House of Representatives

Taxation Laws Amendment Bill (No. 3) 1997

Second Reading

Mr Miles (Braddon--Parliamentary Secretary (Cabinet) to the Prime Minister) (6.16 p.m.)--I move:

That the Bill be now read a second time.

CGT Exemption: Disposal of Small Business Assets on Retirement

The Bill implements the government's election commitment to allow small business taxpayers to claim an exemption from tax on capital gains made on the disposal of some or all of their active business assets if the proceeds are used for retirement.

The CGT retirement exemption will be welcomed by thousands of small business operators. Owners of small businesses often need to reinvest earnings into their business to sustain growth and increase profitability. These individuals are sometimes not financially able to contribute to superannuation on a regular or even occasional basis. This measure offers a way in which those individuals can place accumulated capital gains into the superannuation environment without making regular contributions.

Taxpayers eligible for the CGT retirement exemption are individuals conducting business as sole traders or in partnership, and companies and trusts where there is a controlling individual who is also an employee of the company or trust.

Principal Residence Exemption from CGT

The Treasurer (Mr Costello), in the 1996-97 budget, announced measures to extend the principal residence exemption to assist home owners, and beneficiaries and trustees of deceased estates. The Bill will extend the qualifying period for the capital gains tax exemption on disposal of an inherited house from 12 months to two years. This will assist many trustees and beneficiaries of deceased estates by giving them more time to dispose of the deceased's principal residence.

The Bill will provide a partial CGT exemption for trustees and beneficiaries of deceased estates where the deceased never used the dwelling as a principal residence but beneficiaries of the estate do so.

The provisions will also treat a beneficiary or trustee who acquires a dwelling as a result of a death as having acquired the dwelling at its market value on the date of death if it was wholly the principal residence of the deceased at the time of death. Also, where a person's principal residence is first used for income producing purposes, its market value at that date will be used as its cost base.

The amendments recognise that taxpayers often experience record keeping and compliance problems when disposing of a dwelling that has been used for income producing purposes, either for part of the period of ownership or during a period prior to inheritance. The amendments will ensure that taxpayers do not need to keep records of costs incurred before a principal residence is first used for income producing purposes or inherited by them. This will simplify the tax treatment in the majority of cases.

Subsidiary Company Liquidations and Capital Gains Tax

The Bill amends the capital gains tax provisions of the act to reduce a capital gain or loss otherwise realised on the cancellation of shares on the dissolution of a company which is the wholly owned subsidiary of another company. The provisions apply where consideration for the disposal of the shares is equal to the market value of assets distributed in specie to the shareholder company by the liquidator as part of a final distribution. This measure will ensure that duplication of gains or losses will be avoided as far as possible in these cases.

Gains and Losses

The Bill proposes several amendments to the income tax law in relation to capital and revenue losses. These measures were announced in the 1996-97 budget. The amendments include provisions relating to the offset of current year capital losses, the correction of anomalies in the loss and bad debt provisions relating to companies, the insertion of safeguards in the same business test contained in the capital loss provisions, and the tax treatment of payments made in consideration for the transfer of capital and revenue losses.

In addition to these previously announced amendments, the Bill proposes to amend the capital loss transfer provisions to give the Commissioner of Taxation unlimited time to amend the assessment of a transferee company in certain circumstances. The commissioner already has this power in relation to the analogous revenue loss transfer provisions.

Depreciation of Lessor's Fixtures

Another measure in the Bill will ensure that a lessor of depreciable plant or articles under a chattels lease is treated as the owner for taxation depreciation purposes where that leased equipment has become a fixture on another person's land.

Generally, only the owner of the land is the owner of any fixtures on the land, including plant and equipment that may be leased. technically, that means a lessor may not be entitled to depreciation in respect of leased plant that becomes a fixture on another person's land. The amendment will result in a more consistent treatment of taxation depreciation allowances for capital expenditure on leased plant.

Treatment of Payments Made Under the Firearms Surrender Arrangements

The Bill will implement the announcement made by the Treasurer on 24 July 1996 concerning the tax treatment of payments made under the Compensation for the Surrender of Prohibited Firearms Guidelines issued by the Commonwealth Law Enforcement Board. These guidelines were issued as a result of the meeting of state and territory police ministers regarding uniform gun laws held on 10 May 1996.

The amendments will ensure that no income or capital gains tax will be paid in respect of the compensation payments received under the arrangements by taxpayers who are not gun dealers and who used prohibited firearms either in their business or for private purposes.

The amendments will provide two outcomes for gun dealers. They will ensure that there will be no taxable income in relation to a prohibited firearm during the income years when it was held as trading stock. They will also exempt from tax compensation payments received for the loss of business caused by the prohibition of certain firearms.

Research and Development

On 13 December 1996, the Treasurer announced that the government would move amendments to the R&D tax concession to ensure that companies in partnership could not re-create undesirable syndicate like features.

To that end, the Bill ensures that limits on core technology deductions that came into effect on 23 July 1996 will apply to companies in partnership in the same way as to other companies. One of the worst aspects of syndicated R&D related to the immediate deduction of expenditure on overvalued core technology.

The Bill also authorises disallowance of deductions of R&D syndicates, where an extension of the syndication period has been granted but the syndicate has breached a condition of that extension.

Increase in Age Limit for Superannuation Contributions

This measure will increase to 70 years the threshold from which employers are no longer required to provide superannuation support for their employees. This is consistent with the government's election commitment to allow people over age 65 to continue contributing to a regulated superannuation fund or retirement savings account, RSA, where they maintain a bona fide link with the paid work force.

Rebate for superannuation contributions made on behalf of a low- income or non-working spouse

The Bill implements the government's election commitment to provide a rebate to a person who contributes to superannuation on behalf of a low income or non-working spouse. To be eligible for the rebate, the spouse's assessable income must be less than $13,800. The rebate is calculated as 18 per cent of contributions, up to a maximum of $3,000 in contributions. This limit is reduced where the spouse's assessable income exceeds $10,800.

Family Tax Initiative

The Bill will adjust the calculation of family tax assistance for taxpayers with exempt foreign earnings so that they will receive the proper amount of benefit. The method of calculation will be consistent with that for taxpayers who pay tax at a single rate for every dollar of taxable income.

Remote Area Housing

The Bill will also give effect to the 1996-97 budget announcement that certain remote area housing fringe benefits provided by primary producers will be exempt from fringe benefits tax. Further, the amendments will ensure that, where a primary producer provides free or subsidised residential fuel for use in connection with housing covered by the proposed exemption, the resulting fringe benefit for remote area residential fuel will continue to receive concessional treatment.

Sales Tax

The full Federal Court in Telstra Corporation Ltd v. FCT held that certain items used in Telstra's telephone exchanges were exempt from sales tax as electrical fittings. The government considers that this decision goes beyond the intended coverage of the exemption for electrical fittings and therefore poses a threat to the existing coverage of the wholesale sales tax system.

Accordingly, the Treasurer announced in November 1996 the government's decision to amend the wholesale sales tax to ensure that goods used in the provision of telecommunication or audiovisual services cannot be, from that date, exempt from WST. These amendments will preserve the integrity of the existing tax base.

Dividend Imputation for Tax Exempt Entities

The amendments will cancel the franking surpluses of taxable companies that cease to be wholly owned by tax exempt entities. This will prevent the new owners availing themselves of franking surpluses accumulated during the period when the company was wholly owned by tax exempt entities.

Sale of Mining Rights

The Bill will also make some technical corrections to the Senate's amendment of 12 December 1996 in relation to the exemption available for income derived from the sale, transfer or assignment of mining rights. The corrections will ensure that the Senate's amendment will be given its intended effect.

Full details of the measures in the Bill are contained in the explanatory memorandum circulated to honourable members.

I commend the Bill to the House.