Commonwealth Numbered Regulations - Explanatory Statements
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INCOME TAX (FARM MANAGEMENT DEPOSITS) AMENDMENT REGULATIONS 2011 (NO. 1) (SLI NO 276 OF 2011)
EXPLANATORY STATEMENT
Select Legislative Instrument 2011 No. 276
Issued by authority of the Assistant Treasurer Minister for Financial Services and Superannuation
Income Tax Assessment Act 1997
Taxation Administration Act 1953
Income Tax (Farm Management Deposits) Regulations 1998
Income Tax (Farm Management Deposits) Amendment Regulations 2011 (No. 1)
Subsection 909-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the Governor-General may make regulations prescribing matters required or permitted by the ITAA 1997 to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the ITAA 1997.
The ITAA 1997 provides various specific regulation-making powers, as follows:
• Paragraph 393-20(2)(b) allows regulations to specify information that the depositor must provide in the application form to make a farm management deposit (FMD);
• Paragraph 393-20(2)(c) allows regulations to specify statements that are to be read by the depositor when completing the application form to make an FMD; and
• Subsection 393-40(3A) would allow regulations to specify the way in which Natural Disaster Relief and Recovery Arrangements (NDRRA) made by or on behalf of the Commonwealth apply to a primary production business of an owner of a deposit, and any other circumstances that must be satisfied, in the event of an applicable natural disaster.
The Taxation Administration Act 1953 (TAA 1953) contains a regulation-making power in relation to the information that must be provided periodically to the Agriculture Secretary. Paragraph 398-5(3)(d) in Schedule 1 to the TAA 1953 provides that regulations may require any other information in relation to FMDs held by an FMD provider to be provided to the Agriculture Secretary.
The purpose of the Income Tax (Farm Management Deposits) Amendment Regulations 2011 (No. 1) (the Regulations) is to:
• align the Income Tax (Farm Management Deposits) Regulations 1998 (Principal Regulations) with changes being made to Division 393 of the ITAA 1997 and section 398-5 in Schedule 1 to the TAA 1953. Specifically, the Principal Regulations need to:
- reflect that individuals carrying on a primary production business that are affected by applicable natural disasters can now access their FMDs within 12 months of deposit while retaining concessional tax treatment under the FMD scheme. The conditions for allowing access are to be specified in the Principal Regulations;
- reflect the increased frequency of reporting required by FMD providers to the Agriculture Secretary. FMD providers are required to report monthly, rather than quarterly; and
- reflect the removal of the prohibition on holding FMDs simultaneously with more than one FMD provider.
• reflect the transfer of the legislative provisions governing FMDs from Schedule 2G to the Income Tax Assessment Act 1936 (ITAA 1936) to Division 393 of the ITAA 1997 and section 398-5 in Schedule 1 to the TAA 1953. This transfer was made through the Tax Laws Amendment (Transfer of Provisions) Act 2010.
Under Division 393 in the ITAA 1997, an FMD is a tax-linked, financial risk management tool for individuals carrying on a primary production business in Australia, designed to encourage such individuals to set aside income from profitable years for subsequent draw down in low-income years; thereby reducing the risk of income variability owing to factors such as drought.
The Principal Regulations contain requirements in relation to:
• information that a depositor must give to an FMD provider in an application form for an FMD;
• information that an FMD provider must give to a depositor in an application form for an FMD; and
• information that an FMD provider must give periodically to the Agriculture Secretary.
Clause 7 in the Regulations is intended to apply from 1 July 2010. This retrospectivity is intended to benefit FMD owners who were affected by natural disasters in the 2010-11 income year. All other amendments to the Regulations are to apply from 1 July 2012. These application dates coincide with the application dates found in Schedule 5 of the Tax Laws Amendment (2011 Measures No. 7) Bill 2011.
Details of the Regulations are set out in the Attachment.
Public consultation on an exposure draft Bill and exposure draft Regulations took place over a two-week period in August 2011. The draft Bill and exposure draft Regulations were placed on the Treasury website.
The Department of Agriculture, Fisheries and Forestry contacted all 27 FMD providers, the National Farmers Federation, the Australian Bankers Association and the Rural Financial Counselling Service providers directly by email advising of these changes.
The ITAA 1997 specifies no condition that needs to be satisfied before the power to make the Regulations may be exercised.
The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.
The Regulations commence on the commencement of Schedule 5 of the Tax Laws Amendment (2011 Measures No. 7) Act 2011.
ATTACHMENT
Details of the Income Tax (Farm Management Deposits) Amendment Regulations 2011 (No. 1)
Regulation 1 -- Name of Regulations
This regulation provides that the title of the Regulations is the Income Tax (Farm Management Deposits) Amendment Regulations 2011 (No. 1).
Regulation 2 -- Commencement
This regulation provides that the Regulations commence on the commencement of Schedule 5 of the Tax Laws Amendment (2011 Measures No. 7) Bill 2011.
Regulation 3 -- Amendment of Income Tax (Farm Management Deposits) Regulations 1998
This regulation provides that the Principal Regulations are to be amended as set out in the Schedule.
Schedule -- Amendments
Item [1] - Regulations 3 to 7, including the boxed note
Regulation 3 and the boxed note
Regulation 3 of the Principal Regulations provides definitions of the terms used within the Regulations and guide material relating to the FMD scheme. Item [1] substitutes the definitions in regulation 3. 1953 Act means the Tax Administration Act (TAA 1953). 1997 Act means the Income Tax Assessment Act (ITAA 1997). FMD provider has the meaning given by subsection 393-20(3) of the ITAA 1997. Item [1] also substitutes the guide material in regulation 3 with words that are consistent with those used in the guide material in section 393-1 in the ITAA 1997.
Regulations 4 to 6
Regulations 4 to 6 of the Principal Regulations set out the information to be provided by a depositor in an application form for an FMD, the information that an FMD provider must give to a depositor in an application form for an FMD, and information that an FMD provider must give to the Agriculture Secretary, respectively. Item [1] substitutes regulations 4 to 6 and amends the references to reflect the transfer of the FMD provisions from the ITAA 1936 to Division 393 of the ITAA 1997 and section 398-5 in Schedule 1 to the TAA 1953. Item [1] does not make any substantive changes to regulations 4 to 6.
Regulation 7
Item [1] also inserts a new regulation into the Principal Regulations. The new regulation is dependent on the paragraph 393-40(3A)(b) of the ITAA 1997, which will be inserted by the Tax Laws Amendment (2011 Measures No. 7) Bill 2011. Paragraph 393-40(3A)(b) provides an exemption from the 12-month requirement for FMD owners whose FMDs are repaid early in the event of an applicable natural disaster. (The 12-month requirement provides that FMDs must be held without repayment for at least 12 months to qualify for concessional tax treatment.) FMD owners will retain concessional tax treatment where FMDs are repaid early if:
• Commonwealth Government's NDRRAs apply as specified in the Principal Regulations to a primary production business of the FMD; and
• all of the other circumstances specified in the Principal Regulations are satisfied.
For paragraph 393-40(3A)(b), regulation 7 sets out the circumstances that must be satisfied in relation to the repayment of the whole or a part of an FMD in the event of a natural disaster, where NDRRAs apply. Regulations 7(2) to 7(4) specify the circumstances as follows.
Subitem 7(2) specifies that recovery assistance must have been provided in the form of a Category C measure, as defined in the NDRRAs determined by the Attorney-General. Natural disasters often result in large-scale expenditure by state and territory governments in the form of disaster relief and recovery payments and infrastructure restoration. To assist with this burden the Commonwealth Government's NDRRAs provide financial assistance in some circumstances. The NDRRAs specify that to qualify for recovery assistance, an individual must:
• have a right or interest in the land used for the purposes of a primary production enterprise, and
• contribute a significant part of his or her labour and capital to the primary production enterprise, and
• derive more than 51 per cent of their individual income from the primary production enterprise.
Further, to be eligible for recovery assistance, an FMD owner must have suffered direct damage as a result of the specified event. This may be damage to farm buildings, crops, pasture, stock, fencing and/or tools of trade (equipment, plant) and the essential cost of repair or replacement must be the FMD owner's responsibility.
Subitem 7(3) specifies that the recovery assistance must have been first provided during the 12-month period mentioned in subsection 393-40(1) of the ITAA 1997. That is, the recovery assistance must have been first provided during the 12 months since deposit of the FMD that is to be repaid early.
Subitem 7(4) specifies that the FMD has been repaid after the recovery assistance was first provided.
Example 1.1 FMD owner benefits from repayment within 12 months in the event of a natural disaster
Arthur is an individual partner in a partnership. The partnership carries on a primary production business in Queensland.
On 30 June 2010, Arthur deposited $200,000 of his primary production income from the partnership into an FMD. In Arthur's 2009-10 tax return, he claimed the $200,000 deposit as a deduction.
In January 2011, the partnership was affected by the floods in Queensland. Arthur is eligible to receive a clean-up and restoration grant for primary producers under the Category C of the Natural Disaster Relief and Recovery Arrangements.
Following the receipt of the recovery grant, Arthur withdrew $200,000 from his FMD to rebuild the primary production business. Arthur will have to declare the $200,000 income in his 2010-11 tax return. However, he will not be required to amend his 2009-10 tax return to remove the deduction claimed in that year.
Item [2] - Schedule 1, Item 1
Item [2] inserts a requirement that the depositor's date of birth be provided to an FMD provider in an application form. Currently, the date of birth of the FMD owner is required where the depositor is not the owner of the FMD (that is, where the depositor is the trustee making the FMD on behalf of an individual beneficiary and the owner is that beneficiary). The intention is to require the date of birth of the owner to be disclosed also in cases where the depositor and owner are the same individual.
Item [3] - Schedules 2 and 3
Schedules 2 and 3 provide for the information that must be given in the application form to an individual who chooses to make an FMD. Item [3] substitutes Schedules 2 and 3, however the majority of the wording in existing Schedules 2 and 3 has been retained. The following amendments are made to these Schedules.
Amendments are made to Schedules 2 and 3 to reflect policy changes being made to Division 393 in the ITAA 1997 and section 398-5 in Schedule 1 to the TAA 1953 through the Tax Laws Amendment (2011 Measures No. 7) Bill 2011. These are outlined in the following paragraphs.
Schedule 2, Part 2, paragraph 4(c) is inserted to reflect the exception from the 12-month requirement in the event of an applicable natural disaster. Schedule 2, Part 2, item 4 reflects the circumstances outlined in section 393-40 of the ITAA 1997 in which the tax benefits are retained despite repayment of the FMD within 12 months after the deposit was made.
The prohibition on holding FMDs simultaneously with more than one FMD provider is being removed from Division 393 of the ITAA 1997. Accordingly, the seventh dot point in Schedule 2, Part 2, item 3 and subparagraph 4(b)(iv) in Schedule 2, Part 2 are amended to include reference to a part of a deposit being transferred to another FMD provider upon request. Schedule 2, Part 3, item 3 is also revised to state that an individual can own more than one FMD and can own FMDs with more than one FMD provider.
FMD providers will be required to report to the Agriculture Secretary on the FMDs that they hold on a monthly basis, rather than a quarterly basis. Accordingly, Schedule 3, item 1 is amended to require information regarding the month being reported, rather than the date of the last day of each month being reported, to be given to the Agriculture Secretary.
Amendments are also made to Schedules 2 and 3 as a result of the transfer of the FMD provisions from Schedule 2G in ITAA 1936 to Division 393 of the ITAA 1997 and section 398-5 in Schedule 1 to the TAA 1953. All applicable references to provisions in the ITAA 1936 have been replaced with the references to the corresponding provision in the ITAA 1997 or Schedule 1 to the TAA 1953.
Changes are also made to the terms used in the Principal Regulations to ensure consistency with the word changes made to the FMD provisions in the tax laws when the provisions were transferred to Division 393 of the ITAA 1997 and section 398-5 in Schedule 1 to the TAA 1953. Throughout, 'financial institution' and 'institution' are replaced with 'FMD provider', and 'primary producer' is replaced with 'individual' or 'individual carrying on a primary production business in Australia'. The description of the tax consequences of FMDs in Schedule 2, Part 2, item 2 is amended to reflect the FMD being 'repaid' rather than 'withdrawn'. Additionally, the statement in Schedule 2, Part 1, item 2 that a State or Territory guarantees the repayment of any deposit taken by the FMD provider has been revised to include the Commonwealth in the list of guarantors. An explanation of these changes is given in the explanatory memorandum for the Tax Laws Amendment (Transfer of Provisions) Act 2010.
The seventh dot point in Schedule 2, Part 2, item 3 is amended to reflect the existing requirement in table item 13 in section 393-35 of the ITAA 1997 that a request to transfer a deposit to another FMD provider must be made in writing.
Other minor amendments are made to the wording to ensure consistency with Division 393 of the ITAA 1997.
Broader amendment is made to the description of the purpose of the FMD scheme in Schedule 2, Part 2, item 1. Specifically, reference to taxable non-primary production income is removed. This improves clarity and consistency with the provisions in the law.
In Schedule 3, item 2, the information to be given to the Agriculture Secretary by FMD providers in relation to each FMD is amended to refer to the owner or to the depositor and owner, rather than referring only to the depositor. In most cases, the FMD owner is the depositor, but, in the case of a deposit made by a trustee of a trust on behalf of a beneficiary who is an individual, the trustee is the depositor and the beneficiary is the owner. Replacement of 'depositor' with 'owner' reflects the fact that it is the owner, not the depositor, who owns the FMD.
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