The Senate

Taxation Laws Amendment Bill (No. 3) 1996

Second Reading

Senator CAMPBELL (Western Australia--Parliamentary Secretary to the Treasurer) (4.40 p.m.)--I table a revised explanatory memorandum and move:

That this bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard

Leave granted.

The speech read as follows--

The bill will amend the taxation laws in a number of respects. It delivers on the Government's election commitments to provide a tax rebate for low income aged persons and allowing equity investments in SMEs to be taxed under the CGT provisions.

In addition the bill implements 1996-97 Budget announcements relating to the medical expenses rebate, sale of mining rights, co- operatives, infrastructure borrowings and research and development.

Tax rebate for low income aged persons

The bill implements the election commitment to provide a tax rebate to persons of age pension age who do not receive the age pension. To be eligible, a taxpayer will have to meet the same residency criteria as age pensioners and have a taxable income below the pensioner rebate cut-out thresholds.

This measure builds on other assistance to older persons which the Government has provided since the election including the reduction of the provisional tax uplift factor from 8 per cent to 6 per cent for the 1996-97 financial year.

As a transitional measure, the new rebate for the 1996-97 income year will be at a level equivalent to half the pensioner rebate for 1996-97. For subsequent years, the new rebate will be at the same level as the pensioner rebate. These changes will result in an estimated reduction in revenue of $10 million in 1996-97, $48 million in 1997-98 and $65 million in 1998-99 and the following year.

Equity investments in small-medium enterprises

The bill also implements the Government's election commitment relating to equity investments in small-medium enterprises which was also announced in the Budget. The provisions amend the income tax law to provide an incentive for lending institutions to make long term investments in the small business sector. The changes will encourage banks to become equity partners in SMEs and help alleviate the debt-financing problems suffered by many of these businesses.

The amendments change the tax treatment of certain equity investments from being on revenue account to being treated under the capital gains tax provisions. They will apply to investments made after 1 July 1996.

Medical expenses rebate

The Government announced in the Budget that the threshold for the medical expenses rebate would be raised from $1,000 to $1,500. The increase in the threshold applies from Budget night, so that for the 1996-97 income year the threshold will be $1,430. Medical expenses in excess of the threshold qualify for a rebate at the rate of 20 cents in the dollar on the excess.

As only medical expenses net of reimbursements from health funds qualify for the rebate, the increase in the threshold is consistent with other incentives announced in the Budget for people to take out private health insurance.

The increase in the threshold is expected to raise additional revenue of $26 million in 1997-98, $23 million in 1998-99 and $24 million in 1999-2000.

Sale of mining rights

Another Budget measure to be implemented by this bill concerns the sale of mining rights.

The bill will withdraw the exemption from tax on income from the sale, transfer or assignment of mining rights for gold or other prescribed metals or minerals. Income from the sale of mining rights under contracts entered into after 31 December 1996 will no longer be exempt.

The estimated revenue saving is $2 million in 1997-98, $20 million in 1998-99, and $40 million per year thereafter.

Co-operative companies

The bill implements the repeal of paragraph 120(1)(c) of the Income Tax Assessment Act 1936 announced in the Budget. The measures will prevent the effective 200 per cent tax deduction which was previously available for the cost of certain assets and which provided co-operatives and government lending institutions with commercial and taxation advantages over other companies. these advantages are not justifiable and are inconsistent with competitive neutrality principles.

This measure will apply to government loans entered into after 7.30 p.m. Eastern Standard Time on 20 August 1996 and to existing loans only where their terms are altered after this time subject to transitional arrangements.

The first transitional arrangement ensures that certain loans to eligible co-operatives that were entered into after 7.30 pm on 20 August 1996, but on or before 31 December 1996, will remain eligible for the paragraph 120(1)(c) tax deduction provided the company has in the three years leading up to 20 August 1996 had a loan to which paragraph 120(1)(c) applies. This transitional provision applies if the loan was entered into for the sole purpose of acquiring a specified asset pursuant to:

a business plan approved by the directors where that approval is recorded in the company's minutes before 7.30 pm on 20 August 1996; or
a contract that was entered into before 7.30 pm on 20 August 1996.

The specified asset must be plant or articles for the purposes of section 54 of the act (other than a passenger motor vehicle) or an eligible building for the purposes of section 124ZF of the act. It must be installed ready for use by 30 June 1998.

A further transitional provision applies where a co-operative has entered into a contract (which may include a verbal contract) before 7.30 pm on 20 August 1996 to acquire an asset and has an agreement for the provision of finance before that time. In such a case, any drawdowns of funds under that agreement after that time for the sole purpose of acquiring the asset will be eligible for the tax deduction.

The reference in these transitional provisions to an asset would include a group of assets within a particular project.

The measure is expected to save the revenue $2 million in 1997-98, $4 million in 1998-99 and $6 million in 1999-2000.

Infrastructure borrowings--amendments of the Development Allowance Authority Act 1992

The objective of the amendments to the Development Allowance Authority Act 1992 is to prevent certain types of schemes undermining the integrity of the infrastructure borrowings program by breaking the symmetry in the special tax treatments of the payer and receiver of interest. Such schemes enable indirect infrastructure borrowings to be made functionally independent of the financing of an infrastructure project thereby increasing the value of tax benefits to those involved and the cost to revenue without a commensurate increase in the funding for private sector projects.

The amendments will give effect to the Budget announcement designed to prevent those sorts of schemes from undermining the integrity of the infrastructure borrowings program. As was stated in Statement 4 in Budget Paper No. 1: `If allowed to proceed, such schemes would substantially increase the value of tax benefits to those involved, and the cost to revenue, without a commensurate increase in the funding for private sector infrastructure projects.'

The amending legislation will require:

new indirect infrastructure borrowings or refinancing infrastructure borrowings that succeed them to be made only by Australian resident taxpayers; and
any transfer of rights by a direct infrastructure borrowing lender or repayment of a direct infrastructure borrowing, to be accompanied by repayment or parallel transfer of any associated indirect infrastructure borrowing or refinancing infrastructure borrowing that has succeeded the indirect infrastructure borrowing.

The amendments, which will have effect from 30 October 1995, will not prevent infrastructure borrowings from operating in the way intended by the Government to encourage the genuine private sector development of publicly accessible infrastructure.

The amendments have the potential to prevent a future loss to the revenue. The amount of potential revenue loss is not quantifiable.

Research and development activities

The bill will also amend the Income Tax Assessment Act 1936 and the Industry, Research and Development Act 1986 to give effect to policy changes announced by the Government on 23 July and 20 August 1996.

The concessional deduction rate for R&D expenditure is being reduced from 150 per cent to 125 per cent and new syndicates are prevented from claiming R&D deductions. The R&D deduction rules for interest, core technology, pilot plant and feedstock are also being modified. The definition of R&D activities is being clarified.

The tax concession for eligible R&D nevertheless remains generous. it allows immediate deduction or rapid write-off of expenditures which may otherwise be capital or deductible over longer periods. even the reduced premium rate of deduction provides a considerable degree of concessionality.

The bill amends the Industry, Research and Development Act 1986 to remove the ability of companies to register jointly for the R&D tax concession, or as it is more commonly known, to register a syndicate. Joint registration has facilitated arrangements that provide considerably greater tax benefits than the benefits provided to other registrants under the R&D tax concession. This level of tax benefit was clearly unintended. The Government considers that quality R&D can be promoted effectively through other mechanisms, including the new START program, at lower cost to the Australian taxpayer.

Other minor amendments to the Industry, Research and Development Act 1986 include the streamlining of grant provisions to make them more clear, and the introduction of a mechanism by which the Minister can provide formal advice to the Industry Research and Development Board and its committees in an open and transparent manner.

These changes will result in a gain to revenue of $59 million in 1996-97, $718 million in 1997-98, $630 million in 1998-99, and $840 million in 1999-2000.

Tax exempt entities that become taxable

The bill proposes to amend the income tax law to deal with transition issues that arise when previously tax exempt entities become taxable. The measures were announced by the previous Government on 3 July 1995 and apply to entities becoming taxable on or after that date.

The amendments will generally allocate income, gains, losses and deductions of an entity between its exempt and taxable periods.

The amendments minimise compliance costs for entities that are becoming taxable. Deductions for post transition costs in respect of pre-transition leave, eligible termination payments, bad debts and superannuation are to be determined by reference to liabilities accumulated at the date of transition rather than by reference to the particular cost.

The amendments are expected to be revenue neutral.

Rebatable annuities

The bill closes a loophole in the law that allowed the conversion of non-rebatable annuities to rebatable annuities and pensions.

Amendments to the tax law in 1994 to allow the unused undeducted purchase price of a commuted superannuation pension or roll-over annuity to be further rolled-over had the unintended consequence of allowing amounts received on commutation or termination of annuities purchased with money outside the superannuation system to be treated as eligible termination payments (ETPs).

These ETPs could then be rolled-over into the superannuation system to purchase rebatable annuities and pensions. This rebate is intended to apply only to superannuation pensions and roll-over annuities.

Annuities that have not been purchased with amounts accumulated within the superannuation system should not be eligible for concessional taxation treatment that has been earmarked for genuine superannuation amounts.

The bill will ensure that, subject to exceptions designed to maintain the current treatment of some annuities purchased on or before 9 December 1987, only annuities purchased wholly from ETP monies are treated as ETPs on commutation or termination and can be rolled-over to purchase rebatable annuities and pensions.

The measure will apply to annuities commuted or terminated on or after 15 June 1996. It is not expected to raise any additional revenue. However failure to act to close the loophole would have posed a potentially significant threat to the revenue.

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

I commend the bill to the Senate.

Ordered that further consideration of the second reading of this bill be adjourned until the first day of sitting in 1997, in accordance with the order agreed to on 29 November 1994.