TAX LAWS AMENDMENT (2006 MEASURES No. 7) BILL 2006

This bill implements a number of changes and improvements to Australia’s taxation system.

Schedule 1 to the bill amends the capital gains tax concessions for small business. It will increase the availability of these capital gains tax concessions and reduce the compliance costs of small business.

The amendments will improve the operation of the small business capital gains tax concessions by making changes to the maximum net asset value test, the 15-year exemption, the retirement exemption, the small business roll-over and how the concessions apply to partnerships and deceased estates.

The amendments also replace the controlling individual 50 per cent test with a significant individual 20 per cent test that can be satisfied either directly or indirectly through one or more interposed entities. The significant individual 20 per cent test enables up to eight taxpayers to benefit from the full range of concessions instead of the current limit of two controlling individuals or one controlling individual and their spouse.

Schedule 2 more closely specifies the types of financial instruments that will be eligible for interest withholding tax exemption, provided the public offer requirement and certain other conditions are met.

These amendments are not intended to upset the long held and accepted market views as to what constitutes a debenture.

They will ensure the Government’s policy intent is met when providing interest withholding tax exemptions. The policy intent is, provided certain conditions are met, to ensure Australian business does not face a greater cost of capital as a consequence of the imposition of interest withholding tax.

Schedule 3 gives effect to the Government’s announcement in the 2006-07 Budget that it will enhance philanthropy by streamlining the deductible gift recipients (DGR) integrity arrangements and reduce compliance requirements of DGRs. This is achieved through removing the gift fund requirement for certain DGRs and allowing the consolidation of multiple gift funds for others, while making it a requirement for all DGRs to maintain adequate records to show the deductible public donations they receive and their use.

The amendments also align the integrity arrangements across all DGRs by allowing the Commissioner of Taxation to review whether an entity listed in the law continues to be eligible to receive deductible gifts, in the same way that the Commissioner can review the eligibility of those entities that require the Commissioner’s endorsement.

Schedule 4 of this bill amends the list of deductible gift recipients in the Income Tax Assessment Act 1997, by extending the time period for which four entities can receive tax deductible donations. Extending the deductible gift recipient status will assist the listed organisations to attract public support for their activities.

Schedule 5 of this bill preserves the current effective life depreciation arrangement that applies to tractors and harvesters used in the primary production sector. The measure will provide certainty to farmers in this time of drought.

Schedule 6 will amend the farm management deposit scheme to increase the non-primary production income threshold from $50,000 to $65,000 and the total deposit limit from $300,000 to $400,000. Increasing these thresholds will assist primary producers to cope with the ongoing drought.

Schedule 7 aims to ensure that equivalent taxation treatment is given to capital protection on a capital protected borrowing, whether the capital protection is provided explicitly - for example by way of an actual put option - or implicitly through the terms of the arrangement.

This measure will provide legislative certainty to the tax treatment of capital protected borrowings. From 1 July 2007, where the capital protected borrowing is on capital account, the measure will deny deductibility to interest expense to the extent that the interest rate exceeds the Reserve Bank’s indicator variable interest rate for personal unsecured loans. The excess will be treated as the cost of the capital protection feature.

Full details of the measures in this bill are contained in the explanatory memorandum.

I commend this bill.