House of Representatives

New Business Tax System (Income Tax Rates) Bill (No. 1) 1999

Second Reading Speech

Treasurer, the Hon Peter Costello, MP

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

Today, I am introducing the first tranche of Bills which will implement a New Business Tax System for Australia. The Government's landmark reforms to business tax will build on the significant reforms that the Government has already legislated in relation to indirect tax and personal income tax.

As a result of the Government's vision and commitment, Australia will indeed have a world class tax system for the next century.

As Honourable Members are aware, the business tax reforms that I announced on 21 September are the culmination of 12 months of consultation with the Australian business community. In August last year, the Government established the Review of Business Taxation which was lead by three businessmen - Mr John Ralph AO, Mr Rick Allert and Mr Bob Joss. The Review was given broad terms of reference to consider reforms to Australia's business tax system. Over the 12 month period, the Review consulted extensively with small, medium and large businesses, rural and farming businesses and other interested organisations.

A number of detailed information and options papers were prepared, including one which compared Australia's business tax system with those of other countries. Following the publication of these papers, the Review received public submissions (376 in all) and conducted public seminars and focus groups around Australia. This open and consultative process was welcomed by business and made a significant contribution to the comprehensive recommendations of the Review. Indeed, business has been very supportive of the reforms the Government has announced and this is due in part to the extensive and inclusive consultative process that the Government established.

The Government's response to the recommendations of the Ralph Report is in two stages. On 21 September I announced a range of measures with phased implementation. Today I am introducing the first package of legislation to implement the New Business Tax System. Further legislation will be introduced later this year and early next year. The Government is currently consulting with business on the remaining Ralph recommendations. This consultation is consistent with the approach taken to date and interested organisations have been encouraged to make submissions. The Government will announce its response to the remaining recommendations next month.

The New Business Tax System will give Australia internationally competitive business tax arrangements including the lower company tax rates included in this Bill. This, combined with the reforms to indirect and personal income tax, will create the environment for higher economic growth and more investment. This in turn will mean more jobs and improved saving.

Under the Government's reforms to capital gains tax, individuals will only pay tax on 50 per cent of any gain that they make on the disposal of assets. That means that the highest rate for individuals will effectively be 24.25 per cent. For 80 per cent of Australians, the effective rate will be 15.75 per cent, after income tax rates come down on 1 July 2000. In addition, superannuation funds will only be taxed on two thirds of their capital gains. These cuts in capital gains tax together with scrip-for-scrip rollover relief will give Australia an internationally competitive capital gains tax regime and therefore encourage investment.

Other Government reforms to capital gains tax will particularly encourage investment in venture capital and in Australian small businesses and farms.

The Government will legislate to make capital gains earned by Australian superannuation funds through pooled development funds exempt from capital gains tax. Similarly, investments in venture capital projects in Australia by non-resident tax exempt pension funds, such as UK and US pension funds, will also not be subject to capital gains tax.

The Government has already legislated to provide small businesses with capital gains tax rollover relief or exemptions where they use the funds to purchase another business or to retire. Under the reforms announced on 21 September, these provisions will be extended and simplified. As a result, individual operators of small businesses will not have to pay capital gains tax on 75 per cent of any gain made on the sale of active business assets. The remaining 25 per cent will be subject to significantly expanded and simplified rollover provisions and retirement exemption provisions.

In addition, the Government is introducing a new capital gains tax exemption. Where taxpayers dispose of an active asset, the asset was held continuously for at least 15 years and the taxpayer is at least 55 years of age and intends to retire or is incapacitated, no capital gains tax will be payable.

Small businesses will also benefit substantially from the implementation of a simplified tax system. The simplified tax system will dramatically reduce compliance costs and maintain small business access to existing concessions.

I now turn to a key aspect of business tax reform and that is the reduction in company tax rates. This Bill amends the income tax law to substantially reduce company tax rates. The company rate will fall from 36 per cent to 34 per cent for the 2000-2001 income year and to 30 per cent thereafter. This will make our company tax rate more competitive than many developed nations and amongst the lowest in our region.

Our rate will be lower than in the United States, New Zealand, Japan, and Korea and on par with rates in Germany and the United Kingdom. As a result, Australia's attractiveness as an investment location will increase, strengthening Australia's prospects for investment and economic and jobs growth.

Today I am also introducing three other Bills which implement the Government's business tax reforms. These Bills deal with capital allowances, capital gains tax reductions and anti-avoidance measures. Given the substantive reforms that the Government has announced, it is our intention to legislate the reforms quickly so as to provide certainty to Australians in their taxation affairs.

I commend this Bill to the House and present the Explanatory Memorandum.