House of Representatives

Taxation Laws Amendment Bill (No. 4) 1988

Taxation Laws Amendment Act (No. 4) 1988

Second Reading Speech

by the Hon. Peter Morris, M.P.

the Minister Assisting the Treasurer ?? I move that the Bill be now read a second time.

Madam Speaker, this Bill will give effect to a number of the tax measures announced in the May Economic Statement, and to some measures announced in last week's Budget.

The May Statement measures relate to income tax deductions for depreciation or special write-off of income producing plant, prepaid expenses and mains electricity connection costs; the treatment of certain dividends; the abolition of section 26AAA; the valuation of live stock; and increases in pensioner rebates.

Budget measures in the Bill increase rebates for recipients of social security unemployment, sickness of special benefits, or of certain training or Commonwealth educational allowances; exempt from tax the special temporary allowance; and establish the basis for calculation of provisional tax for 1988-89.

Other income tax measures to be given effect by the Bill deal with the taxation of non-cash business benefits, debt finance for corporate restructuring, public trading trusts, expenditure substantiation rules and the gift provisions.

The Bill will also amend the fringe benefits tax law so that remote area home ownership benefits receive further concessional treatment as announced.

Concessional deductions for income-producing plant

In accordance with the May Economic Statement, the Bill will terminate most of the special deductions in the income tax law for income-producing plant. These are - . the general 5/3 accelerated depreciation allowances; . certain 5 year depreciation arrangements for primary production plant and structural improvements; and . the special write-offs for expenditure on general mining or petroleum mining plant, other than exploration or prospecting plant.

Plant to which these concessions currently apply will in future be written-off at effective life rates, increased by a 20 per cent loading for most plant as an incentive to investmen.t

Effective life rates are determined by the Commissioner of Taxation and a definition of ''effective life" is to be developed for inclusion in a subsequent Bill.

The present Bill will also require taxpayers who wish to use the prime cost method of depreciation to elect to do so in the first year in which the relevant plant is used.

These changes are estimated to produce revenue savings of $190 million in 1989-90, $450 million in 1990-91 and $1030 million in 1991-92, rising further for a few years then settling at an annual gain of around $1 1/4 billion in the mid to late 1990's.

Expenditure paid in advance

The general deductions provisions of the income tax law authorise a deduction in the year in which expenditure is incurred even where the services being paid for are provided over several years.

On the other hand, the person providing the services may generally bring the income to account in the year in which the services are provided and this imbalance provides tax shelter opportunities.

The Bill will change the timing of deductions for expenditure paid in advance under agreements entered into after 25 May 1988.

Instead of being fully deductible when incurred, deductions for the expenditure will be pro-rated over the period during which the services will be provided, with a maximum period of 10 years.

Immediate deductibility will continue to be available if all the services will be provided within 13 months of incurring the expenditure; if the expenditure is less than $1000; or if it is required by order of a court or by law, or is in respect of salary or wages.

Transitional provisions will ensure that the amendments apply prospectively.

The revenue savings from this measure are estimated to be $35 million in 1989-90 and $20 million in subsequent years.

Dividends paid by tax-exempt entities

Two measures announced in the May Economic Statement to prevent abuse of the intercorporate dividend rebate provisions will be given effect by this Bil.

Under the first, certain tax-exempt entities will be discouraged from using innovative financing techniques by which investors receive a return on their investment in the form of tax free dividends rather than as taxable interest receipts.

Denial of the rebate on dividends paid by relevant tax-exempt entities removes the distortion in the tax position of investors who would otherwise obtain unintended financial benefits at the expense of Commonwealth revenue.

Dividends received by private companies

Other intercorporate dividend rebate changes will deny the rebate on unfranked dividend income received by private companies.

These private companies will accrue franking credits that can be used to frank dividends passed on to their shareholders.

This removes the tax deferral advantage of receiving unfranked dividends through a private company and leaves the ultimate individual shareholders in the same position as if the dividends had been received directly.

Unfranked dividends that pass from one company to another within a wholly-owned company group will not be subject to the measure, nor will dividends paid under the arrangements for the phasing-out of Division 7 undistributed profits tax which are required to be unfranked.

These changes will apply to unfranked dividends paid after 25 May 1988, unless the dividends were declared on or before that date.

Abolition of section 26AAA

The Bill gives effect to the proposal announced on 25 May 1988 to abolish the provision which taxes profits made on the sale of property within 12 months of purchase, leaving those gains to be taxed under the general capital gains and capital losses provisions.

Gains arising from short term property sales will qualify for the five year notional averaging of liabilities under the capital gains provisions and may be offset against allowable capital losses.

This amendment will apply to sales of property after 25 May 1988 and is expected to have a revenue cost of $5 million in 1988-89 and $30 million in 1989-90.

Mains electricity connections

Capital expenditure in connecting mains electricity facilities to a property on which a business is carried on is to be deductible over 10 years instead of in the year in which it is incurred.

The amendments will apply to expenditure incurred after 25 May 1988, but will not apply to expenditure incurred under a contract entered into on or before that date.

The expected annual revenue saving from the measure in 1989-90 and subsequent years is $5 million.

Valuation of natural increase in live stock

The value of live stock on hand at the end of a year of income is generally brought to account, at the option of the taxpayer, at either cost price or market value.

Where cost price method is adopted, the law permits the taxpayer to select a cost price for natural increase which, for a class of live stock may not be less than the minimum cost price prescribed in respect of live stock of that class.

The minimum values prescribed are substantially outdated and the Treasurer announced in the May Economic Statement that the values are to be increased for natural increase occurring after 30 June 1988, but to a level that is still less than any reasonable estimate of the cost of natural increase.

A taxpayer who can demonstrate that the actual cost of producing natural increase is less than the relevant new prescribed value will be permitted to value the natural increase at actual cost.

This change will have minimal effect on revenue.

Pensioner rebate

The Bill will increase the maximum pensioner rebate from $250 - or $308 for service pensioners - to $430 for both social security and service pensioners.

It will also increase the taxable income level above which the pensioner rebate begins to shade-out from $6142 - or $6384 for service pensioners - to $6892 for both classe.

These changes, which will have effect for 1988-89 and subsequent years, are estimated to cost $55 million in 1988-89 and $210 million in 1989-90.

Beneficiary rebate

The maximum rebates of tax for other social security beneficiaries and certain recipients of allowances under Commonwealth educational schemes, and the levels at which the rebates begin to shade-out, are to be increased for the 1988-89 and subsequent income years.

For married taxpayers the maximum rebate will increase from $430 to $600, with no tax payable on taxable incomes up to $11,059.

For other taxpayers the maximum rebate will increase from $180 to $260, with no tax payable on taxable incomes up to $6,184.

These measures are estimated to cost $20 million in 1988-89 and subsequent years.

Special temporary allowances

Amendments will also be made by the Bill to give effect to the 1988-89 Budget proposal to exempt from income tax the special temporary allowance payable for a period of 12 weeks to a surviving social security or service pensioner following the death of his or her pensioner spouse.

This change will apply for 1988-89 and subsequent years and will have a negligible revenue cost in 1988-89 and cost $5 million in 1989-90 and $6 million in 1990-91.

Provisional tax for 1988-89

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 1988-89 provisional tax to be calculated on the basis of 1987-88 taxable income increased by 12 per cent, and by applying the 1988-89 rates of tax and medicare levy, and the increased low income thresholds for medicare levy.

Generally, rebates and credits will be allowed in the provisional tax calculation at the levels allowed in 1987-88 assessments but rebates of tax allowed on franked dividends will be the 1987-88 rebates increased by 12 per cen.

Taxpayers who estimate that their taxable income for 1988-89 will increase by less than 12 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 1988-89 recalculated on the basis of their own estimates.

Non-cash business benefits

This Bill will also implement, subject to some minor variations, the proposal which was announced on 4 February 1985 to tax non-cash business benefits, but delayed because of the priority given to major tax reform measures.

This measure will address practices that became more prevalent following the full Federal Court's decision that the existing law taxes non-cash business benefits only if such benefits are convertible to cash and are in the nature of income according to ordinary concepts.

There had also been an increase in the provision of non-cash benefits to induce business taxpayers to purchase items of plant or equipment.

It was originally announced that the law would be amended to tax the arm's length value of non-cash business benefits, subject to certain special rules.

On review a more satisfactory approach is to provide separate simple rules to deal with both these practices.

The Bill will tax non-convertible benefits provided after 5 February 1985 in the same way as benefits that are convertible into cash and which are taxable under the existing law if they are of an income nature.

In other words, the existing rules that apply to the taxation of convertible benefits will be extended to non-convertible benefits.

To ensure that there can be no element of retrospectivity in this revised approach, the Bill contains transitional provisions that will allow benefits provided on or before today to be taxed on the announced basis.

In the case of non-cash benefits provided to induce business taxpayers to purchase items of plant or equipment or to enter into service agreements, the amendments will simply treat the portion of the expenditure that represents the arm's length value of the benefit provided as having been incurred in respect of the benefi.w

This will ensure that the expenditure relating to the benefit will not be deductible or form part of the cost of a depreciable unit of property.

This approach, which varies the announcement, will apply only to benefits provided after today.

Corporate Restructure (Debt Creation) Rules

The Bill will insert in the income tax law rules foreshadowed by the Treasurer on 30 April 1987 against arrangements under which interest-bearing debt is introduced to finance the restructuring of related foreign controlled companies.

The measures will deny interest deductions on debt used to fund the transfer of assets from one related company to another where the buyer and seller are ar least 50 per cent controlled by a non-resident or related non-residents, except where there has been an introduction of additional income producing assets.

The new rules will replace administrative measures that had previously been imposed as a condition for approval of investments under foreign investment policy.

While the amendments will generally apply from 1 July 1987, under transitional arrangements in the Bill, companies that are less than 100 percent foreign controlled will not be subject to the legislation on restructures carried out between 1 July 1987 and 19 June 1988.

As part of its consultative approach to new and complex tax legislation, the Government released a draft of the main operative provisions of this legislation on 20 June 1988 and called for comment from interested persons.

This initiative was well received and, in conjunction with the seminars sponsored by the Taxation Institute of Australia, has resulted in constructive submissions being made by members of the accounting and legal professions and by industry.

A number of changes recommended in these submissions have been adopted so that the measures will not intrude unnecessarily into the normal trading activities of foreign controlled companies.

For example, although the earlier draft legislation was to have a 15 percent foreign control threshold, the Government has agreed to increase the level to 50 percent.

The legislation is limited to corporate restructures, but the Government will quickly respond if evidence emerges of entities other than companies being used to circumvent the provisions now being introduced.

Other income tax measures

Other income tax changes being implemented by this Bill will have negligible revenue effect.

One extends for the 1987-88 and subsequent income years the range of business activities that may be conducted by a public unit trust, without it being treated as a public trading trust and therefore taxed as a company.

Another eases the paperwork burden relating to claims for car expenses, by permitting certain information about car expenses to be specified in records to be retained by taxpayers, rather than in their income tax returns.

Remote area home ownership schemes

Effect is also being given to the Treasurer's announcement on 29 October 1986 that the fringe benefits tax law would be amended to allow employers in Australia's remote areas to amortise the taxable value of certain fringe benefits provided under remote area home ownership schemes.

Subject to a seven year maximum, the value of the benefit may be spread over the period running from the date the benefit was initially provided until the employee is free to transfer the property on the open market.

Other amendments will extend the scope of the existing remote area concessions in certain other respects.

The amendments will apply with effect from commencement of the fringe benefits tax legislation on 1 July 1986, and are expected to cost less than $1 million per annu.o

Recovery of tax

Finally, the Bill will amend the Taxation Administration Act.

Following the decision of the High Court in the Moorebank case, provisions in the Act that modified limitation periods imposed by the various State and Territory limitation laws are redundant, and are to be repealed by this Bill.

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