House of Representatives

Taxation Laws Amendment Bill (No. 2) 1988

Taxation Laws Amendment Act (No. 2) 1988

Second Reading Speech

by the Hon. Peter Duncan, M.P. Minister for Employment and Education Services

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

Much of the Bill is devoted to improving the requirements of the taxation law that deal with the registration of tax agents, a substantial number of other matters are also dealt with.

The Income Tax Law will be amended as foreshadowed to restrict eligibility for the special depreciation allowance available for Australian trading ships.

Tax deductibility is being extended to payments made under cash bidding systems for offshore petroleum exploration permits and production licences.

Practical aspects of application of the foreign tax credit system are being modified and some unintended consequences and technical deficiencies corrected.

Anti-avoidance provisions of the thin capitalisation rules are to be strengthened to ensure that foreign investments in Australia maintain an appropriate balance between debt and equity funding.

The Bill also includes changes to the taxing arrangements for certain educational allowances and similar allowances and for the carer's pension.

Registration of Tax Agents

In the interests of both the revenue and the taxpayer, it is important that a person who charges a fee for conducting income tax business on behalf of a taxpayer has the appropriate knowledge of Australian Income Tax Law and of accounting principles and is otherwise a fit and proper person to be entrusted with the responsibility of conducting a person's income tax business.

The Income Tax Law therefore prohibits a person, partnership or company from charging a fee for preparing an income tax return, or transacting any business relating to income tax matters unless registered as a tax agent, or exempted form registration, by a tax agents' board.

The provisions that deal with the registration of tax agents have remained relatively unchanged since they were first enacted in 1943.

The amendments being made by this Bill will substantially modernise and improve the provisions and give effect to a number of recommendations made by the administrative appeals tribunal, the administrative review council, accounting firms and the boards themselves.

Interested parties were consulted as part of the drafting process and have indicated general support for the proposed measures.

In response to criticisms of the existing provisions by the administrative review council and the administrative appeals tribunal, the Bill will extend the range of decisions of a tax agents' board in respect of which a person may make application to the tribunal for review.

In order to achieve a desirable degree of uniformity between decisions of the 6 state boards and the administrative appeals tribunal, the Bill will provide a more objective test as to who is a suitable person to be registered as a tax agent or as a nominee, and will enable eligibility criteria to be prescribed.

Also in response to a recommendation of the tribunal, the Bill will give the boards a general power to suspend the registration of a tax agent in addition to the power of cancellation.

Under the existing law, company tax agents may register suitably qualified employees as nominees.

Partnership tax agents, however, may only register partners as nominees while sole practitioners may not register nominees at all.

Partnership and sole practitioner tax agents have expressed concern that the inability to register employees as nominees increases the workload of the principals and can impede the timely lodgment of returns.

To overcome these concerns partnership and individual tax agent are to be permitted to register suitably qualified employees as nominees.

The ability of a company to gain registration as a tax agent on the basis of the qualifications of an employee - who need not be a director, shareholder or even a full-time employee of the company - has led to exploitation by some unqualified persons.

The Bill will therefore tighten the rules for registration as a company tax agent by requiring that shares carrying at least 23 per cent of the voting power in a company applying for registration be beneficially owned by a director or directors having the necessary qualifications to be registered as a tax agent.

The $2 fee payable on lodgment of an application for registration as a tax agent or as a nominee of a registered tax agent has not changed since 1943 and is considerably less than those payable for broadly comparable professional registrations.

The Bill will increase the fee to $80.

The existing law requires tax agents to notify the board by 1 April each year if they wish to remain registered.

The Bill replaces the annual notification requirement with a requirement to re-register each 3 years and introduce a re-registration fee of $40 plus $5 per nominee.

The fees have been set at a level that will recover the costs of operating the tax agents' boards and will be subject to regular review.

Other amendments will provide for continuation of a partnership registration following a change in constitution of the partnership, effect changes in the composition of the tax agents' boards and make a number of minor technical and drafting amendments of the tax agents' provisions.

Special Depreciation for Australian Trading Ships

As announced on 2 April 1987, the government has decided to restrict eligibility for the special accelerated depreciation concession for Australian trading ships to new ships that qualify under the federal government's scheme of capital grants for such ships.

Under the ships (capital grants) act 1987 the federal government pays a taxable grant of 7 per cent of the purchase price of eligible Australian trading ships as an incentive to ship operators to purchase modern, efficient and technologically advanced ships.

The Bill will restrict eligibility for special depreciation, from 22 December 1986 (the date form which the capital grants scheme applies), to new ships that both satisfy the present eligibility criteria in the Income Tax Law and qualify for a capital grant.

Ships which do not qualify for a grant but which, on 22 December 1986, had either been given a manning notice under section 57AM of the income tax assessment act or were the subject of an application for such a notice, will continue to be eligible for special depreciation.

The amendments will also disallow the special depreciation if a grant becomes repayable.

Cash Bids

As announced on 17 September 1986, the Bill will extend the scope of the income tax deductions allowable for cash bids paid for the grant of offshore petroleum exploration permits.

The Income Tax Law was amended in 1987 to allow deductions for cash bids paid to the commonwealth, under its cash bidding system introduced in 1985, for the grant of petroleum exploration permits in highly prospective areas.

This ensured that Australian companies would not be disadvantaged in the bidding process in competing with foreign companies that could obtain deductions under their domestic law for their cash bids.

When the amendments were introduced, the government announced that it also proposed further amendments of the Income Tax Law to allow deductions under other commonwealth, state and northern territory cash bidding systems.

The amendments to be made by this Bill will allow deductions for cash bids paid for exploration permits and production licences under the Commonwealth's combined cash bidding and work programme system which was included in the offshore petroleum legislation in 1967.

This combined cash bidding/work programme system can only apply in circumstances where a previous production licence is discontinued or where a production licence application for a permit is not finalised and the relevant permit lapses.

Deductibility will also be extended to cash bids paid under state and Northern Territory cash bidding e systems that are equivalent to the Commonwealth's systems.

Consistent with the existing tax law, cash bid payments will be written off on a straight line basis over the lesser of 10 years or the life of the producing field to which the permit or licence relates.

Write-off for cash bids will commence in the income year in which a production licence is first acquired in respect of the relevant permit area or at the time cash bid payments are made, whichever is the later.

This should not have any cost to revenue over the next three years and revenue effects beyond that are dependent on when production licences are granted under cash bidding arrangements.

The amendments will apply in respect of ash bids paid on or after 15 January 1986, the date of the original announcement to allow tax deductibility for cash bids paid under the Commonwealth cash bidding system introduced in 1985.

Foreign Tax Credit System

Amendments are being made to the foreign tax credit provisions to modify the practical operation of the system in relation to creditable foreign taxes and the treatment of overseas employment income of Australian resident individuals.

The Bill will also correct some technical deficiencies in the law relating tot he quarantining of foreign losses, the treatment of certain dividends as interest income as part of the interest quarantining measures, the amendment of credit determinations and the transfer of excess credits within wholly- owned company groups.

Those amendments to the foreign tax credit system which are of a concessional nature are to apply from the commencement of the 1987-88 year of income.

The changes will have negligible effect on revenue in 1987-88 but may produce some unquantifiable revenue savings in subsequent years.

Madam Speaker, the government has under consideration a number of other foreign tax credit matters which if requiring legislative action will be the subject of a further Bil.a

Thin Capitalisation

The thin capitalisation rules applying to foreign investments in Australia are to be varied in two particular areas.

An amendment to the definition of foreign debt in relation to partnerships and trusts will close off an avenue for avoidance otherwise available to overseas investors who are not themselves partners or beneficiaries.

The amendment will ensure that these investors are subject to the rules.

The second amendment will modify the effect of an equity maintenance requirement that has a potentially broader application than intended.

The redrafted provision will affect a much smaller group of investors than the present law.

Under the thin capitalisation rules the level of foreign equity in an Australian investment is generally measured annually.

An equity maintenance requirement ensures that equity that is introduced in a year of income to comply with a debt/equity ratio rule is not removed in either of the two years of income following its introduction.

Where the equity is prematurely removed the anti-avoidance measure treats that equity as if it had never been introduced.

The present rule could apply wherever equity is removed regardless of how long it has been in place.

For resident companies the modified rule will apply to shares introduced in a year of income to ensure that they are maintained for the two subsequent years of income.

For other forms of foreign investment the equity maintenance rule will apply where the level of equity is increased in a year of income and will operate to ensure that that level is maintained for the two succeeding years of income.

Where the newly introduced equity is not maintained for the required period a lower level of equity will be substituted in debt/equity ratio calculations and may be reflected in an adjustment to related deductions for interest payments.

The amended provisions, which will operate from the commencement of the 1989 year of income, should have negligible impact on the revenue.

Educational Allowances

As part of the government's strategy to increase young people's access to employment, education and training, the government has made a number of changes over the past three years to rationalise and improve youth income support programs.

One of the changes has been to the education assistance available under the Aboriginal Secondary Assistance Scheme and the Aboriginal Study Assistance Scheme to bring the assistance more into line with that provided under AUSTUDY, the main commonwealth scheme for community-wide educational assistance.

Consistent with the taxation treatment of AUSTUDY payments, this Bill will make taxable form 1 January 1988 payments for students aged 16 years or more under the aboriginal secondary assistance scheme and payments under the Aboriginal Study Assistance Scheme.

The Bill will also extend the availability of the beneficiary rebates to affected students for the 1988-89 and subsequent income years.

The purpose of the beneficiary rebate is to ensure that persons wholly or mainly dependent of certain social security benefits or education allowances do not have to pay income tax.

The availability of the beneficiary rebates is also being extended to formal training allowance recipients for the 1987-88 and subsequent income years.

The changes relating to the Aboriginal Study Assistance Scheme and the aboriginal secondary assistance scheme are expected to result in a gain of $0.5 million in a full year while the form training allowance change is expected to cost $2.5 million in 1988-89.

Carer's Pension

Before 1 February 1988 a Carer's pension was payable to a relative of a severely handicapped age or invalid pensioner where the relative provided constant care and attention to the handicapped pensioner in the home of the relative and the pensioner.

The pension was exempt form income tax where both the carer and the handicapped pensioner were c below age pension age; if either were of pension age, the carer's pension was taxable.

From 1 February, the carer's pension has also been available to a person caring for a severely handicapped age or invalid pensioner but who is not a relative.

The effect has been to exempt the carer's pension from income tax where a person who is not a relative and is below age pension age cares for a handicapped pensioner of age pension age.

As this is inconsistent with the treatment of the carer's pension when paid to a carer who is a relative, that particular exemption is to be removed, with effect from the date of enactment of the Bill.

This will ensure that the tax treatment of the carer's pension is determined without regard to whether the carer is related to the person cared for.

The revenue gain is expected to be negligible.

Technical Amendments

The Bill will also make a substantial number of minor technical amendments to the Income Tax Law and certain other laws administered by the commissioner of taxation.

These amendments will have no effect on revenue.

Madam Speaker, an Explanatory Memorandum which comprehensively explains the measures contained in this Bill is being circulated for the information of Honourable Members.

I present the Explanatory Memorandum and commend the Bill to the House.