Second Reading Speechby The Treasurer, The Hon. John Howard, M.P.
In an answer I gave in this House on 27 September, and in a more detailed statement I made later that day, I indicated that the Government has decided to put beyond doubt that employers are entitled to deductions for the cost of their employees' long service and other leave only at the time when payment for the leave is made. This Bill will give effect to that decision.
The need for the amendment arises from a decision of the Supreme Court of Victoria in the case of Nilsen Development Laboratories Pty Ltd v. The Federal Commissioner of Taxation. In its decision, the court held that an employer is entitled to a deduction for the cost of an employee's leave in the year in which the employee becomes entitled to the leave or in any year in which there is an accretion to a previously-accrued leave liability, notwithstanding that no payment is made to the employee.
Appeals against the Supreme Court decision have been lodged by the taxpayer concerned and the Commissioner of Taxation and, in the normal course of events, the Government would prefer to await the decision of an appellate court on such an important matter before considering an amendment of the law.
However there are several important reasons why the Government has decided that on this occasion, it should not wait for the appeal processes to be concluded.
Firstly, the decision has significant revenue implications for the Government. If deductions for leave were to be allowed against 1977-78 income on the basis of the Supreme Court decision, the cost to revenue in the current year would be of the order of $600M. A revenue loss of such proportions in 1978-79 could not be contemplated.
Secondly, the decision creates considerable uncertainty among taxpayers because of the disturbance of a practice that has long been regarded as settled and has been accepted by the very great majority of taxpayers over past years. This uncertainty would continue until the appeals have been finally decided. Taxpayers would be aware that there must be a possibility that if one part of the original decision were upset on appeal - the part which indicates that deductions may be taken when payment is made for previously-accrued leave - they could lose very substantial deductions in future years.
The Bill specifies that the amendment allowing deductions for leave liabilities when payment is made is to apply in respect of assessments for the 1977-78 income year and subsequent years, other than assessments made before 28 September 1978. This will protect the revenue from the loss of up to $600M. In 1978-79. But it will also ensure that employers do not lose deductions when employees are paid for leave which had previously accrued and for which deductions had not been allowed.
The amendment will not apply in respect of assessments yet to be raised in respect of earlier years and it will not apply to assessments already raised in respect of the 1977-78 and prior years where the taxpayer's rights are protected by way of objection or appeal to a court.
The finalisation of these latter cases will have to await the decision of an appellate court, and it could well be that further amendments will be required when that decision is given.
Although the nature of these further amendments will depend on the final decision of the court, it is envisaged that amendments may be necessary either to ensure that employers do not suffer any loss of deductions or to ensure that employers do not gain any double benefit, for example, by having had a deduction when payment is made and by also being found entitled to deductions at the time of accrual.
The Government realizes that by providing for the amendment to apply to the 1977-78 income year, it will be seen as having retrospective effect. For this reason, the Government was very reluctant to take this course. At the same time, it must be stressed that the amendment will not result in the loss of any deductions for taxpayers. It is a question only of the timing of deductions.
There are also the other aspects that I have mentioned - the fact that the amendment will do no more than restore previously long-accepted practice, the fact that it will guard against the possible loss of deductions and will resolve the uncertainty arising from the decision, and finally the significant revenue implications for 1978-79.
Details of the amendment are contained in the explanatory memorandum that is being circulated.
I commend the Bill to the House.