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Thursday, 19 September 1985
Page: 1345

Mr KEATING (Treasurer) —by leave-Since its election in 1983, the Hawke Government has consistently pursued policies directed towards restoring strong economic growth and creating a fairer Australian society. By any measure our strategy has been an outstanding success. For the past two financial years this nation has recorded growth rates that are the envy of the Western world. Under this Government over 430,000 more Australians have found jobs, inflation has been cut significantly from the double-digit legacy of our predecessors and we have arrested and turned around the blow-out that we inherited in the Commonwealth Budget deficit. We now confidently anticipate a third year of strong growth. And despite the protestations of the doomsayers after I brought down the Budget last month, that prospect is being confirmed repeatedly by a series of positive economic indicators.

Mr Speaker, the achievement of sustained high growth rates remains the overriding economic objective of this Government. We have policies set for growth. Not because that is an end in itself, but because it is only through economic growth that we can cut unemployment. It is only through growth that we can increase assistance to the needy. And it is only through growth that we can generate the higher living standards that the whole community desires. If we are to maintain the momentum of growth it is essential that we act now. We must be prepared to tackle head on the issues that in the past have been consigned to the too-hard basket. We must be prepared to debunk the myths and overturn the barriers that stand in the way of our goal. This Government is prepared to do that. Today we are taking the hard decisions, confronting the issues and embarking upon a very substantial reform to the Australian national economy.

For the first time in Australia's recent history a government has been willing to place tax reform on the political agenda. But much more than that, for the first time a government has been willing to act. We have invited debate, we have asked the people of Australia to express their views and we have listened carefully to what they have said. The tax reform measures I am announcing today are the outcome of that unprecedented process of consultation. While they do not include a broad based consumption tax of the kind proposed by the Government at the July tax summit, they do represent the most far reaching reform of the Australian tax system to be undertaken by a government in living memory. Today we are addressing a crisis in our national taxation system that has been left by a succession of governments to compound year upon year. There was a time when Australia had a reasonably sane and credible taxation system. But that time is long gone. The system has been broken and beaten by an avalanche of avoidance, evasion and minimisation. And more so than in any other period in Australia's history, the taxation system deteriorated during the stewardship of the previous Government. During those seven years tax avoidance became the norm for hundreds of thousands of Australians. Taxpayers were allowed the indulgence of moving into contrived artificial paper avoidance and evasion schemes-including those of the criminal variety. The Government of the day was tardy in acting to stem the blatant abuses that were ocurring before its very eyes. More than that, it failed to act at all to tackle the underlying problems. It is the deterioration and decay that occurred during the late 1970s and early 1980s that has now made substantial reform so essential.

For years Australians have gained satisfaction from believing that their tax system was progressive; that those who could afford to shoulder a greater share of the burden did so. Today, that is a fiction. The system no longer works that way.

The top marginal tax rate-the 60c in the dollar rate-has been paid by barely a few of those whose incomes should place them in that bracket. Tens of thousands of these people have walked away from the system. In their place middle income Australians have been forced to take up the load. These are the people who have not been in the position to arrange their affairs to take advantage of the tax shelters, the schemes and the concessions. They have not joined in what had for higher income earners become the socially acceptable business of avoidance and evasion. But it is they who have sustained the system during the past decade. What we have seen is a dramatic compression in the application of the marginal tax rates, so that where at the beginning of the 1970s the top rate came in at the current equivalent of $110,000, today it comes in at $35,000. In the early 1970s the top rate applied at five times average weekly earnings. Today it applies at 1 1/2 times. It is for these reasons that from the outset a major objective of tax reform has been to substantially lighten the heavy hand of high marginal tax rates on honest taxpayers in this country. It would be stupid not to recognise the lesson of recent history; taxpayers just will not pay ridiculously high marginal tax rates. The system invites abuse if it attempts to impose such a burden.

The time has come when the facts must be faced. Change is needed and, if this nation is to continue to progress, it is needed now. Lower marginal rates will enhance our economic performance by better rewarding initiative. They will help generate growth by increasing rewards for work relative to those from tax avoidance and evasion and they will make for a better nation by reducing distortions in the savings and investment decisions of ordinary Australians.

A fundamental and major reform which this Government will undertake is to reduce the top rate of income tax from 60c in the dollar to 49c in the dollar. Further, we will cut the intermediate rate of personal income tax from 46c in the dollar to 40c. This slashing of marginal tax rates represents a dramatic and permanent reform to the Australian tax system. It will mean that in the future no Australian will be required to pay more than half his or her income in taxation. It is this action along with the abolition of shelters and the introduction of stronger penalties which will act to end the rorts and abuse of the system.

Combined with our extensive reform a year ago to drop the bottom personal income tax rate from 30c to 25c in the dollar, today's measures will restore the system's effective progression. They also make possible the vital innovation of aligning the top personal income tax rate with the company tax rate. In a stroke this will make a whole host of tax avoidance devices futile. Further, in this package for the first time a government in this country will have recognised the call from shareholders of Australian companies to remove the double taxation on dividends. This is a reform which was denied in 30 years of coalition government.

From today the Government will also have ended the debate which has persisted in Australia for decades as to whether income taken as capital ought to be exempt from tax. We will establish a capital gains tax so that in the future taxpayers who take their income in the normal manner will not be disadvantaged as against taxpayers who choose to take their income as capital.

The benefits of tax reform will be shared among all Australians. A number of measures are to be taken to relieve poverty traps in our social security system. These changes will involve easing the income tests applied to pensioners and beneficiaries and will increase the incentive available to these people to earn extra income. This whole group of reforms-reductions in marginal rates, the alignment of the top personal rate with the company tax rate, the full imputation system for relief of dividend tax, the capital gains tax and the action to relieve poverty traps-makes this statement of reform the most comprehensive in the modern era.

This reform package launches an attack on tax shelters and sectional concessions. Measures that even up the taxation treatment of different industries will attract resources to where they earn the greatest real profits, rather than to where they attract the greatest concessions or generate the largest tax deductible losses.

It is true that tax shelters and other minimisation devices may, on occasions, stimulate particular industries or activities. But it must be understood that whenever such a subsidy is conceded it involves a real-and largely hidden-cost to the rest of the community. Ultimately, every tax concession, minimisation scheme or evasion rort means that all of those who do not benefit must shoulder a greater burden. More often than not, it is the higher income earners who benefit from exploitation of these practices. Again, it is the middle income earners-ordinary taxpaying Australians-who must shoulder the difference. By broadening the income tax base and closing loopholes, today's measures will achieve a return to fairness in the Australian tax system not seen for decades. Australian society will be much the stronger for it.

These measures, and this reform package, are not about raising revenue for the Government. The total yield of this package will be returned to taxpayers. Not only that; it incorporates tax cuts to be delivered in satisfaction of the Government's commitment to continued wage restraint. In all, significant cuts will be delivered to everyone in the community save those taxpayers who have made a feast of tax avoidance and evasion.

Next financial year tax cuts totalling $2 billion will be delivered to all Australians. Of this $2 billion, $800m will be netted in that year from the tax reform measures. In the following financial year the cost of the tax cuts will be about $4.5 billion, of which the growing yield from the tax reform measures will account for about $1.5 billion. In other words, the cost to revenue of the cuts will far outweight the proceeds from the new tax measures.

Putting these figures in individual terms will mean that in the first year the average income earner will receive an income tax cut of $9 per week. In the second year, a further reduction in the tax scales in July 1987 will bring the total tax cut for the average income earner to $15.20 a week. None of these tax cuts will be financed by adding to the Government's deficit. They will be achieved by the most rigorous restraint on public sector outlays.

This Government has already demonstrated its economic credentials. We are committed to responsible and prudent fiscal policy. We have more than halved the deficit as a proportion of gross domestic product in three years. We have curtailed outlays growth to its lowest rate in six years.

The Government entered the discussions with the trade union movement on wage restraint with a total commitment that the budgetary scope to finance these cuts would be found through expenditure restraint. The tax package is part of our overall strategy designed to promote growth. This Government knows that responsible and appropriate fiscal policies are an essential element of macro-economic management. We will not put sustained economic growth at risk by relaxing fiscal discipline. Details of the proposed measures are provided in attachments to my printed speech, which I shall table on conclusion. I shall now outline the main features of the Government's reforms.


There has been an accelerating shift in recent years toward the payment by employers of remuneration in the form of fringe benefits. While not readily admitted as such, this shift often has all the hallmarks of outright tax evasion. High marginal income tax rates have played a major part in providing the incentive for this trend-and we will rectify that problem in this package. However, the growing shift to fringe benefits has been a major factor in reducing the tax liabilities of predominantly higher income taxpayers.

An increasing awareness of these perks has highlighted the unfairness of the tax system and has contributed to undermining taxpayer morale. As a consequence, the Government will be proceeding with the taxation of fringe benefits broadly along the lines described in the draft White Paper on reform of the Australian taxation system. That will mean taxing all of the major fringe benefits, whether received in cash or otherwise.

Non-Cash Fringe Benefits

In the case of non-cash fringe benefits, the tax will be payable on the assessed value of the benefits provided to employees and will be levied on the employer at the prevailing company tax rate. Initially that will be 46c in the dollar, changing later in line with the alterations to the company tax regime. The type of benefits to be taxed include employer-provided motor vehicles, free or low interest loans, residential accommodation, goods and services sold at below cost or provided free by an employer and expenses paid on behalf of an employee. The valuation rules to apply in each case are detailed in the attachments.

In the case of motor vehicles where no records of costs or business use are maintained, a proportion of the purchase price of the car will be subject to the tax at the relevant company tax rate. Under these rules, the maximum tax payable on each car will be around 11 per cent of the purchase cost. Lower levels of tax apply where the total distance travelled by the vehicle during the year exceeds specified threshold levels. If a higher proportion of business use can be substantiated there will be the option of maintaining cost records and log books detailing the breakdown between private and company use.

The fringe benefits tax will not apply to benefits associated with employer contributions to superannuation funds and employee share acquisition schemes, which are already subject to specific taxation provisions. The tax will be designed to have little or no effect on the many small, traditional employer-provided benefits such as most staff discounts.

A complete exemption applies to staff canteens, free commuter transport fares, the home to work use of taxis and commercial vehicles and child care facilities on employers' premises. Special concessions will apply to housing and travel benefits provided to employees in specified remote areas. All employers, with the exception of religious bodies, will be liable for the tax, including the Commonwealth, State and local governments. Clearly, government bodies other than the Commonwealth will incur a direct liability if they choose to provide such fringe benefits. In the case of the Commonwealth any payment of the tax will be shown in the Budget papers and will be subject to the Government's own on-going expenditure restraint guidelines and to parliamentary scrutiny.

In addition, measures are to be taken to equate more closely the treatment of non-cash fringe benefits for Commonwealth public servants with that which is likely to apply to their counterparts in the private sector. For example, the same rules that the Tax Office applies to private sector employees will be applied to public servants when apportioning the cost of government provided home telephone services. Commonwealth financed provision of credit cards to senior public servants is to cease forthwith and existing cards will not be renewed. The private use of Commonwealth-owned cars provided to employees will be stringently controlled.

With the introduction of this tax it is expected that some employers and employees may see advantage in replacing fringe benefits with cash payments. As this would bring currently non-taxable benefits to book, such a development would be consistent with the Government's objectives in taxing these benefits. The Government will consult with employers and the Australian Council of Trade Unions about possible adjustments to the wage fixing principles to provide for such `cashing-out' of benefits under appropriate conditions.

The Government does not expect, and would not wish to see, any further build-up in the provision of fringe benefits. The Government will review these arrangements, with a view to tightening their application, should any significant increases occur. The tax will commence on 1 July 1986 and be paid quarterly, with the first payment due in October 1986. The amount of tax revenue to be recouped is estimated at $320m in 1986-87 and $515m in 1987-88.

Living Away From Home Allowances

While most living away from home allowances are not paid at excessive rates to avoid tax, there has been growing abuse in this area. The Government has decided to tax the remuneration component of living away from home allowances at the employer level in the same way as for non-cash fringe benefits, with effect from 1 July 1986. The taxable value for this purpose will be equal to the amount of the allowance in excess of the proportion which represents reasonable compensation for additional expenditures on accommodation and on food. The revenue gain is estimated at $10m in 1986-87 and $15m in subsequent years.

Entertainment Expenses

One of the greatest difficulties in recent years in determining legitimate expense claims has been in the area of entertainment. A good deal of so-called business entertainment tends to be done on a reciprocal basis and is often undertaken for predominantly social or personal benefit rather than business purposes. In practice it is almost impossible for the Tax Office to separate those social activities from genuine commercial activities but it appears that the major part of expenses claimed have little or no genuine relevance to business activity.

It is the Government's view that the general public should not have to subsidise through the tax system the social activities of higher income earners who seek tax deductions for entertainment expenses. Accordingly it has been decided to deny deductions for all entertainment expenses incurred after today. Reflecting the lagged nature of business tax payments, this measure will produce $310m in revenue in 1986-87 and $330m in 1987-88.

The disallowance of deductions for entertainment will apply across-the-board and will include business meals, drinks, cocktail parties, tickets or boxes at sporting or theatrical events, sightseeing and hostess allowances. It will include entertainment claimed to be associated with an advertising or promotional purpose, and it will cover the entertainment expenses of all taxpayers. However, the measure cannot be directly applied to a tax exempt organisation which pays entertainment expenses which confer a personal benefit on its employees or associates or reimburses them for such expenses. In such cases, it is intended that entertainment expenses be subject to the tax on non-cash fringe benefits.

Substantiation of Expense Claims

A deficiency of the existing law is that it does not specify the proof required to substantiate employment related expenditure claims. This results in successful claims for which there is no proof of expenditure. To rectify this deficiency the Government has decided to amend the law to provide that deductions will not be allowable for expense claims unless the claimant is able to substantiate the amount and purpose of the claim by receipts or other documentary evidence.

All allowances above a certain limit, including independently arbitrated allowances, such as parliamentarians' electorate allowances, will besubject to substantiation. More detailed substantiation requirements than for other expenses will generally apply in relation to car and travel expenses. Moreover, deductions will not be allowed for the travelling expenses of a spouse on a business trip. For self-employed people the new requirements will apply only to travel and vehicle expenses. However, the rules will not apply to claims within the limits of employment-related travelling and accommodation allowances, provided that the travel is undertaken in Australia and the allowance is reasonable in amount. Similarly, reasonable overtime meal allowances will be excluded. Nor will the rules apply where total eligible expenses do not exceed $300. With a 1 July 1986 commencement date, the estimated revenue in 1987-88 is $105m, building to $200m after about four years.


There has been a long debate in this country about the role of capital gains taxation-a debate which unfortunately has too often been characterised by misinformation and hysteria rather than rational discussion. The Government believes that in inviting discussion about capital gains taxation in the draft White Paper the Australian community was finally offered an opportunity to consider the question of capital gains taxation in a more reasoned atmosphere. The Government has decided to introduce a capital gains tax but, in the light of the public debate, to incorporate several major modifications to the proposal outlined in the White Paper in June.

These changes address the concerns which have been expressed and will substantially reduce the impact of the tax and allow the community a lengthy period in which to adjust to its application. in particular, it has been decided that the tax will in every sense be prospective. That means it will apply only to gains on assets purchased or acquired after today. All assets already owned by taxpayers will be exempt from the tax when sold by them, both in repect of gains accrued until now and all future gains. The Government has decided that the deemed realisation at death proposal, outlined in the draft White Paper, will not apply. Liability for tax in the case of death will be rolled over to successors, and will only be assessed on any subsequent disposal. Therefore the capital gains tax will not apply in the case of death.

Other main features of the tax include:

It will apply only when the asset is sold or transferred by gift;

it will apply only to real capital gains calculated by fully indexing the cost of the asset for inflation;

a complete exemption will apply to gains on the taxpayer's principle residence and reasonable curtilage, on all motor vehicles, on other personal-use items such as furniture up to a sale value of $5000, and on gains with respect to superannuation and the proceeds of life insurance policies;

there will be provision for nominal losses to be offset against gains;

the tax will be levied, on real gains, at ordinary rates of personal and company income tax.

The existing capital gains section 25A of the income tax law will not apply in respect of assets acquired after today, but will continue to apply for assets acquired before midnight tonight. The existing section 26AAA will continue to apply for all relevant assets. Because of the wholly prospective nature of the tax, revenue is expected to build up gradually over a lengthy period, as newly-acquired assets are disposed of.

As an illustration of the fact that this tax will affect only a tiny section of the population, its expected revenue yield, in the fifth year of operation is estimated to be only $25m. The tax will mean that for assets acquired after midnight tonight, taxpayers will simply need to keep their records of purchase price, spending on improvements and sale price. Valuation of assets already held will not be necessary as all are exempt from the new provisions.

To cite an example, suppose an asset such as an office was purchased tomorrow for $100,000 and assume it is sold five years later for $130,000. If during that five-year period inflation totalled 25 per cent, the gain would be assessed only as the difference between $130,000 and $125,000. The gain of $5,000 would be taxed at the taxpayer's marginal rate-which in the case of a 40c in the dollar taxpayer would amount to only $2,000 in tax. I repeat, however, that every asset already owned by taxpayers will be exempt from the tax.


I announced on 13 August 1985 that the Government had decided against any major extension of the indirect tax base but would carry out a rationalisation of the existing wholesale sales tax schedules and rate structure. As a result of this rationalisation, the rate structure is to be simplified to reduce the existing four-step scale to three. These steps will be 10, 20 and 30 per cent, in lieu of the existing 7 1/2, 10, 20 and 32 1/2 per cent schedules. The rationalisation will include the incorporation of the current 7 1/2 per cent category into the 10 per cent category.

The rate for chocolates and other confectionery will be reduced from the current 20 per cent to 10 per cent, while the tax at that rate will be extended to close substitutes of the existing taxable items including snack foods, ice cream and biscuits. Also to be taxed at 10 per cent will be non-oil-burning domestic space heaters, domestic cooking stoves, domestic water heating systems and wrapping materials for household use. Each of those items is currently excluded from the sales tax base, a treatment inconsistent with that accorded almost every product of a similar kind.

The rate of tax on items currently subject to 32 1/2 per cent is to be reduced to 30 per cent in the case of televisions, radios, videos and other electronic equipment, jewellery, furs, cameras, watches and clocks, cosmetics and perfumes and poker and amusement machines. Other items currently taxed at 32 1/2 per cent will fall to only 20 per cent including pens, most brushed and shaving utensils, sound and video tapes and records. A number of other anomalies and inconsistencies in the wholesale sales tax are being addressed, and details of all the changes are included in the attachment.

These changes will apply to goods passing the taxing point after midnight tonight. Safeguarding measures will protect the revenue against any last minute transactions that attempt to avoid tax liabilities arising from the changes. These measures are estimated to result in a net revenue gain of about $75m in 1985-86 and about $110m in a full year. The estimated net effect of these changes in the consumers price index is very small at around 0.1 percentage points.


In order to combat tax evasion and reduce health and welfare fraud, the Government has decided to implement a national identification system involving the issue to individuals of a card to be known as the Australia Card. A companion system for entities such as companies and partnerships is also being developed. Planning and development for the system will be completed over the next 18 months and Australia Cards will be issued from March 1987.

The aim is to create an accurate register of all Australians which will contain only the most basic information, such as full name, address and date of birth. It will assist the Government to verify records and payments, but it will do no more than that. The privacy of every individual will be maintained. People will need their Australia Card in only three situations-in connection with employment, conducting specified financial dealings and other matters with tax implications and when claiming Commonwealth benefits.

The Australia Card will help to ensure that everybody in the community contributes a fair share towards the costs of providing government services and that no individual or group takes from the community more than their fair and equitable entitlements. It is estimated that taxation revenue gains will amount to about $100m in the first year of full operation of the system, expected to be 1989-90. Revenue will rise to around $540m per annum after the third full year of operation.


The tax-free threshold is primarily intended to recognise the limited capacity to pay tax of low income earners who are required to support themselves for the whole of the year on that income. In its present form the threshold provides an overly generous concession to part-year workers who are not wholly reliant for the full year on the taxable income returned.

The Government has decided that from 1 July 1986 the tax-free threshold will apply only on a pro rata basis in the case of those taxpayers joining the Australian work force on a full time basis for the first time and those leaving Australia permanently. The full threshold will continue to apply to other taxpayers. This measure is expected to yield around $90m per annum from 1987-88.


Contrary to the alarmist claims made at the time of its introduction in 1983, the prescribed payments system has proved extremey successful in combating tax evasion by contractors and sub-contractors in the building, transport, motor vehicle repair and cleaning and other industries. On the scheme's introduction, the 10 per cent deduction rate that currently applies to payments by the relevant industries was set on a conservative basis in order to facilitate its implementation. Having reviewed the arragements, the Government has decided to increase the deduction rate from 10 per cent to 15 per cent from 1 July 1986. As as present, those with a responsible tax record may apply to have this rate lowered where appropriate.

This measure will assist in countering evasion by applying a higher withholding rate to those payees who provide false information on deduction forms. Also from 1 July 1986, owner-builders are to comply with full prescribed payments system requirements by making deductions from payments in connection with construction projects in excess of $10 000 that begin after that date. The Government proposes to review further the operation of the prescribed payments system, including the desirability of extension to other industries. The net revenue gain from these changes is estimated at $105m in 1986-87 and $45m in subsequent years.


The existing system for the collection of provisional tax places stress on the money markets due to the substantial seasonal withdrawal of liquidity from the financial system in each June quarter. To overcome this problem the Government has decided to introduce an instalment system for the payment of provisional tax by individuals, to commence in 1987-88. When fully implemented four instalments will be payable.

I emphasise that taxpayers will not be called upon to pay, in any financial year, a greater amount of tax than under the current system. Self-assessment procedures will continue to ensure that taxpayers will not be required to pay an amount which exceeds their estimated net tax payable for the year. The new system will not apply to taxpayers whose provisional tax liability does not exceed $2,000. Such taxpayers will continue to pay provisional tax on an annual basis. This will exclude about three quarters of a million provisional taxpayers, about half of the total.

An alternative pattern of instalment payments with later due dates will be available to taxpayers, such as some primary producers, whose income flow is concentrated in the second half of the financial year. The reduction in sales of government securities that will result from the measure is estimated to generate interest savings of the order of $55m annually from 1987-88.


One of the most heavily used tax shelters set out in the draft White Paper is the write-off of farm losses against income from another source. The manner in which the tax system is currently structured allows other than genuine farmers to generate significant tax gains by directing investment to what otherwise would often be considered unprofitable ventures. The proposed measure is along the lines of that canvassed in the draft White Paper, but with significantly more generous treatment of non-farm income.

The new rules will commence in the 1986-87 income year. There will be two approaches. The first will allow farm losses to be fully written of against non-farm income of up to $15,000 with a dollar for dollar shade-out for non-farm income between $15,000 and $30,000. These thresholds will be subject to indexation.

The second approach will allow farm losses to be written off against non-farm income up to the aggregate of the previous five years net farm income if this provides a greater write-off. This profitability test will cater appropriately for those cases where farm losses are caused by downturns and disasters, rather than tax sheltering activity. Both approaches are designed to ensure that a genuine farmer who needs to take outside work to supplement farm income will in general not be adversely affected. Revenue gains are estimated at $125m in 1987-88 and $95m annually thereafter. Partly offsetting these revenue gains will be a significant improvement in the primary production averaging provisions. An additional $20m per annum benefit to farmers will arise from a complementary increase in the notional farm income limit for primary production averaging purposes, from the current level of $5,000 to the new level of $15,000. This represents a significant increase in the amount of non-farm income which may benefit from the averaging provisions.

Opposition members-Hear, hear!

Mr KEATING —I was interested to hear the cheers from cockies' corner on that one!


The Government has decided to replace the immediate deduction currently allowed for expenditure by primary producers on conserving or conveying water with a write-off in equal instalments over five years. The change will apply to expenditure incurred under contracts entered into after today. Having regard to concerns expressed about land degradation problems, the Government has decided not to change the immediate 100 per cent deduction currently allowed for expenditure on soil conservation. The revenue savings are estimated at $25m in 1986-87 and $20m in 1987-88.


The very generous tax treatment granted to the Australian film industry has in recent years led to a burgeoning cost to the revenue and to accompanying doubts about whether this subsidy is returning value for money. The cost has grown from $13m in 1981-82 to $135m anticipated this financial year. Consequently, the Government has decided that the concessional treatment currently provided for film investments will be reduced to a 120 per cent tax deduction and 20 per cent income tax exemption for income. This will apply to investments made under contracts entered into after today. The grant to the Special Production Fund administered by the Australian Film Commission is to be increased from $4m to $6m in 1985-86, and to $7m in 1986-87. The estimated net saving to revenue of the changes is around $35m in both 1986-87 and 1987-88.


As canvassed in the draft White Paper, the Government has decided to withdraw from midnight tonight the special rebate and deduction available for certain capital subscribed to petroleum and afforestation companies. Revenue savings from these changes are estimated at $10m for 1986-87 and $15m for 1987-88.


The draft White Paper drew attention to the increasing use of trusts to avoid company tax. Although the reforms to the company tax arrangements, which I shall mention shortly, will reduce the incentive to use trusts, there would still be advantages for tax-exempt institutional investors in the trust form. The Government has therefore decided to extend company tax arrangements to public unit trusts but only those which operate a trade or business, as distinct from the great majority which are vehicles for investing in property, equities or securities. These latter public unit trusts, and all private trusts, will be unaffected by this measure. The new arrangements will apply to trusts established after today to operate a trade or business. There will be reasonable transitional arrangements to phase in the new treatment for existing trusts of that kind, with first company tax payments not required before 1988-89.


Under current arrangements the income of Australian residents from foreign sources is generally exempt from income tax if it has been subject to tax overseas. That exemption applies, however, regardless of how little that foreign tax may be. As a consequence the Government has decided to replace the existing arrangements with a general foreign tax credit system along the lines set out in the draft White Paper. Under the proposed system the foreign source income of Australian residents will be taxed in Australia and a credit for foreign tax paid will be allowed against Australian tax payable on that income. Salaries and wages will generally remain exempt in Australia if taxable in the source country. The new system, which is similar to systems operated by the United States, the United Kingdom and West Germany, will apply to income derived from the beginning of the 1987-88 income year. I stress that, in proceeding with this measure, the Government will, through appropriate measures, give recognition to the position of regional countries that provide tax incentives to attract legitimate investment from Australia and elsewhere as a means of fulfilling their development aspirations. The direct gain to revenue is estimated at about $45m per annum at 1984-85 levels of income, with the first revenue gains accruing in 1988-89.


The draft White Paper proposal to tax income from gold mining has not been adopted. An independent inquiry has been established to examine the impact of the White Paper proposal on the gold mining industry. That inquiry will report to the Government during the first half of 1986.


The measures I have announced will raise about $1 billion in 1986-87 and $1.7 billion in 1987-88. As I stressed earlier, the government is engaged in a tax reform exercise, not a tax raising exercise. Consequently, every dollar raised by these measures-and more-will be returned to taxpayers and social security beneficiaries by reform of the income tax rate scale and the company tax regime and by reductions in poverty traps. I turn now to these proposals.


At present, excess deductions for exploration and development expenditure cannot be transferred to another company, even where the companies satisfy the 100 per cent common ownership test. Mining companies therefore cannot take full advantage of the group loss provisions available to other companies. As canvassed in the draft White Paper, the Government has decided to extend that opportunity to petroleum and general mining companies. This will apply to excess deductions from exploration and development expenditures incurred in 1985-86 and subsequent income years. The estimated revenue costs of this measure are $70 million in 1986-87 and $65 million in 1987-88. The Government also proposes to freeze, until the 1986-87 Budget, the difference between the diesel fuel excise and the diesel fuel rebate for diesel fuel used in mining operations. The rebate will be further reviewed in the context of the 1986-87 Budget.


It has long been a complaint of taxpayers that dividend income is effectively taxed twice-once as company profits and once as personal income. A further problem has been that the company tax rate is less than the maximum personal marginal tax rate. This has provided an advantage for some higher income earners who can avoid the higher marginal tax rate by establishing companies for tax sheltering. While the existing tax system provides a positive incentive for some people to channel income through companies, it effectively discourages most investors from buying shares altogether. For decades the pattern of investment by Australians has been distorted away from productive enterprise owing to the double taxation of dividends. The Government believes the raising of equity for our continuing national development should be encouraged. Accordingly, the Government has decided to proceed with a system of full imputation on company income distributed to resident individual shareholders. To help defray the cost of this measure, the company tax rate will be increased from 46 per cent to 49 per cent. However, there will still remain a significant net cost of about $250m per year to Commonwealth revenue. People receiving dividends will receive a credit when they determine their own personal tax liability. Thus, for each $51 of dividends received, $100 will be included in the shareholder's assessable income, and a credit of $49 allowed against the taxpayer's assessed income tax bill. For a taxpayer with a marginal tax rate of 49 per cent, this will effectively free the dividend from any tax. Individuals facing lower marginal tax rates will be able to apply the excess credit to reduce their tax liability on non-dividend income. The credit will not give rise to cash refunds where it exceeds tax otherwise payable. Imputation credits will not extend to non-resident shareholders. Because of the changes, some renegotiation of Australia's double taxation treaties could be involved. It is intended that the 49 per cent company tax rate first apply to company tax collections in 1987-88-that is, relevant to company incomes for the 1986-87 income year-and that imputation credits first apply to dividends paid in 1987-88. On the basis indicated, the annual cost to revenue of these measures could be approximately $250m from 1988-89.

I will be interested to hear honourable members opposite refer to small business, medium business and large business now because they denied the shareholders of this country this reform for 30 years and they subjected their dividends to double taxation for 30 years. They had no appreciation of the needs of investment in the community and no appreciation of the need to raise equity in the community. Again they have been exposed for failing even to consider the necessary and fundamental reforms to which they are supposedly committed. So the small business lobbies, the medium business lobbies and the large business lobbies can weigh the value of the Opposition's rhetoric on these issues and make the appropriate judgment that, as usual, it is worthless.


As part of the reform package, the Government has recognised that certain social security arrangements presently provide little incentive for pensioners and beneficiaries to earn extra income. Accordingly, the Government will take a number of steps to alleviate the problems caused by these poverty traps. First, from 1 November 1986, the amount of private income that a pensioner may earn before his or her pension is reduced under the income test will be increased by $10 per week for single pensioners and by $20 per week for pensioner couples. This increases the amount single pensioners can earn each week without affecting the pension from $30 to $40, and for couples, from $50 to $70. As a result the pension payment received by all of the 450,000 recipients who currently receive a part-rate pension will increase by up to $5 per week. Those pensioners earning in the range $30 to $40 per week may continue to face a small tax liability, but will no longer be subject to the 50c in the dollar income test as well. Secondly, the Government will abolish the separate income test on rent assistance. This test at the moment leads to the withdrawal of 50c in rent assistance for the first and each subsequent $1 of income earned. The inclusion of rent assistance in the general income test will reduce the marginal rate of income withdrawal faced by some 700,000 pensioners and beneficiaries receiving rent assistance, in most cases from 50 per cent to zero. A benefit of up to $15 per week will flow to some 300,000 pensioners with non-pension income in private rental accommodation.

Thirdly, the Government proposes to further assist pensioners with children. At present, the weekly income a pensioner may earn without reduction of pension is increased by $6 for each child. This allowance is to rise to $12 per child. The measure will increase the pension of all part-rate pensioners with children by up to $3 per week for each child. All three measures will be introduced from the first pension and benefit payday in November 1986 as the tax reform measures begin to take effect. The effects of the three measures I have announced may be illustrated by the case of a supporting parent or pensioner with two children living in rental accommodation. At present, if such a pensioner earned $100 a week of private income, the social security pension plus rent assistance is reduced by $44. From November next year, this pensioner would lose only $18 in reduced benefits for a total gain of $26 per week. The full year effect on outlays of the measures is estimated at about $215m. Net full year costs will be around $185m as some part of the outlays will be clawed back in personal income tax in later years.


Mr Speaker, as I said at the outset, our major objective has been to substantially lighten the heavy weight of high marginal tax rates on honest taxpayers and to restore fairness to the operation of the taxation system. That is what we set out to do. With this reform package, that is what we will achieve. The new tax schedules I will announce shortly have been framed with a number of factors in mind. First, they represent the fulfilment of the Government's commitment to provide tax cuts from September 1986, equivalent to a 2 per cent wage increase, as part of its agreement with the Australian Council of Trade Unions for continued wage restraint. In addition, the tax cuts take account of the distributional impact of the reform measures that I have outlined. These impact most heavily upon higher income earners; that is, the reform measures are highly progressive. While that, of itself, does not establish a case for providing greater relief at such income levels, I come back to the point that reductions in the higher marginal rates have been, and remain, a prime objective of tax reform.

It is the high rates of personal income tax which have provided a major incentive for people to avoid and evade their tax and which involve the most severe disincentive to work, save and invest. But few of the people in the top bracket have paid the 60c in the dollar asked of them. They have arranged their affairs to evade, avoid or minimise that liability. Instead their share of the burden has been carried by ordinary middle income Australians. It must be clearly understood that the measures I have announced today will impact most heavily upon high income avoiders and evaders. Those people will very definitely be worse off because of the Government's actions. At the same time, when this package is implemented the Government of the Commonwealth of Australia will no longer be seeking to collect in income tax more than half the income of any citizen.

The tax cuts that I will now detail have been timed to take effect as the extra revenue from our tax reform measures comes on stream. On top of that, the Government fully recognises that the making of these tax cuts imposes very substantial constraints on future government spending proposals. The following changes will be made to the personal income tax rate scale from 1 September 1986: The tax free threshold will be increased from $4,595 to $5,100, and the $12,500 threshold will be increased to $12,600; the 25 per cent marginal rate will be reduced to 24 per cent; the 30 per cent marginal rate will be reduced to 29 per cent; the 46 per cent rate will be reduced to 43 per cent; the 48 per cent rate will be reduced to 46 per cent; and the 60 per cent rate will be reduced to 55 per cent.

From 1 July 1987, by which time the revenue yield of the income tax base broadening measures will have built up significantly, the Government will complete the reform of the scales by making further reductions in the higher marginal rates. Specifically; the 43 and 46 per cent rates will be reduced to 40 per cent; and the 55 per cent rate will be reduced to 49 per cent. With the alignment of the top personal tax rate and the company tax rate at 49 per cent from 1987-88, the special tax on excess profit retentions by private companies-the so-called Division 7 tax-will be unnecessary and will be removed, a further plus for small and medium business. Further details of these tax cuts, and their impact on various categories of taxpayers, are included in the attachments.


What I have announced today are far-reaching genuine, and substantial tax reforms. They achieve the fundamental objectives we set ourselves at the outset of this ambitious endeavour, namely: To significantly reduce marginal tax rates; to curtail tax avoidance and evasion and restore fairness to the tax system; and to gear our tax system for economic growth by providing the greater rewards for initiative, removing distorting shelters and ending the double taxation of dividends. The Government's tax reform exercise is completed. We will, however, continue to act where necessary to stamp out any avoidance and evasion practices that develop. Furthermore, the package I have announced today commits the Government to unprecedented fiscal responsibility over the years ahead.

In bringing down this package, the Government has confronted the issue of tax reform. We have been willing to consult with the people of Australia. We have been willing seriously and responsibly to consider the issues involved and we have been willing to take the hard decisions. These decisions are essential to secure the future economic well-being of the nation. They are essential if we are to recover respect and integrity for the taxation system. They are essential if all Australians are to be treated with fairness and equity. The Government is confident that the people of Australia will recognise that these significant measures are taken in the best interests of the nation and for the greater good of every individual Australia. The attachments to the speech will be tabled subsequently.