Income Tax Amendment Act (No. 5) 1988

This commentary item was published in Public Information Bulletin Volume 181, June 1989

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The Income Tax Amendment Act (No 5) was passed by Parliament on Tuesday 13 December and received the Governor-General's assent on Friday 16 December 1988.

The Act comprises the following Parts:

• Part I - Accruals
• Part II - Taxation of Trusts
• Part III - International Tax
• Part IV - Full imputation, Dividend Withholding Payments, Branch Equivalent Tax Accounts, and Related Amendments
• Part V - Miscellaneous Provisions

This explanatory document explains only the amendments contained in Part V of the Amendment Act.

As explanatory material on the other Parts becomes available this will be issued under separate cover.

Sections 63-65 - Taxation of Youth Allowances

The amendments contained in sections 63-65 result from the Government's Youth Support package which was announced in June 1988. The package provided, inter alia, for the Department of Education to pay youth allowances to students. These allowances, which will be called basic grants and independent circumstances grants, will be paid under the Student Allowances Regulations 1988 which will shortly be promulgated by the Department of Education. First payments are expected to be made after 1 January 1989.

The amendments contained in this Act provide for these allowances to be taxable and subject to deductions at source.

Section 63

amends the definition of the term "salary or wages" contained in section 2 of the principal Act to include the basic grant and independent circumstances grant within that definition. This means that payments of these grants are brought into the PAYE net and are subject to deductions at source.

Section 64

qualifies section 61(37) of the principal Act so as to make it clear that these grants are not included in the term "scholarship or bursary" and are therefore not exempt from income tax.

Section 65

amends section 65(2) of the principal Act to make it explicit that the grants are included in assessable income.

Sections 63-65

have application to income derived in the 1989 and subsequent income years but will not have any practical effect until after 1 January 1989 when the Department of Education starts paying these grants to students.

Section 66 - Retiring Allowances and Redundancy Payments.

Section 66 makes a number of minor drafting amendments to section 68 of the Income Tax Act (tax treatment of retiring allowances and redundancy payments).

Retiring allowances paid from 1 October 1988 are not subject to tax in the recipient's hands but are solely subject to FBT at the rate of 24 cents in the dollar. So much of a redundancy payment paid from 1 October 1988 as does not exceed the specified sum is taxable in the recipient's hands subject to a concessionary tax regime, described under subsection (3) below. To the extent that payments exceed the specified sum FBT at the rate of 24 cents in the dollar is payable on the excess.

The Income Tax Amendment Act (No 3) 1988 made amendments to the definition of the term "specified sum" for the purposes of calculating the tax payable on a redundancy payment. One amendment replaced the term "employment or service" with the word "employment" in that definition. This section of this Amendment Act repeals the definition of "employment or service" and inserts a definition of the term "employment". The effect is that those circumstances which previously were considered to be employment or service with one employer, now satisfy the requirements of employment with one employer.

Subsection (2) provides that the amount of a redundancy payment deemed to be assessable income in the hands of the recipient is the lesser of:

• 5% of the payment, or
• 5% of the specified sum.

Subsection (3) makes a drafting correction to section 68(3A) of the Income Tax Act which provides for the tax treatment of a second redundancy payment. Such payments can qualify for concessionary treatment but the specified sum is calculated on the basis of income derived from the subsequent employment. The amendment does not alter the current treatment.

These amendments apply from 1 October 1988.

Subsection (4) clarifies the application date of the amendments made in the Income Tax Amendment Act (No 3) 1988. (i.e., 1 October 1988).

Note: The Income Tax Amendment Act 1989, passed by Parliament on 22 March 1989, increases the rate of FBT to 49 cents in the dollar and makes fringe benefit tax payments deductible expenditure for income tax purposes. The amendments relate to FBT on fringe benefits provided on or after 1 April 1989.

Section 67 - Depreciation on Motor Cars

Section 67 amends the formula in section 110(3A) of the Income Tax Act (calculation of the depreciable value of a motor car purchased prior to 31 March 1987).

Prior to the 1988 income year, section 110 provided that depreciation allowable on business motor cars would be limited to an amount calculated on the basis of a specified cost (for the 1982 to 1987 income years - $11,000). This provision was repealed in the Income Tax Amendment Act (No 3) 1986. For motor cars purchased prior to 31 March 1987 a formula provided the basis for the calculation of the depreciable value which would apply for the 1988 and subsequent income years. The effect of the formula is to equate the book value of the motor car as at 1 April 1987 to the book value which would have applied if the specified cost provisions had not been introduced and the taxpayer had claimed depreciation on the full cost of the motor car in the years since it had been acquired.

Unfortunately the formula introduced in 1986 did not take account of the fact that when the motor car was purchased the taxpayer may have elected to offset depreciation recovered on a previous motor car against the specified cost of the new vehicle. Section 67 of this Amendment Act amends the formula so that the rollover of depreciation recovered does not distort the intention of the legislation. The operation of the formula is illustrated in Appendix A to this TPC.

Section 68 - Expenditure on Improvements in Relation to Aquaculture

This section amends section 128C(3) of the Income Tax Act to correct a drafting error. From the 1989 income year a deduction for expenditure on aquacultural improvements will be allowed to a lessee of such improvements only if the expenditure was incurred by that lessee.

Section 69 - Determination of Specified Exemption

This section amends section 336BA(1)of the principal Act which deals with the determination of the specified exemption level for the purposes of the National Superannuitant Surcharge.

The Government announced on budget night that from 1 October 1988, all new superannuitants who are married will be paid at the same rate. This removed the anomaly whereby married superannuitants with a spouse under 60 years were paid 60 percent of the married rate of National Superannuation rather than 50 percent like other married superannuitants.

The change is being brought into effect by freezing the amount of National Superannuation received by those married superannuitants who receive the single rate until such time as the married rate, through the normal six monthly adjustments, has caught up.

National Superannuitants who first became eligible for National Superannuation after 1 October 1988 will receive the lower (50 percent of the married) rate immediately.

This change in policy meant that the specified exemption for married superannuitants affected by this change also needed to be adjusted.

Subsection (1) amends section 336BA(1) of the principal Act by replacing paragraph (b) with two new paragraphs (b) and (ba).

The new paragraph (b) determines the specified exemption level that applies to a person who is receiving half the married rate of National Superannuation and who does not have a spouse under the age of 60 years (as it did before the amendment).

The new paragraph (ba) determines the specified exemption level for those National Superannuitants whose spouses do not qualify for National Superannuation (i.e. under 60 years) and who are receiving National Superannuation at 50 percent of the married rate. (i.e. Until the effect of the six monthly adjustments catches up this will only be those who became eligible after 1 October 1988.)

The difference between paragraphs (b)(ba) and results from the need to allow an adjustment for any specified foreign social security pension the spouse (who is under 60 years) may be receiving in order to ensure equal treatment with spouses who are National Superannuitants. For the latter, such pensions are effectively already exempt from surcharge.

Subsection (2) makes an amendment to paragraph (c) of section 336BA(1) to exclude superannuitants who are married from claiming the single specified exemption level.

Married superannuitants who are receiving the frozen amount of National Superannuation (i.e. received National Superannuation before 1 October 1988) still have their specified exemption determined under paragraph (c) (pursuant to 336BA(1)(d)(iii)). Their entitlement to a minimum exemption of $7,202 is therefore protected until such time as their rate of National Superannuation equals 50 percent of the married rate and section 336BA(1)(ba) applies.

Subsection (3) provides that section 69 of the Amendment Act will come into force on the 1st of April 1989.

Section 70 - Family Support Credit of Tax

As part of the youth support package, the Government, on June 1 1988, announced the following changes:

1. Parents of 15 year olds who are not employed (i.e. a student, unemployed, or on an ACCESS course) will be entitled to a Family Benefit and consequently Family Support in respect of those children. This Family Support entitlement will be at the normal rate of either $36 or $16 per week subject to the normal abatement rules.
2. Parents will be entitled to the higher level of Family Support (i.e. $36 per week subject to the normal abatement rules) in respect of each 16, 17, or 18 year old under their care and who is still attending secondary school.

The first of these policy changes requires no amendment to the Income Tax Act. The fact that a Family Benefit will be payable in respect of 15 year olds who are not in employment (a Social Security Act amendment) will automatically result in a Family Support entitlement.

The amendment contained in section 70 of this Amendment Act deals with the second of the above announcements.

Subsections (1) and (2) amend item y in sections 374D(2) and 374D(3) of the principal Act respectively, to give effect to the above announcement. Because a Family Benefit is payable in respect of 16, 17, and 18 year olds who are still at school, this remains the link to a Family Support entitlement.

Subsection(3) provides for this amendment to apply from 1 April 1989.

Section 71 - Director-General to Deliver Credit of Tax

This section inserts two new subsections into section 374I of the principal Act to remove, under certain circumstances, the requirement for the Department of Social Welfare to pay the unabated amount of Family Support to social security beneficiaries. The purpose of the amendment is to give the Department of Social Welfare greater flexibility in dealing with cases where beneficiaries, if paid full Family Support with their benefit, would have a substantial end-of-year tax debit.

Subsection (1) inserts new subsections (3A) and (3B) into section 374I of the principal Act to release the Director-General of Social Welfare and the Secretary for War Pensions from their obligation, imposed by either section 374I(2) or 374I(3) to deliver Family Support in any case where the beneficiary requests not to receive it.

The new subsection (3B) provides for Family Support payments to be recommenced at any time after such a request is cancelled.

Subsection (2) makes a consequential drafting amendment to section 374G of the principal Act.

Subsection (3) provides for these amendments to apply from 1 April 1989.

Section 72 - Interpretation (Provisional Tax)

This section amends the definition of "residual income tax" in section 375 of the principal Act by repealing paragraph (c). This paragraph provided for any Family Support and GMFI tax credits, deducted from or set off against a taxpayer's income tax under section 374F of the principal Act, to be deducted from the taxpayer's income tax for the purpose of determining the taxpayer's residual income tax. This residual income tax would then be used to calculate the taxpayer's provisional tax liability in the following income year.

This approach effectively meant that provisional taxpayers could reduce their provisional tax payments in any one year by the amount of Family Support or GMFI tax credit entitlement of the previous year.

Because a tax credit entitlement should only be delivered during the year pursuant to a certificate of entitlement, Family Support and GMFI entitlements will no longer be deducted from a person's income tax liability to determine the provisional tax liability in the following year. Provisional taxpayers who will be entitled to a tax credit should apply for a certificate of entitlement to have their provisional tax payments reduced in accordance with section 374J of the principal Act.

Subsection (2) deems the above amendment to have come into force on 7 November 1988 from when the new provisional tax rules first applied.

Section 73 - Estimated Provisional Tax

Subsection (1) provides for a new subsection (6) to be added to section 382 of the principal Act. This new subsection determines an estimate for the purposes of section 382(2) in any case where a taxpayer is required to make an estimate but fails to do so.

Section 382(2) of the principal Act provides that taxpayers with provisional income exceeding $1,000,000 must estimate their residual income tax and furnish a notice of that estimate to the Commissioner on or before the taxpayer's third instalment date. Where an estimate is received after the taxpayer's third instalment date it is not valid and the Commissioner must have the authority to determine an estimate for the taxpayer. Failure to furnish an estimate is most likely to occur when a taxpayer incorrectly anticipates the provisional income to be less than $1,000,000 and does not voluntarily make an estimate.

In relation to any such taxpayer where an estimate has not been received by the Commissioner on or before the third instalment date, an amount equal to the aggregate of the provisional tax paid on or before the third instalment date is deemed to be the taxpayer's estimate.

Subsection (2) provides for this section to come into force on 7 March 1989 which is the third instalment date for the majority of provisional taxpayers.

Section 74 - Interest on Tax Overpaid

Subsections (1) and (2) amend the definition of the term "residual income tax" in section 413A of the principal Act. Together they provide for any under- or overpayments of Family Support and GMFI tax credits to be taken into account when determining a taxpayer's eligibility for interest on overpaid provisional tax. The mechanics of the amendments are to add all tax credits received during the income year to the amount of income tax and surcharge payable and then to allow a deduction for the actual tax credit entitlement under sections 374D and 374E of the principal Act.

It should be noted that the amendment to the term "residual income tax" in section 413A of the principal Act (contained in this section) is quite different from thev amendment to that term in section 375 of the principal Act (contained in section 72 of this Amendment Act). While tax credits are ignored for the purposes of calculating provisional tax liabilities, they are fully taken into account in calculating interest on provisional tax overpayments.

Subsection (3) corrects a drafting ambiguity to ensure that the correct amount of overpaid provisional tax, in respect of which interest will be paid by the Commissioner, is the amount that remains to be refunded by the Commissioner of the difference between the provisional tax actually paid by the third instalment date and the amount of income tax payable by the taxpayer.

Subsection (4) provides for the amendments to first apply from 1 April 1988 and therefore affect any overpayment of 1989 provisional tax on which interest will be paid from the third instalment date.

Section 75 - Transitional Provisions in relation to Provisional Tax

Subsections (1), (2), and (3) correct a drafting error in relation to the 1988/89 transitional arrangements applying to companies.

Subsection (1) defines "trustee income" as having the same meaning as in section 226 of the principal Act (as substituted by section 11 of this Amendment Act). This means that "trustee income" (but not beneficiary income for any beneficiary of that trust), in relation to any trust and any income year, is assessable income derived in that income year by a trustee of that trust. Subsection (2) applies the term "trustee income" to ensure that any company which is a trustee of a trust is not eligible to apply the transitional arrangement provided by subsection (3) in respect of any trustee income.

Subsection (3) allows companies who pay their 1988/89 provisional tax in accordance with section 377(1) (i.e. companies who do not estimate their provisional tax liability but pay on the basis of the previous year's tax) to make an adjustment to take into account the reduction in the company tax rate from 48 to 28 cents per dollar.

Subsection (4) allows provisional taxpayers, who are individuals and who earned more than $100,000 provisional income in the 1988/89 income year, to pay their 1989/90 provisional tax based on their 1988/89 residual income tax without the 10 percent uplift. This provision is to partially allow for the reduced individual tax rates which applied from 1 October 1988.

Subsection (5) allows companies who pay their 1989/90 provisional tax in accordance with section 381 (i.e. will not have furnished last year's tax return and will pay 1989/90 provisional tax based on 1987/88 residual income tax) to make an adjustment to take into account the reduction in the company tax rate from 48 to 28 cents per dollar.

Subsection (6) allows certain individuals who will pay their 1989/90 provisional tax in accordance with section 381 to pay an amount of provisional tax equal to 110 percent rather than 120 percent of 1987/88 residual income tax. This provision only applies in respect of a natural person who derived at least $100,000 provisional income in the 1987/88 income year.

A table incorporating all the existing and newly introduced transitional provisions is attached as Appendix B.

Subsection (7) repeals sections 22(1) and 22(2) of the Income Tax Amendment Act (No 3) 1988 which contained the transitional provisions replaced by subsections (1) to (3) of this section.

Subsection (8) deems the above provisions to have come into force on 7 November 1988 from when the new provisional tax rules first applied.

Section 76 - Tenth Schedule

The Tenth Schedule deals with the calculation of the value of motor vehicles for FBT purposes. This section closes a loophole in that legislation.

At present under paragraph (e) of the Tenth Schedule, if an employee has access for private use to more than one motor vehicle of an employer, the liability for FBT is based on the average value of the vehicles available for use. Some employers have lowered their FBT liability by making a low value motor vehicle available to a group of employees who already have a motor vehicle supplied. Even though this vehicle may never be used, it lowers the FBT payable by lowering the average value of the vehicles available for the private use of each employee.

From the quarter commencing 1 January 1989, the only circumstance where averaging will be allowed under the Tenth Schedule will be where an employee is involved in the business of selling cars and the vehicles available for private use are trading stock. In other situations the liability for FBT for the provision of a motor vehicle will be based on the value of the vehicle primarily used by the employee or, if the employee does not primarily use one vehicle, the value of the highest valued vehicle available for the use of the employee.

Appendix A

Depreciable Values of Motor Cars Purchased prior to 31 March 1987 - Operation of Formula in Section 110(3A)

Example

A car was sold in June 1986 resulting in depreciation recovered of $2,000. The depreciation recovered was offset against the cost of a replacement car purchased in June 1986 for $13,000.

If the "specified cost" rules had not applied for the 1987 income year the book value of the new car at 31 March 1987 would have been:

Effect Under Legislation as Amended

The formula reads:

where-

X is the original cost, reduced by depreciation recovered on the previous vehicle.

Y is the specified cost, reduced by depreciation recovered on the previous vehicle.

Z is the depreciation on the motor car allowed in any income year which commenced prior to 1 April 1987, excluding depreciation recovered on the previous vehicle.

W is all depreciation allowed during and prior to the 1987 income year, including depreciation recovered on the sale of the previous motor car.

= 12,600 (Deemed Cost Price)

On this basis the book value is:

Appendix B

Transitional Provisions relating to Provisional Tax