House of Representatives

Taxation Laws Amendment Bill (No. 5) 1992

Taxation Laws Amendment Act (No. 5) 1992

Second Reading Speech

by the Minister assisting the Treasurer the Hon. Peter Baldwin, MP

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

This Bill will amend the taxation laws in a number of respects. It includes measures to implement a number of changes announced in the 1992-93 Budget.

One Budget announcement to be given effect by this Bill is an amendment to allow a deduction for certain environment protection expenditure.

Another gives effect to the amendments to the tax concession for expenditure on research and development activities.

Another announcement to be implemented will reduce the current write-down available to horse breeding stock.

A further amendment relates to the non-deductibility of interest and other borrowing expenses on moneys borrowed to finance personal superannuation contributions and certain life insurance premiums.

Other measures announced in the Budget to be implemented by this Bill include a withholding tax on royalties paid to non-residents, an increase in the zone rebates and new arrangements for gifts to environmental organisations.

The Bill also gives effect to four recent announcements. It will amend the gift provisions of the income tax law to allow gifts to the Australia-United States Coral Sea Commemorative Council, as announced by the Treasurer on 18 June 1992.

On 30 June 1992 the Treasurer announced that section 70B of the Assessment Act would be amended so that losses of capital, or of a capital nature, that are incurred on the disposal or redemption of traditional securities will not be deductible under that section, nor losses arising from the waiver or release of a debt. This Bill gives effect to that announcement.

It amends the provisional tax provisions to implement concessions announced by the Treasurer in July.

The Bill also gives effect to the acting Treasurer's announcement on 25 September 1992 that the rules relating to depreciation of plant and equipment installed on Crown leases will be amended.

Corresponding changes are to be made to the capital allowance for expenditure on income-producing buildings and structural improvements and to the development allowance provisions.

Another amendment provides for a deferral (or "rollover") of assessable adjustments that may arise on the disposal of property to which the Research and Development provisions have applied.

The various capital allowance rollover relief provisions are to be amended so that certain transactions are not inappropriately denied rollover relief.

Other amendments include provisions to make the capital gains tax provisions easier to read, modifications to the foreign source income provisions and a new provision to enable taxpayers to pay their tax liabilities through the Billpay or Electronic Funds Transfer systems.

Finally, the Bill will amend the Petroleum Resource Rent Tax Assessment Act 1987 to correct two technical deficiencies.

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

Environment protection expenditure

The Bill will allow a deduction for environment protection expenditure incurred on or after 19 August 1992 in the year in which it is incurred. This measure results from a Treasury Review of the tax treatment of environment-related expenditure begun in 1990.

Environment protection expenditure is expenditure incurred for the sole or dominant purpose of preventing, combating or rectifying pollution or treating, cleaning up, storing or removing waste.

The deduction will be allowable to taxpayers for environment protection expenditure where the waste or pollution was produced by their income-producing activity, past, present or proposed. It will be allowable where the waste or pollution is on a site of the taxpayer's income-producing activities, past, present or proposed. And it will be allowable where the waste or pollution is on a site on which the taxpayer's predecessor in the same business carried it on.

Plant, equipment, buildings and structures (including certain environmental earthworks of a permanent character) are depreciated or written-off, in the same way when they are used for environment protection activities as when they are used for the purpose of producing assessable income.

A reliable costing of the measure cannot be made.

Research and Development

The Bill proposes changes to the R&D tax concession arising from a review of the concession. These changes were announced in the Budget.

The first change is that the maximum rate of deduction for R&D expenditure will continue at 150 per cent. The rate was to be reduced to 125 per cent from 30 June 1993.

The second change will remove the limit of $10 million that currently applies to pilot plant used in R&D activities. The full cost of pilot plant acquired or commenced to be constructed on or after 19 August 1992 will be able to be claimed over three years as R&D expenditure.

The third change will deny deductions for R&D expenditure where the expenditure is financed by syndicates or other financing schemes under which investors are guaranteed some return on or of their investment and a government body is involved.

The Government does not intend to prevent Government business enterprises that operate on a fully commercial basis from offering investors in R&D syndicates guarantees in the same way as non-Government enterprises. So a further amendment, to be made in a future Bill, will allow for the gazettal of guidelines for determining when Government business enterprises operate on a fully commercial basis. R&D deductions will not be denied to investors in R&D syndicates involving such bodies, even if some guarantees are offered. The guidelines will be developed by the Industry Research and Development Board, in consultation with relevant interested parties.

The Bill also contains amendments to the Industry Research and Development Act 1986. These amendments will confer power on the Industry Research and Development Board to refuse to register or revoke the registration of companies undertaking R&D activities that are to be financed by an ineligible finance scheme. The Board will be required to develop public guidelines for determining whether finance schemes are ineligible.

The amendments will apply to pilot plant acquired or commenced to be constructed on or after 19 August 1992, and to finance schemes entered into for R&D activities on or after 19 August 1992.

These changes to the R&D concession are estimated to cost $110 million in 1994-95 and $125 million in 1995-96.

Horse breeding stock valuation option

The Bill contains amendments that will replace the special live stock option available to horse breeders under the trading stock provisions of the income tax law. The new valuation option will be available for breeding stock acquired under a contract entered into on or after 19 August 1992.

Horse breeders will continue to have the option of valuing breeding stock on hand at the end of a year of income at cost or market selling value. Similarly, the Commissioner will continue to have the discretion to accept another value where it is warranted by the particular circumstances.

The new special valuation option will enable a horse breeder to write down the value of a sire by up to 25% of cost. Brood-mares will be able to be written-down so that the value is $1 at the end of the year of income in which the mare is aged twelve. The maximum rate at which a brood-mare may be written down in any one year is 33 1/3 per cent.

This amendment will result in the period over which a sire or brood-mare is written down for the purposes of the trading stock provisions being more in line with normal "breeding life".

The Bill also takes the opportunity to present the law more simply and clearly. This is done by providing two sections, one to value breeding horses as trading stock, and one to value other live stock as trading stock.

The savings from this measure are expected to be $7 million in 1993-94, $8 million in 1994-95 and $5 million in 1995-96.

Non-deductibility of interest

The Bill will also amend the tax laws to deny an income tax deduction for interest and other borrowing expenses on moneys borrowed to finance personal superannuation contributions and certain life insurance premiums.

These measures will apply to interest and other borrowing expenses incurred on loans entered into after 18 August 1992.

The amendments will reduce the potential for future losses to the revenue.

Royalty withholding tax

A Budget announcement to be given effect by this Bill will introduce a final withholding tax of 30% - subject to reduction on a reciprocal basis by Double Tax Agreement - on royalties paid to non-residents to replace the existing assessment system.

The change will serve to counter tax avoidance, will produce administrative savings, will improve service to taxpayers through simplified administrative procedures, and will be in accord with the move to self-assessment.

The proposal will also bring Australia into line with the approach adopted by our major trading partners.

The UK, USA, Japan, Germany, France, Italy, Canada, New Zealand and almost all other OECD countries apply a flat rate withholding tax to the gross amount of royalty payments to non-residents.

The introduction of a withholding tax is estimated to yield additional revenue of $50 million a year.

However, it is expected that this revenue will not result in any general increase in costs to non-resident technology exporters or Australian technology users since the tax paid by the non-residents will generally give rise to a foreign tax credit in the home country

Over 85% of Australian sourced royalties are received by residents of the USA, UK, Germany and Japan.

All of these countries have foreign tax credit systems and the net effect will therefore be a transfer of revenue from those countries to Australia.

Another amendment contained in this Bill will remove uncertainty about the meaning of a "royalty" by making it clear that the law covers satellite and cable transmissions which to some extent have replaced films and video and audio tapes covered specifically by the present law.

Zone and related rebates

The Bill includes the measures announced in the Budget to increase the fixed dollar amounts in the zone and related rebates by 25% from 1 January 1993. The amounts will be increased by 12.5% for assessments in respect of the 1992-93 year of income and 25% for assessments in later income years.

The estimated revenue cost of this measure is $5 million for 1992-93 and $19 million for 1993-94.

Gifts to gift funds of environmental organisations

Another Budget announcement given effect to by this Bill relates to new arrangements for gifts to gift funds of environmental organisations. The amendment will take effect from the date the Bill receives Royal Assent.

Under the new arrangements tax deductible gifts may be made to gift funds listed on a Register of Environmental Organisations. To be listed, a fund must be approved by the Treasurer and the Minister responsible for the Environment.

The five environmental organisations that are presently listed in the gift provisions of the income tax law may be entered on the Register of Environmental Organisations if they meet the requirements for entry. In any event the organisations will continue to be listed in paragraph 78(1)(a) but, similar to organisations listed on the new Register, they will have to satisfy two new requirements to maintain their tax deductible gift status. The requirements are that they provide statistical information on donations received by their public funds and, secondly, that they cannot act as a collection agency and pass on tax deductible donations to other environmental organisations.

The nature of the measure is such that a reliable estimate of its financial impact can not be provided.

Gifts to Coral Sea Commemorative Council

This Bill will also amend the gift provisions of the income tax law to give effect to the Treasurer's announcement of 18 June 1992. The announcement allows gifts of the value of $2 or more, made to the Australia-United States Coral Sea Commemorative Council Incorporated, to qualify as an income tax deduction if made on or after 26 November 1991 and on or before 30 June 1992.

This measure is to assist the council in satisfying its objective:-

"To promote and foster commemoration of the Australian-United States friendship and co-operation, particularly in relation to the battle of the Coral Sea."

The impact of the amendment on revenue is not expected to be significant.

Losses on disposals of traditional securities

The amendments being made by the Bill to section 70B of the Assessment Act will prevent the deduction of losses incurred on the disposal or redemption of traditional securities after 30 June 1992 that are essentially capital in nature, as well as losses from the waiver or release of debts.

To achieve that effect, a deduction under section 70B will not be allowable for a capital loss where a reason for the disposal or redemption of the traditional security is an apprehension or belief that the issuer of the security may be unable or unwilling to discharge payment obligations under the security.

These loss deduction rules will not prevent a deduction being allowable under section 70B if the traditional security is one that is regularly traded on a stock exchange or other securities market, and the disposal takes place in the ordinary course of trading on the market.

Losses arising from the forgiveness of debts will be denied deduction by treating such a transaction as not a disposal or redemption for the purposes of section 70B.

These amendments will have a positive but unquantifiable revenue effect.

Provisional tax amendments

The Bill makes the necessary amendments to implement the provisional tax concessions announced in July this year. In particular, the uplift factor for the calculation of provisional tax for 1992-93 is being reduced from 10% to 8%.

Also, the margin for error allowed when estimating taxable income when varying down provisional tax is to be increased from 10% to 15% before penalty is imposed.

The estimated cost of the measures announced is $250 million for 1992-93.

Depreciable plant and non-plant structures installed on Crown leases

Property on Crown leases may be depreciable, even though taxpayers don't own the land to which the property is fixed.

The meaning of Crown lease under the plant depreciation provisions is to be extended in a number of ways. First, it will no longer be limited to leases but will extend to other interests in land such as easements, licences and "rights of way".

Next, the present requirement that these interests be statutory leases is to be removed and ordinary commercial interests in land will now be covered.

Finally, for these purposes, certain tax-exempt authorities of Governments are to be treated as "the Crown" to make sure that leases and other interests in land granted by them will qualify as Crown leases.

The amendments will ensure that taxpayers are not inappropriately denied depreciation deductions for expenditure on the construction of public infrastructure projects on Crown land.

They will apply from the same time as existing "Crown lease" measures; that is, to expenditure incurred after 26 February 1992 in installing plant on Crown leases. They will also apply to expenditure incurred on or before that date, based on notional written down values on 27 February 1992.

A similarly extended concept of Crown lease will apply to measures under which the construction costs of buildings and other structural improvements can be written-off as tax deductions when used for income-producing purposes.

This latter amendment will apply to relevant constructions commenced after 26 February 1992.

The amendments give effect to Government policy announced in the One Nation statement and involve no additional cost to the revenue.

Development allowance on property installed on leased crown land

The development allowance provisions will be extended to give the allowance for expenditure which would otherwise be denied the deduction only because the plant in respect of which the expenditure is incurred is installed on leased Crown land.

The extended meaning of Crown lease for depreciation purposes, as amended by this Bill, will be applied for development allowance purposes.

This amendment will apply in respect of expenditure incurred by a taxpayer under contracts entered into, or in respect of construction which commenced, after 26 February 1992, the same time as the original development allowance provisions apply.

The original estimates of the cost of the development allowance to revenue included the cost of this amendment.

Research and development rollover relief

The research and development provisions are to be amended to permit wholly owned company groups to defer (or "rollover") taxable adjustments that could otherwise arise on the transfer of property within the group.

This new measure is similar to existing measures under which taxpayers can defer liabilities to tax on the disposal of property for which deductions have been allowed under any of a number of the provisions which permit deductions for the capital cost of income producing property. Those measures apply where there is no real change in the ownership of the property.

The Government has decided that this new measure will apply from the same time as those existing measures; that is, R & D rollover relief will be available for disposals occurring after 6 December 1990.

A reliable costing of this measure cannot be made.

Amendments to capital allowance rollover relief

The capital allowance rollover relief measures, which enable taxpayers to defer assessable recoupments of capital deductions on the disposal property where there is no change in their real ownership, are to be amended so that rollover relief will be available where:

property is disposed of more than once in the same year; or
assets that were fully written-off at the time they were acquired are disposed of again.

This amendment will apply from the same time as the original measures and involves no further cost to revenue.

Capital Gains Tax

The Bill will insert provisions designed to make the capital gains tax provisions easier to read.

The proposed amendments will provide a simplified outline of the scheme of Part IIIA (the capital gains provisions) of the Act, and an example of how those provisions apply in a typical case.

An index of the key concepts relevant to the operation of the CGT provisions will also be included.

The index will indicate the main concepts relevant to the scheme of the CGT provisions, and also the areas where modifications are made to this scheme where it is not appropriate that it operate in the normal manner.

The amendments will make it easier to see how the CGT provisions apply in any specific situation.

These amendments have no revenue impact.

Amendment to limit the clawback provision in subsection 47A(13)

The amendments to the measures for taxing foreign source income will respond to taxpayer concerns by modifying the anti-avoidance provisions that apply to the disguised distributions of profits between certain offshore companies controlled by Australian residents.

The Bill will provide a further benefit to taxpayers by enabling those who have pre 1989-90 carry forward domestic primary production losses to choose whether to offset the losses against their assessable foreign income.

This amendment will have a small but unquantifiable cost to the revenue.

Amendments to the Taxation Administration Act

The Bill will also amend the Taxation Administration Act in two respects. First, a new provision will be inserted so that regulations can be made under the Act to enable taxpayers to pay their taxation and child support liabilities through the recently introduced Billpay or Electronic Funds Transfer systems.

Secondly, the Bill will make technical amendments, and correct an inconsistency in, the provisions dealing with prosecutions and offences. In particular, the amendments will provide for penalties in respect of convictions for offences such as failing to comply with taxation law requirements to parallel existing penalties for persons convicted of an offence for making a false or misleading statement.

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

Petroleum resource rent tax technical amendments

Under the Petroleum Resource Rent Tax Assessment Act 1987 (the PRRT Act), if a taxpayer incurs exploration expenditure after 1 July 1990 on a petroleum project or exploration right, and then the project licence or exploration permit lapses, the taxpayer cannot transfer that expenditure to another project in which they have an interest.

This is an unintended result of the transfer rules in the Schedule to the PRRT Act. The amendments will ensure that such expenditure is transferable even where the associated licence or right has ceased to be in force.

The PRRT Act will also be amended to remedy an unintended consequence of the calculation of exploration expenditure under the Schedule to the PRRT Act. A taxpayer may sell full entitlement to assessable receipts from a petroleum project to another person. The intention is that all receipts and expenditure of the vendor associated with the project are transferred to the purchaser, so that the purchaser effectively stands in the shoes of the vendor.

Under the existing law, some exploration expenditure incurred by the vendor after 1 July 1990 is unable to be transferred to the purchaser. The PRRT Act will be amended to ensure that all exploration expenditure incurred after 1 July 1990 by the vendor of an entire interest in a petroleum project is transferred from the vendor to the purchaser.

Both these amendments commence on 1 July 1991. There is no significant additional cost to revenue.

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

I commend the Bill to the House.