Taxation Laws Amendment Bill (No. 2) 1991

Taxation Laws Amendment Act (No. 2) 1991

Second Reading Speech

Senator The Honourable John N. Button (Minister for Industry, Technology and Commerce)

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

This Bill will amend the taxation laws in a number of respects.

It contains measures to extend normal mainland Australian taxation arrangements to the Territory of Cocos (Keeling) Islands.

This Bill also contains amendments that relate to the measures enacted by this Government last year to deal with the avoidance of Australian tax through the use of controlled foreign companies and trusts.

The Bill will give effect to the changes the Treasurer announced on 13 December 1990 to the taxation arrangements for foreign employment income derived by Australian residents.

These changes will greatly simplify a complex part of the tax system that affects individual Australians working overseas and will benefit in particular Australian missionaries and volunteer aid workers engaged in foreign service in a country that does not tax their income.

Following consultations with the finance industry, measures are included to give effect to minor concessional modifications to the thin capitalisation provisions of the income tax law.

Amendments to the land degradation provisions to give effect to the measures announced in the 1990-91 Budget arising from the review of Landcare objectives are also proposed.

The Bill will also provide for taxpayers to be able to claim a deduction for both current and capital expenditure incurred on or after 1 July 1991 in the course of rehabilitating mining or quarrying sites.

Amendments to various provisions relating to the quotation of a tax file number for the investment phase and to simplify the provisions of the Act relating to pensions, benefits and allowances are also included.

The Bill will extend the taxation relief presently available for securities transferred between lenders and borrowers under securities lending arrangements.

The gift provisions of the income tax law and the law in relation to the assessment and payment provisions for companies and superannuation funds will be amended.

Finally, as part of its continuing commitment to the fight against organised crime, the Government has decided to extend access to taxation information to three law enforcement agencies.

I turn now to a more detailed discussion of these measures.

Cocos (Keeling) Islands

The Bill will give legislative force to certain taxation measures that are part of a number of reforms to be introduced under the Government's commitment to give effect to the vote by the Cocos Malay people of the Cocos (Keeling) Islands to integrate with Australia.

Broadly, under the proposed changes, residents of the Cocos (Keeling) Islands will, from 1 July 1991, be subject to Australian tax obligations in respect of presently exempt income and capital gains. In addition, previously exempt fringe benefits will become taxable from 1 July 1991.

These changes, the main features of which I will briefly outline, mirror those set out in a Memorandum of Understanding that was signed by the Prime Minister and representatives of the Cocos (Keeling) Islands community on 7 March this year.

Personal income tax is to be phased in so that tax in respect of previously exempt income and capital gains will be reduced by 50 per cent during the 1991-92 income year. Full rates of personal tax will first apply to such income and capital gains in the 1992-93 income year. As Cocos (Keeling) Islands residents already have access to Medicare benefits, normal rates of the Medicare levy will apply from 1 July 1991.

Full rates of company tax will apply to previously exempt income and capital gains of Cocos (Keeling) Islands resident companies in the 1991-92 income year.

Capital gains tax rules will now apply to all assets disposed of on or after 1 July 1991 by residents of the Cocos (Keeling) Islands. However, in respect of previously exempt assets, only the gain which has accrued on or after 1 July 1991 will be subject to the capital gains tax.

A consequential effect of the proposed amendments is that residents of Norfolk Island will, in the 1991-92 and later income years, be liable to tax on income or capital gains derived from sources in the Territory of Cocos (Keeling) Islands in the same way as they are presently liable to tax on income or gains from sources in mainland Australia.

Revenue from these changes is estimated at $260,000 in 1991-92 and $750,000 in 1992-93, although this will be offset by other aspects of the integration package for the Islands.

Foreign Source Income

Amendments in this area reflect the Government's willingness to act on proposals for the smoother implementation of these measures. In this vein, the Bill will exempt from Australian tax certain dividends paid by a controlled foreign company from income that has been taxed under another country's accruals tax measures, and will clarify that distributions from non-resident trusts that qualify for the rebate of tax on winding up will not be subject to the interest charge.

On the other hand, I must also emphasise this Government's determination to ensure that these measures have their intended effect in countering tax avoidance. Some of the amendments will therefore streamline the provisions that were enacted to deal with tax avoidance through disguised distributions of profits, while others will ensure that offshore money lending businesses cannot claim excessive deductions for bad debts.

Taxation of Foreign Employment Income

Under present law an Australian resident person working overseas on certain approved projects, or otherwise as an employee, may be entitled to a full exemption from Australian tax as long as the foreign service is not less than 12 months, or a partial exemption for periods between 3 and 12 months.

The law also makes the exemptions subject to the tax treatment of the income in the other country, and require complex calculations to take the exempt income into account when taxing other income of the taxpayer.

The Government considered several representations concerning difficulties arising under those provisions, including the position of Australian missionaries and volunteer aid workers who generally receive only a modest amount of remuneration and were often disadvantaged by the existing rules.

I am therefore pleased to say that the measures proposed in this Bill will provide a more generous level of tax treatment to these volunteers who contribute to Australia's foreign aid program by working abroad.

The Government concluded also that the variable tests and complex calculations under the existing law should be rationalised in accordance with the Government's announced policy of simplification of the income tax system.

The Bill will therefore amend the income tax law to:

extend the exemption in some circumstances where the foreign earnings are exempt from tax in the other country;
reduce, from 12 to 3 months, the length of time a person must work overseas to qualify for full exemption (a consequential amendment will give a similar result under the fringe benefits tax law; and
apply an average rate rather than a marginal rate to the taxpayer's non-exempt income and thus effectively reduce the Australian tax on that income.

The amendments will apply to foreign earnings derived on or after 1 July 1990 and are estimated to cost about $3 million in 1991-92 and subsequent years.

Thin Capitalisation

The Bill proposes minor modifications to the thin capitalisation provisions of the law which operate to limit interest deductions for Australian companies or other entities on borrowings from related foreign sources.

The first modification will exclude from the definition of foreign debt of an Australian company debentures eligible for the section 128F interest withholding tax exemption which are temporarily held by a foreign related party for the purpose of distribution overseas.

Two other minor technical modifications will extend the existing thin capitalisation concession for a foreign owned resident holding company which partly owns a resident bank.

The revenue effect of these cannot be estimated, but is not considered to be substantial.

Land degradation

The deduction available to primary producers for capital expenditures designed to prevent land degradation is to be extended to taxpayers who derive business income from rural land.

The proposed amendment will allow both primary producers and rural businesses to claim a deduction for fences erected to separate different land classes in accordance with an approved farm plan designed primarily and principally to prevent the degradation of land, whether or not it is already degraded.

These amendments, which see to fruition an undertaking given by this Government in its July 1989 Statement on the Environment, will have effect, broadly, from 22 August 1990 at an estimated cost of $2.7 million in 1990-91, $4.2 million in 1991-92 and $5.0 million in 1992-93.

Mine site rehabilitation

This Bill will give effect to the Government's 1990-91 Budget announcement that current and capital rehabilitation expenditure incurred on or after 1 July 1991 is to be immediately deductible against income from any source.

Rehabilitation expenditure will qualify for the deduction where it is incurred on a site where exploration, mining or quarrying operations have been conducted.

Transitional measures in the Bill will ensure that the rehabilitation process is treated as part of a mining operation for the purpose of deductions available for housing and welfare and plant or articles under both the general and petroleum mining divisions of the income tax law.

The estimated cost of the amendment is $10 million per annum in 1992-93 and later years.

Tax File Number Changes

These changes, which will have a neglible effect on the revenue, are in response to representations from investment bodies and investors and will lessen the administrative burden associated with the reporting requirements of the tax file number arrangements.

The law will be restated to make it clear that where a person makes an investment in a capacity as trustee he or she may quote the tax file number of the trust estate even though the investment is not held in the name of the trust.

Further, the quotation rules will be streamlined where a person invests in an investment body through an interposed entity that is a solicitor or a body corporate.

Where all of the primary investors are identified in the investment made on their behalf by an interposed entity, the amended quotation rules will allow each primary investor to quote his or her tax file number to the investment body directly.

If all of the primary investors are not identified, the interposed entity will be able to quote a reference number - to be called the "investment body remitter number" - instead of its own tax file number.

Other amendments proposed by this Bill will allow the Commissioner of Taxation to vary the date on which investment bodies must remit amounts withheld.

Also, the existing exemption from quoting a tax file number where the income being paid is subject to non-resident withholding tax is to be tightened.

The exemption will apply only where the investment body paying the income is actually required to withhold the tax, or would have been so required but for certain exemptions.

Finally in this regard, the Bill will remove the requirement - which is technically defective - that a deduction be made where a tax file number is not quoted for certain deferred interest securities.

It is proposed to introduce new rules in the Budget Sittings to deal with such investments.

Pensions, benefits and allowances

A project to improve the readability of social security and veterans' entitlements legislation by the use of a clear English drafting style and format is nearing completion and required consequential amendments to the income tax law.

In giving effect to these changes in this Bill, the opportunity has been taken to simplify the provisions of the Income Tax Assessment Act that exempt from tax certain pensions, benefits and allowances.

The new legislation is intended to reflect existing policy and, accordingly, will have no financial impact.

Securities Lending Arrangements

The existing concession for securities lending arrangements will be extended to remove the restriction that currently denies relief if distributions are made or rights or options are issued or exercised during a borrowing period. Relief will be available where lenders receive any such distributions, rights, options, new securities or a compensatory payment. The allowable borrowing period will also be extended to less than twelve months.

These amendments follow consultations with the Stock Exchange and other parties involved in introducing improved settlement procedures in the securities industry. They were foreshadowed when the Government introduced the concession last year, and will have no effect on the revenue.

Company and Superannuation Fund Self-assessment

The Bill will also amend the Income Tax Assessment Act to correct a technical deficiency in the assessment and payment provisions for companies and superannuation funds that commenced to apply in the current financial year.

Provision of tax information

Access to tax information is already given to certain other bodies including all Australian police forces, the Office of the Director of Public Prosecutions, the National Crime Authority and the Australian Securities Commission.

The Bill will allow the Commissioner of Taxation to communicate, in specified circumstances, taxation information to authorised officers of the Australian Bureau of Criminal Intelligence, the Independent Commission Against Corruption of New South Wales and the New South Wales Crime Commission.

The Commissioner will be allowed to disclose taxation information to the authorised officers where he considers that the information is relevant to establishing whether a serious offence - that is, an indictable offence - has been committed.

He may also release information relating to a person convicted of a serious offence for evidence purposes for a post conviction proceeds of crime proceedings.

The requirements of secrecy applying to taxation officers and other persons privy to confidential taxation information extend to officers to whom taxation information is to be communicated.


The gift provisions of the income tax law are amended to reflect a change in name of the College of Nursing, Australia, to the Royal College of Nursing, Australia.

I present the Explanatory Memorandum which contains more detailed explanations of the provisions of the Bill.

I commend the Bill to the Senate.