House of Representatives

Income Tax Assessment Amendment Bill 1976

Income Tax Assessment Amendment Act 1976

Second Reading Speech

by the Treasurer, the Honourable Phillip Lynch M.P.

This Bill will give effect to a number of important taxation proposals that have been announced by the Government.

Provisions relating to the new investment allowance are the outstanding feature of the Bill, just as the allowance itself is an outstanding feature of the Government's program for getting the economy on the move again.

I have adverted, on previous occasions, to the serious downturn in investment which took place under the policies of the former Government.

Let me simply remind the House that, from 1972-73 to 1974-75 the share of private non-dwelling investment in total expenditure on gross domestic product was 10.7 per cent, the lowest recorded share for at least 20 years.

The new investment allowance is being introduced as a decisive and far-reaching incentive to industry to invest and, at the same time, to create jobs; in other words, to repair the damage which has occurred during the past 3 years.

On the other side of the ledger, by reducing government expenditures and lightening the burden of personal taxation, we shall be putting more money into the private citizen's pocket to spend as he wishes, so that investment and private consumption can move forward together.

In my statement to the House on 4 March I emphasised the importance which the Government attaches to an early upturn to the level of private capital investment.

I also stressed the nexus which exists between high rates of inflation on the one hand and low levels of investment on the other.

The strong action taken by the Government to curb inflation will, of itself, significantly contribute to a recovery in investment spending.

But it is clear that, in the absence of taxation incentives, any such recovery in investment would be a drawn out process.

This, in turn, would mean that any recovery in general activity would result in the relatively early appearance of supply shortages and in a consequent return of demand inflation.

Whatever is said by our opponents in this House it is the Government's objective to bring forward a recovery in investment as quickly as possible.

It is precisely for this reason that the tax incentives contained in this Bill are unprecedented in their coverage and extent.

But the Government is also concerned to bring about a greater degree of consumer spending in order to lift company cash flows and, consequently, business ability to finance investment.

The reining in of inflation will lift consumer confidence and unlock much of the build-up in precautionary savings which has occurred in recent years.

There are now signs that both business and consumer confidence is strengthening.

The evidence is that investment, particularly in manufacturing industry, has begun to move ahead and demand, as reflected in retail sales and vehicle registrations, is turning up.

There are three other general comments I want to make about the new investment allowance.

First, it will be available for a period that is both lengthy and certain - up to June 1983, initially at 40 per cent and subsequently at 20 per cent.

Secondly, unlike the earlier investment allowances it will apply over a wide range of industry and will not be confined just to manufacturing and primary production.

Thirdly, again unlike the old allowances, the new allowance will be available for plant acquired under leasing arrangements as well as for plant that is bought outright or under a hire purchase agreement.

It has been the Government's wish and expectation all along - with the position of smaller businesses particularly in mind - that the benefit of the allowance provided in respect of leased plant be passed by lessors through to the lessees who actually operate the plant in productive use.

The special provisions contained in the Bill to apply to leased plant have been drawn up with this end in mind.

As I have announced previously, the new allowance will apply to capital expenditure on acquiring new, but not second-hand, plant or equipment that is ordered on or after 1 January 1976.

Tax deductions available by way of double or normal depreciation on eligible plant will, of course, be additional to the investment allowance.

Plant constructed on a taxpayer's premises will attract the allowance if construction by the taxpayer commenced on or after 1 January 1976 or if a contract for construction of the plant by an independent contractor was entered into on or after that date.

During the first phase of the allowance - from 1 January 1976 to 30 June 1978 - the deduction will be 40 per cent of eligible capital expenditure. A 20 per cent deduction will apply for the second phase running from 1 July 1978 until 30 June 1983.

A 12 month's period of grace for installation of plant ordered during either phase will be available so that unforeseen delays will not necessarily deprive taxpayers of an expected benefit.

To be eligible for the allowance, plant and equipment must qualify for depreciation for tax purposes and be used in Australia solely for the purpose of producing assessable income.

So that the allowance will be directed towards investment that will have the greatest stimulatory effect on the economy, individual items of plant costing less than $500 will not be eligible for it.

The allowance will apply in full to the entire cost of individual items of eligible plant that cost $976 or more and will be shaded-in for items that cost between $500 and $976.

The scope of the allowance has been adequately covered in earlier statements I have made and is set out in detail in an explanatory memorandum that is being circulated for the information of Honourable Members.

I do not, therefore, propose to go into further detail about it in this introductory speech.

The introduction of the new investment allowance makes it necessary to withdraw the double depreciation scheme which the previous Government brought in; the Bill accordingly will limit double depreciation to eligible plant installed no later than 30 June 1976.

Plant or equipment that qualifies under the double depreciation scheme and that is first used, or installed ready for use, by 30 June 1976 will continue to be depreciable at double rates until its cost is fully written-off for income tax purposes.

It is widely accepted that the investment allowance is a great improvement on the scheme which is being terminated.

The double depreciation scheme is too drawn out in its effects.

Its full benefits take time to work out and its impact on business cash flows lacks the immediacy and fullness that the investment allowance will confer.

Beyond the obvious deficiencies of doubled depreciation, I should point out that the scheme was never a permanent feature of the former Government's policy.

It was never brought before this House as anything other than a temporary measure.

In consequence, it served largely to compound the uncertainties created by our predecessors' stop-go economic policies.

Right up to the change of Government no assurance was provided that doubled depreciation would extend beyond the period of the present financial year.

By contrast, the investment incentives provided for by this Bill are long term and will act as a firm basis for investment planning by business.

Another matter dealt with in the Bill also is designed to assist business in the present difficult financial circumstances.

This is the decision the Government has made to defer, until the date for payment of final assessments, the instalment of company tax that would have been due for payment in February 1976.

The Bill makes provision to this effect and it provides also that instalments of company tax are not to be payable during the 1976-77 financial year in respect of 1975-76 income.

Accordingly, the whole of the tax payable by a company on its 1975-76 income will become due in one amount towards the end of the 1976-77 financial year.

I come now to amendments proposed in respect of the conditions which must be satisfied for interest payable on convertible notes to be an allowable tax deduction.

Convertible notes can often be a useful instrument to an enterprise that wishes to raise funds for expansion and development, particularly an enterprise that still has to establish its capacity to pay an attractive rate of dividends or one that is not well known to potential equity investors.

But it is sometimes forgotten that a convertible note issue involves not only the issuing enterprise and the noteholders but also, if the interest on the notes is deductible, the general revenue.

The interests of the general revenue, in particular, can often be overlooked.

This was the case in the period up to 1960 when notes were issued that were only formally distinguishable from shares.

It was customary then for noteholders to have no real choice about converting their notes into shares.

Automatic conversion was virtually the rule and this meant that the revenue bore the cost of deductions for interest payments that were, in all but name, dividends on deferred share issues.

The Government of the day reacted to this situation with measures which virtually closed off the issue of convertible notes.

With the passage of time, however, conditions were developed, in consultation with financiers, that were seen to strike a reasonable balance amongst the various interests involved.

Since 1970, interest on convertible notes has been allowable - provided that these conditions are satisfied.

With experience since 1970 as a guide, the Government believes that further relaxations can appropriately be made.

We will retain safeguards against a return to pre-1960 tax avoidance practices but our changes will be of advantage to enterprises that wish to expand or develop and prefer the flexibility of convertible notes to either pure fixed interest borrowings or immediate share issues.

There are four changes proposed, each of which will apply to convertible note issues connected with loans made on or after 1 January 1976.

A minimum borrowing period - now of 7 years - will no longer be required.

Companies will be allowed much greater freedom in setting the times when noteholders may exercise an option to convert their loan into share capital.

Companies will not be as restricted as they have been in the past in varying the terms of conversion as the period of the loan progresses.

And, finally, it will be permissible for the rate of interest on locally raised convertible loans to vary in line with interest rates prevailing from time to time on relevant markets.

This is already the case with loans raised abroad.

The Bill also gives effect to the Government's recently announced intention to exclude certificates of deposit and other securities issued after 12 April 1976 by Government-owned banks from the range of securities that may be taken into account in ascertaining whether a superannuation fund or life assurance company has satisfied the "30/20" investment rule in relation to its assets.

The income tax benefits available to a superannuation fund or a life assurance company which maintains the "30/20" ratio in relation to its assets are discussed in detail in the explanatory memorandum I have circulated.

The purpose of the amendment is to ensure continued support from the life offices and the superannuation funds for loan raisings by Commonwealth, State and Semi-Government authorities and to remove the competitive advantage that the Government-owned banks would otherwise have over other banks in seeking funds for commercial purposes.

I propose shortly to introduce a separate Bill to make a parallel amendment to the superannuation legislation that was recently considered by this House.

This amendment will make similar changes in the provisions governing the investment of the superannuation fund for Commonwealth employees.

The Bill also provides for some major changes to the scheme, introduced by the previous Government, under which a tax deduction is allowed for home loan interest when certain tests are satisfied.

The Government considers that that scheme was far from soundly based.

For one thing, within the net income limits the deduction was available regardless of the proportion of a person's income which home loan repayments represented.

Thus someone who took out a loan years ago could still obtain tax relief even though home loan repayments had over time come to represent only a small fraction of the person's income.

The Government regards this as inefficient and wasteful and as not getting to the core problem - which is the deposit gap.

A would-be home buyer could get little comfort under the present scheme from the thought that he would be assisted with his interest payments on a home loan when he found it difficult or impossible to save enough to put down a deposit.

The Government's program of assistance to home buyers does get off on the right foot.

On the one side, there is to be a new and more generous home savings grants scheme to assist in bridging the deposit gap.

On the other side, consistent with our election undertakings to support the home loan interest tax deduction scheme, this scheme will be kept in being but in a way that we consider looks better to the realities of the situation.

The realities are that it is the move into the first purchased home that is the key step, and that the relative burden of servicing a loan is normally heaviest during the first few years of the loan.

Once in their first purchased home, taxpayers can normally be expected to be assisted in any move to second and subsequent homes - whether the move is made for employment or private reasons - through gains on the sale of the first home.

Again, as incomes rise the burden of servicing a loan can normally be expected to show a comparative reduction : the hump passed, the need for assistance out of general revenue diminishes.

That is why, under the amendments proposed, interest deductions will be allowable after 30 June 1976 only in respect of first homes and during the first five years of the loan to acquire that home.

Other aspects of the scheme are not being changed.

The last of the major proposals in the Bill relates to the valuation of trading stocks of winemakers.

When the special stock valuation provisions applicable to wine and brandy producers were repealed in 1973, the producers were faced with difficulties in paying off the tax of earlier years that had been deferred through the operation of the provisions.

The previous Government allowed a period of five years for paying off the deferred tax, but this is now seen to be insufficient time.

We gave careful thought to the producers' position in the months preceding the election and said that, on being returned to office, we would review the taxation arrangements that apply to wine and brandy stocks.

The provisions I shall shortly mention have been decided on after frequent and close consultation with industry representatives.

The tax deferred in the past is not to be forgiven.

We had made no commitment on that score and forgiveness would not have been the appropriate step.

But we propose that producers will have a more extended period to pay off the deferred tax.

This should ease their liquidity problems considerably in the coming months.

The industry will also benefit when stock adjustments along lines recommended by the Mathews Committee are determined for the Budget.

At that time, the basis of stock valuation to apply to the wine and brandy industry for future income tax purposes will be considered along with the basis to apply to other industries.

In introducing this legislation I take the opportunity of laying to rest a belief which has been evident in some public discussion that the general stock valuation provisions of the law that now apply to the wine and brandy industry, along with other industries, in some way lead to tax having to be paid in respect of unsold stock still maturing in producers' cellars.

This is just not the case.

If stock is valued at cost - and most producers adopt that basis - no tax is payable on the stock until it is sold because no profit arises on it for tax purposes until it is sold.

Other provisions of the Bill deal with some formal matters associated with changes in the names of departments and the like and I do not think I need to discuss these now.

The Bill is large and not uncomplicated but so are the subjects and situations with which it deals.

I have circulated an explanatory memorandum on it and it now remains only for me to commend the Bill to the House.