Mr MILES (6:05 PM) —I move:

That the bill be now read a second time.

The bill amends the income tax law to give effect to measures announced in previous budgets and in other government statements.

Income Tax deductions for gifts and related matters

The bill will amend the income tax law to allow deductions for gifts made to certain funds and organisations. Amendments are also being made to ensure that grants paid from the Katherine District Business Re-establishment Fund to eligible businesses in the Katherine region are exempt from income tax. A number of minor amendments to the gift provisions also will be made.

Australia—a regional financial centre

The bill honours a commitment made by the Prime Minister (Mr Howard) on 8 December 1997 when he announced, as part of the Investing for Growth statement, a package of measures which are aimed at making Australia a more attractive regional financial centre by building on Australia's existing advantages to ensure its participation in the increasing global trade in financial services. The amendments relate to the exemption from interest withholding tax available under section 128F, the offshore banking unit (OBU) concessional tax regime and the foreign investment fund and the thin capitalisation provisions of the income tax law.

As a means of further developing the domestic corporate debt market, the section 128F interest withholding tax exemption will be widened to allow companies to issue registered and bearer debentures within Australia and pay the relevant interest within Australia. However, the issue of bearer debentures will continue to be restricted to non-residents.

The bill will make a number of changes to increase the attractiveness of the OBU concessions by enlarging the range of entities which can apply for OBU status and expanding the activities which are subject to the concessional rate of tax. In order to provide Australian branches of foreign banks access to funds exempt from interest withholding tax, the operation of the `loan back' provisions in the thin capitalisation regime will be relaxed. This will enable foreign owned banking subsidiaries to raise interest withholding tax exempt funds and on-lend those funds to related Australian bank branches without affecting the subsidiary's thin capitalisation position.

An exemption from the foreign investment fund measures will also be provided for interests in certain foreign investment funds located in the United States. The exemption will increase the efficiency of Australian investment funds by exposing them to greater competition from US funds. Consequential amendments have also been made to ensure the benefits of providing the exemption to certain US trusts are not clawed back under the general provisions for taxing trusts.

The amendments are generally to apply from the date of introduction of the bill. The exemption from the foreign investment fund measures will, however, have effect for notional accounting periods of foreign investment funds ending on or after the date of introduction of the bill. The amendments are estimated to cost $22 million in a full year.

Company tax instalments

The bill makes a minor amendment to the company tax instalment provisions of the income tax laws to exclude superannuation funds, approved deposit funds and pooled superannuation trusts from the grouping rules contained in those provisions.

The amendments, which will prevent certain medium-sized entities from having to pay their tax instalments as if they were large entities, will apply from the 1995-96 income year.

Non-arms-length trust distributions to superannuation and similar funds

The bill gives effect to the Treasurer's announcement of 25 November 1997 to close a loophole in the current law which allows certain distributions of trust income to superannuation entities made under non-arms-length arrangements to be taxed at the concessional rate of 15 per cent. The amendments will ensure that distributions of income from all trusts other than where the superannuation entity has a fixed entitlement are taxed at 47 per cent. The amendments will also ensure that distributions of income where the superannuation entity has a fixed entitlement to income from the trust are also taxed at 47 per cent where the distribution is made in connection with a non-arms-length arrangement. The amendments apply to distributions of income made after 2 p.m. on 25 November 1997 subject to a transitional arrangement.

Franking credit trading: holding period and related payments rules and distribution to beneficiaries and partners that are equivalent to interest

The bill implements a holding period rule and related payments rule for shares and interests in shares to ensure that only taxpayers who bear the economic risk of ownership of the shares or interests will be entitled to franking rebates and credits under the dividend imputation system, and the inter-company dividend rebate. The bill also denies these benefits on trust and partnership distributions which are equivalent to interest on a loan. These measures were announced in the 1997-98 budget and they form the final instalment of measures preventing franking credit trading and dividend streaming.

The amendments to trust and partnership distributions and those implementing the related payments rule apply from 7.30 p.m. AEST, 13 May 1997. The holding period rule generally applies to shares and interests in shares acquired on or after 1 July 1997, with special provisions relating to trusts applying from 3 p.m. AEST 31 December 1997.

Tax penalty arrangements

The bill gives effect to the 1998-99 budget announcement to replace the existing late payment penalties in various taxation laws with a uniform, tax deductible general interest charge. The new arrangements will be simpler and better reflect movements in market interest rates. The changes follow a review by the Australian Taxation Office of late payment and notification penalties in consultation with professional and representative bodies groups. That review flowed from the government's response to the recommendations of the Small Business Deregulation Task Force.

The charge on an outstanding amount will be calculated daily on a compounding basis. The nominal interest rate from which the daily charge is calculated will be set at the 13-week treasury note rate plus eight percentage points. The penalty for late lodgement of income tax returns of individuals and the penalty for underpayment of income tax will also adopt the general interest charge.

Full details of the measures in the bill are contained in the explanatory memorandum circulated to honourable members. I commend the bill to the House and provide the explanatory memorandum.

Debate (on motion by Mr Martin Ferguson) adjourned.