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Thursday, 22 April 1999
Page: 4093


Senator LUNDY (10:00 AM) —Whilst the government's proposal to encourage Australian businesses to become Y2K compliant is sensible and should be supported, it must also be noted that there are significant gaps in its proposals. This legislation provides no scope for immediate deductibility of expenditure which has occurred after 1 January 2000. Under this system, such expenditure will, for consideration, fall under the proposed new general rules and will generally have to be written off over a far lengthier period.

This is an unusual approach for the government, as presumably the proportion of expenses relating to the development of software to overcome the millennium bug after 1 January 2000 will be devoted to urgent remediation works required for systems which are either not functioning properly or not functioning at all. Indeed, these problems may not become immediately apparent. Rather, the progressive corruption of the software will occur over time, and those problems will only come to light as they impact upon business operations.

Surely responsible government should be encouraging businesses to remedy any problems and give them an entitlement to an immediate deduction for remedial millennium bug expenses, at least until 30 June 2000. For this reason, the opposition has proposed an end date of 1 July 2000. This amendment merely brings forward the expenses that would otherwise be claimed later, thus allowing savings to be made in the government's forward estimates which would no doubt have been factored into the government's estimates of the general software depreciation provisions.

The inclusion of a multiple purchase rule in the bill means that, when the total expenditure on identical software in an income year is $300 or less, an immediate write-off of expenditure is available to businesses. This is a measure which the ALP supports, as it effectively means that these minor assets will be treated in the same manner as all items of plant and equipment which are valued at under $300.

This bill also provides special rules for those who develop software. These taxpayers will be able to make a once-only election to pool their expenditure. Once this election has been made, all expenditure incurred in the developing of software in an income year is to be pooled and written off at a rate of 40 per cent in the following two years and 20 per cent in the third year. This is a reasonable position for the government to take, given its claims that this write-off strikes an appropriate balance between considerations that software is a capital expenditure which should be amortised for taxation purposes and the relatively short expected life of software arising from rapid developments in the information technology sector.

This bill highlights an area that is worthy of political attention generally, and that is the tax treatment of this particular product and of the recognition of the crucial capability of software to unlock digital knowledge and information. Software expenditure is a significant and increasing expense of business, particularly if it is viewed in the context of converging technologies. It is also an important consideration, given the rapid rate at which online services facilitated by electronic commerce are developing. Every business now is faced with the challenge of either procuring proprietary software or, indeed, building their own business solutions in a computer or digital environment.

The Internet as a distribution channel for services as well as for retail sales will draw a significant proportion of commercial activity in the future. I cannot think of a business or a commercial entity that will not be confronted by the challenge of working within a digital environment in the very near future. The international nature of the Internet, where location is irrelevant and any form of control is extremely difficult to establish, has the potential to significantly affect other taxation issues, such as taxation revenue, in many countries. The Internet has progressed beyond being an efficient communications medium to become a supply medium. However, the way in which products are delivered on the Internet is determined by the degree to which physical products can be transformed into digital products.

Information is the most obvious commodity for electronic commerce conveyed through a digital environment and includes both knowledge based products and computer software, including software fixes or patches and new versions and upgrades. This information exchange has the potential to significantly impact on taxation revenue. One example of this problem would include the difficulties associated with isolating an online business which deals in Y2K remediation software to a particular country or location for taxation purposes. This is due to the high global connectivity of the business environment with the Internet facilities and the potential for businesses to locate their premises, their fixed addresses, in nations which provide the best tax benefits. The interaction of this anomaly with the changes proposed in this bill will therefore need to be closely monitored due to the possibility of businesses being able to operate in a particular country in a virtual sense.

We agree with the need for business tax changes, and we are prepared to give support to measures where it can be demonstrated, as in this case, that those changes will improve productivity and growth by adding to jobs and strengthening industries. It seems to me that this bill certainly recognises current changes and challenges confronting businesses in their growing need for expenditure on software and digital products. In resisting the temptation to speak at length about the GST, I would comment that the information technology sector is finding it hard enough to deal with the issues of the year 2000 problem without having to face the complex issues of the GST which it now has to deal with.

Time is required for redevelopment and testing of the new software, and the increased cost of software under a GST is yet another barrier the coalition government has created, and one which may begin to stifle this area of Australian innovation. It is interesting to note that whilst the government, in the construction of this bill, is offering a taxation benefit for the costs incurred with Y2K, if the GST bills are passed all software purchased will incur an additional 10 per cent on those costs. So there is some irony in this bill. While providing some respite for business, the overall costs of software to businesses—whether they are for Y2K remediation purposes or for general business operation—will increase under a GST.