House of Representatives

Taxation Laws Amendment Bill (No. 2) 1987

Taxation Laws Amendment Act (No. 2) 1987

Second Reading Speech

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

I move that this Bill be now read a second time.

The Bill will amend the taxation laws in several ways.

It will implement a number of the major changes announced by the Treasurer on 10 December 1986 as part of the Government's overhaul of the company tax system as reflected in Bills introduced into the House on 2 April 1987.

In particular, it will abolish, subject to transitional rules, the additional tax payable by private companies under division 7 and will ensure that the intercorporate dividend rebate is allowed on a gross rather than a net basis. It will also remove the present exemption from tax for certain dividends satisfied by the issue of shares.

Other provisions in the Bill will modify the imputation arrangements in relation to certain companies, extend those arrangements to unit trusts that are taxed as companies and ensure that imputation rebates are able to be taken into account for provisional tax purposes.

The Bill will also amend the income tax substantiation rules as they apply to deductions for car expenses.

Other amendments of the Income Tax Assessment Act proposed by the Bill will overcome a perceived deficiency in certification procedures for the special concessions for investments in the production of Australian films.

The Bill will also make a number of amendments of Australian Capital Territory tax laws to facilitate the transfer of responsibility for their administration to a new statutory officer who will be generally responsible for the administration of ACT revenue laws; to provide an exemption from tax for premiums for certain international trade insurance; and to exempt from pay roll tax wages paid to apprentices and trainees employed under the Australian traineeship system. Another amendment will extend the bank accounts debits tax law to new payment order accounts with non-bank financial institutions.

Yet another will simplify the procedures for approving acting appointments for the offices of commissioner, and Second Commissioners, of taxation.

Finally, the access and information gathering powers of the tax laws are being extended in two respects.

The information gathering power will now cover the pay-as- you-earn provisions of the income tax law, and the access power in that and other taxation laws will now require persons to provide reasonable assistance to the Commissioner of Taxation when exercising statutory powers of access under those laws.

I turn now to discuss in more detail the measures contained in this Bill.

Measures associated with the imputation system private companies in accordance with the Treasurer's announcement of 10 December 1986, this e,ill will abolish the undistributed profits tax payable by private companies, subject to phasing-out provisions that are designed to prevent a loss to the revenue while allowing private companies and their shareholders a tax neutral transition from the classical to the full imputation system.

The combined effect of the full imputation system and the alignment of the company tax rate with the maximum marginal rate of personal income tax will remove the long-standing disincentive for private companies to distribute their after- tax profits.

This change will encourage the efficient allocation of the investible funds of private company shareholders and thereby assist in stimulating economic growth.

The existing division 7 arrangements will last apply to income derived in the 198s-86 income year of private companies.

For the 1986-87 and subsequent income years private companies will be liable to pay undistributed profits tax under division 7 only if they fail to distribute, within the usual time limits, an amount at least equal to the phasing-out dividends included in their after-tax income.

The concept of phasing-out dividends -[s a transitional one. Such dividends will be those paid to one private company by another private company to the extent that they have been taken into account in determining whether that other company has made a sufficient distribution for the purpose of calculating any division 7 tax liability it May have.

Reflecting the intention of these measures, dividends will 3e taken into account for division 7 phasing-out purposes only to the extent that they are not franked in accordance with the new imputation arrangements.

The Bill will therefore modify the imputation legislation as introduced to enable private companies to satisfy their sufficient distribution requirements under the division 7 phasing-out provisions without being subject to any disadvantage under the dividend franking rules.

As a related measure, the restriction on the allowance of the intercorporate dividend rebate currently applicable to private company dividends received by another private company will, by this Bill, be limited in 1986-87 and subsequent income years to phasing-out dividends.

Intercorporate dividend rebate the purpose of the rebate allowable under section 46 of the Income Tax Assessment Act is to prevent the imposition of successive layers of tax at the corporate level as dividends pass from company to company before leaving the corporate sector. Under the present law, this rebate is calculated on the basis of dividends received by a resident company reduced by deductions allowable to it in respect of the dividends.

This Bill will amend section 46 to change the calculation of the rebate to one based on the gross amount of dividends received by one resident company from another.

Section 116aa of the Income Tax Assessment Act further reduces the amount on which the intercorporate dividend rebate is calculated for life assurance companies to take account of special deductions allowed to such companies in relation to their expenses of general management and their calculated liabilities.

To ensure that the treatment of life assurance companies in this area remains consistent with that of other companies, the Bill will also repeal section 116aa.

These measures will apply to the 1987 88 and subsequent income years.

Bonus shares

The Bill will give effect to the proposal also announced on 10 December 1986 to remove the present exemption from income tax of certain dividends that are satisfied by the issue of bonus shares. These measures will subject dividends that are satisfied by the issue of shares after 30 June 1987 to income tax, to withholding tax, and to the provisions of the imputation system in the same way as any other dividend.e

As a related matter, the exclusion from paid-up capital on liquidation of a company of the paid-up value of such bonus shares is to be removed.

Bonus shares of that kind issued after 3rd June 1987 will be included in the paid-up capital of the issuing company and will thus be treated as a return of capital in the event of liquidation.

As foreshadowed by the Treasurer in introducing the taxation laws amendment (company distributions) Bill 1987 in this House, this Bill also contains a series of technical amendments to extend to corporate unit trusts and public trading trusts that are taxed as companies the imputation measures contained in that Bill.

The Bill also contains provisions to enable tax-payers to estimate the new franking rebates to which they May be entitled and to have those estimates reflected in provisional tax variations for the 1987-88 and later income years.

The imputation provisions contained in the Bill to which I previously refered are to be modified by this-Bill so that a franking credit will not arise if a franked dividend is wholly or partly exempt income of the receiving company. Other measures will deny franking credits in relation to dividends received by registered organisations that are subject to tax on income from their life assurance business, and by life assurance companies where the dividends are derived on assets included in their insurance funds.

The measures will ensure that entities which would otherwise accumulate large quantities of unusable franking credits will not be placed in a position where they could become targets of persons seeking to gain the benefit of those credit.n

Madam Speaker, I wish to sound a note of warning to those who might seek to abuse the imputation system in any way.

While further measures, including those dealing with dividend stripping arrangements and forestalling of dividends by private company groups, will be included in a later Bill, the Government will if necessary respond promptly to combat tax avoidance arrangements which May emerge as the imputation system gets under way.

The revenue effects of these imputation related amendments is reflected in the estimated net cost of the imputation system of $50m in 1987-88 and $300m per annum thereafter. Substantiation Honourable Members will recall that I announced on 29 October 1986 new arrangements that would greatly reduce the record keeping obligations of taxpayers who use motor cars in their employment or business.

Under the present law, there are a number of alternative methods of claiming deductions for car expenses, depending upon whether or not the car travels more than 5,000 business kilometres in a year.

If it does, the taxpayer can claim the business percentage, as established by log book records kept continuously throughout the year, of actual receipted expenses.

Alternatively, the taxpayer May elect not to keep a log 300k and claim either one-third of receipted expenses or 12 percent of the cost price of the car.

If the car travels less than 5,000 business kilometres in a year, the taxpayer May claim a percentage of expenses based on continuous log book mileage records, or at a set rate of cents per business kilometre.

The amendments contained in the Bill will enable car fuel and oil expenses to be verified by a record of total kilometres travelled during the year rather than by actual receipts. For that purpose, taxpayers will need to keep records of opening and closing odometer readings for the period of the year when the car is held for business purposes.

The present prohibition on switching from one method of deduction to another is also being removed, so that a taxpayer May move from one basis to another year by year provided he or she qualifies for deduction under the particular method chose.o

The principal change relating to car expense deductions is the relaxation of the present log book requirements under the actual business expenses method of deduction.

The new rules will mean that it will no longer be necessary to record details of business trips throughout the whole year of income.

Instead, taxpayers will be entitled to establish the percentage of business use of a car by making log book entries in a continuous twelve week log book period.

Provided the actual percentage of business use does not fall by more than 10 percentage points from the percentage established by the log book records, the established percentage May continue to be the basis for deduction for the particular car or a car that replaces it. If a taxpayer wishes to increase the established percentage of business travel in any year, he or she will need to establish a new percentage by maintaining log books for a minimum 12 week period.

Log books will also be required in a year in which there is an increase in the number of cars for which deductions are being sought on the log book basis.

In these cases log books for each car must be maintained during the same 12 week period.

To prevent exploitation of rules that are designed primarily for high business use cars, the 10 percentage points margin will apply differently for cars which travel 5,000 or fewer business kilometres per annum.

For those cars, if there is a reduction in the percentage of business use from the business percentage established by previous log book records, deductions are to be based on a reasonable estimate of the actual percentage of business use in the year rather than the previously established log book percentage.

In such a case, it would not be necessary for log books to be kept in the subsequent year unless the difference between the established log book percentage and the actual business use is more than 10 percentage points. 12. Further amendments will give effect to my 29 October 1986 announcement to exclude from the substantiation requirements unregistered cars used wholly or principally for income producing purpose.c

Tax concessions for Australian films division 10ba of the Income Tax Assessment Act authorises concessions for investments in qualifying Australian films.

Division 10ba requires the Minister for arts, heritage and environment - in deciding whether to certify that a film is a qualifying Australian film - to determine whether the film has a significant Australian content.

However, the division does not expressly authorise the Minister to refuse the certification of a film which has a significant Australian content, if it also has a significant non-Australian content.

The Government does not believe that the tax concessions for investments in Australian films should be available where creative control is in non-Australian hands, even though the shooting of the film and other activities May take place in Australia. The amendments proposed by the Bill will ensure that the Minister May take into account any significant non-Australian content in deciding whether to certify a film.

The amendments will apply in respect of all applications for certificates received after today.

These amendments will not have any significant direct effect on revenue.

Information gathering and access powers the Bill will also extend the application of the information gathering power of the Commissioner of Taxation to matters relevant to the administration of the pay-as-you-earn provisions of the income tax law.

Amendments are also to be made to the access provisions of those taxation laws that do not already impose a requirement that persons provide reasonable facilities and assistance to the Commissioner when exercising powers of access under those laws.

The amendments will impose such a requirement and, in so doing, will achieve consistency with the access provisions of the sales tax and Fringe Benefits Tax law.

These measures will have no direct effect on revenue. Bank account debits tax the bank account debits tax is a tax on debits to cheque accounts with banks.

Part viii of the Cheques and Payment Orders Act 1986, which is proposed to come into operation on 1 July 1987, will create a new payment instrument known as a payment order.

A payment order is similar to a cheque but is drawn on accounts with non-bank financial institutions.

This Bill will extend the bank account debits tax law to debits made to payment order accounts with non-bank financial institutions in the same way as the law presently applies to debits made to cheque accounts with banks.

Reflecting that extension, the bank account debits tax will in future be referred to simply as debits tax.

These amendments are proposed to come into operation on 1 July 1987.

The Bill will also remove possible avenues for avoidance of debits tax.

For banks that carry on only limited banking activities, the Bill will restrict the. Present exemption for inter-bank transactions to transactions in connection with those activities. That principle will extend to non-bank financial institutions. Another measure will ensure that debits tax is not avoided by the aggregation of a number of transactions to form one debit.

Finally, the Bill will give legislative support to the present administrative practice of calculating debits tax on the Australian currency equivalent of debits expressed in a foreign currency.

The extension of the debits tax to payment order accounts will prevent the unquantifiable, but possibly substantial, cost to the revenue that would result if those debits were not included in the tax base.

The revenue gain from the other amendments mentioned is likely to be minimal, as they will operate to protect the debits tax base.

ACT tax on insurance business other amendments being made by this Bill will give effect to the decision, announced on 24 December 1986, to exempt from ACT tax premiums received for the insurance of goods carried in international trade and of ships and aircraft engaged in international trade. The amendments reflect the Government's concern that the imposition of this tax has caused much of this insurance to be written overseas to the detriment of the Australian insurance industry.

The exemption will apply to insurance effected on or after 1 January 1987.

The revenue cost of this measure is expected to be negligible.

ACT pay-roll tax under the ACT pay-roll tax law, tax is payable by employers whose annual taxable wages exceed the prescribed exemption level which is currently $200,000.

However, the law exempts certain types of wages from any liability to pay-roll tax.

The Bill will extend these exemptions to include wages paid or payable to first year apprentices and to trainees employed under a training agreement as part of the Australian traineeship system.

This measure is another of the Government's initiatives to give effect to its policy of encouraging youth employment.

The amendment will apply in relation to relevant wages paid or payable on or after 1 July 1986. Madam Speaker, it is estimated that this measure will result in a cost to revenue of $220,000 in 1987-88.

Transfer of ACT stamp duty and pay-roll tax the administration of stamp duty and similar taxes and pay-roll tax in the Australian Capital Territory is presently the responsibility of the Commonwealth Commissioner of Taxation.

In contrast, the states and the northern territory have their own statutory officers responsible for administration of comparable state taxes.

The Government has a commitment to consolidating the administration of the ACT within the department of territories.

The Bill will facilitate the transfer of responsibility for administration, of ACT stamp duties and taxes, including pay-roll tax, to a new statutory officer, the Commissioner for ACT Revenue Collections, who will also be responsible for various other ACT revenue laws.

Complementary ACT ordinances to establish the office of the Commissioner for ACT revenue collections and to complete the transfer of the various ACT laws will be made shortly. It is the Government's intention that these amendments will have come into operation, and the transfer of administrative responsibility for ACT revenue laws will have been completed, by 1 July 1987.

Madam Speaker, these new arrangements will have no effect on Commonwealth revenue.

Acting arrangements

Finally, the Bill will amend the Taxation Administration Act to simplify the procedures for approving acting appointments for the offices of Commissioner, and Second Commissioners, of Taxation.

The amendments will have no effect on revenue.

I commend the Bill to Honourable Members.

In so doing, I present the Explanatory Memorandum on this Bill.