Senator SHERRY (1:31 PM) —The Taxation Laws Amendment Bill (No. 3) 2003 was originally introduced into the House on 5 December last year as Taxation Laws Amendment Bill (No. 8) 2002. The bill contains six schedules and a separate clause providing transitory provisions for the conversion of AGL into an ordinary company. Labor will support the bill with two exceptions: an amendment to the operative date for the deductibility of gifts to organisations named in this bill and amendments to remove one of the proposed modifications to the petroleum resource rent tax.

Schedule 1, the income tax deductions for gifts, provides deductible gift recipient status to a number of organisations, some of them for defined periods. That means that donors to those organisations can claim income tax deductions for gifts of $2 or more. The bill also corrects the names of two organisations already listed that have changed. I want to draw the Senate's attention to one of the organisations named in the bill, the United Nations High Commissioner for Refugees. The UNHCR is overwhelmingly dependent on governments to fund its work on behalf of displaced people around the globe. The UNHCR is now seeking, by way of donations, to diversify its funding base. For those many Australians who are concerned about the plight of displaced people around the world, this is an opportunity to make a meaningful contribution to their welfare. By donating, they will also be making a contribution to our national security. It is an essential aspect of Australia's border protection regime that the UNHCR be given as much support as possible for its work in countries of first asylum. Labor enthusiastically supports the continuation of tax deductibility for gifts to the UNHCR for five years, as well as deductibility for the other organisations listed in schedule 3.

Last week the Liberal government amended this bill to alter the date of application for these DGR measures from the date of royal assent to 29 June 2003. The reason the government gave for this change was that it was to coincide with the proposed new arrangements to provide for listing of named DGRs by regulation rather than legislation. That is contained in the Taxation Laws Amendment Bill (No. 7) 2003, which we will be getting to shortly. Labor will be opposing that measure in that bill for the simple reason that listing by regulation will remove this parliament's capacity to amend an obnoxious condition attached to the listing of an organisation without also striking down the organisation's deductible gift recipient status. Because Labor is opposing that measure in the Taxation Laws Amendment Bill (No.7) 2003, I will move an amendment to change the operative date for the organisations in this schedule back to the date of royal assent.

Schedule 2, employee share schemes, changes the tax arrangements for employee share schemes that are operated through a trust. Tax concessions are available to encourage employees to hold their shares for certain specified periods. The tax concessions relate to the value of any discount against the market value of the shares. Any discount of the market value of the shares is included in the employees' assessable income in the year of income in which the shares, or rights to the shares, are acquired. But the employee may chose to defer income tax on the discount up to $1,000 for up to 10 years, subject to the employee share scheme satisfying certain conditions, including the requirement that the right be held at least three years before disposal. As the law currently operates, gains and losses which accrue during the period the shares or rights are held in the trust are not recognised for capital gains tax purposes and the commencement date of the 12-month period for determining eligibility for the 50 per cent discount on capital gains tax is delayed until the shares are transferred from the trustee to the employee.

Schedule 2, in section 1, provides that the time a taxpayer acquires a beneficial interest in the shares or rights will be the time the trustee first holds the shares or rights for the taxpayer, both for the purpose of assessing gains or losses and for determining the start date for the 12-month holding period for the 50 per cent capital gains tax discount. This is accompanied by schedule 2, section 2, which provides an integrity measure that ensures the terms of an existing employee share scheme cannot be changed to take advantage of the current non-recognition of gains on shares or rights held in trust to increase the cost base on the shares when they are transferred to the taxpayer. The changes ensure the tax treatment of an employee share scheme, operated through a trust, looks through the trust to provide tax treatment of the benefits of the employee share scheme as if the shares were held by the employee. Labor will support schedule 2.

Schedule 3, franking of distributions by cooperatives, provides a cooperative company's access to normal treatment under the imputations system. Currently, cooperative companies, usually agricultural cooperatives can only frank dividends from sources other than assessable income of the income year in which the distribution is made. Cooperative companies are allowed a tax deduction in respect of dividends paid that are not frankable. This stops cooperative companies from passing on to shareholders the full value of tax paid in the form of franking credits.

Schedule 3 allows cooperative companies the same access to the imputation system as other companies. However, they will retain the option to choose to take a tax deduction for dividends paid that have not been franked. The bill also recognises that it is generally not possible to determine final profit until after the end of the year and will allow cooperative companies to claim a deduction for any unfranked distribution paid up to three months after the end of the tax year. Where a cooperative company pays partly franked dividends, a deduction will be allowable for the portion of assessable income distributed as unfranked dividends. As with other companies, cooperative companies will be subject to the benchmarking rule that requires all distributions in a franking period to be franked to the same extent. If the benchmarking rule is breached, a penal franking debit, or overfranking tax, will be imposed. Breaches of the benchmarking rule will not affect a cooperative company's capacity to claim deductions for any unfranked dividends. Labor supports these measures.

Schedule 4 rectifies an anomaly in the reasonable benefit limit provisions that results in different tax treatment of benefits paid depending on whether the taxpayer is alive or dead. When a person receiving a superannuation pension or annuity dies and the benefit is passed on to a reversionary beneficiary, the RBL treatment of these benefits will not change. The same tax concession will apply to the reversionary pension or annuity as applied to the original pension or annuity. Labor supports this measure on equity grounds. Schedule 6 contains a number of technical amendments which Labor will support.

Clause 5 of the bill deals with tax consequences of AGL's conversion into a normal company. The New South Wales government has decided to convert AGL from an unincorporated company of proprietors, established under New South Wales legislation dating back to 1837, to a company registered under the Corporations Act 2001. Clause 5 ensures that there will be no taxation consequences resulting from the corporate conversion of AGL or from its registration under the Corporations Act 2001. This will be achieved by deeming AGL, corporatised AGL and registered AGL to be, and to have always been, the same company and the same entity for the purposes of Commonwealth taxation laws. There is no good reason why a change in government policy in relation to what is the appropriate corporate structure for a utility should trigger a tax event, so Labor will support clause 5.

I now come to schedule 5, one of the contentious measures in the bill, relating to petroleum resource rent tax. PRRT was an important reform of the previous Labor government, replacing the ad hoc arrangements employed by the Fraser government—and in particular its then Treasurer, the current Prime Minister, Mr Howard—to gouge excise on then existing petroleum production. The architect of PRRT, putting taxation of petroleum production into a rational, predictable, profits related regime which would give the industry certainty as to the tax regime it would face over the life of the project, was the then resources minister, former Senator Peter Walsh. Labor remains committed to maintaining the integrity of the PRRT regime. We have run a critical eye over these measures and we will run a critical eye over any future proposals to change the PRRT regime. Labor negotiated the existing PRRT arrangements as a package and will not stand by and see the integrity of the regime destroyed by piecemeal amendments. We understand that there is likely to be a large package of PRRT measures coming forward later this year. We know the industry has some major issues with production from deep water and dry gas fields. Labor wants to see those issues considered on their merits to ensure that the value of production from Australia's petroleum resources is maximised, and Labor will take a positive role in that process.

Schedule 5 contains two measures. The first is the partial use or tolling proposal. Partial use of a PRRT project's facilities can occur in a number of ways where the facilities are used to process, treat or store petroleum from another PRRT project. Unprocessed petroleum may be purchased from another project—a sale situation—or processed on behalf of another project: a tolling situation. Currently where there is a partial use of infrastructure, tolling receipts and expenditures may not be taken into account for PRRT purposes. This may discourage partial use arrangements and impact adversely on the production and international competitiveness of petroleum projects. Currently, where the facilities are intended for use partly in processing petroleum from outside the production licence area, the capital cost of facilities used in carrying on a petroleum project is apportioned. However, that apportionment does not change if relative use changes throughout the life of the project. Schedule 5 broadens the scope of what constitutes a project to ensure that PRRT remains economically efficient and neutral in application by including all partial use, related revenues and expenses in determining a project's PRRT liability. The partial use proposals aim to provide an equitable and uniform treatment of these situations whether they are contemplated from start up or instigated at a later date. The Australian Petroleum Production and Exploration Association originally expressed some reservations about this measure because it had an in principle objection to the extension of PRRT to revenue derived from petroleum produced outside a particular PRRT project. It is clear, from Labor's discussions with the APPEA, that despite that in principle objection they now want it passed. It is both a fair and a practical measure, and Labor will support it.

The other PRRT measure in this bill is the infrastructure proposal, which Labor will not be supporting. Schedule 5 proposes to allow notional expenditures that would have been associated with closing down a petroleum production project to be deductible against the production project's PRRT receipts where the facility continues to be used, but used as a processing facility under an infrastructure licence. This bringing forward of costs before they are incurred as a deduction against PRRT liability amounts to a deferral of tax. It is undesirable to give a deduction for eligible expenditure that has not taken place and, for that matter, may not occur for a very long period.

Transfer of the facility from a processing licence to an infrastructure licence for another project at the conclusion of the PRRT project confers on the facility a residue value that adds to the profitability of the PRRT project for which the facility was originally constructed. There is no justification for attributing to that change of use a fictitious cost. It would confer a large tax benefit on any PRRT taxpayer that took advantage of it. According to the original explanatory memorandum, the cost of this concession may be anywhere between $280,000 and $56 million per field. This was a very curious costing and was considered at length by the Senate Economics Legislation Committee. We had hoped to get a better understanding of how those numbers had been derived as well as the timing and the number of times that revenue cost might be incurred. None of that information was forthcoming. It was remarkable how little assistance witnesses were able to offer the Senate committee on this matter. The APPEA, whose members would be beneficiaries, were not able to explain how the revenue estimate was derived or even to provide information, apart from a list of offshore production licences, as to which of them might utilise the provision or when. They referred the committee to Treasury for an explanation.

The Department of Industry, Tourism and Resources was a little more forthcoming, nominating Esso and BHP as possible beneficiaries of the measure in the next five years. On the actual question of money, Treasury passed the buck to the Australian Taxation Office, who conveniently were not there. The Treasury officer told the committee:

In terms of costing, this has been much less than the Liberal government's finest hour: `We cannot find the cost; we do not know how many platforms will convert; we do not know when.' Before the bill was debated in the House, the Liberal government provided a revised explanatory memorandum that says:

This is an admission of a major error by the Liberal government in costing this policy and would not have come to light had Labor not pursued the matter. We still do not know what the cost of this measure is, because we do not know the period over which the decommissioning cost would notionally be brought forward. Surely it would be possible to provide a table showing the cost per year for every $1 million of decommissioning costs brought forward ahead of the time at which the costs would actually be incurred. We now have an admission by the Liberal government that they do not know what the cost of this measure is. It is hard to believe that it is not possible to estimate decommissioning costs years, or probably decades, into the future.

From a practical point of view there have to be serious doubts about the desirability of separating deductibility for what will be very significant decommissioning costs, even if the treatment were revenue neutral on an accruals basis, which is not a great many years away from when those costs are incurred. The proposed tax treatment, with the deductions used years in advance, could not be better calculated to encourage the taxpaying entity to put off actual decommissioning for as long as possible. Tax concessions brought forward have a cost to revenue. The government and the industry have both failed to make a case for this measure, or even to cost it. I pay tribute to my colleague in the other place, the shadow minister for tax measures, Mr Cox, on picking this important issue up. Labor opposes the infrastructure proposal, and I will be moving a number of amendments to delete it from schedule 5 during the committee stage.