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Wednesday, 1 June 1994
Page: 1013


Senator BOLKUS (Minister for Immigration and Ethnic Affairs and Minister Assisting the Prime Minister for Multicultural Affairs) (9.43 a.m.) —I table a revised explanatory memorandum and move:

  That this bill be now read a second time.

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

  Leave granted.

  The speech read as follows

This bill will amend the taxation laws in a number of respects, giving effect to several previous announcements, including one measure announced in the 1993-94 Budget. It will also make a number of amendments which have not previously been announced.

Capital gains tax measures

On 12 January 1994, the Government announced proposed amendments to the capital gains tax provisions. This bill gives effect to all but one of the proposed amendments. The amendments relating to the assignment of prospective shares of interests in partnerships will be included in a bill to be introduced later this year.

The proposed amendments fall into three broad categories:

first, measures directed at emerging capital gains tax avoidance practices that, if left unchecked, would have posed a significant threat to the revenue at the expense of taxpayers generally;

secondly, measures directed at reducing the capital gains tax compliance burden on taxpayers; and

thirdly, measures directed at redressing certain unintended consequences of the capital gains tax provisions.

I wish to express the Government's gratitude to representatives of the taxation profession for their suggestions as to how the proposals could be implemented to reduce the compliance burden on taxpayers and yet ensure that tax avoidance opportunities were closed off.

Although the Government has not accepted all of those suggestions, I am pleased to announce that it has accepted many of them. This has meant that some of the proposals announced have had to be modified. Full details of all the modifications at the initiative of the profession or the Government were included in a press release issued when this bill was introduced into the Parliament.

I turn now to the measures themselves.

Rebatable dividend arrangements

The bill will counter certain arrangements that involve the avoidance of capital gains tax through the payment of rebatable dividends. The disposal consideration for shares in a company or the amount of capital treated as paid back on shares will include distributions made by the company that are treated as funded out of certain share premium amounts or revaluation reserves. Any capital gain computed having regard to the disposal consideration or the amount of capital paid back will not be reduced by the amount of the distributions that are treated as rebatable dividends.

The amendments relate to:

liquidators' distributions;

off-market share buy-backs;

other disposal of shares; and

amounts of capital paid back on shares.

The amendment will apply to disposals of assets after 12:00 midday Eastern Summer Time on 12 January 1994.

This measure has the potential to prevent a significant future loss to revenue.

Pre-acquisition profits

The bill will deny any part of a capital loss to a controlling shareholder or associate that is attributable to distributions of pre-acquisition taxed or untaxed profits of the company in which the shares are held.

The amendment will apply to disposals of shares made on or after 24 March 1994.

This measure guards against a significant future loss to revenue.

Value shifting

The bill will remove certain capital gains tax advantages of value shifting transactions involving shares. The amendments will apply to material shifts in value between shares held by the controller of a company and associates. A value shift will be material if the value shifted is at least the lesser of 5 per cent of the value of the shares or $100 000.

The amendment will apply to material shifts in value of shares effected after 12:00 midday Eastern Summer Time on 12 January 1994.

This measure will protect the capital gains tax revenue base and prevent a significant future loss to revenue.

Disposal of assets without a change in beneficial ownership

At present a change in the legal ownership of an asset without a corresponding change in beneficial ownership does not constitute a change in ownership and hence a disposal within the meaning of the capital gains tax provisions. The bill will ensure that this is so only in two situations:

first, on the establishment of a trust other than a unit trust over property previously owned by a person where that person, as beneficiary of a trust, remains absolutely entitled to it or would remain so if it were not for a legal disability; and

secondly, when there is a change in trustee without any other change in the ownership of the trust property.

Transfer of assets to a unit trust will constitute a change in ownership and so a disposal.

The amendment will apply to changes in legal ownership of assets after 12:00 midday Eastern Summer Time on 12 January 1994.

This measure has the potential to prevent a significant future loss to revenue.

Transfer of assets within company groups

At present, a requirement for obtaining roll-over relief for transfers of assets within a wholly owned company group is that the transferor and transferee companies are group companies for the whole of the year of income in which the transfer takes place.

The bill will alter this requirement so that the transferor and transferee will only need to be group companies at the time of transfer.

The amendment, which will be to the advantage of taxpayers, will apply to disposals of assets in the 1993-94 income year and later income years.

This measure will have a small, but unquantifiable, cost to the revenue.

Transfer of assets within company subgroups

The bill will ensure that roll-over relief on asset transfers between group companies will not be recaptured if, in broad terms, the asset has remained in a company subgroup and the subgroup was disposed of by the parent company.

The amendments, which will be to the advantage of taxpayers, will apply to disposals of assets after 16 December 1992, the date of application of the relevant section.

This measure will have a small, but unquantifiable, cost to the revenue.

Group company capital loss transfers

The bill will ensure that adjustments are made to the cost base of shares in a group company to which a loss is transferred and for subvention payments.

The amendment, which will be to the advantage of taxpayers, will apply to agreements to transfer losses against capital gains derived in the 1993-94 or later income years, even if the loss was incurred in an earlier year.

This measure will have a small, but unquantifiable, cost to the revenue.

Assets used by non-residents in Australian permanent establishments

Capital gains tax is payable on disposals of assets used by non-residents in permanent establishments in Australia.

The bill will ensure that capital gains tax is paid by reference only to the gains that accrued during the period of use of the asset in the permanent establishment in Australia. Likewise, the bill will allow a capital loss only to the extent to which it accrued during that period.

The amendment will apply only if the asset does not qualify as a taxable Australian asset under any of the other categories of taxable Australian assets.

This amendment will apply to disposals of assets after 12:00 midday Eastern Summer Time on 12 January 1994.

This measure will represent a cost to the revenue of less than $1 million per year.

Division 19A and liquidators' distributions

The bill will ensure that Division 19A of the capital gains tax provisions does not apply to in specie distributions made by the liquidator of a company to shareholders if the liquidation is completed and the company dissolved within a period of three years after liquidation proceedings commenced. The Commissioner of Taxation will be authorised to allow extensions of time in appropriate cases.

The amendment will be to the advantage of taxpayers and will apply to disposals of assets after 6 December 1990, the date of application of Division 19A.

This measure will result in an insignificant cost to the revenue.

Government incentive schemes

The bill will exempt from capital gains tax the reimbursement or payment of certain expenses under Commonwealth, State or Territory incentive schemes as prescribed by regulation.

The amendment, which will be to the advantage of taxpayers, will apply to all reimbursements and payments of expenses made under the prescribed schemes.

The estimated cost of this measure is less than $1 million per year.

Amendment of assessments

The bill will ensure that the time limits normally applicable to the making of amended assessments do not apply to amendments that give effect to the time of acquisition or disposal of assets under a contract or the time of disposal of assets that are compulsorily acquired.

The bill will also ensure that the time limits normally applicable to the making of amended assessments do not apply to amendments that give effect to the finding that a contract was a nullity from the beginning.

Generally, the amendments to the law will apply to assessments made at any time. However they will not allow an amendment of an assessment that would increase a taxpayer's liability if the Commissioner of Taxation was prevented from amending the assessments as at the end of 11 January 1994.

This measure will result in an insignificant gain to the revenue.

In addition to the capital gains tax changes, the bill makes amendments in a number of other areas.

Accruals assessability of certain securities

The amendments being made by this bill to Division 16E of Part III of the Assessment Act will remove unintended tax deferral advantages of some securities covered by the Division.

Tax deferral occurs because Division 16E in its current form includes the fixed component of the return on variable return securities in assessable income by spreading it evenly over the term of the security. That form of accrual is inconsistent with economic reality. For declining balance securities, more income is earned in the earlier years and less in the later years. The greater the fixed component of the return from a security, the greater is the income deferral.

The bill will amend Division 16E so that all returns—both fixed and variable—from variable return securities will be brought to account under a compounding accruals accounting method.

This solution is already adopted in Division 16E in relation to fixed return securities.

The proposed amendments to Division 16E will apply to qualifying securities issued after 27 January 1994.

They are expected to result in revenue savings of $10 million in 1993-94, $18 million in 1994-95 and $26 million in 1995-96.

The bill will also remove an unintended consequence of Division 16E to securities issued in a series. It will ensure that if the first security issued in a series is not a qualifying security within Division 16E, securities issued later in the series, i.e. under the same terms and conditions, will not be qualifying securities either. It will apply to qualifying securities issued after the commencement date of Division 16E (16 December 1984) and should not have any revenue impact.

Secrecy

The bill will also amend the secrecy provisions to let the Commissioner of Taxation tell the Health Insurance Commission whether or not a registered carer or an applicant for registration as a carer under the new childcare rebate scheme has a tax file number.

The amendment, which will not impact on the revenue, does not let the Commissioner of Taxation give the carer's tax file number.

HECS: Inclusion in provisional tax calculation

This bill also contains amendments to include Higher Education Contribution assessment debts in calculating provisional tax for the 1994-95 and later years of income.

This measure, announced in the 1993-94 Budget, complements the inclusion of HEC assessment debts in the PAYE arrangements and will bring forward revenue by approximately $12 million in 1994-95, $3 million in 1995-96 and

$2 million in 1996-97.

Offshore banking units

The offshore banking unit (OBU) concessional tax regime has now been in operation for over 18 months. While the Government does not yet know precisely how successful the new measures have been in establishing Australia as an offshore banking centre, the number of registrations and requests for advice suggest a reasonably high level of interest.

There has been extensive consultation with the banking and finance industry and their advisers ever since the Government first announced its intention to tax OBU income at a concessional rate.

As a result the Government has now decided to extend the scope of possible borrowing and lending activities to include gold borrowings and gold loans. The measure will further promote Australia as a viable offshore banking centre.

However, the Government also recognises the need to balance the development of a viable offshore banking centre with the need to protect the revenue. The bill will also amend the OBU provisions to make it clear that a guarantee, letter of credit or performance bond must be in respect of activities of offshore parties and outside Australia in order to attract concessional tax treatment.

The opportunity has also been taken to correct some minor technical deficiencies.

The amendment is likely to have a positive but unquantifiable revenue effect.

Foreign investment funds and foreign life insurance policies

The foreign investment fund measures, which took effect from 1 January 1993, are part of Australia's comprehensive system of taxation of foreign source income.

Changes in the foreign investment fund measures were announced by the Treasurer on 22 December 1993.

Some changes provide a holding company exemption for certain indirect investments in foreign companies which carry on general insurance, life insurance, real property or certain multi-industry activities.

In addition, activities in connection with construction will be excluded from the general non-exempt list of activities. This means an investment in a foreign company which is principally engaged in construction activities may qualify for the active business exemption. Australian taxpayers who have an interest in the company will not be subject to taxation under the foreign investment fund measures because of that interest.

The amendments will have minimal effect on revenue.

Non-compulsory uniforms or wardrobes

Recently introduced rules limit the general income tax deduction for expenditure by employees on non-compulsory uniforms and wardrobes that do not comply with the Occupational Clothing Guidelines.

Currently, a deduction may be denied under the rules for expenditure on what may be called occupation specific clothing (for example, nurses' traditional uniforms) merely because the uniform could be linked with a particular employer (perhaps by a logo).

The proposed amendments will exclude occupational specific clothing from having to comply with the guidelines. The amendment will be backdated to the commencement date of the new rules.

The Government has also decided to extend and modify the transitional arrangements for non-compulsory uniforms and wardrobes.

A transitional arrangement operates to generally allow deductions for expenditure incurred before 1 July 1994 on clothing approved by the Commissioner of Taxation.

The transitional arrangement will be extended for an extra year so that it will now apply to expenditure incurred before 1 July 1995. This will allow clothing manufacturers to use up existing stocks of clothing approved by the Commissioner.

The transitional arrangement will be modified to let the Commissioner give deductions for expenditure incurred before the actual approval was given.

The impact on revenue of these measures is negligible.

Gifts

The bill will amend the gift provisions of the income tax law to allow deductions for gifts of $2 or more made, during limited periods, to The "Weary" Dunlop Statue Appeal and to The Sandakan Memorials Trust Fund.

The "Weary" Dunlop Statue Appeal will raise funds to assist with the erection of a statue in honour of the late war hero and humanitarian, Sir Edward "Weary" Dunlop.

The Sandakan Memorials Trust Fund will raise funds to assist in establishing memorials in various places throughout Australia in memory of those Australians who died at Sandakan prisoner of war camps during World War II.

The impact of the amendments on revenue is not expected to be significant.

Depreciation of employee amenity property

Property used by a taxpayer mainly to provide certain amenities in the workplace for employees and their children qualifies for a high minimum rate of depreciation.

The amenities must be used mainly for the benefit of the taxpayer's employees or children of those employees. This can cause difficulties where employees of other companies within a wholly-owned company group share the use of the amenities.

Accordingly, the law is to be amended so that the concession will apply on a wholly-owned company group basis.

The amendment will apply from the commencement of the 1993-94 year of income in relation to existing and future property.

This measure was announced on 29 November 1993. The impact on revenue is unlikely to be significant.

Development allowance and general investment allowance

Two amendments announced on 29 November 1993 are to be made to these allowances. One relates to the use of property within wholly-owned company groups so that a taxpayer may qualify for the allowance even where the right to use the relevant property has been granted to another wholly-owned group company. The revenue cost of this amendment is unlikely to be significant.

The other will extend the allowances to property for use in the transport of minerals and quarry materials. The cost to the revenue of this measure is unlikely to exceed $20 million per annum over the term of the allowances.

A third measure, not previously announced, will simplify procedures for a leasing company to transfer its entitlement to the development allowance to a lessee. This amendment is revenue neutral, but should reduce the compliance costs of leasing companies.

The first two changes apply from the time when the allowances commenced; that is 27 February 1992 in the case of the development allowance, and 9 February 1993 in the case of the general investment allowance.

The third amendment will apply to leasing arrangements entered after the day on which this bill receives Royal Assent.

Constitutionally protected superannuation funds

The bill proposes to exempt from tax all income derived by certain State public sector superannuation funds that are constitutionally protected from tax on any of their receipts.

The amendment will ensure that benefits in a constitutionally protected fund are not taxed partly in the fund's hands during the accrual period and again on payment out of the fund following the decision of the High Court of Australia in The State of South Australia & Anor v The Commonwealth of Australia & Anor (1992) 105 CLR 171.

The amendment will apply with effect from 1 July 1993. However, if a constitutionally protected fund has not paid income tax on the assumption that all its income was exempt from tax, the amendment will apply from 1 July 1988.

The amendment has been developed in consultation with the State Governments and is expected to have a minimal financial impact.

Fringe benefits tax measures

Entertainment expense payments

As part of the 1993 Budget measures, amendments were made to the fringe benefits tax and income tax legislation so that certain benefits provided by an employer to an employee or an associate of the employee in connection with entertainment would become liable to fringe benefits tax.

The amendment made by this bill will ensure that the method of payment of the entertainment expenses does not change the amount of fringe benefits tax payable on that entertainment.

The impact on revenue of this measure is negligible.

Benchmark interest rate

Under the existing fringe benefits tax law, a loan fringe benefit arises when an employer makes a low interest loan to an employee.

The amount of that benefit will be the difference between the lower interest payable and the interest that would be payable using the market interest rate. At present, this market interest rate is based on the lowest rate of interest offered by the Commonwealth Bank on a housing loan at 31 March preceding the fringe benefits tax year.

This rate includes any `capped rate' available at that time. However, as capped rates are lower than normal market rates, the taxable value of the benefit understates the real benefit of the low interest loan.

The bill will provide that the market rate will be the standard variable rate for owner-occupied housing loans of the major banks as determined by the Reserve Bank of Australia.

The financial impact of the amendment will be a gain to the revenue of $60 million in the 1994-95 year and $45 million in the 1995-96 year.

Outdated references

The bill also makes minor technical amendments to update relevant references to provisions of the United States Internal Revenue Code in order to ensure the technical accuracy of Australian income tax law and will have no practical effect on the application of the section.

There is no impact on the revenue.

Full details of the amendments are contained in the Explanatory Memorandum circulated to honourable senators.

  Debate (on motion by Senator Reid) adjourned.