Income Tax Amendment Act (No. 3) 1987

This commentary item was published in Public Information Bulletin Volume 170, February 1988

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Part I

Section 1 - Short Title

This section provides for this Act to be read together and be deemed part of the Income Tax Act 1976.

Section 2 - Dates by which Annual Returns to be Furnished

This section amends section 17 of the principal Act to bring forward the date by which provisional taxpayers must furnish their annual returns of income. The new dates are as follows:

1. (a) If the taxpayer's balance date is in the period 1 October to 7 May, the return must be furnished not later than 7 July.
2. (b) If the taxpayer's balance date is in the period 8 May to 30 September, the return must be furnished not later than 2 months after that balance date.

These changes were necessary to align the return furnishing dates with the date for payment of the first instalment of provisional tax which is also 7 July.

Subsection (2) provides for the new return furnishing dates to apply in respect of returns for the 1987/88 income year and all subsequent income years.

Section 3 - Income and Expenditure where Financial Arrangement Redeemed or Disposed of

This section inserts two new subsections (7A) and (7B) into section 64F of the principal Act.

Section 64F(7A) provides that where an amount to be paid under a financial arrangement is forgiven under a testamentary disposition executed before 1 October 1987 the forgiveness is not to be dealt with under the accrual tax accounting regime.

Under the accrual tax accounting regime, if a debt owing is forgiven the amount forgiven may be assessable income to the debtor. This will be the case where the amount forgiven exceeds the cost of the borrowing, which is generally the case with debt used for estate planning purposes and forgiven in wills.

As a result of submissions to the effect that law practitioners are unable to take the necessary steps to ensure that wills are redrafted to avoid the consequences of debt forgiveness under the accrual tax accounting regime, the Government decided to ensure that the accrual tax accounting regime would not affect the forgiveness of debt in testamentary dispositions executed before 1 October 1987.

A testamentary disposition is an instruction given by a person regarding the disposition of his or her assets at death. As the testamentary disposition must be executed to satisfy section 64F(7A), it must be in writing: a will or a codicil to a will.

The instrument making the gift on the death of the testator must be executed before 1 October 1987: where there is a will executed before 1 October 1987 it is not possible to satisfy section 64F(7A) by executing a codicil to the will on or after 1 October 1987 to forgive the debt in the event of the testator's death.

Section 64F(7B) provides that where an amount owing under a debt (including accrued interest)is forgiven by a natural person in consideration of natural love and affection, the amount owing shall be deemed to have been paid when it is forgiven.

Example 1:

Daughter owes Father $200,000. Debt at call with interest payable on demand. The advance was made on 15 June 1988 and no interest has yet been demanded.

On 17 April 1989 Father forgives the debt. The debt is therefore deemed to be repaid at that time. There being no interest, the deemed repayment will not affect the income tax position of either party.

Example 2:

Daughter owes Father $200,000. Advance was made on 5 June 1988, repayable on 5 June 1998, interest of 19% per annum payable annually in arrears.

On 5 December 1988 Father forgives the debt including all accrued interest. The debt and all accrued but unpaid interest is deemed to be paid on 5 December 1988.

Base price adjustment: Father

Base price adjustment: Daughter

(expenditure deemed to be incurred, which may be deductible depending upon the use to which the borrowed money was put)

A forgiveness in a will may be made in consideration of natural love and affection, and if so it is to be treated according to section 64F(7B). Where a forgiveness is conditional it does not occur until the conditions are fulfilled, so that the amount forgiven is not deemed to be paid until the conditions are fulfilled.

Section 4 - Rural Debt Restructuring

This section inserts into the principal Act a new section 64FA, which is intended to ensure that where in the course of the rural debt restructuring an amount owing under a variable principal debt instrument and borrowed before 2 July 1986 is forgiven before 31 December 1988, the forgiveness will not be affected by the accrual tax accounting regime.

Where the balance owing under the variable principal debt instrument is reduced on or after 2 July 1986, the amount for which the concession is available is also reduced. Where the debt under the variable principal debt instrument at 2 July 1986 is replaced with other debt and the other debt is later forgiven before 31 December 1988, the other debt also qualifies for the concession.

Who qualifies for the concession?

The concession under the new section 64FA is available only to:

1. Farmers engaged in livestock farming, horticulture or cropping; and
2. Agricultural contractors.

For the purposes of section 64FA "livestock farming" is defined in section 64FA(1) as follows:

"'Livestock farming' means the business of animal husbandry; and includes poultry-keeping, bee-keeping, and the breeding of horses (other than bloodstock):"

An agricultural contractor is a person who undertakes contract work in the agricultural sector. Examples are fencers, top-dressing firms, contract shearers and transport operators engaged chiefly in work for the agricultural sector. It includes contractors engaging in work that may be done for persons outside the agricultural sector, but which the contractor undertakes chiefly for persons in the agricultural sector.

What debt qualifies for the concession?

The concession is available only for debt incurred in the course of business as a farmer engaged in livestock farming, horticulture or cropping or in the course of business as an agricultural contractor.

The concession is available only in relation to -

1. Variable principal debt instruments, and then only in relation to the amount owing that was incurred before 2 July 1986 and, at the time of the forgiveness of debt, has not since been repaid (section 64FA(2) refers); and
2. Debts that replace amounts that were owing under a variable principal debt instrument at the beginning of 2 July 1986, and then only in relation to the amount of the replaced debt that, at the time of the replacement, has not been repaid (section 64FA(3) refers).

To achieve this end the legislation applies the concession to the "specified principal" of the debt. "Specified principal" is defined in section 64FA(1).

When dealing with an amount owing under a variable principal debt instrument at 2 July 1986, the specified principal is the least amount owing under the variable principal debt instrument at the beginning of every day from and including 2 July 1986 to the day on which the forgiveness occurs. It is not necessary to consider movements in the balance owing during the course of a day.

When dealing with a debt that replaces an amount owing under a variable principal debt instrument at the beginning of 2 July 1986, the specified principal is the least amount owing under the variable principal debt instrument at the beginning of every day from and including 2 July 1986 to the day on which the amount owing under the variable principal debt instrument is replaced.

In what circumstances is the concession available?

The concession is available where the debt is forgiven -

1. Before 31 December 1988; and
2. In the course of a rearrangement of the debtor's liabilities due to financial difficulties of the debtor that render doubtful the capacity of the debtor to carry on in the business of livestock farming, horticulture, cropping or agricultural contracting.

The concession is intended to be available for any rural debt restructuring before 31 December 1988. It is intended as an assistance to farmers and agricultural contractors in such severe financial difficulty that they may have to leave their businesses.

Section 5 - Deduction in respect of Livestock Revaluation

Death of Farmers in Period 12 December 1985 to end of 1986 Income Year

This section amends section 86E(2) of the principal Act, which gives a "write-off" to farmers ceasing farming after 12 December 1985 and before the end of the 1986 income year. The "write-off" given to such farmers is similar in principle to that allowed to continuing farmers in the 1987 income year when specified livestock were required to be revalued to new standard values.

The amendment ensures that the estates of farmers who died in the period between 12 December 1985 and the end of the 1986 income year receive the same concession as farmers who retired in that period. The write-off which will now be available to the estate of a farmer who died between 12 December 1985 and the end of that income year will be 70 percent of the difference between:

1. the total of—
   1. the sale proceeds of any of the specified livestock which were on hand at the beginning of the 1986 income year and sold during that income year before the date of death; and
   2. the probate value of any of the specified livestock which were on hand at the beginning of the 1986 income year and still on hand at the date of death; and
2. the value of specified livestock on hand at the beginning of the 1986 income year as taken into account for income tax purposes.

Prior to this Amendment the "write-off" did not apply to (a)(i) above.

It should be noted that this provision only applies where the farmer at date of death was still in the business of farming. In other words, the write-off does not apply where the farmer disposed of the farming business prior to 12 December 1985 and died subsequently but prior to the end of the 1986 income year. Similarly, the write-off does not apply to a farmer who retired or died prior to 12 December 1985.

Section 6 - Deferral of Income derived from Livestock in 1987 Year

This section gives effect to a decision by the Government to allow a deferral of revaluation income not covered by the existing legislation. In essence it allows a spread of revaluation income arising from the retention of natural increases in specified livestock during the 1987 income year.

To calculate the income which qualifies for the deferral, an adjustment has to be made for purchases of livestock in the 1987 income year which increase the total value of livestock on hand. A deduction is received for such purchases so revaluation income is increased.

The amount of livestock income which may be deferred ("deferrable livestock valuation income") is arrived at by using the following formula:

a - (b - c) - d

Where -

a is:

1. the total value of all specified livestock (other than livestock deemed to be high-priced livestock by sections 86G(6) or 86G(7) of the Income Tax Act) to be taken into account for tax purposes at the end of the 1987 income year; less
2. the total value of all specified livestock (other than livestock deemed to be high-priced livestock by section 86G(6) of the Income Tax Act) to be taken into account for tax purposes at the end of the 1986 income year.

b is the total amount spent in the 1987 income year on purchasing or capturing non high-priced livestock that were, at the beginning of the income year, herd class livestock. For this calculation herd class livestock are taken as any livestock, regardless of ownership or valuation, of the types shown in column 3 of the Twelfth Schedule to the Income Tax Act.

c is the total amount received from the sale in the 1987 income year of non high-priced livestock that were, at the beginning of the income year, herd class livestock.

If c is greater than b then subsection (2) of section 6 deems b - c to be nil. This is done because such an amount would represent net cash income The deferral applies to unrealised revaluation income only.

d is:

1. the amount of the livestock revaluation income "write-off" given by section 86E(3) of the Income Tax Act; and
2. the amount of' livestock revaluation income able to be spread over 5 years by section 86F of the Income Tax Act. (This is the amount of "livestock revaluation income" defined in 86F(1)); and
3. the amount of any loss available for tax purposes in the 1987 income year. This includes any past losses carried forward under the provisions of section 188 or 188A of the Income Tax Act.

The income which qualifies for the deferral may be spread over the 1987 income year and the two income years immediately succeeding that year. However, it need not be spread equally over the three years. In other words, the income may be allocated in whole or in part to any of the three years.

It should be noted that under the provisions of this amendment every taxpayer is required to elect, by notice in writing, the amount to be allocated to each of the income years. The election only becomes binding after 31 March 1988. It can, therefore, be amended, if desired, before this date.

Subsection (4) requires that the notice of election be submitted by 31 March 1988.

Example showing Calculation of the Deferral

In the example sheep numbers are being built up until the 1988 income year. The herd scheme is used to value qualifying animals, i.e., mature sheep.

Sheep Account

If the deferrable income is spread between the 1988 and 1989 income years, 1987 taxable livestock income will be:

$14,651 - 2,276 = $12,375

Section 7 - Farmers Expenditure on Tree Planting

This section clarifies section 134 of the principal Act, which gives a deduction for the cost of maintaining and planting of trees on farm land. The amendment excludes from section 134 trees planted primarily and principally for the production of fruit. Such trees may be depreciated under the provisions of section 128A.

Section 8 - Accounting for Goods and Services Tax

This section amends section 140B of the principal Act. It ensures that the entire refund of Sales Tax under section 83(2) of the Goods and Services Tax Act is included as assessable for income tax purposes.

As the registered person has been allowed an Income Tax deduction for the Sales Tax paid, it is logical that the refund of that tax should be assessable, thereby giving the net effect of a claim for the true final cost of those goods on hand as at 30 September 1986.

This adjustment should be made in returns for the income year which commenced on 1 April 1986, i.e., the 1987 income year.

Section 9 - Pay-Period Taxpayers

This section amends section 356(1) of the principal Act. It increases the pay-period taxpayer's income limit from $11,500 to $20,000.

This change, which applies from the income year commenced 1 April 1987, means a taxpayer will not be required to furnish a return if that taxpayer's income does not exceed $20,000 and that taxpayer:

1. did not derive income as a shearer or shearing shed hand; and
2. does not receive, or has a spouse who receives, family support; and
3. does not derive income from National Superannuation as well as income from other sources exceeding $6,500; and
4. is not an absentee; and
5. is not a person who is deemed not to be pay-period taxpayer by the Commissioner; and
6. did not operate a special tax code; and
7. did not use an incorrect tax code.

A pay-period taxpayer's tax liability is determined by the PAYE which has been deducted from that income. The PAYE becomes, in effect, a final tax.

Section 10 - Interpretation and Section 11 - Determination of Assessable Income

Family Support and Livestock Valuation Income

These sections give effect to the changes in the determination of Family Support for farmers. There are three main changes in the amendment.

Firstly -

the amendment removes totally from income used for determining eligibility for Family Support, the amount of "livestock revaluation income" able to be spread over five years by section 86F of the Income Tax Act. Previous to this amendment this income had to be taken into account in full in the 1987 income year for family support purposes.

Secondly -

the livestock valuation income which may be deferred and spread over three years by section 86FA, as introduced by this Amendment Act, is to be taken into account in full as income for family support purposes in the 1987 income year. This is done because this income represents an increase in the total value of trading stock on hand.

Thirdly -

from the 1988 income year onwards, where livestock is valued under the herd scheme basis of valuation, stock will be required to be valued at the trading stock scheme standard values for determining assessable income for Family Support. This is to ensure that for family support purposes the assessable income factor is calculated on the same basis as farmers using the trading stock scheme.

Example showing Calculations of Income for Family Support Purposes

1987 Calculation of Family Support Income (using figures from example in section 6)

Livestock income to be included in Family Support income is:

Sheep Account

1988 Gross livestock income from Sheep

1988 Calculation of Family Support Income

Livestock income to be included in Family Support income and will be:

Non High-Priced 1988 Herd Class Livestock

If standard values were used, the deduction of opening livestock would be reduced by $6,787. Income arising from valuation of closing livestock would be reduced by $6,251. The overall change to income for family support purposes would be an increase of $536.

Section 12 - Provisional Taxpayers

This section amends section 377 of the principal Act. It increases from $1,000 to $3,000 the amount that any person, whose only other income is from source deduction payments, may earn from interest, dividends and rents in any income year before being required to pay provisional tax.

This section also consequentially amends section 17 (due date for furnishing returns) to allow such taxpayers to furnish IR5 returns of income.

Both changes will apply from the income year commencing 1 April 1988. This will mean that such taxpayers will not be required to pay 1989 provisional tax, and will become IR5 taxpayers for the 1988/89 income year.