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Monday, 23 June 2003
Page: 17257

Ms LEY (8:21 PM) —I quite happily accept the apology, because it has given the opportunity to listen in detail to the member for Blaxland's explanation—although I am not sure that it was an explana-tion—of why the opposition has moved a second reading amendment to the Taxation Laws Amendment Bill (No. 5) 2003. This bill concerns five main measures, none of them particularly remarkable. I would hesitate to say that all of them do not protect the revenue. The member for Blaxland has talk-ed about our failure to confront threats through offshore tax havens and the need for our tax system to be internationally competitive in the context of these amendments. Again, I am not sure what links are made but, as I go through the five main measures in this bill, it will be clear that we are making our tax system internationally competitive, we are confronting threats through offshore tax havens, we are continuing with the good work we have done with the review of business taxation and the Ralph review of tax reform and we are building on a sensible, workable, fair and efficient tax system.

The thin capitalisation measures commenced on 1 July 2001. They limit the amount of debt that can be used to finance the Australian operations of certain investors by reducing the debt deductions—essentially the interest expenses—when an entity's debt to equity ratio exceeds certain limits. These measures are preventing offshore entities using us as a way of getting taxation deductions—an activity which the previous speaker spoke of as being necessary. The policy underlying the so-called thin capitalisation regime is to ensure that multinational entities do not allocate an excessive amount of debt to their Australian operations. The amendments will ensure that the policy objectives of the thin capitalisation regime are achieved, that equity between taxpayers is promoted, that generally compliance costs are reduced and that the application of the law is clarified.

The amendments to the regime will extend the range of entities that qualify as securitisation vehicles, and so are excluded from the thin capitalisation rules. They will allow certain financial entities to use the same gearing methodology as used by the banks, and they will relax the requirements for revaluation of assets and ease record-keeping requirements for permanent establishments. The amendments will reduce compliance costs for taxpayers and will ensure that taxpayers undertaking similar financial activities are able to apply comparable thin capitalisation rules.

The next measure is the FBT exemption for public hospitals. Currently, public hospitals of the Commonwealth, a state or a territory must be public benevolent institutions in order for FBT exemptions to apply. However, public hospitals that are not hospitals of the Commonwealth, a state or a territory do not have to be a public benevolent institution. Certain public hospitals are currently provided with an FBT exemption of up to $17,000 grossed up taxable value per employee. As part of the government's response to the report of the inquiry into the definition of charities and related organisations, changes will be made to the Fringe Benefits Tax Assessment Act 1986. These amendments will ensure that, whether or not a public hospital is a public benevolent institution, public hospitals of the Commonwealth, a state or a territory will continue to have access to the $17,000 capped FBT exemption and, for the purposes of the remote area housing FBT exemption, a `remote area' for a public hospital will be one that is at least 100 kilometres from a population centre of 130,000 or more.

This amendment is designed to allay the suspicions of state governments that a change in the structure of their public hospitals in the future may result in their no longer meeting the public benevolent institution requirements and losing access to the FBT con-cessions—and that is not something this gov-ernment would willingly do or try to do with any backhanded measure. In referring to the member for Blaxland's comments about some dire need to protect the revenue, this is again an unremarkable administrative measure.

The third measure concerns reducing the tax on excessive ETPs, and I understand the opposition is opposing this measure quite vigorously. This measure has two components. It delivers one of the government's 2001 superannuation election commitments and will be beneficial to taxpayers. Through a reduction in the rate of tax, the measure will benefit those who take lump sums—otherwise called eligible termination payments—from superannuation funds on retirement, where the lump sum is above the person's reasonable benefit limit. The impact on taxpayers will vary, depending on taxpayers' individual circumstances. The first component of the measure reduces the tax payable by a person who gets a lump sum payment from a super fund that is above the reasonable benefit limit of $562,195—now called an excessive lump sum—from 48.5 per cent to 39.5 per cent. The second component will reduce the super surcharge that the person has to pay. The amount of the surcharge reduction will depend on the contributions made to the super fund in the year that the excessive lump sum payment is paid.

Industry has been consulted widely in developing both the policy detail and the legislation for this measure. Industry believes that the measure implements the government's election commitment and supports the fact that superannuation funds do not bear any new compliance costs. This measure is necessary because sometimes the overall tax paid on excessive lump sums from superannuation funds is greater than the top marginal tax rate. Total tax might include contributions tax and the superannuation surcharge in addition to the ETP tax rate for excessive components of 47 per cent, plus the Medicare levy. The government is trying to avoid a situation where the effective marginal tax rate on the excessive component of an ETP from a superannuation fund exceeds the top marginal tax rate. The tax rate which applies to earnings and the surcharge varies from year to year and does not affect all taxpayers in the same way. We would have to introduce some administrative mechanism that explains how, for each taxpayer, these amounts contributed to the excessive ETP. What sort of an administrative and compliance burden would that be? We have perfectly sensibly chosen a model that relieves excessive tax rates with a minimum administrative burden.

If some taxpayers are being subjected to tax rates higher than the top marginal tax rate, should we not be doing something about it, particularly when we are talking about eligible termination payments, superannuation and retirement? Should we be giving people who have worked hard and saved hard a kick in the teeth by taxing their eligible termination payments at higher than any other tax rate? Remember that these ETPs are generally not golden handshakes or complimentary buckets of money. They usually represent the accumulated savings of a lifetime of hard work. Again, the opposition seems terrified of anything that removes what we often see as a penalty tax rate.

There are two more measures: one is the application of the `same business test'. In the context of these amendments, currently under the income tax law taxpayers are entitled to deduct in an income year losses incurred in previous years. Special rules apply to companies. Companies are allowed to deduct a prior year loss if they pass what is called a `continuity of ownership test'. Broadly, more than 50 per cent ownership of the company must be maintained from the beginning of the year of the loss until the end of the year in which the deduction is claimed. If the company does not pass this test, it can still claim the deduction if it passes the `same business test'. Broadly, a company must carry on the same business both immediately before the disqualifying change of ownership and during the year it claims deduction for the loss. Similarly, a company cannot deduct a debt that it writes off as bad in the current year, unless it satisfies either the continuity of ownership test or the same business test.

Problems inherent in the current law have become apparent in circumstances where a com-pany is unable to positively satisfy the con-tinuity of ownership test but is also unable to demonstrate a specific date on which it failed the continuity of ownership test—that is, the company is unable to establish a test time for which the same business test can be applied. These amendments provide for what is called a `default test time' at which that same business test can be applied if the company cannot properly determine exactly when it failed the continuity of ownership test.

The final measure concerns tax losses for corporate entities. This measure will ensure companies do not have to use up tax losses against franked dividend income which is already tax free because of the availability of the franking tax offset. Corporate groups have in the past been able to avoid the wastage of losses by separating the franked dividend income and losses between different members of the group. For example, dividend income could be received by the head company of the group while various trading activities and any losses associated with those activities could be contained within subsidiaries. With the advent of the consolidation regime, this ability to quarantine losses from franked dividend income has been removed.

These changes will allow companies to choose the amount of prior year tax losses they want to deduct. Also, any excess franking tax offsets will be allowed to be carried forward as an equivalent amount of tax loss for deduction in a later income year. This was a Ralph recommendation and it was a budget announcement. I commend the measures in this bill to the House. I urge the opposition to get on the same train that we have been on since we introduced a modern, more equitable tax system, with courage and not without pain—a tax system for today, not yesterday. I conclude by heartily agreeing with the member for Blaxland that we do need a tax system that competes in an international market in a globalised world economy. Thank goodness this government is introducing just such a tax system.