House of Representatives

Taxation Laws Amendment Bill (No. 2) 1993

Second Reading Speech

by the Assistant Treasurer, the Hon George Gear, MP

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

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

It includes a number of measures announced in the Prime Minister's "Investing in the Nation" statement on 9 February 1993.

These measures are the introduction of a general investment allowance; the reduction in the rate of tax for most companies in Australia from 39 per cent to 33 per cent; the introduction of revised company tax collection arrangements; and an extension of the child care exemption currently available to priority access payments to eligible child care centres.

The Bill also proposes some amendments to the foreign investment fund measures enacted by the Government late last year; an income tax exemption for the pay and allowances of Defence Force and Federal Policy personnel serving in certain areas; and an amendment to the secrecy provisions to provide certain information concerning unlawful immigrants.

Lastly, the Bill includes a law improvement measure by proposing the amendments of the gift provisions to improve the overall readability of these provisions.

Mr Speaker, the changes to the company tax regime introduced by this Bill will act as an important stimulus to business investment in this country. They will increase the level of profits companies can retain to finance expansion and future investment, and improve the attractiveness of Australia for investment by both Australian and foreign investors. Together with the changes already made by the Government to provide full dividend imputation and to improve Australia's depreciation provisions, the measures I am introducing today will provide Australian industry with a most competitive and supportive business tax environment.

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

General Investment Allowance

This Bill introduces the general investment allowance foreshadowed in the Prime Minister's "Investing in the Nation" statement of 9 February 1993.

A general investment allowance, which will provide an additional short-term incentive for investment, is to be available for eligible plant and equipment acquired or commenced to be constructed between 9 February 1993 and 1 July 1994 and which is first used for the purpose of producing assessable income, or installed ready for such use, before 1 July 1995.

The allowance, which will be deductible in the year eligible property is first used, will be at the rate of 10% and will be additional to both depreciation and the development allowance.

The general investment allowance will operate similarly to the development allowance, the principal differences being that the capital cost of a unit of property must be not less than $3000 and that the expenditure need not be in relation to a project that qualifies for the development allowance.

To qualify, property must be plant or articles, within the meaning of the depreciation provisions, acquired or constructed by a taxpayer solely for use in Australia in the production of assessable income.

Certain items will not qualify for the allowance including property deductible under certain provisions providing a special basis of deduction, passenger motor vehicles, household appliances, furniture, fixtures and fittings (unless for use in the entertainment/tourist accommodation industry), artwork, books, non-protective clothing and accessories, and aircraft.

The property must be retained by the taxpayer for at least 12 months and must not, in that period, be made available for use by other persons or be used either outside Australia or otherwise than for producing assessable income. Further, the allowance can be withdrawn at any time if property is acquired or constructed by taxpayers with the intention of dealing with it in a disqualifying manner even after the first 12 months.

The allowance will be available to leasing companies if lessees contract to use the property for not less than 4 years. Lessors will have the option to transfer some or all of their entitlement to the allowance from leased property to the lessee.

This measure is estimated to cost $130m in 1993-94, $330m in 1994-95 and $270m in 1995-96.

Company Tax Rates Reduction

This Bill will reduce the rate of tax for most companies in Australia from 39 per cent to 33 per cent by amending the Income Tax Rates Act 1986. It will also reduce the rate of tax for Pooled Development Funds from 30 per cent to 25 per cent.

This measure will ensure that Australia continues to be an attractive location for business investment.

The reduction of the rate of tax on company profits to 33 per cent will improve Australia's attractiveness as a destination for foreign direct investment. A 33 per cent company tax rate compares favourably with the rates prevailing in the major economies from which Australia draws most of its foreign direct investment. Lower company rates will also ensure that Australian investment will be less likely to locate offshore simply because of more attractive tax regimes in other countries, especially in the Asia-Pacific region.

Cutting the company tax rate will not induce a rush to incorporate for tax avoidance reasons. The Australian Taxation Office advises that, based on the most recent Court authorities, Part IVA of the Income Tax Assessment Act 1936 provides an adequate response to attempts to alienate income from personal services for tax purposes.

The new rates will apply to the 1993-94 income year and subsequent years of income.

These amendments will result in consequential amendments to the franking of dividends provisions of the Income Tax Assessment Act 1936. These consequential amendments will be introduced in a later Bill.

The reduction in the company tax rate will, after allowing for some clawback through the imputation system, cost the revenue $0.4 billion in 1993-94, $1.8 billion in 1994-95, $1.6 billion in 1995-96 and $1.7 billion in 1996-97. The Pooled Development Fund rate cut will cost an additional $3.0 million in 1994-95.

Company tax instalment system

This Bill will give effect to the revised company tax collection arrangements announced on 9 February 1993 by the Prime Minister in his "Investing in the Nation" statement. This measure will improve the equity of the company tax instalment system relative to other taxpayers, particularly unincorporated businesses.

The most fundamental change introduced in the amendment is that for most companies there will be 4 payments to make each year rather than the existing 2 payments. Some very small companies will only be required to make one payment. For larger companies, the timing of those payments will generally be earlier than those under the existing payment arrangements. For small companies, the new arrangements should result in lower financing costs, because on average they will result in a deferral of their tax payments.

The revised company tax instalment arrangements will apply to large companies in the 1995-96 year of income and to all other companies, a year earlier, in the 1994-95 year of income.

In order to avoid an overlap with the existing company tax instalment arrangements, large companies will have transitional payment arrangements in the 1995-96 year of income.

The amendments contained in this Bill will result in consequential amendments to the franking of dividends provisions of the Income Tax Assessment Act 1936. These consequential amendments will follow in a later Bill.

The measures introduced in this Bill will result in a bring forward of $0.6 billion of revenue into 1994-95, $1.6 billion into 1995-96 and $1.7 billion into 1996-97.

In the "Investing in the Nation" statement it was announced that the new company tax instalment system would contain rules to prevent small companies in large company groups taking advantage of the more generous payment arrangements for small companies. In view of the numerous methods available to consolidate the tax position of a group of companies for these purposes, it is the Government's view that there should be wide public consultation during the formulation of these rules. Accordingly, these rules have not been incorporated into this Bill and will follow, after adequate consultation, in a later Bill.

Fringe Benefits Tax - Extension of Child Care exemptions

Under the existing fringe benefits tax law, employers who secure priority of access in child care centres for children of employees, by making payments under a program operated by the Department of Health, Housing, Local Government and Community Services, are exempt from fringe benefits tax on the benefit provided. These child care centres must be an eligible child care centre for the purposes of the Child Care Act 1972.

This Bill will give effect to the announcement on 9 February 1993 by the Prime Minister in his "Investing in the Nation" Statement to extend this exemption to payments made for priority of access to Family Day Care, Outside School Hours Care and Vacation Care.

The payments must now be made under the Children's Services Program which has replaced the program known as Services for Families with Children.

The estimated cost to revenue is $0.5m in 1993-94, $1.5m in 1994-95, $2.2m in 1995-96 and $3.0m in 1996-97.

The taxation of Foreign Investment Funds

This Bill contains amendments that relate to the foreign investment fund measures enacted late last year. These measures sought to remove the tax deferral advantage that could have been obtained by resident taxpayers who held interests in certain offshore companies and trusts.

Australia now has a comprehensive system of taxing foreign source income. The first two parts of this system were the foreign tax credit system and the controlled foreign company measures. The third and last part of the system, the Foreign Investment Fund Measures, took effect from 1 January 1993.

These measures have been kept under constant review to put right any difficulties which might arise in the course of their operation.

The review has confirmed the validity of the measures that have been put in place. However, some amendments to the law are required to fine tune the foreign investment fund measures and to align them properly with existing provisions, particularly the controlled foreign company measures. The Bill contains these amendments.

These amendments will have minimal effect on revenue.

Income tax exemption for Defence Force and Federal Police personnel serving in certain areas

The Bill will also exempt from income tax the pay and allowances of members of the Australian Defence Force allotted for duty in Somalia, and the United Nations peacekeeping force in the area formerly known as Yugoslavia.

Members of the Australian Federal Police serving with the United Nations Transitional Authority in Cambodia will also receive an exemption from income tax of their pay and allowances.

These amendments are expected to cost approximately $13 million and $1 million for the 1992-93 and 1993-94 income years respectively.

Amendment relating to migration information

The Bill gives effect to the Minister of Immigration and Ethnics Affairs' announcement on 17 December 1992 to introduce new measures aimed at detecting and locating overstayers and visitors working in Australia without authority.

The Bill will amend the secrecy provisions to permit the Commissioner to furnish information to the Secretary to the Department of Immigration and Ethnic Affairs for the purpose of assisting in locating persons who are unlawfully in Australia.

The amendment is not expected to impact significantly on the revenue.

Amendments to improve the readability of section 78

The gift provisions of the income tax law will be amended to improve the overall readability of the provisions. The amendments are part of the ongoing efforts to improve the tax laws while not changing the policies and principles underlying the existing legislation. These changes will have no impact on revenue.

The amendments remove the ad hoc list of funds, authorities and institutions that have been added to the law since 1936 and replace it with a comprehensive index and a set of tables dividing the various funds into broad categories. This will help the reader to locate a particular fund far more easily than in the past.

The amendments will also group together, and clarify, the valuation rules relating to gifts of property.

Transitional arrangements will ensure that those funds, authorities or institutions approved under the existing legislation will continue to hold that approval under the new legislation.

These amendments will take effect on 1 July 1993.

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

I commend the Bill to the House.