Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
 Download Current HansardDownload Current Hansard   

Previous Fragment    Next Fragment
Wednesday, 8 June 1994
Page: 1519

Senator WATSON (4.46 p.m.) —I thank the minister for his response in relation to HECS now being payable in instalments during vacation employment. I am sure that students will be particularly disappointed with this, particularly students who are required to undertake long periods of study, such as engineers, doctors and others. HECS will now be taken out of this valuable money they see as providing them with living expenses during their sojourn at university.

  Certainly, when we thrust the responsibility back on the three tiers of the tertiary education sector—the students, the union and the vice-chancellors—we did so on the basis that it would subject this legislation to the same degree of rigorous analysis that we did. Also, I ask the minister for a concession—which I think could be forthcoming—that when the government introduces its legislation relating to the pro rata amounts issue, could it give this issue that has just been raised further consideration? Can vacation employment be exempted from the payment of HECS so that it starts after a course has been abandoned or when a course has been completed?

  I would also like to take this opportunity to comment on an article in today's Australian referring to Mr John Mullarvey, the acting executive director of the Australian Vice-Chancellors Committee, who allegedly said that he was happy that the opposition has finally seen sense. That sort of concept seemed to permeate the particular article. I must say that I took some little offence at the condescending nature of that comment. While I acknowledge that we gave way to the force of arguments raised by the three elements in the higher education sector, we did so on the basis that they would do a thorough and robust analysis of all the issues involved, including the sorts of questions that have been raised during this debate, some of which were of great concern to us.

  I say now that it is very much on the heads of those three bodies to take full acceptance regarding what they recommended to this party and the manner in which they leaned upon us. It would have been unreasonable for us not to accept the fact that, given their high learning and their interest in this particular subject, they did not participate in this debate without that very comprehensive analysis and on the basis of full consultation with the groups that they represented.

  Given the fact that we are under very tight time restrictions, and the fact that there are fundamental issues changing the taxation structure in Australia, I have been requested to incorporate in Hansard the remainder of my comments relating to the general debate. I do not think that will take very much away from what is required, given the arrangements that the minister raised today in terms of the Acts Interpretation Act. Having made those comments, I now seek this opportunity to have the rest of my contribution, which I have put in writing, incorporated in Hansard. I seek the minister's full response on the questions that are implicit in the debate.

  The TEMPORARY CHAIRMAN (Senator McKiernan)—Is leave granted?

Senator Cook —Yes.

Senator Bell —I will not deny leave, but I am disappointed that we will not have the opportunity to hear Senator Watson's very carefully considered questions on this matter. I would thoroughly appreciate that opportunity. But if it is his wish, leave is granted.

  Leave granted.

  The document read as follows

General comments

The Government has taken tentative steps to establish Australia as a viable regional headquarter for multi-nationals. Can the Government advise whether any analysis has been made of the impact of these complex capital gains tax amendments on the attractiveness of Australia as a regional headquarter for American or European companies investing in the Asia Pacific region?

Will the Government advise as to how this Bill can be said to be constitutionally valid under section 55 of the Constitution which requires there be only "one subject of taxation", namely a tax upon income, given that the Bill purports to tax taxpayers on notional unrealised accruals and deemed capital gains when they have not sold any shares and the shares have depreciated in value or under a declaration of a unit trust where there has been no change in the legal or beneficial ownership of an asset and no disposal of the asset?

I repeat what I asked in second reading—why are the capital gains tax provisions necessary when there is already, within our complex tax system extensive anti-avoidance measures. The second reading indicated that the Government's intention was to catch them since they would have posed a significant threat to the revenue—this is not a satisfactory explanation.

I strongly urge the Government to adopt this approach of introducing amendments in the House of Representatives as the standard procedure instead of its usual stunt of introducing amendments at the last minute in this Chamber. That having been said I am concerned that, for example, the new formulae in Division 19B are extremely complex and I am not confident that there has been sufficient time for everyone to "get their minds around" the amendments. I have received a representation that goes so far as to say the provisions are "of almost unprecedented mathematical complexity". This seems to be yet another area where the Government cannot make equity and simplicity run together .

Division 19B: Clauses 25,26,27 : Share value shifting

General comments

The value shifting provisions in Subdivision A of Division 4 of the Bill have attracted a lot of interest as the government would be well aware. In fact I would go so far as to say that the amendments are the most significant CGT amendments since the amendments to the "terrible twins" subsections 160M (6) and (7) in 1992. They address many of the prime concerns of the accounting industry although the industry still has some problems with the legislation.

These few pages of legislation will potentially have a significant impact and will become an essential reference point for all tax professionals advising on structuring large and small companies alike. The provisions will have a large impact for one simple reason—it is very common in Australia for one company to control another given the existing control test. Given this it is of concerns that the provisions ignore whether a company actually makes a gain and whether the shares later fall in value.

I would also like to stress my concerns about the potential impact of these provisions on mums and dads companies. The Government will certainly need to engage in a publicity campaign aimed at small business so that small business does not inadvertently fall within the Division 19B net. I call for an assurance that it will do so.

One might have reasonably thought that the existing anti-avoidance provisions would be sufficient to overcome the type of abuse that could occur if, for example, a tax payer entered into a gross value shifting arrangement such as those identified in various death duty avoidance arrangements.

Australian entities owning operations overseas face difficulties without these value shifting complications be added. The share value shifting provisions will make the raising of new capital by private companies extraordinarily timorous. The share price at which new capital has to be raised will required considerable precision and the fact that the provisions will extend to capital changes undertaken by subsidiary companies far remote from Australian operations damns them.

Another of the consequences of these provisions is that conservative practitioners who did not carry out the artificial transactions at which the provisions are targeted seem incompetent for not having engaged in them.

I also have concerns about the cost of monitoring and complying with the share value shifting provisions on the corporate community. They will far outweigh the tax lost to those who innocently run into a shift of share values.

I now turn to some more particular comments about the value shifting provisions. It appears that the value shifting provisions could apply to public floats (where shares will often be offered at a discount on market value to obtain full coverage for the issue) and section 26AAC employee share schemes (where shares will be issued at a discount on market value to employees). I have real concerns about this. The object of the original provisions was to overcome situations where value shifting creates the effect of a disposal of a share or shares without an actual disposal for CGT purposes. The potential application of these provisions to public floats and employee share schemes is surely an unintended consequence of the provisions. When they are available on a widespread basis they are normally on commercial terms and will not be transactions which are contrived to overcome the effects of the CGT provisions. These should clearly be exempted from the value shifting provisions in order to avoid confusion as to which provisions take precedence and, at worst, result in a double taxation impost or multiple cost base adjustments.

Will the Government give an undertaking to examine this issue closely with a view to excluding such transactions and employee share plans from the operation of Division 19B?

My next point is that page 14 of the supplementary explanatory memorandum concedes that both subsection 160M(7) and Part IVA may continue to apply to share value shifting arrangements. It states that where new Division 19B applies subsection 160M(7) will not operate—but that the operation of Part IVA is not excluded.

Will the Government advise as to the policy behind excluding the operation of 160M(7) but not Part IVA?

Will the Government advise why this is in the Explanatory Memorandum and not in the Bill itself—is it purporting to make law by Explanatory Memorandum?

The EM also advises that to the extent that a share value shift is addressed by the specific provisions of Part IIIA relating to the issue of bonus shares those provisions apply to the exclusion of new Division 19B.

Will the Government give a firm assurance that bonus shares will only be dealt with under Part IIIA (given that there is no explicit exclusion clause).

Division 19B does not offer rollover relief to corporate groups with respect to value shifting arrangements. I call on the Government to give further consideration to this matter.

My final series of questions with respect to the share value shifting provision raise some interesting points. Can the value shifting provisions be used to avoid tax in the situation where a non-resident shareholder shifts value into shares held by Australians to increase their cost base? How can a capital gains tax liability be enforced against such a non-resident shareholder if it is a resident of certain treaty partners, where the treaty limits Australia's taxing rights as to capital gains? How can any capital gains tax liability be enforced against such a non-resident shareholder in any case, if it has no assets in Australia and the shares from which value has been shifted are subsequently worthless?

Clause 26: proposed section 160 ZZRO: materiality test

The materiality test only requires a shift in market value of more than the lesser of 5% in value or $100,000 which is not a very material for a large corporation. I urge the Government to give very serious consideration to revising the test to 10 or 15% or $0.5 million.

The Government surely appreciates after speaking with business groups that the low materiality threshold test will create practical problems for corporations. Taxpayers may find themselves inadvertently within Division 19B, for example, by simply failing to precisely value a company which they control when subscribing for additional shares.

Clause 26: proposed sections 44—46 : Companies ceasing to be related

Clause 45 of the Bill relates to companies ceasing to be related after section 160ZZO application. Its amendments to section 160ZZOA do not reflect the tenor of the relevant attachment to the 12 January announcement of the CGT changes, which this Bill incorporates.

Section 160ZZOA is an anti-avoidance provision designed to avoid abuses of the company rollover provisions of the CGT provisions. That section currently operates in circumstances where two group companies have taken 160ZZO rollover relief in relation to the transfer of an asset and the transferee company is not the "ultimate holding company" of the group of companies. Should the transferee company cease to be a subsidiary of the ultimate holding company after the transfer of the asset, then the transferee company is taken to have disposed of the rolled over asset for an amount equal to its market value at that time and to have immediately reacquired the asset for the same amount, thus bringing to account for tax purposes the capital gain inherent in the asset. Given the 100% beneficial ownership requirement needed to qualify a company as a "subsidiary" of another company it is easy to see that the transferee company would cease to be a subsidiary of the ultimate holding company should any part of that 100% relationship be broken.

The ownership test was seen to give rise to unintended adverse consequences for large wholly owned company groups where each company (except the ultimate holding company) would be considered a subsidiary of all other companies. The proposed amendment will exempt an "eligible sub-group break-up" from the adverse impact of section 160ZZOA. However the definition of "eligible sub-group break up" does not give full effect to the 12 January announcement. It restricts the benefit of the amendment to corporate reorganisations where a complete disposal of the relevant sub-group wit the result that:

if all shares in the relevant companies of the sub-group continue to be beneficially held by the ultimate holding company of the group then the provisions of section 160ZZOA are not triggered:

if all shares in the relevant companies of the subgroup are completely disposed of by the ultimate holding company and any related company to unrelated parties then 160ZZOA will not be triggered; and

if any percentage beneficial ownership interest (other than 100%) in those relevant companies of the sub-group is transferred by the ultimate holding company or by an related company to an unrelated party, then the beneficial effect of the proposed amendment to section 160ZZOA will not be available.

There does not appear to be any policy reason or logic for denying the beneficial effect of the proposed amendments to reorganisations where a less than 100% interest in the sub-group is disposed of to an unrelated party.

The provisions as drafted, I therefore argue, are too narrow and operate inequitably.

Will the Government give an assurance that it will give further consideration to those situations?

Clauses 50—53: Amendment of Assessments

Clauses 50—53 seek to enlarge the Commissioner's powers to issue an amended assessment in relation to capital gains. Currently the Commissioner has four year to amend an assessment, commencing at the date tax is payable under the original assessment. Clause 52 of the Bill attempts to remedy certain problems with the existing provisions but create its own. It appears to give to give the Commissioner unrestricted time limits for issuing amended assessments in respect of capital gains even where there has been no delay between the contract date and the disposal date. This is a matter of concern and I would hope only a matter of poor drafting and not the result of a policy decision.

Where a taxpayer disposes of an asset under a contract entered into more than four years before the time of disposal these amendments create difficulties for the taxpayer. An example would be the disposal of land under a terms contract in 1987 but the title to the land would not pass until 1993. By the time there had been an actual disposal the Commissioner would be too late to tax the capital gain.

Clause 52 attempts to remedy this by removing all time limits on the commissioner's powers to issue assessments where an asset has been disposed under a contract or as a result of compulsory acquisition. But in the process seems to give the Commissioner unrestricted time limits for issuing amended assessments in all cases.

Did the Government intend to create this situation or does it concede that the result referred to is the result of poor drafting?

A simple amendment would correct this poor drafting and I call on the Government to undertake examination of this issue with haste.


The amendments create the result that the provisions are becoming incredibly complicated and corporate clients are not prepared to pay the record keeping expenses to their accountants to meet the requirements. The loss transfer provisions have been in existence for insufficient time for business to monitor their operation in practice. I call on the Government to search for a simpler solution.

Clause 63—71: Rebateable dividend adjustments

The provisions dealing with payment of rebateable dividends out of pre-acquisition profits will have wide application—in fact, probably to all Australian companies buying shares in other Australian companies. Companies who have bought shares will need to look at what the effect of receiving rebateable dividends and the effects on the cost base of their shares. Apart from those wide implications has the government taken into consideration that it would be unusual for companies paying dividends to turn their minds to whether or not they were paid out of pre-acquisition profits or not.

Clause 70

I refer to proposed section 160ZLA(4)(iii)(B) which addresses the situation where a distribution is and I quote "for the purposes of 160ZL—in connection with a reduction in the capital of the company". Can the Government advise why there is different treatment of dividends paid out of asset revaluation reserves which are connected with a reduction in capital and those which are not connected with a reduction in capital. In both circumstances the impact on the share price will be the same.

Will the Government undertake to make a clear statement confirming that a loss company which receives a distribution will not obtain a dividend rebate and will consequently not be subject to dividend rebate adjustments.

Division 8, Subdivision C: Clauses 97—105: Constitutionally protected superannuation funds

Prudential Corporate Management Limited has made a representation to me concerning the effect of these provisions.

State Government Superannuation funds and tax exempt bodies such as registered charities and churches have been prohibited from investing on a tax exempt basis in Life Office Statutory Funds.

A recent High Court decision, State of South Australia v Commonwealth of Australia & Anor held that State superannuation funds which are constitutionally protected are exempt from tax on part of their income.

This Bill replaces the definition of constitutionally protected fund. Prudential welcomes the legislation in that it confirms the High Court's decision.

However they believe the Bill could be improved by removing an inconsistency which the Bill creates by treating constitutionally protected superannuation funds and tax exempt entities such as churches and charities differently under the Income Tax Act.

They argue that the Bill will mean that constitutionally protected super funds will be able to invest (on a tax exempt basis) in life offices while the tax exempt bodies will not.

They suggest that the legislation could be improved by removing the distinction and affording tax exempt bodies the same tax treatment as superannuation funds. They suggest an amendment to the definition of constitutionally protected superannuation funds to include tax exempt bodies such as registered charities and churches.

Clauses 128—130: FBT and entertainment expense

Clauses 131—134: Income Tax and entertainment expense

I would like to make a few general comments concerning the existing FBT regime. I call on the Government to investigate extending grouping rules to FBT. The current approach of a single entity approach is artificial. At the same time the Government must give serious consideration to making the grouping rules uniform throughout the Income Tax legislation including payroll and income tax areas.

The Government appears to have lost sight of the original policy behind FBT. This is illustrated by extending FBT to entertainment expense which we are examining here. The business lunch is clearly a legitimate business expense aimed at furthering the business.

Can the Government explain why FBT has been extended to entertainment expense given this together with the fact that it is not a "benefit" convertible to cash.

The removal of the client's part of entertainment expenses raises substantiation issue questions. Will the Government give an assurance that if the employer cannot prove that a client was entertained that the whole of the expense will be deductible to the employer but liable to FBT?

Clauses 123—125: Occupational specific clothing

The Explanatory Memorandum in paragraph 23.1 provides that section 51AL will be amended so that it does not apply to occupation specific clothing and continues in paragraph 23.2 to say that by removing occupation specific clothing from the operation of the new rules expenditure on such clothing can be considered for deduction under subsection 51(1) of the Act.

I refer to the recent Full Federal Court Case, FCT v Edwards in which the Court held that expenditure on additional clothing of a conventional kind and worn in a conventional way, could be deductible, and each case needed to be approached on its particular facts.

Having read the explanatory memorandum and particularly paragraphs 23.15 and 23.21 I am very concerned that it does not totally reflect the law including Edwards case. Those paragraphs in particular seem to indicate that occupational specific clothing, which now will come within subsection 51(1) will need to be unconventional in nature if it is to be deductible under that subsection.

Would the Minister clarify the position with respect to conventional clothing given the references to unconventional nature of clothing in the explanatory memorandum.

Clause 124 inserts a definition of "occupation specific clothing" which I shall quote:

The definition is very specific. Can the Government advise what the practical effect of the definition is?

Clothing such as a white jacket or coat worn with white trousers, which might be worn by a pharmacist or health workers may indicate that the wearer belongs to the health profession but it does not readily identify the specific or particular occupation of the wearer. The wearer could be a pharmacist, dentist or a number of other occupations.

Will the Government confirm whether such clothing, whether or not it notes the name of the employer will no longer be deductible under these provisions?

Will the Government advise what the fringe benefits tax implications for employers who have supplied their employees with a white uniform which notes its name, but which cannot be said notes which profession or trade the wearer belongs?