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Tuesday, 3 December 1985
Page: 2838


Senator WALSH (Minister for Finance)(9.56) —I move:

That the Bills be now read a second time.

I seek leave to incorporate the second reading speeches in Hansard.

Leave granted.

The speeches read as follows-

TAXATION LAWS AMENDMENT BILL (No. 3) 1985

This Bill will amend the Taxation Laws in several ways.

It represents a start to the Government's Legislative Programme to give effect to the measures the Treasurer announced on 19 September for reform of the Australian Taxation system.

In that regard, amendments of the income tax law in this Bill will provide for undeducted exploration and development expenditure incurred by petroleum and general mining companies to be treated as transferable company group losses.

Other amendments will withdraw the rebate and deduction for Capital subscribed to petroleum and afforestation companies, and reduce the taxation concessions available for investments in Australian Films.

Another reform measure to be given effect by this Bill will ensure that owner-builders of larger domestic building projects commenced after 30 June 1986 make deductions of tax under the prescribed payments system from payments made after that date.

Together with two other Bills that I will introduce shortly, this Bill will also finalise the implementation of the Government's 1985-86 Taxation Budget Proposals.

One of the three Budget measures designed to assist the Horse Racing Industry-the provision of a more generous livestock valuation option for Horse Breeders-is contained in the Bill.

The Bill will remove the exemption from tax for payments to Students under the Tertiary Education Assistance Scheme and the Adult Secondary Education Assistance Scheme.

As part of the Budget proposal to align A.C.T. taxes more closely with those of the States, the Bill will provide for the imposition of A.C.T. Stamp Duty on Loan Securities and on Transfers of units in unit trusts.

Finally, there are two measures in the Bill unrelated to the Budget of Tax reform.

First, the Bill will give effect to the proposal-announced on 21 May 1985-to amend the income tax secrecy provisions to permit greater use of taxation information by a Royal Commission.

Secondly, the Bill will give the Force of Law in Australia to a new Comprehensive Taxation agreement and a related protocol with Finland that were signed in Canberra on 12 September 1984.

A number of Technical Amendments of the Taxation Laws are also to be made by the Bill.

Mr President, I now turn to outline in greater detail the more significant amendments contained in the Bill.

Petroleum and General Mining Company Losses

As announced in the Treasurer's Tax reform statement, an annual election is being made available to General Mining and Petroleum Companies to enable them to have undeducted exploration and development expenditure treated as transferable company group losses.

Under the Existing Law, the deduction allowable for such expenditure cannot create or increase a Mining or Petroleum Company's deductible carry-forward loss.

One result of this is that any such expenditure not offset aganist the company's income may not be transferred to another company in the same group under the group loss transfer arrangements.

Measures in the Bill will allow a Mining or Petroleum exploration company that is part of a company group to elect that any excess deductible exploration and development expenditure incurred in the 1985-86 and subsequent income years forms part of the company's carry-forward loss available for transfer to another company within the same group.

A separate election will be available for each year of income.

The Estimated Revenue cost of the measure is $70 million in 1986-87 and $65 million in 1987-88.

Capital Subscribed to Petroleum and Afforestation Companies

In giving effect to another tax reform proposal, provision in the Bill will withdraw the Tax Concessions in respect of moneys paid on shares in Petroleum or Afforestation Companies. First, there is the tax rebate of 27 cents in the dollar for moneys paid on shares in an eligible Petroleum Company. This is available where the Company lodges a declaration that it has expended, or will expend, the moneys on prospecting, Exploration or Mining for petroleum in Australia. There is also a deduction for one-third of calls paid on non-redeemable shares in a Company whose Principal Business is Afforestation in Australia, where the call moneys are for use in that Business.

Both the rebate and deduction are being withdrawn for moneys paid on shares after 19 September 1985, other than moneys paid by a person on calls made on or before that date on shares then owned or beneficially owned by the person. Withdrawal of these concessions is estimated to result in a gain to revenue of $10 million in 1986-87 and $15 million in 1987-88.

Investment in Australian Films

As the Treasurer announced on 19 September 1985 in the tax reform statement, the tax concessions for investment in the production of Australian films are to be reduced as part of the restructuring of assistance to the film industry. For eligible expenditure contracted for after 19 September, the special income tax deduction will be 120 per cent of the expenditure, in lieu of 133 per cent. The associated income tax exemption in respect of the net income from a film will be 20 per cent of the eligible investment, rather than 33 per cent. The higher concession levels will, however, continue to be available to an investor who takes up an interest in an Australian film in place of an underwriter who entered into underwriting arrangements on or before 19 September 1985. This reduction in taxation concessions is to be offset by additional funding of $2 million in 1985-86 and $3 million in each of the following two years. This will be achieved through the special production fund administered by the Australian Film Commission. The estimated net saving to revenue is $35 million in 1986-87 and subsequent years.

Prescribed Payments System

This Bill will also give effect to the tax reform measure to impose on ``owner-builders'' a liability under the prescribed payments system to make deductions of tax from prescribed payments made in connection with domestic construction projects exceeding $10,000 in cost. Mr President, this measure represents the Government's considered response to industry representations that an owner-builder should, as far as the prescribed payments system is concerned, be treated in the same way as the professional builder. By this Bill, owner-builders are to have the same obligations and duties as are currently imposed on professional builders under the prescribed payments system. This change will apply in relation to prescribed payments made by owner-builders on or after 1 July 1986 in connection with domestic construction projects costing more than $10,000 that are commenced on or after that date. It is estimated that this measure will lead to a net revenue gain of $16 million in 1986-87 and $4 million in 1987-88. Another amendment to be made to the prescribed payments system provisions of the law will overcome a possible technical weakness in the present statutory definition of a ``householder''. This amendment will affect neither the practical operation of, nor collections received under, the prescribed payments system. It will apply from the date of royal assent to the Bill. Mr President, as the Treasurer said to honourable members when delivering his statement on reform of the Australian taxation system on 19 September, the Government is engaged in a tax reform exercise, not a tax raising one. The gains to revenue arising from the tax reform changes will be applied by the Government towards substantially easing the burden of high marginal rates of tax on honest middle income taxpayers. Together with other elements of our tax reform package, these changes will restore fairness to the Australian tax system.

Live stock Valuation Option

A budget measure contained in the Bill will provide-for horse breeders-an additional live stock valuation option under the trading stock provisions of the income tax law.

This measure was one of the three proposals announced in the 1985-86 Budget to assist the horse racing industry.

The additional option will be available in respect of a sire or brood-mare acquired under a contract entered into after 20 August 1985.

Under the present law, a taxpayer may elect to value live stock on hand at the end of the year of income at cost price, market selling value or some other appropriate value.

The new live stock valuation method for horse breeders is in addition to existing valuation options available.

This further method of valuation will enable a horse breeder to write down the cost of a sire by up to 50 per cent per annum or a brood-mare by 33 1/3 per cent per annum-in either case on a diminishing value basis.

An alternative in the case of a brood-mare will be to write down its cost to $1 on a straight line basis over, depending on the mare's age, minimum period of three years.

The Bill contains safeguarding provisions that will operate to counter artificial arrangements designed to make eligible for the new option a horse that would not otherwise qualify because it was in fact owned by the breeder on or before 20 August 1985.

Mr President, this measure should have no effect on 1985-86 revenue.

The nature of the measure is such that a reliable estimate of its revenue effect in future years cannot be made.

Education Assistance Scheme Payments

As announced in the Treasurer's Budget Speech, the Government has developed a comprehensive four year plan designed to encourage young people to remain in education.

Financial support for young people is one area of our strategy designed to ensure the youth of Australia share in the benefits of economic recovery and growth.

Part of the Government's plan is to bring education assistance allowances for those under 18 and those in the 18 to 20 age group more into line with the benefits payable to single unemployed people in the equivalent age brackets.

By 1988, students entitled to education assistance and young people on unemployment benefits will be receiving basically the same rate of payment. Unemployment benefits are already taxable.

The living allowance and incidentals allowance payable under the education schemes should, therefore, also bear tax.

This Bill proposes, with effect from 1 January 1986, to remove the present exemption from income tax of payments received under the tertiary education assistance scheme and the adult secondary education assistance scheme.

However, any component of the allowance attributable to a dependant child will, as is the case with unemployment benefits, remain exempt.

An associated amendment will provide for taxable scheme payments to be subject to regular pay-as-you-earn deductions.

The estimated net gain to revenue from this measure is nil in 1985-86, $4 million in 1986-87, $23 million in 1987-88 and $25 million in 1988-99.

The Government has also announced that it proposes to remove, from 1 January 1987, the tax exemption now available for payments made to parents of secondary students under the secondary assistance scheme.

The conditions that apply to determine entitlement to payments under this scheme are to be changed and legislation to give effect to the decision to withdraw the tax exemption will be introduced into the Parliament after the details of the revised scheme are settled.

A.C.T. Stamp Duty

Together with two further Bills that I will shortly introduce, this Bill will also give effect to the government's 1985-86 Budget proposals to introduce new and increased taxation in the Australian Capital Territory.

One of these proposals is to subject transfers of units in unit trusts to A.C.T. stamp duty and tax.

To that end, a transfer of a unit in a unit trust is to be treated as a transfer of a marketable security.

The result will be that stamp duty and tax will be imposed on such transfers at the rates applicable to marketable security transfers.

The estimated revenue gain from this measure is $50,000 in a full year.

Provisions of the Bill will also counter the avoidance of stamp duty on certain conveyances by way of mortgage under the A.C.T. real property ordinance.

Under existing A.C.T. stamp duty law, a conveyance of a legal interest in land by way of mortgage is specifically exempt from duty-on the principle that the transfer of the legal title to a mortgagee is no more than a means of securing repayment of the borrowed moneys.

In such cases the mortgagor is intended to retain what is called the equity of redemption which carries with it the right to re-transfer of the legal title on repayment.

This exemption could be abused to obtain an exemption from duty in cases where there is no intention that the mortgagor will re-acquire the legal interest.

The exemption from stamp duty is to be removed in relation to transfers of legal interests under the real property ordinance by way of mortgage where there is an intention that both the legal and equitable interests are being transferred to the mortgagee.

Where property transferred in these circumstances is subsequently re-transferred to the mortgagor, a refund of the excess duty paid will be available.

The tax on transfers of units in unit trusts and the amendments relating to duty on non-bona fide mortgages will apply to transactions occurring on or after the first day of the month following that in which the Bill receives the royal assent. While the imposition of A.C.T. stamp duty on mortgages, debentures and other loan securities is being implemented by amendments contained in the Australian Capital Territory Stamp Duty Amendment Bill, provisions in this Bill will set out the rules governing liability for the new duty.

Under those rules, a document will be subject to duty if it is a mortgage, a company debenture, or a bond or covenant securing a loan and it is executed or issued in the A.C.T. by the borrower.

Likewise, a loan security on property in the A.C.T. will be subject to duty.

In these cases the person liable to pay the duty will be the borrower and the Bill sets out the requirements as to payment of duty.

Other provisions of the Bill will validate the regulation-making power under the A.C.T. Stamp Duty Act, and several related taxing acts.

At the time of enactment of the Australian Capital Territory Stamp Duty Act, the regulation-making power contained in the Australian Capital Territory Taxation (Administration) Act was thought to be adequate to authorise regulations under the Stamp Duty Act and related taxing Acts.

This is because those Acts and the Administration Act are to be read as one.

Regulations were accordingly made specifying circumstances in which duty or tax is not imposed.

Following the recent decision of the Federal Court in Amalgamated Television Services Pty Ltd v. Australian Broadcasting Tribunal it is now clear that a separate power to make regulations is required for each Act.

Provisions in the Bill will provide a specific regulation-making power in each of the A.C.T. Stamp Duty and Taxing Acts.

To validate regulations that have already been made, the regulation-making power will, where necessary, be deemed to have come into operation on 1 July 1969.

Taxation Secrecy Provisions

Amendments contained in the Bill will permit greater use of information that, under the existing income tax secrecy provisions, may be provided to certain royal commissions.

These amendments give effect to a recommendation made by Mr F. X. Costigan, Q.C. in the fourth interim report of the Royal Commission on the Activities of the Federated Ship Painters and Dockers Union.

The amendments will allow a royal commission to make taxation-sourced information available to the director of public prosecutions or a special prosecutor, if the Commission considers that the information is relevant to an investigation of a tax-related offence.

The requirements of secrecy applying to taxation officers and other persons privy to confidential taxation information will, of course, extend to persons to whom taxation information can be communicated under these amendments.

The amendments will also remove any doubt that taxation-sourced information can be passed on by a royal commission to a police officer assigned to make an investigation on behalf of the Commission.

These measures should have no effect on the revenue.

The Finnish Tax Agreement

I now turn to provisions of the Bill that will provide legislative authority for the entry into force of a comprehensive double taxation agreement and protocol dealing with all forms of income flowing between Australia and Finland.

The agreement and protocol were signed on 12 September 1984, at which time details were announced and copies of the agreement were made publicly available.

The Bill will insert the text of the agreement and protocol into the Income Tax (International Agreements) Act 1953 as a schedule to that Act.

The agreement with Finland, as with comprehensive taxation agreements generally, has two primary objectives-the elimination of international double taxation and the prevention of fiscal evasion.

The first of these objectives is achieved by the contracting countries agreeing to allocate taxing rights between them.

There are various ways in which this is done, the particular method depending upon the nature of the income concerned.

For example, some classes of income are to be taxed only in the country of residence, while others will be taxed only in the country of source.

A third category is comprised of income consisting of dividends, interest and royalties which may be taxed in both countries.

In this case the country of source generally agrees to limit its tax, and the country of residence of the taxpayer agrees to allow a credit against its tax on such income for the tax paid in the other country.

The agreement contains measures for the formal relief of double taxation of income that may be taxed in both countries.

It also contains provisions of a kind common to taxation agreements relating to the taxation of business profits, professional services, employees, public entertainers, students, pensioners and so on.

So far as the object of preventing fiscal evasion is concerned, provision is made in the agreement for the exchange of information and for consultation between the tax administrations of the two countries.

In these and all other essential respects, the agreement accords with the position that Australian Governments have taken over the years in relation to the negotiation of comprehensive taxation agreements.

The agreement and protocol will not enter into force until all necessary constitutional processes are completed both by Australia and Finland.

They will then have prospective effect in accordance with their terms.

For Australia, this Bill will, when assented to, complete the constitutional processes required of us.

The agreement and protocol are not expected to have any significant effect on the revenue.

Mr President, a detailed explanation of each provision of the Bill is contained in the memorandum being made available to honourable senators.

I commend the Bill to the Senate.

SOCIAL SECURITY (POVERTY TRAPS REDUCTION) BILL 1985

The Government has been concerned for some time that Commonwealth programs can interact in a way that disadvantages the people they should help, by trapping them in poverty.

It has been recognised that the most savage of these poverty traps occurs when tax and social security interact.

An attack on poverty traps is an essential part of the Government's tax reform package. It was one of the nine principles in the ALP's taxation policy in last year's election. It was also a commitment renewed as part of the renegotiated Accord in September.

This Bill deals with the extremely high marginal tax rates faced by people receiving social security payments when they try to earn some extra income for themselves and their families.

The effective marginal tax rates faced by such people can be higher than the total facing the highest income earners.

This is plainly inequitable. It keeps people in poverty and it provides a disincentive to people to care for themselves through, for example, part-time work.

The attack on poverty traps embodied in this Bill will have three results.

First, it will leave more money in the pockets of hundreds of thousands of people on social security with some private income.

Second, it will ease the transition from welfare to work for people, such as supporting parents, who are temporarily out of the permanent paid workforce.

Third, it will provide an incentive to all people on social security to provide for themselves, either through part-time work or investments.

Poverty traps will be attacked on three fronts.

1. The amount pensioners can earn privately before they are affected by the income test will be increased from $30 to $40 a week for single pensioners, and from $50 to $70 a week for couples.

2. The additional allowable income for pensioners with children will be doubled from $6 to $12 a week per child.

3. The very strict separate income test for rent assistance will be abolished. Rent assistance will simply be added on to payments, and be subject to the normal income test.

In particular, these reforms will concentrate on groups of special concern to the Government-the aged, children in poverty, particularly in sole parent families, and pensioners and the unemployed renting in the private market.

Pension ``income test free'' areas

From November 1986, the basic income test for pensions will be liberalised by an increase in the free areas from $30 a week to $40 a week for single pensioners and from $50 a week to $70 a week for a pensioner couple.

This means that single pensioners with incomes above $40 a week will receive an increase in pension of $5 a week, and a pensioner couple with an income above $70 a week will receive an increase in pension of $10 a week (combined). Pensioners with incomes between the old and new free areas will receive slightly less. In addition, because the pension cut-out points will increase, some persons currently not entitled on income grounds will become entitled to part rate pensions.

It should be noted that the free area increases apply only to pensioners. The benefit income test will not be affected by this Bill. However, as a result of changes in the 1985-86 Budget which are included in the Social Security and Repatriation (Budget Measures) Amendment Act 1985, the benefit free area will be increased from $20 to $30 a week from 1 May 1986.

The assets test will be unaffected and will apply as it does now.

The special income test applying to age pensioners 70 years of age and over will not be affected.

The ``income disregard'' for children

From November 1986, the income disregard for children of pensioners will be increased from $6 a week to $12 a week per child. The income disregard for children is the reduction in the income of a pensioner for each child.

This, plus the increase in the basic free areas, will mean that pensioners with children will have higher free areas than currently. For example, a sole parent pensioner with one child will be able to have a non-pension income of $52 a week and still receive a full pension. These amounts are to be increased by $12 a week for each additional child.

There is to be no change to the treatment of unemployment, sickness and special beneficiaries with children who will continue to have no income disregard.

There will also be no change to the income disregard for children in the income test for concession cards and fringe benefits.

Rent assistance

From November 1986, the separate income test for rent assistance will be abolished for both pensioners and beneficiaries.

Currently, rent assistance is reduced by 50 cents for every dollar of non-pension or benefit income from the first dollar of private income. (Private income will now be higher in the case of pensioners with children who currently benefit from the income disregard of $6 a week per child.)

From November 1986, rent assistance will be income tested like other additional payments such as additional pension or benefit for children and ``mother's/guardian's allowance''. The effect will be that people now receiving a part rate of rent assistance because of their private income will become eligible for the maximum rate, and other pensioners and beneficiaries renting in the private market who satisfy the rent test will also become eligible for the full or a part rate of rent assistance.

This will mean that people renting in the private market will receive an increase in payment of up to $15 a week for sickness beneficiaries and pensioners (plus the gains from other initiatives), and of up to $10 a week for unemployment and special beneficiaries. (The latter groups will become eligible for rent assistance of up to $10 a week from 1 May 1986 as a result of changes in the 1985-86 Budget, which are included in the Social Security and Repatriation (Budget Measures) Amendment Act 1985.)

There will be little change to other aspects of rent assistance. In particular, the rent test will remain as it is.

Where a pensioner is being assessed under the assets test, the pensioner will now be eligible for rent assistance on the same basis as a pensioner assessed under the income test.

Persons renting public housing will not be eligible for payments. However, the existing savings clause covering public housing tenants will remain.

The categories of unemployment beneficiaries eligible for rent assistance from May 1986 will not alter.

Some examples of what the new measures will mean are as follows-

(a) A sole parent with one child and modest earnings of $80 a week will receive an increase in pension of $8 a week. If that sole parent pensioner is renting in the private market, his or her social security payment will be increased by $23 a week.

(b) An unemployment beneficiary renting in the private market and with modest income from part-time earnings will become eligible for additional rent assistance of up to $10 a week.

(c) A single age or invalid pensioner with $100 a week in private income will receive an increase in pension of $5 a week. If the pensioner is renting in the private market, the increase in pension could be $20 a week.

The Explanatory Memorandum accompanying the Bill contains the text of the Treasurer's statement concerning these matters together with details of the financial impact of the measures.

These measures mark a significant development in assistance to those members for our community who are in greatest need and who want the opportunity to break free of the social security system and become self-supporting. The measures will encourage their efforts in a positive way, and the reduction of poverty traps will assist those pensioners and beneficiaries, their children and the wider community.

Mr President, I commend the Bill to the Senate.

AUSTRALIAN CAPITAL TERRITORY STAMP DUTY AMENDMENT BILL 1985

In association with the Taxation Laws Amendment Bill (No. 3) 1985 just introduced, this Bill will give effect to the 1985-86 Budget proposal to impose A.C.T. stamp duty on loan securities.

It will also increase the current rates of A.C.T. duty on conveyances of real property.

These measures are part of the wider proposal to better align A.C.T. taxes with those levied by the States. The duty to be formally imposed by this Bill on loan securities will be $5 where the maximum amount repayable under, or secured by, the security does not exceed $15,000. On securities for greater amounts, the duty will be $5 for the first $15,000 and 40 cents for every $100 or part thereof that exceeds the first $15,000. Loan securities for amounts up to $500 will be exempt. The estimated revenue yield from this measure is $1.5 million in a full year. Stamp duty on real property transfers up to a value of $14,000 will remain at the present rate of $1.25 per $100 or part of $100. Where the value of the transfer is between $14,001 and $30,000, the duty will be $175 plus $1.50 for each $100 or part thereof over $14,000.

In the range of $30,001 to $60,000, duty of $415 plus $2 per $100 or part thereof over $30,000 will be payable. Above $60,000, the duty payable will be $1015 plus $2.50 for each $100 and any fractional part of $100. The increased duty on real property transfers will produce a revenue gain estimated at $1.5 million in a full year. Both the new duty on loan securities and the increased rates for conveyances of real property will apply to instruments executed on or after the first day of the month following that in which this Bill receives the Royal Assent. Mr President, an explanation of the provisions of the Bill is contained in the explanatory memorandum being made available to honourable senators. I commend the Bill to the Senate.

BANK ACCOUNT DEBITS TAX AMENDMENT BILL 1985

This Bill will give effect to the proposal announced in the 1985-86 Budget to double the rates of bank account debits tax in the Australian Capital Territory, in lieu of the introduction of a State-type financial institutions duty.

The proposal is part of a package designed to bring taxes and charges in the A.C.T. more closely into line with those that commonly apply in the States.

In keeping with other A.C.T. taxes, the increased rates of bank account debits tax will apply also in the Jervis Bay Territory.

The new rates will be 20 cents on debits of $1 or more but less than $100, 50 cents on debits of $100 or more but less than $500, $1 on debits of $500 or more but less than $5,000, $2 on debits of $5,000 or more but less than $10,000 and $3 on debits exceeding $10,000.

Special provisions will counter arrangements to avoid A.C.T. rates of bank account debits tax by keeping accounts outside the A.C.T.

The Bill also provides that cheque accounts kept in Australia but outside the A.C.T. are to be subject to A.C.T. rates of tax where those accounts have been opened on behalf of depositors with A.C.T. building societies or credit unions.

The revenue gain from the measure is estimated at $4 million in a full year.

Mr President, an explanation of the provisions of the Bill is contained in the explanatory memorandum being made available to honourable senators.

I commend the Bill to the Senate.

INCOME TAX (COMPANIES, CORPORATE UNIT TRUSTS AND SUPERANUATION FUNDS) AMENDMENT BILL 1985

In line with the measures contained in the Taxation Laws Amendment Bill (No. 4) 1985 about which I have just spoken, this Bill will amend the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1985 to declare and formally impose income tax-at the rate of 46 per cent-on the net income of a public trading trust that is to be subject to company tax arrangements.

The provisions of the Bill will have effect only in relation to income of the 1985-86 financial year-the first year in respect of which any tax will be payable under the new arrangements by a trustee of an affected trust.

I commend the Bill to the Senate.

TAXATION LAWS AMENDMENT BILL (No. 4) 1985

With the introduction of this Bill the Government is taking another important step towards achieving our critical reform program for repairing the Australian tax system.

The Bill continues our attack on the tax shelters, evasion and avoidance practices and sectional preferences that have caused our system to become distrusted by honest citizens.

It contains measures to put in place four of the reform proposals announced in the statement of 19 September 1985 on reform of the Australian taxation system.

One of these is to deny income tax deductions for entertainment expenses incurred after that date.

Another will require specific substantiation of claims made for the deduction of employment-related expenses by employees and of car and travel expenses of employees and self-employed persons.

A third reform measure removes the tax bias in favour of the use of public unit trusts as a vehicle for the participation in trading and business ventures by tax-exempt investors.

The fourth will give effect to the decision to replace, with write-off over 5 years, the immediate income tax deductibility of capital expenditure by primary producers on conserving and conveying water.

Some measures in the Bill are unrelated to the tax reform package. One of those is the proposal-announced on 22 August 1985-to counter tax avoidance arrangements involving the commutation of immediate annuities. Another is to extend to taxable bonuses and similar amounts received under life assurance policies issued by certain state government insurance offices the rebate of tax in respect of such amounts received under policies issued by taxable insurance companies. At the same time a technical deficiency in the rebate provisions will be corrected. Those changes were announced on 9 October 1985.

The Bill will ensure that the new carer's pension introduced from 1 November 1985 is taxed on a similar basis to the spouse carer's pension it replaced. Finally it contains a number of purely technical amendments consequent on recent changes to social security and repatriation laws. I turn now in more detail to the various measures.

Entertainment Expenses

The Bill will give effect to the decision announced in the 19 September statement to deny deductions for entertainment expenses. As noted in that statement, the Government cannot stand by and allow the general body of taxpayers to subsidise through deductions for entertainment expenses the frequently social activities of a group of usually well-off people. The Government recognises that this measure will mean that in some cases deductions will be denied for genuine business expenses. Nevertheless, the fact remains that certain sections of the community have abused the availability of deductions for entertainment expenses.

That abuse has been possible because of the inherent difficulties in distinguishing between genuine and non-genuine entertainment: difficulties that have proved intractable despite suggestions that have been offered to us. The extent of that abuse and the lack of a viable alternative to restrict deductions to genuine business entertainment have confirmed that the Government has no option but to act across-the-board in disallowing entertainment expenses. There are also equity considerations.

The vast majority of taxpayers do not benefit from the current law which is available only to a limited class of persons. The fact that lunches are deductible for the business person eating with clients or colleagues in an expensive restaurant, but not for the ordinary worker, has added to the public's perception of the unfairness of the current taxation system. There has been much public comment on the impact of the measures on the restaurant industry. While that industry will be affected by the Government's decision, it would be wrong to justify a continuation of the present system on that ground when it is clear that the present level of activity has been achieved through the utilisation of an unintended subsidy, financed by the general body of taxpayers.

In assessing the extent of that impact it should also be remembered that the restaurant industry will be one of the beneficiaries of the increased community spending power that will result from the reduced rates of tax that are to be introduced as part of the overall reform package. The amendments proposed by the Bill will deny deductions for entertainment expenses incurred after 19 September 1985.

Typical kinds of entertainment that will no longer attract deductions include business lunches and drinks, dinners, cocktail parties and staff social functions. Deductions will also be denied for expenses incurred in providing entertainment, such as tickets or boxes for sporting or theatrical events, and sightseeing. Hostess allowances paid by employers to spouses or other relatives of senior executives to offset the cost of attending or hosting company-sponsored functions will also no longer be deductible.

The entertainment deduction prohibition will not, of course, apply to expenses incurred in operating a business for the provision of entertainment.

As a general rule, expenditure on entertainment for promotional or advertising purposes will also continue to be deductible provided it is made available to the public generally and not confined to selected guests.

The costs of overtime meals of an employee governed by requirements of an industrial award will also be unaffected by the proposed amendments, as will the cost of a person's meals while travelling on business away from home.

Special rules will apply to ensure that the costs associated with in-house dining and recreational facilities for employees will be unaffected by the amendments.

However, as announced by the Minister Assisting the Treasurer when introducing the Bill in another place on 15 November 1985, expenditure incurred after that date in entertaining non-employees in an in-house dining facility will, broadly speaking, no longer be deductible.

The Bill will also ensure that the cost of meals that are reasonably incidental to a person's attendance at a seminar will continue to be deductible, although the cost of any associated recreational activities will come within the scope of the disallowance provisions.

The Bill also contains a number of safeguarding provisions to ensure the intended operation of the measures.

In this regard I note that there are already indications of moves to substitute entertainment allowances presently paid to senior executives with what are said to be overtime meal allowances payable on the basis that it is normal for these executives to work long hours.

The specific exception in relation to overtime meals I referred to earlier is to apply only to the cost of overtime meals provided pursuant to an industrial award, with the result that the disallowance measures being introduced by this Bill will apply in relation to privately negotiated meal allowances.

Substantiation Rules

A further measure announced in the 19 September statement which is being introduced by this Bill is the requirement for the substantiation of employment-related expenses of employees and car and travel expenses of employees and self-employed persons.

These measures will correct a deficiency in the existing law which, while specifying the type of expenses which qualify for deduction, fails to specify what proof is required to substantiate those claims.

Subject to the exemptions outlined below, the proposed amendments will make it a requirement for deduction that appropriate documentary evidence be maintained.

For this purpose, the general rule will be that an expense will be regarded as substantiated only where a taxpayer is able to produce a reciept, invoice or other documentary evidence that evidences the amount, date and essential character of the expense.

More detailed substantiation requirements will apply in relation to car and travel expenses.

In addition to the basic substantiation rules which will apply to verify actual expenditure, taxpayers seeking to deduct the whole or any part of care expenses are, subject to alternatives I shall outline, to be required to maintain daily log books or similar records in which details of business trips are recorded.

For travel expenses, taxpayers will be required to substantiate the business purpose of overseas travel and extended domestic travel by maintaining a dairy of the business activities conducted during the trip.

A further measure will ensure that deductions are not allowable for the travelling expenses of a spouse or other relative who accompanies an employee or self-employed person on a business trip.

The substantiation requirements applicable to employees will be subject to two exclusions.

Under the first of these, the general substantiation requirements will not apply to claims within the limits of reasonable domestic travel or overtime meal allowances.

The second exclusion will apply generally to exempt from the substantiation requirements claims which in aggregate do not exceed $300 in the particular income year.

Concurrent with the introduction of substantiation requirements for car expenses, the Bill will authorise alternative arbitrary bases of deduction depending on whether or not business use during a year of income can be expected to exceed 5,000 kilometres.

Where business use exceeds 5,000 kilometres a taxpayer is to be entitled to claim a deduction equal to one-third of the vehicle costs or, alternatively, a deduction equal to 12 per cent of the purchase price of a motor vehicle.

Where the vehicle is acquired under a lease agreement, the 12 per cent deduction will be based on the market value of the vehicle at the time the lease was entered into.

The value on which the 12 per cent deduction is to be based will be subject to the limit under the existing law on the cost price of cars for depreciation purposes.

For cars with an estimated annual business use of less than 5,000 kilometres, a taxpayer will be entitled to a deduction based on applying standard rates per kilometre.

Public Unit Trusts

The draft White Paper on the Reform of the Taxation System drew attention to the marked erosion of the company tax base over recent years, caused partly by the use of both public and private trusts in substitution for companies as a mechanism for conducting business activities.

A further study of the matter was undertaken in the context of possible changes to the company tax system which were also being considered by the Government.

The problem was that although the very significant changes to company tax arrangements ultimately decided on by the Government will reduce the incentive to use trusts, considerable advantages in using the trust form would still have remained for tax-exempt bodies investing in large business undertakings. Given the very favourable treatment already given to such bodies that would have been an unacceptable situation.

The Government therefore decided, as announced in the Tax Reform Statement of 19 September, that company tax arrangements should be extended to public unit trusts that operate a trade or business.

In announcing that decision, it was also indicated that private trusts and public unit trusts of the more traditional kind that do no more than invest in property, equities, or securities would not be affected.

Measures contained in this Bill to give effect to those decisions in many respects mirror the present corporate unit trust provisions.

Subject to transitional arrangements, they will apply to a unit trust which, at any time during a year of income, is a trading trust that is also a public unit trust.

For these purposes, a trust will be a trading trust if its business activities go beyond investing in land for rental, or investing or trading in shares, units, loans and other securities.

Following the basic rules already in the income tax law for taxing corporate unit trusts as companies, a trust will be treated as a public unit trust if its units are listed on a stock exchange, if they are held by 50 or more persons, or are available for investment by the public.

A trust will also be a public unit trust if units entitling the holder or holders to 20 per cent or more of the beneficial interests in the income or property of the trust are held by persons or bodies, including a government or a government authority, that are exempt from income tax.

I point out that this test, which reflects the Government's underlying concern over the use of trusts as an investment vehicle by tax-exempt investors, will result in a unit trust being treated as a public unit trust where that would not otherwise be the case, for example, where units in the trust are not available for investment by the public, or are held by less than 50 unitholders.

Provisions in the Bill, like those in the present income tax law relating to corporate unit trusts, will ensure that distributions made by public trading trusts are treated for all practical purposes in the same way as dividends paid by a company.

Thus, a distribution received by a company or other affected trust from a public trading trust will qualify for a rebate of tax in the same way as a public company now qualifies for a rebate on dividends it receives from other companies.

Similarly, where the income of a public trading trust includes dividends from companies, corporate unit trusts or other public trading trusts, a rebate of tax will be available on a comparable basis.

Distributions made by a public trading trust to a resident individual will be included in assessable income in the same way as company dividends.

Where such distributions are made to non-residents they will be subject to dividend withholding tax.

The new basis for taxing public trading trusts and their unitholders will apply to income of the 1985-86 year of income for relevant trusts that are established after 19 September 1985.

For trusts that were established on or before that date, the new measures will first apply to income of the 1988-89 income year. This will allow reasonable time for parties to such arrangements to review and change them as may be appropriate.

For the purpose of this transitional provision, it will not be necessary for a unit trust to have actually progressed to the point of being a public unit trust or to have commenced trading activities on or before 19 September 1985. It will be enough if the trust was then in existence and it can be demonstrated that it was in course of meeting those criteria by that date.

Consequential amendments are being made to the Income Tax (Rates) Act 1982 and the Income Tax (Individuals) Act 1985 to exclude from their operation the trustee of a public trading trust falling within this measure.

A complementary amendment will be made by an accompanying Bill to the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1985 to declare and impose tax on income of affected trusts.

Other consequential amendments are proposed to the Income Tax (International Agreements) Act 1953.

These measures will curb the trend that has been developing in the erosion of the company tax base through such creations and which would have had more serious revenue consequences in the absence of the corrective action.

On that view, I repeat the warning issued by the Minister assisting the Treasurer when introducing this Bill in another place on 15 November 1985 that, should evidence emerge of arrangements designed to circumvent these measures, the Government will propose remedial legislation to the Parliament to apply with effect after that date.

Water Conservation or Conveyance Expenditure and Soil Conservation Expenditure

Under the present income tax law, capital expenditure incurred on plant or structural improvements for the purpose of conserving or conveying water for use in a business of primary production is fully deductible in the year in which the expenditure is incurred.

The ability to fully deduct such capital expenditure reduces the after-tax cost of improvements of this kind relative to other investments in property and can therefore encourage expenditure for tax sheltering purposes.

As announced in the tax reform statement, that immediate deductibility is, where the expenditure is incurred under a contract entered into after 19 September 1985, to be replaced by deductibility in equal instalments over 5 years.

A deduction of 20 per cent of the expenditure is to be allowed in the year in which the expenditure is incurred and in each of the subsequent 4 years.

Such a write-off period is consistent with the General treatment of assets of primary producers and other businesses.

Increased funding under the Federal Water Resources Assistance Program, which includes assistance for rural water conservation, is evidence of the fact that this reform measure does not represent reduced Government priority for water conservation. That funding is to be increased by $4.6 million in 1985-86.

As announced in the 19 September 1985 statement the Government has decided against changing the immediate deduction available for capital expenditure on soil conservation after taking account of concerns over land degradation problems.

In recognition of those problems the capacity to write-off expenditure on arresting or preventing soil erosion or soil salinity is, by the Bill, to be extended to expenditure on arresting land degradtion generally.

Capital expenditure incurred after 19 September 1985 in overcoming land degradation in the form of soil infertility and structure decline, to give but two examples, will thus be subject to immediate write-off.

Commutations of Immediate Annuities

The Bill will give effect to the proposal announced on 22 August 1985 to counter exploitation of the eligible termination payment provisions of the income tax law through arrangements for the commutation of immediate annuities purchased with moneys other than retirement or employment termination moneys.

Under one such arrangement, an immediate annuity is purchased with a substantial sum of money that has no source in retirement or termination payment. The moneys could be borrowed solely for the purpose.

Although the annuity is expressed to be payable over a number of years, it is commuted to a lump sum after, say, one year and the greater part of the earnings are received on commutation.

By this process moneys that, if invested elsewhere, would give rise to earnings taxable at full marginal rates are used to generate amounts that, when paid out on commutation, are eligible termination payments for Income Tax purposes.

Such amounts are subject to tax at a maximum rate of 30 per cent. The rate would be 15 per cent on the first $55,000 if the recipient were aged 55 or more. When this proposal was announced, the Government was unable to specify comprehensively what form the necessary remedial legislation would take.

Being mindful that the provisions being exploited are designed to provide concessional tax treatment for retirement pay-outs where appropriate, the Government wished to ensure that the remedial legislation could not adversely affect genuine cases.

Consistent with the assurance given when announcing the proposal, the amendments contained in this Bill will not apply where immediate annuities are purchased wholly with lump sum retirement or termination payments.

Nor will they apply in respect of earnings on a commuted immediate annuity that are attributable to annuity pricipal funded by retirement or termination payments.

The amendments will only apply in respect of such earnings attributable to principal funded by non-retirement moneys.

The commutation of an immediate annuity purchased prior to 1 July 1983, being the date from which the eligible termination payment provisions of the income tax law first applied, will not be within the scope of the amendments.

However, where an immediate annuity purchased after 30 June 1983 is commuted after 22 August 1985, or its residual capital value becomes payable after that date, the accrued earnings referable to that part of the purchase moneys not attributable to retirement or termination payments will not qualify for the concessional treatment otherwise available.

Such earnings will be subject to tax at full marginal rates.

The ability to roll-over such earnings into, for example, an approved deposit fund and thus defer any liability to tax will also be removed.

I also take this opportunity to re-iterate the Government's warning that, should the need arise to introduce additional legislation to counter any further artificial tax avoidance arrangements designed to exploit the eligible termination payment provisions of the taxation law, that legislation will also be made effective from 22 August 1985.

Short Term Life Assurance Policies

This Bill gives effect to the Government's decision-announced on 9 October 1985-to extend to recipients of taxable bonuses and similar amounts paid under life assurance policies issued by certain State Government Insurance offices eligibility for the rebate of tax presently available to recipients of such amounts paid under policies issued by taxable insurance companies.

Under the existing law, bonuses of life assurance policies and other amounts in the nature of bonuses that are received either during the first four years or during the first ten years of the policy, depending on its date of commencement, are subject to tax.

To broadly compensate for the tax paid by the policy issuer, a rebate equal to 30 per cent of the taxable bonus is allowed to the recipient. However, as State Government Insurance offices are exempt from Commonwealth tax, no rebate is available in relation to policies they issue.

The State Government Insurance offices that presently offer short-term life assurance policies-those in New South Wales, Queensland and South Australia-each pay to their respective State treasuries an amount equal to the Commonwealth income tax that would be payable if they were not tax-exempt.

The Government therefore recognises that the non-availability of the rebate could affect the competitive position between those offices and taxable insurance companies in relation to the issue of life policies.

This Bill will remedy that situation by allowing a rebate of 30 per cent in respect of amounts paid by the insurance offices in question that are subject to tax in the hands of the recipients.

In return, the relevant State Governments have agreed to reimburse the Commonwealth for the revenue forgone.

By another amendment, a technical deficiency in the relevant rebate provisions of the law is being rectified.

It will extend the rebate to the trustees of taxable superannuation funds and ineligible-that is, taxable-approved deposit funds in reciept of taxable bonuses.

Both these amendments will generally be effective from the date that the rebate provisions were first applicable-that is, 27 August 1982.

Carer's Pension

Effect is being given by the Bill to the income tax implications of the Budget announcement to subsume, from 1 November 1985, the former spouse carer's pension into a new carer's pension.

The previous pension was payable to a man not receiving a pension in his own right who was providing constant care and attention for his aged, service or invalid pensioner wife for an extended or indefinite period.

The new pension is available to people who provide constant care and attention to a severely handicapped, aged or invalid pensioner spouse or near relative on a long term basis in the private home.

Measures contained in this Bill will extend to the new carer's pension the same basic tax rules that applied to the former one.

That is, the carer's pension will be exempt from tax except where either the carer or his or her handicapped relative is of pensionable age.

Where the new carer's pension is payable under repatriation legislation it will also be exempt from tax if the relevant handicapped relative is in receipt of a service pension equivalent to a social security invalid pension, and neither the carer nor the relative is over age pension age.

In other circumstances the carer's service pension will be taxable.

This Bill also proposes several purely technical amendments of the Income Tax Assessment Act consequent on recent amendments of social security and repatriation laws.

Finally, it will make other formal amendments of the assessment act made necessary by proposals contained in the Veterans' Entitlements Bill 1985 to rationalise and simplify various repatriation statutes into a consolidated Act.

A comprehensive memorandum explaining in detail the measures that I have outlined is being circulated to honourable senators. I draw attention to the schedule at page 4 of the memorandum which sets out the financial impact of the various measures proposed by the Bill. I commend the Bill to the Senate.