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Monday, 9 September 1996
Page: 3065


Senator KEMP (Parliamentary Secretary to the Minister for Social Security)(4.58 p.m.) —I table a revised explanatory memorandum relating to the Veterans' Affairs Legislation Amendment Bill (No. 1) 1996 and move:

That these bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard

Leave granted.

The speeches read as follows—

TAXATION LAWS AMENDMENT (INTERNATIONAL TAX AGREEMENTS) BILL 1996

I move that the bill be now read a second time.

The bill will provide legislative authority for the entry into effect of an agreement negotiated between the Australian Commerce and Industry Office (ACIO) and the Taipei Economic and Cultural Office (TECO) which was signed on 29 May 1996.

The bill will insert the text of the agreement into the International Tax Agreements Act 1953. The bill will also make consequential amendments to that act, the Income Tax Assessment Act 1936 and the Taxation (Interest on Overpayments and Early Payments) Act 1983. The consequential amendments to the International Tax Agreements Act 1953 will provide for certain source rules necessary in Australia for the operation of the agreement and for the amendment of previous assessments as a consequence of provisions of the agreement having, or being capable of having, retrospective effect.

The consequential amendments to the Income Tax Assessment Act 1936 and the Taxation (Interest on Overpayments and Early Payments) Act 1983 reflect the fact that the agreement is between trade offices and that, as such, the agreement would not fall within some of the current definitions of "agreement" and "double tax agreement" in those acts.

The Australian Government has decided to give effect to the undertakings made by the ACIO in the agreement and does so on the understanding that the TECO has received assurances from appropriate authorities of reciprocal tax treatment in Taiwan.

The agreement paves the way for greater business dealings between Australia and Taiwan. It will significantly enhance the development of our commercial relationship with Taiwan by providing more favourable tax conditions for Australian business operating in Taiwan and by freeing up prospects for investment in both directions.

Australia has a flourishing economic relationship with Taiwan. The Government is committed to encouraging this relationship to grow still stronger in the future. Taiwan is now our ninth largest trading partner and sixth largest export market. Over the five years to 1994/95, merchandise exports grew by 10.5 per cent per annum. Two-way trade totalled A$5.9 billion in 1995.

The effect of the undertakings in the agreement are that:

.   income flows between Australia and Taiwan will not be subject to double taxation;

.   taxing rights over various categories of income flows will be clarified; and

.   co-operation between the respective tax administrations will operate to prevent tax evasion.

The agreement will have effect in Australia and Taiwan from dates specified in the agreement.

Shipping and aircraft profits will be taxable solely in the territory in which the operator of the ships or aircraft is resident for tax purposes. This treatment will apply from 1 January 1991 being the date on which approaches were first made on taxing shipping and aircraft operations solely on a residence basis. Income of certain organisations promoting trade, investment and cultural exchanges between Australia and Taiwan will also be taxed solely in the territory whose interests the organisation promotes and this may be from a date earlier than the date of entry into effect of the agreement.

Interest at source will generally be taxed at 10 per cent. Royalties will generally be taxed at source at 12.5 per cent. Taxation of dividends at source will be effectively limited in Australia to 15 per cent on unfranked dividends (with Australia's domestic law dividend withholding tax exemption continuing for franked dividends). In Taiwan its tax will be limited to 10 per cent where the Australian company receiving the dividends holds at least 25 per cent of the capital of the company resident in Taiwan, and to 15 per cent in other cases.

However, as is customary in agreements of this type, the agreement does not require that the nominated limits apply to dividends, interest or royalties that are effectively connected with a permanent establishment or fixed base.

Capital gains are to be taxed in accordance with the domestic law of each territory but there will be special rules for gains made on the alienation of real property; assets used by permanent establishments; ships; aircraft and shares in companies used principally to hold real estate.

Business profits derived from one territory by an enterprise of the other territory will be subject to tax to the extent that they are attributable to a "permanent establishment" that the enterprise has in the territory in which the profits are sourced.

Other income that will be subject to full taxation at source will include income from employment (except in relation to visits of short duration) and income derived by entertainers and athletes.

Shipping and aircraft profits derived from international operations; pensions and annuities; and most independent services income will be taxable only in the territory in which the recipient is resident.

Income which under the agreement remains taxable in both territories will continue to be eligible for tax relief under the general foreign tax systems of the respective territories.

Under the terms of the agreement the competent authority for the exchange of information under the agreement and the institution of mutual agreement procedures in Australia is the Commissioner of Taxation, or an authorised representative of the Commissioner. In Taiwan the competent authority is the Director-General of the Department of Taxation, or an authorised representative.

The Government recognises that the Government of the People's Republic of China is the sole legal Government of China and acknowledges the position of the People's Republic of China that Taiwan is a province of China. The Government of Australia thus declares that its decision to implement the agreement providing for the Commissioner of Taxation to be the competent authority does not constitute, and should not be interpreted as constituting, an implied or express decision to recognise Taiwan. The Government further declares that any contact necessary between the competent authorities for the implementation of the terms of the agreement is considered functional in nature and hence does not constitute, and should not be interpreted as constituting, an implied or express decision to conduct official contacts with Taiwan.

I should also note that it is the longstanding practice of the Australian Taxation Office that references in Australia's taxation laws to `country' and `foreign country' have been interpreted as applying to the territory in which the taxation laws administered by the taxation authorities, Taipei apply. The implementation of this agreement will not alter this interpretation.

I present the explanatory memorandum and commend the bill to the Senate.

SALES TAX LAWS AMENDMENT BILL (No. 1) 1996

The bill gives effect to the Government's decision, announced in the context of the June Premiers conference, to remove the wholesale sales tax exemption currently enjoyed by all levels of government in relation to motor vehicles, and parts for those vehicles, provided wholly or partly for private use as part of remuneration.

Affected governments and government bodies will no longer be able to acquire sales tax free cars that are to be used, or made available for use, for private purposes by employees with little or no restriction. For example, cars that are typically made available by Governments to Senior Executive Service officers, which those officers are free to use more or less as they please outside working hours, will no longer be able to be acquired free of sales tax by the Government employer. This will be the case whether or not those cars are formally provided as part of a salary package.

On the other hand, cars that are to be used for private purposes infrequently and irregularly, or where the private use is to be restricted to travel between home and the workplace or other travel incidental to the employee's duties, will still be able to be acquired sales tax free. This will cover, for example, most `pool' and government-plated cars, where the private uses of the cars are restricted in the ways I have outlined.

The institutions affected by these changes include Commonwealth and State Governments and authorities, State/Territory bodies, local governments, public transport authorities, ATSIC, the Reserve Bank and State libraries, museums and art galleries established in the capital city of a State. Schools, universities, public hospitals and public benevolent institutions will not be affected by these changes. Vehicles that will be affected include motor cars, station wagons, panel vans, utilities and 4WDs, provided they are designed to carry a load of less than one tonne, and motor cycles.

The changes apply to dealings with cars after 3.15 p.m. Australian Eastern Standard Time on 11 June 1996, and are expected to raise additional revenue of between $50 million and $100 million in 1996-97.

I present the explanatory memorandum and commend the bill to the Senate.

TAXATION LAWS AMENDMENT BILL (No. 2) 1996

The bill amends the taxation and superannuation laws in a number of significant respects. These include giving effect to an election promise by the Government in respect of fringe benefits tax. It will also relieve uncertainty in the business and taxpaying community regarding several measures outstanding from the previous Government.

Forgiveness of commercial debt

The bill will introduce new taxation rules relating to the forgiveness of commercial debt. The new measures are based on provisions introduced by the previous Government into the Parliament which lapsed when the Parliament was prorogued prior to the election.

The measures I am introducing today depart in several important respects however from those lapsed provisions to take account of public concerns that have been expressed about certain aspects of the lapsed provisions.

The proposed amendments will apply to commercial debts forgiven after 27 June 1996, and not from 9 May 1995 which was the proposed commencement date announced by the former Government. Under revised transitional arrangements, if forgiveness occurs after 27 June 1996 pursuant to an agreement or arrangement entered into on or before 27 June the forgiveness will not be affected by the amendments.

The commercial debt forgiveness provisions will not affect the creditor's taxation entitlements. However, the total amount of debt forgiven in a year of income will be applied to reduce the debtor's entitlement to accumulated deductible losses and other amounts that would otherwise be taken into account in the future in calculating the debtor's taxable income. In certain circumstances, the net forgiven amount of a debtor which is a company will be apportioned among a group of companies related to the debtor company. The measures incorporate rules relating to the forgiveness of debts by a company forming part of a company group. Such provisions, which are anti-avoidance in nature, were foreshadowed but not introduced by the former Government.

The forgiveness of commercial debt measures will correct a structural weakness in the present law which does not properly tax the economic benefit to a taxpayer from being forgiven a debt. The present law creates scope for duplication of deductions in circumstances where the creditor would be entitled to tax relief for a loss on a debt that is forgiven or otherwise settled for less than full value.

Notwithstanding that the act of forgiveness relieves the debtor of the economic loss represented by the debt, tax losses that accumulated before the debt was terminated generally remain available to shield future income from taxation. On occasions, accumulated losses of a corporate debtor have been used to absorb future income after being acquired by new shareholders under arrangements that include the forgiveness of pre-existing debts.

The estimated gain to revenue from the proposed amendments is $20 million in 1997-98, $40 million in 1998-99 rising to $130 million by 2003-04.

Extended use of tax file numbers for superannuation purposes

The bill expands the use of tax file numbers (TFNs) for superannuation purposes. The greater use of TFNs will:

.   help beneficiaries by:

.   ensuring that their entitlements do not become lost;

.   allowing for the amalgamation of accounts and transfer of the TFN with the entitlements when the beneficiary leaves the fund;

.   facilitating more efficient use of TFNs to avoid the top rate of tax automatically applying to beneficiaries on the ground that they quoted their TFN for a superannuation purpose but not a taxation purpose;

.   enable the administration of the superannuation system to be streamlined;

.   enable superannuation funds to locate and identify amounts for beneficiaries including when transferring amounts between funds;

.   allow funds to amalgamate multiple contributions on behalf of the same individual;

.   allow the Commissioner of the Insurance and Superannuation Commission (ISC) to collect and use superannuation entity TFNs as part of the Commissioner's supervision of the superannuation industry; and

.   allow the Commissioner of the ISC to supply these TFNs to the Australian Taxation Office for data matching purposes so as to ensure that superannuation entities pay the correct amount of tax.

The bill also contains a number of safeguards to meet concerns about the privacy of individuals. The proposed means for TFNs to enter into the superannuation system is by the beneficiary voluntarily quoting the TFN to either the trustee of a fund or the employer who passes it to the fund.

The amendments will generally apply from the 60th day after Royal Assent.

These amendments are not expected to impact on the revenue.

Fringe benefits tax: exemption for minor benefits with a value less than $100

The bill will give effect to the Coalition's election commitment to double the FBT minor benefits exemption.

The amendments will ensure that fringe benefits of less than $100 (provided they meet the other conditions under the law) can qualify for exemption from fringe benefits tax.

This amendment will help to reduce compliance costs for employers who provide minor benefits to employees and will ensure that employers who only provide irregular minor benefits of less than $100 avoid paying FBT altogether.

The amendment will apply from the day the bill receives Royal Assent.

Offshore banking units

The bill will allow offshore banking units that provide funds management activities for non-residents to invest in Australian assets. A 10 per cent limit (by value) will be set on the Australian asset component of each investment portfolio. The Government considers that this will be appropriate to meet the requirements of most global fund managers by enabling them to offer more balanced global portfolios with a small component of Australian assets.

These amendments have the potential to bring about a large increase in the level of offshore funds managed by Australian banks and enhance the development of Australia as a financial centre in the Asia Pacific region.

The amendments will apply from the commencement of the OBU's 1996-97 year of income.

These amendments are expected to have a negligible direct effect on revenue.

Repeal of section 261

The Government has decided to repeal section 261 of the Income Tax Assessment Act 1936. Section 261 effectively increases the costs involved in negotiating secured offshore lending agreements and hinders the development of Australia as a major financial centre in the Asia Pacific region.

The repeal applies to mortgages entered into after today.

The revenue impact of the amendment will be negligible.

Pooled superannuation trusts

The bill will allow complying superannuation funds and complying approved deposit funds (ADFs) to claim deductions for expenses relating to investments in pooled superannuation trusts and life insurance policies issued by life assurance companies or registered organisations.

Since 1 July 1988, when the income of superannuation funds and ADFs became taxable, a complying superannuation entity is unable to claim a deduction for expenses that relate to an investment in a pooled superannuation trust, life insurance company or registered organisation. The entity's ability to claim a deduction for expenses incurred as a result of investing in a PST or life policy is limited by the fact that any amount received upon redemption of units in a PST or surrender of a life policy is treated as tax exempt income. By contrast if a superannuation entity had made a direct investment in a product which was taxable in its hands, then it would be allowed a full deduction for its general management expenses.

This treatment is anomalous. Accordingly the measure will apply from 1 July 1988.

As a result of the amendments there will be a small but unquantifiable cost to the revenue.

Deductions for gifts

The bill will amend the gift provisions of the income tax law to allow deductions for gifts of $2 or more to The Central Synagogue Restoration Fund and The Borneo Memorials Trust Fund.

The bill also makes a number of other less significant and largely technical amendments to the superannuation and income tax laws.

I commend the bill to the Senate. I also commend to the Senate the explanatory memorandum, which describes the measures in the bill in considerably greater detail.

VETERANS' AFFAIRS LEGISLATION AMENDMENT BILL (No. 1) 1996

This bill proposes amendments to veterans' affairs legislation designed to safeguard the interests of veterans and their families and to minimise the action needed to grant certain claims for pensions.

The first of the proposed amendments is to the Defence Service Homes Act 1918 and ties in with the start of the uniform Consumer Credit Code which all States and Territories are to implement later in the year. This code will apply to credit provided wholly or chiefly for personal, domestic or household purposes by banks and certain other lenders.

When the code comes into force, people eligible for housing assistance under the Defence Service Homes Scheme will gain consumer rights comparable to those of other borrowers. The amendments in this bill will ensure that they also retain the scheme's benefits.

Westpac Banking Corporation provides subsidised Defence Service Home loans to veterans and other eligible people under an agreement with the Commonwealth.

This bill identifies elements of the code that Westpac should not apply to loans provided under the scheme so as to preserve the scheme's benefits. For example, a veteran's age may affect the chance of obtaining a loan elsewhere.

Under the scheme's agreement, the Bank cannot take this into account when deciding whether to provide the veteran with a Defence Service Home loan. The concurrent operation of the Consumer Credit Code will not be limited except for matters set out in the bill.

One important aspect of the Consumer Credit Code addressed by the bill is the payment of the loan interest subsidy to Westpac. The Commonwealth now pays this subsidy in advance. In adopting the approach of the Consumer Credit Code, the calculation of interest charged on loans will be linked to unpaid daily balances instead of unpaid monthly balances.

This new method of calculating interest will be more favourable to borrowers who repay on or before the due dates. It will result in the Commonwealth paying the subsidy to Westpac in arrears. This changeover will result in a one-off saving of over four million dollars.

The second of the proposed measures is an amendment to the Veterans' Entitlements Act 1986. It will mean that a dependant of a veteran, who has died from a disability already accepted as being war-caused, will be eligible for a pension without the relationship between the veteran's death and war service having to be re-established.

This is an important change and is consistent with the coalition's undertaking before the election to make the system for claiming pension as simple as possible.

Any claim for pension for a dependant, made since 1 June 1994, is determined according to Statements of Principles, prepared by the Repatriation Medical Authority, for the kind of death met by the veteran. In many cases this will require additional investigation into the background of the fatal disability to enable the criteria in the Statements of Principles to be addressed.

This retracing of the war service link is time consuming and often quite complicated, even where the disability had previously been related to the veteran's war service. Sometimes, the war service relationship cannot be re-established. This could happen because advances in disease research have changed our understanding of the causes of the disability. It could also occur because of changes in legislation made since the disability was determined to be war related. As a result, a veteran's death from a war disability is now no guarantee that his or her dependants will have access to repatriation benefits. This uncertainty is unacceptable.

This bill will do away with these uncertainties, and also the time consuming investigation process. The change will reassure veterans and their families that financial support will continue to be available should the veteran die from a previously accepted war-caused disability.

In conclusion, Mr President, this is a bill that will preserve the interests of veterans and their families and streamline access to certain benefits.

I commend the bill to the Senate.

Debate (on motion by Senator Conroy) adjourned.

Ordered that the bills be listed on the Notice Paper as separate orders of the day.