Second Reading Speechby the Treasurer, the Hon. John Howard, M.P.
This Bill, in terms both of its size and the range of matters it covers, may well be described as an omnibus measure to amend the Income Tax Law.
Three of the measures will give effect to policies foreshadowed in the Prime Minister's Policy Speech for the last election.
These are an immediate deduction for capital expenditure on the connection of a business property to mains electricity, a concessional deduction for the cost of insulating a taxpayer's first home and an immediate deduction for capital expenditure on storage facilities for petroleum fuel.
Also included are provisions to give effect to the decision, announced by me late last year, that tourist buses may qualify for the investment allowance with effect from 1 January 1976.
The Bill also contains further amendments to the gift provisions of the Income Tax Law, including some that will give effect to the 1980-81 budget decision to allow deductions for gifts to certain overseas aid organisations.
Last, but by no means least in importance, the Bill proposes amendments designed to provide a counter to various forms of tax avoidance.
Trust stripping, expenditure recoupment schemes and exploitation of trading stock transfer provisions and of the tax-exempt status of certain bodies are the avoidance areas covered.
Mr Speaker, extensive details of most of these changes have already been announced and, relying on that and on the detailed explanations contained in an explanatory memorandum that will be circulated to Honourable Members, I propose in this introductory speech to limit myself to the key points.
Cost of connection to mains electricity
In this respect the Government is aiming to provide assistance to persons who, particularly in remote areas of Australia, face the often heavy cost of obtaining the facility of a mains electricity supply.
Capital expenditure on connecting mains electricity, or upgrading an existing connection, to a property on which a business is carried on is to qualify for deduction in the year in which the expenditure is incurred.
Qualifying expenditure will be the capital costs incurred by an owner of the property, or by a lessee or sharefarmer, in bringing the mains electricity to the point on the property where the supply authority meters consumption.
The deduction will be available only where the connection or upgrading is, at least in part, to be used for business purposes in the production of assessable income.
In its present form the Bill would apply to connections or upgradings effected under contracts entered into on or after 1 October 1980.
In the light of representations to the effect that this would disadvantage people in rural areas who, after having contracted for supply, may have to wait a considerable period for the connection to be made, the Government has now decided that the concession should be available for connection and upgrading costs incurred on or after 1 October 1980, no matter when contracts were entered into.
I shall be proposing amendments to this effect when the Bill is in Committee.
I want to add that the Government is aware that some may see scope in the concession for the inflation of costs so as to benefit the utilities that supply electricity.
I give notice now that any action of this kind could very well place the continued availability of the deduction in serious jeopardy.
Home insulation costs
This concession will provide tax assistance to people who take steps that have an effect of reducing energy consumption.
It is proposed that an income tax deduction will be allowed for amounts paid by a resident taxpayer for insulating a first home.
Amounts paid by a taxpayer for thermal insulation materials, and for the cost of their installation in a dwelling, are to be an allowable deduction if the dwelling is the sole or principal residence of the taxpayer in Australia.
It is a further condition of the deduction that the taxpayer or, in the case of married couples, the taxpayer or his or her spouse, has not previously owned another dwelling in Australia that he or she used as a home.
The deduction will be available for insulating a dwelling purchased by the taxpayer on or after 1 October 1980, as well as a dwelling constructed by the taxpayer, where construction started on or after that date.
Amounts expended by eligible taxpayers for the insulation of extensions to their dwellings will qualify for the new deduction under corresponding conditions.
Fuel storage facilities
The third election policy initiative covered by the Bill relates to the capital cost of storage facilities for petroleum-based liquid or gaseous fuel.
The Bill will authorise a deduction, by way of a 100 per cent depreciation allowance, in the income year in which the facilities are first used or installed ready for use to produce assessable income.
The allowance will apply to plant in Australia used wholly and exclusively to store fuel held for use in a business as fuel or as trading stock for disposal.
Ancillary plant used wholly and exclusively to convey fuel in and out of storage, or to measure the amount of fuel stored, will qualify.
So too will the cost of installation of eligible plant.
Storage facilities for crude oil and other fuels being held for further processing will not qualify for the allowance nor will rail, road or shipping tankers, pipelines or containers for use in the transport of fuel.
Expenditure will qualify for the allowance if it is incurred under a contract entered into on or after 1 October 1980 or, if the expenditure is on facilities constructed by the taxpayer, if construction commenced after that date.
Facilities that a taxpayer acquired secondhand on or after 1 October 1980 will qualify if used by the taxpayer at a site other than where they were situated at that date.
Honourable members will recall that, late last year, legislation was enacted to give effect to the Government's decision to remove the specific exclusion from the income tax investment allowance of plant for use in connection with amusement or recreation.
When introducing that legislation, which applies from 1 October 1980, I announced the Government's further decision to permit tourist buses to qualify for the investment allowance as from 1 January 1976, the date of commencement of the allowance.
Measures to achieve that result are in this Bill.
By these measures, the exclusion that applied for the period between 1 January 1976 and 30 September 1980 of plant for use in connection with amusement or recreation will be treated as not having applied in relation to tourist buses.
Buses brought within the scope of the investment allowance by this amendment will, of course, remain subject to the general requirements of the investment allowance provisions. For example, the general exclusion from the allowance of cars and other light vehicles will mean that buses designed to carry fewer than nine passengers will continue to be excluded, as will buses of any size that are hired out on a "drive-yourself" basis.
Amendments under this head will extend the existing gift provisions of the Income Tax Law which confer deductions for gifts of the value of $2 or more to specified funds, authorities or institutions in Australia.
One extension will introduce a scheme to authorise deductions for gifts to certain public funds maintained for the relief of persons in developing countries.
That proposal, which has been most warmly received, was announced in the 1980-81 Budget Speech.
It was supplemented by a Ministerial Statement on 18 September 1980 which listed 22 organisations that are to qualify for the concession, with effect from that date. The proposed arrangements will accommodate the decisions announced in that statement and, as well, will make provision for further additions to the list of eligible organisations and funds.
Under the legislative scheme proposed in the Bill, gifts made to a public fund established by an organisation approved for purposes of the scheme by the Minister for Foreign Affairs may qualify for deduction.
It will be necessary that the treasurer be satisfied that a particular fund is for the relief of persons in a country that is certified by the Minister for Foreign Affairs to be a developing country.
A further requirement is that the Treasurer - by notice published in the Gazette - declare the fund to be an eligible fund for purposes of the scheme.
Generally, gifts to an eligible fund will be deductible from the date of the Gazette declaring its eligibility.
Transitional arrangements will apply so that gifts made to a fund maintained by one of the 22 organisations nominated in the ministerial statement may qualify for deduction when made after 18 September 1980.
Other amendments will mean that gifts to the I.D.E.C. African Relief Appeal will qualify for deduction when made after 30 June 1980. Further amendments will ensure that deductions are available for gifts to the I.D.E.C. Kampuchean Relief Appeal made after 30 June 1980 when the present authorisation of deductions was to have terminated.
The Bill will also authorise deductions for gifts to the Herbert Vere Evatt Memorial Foundation, made after 16 January 1981, and for gifts made after 23 December 1980 to a public fund that is established and maintained exclusively for the purpose of providing religious instruction in Government schools in Australia.
This latter amendment places on a general basis a right of deduction now contained in the law in respect of a limited range of bodies.
I turn now to remaining provisions of the Bill designed to deal with a variety of income tax avoidance practices.
With one qualification that I shall specify later, the amendments have all been foreshadowed in announcements I made last year on 5 March, 24 June and 4 August and on 30 January this year.
With the introduction of this Bill, all proposals for action against specific schemes of tax avoidance foreshadowed in announcements I have made will have been given legislative form.
I also expect that, before the house rises for the winter recess, new general anti-avoidance provisions will be brought before it for consideration.
Section 36A Schemes
The Bill proposes the amendments foreshadowed in my statement of 30 January 1981.
These are designed to provide a counter to tax avoidance schemes that set out to exploit the special provisions of section 36A of the income tax law that apply to changes in interests in trading stock, such as changes that occur on the formation of a partnership.
This exploitation takes place under arrangements whereby a person who has, for example, some cattle about to be sold or a crop ready to be harvested, enters into a partnership with a company controlled by the promoter of the scheme.
The cattle or the crop, as the case may be, is transferred to the partnership for an amount roughly equivalent to market value.
However, a special right of election available under section 36A is used so that the property is treated for tax purposes as having been transferred at the substantially lower tax value at which it would have been brought to account if the transfer had not taken place.
The net result is that the former owner realises an amount close to market value of the property, but is taxed only on the substantially lower value.
The amendments proposed will make an election under the section ineffective where the person who disposes of an interest in relevant property receives consideration in respect of the disposal that is substantially more than the amount that might reasonably have been expected if the property had been valued at the low tax value applicable as a result of the election.
The consequence of the ineffectiveness of an election in these circumstances will be that the person will be treated as having disposed of the property at its market value.
Transfers made in ordinary family or commercial dealing are specifically excluded from the scope of the amendments.
These amendments will apply generally to changes in ownership or interests occurring after 30 January 1981.
However, consistently with action taken previously by the Government to debar the carry-forward of "paper" losses resulting from avoidance schemes, the Bill will ban the carry-forward from one year to another of such tax losses resulting from earlier section 36A schemes, with first effect for the income year 1980-81.
Trust Stripping Schemes
Changes that I outlined on 5 March 1980 to deal with variants of the trust stripping arrangements against which remedial legislation was enacted early in 1979 are the next matter covered by the Bill.
These arrangements, which sought to free from tax altogether the trading profits and other income of trusts, commonly entailed a specially introduced nominal beneficiary being made presently entitled to income of the trust that was to be stripped.
By this means, the trustee was relieved of any tax liability in respect of the trust income.
The arrangements were at the same time designed so that not only did the special beneficiary escape tax, but the family from which the income was diverted received the benefit of it in a tax-free capital form.
The 1979 amendments are contained in section 100A of the income tax assessment act and operate to treat income to which a beneficiary is nominally made presently entitled under "reimbursement" arrangements of this type as income of the trust estate to which no beneficiary is presently entitled.
The trustee is thus liable to be taxed on the income at the maximum rate of personal income tax, which for 1980-81 is 60 per cent.
The variants of the trust stripping arrangements with which this Bill deals exploit the exclusion from the 1979 amendments of income of a trust estate to which a beneficiary becomes presently entitled in the capacity of a trustee of another trust estate.
That exclusion was intended to ensure that section 100A would apply only in relation to the last link in a chain of distributions through interposed trusts, thereby removing any possibility of double taxation on income as it passed through the chain.
The amendments now proposed will continue the scheme of applying section 100A to the last nominal beneficiary only, but in a way that airms to prevent the exploitation that has been being experienced.
For this purpose, the exclusion from section 100A of income to which a trustee-beneficiary becomes presently entitled is to be limited to so much of that income as is passed on by the trustee as income to which a beneficiary of that trust estate is in turn presently entitled.
Further amendments will deny deductions for losses or outgoings incurred under arrangements to which the section applies.
This will prevent the section being frustrated through such amounts being available for write-off against other income of the nominal beneficiaries.
The amendments will apply generally to trust income paid to, or applied for the benefit of, a beneficiary after 5 March 1980 and to losses or outgoings incurred after that date.
Expenditure Recoupment Schemes
Legislation against "Expenditure Recoupment" schemes already exists.
It was foreshadowed on 24 September 1978 and now applies to a range of losses and outgoings.
Broadly, the legislation applies to deny a deduction where the specifically designated loss or outgoing is incurred under an arrangement whereby the taxpayer or an associate obtains a benefit the amount or value of which, together with the tax advantage sought, effectively recoups the claimed loss or outgoing.
In my statement of 4 August 1980 I foreshadowed action to extend the provisions to deal with variants of the recoupment type schemes that had by then been encountered.
These involve paper losses generated in producing or marketing films, in operating gold mines, in purchasing consumable supplies and in carrying out market research.
The amendments in respect of these variants are to apply with respect to losses or outgoings incurred after 24 September 1978. The decision to do this follows the clear warning given on that day and repeated subsequently.
I now make public that more recent information coming from returns of income for 1979-80 indicates that, before my announcement on 4 August 1980, still further schemes of the expenditure recoupment type had been implemented.
As in the case of the schemes referred to in that announcement it would appear that promoters of the further schemes had chosen to ignore the Government's repeated warnings.
In the light of the information now available, and of the clear Government commitment to put an end to expenditure recoupment schemes, the Bill proposes extensions of the existing legislation additional to those I have already announced.
These latest identified variants against which remedial action is now proposed involve paper losses generated -
- in acquiring a licence under a copyright existing in computer software;
- by way of commission for collecting assessable income;
- by way of a fee in relation to the growing, care and supervision of trees;
- by way of an amount paid in relation to the enhancement of the value of shares held as trading stock; and
- by way of a fee in relation to the procuring of master sound recordings.
Honourable members would be interested to know that one of these schemes - that built on commissions for collecting assessable income - generated identified claims for deductions for 1979-80 of $111M.
The additional amendments will also have effect from 24 September 1978.
They, and the amendments specifically outlined in my statement of 4 August 1980, will ensure that the ban on the carry-forward from one year to another of paper losses created under tax avoidance schemes, and which at present applies to expenditure recoupment arrangements, will apply similarly in respect of all the latest variants.
In a statement on 24 June 1980, I foreshadowed legislation on tax avoidance through attempts to exploit the tax-exempt status of various entities.
As I said at the time, two earlier warning about the abuse of the privileged status of tax-exempt bodies had gone unheeded, and there was clear evidence that substantial revenue losses were accruing through the use of these bodies as vehicles for diverting taxable income from individuals and companies.
I outlined in my statement examples of the kinds of schemes being employed.
I do not think it is necessary to describe them in detail again now.
Broadly, however, the schemes involved the diversion of income from a person who would otherwise be liable to tax on it to a body that has no tax liability.
The exempt body was required to pay to the person from whom the income was diverted, or to an associate of that person, a tax-free consideration equal to the greater part of the diverted income.
As a fee for its participation it retained a small amount of the income for its own benefit.
As mentioned in my statement, the legislation will operate where under a tax avoidance agreement entered into after 24 June 1980. An exempt body provides consideration for property giving rise to diverted income and the consideration is substantially more than the amount that, in the circumstances, would be paid by a taxable public company.
The income derived by the exempt body in these circumstances, without deduction of losses or outgoings incurred under or in connection with the tax avoidance agreement, will be subject to tax at the maximum rate of personal tax.
These measures will apply only to income derived by exempt bodies from participation in the particular tax avoidance schemes.
Their ordinary income will continue to be exempt from tax.
Finally, the last, and bulkiest, section of the Bill contains a number of formal amendments, incorporating changes in drafting style.
These will result in the adoption, in references to other provisions of the income tax assessment act, of a "forward referencing" style.
Before concluding, I mention that legislation in pursuance of the Government's commitment to provide tax incentives for investment in Australian films is at an advanced stage and will be brought before the house before the winter recess.
I commend the present Bill to the house.