House of Representatives

Taxation Laws Amendment Bill (No. 5) 1998

Second Reading Speech

by the Minister for Financial Services and Regulation the Hon Joe Hockey MP

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

This Bill amends the income tax law to give effect to the following measures:

Firstly, Tax penalty arrangements.

This Bill gives effect to the 1998-99 Budget announcement to replace the existing late payment penalties in various taxation laws with a uniform tax deductible general interest charge. The new arrangements will be simpler and better reflect movements in market interest rates. The changes follow a review by the Australian Taxation Office of late payment and notification penalties in consultation with professional and representative bodies. That review flowed from the Government's response to the recommendations of the Small Business Deregulation Taskforce.

The charge on an outstanding amount will be calculated daily on a compounding basis. The nominal interest rate from which the daily charge is calculated will be set at the 13 Week Treasury Note rate plus 8 percentage points. The penalty for late lodgement of income tax returns of individuals and the penalty for underpayment of income tax will also adopt the general interest charge.

Secondly, the Alignment of remittance dates

This Bill implements the announcement in the Government's tax reform paper, Tax Reform: not a new tax, a new tax system, that from 1 July 1999 the remittance dates for medium and small Pay As You Earn (PAYE), Prescribed Payments System (PPS) and Reportable Payments System (RPS) payers will move from the 7th to the 21st of the month.

The alignment to the 21st of the month is in anticipation of a large number of businesses being required to make one payment on the 21st of each quarter to cover most tax debts.

Thirdly, Running Balance Accounts.

This Bill also introduces amendments to support a system of running balance accounts. The objective of this measure is to establish a taxpayer accounting system under which the Australian Taxation Office can record and monitor all of a business's different tax liabilities on a single account. Debts under the sales tax, pay as you earn, prescribed payments and reportable payments arrangements for the year ending 30 June 2000 will be administered in this way.

The introduction of running balance accounts will provide for simpler tax accounting and collection arrangements.

These new accounting and penalty arrangements will position the ATO to better assist taxpayers in minimising any escalation of taxation debt and will allow for a simpler and more efficient process of penalty calculation.

They will also enable the ATO to provide a comprehensive statement of a taxpayer's outstanding tax debts at a particular point in time.

These amendments will provide an accounting platform in the lead up to one running balance style account to support most taxation debts after 1 July 2000.

And lastly, Tax avoidance: foreign tax credit schemes

This measure amends the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 (the Act) to render ineffective schemes designed to acquire or generate foreign tax credits that can be used to shelter low-taxed foreign source income from Australian tax.

A foreign tax credit scheme operates on the basis that foreign income is earned which gives rise to an entitlement to foreign tax credits. A scheme is entered into whereby a foreign income stream is acquired by another taxpayer. Where the acquisition cost of the income stream is deductible to that another taxpayer those deductions largely cancel out the foreign income the other taxpayer has now acquired. The major portion of the foreign tax credits which relate to the acquired foreign income stream are then available to offset tax payable on the taxpayer's other foreign income of the same class.

The Australian Taxation Office became aware that these types of schemes were being promoted in Australia. The Commissioner of Taxation does not accept the efficacy of these arrangements, and proposes to challenge them under the existing law in the courts. To put a stop to the development of future schemes the Government announced on 13 August 1998 that it would amend the general anti-avoidance provisions of Part IVA of the Act to render such schemes ineffective.

These types of arrangements have also been identified in the United States and the United Kingdom and remedial action has also swiftly been taken in both those countries.

The amendment is designed to protect the revenue base. In the absence of such swift action the revenue base could be exposed to a significant threat.

The Government also announced on 13 August 1998, as part of its tax reform package Tax Reform - not a new tax - a new tax system, that it will modernise the general anti-avoidance rules. This process will be conducted in line with the principles of the integrated tax code. In view of the threat that the foreign tax credit schemes posed to the revenue base it was necessary to announce the measures and bring legislation to the Parliament as soon as possible rather than await the modernisation of the general anti-avoidance rules.

Full details of the measures in the Bill are contained in the explanatory memorandum circulated to honourable members.

I commend the Bill to the House.