House of Representatives

Tax Laws Amendment (2005 Measures No. 5) Bill 2005

Second Reading Speech

Mr BROUGH (Longman-Minister for Revenue and Assistant Treasurer)

I move:

That this bill be now read a second time.

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

Firstly, this bill modifies some aspects of the foreign employment income exemption. This tax exemption applies to the foreign earnings of Australian residents engaged in foreign service for a continuous period of 91 days. The existing credits and debits rule used in determining whether a taxpayer with breaks in their employment service satisfies the 91-day rule period will be replaced with a simpler and more generous rule. The new rule-the one-sixth rule-states that a period of foreign service will not be considered to have been broken until the point when absences exceed one-sixth of the days in foreign service. This rule allows for more absences and reduces compliance costs for taxpayers.

The amendments reinstate the exemption where a taxpayer was employed in Iraq during the period that Iraq's income tax system was suspended.

In addition, the amendments change the law to ensure that, where a taxpayer dies before reaching 91 days of continuous service, the exemption will apply.

Secondly, amendments to the film tax offset provisions will allow qualifying high-budget television series to claim the refundable 12.5 per cent offset against their qualifying Australian production expenditure. This amendment aims to attract large-scale, high-budget television series to Australia. This will help showcase Australian locations and talent and help to increase spending on infrastructure development, local casts, crew, postproduction facilities and other services.

The third measure this government is taking is to do with further refinements to the consolidation regime. The refinements clarify the operation of the bad-debt rules to multiple entry consolidated groups. They also ensure that the modifications to the bad-debt rules for consolidated groups and multiple entry consolidated groups apply to determine whether those groups can deduct swap losses.

This measure also extends until 31 December 2005 the time in which head companies of consolidated groups and multiple entry consolidated groups can make or revoke certain choices in relation to setting the tax cost of assets and the utilisation of losses.

Schedule 4 of the bill amends the thin capitalisation regime to ensure that a taxpayer's thin capitalisation position is not immediately affected by the alignment of the Australian accounting standards with the international financial reporting standards. For three years taxpayers will be able to use accountings standards as they existed prior to the alignment with the international financial reporting standards when undertaking their thin capitalisation calculations.

Schedule 5 extends the operation of the 12-month rule for forestry managed investments from 30 June 2006 to 30 June 2008. This fulfils a 2005-06 budget commitment by this government that the 12-month rule would be extended for a further two-year period.

The 12-month rule provides a year-of-expenditure deduction in respect of expenditure incurred by a taxpayer under an agreement with a manager of a forestry scheme. The expenditure must cover 'seasonally dependent agronomic activities' that will be carried out during the establishment period of a particular planting of trees.

The provision currently applies to expenditure incurred on or after 2 October 2001 and on or before 30 June 2006. The two-year extension will allow an extensive review to be conducted into all aspects of support for the plantation timber industry.

The final change recognises that the government is concerned about imposing compliance costs unduly on small businesses and is acting to keep compliance costs down. Under the general rules for determining whether an interest in a company is debt or equity for tax purposes, special advice may be needed, and the subsequent treatment of a related party at-call loan as equity would require the keeping of tax accounts. This means the compliance costs can be relatively high compared to treating the loan as debt in accordance with its legal form and commercial classification.

The proposed changes involve a simple test-the tax law will treat the at-call loans of companies with an annual turnover under $20 million as debt.

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

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