House of Representatives

Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Bill 2005

Second Reading Speech

Mr Brough (Minister for Revenue and Assistant Treasurer)

I move:

That this bill be now read a second time.

This bill amends various laws to implement a range of changes and improvements to Australia's taxation and superannuation system.

Firstly, schedule 1 introduces reforms to the company loss recoupment rules. A company can deduct losses incurred in earlier income years if it satisfies the continuity of ownership test or the same business test. Listed public companies and their wholly-owned subsidiaries can use a modified continuity of ownership test to determine whether they have the same owners.

These amendments extend the range of companies that are eligible to use the modified continuity of ownership test to include all widely held companies and eligible subsidiaries. The amendments will make it easier and more certain for these companies to apply the modified continuity of ownership test by relaxing the rules for tracing ownership under that test and by specifying the times at which these companies will need to test for continuity of ownership. The amendments also make various technical changes to clarify the operation of the continuity of ownership test for all companies.

The changes to the continuity of ownership test will reduce the need for large companies to rely on the same business test to be able to claim deductions for prior year losses. Large companies with diverse businesses have difficulty in satisfying the same business test. Therefore, the amendments will remove the same business test for companies (including consolidated groups) whose total income is more than $100 million.

Schedule 2 replaces the existing foreign dividend account provisions. The changes provide tax relief for conduit foreign income, which generally is foreign income received by a foreign resident through an Australian corporate tax entity. These rules will allow Australian companies that receive foreign income on which no Australian tax is payable to pay dividends to foreign shareholders that are also free of Australian withholding tax.

This measure will provide foreign investors who structure their foreign investments through Australian entities with more neutral Australian tax outcomes when compared to foreign investors who hold their foreign investments more directly. This will further enhance the ability of Australian entities with foreign investments to compete for foreign capital. It will also improve the attractiveness of Australia as a location for regional holding companies.

These amendments represent the sixth instalment of the government's reform of Australia's international tax arrangements.

Schedule 3 denies deductions for expenditure incurred in the furtherance of, or directly in relation to, activities where the taxpayer has been convicted of an offence that is punishable by imprisonment for at least 12 months.

Deductions will be denied for all expenditure where the activities are wholly illegal, such as drug dealing or people smuggling. On the other hand, there will be cases where a taxpayer is conducting a lawful business but is convicted of an illegal activity while carrying on that business. In these cases only the expenditure that is incurred directly or in the furtherance of the illegal activity will be denied. Expenditure that is incurred in undertaking the underlying lawful activity and that would have been incurred regardless of the illegal activity will continue to be deductible. This is because the expenditure cannot be said to further or be directly related to the illegal activity. The expenditure is too remote to the illegal activity.

Schedule 4 will include copyright in a film in the general effective life depreciation of the uniform capital allowances provisions.

Under effective life depreciation, taxpayers will have a choice of using the Commissioner of Taxation's safe harbour effective life determination or self-assess the effective life of their copyright in a film. They will also be able to choose between the diminishing value method and the prime cost method when depreciating their asset.

These amendments will apply to a copyright in a film acquired on or after 1 July 2004.

Schedule 5 provides tax relief, in certain circumstances, for employees who participate in employee share schemes. When an employee is issued new shares or rights as the result of a corporate restructure or 100 per cent takeover, they will now be able to treat their new shares or rights as a continuation of their old shares or rights. This ensures that a taxing point does not arise for employee share scheme participants in the event of a corporate restructure. It also ensures continuity of treatment for capital gains tax purposes. In this manner, the amendments further support the development of employee share schemes and the alignment of employer and employee interests.

Schedule 6 provides relief for employers who may potentially have to make a double payment of superannuation contributions.

Currently, employers who make a late contribution to a superannuation fund may be required to pay this amount again as part of the superannuation guarantee charge payable to the Australian Taxation Office. This charge includes the full amount of any shortfall, even though a contribution relating to the relevant period had subsequently been paid into an employee's superannuation fund or retirement savings account by the employer.

These amendments will allow late employer superannuation contributions, which have been made for an employee to a superannuation provider within a month of the superannuation guarantee due date, to be used to offset the portion of any superannuation guarantee charge that relates to that employee for the quarter. To ensure there continues to be a strong incentive for employers to make superannuation guarantee payments by the due date, late payments will not be tax deductible.

Employee entitlements will not be jeopardised, as employees will still receive their full superannuation shortfall plus interest to compensate them for the late payment.

These amendments will apply to late payments of contributions made on or after 1 January 2006.

Schedule 7 clarifies that mandatory employer contributions under the superannuation guarantee arrangements are payable on wages or salary paid in a quarter following the termination of an employment relationship.

This ensures employees do not lose their superannuation guarantee entitlements as a result of being underpaid during their employment.

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

I commend this bill and present the explanatory memorandum.

Debate (on motion by Mr Bevis) adjourned.