for remittance by large remitters is listed in the table contained in proposed section 220AAE which lists the day the deduction is made and the day on which payment is due. The payment is generally to be made 7 days after the deduction is made. A person, other than a government body, who intentionally or recklessly breach the requirement will be guilty of an offence with a maxim penalty of 12 months imprisonment.

Large remittances must be made electronically or in another form approved by the Commissioner. If the approved method of remittance is not used, the person will be liable to a penalty, which will be the greater of $500 and 16% on the amount due for a period of 7 days (proposed section 220AAF).

Medium remitters are dealt with in proposed subdivision C. A person will be a medium remitter if they are not a large remitter and make deduction in excess of $18 750 for the period 1 July 1997 to 31 March 1998 (this is a proportional amount that will be used to determine whether the person is a medium remitter for the first year of the new scheme) or makes deductions exceeding $25 000 in the year ending 30 June 1998 or later years. A person cannot be a medium remitter before July 1998 and the Commissioner will have power to determine that a person who would otherwise be a medium remitter is not a medium remitter (proposed section 220AAJ).

The Commissioner will have power to declare that a person who would otherwise be a small remitter is a medium remitter either for a particular future month, or for a particular future month and all later months. The Commissioner will be able to revoke or vary a determination. In making such a determination the Commissioner may have regard to the matters listed in the proposed section, which include any failure by a small remitter to comply with these amendments; any avoidance arrangement entered into; the extent to which the person makes payments that were previously made by another; the amount likely to be deducted in the following 12 months; and any other matters the Commissioner considers relevant (proposed section 220AAK).

A medium remitter must remit the deductions they have made within 7 days of the end of the month in which the deduction was made. A person, other than a government body, who intentionally or recklessly breach the requirement will be guilty of an offence with a maximum penalty of 12 months imprisonment (proposed section 220AAM).

Remittances must be made electronically or in another form approved by the Commissioner but there is no specific penalty for a failure to do so (proposed section 220AAN).

Small remitters are dealt with in proposed subdivision D. A small remitter is defined as a person who is neither a large or medium remitter (proposed section 220AAQ). Remittances must be sent in sufficient time for them to be received in the ordinary course of business by 31 March, 30 June, 30 September and 31 December and each remittance is to cover the deductions made in the quarter ending on these dates. A person, other than a government body, who intentionally or recklessly breaches the requirement will be guilty of an offence with a maxim penalty of 12 months imprisonment (proposed section 220AAR).

Proposed subdivision E contains a number of offences and penalties, including:

• where a remittance is not made by the due date a penalty will apply. For a non-government body this will be 20% of the unpaid amount plus interest calculated at the rate of 16% of so much of the original amount and penalty as remains unpaid. For government bodies the penalty will be calculated at the rate of 16% of the unpaid amount (proposed section 220AAV);
• where a large remitter fails to use an approved remittance method (see above) (proposed section 220AAW).

The Commissioner will be given power to remit all or part of any interest penalty imposed under the above provisions if the grounds contained in proposed section 220AAX are met. In relation to the 16% interest penalty, it may be remitted if the Commissioner is satisfied that:

• the reason for the delay was not caused by the person liable to make the remittance and the person has taken reasonable action to mitigate the causes of the late remittance;
• the cause of the delay in contributions was an act of the person liable to make the payment and the person has taken reasonable action to mitigate the causes of the delay and having regard to the circumstances it would be fair and reasonable to remit all or part of the penalty; or
• the Commissioner is satisfied that there are reasonable grounds to remit all or part of the penalty (the above provisions give the Commissioner power to remit penalty interest payments in a number of circumstances where there are reasonable grounds for the payment not to have been made on time. However, this does not apply to the 20% penalty applicable under proposed paragraph 220AAV(93)(a) which will apply automatically regardless of the reasons for the delay. In many cases of a payment received marginally outside the allowed time, eg. a one or two day delay, the 20% penalty will greatly exceed the potentially interest liability.

In regard to the penalty applicable for the non-use of electronic lodgement by a large remitter, the Commissioner may remit all or part of the penalty amount payable if satisfied on the same grounds that apply for the penalty interest rate (proposed section 220AAV).

Additionally, any penalty will be reduced by the amount calculated under an order made by a court for the payment of the debt that includes payment of interest on the amount awarded (proposed section 220AAY).

Proposed subdivision F provides for the Commissioner to seek recovery of amounts due through the courts as a civil debt or as an order as part of criminal proceedings.

Decisions relating to whether a person is a large or medium remitter will be subject to review under the normal taxation appeals mechanisms contained in the Taxation Administration Act 1953 (proposed section 220AAZF).

This measure has it origins in the reduction of tax rates proposed in the Taxation (Deficit Reduction) (No. 3) Act 1993 which proposed an initial reduction in tax rates and a further reduction when regulations were made to give effect to the legislation (the further reductions are commonly referred to as the L.A.W. tax reductions following statements made by the then Prime Minister). However, following the re-election of the Labor government in 1993 the further tax reductions were not implemented. It was announced in the 1995-96 Budget that the proposed tax reductions would instead be used to fund matching employee contributions to superannuation. The proposal was that through awards and industrial agreements employees would be required to contribute 3% of their earnings to superannuation by 2000. It was also envisaged that there would be matching government contributions, subject to a means test, to a maximum of 3% of the employee's earnings. The latter component was proposed to be funded through the abolition of the L.A.W. tax reductions. Combined with the maximum rate of employer contribution under the Superannuation Guarantee scheme, which will rise to 9% by 2002-3, this would have provided by that date a 15% contribution towards superannuation, a figure often seen as that necessary to enable sufficient retirement income. Through the proposed means tests the measures were aimed at low to middle income earners.

It was announced in the 1997-98 Budget that the funds set aside for delivery of the original L.A.W. tax reductions would instead be used to fund a tax rebate on member funded, undeducted superannuation contributions and income from other savings and investments. It was announced that the maximum amount of rebate would be $450 in 1999-2000 and later financial years after a transitional maximum of $225 in 1998-99. The rebate will be at the rate of 7.5% of savings and investment income in the transitional year and 15% in later years. It was also announced that the rebate would not be subject to a means test, and so be equally available to the highest and lowest resident income earners. In this regard it was stated that:

It will provide equitable assistance to private savings, that recognises the importance of superannuation savings, but also provide assistance for individuals who save for other life cycle needs. The savings rebate will also benefit individuals who have retired and are living on the returns from their savings.(7)

It may be argued that while the lack of a means test opens up the rebate to all those who have saved regardless of their income or assets, the introduction of a savings rebate implies that the person is financially capable of making additional superannuation contributions or having funds available to secure sufficient investment or savings income to be able to take advantage of the rebate. In it's Media Release on the 1997-98 Budget, dated 13 May 1997, the Australian Council of Social Service stated:

Very few low wage earners and social security recipients can afford to save the amounts required to take full advantage of the rebate. They would have to contribute $3 000 per annum to superannuation, or save between $50 000 to $100 000 in other savings vehicles to receive the full $450 rebate each year. Its main beneficiaries will therefore be high income earners and wealthy retirees, most of whom would have saved in the absence of the rebate.

Schedule 10 of the Bill will insert a new subdivision 61-A into the Income Tax Assessment Act 1997 (the 1997 Act). In the proposed subdivision the rebate is referred to as a tax offset (the 'tax offset' has the same effect as a rebate as it reduces the amount of tax payable on a dollar for dollar basis, rather than a deduction which reduces the amount of tax payable by the taxpayer's marginal tax rate). Individuals who are Australian residents at any time during the year of income will be eligible for the tax offset, as will trustees where the beneficiary of the trust is under a legal disability. In the later case, the tax offset will apply for each beneficiary. The amount of rebate available will, after the transitional year, be 15% of the amount calculated by using the following steps:

• calculate the total savings and investment income for the year (see below);
• add any contributions to a superannuation fund and/or a Retirement Savings Account;
• subtract any deductions that relate to savings or investment income;
• subtract any deduction allowed regarding superannuation contributions (including RSAs); and
• the result will be the amount subject to the 15% (7.5% in 1998-99) tax offset allowed to a maximum of $450 ($225 in 1998-99).

Savings and investment income is defined in proposed section 61-60 to be:

• assessable income that is not PAYE income;
• superannuation benefits, pension or retiring allowance paid from an Australian source which are included in assessable income and are not already subject to a rebate under the ITAA;
• superannuation benefits, pension or retiring allowance payable from a non-Australian source which are included in assessable income and for which a deduction has been allowed (basically the relevant provision of the ITAA allows deductions relating to the purchase of annuities from such sources); and
• the proportional of an eligible termination payment included in assessable income.

However, certain items are specifically excluded from the definition of savings and investment income. These are: remuneration paid to members of local government; tax related expenditure to the extent to which it is recouped and included in assessable income; and election expenses of candidates for Parliament to the extent that it is recouped and included in assessable income.

For the purposes of the ITAA, the tax offset will be taken to be a rebate or a tax credit (proposed sections 160ADA and 160AHA) (this reflects the difficulties of operating under both the ITAA and the 1997 Act until the taxation laws improvement program is completed).

Application: The amendments will apply for the 1998-99 and later years of income. However, for 1998-99 the maximum rate of tax offset will be 7.5% of the amount calculated using the steps described above with a maximum offset of $225 during that year (items 14 and 15 of Schedule 10).

Endnotes

1. The Australian Financial Review, 31 December 1997.
2. The Australian Financial Review, 15 January 1998.
3. The Australian Financial Review, 11 December 1997.
4. The Sydney Morning Herald, 8 December 1997.
5. The Australian Financial Review, 22 December 1997.
6. The Australian Financial Review, 15 December 1997.
7. Treasurer, Press Release, 13 May 1997.

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ISSN 1328-8091
© Commonwealth of Australia 1997

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Published by the Department of the Parliamentary Library, 1997.

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