House of Representatives

New Business Tax System (Integrity and Other Measures) Bill 1999

Second Reading Speech

Treasurer, the Hon Peter Costello, MP

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

This bill will implement a number of the measures arising from the Review of Business Taxation which form part of the New Business Tax System I announced on 21 September 1999.

The measures include the introduction of reduced capital gains tax rates for individuals and superannuation funds as part of the Government's new, internationally competitive capital gains tax regime. They also include integrity measures that will improve the fairness of the tax system.

A new internationally competitive capital gains tax regime

The reductions in capital gains tax rates for individuals and complying superannuation entities introduced by the bill are a central part of the Government's policy to improve incentives to save and invest. From 21 September 1999, individuals will have the choice of working out their capital gains tax by either reducing their nominal gain by half (with the result that the highest rate for individuals would effectively be 24.25 per cent) or using an indexed cost base frozen as at 30 September 1999. Complying superannuation entities will be able to reduce their nominal gains by one third.

This tax treatment applies to assets held for at least one year.

The bill also reduces complexity of the capital gains tax provisions by freezing indexation as at 30 September 1999.

Tightening the 13 month prepayment rule for advance expenditure

Under the current law, advance expenditure incurred in respect of services to be completed within 13 months is generally deductible immediately. The bill improves the tax treatment of such expenditure by spreading the tax deduction over the period to which it relates. This measure, which generally applies to expenditure incurred after 11.45 am on 21 September 1999, does not apply to small business taxpayers, nor to non-business expenditure. Transitional arrangements phase in the initial impact of this measure over five years.

Lease assignments

The bill addresses, from 22 February 1999, the tax avoidance opportunities relating to lease assignments which were highlighted in the Review of Business Taxation discussion paper A Platform for Consultation. It does this by ensuring the full consideration received from assigning leases is taxed. It also includes an amount in assessable income where an interest in leased plant is disposed of, including by disposal of an interest in a partnership or by disposal by a wholly-owned group of a majority interest in a subsidiary that holds leased plant.

Tax payable under this measure by certain members of a wholly-owned company group is imposed by a related bill, the New Business Tax System (Former Subsidiary Tax Imposition) Bill 1999 which I am also introducing today.

Loss duplication and value shifting

The bill protects the integrity of the company tax system by removing current defects and anomalies in the treatment of entity losses and value shifting. In particular, the bill:

removes the multiplication of revenue losses through loss transfers occurring on or after 22 February 1999;
prevents artificial losses arising from the forgiveness of debts between commonly-owned companies on or after 22 February 1999;
prevents, from the date of introduction of the bill, the multiplication of losses where loss assets are transferred within a wholly-owned company group, and the use of losses realised by the transfer of loss assets within a majority-owned company group or from a majority-owned company group to a connected trust or individual;
removes defects in the continuity of ownership test that applies to companies' tax losses, net capital losses and bad debt deductions claimed in relation to an income year ending after 21 September 1999;
applies the same business test to a company's unrealised net losses where there is a change in the company's ownership or control after 21 September 1999; and
repeals the excess deduction rules for mining operations from the 1999-2000 income year.

Full details of the measures in this Bill are contained in the explanatory memorandum.

I commend this Bill to the House and present the explanatory memorandum for this Bill and the New Business Tax System (Former Subsidiary Tax Imposition) Bill 1999.