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Thursday, 4 March 2004
Page: 25989

Mr COX (11:48 AM) —The Tax Laws Amendment (2004 Measures No. 1) Bill 2004 is an omnibus bill, introducing a range of measures. Labor will support the bill in the House, but will refer schedules 7, 10 and 11 to a Senate committee for further consideration. These schedules deal with charities, and Labor is concerned about their impact on the charitable sector and the integrity of the tax system. Schedule 1 of the bill extends eligibility for the medical expenses tax offset to include the cost of maintaining properly trained dogs for guiding or assisting people with a disability. The medical expenses offset provides a tax offset of 20 per cent of eligible medical expenses over a $1,500 threshold. The costs of maintaining guide-dogs for the blind are already eligible, but this amendment will extend eligibility to hearing and other disability guide-dogs.

Schedule 2 of the bill will provide an income tax deduction for certain expenses incurred in travel between workplaces. Prior to a decision of the High Court in 2001—Commissioner of Taxation v. Payne [2001] HCA 3—it was understood that such a deduction was allowable. However, this decision held that the cost of travel between two separate workplaces was not tax deductible. The amendments will ensure that where an employee is travelling directly between two workplaces, the cost of that travel is deductible—for example, in travel directly from a full-time job during the day to a part-time job in the evening.

Schedule 3 of the bill will ensure that small businesses do not become ineligible for the small business capital gains tax concessions because deductible gift recipients are beneficiaries of a discretionary trust controlled by that small business. Under the new capital gains tax rules, small businesses must have assets of less than $5 million to be eligible for concessional treatment, including the 50 per cent active asset reduction, the 15-year asset exemption, the retirement exemption and rollover relief. This asset test includes the assets of trusts which are deemed to be controlled by the small business. If a discretionary trust lists a charity or deductible gift recipient as a beneficiary, they are viewed as controlling that charity, and assets of the charity are included in the assets of the small business, possibly denying the business access to the capital gains tax concessions. The proposed amendments will ensure that the assets of a charity or deductible gift recipient which is a beneficiary of a discretionary trust are not included in the asset test to determine eligibility for a small business CGT concession. In addition, the amendments will ensure that the determination of whether a trust is controlled by a small business is based on actual distributions, not on simply being a beneficiary.

Schedule 4 of the bill makes changes to the transitional arrangements in place for the move from the Diesel Fuel Rebate Scheme and the Diesel and Alternative Fuels Grants Scheme to the new Energy Grants (Credits) Scheme. On 1 July 2003, the Energy Grants (Credits) Scheme replaced the Diesel Fuel Rebate Scheme and the Diesel and Alternative Fuels Grants Scheme. This was part of the government's agreement with the Democrats for passage of the GST. To ease the transition to the EGCS, fuel purchases in the three years prior to its introduction could be claimed under it rather than the previous scheme. As a consequence, some entitlements have been created under the EGCS that did not exist under the previous scheme. For example, the use of diesel to generate electricity in a retail or hospitality business without access to grid power became eligible under the DFRS on 1 July 2002. Under the transitional EGCS, such activity would be eligible from 1 July 2000. The proposed amendment will ensure that fuel purchases are only eligible under the transitional EGCS arrangements where they were also eligible under either the DFRS or DAFGS. This will include the recovery of claims lodged before the amendment is passed.

Schedule 5 of this bill deals with the cost base of assets for capital gains tax purposes and the impact of the GST. Capital gains and losses are calculated with reference to the cost of the asset when it is acquired—the cost base. The cost base also takes into account any subsequent expenditure or alterations to the asset which have the net effect of increasing or decreasing the value of the asset—for example, renovating a rental property. Due to oversights in amendments to the capital gains tax provisions at the time the new tax system was introduced, the value of net input tax credits are included in the cost base of assets in certain circumstances—for example, to renovations post September 1999. This inflates the cost base of assets, minimising capital gains and maximising capital losses. The proposed amendment would ensure that net input tax credits are never included in the cost base of an asset, which will make sure taxpayers do not receive a windfall gain from this oversight.

Schedule 6 will allow Australian business numbers to be disclosed to the heads of Commonwealth agencies and state and territory departments in respect of all agency and department functions. Regulations already allow for this, but it is unclear whether these regulations would hold up to scrutiny by the courts. The provisions will simplify compliance for business as they will not have to provide their ABN to every government department they have dealings with.

Schedule 7 provides a new deduction for contributions related to fund-raising events. The proposal would give individuals an income tax deduction for contributions to deductible gift recipients. For example, individuals could claim a deduction for the cost of attending a charity dinner. This will not apply to political parties, which are not deductible gift recipients. Under the current law, and consistent with general tax principles, no deduction is allowed where the individual receives any personal benefit.

This amendment will allow donors a tax deduction for contributions to charities where they receive a benefit in return. While this amendment may increase the ability of charities to use special fund-raising events to attract donations, it will certainly benefit affluent donors. The deduction will be allowed for contributions of cash over $250, where the benefit received is no more than $100 or 10 per cent of the value of the contribution. In the case of property, it must be valued at more than $250—or $5000 if purchased 12 months prior to the contribution being made. In both cases, the value of the benefit received must be no more than $100 or 10 per cent of the value of the contribution. The government initially claimed that this measure would have no cost; they now say that it will cost taxpayers $3 million a year. I am a little dubious that that is not a significant underestimate.

This amendment seriously undermines basic tax principles. Firstly, where an individual receives a personal benefit, no deduction is allowed. Secondly, it creates an artificial distinction between the market value of something and what an individual actually pays for it. There must be major concern that this measure will be open to abuse with people undervaluing the size of the benefit that they receive in return for their so-called contribution. Arguably, the market value of a charity dinner and therefore the individual benefit is the price of the ticket, otherwise—as is allowed under the tax law—charities could charge a price for entry into a charity function and then ask for a donation. The fact that this is not possible implies that the personal benefit to the individual of attending the dinner is what they are prepared to pay. Labor is aware that charities are likely to benefit from this measure. However, these serious issues require some further scrutiny, which is why Labor will refer the matter to the Senate Economics Committee.

Schedule 8 of the bill deals with distributions to certain entities. When the Board of Taxation conveniently recommended that the government not proceed with its promise to tax trusts like companies, it also recommended amendments to section 109UB of the Income Tax Assessment Act 1936. These amendments are an integrity measure which aims to ensure that a trustee cannot shelter income in a discretionary trust at the company tax rate through creating a present entitlement to a private company without paying that entitlement and then distributing the underlying cash to a beneficiary, usually through a loan payment or forgiven debt. This practice means that the income is only ever taxed at the company tax rate and not the beneficiary's marginal tax rate. The current law deems that loans in these circumstances are treated as dividends. This means that they are taxed in the hands of the beneficiary at their marginal tax rate. The proposed changes would include a payment from the trust or forgiven debt in the same way as loans are currently treated. While the amendment will tighten up integrity rules with regard to trusts, it will also ensure that when companies are not up to mischief, such as where the loan is on a commercial basis or repaid, that the deemed dividend rules do not apply.

The House should note that this amendment is only necessary because of the complete lack of backbone of the Howard government, and the Treasurer in particular, in tackling tax minimisation issues. After promising to end a rort that both sides of the House admitted had gone on for too long, the government would not follow through. This was another 2001 election backflip. The Treasurer had given a signed undertaking to implement certain measures contained in the review of business taxation, which would have made the government's business tax reforms revenue neutral. These particular measures were based on the very good tax principle that people in similar circumstances should pay the same amount of tax. So while average Australians continue to pay the right amount of tax, affluent Australians that do not want to, do not have to.

Section 46FA of the Income Tax Assessment Act 1936 provides certain resident companies a deduction for on-payment of certain unfranked or partly franked non-portfolio dividends to their wholly-owned foreign parents. Schedule 9 simply reinstates this deduction because it was inadvertently made inoperative when the inter-corporate dividend rebate was repealed as part of the consolidation reforms.

Schedule 10 requires public benevolent institutions and health promotion charities to be endorsed by the Commissioner of Taxation to access relevant tax concessions. The amendments are in response to recommendations of the Report of the inquiry into the definition of charities and related organisations. The amendments will require public benevolent institutions and health promotion charities to be endorsed by the commissioner in order to access all relevant taxation concessions, such as income tax, GST and FBT relief. The organisation will be required to display its charitable status on the Australian Business Register. The amendments will affect a number of concessions, particularly fringe benefits tax concessions, for some organisations—especially those which are deemed to be under ministerial control, particularly of a state government.

This is already occurring, with thousands of employees in South Australia alone set to lose fringe benefits concessions from 1 April 2004. This is having a big impact on a number of low-paid workers—workers who rely upon salary packaging arrangements with fringe benefits tax concessions to simply get by. The Australian Taxation Office is conducting a clean sweep of organisations prior to the passage of this bill, leaving distressed employees in critical sectors, such as medical research and care for the disabled. I am concerned about the complete lack of a transitional period for this measure and for organisations which lose their PBI status. As such, we will be referring this measure to the Senate Economics Committee for further examination.

Schedule 11 of the bill seeks to specifically list three organisations in the tax law as deductible gift recipients. Donations and contributions for deductible gift recipients over $2 provide the donor with an income tax deduction. Organisations that do not meet the general requirements in the tax law can be specifically listed as deductible gift recipients. Schedule 11 of the bill seeks to specifically list in legislation the following organisations as DGRs: Dunn and Lewis Youth Development Foundation Ltd from 10 November 2003 to 9 November 2005; Crime Stoppers South Australia Inc. from 19 September 2003; and the Country Education Foundation of Australia Ltd from 20 August 2003. In addition, the specific listing of the Bowral Vietnam Memorial Walk Trust will be extended until 16 August 2005. Labor is concerned that the conduit nature of the Country Education Foundation means that it could be used to provide parents with income tax deductions for their children's educational expenses that are not available to other taxpayers. Labor will refer the specific listing of this organisation to a Senate committee for investigation.

This bill also represents an opportunity for me to express Labor's support for the Australian Timor-Leste Embassy Fund to be granted tax deductible gift recipient status through a general listing or a specific listing in the Income Tax Assessment Act 1997. East Timor is a country with a long and rich connection to Australia—from the support that the East Timorese gave to Australian soldiers in the Second World War to Australia's involvement in East Timor's independence. The establishment of an East Timorese embassy in Australia is practically and culturally very important, given the long history shared by the two countries, the number of East Timorese living in Australia and the number of Australians who are living in East Timor. Providing the Australian Timor-Leste Embassy Fund with deductible gift recipient status would give all Australians an opportunity to participate in the evolution of the relationship between the two countries. It would also mean that the reality of an East Timorese embassy could be realised sooner rather than later. I call on the government to move quickly to grant the Timor embassy fund DGR status. I move:

That all words after “That” be omitted with a view to substituting the following words:

“whilst not declining to give the bill a second reading, the House notes that the amendments dealing with distributions to certain entities will act as safeguards against certain abuses of trusts by individuals, the effect of these measures falls short of the Treasurer's commitment to ensure that the outcome of the Review of Business Taxation was revenue neutral”.

The DEPUTY SPEAKER (Mr Wilkie)—Is the amendment seconded?

Mr Murphy —I second the amendment.