House of Representatives

Taxation Laws Amendment Bill 1986

Taxation Laws Amendment Act 1986

Second Reading Speech

By the acting Treasurer, the Hon. Chris Hurford, M.P.

This Bill will give effect to a further two of the Government's tax reform measures.

First, it will provide rules limiting tax deductions for interest incurred in borrowing money to finance rental property investments - so called "negative gearing".

Secondly, it provides a depreciation allowance of 4 per cent per annum in respect of residential income-producing buildings.

The Bill also contains amendments to overcome a decision of the federal court that sanctioned arrangements under which future income rights could be disposed of for a non-taxable capital sum.

Other provisions contained in it will introduce grouping provisions into the ACT pay-roll tax law to close a loophole which enables employers - by pay-roll splitting - to make multiple use of the exemption available for small pay-rolls.

Finally, the Bill will amend the income tax law to facilitate the introduction of a system of self-assessment for taxpayers, give the force of law in Australia to an airline profits agreement with the people's republic of China and authorise deductions for gifts made to the Australian sports aid foundation.

Madam Speaker, I will now outline in more detail the significant measures contained in the Bill.

Negative Gearing

The Bill will give effect to the Government's decision - - explained in the Treasurer's statements of 17 July and 25 September 1985 - to limit the income tax deductibility of interest associated with the negative gearing of rental property investments. Negative gearing occurs where, in a particular year, interest on borrowings used to finance rental property investments exceeds net rental income from those investments.

Under the existing law, a taxpayer is able to set off that excess against income from other sources and thereby shelter that other income from tax.

Madam Speaker, the Government takes the view that the general taxpaying community should not be obliged to effectively subsidise the acquisition of investments by a particular group of taxpayers in this wa.o

Competition for the purchase of residential property between these investors has been reflected in increased prices, to the detriment of ordinary home buyers.

The amendments proposed by this Bill are to apply whether the investor is an individual, company, partnership or trustee of a trust.

Under them, a limit will be placed on the income tax deduction allowed for interest on borrowings used to finance rental investments made after 17 July 1985.

The deduction limit will be an amount equal to the net rental income from those investments.

Net rental income is the aggregate of gross rental income from all such investments less related deductions other than building depreciation and interest.

Interest in excess of the deduction limit in any year will be carried forward and treated as interest incurred in the next income year.

In this way it May be set off against net rental income of that next year or of later years.

There is to be no limit on the number of years excess interest May be carried forward.

In the case of a partnership, each individual partner will be deemed to have incurred his or her share of the partnership's excess interest.

Measures in the Bill will allow a company to transfer excess interest to another company within the same group of companies.

Investments in land and buildings will be regarded as rental investments to the extent that the land and buildings are used, or held ready for use, for the purpose of producing rent.

Rental investments made after 17 July 1985 will include land and buildings acquired under contracts entered into after that date and, with certain exceptions, buildings and improvements the construction of which commenced after that date.

Such investments will also include shares in rental property companies and interests in rental property partnerships and trust estates acquired after 17 July 1985

The Bill provides that a rental property company, partnership or trust estate is one having at least 75 per cent of its net worth on the last day of the year of income in interests in land used, or held ready for use, for rent producing purposes.

The interests May be held directly or through interposed companies, partnerships or trusts.

The amendments will not apply to investments by employers in residential accommodation leased to employees at or adjacent to a site of mining operations or in or adjacent to a timber felling area, where capital expenditure on that property May be written off under the existing income tax law.

Rental property acquired as a beneficiary of a deceased person who acquired the property before 18 July 1985 is also excluded from the scope of the amendments.

Interest on a loan replacing borrowings that financed a rental property investment made before 18 July 1985 will generally not be subject to the deduction limit.

Where, after 25 September 1985, a change of 50 per cent or more occurs in the beneficial ownership of rental property acquired before 18 July 1985, the amendments will apply.

On the other hand, they will generally not apply to a rental investment made after 25 September 1985 if changes in beneficial ownership after that date are less than 50 per cent and the former owner or owners acquired the property before 18 July 1985.

It is estimated that this measure will result in a revenue gain of $55 million in 1986 87, $100 million in 1987-88, rising to $195 million in 1990-91 and subsequent years.

Residential Income-Producing Buildings

The income tax law is to be amended by the Bill to allow depreciation deductions in respect of residential buildings used for the purpose of producing assessable income, where construction commenced or commences after 17 July 1985 - the date on which the proposal was announced.

Extensions, alterations or improvements will similarly qualify for depreciation deductions.

This measure is aimed at stimulating new building for rental housing purposes and thus increasing the supply of rental accommodation.

Deductions will be available on the same general basis as deductions are presently available in respect of traveller accommodation buildings and non-residential buildings used for income-producing purposes.

In broad terms, fixed annual deductions of 4 per cent of capital expenditure on the construction of an eligible building, extension, alteration or improvement will be available to the owner, or in certain circumstances the lessee, over a 25 year period.

Madam Speaker, with the introduction of this measure, all new buildings, extensions, alterations and improvements that are used for the purpose of producing assessable income will generally now qualify for depreciation deductions.

For residential buildings, special provisions will apply to deny deductions where a building, or any part of a building, is used by the owner, or eligible lessee, or by an associate of them.

The cost to revenue of this measure is estimated at $2 million in 1986-87 and $7 million in 1987-88.

Assignment of Rights to Future Income

This Bill will give effect to the Government's decision announced on 9 October 1985 to tax, in the hands of the assignor, consideration received for the assignment of rights to future income.

The Government's decision was made following the decision of the federal court of Australia in a case where rights to receive future interest payable under long-term agreements were assigned to an unrelated finance company for full consideration.

The court upheld the claim by the assignor that the consideration received was a non-taxable capital receipt.

The assignee, as a finance company, could offset the consideration received by it against the assigned interest as it was derived.

The Commissioner of Taxation, under special leave granted by the high court, has appealed against the decision of the federal cour.u

In the Government's view, the taxation implications of pre-10 October 1985 arrangements are therefore appropriately a matter for determination by that court.

However, in view of the potentially large amounts of tax involved in arrangements of the kind in question, the Government believes it is proper to amend the income tax law, as a precautionary measure, in relation to such arrangements entered into on or after that date.

By this Bill, where a right to receive income is transferred after 9 October 1985 under arm's length and certain non-arm's length arrangements without the transfer to the transferee of the property giving rise to the right, the amount of any consideration received or receivable in respect of the transfer will be taxed in the hands of the transferor.

Complementary amendments will modify the existing anti-avoidance provisions relating to the transfer of future income rights for less than 7 years.

They will, in relation to post-9 October 1985 assignments, only apply where the parties to the transfer are associated and the consideration (if any) in respect of the transfer is less than full consideration.

Where the existing anti-avoidance provisions as modified apply, any consideration for the assignment will not be treated as assessable income.

While it is not possible to quantify the saving to the revenue from this proposal, the potential revenue loss in the absence of this change in the law could, if the high court confirms the efficacy of the arrangements, have amounted to many millions of dollars.

ACT Pay-Roll Tax

The Bill will also give effect to the Government's decision announced on 26 July 1985 - to close a loophole in the ACT pay-roll tax law.

It will do this by the introduction of grouping provisions.

Under the ACT pay-roll tax law, tax is payable by employers whose annual taxable wages exceed the prescribed exemption level.

This is presently $170,000.

Some employers have entered into arrangements under which their business operations are conducted by a number of separate entities, so that their pay-roll is split between these entities.

Under these arrangements, liability to pay-roll tax is either avoided totally or at least substantially reduced.

Madam Speaker, exploitation of the exemption level is estimated to cost the revenue some $7 million annually.

The Bill will introduce into the ACT pay-roll tax law provisions, similar to those in force in the states and the northern territory, under which certain related employers are to be treated as an employer group for pay-roll tax purposes.

Several employers will constitute a group where they are related companies, they share the same employees or they carry on businesses that are under the control of the same person or persons.

Where several employers are treated as an employer group, only one member of that group will be entitled to the benefit of any exemption available.

That entitlement will be calculated by reference to the wages paid or payable by all members of the employer group.

The amendments will apply in relation to wages paid or payable on or after the first day of the month following that in which this Bill receives the Royal Assent.

Self Assessment

Other provisions in this Bill will smooth the way for the introduction of a system of "self-assessment" of income tax returns.

The decision to introduce this system was taken following a detailed examination by the Commissioner of Taxation of existing income tax assessing methods.

The Government has endorsed the Commissioner's decision and agreed to some technical changes in the income tax law to facilitate introduction of the system from 1 July.

Under self-assessment the Commissioner's officers will generally not subject income tax returns to the same degree of technical scrutiny that has existed in the past before a notice of assessment is issued a

Self-assessment will mean that, after assessments have issued, there will be more audits and more checking and verifying of information in returns against data obtained from external sources.

Taxpayers who, when their return is processed or later, are found to have made false or misleading statements in their returns will face heavy penalties.

Measures passed by the Parliament in 1984, are relevant in this regard.

The more limited initial checking of returns that will occur under self-assessment could mean that the assessment that is made on the basis of a taxpayer's return produces a tax Bill that is higher or lower than what the law really authorises.

To remedy this, the Commissioner's power to amend assessments is to be widened.

The new power to amend to correct an error of law will enable a taxpayer's liability to be either increased or decreased, generally within a period of three years after the due date for the payment of tax under the assessment.

Where the Commissioner detects an error that was against the taxpayer, the taxpayer will be paid interest when the original mistake is corrected.

To compensate the revenue where tax was underpaid as a result of an error in a taxpayer's favour, the Bill also contains provision for the payment of interest to the Commonwealth.

Where an amended assessment increasing a taxpayer's liability occurs because the taxpayer made a false or misleading statement in his or her return then, rather than interest, the penalties provided for under existing law May apply.

Interest will be calculated from the date on which the underpaid tax should have been paid to the date on which the amended assessment is made.

The rate of interest will be the same as that applicable from time to time under the Taxation (Interest on Overpayments) Act 1983.

The present rate is 14.026 per cent per annum.

These amendments are to apply to amended assessments made on or after 1 July 1986 in respect of the 1985-1986 year and all subsequent years of incom.


The gift provisions of the income tax law will be amended by the Bill to give effect to the Government's announcement of 10 December 1985 to make gifts to the Australian sports aid foundation tax deductible.

Deductions will be allowable for gifts the value of which is $2 or more made on or after 18 February 1986 - that being the date of the foundation's incorporation.

The cost to revenue of this measure is estimated at up to $5 million in a full financial year.

Airline profits agreement with the people's republic of China

Finally, Madam Speaker the Bill will provide legislative authority for the entry into force of a taxation agreement (limited to the taxation of profits derived from international air transport) with the people's republic of China.

Details of the agreement were announced when it was signed in beijing on 22 November 1985, and copies were made available to the public at that time.

By the agreement, Australia and China are to exempt from their respective income taxes profits derived from international air transport by the other country's international airline.

The practical effect of the agreement is that Australia will have the sole right to tax chinese source profits from the international airline operations of qantas, while China will have the same right with respect to Australian source profits from international operations of China's airline, CAAC. Upon entering into force, the agreement will have effect in both countries in relation to profits and revenues derived on or after 1 July 1984.

Although this agreement with China is restricted to international airline profits, I advise Honourable Members that China is included in the Government's current negotiating program for comprehensive taxation agreements.

The agreement with China is expected to have a negligible impact on revenue.

An Explanatory Memorandum comprehensively explaining the features of this Bill, and an associated Bill that I will introduce shortly, is being circulated for the information of Honourable Member.

I commend the Bill to the House.