House of Representatives

Taxation Laws Amendment Bill 1990

Taxation Laws Amendment Act 1990

Second Reading Speech

by the Minister for Science and Technology and the Minister Assisting the Treasurer, the Hon. Simon Crean, M.P.

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

Mr Speaker, this Bill, apart from minor technical changes, is substantially the same as a Bill that was introduced on 30 November 1989 but which lapsed when the House was dissolved following the calling of the election. It amends the tax laws in a number of respects.

It contains all but one of the capital gains tax measures announced in the 1989-90 Budget. These amendments do not encompass any fundamental changes in the design of the capital gains tax. Rather, they represent a fine tuning of the provisions that the Government believes necessary having monitored the function of the tax over the past four years.

The Bill proposes amendments on the subject of so called double dipping tax avoidance arrangements announced in December 1986. Since that time the Government has given detailed consideration to various representations received in relation to the matter and to the effects of numerous other legislative changes and developments both in Australia and overseas. It has decided that the scope of the arrangements requiring legislative action now is not as-broad as that foreshadowed earlier. This result is reflected in the relevant provisions of this Bill.

Another measure included in the Bill are the amendments to the research and development expenditure provisions foreshadowed on 7 September 1989. Also included are consequential amendments reflecting a change in the basis of payment of the carer's service pension.

Finally, the Bill proposes a number of minor amendments to the income tax law.

I turn now to a more detailed discussion of these measures.

Capital Gains Tax

The Bill contains three categories of capital gains tax measures. The first category are of an anti-avoidance nature, consistent with the Government's ongoing commitment to prevent abuses of the taxation system by a small minority at the expense of the honest tax-paying community. These amendments promote fairness and equity in the system and also prevent significant losses of revenue m

These particular amendments - which generally apply to assets disposed of after 15 August 1989 - are largely technical in nature. They will, amongst other things, vary the consideration taken to have been paid or received on an acquisition or disposal of an asset other than from or to another person, and will prevent abuses of certain concessional provisions relating to transfers of capital losses and assets between companies in the same group. Certain consequential amendments in relation to exemption from capital gains on the disposal of traditional securities are also included.

The Bill will also address technical deficiencies in the operation of provisions designed to prevent "double-tax" on the disposal of assets, and in transitional measures that apply on the disposal of shares or interests in companies or trusts acquired before 20 September 1985 where, on or after that date, the particular company or trust has acquired significant new assets.

The final anti-avoidance amendment will prevent taxpayers from obtaining benefits of indexation for amounts incurred on the acquisition of an asset - where the asset was not disposed of by another person - until such time as those amounts are actually paid. This will prevent widespread abuses, particularly in the area of nominally paid shares schemes in respect of liabilities to make call payments that are incurred but not yet discharged.

The second category of amendments will implement a number of concessional measures which, to the extent they operate to a taxpayer's advantage, will generally apply from 20 September 1985.

Foremost amongst these concessional measures are amendments to the capital gains Principal Residence Exemption. Broadly speaking, these changes will expand the availability of an extended exemption for the construction of a new home, or during a temporary absence from an existing home. The circumstances in which the exemption is available to a trustee for periods where a home is occupied by a beneficiary will be extended e

Another measure provides rollover relief - that is, deferral of tax on accrued gains or the retention of the effective capital gains exempt status of assets originally acquired before 20 September 1985 - for certain strata title conversions and incorporations of associations as companies.

Some minor technical amendments of a concessional nature are also included. These will ensure the availability of full 3.

indexation of amounts remaining in the cost base of shares or units following the payment of an amount that is not a dividend or amounts that are tax-free. The concessional treatment for rights or options issued by a company to shareholders of another group company is to be extended.

They will also ensure that assessable amounts on the conversion of a convertible note are included in the cost base of the shares thereby acquired. The harsh operation of one of the transitional provisions in certain situations following the rollover of a taxable Australian asset to a non-resident group company is also to be removed.

All of these amendments have been brought forward by the Government in response to concerns identified about the operation of the capital gains tax, and are a further demonstration of the Government's commitment to a fairer tax system.

The third category of amendments will ensure that certain capital gains provisions only apply from 23 May 1986, the date of introduction of the original legislation, rather than 19 September 1985 when the new regime was announced. The areas affected by this amendment concern the deemed disposals of created assets, for example, leases, options and restrictive covenants. These amendments will address concerns expressed by bodies such as the Law Council of Australia that the original provisions could, in certain circumstances, be perceived as having a retrospective application.

Mr Speaker, it is not possible to put a precise revenue figure on these CGT amendments. Some are concessional, some are not. On balance they will prevent a substantial loss of CGT revenue.

Double Dipping Tax Avoidance Arrangements

This Bill will insert in the income tax law rules to counter arrangements - referred to as double dipping tax avoidance schemes - under which a tax benefit is obtained both in Australia and in another country for a loss incurred by a company that, under their respective income tax laws, is resident in both countries and that is essentially financing vehicle within a company group.

The measures will deny a dual resident investment company the ability to transfer either "income" or capital losses to other group companies under the group relief provisions of the income tax law. The amendments will apply to such losses incurred in the 1989-90 and subsequent income years.

The proposal is broadly in line with measures taken in the United States of America, United Kingdom, and New Zealand to counter the double deduction-of losses.

These measures will effectively prevent a dual resident investment company from having the ability to transfer to other group companies both "income" and capital losses under the group relief provisions. However, such a company will retain the ability to carry forward such losses for set off respectively against future income or capital gains it may derive.

Although they cannot be quantified, these measures are expected to result in revenue savings.

Research and Development Expenditure The Bill proposes four changes to the operation of the research and development tax concession.

As the law now stands a deduction of up to 150% of the cost of acquisition of core technology may be allowable and in addition, the original developer may also have obtained a deduction for expenditure in developing the core technology. This can lead to a double deduction in relation to the same work. This Bill proposes, therefore, that the company acquiring or acquiring the right to use the core technology be only able to claim a deduction at the reduced rate of 100% of the expenditure incurred s

The second change proposes that, where a deduction has been allowed or is allowable for expenditure on an R&D project, receipts from granting access to or the right to use the results of the project are to be included in assessable income.

The third change relates to commercial risk in R&D ventures. Deductions at the rate of 150% are now available where all or some funds may be invested at less than full risk. The Government considers that the highest rate of deduction should only be applicable where all of an investor's funds are at full risk. New provisions are therefore proposed by the Bill which will reduce the deduction allowable proportionately, from 150% to 100%, as the element of risk is reduced.

Finally, the fourth change will widen the range of potential investors by deleting the requirement that syndicates of eligible companies must include financial institutions.

Savings from these changes to the R&D tax concession are estimated to be $55 million in 1990-91.

Carer's Service Pension Before 1 November 1989 a carer's service pension was payable only to a relative of a severely handicapped veteran where the relative provided constant care and attention to the veteran.

The pension is exempt from tax where both the veteran and the career are below age pension age and the veteran is receiving a service pension because he or she is permanently incapacitated for work. In all other cases the carer's service pension is taxable.

The carer's service pension is now to be extended, operative from 1 November 1989, to any person caring for a severely handicapped veteran, without regard to whether he or she is a relative of the veteran.

The amendment will ensure that the existing tax treatment of the carer's service pension will be retained in respect of the person providing the care h

The revenue effect of the amendment is expected to be negligible.

I present the Explanatory Memorandum which contains more detailed explanations of the provisions of the Bill.

I commend the Bill to the House.