House of Representatives

Income Tax Assessment Amendment Bill 1977

Income Tax Assessment Amendment Act 1977

Second Reading Speech

by the Treasurer, the Rt. Hon. Phillip Lynch, M.P.

This Bill will amend the income tax law in several important respects and, in so doing, will give effect to the first stage of company tax indexation.

The major proposal contained in the Bill is the introduction of a special deduction which in effect adjusts the value at which the cost of trading stocks is brought to account for income tax purposes.

As I foreshadowed in my Budget speech, and explained at greater length in my statement of 9 December 1976, the Government has decided that the impact of inflation on trading stock financing should be taken into account in assessing the income tax liabilities of business enterprises.

The new deduction proposed in the Bill will provide very significant income tax relief for firms and companies carrying trading stocks for business purposes.

The estimated cost to revenue next financial year of the new deduction is around $360 million, equivalent to an across-the-board rate reduction for all companies of 5 1/2 percentage points.

It is important to understand that the deduction will have a differential impact on businesses according to the degree to which they are adversely affected by inflation and this is, of course, the principal reason why the scheme contained in the Bill is far more equitable than an across-the-board rate reduction.

Under existing income tax rules, businesses are paying taxes out of what amounts to no more than paper profits and this has limited, and in many cases depressed, the general level of business activity within the economy.

To put it another way, existing legislation has led to a substantial erosion of the capital base of the free enterprise sector.

The changes being made by the Government - changes that our predecessors in office refused to make - will give to the business sector, for the first time, a significant measure of protection against the effects of inflation.

The provisions contained in the Bill are in line with the comprehensive description given in my statement of 9 December 1976 and are explained in detail in a memorandum I have arranged to be circulated for the information of Honourable Members.

In this introductory speech I will, therefore, refer only to the principal features of the scheme.

For a continuing business, a special deduction related to the taxation value of specified trading stocks on hand at the beginning of the year of income is to be allowed, commencing with assessments based on income derived during the 1976-77 income year.

The deduction in assessments will be ascertained by applying to the value of the trading stock - not being a value higher than the cost of the stock - one-half of the percentage increase in the goods component of the Consumer Price Index measured from the June quarter of the year preceding the year of income to the June quarter of the year of income.

For 1976-77, therefore, the relevant increase will be that occurring from the June quarter of 1976 to the June quarter of 1977.

Most classes of trading stock, including livestock, required to be brought to account under the general trading stock provisions of the income tax law will be eligible for the deduction.

The deduction will not, however, be available in respect of land, buildings, construction work-in-progress, consumable stores, spare parts, shares, debentures, public securities or other choses in action or animals for use in sporting or recreational activities or for domestic purposes.

Special arrangements are to apply where a new business is commenced during an income year or where a business changes hands during an income year.

A proportionate deduction will be allowable for the part of the first year in which a new business is carried on.

As there will be no trading stock on hand at the commencement of this first year, the deduction for the year is to be calculated in respect of two-thirds of the value of stock on hand at the end of the year.

Where a business changes hands during a year of income, the deduction allowable will be apportioned between the vendor and the purchaser according to the period of the year in which each carried on the business.

In such a case, the deduction will generally be measured by reference to the value of the trading stock at the beginning of the year in which the change of ownership occurs or the value at the date of sale, whichever is the less.

Where, as in the case of a reorganisation of a company group, a business is transferred from one company to an associated company, the latter company will, if both companies elect, be entitled to the deduction otherwise allowable to the vendor company in addition to any entitlement of its own.

As a general rule, a deduction will not be available for an income year in which a business ceases operations.

However, where a business is terminated on the death or bankruptcy of a proprietor, an appropriate part year deduction will be allowable.

To prevent the use of the deduction to obtain unwarranted tax advantages, safeguarding provisions will apply to reduce deductions otherwise available where there is a permanent reduction in the scale of operations of a business or a business is holding an unnecessarily high level of stocks.

Where a permanent reduction in the level of business operations occurs, the deduction will be based on the closing instead of the opening stock.

Where the Commissioner of Taxation considers that, with a view to maximising the stock valuation deduction, a business is holding an unnecessarily high level of stocks, he will be empowered, subject to the usual objections and appeals provisions, to base the deduction on a lower value of trading stock.

As I foreshadowed in my statement of 9 December 1976, the Bill also contains other provisions to ensure that the new stock adjustment deduction is not deliberately exploited for tax avoidance purposes.

To this end, special provisions are being enacted to combat arrangements between parties not acting at arm's length for the acquisition by one from the other of trading stocks at inflated prices.

Contrived arrangements of this kind can, of course, result in overstatement of deductions properly allowable for trading stock purchases as well as of the new deductions in respect of opening stock values.

For this reason, the safeguarding provisions will have effect both for purposes of the new deduction and for the general purposes of the income tax law.

The provisions will enable an arm's length price to be ascribed to the trading stock for income tax purposes in the assessments of both the purchaser and the vendor.

An associated measure, directed to the same end, will qualify the circumstances in which trading stock may be transferred at cost price instead of market price where, as in the case of partnership formations, there is a partial change in the ownership of stock.

Before going on to other aspects of the Bill, I wish to refer to representations that have been made to the Government since the release of my statement of 9 December last on the new deduction in respect of trading stock.

Without exception, these representations have been on matters that were thoroughly canvassed by the Government before my statement was made.

The Government has carefully re-examined its proposals in the light of the representations and is convinced that there should be no substantial departure from the lines of action set out in the 1976-77 Budget Speech and my December statement.

I turn now to other provisions of the Bill that cover several proposals, most of which have already been announced.

The new C.R.A.F.T. scheme - the Commonwealth Rebate for Apprentice Full-Time Training - provides rebates for employers in respect of wage costs incurred in respect of apprentices who undertake full time off-the-job training.

The Bill provides that these rebates are to be exempt from income tax.

The Bill provides also that the payment of special allowances to apprentices under the scheme are to be subject to P.A.Y.E. deductions in the same way as similar allowances in the nature of income.

Another matter dealt with in the Bill is the system for the collection of company tax by instalments.

The temporary suspension of the system from early in 1976, a time when the corporate sector faced serious liquidity and cash flow problems, relieved companies from obligations to pay the third quarterly instalment in 1975-76 and all three instalments that otherwise would have been payable in 1976-77.

The improvement in company profitability, and business conditions generally, has substantially diminished the need for this kind of interim assistance.

In January, I announced a number of fiscal policy decisions, including a decision that, in accordance with the Government's intention when company instalments were temporarily suspended, the system of collection by instalments would come back into operation in 1977-78.

Re-introduction of the instalment system will contribute towards evening out swings in liquidity in the economy within any financial year and thereby add to the effectiveness of monetary management.

An associated Bill - the Income Tax (Companies and Superannuation Funds) Amendment Bill 1977 - will provide authority for the resumption of instalment collections in that year on the basis laid down in the Income Tax Assessment Act.

In its present form, the Assessment Act authorises the Commissioner of Taxation to call upon a company to pay three instalments of tax plus a balancing payment in 1977-78 and each subsequent year in respect of tax on its income of the preceding year.

Amendments proposed by this Bill will reduce to two the number of instalments that a company may be called upon to pay in 1977-78 and set the earliest due dates for payment of the instalments as 15 November 1977 and 15 February 1978 respectively.

The amount of the instalments will be determined on the same basis that applied before the temporary suspension of the scheme, and any company obliged to pay one or both of them will not be required to pay the balance of tax assessed on 1976-77 income before 30 April, 1978.

The Bill also proposes to make an amendment to the averaging system applying to primary producers.

At present, taxable income in excess of $16,000 is taxed at general rates and is also taken in as part of the average income calculations for the year in which it is so taxed and the next 4 years.

Commencing with assessments of tax based on 1976-77 incomes, it is proposed to exclude from the averaging calculations any amount by which the taxable income of any year within the averaging period exceeds $16,000.

Another provision of the Bill will amend the income tax law to ensure that all pensions paid under the superannuation arrangements for members of the Defence Force are liable to tax.

The need for the amendment - which was announced on 15 April 1977 - arises from a recent decision by the High Court involving an invalidity pension paid under the Defence Forces Retirement Benefits Scheme to a former officer of the Navy who was prematurely retired as the result of an accident sustained in the course of duty.

The High Court held that the pension concerned fell within the scope of provisions of the law which exempt from tax pensions similar in nature to exempt repatriation disability pensions.

In a setting where tax is levied on pensions paid under other occupational superannuation schemes, the Government thinks it only equitable that all DFRB and DFRDB pensions be taxed and the Bill contains provisions to this effect.

An amendment is also proposed to the gift provisions of the income tax law to provide for the deductibility of gifts to the Queen Elizabeth II Silver Jubilee Trust for Young Australians.

Finally a technical amendment is being made in connexion with the rights of a tax agent to apply for a review of cancellation of registration as a tax agent.

The amendment will reflect the changed review arrangements that have applied since 1 July 1976 under the Administrative Appeals Tribunal Act.

Detailed explanations of the provisions of this and the related Bill are given in the explanatory memorandum of which I spoke earlier.

I commend the Bill to the House.