House of Representatives

Taxation Laws Amendment Bill (No. 4) 1997

Second Reading

Mr Miles (Braddon--Parliamentary Secretary (Cabinet) to the Prime Minister) (6.20 p.m.)--I move:

That the Bill be now read a second time.

Thin Capitalisation

The Bill will amend the tax law to improve the effectiveness of the thin capitalisation rules in order to ensure that an appropriate amount of profit is derived in Australia in respect of foreign controlled Australian enterprises. The thin capitalisation foreign debt to foreign equity gearing ratio will be reduced from 3:1 to 2:1 for taxpayers who are not financial institutions. The gearing ratio for financial institutions will remain unchanged at 6:1.

To complement the new gearing ratio, the definition of foreign debt for companies that are not financial institutions will be extended to borrowings from overseas lenders for which a guarantee has been provided by a foreign controller or their non-resident associates or such debt secured against the assets of a foreign controller or their non-resident associates. This extension of foreign debt will not apply where a resident company can establish to the satisfaction of the Commissioner of Taxation that the loan could have been obtained without the guarantee or security.

The definition of foreign equity for fixed trusts will be calculated on the basis of their foreign controllers' fixed interests in the capital and net income of the trust. discretionary trusts will be denied an income tax deduction for interest paid to foreign controllers or their non-resident associates. For partnerships the foreign equity will be based on the interest that the foreign partners have in the capital and income of the partnership.

The Bill also contains measures to counter avoidance arrangements. Asset revaluations for partnerships and trusts will be limited to market value changes. The provisions dealing with back to back arrangements will be repealed as it is considered that the general anti-avoidance provisions of the income tax law will be more effective in countering such arrangements. A foreign controller of a partnership or trust will be denied a deduction for loans from a non-resident associate which is invested as either debt or equity in the partnership or trust respectively.

Finance Shares

The Bill will amend the income tax law to address tax avoidance arrangements involving eligible finance shares and widely distributed finance shares. In February the government announced measures denying non-portfolio dividend status and eligibility for an underlying foreign tax credit on dividends paid on eligible finance shares and widely distributed finance shares. These provisions give effect to that announcement.

Group Certificates for Employees Ceasing Employment

The Prime Minister, in his statement dated 24 March 1997 and contained in the report more time for business, announced a proposal designed to reduce employers' compliance costs by removing the requirement on employers to always issue group certificates within seven days for employees who cease working.

The Bill amends the law relating to group certificates to generally allow employers to issue group certificates by 14 July after the end of the relevant year of income unless an employee who leaves employment during the year makes a written request for their group certificate at an earlier date. The amendment will not, however, affect the obligation of an employer to issue a certificate within seven days when making an eligible termination payment.

Tax Exempt Entities that become Taxable

The Bill also proposes amendments to overcome deficiencies identified in the existing law. The proposed amendments will ensure that where a tax exempt entity becomes taxable: the entity is allowed a deduction for any surplus in its defined benefit superannuation scheme; the entity is allowed a deduction for contributions made in arrears after the transition time where the defined benefit superannuation scheme was in surplus at the transition time; and the doubtful debt provision for debts existing immediately before the transition time, for which no deduction is allowable, is reduced where such a debt is sold at or after the transition time.

Measures to address tax avoidance through tax exempt entities distributing funds offshore

As part of the 1996-97 budget, the Treasurer announced that the government intended to introduce legislation to counter tax avoidance through the use of tax-exempt bodies distributing funds offshore.

As part of this government's commitment to undertake consultation before introducing legislation into parliament, an exposure draft of this legislation together with explanatory notes were released on 20 February 1997.

At the outset, it should be emphasised that under both the exposure draft and the legislation now before the parliament, any distribution of funds received from donations, gifts, offerings, `plate money' and the like will not affect an organisation's tax exempt status.

Although the charitable trust provisions are of an anti-avoidance nature, the government has, where possible, adopted a number of suggestions made by interested parties to ensure as far as possible that bona fide organisations will not lose their tax exemption.

With respect to other tax exempt organisations covered by provisions in the Bill, the government has also amended the wording of the proposed legislation to make it perfectly clear that organisations based in Australia will not be affected by these measures as long as they incur their expenditure and pursue their objects principally in Australia. This amendment specifically addresses the concerns of a large number of representations received by the Government on the draft legislation, including from many religious, missionary and sporting organisations.

Consistent with the announcement by the previous Government, the charitable trust measures will take effect after the commencement of charitable trusts' 1996-97 year of income. The measures affecting other exempt organisations will apply from the 1996-97 budget announcement as previously announced.

Quasi-Ownership of Fixtures/Leases of Luxury Cars

There are two measures in the Bill which relate to the Tax Law Improvement Project. The first measure ensures that luxury car leasing rules in the Income Tax Assessment Act 1936 continue to have application to the 1997-98 and later income years. The second incorporates into the rewritten 1997 Assessment Act rules which treat a lessor of depreciable plant under a chattel lease as the owner for taxation depreciation purposes where the plant has become a fixture on another person's land.

Electronic Lodgment and Electronic Funds Transfers

The Bill will amend the income tax law and fringe benefits tax law to provide for electronic lodgment of returns, applications for amendment and other documents provided to the commissioner. These amendments give legislative effect to what is a current administrative practice for taxpayers who lodge through tax agents. The amendments will also enable other taxpayers to lodge these documents by electronic transmission to the Commissioner.

Amendments will be made to allow the Commissioner to pay refunds by electronic funds transfer to any account nominated by the taxpayer. The account may be an account of another person.

Rate of Tax for Friendly Societies

In the 1997-98 budget the Government announced that, in keeping with the competition objectives of the financial system inquiry that reported in March 1997, it would recommence the review of the taxation treatment of life insurance that was initiated in the 1995-96 budget, but not completed by the former government prior to the election.

To ensure that the present taxation treatment of friendly societies is undisturbed for the duration of the review, the rate of tax imposed on the life insurance business of friendly societies will be retained at 33 per cent for the 1997-98 and 1998-99 income years. Similarly, the rebate available to policyholders who receive assessable bonuses on life insurance policies issued by friendly societies will be retained at 33 per cent for the 1997- 98, 1998-99 and 1999-2000 income years.

The trustee rate will be increased to 39 per cent from 1999-2000 and the rebate rate will be increased to 39 per cent from 2000-01 unless other relevant amendments to the taxation treatment of friendly societies are made prior to that time.

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.