House of Representatives

New Business Tax System (Miscellaneous) Bill (No. 2) 2000

Second Reading Speech

Costello, Peter, MP (Higgins, Treasurer, LP, Government)

I move:

That the bill be now read a second time.

The New Business Tax System (Miscellaneous) Bill (No. 2) 2000 builds on earlier legislation implementing the government's landmark business tax reforms. It contains a wide range of measures, most of which are based on the recommendations of the Review of Business Taxation.

The review was established by the government to consult extensively with business over a 12-month period and make recommendations on business tax reforms. Since the government announced its response to those recommendations, it has continued to extensively consult with business on the implementation details.

The measures in this bill can be broadly broken down into six categories: scrip for scrip rollover relief, the taxation of life insurers, measures dealing with losses, measures dealing with the imputation system, other CGT measures and integrity measures.

Scrip for scrip rollover relief

One of the government's key business tax reforms is the provision of scrip for scrip rollover relief for takeovers between companies and between trusts, regardless of whether the entities are widely-held or private.

This measure has already been legislated and took effect from 10 December 1999. It removes a major impediment to mergers and takeovers and allows start-up and innovative firms to undergo restructuring without triggering a capital gains tax liability.

Schedule 5 of this bill puts beyond doubt that scrip for scrip rollover relief is available for: schemes of arrangement; where scrip is cancelled and reissued; and where a subsidiary company makes the takeover offer using its parent's scrip-so-called `downstream' acquisitions. These amendments are important because takeovers may utilise these types of features.

Schedule 5 also contains integrity rules as well as some technical amendments.

Life insurers measures

This bill represents a major improvement in the competitive neutrality, the consistency and the integrity of the taxation system. It is indisputable that life insurance companies should be taxed on their profit at the company tax rate like all other companies. The former government announced its intention to review the taxation arrangements for life insurers in the 1995-96 budget. However, it did nothing. The government announced that it would reform the tax treatment of life insurers in its tax reform document A New Tax System. Since that time, the life insurance industry has been extensively consulted regarding the impact of the measures, both during the review of business taxation and subsequently. This bill now delivers the long overdue reforms.

The bill will introduce new rules that will broaden the tax base for life insurance companies and friendly societies. The reforms will apply from 1 July 2000 and will ensure that life insurers are treated on a more consistent basis with other entities. Promoting this kind of equity across taxpayers is a key foundation on which the new business tax system is based as it facilitates much lower company tax and capital gains rates. The new rules will increase the integrity of the tax base and will also substantially reduce complexity.

Losses measures

There is a range of losses measures in the bill. They include those designed to: prevent the multiple recognition of losses in a company for tax purposes in certain circumstances, known as the inter-entity loss measure; modify and refine the continuity of ownership test and provide an appropriate link to the inter-entity loss measures; align the application of certain loss measures; and strengthen the unrealised loss measures where loss assets are transferred within a company group. These measures are based on the recommendations of the review of business taxation.

Imputation measures

Small individual shareholders will benefit from reduced compliance costs flowing from a measure that will extend an exemption under the franking credit trading rules. The effect of this measure will be that shareholders entitled to franking rebates of up to $5,000 will no longer need to consider the 45-day holding rule. This change recognises that such shareholders would seldom be caught by the franking credit trading rules. The imputation system, as it applies to life insurers, is amended in the bill so that franking credits and debits accrue to life insurance companies based on tax paid on income actually allocated to shareholders. This replaces the more arbitrary basis through which franking credits and debits currently accrue to life insurance companies.

There are also other changes which are consequential on the broadening of the tax base for life insurers referred to earlier, including changes to franking accounts. Measures in the bill also recognise the introduction of the pay-as-you-go instalment system in allowing franking credits and debits to arise in relation to PAYG instalments and in recognising payments under PAYG before 1 July 2000 by early balancing companies

Other CGT measures

In relation to capital gains tax, the bill ensures that the government's fundamental capital gains tax reforms introduced last year operate in the intended manner.

Integrity measures

Finally, there are two other specific integrity measures in the bill. First, there are rules that will penalise taxpayers who obtain tax benefits from schemes to avoid, defer or reduce PAYG instalments. The rules are consistent with the framework of a general anti-avoidance rule. The general anti-avoidance rule in the income tax law does not apply to the PAYG system contained in the Taxation Administration Act.

Second, there are technical amendments to the prepayments measure already legislated to ensure that the provisions operate in the way that they were intended, including correcting potential anomalies in the law. Full details of the measures in the bill are contained in the explanatory memorandum. I commend the bill and present the explanatory memorandum to the House.