House of Representatives

Income Tax Assessment Bill (No. 5) 1973

Income Tax Assessment Act (No. 5)1973

Second Reading Speech

Mr CREAN (Melbourne Ports-Treasurer)(2.15)- I move:

That the Bill be now read a second time.

This Bill will give effect to taxation proposals announced in the Budget Speech and to several other such proposals. The Bill will withdraw some taxation concessions that have been allowed to primary producers, manufacturers and mining companies and their shareholders. These proposals result from a careful review by the Government, aided by the Coombs Report, of a number of revenue concessions which can fairly be categorised as disguised expenditures and which result in additions to the burdens on other taxpayers. Since the proposals were announced the Government has received, and carefully considered, representations on most of them. Mainly for the reasons stated in the Budget Speech it has, subject to one or two modifications, decided to hold to them. They are all in the interests of rational tax reform and of the ordinary taxpayer.

As to mining, the Bill will withdraw for 1973-74 and future years the exemption for gold mining income and the partial exemption -20 per cent-of certain other mining profits. Income from the sale of mining rights, other than any derived under pre-Budget contracts, is no longer to be exempt. Dividends paid out of the kinds of profits I have mentioned, if declared after Budget day, are also to become taxable as are dividends paid out of income from profits from the sale of oil or natural gas or their products. The Budget Speech indicated also that we have decided to end a number of concessions subsidising capital expenditures or encouraging investment which would otherwise be uneconomic. These include the investment allowances which provide a special income tax deduction of 20 per cent of capital expenditure on specified new manufacturing and primary production plant. The special deduction is not to be available in respect of expenditure after Budget Day unless it is incurred under a pre-existing contract and, in the case of manufacturing plant, not later than 30 June 1975.

Other proposed measures in this class will terminate provisions which allow some capital expenditures by primary producers to be wholly deductible in the year in which they are incurred and others to be subject to accelerated depreciation over 5 years. It is proposed that the concessions will not apply to capital expenditures incurred after Budget day unless under a contract entered into before then. In future, deductions will be allowed as ordinary depreciation on plant and structures and over 10 years for other items. I stress that these measures affect only capital expenditures. They do not change the basis of deduction of running expenses of established farming or grazing businesses. It is also proposed to eliminate an anomaly in the basis of valuation of trading stock manufactured from grapes which, of course, includes wine and brandy. This stock has in the past been valued by some manufacturers of these commodities on a remarkably generous basis differing considerably from what is required of other manufacturers. The change to valuation in accordance with the general law is to be phased in over a period of 5 years beginning with the end of 1973-74 valuations. I am sure that the honourable member for Angas (Mr Giles) will be slightly mollified by that. This is a modification of the 3-year phasing in period mentioned in the Budget Speech and has been made in consequence of representations received from the industry. I had discussions with representatives of the industry as late as Tuesday of this week and indicated that they should have further discussions about some of the technicalities that are involved. I also indicated that if they are able to demonstrate certain things it will be possible, since the tax year concerned has a long way to run, if necessary to make adjustments later should their case be established. Having considered these representations with the utmost care, we have decided that, with the modification mentioned, it is right to hold to the principle involved. The Bill also deals with the Budget proposals on private rates and land tax and gifts to war memorial funds. As to the first matter, it is proposed that, for income year 1973-74 and subsequent years, an overall ceiling of $300 be placed on the deduction allowable and that it be limited to the Taxpayer's home. As to the second matter, it is proposed to remove deductions for gifts to the funds, except where the fund was established before Budget day. Gifts to war memorial funds will not in any event be allowable if made after 30 June 1974.

I turn now to the amendments affecting life assurance companies. A life assurance company is allowed a deduction from its assessable income of a proportion of what are called 'calculated liabilities'. In effect, the deduction frees from tax a basic 3 per cent return on policy holders' funds, and this ultimately goes to policy holders in a non-taxable form. If a company's holdings of public securities rise above, or fall below, the 30-20 investment ratio, the deduction is varied upwards or downwards. One amendment will reduce the deduction based on calculated liabilities by one-third, so that the basic deduction will become 2 per cent. Corresponding reductions will apply if the deduction allowable is higher or lower than the basic allowance. The Bill also provides for a reduction in the amount of dividend income of a life assurance company on which a rebate of tax is allowed. Part of the deduction based on calculated liabilities is attributable to the value of shares which produce rebatable dividends included in a company's assessable income. Similarly, part of the deduction allowed for general management expenses is attributable to the amount of rebatable dividends so included. However, following interpretations by the courts, these deductions, while they reduce taxable income, cannot reduce rebatable dividends. This quite unjustifiably inflates the amount of the rebate.

Broadly stated, the Bill provides for a part of each deduction to be set off against dividends. These parts are the amounts by which the deductions are increased through the inclusion of dividends in assessable income and the inclusion of the value of shares on which dividends are paid in the value of assets producing assessable income. A further proposal announced in the Budget Speech relates to the taxation of casual profits from the sale of property within the year following its acquisition. The Bill contains provisions to treat such profits on property purchased after 21 August 1973 as assessable income. These short-term profits are essentially in the nature of income and ought to be subject to tax as such. The provisions give expression to this concept. An exemption is proposed to meet the case where a person finds it necessary to sell a home quickly because of a change in place of business or employment. An associated provision will limit the application of measures enacted last year which freed individuals from any liability to tax on profits on stock exchange transactions if the shares had been held for 18 months or more. This will in future apply only to shares acquired no later than 21 August 1973.

This Bill and the Income Tax Bill 1973 shortly to be introduced will give effect to the taxation side of the package of pension and taxation measures associated with the phased abolition of the means test for people aged 65 years or more. Partial effect has been given to the pension side of the new arrangements, and there will be further pension increases enacted in the autumn. The Bill will withdraw the tax exemption for social service and repatriation pensions, but not war pensions, paid to men aged 65 years or more and women aged 60 or more. Pensions paid to women less than 60 years of age by reason of their being wives of men aged 65 years or more will also become taxable. I think it is generally acknowledged that free-of-means-test pensions must be exposed to tax. Otherwise, aged people in the higher income groups would be put in a privileged position as compared with other aged people who have little income and with young people bringing up families. Means-tested age pensions can be paid to people with substantial amounts of other income, for example, superannuitants. For similar reasons to those I have mentioned, and to avoid larger transitional problems later, taxation must extend to age pensions that remain means-tested.

Details of the categories of taxable and exempt pensions are given in the explanatory memorandum circulated in my name. Some elements of taxable pensions, such as allowances for the payment of rent or for the support of children, will remain exempt and, in the latter case, concessional deductions will also be allowed in assessments for the maintenance of children. Although some pensions are to become assessable income, another part of the package-the special rebate of tax for aged persons proposed by the Income Tax Bill 1973 -will have the effect that appreciably more than 80 per cent of aged pensioners will not have to pay any tax or lodge tax returns. The rebate allowance will be $156 for persons with taxable incomes of up to $3,224, reducing thereafter by 25c for each dollar by which taxable income exceeds $3,224. Aged people whose taxable income-that is, after all allowable deductions-does not exceed $1,921 will not have to pay tax. Those whose taxable incomes are between $1,921 and $3,847 will pay less than younger people with the same taxable income.

The existing age allowance is being abolished. It was introduced in 1951-52 for the specific purpose of removing an anomaly which existed then. Aged persons in receipt of the full pension and the maximum permissible income allowed by the means test at that time paid no tax, while those with larger amounts of other income suffered a $1 loss of pension for each extra $1 of other income under the non-tapered means test then applying, and also paid tax on the extra income to prevent the latter group from becoming absolutely worse off than the full pensioner with maximum permissible income, it was necessay for all aged persons to be exempted from income tax if their total income did not exceed the sum of the full pension and the maximum permissible income. Above that point it was necessary for tax to be shaded in to normal tax rates and, while aged persons with incomes within this shading-in range paid less than tax at normal rates, the shading-in provisions were designed purely for the purpose of easing the transition from complete exemption to normal tax rates, and not for the purpose of placing aged persons in a more favourable tax position than people below pensionable age on the same or lower incomes. With the introduction of the tapered means test in 1969, the situation which the age allowance was designed to alleviate ceased to exist, though this does not seem to have been acknowledged until the 1971-72 Budget when, apparently in recognition of the stark anomalies it generated, the allowance was for the first time left unchanged at a time when pensions were being increased. The proposed phasing out of the means test would make the age allowance even more anomalous, and the benefits which it now provides to some aged persons with quite large incomes even more inequitable by comparison with the position of young married couples setting up home and raising families on the same or smaller incomes.

As I have said, the package of measures I have referred to will leave more than 80 per cent of aged pensioners free of tax. Most of the minority with higher incomes who will pay tax will still pay less than younger people with the same incomes. No aged person will pay more tax than a younger person having the same income. The great majority will pay no tax or less tax. Added to this, pensions will be paid at higher rates and the means test will be phased out. Altogether, what the Government proposes must, when judged fairly, be acknowledged as more equitable and generous than the largely ad hoc and unco-ordinated measures of the past.

A further Budget measure in the Bill will require a company to pay-not earlier than 31 December 1973-as an instalment of the tax to be assessed on its 1972-73 income an amount equal generally to one-quarter of its 1971-72 tax or, at the company's option, of its estimated 1972-73 tax. This is the first step towards a system of quarterly payments of company tax to be phased in over 3 years. An important purpose of the scheme is to elleviate problems of economic management associated with the high level of liquidity in the Banking system in the first half of the financial year and the run down, largely due to payment of company tax, in the last quarter of the financial year. Quarterly payments by companies will not mean that they will pay tax on a pay as you earn basis. Company tax for a financial year will still be calculated on taxable income of the preceding year. The quarterly payments will, however, mean that companies will make payments progressively throughout the later year. To some extent, therefore, the system will reduce the existing inequity between companies and individuals who are on the PAYE basis. As a sanction against over-retention of profits taxed at a rate lower than personal progressive rates, a private company that does not distribute a sufficient proportion of its after-tax income is liable to pay tax at the rate of 50 per cent on the amount by which dividends paid fall short of a sufficient distribution. In determining whether a sufficient distribution is made, the company may deduct a retention allowance of 50 per cent of the first $10,000 of after-tax income other than property income 45 per cent of the next $10,000 and 40 per cent of the balance. It may also deduct 10 per cent of after-tax property income other than dividends from other private companies. It is proposed to increase the retention allowance on income other than property income to a flat rate of 50 per cent. No change is proposed for property income.

One measure that does not arise from Budget decisions is designed to ensure that companies that are essentially public in character, but fall in some insignificant way to qualify as public companies under specific tests in the law, will not be taxed as private companies by reason of a restriction on the circumstances in which the Commissioner of Taxation may exercise a relevant discretionary power. This amendment is to apply for the 1972-73 and subsequent income years and was foreshadowed in a statement I made on 28 June 1973 following the decision of the full High Court in the Stocks and Holdings (Constructions) Pty Ltd case. The effect of the Court's ruling was that the Commissioner's discretionary power to treat a company as public for income tax purposes cannot be invoked unless the company would, as a consequence, be relieved from a liability for additional tax on undistributed income.

The proposed amendment will restore to the discretionary provision the scope it was intended by the legislature to have and will avoid anomalous and inappropriate consequences that would occur if the limitation imposed by the Court's decision were allowed to remain. In forming an opinion whether it would be reasonable to treat a company as public, the Commisioner will be able, as had been his practice until the adverse court decision, to reach his conclusion on the basis of factors relevant to the true character of a company.

The Bill will also extend the withholding tax provisions of the income tax law to dividends and interest flowing from Australia to Papua New Guinea which have, up to now, been taxed on an assessment basis. The rtae of withholding tax on interest will be 10 per cent. This is the withholding rate uniformly applied to interest paid to non-residents. The rate of dividends paid to residents of Papua New Guinea will be 15 per cent, the same rate as is imposed by Papua New Guinea on dividends flowing to Australia. The withholding tax will be payable on dividends and interest paid to residents of Papua New Guinea, including companies, after today. This income will no longer be included in assessable income and the rebate on inter-company dividends will no longer be available to Papua New Guinea companies. Papua New Guinea has withdrawn a corresponding rebate from Australian companies.

Provisions in the Income Tax Assessment Bill (No. 4) 1973, which was introduced recently, are designed to frustrate tax avoidance through the payment of dividends by Australian private companies to so-called 'Repository' companies owned by Australians but set up in Papua New Guinea. Further investigations have shown that 'Repository' companies in other countries, and especially in tax havens, would be used for the purpose of avoiding Australian tax if the new rules were applied only to Papua New Guinea. It is proposed, therefore, to extend the relevant provisions of the Income Tax Assessment Bill (No. 4) to dividends paid to private companies in any country.

Another non-budgetary measure contained in the Bill relates to the income tax rebate on expenditure to develop export markets. In accordance with my announcement of 10 September 1973, it is proposed that the rebate no longer be available for expenditure incurred after that date in the development of export markets for meat, unless incurred in pursuance of a pre-existing contract. With the present buoyant demand for meat there is, of course, no reason why the Australian taxpayer should continue to subsidise its export.

The last proposal concerns the application of the pay as you earn system to weekly payments of workers compensation made to an employee who is away from work because of an injury or accident. Those payments form part of his income and are subject to tax but, unlike ordinary payments of salary or wages, are not subject to deduction of tax instalments unless the insurer paying the compensation agrees to an employee's request to make the deductions. This has produced situations in the past where employees have been faced with large income tax bills after lengthy periods on compensation. The situation has given rise to a number of cases of hardship and both employee and employer bodies have asked that tax instalments be made deductible from workers compensation payments in the same way as they are from salary and wages. The Bill contains provisions to give effect to these requests. Weekly payments of workers compensation made after the Bill becomes law will be treated in the same way as salary and wages for the purposes of tax instalment deductions. Group certificates showing the amounts deducted would then be issued to the employees concerned for lodgment with their income tax returns along with the group certificates received from employers. The Bill will give effect to a considerable number of proposals. Its provisions are explained in detail in a memorandum being circulated to honourable members and I do not need to say more about the provisions at this stage. I commend the Bill to the House.

Debate (on motion by Mr Giles) adjourned.