The Senate

Taxation Laws Amendment (Tax File Numbers) Bill 1988

Taxation Laws Amendment (Tax File Numbers) Act 1988

Second Reading Speech

by the Minister for Finance Senator the Honourable Peter Walsh I move that the Bill be now read a second time.

Mr President, this Bill will implement measures to attack the last remaining area of widespread tax evasion in our economy.

It builds upon the unprecedented action this government has already taken in the past 5 1/2 years to close the net on tax evasion and avoidance.

Right from the beginning of our period in office we announced our intention to act retrospectively against any new avoidance schemes that emerged, in one stroke wiping out a large Part of the professional tax avoidance industry.

That overriding commitment to nullify any reward from avoidance has been backed up by a host of specific measures aimed at particular schemes that threatened the revenue.

At the same time we have given the Tax Office the necessary resources in staff and equipment to do its job properly.

But much more than that, through the most comprehensive tax reform process in Australia's history, we have turned the whole psychology of avoidance on its head.

The integrity of the tax system has been restored.

Today people much more readily comply, simply because lower rates make compliance less of a burden.

But if they choose to evade, they run the risk of much stiffer penalties, some of which had not previously been up-dated since 1936.

At the same time the old loop-holes have been eliminated and closed off.

Income derived from capital gains is now taxed on the same basis as income derived from employment.

Fringe benefits are no longer tax preferred, the deduction for entertainment has been removed and people claiming tax deductions now have to maintain proper records.

All of the proceeds of these and the other measures we have taken have been fully devoted to cutting personal income tax rates.

The result is that we now have a genuinely progressive personal income tax scale.

That is in complete contrast to the situation before, when what at first sight appeared a highly progressive scale was in reality highly regressive.

Higher income people walked around it while lower income PAYE. Taxpayers carried much more than their share.

Mr President, the same principle of lower rates, tougher enforcement and fewer concessions has been extended to the corporate sector.

As recent publicity testifies, the tax Commissioner has devoted a large Part of his increased audit resources to a crackdown on company tax avoidance.

I make it clear to the so-called "tax industry" that the Commissioner's actions in this area receive the full support of the Government.

However, I stress that there is something much more fundamental than increased enforcement activity underlying the improvement in compliance from the company sector.

By implementing the new imputation system of company tax we have changed the whole basis of company tax collections for the better.

The new system allows tax-free dividends to be paid to shareholders if tax has already been paid at the company level.

In other words, it removes the double taxation of dividends, and in doing so it completely reverses the previous incentive for companies to minimise their tax payments.

Today, managers who arrange their corporate affairs so as to minimise tax will only be depriving their shareholders of tax-free dividend payments.

Only now is there a growing recognition of the massive shift in favour of the psychology of compliance that has been brought about by the imputation system.

In this way its impact is totally beneficial - it tips the balance of the system towards companies that earn genuine profits and honestly pay their full tax liability.

Mr president, as I said at the outset, this Bill mounts a fundamental attack on tax evasion, where people use false names, do not declare income, or fail to lodge returns.

The measures contained in the Bill will attack these practices by increasing the efficiency and effectiveness of the Australain Taxation Offices' income matching system.

In doing that, they will return to the revenue $2,200 million over the next ten years.

All of this money will be redistributed in the form of tax cuts.

There is a clear need for action to clamp down on these evasion practices.

To take one recent example, an inspection of the employment details of a firm with an annual wages Bill of some $13 million revealed that less than $2 million had been included in returns lodged by employees with the Tax Office.

The Tax Office estimates that tax properly payable was in excess of $5 million.

In another case, in a firm with some 800 employees, over 400 resigned hurriedly on hearing of the arrival of Tax Office inspectors.

That they were being less than honest with their tax affairs can be gauged from the fact that they have left behind almost $120,000 in unclaimed severence pay.

The case for concerted action against such evasion is reinforced by the opportunity recently allowed by the tax Commissioner for people who have not been lodging returns to do so without penalty or prosecution if they did by 31 October 1988.

For those who did not take up the Commissioner's invitation, the file number arrangements now being introduced will provide a trail for future strong enforcement action by his office.

Mr president, the Government fully shares the genuine concerns in the community for the protection of privacy.

For this reason we have introduced into the Parliament a revised general privacy Bill.

The revised privacy Bill includes provisions relating to the tax file number.

More specifically, the Government has also been determined to include very strict privacy safeguards in the present Bill.

There will be no requirement on people to produce a card or any other evidence of their tax file number.

No other government or non-government agency will have access to the Tax Office file number registration system, nor will they be able to use an individual's tax file number for any registration system of their own.

In addition the Bill contains a range of quite specific privacy safeguards.

New offences punishable by a penalty of up to $10,000 or two years imprisonment are proposed for a person who in unauthorised circumstances requires or requests another person to quote his or her file number, keeps a record of another person's file number, discloses another person's file number or uses another person's file number.

While the Tax Office has an exemplary record in maintaining the confidentiality of taxpayer information, this Bill further toughens the law against disclosure.

It doubles to $10,000 or two years imprisonment the penalties that already apply to unauthorised release of information by Tax Office employees.

An equivalent offence is being introduced for disclosure of information obtained in unauthorised circumstances by non-employees.

The Commissioner will also be able to obtain an injunction to prevent unauthorised disclosure of information.

Mr President, I will now turn to the major features of the Bill.

As foreshadowed in the Treasurer's statement in May, extensive consultations have been held with industry groups affected by the proposals.

Those discussons have proved fruitful and the views expressed have, where possible, been incorporated in the arrangements.

Before doing so I should record the Government's appreciation for the constructive way in which industry groups have approached the discussions with Tax Office officials.

The Treasurer and tax officials have also discussed these measures with members of the opposition, and in particular, the shadow Treasurer.

I believe that the opposition has approached this issue constructively, and has made a number of positive suggestions which have been incorporated in this Bill.

In particular, the Government has adopted the opposition's suggestions on extending a withholding tax system to interest paid on bank accounts where no tax file number is quoted.

This is in lieu of the original proposal to freeze bank accounts.

The Government has also agreed to adopt the opposition's suggestion that a similar provision apply to dividend payments on shares.

This means that people will not be obliged to quote their file number to enter into a relevant transaction or operate an investment account.

However, prior to receiving income from those investments the taxpayer would be able to quote his or her file number to avoid tax being deducted from the income by the payer.

Further, the Government has accepted the opposition's suggestions that the tax file numbering scheme be made completely voluntary.

The Bill now ensures that taxpayers will in all circumstances retain the right to elect to have tax withheld at source rather than quote their tax file number.

Another matter on which we have been able to agree with the opposition is that the tax file number legislation should not commence before the privacy legislation.

The tax file number Bill now ensures that the file number system will commence on the same day as the privacy legislation that has the general support of the opposition.

As I stated, the essential purpose of the new file number arrangements is to improve the efficiency and effectiveness of the Australain Taxation Office's income matching system as a means of furthering the attack on tax evasion.

That system presently relies on names and addresses to match details contained in taxpayers' returns with those supplied to the Tax Office on, for example, interest and dividend advices received from companies.

By providing for the use of tax file numbers rather than just names and addresses, the measures incorporated in this Bill will substantially improve the matching process.

By way of example, the present reliance on names and addresses means that around 30 per cent of interest reports cannot be readily matche.y

Subject to certain extensions to ensure comprehensive coverage, the new arrangements will apply to the principal areas in which income reports are already received by the Tax Office.

The first of these is employment.

After the first phase of the new arrangements are commended by proclamation those starting a new job or changing jobs will be able to quote their file number on an employment declaration to their employer.

If they do not, tax will be deducted from their pay at the highest rate, plus the medicare levy.

Later the arrangements will extend to all employees who will be asked to lodge with their employer a revised.income tax instalment declaration form and quote their file number.

These arrangements will extend to recipients of unemployment or sickness benefits.

Pensioners, including age, invalid and service pensioners, will not be required to quote a file number; nor will children under 16 who do not earn enough to have tax taken out of their pay.

The second phase of the implementation of the scheme will be its extension to investment uses.

The investment areas to be covered by the legislation fall into two groups.

First, interest income received from investments with banks and other financial institutions and with companies, government and semi-government authorities and solicitors' trust funds.

Second, dividends from share investments and distributions from cash management and property trusts.

In the May statement it was announced that the investment use arrangements would be phased in over two years from 1 July 1990.

However, discussions with organisations have established that, provided there were adequate lead time, phasing arrangements were unnecessary and were, in any event, difficult to administer.

Revised implementation arrangements now decided on will enable file numbers to be quoted for all new accounts opened or investments made on or after 1 July 199.t

The quotation requirement will also apply for existing accounts or investments at that date.

To assist in the administration of these, people will be able to quote their file numbers in respect of existing investments from 1 July 1990.

The Government has also considered views expressed about the severity of the original sanction for non-quotation.

The Government has now decided to align the investment sanction with that proposed for employment.

That is, where people have elected not to quote their file number at the time any interest or income distribution is payable, tax will be withheld at the maximum marginal rate, plus the medicare levy.

In light of the new sanction arrangements and administrative difficulties identified in relation to the original proposals, the quotation arrangements for investments in shares in public companies will apply to pre-existing shareholdings at 1 July 1991, and not just new investments, as was originally proposed.

In this way the rules for shares will apply on an equivalent basis to that for other forms of investments.

The general rule is that the withholding sanction will apply to interest or income distributions made on or after 1 July 1991.

In the case of shares the withholding sanction will apply on a pro rata basis to the extent that the divident is not a franked dividend.

As with employment, deductions made under these arrangements will not be a final tax.

A person will be required to include total investment income in his or her income tax return, and credit will be allowed for any amounts deducted.

Early access to funds withheld will only be possible in certain hardship cases.

There will be a range of exemptions to these investment uses.

For accounts with banks, building societies and credit unions in existence at 1 July 1991, there will be no need to quote a file number where interest is payable at a rate that is less than $120 per annu.m

This reflects the original proposal to exclude pre-existing accounts with a balance of less than $1000.

Financial institutions have advised that they cannot efficiently administer a system that distinguishes accounts by reference to account balances.

A file number will be able to be used in relation to all new accounts opened after 1 July 1991 irrespective of the level of interest paid.

Mr president the Bill ensures that people receiving any Part of an age, invalid or other pension from the department of Social Security, or service pension from the department of veterans'

Affairs, will have no need to quote a tax file number to operate bank or similar accounts, buy shares, or have dealings with other financial institutions.

A person in receipt of any Part of an eligible pension, benefit or allowance will be taken to have quoted a tax file number to a financial institution or other investment body upon the lodgment of a declaration with the investment body.

This exemption will not apply to people receiving unemployment or sickness benefits, since in these cases there can be no expectation that the recipient will permanently remain out of the workforce.

Children under the age of 16 who do not have a tax file number will also have no need to obtain one for banking and other financial transactions, provided interest is payable at a rate that is less than $420 per annum.

This exemption does not extend to dividend income.

In order to ensure that financial institutions will have no need to quote their tax file number when making loans to their corporate or government customers such loans have been removed from the investment categories for which tax file numbers might be used.

As a further measure designed to improve the efficiency of the income matching system, the Bill will also introduce an obligation on employers and investment bodies who store information on computer to supply information reports to the Commissioner in a form si Table for processing by the Tax Office computer system.

Table Organisations will not be required to establish computer storage systems where they do not already exist.

For those who presently store information on computer, there will be exemptions from the requirements where meeting the Commissioner's specifications for transmission of data would create substantial difficulties.

Mr president, as was announced by my colleague, the Minister for Employment, Education and Training, there will be one other use for the tax file number.

That is, as Part of the higher education contributions scheme, students choosing to pay their contributions through the tax system will need to have a tax file number.

The legislative authority for that use of tax file numbers is included separately in the legislation introduced for the higher education contributions scheme.

I stress at this point, that the same strict privacy safeguards I have outlined applying to this Bill apply to the use of the tax file number under the higher education contributions scheme.

Mr President, as I said earlier, the measures in the Bill will result in retrieving substantial revenue that would otherwise remain uncollected.

It is estimated that revenue will progressively build up from 1988-89 to the point where an additional $337 million annually will be collected by 1993-94.

Those who choose to oppose these measures are choosing to allow those who are cheating on the tax system to continue to do so at the expense of the more honest members of our community.

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