House of Representatives

Taxation Laws Amendment Bill (No. 2) 1985

Taxation Laws Amendment Act (No. 2) 1985

Second Reading Speech

By The Minister Assisting the Treasurer, The Hon. Chris Hurford, M.P.

This Bill is the first in a package of 4 Bills.

It will amend the various taxation laws in several respects.

The Bill proposes amendments of the income tax law to give effect to the Government's decisions to counter the use of non-leveraged finance leases and similar arrangements to achieve tax benefits.

It will introduce statutory loan-back rules that employer-sponsored superannuation funds will be required to follow to secure relevant tax concessions.

This Bill will also give effect to a number of the Government's 1985-86 Budget Proposals.

Among these is the increase in two superannuation-related monetary limits that apply for income tax purposes.

Further, it will authorise income tax deductions for gifts made to the Australian Academy of the Humanities and to the Royal Australian and New Zealand College of Psychiatrists.

The Bill will amend the income tax law to allow a deduction of up to $1,000 per election for expenses incurred by candidates contesting elections to local government or to the Australian Capital Territory House of Assembly.

One of the three measures this Government has announced to assist the horse racing industry - the exemption from income tax of the income of animal racing clubs - will be given effect by this Bill.

For persons wholly or mainly dependent on social security unemployment, sickness or special benefits the Bill will increase the income threshold below which they will not be required to pay tax.

As is customary at Budget time, this Bill will also provide the basis for calculation of provisional tax for the 1985-86 year of income.

Also included in the Bill are the amendments to give effect to the measure announced on 17 July 1985 to replace the existing concessional expenditure rebate for eligible expenditure exceeding $2,000 with a rebate for net medical expenses exceeding $1,000.

The Bill will also amend the Taxation Administration Act to provide for co-operation with the States and the Territories in the administration of their revenue laws.

The secrecy provisions of various taxation laws administered by the Commissioner of Taxation are to be amended to cover persons such as those from another country performing duties while on attachment to the Australian Taxation Office.

And finally, the Bill will make a number of minor technical amendments of the taxation laws.

Mr Speaker, I now turn to outline in more detail the more significant measures contained in this Bill.

Non-Leveraged Finance Leasing and Similar Arrangements

Measures announced on 15 May and 16 December 1984 to treat, for income tax purposes, certain non-leveraged finance leases and similar arrangements as though they were loans by the lessor to enable the lessee or user to acquire the leased property are to be implemented by this Bill.

Under the arrangements in question, the lessor passes on to a lessee such as a tax-exempt body, in the form of lower lease rentals, some of the tax benefits that would be available to the body if it owned the property and were subject to tax.

At the same time, the tax-exempt body assumes most of the risks and benefits associated with ownership of the leased property.

By amendments proposed in the Bill, the lessor will be denied income tax deductions in respect of capital expenditure on property that is the subject of such an arrangement.

Instead, the lease payments made to the lessor will be treated as consisting of non-taxable repayments of principal and taxable payments of interest.

Deductions for interest on moneys borrowed to fund the capital expenditure will not be affected.

These measures will mean that the tax advantages, and therefore substantial revenue losses, associated with the use of these arrangements will be removed.

In more detail, the measures are to apply where plant, equipment or other property is leased under a finance lease either to a government or tax-exempt government authority or to a person who uses the property outside Australia to produce income that is not subject to Australian income tax.

They will also apply where such property, although not leased, is the subject of an arrangement having the hallmarks of a finance lease.

The amending legislation contains tests as to whether an arrangement is a finance lease or similar arrangement.

These tests are based on those developed for accounting and commercial purposes and are aimed at determining whether all, or substantially all, of the risks and benefits associated with ownership of the subject property are transferred from the lessor to the lessee.

It is estimated that the measures will result in a tax saving in excess of $100 million in 1985-86 and even larger amounts in subsequent years.

Statutory Loan-Back Rules

This Bill will give effect to the Government's decision, announced on 11 March 1985, to introduce statutory rules to apply to certain investments by employer-sponsored superannuation funds.

Mr Speaker, that decision reflects the Government's concern that excessive investment by a Superannuation Fund in the sponsoring employer's business may mean, in the event of the failure of that business, that employees lose not only their jobs, but also their superannuation entitlements.

This concern was shared by the Commonwealth Task Force on Occupational Superannuation, The Asprey Taxation Review Committee, The Hancock National Superannuation Committee and the Campbell Committee of Enquiry into the Australian financial system.

The basic rule contained in the Bill adopts the recommendation of the Commonwealth Task Force. This is, that not more than 10 per cent of the assets (measured at cost) of an employer-sponsored superannuation fund should consist of equities in, or loans to, the employer or associated persons or entities.

For funds established after 11 March 1985, that basic rule is to first apply for the 1985-86 year of income.

For funds in existence at 11 March 1985, a special transitional rule will apply over the 10 year period ending with the 1994-95 year of income.

The special transitional rule will limit employer investment by such a fund to the greater of 10 per cent of the fund's assets or the level of investment as at 11 March 1985.

That rule will allow those funds in existence at 11 March 1985, that would otherwise breach the 10 per cent investment restriction, to comply with the basic rule by way of natural growth, so avoiding significant re-financing problems for some businesses.

Mr Speaker, in announcing the Government's decision to introduce statutory loan-back rules for employer-sponsored superannuation funds. The Treasurer stated that the consequences of non-compliance would be that the investment income of the fund would be taxed at the rate of 60 per cent, that employer contributions would not be deductible and that member contributions would be neither deductible nor rebatable.

The no-rebate consequence for member contributions is no longer relevant following the Government's decision to abolish the concessional expenditure rebate.

The no deduction consequence for both employer and member contributions will, however, remain.

On further consideration the Government has decided that the announced penalty tax rate of 60 per cent on the investment income of non-complying funds is inappropriate.

Having regard to the non-deductibility of contributions and to the fact that payments to members - either in the form of pensions or lump sum termination payments - will be subject to tax, it has been decided that a more appropriate rate of tax is 30 per cent. That rate is being imposed by another Bill that I will shortly introduce.

The new rules are not there for revenue-raising purposes, but are designed to protect members' benefits by encouraging superannuation funds to restrict the level of their investments in sponsoring employers.

The amendments should therefore have little effect on the revenue.

Superannuation Contributions

The Bill will give effect to a 1985-86 budget proposal to increase from $1,200 to $1,500 the maximum annual income tax deduction allowable for contributions to approved Superannuation Funds by self-employed persons or employees not covered by employer-funded schemes.

The increase is to apply for the 1985-86 and subsequent income years.

The estimated revenue cost of this measure is nil in 1985-86, $14 million in 1986-87 and $10 million in 1987-88.

Lump Sum Termination Payments

The Bill will also increase the amount of lump sum superannuation and kindred payments relating to the period after 30 June 1983 that is taxed at the concessional rate of not more than 15 per cent.

Under the existing law, the first $50,000 of such payments made to a person aged 55 or more qualifies for the 15 per cent rate of tax.

As announced in the 1985-86 Budget, that limit is being increased to $55,000 for the 1985-86 and subsequent income years.

This particular measure will cost an estimated $500,000 in 1985-86, increasing to $8 million per annum in future years when relevant payments are wholly attributable to the period after 30 June 1983.

Concessional Expenditure Rebate and Medical Expenses Rebate

The Draft White Paper on Tax Reform canvassed the abolition of the Concessional Expenditure Rebate and its replacement with a rebate for medical expenses.

On 17 July 1985 the Treasurer announced that the Government had decided to proceed with this proposal in relation to the 1985-86 and subsequent income years. This Bill will give effect to that decision.

As indicated at that time only about 6 per cent of taxpayers incur sufficient expenses to benefit from the concessional expenditure rebate.

It was also noted that most of the items under the rebate already receive substantial Government assistance in other ways and that it was therefore inappropriate to provide assistance to a small section of the community by way of a tax rebate.

However, the Government also recognised a continuing need for some assistance to those incurring high unreimbursed medical expenses and has therefore decided to introduce a new medical expense rebate for net outgoings exceeding $1,000.

This rebate will apply to the existing range of medical expenses which form part of the concessional expenditure rebate, including payments to medical practitioners, nurses, hospitals and chemists in respect of an illness or operation and payments for dental and optical treatment.

The decision to abolish the concessional rebate requires some consequential amendments, one of which I particularly draw to the attention of Honourable Members.

Under existing arrangements the first $250 of the net amount of self-education expenses necessarily incurred in connection with a prescribed course of education is absorbed by the concessional expenditure rebate provisions, leaving the general deduction provision of the income tax law, where it has application, to allow a deduction only for the balance of such expenditure.

Provisions in this Bill will ensure that, with the abolition of the concessional expenditure rebate, a taxpayer's entitlement to a deduction for relevant self-education expenses will continue to fall for consideration under the general deduction provision of the income tax law only to the extent such expenses exceed $250.

The net gain to revenue from these measures is estimated at $15 million for 1985-86 and $60 million in 1986-87 and subsequent years.

Animal Racing Clubs

In his Budget Speech the Treasurer foreshadowed three measures designed to assist the horse racing industry. This Bill will give effect to one of those measures by amending the income tax law to exempt from income tax the income derived by animal racing clubs.

The exemption will apply primarily to horse and greyhound racing clubs. Consistent with the exemption currently applying to clubs conducting athletic sports, it will not apply to clubs the activities of which are predominantly social in nature or are carried on for the purposes of profit or gain to individual members.

The exemption is to apply for the 1985-86 and subsequent years of income.

The estimated revenue cost of this measure is nil in 1985-86 and $1 million for a full year.

Local Government Election Expenses

This Bill will implement the Budget proposal to allow, in 1985-86 and subsequent income years, a deduction of up to $1,000 for expenditure incurred in contesting local government elections.

The deduction will also be available to candidates for the Australian Capital Territory House of Assembly.

The present income tax law includes in assessable income the amount of any election expenditure that has been allowed as a deduction to a candidate for this Parliament or a State Parliament, and which is reimbursed or paid on the candidate's behalf.

Similar provisions are included in this Bill in relation to candidates for local government elections.

However, because of the $1,000 ceiling proposed, the provisions in this Bill will effectively ensure that relevant payments will be included in a candidate's assessable income only to the extent that they exceed the amount of total expenditure incurred in relation to a particular election which has not been allowed as a deduction.

The Budget announcement on this matter indicated that the allowance of a deduction for election expenses would be subject to verification of the expenditure.

Provisions to this effect are not contained in this Bill but will be taken up in the context of the substantiation rules the Treasurer will be announcing in his statement on tax reform.

It is estimated that the cost of this measure will be nil in 1985-86 and $2 million in a full year.

Social Security Beneficiary Rebates

As announced in the Budget Speech, the maximum rebates of tax and the taxable income levels at which the rebates begin to shade-out for taxpayers in receipt of social security unemployment, sickness or special benefits, are to be increased with effect from 1 July 1985.

The rebates will continue to ensure that persons wholly or mainly dependent on social security benefits do not have to pay tax.

For married beneficiaries the maximum rebate will be increased from $75 to $220 and no tax will be payable in 1985-86 on taxable incomes up to $8,795.

For other beneficiaries the maximum rebate will increase from $50 to $170 and no tax will be payable on taxable incomes up to $5,275.

The rebates will shade-out above those income levels, resulting in some rebate being available until the 1985-86 taxable income exceeds $10,555 for married beneficiaries and $6,635 for other beneficiaries.

The cost to revenue of this measure is estimated an nil for 1985-86 and $9 million for a full year.


The Bill will amend the gift provisions of the income tax law to give effect to the decision announced in the 1985-86 budget to allow deductions for gifts made after 20 August 1985 to the Australian Academy of the Humanities and to The Royal Australian and New Zealand College of Psychiatrists.

The cost to revenue of this measure is estimated at nil for 1985-86 and less than $200,000 in a full year.

Provisional Tax for 1985-86

As provisional tax is part of the pay-as-you-earn system and is designed to collect tax on income other than salary and wage income within the year in which the income is derived, it is generally accepted that the amount of provisional tax charged should approximate as closely as practicable the amount of tax actually imposed for the year.

Incomes for 1985-86 are expected to be higher than for 1984-85 and, due to the changes to the personal income tax rate scale that applied from 1 November 1984, effective rates of tax for 1985-86 will be lower than for last year.

Accordingly, as in past years, it is proposed to vary the basis of calculating provisional tax for 1985-86 to be notified in assessment notices to issue this year.

This Bill provides for 1985-86 provisional tax to be calculated on the basis of 1984-85 taxable income increased by 11 per cent and by applying the lower rates of tax for 1985-86.

Also reflected in the provisional tax calculation will be the Medicare levy of one per cent. The removal of the ceiling on the maximum amount of levy payable by a taxpayer or by a married couple and the increased low income thresholds to apply for levy purposes in 1985-86 will be taken into account.

Generally rebates and credits will be allowed in the provisional tax calculation at the levels allowed in 1984-85 assessments.

However, the concessional expenditure rebate allowed to a taxpayer in 1984-85 will not be allowed in the provisional tax calculation. This rebate is to be removed effective for the 1985-86 and subsequent years.

Taxpayers will continue to have the right to "self-assess" and have the provisional tax for 1985-86 recalculated on the basis of their own estimates in appropriate circumstances.

Co-operation Between Commonwealth, State and Territory Revenue authorities

Measures announced on 20 December 1983 to assist the States and the Northern Territory to counter avoidance and evasion of State and Territory taxes are contained in the Bill.

The Commissioner of Taxation is to be empowered, on request by a State or the Northern Territory Revenue authority, to authorise a Commonwealth, State or Northern Territory taxation officer to conduct in the Australian Capital Territory an investigation for the purposes of a State or Northern Territory taxation law.

For that purpose, the authorised officer will have investigation powers similar to those a Commonwealth taxation officer has for Commonwealth purposes. The Commissioner will also be able to require persons to furnish information or produce documents that are relevant to such an investigation.

State and Northern Territory taxation officers will be under the obligation to maintain secrecy in relation to information obtained while undertaking investigations in the A.C.T.

The Commissioner will further be authorised to provide Commonwealth taxation information to State and Territory taxation officers to enable them to administer their laws, if those laws provide reciprocal rights for the Commissioner.

For the purposes of these co-operative measures, the Bill provides that, in proceedings relating to Federal taxation laws, an appropriately certified true copy of, or extract from, an original document that is obtained under a State, Territory or Commonwealth taxation law will generally be admissible as evidence as if it were the original document.

To ensure that these measures are fully effective, it will be necessary for the States and the Northern Territory to introduce complementary legislation.

The practical application of co-operation will require some Australian Taxation Office resources, but the additional administrative costs should be offset by the revenue yield from reciprocal State and Territory co-operation.

Secrecy Provisions

Mr Speaker, under the taxation secrecy provisions taxation officers are, except in carrying out their duties or in other specified circumstances, prohibited from disclosing confidential taxation information.

That prohibition extends to all other persons appointed or employed by the Commonwealth.

The income tax secrecy provisions were amended last year to ensure their application to persons such as those from overseas countries working in the Taxation Office under exchange arrangements. These persons are neither appointed nor employed by the Commonwealth.

The secrecy provisions of the various other laws administered by the Commissioner of Taxation are, by this Bill, to be amended in a similar fashion.

The amendments will have no effect on the revenue.

Mr Speaker, broad explanations designed to give a guide to the provisions of the Bill are contained in Part A of an explanatory memorandum being circulated to Honourable Members.

A clause by clause explanation of each provision of the Bill contained in Part B of the explanatory memorandum will be made available to Honourable Members in the next few days.

I commend the Bill to the House.