House of Representatives

Taxation Laws Amendment Bill (No. 3) 1992

Second Reading Speech

by the Minister assisting the Treasurer the Hon Peter Baldwin

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

This Bill will amend the taxation laws to implement several measures outlined by the Prime Minister in his "One Nation" statement of 26 February 1992.

It will change the taxation provisions to make investment in Australian industry more attractive. This is, of course, part of the Government's strategy to assist Australian business to become more competitive in the international arena.

The Bill will amend the depreciation provisions in a number of respects.

Taxpayers who install depreciable property on Crown leases will no longer be denied depreciation deductions only by reason of the fact that the property is attached to leased land.

Capital expenditure on the construction of buildings used for short-term traveller accommodation and industrial buildings will be able to be written-off at an accelerated rate.

The Bill will also extend depreciation eligibility to certain structural improvements at the 2 1/2 per cent rate accorded income producing buildings.

The Bill also provides for the taxation treatment of the proposed Development Allowance and Pooled Development Funds.

Also provided for in the Bill are the taxation measures to provide the facility for certain new transport and electricity projects to be financed by means of non-assessable/non-deductible borrowings.

Another "One Nation" initiative to be provided for by this Bill is amendments to the bad debt provisions to remove some uncertainty as to the operation of the taxation law.

In addition to these One Nation measures, the Bill will amend the definition of primary production and the research and development provisions of the taxation law.

The definition of "primary production" will be amended to include taxpayers engaged in horticulture. "Horticulture" will include the propagation or cultivation of plants for themselves or their commercially useful parts and includes the use of intensive and artificial growing techniques.

The research and development provisions of the taxation law are to be amended to confirm that prospecting, exploring or drilling for minerals, petroleum or natural gas is not as such research and development (R&D) for the purpose of the special R&D deduction of up to 150% of expenditure.

The Bill will also make changes to the arrangements for the administration of the reasonable benefit limits as set out in the Occupational Superannuation Standards Act 1987.

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

Crown leases

This Bill amends the plant depreciation provisions so that taxpayers who install depreciable property on Crown leases will no longer be denied depreciation deductions only by reason of the fact that the property is attached to leased land.

Under existing law, taxpayers who install depreciable property on Crown leases can be denied depreciation deductions because, owing to the degree of attachment of the property to the land, the law treats the Crown as the owner, and not the taxpayer who actually incurred the expenditure. Taxpayers must own the property for which deductions are sought.

The law is to be amended to treat taxpayers in those circumstances as owners of the property for depreciation purposes, so enabling them to obtain deductions for the income-producing use of such property that occurs after 26 February 1992.

A number of consequential amendments are required for the capital gains tax provisions as the result of the changes to the depreciation provisions, to ensure that the two provisions treat property on Crown leases in a consistent manner.

Those consequential amendments will be introduced during the Budget session of the Parliament and will apply from the same date as the depreciation changes, 26 February 1992.

These amendments are not expected to have a significant impact on the revenue.

Traveller accommodation

The capital cost of buildings used in the provision of short-term traveller accommodation is to be evenly deductible over 25 years at the rate of 4 per cent per annum, up from 2.5 per cent per annum. The higher rate will also apply to extensions, alterations or improvements.

The amendment applies to hotels, motels and guesthouses that contain at least 10 rooms available for short-term use by travellers. It also applies to buildings containing not less than 10 apartments, units or flats, and associated facilities, for short-term use by travellers.

The higher rate will be available where construction commences after 26 February 1992.

The estimated cost to revenue of these amendments is nil in 1991-92 and 1992-93, $2 million in 1993-94l $6 million in 1994-95; and $12 million in 1995-96.

Industrial buildings

The rate of deduction for buildings used in industrial activities is to increase from 2.5 per cent per annum to 4 per cent per annum.

Industrial activities encompass manufacturing operations and certain closely related activities. They also include the processing of primary products, such as minerals, wool, timber and foodstuffs. Printing and similar activities are also included as is the production of energy either for sale or for use in manufacturing and related activities.

Buildings not covered by the amendments, such as offices and shops, will continue to be deductible at the rate of 2.5 per cent per annum.

The amendment applies to buildings, or extensions, alterations or improvements to buildings, commenced to be constructed after 26 February 1992.

It is estimated that the cost to revenue will be nil in 1991-92 and 1992-93; $3 million in 1993-94; $9 million in 1994-95; and $18 million in 1995-96.

Income-producing structural improvements

Deductions are to be available for the cost of income producing structures on land that are not presently deductible under existing capital allowance concessions for plant, buildings, mining, etc.

The rate of deduction will be 2.5 per cent per annum, the same as for most income-producing buildings.

Examples of structures to which the concession applies include roads, runways, bridges, dams, walls and fences, including earthworks integral to the installation of those structures.

The concession will not apply to other non-depreciating earthworks and artificial landscapes such as grass playing fields and fairways.

The amendment applies where construction commences after 26 February 1992.

Development Allowance

The Bill includes measures to re-activate and amend the former investment allowance provisions to allow a deduction, for a restricted period, of 10% of capital expenditure on plant and equipment acquired by taxpayers for conducting certain Australian projects, costing $50 million or more, which meet some other criteria.

This proposal was announced in the "One Nation" statement, on 26 February 1992. Further criteria were announced on 5 April 1992.

The Development Allowance Authority Bill 1992 is integral to the operation of the taxation provisions covered under this Bill. That Authority will determine whether certain criteria have been met. A certificate issued by the Authority is a pre-requisite to any deduction under these tax provisions.

The Bill also contains amendments to the income tax law, including the Taxation Administration Act 1953, which are directly relevant to the operations of the Development Allowance Authority. These measures include provisions to permit the Authority to utilise the prosecution provisions of the income tax law against persons who breach requirements relating to the provision of information and documents.

The estimated cost of this measure is expected to be $40 million in 1994-95 and $70 million in 1995-96.

Pooled Development Funds

This Bill will also provide for the taxation of Pooled Development Funds (PDFs) and the tax effects for investors investing in PDFs.

PDFs will be companies registered by a Board established under the Pooled Development Funds Act. The scheme will be administered by the Department of Industry, Technology and Commerce.

PDFs will be taxed on their taxable income at a concessional rate of 30 per cent. Their taxable income will be calculated on the same basis as that of other companies. The imputation provisions of the income tax law will apply to PDFs in the same way they apply to other companies. Dividends paid by PDFs will therefore be frankable.

Unfranked dividends paid by PDFs will be exempt from income tax. In the case of franked PDF dividends, shareholders will have the choice of claiming the exemption, or using the imputation credits attached to those dividends by including the dividends in their assessable income for the particular year.

Shareholders will also be exempt from tax on any profits or gains on the disposal of PDF shares. Correspondingly, no deductions will be allowable for any losses incurred on disposal.

There is no estimated revenue cost for the first two years. The estimated cost for 1994-95 and 1995-96 is $5 million in each year.

Infrastructure borrowings

The Bill creates a category of borrowings - described as infrastructure borrowings - that will be available to finance the construction of certain new land transport, seaport and electricity generating facilities.

The tax benefits provided by this measure will facilitate private sector investment in the construction, ownership and operation of infrastructure that in the past was normally undertaken by the public sector.

Infrastructure projects of the type specified typically have a long construction period and do not produce revenue for some years. This can mean that companies borrowing to develop such projects will not be able to obtain a deduction for interest costs in the year in which they are incurred. The measure will assist the financing of the projects by effectively allowing the borrowing company to transfer the benefit of its interest deduction to investors. Such a transfer reduces the financing cost to the borrower.

The transfer of the benefit of tax deductibility for interest will be achieved by the interest on the infrastructure borrowing being freed from income tax in the hands of investors, with the interest paid by the borrower not qualifying for deduction.

Investors in infrastructure borrowings will also benefit by not having to pay income tax on any profits on the disposal of their interest in the borrowing. They will not, however, be able to claim a deduction for any loss on disposal.

Importantly, the Government has decided to further encourage private sector investment in the specified areas by allowing a tax deduction for interest on borrowings to invest in infrastructure borrowings.

The measure, as indicated, is targeted to genuine private sector projects in the areas specified. It is not designed to promote new forms of financing the public sector. Eligibility is based on the private sector infrastructure provider deriving assessable income in consequence of the public being charged a fee for the use of, or output from, the facility. The tax benefits of an infrastructure borrowing will not be available for projects where there is a form of public underwriting of the risks associated with construction, ownership or use.

Infrastructure borrowings will be able to be used to finance the construction of one of the specified facilities by a company, a corporate unit trust or a public trading trust that intends to own, use and effectively control the use of the facility to generate assessable income for at least 25 years.

Companies whose sole purpose is to invest in bodies constructing one of the specified categories of infrastructure facility will also be able to raise infrastructure borrowings.

The maximum period of an infrastructure borrowing, including the refinancing of an infrastructure borrowing, will be ten years.

The estimated revenue cost of this measure for 1993-94, 1994-95 and 1995-96 is $10 million, $35 million and $100 million respectively.

Bad debts

This Bill will give effect to the Prime Minister's announcement in "One Nation" statement to amend the bad debt provisions in the income tax law.

The Bill will clarify that the writing-off of a bad part of a debt is an allowable deduction.

It will also ensure that a deduction will be allowed for swap losses where the debt is extinguished on or after 27 February 1992 as a result of entering into debt/equity swap arrangements. Under the proposed amendment, debt/equity swaps may be arranged even though the debt is not yet bad.

The swap loss is the difference between the book value of the debt and the value taken in exchange for the debt. The value of the equity will be its market value or the value recorded in the books of the creditor, whichever is greater. The allowable swap loss deduction is reduced to the extent that it has been previously allowed as a deduction under the income tax law.

The Bill will also ensure that any profits or losses subsequently realised from the disposal, cancellation or redemption of the equity acquired through debt/equity swaps are assessable or deductible.

These measures will enable some debt restructuring for debtors in difficulty without requiring trading to cease and should therefore result in some reduction in the number of cases where businesses are liquidated.

The amendment will have no long term cost to the revenue. Some deductions from debt/equity swaps could be brought forward at a small but unquantifiable cost to the revenue.

Expenditure on research and development activities

Mr Speaker, the Bill will confirm that prospecting, exploring or drilling for minerals, petroleum or natural gas is not as such research and development (R&D) for the purpose of the special R&D deduction of up to 150% of expenditure.

The amendment will be in line with consistent interpretation that if the purpose of the prospecting, exploring or drilling activities is to discover, determine more precisely the location of, or determine the size or quality of, deposits,then the activities are not research and development activities.

The amendment will have no effect on revenue.

Primary production definition

With regard to taxpayers engaged in the growing of plants, the definition of "primary production" in the Income Tax Assessment Act has been interpreted as being limited in its application to activities involving the cultivation of soil.

Therefore taxpayers engaged in the cultivation or propagation of plants in media other than soil (for example using techniques such as hydroponics) were not considered to be engaged in primary production for taxation purposes.

In recognition of the inequity of this situation, the Government proposes an amendment to the definition of primary production so as to include taxpayers engaged in horticulture. The proposed definition of horticulture will apply to taxpayers who are engaged in the cultivation or propagation of plants (including fungi) for themselves or their commercially useful parts, and expressly includes propagation or cultivation in media other than soil.

The definition will not apply to activities other than in the course of, or for the purpose of, a business.

The estimated cost to the revenue of the inclusion of horticulture in the definition of primary production will be $0.5 million per year from 1992-93.

Occupational Superannuation Standards Act amendments

The Bill will make changes to the arrangements for the administration of the reasonable benefit limits (RBL) as set out in the Occupational Superannuation Standards Act 1987.

The RBL are limits on the total amount of retirement benefits receivable on a concessionally taxed basis. The payment of amounts in excess of the RBL are identified by the Insurance and Superannuation Commissioner and communicated to the Commissioner of Taxation for tax assessment purposes.

The Bill proposes that only determinations that result in an income tax liability for the taxpayers be notified. At present the Act requires that all determination decisions made by the Insurance and Superannuation Commissioner be individually notified to taxpayers.

The Bill also proposes that determinations which do not give rise to a tax liability can be notified upon the initiative of the Insurance and Superannuation Commissioner. The existing right of taxpayers to request a copy of a determination will remain.

Almost 600,000 determinations were dispatched for payments made in 1990/91. It is estimated that the effect of these changes will be to reduce the number of determinations required to be notified by approximately 50%.

This will result in substantial reductions in the administrative burden on ordinary taxpayers, particularly when completing their tax returns.

There will also be reductions in ISC administrative costs other than a small cost increase to be incurred next year to cover implementation.

The changes will be advertised widely in the press before 30 June so that taxpayers are aware of them in time for the lodgement of tax returns.

By way of enhancing the reliability of the assessment procedure, and in particular to assist Tax Office auditing, the Bill provides for extended and improved communication of RBL information by the ISC to the Commissioner of Taxation.

Finally, the Government will separately amend the Occupational Superannuation Standards Regulations to improve the provision of data to the Commissioner for making determinations.

Currently, provision of some data is optional and the Insurance and Superannuation Commissioner has to make interim determinations while seeking the missing information from the taxpayer. Such amendment of the Regulations will complement the proposed amendments to the Act by reducing substantially the number of interim determinations to be made and the administrative burden on taxpayers.

The combined cost of implementing the proposed measures are estimated to be $70,000 in 1991-92 and $0.3 million in 1992-93. Estimated savings for 1993-94 and following years are estimated at $0.1 million per annum.

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

I commend the Bill to the House.