House of Representatives

Income Tax Assessment Bill 1973

Income Tax Assessment Act 1973

Second Reading Speech

Mr CREAN (Melbourne Ports -- Treasurer)(4.3)-I move:

That the Bill be now read a second time.

This is a Bill to amend several aspects of the income tax law. Its main proposals are designed to curtail widespread misuse of some features of the law and so to ensure that proper effect is given to the policy underlying provisions intended to provide concessions for particular purposes. Much of the Bill is taken up with measures relating to the concessional deductions for life insurance premiums and superannuation contributions and to provisions concerned with company losses and bad debts and with dividend distributions by private companies.

A concessional deduction of up to $1.200 a year is allowable to a person for amounts paid as life insurance premiums or as personal contributions to a superannuation fund. This concession is provided to encourage a person to make financial provision for his own retirement, or for his dependants when he dies and one of course could add 'her dependants', if it is a female. For some time however, it has been exploited for very different purposes. Practices have grown up that have nothing at all to do with the objectives underlying the concession; they are simply arrangements adopted by people who are in a position to do so to avoid the payment of tax which ought to be paid. The most widely used arrangements take advantage of the fact that an insurance policy in force for a relatively short time may be surrendered for an amount close to the sum of the premiums paid on it. Many policies are taken out solely to secure the tax deduction and are surrendered at the earliest practicable time. In effect the person concerned gets a tax deduction for premiums which to a large extent are received back within a short time. These arrangements do not remotely accord with the policy underlying the concession. Another source of tax saving which is quite out of step with the policy objectives is the use of short term endowment policies.

I foreshadowed this feature of the amendments proposed in this Bill in a public statement I made on 29th December 1972. In broad terms, the amendments will change the law so that, with some exceptions, a deduction will not be available for premiums on a policy which provides for benefits (other than death benefits) to be paid within 10 years after the issue of the policy. Other countries- notably New Zealand and the United Kingdom-have adopted already this basic criterion for these deductions.

The proposed restrictions on deductions for premiums on short term policies could, however, be got around by the early surrender of whole-of-life or long term policies. As a safeguard against this the Bill provides that, where a policy in force for less than 10 years lapses or is surrendered, the Commissioner of Taxation will be authorised to disallow deductions for premiums on the policy paid within 5 years immediately prior to the surrender or lapse. Single premiums will be notionally spread over the life of the policy for this purpose. It is proposed, however, that there be no disallowance where it is demonstrated that a policy is discontinued because of serious financial difficulties and had not been taken out as a tax avoidance scheme. The proposed amendments will not affect deductions for contributions to superannuation funds in respect of life insurance policies, or whatever term, taken out by the trustees of a fund to provide retirement benefits for members. Should any such policy be assigned to a member who leaves a fund because of premature retirement, deductions for future premiums paid on the policy by the ex-member will not be affected. In addition the amendments will not apply to premiums on what is known as 'term' insurance in respect of which there is no surrender value.

The Government received representations that an exception from the 10-year rule should also be made for short term endowment policies that are taken out independently of superannuation funds by people who are within 10 years of the common retiring ages of 65 years for men and 60 years for women. The Government decided, however, that it would be more in harmony with the general policies of the tax law to meet the needs of these people through the exception for policies issued to trustees of superannuation funds. Public superannuation funds exist which are able to provide for the retirement needs of these older people.

In respect of payments to superannuation funds, the Bill proposes that deductions be limited to payments to funds the income of which presently is accorded either exemption or special treatment under the income tax law. Such funds include all traditional employer-employee funds and funds catering for people who are self employed or are employees unable to benefit, or benefit adequately, through an employer sponsored fund. The purpose of this is to put an end to schemes that set out to obtain tax deductions for contributions to what are in reality no more than outright savings or investment funds. As I announced on 29th December, the amendments are to apply in respect of premiums on policies taken out on or after 1st January 1973 and contributions made to superannuation funds on or after that date.

I turn now to measures contained in the Bill which are directed against familiar tax avoidance practices involving the use by profitable enterprises of companies that are no more than shells but that can provide very valuable tax benefits when profitable business is put their way. Two of these tax benefits accrue from setting off against current income deductions for past year losses, or for debts that have long been bad but have not been written off by the acquired company. A third type of benefit may be that accruing from the use of a past distribution of dividends made by an acquired private company-that has been stripped of all its assets in a dividend stripping operation-as a means of avoiding the requirement that an appropriate proportion of the income of a private company that is active and profitable be distributed to, and taxed in the hands of, the shareholders.

In 1964 and 1965 the Parliament moved against the trafficking in companies with accumulated losses. The provisions we agreed to then have been applied with some success but it is apparent that they need strengthening in some respects. This the Bill is to do. It will also apply the central principles of the 1964-65 legislation to the acquisition, through the purchase of shares in companies, of deductions for bad debts and of an entitlement to have earlier excess dividend distributions offset against current distributable income of private companies. The central principles are simple. For a company to obtain these tax benefits, there is required to be a real and substantial identity between its beneficial ownership when the losses or debts were incurred, or the excess distributions were made, and its current beneficial ownership. Alternatively, if there is not that identity, the company must currently be carrying on the same business as it was when the change in shareholders occurred.

The principles are simple, but it does not follow that the legislation expressing and enforcing them can also be simple. The Bill is voluminous. One must apologise in some respects for the voluminous Bill and also for the rather heavy compendium known as the 'Explanatory Memorandum' which is associated with it. It runs to some 55 pages of fairly closely typed material. There is no alternative. When clever lawyers outside conspire, clever legislators inside must also act. I repeat that the Bill is voluminous. This is accounted for to some extent by 2 practical factors-firstly, the necessity to re-enact existing provisions and, secondly, the unavoidability, from the draftsman's viewpoint, of repeating in relation to each subject-losses, bad debts and excess distributions-legislative principles common to each. But, also, many peripheral matters of a technical and transitional nature have had to be catered for in the drafting and, in this age of enthusiastic and ingenious tax avoidance, many safeguards of the central principles have had to be provided. It is no use, for instance, having legislation requiring continuity of beneficial ownership in a company, if it leaves open arrangements under which the purchasers of shares in the company need not be concerned about any continuity of the old ownership because the old shareholders can easily be kept from receiving any benefit from the company's current activities. The Bill proposes safeguards against arrangements of this kind and generally is designed to make clear the legislative intention that acquisitions of company shells for tax benefits will not bring forth those benefits.

In 1964 the Parliament considered a 40 per cent continuity of shareholding would be a reasonable criterion to apply. Experience has shown that anything less than a continuity of a controlling interest, that is, more than 50 per cent, is unlikely to be effective. So that is what the Bill proposes. Under the existing law, a company is required to satisfy the commissioner as to a 40 per cent continuity of shareholding. Under the amended law this will move up to a percentage in excess of 50. Provisions adopted by the Parliament in 1965 left undisturbed the availability of deductions for company losses when the same business is carried on at all relevant times. These provisions are being re-enacted with no substantial change. They will apply in respect of bad debt and excess distribution acquisitions as well as in the company loss situation.

The new code we propose will, in general, apply in assessments on company income of the current year 1972-73. An important exception is that the 40 per cent test for continuity of shareholdings will apply in assessments for that year in respect of deductions for past year losses and bad debts. The larger percentage, more than 50, will not take over until 1973-74. The amendments relating to excess distributions of companies will, in general, apply for dividends relating to income of the year ended 30th June 1972 but again the 40 per cent test will apply for that year and the larger percentage will not take over until the succeeding year. The Government considers it reasonable to apply the amended provisions in this way. Many intending purchasers of tax losses, bad debts and excess distributions have made saving arrangements to the effect that they are to pay the vendors of the company shells only for the amounts for which the purchasers secure allowances under the taxation law. Apart from this, the loss of revenue is most significant and the Government considers it only right that it should be stopped with as little delay as possible.

There are some other matters dealt with in the Bill and I shall refer briefly to them. An apparent technical deficiency in the provisions governing the taxing of dividends is being remedied by the Bill so that an exempting provision clearly applies in respect of dividends out of profits from gold mining, but not other types of mining, in Papua New Guinea. The Bill will provide for an outright deduction to be allowed in the year of incurrence for expenditure on converting income producing plant for use under the metric system. We are proposing the same now in this respect as was done in 1965 in relation to conversion of plant for use with the dollar currency.

There are some minor amendments relating to the communication by the Commissioner of Taxation of information necessary for the administration of the Commonwealth employees compensation provisions and scholarships schemes. There is also a technical amendment to a transitional measure concerning contracts between mining companies and the Commonwealth or a State Government which, with the approval of the relevant government, have been assigned to a third party. We are taking this opportunity to give effect to the Government's announced intention to extend the export market development allowance for another year, until 30th June 1974. Extension of other aspects of the export incentive schemes will be dealt with in other legislation. Finally, formal amendments reflecting current drafting practices are proposed. These will not affect the operation of the law. A memorandum providing detailed explanations of technical aspects of the Bill is being made available to honourable members and I do not propose to speak at any greater length at this stage. I commend the Bill to the House.

Debate (on motion by Mr Lynch) adjourned.

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