House of Representatives

Taxation Laws Amendment Bill (No. 5) 1999

Second Reading Speech

Mr HOCKEY (North Sydney-Minister for Financial Services and Regulation)

I move:

That the bill be now read a second time.

The bill makes amendments to the income tax law and sales tax law to give effect to the following measures:

Sales Tax (Exemptions and Classifications) Act 1992

The bill amends the sales tax law to correct a deficiency relating to the exemption for goods incorporated into property owned by, or leased to, always exempt persons or the government of a foreign country.

Access to the exemption will now be available only where the property is occupied principally by an always exempt person or the government of a foreign country or where the property is used principally for the provision of services to an always exempt person or government of a foreign country. The amendment applies to dealings after 2 April 1998, unless the goods concerned were acquired on or before 2 April 1998.

Arrangements treated as a sale and loan and limited recourse debt

These amendments were originally introduced as part of Taxation Laws Amendment Bill (No. 4) of 1998. The bill was passed by the House of Representatives and was referred to the Senate Economics Legislation Committee. The bill lapsed when parliament was prorogued. Since that time the government has consulted with professional and industry bodies. Consequently, several technical changes have been made to the legislation as originally introduced.

The bill will implement a measure announced in the 1997-98 budget to prevent taxpayers obtaining deductions for capital expenditures in excess of their actual outlays. The measure will apply where the expenditure has been financed by hire purchase or limited recourse finance and the debtor does not fully pay out the capital amounts owing.

In those circumstances, an amount will be included in the debtor's assessable income to compensate for excessive deductions that were allowed to the taxpayer based on the initial cost of the relevant capital asset or specified capital expenditure. The adjustment to taxable income will reflect amounts that remain unpaid when the hire purchase or limited recourse debt arrangement is terminated. The amendment applies to debts that are terminated after 27 February 1998.

Two major technical changes to the original bill are concerned with limited recourse debt. First, where a debt is terminated and refinanced on arms-length terms, payments of the terminated debt that are funded by a replacement limited recourse debt will be counted in calculating any adjustment to be made. This will allow investors to refinance assets without adverse tax consequences.

Secondly, debt will not be treated as limited recourse debt where the conditions of the debt and any associated security arrangements do not have a limiting effect, for example, where ordinary business debts are fully secured by a floating charge over the assets of a debtor-other than the financed asset.

Another amendment will treat taxpayers who finance assets by hire purchase as the owners of those assets for purposes of applying the various capital allowance deductions. Hire purchase and instalment sale transactions will be treated as the equivalent of sale, loan and debt transactions in assessing the taxation liability of the financier and the hire purchaser respectively. The amendment applies to arrangements entered into after 27 February 1998.

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 and present the explanatory memorandum.

Debate (on motion by Mr Melham) adjourned.