House of Representatives

Taxation Laws Amendment Bill (No. 4) 1986

Taxation Laws Amendment Act (No. 4) 1986

Second Reading Speech

by The Minister Assisting the Treasurer The Hon. Chris Hurford, M.P.

This Bill to amend various taxation and other laws will give effect to further decisions of the Government announced by the Treasurer in the budget.

In particular, it will advance the due dates for payment of instalments of company tax by early balancing companies and introduce measures to overcome arrangements to avoid provisional tax by the manipulation of income distributions of closely-held partnerships and trust estates.

Legislation to provide for the payment of a $200 filing fee for applications to the administrative appeals tribunal to review certain decisions of the Commissioner of taxation is contained in this Bill.

Amendments of the capital gains and capital losses provisions of the Income Tax Law to give effect to the announcement by the Treasurer on 22 July 1986 are included in this Bill.

The Bill also proposes Amendments of the Income Tax Law to attribute a wholly Australian source to certain payments of natural resource income to non-residents and to provide for payers of natural resource income and certain royalties to non-residents to make regular remittances to the Commissioner of amounts retained from such payments.

Exemption provisions of the Income Tax Law are also being amended by the Bill to reflect the introduction of the Government's new age-related study assistance scheme - Austudy.

Payments under this scheme, including payments of a kind formerly made under the secondary allowances scheme, are to be made subject to tax.

Extension of the rebate of tax available in respect of taxable amounts received under certain Life Assurance policies to amounts received under policies issued by the State Insurance Office of Victoria is a further measure in this Bill.

Also proposed by this Bill are Amendments of Administration provisions of the A.C.T. Tax Law consequential on two A.C.T. Bills that I will introduce shortly.

Finally, the Bill will strengthen the management of the Australian Taxation Office by creating a third position of second Commissioner and correct several minor drafting errors identified in the Taxation Laws.

Madam speaker, I now turn to discuss in greater detail the more important aspects of this Bill.

Instalments of Company Tax

This Bill gives effect to the budget decision to advance the due dates for payment of instalments of company tax by early balancing companies.

These are companies that, by agreement with the Commissioner of Taxation, have adopted accounting periods ending other than on 30 June.

In many cases these companies balance on a date after 30 November in lieu of the succedding 30 June.

Under the existing law, a company's income tax liability for a year of income is met by the payment of three quarterly instalments in August, November and February in the following financial year with the balance paid after the issue of a notice of assessment.

Each instalment is generally equal to one quarter of the company's tax for the year preceding the year of income.

As the dates for payment of instalments are, under the present law, the same irrespective of the company's balancing date, a company that balances early enjoys a deferral of tax compared with a company that balances on 30 June.

This Bill will remove this advantage by providing for instalments to be payable by early balancing companies one and a half, four and a half and seven and a half months after the end of the month in which the accounting period ends.

This will mean that the interval between the end of the accounting period and the date for payment of instalments will generally be the same for all companies.

However, a company with an accounting period ending before 31 December in lieu of the succeeding 30 June will be treated as if its accounting period ends on 31 December.

The new arrangements will be phased in over 3 years to lessen their impact on companies that could otherwise be called upon to pay up to one and a half year's tax in the current financial year.

Instalments that would otherwise be payable before 30 June 1987 are to be paid in three approximately equal amounts on dates not earlier than 15 June 1987, 15 June 1988 and 15 June 1989.

The measure will produce gains of $220 million, $230 million and $240 million in 1986-87, 1987-88 and 1988-89, respectively.

Provisional Tax

The Bill will also give effect to the budget decision to amend the Income Tax Law to overcome arrangements for the avoidance of Provisional Tax.

The arrangements involve the manipulation from year to year of distributions of net income of "closely-held" partnerships or trust estates between partners or beneficiaries.

They rely on the ability of a person to furnish to the Commissioner of Taxation his or her own estimate of taxable income for a year of income and to have Provisional Tax recalculated on the basis of that estimate.

By varying the distribution of the net income of a partnership or trust so that a partner's or beneficiary's income in alternate years is only slightly above or below the tax free threshold, liability for Provisional Tax could be completely, or almost completely, eliminated.

The new measures will effectively deny to a taxpayer the right to vary Provisional Tax on account of a reduction in income from a family partnership or family trust estate (as defined in the Bill) where the Commissioner considers that the reduction is the result of an arrangement that, objectively viewed, had the dominant purpose of reducing the Provisional Tax.

Where a taxpayer has made application for a variation of Provisional Tax and the Commissioner has formed such a view, an amount calculated in accordance with provisions in the Bill and referred to as the "Provisional Tax Benefit" will be added to the taxpayer's estimated taxable income before effect is given to the application.

However, addition of the Provisional Tax Benefit amount is not to result in a Provisional Tax liability greater than that originally imposed on the taxpayer.

Notice in writing of the amount of the Provisional Tax Benefit is to be given to the taxpayer who will have rights of objection and appeal corresponding with those available against an assessment.

The estimated revenue effect of this measure is $50 million in 1986-87.

There will be no revenue effect in subsequent years.

Capital Gains Tax

The Bill will give effect to the announcement on 22 July 1986 that the Capital Gains and Capital Losses Provisions of the Income Tax Law would be amended in relation to certain options granted after 19 September 1985 by a company.

Under the existing law, where a company grants an option to acquire shares of the company, and the options are exercised in a later year of income, the capital gains tax applies in the year of grant but the gain is excluded when the options are later exercised.

If the options are not exercised, the gain on the grant of the option remains subject to tax in the year of grant.

There are no capital gains consequences where the options are both granted and exercised in the same year of income.

As announced on 22 July, the Bill will provide that, where a company grants options to acquire shares in or debentures of the company, there will be no capital gains tax liability to the company in the year of income in which the options are granted.

Instead, the liability will arise in the year in which the options expire, and then only in respect of options which expire without being exercised.

The amendment will equally apply to similar options granted by a trustee of a unit trust.

The Bill also contains several technical amendments of the capital gains and capital losses provisions, details of which are given in the explanatory memorandum on the Bill.

These amendments are not expected to have any significant effect on revenue.

Natural Resource Payments and Royalties

The Bill will also give effect to the decision, announced on 7 April 1986, to amend the Income Tax Law to ensure that certain income derived by non-residents of Australia and directly related to the development and exploitation of Australia's natural resources - referred to in the Bill as "Natural Resource Income" - is treated as having a source in Australia.

The amendment will, subject to an exception I will mention shortly, make natural resource income derived by a non-resident assessable in full.

The amendment will apply to payments made after 7 April 1986 that are based on production and recovery of natural resources after that date.

Until that date, payments of certain natural resource income had been treated, under a longstanding agreement between the Commissioner of Taxation and one of Australia's taxation treaty partners, on the basis that only 50% of the payments had a source in Australia.

That arrangement will continue where natural resource income is paid to a non-resident who, as at 7 April 1986, had an entitlement to receive income subject to that agreement, provided that the non-resident was at that time a resident of a country with which Australia had a double taxation treaty.

A non-resident taxpayer who does not satisfy these criteria will not, after 7 April 1986, be entitled to the benefit of this agreement, although any payments made after 7 April 1986 based on production and recovery of natural resources on or before that date will be assessable on only 50% of those payments irrespective of the country of residence.

A person liable to make a payment of natural resource income to a non-resident is required, under the existing law, to retain tax that is, or may become due, by the non-resident.

Under provisions included in the Bill, the amount retained is to be remitted to the Commissioner within 14 days after the end of the month in which the payment is made.

The requirement to remit is, by the Bill, to apply also to payers to non-residents of royalties, other than film and video tape royalties.

These royalties are, under the existing law, subject to retention requirements similar to those just mentioned for natural resource income.

The Bill will give the force of law to administrative arrangements under which most payers of royalties have, in the past, remitted tax deducted on a regular basis to the Commissioner.

The legal requirement to remit deducted tax to the Commissioner will apply in respect of payments made after the day on which Royal Assent is given to the Bill and will be supported by appropriate penalty provisions.

The Crown priority that applies to pay-as-you-earn deductions and deductions under the prescribed payments system in the event of bankruptcy or insolvency of the payer is to be extended to amounts that are required by the Bill to be remitted to the Commissioner.

The gain to revenue from these measures is estimated to be $6 million in a full year, but for 1986-87 estimated collections are $11.7 million, reflecting the earlier receipt of amounts that would not otherwise have been collected until 1987-88.

Tribunal and Court Fees

Measures contained in this Bill give effect, in relation to the various Taxation Laws, to the budget decision to introduce a general filing fee of $200 for most applications to the Administrative Appeals Tribunal.

With a taxation objection decision that is reviewable by the AAT, the $200 fee will be payable when the Commissioner of Taxation is requested to refer the decision to the Tribunal.

If a request for reference to the Tribunal is not accompanied by the fee, the request will be treated as not having been lodged.

As announced in the budget, the fee will be refunded where the application is successful.

In relation to taxation decisions, this will be where a decision on an objection is varied to any extent in favour of the applicant.

The fee will also be refunded where the request is withdrawn by the application before the Commissioner has forwarded it to the Tribunal.

The fee will be payable where the objection decision that is subject to a request for review by the Tribunal is served after a date to be fixed by proclamation.

The various Taxation Laws generally provide for the review of decisions on objections by a Supreme Court of a State or Territory as an alternative to a review by the Administrative Appeals Tribunal.

The Bill also provides for the payment of a refundable $200 fee where a person requests review of an objection decision by a court.

The $200 fee for court requests will apply to objection decisions served after a date to be fixed by proclamation.

This measure is expected, at the current rate of requests for reference, to yield $2 million in a full year.

Madam Speaker, I take this opportunity to indicate that the Government has decided that, along with jurisdiction to review certain other Commonwealth administrative decisions, jurisdiction to review decisions of the Commissioner of Taxation on objections against assessments and other decisions is to be transferred from the Supreme Courts to the Federal Court.

Legislation to give effect to this decision will be introduced into the Parliament in the near future.

Educational Allowances

The Income Tax Law will be amended as a consequence of recently proposed amendments of the Student Assistance Act 1973 that provided for the introduction of the Government's new Age-Related Student Assistance Scheme called "Austudy".

Austudy will replace the Tertiary Education Assistance Scheme (TEAS), the Adult Secondary Education Assistance Scheme (ASEAS) and the Secondary Allowances Scheme (SAS).

As a result of amendments of the Income Tax Law in 1985, TEAS and ASEAS payments have been subject to tax since 1 January 1986.

In my Second Reading Speech on the introduction of those amendments, I foreshadowed that SAS payments would become taxable from January 1987.

The main effect of the amendments now proposed will be to tax, from 1 January 1987, Austudy payments to people who, under existing arrangements, would have qualified for SAS payments.

Recipients of such payments will, however, be entitled from 1 July 1987 to the beneficiary rebates available to recipients of unemployment benefits.

I note that people currently in receipt of TEAS and ASEAS payments are to be entitled to those rebates for 1986-87 under amendments in the Taxation Laws (Miscellaneous Provisions) Bill 1986 at present before the Parliament.

Short Term Life Assurance Policies

This Bill will extend, to recipients of taxable bonuses and similar amounts paid under Life Assurance Policies issued by the State Insurance Office of Victoria, eligibility for the Income Tax Rebate presently available on similar amounts paid under certain other Life Assurance Policies.

Bonuses received under a Life Assurance Policy within either 4 or 10 years of its commencement date - depending on that date - are generally subject to tax.

Where such a bonus is included in a taxpayer's assessable income, a Tax Rebate is allowed to the recipient to broadly compensate for the tax paid by the policy issuer.

Although State Government Insurance Offices do not pay Commonwealth Tax, the rebate was extended last year to short-term policies issued by certain of those offices.

This was on the understanding that the relevant State Governments would reimburse the Commonwealth for revenue forgone by allowing the rebate.

The State Insurance Office of Victoria has since commenced to offer similar policies and this Bill will extend application of the rebate to amounts paid under those policies.

In return, the Victorian Government has also agreed to reimburse the Commonwealth for revenue forgone.

The Bill will further amend the rebate provisions as a consequence of the recent renaming of the State Government Insurance Office (Queensland) - to which those provisions presently refer - as Suncorp Insurance and Finance.

Second Commissioners of Taxation

Finally, this Bill will provide for the creation of a third statutory office of second Commissioner of Taxation.

The third second Commissioner will have the same powers and functions as the two existing second Commissioners.

Second Commissioners of Taxation have all the powers and functions of the Commissioner of Taxation except the general administration of the Taxation Laws, the authority to report to Parliament on the working of those laws and the power to delegate to subordinate officers.

The Government sees a need to strengthen the top level management of the Australian Taxation Office to cater for the increased responsibilities given to that office, to assist in oversighting improved administrative arrangements in the office and to co-ordinate implementation of the Government's tax reform initiatives.

Madam Speaker, as an explanatory memorandum providing detailed explanations of this Bill and the remaining three Bills in this legislative package is being circulated to Honourable Members, I will not trouble the house with further explanation of the Bill.

I commend the Bill to the House.