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Thursday, 13 May 2010
Page: 3503

Ms LEY (11:30 AM) —I am pleased to speak on the Tax Laws Amendment (2010 Measures No. 2) Bill 2010. This bill contains six schedules. Four of them are pretty much uncontroversial. There are a couple that the coalition senators in the Senate Economics Legislation Committee have found some problems with and I would like to bring to the attention of the House those problems today. Broadly, I will go through the schedules and briefly discuss each one.

Schedule 1 amends the non-commercial loan rules in division 7A of the Income Tax Assessment Act 1936 to prevent a shareholder of a private company or an associate accessing tax-free dividends from the provision of company assets for less than their market value. Other technical amendments have also been made to strengthen the non-commercial loan rules to ensure that they operate in accordance with their original policy intent and cannot be circumvented by the use of closely held corporate limited partnerships or interposed entities.

Schedule 2 to this bill amends the Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997 and the Taxation Administration Act 1953 to extend the existing arrangements for tax file number withholding to cover closely held trusts, including family trusts. The information collected by the ATO under these amendments will facilitate data matching and allow the ATO to check whether the assessable income of beneficiaries of these trusts correctly includes their share of the net income of the trust.

Schedule 3 to this bill amends the Income Tax Assessment Act 1997 to exempt from income tax the Higher Education Contribution Scheme-Higher Education Loan Program benefit, the HECS-HELP benefit. The HECS-HELP benefit was an initiative first introduced in the 2008-09 budget. The benefit gives eligible recipient in their compulsory HECS debt repayment and/or their HELP debt repayment or, in some cases where a repayment is not required due to low income, a direct reduction in their HELP debt.

Schedule 4 to this bill amends the Income Tax Assessment Act 1997 to update the list of deductible gift recipients to include two new entities and extend the period for which another deductible gift recipient may collect deductible gifts.

Schedule 5 to this bill amends the Income Tax Assessment Act 1997 to make the Global Carbon Capture and Storage Institute Ltd, the institute, income tax exemption for a four-year period. The central objective of the institute is to accelerate the commercial development of carbon capture and storage projects to contribute to reducing carbon dioxide emissions. The information and expertise developed by the institute is to be disseminate broadly and globally for the benefit of both the Australian and global carbon capture and storage communities.

Schedule 6 to this bill amends various taxation laws to repeal over 100 unlimited amendment periods. As a result, a number of provisions which provide the Commissioner of Taxation with indefinite time to amend taxpayers’ assessments are replaced with the existing amendment provisions, which have certain finite periods. The removal of these unlimited amendment periods will improve certainty for taxpayers in their taxation affairs and contribute to reducing the volume of unnecessary provisions in the taxation laws.

I will now go back to schedule 1, which is the most contentious schedule in this tax laws administration bill, and summarise the new law that is proposed in that schedule. The existing law is that when a private company provides an asset to a shareholder or an associate of the shareholder for use other than a transfer of property, a payment for the purposes of division 7A will arise. There are three exemptions to this treatment. They are for the minor use of company assets, for certain payments that would otherwise be allowable as a once only deduction to the user of the asset and for the use of certain residences. Broadly, subdivision EA of division 7A operates where a private company has an unpaid present entitlement to income of a trust and the trust makes a payment, loan or forgiveness of debt to a shareholder of the private company or an associate of the shareholder in particular circumstances.

These amendments ensure that the operation of the subdivision cannot be circumvented by interposing an entity between the trust making a payment or a loan to a shareholder or between the trust and the private company that holds an unpaid present entitlement to an amount from the net income of the trust. Other technical amendments are also made to strengthen the non-commercial loan rules to ensure that they cannot be circumvented by the use of corporate limited partnerships, which are partnerships that are taxed like a company. Amendments are also made to put beyond doubt that division 7A applies to arrangements that involve a non-resident private company making a payment, loan or forgiveness of debt to a resident shareholder or their associate. That is schedule 1 of the bill.

The Senate Economics Legislation Committee had a very short hearing and did very well to come up with the recommendations that they did. I would like to run through the recommendations that were agreed to by the entire committee—government and non-government senators. Recommendation 1 was that the committee recommends that the bill be amended so that company title apartments where the company title arrangement, its memorandum and articles create a right for the occupier are clearly excluded from its coverage before the bill is passed. Everybody involved would agree that that is absolutely essentially. Those who occupy their residences by way of a company title arrangement—somewhat analogous to a strata title but not exactly the same—cannot possibly be conceived to be receiving a deemed dividend from the corporation that issues the title.

The second recommendation is:

The committee recommends that the Commissioner of Taxation review Draft Ruling 2009/D8 following passage of the Schedule 1 amendments to ensure it is operating appropriately.

I would say that this draft ruling is a divergence from the views expressed in the draft, with the underlying policy intent of division 7A. The concerns that have been raised with me about this draft ruling have been many and have been everywhere. I would like to draw the House’s attention to a submission by the professional bodies. The Institute of Chartered Accountants in Australia, the CPA, Superannuation Australia-Taxpayers Australia, the National Institute of Accountants, the Taxation Institute of Australia and the Secretary-General of the Law Council of Australia have made a joint submission on this draft tax ruling. That was in February this year and it concerns exposure draft legislation that deals with this subject, I understand.

The strength of the views expressed in this submission about draft tax ruling 2009/D8, demand a response from the Assistant Treasurer and from the ATO. I am not confident that the ATO appreciates the level of concern that this sector is expressing. I would like to quote briefly from the remarks in their submission. They say:

The collective view of the professional bodies is that the draft Ruling contradicts the underlying legislative purpose of section 109D and Subdivision EA—

the operative provisions—

of Division 7A, contains various arguments which are legally flawed, makes the operation of Subdivision EA effectively redundant and creates adverse tax consequences for trusts and corporate beneficiaries including double taxation. Accordingly, it should be withdrawn.

They go on to say:

In our view the crux of the problem is the mechanics of Division 6 of the Income Tax Assessment Act (1936) (the ITAA(1936))—

division 6 is pretty old—

which requires a trustee to appoint income in favour of beneficiaries by 30 June.

Otherwise the issue of an unpaid present entitlement arises. They continue:

We believe there is widespread if not universal agreement that the structure of Division 6 is inappropriate for modern day trusts and warrants review.

In my perusal of the ubiquitous Henry review I saw that it has recommended—I think it was in recommendation 36—that there be undertaken a complete rewrite of trust law as it applies to tax so that we are not constantly faced with the overlay of a set of laws relating to trusts onto modern-day tax structures. There are those who say that businesses should not operate through trust structures. We would completely disagree. What is needed is a rewrite of the law, and that is needed urgently. So I would encourage the government to be brave about many of the recommendations in the Henry review and certainly be brave about recommendation 36, which does not require any expenditure; it just requires a direction that energy be applied to rewriting the trust tax provisions. I know that it is not simple but it needs to start quite quickly.

Further, the professional bodies make the point in their submission that, as it is currently issued, the draft ruling introduces ideas and concepts as to when a deemed dividend might arise where there is an unpaid present entitlement. Importantly, it does not provide any clear and definitive interpretations which will enable tax practitioners and their clients to comply with division 7A with any degree of certainty. In particular, the draft ruling does not provide any guidance as to the point in time at which a subsisting unpaid present entitlement will flip over and be regarded as the provision of financial accommodation, and hence a loan for division 7A purposes. As the draft ruling currently stands, where a trustee resolves on or before 30 June to appoint the year’s income in favour of a corporate beneficiary, neither the trustee nor the corporate beneficiary will be able to identify whether they have reached this ruling unless the distribution is paid out on that day—on 30 June. That, quite clearly, is unacceptable.

The confusion that would arise will inevitably lead to non-compliance and possibly further litigation. This draft ruling has also been expressed as being prospective, and we on this side of the House would certainly urge the commissioner, if he insists on applying the approach that it contains—and I am sure that certain of the issues raised will be tightened up in any final ruling—to apply it on a fully prospective basis.

That was recommendation 2 of the Senate Economics Legislation Committee, which links in to draft tax ruling 2009/D8, but in terms of the present bill I will move forward through the recommendations. Recommendation 3 was about the schedule that deems present entitlement and about which concerns have been raised. It says:

The committee recommends that Item 2 of the bill dealing with the commencement date of the provisions be amended to reflect that Schedule 1 takes effect from 1 July 2010.

It is quite ridiculous that it should take effect from 1 July 2009. The recommendation of the whole committee goes on:

The committee is of the view that this time frame strikes the appropriate balance between providing taxpayers with time to prepare for the changes with the need to strengthen the integrity of the tax laws.

Now I am going to move to the discussions that coalition senators had. They take these recommendations further but it is important to note that these three recommendations I have mentioned were recommendations of the whole committee. The remaining recommendations that the whole committee made were that schedule 5, schedule 4 and schedule 3 be passed unchanged, without amendment, and that schedule 2 and schedule 6 of the bill be passed.

I now move to the comments that were made by coalition senators about the Tax Laws Amendment (2010 Measures No. 2) Bill 2010. They say:

Coalition Senators are extremely concerned about the way the Government has pursued this legislation and pushed this inquiry along. It is highly inappropriate for a Committee Report to be tabled on Budget Night when the Chair of the Committee has held their part of the report until the day before the report is due to be tabled.

It really does not provide the coalition senators, or any members of the committee, the opportunity to make coherent comments within such a short time table of tabling. Having said that, I think the comments made have been well expressed. They have obviously been prepared for longer than that, and those concerns expressed to the senators during the committee hearings have been heard and have been reflected.

The committee was apparently not briefed by Treasury officials prior to the commencement of hearings held on 28, 29 and 30 April. In fact, Treasury did not appear to before the committee until the last day of hearings, on 30 April 2010. I would like to mention that the Secretary of the Treasury, Ken Henry, has been the subject of a motion in the Senate this morning. Apparently, Dr Henry had announced that he would be unavailable for Senate estimates later on this month. The Senate has passed a motion that he will make himself available. There is an order of the Senate that the secretary will make himself available for Senate estimates. I think that is a good thing. I do not think there is any reason why Treasury and its leaders and officials should not participate in a fully open and transparent process at such an important time for tax reform.

Moving back to the specific comments made about the legislation, I return to schedule 1, non-commercial loans. There were many submissions concentrated on the problems with schedule 1. I have received copies of ones from the Institute of Chartered Accountants and from the Law Council of Australia raising serious concerns. They are summarised in the committee report this way: ‘Several submitters argued that the introduction of section 109CA was too broad.’ The Institute of Chartered Accountants evidence stated:

… the scope of the proposed use of asset rules reaches well past what was stated in the budget night announcement. There was no indication on budget night or in the budget papers that company assets merely available for use, rather than in fact put to use, by shareholders would be caught by the new laws.

…            …            …

The proposed amendments will apply in respect of virtually any asset of a private company, regardless of when that asset was acquired, and it will operate to deem a dividend to the shareholders of a company where the company has merely provided an asset for the use of a shareholder or their associate, without any disguised or other distribution of company profits.

The extension of the division goes well beyond the original intent of the division. It will apply where there is no transfer of company resources away from the company, it will apply where those assets being used were not acquired with company profits and it will apply where there are simply no company profits. It will deem a dividend regardless.

…            …            …

In many cases—whether it is for asset protection, succession or other reasons—individuals will use a company structure funded from their own after-tax moneys to hold assets. The money used on those circumstances by the company is the shareholder’s own after-tax funds. It is not company profits. The bill will, however, tax the use of such an asset acquired in that fashion as if it was a dividend made out of profits, which it is not.

As far as the complications that this would bring to the tax profession itself, they said:

… we would have to look at every asset that a company holds and work out if those assets would be used by the shareholders or be available for use by the shareholders. We would then have to ascertain if there is any risk in terms of them being used or available to be used by way of the technical definition in the act … small businesses understand exactly what that definition means and how wide that definition can be. We then would require them to keep track of their use or their availability for use on an annual basis and we—the tax profession—would then have to ask them to value those uses, so we would have to get a market valuation for each of those. We then would have to determine whether those are under the exceptions—to the new provisions.

They are proposing to introduce a minor benefit exception for infrequent use or if it is under $300 in value.

So there is another calculation. They continued:

It would have to be ascertained whether it falls within those exceptions.

There is therefore a significant level of compliance for small business taxpayers. We have had the government trumpeting all of their changes in the budget and in the Henry review that make life easier for small businesses. A great deal of small businesses operate with a trust and company structure, maybe 50 to 70 per cent of the ones typically in every town in Australia. So this is a serious addition to the compliance burden of those businesses. And, of course, you consider the penalties that may flow when calculations are made wrongly or you consider the additional cost for taxpayers in terms of the compliance burden, because their accountants and their agents are making these calculations on their behalf. The committee report states:

The Coalition senators argue that there needs to be a reasonable interpretation of personal use so that if a taxpayer drives a work ute from home to work and home again, and has a personal vehicle, there should be no penalty.

That is an interesting example. Under the fringe benefits tax legislation that would be an exempt fringe benefit, whereas under division 7A it would be taxable. So the fringe benefits legislation recognizes that it is not taxable, but this legislation would bring it in as a deemed dividend. The report stated:

An additional issue was the lack of knowledge among the small business community regarding the legal obligations that arise from the establishment and operation of companies, and the onus—

the enormous onus—

placed on legal and tax advisers.

So recommendation 1 from the coalition senators is:

… that there be an increased level of education made available to small businesses entering into business arrangements and restructuring businesses, and that tax and legal advisors be encouraged to ensure that the appropriate structures and arrangements are being put in place.

1.11         The Coalition supports the view of the Law Council regarding the treatment of the owner of a company title apartment. It is inappropriate to treat the owners as though the company was giving them a benefit, imposing a large tax on them which would not be imposed on someone who owned a similar apartment under strata title.

The coalition supports recommendation 1 of the entire committee.

Subdivision EB received considerable debate from Dominion Private Clients, who appeared before the committee. They said:

The point of schedule 1 to the bill is to expand the operation of division 7A to cover interposed entities and, in a vanilla case… they work in an appropriate manner; however, there are cases where there are a multitude of trusts in a group. Just to illustrate, the first slide—

they are obviously showing a presentation here—

is a … case that is meant to be covered by proposed sections 109XF, XG and XH. In the diagram, you will see that there is a trust that distributes income to a corporate beneficiary—‘distribute’ meaning that the trust resolves to make a gift to the corporate beneficiary … It generally remains unpaid for a period of time. Then that trust subsequently makes a loan to an interposed entity … and then that interposed entity makes a loan to a shareholder. Sections 109XF, XG and XH are meant to say that the trust, by making the loans through the interposed entity to the shareholder, is actually deemed to have caused this … notional loan between the corporate beneficiary and that shareholder … And the reason for that is that that original—


was ostensibly sourced from the distribution made by the trustees for the beneficiary.

The coalition supports recommendation 2 of the full committee report. The retrospectivity of the bill was also of considerable concern, particularly given that this bill is coming in so late in the financial year. The coalition supports recommendation 3, as this will allow the relevant structures to reorganise, or make appropriate record-keeping changes, to ensure that they are not caught short at the end of financial year 2009-10. There were some other minor remarks, which I will not go into.

In conclusion, the coalition has pointed out that the rush associated with this bill, where some submissions and witnesses expressed substantial concern about the speed at which the bill and, as a result, this inquiry, has been pushed through. We continue to express disappointment in the government for holding rushed hearings into poorly drafted legislation, which leaves numerous unintended and inadequately examined consequences and really does not serve the interests of the Australian people.

We all know that taxation law is complex and is not of a lot of interest to a lot of people. But where we might see complicated provisions that seem awfully detailed and overly expressed, what comes out can be quite different. As soon as you translate this rather mind-numbing list of provisions to an ordinary company running a business and doing its best in a small town, and you see the effect of additional costs for an accountant or being told that private use of a vehicle--purchased by the company with after-tax dollars for which the company is not claiming any deductions for running costs--could give rise to a deemed dividend of thousands of dollars stretching back over time, you realise we have to be very careful that we do not become too draconian and that we carefully examine the consequences of every single change to tax law that we may put in place here.

We are very good at trumpeting the good things when we make reforms that make life easier and that make the tax laws simpler. But we sometimes appear to run away from the unintended consequences of other legislative provisions. These are described as integrity measures. That tends to make people think it is to make absolutely certain no-one is cheating the system and getting something they should not, or finding loopholes and operating their businesses through them and therefore, there are hundreds of thousands of dollars worth of tax not being collected. I do not believe those things are true. I believe that the vast majority of small businesses are doing their very best. The deadweight burden of compliance that is forced on them by the government can make life extremely difficult.

In conclusion, while many of the schedules in this bill do not give rise to concerns by the opposition, schedule one certainly does and the short time frame with which we have received this report from the Senate Economics Legislation Committee and I have not studied it in as much detail as I would like to have, I would hope that the Assistant Treasurer takes note of our comments. We certainly reserve the right to move amendments relating to our very serious concerns in the Senate, when this bill arrives in that place.