House of Representatives

Tax Laws Amendment (2007 Measures No. 3) Bill 2007

Second Reading Speech

Mr Dutton (Minister for Revenue and Assistant Treasurer)

I move:

That this bill be now read a second time.

This bill makes numerous improvements to Australia's tax laws.

Schedule 1 to this bill makes amendments to the tax integrity rules concerning private company distributions to shareholders and their associates. The amendments in this schedule reduce both the extent to which taxpayers can inadvertently trigger a deemed dividend under division 7A of the Income Tax Assessment Act 1936, and the punitive nature of the provisions. The amendments remove the automatic debiting of the company's franking account when a deemed dividend arises under division 7A.

The amendments give the Commissioner of Taxation a discretion to disregard a deemed dividend that has arisen because of an honest mistake or omission by a taxpayer, providing greater flexibility to administration of the provisions. Further, certain shareholder loans will be able to be refinanced without triggering a deemed dividend, and division 7A compliant loans will be exempted from fringe benefits tax.

These measures will reduce ongoing compliance costs for private companies and reduce tax penalties, especially for the many small businesses that use a company structure.

Schedule 2 makes amendments to ensure that certain superannuation contributions made prior to 1 July 2007 are subject to the contributions cap in the simplified superannuation system.

This measure ensures that contributions, such as those made by a friend during the simplified superannuation transitional period, are included in the non-concessional contributions cap calculation for that period.

Schedule 3 makes amendments to allow a trustee of a resident testamentary trust to choose to be assessed on capital gains of the trust. The changes will ensure that an income beneficiary of a resident testamentary trust need not be assessed on capital gains of the trust from which they will not benefit.

Schedule 4 to this bill makes amendments to allow non-dependants of a member of the Australian Defence Force or any Australian police force, or an Australian Protective Service officer, killed in the line of duty, to access the same concessional tax treatment for lump sum superannuation death benefits as dependants. This means that from 1 July 2007, eligible non-dependants will pay no tax on the lump sum superannuation benefit left to them by someone who has died in the line of duty.

The government will also be making ex gratia payments to eligible non-dependants who received a lump sum superannuation death benefit payment over the period from 1 January 1999 to 30 June 2007. These payments will be equivalent to the additional tax paid on the superannuation death benefit and will be administered by the Australian Taxation Office.

Schedule 5 will extend by one year, an existing transitional period under the thin capitalisation rules. The transitional period allows taxpayers to elect to use current or former accounting standards to make certain calculations. The extension will enable a thorough assessment of the impact on the thin capitalisation rules of adopting Australian equivalents to International Financial Reporting Standards. It will also provide time to develop and consult on any changes to the rules that may be considered appropriate.

Schedule 6 to this bill repeals the dividend tainting rules and makes two consequential amendments. The first consequential amendment ensures that distributions from a share capital account continue to be unfrankable. The second modifies the general anti-avoidance rule that applies in relation to the imputation system. When considering whether to apply the rule, the Commissioner of Taxation will be able to take into account whether a distribution is sourced from unrealised or untaxed profits.

The changes will apply in relation to distributions made on or after 1 July 2004. This will ensure that taxpayers do not inadvertently trigger the dividend tainting rules by accounting entries required under the Australian equivalent of the International Financial Reporting Standards.

Schedule 7 clarifies the types of financial instruments that are eligible for the exemption from interest withholding tax (IWT) to correct an unintended broadening of the exemption. In addition to debentures, only non-debenture debt interests that are non-equity shares, syndicated loans and instruments prescribed by regulation will be eligible for the IWT exemption. This realigns the exemption with the government's policy intent and enhances the integrity of the tax base.

It will still be necessary for these debt interests to satisfy the public offer test. In the case of syndicated loans, modifications have been made to the public offer test so that it operates appropriately and accommodates market practices.

Schedule 8 to this bill inserts new rules to ensure that investment in forestry managed investment schemes is encouraged to facilitate the continued expansion of our plantation forestry estate and to reduce our reliance on both native forests and overseas imports.

Investors will be eligible for income tax deductions for any contributions they make to new schemes for developing plantation forests in Australia, provided a 70 per cent direct forestry expenditure rule and some other requirements are met.

To address the government's concerns about the level of commissions charged, this measure incorporates an arms-length pricing rule and a requirement that all of the trees are established within 18 months.

Consistent with the rules for existing schemes, the schedule includes a rule for a manager of a new scheme to include investors' contributions received in its assessable income in the income year the contributions are first deductible to the investors.

The government expects that secondary market trading of interests in forestry schemes will introduce pricing information and increase the liquidity of forestry scheme investments. To facilitate a deeper secondary market for forestry scheme investments, the schedule inserts new rules to allow trading of interests in existing schemes. Initial investors who hold existing or future interests will be subject to a four-year holding period, market value pricing rules, and are required to return sale or harvest proceeds on revenue account.

The schedule also clarifies the income tax treatment of sale or harvest proceeds received by secondary investors and the deductibility of payments by secondary investors to the schemes.

Schedule 9 makes amendments to require Australian trustees to collect tax from trust taxable income that is payable to the trustee of a foreign trust.

Therefore, after these changes, Australian trustees will be required to pay tax on the taxable income of the trust attributable to any foreign resident entity, whether an individual, company or trust.

Schedule 10 to this bill enables Australian managed funds to collect a non-final withholding at a single rate-the company tax rate-on distributions of Australian source income that is not a dividend, interest or royalty. Investors will then be able to claim a credit for the amount withheld when they lodge an Australian income tax return to determine their final tax liability.

Currently Australian trusts and Australian custodians face different withholding obligations depending upon whether the foreign resident is an individual, company, trust or foreign superannuation fund.

This schedule will improve the efficiency of Australia's managed funds industry and provide greater certainty to the industry.

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

Debate (on motion by Ms Plibersek) adjourned.