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Thursday, 25 May 1972
Page: 2073

Senator COTTON (New South WalesMinister for Civil Aviation) - I move:

That the Bill be now read a second time.

With the concurrence of honourable senators I incorporate my second reading speech in Hansard.

The purpose of this Bill is to give effect to a proposal announced by the Treasurer (Mr Snedden) in a statement to Parliament on 11th April last that the operation of section 26 (a) of the Income Tax Assessment Act would be varied so as to provide greater certainty in the taxation law for people having stock exchange transactions in shares. Under the present law, section 26 (a) applies where a person acquires shares or other property with the sole or dominant purpose of reselling at a profit. It provides that, in these circumstances, any profit that eventuates on sale is subject to tax. A complementary provision - section 52 - applies where the sale of property acquired with the purpose I have mentioned results in a loss. It authorises the allowance of an income tax deduction for the loss.

These provisions have no application where property is acquired for purposes other than that of profit making. For example, where an investment is made in shares principally for the purpose of deriving dividends from them or where a person buys a house for his residence, a capital profit made on the eventual disposal of the property is not taxable, nor is a tax deduction allowable if a capital loss is suffered. It is the view of the Government that the basic principles of the law are sound and, as a broad general rule, should not be disturbed. The Government has accepted, however, that there is evidence that the application of the principles to the acquisition and sale of shares traded on stock exchanges has caused some uncertainty as to the practical operation of the law. In this particular area, the Government con siders it desirable to take action to reduce the uncertainty without fundamentally changing the principles. It accordingly proposes amendments to the income tax law which will provide a more certain basis for determining the taxability or otherwise of profits on the sale of shares.

For this purpose the Bill, in broad terms, provides that profits or losses made by a person on the sale of shares listed on a stock exchange are not to be taken into account for income tax purposes if the person had owned them for a period of at least 18 months before sale, and had not acquired them as an incident of carrying on a business. It is proposed that the new provisions will apply to shares acquired on or after 12th April 1972, the day immediately following the Treasurer's announcement of the Government's intentions. The principal effect of the Bill will be that persons who are not engaged in a business of share dealing, or whose share transactions are not incidental to their business activities, may be sure that any profit arising on the sale of listed shares that they have held for at least 18 months will not be subject to income tax. As a corollary, losses on the sale of shares they have held for at least this time will not be tax deductible.

The proposed amendments will not apply where, on or before lodging his first return after acquiring particular shares, a person has notified the Commissioner of Taxation that the shares were acquired for the purpose of profit making by sale. Where such a notification has been given - in accordance with the existing section 52 of the Assessment Act - the present law will have effect regardless of when the shares are eventually sold by the person concerned. The present law will also continue to apply as regards shares sold within 18 months of acquisition. The proposed amendment will have effect where persons acquire shares jointly or alone, and will apply whether or not shares are registered in the name of the owner or in the name of a nominee or trustee, provided the beneficial ownership of the shares docs not change within 18 months. It will also apply to an interest in shares acquired by a person as an owner in common if he remains the owner of that interest for at least the statutory period. Changes in ownership of shares due to the death or bankruptcy of the owner will, however, be disregarded in determining how long shares have been owned for the purpose of the 18 months test.

To meet the case where a person is allotted shares in a new issue by a company and the shares have not been listed prior to allotment, the Bill requires that, for the 18 months exemption to apply, the shares must become listed on a stock exchange within 3 months after he became the owner of them. The amendments proposed by the Bill will apply only where shares are owned by individual persons. The tax situation of companies will therefore remain unchanged. The Government has decided on the course of action I have outlined as a means of providing greater certainty in the application of the income tax law to people who, for any of a number of reasons, buy shares which they may later sell, but who are not engaged in a business of share dealing. The operation of the proposed amendment will be carefully watched and, should experience show that it is tending to lead to the devising of arrangements to avoid or minimise taxation, the Government will have no hesitation in introducing such further amendments as may be thought necessary to prevent systematic income tax avoidance. Explanations of the technical features of the Bill are contained in an explanatory memorandum being made available to honourable senators. 1 commend the Bill to the Senate.

Debate (on motion by Senator O'Byrne) adjourned.

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