House of Representatives

Tax Laws Amendment (2012 Measures No. 6) Bill 2012

Second Reading Speech

This Bill implements a range of improvements to Australia's taxation laws. Schedule 1 confirms that income tax is not payable on certain native title benefits or on certain capital gains tax (CGT) events involving native title rights. At present, when applying the ordinary rules of the income tax system based on traditional common law concepts, it is unclear what the tax implications are for Indigenous communities when a native title benefit is received and with respect to certain CGT events involving native title rights, due to the unique nature of a native title right.

By confirming that there are no tax implications for these acts, this amendment provides Indigenous communities with much needed certainty and clarity which is important when they are negotiating native title agreements.

Schedule 2 amends the list of deductible gift recipients (DGRs) identified by name in Division 30 of the Income Tax Assessment Act 1997. Donations made to organisations with DGR status are income tax deductible to the donor and therefore DGR status will assist the listed organisations in attracting public support for their activities.

The Schedule adds two new organisations to the Act, namely, AE1 Incorporated and Teach for Australia, and extends the time period for listing of Australia for UNHCR, One Laptop per Child Australia, and the Yachad Accelerated Learning Project. Schedule 3 amends the Income Tax Assessment Act 1997 to extend the immediate deductibility of 'exploration and prospecting expenditure' to geothermal energy explorers.

Geothermal energy is an emerging clean and renewable energy source with the potential to be used for the generation of electrical power in a largely emissions-free manner. These amendments will assist the Government's objective of encouraging exploration for geothermal energy.

Geothermal energy explorers will be entitled to equivalent treatment for their exploration or prospecting expenditure incurred on or after 1 July 2012 as that afforded to mining and petroleum explorers. This includes an immediate tax deduction for the cost of depreciating assets first used for exploration or prospecting on or after 1 July 2012, provided certain criteria are met.

The amendments in this Schedule will include geothermal exploration rights and geothermal exploration information in the list of intangible assets included in the definition of 'depreciating assets'.

The changes will also extend the definition of 'exploration or prospecting' to include exploration or prospecting for geothermal energy resources. This will allow geothermal energy explorers to immediately deduct the cost of the tangible and intangible depreciating assets they acquire if they first use the assets for exploration or prospecting, provided certain criteria are met.

In addition, these amendments will allow geothermal energy explorers to deduct expenditure incurred on exploration or prospecting for geothermal energy resources in an equivalent manner to mining and petroleum explorers.

Finally, the changes will prevent geothermal energy explorers from incurring an unintended liability in circumstances where they stop holding an exploration right because they merely acquire an energy extraction right relating to the same area or an area that is not significantly different. This will provide for an outcome equivalent to that for mining and petroleum explorers.

These amendments will encourage exploration for geothermal energy resources, and ensure that geothermal energy is an important part of the renewable energy mix. Schedule 4 to this Bill amends Schedule 2 of the Tax Laws Amendment (2011 Measures No. 5) Act 2011 to extend the exemption for managed investment trusts (MITs) from the interim streaming rules introduced by that Schedule until the 2013- 14 income year.

The Government provided an optional exemption from the application of the interim streaming rules for MITs and certain trusts treated like MITs. This was in recognition that these trusts generally do not 'stream' income; instead, they distribute all of their trust income proportionally. Extending this exemption ensures that MITs can continue to use the current arrangements until the commencement of the new tax system for MITs on 1 July 2014.

Schedule 5 to this Bill implements the Government's 2012-13 Budget measure to better target the net medical expenses tax offset by means testing the threshold above which a taxpayer may claim the offset and the rate of reimbursement from 1 July 2012.

Australian Government annual health expenditure is expected to reach around $100 billion by 2022. Means testing ensures this tax offset is appropriately targeted and is one of a number of measures the Government has identified to ensure a strong and sustainable health care system.

For taxpayers with adjusted taxable income above the Medicare Levy Surcharge thresholds ($84,000 for singles or $168,000 for couples or families in 2012-13), the threshold above which they may claim the net medical expenses tax offset will increase to $5,000 and the rate of reimbursement will be reduced to 10 per cent. The claim threshold will be indexed annually to the CPI.

People with adjusted taxable income below the surcharge thresholds will not be affected by this means test.

These changes will provide an ongoing gain to revenue which is estimated to be $370 million over the forward estimates period.

Introducing a means test will protect low and middle income earners, while helping to reduce the long term cost to the budget and ensure the ongoing sustainability of the net medical expenses tax offset.

The Government continues to provide substantial support for health expenses, including around $27 billion in 2012-13 through the Medicare Benefits Schedule, the Pharmaceutical Benefits Scheme and related safety nets.

Schedule 6 amends the definition of limited recourse debt. The amendment is necessary to ensure that the limited recourse debt tax provisions achieve their policy objective.

The objective of these provisions is to reverse a taxpayer's deductions for unpaid capital expenditure, where the taxpayer has not been fully at risk in relation to the expenditure.

The amendments will achieve this objective by looking at the substance or effect of a loan arrangement to determine whether a debt is a limited recourse debt, not just the legal form. This will ensure that taxpayers cannot structure their arrangements to avoid the limited recourse debt provisions.

The amendments will apply to debt arrangements that are terminated at or after the announcement of this measure at 7.30 pm (AEST) on 8 May 2012.

Schedule 7 amends the Fringe Benefits Tax Assessment Act 1986 to implement the 2012-13 Mid-Year Economic and Fiscal Outlook measure to remove the concessional treatment of 'in-house' fringe benefits that are purchased through salary sacrificing.

The current fringe benefits arrangements allow employees to receive concessional treatment for goods and services that an employer or an associate produces or sells in the ordinary course of its business.

The Government recognises that it is not appropriate for the tax system to subsidise `in-house benefits' for employees accessing them though salary sacrificing arrangements. This is why the Government is amending the Fringe Benefits Assessment Act 1986 to restore the concessional treatment of fringe benefits to its original policy intent.

Employers will still be able to provide staff discounts that will continue to receive the concessional treatments as long as the employee purchases the goods and services out of after-tax income.

The amendments in Schedule 7 mean that the concessional tax treatment is available for employers to reflect the true cost of providing the benefits and minimise the compliance costs, rather than as a means of employees reducing their income tax.

The amendments in Schedule 7 apply from 22 October 2012 (the date of announcement) for all new arrangements and from 1 April 2014 for all existing arrangements.

And finally, Schedule 8 includes several miscellaneous amendments to the taxation laws.

These include making sure that the promoter penalty provisions in the tax laws are effective against conduct that takes place outside Australia.

Such amendments are regularly made to correct minor technical or drafting defects in the taxation laws, and to address unintended outcomes. The Government has a long-standing commitment to uphold the integrity of the taxation system, and advancing such amendments gives effect to this very important commitment. Full details of the measure are contained in the explanatory memorandum.