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Wednesday, 6 June 1984
Page: 2691


Senator GARETH EVANS (Attorney-General)(9.57) —I move:

That the Bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows-

Income Tax Assessment Amendment Bill (No. 3) 1984

The primary purpose of this Bill is to introduce new taxation arrangements for retirement and kindred payments, effective for payments made on or after 1 July 1983. The measures were first announced in the Government's economic statement of 19 May 1983. Details were subsequently clarified in press statements on 30 May and 7 August 1983.

While those important measures take up much of the Bill, a wide range of other matters are dealt with in it.

Another major proposal to be given effect is the introduction of amendments to strengthen section 26(a) of the Income Tax Assessment Act which imposes tax on profits made on the sale of property acquired or the purpose of resale at a profit. Details of these measures were given in an announcement made on Budget night last year.

Also included are measures to give effect to the taxation concession for investors of share capital to licensed venture capital companies under the incentive scheme announced by the government on 14 September 1983.

To be given effect too is the Government's decision, which was announced in the 19 May 1983 Economic Statement, to tax the income of friendly societies from the investment of their funds from life, disability and accident insurance business, on a basis broadly comparable with life insurance companies.

Other measures will clarify the operation of the income tax law with respect to deductions for repairs to property that is used only partly for the purpose of producing assessable income. As announced on 18 April 1984, this action is necessary following a decision handed down by a taxation board of review. Other areas of the law which could be affected by the principles emerging from the board's decision are also being amended.

Included in the Bill too are measures to give effect to the Government's decision, announced on 3 May 1984, to reduce the paperwork burden of the prescribed payments system by removing the requirement for deduction forms to be lodged with income tax returns.

A further measure will give effect to the Government's decision, announced on 9 March 1984, to authorise deductions for capital contributions to the cost of railway rolling-stock owned by a government or tax exempt government authority that is used for the transport of petroleum or minerals.

Additionally, the Bill will authorise income tax deductions for gifts of $2 or more made to the African Famine Appeal conducted by the International Disaster Emegencies Committee.

Finally, the Bill contains measures to exempt from tax rent subsidy payments made to persons to assist with their rent costs under the Commonwealth/State Mortgage and Rent Relief Scheme.

Before turning to details of these various measures, I first wish to make some remarks about aspects of the Government's retirement income policies and then about the rationale for the new taxation arrangements.

In the decades ahead a smaller proportion of employed people will have to support relatively larger numbers of aged people. Accordingly, this government places a high priority on developing a national retirement incomes package. There are three major element in this package-improvements to occupational superannuation, improvements to the age pension, and consideration of a national superannuation scheme.

There are widely acknowledged deficiencies in existing arrangements for occupational superannuation. These include the extent of coverage-and thus the access to taxation benefits for retirement saving, the portability of superannuation benefits and the conditions relating to the vesting of employer contributions. The Government has a good deal of work in hand relating to these issues. The area is complex and there are no easy answers.

The Government is proceeding with an assessment of the report of the Commonwealth Task Force on occupational superannuation in the light of views received from the States, the superannuation and insurance industries and other interested parties.

With regard to pensions, the Government has a commitment to raising the standard pension to 25 per cent of average male earnings. We hope to be able to move further towards this target in the coming Budget.

We also expect, in the near future, to receive a paper prepared by an interdepartmental committee canvassing options in relation to improvements in the provision of retirement incomes, including possible national superannuation alternatives. The Government will also give careful consideration to the views of the Senate standing committee on social welfare when it reports on its enquiry into retirement income systems.

The Government recognises the particular importance of portability and vesting arrangements in the occupational superannuation area. This Bill provides for the setting up of approved deposit funds, which will represent a major institutional innovation as a mechanism for portability of benefits. Employees who change jobs may, without paying any tax, deposit any superannuation lump sum received on termination into an approved deposit fund.

Investment income earned on lump sums deposited in these funds will be tax exempt, in the same way as if the sum had remained in an employer-sponsored superannuation fund or had been accepted by a new employer's fund. This innovation is not, of course, a complete answer to the very difficult question of portability but is a major step in the right direction.

The Government aims to have discussions with interested parties on further ways of extending and improving arrangements for occupational superannuation. It also expects that its consideration of the IDC report on national superannuation will involve discussions with interested groups.

The changes to the taxation treatment of lump sum superannuation and kindred benefits contained in this Bill themselves represent a major reform of retirement income arrangements and will facilitate further reforms to the retirement incomes system. The major reason for the changes is taxation equity. There has been a glaring inequity between those people who receive remuneration in the form of an income stream and those receiving it in a lump sum.

The differential income tax treatment is particularly apparent in the retirement benefit area. Pensions are fully assessable but, prior to the new measures, a mere 5 per cent of lump sum benefits was assessable. This meant that at Maximum-were the recipient faced the top marginal rate of 60 per cent-any lump sum would be taxed at only a rate of 3 per cent.

Needless to say, this near-absence of tax has been a major avenue for tax minimisation. Employers have faced a strong incentive to provide remuneration to their employees-especially those for whom wage and salary income would be taxed at high marginal rates-in the form of contributions to superannuation funds receivable as lump sums at the termination of employment.

Moreover, a practice, essentially for tax avoidance purposes, has developed in some industries of paying deferred remuneration as severance pay on termination of employment.

The taxation treatment of lump sums has been recognised as anomalous by a succession of committees of inquiry-the Asprey Taxation Review Committee, the Hancock National Superannuation Committee and the Campbell Committee of inquiry into the Australian Financial System. I think it is fair to say that the line of thought common to all of these inquiries is that, while taxpayers should retrain the option of taking a lump sum on retirement, the taxation system should not provide an incentive for taking retirement benefits in that form rather than as a pension.

The tax treatment of pensions is, of course, consistent with the treatment of other forms of income under the tax system. It is the treatment of lump sums that has, in the past, been out of step. Superannuation benefits received by employees are a form of remuneration which is available only to some of the work force. The Government intends that remuneration in that form should be taxed on a basis reasonably consistent with other forms of remuneration.

When, as to the present time, this is not the case, tax rates generally have to be set higher than would otherwise be needed to raise a given amount of revenue. That means that those without access to superannuation have been bearing significantly higher tax rates on their total remuneration than those with access to this savings medium. That is unfair, and needs to be corrected.

I must emphasise that the measures contained in this Bill involve no element of retrospectivity. There is no diminution of any benefit relating to employment before 1 July 1983. Lump sums paid after June 1983 will continue to attract the previous tax rules to the extent that they relate to service before the change- over date.

Of course no-one is happy to pay more tax. The expected effect on revenue of the tax changes demonstrates the moderation, and absence of retrospectivity, of the Government's proposals. The additional revenue collected from the taxation of lump sums is estimated to be $70 million in 1984-85. This represents some $20 million collected on assessment in respect of lump sums received in 1983-84 and collection of some $50 million on a PAYE basis in respect of lump sums received in 1984-85.

The revenue gain will rise steadily over the years ahead as the proportion of future lump sum payments in respect of service after the transition date rises.

The cost to the public purse of taxation concessions for superannuation is now of the order of $2.5 billion. This Bill contains some measures directed towards ensuring that tax concessions for occupational superannuation foster their purpose of encouraging genuine provision for retirement incomes. After all, if the tax concessions do not achieve genuine provision for retirement what are they for?

The first such measure is that no tax is to be payable immediately on termination payments that are rolled over into annuities, into another superannuation fund or into an approved deposit fund. That is, no taxation is payable where the amount is being preserved for retirement income purposes or converted into an income stream that can be used for retirement.

Secondly, approved deposit funds will provide a mechanism for portability that promotes the use of termination payments for retirement income purposes.

Thirdly, a reduced tax rate of 15 per cent is to apply to the first $50,000 of lump sums received after the age of 55.

Consultation has been a feature of the development of the present proposals. The Government recognised that, for such a very complex change to the income tax law, consultation was essential. Accordingly, we announced the broad principles and structure of the new arrangements in May last year, but also indicated that we would sit down with interested parties and be receptive to views that were consistent with the broad thrust of the new arrangements. We have had extensive consultations with the Australian Council of Trade Unions, and the Confederation of Australian Industry. We have also consulted with and received submissions from very many other groups, including the superannuation industry.

As a result of these consultations we have made a number of modifications to the original proposals to meet reasonable concerns. We have significantly reduced the tax rates to apply. In particular, the first $50,000 of a lump sum paid after age 55 is to attract a 15 per cent rate. As announced in the Press statement of 7 August 1983, we have made changes that recognise the concerns registered in respect of lump sum death benefits and disability payments. We have also made special provision for the treatment of lump sum payments received under the auspices of approved early retirement schemes. The guidelines and mechanism for approval of such schemes are included in this Bill.

The Government has not, of course, been able to accommodate all proposals for change to the new arrangements. Some groups have suggested changes that would strike at the basic rationale of the new arrangements or changes that reflect little more than an aversion to paying more tax.

Because the new taxation arrangements are to apply from 1 July 1983, there are major administrative reasons for the Government wishing to secure passage of this legislation during the current sittings, and in advance of the distribution of income tax return forms for the 1983-84 income year.

I turn now to the main features of the Bill.

The taxation arrangements proposed for termination payments depend upon four attributes: Whether the payment is one judged to be a payment that is subject to the new taxation treatment; whether transitional rules apply to the payment; whether the payment falls into a category which attracts concessional taxation treatment, and the extent to which the taxpayer has appropriately ''rolled-over' ' the termination payment so as to defer the tax payable on it.

To elaborate on the first of these attributes, the new taxation treatment proposed by the Bill is to apply to three classes of payment made on or after 1 July 1983. These payments are described in the Bill as ''eligible termination payments''.

The first class is those retirement and kindred payments that are generally assessable under the existing law as to 5 per cent of the amount paid. This category includes payments from superannuation funds upon retirement through age or invalidity or upon other cessation of employment, ''golden handshakes'' and other severance payments, contractual termination payments, payments in lieu of unused sick leave and payments in compensation for loss of office or employment.

The second class of payment consists of those amounts that have their origin in untaxed income and are not taxed at all under the existing law. This category includes payments in full or partial commutation of pensions and most classes of annuity, payments of residual capital values of pensions and such annuities, distributors made from superannuation funds in accordance with fund rules during an employee's service, and termination payments made otherwise than as a lump sum.

The third class is payments from approved deposit funds.

The changes will not apply to capital sums paid under covenants in restraint of trade or as compensation for loss of income through personal injury and amounts received on retirement or termination of employment in lieu of annual leave or long service leave. Payments of these kinds will remain subject to the existing law.

The press statement of 7 August 1983 indicates that in certain circumstances amounts by way of death benefits would be exempt from the new taxation arrangements. I now clarify the scope of the exemption for death benefits. The death benefits exemption will apply to the following cases of termination payments to the estate, widow, widower or dependents of a deceased person: Payments from a superannuation fund; gratuities in the form of ''golden handshakes''; and withdrawals from approved deposit funds.

The exemption will not extend to commutations of superannuation pensions and annuities. To do so would tend to encourage, through the tax system, the conversion of retirement income streams into capital amounts.

Because the rationale for the death-benefit exemption is our concern to alleviate any possible financial hardship for those dependent on the deceased person, the exemption will be restricted to situations where, and to the extent to which, an amount paid to an estate is for the benefit of the spouse or dependants of the deceased person. Death benefit payments within the scope of the exemption will be free of tax in the recipient's hands.

As already mentioned, the Bill has no element of retrospectivity in the application of the new taxation arrangements. Where a payment is subject to the new rules only so much of the payment as is referable to periods of service or fund membership after 30 June 1983 will be subject to the new tax treatment. Any part of the payment that is referable to service or membership up to 30 June 1983 will continue to be taxed on the basis of the existing law.

The standard rule for apportioning a lump sum into its ''before'' and ''after'' components is to be that the ''pre-30 June 1983 component'' is the proportion of the basic payment that the period of the taxpayer's service or fund membership up to 30 June 1983 bears to the total period of service or fund membership. The total period may include periods of employment prior to attaining fund membership.

Where there has been a full transfer of benefits between funds or between a fund and the issuer of an annuity, total period of service will also include periods of membership of the earlier fund or funds. Periods during which moneys are held in an approved deposit fund are also to be included. Any period of entitlement to a pension or annuity is to be included in the case of payments that result from a commutation, or consist of the residual capital value, of that pension or annuity.

As the press statement of 7 August 1983 indicated, where a lump sum is only partially preserved by transfer to another fund, there will be an adjustment, related to the unpreserved amount, to the operation of the ''before/after'' formula. The Bill provides that a proportion of the period of service up to 30 June 1983 will be used in the application of the ''before/after'' formula to a termination payment from the later fund. The proportion will be determined by reference to how much of the ''pre-30 June 1983'' component of the first lump sum is preserved.

From the viewpoint of the tax rate to apply, payments subject to the new arrangements may consist of four different classes of component.

First, there is the ''pre-30 June 1983 component'' that is referable to service or fund membership up to 30 June 1983. This is to be taxed on the basis of the existing law. Accordingly, 5 per cent of the amount will generally be included in assessable income, but in certain circumstances, such as where the amount is tax-free under existing law, a lesser amount or no amount may be assessable.

The second class is the component of an eligible termination payment that represents contributions by the employee or fund member after 30 June 1983 that have not attracted an income tax deduction. These are to be exempt from tax.

Third, there will be the part of the eligible termination payment which relates to service or fund membership after 30 June 1983-Net of any employee contributions which have not attracted a tax deduction. This component is to be included in full in assessable income. A tax rebate, however, will apply to ensure that the ''after 30 June 1983'' component of a lump sum received before the taxpayer reaches age 55 is taxed at a flat rate of 30 per cent. The first $ 50,000 of a lump sum received after a taxpayer reaches age 55 is to be taxed at 15 per cent.

Finally, an eligible termination payment may include various concessional components which will be assessable as to 5 per cent. These components are such parts of an eligible termination payment as consist of a bona fide redundancy payment, a payment under an approved early retirement scheme or an invalidity payment. The concession for redundancy and early retirement payments will apply to the extent that the eligible termination payment exceeds the amount that would have been received had the employee resigned on the date of the retrenchment or early retirement.

In the case of a person who retires prematurely due to invalidity the application of the ''before/after'' transition formula will be varied so that, in determining the ''before 30 June 1983'' component, the individual's notional period of service from the date of invalidity until normal retirement will be treated as ''before'' service. The benefit of this concession will increase with the length of the period from the individual's invalidity retirement to his or her normal retirement age.

The tax treatment of an eligible termination payment will depend upon the extent, if any, to which the payment is ''rolled over'' by way of payment into any of the following forms of investment:

A superannuation fund for the provision of superannuation benefits for the taxpayer (or in the event of the taxpayer's death, his or her dependants);

An approved deposit fund; or

The purchase of an annuity for the benefit of the taxpayer.

Any part of the eligible termination payment may be ''rolled over'' in this manner. To the extent to which a component of an eligible termination payment is ''rolled over'', it will be exempt from tax unless and until returned to the taxpayer in a taxable form. A person will generally have a period of up to 90 days after receiving an eligible termination payment in which to ''roll over'' the payment in order to secure immediate exemption from tax. As a transitional measure, the initial ''roll over'' period will be from 30 June 1983 to the date 90 days after royal assent to this legislation.

Having regard to the role of annuities as one of the designated ''roll over'' mediums for exempting a termination payment from tax, the Government has proposed the removal of major impediments to the development of the annuities market.

These steps are directed to making annuities a viable alternative form of retirement income provision for retired persons. In particular, this Bill removes the effective double taxation of income that applied to most annuities, where those annuities are used for retirement income purposes. The Government has previously announced its intention to make the writing of annuity business more attractive to life offices by changing the minimum valuations basis prescribed under the Life Insurance Act.

This Bill also sees to it that if a purchased annuity or pension is derived successively by two or more persons, the exclusion from assessable income of the capital component of the annuity or pension (commonly called the ''Undeducted Purchase Price'') will not be lost on the death of the person who made the contributions or paid the purchase price.

Further, superannuation contributions and other payments towards a purchased annuity or pension that are concessionally rebatable under the income tax law are to be treated as part of the undeducted purchase price even though some tax concession by way of rebate at the standard rate may have been allowable. These measures will to an extent operate to reduce the tax payable on income in the form of an annuity or pension.

We have also proposed a more generous-and fairer-treatment of the return-of- capital component of annuity income in the assets test for the determination of eligibility for the age pension than currently applies in relation to the income test. The Government has announced its intention to issue indexed bonds, which will facilitate the supply by financial institutions of indexed annuities and pensions. As a further step, the Government is proposing to conduct a review, to be completed by 30 September 1984, of the scope for wider participation in the issue of annuities.

I emphasise that these changes are designed to make annuities more attractive by putting the tax treatment on a par with that of other retirement incomes and to remove other disadvantages associated with annuities. The Government's measures have not been designed to force people to take retirement income as an annuity, rather than in a single payment-but rather to restore taxation even- handedness between these alternatives.

In proposing these improvements to the law governing the taxing of annuity income, the Government has taken the opportunity to remedy a deficiency in the existing law revealed in the decision in the case of Federal Commissioner of Taxation v. Harris in which the Federal Court of Australia held that a gratuitous supplementary payment to a retired employee by a former employer was not assessable income. Payments of this kind will be made subject to tax.

A feature of the Bill is its framework for the establishment of approved deposit funds. An approved deposit fund will be one established to receive on deposit amounts of eligible termination payments, to deal with those amounts in accordance with specified rules and to repay those amounts with accumulated earnings at the request of the depositor.

The Bill allows for wide participation in the conduct of approved deposit funds . Categories of institutions specifically eligible to establish approved deposit funds include banks, life insurance companies, State government insurance offices, trade unions, employee associations, building societies, finance companies, money market corporations, credit unions, friendly or benefit societies and trustee corporations. As well, other institutions or classes of institutions may be added by regulation.

I mention that the Bill does not impose any prudential requirements in respect of approved deposit funds-except for certain rules designed for revenue protection purposes. Depositors will need to make their own decisions in selecting between approved deposit fund institutions and in considering the terms and conditions on which deposit facilities are offered.

As long as such a fund is maintained at all times by an approved trustee as an indefinitely continuing fund for approved purposes and with approved rules, the investment income of the fund will be exempt from tax.

If, by virtue of non-compliance with the rules for the operation of approved deposit funds, the income of an approved deposit fund is not exempt from tax but the fund is maintained by an approved trustee on the last day of the year of income, the income will be subject to tax at the rate of 46 per cent. If the fund is not maintained by an approved trustee, the income will fall to be taxed under the general trust provisions of the income tax law.

The Government has also reviewed the taxation status of superannuation funds for which investment income is already taxed, against concerns that-with increased taxation of the end-benefit in the hands of the recipient-the total tax burden borne by a member of a taxed fund may be unduly high.

Investment income derived by most classes of superannuation fund-generally section 23F and paragraph 23 (ja) and 23 (jaa) funds-is currently exempt from taxation in most situations. There are some exceptions in the form of section 79 funds and section 121DA funds. We have decided to reduce certain taxation rates which apply to taxed funds; with effect for the 1984-85 income year. In particular the penalty tax rate on non-approved (section 121DA) funds will generally fall from 60 per cent to 46 per cent. The penalty rate for non- compliance with the 30/20 investment rules by section 23F funds (employer- sponsored employee funds) and paragraph 23 (ja) funds (approved funds for 20 or more self-employed persons) is to fall from 46 per cent to 30 per cent.

As a measure to guard against exploitation of these reduced tax rates for tax avoidance purposes, funds which do not provide genuine superannuation benefits on retirement will continue to be taxed at the rate of 60 per cent. Payments from such funds will not be subject to the new tax treatment. Nor will employer contributions to these funds any longer be tax deductible.

The final tax rate change concerns section 79 (non-supported employees and self -employed persons) funds whose investment income has been subject to tax at the specified rate of 50 per cent. Relief in the form of a special deduction equal to 5 per cent of the cost of certain prescribed assets has enabled such funds to reduce substantially the effective tax rate payable. It is proposed that the investment income of these funds will in future be exempt from income tax and the 5 per cent cost-of-assets deduction will therefore be abolished. A benefit of this will be the removal of incentives that led section 79 funds to distort severely their choice of investments.

Section 79 requires that benefits generally not be paid before the fund member' s 60th birthday. The same requirement is usually adopted by the Commissioner of Taxation in administrative rulings in relation to benefits paid by paragraph 23 (ja) funds. Under the Bill there will be a reduction in the earliest age at which benefits may be paid from age 60 to age 55. This is consistent with contemporary community standards as to earlier retirement which are also reflected in the Government's decision that the earliest qualifying age for the concessional 15 per cent tax rate under the new lump sum measures is to be 55 years.

Pay-as-you-earn tax instalment deductions are to apply when an eligible termination payment is made to a person. Such deductions will be required whether the eligible termination payment is made by the employer of the person or, for example, by the trustee of a superannuation fund or from an approved deposit fund on withdrawal of a deposit. The paye arrangements are to apply from 1 August 1984.

I turn now to other features of the Bill.

Speculative transactions

Under section 26 (a) of the Income Tax Assessment Act, the assessable income of a taxpayer includes any profit made on the sale of property acquired for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking of scheme.

On budget night last year, we announced the government's decision to amend that provision to overcome some clear technical deficiencies it contained.

To give effect to this decision the existing provision is to be repealed and a new section introduced covering both the present operation of section 26 (a) and the remedial measures.

The first measure will cover those situations where an entity, typically a private company, acquires property with the intention of profit-making by sale and, when the property has appreciated in value, the proprietors of the company effectively dispose of the property and realise the profit by selling some or all of the shares in the company.

The relevant provisions will extend to the disposal of an interest in a private trust estate or a partnership which is used as the vehicle to hold the underlying property, or where an interest in such property is effectively held through a chair of companies or through any combination of interposed companies, partnerships or trusts.

These provisions will ensure that such part of the proceeds of a sale or such shares or interests occurring after 23 August 1983 as represents a profit on the effective disposal of the direct or indirect interest in the underlying property will be included in the assessable income of the vendors.

The second measure will authorise the inclusion in assessable income of profits made on the sale of bonus shares or rights arising from ownership of shares in situations where, had a profit been made on disposal of the original shares, that profit would be assessable.

This provision will apply to bonus shares or rights acquired after 23 August 1983.

A further measure will cover the situation where a person disposes of property acquired, after 23 August 1983, in a non-arm's length manner from the original owner in circumstances where, if the original owner had sold the property, there would have been a liability to tax on the profit arising from the sale.

In these circumstances, the donee or transferee will be treated as having acquired the relevant property for the same purpose as it was acquired by the original owner and thus attract appropriate tax consequences.

However, where the transferee has incurred expenditure in making improvements to the transferred property before it is sold (other than expenditure on the property which was also incurred for profit-making purposes), that part of the profit on sale which is attributable to those improvements will not be treated as taxable. Allowance will also be made for the amount of any profit that has been included in the assessable income of the transferor in a case where the transfer was made for inadequate consideration.

The provision will also have application to a distribution in specie to a shareholder or beneficiary from a company or trust, but will not apply to any property acquired by a beneficiary in a distribution from a deceased estate.

In addition, the Bill contains provisions which make it clear that strict legal identity between the property purchased and the property sold is not necessary where the general requirements for application of the section are met.

Under these provisions a taxpayer will be taken to have acquired property for the purpose of profit-making by sale where the property sold is an interest in property which was acquired for speculative purposes or where it is property in which has been merged an interest in property acquired for speculative purposes. In such circumstances, the amount to be included in the assessable income will be ascertained with regard to the property or interest which was originally acquired for the purpose of re-sale at a profit.

The measures I have just outlined will remove certain technical deficiencies which, over the years, have resulted in the intended application of the law relating to the taxation of speculative profits being avoided. Reflecting the nature of these changes, the Bill also contains a number of consequential and complementary technical amendments to the provisions of the income tax law which prescribe the circumstances in which a loss on the disposal of property may be allowed as a deduction.

Subscriptions to licensed management and investment companies

This legislation also implements the taxation aspects of the incentive scheme announced on 14 September 1983 to encourage the development of a substantial venture capital market in Australia.

Under the proposals, initial subscribers of share capital in companies licenced under the Management and Investment Companies Act 1983 will be entitled to an income tax deduction equal to the capital subscribed on their shares, including any share premiums.

This concession will have an annual revenue cost of about $20m and the amounts of share capital authorised to be raised by licensed companies will be monitored so that it reflects the level of support intended by the Government.

The deduction will be allowable, in the year in which the subscription is made, in respect of amounts paid after 13 September 1983 to a licensed management and investment company (MIC) on application for or allotment of shares, and on subsequent calls.

Consistent with the aim of the scheme to encourage patient capital into high- risk investment areas, deductions so allowed will be subject to withdrawal or partial disallowance if a shareholder disposes of his or her shares within a 4 year period. Relevant periods will be measured from the time when the shares are fully paid-up or, in the case of partially paid-up shares, from the date on which the last amount of share moneys was paid.

Under these arrangements, the deduction will be wholly withdrawn if the disposal takes place within 2 years, while 50 per cent or 25 per cent respectively of the deduction will be withdrawn if there is a disposal in the 3rd or 4th year.

There will be comparable withdrawal or partial withdrawal of deductions if an MIC has its licence revoked or not renewed by the MIC Licensing Board or if shares in the company are redeemed, cancelled or forfeited, or their capital value is reduced, within the 4 year period.

The deduction for subscriptions paid on shares held in a licensed MIC will generally be limited to amounts paid by the initial subscriber but where the shares devolve on account of the death of the original subscriber the new owner will be entitled to deductions in respect of any calls that he or she pays.

Subscriptions will generally attract deductions only if made at a time when the MIC is licensed or, if made before the grant of a licence, where the MIC licensing board determines that they were made in anticipation of the licence being granted or to ensure that the company satisfies statutory minimum paid-up capital requirements as a pre-requisite to the grant of a licence.

Safeguarding provisions in the bill are designed to prevent the 4 year holding rules being circumvented by arrangements under which persons could dispose of an interest in MIC shares held indirectly through their ownership of company shares or through partnership or trust interests. Appropriate assessing adjustments will be authorised to reflect the underlying disposal of interests in the MIC shares by the persons who have effectively enjoyed the benefit of the deductions .

Repairs and other expenditure not wholly to produce assessable income

The bill will clarify, in relation to property that is used only partly for the purpose of producing assessable income, the operation of the provision of the income tax law which allows a deduction for expenditure on repairs.

The Government's decision to amend the income tax law in this way was announced on 18 April 1984, following a decision handed down by a taxation board of review which held that a deduction was allowable for the whole of the cost of repairs to a car in a year of income, although the car was used only partly for business purposes.

The amendment will restore the previously understood principle of longstanding that expenditure should be deductible only to the extent that it is incurred for the purpose of producing assessable income.

In addition, we announced at the same time that the Government had decided to propose amendments to three other provisions of the law which might be affected by the views emerging from the Board's decision. These authorise deductions for expenses of borrowing, expenses relating to lease documents and expenses relating to the grant of patents or the registration of designs or copyrights.

The proposed amendments will apply to expenditure in these categories incurred on or after 19 April 1984.

Rent subsidy payments

Under the mortgage and rent relief scheme, the Commonwealth and the States and Northern Territory share on a 50/50 basis the cost of providing short-term financial assistance to tenants and mortgagors who are experiencing genuine financial difficulty in meeting their rent or mortgage commitments.

Payments under the scheme may take the form of rent subsidies, help with bond payments and re-location expenses and assistance with mortgage repayments. With the single exception of those rent subsidies that are paid direct to a tenant, payments under these assistance arrangements have no income tax consequences for the tenants and mortgagors being assisted.

The Bill will amend the income tax law so that rent subsidy payments made direct to persons being assisted are exempt from tax and so maintain comparable net levels of assistance to all those qualifying for relief. To ensure that all such payments made from the commencement of the mortgage and rent relief scheme are exempt, the amendment will apply to payments made after 17 August 1982.

Prescribed payments system

The prescribed payments system was introduced by the Government in September 1983 to deal with a significant tax evasion problem involving the non-reporting of income in certain industries. There is already ample evidence that it has been a success in this regard.

While the Government has been pleased with the early results of the system, it has always appreciated that some adjustments could be required in the light of experience.

It was for this reason that the Government acted swiftly to place on the statute books the changes to the system recommended by the Senate Standing Committee on Finance and Government Operations late last year.

Since then, the Government has continued to monitor the system's operation and, as announced on 3 May 1984, we have decided to introduce a further change to reduce the paperwork associated with the system in connection with the preparation and lodgment of income tax returns. This will remove the immediate effect the statutory requirements for copies of deduction forms received by payees to be furnished with their annual income tax returns.

At the same time, the Commissioner of Taxation has indicated his intention that the schedule of deduction forms which it was envisaged would also have to accompany a payee's return, will now only have to be completed in respect of forms relating to prescribed payments from which tax deductions have been made. Where tax is not required to be withheld from prescribed payments, only the total income recorded on relevant deduction forms will need to be shown on the return form.

A review of the first six months operation of the prescribed payments system is currently proceeding and the Government will consider other aspects of the system's operation following completion of that review.

Life insurance business of friendly societies

Because friendly societies are specifically exempt from tax they are, in relation to the investment income they receive from their life, disability and accident insurance business, placed at an advantage over life insurance companies. In the 19 May 1983 economic statement we announced that the Government had decided that the tax exemption of friendly society income from such business would be terminated in respect of the 1983-84 and later income years. This Bill will give effect to that decision.

Reflecting this Government's approach in dealing with the introduction of measures such as these, I note that the details of the new arrangements as announced on 17 April 1984 were settled in the light of extensive discussion and correspondence with representatives of the friendly societies and other interested parties.

The Bill will make friendly societies subject to tax in the 1983-84 and later income years on earnings from investment of funds from their life, disability and accident insurance business. Earnings from traditional activities of friendly societies in providing sickness and funeral benefits will continue to be exempt from tax. In addition, the assessable income of friendly societies will not include earnings related to superannuation business and annuities of a kind which, as I mentioned earlier, are to be exempt when issued by a life office.

In determining their taxable incomes, friendly societies are to be allowed deductions for expenditures related wholly to the earning of the income that is to be assessable. Other expenditures incurred in earning income but not directly related to a specific income source, such as general overheads, will be pro- rated between exempt and assessable income, and will be deductible in part on that basis.

Within the aim of achieving a tax treatment broadly comparable on average to that applicable to the non-superannuation business of life offices, the Government has devised a less complex legislative basis of taxing friendly societies than applies to life offices.

Thus the 30/20 investment rules will not apply to friendly societies. Certain concessional provisions applied in the assessment of life offices will not enter into the calculation of friendly societies' taxable income either. The effect of those concessions generally result in life offices bearing, on average, effective rates of tax on their investment income that are well below the nominal tax rate of 46 per cent applied to the taxable incomes of life offices.

For these and other reasons, including the statutory constraints which typically apply to the investment avenues of friendly societies, the Government has decided that the rate of tax to be applied to the taxable investment income of friendly societies should be 20 per cent.

The present Bill also proposes to allow a 30 per cent rebate to holders of policies issued by friendly societies who are taxed in 1983-84 or later years on proceeds of certain short-term policies. This will ensure treatment consistent with that accorded to policy holders of life offices under recent amendments to the income tax law.

Capital contributions to government-owned railway rolling stock

The Bill will also authorise deductions-under special provisions in Division 10AAA of the income tax law which permit the write-off of expenditure on mineral transport facilities-for capital contributions to the cost of railway rolling- stock owned by a Government or Government Authority and used for the transport of minerals, including petroleum.

Capital contributions of this kind where incurred after 9 March 1984, the date on which this change was foreshadowed, will be deductible over 10 years or, at the option of the taxpayer, over 20 years.

Expenditure on railway rolling-stock is currently excluded from the scope of Division 10AAA but if the rolling-stock is owned by a taxable entity its cost is eligible for deduction under the general depreciation provisions of the income tax law. The practice has recently developed for mineral producers to be required by State Authorities to contribute to the cost of railway rolling-stock used for the carriage of their mineral output but which continues to be owned by a Government or tax-exempt Government authority.

Without the proposed amendment no deduction would be allowable in these case either under Division 10AAA, because of the specific exclusion, or by way of depreciation, because the rolling stock is not owned by the mining company.

Gifts

Under the gift provisions of the income tax law, deductions are allowed for gifts of the value of $2 or more to specified funds, authorities and institutions.

These provisions are to be amended to authorise deductions for gifts made between 27 June and 30 November 1983 to the African Famine Appeal conducted by the International Disaster Emergencies Committee. By virtue of the Gazettal, on 1 December 1983, of the IDEC Overseas Disaster Aid Fund as and eligible fund for the purposes of the income tax gift provisions, any donation made to the appeal on or after that date is already tax deductible.

A detailed technical explanation of the Bill is contained in an explanatory memorandum that has been circulated to honourable senators. I commend the Bill to the Senate.

Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1984

This Bill is complementary to proposals contained in the Income Tax Assessment Amendment Bill (No. 3) 1984 which I have just introduced.

It will amend the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1983 which imposes income tax on income derived by companies, corporate unit trusts and superannuation funds and established rates of tax for that purpose.

The purpose of the amendments made by this Bill is to declare and impose the rate of tax payable on the taxable income of certain approved deposit funds- whose establishment is provided for under the previous Bill-in cases where such a fund fails to meet the statutory requirements for tax exemptions set by that Bill.

The rate of tax so imposed on the income of a non-complying approved deposit fund by this Bill is to be 46 per cent and will apply for the 1983-84 financial year and, until the Parliament otherwise provides, for the 1984-85 financial year.

In accordance with established practice, rates of tax applying to the 1983-84 year of income for companies-which will, at the rate of 20%, also apply to the insurance business of friendly societies and other registered organisations-will be declared by a bill to be introduced in the Budget sittings. Similarly, rates of tax for 1984-85 in respect of superannuation funds will be dealt with then. I commend the Bill to the Senate.

Debate (on motion by Senator Collard) adjourned.