The Senate

Taxation Laws Amendment Bill (No. 2) 1995

Second Reading

The bill will amend the taxation laws in a number of respects. It includes measures announced in the Treasurer's Superannuation Policy statement of 28 June 1994. In that statement the Treasurer outlined several major initiatives to enhance the Government's retirement incomes policy and to alleviate the small amounts problem.

Some of the measures in the bill, such as the employee share scheme provisions, are new and largely self-contained. These have been drafted in the new tax law improvement style. Other measures in the bill either amend existing provisions of the law or inter- relate with concepts already contained in other parts of the law (for example, the late lodgment penalty and interest provisions). For these reasons it has not been possible to fully adopt the new drafting style as this would entail changes to a much broader range of provisions. The tax law improvement project will be redrafting the tax law over the next three years.

Employee share schemes

The bill will amend the Income Tax Assessment Act 1936 to provide a new income tax regime for the taxation of employee share schemes. The new regime will generally apply from 6pm in the ACT (and the equivalent time elsewhere) on 28 March 1995.

Transitional arrangements will apply so that in certain circumstances the existing provisions of the income tax law will continue to apply to shares or rights to shares acquired after the date of commencement of the amendments.

The Government is making these changes to reduce the exploitation of the existing legislation and to ensure that the tax concessions that are available under the new arrangements are directed at share schemes which encourage employees to own shares in the company in which they are employed or a holding company of the employer. The measures will increase the taxation benefits available to employees under these schemes.

The amount to be included in a taxpayer's assessable income in respect of the shares and rights acquired will be the differene between the value of the share or right and any amount paid by the taxpayer to acquire the share or right. Generally, the amount is to be included in assessable income in the year that the share or right is acquired.

However, in certain circumstances a deferral of taxation of up to 5 years without any upper limit on amount will be available. Conditions have to be satisfied before a share or right qualifies for the deferral concession. The share or right must be acquired under an employee share scheme. At the time the share or right is acquired, or at an earlier time, each permanent employee should have been entitled to acquire shares or rights of the employer or holding company of the employer. The shares or rights should be ordinary shares or rights of the employer or holding company. The employee should also not hold more than 5% of shares or voting rights of the employer company or holding company.

An exemption concession will apply for certain shares or rights that are issued to employees under a scheme operated on a non- discriminatory basis. The employee can elect that the discount received be included in his or her assessable income in the income year in which the shares or rights are acquired. Where this election is made, benefits up to a limit of $500 for an income year will be exempt from tax.

If the exemption concession applies, the provider of the benefit will be entitled to a tax deduction for up to $500 of benefits provided to each employee. This deduction will apply if the deduction is not allowable under the other provisions of the tax law.

The bill will also amend the capital gains provisions and the fringe benefits tax law to ensure that there is no double taxation of share or right benefits.

The nature of these measures is such that a reliable estimate of the revenue impact cannot be provided.

Capital gains tax--roll-over relief for merging superannuation funds

The bill will amend the capital gains tax (CGT) provisions to allow certain superannuation funds which merge to defer any CT gains or losses that would be realised at the time of the merger on the assets transferred.

Although the Government remains of the view that CGT should, in general, be payable on assets realised when entities merge, it considers that special circumstances exist that justify this concession.

For example, the Government recognises that the new member protection rules may put greater pressure on superannuation funds to merge to improve their economies of operation. It also realises that current CGT rules may affect the short term liquidity of such superannuation funds.

This temporary relief will improve the efficiency and performance of the industry.

The amendments will apply to superannuation funds that merge on or after 1 July 1994 and before 1 July 1997.

The notional cost to the revenue from the proposal is estimated to be $50 million for each of the 3 years of its operation. The actual cost to the revenue will be less because many funds would not merge if roll-over relief was not available.

Superannuation guarantee--jurisdiction of the Australian Industrial Relations Commission

The bill clarifies the jurisdiction of the Australian Industrial Relations Commission (AIRC). It is generally accepted that the operation of the superannuation guarantee legislation has not affected the jurisdiction, powers, or functions of the AIRC. However, there is no express statement in the superannuation guarantee legislation or the Industrial Relations Act 1988 to this effect.

For this reason, and because there has been doubt expressed in some quarters concerning the power of the AIRC to continue to arbitrate on superannuation, the amendment makes it clear that the superannuation guarantee legislation does not alter in any way the substantive jurisdiction, functions and powers of the AIRC.

The amendment will apply from the commencement of the superannuation guarantee law on 1 July 1992.

The amendment has no impact on the revenue.

Superannuation guarantee--flat dollar contributions

The bill also amends the superannuation guarantee law to ensure that the percentage level of superannuation support actually provided for an employee for flat dollar contributions is calculated based on actual contributions, rather than the amount specified in the award. The current provision causes problems where contributions differ from the award amount. The effect of the amendment will be to make it easier for some employers to satisfy their superannuation guarantee requirements.

The amendments will take effect from 1 July 1994.

There is no cost to the revenue from the change.

Superannuation guarantee--local government councillors

The bill proposes to generally exempt from the superannuation guarantee law the payments received by local government councillors in the course of their duties. The payments will not be regarded as salary and wages for superannuation guarantee purposes, enabling councillors to claim deductions under the income tax legislation for any personal superannuation contributions. The exemption will not apply to payments from certain local government bodies.

Local government councillors will retain their status as employees for the purposes of the superannuation industry supervisory legislation to prevent some funds which have councillors as members from being treated as public offer funds which entails higher compliance costs.

The amendments will apply from 1 July 1993.

Cost to the revenue in the 1994-95 and subsequent years will be less than $500 000 per annum.

Superannuation--various amendments to the income tax law

Following the Security in Retirement statement of 30 June 1992 the Government has introduced a number of changes to the income tax law to encourage superannuation pensions and annuities and to ensure that superannuation moneys are kept within the superannuation system until withdrawal. This bill makes some minor adjustments to some of these changes to clarify their operatint and further ease administrative requirements.

In addition, the bill changes the income tax law to ensure that superannuation pension and roll-over annuity recipients who started receiving a pension or annuity before 1 July 1994 will be able to change providers without losing tax concessions. This change will allow pensioners and annuitants to move their investment without being disadvantaged by a different tax treatment.

The bill also amends the income tax law to ensure that tax concessions for employer superannuation contributions are restricted to superannuation funds established primarily for the benefit of employees.

The amendments are not expected to have any significant impact on the revenue.

Superannuation--miscellaneous amendments

The bill also makes a small number of miscellaneous amendments to superannuation law administered by the Insurance and Superannuation Commissioner.

The two main amendments allow the Insurance and Superannuation Commissioner to undertake statistical surveys of the superannuation industry and change the method of collection of the superannuation supervisory levy. As a result, the manner in which the late payment penalty for the levy is calculated is also changed.

The bill also makes some other, more technical, amendments.

No overall impact on revenue is expected to result from these amendments.

State and Territory bodies

Amendments in the bill will create broad new exemptions from income tax and sales tax for certain State and Territory bodies. These amendments arise from an agreement reached at the 1994 Premiers' Conference, which aims to promote efficiency and competitive neutrality in markets in which State and Territory trading enterprises operate. One aspect of this is removing the tax advantage enjoyed by State and Territory trading enterprises over private businesses.

It was agreed that the tax advantage could be eliminated if the States and Territories imposed tax equivalent regimes on therf trading enterprises. A tax equivalent regime is basically equivalent to Commonwealth income tax and sales tax in its principles and the rates imposed.

Before tax equivalent regimes are introduced, the States and Territories need to be certain that their trading enterprises will be exempt from Commonwealth income tax and sales tax. Certain State and Territory bodies will therefore be made clearly exempt. Some bodies will be specifically excluded from the exemption, including bodies prescribed by regulations.

These amendments will not change the tax status of many of these bodies. For the 1994-95 year, the bodies which were taxable at the time of the 1994 Premiers' Conference will remain taxable. These bodies will in most cases become exempt from 1 July 1995.

The amendments are expected to be revenue neutral.

Late lodgment penalty

The bill introduces a new penalty regime for late lodgment of income tax returns. The penalties will apply to 1994-95 and later year returns where the due date for lodgment occurs after the later of 30 June 1995 or 60 days after the date of Royal Assent of the bill.

Companies, superannuation funds and certain trusts will be liable for a flat rate penalty of $25 for each week that a return remains outstanding, up to a maximum of $500.

All other taxpayers who are late in lodging an income tax return will be liable for additional tax of 8% per annum on the amount of net tax payable for the year of income. In addition they will also be liable for interest on the net tax payable at the same rate that applies to underpayments and late payments of income tax. That interest rate is currently 10.8% per annum. The additional tax and the interest will be calculated from the due date for lodgment until the return is lodged.

A reliable estimate of the impact on the revenue cannot be provided.

Refunds of tax file number amounts deducted in error

The bill will also amend the income tax law in a number of respects to ease compliance costs encountered by investment bodies when they are required to refund tax incorrectly deducted by them because of a mistake concerning an investor's tax file number.

One amendment limits the refunds to be made by investment bodies to requests for refunds received on or before 15 July following the year of income in which the incorrect deduction of tax file number amounts occurred. This will reduce investment body tax compliance costs associated with refunds that they are presently required to make in respect of amounts deducted in earlier years.

Any incorrectly deducted amounts not refunded by the investment body within the 15 July time frame would normally be allowed as a credit to the investor upon assessment of the investor's tax return for the relevant income year. However, where it is not reasonably appropriate for an investor to wait until an assessment has issued, the Commissioner of Taxation will be required to make refunds directly to an investor. This will ensure that an avenue for a refund is always available to an investor.

A further amendment will provide for investment bodies to choose to offset any amounts that they refund against other amounts they deduct during the same year. This will also reduce compliance costs for investment bodies.

These amendments will have no impact on the revenue.

Pensions, allowances and benefits

When the mature age partner allowance was introduced, it was exempted from income tax. This is inconsistent with the treatment of the mature age allowance which is taxable. The bill ensures that, as from 1 July 1995, the mature age partner allowance will be taxable. Recipients of the allowance will generally be eligible for the pensioner rebate which will offset the tax on the allowance, subject to any other income received.

The financial impact of this measure is a negligible gain to the revenue.

The bill also makes a number of minor technical amendments of txn provisions related to social welfare matters which have no impact on the revenue.

Sales tax--new credit ground for unregistered exemption users

Under the existing sales tax law an assessable dealing is taxable unless an exemption applies. An exemption applies when a quotation is made or the goods in question are always exempt goods. The law requires that a quote for a dealing be made at or before the time of the dealing for it to be effective.

If a person does not quote for a taxable dealing, then the dealing is taxable. A credit ground currently exists to enable a registered person to obtain a credit of tax paid on a dealing for which they had borne tax even though they were entitled to quote a registration number.

The bill proposes to insert a similar credit ground to enable unregistered persons to obtain a credit of tax paid on a dealing for which they had borne tax even though they were entitled to quote an exemption declaration.

The effect of this amendment on the revenue will be negligible.

Sales tax--exemption for UHF transmitters

The bill proposes a limited extension to the operation of an earlier exemption from sales tax, for certain UHF transmitters, for use in commercial television broadcasting to cover the period 1 January 1994 to 31 December 1995.

The new exemption will apply to transmitters for use in connection with the equalisation program which aims to provide services in regional areas comparable to those in capital cities. The Government considers that the extension is appropriate because the equalisation program is not yet completed in Tasmania.

The total cost to the revenue for the period of the exemption is likely to be about $2 million.

Minor amendments

The bill also makes a number of minor technical amendments which have no impact on the revenue.

Full details of the amendments are contained in the Explanatory Memorandum circulated to honourable senators.

I commend the bill to the Senate.