Taxation Laws Amendment Bill (No. 9) 2003

Second Reading Speech

Senator ELLISON (Western Australia - Minister for Justice and Customs)

I table a revised explanatory memorandum relating to the Taxation Laws Amendment Bill (No. 2) 2004 and move:

That these bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows-


In this year's Budget the Treasurer announced the outcome of the review of international tax arrangements. The Government initiated this review because we understand that the future of the Australian economy is fundamentally linked to global prosperity and to Australians being a part of that prosperity. We want our tax system to help that and not hinder it. So, in the Budget over 30 initiatives designed to modernise the international tax system were foreshadowed. These initiatives will help Australian companies compete abroad and boost Australia's status as an attractive place for investment.

These reforms are not just about how we tax current international business transactions. The reforms are also about business that is not going on because some of our current international tax laws impede genuine business decisions, making it more difficult for our businesses to expand into global markets and to access foreign capital. And, it's not just about the big end of town either-our small and medium businesses are more and more globally orientated. These reforms will free up new and emerging businesses so they can engage internationally and create more jobs for Australians.

The Government delivered on the first of these reforms with the signature of a new tax treaty with the United Kingdom which was enacted by the Parliament last week. That treaty reflects the policy position announced following the review.

The bill that I am introducing today covers the first of the foreshadowed legislative reforms. These measures will reduce unnecessary tax compliance burdens for the superannuation and managed funds industries . The Government intends to bring forward more of the announced reforms in the new year.

This bill modifies the foreign investment fund rules, which are designed to prevent the deferral of Australian tax by accumulating passive income offshore. However, these rules as they currently stand impose significant compliance costs-resulting in higher costs and lower returns for investors. These compliance costs also disadvantage internationally focussed Australian funds seeking foreign investment, compared to foreign funds. These rules are to be changed to provide a better balance between their integrity objectives and the compliance cost burden for taxpayers.

Compliance costs will also be reduced by increasing the threshold for the `balanced portfolio' foreign investment fund exemption from 1 July 2003. The increase from 5% to 10 % will allow Australian managed funds and investors to diversify their offshore investment portfolios without taking on excessive compliance costs associated with the foreign investment fund rules.

Superannuation entities and certain other concessionally taxed entities will be exempted from the foreign investment fund rules from 1 July 2003. As these entities currently have a low tax rate, their investment decisions are unlikely to be biased towards investment in the kinds of offshore investment vehicles that the foreign investment fund rules are designed to target. It is therefore not necessary to subject this industry to the compliance costs associated with the foreign investment fund rules.

Companies carrying on business in Australia are currently able to receive an exemption from withholding tax on interest payments made to non-residents on debentures and other securities that satisfy a `public offer test'. However, other borrowers, including managed funds organised as unit trusts, are not similarly exempted from withholding tax. This bill removes this distortion and reduces compliance costs by extending the withholding tax exemption to public unit trusts and certain other unit trusts.

This bill also amends the controlled foreign company rules, which are designed to prevent deferral of Australian tax on certain income earned by foreign subsidiaries of Australian taxpayers. The amendments will remove the need for taxpayers to consider whether certain foreign source income derived by a controlled foreign company in a country with a broadly comparable tax system is to be included in their assessable income. As a future safeguard, if specific types of foreign source income raise integrity concerns, this bill permits regulations to be made attributing such income under the controlled foreign company rules.

This controlled foreign company change is part of a wider measure arising from the review of international tax arrangements, that will pare back the attributable income of controlled foreign companies in broad exemption listed countries. This will principally be achieved by changes, in the first half of 2004, to the current income tax regulations.

I commend this bill.


This bill makes amendments to the income tax law and other laws to give effect to several taxation measures.

Schedule 1 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 to ensure that a GST registered supplier of an eligible first aid or life saving course is able to treat the supply as GST-free.

The amendments in Schedule 2 will amend the Income Tax (Transitional Provisions) Act 1997 to modify the General Value Shifting Regime so that the consequences arising under that regime do not apply to most indirect value shifts involving services. These amendments will ease compliance costs for taxpayers on the transition to consolidation.

The consolidation measure is an important business tax reform initiative that allows wholly-owned corporate groups to elect to be treated as single entities for income tax purposes. The consolidation regime will promote business efficiency, improve the integrity of the Australian tax system and reduce ongoing income tax compliance costs for those wholly-owned groups that choose to consolidate.

The general value shifting regime is an important integrity measure designed to prevent the manipulation of tax rules by shifting value between assets by closely held entities that are not part of the same consolidated group. This new regime is complementary to the consolidation regime and reproduces the structural value shifting integrity achieved by the consolidation regime to those groups outside consolidation.

The measure in this bill ensures that groups that consolidate during a transitional period do not incur compliance costs associated with setting up systems to identify service-related indirect value shifts when those systems will not be needed after consolidation. The measure will reduce compliance costs for business during the transition to consolidation.

The measure would also allow groups that do not consolidate extra time to establish systems track service related indirect value shifts that may require adjustments under the general value shifting regime.

Schedule 3 will amend the Income Tax Assessment Act 1997 to improve the operation of the alienation of personal services income provisions. The Fringe Benefits Tax Assessment Act 1986 will be amended to remove the potential for effective double taxation of payments that are made non-deductible by the personal service income provisions and which may also be subject to fringe benefits tax. This schedule will also make further amendments to the Income Tax Assessment Act 1997 to allow an individual working through a personal services entity to deduct a net personal services income loss.

The amendments in Schedule 4 will amend the Income Tax Assessment Act 1997 to specify the taxation treatment of sugar industry exit grants made under the Sugar Industry Reform Program. Sugar industry exit grants that are paid to taxpayers who leave the agricultural industry altogether will be exempt from income tax. Grants that are paid to taxpayers who leave the sugar industry but continue to carry on another agricultural enterprise will be included in assessable income.

Schedule 5 will amend the Pay As You Go withholding rules in the Income Tax Assessment Act 1997 so that the foreign resident withholding arrangements will apply as intended to alienated personal services payments that are payments of a kind prescribed in the regulations to be covered by those arrangements. This will facilitate the efficient collection of tax on the payments.

The amendments in Schedule 6 will amend the Income Tax Assessment Act 1997 to ensure that mutual friendly societies that are life insurance companies which restructure by demutualising can benefit from the taxation framework that applies to other mutual life insurance companies which restructure by demutualising.

Schedule 7 will amend the simplified tax system provisions in the Income Tax Assessment Act 1997 to provide optional roll-over relief when there are partial changes in the ownership of an simplified tax system partnership. Roll-over relief will ensure that a taxable gain or loss will only arise when the partnership ultimately disposes of its depreciating assets. These amendments will remove a barrier that may be deterring some taxpayers from entering the simplified tax system.

Schedule 8 also makes amendments to the consolidation regime, under which wholly-owned corporate groups are treated as a single entity for income tax purposes.

The amendments will provide additional flexibility in the transition to consolidation by allowing certain choices made by a head company to be revoked or amended before 1 January 2005. The amendments in this Schedule also ensure that the rules governing eligibility for the research and development tax offset apply appropriately in cases where companies join or leave a consolidated group part-way through an income year.

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

I commend this bill.

Debate (on motion by Senator Crossin) adjourned.

Ordered that the resumption of the debate be made an order of the day for a later hour.

Ordered that the bills be listed on the Notice Paper as separate orders of the day.