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Tax and Superannuation Laws Amendment (2015 Measures No. 3) Bill 2015



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BILLS DIGEST NO. 127, 2014-15 19 JUNE 2015

Tax and Superannuation Laws Amendment (2015 Measures No. 3) Bill 2015 Leslie Nielson Economics Section

Contents

The Bills Digest at a glance ................................................... 3

Purpose of the Bill ............................................................... 4

Structure of the Bill ............................................................. 4

Background—tax offsets explained ...................................... 4

Refundable v Non-refundable tax offsets ........................... 4

Schedule 1—Seafarer tax offset ........................................... 5

Background .............................................................................. 5

What is the seafarer tax offset .............................................. 5

What use has been made of it? .......................................... 5

How effective has it been? .................................................. 6

Previous legislative action ..................................................... 6

Schedule 2—Research and Development Tax Incentive ......... 6

Background .............................................................................. 6

Previous legislative action ..................................................... 7

Current costs of R&D tax incentives ...................................... 7

Previous Senate Inquiry ......................................................... 7

Policy Announcement .......................................................... 7

Committee consideration .................................................... 7

Policy position of non-government parties/independents ..... 7

Seafarers Tax Offset ............................................................ 7

R&D Tax Incentive ............................................................... 8

Position of major interest groups ......................................... 9

Seafarers Tax Offset ............................................................ 9

R&D Tax Incentive ............................................................. 10

Financial implications ........................................................ 11

Date introduced: 27 May 2015

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1-3 and Schedule 2 on Royal Assent and Schedule 1 on the day after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

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Statement of Compatibility with Human Rights .................. 11

Key issues and provisions................................................... 11

Would the Senate’s rejection of the current Bill give rise to a Double Dissolution trigger? ................................... 11

Repeal of the Seafarers Tax Offset ...................................... 11

Reduction in R&D tax incentive rates .................................. 11

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The Bills Digest at a glance

Purpose

This Bill repeals the seafarer tax offset and reduces the rates of the research & development (R&D) tax incentive.

Structure

The Bill contains two schedules:

• Schedule 1 repeals the seafarer tax offset with effect from 1 July 2015 and

• Schedule 2 reduces the rates of the R&D tax incentive with effect from 1 July 2014.

Rational

The Government states that the seafarer tax offset has been little used and that it has failed in its policy intent.1 It says both measures are being taken to achieve budget savings. These savings, over the forward estimates period are:

• repeal of the Seafarers Tax Offset (STO) - $12 million2 and

• reduction in the R&D tax incentive rates - $620 million from 2014-15.3

Previous legislative action

These measures were previously rejected by the Senate on 2 March 2015 when Schedules 2 and 3 of the Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014 (the previous Bill) were deleted. The House of Representatives passed the Bill with these amendments on 3 March 2015.4

Position of Major political parties

Both the Australian Greens and the Labor Party opposed these measures during debate on the previous Bill.5

Would the Senate’s rejection of the current Bill give rise to a Double Dissolution Trigger?

No: the previous Bill was passed by the Senate and amendments to that Bill, which removed the changes made by this Bill, were agreed to by the House of Representatives. Thus the constitutional requirements for a double dissolution election do not arise in respect of the current Bill.6

1. Explanatory Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 3) Bill 2015, paragraph 1.6, accessed 17 June 2015. 2. Ibid., p. 3.

3. Ibid., p. 4.

4. Parliament of Australia, ‘Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014 homepage’, Australian Parliament website, accessed 9 June 2015. 5. Ibid.

6. Constitution, section 57.

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Purpose of the Bill This Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to:

• abolish the seafarer tax offset (STO) and

• reduce the rate of tax offsets available under the research and development tax incentive (R&D tax incentive).

Consequential amendments are also made to the Shipping Reform (Tax Incentives) Act 2012. The rationale for these changes is primarily to reduce expenditure.7

Structure of the Bill The Bill contains two short schedules dealing with the STO and the R&D Tax Incentive respectively.

Background—tax offsets explained A tax offset is another name for a tax rebate. It is different from a tax deduction:

• a tax deduction is a reduction in a taxpayer’s assessable income and

• a tax offset (or rebate) is a reduction in the amount of tax the person has to pay.

Tax offsets are available for a range of business expenditures. Typically, expenditures are treated as deductions from assessable income to arrive at taxable income upon which tax is levied at the company tax rate of 30 per cent.

Some expenditures are treated as being subject to a rebate or offset instead, at a rate different from the company tax rate. This gives the taxpayer greater benefit than if the expenditure were treated as a deduction.

Example

A company has revenue (assessable income) of $100,000 and has only one item of expenditure of $40,000.

Treating that expenditure as a deduction gives taxable income of $60,000 and a tax liability of $18,000 (30% of $60,000) giving an after tax income of $82,000.

If however, the expenditure is subject to an offset of 40%, the company will not usually be able to treat the expenditure as a deduction as well so its taxable income will be $100,000 on which it will pay $30,000 tax giving an after tax income of $70,000. However, it will be able to claim a rebate or offset of $16,000 (40% of $40,000). With the rebate its overall after tax income is $86,000, so it is $4,000 better off.

Refundable v Non-refundable tax offsets Tax offsets or rebates can be refundable or non-refundable. The distinction is relevant where the tax rebate exceeds the amount of tax otherwise payable:

• a refundable tax offset is one where the full amount of the offset is paid, even if that amount exceeds the taxpayer’s tax liability and

• a non-refundable tax offset or rebate is limited to the taxpayer’s tax liability.

Example

A company with revenue (assessable income) of $50,000 has only one item of expenditure of $40,000, rebateable at 40%.

The company’s tax liability on $50,000 will be $15,000 (30% of $50,000).

The rebate on the $40,000 expenditure will be $16,000 (40% of $40,000).

7. J Frydenberg, ‘Second reading speech: Tax and Superannuation Laws Amendment (2015 Measures No. 3) Bill 2015’, House of Representatives, Debates, 27 May 2015, pp. 20-22, accessed 11 June 2015.

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If the offset is refundable, the company will receive the benefit of the whole $16,000 rebate, meaning its net after tax position will be $51,000 ($50,000 of assessable income plus a $1,000 refund from the ATO). If the offset is non-refundable, the rebate will be limited to the amount of tax otherwise payable - $15,000 - meaning the company’s net after tax position will be $50,000.

Schedule 1—Seafarer tax offset Background

What is the seafarer tax offset This refundable tax offset started from 1 July 2012 for employers of certain Australian seafarers. A company employing Australian seafarers on prescribed overseas voyages made by certified vessels may be entitled to claim the seafarer tax offset.

Section 61-710 of the ITAA 1997 specifies the amount of this tax offset as 30 per cent of the gross payments made to the seafarer(s).8 The seafarer does not benefit directly from this offset.

This offset was part of a package of measures implemented by the previous Government to assist Australian shipping companies to compete against their international rivals and to revitalise the Australian shipping industry.9

What use has been made of it? An Australian corporation that employs at least one Australian resident as a seafarer (that is, as a master, officer, engineer, integrated rating et cetera) for a period of at least 91 days in an income year to undertake overseas voyages on certified vessels is entitled to claim this offset. The Australian Taxation Office (ATO) does not publish separate statistics on the number of times this offset has been claimed, or the value of such claims. The Explanatory Memorandum states that since its introduction this offset has been claimed by fewer than five taxpayers.10 That observation made, some idea of the use to which this offset has been put can be gained by observing the trends in the Australian trading fleet.

The number of Australian registered ships in the Australian international trading fleet has declined from ten in 2007-08 to six in 2012-13.11 The Australian Shipowners Association (ASA) has informally estimated that this number has fallen to four, perhaps five.12

Under section 33A of the Shipping Registration Act 1981, vessels may be included on the Australian International Shipping Register provided that either the Master or the Chief Mate, and either the chief engineer or first engineer, are Australian citizens or residents.13 Although the number of Australian seafarers working in the trade between Australia and elsewhere is not available, the above information suggests that this number is not large. The following provides some estimates of the number of Australian seafarers working in the international shipping trade between Australia and other countries.

In a 2014 submission to the Senate Economics Legislation Committee the Maritime Union of Australia noted that each international voyaging ship would engage approximately 34 seafarers (17 on a 2 crew system=34) so six ships would employ approximately 204 seafarers.14 This would be a low estimate.

Industry sources suggested that about 300 Australian seafarers are employed on Australian ships trading internationally. Further, the Shipping Reform (Tax Incentives) Regulation 2012 requires that the company that

8. Income Tax Assessment Act 1997, accessed 17 June 2015. 9. Further details of this package can be found in M Brennan and L Nielson, Shipping Reform (Tax Incentives) Bill 2012 [and] Tax Laws Amendment (Shipping Reform) Bill 2012, Bills digest, 146, 2011-12, Parliamentary Library, Canberra, 2012, accessed 11 June 2015. 10. Explanatory Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 3) Bill 2015, op. cit., p. 6. 11. Bureau of Infrastructure, Transport and Regional Economics, Australian sea freight 2012-13, Statistical report, ‘Table 5.1 - number of ships in

the Australian trading fleet’, p. 61, accessed 9 June 2015. 12. Australian Shipowners’ Association, telephone call from Author, 9 June 2015. Four of the ships are the very large Liquefied Natural Gas Tankers trading between Asia and Australia. 13. Shipping Registration Act 1981, accessed 17 June 2015. 14. Maritime Union of Australia (MUA), Submission to the Senate Standing Committee on Economics, Inquiry into the Tax and Superannuation

Laws Amendment (2014 Measures No. 5) Bill 2014, 13 October 2014, paragraph 4.14, accessed 17 June 2015.

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receives the Tax Offset ensures that, for each vessel operated by the entity, training is being undertaken by at least one person (the trainee) in each of the following three categories: Engineer officer training; Deck officer training; and Integrated rating and steward training.15 Taking these factors into account an estimated number of Australian seafarers affected by the repeal of this offset may be in excess of 330.16 This would be an upper estimate.

How effective has it been? If the number of crew in respect of which the STO has been granted is taken as a measure of effectiveness then this offset has not been effective, as the number of crew in respect of which the STO can be claimed has declined along with the number of Australian ships trading internationally. The low number of companies claiming the STO is a consequence of the decline in the number of Australian registered ships in these trades. But these measures may not be appropriate for judging the effectiveness of the STO, as the aim of this offset was to make Australian crews more competitive with crews sourced from other countries.

In its submission to the Senate Economic Legislation Committee’s inquiry into the previous Bill (see below) the ASA, which is the major employer body in the industry, stated that:

The Seafarers Tax Offset provides a rebate to the employer of Australian staff for part of the income tax withheld while working in international trades, thereby making the employment costs more comparable with international seafarers. 17

Previous legislative action The Government has previously attempted to abolish the STO. Schedule 2 of the previous Bill, introduced into the House of Representatives on 4 September 2014 sought to abolish the offset. This schedule was deleted by Senate amendment on 2 March 2015. The House of Representatives agreed to this amendment (amongst others) on 3 March 2015.18

Schedule 2—Research and Development Tax Incentive Background The current R&D tax incentive came into effect on 1 July 2011. The R&D tax incentive assists businesses to offset some of the costs of doing R&D and aims to promote innovation. The program is administered jointly by AusIndustry (on behalf of Innovation Australia) and the ATO.19 The R&D tax incentive replaced the previous R&D tax concession.20

The R&D tax incentive operates by enabling companies to receive a tax offset for eligible R&D expenditure, rather than claiming R&D expenditure as a normal expense. As explained in the Background of this Digest, above, a tax offset reduces the amount of income tax payable, after calculating the basic income tax liability.21 If a company claims an item under the R&D tax incentive, it cannot also claim it as a normal business expense.

Because the rate of the offset (currently 40 or 45 per cent) is greater than the company tax rate (currently 30 per cent), companies have an additional incentive to engage in research and development.

If a tax offset exceeds the tax otherwise payable, the way that the excess is treated depends on whether the tax offset is refundable or non-refundable. A non-refundable offset that exceeds tax otherwise payable can be carried forward to future income tax years. A refundable tax offset that exceeds tax otherwise payable may be refunded to the entity (subject to certain rules).22

15. Shipping Reform (Tax Incentives) Regulation 2012, accessed 17 June 2015. 16. That is, 300 seafarers and 3 trainees per crew per Australian ship, assuming six Australian ships trading internationally (300 + 36 trainees). 17. Australian Shipowners Association, Submission to the Senate Standing Committee on Economics, Inquiry into the Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014, 9 October 2014, paragraph 3.6, accessed 11 June 2015.

18. Parliament of Australia, ‘Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014 homepage’, op. cit. 19. Australian Government, ‘R&D tax incentive’, business.gov.au, accessed 17 June 2015. 20. For a discussion of the process leading to the current arrangements, see J Murray, Tax Laws Amendment (Research and Development) Bill 2010, Bills digest, 165, 2009-10, Parliamentary Library, Canberra, 2010, accessed 17 June 2015.

21. Income Tax Assessment Act 1997, subsection 4-10(3), method statement, Step 4, accessed 15 June 2014. 22. Australian Taxation Office (ATO), Research and development tax incentive - refundable and non-refundable tax offsets, Fact sheet, ATO website, October 2011, accessed 17 June 2015.

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Additional background on the R&D tax incentive can be found in the recent Parliamentary Library Bills Digest on the previous Bill.23

Previous legislative action Schedule 3 of the previous Bill contained all but identical measures to those in Schedule 2 of this Bill. As with the proposed amendments to the STO the proposed changes to the R&D tax incentive were deleted from the previous Bill by Senate amendment. Again, these particular changes were agreed to by the House of Representatives on 3 March 2015.24

Current costs of R&D tax incentives Currently the R&D tax concession is given at two rates, 40 and 45 per cent:

• the 2013-14 ATO Annual Report states that for the 40 per cent non-refundable tax offset: there were 1,780 claims worth about $15.2 billion and

• there were 8,200 claims worth about $4.4 billion for the 45 per cent tax offset.25

Briefly, the 45 per cent rate is applied to companies with a turnover of less than $20 million. Thus the majority of the benefits are going to companies whose turnover exceeds this figure.26

Previous Senate Inquiry Almost identical provisions to those in Schedules 1 and 2 were in the previous Bill which was subject to a recent inquiry by the Senate Standing Committee on Economics, chaired by Senator Edwards. The Committee recommended that the Bill be passed.27 However, in their dissenting report, Labor Senators opposed the abolition of the STO and the reduction in the R&D tax incentive rates.28

Policy Announcement Both these measures were first announced in the 2014-15 Budget.29

Committee consideration As at the date of writing, the Bill had not been referred to a Parliamentary Committee.

Policy position of non-government parties/independents Seafarers Tax Offset During debate on Schedule 2 of the previous Bill, the Shadow Treasurer, Mr Bowen stated that the Labor Party would oppose the repeal of the STO, and noted that the ASA had stated that:

The Seafarers Tax Offset was a key element of the 2012 reforms which helped to reduce the operating costs of Australian vessels, increased the competitiveness of Australian shipping and provided significant opportunity for employment of Australians in international trades … the impact [of abolition] is severe with regard to future opportunity.

30

In the Senate, during the second reading speech on the previous Bill, Senator Rice flagged that the Australian Greens would seek to amend it in relation to the STO, stating that:

23. B Pulle, T Kryger and D Weight, Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014, Bills digest, 41, 2014-15, Parliamentary Library, Canberra, 2014, accessed 9 June 2015. I am indebted to these Authors for much of this section. 24. Parliament of Australia, ‘Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014 homepage’, op. cit. 25. Australian Taxation Office (ATO), ‘Administered programs 2013-14’, ATO website, accessed 12 June 2015. 26. Australian Tax Office, (ATO), ‘Research and Development Tax Incentive’, ATO website, accessed 19 June 2015. 27. Senate Economics Legislation Committee, Inquiry into the Tax and Superannuation Amendment (2014 Measures No. 5) Bill 2014, The Senate,

28 October 2014, p. 15, accessed 12 June 2015. 28. Ibid., p. 17. 29. Australian Government, ‘Part 1: revenue measures’, Budget measures: budget paper no. 2: 2014-15, ‘R&D tax incentive’, p. 18; and ‘Part 2:

expense measures’, Budget measures: budget paper no. 2: 2014-15, ‘Abolish the Seafarer tax offset’, p. 212, accessed 6 June 2015. 30. C Bowen, ‘Second reading speech: Tax and Superannuation Laws Amendment (2014 Measures No. 4) Bill 2014, Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014’, House of Representatives, Debates, 24 September 2014, p. 10358, accessed 12 June 2015.

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This tax incentive goes a long way to ensuring workers on overseas journeys can get a decent pay and it keeps their jobs viable, and it costs us the measly sum of $2 million a year. For the sake of $2 million a year, the government is continuing to apply measures that are going to be making it more and more difficult to employ Australian workers on our seas and to have Australian-flagged ships plying our coast.

You can see that there are all sorts of measures that are all coming together to completely decimate the Australian shipping industry, and that will be a disaster. It will be a disaster for the Australian workforce but also a disaster for us having good work conditions and safe environmental conditions for the ships that are in our waters. It is a tiny saving that the government is trying to achieve, and for that it is going to ditch security for workers and our shipping industry at the very time that they need our support. We must not let it happen. Right now, what the Australian shipping industry needs is certainty. The industry is awaiting the results of the minister's options paper. The last thing it needs is to be forced to negotiate the storm that abolishing this tax incentive would create.

The policy as it stands at the moment, which is going to be abolished, also promotes professional development and training of workers by including this in the period deemed to be on a voyage. This is an essential measure to train up Australian shipping workers and give them the know-how to maintain our status as a major shipping nation. It is a status that we do not need to let go. We have options. There are constructive ways forward for us to maintain a strong, healthy, viable Australian shipping industry with good working conditions for the seafarers and with good environmental protections.

Perhaps most importantly, the Australian shipping industry can be a shipping industry that is competitive with the rest of the world, because it needs to be that. It truly is an international business. The industry operates in a market that is largely tax free in international terms and in which other players—seafarers on other countries' ships—are given similar tax incentives. So to take away this benefit from our workers will be putting them at a disadvantage to the rest of the world just when we need to be doing everything we can in order to maintain their jobs.

The government argues that the seafarers tax offset has had a low uptake. But, while uptake numbers might appear low at first glance, the reality is that it reflects the small number of Australian ships operating internationally. We need to be maintaining those ships and increasing the number of Australian ships operating. At the moment we have a small number of ships, but it is a vital industry and a tax measure that we must keep.

31

Neither Labor nor the Greens have made any public statement on the STO-related provisions of the current Bill.

R&D Tax Incentive Mr Bowen stated that Labor would oppose the proposed changes to the rates of the R&D tax incentive in the previous Bill and observed:

A measure before the House here is a $620 million cut to the research and development tax concession. I will say a number of things about this. Firstly, the support given to research and development through the incentive in the tax system has been very important in Australia's research and development efforts. What the government is doing here is relinking the concession to the corporate tax rate. The previous Labor government explicitly delinked the corporate tax rate and the research and development incentive. We did that to provide certainty so that Australian companies investing in risky research and development ventures knew the sort of support they would receive from the government when they were undertaking the difficult decision about how much to invest. Some of these ventures will not pay off for the company and most of them, if they do pay off for the company, will have spillover effects for the entire economy. So that was the approach taken by the previous government.

This government has taken the approach of relinking the corporate tax rate with research and development incentives. I accept that there is a legitimate debate to be had about that and that there could be good arguments put on both sides. But the approach taken by the Labor Party in office that we continue to defend, protect and promote is that it is important that firms have certainty when it comes to investing in research and development.

32

31. J Rice, ‘Second reading speech: Tax and Superannuation Amendment (2014 Measures No. 5) Bill 2014’, Senate, Debates, 2 March 2015, pp. 886-887, accessed 12 June 2015. 32. C Bowen, ‘Second reading speech: Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014’, op. cit., p. 10357.

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Senator Rice, speaking for the Australian Greens on the same set of proposed amendments noted that:

Schedule 3 of the Bill, of course, continues the Abbott government's attacks on science and research and development. The Bill cuts 1½ per cent from the research and development offsets available to businesses and rips $620 million out of research and development spending over the forward estimates. This, again, is just what we do not need to be doing to have a prosperous Australia. We know that increasing investment in science and research is the way forward. We know that our wellbeing, our security and our economic viability as a nation depend on this research and on our having an innovative economy that is using our brains. That is where we are going to be able to continue to compete on the world stage. The government tries to justify this cut by saying it brings it into line with business tax cuts also outlined in the budget, but this cut will occur a year before those possible tax cuts, and the passage of those tax cuts through the Senate is, of course, by no means certain.

Of course, these cuts to research and development also come on top of the cuts to the R&D tax offset that targeted large company investment that recently passed the Senate. This is insanity—it is totally the direction that we should not be going. The insanity of these cuts is reinforced and underlined by the government's own figures on science expenditure. Just as we know that science increasingly needs to underpin our future as a nation, we are set to spend less on science and research this year than we did in 1979. We know that, over the past few decades, science and research has become increasingly important to our society and economy. The rot began under Labor in 2012, but Tony Abbott is taking spending on science and research to the equal lowest level since records began. We have had cuts to CSIRO. CSIRO scientists have been taking voluntary redundancy packages across the country. CSIRO scientists who have been working for decades are no longer going to have their contribution to our country used and valued. We have seen cuts to clean energy programs, and the cuts to tax concessions for R&D such as the cuts in this Bill have contributed to this woeful result of spending on science and research being at its equal lowest level since records began.

We will never be able to compete with China or India on wages, but we have the potential to be stronger on research and innovation. That needs secure and significant public investment, something that other countries have certainly twigged to. We are trailing way behind countries that are our competitors in the world—countries like Germany, the UK and US—and we are outspent by key trading partners like Korea and Japan.

33

Position of major interest groups Seafarers Tax Offset The Author’s personal contact with the ASA confirms that its previous opposition to repealing this tax offset remains unaltered.34 Further, the ASA noted that it had nothing to add to its previously stated reasons for opposing the repeal of this offset, as follows:

• the budget impact of abolishing this measure is miniscule however the consequential impact is that it decimates any possibility of a company investing in a ship that would operate under the Australian International Shipping Register (AISR)

• the AISR was created to increase Australia’s participation in our international trades which would add significant value to the national economy, create jobs and which is strongly in Australia’s strategic interest

• for the AISR to work, it needs certainty around the continuance of supporting measures such as the Seafarers Tax Offset. It has only been in operation for two years, much of which has been shrouded in policy uncertainty and

• very real potential exists for the AISR to add value to Australia and it should be given a chance to work.35

The Maritime Union of Australia (MUA) has also confirmed that it opposes the repeal of this tax offset.36 In a recent private briefing paper the MUA gave five reasons why this particular offset should not be repealed:

33. J Rice, ‘Second reading speech: Tax and Superannuation Amendment (2014 Measures No. 5) Bill 2014’, op. cit., p. 887. 34. B Pulle, T Kryger and D Weight, Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014, Bills digest, op. cit., p. 7. 35. Australian Shipowners Association, Submission to the Senate Standing Committee on Economics, Inquiry into the Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014, op. cit., executive summary.

36. Author’s telephone call to both the ASA and MUA, 9 June 2015.

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… it would be premature abolish one of a package of four taxation incentives to support Australian shipping in advance of a Government decision on shipping reform being considered in response to stakeholder comments on Minister Truss’s Options Paper on the regulation of coastal shipping in Australia. 37

What the industry requires is

policy certainty and in particular certainty about passage of any consequential amending legislation that arises from Government consideration of responses to the Minister’s Options Paper

…although the Government has foreshadowed substantial deregulation of coastal shipping through a substantial winding back of the Coastal Trading (Revitalisation of Australian Shipping) Act 2012, no legislation has yet been introduced into the Parliament.

The Seafarer Tax Offset is consistent with the rules for exempting certain overseas employment income in s23GA of the ITAA 1936 and addresses an anomaly whereby up until July 2012, service on a ship in international waters was not considered to be foreign service because international waters do not form part of the territory of a foreign country, thereby creating an anomaly for this category of overseas employment. Notwithstanding reforms to the s23AG provisions in 2009, seafaring is a truly international occupation, and employers of Australian national seafarers should retain access to the tax offset to ensure Australian shipping remains internationally competitive…

The tax measure is an important part of a package of measures to help ensure the competitiveness of Australian shipping in a global marketplace where all other seafaring nations provide a similar tax exemption…

The Budget saving is extremely modest with the Budget papers saying that in underlying cash terms, the saving is $8.0 million over the 4 year forward estimates period, or $2 million per annum (see p. 212 of Budget Paper No. 2 of 2014-15) and

…it helps stimulate the training of Australian seafarers, which remains an important outcome given that Australia is such a major shipping nation. 38

R&D Tax Incentive As at the date of writing there has been little, if any, reaction to the possible repeal of this incentive. But the identical provisions of the previous Bill were the subject of some comment:

RSM Bird Cameron wrote that while the reduction would reduce government support for R&D, the reduction was not significant. A KPMG summary noted that it was ‘disappointed’ with the cut in the 2015-16 financial year, and that while the reduction in company tax rate would match the reduction in the offset, that cut in company tax would be offset by the proposed paid parental leave levy for companies with taxable income over $5 million. One industry member commented that the reduction was ‘sending a clear message that innovation is not a priority’.

In its submission to the inquiry on the previous Bill, PricewaterhouseCoopers (PwC) expressed concern that the proposed changes to the offset rates will give rise to undesirable and unintended consequences and therefore diminish the support for research and development that the R&D tax incentive currently provides.

Redarc Electronics stated that it was deeply concerned that the R&D measures in the Bill are ‘ill-conceived and will adversely impact on [the company’s] ability to utilise the benefits of the incentives in furthering [its] R&D and its commercialisation’. 39

There is nothing to suggest that these views have changed since the time of the Senate Economics Legislation Committee Inquiry into the previous Bill.

37. Australian Government, Options paper: approaches to regulating coastal shipping in Australia, April 2014, accessed 12 June 2015. See also W Truss (Minister for Infrastructure and Regional Development), Shipping to cast off red tape and set sail for productivity boost, media release, 8 April 2014, accessed 12 June 2015.

38. MUA, Background brief for Politicians, Opposition to repeal of Seafarer Tax Offset, June 2015. This paper was kindly provided to the author by the MUA on request. The MUA published a parliamentary briefing note in relation to the previous Bill. See MUA, Parliamentary Brief - Seafarers Tax Offset, accessed 19 June 2015.

39. B Pulle, T Kryger and D Weight, Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014, Bills digest, op. cit., p. 9.

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Financial implications As indicated above, the Government’s position is that financial considerations are the main reason for repealing the STO and lowering the rates for the R&D tax incentive. This makes the financial implications of the Bill particularly relevant. These implications are shown in the following table:

Table 1 Financial implications, $m

Year 2014-15 2015-16 2016-17 2017-18 Totals

Repeal of STO 4 4 4 12

Reduction in R&D Tax Incentive Rates 70 160 200 190 620

Totals 70 164 204 194 632

Source: Explanatory Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 3) Bill 2015, pp. 3-4.

As can be seen the overwhelming majority of the expected savings in this Bill come from the lowering of the R&D tax incentive rates.

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.40

Key issues and provisions Would the Senate’s rejection of the current Bill give rise to a Double Dissolution trigger? As indicated above, the measures in the current Bill were deleted from the previous Bill on 2 March 2015. These amendments were agreed to by the House of Representatives on 3 March 2015. In light of the Senate’s treatment of the previous Bill, would the Senate’s rejection of this Bill give rise to the necessary conditions to allow a double dissolution election?

Under section 57 of the Constitution, a number of steps are necessary for a double dissolution trigger to become available. The preliminary steps are:

• firstly, the House of Representatives passes a proposed law, which occurred with the previous Bill on 24 September 2014 and

• secondly, the Senate must reject or fail to pass the proposed law, or pass it with amendments to which the House of Representatives will not agree.

This second condition was not satisfied in relation to the previous Bill, as the Senate passed the previous Bill with amendments which were agreed by the House. Therefore rejection of the current Bill by the Senate would not be a double dissolution trigger.

Repeal of the Seafarers Tax Offset Item 2 of Schedule 1 repeals Subdivision 61-N of the ITAA 1997.41 This Subdivision contains the main provisions governing the operation of the STO.

Item 5 of this Schedule applies these amendments to tax assessments from the 2015-16 income year. That is, the proposed measure is to start on 1 July 2015.

Reduction in R&D tax incentive rates Items 1 to 3 of Schedule 2 amend the Table in subsection 355-100(1) of the ITAA 1997 to reduce the R&D tax incentive rates.

40. The Statements of Compatibility with Human Rights can be found at pages 7 (repeal of the STO) and 13 (reduction in R&D tax incentive rates) of the Explanatory Memorandum to the Bill. 41. Income Tax Assessment Act 1997, accessed 17 June 2015.

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Item 1 of the Table provides that an R&D entity, to which item 2 of the Table does not apply, is entitled to a R&D tax offset of 45 per cent of the expenditure on eligible R&D activities, if its aggregated turnover for an income year is less than $20 million. Item 1 of Schedule 2 reduces this rate by 1.5 per cent to 43.5 per cent.

Item 2 of the Table in subsection 355-100(1) will apply to the company where two or more exempt entities, irrespective of their relationship, beneficially own interests in the company carrying more than 50 per cent of the voting rights or rights to a distribution of income or capital. Item 2 of Schedule 2 reduces the rate of R&D tax offset applying in these circumstances by 1.5 per cent to 38.5 per cent.

Item 3 of the Table provides that in any other case, not covered by items 1 and 2, the R&D entity is entitled to a R&D tax offset of 40 per cent of the expenditure on eligible R&D activities. Item 3 of Schedule 2 reduces this rate to 38.5 per cent.42

Item 5 of Schedule 2 applies these rates to assessments for income years commencing on or after 1 July 2014. Although assessments for this tax year take place after 1 July 2015, companies would have been planning their affairs on the expectation of the current rates applying throughout the 2014-15 year.

42. I am indebted to B Pulle, T Kryger and D Weight, Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014, Bills digest, op. cit., p. 11 for this explanation.

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