The Senate

Taxation Laws Amendment Bill (No. 3) 1995

Second Reading Speech

by the Minister for Industry, Science and Technology Senator the Hon Peter Cook

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 four measures announced in the 1995-96 Budget.

Rebatable and frankable dividends

The bill will give effect to the 1995-96 Budget announcement that dividends paid out of share capital funds and asset revaluation reserves will not be rebatable or frankable.

This is an anti-avoidance measure which will apply to dividends paid after 7.30pm Eastern Standard Time on 9 May 1995, unless declared before that time or paid under certain transitional arrangements.

The measure is expected to prevent a significant loss to the revenue.

Infrastructure borrowings

The bill will give effect to the 1995-96 Budget announcement to increase the infrastructure borrowings tax rebate from 33 per cent to 36 per cent. The increase in the rebate corresponds to the change in the company tax rate and will have effect from a taxpayer's 1995-96 income year.

The estimated cost to the revenue of the increase in the rebate is $2 million in 1995-96, $8 million in 1996-97 and $10 million in 1997-98.

Reduction of PAYE early remitter threshold

The bill amends the law to lower, from $5 million to $1 million, the threshold at which a group employer is treated as an early remitter. As a result, the twice monthly remittance arrangements will apply to group employers who have annual PAYE remittances in excess of $1 million per year.

The amendment will bring forward $275 million into the 1995-96 year of income.

Depreciation on trading ships

In the 1995-96 Budget the Government announced an extension of the operation of the provision allowing for accelerated depreciation of trading ships. The concession will phase out on 30 June 2002 instead of 30 June 1997. This extension parallels the extension of the Ships (Capital Grants) Act 1987. That Act provides a grant against the capital cost of purchasing an eligible Australian ship.

This measure will cost the revenue $11 million in 1997-98 and $16 million in 1998-99.

Superannuation guarantee charge - excess benefits

Employers who do not provide the minimum level of superannuation support for their employees are liable to pay the superannuation guarantee charge. Currently, this charge applies even if an employee has already accumulated superannuation entitlements in excess of the reasonable benefits limit or RBL. Superannuation benefits which are in excess of the RBL are taxed at the highest marginal rate in the hands of the recipient.

This bill will allow employees with accumulated superannuation entitlements in excess of the pension RBL to make an election not to receive superannuation support from their employers. When an employee makes the election, the employer will be exempted from the superannuation guarantee charge in respect of that employee.

Employees who make this election will, however, be denied income tax deductions for personal superannuation contributions.

The measure will have minimal impact on the revenue.

Superannuation guarantee charge - notional earnings base

The bill will amend the Superannuation Guarantee (Administration) Act 1992 to extend the use of pre 21 August 1991 employee earnings bases if employers restructure their superannuation funds.

Under the existing earnings base regime, as soon as an employer transfers members to another fund or amalgamates funds, the employer loses the right to contribute under a pre 21 August 1991 earnings base. A new employer acquiring a business loses the right to contribute to the existing superannuation fund on the pre 21 August 1991 base available to the former employer.

The bill proposes to extend the right to contribute under the same earnings base if members transfer to another of their employer's superannuation funds or a reorganisation of superannuation funds occurs in a business acquisition.

The measure is consistent with the Government's general approach to superannuation policy, which is to encourage appropriate restructuring of superannuation arrangements to ensure that benefits are provided with the lowest possible administrative costs.

The amendments will take effect from 1 July 1995, for reorganisations which took place on or after the Treasurer's announcement of the measure on 28 June 1994.

The amendments do not have any impact on the revenue.

Bankruptcy and losses

The bill will give effect to the Treasurer's announcement on 26 February 1995 of the Government's intention to strengthen and extend the provisions of the law that deny deductions for losses where debts are released under bankruptcy law.

The amendment will ensure that, where an annulment of bankruptcy occurs in connection with arrangements under which debts are or may be released, revenue losses will be denied as if the bankruptcy had not been annulled.

In addition, the bill amends the capital gains tax provisions to ensure that net capital losses are also denied where a taxpayer has become a bankrupt or is released from debts under bankruptcy law.

The revenue gain will be less than $1 million per year.

Group certificates and other PAYE provisions

The bill amends the income tax law to require group employers to provide original group certificates to the Australian Taxation Office rather than to employees. The changes will facilitate the introduction of optical character recognition equipment by the Australian Taxation Office. The new equipment will be able to more efficiently and accurately capture employment income data and assist in identifying areas of potential non-compliance.

The amendments have provided an opportunity to generally modernise the group tax provisions of the law. For example, a new system of tax vouchers is being introduced to partially replace the outmoded tax stamp system, and the Commissioner will be able to apply excess PAYE credits against other debts owing to the Commissioner, in line with more recently enacted collection systems. The amendments also use a clearer drafting style and structure than the provisions they replace.

The amendments are expected to result in an unquantifiable revenue savings through increased integrity of the income matching system and some public debt interest savings.

Foreign income

Australia now has a comprehensive system for taxing foreign source income. The first two parts of the system were the foreign tax credit system and the controlled foreign company measures. The foreign investment fund measures constitute the third and final part of the system.

The bill contains an amendment to the controlled foreign company measures that will reduce compliance costs and facilitate corporate restructures involving foreign companies. The amendment will have the effect that only capital gains and losses which accrue after a company becomes a controlled foreign company will give rise to attributable income.

This amendment will result in an unquantifiable loss to revenue.

The bill also contains three amendments that close potential tax avoidance loopholes in the foreign source income provisions.

First, the rules for obtaining a foreign tax credit will be tightened to ensure that a credit is not available for tax which is effectively refunded to the payer or to another person. A credit will also be denied where a benefit is provided as a direct result of the payment of foreign tax.

Secondly, the amendments will clarify that adjustments reflecting arm's length values can be made to amounts used in determining whether a controlled foreign company has passed the active income test.

Thirdly, rules will be introduced to ensure that the controlled foreign company measures are not avoided by the liquidation of a controlled foreign company prior to the end of the period for which its attributable income is calculated.

The closure of these loopholes will result in an unquantifiable gain to revenue.

Minor amendment

The bill also makes a minor technical amendment to the Taxation Laws Amendment (Drought Relief Measures) Act 1995.

Full details of the amendments are contained in the explanatory memorandum circulated to honourable senators.

I commend the bill to the Senate.