Second Reading SpeechBy the Treasurer, the Hon. Paul Keating, MP
When the Government embarked on its critical task of reforming the Australian taxation system, it first set out the major objectives for worthwhile and enduring reform, and then painstakingly developed a detailed program for achieving those results.
One goal that emerged clearly was the need to improve the fairness of the system for the majority of Australians by pursuing with resolve our policy of rooting out tax avoidance and evasion practices that had been found to exist on a large scale.
These had seriously eroded public confidence in the integrity of the tax system and had caused a disproportionate shouldering of the revenue burden by honest citizens.
An associated goal was to lighten substantially the weight of high marginal tax rates which were operating to undermine the income tax base. Those related aims - indeed the whole thrust of the tax reform package - was about improving equity and not about increasing government revenues.
This Bill introduces another major element of the tax reform package, a system for effectively taxing remuneration obtained as fringe benefits which has been escaping the tax net. By and large the measures that the Bill contains follow closely the proposals for dealing with fringe benefits that were contained in the 19 September 1985 statement.
In outlining those measures now I observe that the Government has readily entered into consultation with employer representatives, trade unions and other interested groups.
It has been ready to listen and respond to reasoned argument as to whether particular aspects of its proposals should be modified. The willingness of the Government to entertain responsible dialogue in this area has been a feature of its approach.
But our principal goals have been kept unswervingly in sight. Major reform necessarily means that relative shares of the tax burden will shift and other adjustments will occur as a consequence.
The process cannot be painless for all. It must be expected that some will disagree with measures affecting them. We cannot allow that small measure of disagreement to defeat our objective of providing a fairer and better deal for Australian taxpayers.
Before turning to the main features of the Fringe Benefits Tax, I remind Honourable Members of the background. There has over the years been a very strong movement towards the remuneration of employees - especially higher income earners - by fringe benefits packages which allowed income tax to be avoided on substantial parts of the overall remuneration.
So called tax-free perks came to dominate salary package negotiations and packages were openly advertised in the market place. Increasingly innovative deals were emerging particularly after the demise of the "paper" tax avoidance schemes in the early 1980's.
All of this was aggravated by the inability of the existing income tax system to exact tax effectively from recipients of fringe benefits. Several factors contributed to this.
First there were deficiencies in the income tax law itself. A major one was that it called for case by case subjective judgments to be made as to the value of fringe benefits in the hands of individual employees.
That kind of requirement is simply incompatible with the efficient assessment and collection of tax on a mass scale and invites disputation.
There were also technical defects creating gaps in coverage, for example, when benefits were given to family members and associates rather than to employees directly.
A decided lack of enthusiasm to tackle such problems over the years by previous governments inhibited administrative initiatives in this area, encouraged the growth of fringe benefits and heightened perceptions that there was a right to enjoy perks tax-free once they were negotiated.
This was a situation that the Government could not leave unchallenged if tax reform was to have any meaning.
Plan of the tax
Fringe Benefits Tax will be imposed on employers on the taxable value of fringe benefits that they provide to their employees. There is no practical alternative to that course.
It will commence to apply from 1 July 1986 and the tax will be payable in quarterly instalments, the first of which will be due by 28 October 1986 in relation to fringe benefits provided in the quarter to 30 September 1986.
The system will be one of self-assessment which means that a responsibility will be placed on employers to lodge an annual return and, when doing so, to calculate the amount of Fringe Benefits Tax payable.
To avoid imposing a further concentration on the workloads of employers, tax agents and the tax administration in peak processing periods, the standard tax year for Fringe Benefits Tax purposes will be the year from 1 April to 31 March rather than the financial year.
As the tax is to commence on 1 July 1986, transitional provisions will enable the first year of tax to apply for the 9 months period to 31 March 1987, with the second year of tax being from 1 April 1987 to 31 March 1988.
For the transitional "year", tax will be imposed at the rate of 46 cents in the dollar on the taxable value of fringe benefits subject to the tax. Thereafter the rate will be 49 cents which equates with both the maximum marginal rate of income tax proposed to apply from 1 July 1987 and the company tax rate to apply to corporate incomes derived in 1987-88.
Once the tax is fully operational, after the initial transitional period, three quarterly instalments of tax will be payable in each year for the quarters ending 30 June, 30 September and 31 December with payments falling due on the twenty-eighth day of the succeeding month in each case.
The quarterly instalments will normally be based on the tax payable for the previous year. Employers will, however, be permitted to estimate their annual liability for the purpose of varying their quarterly instalments where the level of benefits changes from year to year, in much the way that provisional tax May be varied under the income tax law.
For the transitional 9 month assessment period two quarterly instalments will be payable, for the quarters ending 30 September and 31 December 1986. As there will be no previous year liability on which those instalments could be based, each will be calculated and paid by reference to the actual levels of benefits provided to employees in the respective quarter periods.
The Bill contains legislative directions as to how this is to be done.
Taxable fringe benefits
As the purpose of the tax is to remove a serious gap in the income tax law and ensure that all forms of remuneration paid to employees bear a fair measure of tax, Fringe Benefits Tax is pitched at all employers - both taxable employers and exempt employers under the income tax law.
It will apply to commonwealth, state and local governments and their agencies. An exception - but a tightly drawn one - will apply in the case of members of religious bodies.
Consistent with this approach, the tax will have a wide sweep as to the kinds of fringe benefits it will cover. As stated in the 19 September 1985 announcement, the types of benefits to be taxed include employer-provided motor vehicles, free or low-interest loans, residential accommodation, board and excessive living-away-from-home allowances, goods and services sold at or below cost, or provided free, and expenses paid on behalf of employees.
In fact, unless specifically exempted, any form of employee fringe benefit will come within the new rules.
Honourable Members will recall some exclusions that have been announced previously. Fringe Benefits Tax will not apply to benefits associated with contributions to superannuation funds and employee share acquisition plans. The income tax law already deals with these.
Generally excluded also are staff canteens and free or discounted use of commuter transport systems by their employees. There will be no tax on the use of child care facilities and recreational facilities on an employer's premises.
As a practical matter, there will be no tax on goods consumed at work nor on the first $200 in value in a year of free or discounted goods or services provided to an employee, including discounted air fares to airline and travel agency employees.
Some further exemptions not announced earlier are to be given. I draw attention to them now -
- Low interest loans granted to veterans under the defence service homes act;
- Consistent with our international obligations, benefits provided to employees by organisations that are immune from income tax by virtue of the international organisations (privileges and immunities) act, the consular privileges and immunities act or the diplomatic privileges and immunities act, or under international agreements; and
- Live-in accommodation of employees who care for disabled people or disadvantaged children or other persons in a House, unit or hostel operated by a government body, religious body or other non-profit organisation.
The exemption referred to earlier that is proposed for religious institutions will only apply to benefits that are given to clergy and other members of a religious order. To ensure equity between employees in like occupations, benefits will be taxable if they are given mainly in respect of secular or commercial activities and not religious duties.
Valuation of benefits
The taxable values of the various fringe benefit categories will be determined under rules set out in the Bill. For the most part the valuation rules follow closely details contained in the announcement of 19 September 1985. There are some respects in which the initial proposals are to be adjusted or extended following consideration of representations.
For employer-provided cars made available for personal use of employees, two alternative methods of valuation were specified. One values the benefit as the actual private use proportion of the costs of operating the vehicles and requires detailed record-keeping.
The second is an arbitrary formula which May be chosen by those preferring not to document fully their business and private travel. Under this method the taxable value is a specified percentage of the original purchase price of the vehicle to the employer or, for a leased vehicle, the market value when the lease commences.
Under each of these methods the cost price or market value will be adjusted upwards to reflect any sales tax or customs duty exemptions that applied when the car was acquired by the employer.
This adjustment will place on an equal footing for Fringe Benefits Tax cars provided by all classes of employers, including governments, whether or not they receive concessional treatment for other purposes.
For car benefits valued under the arbitrary formula the cost price or market value base for calculating the taxable value will be discounted by one-third if the car is held for more than four years. This recognises that the right to use older vehicles is somewhat less valuable than the use of a newer one.
Before moving away from motor vehicles, I refer to concerns expressed to the Government about the impact of Fringe Benefits Tax on the motor vehicle industry.
We have listened carefully to those representations and we have tested and analysed the material offered in support of them. It is the Government's considered view that the new tax rules are quite fair - indeed the arbitrary formula is somewhat generous - and will not produce distortions in the car market.
That is not to say that the costs of Fringe Benefits Tax will have no impact on car sales. We judge, however, that loss of unit sales due to the tax will fall within tolerable limits for the industry and certainly will not impact in a discriminatory manner.
We cannot let short-term adjustment considerations stand in the way of essential and lasting closure of a notorious tax loop-hole. The industry need not rely on unfair tax advantages in the context of the stronger economy, improved competitiveness and the further advantages provided by the car plan which have derived from the policies of the government.
It was previously announced that the taxable value of free or subsidised rental accommodation would be discounted by one-third if the housing qualified for the existing remote area housing concession available under the income tax law.
We have decided to increase the discount to 40 per cent. This concession is in recognition of the cost disadvantages of constructing accommodation in such areas.
It has also been decided to make available a statutory formula for valuing remote area housing benefits as an alternative to basing it on 60 per cent of the market value.
Under the alternative, an employer will be able to elect to have the taxable value of employee housing taken as a specified proportion of average adult male full-time earnings in the mining industry.
That proportion will be the dwelling rent component of private consumption expenditure as published in the Australian national accounts by the Australian statistician.
This arbitrary method will obviate the need to determine market values in remote areas where the local housing market can be subject to abnormal supply and demand factors.
Where an employer adopts this method it will apply to all remote area housing provided to employees of that firm.
The Bill makes further allowances for the situation of remotely located employment. One of these is to discount by half the value of holiday travel subsidised or paid for by employers where, under an employment agreement or award, the employees are entitled to be assisted with travel to the location where they were engaged or to the nearest capital city.
For all these purposes the tests of remoteness under the income tax law are to be modified. A location will be remote if it is more than 40 kilometres from a population centre of 14,000 or more and beyond 100 kilometres of a population centre of 130,000 or more, the populations being as established by the 1981 census.
The figure of 14,000 is an increase on the 12,000 figure under the income tax concession and ensures that there is no detriment to employers in areas that have increased in population since the previous census.
In addition, if a location is in zone a or zone b it will be treated as remote for Fringe Benefits Tax if it is more than 40 kilometres from a population centre of 28,000 rather than 14,000. Again this recognises the costs of providing reasonable working conditions, including recreation assistance, in less congenial areas.
Employees of airlines and travel agencies May fly on private travel at greatly reduced fares under arrangements applying within the travel industry. Under these, the travel rights of the employees are available on a stand-by basis only after seating is allocated to members of the public, including those travelling on commercial stand-by fares.
In valuing the resulting fringe benefit, due allowance is to be made for the restrictions attaching to this kind of travel right.
Where the travel is on a scheduled service of a domestic carrier a discount of 50 per cent will be applied to the standard economy fare. For stand-by travel on an international route this discount will generally be applied to the lowest fare for the route published in Australia for individual bookings during the tax year.
In each case the generally applicable concession for staff discounting of goods and services will also be extended. That is, the taxable value will be reduced to 75 per cent of the benefit.
Tax will be payable by the employer whether or not the employer is the actual carrier.
I could take up the time of the House in discussing other aspects of this Bill but do not propose to do so. The main features of the new tax have been spelled out and a detailed Explanatory Memorandum is being made available.
This is an assessment Bill for a new tax and therefore contains all the usual machinery provisions of a tax law for such things as collection and recovery procedures, appeal rights and the necessary administrative arrangements.
Its design features are directed at making the operation of the tax as readily manageable as possible for employers. The Bill also contains all the rules necessary to identify and value the wide range of fringe benefits it deals with.
All of this means that this is a very substantial Bill both in content and importance. It represents another major step towards completing our tax reform program.
The revenue gain from the imposition of Fringe Benefits Tax is estimated at $330 million in 1986-87, $540 million in 1987-88 and $625 million in 1988-89.
I have pleasure in commending the Bill to the House.