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Thursday, 9 December 1976


Mr LYNCH (Flinders) (Treasurer) -by leave-Mr Deputy Speaker, the purpose of this statement is to inform the House of the further decisions that have been taken concerning the system of trading stock valuation adjustments foreshadowed in the Budget Speech. With the indexation of the personal tax system, the Government has already seen to it that inflation can no longer act as a silent and unlegislated tax on personal income. This represents the most farreaching reform made to the Australian system of personal income tax in our time. It has been introduced at a cost to the revenue during the current financial year of around $ 1,050m, equivalent to $1,2 10m in a full year. By doing this the Government fulfilled, in the space of 6 months, an election commitment that was to be met over a period of 3 years.

At the time of the last election the Government also promised to reduce the burden of income tax on firms and companies which, because of inflation, have had to find increasing amounts of working capital to maintain business activity. During our predecessors' term of office the capital base of the free enterprise sector was substantially eroded by high rates of inflation. In other words, inflation, acting through the taxation system, was not only the instrument whereby resources were transferred in an arbitrary way from individuals to the Government but also, because of its impact on companies, a central element in the weakening of the free enterprise system that took place under our predecessors. Inflation, in precise terms, adds to the burden of taxation on business enterprises which have to replace goods that constitute their trading stocks, at constantly increasing prices, out of profits which, calculated in the conventional way, are fully subject to income tax. Under existing income tax rules full taxation is imposed on business profits that, for obvious reasons, are not available in a wholly liquid form and that are, to an increasing extent, being tied up in goods held as trading stocks. To put it another way, businesses are paying taxes out of what amounts to no more than paper profits and this has limited, and in many cases depressed, the general level of business activity within the economy.

As a first step in putting an end to this problem, the Government has decided that the impact of inflation on trading stock financing should be taken into account in assessing the taxation liabilities of business enterprises. In effect, a special income tax deduction, measured by reference to the annual increase in the goods component of the consumer price index, will be allowed to firms and companies holding eligible trading stocks for business purposes. Honourable members will know that, under provisional standards issued by the professional accountancy bodies in Australia, accounting profit will be measured in terms of current, and not historical, cost concepts. In relation to trading stocks, the full current cost price of goods sold by a firm will be charged against its profits so that its financial statements will reflect changes that take place in the price structure of the goods and rises in general price levels. The trading stock adjustments, to be made for income tax purposes, are designed to protect business working capital against erosion by inflation in broadly the same way as current cost accounting that is now being taken up by accountants.

For 2 major reasons, the income tax adjustments will be measured by movements in the general price level and not on specific price changes. First, the adjustments are intended to compensate for inflation-caused cost increases and not to reflect changes that may occur even when money values are stable, in price structures of particular goods. Second, the use of the general index will provide a standard basis of measurement of price level changes that can be applied uniformly in the income tax assessments of businesses dealing in goods. Having described briefly the nature of the problems that the new income tax stock valuation adjustments are designed to resolve, I turn now to the adjustments themselves.

The annual adjustment for a firm or company will be made by way of an income tax deduction calculated as a proportion of the taxation value of its trading stock of goods on hand at the beginning of the year of income. The proportion of the stock valuation to be allowable as a deduction will be based on the percentage increase, June quarter to June quarter, in the goods component of the consumer price index. The scheme is to be phased in and, for 1976-77, the first income year for which the adjustment will be allowable, the proportion will be one half of the percentage increase in the goods component of the index. The stock valuation figure will be that adopted by the firm or company for income tax purposes, as long as no stocks are valued at a figure in excess of the true cost. Income tax valuations in excess of cost will have to be converted to cost for the purposes of the adjustment.

An important matter is the range of trading stocks to which the adjustment is to apply. This has been considered carefully by the Government and it has been decided that goods held, and properly accounted for as trading stock for income tax purposes, will be within the scope of the new allowance. Accordingly, the cost price of such property as land, buildings, construction work in progress, shares, other securities and other legal rights, including industrial property such as patents and copyrights, will not be subject to adjustment.

In a business of primary production, or other business in which livestock is held as trading stock, the adjustment will be calculated generally by reference to the cost values adopted for income tax purposes so that where a standard cost has been ascribed to natural increase the adjustment will be a proportion of that figure. In this connection, I add that it is not proposed that a deduction will be available in respect of the cost of racehorses and other animals used or bred for sporting or domestic purposes.

Inquiries have been received as to how the scheme will operate where a company has, with the approval of the Commissioner of Taxation, adopted a substituted accounting period in place of a year of income ending 30 June. Whether such companies balance earlier or later than 30 June, the rates of tax applying in their assessments are those usually announced in the Budget Speech each year, for application to companies generally. It has been decided that, where a company balances on a date other than 30 June, the increase in the general index between June quarter and June quarter used for the purposes of the stock adjustment will be applied to the relevant value of the trading stocks held by the company at the beginning of its accounting period. There will not, therefore, be any special index for these companies.

Difficult questions arise where, during a particular year of income, a business changes hands, the interests of the proprietors in a business change, or the scale of operations of a business is substantially reduced. Generally speaking, it is not proposed that an income tax adjustment be available for a business in the income year in which it is brought to an end. However, where a business is terminated on the death of its proprietor, a special proportionate adjustment will be allowable. Furthermore, if the trustee and beneficiaries indicate that the business will be carried on, a special proportionate adjustment will also be available in the assessments based on income derived by the estate.

Where the scale of operations of a business is substantially reduced during a year so that the value of closing stock is less than its opening stock value, the adjustment will be measured by reference to the closing stock value, as the purpose of the scheme is to assist businesses which want to preserve the same level of operating capacity. If the shareholders or proprietors in a business change during a year but it is established that the same business is carried on for the rest of the year by the new owners, the ordinary adjustment will be allowable. In the case of a business carried on by a sole proprietor or partnership, the adjustment will be apportioned on a time basis between the old and new owners. In a year in which a firm or company commences business and first acquires goods as trading stocks, a proportionate adjustment based on its holdings of stocks will be made.

Finally, if a business conducted by a company is taken over by an associated company, as in the course of a group reorganisation, the adjustment will generally be apportioned between the 2 companies on a time basis, but with provision for the deduction to be allowed to the company acquiring the business where there is agreement that this be done. Honourable members will be aware that some protective provisions will be required to ensure that the new scheme of stock adjustments is not misused for tax avoidance purposes. I do not think it appropriate at this stage to lay undue stress on this aspect, other than to say that our examination has led us to conclude that safeguards, in wide terms, will need to be written into the law to ensure that neither the cost price of trading stock nor its opening value is overstated for income tax purposes.

Other safeguarding provisions will be available to the Commissioner in situations where an unusually or unnecessarily large volume of trading stock is held at the beginning of an accounting period with a view to maximising the stock adjustment.

As foreshadowed in the Budget Speech, amending legislation to provide for the trading stock valuation adjustments will be introduced during the Autumn sittings and will give full particulars of the new system. The details that I have announced' today- indeed this is the purpose of making the statement to the House today- will enable individual firms and companies to assess the changes that will be incorporated in legislation next year. By giving details of the new scheme now there will, as well, be an opportunity for the Government to take into account public discussion and informed comment before final enactment of the proposals.







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