The Senate

Taxation Laws Amendment Bill (No. 2) 1996

Second Reading Speech

by the Assistant Treasurer Senator the Hon Jim Short

The bill amends the taxation and superannuation laws in a number of significant respects. These include giving effect to an election promise by the Government in respect of fringe benefits tax. It will also relieve uncertainty in the business and taxpaying community regarding several measures outstanding from the previous Government.

Forgiveness of commercial debt

The bill will introduce new taxation rules relating to the forgiveness of commercial debt. The new measures are based on provisions introduced by the previous Government into the Parliament which lapsed when the Parliament was prorogued prior to the election.

The measures I am introducing today depart in several important respects however from those lapsed provisions to take account of public concerns that have been expressed about certain aspects of the lapsed provisions.

The proposed amendments will apply to commercial debts forgiven after today, 27 June 1996, and not from 9 May 1995 which was the proposed commencement date announced by the former Government. Under revised transitional arrangements, if forgiveness occurs after 27 June 1996 pursuant to an agreement or arrangement entered into on or before 27 June the forgiveness will not be affected by the amendments.

The commercial debt forgiveness provisions will not affect the creditor's taxation entitlements. However, the total amount of debt forgiven in a year of income will be applied to reduce the debtor's entitlement to accumulated deductible losses and other amounts that would otherwise be taken into account in the future in calculating the debtor's taxable income. In certain circumstances, the net forgiven amount of a debtor which is a company will be apportioned among a group of companies related to the debtor company. The measures incorporate rules relating to the forgiveness of debts by a company forming part of a company group. Such provisions, which are anti-avoidance in nature, were foreshadowed but not introduced by the former Government.

The forgiveness of commercial debt measures will correct a structural weakness in the present law which does not properly tax the economic benefit to a taxpayer from being forgiven a debt. The present law creates scope for duplication of deductions in circumstances where the creditor would be entitled to tax relief for a loss on a debt that is forgiven or otherwise settled for less than full value.

Notwithstanding that the act of forgiveness relieves the debtor of the economic loss represented by the debt, tax losses that accumulated before the debt was terminated generally remain available to shield future income from taxation. On occasions, accumulated losses of a corporate debtor have been used to absorb future income after being acquired by new shareholders under arrangements that include the forgiveness of pre-existing debts.

The estimated gain to revenue from the proposed amendments is $20 million in 1997-98, $40 million in 1998-99 rising to $130 million by 2003-04.

Extended use of tax file numbers for superannuation purposes

The bill expands the use of tax file numbers (TFNs) for superannuation purposes. The greater use of TFNs will:

help beneficiaries by:
ensuring that their entitlements do not become lost;
allowing for the amalgamation of accounts and transfer of the TFN with the entitlements when the beneficiary leaves the fund;
facilitating more efficient use of TFNs to avoid the top rate of tax automatically applying to beneficiaries on the ground that they quoted their TFN for a superannuation purpose but not a taxation purpose.
enable the administration of the superannuation system to be streamlined;
enable superannuation funds to locate and identify amounts for beneficiaries including when transferring amounts between funds;
allow funds to amalgamate multiple contributions on behalf of the same individual;
allow the Commissioner of the Insurance and Superannuation Commission (ISC) to collect and use superannuation entity TFNs as part of the Commissioner's supervision of the superannuation industry; and
allow the Commissioner of the ISC to supply these TFNs to the Australian Taxation Office for data matching purposes so as to ensure that superannuation entities pay the correct amount of tax;

The bill also contains a number of safeguards to meet concerns about the privacy of individuals. The proposed means for TFNs to enter into the superannuation system is by the beneficiary voluntarily quoting the TFN to either the trustee of a fund or the employer who passes it to the fund.

The amendments will generally apply from the 60th day after Royal Assent.

These amendments are not expected to impact on the revenue.

Fringe benefits tax: exemption for minor benefits with a value less than $100

The bill will give effect to the Coalition's election commitment to double the FBT minor benefits exemption.

The amendments will ensure that fringe benefits of less than $100 (provided they meet the other conditions under the law) can qualify for exemption from fringe benefits tax.

This amendment will help to reduce compliance costs for employers who provide minor benefits to employees and will ensure that employers who only provide irregular minor benefits of less than $100 avoid paying FBT altogether.

The amendment will apply from the day the bill receives Royal Assent.

Offshore banking units

The bill will allow offshore banking units that provide funds management activities for non-residents to invest in Australian assets. A 10% limit (by value) will be set on the Australian asset component of each investment portfolio. The Government considers that this will be appropriate to meet the requirements of most global fund managers by enabling them to offer more balanced global portfolios with a small component of Australian assets.

These amendments have the potential to bring about a large increase in the level of offshore funds managed by Australian banks and enhance the development of Australia as a financial centre in the Asia Pacific region.

The amendments will apply from the commencement of the OBU's 1996-97 year of income.

These amendments are expected to have a negligible direct effect on revenue.

Repeal of section 261

The Government has decided to repeal section 261 of the Income Tax Assessment Act 1936. Section 261 effectively increases the costs involved in negotiating secured offshore lending agreements and hinders the development of Australia as a major financial centre in the Asia Pacific region.

The repeal applies to mortgages entered into after today.

The revenue impact of the amendment will be negligible.

Pooled Superannuation Trusts

The bill will allow complying superannuation funds and complying approved deposit funds (ADFs) to claim deductions for expenses relating to investments in pooled superannuation trusts and life insurance policies issued by life assurance companies or registered organisations.

Since 1 July 1988, when the income of superannuation funds and ADFs became taxable, a complying superannuation entity is unable to claim a deduction for expenses that relate to an investment in a pooled superannuation trust, life insurance company or registered organisation. The entity's ability to claim a deduction for expenses incurred as a result of investing in a PST or life policy is limited by the fact that any amount received upon redemption of units in a PST or surrender of a life policy is treated as tax exempt income. By contrast if a superannuation entity had made a direct investment in a product which was taxable in its hands, then it would be allowed a full deduction for its general management expenses.

This treatment is anomalous. Accordingly the measure will apply from 1 July 1988.

As a result of the amendments there will be a small but unquantifiable cost to the revenue.

Deductions for gifts

The bill will amend the gift provisions of the income tax law to allow deductions for gifts of $2 or more to The Central Synagogue Restoration Fund and The Borneo Memorials Trust Fund.

The bill also makes a number of other less significant and largely technical amendments to the superannuation and income tax laws.

I commend the bill to the Senate.

I also commend to the Senate the Explanatory Memorandum, which describes the measures in the bill in considerably greater detail.