Second Reading Speech
By the Treasurer, the Hon. P.J. Keating, M.P.This Bill will amend the income tax law in two major respects.
It also contains several other amendments of the taxation laws.
The principal measures to which it will give effect are the proposals I announce in December 1984.
The first of these was to tax each year the income accruing to resident taxpayers from discounted, deferred interest and capital indexed securities.
The other was to strengthen the interest withholding tax provisions in relation to such securities held by non-residents, and other non-traditional financing arrangements.
The Bill will also exempt from tax certain allowances paid to recipients of the New Commonwealth Formal Training Allowance.
A technical defect in the rebate provisions of the income tax law that apply to certain employment termination payments is to be corrected.
The income tax secrecy provisions are to be amended to enable information concerning superannuation funds, approved deposit funds and similar funds to be conveyed to persons who may be responsible for supervision of the superannuation industry.
And finally, the Bill will amend the income tax gift provisions and make a number of purely technical amendments relevant to the recent changes to the repatriation laws.
I turn now to discuss in more detail the measures contained in the Bill.
Discounted and Other Deferred Interest Securities
In December 1984 I announced the Government's decision to adopt a new method of taxing income accruing on certain non-traditional securities on which some or all of the income yield is accumulated and paid only at maturity.
The gain to an investor from holding such securities is income that is akin to interest, and is taxed under the present income tax law only on redemption or prior sale of the instruments.
That deferral of tax gives rise to effects on budgetary revenue and advantage investors in those securities by comparison with investors in traditional securities having the same nominal before-tax yield.
These revenue and market effects are undesirable, and the income tax law is to be changed to correct that situation by taxing the overall yield on non-traditional securities on a basis broadly comparable to the way in which income derived from traditional securities is taxed.
Amendments contained in this Bill will ensure that income that is compounded or accrued in each year from a discounted or other deferred interest security will be taxed in that year to the investor.
This accruals basis of assessment will apply to the holder of an affected security whether it was acquired on issue or by purchase in the secondary market.
A gain arising from the sale of an affected security for more than its accrued value will be included as assessable income of the vendor, while a loss on sale will be an allowable deduction.
With certain exceptions the securities to which these particular measures will apply include original issue discount securities, interest-at-maturity securities, and securities (such as dingo bonds) which separately market the entitlements to principal and interest on underlying securities.
However, such securities will only be subject to these measures if they were originally issued after 16 December 1984 with a term exceeding one year and where, at the time of issue, the deffered yield on the security can be ascertained and, for each year in the term of the security, exceeds 1.5 per cent of the redemption price.
Securities on the indexed capital type or those where the yield to redemption cannot be determined on issue, will be subject to other measures contained in this Bill, provided they were also issued after 16 December 1984 for a term exceeding one year.
In these cases, the assessable income of the investor in any year will include the actual increase, by indexation or otherwise, in the accrued value of the security during the year, as well as any interest actually derived during that year.
Where these kinds of affected securities are also issued or purchased at a discount, the discount will be included in the holder's assessable income on a straight-line basis over the period the security is held.
This will be based on the term, or the remaining term, as the case may be, of the security.
If such a security is purchased on the secondary market at a premium over its accrued value, the premium is to be allowed as a deduction on the same basis.
The accruals basis of assessment will not apply to relevant securities held by non-residents or forming part of a taxpayer's trading stock.
Subject to certain exceptions, issuers of affected securities will be allowed deductions each year for the discount or other interest component calculated on a basis similar to the assessable income of the investor.
The exceptions, which are of an anti-avoidance and revenue protection nature, are securities issued after today offshore or payable to bearer.
Deductions in those cases will continue to be allowed in the year in which the discount or deferred interest is actually paid.
By bringing forward the taxing point of income on these securities, the arrangements I have outlined will redress the tax deferral advantages of such securities.
This will result in some unquantifiable gains to revenue.
I turn now to the proposal I also announced in December 1984 to strengthen the interest withholding tax provisions of the Income Tax Law.
In recent years, there has been a move away from the more conventional means by which overseas finance is provided.
This has been with the aim of avoiding the non-resident lender's liability to Australian withholding tax.
Some of the arrangements involve the use of discounted and other deferred interest securities, including capital-indexed securities of the kind I have just spoken about.
A typical arrangement involves securities which, instead of being held by a non-resident until redemption - at which time withholding tax would apply to the payment of the discount or deferred interest - are sold to a resident just prior to maturity.
This means that, while the resident purchaser is usually liable to tax on the excess of the redemption price over the purchase price, the balance of the discount, which effectively passes to the non-resident as part of the proceeds from the sale of the security, is not subject to withholding tax.
Further, the arrangements are often structured so that the profit has an ex-Australian source.
In these cases the profit derived by the non-resident cannot be taxed by assessment.
The proposed amendments will overcome this avoidance technique by ensuring that the tax will apply to the difference between the sale price of the security and its issue price.
Where a non-resident vendor has purchased such a security from a resident of Australia, The Bill provides that the withholding tax liability may be adjusted to bear only on the difference between the sale proceeds and the purchase price.
This measure will apply to relevant debt obligations and securities issued after 16 December 1984 irrespective of their term but, subject to certain safeguards, will only affect payments made on or after the date The Bill becomes law.
Techniques that result in the avoidance of interest withholding tax include hire purchase and similar contracts, such as "Terms Purchase" and "Lease With Option to Purchase" arrangements.
The charges under these arrangements have not, in the past, been classed as interest for withholding tax purposes, although they are, in reality, the reward for the provision of the finance.
Again, because the arrangements do not enable an Australian source to be attributed to the charges, the non-resident "lender" is not subject to tax by assessment.
The Bill will amend the Income Tax Law to bring hire purchase and similar charges - that is, the excess of total payments over the cost price of the goods - within the scope of the interest withholding tax provisions.
This amendment will also apply to contractual obligations entered into after 16 December 1984 but, again subject to appropriate safeguards, only in relation to relevant payments made on or after the amendment becomes law.
The Bill will also remove doubts that may exist about the application of the interest withholding tax provisions to certain payments made in relation to bank accepted Bills of Exchange.
It is not altogether clear whether withholding tax is payable on the discount element of a bank accepted bill where a resident indemnifies or reimburses a non-resident acceptor for the face value of the bill at maturity.
This is to be compared to the situation where, if the resident drawer of the bill had met the face value of the bill directly, withholding tax would clearly be payable on the discount.
The Bill will clarify this by specifying that withholding tax is to be payable on any amount or amounts that constitute the discount or interest factor under a Bill of Exchange.
Similar provisions are contained in The Bill in relation to Promissory Notes.
These provisions will only affect payments made in respect of Bills of Exchange and Promissory Notes drawn or issued after the amendments receive the Royal Assent.
These changes will prevent a continued loss of revenue of an unquantifiable amount.
On 19 December 1985, my colleagues, the Minister for Employment and Industrial Relations and the Minister Assisting the Prime Minister for Youth Affairs, announced the introduction, from 1 January 1986, of a new system of Commonwealth Training Allowance.
The new allowance, called A Formal Training Allowance, has a single age-related structure and is consistent with the aim of the Government's Priority One Strategy in improving education and training opportunities for young people.
The Formal Training Allowance includes a living component which is equivalent to the Social Security Pension or Benefit Entitlement for which a trainee may otherwise have qualified.
Recipients of Social Security Pensions or Benefits who are paid allowances because they have a dependent child, live in a remote area or require rent assistance, are exempt from tax on those allowances.
So as not to disadvantage persons in receipt of The Formal Training Allowance, an amendment proposed by The Bill will exempt from income tax those allowances that may be paid to trainees that correspond with the non-taxable allowances paid to Social Security Pensioners or Beneficiaries.
As associated amendment will ensure that taxable payments of trainees are subject to regular pay-as-you-earn tax instalment deductions.
The estimated cost to revenue of this measure is $100,000 in 1986-87 and $200,000 in a full year.
Employment Termination Payments Rebate
The Bill will give effect to the proposal announced on 11 March 1986 to remove an unintended effect of the Income Tax Rebate Provisions that limit the rate of tax payable on certain payments made on termination of employment.
Those payments are Lump Sum Superannuation and kindred payments that relate to service after 30 June 1983 and most lump sum payments in lieu of accrued Annual Leave and Long Service Leave.
The rebate provisions limit the rate of tax on such payments to no more than 30%.
In the case of the first $55,000 of relevant Lump Sum Superannuation and kindred payments made to a taxpayer aged 55 or more, the rate is limited to a maximum of 15%.
However, a technical defect means that the provisions may not always allow the full benefit of the rebate where some part of the payments is subject to tax at the lowest marginal rate of 26.67% for 1984-85 and 25% for 1985-86.
Amendments contained in The Bill, which will first apply for 1984-85, will correct that defect.
The amendments are not expected to have any significant effect on revenue.
At present, because associated exemptions and deductions are dependent on compliance with various provisions of the Income Tax Law, the Commissioner of Taxation is largely responsible for the regulation of Superannuation and similar funds.
The suggestion is made from time to time that the non-revenue aspects of fund regulation should be the responsibility of someone other than The Commissioner and the Government has that possibility under consideration.
Any transfer of this responsibility would, of course, occur only after consultation with appropriate representatives of employer and business groups, the ACTU and the Superannuation industry.
If it is decided to transfer responsibility, it is most likely to be given to the Department of The Treasury or to a new supervisory authority.
In either event, it is anticipated that any decision in that regard would be taken prior to the budget sittings.
Therefore, this Bill - the last relevant Bill scheduled for passage during the current sittings of The Parliament - proposes the amendment of the Income Tax Secrecy Provisions to permit The Commissioner of Taxation to communicate information to either The Secretary to The Treasury or any new authority for the purposes of carrying out any transferred functions.
The proposed amendment will have no revenue impact.
The gift provisions of The Income Tax Law are being amended by The Bill to make gifts to The Pearl Watson Foundation tax deductible.
The Pearl Watson Foundation was established to commemorate the considerable contribution to the Australian community of Pearl Watson, the late wife of Mr Justice R.S. Watson of The Family Court of Australia.
As honourable members will be aware, Mrs Watson died tragically in a bomb explosion at her home on 4 July 1984.
The Foundation promotes education and information programs in areas such as marital breakdown, family law, and marriage counselling and conciliation services.
Deductions will be allowable for gifts, the value of which is $2 or more, made after today.
The cost to revenue of this measure is estimated at less than $10,000 in a full financial year.
Finally, The Bill will make formal amendments of The Income Tax Assessment Act made necessary by changes contained in the recently enacted Veterans' Entitlements Act 1986.
A comprehensive memorandum explaining in detail the measures that I have outlined will be circulated to honourable members within the next day or so.
I commend The Bill to The House.