Rewrite remedials

• Land sales – associated persons
• Calculation of average tax rate for an extra pay
• Pre-consolidation imputation credits
• Definitions of settlor and settlement
• Maintenance amendments

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LAND SALES – ASSOCIATED PERSONS

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(Clause 108)

Summary of proposed amendment

This amendment clarifies the two associated person rules that apply to disposals of land to ensure that:

• under an anti-avoidance rule applying to a disposal of “tainted land”, the income derived on disposal is not income under any of the main land sales rules (sections CB 6 to CB 14); and
• a relief provision for associated persons applies only if the test of association applies in relation to a single transaction and not multiple transactions.

Application date

The proposed amendment will apply from the beginning of the 2008–09 income year. A savings provision is proposed to protect tax positions taken on the basis of the existing law prior to introduction of the Bill.

Key features

An amendment is proposed to section CB 15 to clarify that its two subsections apply in different circumstances for a disposal of land and are not interdependent. The different circumstances are:

• a disposal of land that was acquired at an earlier time from an associated person of the vendor who would have been taxed on the disposal had the associated person retained the land and made the disposal themselves;
• a disposal of land that would be taxed under one of the land sales rules if the land is sold within 10 years of acquisition (or, in the case of the land sales rule applying to builders, sold within 10 years of commencing making improvements to the land).

The amendment proposed to the anti-avoidance rule for land sales (section CB 15(1)) will clarify that the income derived on disposal is income of the vendor under the anti-avoidance rule, rather than under any of the main land sales rules. This will ensure that the anti-avoidance rule does not apply where there is a series of transactions between associated persons, and also clarifies that the vendor cannot use any of exclusions from the main land sale rules.

The amendment proposed for the associated persons relief rule (section CB 15(2)) will clarify that the vendor is not taxed on the disposal of land if there is a combined period of actual ownership exceeding 10 years between:

• the vendor; and
• in certain circumstances, an associated person from whom they acquired the land.

Detailed analysis

Section CB 15 contains both an anti-avoidance rule and a relief rule relating to a disposal of land, which the vendor of the land has acquired from an associated person. Under some recent interpretations of this provision, a disposal of land could be taxed incorrectly.

Independent operation of the two rules

One interpretation is that the relief rule applies only if the anti-avoidance rule applies. That is not how the provision is intended to operate. The proposed amendment clarifies that the two rules operate independently of each other.

Anti-avoidance rule

The anti-avoidance rule is intended to apply to a vendor who disposes of land to a third party if:

• the vendor had acquired the land from an associated person; and
• the associated person would have been taxed on the disposal of land to the third party, had they kept the land and disposed of it themselves to the third party.

One interpretation of the anti-avoidance rule argues that the associated person’s requirements in the anti-avoidance rule can apply to a series of transactions between associated persons. This interpretation:

• arises from the anti-avoidance rule stating that the vendor is taxable under one of the main land sales rules; and
• results in over-taxation of disposals of land.

The proposed amendment clarifies the rule’s intent by providing that the vendor is taxed under the anti-avoidance rule, rather than under the main land sales rules the associated person would have been taxed under. The income is derived in the year it is incurred unless a specific timing rule applies to the sale of the land.

A second interpretation is that the vendor of the land is entitled to the benefit of the exclusions from the land sales rules because they are taxed under one of the main land sales rules rather than under the anti-avoidance rule.

An example of a disposal of land to which this interpretation might result in unintended consequences is for land that:

• was acquired by a property developer for the development business;
• was later transferred by the developer to his or her spouse;
• the spouse builds a home on the land and lives in it; and
• later, the spouse on-sells the land to a third party and leases back the home.

As the property was acquired for the purpose of the property development business, it is intended that the disposal of that land to a third party is always subject to tax (revenue account property). The anti-avoidance rule is intended to tax a disposal of land that is revenue account property that has been transferred to an associated person before disposal to a third party.

However, under this interpretation, because the anti-avoidance rule makes the disposal of land taxable under one of the main land sales rule, the vendor is entitled to the exclusions from the land sales rules (for example, the residential home exclusion). This outcome is not intended and the proposed amendment will ensure that this interpretation is not available.

Associated persons’ relief rule

The associated persons’ relief rule is intended to apply to a person who disposes of land if the disposal of land would be taxable because it was disposed of within 10 years of the person acquiring the land. Typically, the associated persons’ relief rule is relevant to a vendor who disposes of land within 10 years of acquiring it from an associated person and any of the following apply:

• The associated person is a builder, or a land dealer or a land developer.
• The value of the land has increased during vendor’s actual period of ownership because of land zoning changes.
• Within the vendor’s actual period of ownership, a scheme of development or subdivision has been carried out on that land.

In counting the 10-year period for the purpose of the associated persons’ relief rule, the proposed amendment will permit the vendor of land to combine their actual period of ownership of the land with the actual period of ownership of the associated person from whom they acquired the land. The intent is that the disposal would not be taxed if this combined period of ownership was 10 years or more.

One interpretation is that the associated person’s relief rule can be applied to a series of sequential transfers of land between associated persons (a circle of association). This interpretation results in the 10-year period being determined from the first date the land was acquired within that circle of association. This interpretation is inconsistent with the policy intent and can result in under-taxation.

The proposed amendment clarifies that the relief rule applies only to a combined ownership period of the vendor and the associated person from whom the vendor acquired the land.

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CALCULATION OF AVERAGE TAX RATE FOR AN EXTRA PAY

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(Clause 199)

Summary of proposed amendment

The proposed amendment corrects an unintended legislative change in section RD 17 that potentially results in too much PAYE being withheld from an extra pay.

Application date

The proposed amendment will apply from the beginning of the 2008–09 income year.

Key features

The calculation of PAYE to be withheld from an extra pay (for example, a performance bonus) is determined by a calculation of an average rate of tax on an annualised amount of PAYE income payments based on:

• the amount of the extra pay; and
• all regular wages and salaries paid in the four weeks prior to the date of the extra pay.

This annualised calculation is not intended to take into account any other amounts of extra pay that may have been made in that four week period.

The rewrite of this provision into the Income Tax Act 2007 inadvertently includes all previous amounts of extra pay within that four week period when calculating the annualised amount. This inadvertent drafting change could result in too much PAYE being withheld.

The proposed amendment restores the intended effect and confirms current practice.

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PRE-CONSOLIDATION IMPUTATION CREDITS

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(Clause 186)

Summary of proposed amendment

The proposed amendment provides a savings provision for tax positions relating to:

• the transfer of a pre-consolidation imputation credit from an individual company’s imputation credit account (ICA) to the ICA of a consolidated imputation group; and
• the law as it was prior to amendments made to section OP 22 (use of pre-consolidation imputation credits) of the Income Tax Act 2007 by the Taxation (Annual Rates for 2017–18, Employment and Investment Income and Remedial Matters) Act 2018 (the EII Act).

Application date

The amendment proposes a savings provision for tax positions taken for the transfer of pre-consolidation imputation credits for tax years beginning before 29 March 2018 (the date of enactment of the EII Act).

Key features

The proposed savings provision relates to amendments made to section OP 22 by the EII Act (retrospective to the beginning of the 2008–09 income year) that:

• confirm the Commissioner’s application of section OP 22;
• correct a minor unintended legislative change arising in the rewrite of the provision; and
• ensure the law works as intended.

The proposed savings provision applies if a pre-consolidation imputation credit is transferred to a group ICA prior to 29 March 2018 in excess of the amount that is allowed under the amended section OP 22. The amount of the transferred pre-consolidation credit must meet all of the following requirements:

• the group ICA has a debit entry in a tax year;
• the amount of the pre-consolidation imputation credits transferred to the group ICA is limited to the amount of that debit entry to the group ICA; and
• shareholding continuity is satisfied for the pre-consolidation imputation credits transferred up to the time of the transfer.

If the amount transferred exceeds the limit on the amount being transferred, the excess amount is treated as not being transferred to the group ICA (that is, the debit and credit entries would need to be retrospectively adjusted to achieve the correct outcome).

A transitional rule is proposed which will provide:

• retrospective debit and credit adjustments are to be aggregated and combined with the closing balance of the group ICA at 31 March 2018;
• further income tax that becomes payable as a result of these retrospective adjustments will have a due date 60 days after the enactment of the bill; and
• imputation penalty tax will not be imposed on this amount of further income tax.

If payment of the further income tax is not made by the due date, normal late payment rules will apply.

Detailed analysis

Amendments to section OP 22 in the EII Act:

• corrects an unintended legislative change in the rewrite of the section;
• ensures the law works as intended; and
• applies retrospectively to the beginning of the 2008–09 income year.

The amendments to section OP 22 in the EII Act confirmed that pre-consolidation imputation credits may only be transferred to a group ICA if the group ICA does not have sufficient imputation credits to offset an imputation debit to the group ICA and shareholding continuity was satisfied for the transferred credits (example 18).

This outcome is consistent with the policy for the use of pre-consolidation imputation credits set out in Tax Information Bulletin Vol 16, No. 1 February 2004, pages 56–57.

“As with the original consolidation provisions, the existing pre-consolidation balances of the members’ balance of the members individual ICAs are not transferred to the imputation group’s consolidated imputation credit account but remain separate until such time as the ICA of the consolidated imputation group has a debit to its ICA which it cannot offset by an existing credit in the group ICA.”

“… subject to shareholder continuity being maintained, a credit may be transferred from a member’s individual imputation credit account to the … group ICA, to the extent of the ICA’s debit balance.”

Prior to the EII Act amendments to section OP 22, some taxpayers argued, based on comments made in a 1992 business discussion document about the use of pre-consolidation imputation credits, that:

• pre-consolidation credits could be transferred to the group ICA if a debit entry had been made to the group ICA during a tax year, even if the group ICA had imputation credits made in the same tax year prior to that debit. The amount of the transfer would be limited to the debit entry to the group ICA (see example 19); and
• in some cases, the argument was that the amount of the transfer of pre-consolidation credits was not limited to the amount of the debit to the group ICA (see example 20).

Savings provision proposed

The savings provision proposed is to protect tax positions taken by taxpayers that are consistent with example 19. For tax positions that reflect the outcome in example 20, past debits and credits will be adjusted to reflect the approach taken in example 19.

The retrospective adjustments to debits and credits are to be aggregated and treated as being combined with the ICA balance at 31 March 2018. If an amount of further income tax becomes payable because of these retrospective adjustments:

• the due date for payment of the further income tax is 60 days after enactment of the Bill; and
• imputation penalty tax is not imposed on this increased amount of further income tax.

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DEFINITIONS OF SETTLOR AND SETTLEMENT

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(Clause 161(1), (2) and (5))

Summary of proposed amendment

The proposed amendments:

• correct an unintended legislative change arising in the rewrite of the trust rules relating to services provided to the trust for less than market value; and
• clarifies that incidental services provided by a trustee (such as bookkeeping and trustee services) for less than market value are not a transfer of value, which aligns the general meaning of settlement with current practice.

Application date

The proposed amendment for the unintended legislative change will apply from the beginning of the 2008–09 income year.

The amendment to the meaning of settlement and transfer of value for incidental services provided for less than market value is proposed to apply from the date of enactment.

Key features

Rewrite amendment

The rewrite of the trust rules rationalised a number of provisions relating to definitions of “settlor” and “settlement”, into the definition of “transfer of value”. A transfer of value, in relation to a settlement on a trust, is defined generally as a transfer of money (or money’s worth) to or for the benefit of a trust, without adequate consideration being given in return from the trust.

In addition, other transactions are specifically included in the definition of settlor and settlement as they do not represent a transfer of value under ordinary principles. For example, a person who provides an “on demand” loan to a trust is treated as a settlor if the right to demand payment is either deferred, or not exercised.

However, under ordinary principles, a transfer of value-for-money’s worth normally requires the amount transferred to the trust to be convertible into money. For example, the gifting of property to a trust is a transfer of value to the trust because, under ordinary principles, the property is readily convertible into money.

However, the provision of services to, or for the benefit of, a trust for less than market value is not an amount that is readily convertible into money. Therefore services provided at less than market value do not come within the definition of transfer of value and would not be a settlement under the Income Tax Act 2007.

In contrast, the value of these services for less than market value was specifically treated as a settlement in the Income Tax Act 2004. The proposed amendment restores the position of the Income Tax Act 2004 into the rewritten provisions in the Income Tax Act 2007.

Incidental services provided to a trust

The minor beneficiary rules, which apply to tax trustees at 33% on income distributed to minor beneficiaries, recognise that incidental services such as bookkeeping and trustee services provided to the trust should not be counted as settlements. The purpose of that exclusion is to simplify compliance.

However, as a result of the proposed rewrite amendment, such incidental services will be counted as settlements under the more general meaning of settlement. On analysis this results in different rules relating to a settlement on a trust applying depending on whether the trust has minor beneficiaries. Aligning the two rules is more consistent with current practice.

The proposed amendment ensures that the incidental services provided to trusts (such as bookkeeping and trustee services) will not be treated as a transfer of value on a prospective basis.

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MAINTENANCE AMENDMENTS

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(Clauses as per the table)

Summary of proposed amendments

The following proposed amendments reflect minor technical maintenance items arising from both the rewrite of income tax legislation and subsequent changes.

Application dates

Commencement dates for each proposed amendment are stated in the table.

Minor maintenance items

The following amendments relate to minor maintenance items to correct:

• ambiguities;
• compilation issues;
• cross-references;
• drafting consistency, including readers’ aids – for example, the defined terms lists;
• grammar;
• consequential amendments arising from substantive rewrite amendments; or
• the inconsistent use of terminology and definitions.

Maintenance amendments: schedule of clause numbers and changes to text

Clause	Section	Enactment	Amendment	Commencement date
107	CB 11(2)	Income Tax Act 2007	Improve drafting consistency	1 April 2008
116	CD 3	Income Tax Act 2007	Correction to cross-reference	1 July 2009
117	CD 5(2)(a)	Income Tax Act 2007	Correction to cross reference	1 April 2008
118	CD 6(4)	Income Tax Act 2007	Correction to cross reference	1 April 2008
122	CW 9(2)(a)(vi)	Income Tax Act 2007	Repeal redundant provision	Enactment date
123	CW 19	Income Tax Act 2007	Improve drafting consistency	30 March 2017
133	DV 19(2)	Income Tax Act 2007	Correction to grammar	1 April 2008
150	EW 46C	Income Tax Act 2007	Improve drafting consistency	2008–09 income year
165	HE 3(1)(a)	Income Tax Act 2007	Correction to grammar	Enactment date
166	HM 2(3)	Income Tax Act 2007	Correction to cross-reference	Enactment date
193(2)	RD 2	Income Tax Act 2007	Correction to cross-reference	1 April 2019
200(1)	RD 22(1)	Income Tax Act 2007	Correction to cross-reference	1 April 2019
204	RF 2B	Income Tax Act 2007	Omit redundant terms	Enactment date
205	RF 2C	Income Tax Act 2007	Omit redundant terms	Enactment date
213(11)	YA 1 “employer monthly schedule”	Income Tax Act 2007	Correction of terminology	Enactment date
213(12)	YA 1 “financial institution”	Income Tax Act 2007	Correction of terminology	Enactment date
213(15)	YA 1  “large budget film grant”	Income Tax Act 2007	Improve drafting for clarity	Enactment date
213(18)	YA 1 “multi-rate PIE”	Income Tax Act 2007	Correction to grammar	Enactment date
213(21)	YA 1 “overtime”	Income Tax Act 2007	Correction to cross-reference	Enactment date
5(41)	3 “person incorrectly assumed to be a provisional taxpayer”	Tax Administration Act 1994	Omit redundant terms	1 October 2007
24	23C(1)	Tax Administration Act 1994	Correction to cross-references	1 April 2019
25	23D(4)	Tax Administration Act 1994	Correction to cross-references	1 April 2019
32	31C(5)	Tax Administration Act 1994	Correction to cross-references	Enactment date
38	36BD(5)	Tax Administration Act 1994	Correction of terminology	1 April 2008
45	47(2)	Tax Administration Act 1994	Omit redundant cross-reference	Enactment date
100	Schedule 4 “earner levy”	Tax Administration Act 1994	Correction of terminology	1 April 2019
241	163(1)(b)	Child Support Act 1991	Correction to cross-reference	1 April 2019
249	Schedule 2	Student Loan Scheme Act 2011	Correction to cross-reference	9 December 2009