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Wednesday, 19 May 1993
Page: 888


Senator WATSON (6.53 p.m.) —The Senate is debating cognately the Taxation Laws Amendment Bill 1993 and Taxation Laws Amendment Bill (No. 2) 1993. Both Bills reflect the rapid change to tax law spearheaded by the Labor Government and its tax architect, the former Taxation Commissioner, Trevor Boucher. The new commissioner, Mr Michael Carmody, now has the job of fitting in the missing pieces—details that should have been part and parcel of the earlier legislation.

  The Government has limited the second reading debate to 20 minutes, meaning 10 minutes for each of these two long, complicated and technical Bills with extensive implications for business in Australia. The Senate is referring both Bills to the Senate Standing Committee on Finance and Public Administration for further scrutiny.

  I commend the earlier speakers for their contribution. I must say the coming of Senator Kernot as their spokesperson for Treasury matters has certainly raised the level of debate from the Australian Democrats, and I thank her for her contribution.

  The Taxation Laws Amendment Bill is technically the same Bill that was introduced into the House of Representatives on 16 December 1992 as the Taxation Laws Amendment Bill (No. 7). The only major change is within certain transitional capital gains provisions.

  A number of measures in this Bill have caused the coalition some concern. For example, there are far too many elements of retrospectivity. Firstly, I refer to the amendments regarding accrued leave payments. This measure is concerned with payments made by a former employer to a current employer in respect of the accrued leave entitlements of employees whose services are being transferred.

  While the intention is that only a few industries will be affected by the provision, namely industries in which employees change employers so frequently that awards permit entitlements to leave to be based on total service with a number of employers, I believe that a literal reading may give this amendment a much wider and an unintended scope.

  It also concerns me that the drafting of the proposed legislation has created some unintended consequences. A literal reading of this section deems it to have effect since 1978. For practical purposes, the retrospective aspect would be four years. While the coalition has concerns about retrospectivity, in this case the retrospectivity provides some benefit to certain classes of taxpayers. However, the Senate must not overlook the fact that the other retrospective element within the same measure could create doubts about prior application of certain awards which many employers, other than those affected on the waterfront, may not know much about. Allowing this retrospectivity may encourage award changes in other industries to enable employers to pick up the liability when employees change jobs.

  The explanatory memorandum claims that in practice the retrospective character of the amendment will not disadvantage taxpayers because the amendment will give effect to the interpretation of the law which the Commissioner of Taxation has applied from the commencement of section 51(3) of the Income Tax Assessment Act until 24 August 1989, when the commissioner changed his earlier interpretation as a result of the decision in the TNT Skypack case.

  For the record, I think it should be noted that the TNT Skypack case involved the sale of a business, whereas section 51(3), introduced in 1978, sought to deny deductions essentially for provisions for such things as long service leave and sick pay, and to allow the deduction only when the benefit was paid when the leave was taken or a benefit was derived by a beneficiary of the deceased person who derived the benefit.

  It is remarkable to consider that since 1978 section 51(3) of the Income Tax Assessment Act has denied a deduction in respect of leave payments unless they are made to the employee or to his or her estate. Business is of the belief that the amendments should have been much more narrowly drafted so as to clearly confine their operation to the issue at hand and that the amendment should not be retrospective. We will have to consider the possibility of an amendment after hearing some explanations during the committee stage.

  Secondly, the coalition is concerned about the retrospective aspect contained in the depreciation broadbanding measures. The broadbanding legislation needed amending, and I have no doubt that this has occurred. A literal interpretation could have led to an item of plant at a higher rate than that intended by the drafter of the legislation. No-one would really be worried about an amendment to fix a mischief of that kind, but it is quite a different matter to legislate for the change to have a retrospective effect. Not only is retrospective legislation wrong in principle; in this instance it will mean that taxpayers who have been prepared and have lodged their returns based on the black letter of the law—and that is important—would now have to lodge amended returns. Unnecessary time, effort and money will be spent—all because of poor drafting.

  A number of other depreciation refinements are also included. These cover, for example, depreciable property installed on crown leases, the adjustment of the depreciation cost price limit, as well as options to specify lower rates being removed. I commend the Government for extending the provision to cover a situation in which a vehicle has to be modified to allow people with disabilities access through wheelchairs. This is consistent with the concessional treatment granted in sales tax legislation and is symmetrical. Therefore, I believe that it is important.

  The Bill also contains a number of amendments which seek to remedy inconsistent technical problems in conjunction with the capital gains tax provisions. For example, changes will ensure that the capital gains provisions do not apply to tax an amount where an amount would otherwise be included in assessable income.

  One problem brought to my attention in this regard is that the new section does not cover the situation whereby a club hires an asset to a member—that is a voluntary club or association—and the receipt is not protected by section 23(g), 160K(1), or 160Z(8), and whether section 160M(7) will assess the gross consideration. I will raise this issue further when the Bill is referred to committee.

  I am pleased to note that this Bill has incorporated a number of provisions which have been raised by business with the Australian Taxation Office with regard to corporate rollover amendments and the disposal of assets within a company group. It is good to see that the Government has listened, at least in part, to the concerns raised by the Taxation Institute of Australia on behalf of a number of businesses in this particular category. The changes introduced in Taxation Laws Amendment Bill 1993 and which were not contained in Taxation Laws Amendment Bill (No. 7) 1992 should allow the maximum flexibility for assets to be transferred between companies within a wholly owned corporate group to both maximise economic efficiencies and reduce unnecessary compliance costs.

  The coalition also welcomes capital gains amendments which concern the principal residence exemption and the cancellation of statutory losses. The coalition also commends to the chamber the amendments covering dividend streaming, rollover relief for petroleum mining, the tax deductibility of gifts to the Shrine of Remembrance Restoration and Development Trust in Melbourne and the PAYE provisions—in particular the ability of an employee with more than one employer to obtain from the Tax Office a single variation in PAYE tax instalment deductions which will apply to more than one employer. However, I do believe it is my place to query how this change will affect the 15 per cent instalment tax rate deduction concession, which is currently in vogue, granted to employers in certain primary industries.

  Both Bills contain intrusions into the privacy provisions of the Tax Administration Act and section 16 of the Income Tax Assessment Act. The first Bill will allow the provision of tax information to the Queensland Criminal Justice Commissioner. The Taxation Laws Amendment Bill (No. 2) will allow the Commissioner of Taxation to furnish information to the Secretary to the Department of Foreign Affairs for the purpose of locating persons who are unlawfully in Australia.

  This raises privacy provisions. I would have thought that any responsible government with a concern for privacy issues would have had, concurrent with this legislation, a privacy amendment because what is really needed in terms of releasing further information unprotected by the privacy provisions of section 16 of the Income Tax Act or section 3 of the Tax Administration Act is a complementary change to the Privacy Act to allow for the Privacy Commissioner to audit who has used that information and how. I ask the Government to act because we are seeing more and more extensions and liberalisations of the privacy provisions without adequate privacy protections. I think such a mechanism is needed in the interests of protecting the privacy of so-called innocent persons.

  I now turn to Taxation Laws Amendment Bill (No. 2) 1993. I do so quickly because I do not wish to canvass issues raised by Senator Kernot and by my colleague Senator Short, who made a very fine contribution. This Bill makes provision for a 10 per cent margin of error in estimating corporate income. I remind the Senate that that does not match up with a 15 per cent margin which applies to provisional taxpayers. The question arises as to why the Government believes that corporate officers have better foresight in estimating the income of corporate organisations than provisional taxpayers have in estimating theirs. I believe that this anomaly needs to be addressed.

  The company rate is to be reduced from 39 per cent to 33 per cent. The reduction in the corporate rate hopefully should stimulate some new corporate investment. I acknowledge that, but it will not do much to lower the cost structure because most firms do not always take the tax component into account when calculating their costs. It is far better, as Fightback states, to lower the cost structure by taking those hidden taxes out of business costs.

  I refer to a report by the Economic Planning Advisory Council, which suggests that the reduction of the company tax rate will only deliver marginal benefits to local firms. The reduction will mean that Australia will become more attractive for foreign investment as the promised six per cent cut to the company rate will reduce the final tax cost to foreigners for new investments here by 5.2 percent to 28.1 percent. In comparison, the real cost to local investors will be reduced by only 1.5 per cent to 31.8 per cent.

  It is also interesting to note that the Prime Minister (Mr Keating) informed the House of Representatives at Question Time that the reduction would mean a tax rate comparable with that of Singapore and about the average for countries in the Asian region. In other words, it is meant to give Australia an advantage. However, the Prime Minister seems to have either forgotten or does not know that Singapore has just reduced its company tax rate to 27 per cent and there are further plans for a reduction to 25 per cent. Thus, we are not comparable with Singapore and never will be because Singapore plans to undercut the advantage Australia was presumably to obtain by this measure.

  Concern has been expressed that, given the disparity between the top marginal rate of 48.4 per cent from 1 July, which includes the Medicare levy, and the proposed company tax rate of 33 per cent, incorporation may be a very attractive option for some classes of taxpayer. It is generally thought that certain taxpayers will incorporate despite the Australian Taxation Office and the Government saying that the anti-avoidance law is adequate to prevent such change. In all cases, from where I stand, I do not believe that it is.

  Business has queried whether the Government might not reconsider the activation of Division 7, at least in relation to private companies that do not earn the majority of their income from active business. Something will have to be done to stem the flow of money. Another sideline of the change will be that franked dividends will be less attractive since the imputation credit to shareholders will drop from 39 per cent to 33 per cent. Companies will be under pressure from shareholders to pay out a higher dividend to maintain shareholders' net dividend income.

  The EPAC report questions whether Australians will invest more themselves because the system of dividend imputation actually washes out the benefits of corporate tax concessions to shareholders as the gap between the company rate and the personal income tax rate widens with the lowering of the corporate tax rate. Foreign investors do not confront the same problems as they do not pay the same personal tax rates as local shareholders by virtue of the implications of the franked credit system and international agreements.

  The change in the corporate tax rate will also affect the insurance industry as there is to be no change to the tax rates applying to certain categories in this industry. However, I understand that discussions have been occurring between the Taxation Office and the insurance industry concerning the appropriate basis for taxing the general fund or non-fund income of a mutual company. Now suddenly the industry discovers without warning, according to statements made in the explanatory memorandum, the Government has effectively decided that because the company is owned by the policyholders all the funds held are in fact insurance funds and should be taxed accordingly.

  This ignores the fact that policyholders of a mutual company have two sets of rights. They have rights as a policyholder in which there is a contractual obligation between the policyholder and the company according to the respective policy documents. They also have rights as members of the company in accordance with the company's constituting documents. These two rights seem to be confused in this legislation.

  It needs to be remembered that the function of the general fund, or non-fund, of a mutual company stands in exactly the same way as the shareholders' fund in a proprietary company. The general fund has gained greater significance with the Life Act requirements under these provisions.

  I turn now to the general investment allowance. I believe that this is a not unreasonable measure. But life assurance companies have been prejudiced from being able to claim the allowance on new plant and equipment that they purchase. This applied to the development allowance and, under this legislation, it will apply to the investment allowance. It applies in circumstances in which the companies are providers for beneficiaries who are annuitants and that proportion of tax in the life assurance company's hands, as such, is exempt. This creates some problems for the industry in that it tends to deny it access to both the development allowance passed last year and the investment allowance which we are debating at the moment. Why this discrimination? It is quite unfair.

  It is important to follow through the whole of subdivision B, the development allowance of part III of the Act. It is clear from section 82AA that the property to which the allowance is to be applied is that which is used by the taxpayer, wholly and exclusively in Australia, for the purpose of producing assessable income; that is, the end user of an eligible item must use that property for the above purpose. The explanatory memorandum makes it clear that the new allowance is to apply only to plant and equipment used wholly and exclusively for producing assessable income. This being so, life companies and superannuation funds will not be eligible for the deduction for equipment that they acquire for use in their businesses because of the apportionment of investment income to current pension and immediate annuity business.  This situation seems grossly unfair, and I would like the Government to comment. It is an issue that we will certainly raise at the committee stage.

  Before I go to my next point I raise the question of whether mutual income, which is taxed at the trustee rate, is really taxed at the appropriate rate. If we look at some actuarial studies we see that many policyholders' average tax rate is now well below 39 per cent. It seems quite unfair that this group of people should be taxed at the rate of 39 per cent, the trustee rate, when the ordinary corporate rate is 33 per cent. I believe this discrimination should be addressed.

  The Bill also covers amendments to the fringe benefits tax in that it extends the exemption which is currently available to priority of access payments to eligible child-care centres to priority of access payments to family day care, outside school hours care and occasional care. The coalition, naturally, welcomes this move as well as the amendments to the foreign investment funds measures enacted last year, and the income tax exemption for defence force personnel and federal police serving in certain areas: Cambodia, Somalia and the like.

  My final comment is in the form of a compliment—I see the tax officers smiling for once. It is pleasing to see that section 78 covering gift provisions has been restructured. It is a lot easier to read and to follow; so I say congratulations. I look forward to seeing many more sections of the income tax legislation similarly handled. In that way I believe we will have a much more easily understood, comprehensible and useful income tax Act.