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Thursday, 3 June 2004
Page: 30102

Mr COX (12:16 PM) —The Tax Laws Amendment (2004 Measures No. 2) Bill 2004 and the Tax Laws Amendment (2004 Measures No. 3) Bill 2004 are omnibus tax bills with largely technical amendments to the tax law, and Labor will support them. However, the limited time made available by the government to consider Tax Laws Amendment (2004 Measures No. 3) Bill 2004 makes it prudent for Labor to refer that bill to the Senate Economics Legislation Committee for closer examination.

Tax Laws Amendment (2004 Measures No. 2) Bill 2004 includes 12 schedules. While Labor supports all the measures in the bill, it welcomes in particular the Howard government's backflip on providing public ambulance services with the same fringe benefits tax treatment as public hospitals. On 2 December last year, the government voted against a Labor amendment to Taxation Laws Amendment Bill (No. 5) 2003 which would have provided relief. In doing so, the government created anxiety and uncertainty amongst ambulance officers around the country. Many ambulance officers faced a drop in income of around $200 per week, yet the government did nothing. That was until the secretary of the Victorian ambulance officers association and I went on Neil Mitchell's radio program on 3AW in Melbourne highlighting the issue. Within 24 hours on the same radio program, Treasurer Costello overruled his junior minister Senator Helen Coonan and announced that an FBT exemption would be granted to public ambulance services.

This was another example of the Treasurer having to step in to fix the errors of an incompetent minister who cannot be trusted to deal adequately with the sensitive issues in her portfolio. It was another example of the growing list of issues where the Howard government has been forced to follow Labor's agenda. It is quite satisfying watching the coalition steal Labor's ideas and implement them. The Australian people could be forgiven for thinking that Mark Latham, not John Howard, is actually running this country today. Australians know that they have a tired old government that is out of ideas, slow to respond to problems and has to resort to adopting the other side's policies.

Labor also welcomes the government's decision unveiled in the budget to implement another Labor proposal—that is, to recognise the need for transitional relief for organisations that have recently lost their public benevolent institution status, and therefore their fringe benefits tax exemption, as a result of decisions by the tax commissioner. Most of these organisations are medical research, health and disability services undertaking very important work for the community. Workers in these organisations, particularly in the disability area, are notoriously underpaid and have relied on their salary-sacrificing arrangements just to get by. The loss of these arrangements cut the incomes of thousands of workers on 1 April. I would like to catalogue some of the effects that this change had on individuals. We implored the Minister for Revenue and Assistant Treasurer, Senator Coonan, to announce the government's position on this before the loss of these salary-sacrifice arrangements, and she declined. It was all a little bit complicated. These people were left to wait until budget night. This had very severe effects on a number of individuals. I am not going to identify them by name, but I will read into the Hansard some of the things that they were being forced to do to make their own household budgets balance. One person writes:

The change to salary sacrifice coincided with changes in my personal circumstances. Having done a yearly budget, I fall $6,000 short of being able to pay my basic living expenses, mortgage, school fees, utilities, health insurance et cetera. I have made a decision for my daughter and I to move back in with my parents for one year to give me time to re-establish more control over my finances.

Another person writes:

I had to sell my house because I was not able to afford the mortgage payments after losing salary sacrifice.

An early indication of the government's intention would have obviated the need for that person to do that. Another person writes:

I had to place my home unit on the market.

Hopefully that sale did not go through before the budget announcement. A further person writes:

I salary sacrificed in the beginning because my husband and I do not have enough super when I retire and we wanted to be responsible for our finances and not rely on a pension. My husband was retired due to ill health. We bought a rental property as well as a life plan bond and the bond was paid out of the $200 we were saving each fortnight. The rent on the house almost pays the mortgage and management costs but we will get that back on tax. At the moment I am robbing Peter to pay Paul. I am paying the ETSA and Telstra bills by my Bankcard and paying minimum payments on this. This financial year I have studied and payed for this out of the renovation money saved and so I am hoping that at tax time I will get enough back to cover the Bankcard. Really, I am limping along hoping that the decision re the salary sacrifice will be overturned, so I am prepared to carry on like this for a few months.

They had to. Another writes:

I have put my house on the market and need to purchase a cheaper house to reduce my overall costs.

Another writes:

I have cancelled both my health cover and resigned from the Public Service Association. We purchased our house last year based on my total salary. I have lost $95 per week and even without paying union fees and health cover I am still behind. I have found the whole situation most stressful and anxiety producing.

Another person writes:

My wife and I have refinanced, i.e. we have renegotiated our home loan, the net effect being that we have extended it. This was needed to enable us to meet the costs of the financial commitments that we had made premised upon ongoing salary sacrifice.

Another says, `I had to cancel my health fund contribution.' Another person writes:

I had to take out a loan to cover the cost of my studies. I also have two 18-year-olds that are at uni who have had to take on extra part-time work to help pay for their studies as I am restricted financially in continuing to support them. Due to having an older, unreliable car I was also about to update my car but have had to abandon this.

Here is another:

I am struggling to make mortgage payments and I am having to cut back in other areas. I have also recently accepted a new job that pays more money but would have preferred to stay where I am had salary sacrifice remained in place.

So there is somebody who has made a life-changing decision which was caused by the minister's tardiness in making an announcement about what the government was contemplating when it was urgently required. Instead she waited another six weeks for the budget. Another person writes:

I am requesting extra permanent working hours as and when they become available—tough, though, with IDSC staffing. I am also about to cancel my extras medical tables.

Another person writes:

We have reduced our mortgage payments down to the minimum monthly payment and increased additional part-time work in order to supplement our income. At present we are attempting to struggle through in the hope that it will be reinstated. But if that does not occur we will be stopping our private health benefits and our personal contributions to superannuation.

Another writes:

I had planned to reduce my expenses by budgeting further on general expenses, eliminating regular payments to a specific charity, ceasing Public Service Association membership, reducing superannuation payments and keeping mortgage to interest only.

These are only a few of the individual cases that have been drawn to my attention by some of the people working for those organisations. One of the things that I think is important to put on record is that the relief that has been offered in the budget for these people is only transitional. It is for four years. That means that, in four years time, some adjustments are going to have to be made to these people's personal finances—typically along the lines of the ones that people were arranging to make after 1 April. So there is an onus on their employers and an onus on their unions to negotiate improved salary arrangements that are commensurate with what will be their ongoing financial need and payment situation when salary sacrifice for them eventually expires. I hope that both their employer and their union take this issue on board early and do something about it. It is going to be a significant cost to employers. It is going to be a significant industrial issue for unions. The onus is on the unions to get in there and do something about it, and they need to do it early. I would not like to be standing here in four years time dealing with the same issue because it has been allowed to run on.

I want to turn to the details of these bills. Schedule 1 of the Tax Laws Amendment (2004 Measures No. 2) Bill 2004 amends the taxation of life insurance companies. Before 1 July 2001, life insurance companies were exempt from tax or were taxed concessionally on certain income. As part of the government's business tax reforms, life insurance companies are now taxed as companies. These were major reforms and the amendments in this bill seek to respond to industry and ATO concerns about the operation of the new taxation regime. The income of life insurance companies is divided into different types for income tax purposes. The three main types of income, which reflect the different types of business of life insurance companies, are: the ordinary class of taxable income which is taxed at company tax rates, income derived in relation to risk business and ordinary investment business being included in this class; the complying superannuation class of taxable income that is taxed at a rate of 15 per cent; and non-assessable, non-exempt income derived in relation to immediate annuity business.

The bill clarifies that tax losses in each class of income can only be used against taxable income in each class of income. If a tax loss occurred in the superannuation business, it cannot be used against taxable income in the ordinary side of this business. Previously, life insurance companies had to apply tax losses from the ordinary side of the business against either ordinary income or superannuation income.

The amendments also modify the taxation treatment of each type of business. In relation to risk business, the amendments ensure that provisions in the Income Tax Assessment Act 1936 relating to reinsurance with nonresidents apply only to accident and disability risks covered by the relevant reinsurance contracts. Certain reinsurance commissions are included in assessable income and the basis for determining the amount of the decrease in the value of policy liabilities that is included in assessable income is the same as the basis for determining the amount of the increase in the value of policy liabilities that is deductible.

In relation to ordinary investment business, the amendments clarify that the deduction for the capital component of ordinary investment policies does not apply to other types of policies, ensure that the funeral policies issued by friendly societies are taxed as ordinary investment policies, ensure that the amount of the reduction in exit fees over the term of a life insurance policy is deductible and ensure that risk rider premiums are included in assessable income.

In relation to complying superannuation business, the amendments clarify the scope of the deduction for the capital component of premiums received in respect of virtual pooled superannuation trust policies, clarify the scope of the liabilities that can be supported by virtual pooled superannuation trust assets, allow up to 30 days after the time of the transfer value of virtual pooled superannuation trust assets is determined or the time that the value of the virtual pooled superannuation trust policy liabilities is determined, whichever is later, to transfer excess assets out of the virtual pooled superannuation trust; and impose administrative penalties for the failure to undertake the required valuations of assets and liabilities or to transfer excess assets out of the virtual pooled superannuation trust within specified time periods.

In relation to immediate annuity business, the amendments modify the types of policies that are exempt life insurance policies, clarify the scope of the liabilities that can be supported by segregated exempt assets, allow up to 30 days after the time that the transfer value of segregated exempt assets is determined or the time that the value of the exempt life insurance policy liabilities is determined—whichever is later—to transfer excess assets out of the segregated exempt assets; and impose administrative penalties for the failure to undertake the required valuations of assets and liabilities or to transfer excess assets out of the segregated exempt assets within specified time periods.

The bill also includes a number of technical amendments to the operation of the life insurance regime. Schedule 2 of the bill deals with the consolidation regime. The consolidation regime began on 1 July 2002 and allows groups of companies to be treated as single entities for taxation purposes. The amendments in this bill will provide greater flexibility to consolidated groups and will clarify the operation of the consolidation regime. There is a range of amendments to the consolidation regime included in the bill, including allowing corporate unit trusts and public trading trusts to head up a consolidated group. This is appropriate, as these types of trusts are taxed like companies.

The amendments also include aligning the period in which a choice is made to continue as a consolidated group when shares in one company are exchanged for shares in another company, with the notification period for events affecting consolidated groups, and ensuring that the assets of a joining entity that do not become assets of the head company under the single entity have their tax cost reset when the entity joins the consolidated group. The amendments further include implementing special rules for determining the income tax consequences that arise where a partner or a partnership leaves a consolidated group. They provide that, where entities with excess foreign tax credits join a consolidated group at the start of the head company's income year, the head company will be able to use those credits at the end of that income year. The amendments provide modifications to the clear exit rule and the pay-as-you-go instalment liability rules and clarify that a group liability can be subject to only one tax-sharing agreement.

Schedule 3 of the bill deals with the venture capital regime which established three kinds of limited partnerships as a mechanism for accessing tax concessions. These amendments simply ensure that limited partnerships that are separate legal entities are eligible to access the venture capital concessions. Schedule 4 of the bill amends the Fringe Benefits Tax Assessment Act 1986 to allow for continuity of FBT treatment for non-remote housing benefits where administration and payment of FBT is devolved by state or territory governments to a departmental level. Schedule 5 of this bill amends the Income Tax Assessment Act 1997 to ensure that a capital gains tax event is not inadvertently created by the disposal of new interests in demerged entities.

Schedule 6 provides an explicit income tax deduction for individuals who must make United Medical Protection Ltd support payments. Without these amendments only practising doctors could claim a deduction for their UMP support payments. Retired or non-practising doctors who are required to make support payments would not be eligible for a deduction because these payments do not relate to their taxable income. This is consistent with the general rule that deductions are available only for expenses incurred in generating taxable income. The amendments ensure that all individuals who make UMP support payments can deduct those payments from their taxable income. This is done on fairness grounds, as retired or non-practising doctors are effectively incurring expenses related to past income.

Schedule 7 of the bill amends the A New Tax System (Goods and Services Tax) Act 1999 to ensure that the goods and services insurance provisions apply as intended to transactions undertaken by operators of compulsory third party schemes. Schedule 8 of the bill provides a limited response to recommendations made by the Senate Select Committee on Superannuation on the taxation of transfers from overseas superannuation funds. Australian residents can transfer superannuation funds from overseas accounts into Australian superannuation accounts. If such a transfer occurs within six months of an individual becoming an Australian resident, the funds are not taxed. However, if the transfer occurs after six months then any investment earnings from when that individual became an Australian resident are taxable.

Currently that tax must be paid by the individual at their marginal tax rate, not at the concessional superannuation tax rate of 15 per cent. This can create significant financial difficulties for individuals because they cannot access their superannuation funds until retirement to actually pay the tax. To avoid the situation of individuals not being able to meet their tax liability or being deterred from bringing overseas superannuation to Australia, the amendments in this bill make the superannuation fund liable for the tax. The investment earnings on the overseas superannuation will be taxed at the normal concessional superannuation rate of 15 per cent rather than at the individual's marginal tax rate.

The bill also amends the foreign investment fund rules to ensure that transfers of overseas superannuation into complying Australian superannuation funds are not taxed twice. Schedule 10 includes some minor amendments to the simplified imputation system. The bill contains a minor amendment which ensures that provisions for the carry forward of excess foreign tax credits operate properly following changes to the foreign tax credit provisions that were made as a result of the Timor Sea Treaty. Finally, schedule 12 of the bill amends the alienation of personal services income provisions to clarify when the Commissioner of Taxation can make a personal services business determination which is consistent with policy intent. The effect of the commissioner granting a PSB determination is that the PSI provisions do not apply to the taxpayer.

In comparison to the Tax Laws Amendment (2004 Measures No. 2) Bill 2004, the Tax Laws Amendment (2004 Measures No. 3) Bill 2004 is a much smaller bill. It includes three schedules with no financial impact. Schedule 1 of the bill deals with the venture capital regime. The venture capital regime came into effect on 1 July 2002 and aims to facilitate the development of a venture capital industry in Australia by providing incentives for non-resident investment in relatively high-risk businesses. Eligible taxpayers and registered venture capital partnerships are exempted from Australian income and capital gains tax on their Australian investments. The concessions are limited to investments in companies with assets of up to $250 million. The amendments in this bill aim to ensure that the regime operates as intended and extend the eligibility criteria for the concessions to investments in holding companies that meet the eligibility criteria.

Holding companies are often used as investment vehicles by venture capitalists. Investments are made through holding companies in businesses eligible for the venture capital concessions. However, investments through holding companies are currently not eligible for the concessions. The amendments deem holding companies to have met the eligibility criteria for the concessions if they meet the other requirements that a company must meet to access the venture capital investment concessions. The bill also amends the permitted entity value rules under the venture capital regime. An eligible venture capital investment cannot be made into a company whose asset value, together with the asset value of any connected entity, exceeds $250 million immediately before the investment is made. The amendments in this bill will exclude the value of the assets of any connected entity that will not be connected with the investee company after the investment is made. New integrity rules will ensure that venture capitalists cannot over time purchase connected entities of a group and claim the concessions for each purchase.

Schedule 2 deals with worker entitlement funds. Worker entitlement funds are funds that provide for employee entitlements, such as leave and redundancy payments. They are used extensively in the building industry to allow workers to transfer their entitlements between employers and ensure that workers' entitlements are secure in the event of insolvency. The ATO issued a taxation ruling in 1999 which would have resulted in payments to worker entitlement funds being subject to fringe benefits tax from 1 April this year. This would have resulted in payments to worker entitlement funds effectively being taxed twice, once on the way in and then when payments were made to workers. In response, the government—again, belatedly—introduced legislative changes in Taxation Laws Amendment Bill (No. 4) 2003 to exempt payments to prescribed employee entitlement funds from FBT. In order to allow existing funds adequate time to comply with the requirements for a prescription under the legislation, an FBT exemption was provided for certain contributions until May of this year.

I would like to acknowledge the role that Senator Marshall played in the other place in what was a fairly lengthy and difficult campaign to ensure that the government did provide that transitional arrangement which we are today extending, because some worker entitlements funds are still making adjustments to their arrangements to comply with the requirements of the exception to ensure that these funds are not adversely affected. The bill extends the exemption period until 30 May 2005. Again, Senator Coonan should have gotten on to this early and given it adequate priority. The commissioner originally issued his ruling in 1999 but it was not until almost four years later that the government decided to introduce the corrective legislation that the commissioner had effectively foreshadowed—

Dr Emerson —They were reluctant to amend their streamlined new tax system.

Mr COX —They are always reluctant to amend their streamlined 8,000 additional pages of `a new tax system for a new century'. We are going to have to address improving tax administration in this country. We are going to have to be a lot more ready to give priority to administrative issues in the taxation system so that we do not have this continuing, serial list of near train wrecks that have to be averted with emergency legislation. Employee entitlement funds is one example of government policy that we have now had to revisit twice. The FBT exemption for health and disability workers is another that has been revised belatedly, as I was saying earlier before the member for Rankin entered the chamber.

Dr Emerson —Was that done in response to your information?

Mr COX —It was in response to an amendment that was moved by the Labor Party at the end of last year, and it took the government six months to come to a definitive position. They obviously had plenty of time to think about it. They were slow to act. Senator Wong asked a series of questions in the Senate pressing the minister before the deadline in April—when the FBT exemption was to be lost—to state a clear position so that the people who were going to be affected would know where they were going, and preferably to provide some relief. Senator Coonan fobbed her off and said that it was all very complicated and she was not going to make any hasty decisions. She had had five months to think about it at that stage and it took more than a month more to get an answer. An awful lot of people suffered a great deal in the meantime. Their lives had been disrupted and they had been put through a great deal of financial stress. People had put homes on the market and people had changed employment.

One of the ongoing issues in relation to the differential treatment of FBT in this area is that in four years time we are going to have two classes of workers in the disability area: those who continue to work for private PBIs, who will have access to salary sacrifice, and those that do not. That will be an ongoing complexity. There will obviously be a drift away from the non-PBI organisations towards the PBI organisations, and the non-PBI organisations will find it very difficult to retain their workers. That is a significant industrial issue that has to be addressed.

The final schedule in this bill, schedule 3, contains minor technical amendments that ensure that the provision for allowing foreign tax credits to arise in certain circumstances will continue to operate properly following changes to the foreign tax credit provisions that were made as a result of the Timor Sea Treaty. These changes are needed due to changes in the numbering of sections in the Income Tax Assessment Act in relation to the Timor Sea Treaty. (Time expired)