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Wednesday, 11 August 2004
Page: 2112


Mr COX (5:23 PM) —The Tax Laws Amendment (2004 Measures No. 4) Bill 2004 is an omnibus tax bill with largely technical amendments to the tax law. Labor will support it. Schedule 1 of the bill deals with the new consolidation regime which came into operation on 1 July 2002. The amendments aim to provide greater flexibility to consolidated groups, clarifying the operation of the consolidation regime and ensuring that the regime interacts appropriately with other aspects of the income tax law. The amendments will apply retrospectively from 1 July 2002 but will only benefit affected taxpayers.

Schedule 1 includes clarification of the meaning of `beneficial ownership' for the purposes of the consolidation membership rules. The amendments will ensure that entities under external administration will not be prevented from being or remaining members of consolidated groups. The amendments also provide special rules for setting the tax cost of assets that are subject to a finance lease held by an entity that becomes a member or ceases to be a member of a consolidated group. These rules will ensure that the cost-setting rules apply appropriately and take into account the different treatment of finance leases under accounting standards and under the income tax law. The bill also clarifies the operation of the cost-setting rules and the inherited history rules for assets arising from allowable capital expenditure, transport capital expenditure and exploration and prospecting expenditure in the mining industry.

The bill amends the income tax law dealing with low-value pools to ensure that the head company of a consolidated group receives appropriate allowances for the decline in value of these pools. The rules will ensure that the head company and a leaving entity receive an appropriate allowance for the decline in value of the pools where a leaving entity takes some of the pool with it upon exiting the consolidated group. Similarly, the bill ensures that the head company of a consolidated group and a leaving entity receive an appropriate allowance for the decline in value of software development pools where an entity takes some of the pool with it upon exiting the consolidated group.

The bill also amends the income tax law to alleviate the notice requirements under the inter-entity loss multiplication rules for entities that are in the same consolidatable group during the consolidation transitional period. The amendments will give the Commissioner of Taxation the discretion to extend the time for giving notices or waiving the notice requirement in appropriate circumstances.

Schedule 2 of the bill deals with the taxation treatment of copyright collecting societies. Copyright collecting societies administer certain rights of copyright on behalf of copyright owners, such as composers. Income received in relation to copyrights is held by societies pending identification of and allocation to the copyright owner. Historically, these societies have not been subject to taxation, with tax being levied on the royalties in the hands of the copyright owner.

Following a review of the tax treatment of copyright collecting societies, the tax commissioner determined that a trust relationship existed between the societies and their members. From 1 July 2002 the societies lost their income tax exemption and have been subject to taxation as discretionary trusts. Consequently, if the society has not identified the copyright holder entitled to certain royalties by the end of a financial year, those royalties are taxed in the hands of the trustee at the top marginal rate. While the tax law allows two months after the end of the financial year for the copyright owner to be identified, a significant percentage of copyright income is generally not allocated within that time frame. As such, without these amendments a significant proportion of the income of copyright collecting societies would face tax at the top marginal rate.

The then Minister for Revenue and Assistant Treasurer, Senator Coonan, announced on 1 August 2002 that copyright collecting societies would be exempt from tax on copyright income that they collect on behalf of copyright owners. In addition, other income generated by copyright collecting societies will also be exempt from tax providing that this non-copyright income does not exceed the lesser of five per cent of the copyright collecting society's total income for the year and $5 million or an amount prescribed by regulations. This test is designed to minimise compliance costs for copyright collecting societies. The amendments also ensure that any income derived by copyright collecting societies that is not taxed in their hands is included in the assessable income of members upon distribution.

Because the amendments do not create a tax liability for the member at the time they become entitled to that income—that is, when their entitlement was identified by the copyright collecting society—these amendments do present a slight opportunity for income tax deferral. There are some safeguards in this bill to protect the revenue against copyright collecting societies being used on a large scale to defer tax. If these safeguards prove ineffective, it may be necessary to revisit the issue. The amendments will significantly reduce the compliance costs for copyright collecting societies, which are important in ensuring that intellectual property rights are protected in Australia.

Schedule 3 of the bill deals with the simplified imputation system which commenced on 1 July 2002. The amendments in this bill contain mainly consequential and technical amendments to other areas of the income tax law to ensure that the SIS operates as intended—in particular, replacing references to the former imputation system with those of the simplified imputation system and updating terminology of the former imputation provisions to SIS equivalent terms.

Schedule 3 also contains four minor technical amendments. The first ensures that a deduction continues to be available for on-payments of unfranked dividends made from a resident company to its wholly owned foreign parent. This was meant to have been effected by Taxation Laws Amendment (2004 Measures No. 1) Bill 2004, but one relevant paragraph was not amended by that legislation, resulting in this deduction inadvertently remaining inoperative.

The second amendment is to the exempting entity rules to replicate under SIS the treatment of dividends paid to an eligible continuing shareholder or an employee who has acquired a share under an employee share scheme under the old imputation regime and the SIS. The third amendment ensures that the priority rule for refundable tax offsets interacts properly with the franking deficit tax offset rules. And the fourth amendment alters the conditions that a recipient of a distribution franked with venture capital credits must satisfy before they are entitled to a tax offset—in particular, to ensure that they are not party to a franking credit trading arrangement.

Schedule 4 of the bill deals with specific listing of numerous organisations as deductible gift recipients. DGRs have access to a range of tax concessions, including being able to provide a deduction to a donor for donations over $2. Organisations that fall within the general categories of DGRs can be endorsed by the Commissioner of Taxation as DGRs. Organisations that do not fall within those categories must be specifically listed in the Income Tax Assessment Act 1997.

The Howard government has been attempting to change this requirement so that organisations could be specifically listed as DGRs by regulation rather than by legislation. This would have presented a number of issues, including lack of scrutiny of organisations being granted specific listing and the ability of the government to place restrictions on organisations specifically listed, such as to ensure that they do not criticise the government. The Australian Democrats have also expressed concern that determining DGR status through regulation would remove the right of non-government members to propose specific listing of organisations. Regardless of the last point, Labor opposed these provisions.

Labor welcomes the government's backflip during the last session of parliament to remove these provisions from Taxation Laws Amendment Bill (No. 7) 2003. Organisations that will be granted specific listing by this bill include state country fire authorities; the International Social Service Australian Branch from 18 March 2004; the Victorian Crime Stoppers program from 23 April 2004; the Australian Ex-Prisoners of War Memorial Fund from 20 October 2003 to 19 October 2005; the Tamworth Waler Memorial Fund from 20 April 2004 to 19 April 2006; and Australian Business Week Ltd from 9 December 2003.

The last of those organisations I would particularly cite as being an organisation that provides very worthy educational services in schools. I make it an absolute rule to attend Australian Business Week in any school that is running one in my electorate. It is a wonderful opportunity for young people who may not have had any experience with business to get a very broad understanding of what a company is about.

For kids whose parents are not affluent and do not have ready access to a supply of annual reports of major companies, to go through the process of actually putting one together—going through a detailed computer simulation so that they start to understand various relationships in business and doing simple things like putting on a trade show and making a short commercial—really enlivens their interest. I suspect that many of them who have not thought about careers in those sorts of areas might well be stimulated to do so. It is always difficult for schools, particularly those in low-income areas, to get the necessary money together to run an Australian Business Week. Anything that can make Australian Business Week more affordable and more accessible to a larger range of students is to be welcomed.

Schedule 5 of the bill deals with the debt to equity rules and the treatment of at-call loans. While Labor will support these amendments, they are another example of a government bending over backwards not to offend anyone in an election year. This time it is small business. New debt/equity rules were introduced from 1 July 2001. Whether an interest is considered debt or equity has important taxation consequences. In particular, if it is considered debt then an interest expense can be claimed by a business.

At-call loans are typically made by small business owners to their own businesses, have no fixed term and are repayable on demand. Transitional rules allowed certain related party at-call loans entered into between 21 February 2001 and 31 December 2002 to be considered a debt interest, so that an interest deduction would continue to be available. The amendments in this bill will extend the transitional period until 30 June 2005, with the effect that any at call loans made to a company by a connected entity on or before that date will be treated as debt interests under the debt to equity rules so the company will continue to be able to claim an interest expense. While this will allow small businesses more time to adjust to the new rules, these amendments are largely driven by opposition to the new rule from the small business sector and are yet another example of the Howard government putting off a potential problem until after the election.