The Senate

Taxation Laws Amendment Bill 1991

Taxation Laws Amendment Act 1991

Second Reading Speech

by the Minister for Industry Technology and Commerce Senator the Hon. John N. Button

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

This Bill will amend the taxation laws in a number of respects.

It will give effect to the personal tax cuts announced on 20 November 1990, and make a consequential amendment to the rebate allowable for medical expenses.

Capital gains tax amendments to be made by the Bill will ease restrictions on the availability of capital gains tax rollover relief, and also ensure capital losses are not brought forward artificially as a consequence of asset transfers between companies under common ownership. Some technical amendments to the capital gains tax provisions as they apply to disposals of partnership assets are also proposed.

A Budget announcement to be given effect by this Bill will limit the franking credits available to life assurance companies under the imputation system.

It will also provide for the taxation treatment of various bereavement payments that have replaced the special temporary allowance and funeral benefit.

Other amendments contained in this Bill will modify the foreign income legislation presently before the Parliament to remove some potential double taxation, to correct technical deficiencies and overcome tax avoidance avenues, and to implement the Budget announcement to extend the deductions for certain capital expenditures on particular activities in Australia to similar offshore activities that generate income to be taxed here.

The Bill will also ensure that a deduction is not allowable for bad debts of a foreign branch of a money-lender who has not derived assessable income from those debts. Finally, the Bill will amend certain provisions of the Taxation Administration Act that deal with the protection of taxation information.

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

Personal tax cuts

The Government announced on 20 November 1990 that it had reached agreement with the ACTU to replace the first wage adjustment under Accord Mark VI with personal tax cuts to cement in place Australia's decelerating inflation rate which is now lower than the average for OECD countries.

The Bill will amend the Income Tax Rates Act 1986 to reduce the lowest marginal rate of tax, applying in the income range $5,401 to $20,700, from 21 per cent to 20 per cent.

This reduction will only apply for resident individuals and trustees.

As the change applies from 1 January 1991 a composite rate scale will apply for the 1990-91 financial year.

That scale will comprise a weighted average of one half of the rate scale applying from 1 July 1990 to 31 December 1990, and one half of the new rate scale that is to apply from 1 January to 30 June 1991.

The lower rate of tax will be reflected in pay-as-you-earn deductions from 1 January 1991.

It will not be used in the calculation or recalculation of 1990-91 provisional tax, but will be available to provisional taxpayers on assessment in 1991-92.

The cost to the revenue of the personal tax cuts is estimated at $430 million in 1990-91, and $1 billion in a full year.

Rebate for medical expenses

As a consequence of the reduction in the lowest marginal rate of tax from 21 to 20 per cent, which I have just mentioned, the level of the rebate of tax for net medical expenses exceeding $1,000 will be reduced to 20 per cent for 1991-92 and subsequent years.

The revenue savings from this measure are estimated at $2 million in a full year.

Capital Gains Tax

Capital gains tax rollover relief will be made more accessible for asset transfers in a company group. Existing anti-avoidance rules require the issue of shares or securities equal in value to the transferred asset as consideration for the transfer. Taxpayers and professional groups have made a number of representations over difficulties that company groups experience in reorganizing their business affairs to meet these requirement.

The Government has considered the arguments put to it and has decided to replace the existing requirements with a new anti-avoidance provision - to be inserted by this Bill - that will deem a transferred asset to have been disposed of at market value if the group subsequently ceases to have effective control of the asset.

The Government believes that this change will make it easier for company groups to reorganize without suffering any adverse capital gains tax consequences, while still maintaining the Government's anti-avoidance objectives.

The Bill also proposes a number of technical measures to ensure that no artificial timing advantages are obtained by shareholders in a company as a result of the transfer of an asset to another group company for reduced consideration. At present, such asset transfers between 100 per cent commonly owned company groups can result in the early realisation of capital losses or reduced capital gains on the disposal of shares in the transferor company. Advantages can also arise in some cases in respect of loans made to the transferor company.

The Government believes that no taxpayer should obtain tax advantages by reason of an internal reorganisation of a company group's affairs, as a result of which assets are transferred within the group. To prevent this, the Bill proposes a series of cost base adjustments to shares or loans held, directly and indirectly, in the respective companies, that is, the transferor and transferee of the asset. The adjustments are intended to reflect changes in the value of shares or loans held within the group following the transfer of assets from one group company to another.

These provisions will generally apply only where actual consideration paid for the transfer of an asset is less than its indexed cost base or, if less, its market value. In other words, companies will be able to avoid the need to make any cost base adjustments by ensuring that consideration equal to the indexed cost base of an asset is paid for its transfe.v

Finally, the Bill will make a number of technical amendments to make it clear that the capital gains tax consequences on the disposal of a partnership asset will be accounted for by the individual partners, and not by the partnership.

The capital gains tax rollover and partnership amendments will not substantially change the operation of the existing law and should have no revenue impact. The amendments to deny timing advantages for asset transfers between commonly owned companies will prevent significant but unquantifiable revenue losses.

Dividend imputation arrangements for life assurance companies

Under present law, tax paid by a company gives rise to a franking credit which may be used to frank dividends paid to shareholders. This is also the case for mutual life assurance companies and government insurance offices which have no shareholders to whom dividends can be paid.

Amendments contained in the Bill will give effect to the Budget announcement to deny mutual life assurance companies and government insurance offices the right to maintain a franking account, and cancel any surplus of franking credits held by them at 21 August 1990.

As also announced in the Budget, franking credits arising to non-mutual life assurance companies from the beginning of their next franking year on account of tax paid on the income from statutory fund business will be reduced by 80%.

These measures will stop double dipping of imputation credits and prevent the potential loss of significant but unquantifiable amounts of revenue. New shareholders of companies that were previously mutuals, or of privatised government insurance offices, will not have access to franking credits that arose before such companies changed their status.

The Bill will also give effect to the Government's decision that franking credits should arise to non-mutual life assurance companies for 20% of franked dividends paid on assets included in their insurance funds. This will apply to franked dividends received by the companies from the beginning of their next franking yea.e

Bereavement Payments

The Social Security and Veterans' Affairs Legislation Amendment Act (No.4) 1989 gave effect to a number of measures announced in the 1989-90 Budget, including a scheme of bereavement payments to either replace the tax exempt special temporary allowance and funeral benefit, or to make such payments in a number of situations not previously covered by the special temporary allowance.

This Bill will ensure that the taxation treatment of bereavement payments is broadly the same as the treatment which applied to the benefits they replaced.

Specifically, the Bill will exempt from tax the additional pension payment that is made following the death of a pensioner without a pensioner spouse, and the payment made to a third party in the situation where the death of the first deceased pensioner is not notified until after the spouse has also died. Further, the bereavement payment made following the death of a child to a person who was in receipt of a child related payment will also be exempt.

Sole parent's pension is now continued for 14 weeks after the death of the only qualifying child. These payments will continue to be included in assessable income. The continuation of carer's pension for 14 weeks after the death of the person being cared for (not being the carer's spouse), will be exempt in certain circumstances where the recipient is under age pension age.

The Bill will also exempt from tax the bereavement payment made to a widow or widower of a veteran or mariner who was in receipt of a disability pension.

The estimated cost to revenue of these proposals is less than $500,000 in a full year.

Foreign Source Income Measures

This Bill will give effect to the proposal announced in the Budget to extend the scope of certain special deduction provisions of the income tax law relating to capital expenditures incurred in particular activities or investments which take place in Australi.b

Those provisions are to be broadened to allow these deductions for relevant capital expenditures incurred after 7.30 pm Eastern Standard Time on 21 August 1990 in the derivation of income that will be assessable in Australia.

In particular, the Bill will extend, in relation to foreign activities that generate assessable income -

the deductions relating to mining and petroleum activities in Australia;
the deductions for industrial property granted, registered or subsisting in Australia; and
the deductions for capital expenditure on buildings in Australia.

It is estimated that the cost to revenue of extending these deductions will be less than $15 million in 1991-92 and subsequent years.

It was also announced in the Budget that, because of the way the income tax law dealing with bad debts is couched, it is arguable that a financial institution is entitled to an income tax deduction for bad debts of its foreign branch that are written off even though, under the proposed new foreign income measures, the income of the branch will generally be exempt from Australian income tax. Measures in this Bill will ensure that a deduction will not be allowable for bad debts in these circumstances.

An appropriate apportionment arrangement will apply where a relevant loan has been created or acquired after 7.30 pm Australian Eastern Standard Time on 21 August 1990, and some of the income derived from the loan debt will be assessable to Australian tax.

While there is no revenue gain or loss from this measure, it could be significant in protecting the revenue.

Other amendments contained in this Bill are directed at removing some potential for double taxation and correcting technical deficiencies in legislation now before the Parliament (the "Foreign Income Bill"), and at removing tax avoidance avenues l

Some of these amendments are aimed at ensuring continuity in the capital gains tax treatment of assets when an entity either ceases to be or becomes an Australian resident. For the purpose of calculating the attributable income, the assets will be treated as having been disposed of and re-acquired on the change of residence. This will ensure that no part of any capital gain is taxed twice.

Also to eliminate double taxation, income of a controlled foreign company (CFC) will not be attributed to Australian taxpayers where they hold interests in the CFC through another entity resident in a country that taxes the income under its accruals tax measures.

Other measures in the Bill will extend foreign tax credit and exemption arrangements to certain deemed dividends subject to appropriate notification within one year of the end of the relevant financial year. These credits and exemptions would then be available in much the same way as where an actual dividend is paid.

The definitions of "exempting receipt" and "notional exempt income" in the Foreign Income Bill are to be amended to ensure that premiums paid for insurance or reinsurance with non-residents are not categorised with income that has been subject to full rates of Australian tax. The cases covered are those where, under special provisions of our domestic law, only 10 per cent of the premium income is subject to Australian tax.

Changes being made to the foreign branch exemption provisions will create greater certainty about the time at which the tests for exemption are to be met, and close off tax avoidance opportunities. They will also align the treatment of foreign source capital gains and losses of an overseas branch of a resident company. This will be done by ensuring that a foreign capital loss is not available for offset against capital gains where, had that loss been a gain, it would have been exempt from tax.

Other measures in the Bill will close potential avoidance avenues by the use of interposed partnerships and trusts to prevent Australian residents being assessed on income from a CFC, and will allow a deduction for interest payable on certain convertible notes in calculating the attributable income of a CF.t

This Bill will also amend the Fringe Benefits Tax Assessment Act 1986, to effect minor technical changes consequential upon the proposed introduction - in the Foreign Income Bill - of a new system for the quarantining of foreign losses.

The revenue impact of the amendments to the foreign income measures is not quantifiable.

Protection of Information

The Bill will amend the provisions in the Taxation Administration Act in two respects.

The existing law makes it an offence for a person knowingly to take action to obtain information held under or for the purposes of a Commonwealth taxation law, unless the person does so in the course of exercising powers or performing functions under the law.

This is having the unintended effect of hindering enforcement activities by State and Territory taxation authorities who, for purposes of their own revenue laws, are seeking access to information collected by businesses and used for the purposes of a Commonwealth taxation law.

The law will be changed so that an offence is committed if a person takes action other than in authorised circumstances to obtain access to records containing information about a person's affairs, but only if those records are in the possession of the Commissioner of Taxation and are held by the Commissioner for the purposes of a Commonwealth taxation law.

The relevant provision will no longer operate to prohibit access to records that are in the possession of someone other than the Commissioner. The amendment will not adversely affect the confidentiality of tax file number or other personal information as the taxation and criminal laws contain safeguards which ensure that any unauthorized conduct in these areas is an offence.

Finally, the law will be strengthened to create an additional offence if a person uses information in respect of another person's affairs held by the Commissioner, where the information was obtained by breach of a taxation la.t

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

I commend the Bill to the Senate.