House of Representatives

Taxation Laws Amendment Bill (No. 3) 1987

Taxation Laws Amendment Act (No. 3) 1987

Second Reading Speech

By the Minister assisting the Treasurer the Hon. Clyde Holding, M.P.

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

This Bill will amend the income tax law to give effect to a number of earlier announcements made by the Treasurer, some of which were foreshadowed in a draft exposure Bill released On 4 June 1987, and to some budget initiatives.

They include measures designed primarily to prevent abuses of The new imputation system of company tax, and changes to the capital gains, superannuation deductions and gift provisions of the income tax law and the taxing arrangements for certain educational allowances.

Two budget announcements to be given effect by the Bill vary The level of the rebates of tax available to recipients of certain Commonwealth benefits or allowances, and provide for the calculation of 1987-88 provisional tax.

The Bill will also amend the Taxation Administration Act 1953 To make it clear that certain earlier amending Action modifying state and territory limitation laws applies to additional tax for late payment.

Finally the Bill will remove the existing requirement to annually impose provisional tax or instalments of company tax.

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

Franked Dividends Paid as Part of a Dividend Stripping Operation

This Bill will introduce anti-avoidance provisions to combat dividend stripping operations that seek to exploit benefits provided under the imputation system.

The Government's intention to introduce such measures was made clear in the Treasurer's announcement of 10 December 1986 which outlined the imputation system now in operation, and the measures were contained in the draft Bill released by the Treasurer on 4 June 1987.

Under imputation, the franking rebate will mean that resident individuals and certain trustees will effectively receive franked dividends tax free.

The potential double benefit for such taxpayers of both a tax deduction for the cost of shares purchased in a dividend strip, and a rebate on the dividends distributed on the shares, is similar to that which was available to companies prior to the introduction of legislation to limit or deny the intercorporate dividend rebate in cases involving dividend stripping.

To prevent such abuse of the imputation system this Bill will deny the entitlement of resident individuals and certain trustees to a franking rebate where dividends are paid as part of a dividend stripping operation.

To deter companies from engaging in dividend stripping schemes to gain the benefit of franking credits, and to prevent individuals and trustees who otherwise would be denied a franking rebate under the measure proposed from achieving the same end by interposing a corporate structure, The Bill will also deny franking credits to companies where dividends are paid in the course of a dividend stripping operation.

Dividend Stripping Schemes

Another measure contained in the draft Bill released on 4 June 1987, and now included in this Bill, will extend the present rules relating to dividend stripping operations that give rise to an income gain or loss, by limiting or denying the entitlement of a resident company to the intercorporate dividend rebate in respect of a dividend paid after 4 June 1987 as part of a dividend stripping operation which gives rise to a capital gain or loss.

The measures proposed will ensure that the cost base of shares or other relevant property acquired as part of a dividend stripping operation is offset against dividend income in determining entitlement to a rebate.

A rebate will be denied in such cases where they involve the payment of a dividend to an associate of the dividend stripper.

Asset Revaluation Dividend Schemes

The Treasurer's announcement on 4 June 1987 also foreshadowed the introduction of legislation to counter certain scheme which seek to avoid income tax properly payable on the disposal of assets by means of the payment of rebatable dividends out of profits arising from the revaluation of the assets concerned.

This Bill will deny the intercorporate dividend rebate in respect of a dividend paid, after 4 June 1987, out of profits arising from the revaluation of an asset which is disposed of, or an interest in which is disposed of, either by the sale of shares in the company holding the asset or by the sale of an interest in an entity which has a beneficial shareholding in that company.

The proposed measures will apply only where the company that revalues an asset is not listed on a stock exchange, and its revalued assets are not less than 75 per cent of the net worth of the company at the time of disposal of the shares or other relevant property.

These measures will also apply to corporate unit trusts and public trading trusts that are taxed as companies under the income tax law.

Tax Avoidance by Private Companies

Sections 108 and 109 of the Income Tax Assessment Act are designed to prevent avoidance of tax by private companies and their shareholders at the shareholder level by disguising dividends as non-taxable loans or advances, and at the corporate level by disguising dividends as tax deductible remuneration.

Although the scope for avoidance in this area has been diminished under the imputation system, the need for these provisions remains.

Accordingly, as foreshadowed by the Treasurer on 4 June 1987, these provisions will be amended by this Bill so that, while preserving their originally intended purpose, technical deficiencies that have prevented their proper application will be remedied.

Capital Gains tax : Change of Residence

The Bill will give effect to the announcement on 23 December 1986 that two changes would be made to the capital gains and capital losses provisions of the income tax law in relation to taxpayers who cease to be Australian residents.

First, the existing law will be modified where a taxpayer has been an Australian resident for a total period of less than five years in the ten years preceding the time he or she ceases to be a resident.

In these cases the rules which deem certain assets to have been disposed of on change of residence will not apply to assets owned at the time the taxpayer last became a resident or to assets acquired by the taxpayer since that time as a result of the death of a person.

The second change will enable a taxpayer to elect that the deemed disposal rules not apply to the assets that otherwise would be taken to have been disposed of.

Capital Gains tax : Distributions by a Trustee

The Bill will also implement the change announced on 17 December 1986 where a taxpayer receives a distribution of certain tax-free income as a beneficiary or unit holder of a trust.

This amendment ensures that, in calculating capital gains, the cost base of the interest or units in the trust will no longer be reduced by that part of a tax-free distribution which represents income freed from tax by the allowance of certain building depreciation deductions.

By this measure trusts will be able to pass on the benefits of depreciation allowances on income producing buildings to beneficiaries or unit holders.

Capital Gains Tax : Bonus Shares and Bonus Units

Another amendment gives effect to the announcement made on 10 December 1986 to change the capital gains tax treatment of partly paid bonus shares and bonus units issued after 1pm on that day.

The existing law treats bonus shares and most bonus units as having been acquired when the original shares or units were acquired.

Under the existing law, where original shares or units were acquired before 20 September 1985, the issue of partly paid bonus shares or units can potentially confer capital gains tax exempt status on new investments made after 19 Septembe 1985 - for example, through the payment of calls of capital In respect of the partly paid shares or units.

In such cases, the date of acquisition of the bonus shares or bonus units will now be taken to be the date on which the liability to make the first such payment arose.

This Bill will also implement changes announced on 10 December 1986 in relation to bonus shares issued after 30 June 1987 where some or all of their paid-up value is a dividend.

The effect will be that such bonus shares issued after 30 June 1987 will be subject to the capital gains tax provisions irrespective of the date of acquisition of the original shares in respect of which the bonus shares were issued.

A reliable estimate of the revenue effect of these capital gains tax related amendments cannot be ascertained.

Deductions for Contributions to Superannuation Funds for Certain Gainfully Employed Persons

The Bill will give effect to the Treasurer's announcement of 22 December 1986 that employees would not lose the deduction available - which is set at a maximum of $1500 per year - for their contributions to private superannuation funds by reason only that they are the subject of superannuation benefits provided by an employer as a result of an agreement of the kind referred to by the conciliation and arbitration commission in its national wage case decision of 26 June 1986.

The amendments made by this Bill will apply to cases where the employer-provided superannuation cover is under an agreement made or ratified by the conciliation and Arbitration commission or a state industrial tribunal in accordance with the commission's decision of 26 June 1986, or any subsequent modification of that decision in a national wage case.

The Bill will also apply to cases where the contributions are made under an agreement that has not been ratified but is substantially identical to a ratified agreement applying to employees in the same industry.

The amendments will apply for the 1986-87 and subsequent income years.

Educational Allowances

Over the last two years the Government has made a number of changes to deliver more educational opportunities for young people by continuing to improve and rationalise student allowances.

As part of this process the Government changed the assistance for isolated children scheme and the veterans' children education scheme to make them more consistent with the mainstream provisions of the Austudy scheme.

The Austudy scheme replaced the former tertiary education assistance scheme, the adult secondary education assistance scheme and the secondary allowances scheme.

Consistent with the taxing arrangements for Austudy, payments from 1 January 1987 under the veterans' children education scheme and the assistance for isolated children scheme, to students aged 16 years or over, are to be made taxable by this Bill.

The Bill will also extend, from 1 July 1987, the availability of the beneficiary rebates to recipients of the education allowances that are to be made taxable by this Bill.

The beneficiary rebates ensure that persons wholly or mainly dependent on certain Commonwealth benefits or allowances do not have to pay income tax.

The revenue effects of these changes is are Estimated to be negligible.

Beneficiary rebates

As part of the 1987-88 budget measures, the maximum rebates of tax for taxpayers in receipt of the beneficiary rebates I have just referred to, and the levels at which the rebates begin to shade-out, are to be varied for the 1987-88 income year.

For married persons the maximum rebate will be increased from $280 to $430 and no tax will be payable in 1987-88 on taxable incomes up to $10,350.

For other persons the maximum rebate is to be decreased from $190 to $180 reflecting in combination the Government's decision in the May statement to align the level of the single sickness benefit with single unemployment benefit, the reduction in tax rates and the increase in the tax free threshold.

The new rebate of $180 means that no tax will be payable in 1987-88 by single beneficiaries on taxable incomes up to $5,850.

The rebates will shade-out where taxable incomes exceed the threshold levels and will shade-out completely where a married person's taxable income is $13,790 or more, or $7,290 or more for other persons.

These measures are estimated to have no cost in 1987-88 and will cost $8 million in 1988-89.

Provisional Tax for 1987-88

Provisional tax is that part of the pay-as-you-earn system designed to collect tax on non-salary or wage income within the year in which the income is derived.

As such, it is generally accepted that the amount of provisional tax charged should approximate as closely as practicable the amount of tax actually imposed for the year.

This Bill provides for 1987-88 provisional tax to be calculated on the basis of 1986-87 taxable income increased by 11 per cent, and by applying the 1987-88 rates of tax and medicare levy.

The increased low income thresholds to apply for medicare levy purposes in 1987-88 will be taken into account.

Generally, rebates and credits will be allowed in the provisional tax calculation at the levels allowed in 1986-87 assessments.

Taxpayers who estimate that their taxable income for 1987-88 will increase by less than 11 per cent, or who consider that their rebates or credits will be at a higher level, will continue to have the right to "self-assess" and have the provisional tax for 1987-88 recalculated on the basis of their own estimates.


This Bill will also amend the gift provisions of the income tax law to allow deductions for gifts to the Lionel Murphy Foundation and to the Australian-Hellenic Memorial Trust Fund.

The estimated cost of admitting the Lionel Murphy Foundation Is $80,000 in 1987-88 rising to $400,000 in 1988-89 and subsequent years, and of admitting the Australian-Hellenic Memorial Trust fund is $60,000 in 1987-88 and $70,000 in both 1988-89 and 1989-90.

Application of Statutes of Limitations to Tax Debts

Honourable Members will recall that legislation introduced in this House during the budget sittings of last year, and subsequently enacted as the Taxation Administration Amendment (Recovery of Tax Debts) Act 1986, modified the application of state and territory limitation laws in those cases where an objection or appeal has been lodged against an assessment or decision of the Commissioner of Taxation.

The effect of the modification in such cases was simply to continue the relevant state or territory limitation period so that it would be taken to have ended on a later date measured by reference to the date on which the objection and appeal process is finalised.

The modification was necessary to counter abuses of the objection and appeal processes by those persons who sought to defer payment of taxes for as long as possible, and to then rely on the limitation laws to avoid payment of the taxes altogether.

The persons concerned - generally participants in the tax avoidance schemes of the late 1970's - have failed to take heed of the warning underlying the 1986 amendments - that is, that this government will do all in its power to ensure that payment of taxes that are rightly due to the people of Australia cannot be avoided on the basis of a legal technicality.

Despite this warning, a technical argument has now been raised to the effect that the modification does not apply, as intended, to additional tax for late payment of the tax that is the subject of an objection or appeal.

The Government does not accept this argument but, against the background that a significant loss to revenue would arise if the argument is upheld by the courts, has decided to make a clarifying amendment of the relevant provisions of the law.

I present the Explanatory Memorandum to this Bill.

I commend the Bill to the House.