House of Representatives

Tax and Superannuation Laws Amendment (2015 Measures No. 2) Bill 2015

Second Reading Speech

Mr Frydenberg (Assistant Treasurer)

I move:

That this bill be now read a second time.

Today I introduce a bill that is yet another stepping stone towards repairing Australia's budget.

Like the many tax bills since we took office, this bill helps get the budget back on track and amends various taxation laws to reduce uncertainty for investors and companies.

First, let's talk about the budget. We are all aware of the budget position that was left to us by the previous government. In the 2013-14 Mid-Year Economic and Fiscal Outlook, gross debt was projected to grow to $667 billion by the end of the medium term.

Without taking action to address this debt, Australian families and businesses face a bleak future. Tackling the debt and getting the budget back on track is vital to maintaining our living standards. And we need to maintain them so that our children and grandchildren can enjoy the same lifestyle we do.

Our fiscal plan will ensure government services are sustainable and stop borrowing at the expense of future taxpayers.

This bill is another part of the job the Australian people elected us to do: to fix the nation's debt and build a strong, prosperous economy.

Second, this bill reduces uncertainty and red tape for investors and companies, and ensures the tax system operates as intended. Because it is yet another step towards our commitment to clear the backlog of 92 announced but unenacted measures.

The changes in this bill will make our tax system better, support businesses, investors and mining exploration.

Specifically, this bill makes four changes.

One - the bill provides tax relief for some companies altering their mining practices.

Two - the bill alters the way software expenses is treated for tax purposes, so that the effective life of in-house software is increased.

Three - the bill confirms the longstanding industry tax treatment for investors in instalment warrants, and instalment receipts over certain assets.

Four - the bill clarifies the ability of companies to carry forward losses.

Schedule 1: Tax relief for certain mining realignments

Schedule 1 of this bill will make sure that the immediate tax deduction, for rights and information used in resource exploration, fulfils its original purpose of encouraging genuine exploration.

Limiting the immediate deduction was intended to remove the exploration tax concession for trading of late stage exploration rights and information, where the price reflected the value of resources discovered rather than the right to explore.

It was not meant to remove the immediate deductibility of an exchange of an interest in a mining, quarrying or prospecting right in return for exploration services, otherwise known as a 'farm-in, farm-out' arrangement.

Nor was the integrity measure meant to affect parties to a joint venture, when they exchange interests in mining, quarrying or prospecting rights so that the owners of the project have a consistent ownership interest in all the reserves and resources of the project.

The resources sector was given assurances that these arrangements would not be affected when the changes were announced. Although not subject to the integrity concern, resource sector companies would be affected if not specifically exempted from the integrity provisions.

So, this bill will maintain the tax neutrality of a 'farm-in, farm-out' arrangement where an interest in a mining, quarrying or prospecting right is exchanged in return for exploration services.

This bill will also provide tax rollover relief for an interest realignment, in which parties to a joint venture exchange their interests in mining, quarrying or prospecting rights to pursue a single development project.

It will also address a technical issue that may have prevented some taxpayers from claiming immediate deductions for expenses for enhancing mining, quarrying or prospecting information.

These arrangements mean that genuine exploration activities and other legitimate restructuring arrangements can continue without any unintended tax consequences.

And importantly, these amendments will minimise uncertainty for business, and prevent investment decisions in the mining and petroleum industries from being delayed.

Schedule 2: Increasing the effective life of in-house software

Speaking of investment, let me now talk about the change to the tax treatment of software expenses.

Schedule 2 of this bill makes a small change to the way expenditure on software is treated for tax purposes, to increase the effective life of in-house software.

Currently, taxpayers claim a tax deduction for software expenditure over four years. Software expenditure can include software bought off the shelf, as well as money spent on developing software in-house.

This schedule changes the time period over which the tax deduction can be claimed from four to five years.

This will ensure that the effective life of software for tax purposes better reflects the typical useful life of software for businesses.

The new treatment will start for expenditure made on or after 1 July 2015 and will result in a saving of $420 million over the four years to 2017-18.

That is not far from half a billion dollars-money which can be redirected to fund other priorities.

Schedule 3 : Income tax look-through treatment for instalment warrants and similar arrangements

As well as altering a tax treatment to help progress our repair of the nation's finances, this bill confirms into law an existing tax treatment for investors in instalment warrants.

In this way, schedule 3 of this bill provides certainty to investors. Schedule 3 clarifies the income tax treatment for investors in instalment warrants and instalment receipts over certain assets.

Instalment warrants and receipts allow an investor to purchase an asset, such as a share, by paying in one or more instalments.

Under these arrangements the investor is entitled to receive the benefit of any income, such as dividends, from the underlying asset throughout the term of the arrangement.

Uncertainty has arisen about whether this industry practice is supported by the tax law.

The changes in this schedule confirm the longstanding industry practice to ignore the instalment warrant or receipt for capital gains tax purposes.

These amendments treat an investor in an instalment warrant or receipt in certain widely held securities as the owner of the underlying asset for income tax purposes.

Investors benefit from these changes, as there will be no capital gains tax applicable at the time the last instalment is paid.

Equally, the investor rather than trustee will be assessed on any dividends or income received from holding or selling the assets.

Consistent with providing this treatment for instalment warrants and receipts, regulated superannuation funds that borrow to buy assets in a particular way, including with instalment warrants, are also provided with this treatment for income tax purposes.

These changes provide much-needed certainty for individuals, businesses and superannuation funds.

Schedule 4 : Multiple classes of shares

This bill also provides certainty about the tax treatment of losses. Schedule 4 of the bill clarifies the ability of companies to carry forward losses.

Companies make a tax loss when their total deductions claimed are greater than their taxable income earned in a year.

Companies can carry forward these losses to offset assessable income in future years.

To carry forward losses, companies must have either maintained the same ownership and control or carried on the same business since the loss was incurred. A number of tests are used to assess this.

There are a couple of minor technical issues with these tests which may result in the rules not operating as intended.

The bill will:

modify the continuity of ownership test for companies whose shares have unequal rights to dividends, capital distributions or voting power;
ensure that companies do not have to trace ownership through certain entities, including complying superannuation funds; and
clarify that in applying the same business test, the head company or members of a consolidated group will not need to take into account the history of a subsidiary member prior to the time that it joined the group.

Without these amendments, companies may be unable to meet the tests even though there was no significant change in underlying beneficial ownership, control or business during the period.

The amendments are good for business and will provide taxpayers with the certainty that they need.

In conclusion, this bill is part of the government's plan to repair the budget and secure Australia's future so that future generations can enjoy the same living standards as we do.

That plan is all about government living within its means so that vital services can be sustained well into the future. It is about laying the groundwork for the economy to grow and for all of us to participate. And it is about building a future that is just and prosperous.

This bill also ensures that genuine exploration activities and other legitimate restructuring arrangements can continue without any unintended tax consequences.

In addition, this bill reduces both uncertainty and compliance costs for investors and businesses and restores integrity to the tax system.

Full details of each of the measures are contained in the explanatory memorandum.

I commend this bill to the House.

Debate adjourned.

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