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INCOME TAX AMENDMENT REGULATIONS 2006 (NO. 2) (SLI NO 166 OF 2006)
EXPLANATORY STATEMENT
Select Legislative Instrument 2006 No. 166
Issued by authority of the Minister for Revenue and Assistant Treasurer
Income Tax Assessment Act 1936
Income Tax Regulations 2006 (No. 2)
Section 266 of the Income Tax Assessment Act 1936 (the Act) provides that, in part, the Governor-General may make regulations, not inconsistent with the Act, prescribing all matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.
The Income Tax Regulations 1936 are updated to prescribe exceptions to the two year amendment period for the income tax assessments of individuals and very small business taxpayers with higher risk tax affairs.
The Regulations operate in the context of the new subsection 170(1) of the Act which provides that Regulations may exclude certain groups of taxpayers from the standard two year amendment period. The exclusions are in addition to the exclusions specifically provided for by subsection 170(1). Excluded taxpayers will have a four year amendment period (unless they are subject to a special amendment period in the tax laws) where the circumstances prescribed in an item of the Regulations are met for an income year.
The purpose of the Regulations is to prescribe exceptions to the standard two year amendment period for the income tax assessments of certain groups of taxpayers with higher risk tax affairs. The standard amendment period allows the Commissioner of Taxation to amend the income tax assessments of most individuals and very small businesses (businesses that are eligible for, and have elected to be part of, the Simplified Tax System) up to two years after the Commissioner gives the taxpayer a notice of assessment.
The exclusions from the two year amendment period respond to a present revenue risk that may be removed in future when enhancements in tax compliance remove that risk to the revenue.
Similarly, emerging risks to the revenue may be addressed by future additional exclusions from the two year period of review. The process of excluding groups of taxpayers from the two year period of review by way of regulation is intended to provide the necessary flexibility to respond to a changing risk environment.
Details of the Regulations are set out in the Attachment.
Open public consultation was undertaken on the draft regulations and explanatory notes. The draft regulations were amended to address many of the issues raised in consultation.
The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.
The Regulations commence on the day after registration on the Federal Register of Legislative Instruments.
These Regulations apply to income tax assessments for the 2004-05 income year and later years.
ATTACHMENT
Regulation 1 -- Name of Regulations
This regulation provides that the title of the Regulations is the Income Tax Amendment Regulations 2006 (No. 2)
Regulation 2 -- Commencement
This regulation provides for the Regulations to commence on the day after registration on the Federal Register of Legislative Instruments.
Regulation 3 -- Amendment of Income Tax Regulations 1936
This regulation provides that the Income Tax Regulations 1936 are amended as set out in the Schedule.
Schedule - Amendments
After regulation 19 a new regulation 20 is inserted with an accompanying table that sets out exclusions to the standard two year amendment period.
Item 1 excludes from the two year period of review taxpayers who are involved in non-arm's length transactions with associates, where there is a mismatch in the review periods of the parties involved. For example, this exclusion applies where a private company has a four year period of review and a shareholder in the company, who has a majority voting interest, has a two year period of review and the two parties have entered into a non-arm's length transaction with tax consequences.
This exclusion covers non-arm's length transactions between associates, regardless of the structure of the parties involved. These types of transactions present a high risk to the revenue. For the exclusion to apply, the transaction needs to have income tax consequences -- it would not apply, for example, to gifts between parties in a personal relationship where there are no tax ramifications, even if such a gift could be characterised as a non-arm's length transaction between associates (as defined in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Further, the exclusion does not cover a non-arm's length transaction between parties who are not 'associates' as defined nor to transactions between associates that are conducted at arm's length.
Item 2 excludes taxpayers involved in transactions to which Division 7A of the ITAA 1936 applies, where there is a mismatch between the company's period of review (four years or more) and the related entity's period of review. Transactions or amounts to which Division 7A applies, are treated as dividends. These amounts include amounts paid or lent by a private company or debts that a private company forgives.
This exclusion includes related entities who are shareholders, former shareholders and associates of current and former shareholders who have a two year period of review.
Item 3 excludes taxpayers involved in transactions to which Subdivision EA of Division 7A of the ITAA 1936 applies. As a result of Subdivision EA applying, certain amounts are included in assessable income as if they were dividends. These amounts include amounts paid or lent by a trust or debts that the trust forgives. The related entities include shareholders, or associates of a shareholder, of a private company as outlined in Subdivision EA of Division 7A of the ITAA 1936. The exclusion applies where the private company and trust have periods of review of four years or more and the shareholder (or their associate) have a two year period of review. Information needed to identify specific assessable income amounts is required from both the records of the private company and trust.
An anti-avoidance rule operates in respect of employee shares and rights offered by a company whose predominant business is the acquisition, sale or holding of shares, securities and other investments (directly or indirectly), where a taxpayer is employed by a company and is also employed by another company who is in the same group of companies. Section 139DF of the ITAA 1936 will treat the share, or right to acquire a share in the company, as a non-qualifying share or right in the hands of the employee. The period of review of the company and that of the employee shareholder need to be the same for the provision to operate effectively. Accordingly, item 4 of the table excludes employee shareholders subject to these provisions from the standard two year period of review unless the company in question is a Simplified Tax System (STS) business that itself has a two year period of review.
The only employee shareholders, or option holders, affected by this exclusion are those employees whose shares or options are affected by the anti-avoidance provision and whose employer has a four year period of review. Taxpayers participating in employee share schemes would not generally be excluded from the two year period of review.
Item 5 excludes from the two year period of review individuals and small businesses who omit, from a return or other documents provided in the course of an assessment, ordinary or statutory income from foreign transactions.
The exclusion does not affect individuals and small businesses that correctly include income from foreign transactions in their tax returns. Taxpayers who receive this income from resident investment vehicles (within the meaning of section 118-510 of the Income Tax Assessment Act 1997 (ITAA 1997)) are not excluded because income received through resident investment vehicles is already subject to data‑matching within a two year period.
The term 'foreign transaction' takes its common meaning. A taxpayer involved in a transaction which predominantly occurs outside of Australia is caught by this exclusion where the income has not been received through a resident investment vehicle and is not reported for tax purposes.
The exclusions from the two year period where information is required from overseas also extend to two specific anti-avoidance provisions, namely:
* deemed transfers of property and services (subsection 345(5) of the ITAA 1936); and
* tainted services income (paragraph 448(1A)(f) of the ITAA 1936).
In relation to other foreign transactions that may be designed to reduce tax liability within Australia, there is already a general anti-avoidance exclusion from the two year amendment period in the new subsection 170(1) of the ITAA 1936.
For the general anti-avoidance exclusion in the new subsection 170(1) of the ITAA 1936 to apply, it must be reasonable to conclude that any person entered into or carried out a scheme for the sole or dominant purpose of a taxpayer obtaining a scheme benefit.
There are a number of specific anti-avoidance provisions in the tax laws that do not fit the general anti-avoidance exclusion but, nonetheless, could involve individuals and STS businesses in tax avoidance, with a significant revenue risk.
Accordingly, item 8 of the table excludes from the two year period of review individuals and small businesses whose tax affairs fall for consideration under the following specific anti-avoidance provisions:
* sections 45A and 45B of the ITAA 1936 (distributions of preferentially taxed capital);
* subsection 102AE(7) of the ITAA 1936 (excluded income of minors);
* section 177E of the ITAA 1936 (stripping of company profits);
* section 177EA of the ITAA 1936 (franking debit creation and franking credit cancellation schemes);
* Division 270 of Schedule 2F to the ITAA 1936 (schemes to take advantage of deductions);
* subsection 26-50(7) of the ITAA 1997 (expenses for a leisure facility or boat);
* sections 165-80 to 165-205 and Division 175 of the ITAA 1997 (rules affecting the operation of tests for changing ownership of a company and use of a company's losses or deductions to avoid income tax); and
* Subdivision 207-F of the ITAA 1997 (cancellation of gross up or tax offset where the imputation system has been manipulated).
Section 165-205 is one of the provisions to be applied in determining whether a company has maintained the same owners and accordingly, it has been included with the group of provisions 165‑80 to 165-205.