House of Representatives

Income Tax Assessment Amendment Bill (No. 5) 1983

Income Tax Assessment Amendment Act 1984

Second Reading Speech

By the Treasurer, the Hon. P.J. Keating, M.P.

This Bill to amend the Income Tax law covers a range of subjects.

Amongst other things it will, so far as income tax is concerned, complete the implementation of unfinished proposals of the former government which this government decided to adopt.

The measures being finalised include the denial of relevant income tax deductions in respect of property that is the subject of certain leveraged leasing and similar arrangements, and the extension of special income tax concessions to Australian Trading Ships.

In the same category is the removal, in respect of short-term life insurance policies, of the advantage in the present law under which bonuses and other amounts are received by policyholders free of income tax.

The already announced measures covering payments made within 4 years of taking out such policies will apply in respect of life insurance policies secured between the date of the former government's announcement and today.

Policies taken out after today will be subject to tougher measures that I will describe later.

The Bill will also give effect to the government's decision, announced on 27 April 1983, to exempt from tax the first 2 weeks of social security special benefits paid on or after 17 February 1983 to victims of major disasters.

Amendments foreshadowed on 14 November 1983 to counter tax avoidance practices involving employee superannuation funds are included in the Bill.

Other provisions of the Bill will make certain modifications to the Australian Film Incentives Scheme.

Finally, the Bill also provides for extension of the present exemption from interest witholding tax for interest paid on public or widely-spread overseas issues of bearer debentures.

I turn now to details of these various measures.

Leveraged Leasing and Similar Arrangements

The Bill will give effect to 2 measures announced by the previous government to deny tax deductions that would otherwise be allowable to an owner of property that is the subject of certain leveraged finance arrangements.

Under the first measure, deductions - for example depreciation, repairs, interest and expenses of borrowing - will not be allowable where the property has been leased to a non-resident and is used overseas, is leased to a tax-exempt organisation, or is leased back to a person who was the previous owner and user.

Similarly, deductions will not be allowable where the property, although not leased, is used in providing goods or services and the person having effective control of the property in providing those goods or services is a non-resident, a tax-exempt organisation or the previous owner and user.

However, a taxpayer whose property is being used by a lessee or end-user partly in tax-exempt activities and partly to produce assessable income will be entitled to obtain deductions on a basis that is consistent with the extent to which the end-use of the property is for taxable purposes.

That would occur, for example, if the property was the subject of a leveraged lease to a life insurance company that used it partly in connection with its tax-exempt superannuation business and partly in connection with its taxable business.

The particular arrangements that will attract the application of the provisions are those under which the predominant part of the purchase or construction cost of a taxpayer's property is financed by a non-recourse debt.

Broadly, a non-recourse debt is one where the lender's rights against the taxpayer in the case of default in repayment are effectively limited to rights against the property, or against income generated or goods produced by the property.

A debt is also regarded as being effectively non-recourse if, in the ordinary course of events, the lender would not have access to the general assets of the taxpayer in an action for recovery.

To prevent a taxpayer being denied deductions in circumstances where the property has been financed under arrangements which might technically be described as non-recourse but where there is no real restriction of the lender's rights against the taxpayer, the Commissioner of taxation will be authorised not to treat a particular debt as a non-recourse debt if the circumstances so warrant.

As announced, this measure will apply to property that a taxpayer purchases under a contract entered into after 1 P.M. on 24 June 1982 or that a taxpayer commenced to construct after that time.

The second of these related measures had been announced first, on 18 December 1981. It is designed to preserve the policy underlying the investment allowance that it should apply only to eligible plant that is used by the owner or lessee exclusively for the purpose of producing assessable income.

That policy has been circumvented by arrangements under which plant legally owned by a taxable entity is used to produce goods or services for a tax-exempt organisation in circumstances where that organisation has effective control of the use of the plant.

An example of the kind of arrangement that has been devised is one where an exempt organisation retains the effective use, but not the formal ownership, of plant that it would ordinarily own and use itself in providing goods or services to its customers.

Such ownership may be acquired by a partnership which appoints the tax-exempt organisation as its management agent in the provision of the goods or services per medium of the subject plant.

Under the agreement between the partners and the organisation, the organisation buys all of the goods or services so provided before in turn re-selling them.

The real effect, of course, is that the plant is being used by the organisation in providing goods or services to its customers in the ordinary course of business, as though it were the owner or lessee of the plant.

If the exempt organisation were the legal owner or lessee, no investment allowance would be available in respect of the plant.

The measures contained in the Bill will deny the investment allowance, in the circumstances I have outlined, where the plant is acquired by a taxpayer under a contract entered into after 18 December 1981 or, if constructed by the taxpayer, where construction commenced after that date.

Special Concessions for Australian Trading Ships

The Bill will authorise special taxation concessions for eligible Australian Trading Ships. The measures were first announced by the previous government on 29 July 1982 and will give effect to recommendations in the Crawford report on the revitalisation of Australian Shipping.

The new rules will apply to an eligible Australian Trading Ship which is acquired new or constructed by a taxpayer, and is or was first commissioned on or after 29 July 1977.

Broadly, a ship will be eligible for the special allowances if it is registered in Australia, is engaged exclusively in the coastal or overseas carriage of passengers or cargo, is wholly owned, used and manned by Australian residents and is used exclusively to produce income assessable in Australia.

In addition, the level at which the ship is manned must not exceed the level determined for that ship by the secretary to the department of transport.

Eligible ships will qualify for depreciation in equal instalments over 5 years beginning, generally, in the year in which the eligibility criteria are satisfied. If the criteria are satisfied in a year later than the commissioning year, depreciation will be based on the depreciated value of the ship at the beginning of that later year.

Ships which satisfy the eligibility criteria within 90 days of commissioning will qualify for the new rate of depreciation in the commissioning year, or the 1982-83 income year, whichever is later.

In certain circumstances, depreciation at the new rate in respect of a ship commissioned after 30 June 1983 may be allowable in the year preceding the year in which the ship is commissioned.

Eligible ships will also be excluded from the legislative requirement that, to qualify for investment allowance purposes, the property concerned must be used only in Australia. The exclusion will extend to eligible ships in respect of which the investment allowance has previously been denied for this reason.

The investment allowance for eligible ships used outside Australia will be available in the same year of income as the new rate of depreciation commences to apply to the ship after it is commissioned. The amount of the allowance will be 18% of the depreciated value of the ship in that year.

The revenue cost of these special concessions for eligible Australian ships is estimated to be $8 million for the 1983-84 and 1984-85 income years, $25 million for 1985-86 and $19 million for 1986-87.

Short-Term Life Assurance Policies

On 30 March 1983, soon after we came to office, my colleague, the Minister for Finance announced that the Government, during these sittings of the Parliament, would introduce legislation to give effect to the measures proposed by the former Government to remove the tax advantage available in respect of short-term life assurance policies issued after 27 August 1982.

The present Bill fulfils that commitment but the Government believes that the previously announced measures are quite inadequate to stamp out this form of tax avoidance. The weakness of those measure is that they not only failed to counter avoidance through short-term life assurance policies, but gave a degree of legitimacy to policies with at least a duration of 4 years and 1 day. Recently advertisements have appeared exploiting this very aspect of the announced measures and claiming that tax freedom is assured provided a policy is allowed to run for more than 4 years.

This Government is not in the business of facilitating tax avoidance from and including tomorrow policies of life assurance will, with specified exceptions, need to be held for at least a period of 10 years before bonuses and similar proceeds received under those policies will be completely free of income tax.

This Bill will make subject to tax bonuses on life assurance policies and other amounts in the nature of bonuses that are received within 4 years of commencement of a policy taken out after 27 August 1982 and before tomorrow. In these cases the amount received in the first two years of a policy will be fully assessable while amounts received in the third and fourth year after commencement will be taxable as to two-thirds and one-third respectively.

For policies taken out after today bonuses, and other amouns representing bonuses, will be subject to tax in full if received within eight years of the commencement of the policy. Two-thirds of such amounts received in the ninth and one-third of such amounts received in the tenth year of the policy will also be subject to tax.

The Bill will not tax amounts paid as a result of death, accident or disability or of forfeiture or surrender of a policy in circumstances arising out of serious financial difficulties or amounts received in respect of superannuation policies.

The Bill also contains a range of safeguards to prevent the use of devices, such as low or no interest loans or policies with nominal premiums in earlier years and substantial increases in later years, to avoid the operation of the new arrangements.

I emphasise that measures contained in the Bill, including the extension to 10 years of the taxable period, will not affect the use of life assurance as a means of providing adequate death cover for taxpayers and their families or for the long-term provision of future needs through regular and sustained savings.

Special Benefits for Disaster Victims

After the disastrous bushfires and floods earlier in the year the Prime Minister announced that the income tax law would be amended to exempt from tax the first 2 weeks' payments of social security special benefit to the victims of those and any similar future disasters.

This measure, which the Bill gives effect to, will give these payments the same tax-free status that applies generally to relief payments provided for disaster victims from public appeal funds.

At present all special benefit payments are assessable income.

This Bill will ensure that payments of special benefit for the first 2 weeks of eligibility will not be subject to tax if they are made in relation to a disaster that the Director-General of Social Security considers to be a major disaster affecting a substantial number of people. In other circumstances special benefits will remain subject to tax to the extent that a beneficiary's annual taxable income exceeds the tax threshold.

The amendments will apply to payments made on or after 17 February 1983.

Tax Avoidance Practices in Relation to Employee Superannuation Funds

Another provision in the Bill will change the Income Tax Law as it relates to the taxation of payments from employer-sponsored employee superannuation funds - commonly called "section 23F funds". It extends to these funds provisions enacted in 1980 in relation to funds for the self-employed.

This amendment is directed against a particularly distasteful tax avoidance practice containing clear elements of fraud against both the revenue and unsuspecting employees. It will, in accordance with the Government's announced policy in relation to blatant tax avoidance practices, apply with retrospective effect from 1 July 1977.

The Income Tax Law provides a number of significant taxation concessions for section 23F superannuation funds, on the condition that those funds are operated in accordance with guidelines set out in the law.

The proprietors of some businesses, however, establish superannuation funds ostensibly for the purpose of providing superannuation benefits for their employees and, after taking advantage of the taxation concessions for contributions and the tax-free treatment of the funds, wind up the funds.

This is done in circumstances where the accumulated assets of the funds are paid out, not to the employees, but to the proprietors of the business concerned. The procedure is possible because employees are either not informed of their rights under the superannuation scheme or have their employment terminated in circumstances where they become disentitled to benefits from the fund. Sometimes employment is terminated only a few days before the employee reaches normal retirement age and would have become entitled to substantial benefits from the fund.

The amendments contained in the Bill are designed to neutralise taxation benefits received from the use of this device in the past and ensure that it will not be practised in the future. It does this by providing that benefits received from a section 23F fund in breach of the rules of the fund or which are excessive in amount having regard to criteria specified in the existing law, are to be wholly subject to income tax in the hands of the recipient.

Investment in Australian Films

As announced in the Budget Speech, the tax concessions for investment in the production of qualifying Australian films are being reduced as part of the restructuring of assistance to the film industry.

For eligible expenditure contracted for after budget night, 23 August 1983, the special income tax deduction will generally be 133 per cent of the investment, in lieu of 150 per cent.

The associated exemption from income tax in respect of the net revenue from a film will be 33 per cent of the investment, rather than 50 per cent.

The exception to that general position is where an eligible investor takes up an interest in a film in place of an underwriter who would have been entitled to the higher concessions under arrangements made on or before 23 August 1983. Such an investor will qualify for the concessions at pre-budget levels.

These measures are estimated to save revenue of $1 million for 1983-84 and $4 million in a full year but this is more than offset by additional direct Government assistance to the film industry through the Australian Film Commission.

The Bill will also give effect to the Government's decision, announced on 21 June 1983, to facilitate the use of certain underwriting arrangements in the funding of film production budgets.

A technical amendment to the present scheme of film investment tax incentives will recognise arrangements entered into by a producer with an underwriter so as to fulfil the basic legislative requirement that a film's budget be fully secured by the end of the financial year in which amounts are first expended in, or contributed to, the production of a film.

The amendment will enable an investor who takes the place of the underwriter to qualify for the tax concessions without having been a party to the contract securing the film's budget.

A further minor change to the film incentive scheme is being given effect by this Bill.

It will provide for isolated cases in which films that were in production before the 1982-83 year, and unfinished when the recently modified incentive scheme came into effect on 13 January 1983, cannot, for technical reasons, at present attract concessions under either the modified scheme or the earlier scheme.

Eligible investors in such films will be entitled to tax concessions on the basis of the earlier scheme.

Interest withholding Tax

On 23 November 1983 I announced the Government's decision to extend the present exemption from interest withholding tax for interest paid on certain overseas issues of bearer debentures.

Concern has been expressed in representations received by the Government over the difficulties of raising funds in certain overseas markets - most notably, the United States of America - through public or widely issued debentures which are in bearer form.

To overcome these difficulties this Bill will extend the present exemption from interest withholding tax to cover interest on all overseas debenture issues, whether in bearer or registered form. This will eliminate any bias favouring public issues by way of bearer debentures over issues of registered debentures and will facilitate increased access by Australian companies to the financial markets of the United States of America.

The extended exemption will apply in relation to interest paid on debentures issued after 23 November 1983. Where interest withholding tax becomes payable on interest on a post 23 November debenture issue paid before the date on which the amendment comes into operation, the tax will be refunded after that date.

A technical explanation of the provisions of the Bill is contained in a memorandum that will be circulated to honourable members.

I commend the Bill to the House.