House of Representatives

Taxation Laws Amendment Bill (No. 3) 1985

Taxation Laws Amendment Act (No. 3) 1985

Second Reading Speech

by the Minister assisting the Treasurer, the Hon. Chris Hurford, M.P.

This Bill will amend the taxation laws in several ways.

It represents a start to the Government's legislative programme to give effect to the measures the Treasurer announced on 19 September for reform of the Australian taxation system.

In that regard, amendments of the income tax law in this Bill will provide for undeducted exploration and development expenditure incurred by petroleum and general mining companies to be treated as transferable company group losses.

Other amendments will withdraw the rebate and deduction for capital subscribed to petroleum and afforestation companies, and reduce the taxation concessions available for investments in Australian films.

Another reform measure to be given effect by this Bill will ensure that owner-builders of larger domestic building projects commenced after 30 June 1986 make deductions of tax under the prescribed payments system from payments made after that date.

Together with two other Bills that I will introduce shortly, this Bill will also finalise the implementation of the Government's 1985-86 taxation budget proposals.

One of the three budget measures designed to assist the horse racing industry - the provision of a more generous livestock valuation option for horse breeders - is contained in the Bill.

The Bill will remove the exemption from tax for payments to students under the tertiary education assistance scheme and the adult secondary education assistance scheme.

As part of the budget proposal to align ACT taxes more closely with those of the states, the Bill will provide for the imposition of ACT stamp duty on loan securities and on transfers of units in unit trusts.

Finally, there are two measures in the Bill unrelated to the budget or tax reform.

First, the Bill will give effect to the proposal - announced on 21 May 1985 - to amend the income tax secrecy provisions to permit greater use of taxation information by a Royal Commission r

Secondly the Bill will give the force of law in Australia to a new comprehensive taxation agreement and a related protocol with Finland that were signed in canberrra on 12 September 1984.

A number of technical amendments of the taxation laws are also to be made by the Bill.

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

Petroleum and General Mining Company Losses

As announced in the Treasurer's tax reform statement, an annual election is being made available to general mining and petroleum companies to enable them to have undeducted exploration and development expenditure treated as transferable company group losses.

Under the existing law, the deduction allowable for such expenditure cannot create or increase a mining or petroleum company's deductible carry-forward loss.

One result of this is that any such expenditure not offset against the company's income May not be transferred to another company in the same group under the group loss transfer arrangements.

Measures in the Bill will allow a mining or petroleum exploration company that is part of a company group to elect that any excess deductible exploration and development expenditure incurred in the 1985-86 and subsequent income years forms part of the company's carry-forward loss available for transfer to another company within the same group.

A separate election will be available for each year of income.

The estimated revenue cost of this measure is $70 million in 1986-87 and $65 million in 1987-88.

Capital Subscribed to Petroleum and Afforestation Companies

In giving effect to another tax reform proposal, provisions in the Bill will withdraw the tax concessions in respect of moneys paid on shares in petroleum or afforestation companies.

First, there is the tax rebate of 27 cents in the dollar for moneys paid on shares in an eligible petroleum compan.m

This is available where the company lodges a declaration that it has expended, or will expend, the moneys on prospecting, exploration or mining for petroleum in Australia.

There is also a deduction for one-third of calls paid on non-redeemable shares in a company whose principal business is afforestation in Australia, where the call moneys are for use in that business.

Both the rebate and deduction are being withdrawn for moneys paid on shares after 19 September 1985, other than moneys paid by a person on calls made on or before that date on shares then owned or beneficially owned by the person.

Withdrawal of these concessions is estimated to result in a gain to revenue of $10 million in 1986-87 and $15 million in 1987-88.

Investment in Australian Films

As the Treasurer announced on 19 September 1985 in the tax reform statement, the tax concessions for investment in the production of Australian films are to be reduced as part of the restructuring of assistance to the film industry.

For eligible expenditure contracted for after 19 September, the special income tax deduction will be 120 per cent or the expenditure, in lieu of 133 per cent.

The associated income tax exemption in respect of the net income from a film will be 20 per cent of the eligible investment, rather than 33 per cent.

The higher concession levels will, however, continue to be available to an investor who takes up an interest in an Australian film in place of an underwriter who entered into underwriting arrangements on or before 19 September 1985. .

This reduction in taxation concessions is to be offset by additional funding of s2 million in 1985-86 and $3 million in each of the following two years.

This will be achieved through the special production fund administered by the Australian film commission.

The estimated net saving to revenue is $35 million in 1986-87 and subsequent year.d

Prescribed Payments System

This Bill will also give effect to the tax reform measure to impose on "owner-builders" a liability under the prescribed payments system to make deductions of tax from prescribed payments made in connection with domestic construction projects exceeding $10,000 in cost.

Mr Speaker, this measure represents the Government's considered response to industry representations that an owner-builder should, as far as the prescribed payments system is concerned, be treated in the same way as the professional builder.

By this Bill, owner-builders are to have the same obligations and duties as are currently imposed on professional builders under the prescribed payments system.

This change will apply in relation to prescribed payments made by owner-builders on or after 1 July 1986 in connection with domestic construction projects costing more than $10,00o that are commenced on or after that date.

It is estimated that this measure will lead to a net revenue gain of $16 million in 1986-87 and s4 million in 1987-88.

Another amendment to be made to the prescribed payments system provisions of the law will overcome a possible technical weakness in the present statutory definition of a "Householder".

This amendment will affect neither the practical operation of, nor collections received under, the prescribed payments system.

It will apply from the date of Royal Assent to the Bill.

Mr Speaker, as the Treasurer said to Honourable Members when delivering his statement on reform of the Australian taxation system on 19 September, the Government is engaged in a tax reform exercise not a tax raising one.

The gains to revenue arising from the tax reform changes will be applied by the Government towards substantially easing the burden of high marginal rates of tax on honest middle income taxpayers.

Together with other elements of our tax reform package, these changes will restore fairness to the Australian tax system

Live Stock Valuation Option

A budget measure contained in the Bill will provide - for horse breeders - an additional live stock valuation option under-the trading stock provisions of the income tax law.

This measure was one of the three proposals announced in the 1985-86 budget to assist the horse racing industry.

The additional option will be available in respect of a sire or brood-mare acquired under a contract entered into after 20 August 1985.

Under the present law, a taxpayer May elect to value live stock on hand at the end of a year of income at cost price, market selling value or some other appropriate value.

The new live stock valuation method for horse breeders is in addition to existing valuation options available.

This further method of valuation will enable a horse breeder to write down the cost of a sire by up to 50 per cent per annum or a Brood-mare by 33 1/3 per cent per annum -in either case on a diminishing value basis.

An alternative in the case of a brood-mare will be to write down its cost to $1 on a straight line basis over, depending on the mare's age, a minimum period of three years.

The Bill contains safeguarding provisions that will operate to counter artificial arrangements designed to make eligible for the new option a horse that would not otherwise qualify because it was in fact owned by the breeder on or before 20 August 1985.

Mr Speaker, this measure should have no effect on 1985-86 revenue.

The nature of the measure is such that a reliable estimate of its revenue effect in future years cannot be made.

Education assistance scheme paymentsas announced in the Treasurer's budget speech, the Government has developed a comprehensive four year plan designed to encourage young people to remain in education.

Financial support for young people is one area of our strategy designed to ensure that the youth of Australia share in the benefits of economic recovery and growt.s

Part of the Government's plan is to bring education assistance allowances for those under 18 and those in the 18 to 20 age group more into line with the benefits payable to single unemployed people in the equivalent age brackets.

By 1988, students entitled to education assistance and young people on unemployment benefits will be receiving basically the same rate of payment. .

Unemployment Benefits are already Taxable.

The living allowance and incidentals allowance payable under the education schemes should, therefore, also bear tax.

This Bill proposes, with effect from 1 January 1986, to remove the present exemption from income tax of payments received under the tertiary education assistance scheme and the adult secondary education assistance scheme.

However, any component of the allowance attributable to a dependent child will, as is the case with unemployment benefits. remain exempt.

An associated amendment will provide for taxable scheme payments to be subject to regular pay-as-you-earn deductions.

The estimated net gain to revenue from this measure is nil in 1985-86, $4 million in 1986-87, $23 million in 1987-88 and $25 million in 1988-89.

The Government has also announced that it proposes to remove, from 1 January 1987, the tax exemption now available for payments made to parents of secondary students under the secondary assistance scheme.

The conditions that apply to determine entitlement to payments under this scheme are to be changed and legislation to give effect to the decision to withdraw the tax exemption will be introduced into the Parliament after the details of the revised scheme are settled.

ACT Stamp Duty

Together with two further Bills that I will shortly introduce, this Bill will also give effect to the Government's 1985-86 budget proposals to introduce new and increased taxation in the Australian Capital Territory.

One of these proposals is to subject transfers of units in unit trusts to ACT stamp duty and tax.

To that end, a transfer of a unit in a unit trust is to be treated as a transfer of a marketable security.

The result will be that stamp duty and tax will be imposed on such transfers at the rates applicable to marketable security transfers.

The estimated revenue gain from this measure is $50,000 in a full year.

Provisions of the Bill will also counter the avoidance of stamp duty on certain conveyances by way of mortgage under the ACT real property ordinance.

Under existing ACT stamp duty law, a conveyance of a legal interest in land by way of mortgage is specifically exempt from duty - on the principle that the transfer of the legal title to a mortgagee is no more than a means of securing repayment of - the borrowed moneys.

In such cases the mortgagor is intended to retain what is called the equity of redemption which carries with it the right to re-transfer of the legal title on repayment.

This exemption could be abused to obtain an exemption from duty in cases where there is no intention that the mortgagor will re-acquire the legal interest.

The exemption from stamp duty is to be removed in relation to transfers of legal interests under the real property ordinance by way of mortgage where there is an intention that both the legal and equitable interests are being transferred to the mortgagee.

Where property transferred in these circumstances is subsequently re-transferred to the mortgagor, a refund of the excess duty paid will be available.

The tax on transfers of units in unit trusts and the amendments relating to duty on non-bona fide mortgages will apply to transactions occurring on or after the first day of the month following that in which the Bill receives the Royal Assent.

While the imposition of ACT stamp duty on mortgages, debentures and other loan securities is being implemented by amendments contained in the Australian Capital Territory stamp duty amendment Bill, provisions in this Bill will set out the rules governing liability for the new dut.

Under those rules, a document will be subject to duty if it is a mortgage, a company debenture, or a bond or covenant securing a loan and it is executed or issued in the ACT by the borrower.

Likewise, a loan security on property in the ACT will be subject to duty.

In these cases the person liable to pay the duty will be the borrower and the Bill sets out the requirements as to payment of duty.

Other provisions of the Bill will validate the regulation-making power under the ACT Stamp Duty Act, and several related taxing Acts.

At the time of enactment of the Australian Capital Territory Stamp Duty Act, the regulation-making power contained in the Australian Capital Territory Taxation (Administration) Act was thought to be adequate to authorise regulations under the Stamp Duty Act and related taxing Acts.

This is because those Acts and the Administration Act are to be read as one.

Regulations were accordingly made specifying circumstances in which duty or tax is not imposed.

Following the recent decision of the federal court in amalgamated television services pty ltd v. Australian broadcasting tribunal it is now clear that a separate power to make regulations is required for each act.

Provisions in the Bill will provide a specific regulation-making power in each of the ACT Stamp Duty and taxing Acts.

To validate regulations that have already been made, the regulation-making power will, where necessary, be deemed to have come into operation on 1 July 1969.

Taxation Secrecy Provisions

Ammendments contained in the Bill will permit greater use of information that, under the existing income tax secrecy provisions, May be provided to certain Royal Commissions.

These amendments give effect to a recommendation made by Mr F.X. Costigan q.c. in the fourth interim report of the Royal Commission on the activities of the Federated Ship Painters and Dockers Union.

The amendments will allow a Royal Commission to make taxation-sourced information available to the Director of Public Prosecutions or a Special Prosecutor, if the Commission considers that-the information is relevant to an investigation of a tax-related offence.

The requirements of secrecy applying to Taxation Officers and other persons privy to confidential taxation information will, of course; extend to persons to whom taxation information can be communicated under these amendments.

The amendments will also remove any doubt that taxation-sourced information can be passed on by a Royal Commission to a police officer assigned to make an investigation on behalf of the commission.

These measures should have no effect on the revenue.

The Finnish Tax Agreement

I now turn to provisions of the Bill that will provide legislative authority for the entry into force of a comprehensive double taxation agreement and protocol dealing with all forms of income flowing between Australia and Finland.

The agreement and protocol were signed on 12 September 1984, at which time details were announced and copies of the agreement were made publicly available. .

The Bill will insert the text of the agreement and protocol into the Income Tax (International Agreements) Act 1953 as a schedule to that Act.

The agreement with Finland, as with comprehensive taxation agreements generally, has two primary objectives -the elimination of international double taxation and the prevention of fiscal evasion.

The first of these objectives is achieved by the contracting countries agreeing to allocate taxing rights between them.

There are various ways in which this is done, the particular method depending upon the nature of the income concerned.

For example, some classes of income are to be taxed only in the country of residence, while others will be taxed only in the country of source.

A third category is comprised of income consisting of dividends, interest and royalties which May be taxed in both countries.

In this case the country of source generally agrees to limit its tax, and the country of residence of the taxpayer agrees to allow a credit against its tax on such income for the tax paid in the other country.

The agreement contains measures for the formal relief of double taxation of income that May be taxed in both countries. It also contains provisions of a kind common to taxation agreements relating to the taxation of business profits, professional services, employees, public entertainers, students, pensioners and so on.

So far as the object of preventing fiscal evasion is concerned, provision is made in the agreement for the exchange of information and for consultation between the tax administrations of the two countries.

In these and all other essential respects, the agreement accords with the position that Australian governments have taken over the years in relation to the negotiation of comprehensive taxation agreements.

The agreement and protocol will not enter into force until all necessary Constitutional processes are completed both by Australia and Finland.

They will then have prospective effect in accordance with their terms.

For Australia, this Bill will, when assented to, complete the Constitutional processes required of us.

The agreement and protocol are not expected to have any significant effect on the revenue.

Mr Speaker, a broad guide to the provisions of the Bill is contained in part a of the Explanatory Memorandum being made available to Honourable Members.

A detailed, clause by clause explanation of each provision of the Bill contained in part b of the memorandum will be made available to Honourable Members in the next few days.

I commend the Bill to the House.