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Wednesday, 28 February 2001
Page: 24742


Mr Latham asked the Treasurer, upon notice, on 7 December 2000:

(1) Did the Ralph Review of Business Taxation recommend a unified entity tax system in which all forms of companies and trusts would be taxed in the same way.

(2) Did the Government announce in 1999 that these arrangements were due to start on 1 July 2001.

(3) What progress has the Government made in implementing the recommendations referred to in part (1).

(4) With the company tax rate at 30% and only one-half of capital gains subject to tax, how will the Government prevent wealthy taxpayers from incorporating, using family trusts and transforming their incomes into capital.

(5) Are the incentives to engage in the financial activities referred to in part (4) now greater than when the Ralph process began.

(6) What action has the Government taken to improve the structural integrity of the business tax system and minimise avoidance.


Mr Costello (Treasurer) —The answer to the honourable member's question is as follows:

(1) I refer the honourable member to `A Tax System Redesigned' - the report of the Review of Business Taxation.

(2) The Government's position is outlined in my press releases of 21 September and 11 November 2000.

(3) On 11 October 2000, the Government released an exposure draft of legislation to tax non-fixed trusts like companies. The Government is now considering the submissions it has received on entity taxation.

(4) Measures were introduced in conjunction with the CGT discount regime to ensure that the CGT discount was not accessed inappropriately. These measures included:

· extending the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 to cover schemes which seek to transform income into capital so as to access the CGT discount;

· requiring a 12 month holding period before the CGT discount can be claimed;

· preventing taxpayers from transferring assets into a company or trust to bring forward access to the discount by disposing of the equity interests in the company or trust; and

· denying the discount to taxpayers entering arrangements that artificially extend the period of ownership to avoid the 12 month holding period test.

· Also, the recent measures to address the alienation of personal services income will prevent individuals reducing their tax by diverting income generated by their personal services to a company, partnership or trust.

· The Government does not intend to prevent the legitimate use of family trusts and companies for carrying on genuine businesses.

(5) No.

(6) The Government took considerable action to improve the structural integrity of the business tax system and minimise tax avoidance in its response to the report of the Ralph Review of Business Taxation. Measures have already been legislated to:

· prevent loss duplication on the transfer of revenue losses;

· prevent artificial loss creation from debt forgiveness;

· prevent tax avoidance through lease assignments;

· prevent loss duplication arising from defects in the continuity of ownership test for deducting company losses;

· apply the same business test to unrealised losses;

· prevent the transfer of loss assets resulting in the duplication of losses within a wholly owned group and the creation of artificial losses within a majority owned group;

· prevent avoidance opportunities by removing excess mining deductions;

· limit avoidance through the exploitation of non-commercial losses;

· restrict the ability of individuals to reduce tax through the `alienation of personal services income';

· limit the use of `tax shelter' arrangements by requiring the deduction of prepayments in respect of certain shelter arrangements to be spread over the period during which the services are provided, rather than being immediately deductible; and

· reduce avoidance opportunities by removing the inter-corporate dividend rebate on unfranked dividends.

The Government had already taken substantial action to combat tax minimisation and avoidance prior to the Ralph Review, including:

· funding the High Wealth Individuals Taskforce within the Australian Taxation Office to investigate the tax-driven activities of High Wealth Individuals;

· closing abuse of the Research and Development (R&D) tax concession through syndication arrangements;

· stopping abuse of luxury car leasing;

· closing the Infrastructure Borrowings Scheme;

· tightening thin capitalisation to address tax minimisation by foreign companies;

· measures to address tax avoidance through overseas charitable trusts;

· extending the general anti-avoidance provisions of the taxation system to combat withholding tax avoidance;

· preventing the trafficking of trust losses;

· taxing distributions disguised as loans from private companies;

· denial of artificially created capital losses;

· measures to prevent trading in franking credits and dividend streaming;

· correcting abuse of trusts and superannuation funds by taxing non-arms' length distributions from trusts to a superannuation fund at 47 per cent;

· introducing measures to prevent tax avoidance in hire purchase and limited recourse debt finance arrangements;

· combating tax minimisation in the cash economy;

· introducing ultimate beneficiary provisions.