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Tuesday, 22 June 2010
Page: 6171

Ms LEY (8:00 PM) —I thank the previous speaker for going ahead of me in the schedule when I was not appropriately prepared. It gives me pleasure to speak on the Tax Laws Amendment (2010 Measures No. 3) Bill 2010. This bill amends various tax laws to implement a range of changes to Australia’s tax system. Amendments include the government’s changes to the superannuation co-contribution for low-income earners, changes to the thin capitalisation rules for authorised deposit-taking institutions, changes to financial transactions involving security and intelligence agencies, changes to the taxation of unexpended income of special disability trusts and changes to the definition of a managed investment trust.

The bill deals with five schedules. Schedule 1 refers to changes to the superannuation co-contribution scheme. It removes the indexation of the co-contribution income thresholds for the 2010-11 and 2011-12 financial years. It also removes the legislated increase in the maximum contribution. The current maximum co-contribution amount was scheduled to increase from $1,000 to $1,250 in 2012-13 and to $1,500 in 2014-15. The amendments in schedule 1 will mean that the maximum co-contribution amount will remain at $1,000. The changes in schedule 1 were announced by the government in the 2010-11 budget. Schedule 1 has a financial impact of $645 million of savings over the forward estimates.

Schedule 2 concerns the changes to the thin capitalisation rules of authorised deposit-taking institutions and amends those rules to reflect the new accounting treatment of certain assets under the Australian Equivalents to International Financial Reporting Standards that the industry adopted in January 2005. The assets that are affected are Treasury shares, the value of the business enforced component of the excess market value over net assets, or EMVONA, and capitalised software costs. The amendments in schedule 2 were announced by the government in the 2009-10 budget.

Schedule 3 concerns financial transactions involving the security and intelligence agencies. This schedule will allow the directors-general of the Australian Security Intelligence Organisation and the Australian Secret Intelligence Service to exempt certain financial transactions from Australian tax law. Schedule 3 will allow certain transactions to certain entities to be exempt from tax law to ensure that information related to national security remain secret. The amendments in schedule 3 reflect the current practice of Australian tax authorities. However, it is not clear whether that practice is legally justified. Schedule 3 ensures that it is.

Schedule 4 concerns the changes to the taxation of unexpended income of special disability trusts. It amends the law to reduce the tax rate of unexpended income of a special disability trust from the highest marginal rate to the beneficiary’s personal rate. Provision for these trusts, as many of us know, was introduced by the former coalition government in 2006 to allow families and carers to establish a trust with the specific purpose of paying for the care and accommodation of a beneficiary with a severe disability. These trusts allow a gift concession of up to $500,000 and an assets exemption of up to $551,750, which is indexed annually. Currently, where the annual income of a special disability trust is not completely spent on the care and accommodation costs of the beneficiary then the remaining unexpended income is taxed at the penalty rate of 46½ per cent. This is the same treatment as for unexpended income of other trusts, and schedule 4 removes this unintended consequence.

Clearly, if we are setting up trusts in order to assist parents to care for their, usually adult, disabled children after they are no longer here to provide for them and if we intend these trusts to attract the capital that those parents would like to pass on—but that might, of course, trigger capital gains tax consequences were they to go through normal estate processes—then we certainly do not want the punitive act of unearned income in a trust being taxed, as it is under trust law, at the highest marginal rate. That is why this measure is required. I understand that, with regard to the trusts that have been set up—and there are not many—the Australian Taxation Office has simply suspended the processing of the returns for these trusts and is waiting for this provision to be passed. So I thank the ATO for their treatment of this and their understanding in not adding to the stress of those who would certainly be stressed were they to receive assessment notices that taxed, at the highest marginal rate, income that is being retained in order to be reinvested in these special disability trusts.

Currently, where the annual income of a special disability trust is not completely spent on care and accommodation costs then the remaining income, the unexpended income, is taxed, as I said, at the penalty rate of 46½ per cent. This schedule ensures that any income in a special disability trust that is unexpended will be taxed at the same rate as the beneficiary’s marginal tax rate. It is not a matter of the income escaping taxation; it is a matter of it escaping, quite rightly, penalty taxation. A financial cost has been allocated to this measure of $1 million a year. As I said, this was always the intended application of this provision when it was conceived. In order to assist those tax returns that are held up at the moment and, in fact, to cover special disability trusts for the entire life of those trusts, the amendments will apply from 1 July 2008.

Schedule 5 expands the definition of a managed investment trust in relation to the withholding tax rules to provide a closer alignment between the withholding tax rules and the capital account election rules that were passed by the parliament with the support of the coalition earlier this year. The managed investment trust withholding tax definition will be expanded to include wholesale managed investment schemes and government owned managed investment schemes. The changes will also amend the managed investment trust withholding tax definition to introduce a trading business test for trusts that would otherwise qualify as managed investment trusts and will clarify the operation of the definition where there is only one member.

I understand that the government will be moving amendments in this place to schedule 5 of this bill, which concerns the definition of a managed investment trust. Those amendments will broadly satisfy some very serious concerns that were raised when this bill first became known. The first of the amendments that the government has foreshadowed broadly allows a trust to qualify as an MIT if a substantial proportion of the investment management activities relating to the assets of the trust that have a relevant connection with Australia are carried out in Australia. That is the investment management requirement, which only applies in respect of assets of the trust that have a relevant connection with Australia. Restricting the investment management requirement to such assets ensures that trusts that have a mix of Australian and offshore assets, where the investment management activities are located where the assets are located, remain eligible for the definition of a managed investment trust. Assets that have a relevant connection with Australia are assets of the trust that are situated in Australia, taxable Australian property, or shares, units or interest traded on an Australian stock exchange.

It was a key point in the submissions that were received that the introduction of this Australian management requirement as it was originally conceived in the bill would not actually promote the establishment of funds in Australia that would be offered for offshore investment, because in order for a trust to qualify for the concessional withholding rules the investment management activities for the trust must be performed in Australia. This applies to both registered and unregistered managed investment schemes. It is appropriate that this appears to have been addressed in the amendments.

Further amendments that the government is moving to its own bill prescribe that widely-held trusts apply for registered trusts that are wholesale trusts within section 12-401 and that the trusts will pass the widely-held test if they satisfy one of two criteria. Those criteria are that the trust has at least 25 wholesale members, or one or more specified widely-held entities together hold at least 25 per cent and no single other type of entity holds in excess of 60 per cent of the interests of the trust. The opposition supports those amendments. Obviously they are quite recent in their arrival and time lines have been tight. They will be considered further by the Senate, but we broadly support the amendments, as we do a strong and vibrant managed investment trust regime in Australia that enables Australian fund managers to exercise skills that are genuinely recognised throughout the world under a regime that does not act as a disincentive for overseas investors to invest their funds here. I commend the bill to the House.