The Tax Laws Amendment (2005 Measures No. 5) Bill 2005 proposes six schedules of amendments to various taxation laws. It has been indicated that several measures contained within this bill require enactment as early as possible since they have either retrospective effect or are due to commence operating in 2006.

This is a small omnibus bill this time, with just 34 more pages to add to the Tax Act, but for anyone thinking its simple, the Explanatory Memorandum is 71 pages.

It is my intention today to concentrate on schedules one and four, pertaining to tax exemption provisions and thin capitalisation provisions respectively.

Before I do that I will briefly mention the other schedules.

Schedule 2 extends the tax offset for Australian film production expenditure to high budget television series.

Schedule 3 clarifies the operation of the bad debt rules and the setting of tax cost of assets and utilisation of losses for multiple entry consolidated (MEC) groups and to ensure that such rules account correctly for swap losses.

Schedule 5 extends the operation of the ‘12 month rule’ for certain prepaid expenditure by investors in forestry managed investment schemes by two years until 30 June 2008.

Schedule 6 amends a technical rule to allow for related party at call loans, currently classified as equity, to be classified as debt. Schedule 6 addresses the high compliance costs faced by small business in having to classify all “intercompany at call” loans as equity rather than debt. Whilst the reduction in compliance costs is a positive, there is some concern that these measures may allow excessive negative gearing.

The Democrats are deeply concerned by our excessively generous negative gearing regime, supported by a deeply discounted capital gains tax regime, which we opposed. These two in concert, as noted by the reserve Bank and the Productivity Commission, produce negative economic side-effects.

Schedule 1 addresses foreign income tax exemption regulations as defined in section 23 AG of the Income Tax Assessment Act 1936. It should be noted at the outset that these amendments will apply with retrospective effect.

Foreign income that is taxed at its origin should not theoretically be taxed again on entry to Australia. This double-taxation prevention mechanism was the original intent of the foreign income tax exemption provisions contained in the Income Tax Assessment Act of 1936.

It was a measure introduced on the grounds of equity and thus all subsequent amendments to this component of the act should accordingly be judged on whether its equitable purpose is enhanced or impeded.

The purpose of Schedule 1 is to simplify the onerous debit/credit method of calculating eligibility for foreign income tax exemption, and as a consequence it can be viewed as an equity enhancing measure, justly deserving of the Democrats’ support.

Whilst the requirement of 91 days of continuous foreign employment still applies, the means by which short breaks are calculated during the accumulation of the service period has been replaced with a new “one sixth rule”.

The new rule allows different foreign service periods to be aggregated, so long as the period of absence that separates them does not exceed one-sixth of the total number of days of foreign service at any time.

Otherwise stated, foreign employed individuals are able to accrue one leave day for every day worked without affecting their ability to aggregate periodic terms of foreign service.

In addition to the new one sixth rule, a special provision is also introduced by this schedule that retrospectively applies to individuals employed in Iraq between 1 January 2003 and 30 April 2004.

During this time, the Iraq Coalition Provisional Authority suspended the operation of the Iraqi personal income tax system, and Australians employed in Iraq during this transitional period did not pay tax on their earnings as a result.

This breached the requirements of section 23 AG of the Income Tax Assessment Act 1936, preventing its application by those concerned since:

foreign earnings derived in a foreign country is not exempt from tax under this section if the amount is exempt from income tax in the foreign country.

Thus the proposed amendment effectively overrides the provisions of section 23 AG (2) for the aforementioned period thereby reinstating the tax free status.

The final amendment contained in Schedule 1 specifies that the death of a foreign employed Australian no longer prevents the 91 day test from being met, so long as the pre-existing intention of the employee was to continue working to meet this exemption condition. Once again this is a measure designed to support the equitable purpose and nature of the underlying law and deserves the Democrats full support.

Schedule 4 delays the introduction of new International Financial Accounting Standards for thin capitalisation positions of Australian firms, by applying accounting standards as they existed prior to 1 January 2005 for a further period of three years.

This transitional measure will provide ill-prepared or unethical Australian corporate entities with a further three years to meet international and best practice standards on thin capitalisation regulations.

The question that I ask of legislators is how much leniency should be provided to entities who, with the benefit of three years of hindsight, still do not meet internationally recognised standards that pertain to thin capitalisation standards?

The first formal designation of proposed changes to thin capitalisation provisions was contained in an exposure draft by the Australian Accounting Standards Board released in December 2002.

Yet here we are today, considering a further three year delay to standards designed to protect the interests of stakeholders. Whilst I will not vote against such a measure, I think it is fitting to criticise the delay and the let-off.