House of Representatives

New Business Tax System (Integrity Measures) Bill 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 (Integrity Measures) Bill 2000 contains two important integrity measures. The Review of Business Taxation, chaired by John Ralph, recommended the measures and the government announced on 11 November 1999 that it would adopt them.

The measures will:

limit the extent to which taxpayers can use non-commercial losses to reduce the tax paid on their other income; and
require that prepayments for services under tax shelter arrangements be deducted over the period during which the services are provided, rather than being immediately tax deductible.

The non-commercial losses measure will improve the integrity of the tax system by limiting the extent to which losses from an individual's non-commercial business activities are used to reduce the tax paid on other income such as salary or wage income. The Ralph Review of Business Taxation noted that there was a significant revenue leakage from unprofitable activities carried out by taxpayers and that many of these activities are more like hobbies and/or lifestyle choices.

The review recommended, and the government accepted, that it was necessary to implement a systemic solution to this issue rather than continue to rely on the current law which is resource intensive to administer.

The new rules I am introducing today do not change the existing general law tests that determine whether an individual is carrying on a business activity; nor do they deny the deductibility of a loss from that activity.

The rules ensure that individual taxpayers carrying on a business activity either alone or in partnership may only claim a loss from that activity against their other income in an income year if they satisfy one of five tests in that year.

The tests look at the activity's level of turnover, history of profitability, the value of real property used in carrying on the business and the value of other assets used in carrying on the business. Only one of the tests needs to be passed to enable an individual's loss from a business activity in a year to be deducted against the individual's other assessable income, such as wages and salary.

There is also a discretion to allow the losses where the business is affected by special circumstances, such as natural disasters, or is in its start-up phase.

In addition, if an individual is carrying on a primary production business, the measure does not apply where their non primary production assessable income (excluding net capital gains) is less than $40,000. This assists those small primary producers who find it necessary to support themselves through moderate amounts of off-farm income (particularly during periods of hardship), while genuinely, at the same time, seeking to pursue their farm activities on a commercial basis.

Where a test is not satisfied in an income year, the loss is deferred and can be offset in a future year against income from the activity or against other income if one of the tests is satisfied.

These rules will apply to assessments for the 2000-01 income year and later income years.

The estimated increases in revenue from the measure are $30 million in the 2000-2001 financial year, $230 million in 2001-2002 and $170 million in 2002-2003.

The second measure in the bill deals with prepayments. Again this integrity measure is based on the recommendations of the Ralph Review of Business Taxation.

The measure introduces new rules on when prepaid expenditure for services in respect of `tax shelter' arrangements is to be deductible. The effect is to align the deduction for the expenditure with the period during which the services are provided rather than being immediately deductible when the payment is made.

Under the existing law, prepayments for things to be done wholly within 13 months, including those relating to tax shelter arrangements, are immediately deductible for small business taxpayers and for payments outside a business. This rule has given rise to many tax minimisation schemes, particularly end-of-year schemes.

These new rules will reduce the tax advantages that are derived from participation in these tax shelters by limiting immediate deductibility for prepayments. This measure will promote equity in the tax system and more productive investment activity.

The new rules will apply to prepaid expenditure incurred by all taxpayers under tax shelter arrangements after 1 p.m. Australian Eastern Summer Time on 11 November 1999.

However, certain prepayments will be specifically excluded from the operation of the new rules. These include prepayments for:

interest on borrowings to acquire real property or interests in real property, publicly listed shares or units in widely held unit trusts;
premiums for building, contents or rent protection insurance;
interest on infrastructure bonds;
irrevocable commitments entered into before 11 November 1999;
and arrangements which have an ATO product ruling, where the ruling issued or the application had been lodged with the ATO before 11 November 1999.

The estimated increases in revenue from the measure are $40 million in the 2000-2001 financial year, $100 million in 2001-2002 and $90 million in 2002-2003.

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

I commend the bill and present the explanatory memorandum to the House.