House of Representatives

Income Tax Assessment Amendment Bill 1985

Income Tax Assessment Amendment Act 1985

Second Reading Speech

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

This Bill will amend provisions of the income tax law enacted last year to change the taxation treatment of lump sum superannuation and kindred payments to clarify and reinforce the operation of the law in line with the Government's announced objectives.

First, provisions in the Bill will eliminate a possible avenue of tax avoidance in relation to eligible termination payments by ensuring that an amount received on the assignment or transfer after today of a right to receive a superannuation pension or annuity will give rise to a taxable eligible termination payment.

Another amendment, effective from today, will ensure that where a payment may be included in more than one category of the statutory definition of an eligible termination payment it is taxed in accordance with the relevant specific rule.

A further amendment is consequential on one made last year to tax benefits obtained under so-called "cherry-picker" schemes of tax avoidance. This will prevent such benefits from being treated as eligible termination payments.

Yet another measure will provide that consideration paid in respect of an eligible termination payment in the form of a transfer of property will reduce the taxable amount of that payment.

The Bill will, effective from today, amend the law to make it clear that payments made by an employer as superannuation contributions or to purchase an annuity for an employee do not reduce the taxable amount of the ultimate payment to the employee.

Mr Speaker, the Government has decided that the premature retirement test in the law that determines whether certain early retirement or redundancy payments qualify for concessional tax treatment is unduly restrictive.

Amendments being made by the Bill will, from 1 July 1983, provide access to that concession where termination of employment occurs before the taxpayer's 65th birthday and before the date on which the employment would necessarily have had to end.

Another measure related to the early retirement and redundancy payment provisions of the law will provide that, for relevant payments made in respect of termination of employment after today, the value of retirement benefits forgone in favour of redundancy or early retirement may be taken into account in determining the amount that would have been received on ordinary termination of employment.

Under the existing law, the rules of an approved deposit fund must provide for the repayment of deposits no later than when the depositor attains 65 years of age.

It has been suggested that if a depositor dies before turning 65, the deposit can be left in the fund accumulating tax-free income until the date on which he or she would have turned 65.

That was unintended and the law is to be amended to require deposits to be paid to the estate of a deceased depositor within 90 days of probate or letters of administration being granted.

Where a depositor has died prior to the Bill becoming law, fund trustees will be expected to repay deposits within 90 days of the later of the date of Royal Assent and the date on which probate or letters of administration are granted.

Existing funds will be given adequate time to alter their rules to retain their tax-exempt status.

The law will also be amended, with effect from 1 July 1983, so that a deposit fund may, where appropriate, retain its approved status despite a failure to satisfy the establishment tests laid down in the law.

The Bill will also give effect to the proposal announced on 18 February 1985 to close a loophole in the law that allows recipients of lump sum eligible termination payments to escape tax by converting those payments into an annuity and subsequently cashing-in that annuity.

It will prevent an eligible termination payment that is used to purchase an annuity from being treated as substantially tax-free if the annuity is commuted after 18 February 1985 or its residual capital value becomes payable after that date.

Those measures will apply also where a superannuation pension acquired with a lump sum payment is re-converted to a lump sum after today.

In addition, the Bill will close off another possible avenue of exploitation in relation to annuities. It will ensure that an eligible termination payment used to purchase a deferred annuity after today is not freed from tax unless the annuity is purchased wholly from eligible termination payments.

The Bill will also provide that payers of annuities and supplements to pensions and annuities will be required to make P.A.Y.E. tax instalment deductions. This requirement will apply from the second month after the Bill becomes law.

The first $50,000 of the post-June 1983 component of an eligible termination payment received by a taxpayer aged 55 or more is taxed at a maximum rate of 15 per cent - any balance being subject to the standard rate of 30 per cent.

By oversight, the law as presently drafted operates to deny the application of the 15 per cent rate in the case of a payment to the trustee of the estate of a deceased taxpayer even though, had the deceased lived, he or she would have been entitled to that rate.

The Bill will correct that oversight with effect from 1 July 1983.

On 22 January 1985, the Acting Treasurer announced that the Government would correct a drafting error in the rule that recognises a person's period of service prior to July 1983 where only part of a lump sum termination payment is preserved.

This Bill will make that correction. Where none of the pre-July 1983 component of an eligible termination payment is preserved, no part of the relevant service period accruing before July 1983 will, as was intended, be recognised.

Mr Speaker, some of the measures in this Bill will prevent the exploitation of the eligible termination payment provisions of the income tax law. The likely revenue effect of any prior exploitation cannot be determined at this stage, but it is likely these measures will prevent the future loss of significant revenue.

At the same time, the Bill will ensure that the existing provisions of the law do not result in a greater liability to tax than was originally intended.

A detailed technical explanation of the provisions of the Bill is contained in a comprehensive explanatory memorandum that is being made available.

I commend the Bill to the house.