Second Reading Speech
Mr CREAN (Melbourne Ports-Treasurer) (5.47)-I move:That the Bill be now read a second time.
This is a further measure to amend the income tax law. Amongst its proposals are provisions to give effect to the decision announced on 7th May 1973 to discontinue tax deductions for capital subscribed to mining or prospecting companies. Amendments foreshadowed on 16th July 1972 by the then Treasurer, dealing with misuse of these deductions, are also proposed by the Bill. Section 77D of the Income Tax Assessment Act makes deductions available to residents of Australia for capital subscribed directly, or through interposed companies, to companies engaged in mining or prospecting for oil or other minerals in Australia or Papua New Guinea. To enable shareholders to qualify for the deductions a mining company must lodge with the Commissioner of Taxation a declaration that the capital is for expenditure on mining or prospecting. By making this declaration the company confers deductions on its shareholders but forgoes any entitlement it might itself eventually have to be allowed deductions for the expenditure.
Under section 77C, and provisions which preceded it, deductions are allowable to residents and non-residents alike for one-third of amounts paid as calls to companies engaged in prospecting for minerals in Australia or Papua New Guinea. An exploration company is not required to forgo any part of its own deductions in return for the one-third deduction allowed to its shareholders. The stated purpose of these deductions has been to assist companies to attract capital for mining and exploration projects. They have been a costly and inefficient way of doing this and have opened up avenues for tax avoidance by persons who have contributed little, if at all, towards mining development in Australia.
The Bill proposes that the deductions will cease to be generally allowable for capital paid to mining or prospecting companies after 7th May 1973. As a transitional measure, deductions will remain available for amounts subscribed after that date by a person who owned the shares at that date as payment of an earlier call made by the company. Special provision is also to be made to cover bona fide arrangements where, before the termination date, a listed public company raised new capital, or made a call on its shareholders, to enable it to finance mining or prospecting expenditure by an associated mining company. The associated company will, in these circumstances, be permitted to lodge a declaration when the capital raised or called up by 7th May is subscribed to it by the listed public company. This will preserve the entitlement to deductions of shareholders in the listed company.
Tax avoidance schemes against which the Bill is directed have the purpose of conferring deductions on persons whose contributions of capital to mining or prospecting companies are recovered, wholly or substantially, by an early disposal of their interests. In one typical scheme persons contribute the share capital of a newly incorporated prospecting company, usually doing this through an interposed private company set up for the purpose. After lodgment of the necessary declarations to confer deductions on the contributors, but before the subscribed capital has been expended, the shares in the prospecting company are sold at a discount to an established mining company which in most cases is substantially owned by overseas interests. The objective of the arrangement is that the persons originating the scheme should obtain deductions for the whole of the capital of the prospecting company, although they are out of pocket only to the extent of the amount of discount allowed on the sale of the shares. The amount of the discount is the only amount of new money being made available for mining or prospecting purposes because all that has really happened is that the established mining company has acquired the unexpended capital of the prospecting company at a discount.
The Bill proposes to amend the law so as to specify that persons carrying a scheme of this kind through to completion after 16th July 1972 will not be allowed deductions for an amount of capital subscribed equal to the sale price of the shares. The deductions will thus effectively be limited to the actual amount of new mining capital contributed. The relevant company will also be regarded as having declared only this amount. Deductions for call moneys under section 77C will be limited in a similar way.
Another scheme proposed to be dealt with by the Bill involves the use of the interposed company provisions of section 77D as a means of circumventing the general rule against the allowance of double deductions for subscriptions of mining capital. Essentially the scheme involves the subscription of capital for mining shares acquired for resale through an interposed company which lodges a declaration in favour of its shareholders. When the shares are sold, the interposed company can claim a deduction against the sale price for the capital subscribed by it on the shares, despite the fact that it has already lodged a declaration to confer a deduction for this amount on its shareholders. The Bill proposes that a company that has lodged a declaration for share capital subscribed to it after 16th July 1972 will not be entitled to claim a deduction in its own right in respect of expenditure of the capital on shares in a mining company.
Other amendments, mainly technical in nature, are proposed to apply from 17th July 1972 for as long as the concessions for capital paid to mining companies continue. One of these amendments will make it clear that, if a mining company does not comply with a declaration under section 77D as to how it will expend specified moneys, the Commissioner of Taxation will be authorised to reduce the level of deductions of shareholders who subscribed the money through an interposed company. Another amendment will overcome a technical deficiency in the law that can enable a productive mining company, by arranging its accounts in a particular way, to defer payment of tax on income up to the amount of deductions that it has transferred to its shareholders through a declaration.
The Bill also contains provisions to give effect to the recently announced decision that the income tax concessions available to visiting experts are to be withdrawn. The concessions available for industrial experts are 2-pronged. First there is an exemption from income tax for up to 2 years where the expert is subject to tax in his own country. Where this exemption does not apply, a rebate of tax is allowable for up to 4 years sufficient to ensure that Australian tax does not exceed the tax that would have been payable in the expert's home country if the income had been earned there. These concessions were introduced in the early post-war years with the aim of assisting in the building up and improving of Australian industry. At that time there was a shortage of local expertise, and overseas experts were reluctant to come here because of the relatively high levels of Australian income tax. Australia did not have double taxation agreements with the countries from which the majority of visiting experts come.
Conditions are vastly different now. Local experts are available in most if not all fields; our rates of tax are more in line with those of the countries from which most visiting experts have been recruited, and Australia has double taxation agreements with most of these countries. On these grounds alone there would have been a good case for withdrawing the visiting experts' concessions. But on top of that there has been evidence that the concessions were not operating as had been intended. About 90 per cent of visiting experts are employed by overseas-owned enterprises, most of which have ready access to overseas expertise and would, in the normal course and without any concessions, be expected to move experts to and from Australia. Furthermore, instead of using the period for which the concessions are available to train local experts to replace the visiting experts, many firms have merely brought in replacement staff from overseas at the end of each prior visit so that, rather than diffusing overseas expertise through Australian industry, the result has often been the continued employment of overseas instead of local experts. It is estimated that these concessions cost about $7m a year. A large part of this has been given up for the benefit of foreign treasuries without having any effect on the visiting expert or his Australian employer.
For all of these reasons it was decided to withdraw these income tax concessions, and introduce in their place a system of direct grants to Australian enterprises employing visiting experts. Details of this scheme, which will be administered by the Department of Secondary Industry, are being developed now. It has been concluded that, with the withdrawal of the concessions for visiting industrial experts, the exemption for experts who come to assist government should also cease to apply. This Bill accordingly withdraws the present income tax concessions, subject to transitional provisions in relation to visits that commence on or before 30th June 1973 and in relation to visits that commence after that date in pursuance of a contract entered into by the date of the Government's announcement. Legislation to give effect to the grants scheme will be introduced at a later date.
The remaining proposals in the Bill are a result of the introduction by the Commonwealth of schemes to assist with the education of children living in isolated areas and for the payment of a domiciliary nursing care benefit to persons taking care of invalid aged relations in their homes. The amendments proposed in relation to the isolated children's education scheme will ensure that allowances paid under the scheme will receive the same exemption from income tax as payments under the Commonwealth secondary and technical scholarship schemes. Like the scholarship schemes, however, amounts payable for the maintenance or accommodation of isolated children are to be taken into account for the purposes of the concessional deductions for maintenance of dependants, while allowances paid in respect of education costs are to be taken into account in calculating the concessional deduction for a child's education expenses.
Domiciliary nursing care benefit payments are also to be exempt from income tax. It is also proposed that the receipt of these benefits will not disturb the level of any concessional deductions otherwise allowable for the maintenance of a dependant or the payment of medical expenses of a person provided for by the scheme. Detailed explanations of technical aspects of the Bill are contained in a memorandum being circulated to honourable members.
This Bill and the Income Tax Assessment Bill I introduced earlier in the sittings contain important measures directed against tax avoidance. In the Budget sittings I will be introducing legislation to prevent tax haven resort to Norfolk Island and other territories under Australian control. It has not proved practicable to have this legislation drafted for the current sittings, but it will take the form outlined in the statement made by my predecessor on 19th July 1972. It will be operative as from then. As long as the tax laws can be exploited or circumvented by a relatively small number of persons, there can be little fairness in a situation in which the resultant loss of revenue has to be made up by the tax-paying public. The Government is determined to curtail tax avoidance and will move as quickly as possible to deal with fresh schemes as they are encountered. I commend this Bill to the House.
Debate (on motion by Mr Peacock) adjourned.