Second Reading Speech
by the Treasurer, the Hon. John Howard, M.P.The major purpose of this and associated Bills I shall shortly introduce is to give effect to taxation proposals announced in my Budget speech. This Bill will also give effect to proposals announced in my statements of 12 June and 25 June 1979. The first of these related to tax avoidance schemes designed to exploit the general depreciation provisions of the tax law. The second related to depreciation allowable when plant is owned and used for only a part of an income year.
Before proceeding to the matters dealt with in the Bill I mention that it has not been possible to include in it provisions to give effect to some major initiatives announced in my Budget speech. These are the proposed income tax concessions for conversion of oil-fired industrial equipment to other energy sources, the extension of the offshore petroleum rebate to onshore petroleum exploration and development, the provision of a system of depreciation allowances for buildings used in traveller accommodation and two proposals relating to motor vehicles. As honourable memebers are aware, the latter involve restrictions on depreciation allowances for luxury vehicles and adjustments - corresponding to those made in respect of depreciation allowances - where a taxpayer buys and sells a vehicle that had been held under a lease.
These proposals are all matters of substance and considerable complexity, which require the most careful attention. In some cases they break entirely new ground. It has just not been possible to finalize them in time to be included in a Bill during these Sittings. However, comprehensive statements on the proposals will be made within the next few weeks and the legislation will be available for introduction early in the 1980 autumn sittings.
Facilities for the Storage of Grain, Hay or Fodder
One of the Budget proposals dealt with in the Bill is the special accelerated rate of depreciation for on-farm structural improvements used for storing grain, hay or fodder in the course of carrying on a primary production business. The cost of such a facility will be able to be written off as depreciation in equal instalments over 5 years beginning with the year in which it is first used or installed ready for use.
This accelerated allowance will apply to storage facilities ordered, or commenced to be constructed, by the taxpayer after 21 August 1979.
As I mentioned in my Budget speech, the 20 per cent rate of investment allowance will continue to be available in respect of the facilities.
Retention Allowance for Private Companies
Another Budget proposal implemented in the Bill is an increase from 60 per cent to 70 per cent in the retention allowance for business income of private companies. By so easing the dividend distribution requirements of private companies, the Government recognises that a frequent concern of small business is the maintenance of adequate working capital.
The increased rate of retention allowance will first apply in respect of the 1978-79 income year.
As tax indexation is not to apply for 1979-80, the Bill proposes that the value of dependant rebates will be the same as for 1978-79.
To reflect the change in the standard rate of tax, the Bill also provides that the rebate for general concessional expenditure in excess of $1590 will be calculated at 33.07 per cent.
There is also provision that the rebate provided to ensure that certain lump sum payments on account of annual or long service leave bear no more than the standard rate is to be calculated by reference to a standard rate of 33.07 per cent.
Provisional tax is, of course, the part of the PAYE system designed to collect tax on income other than salary or wages within the year in which it is earned. Provisional tax arrangements seek to achieve reasonable consistency between the treatment of salary and wage earners and the self employed. As income for 1979-80 will generally be higher than the 1978-79 taxable income on which provisional tax is based, somewhat higher rates than those applicable for 1978-79 are to apply for provisional taxpayers who do not self-assess. In essence, the Bill provides that provisional tax for 1979-80 will be an amount equal to tax payable for 1978-79 plus a loading of 2.57 percentage points applied to the part of 1978-79 taxable income in excess of $3893.
Provisional tax will also be increased to take account of the withdrawal of the trading stock valuation adjustment as from the beginning of the 1979-80 income year.
In addition to the Budget proposals I have mentioned, the Bill gives effect to four decisions of the Government that I announced in recent months.
On 25 June this year I foreshadowed amendments to make it clear that a pro-rata deduction for depreciation is to be allowed where plant is owned and used for business purposes for part only of an income year.
This decision was taken following a decision by a Taxation Board of Review which allowed a full year's depreciation in a case in which plant was owned and used for only one day of the income year. That decision overturned a long-standing practice, widely accepted by accounting and legal practitioners as appropriate, of determining depreciation allowances by reference to the period during which the plant is owned and used.
The amendment is to apply to plant acquired after 25 June 1979, except where it is acquired under a contract entered into on or before that date, and also to plant which the taxpayer commenced to construct after that date.
Depreciation Schemes to Avoid Tax
In my statement of 12 June 1979, I foreshadowed amendments to counteract schemes that exploit the depreciation provisions of the income tax law to create deductions for artificial losses. These amendments are contained in this Bill.
The mechanics of one such scheme are for a promoter to lend a taxpayer an amount that enables the taxpayer to buy plant from the promoter at an excessive price. The taxpayer then uses the plant to produce assessable income, generally by hiring it back to the promoter for a short period. Because depreciation is allowable on the cost of plant, the scheme is designed to give the taxpayer an entitlement to depreciation based on the inflated cost price. A depreciation deduction based on that price is accelerated by the taxpayer then selling the plant at its true value, thereby producing a deduction in the form of a balancing adjustment of the difference between the inflated cost price and sale price at true value. By paying the promoter an amount representing the nominal present value of the loan, the taxpayer discharges that liability. In this way, for a small outlay, a very large income tax deduction may be manufactured.
The amendments proposed in this Bill will ensure that in situations where no existing provision applies to limit the cost of an item of plant for depreciation purposes, its cost for those purposes will be restricted to the true value of the plant.
A second type of depreciation scheme exploits a feature of a special provision that deems a disposal of plant to occur when it is transferred on the formation or dissolution of a partnership or nr a change in the interests in a partnership. In these circumstances the law permits the parties to specify a disposal value in the agreement giving rise to the change and, where this is done, that value must be accepted by the Commissioner of Taxation.
Relying upon this provision, a partnership may purchase plant for a significant amount, most of which is provided by way of loan from the scheme promoter. As is the case with the first scheme, the plant is hired out by the partnership (often back to the vendor) for a short period to ensure that the plant technically qualifies for depreciation allowances. The partnership is then reconstituted to admit as a new partner a company controlled by the promoter. The takeover agreement specifies a nominal amount as the value of the plant and this gives rise to a large depreciation deduction - by way of a balancing adjustment - to be shared by the original partners. The new partnership then enters into a series of transactions which results in the plant being sold back to the original owner for the original price and the proceeds of that sale are used to repay the loan to the promoter. Once again, for a very small outlay by the benefitting parties, a very large income tax deduction may be manufactured.
As a counter to this type of scheme the Bill proposes amendments to the provision that enables partners to specify a transfer value of plant in the takeover agreement. The amendments will ensure that, should the parties specify a value that is less than both the true value and the depreciated value of the plant, the lower of these 2 values is to be adopted in calculating the balancing adjustments applicable to the transferors.
The law is also to be amended to deal with a variation of the second type of depreciation scheme. In this varied arrangement, the original partnership would not be reconstituted but would simply sell the plant to the promoter's company for an amount that is well below the purchase price to the partnership. In that event the partnership could found a claim for a manufactured balancing adjustment based on the actual sale pric.
As a counter to this possible variation the Bill provides that, if depreciable plant is sold in a situation in which the parties are not dealing at arm's length at a price that is lower than both its true value and its depreciated value, the vendors will be treated as having sold the plant at the lower of the 2 values.
As mentioned in my Statement of 12 June 1979, the transfer provisions that have enabled partners to manufacture depreciation deductions also appear in the special mining provisions of the income tax law. Accordingly the Bill contains amendments to these provisions along the same lines as I have outlined in respect of the general depreciation provisions.
The amendments are to apply to property acquired or disposed of, or in respect of which an interest is transferred, after 12 June 1979 other than acquisitions, disposals or transfers under contracts or agreements entered into on or before that date.
I also announced on 12 June that losses generated by these depreciation schemes will not be permitted to be carried forward for deduction into a future income year. This is, of course, in accord with the policy of the Government announced on 24 may 1979 that paper losses produced by tax avoidance schemes are not to be allowed to be carried forward as income tax deductions. The Income Tax Assessment Amendment Bill (No. 5) 1979 contains provisions that ban the carry-forward of deductions for artificial losses arising from so-called "Curran" schemes, trading stock schemes, pre-payment schemes and expenditure recoupment schemes. Amendments in this Bill will apply the policy to paper losses generated by depreciation schemes.
Paper losses created by these depreciation schemes in 1977-78 or earlier years will not be allowed as carry forward deductions in 1978-79 or any subsequent income year, while such losses manufactured in the 1978-79 income year will not be deductible against income of 1979-80 or subsequent years.
Penalties for False Rebate Claims
The Bill also contains provisions to give effect to my announcement of 20 July 1979 that the income tax law was to be amended to expose taxpayers who make false claims for rebates to the same additional tax to which taxpayers who omit assessable income or make falea claims for expenditure incurred are exposed. The rebates in question are those which are not related to specific amounts of expenditure.
Under the present law a taxpayer who makes a false claim for a rebate for a spouse or other dependant may be subjected only to prosecution action. Action taken in a number of these cases has resulted in the imposition by the courts of fines and penalties which vary significantly but which are very substantial in some cases. By way of contrast a taxpayer who seeks to evade tax by omitting income, or by claiming a deduction in excess of expenditure incurred, may either be prosecuted or be liable to additional tax imposed by the statute but capable of remission in whole or in part by the commissioner.
The amendments now proposed will extend the additional tax alternative to false claims for rebates in cases where the claims are made after 20 July 1979. The rebates that will be affected by this amendment are those for a spouse, a daughter-housekeeper, a house-keeper, parent or parent-in-law, an invalied relative, as a sole parent, the zone rebate and the rebate for overseas service of members of the defence force or for service with a United Nations armed force.
The Bill proposes amendments to the gift provisions of the income tax law to provide deductions for gifts to funds established by Roman Catholic Archdioceses or Dioceses exclusively to provide religious instruction in government schools in Australia.
I mention that the gift provisions already apply to gifts to the Council for Christian Education in schools representing the Protestant churches and the Council for Jewish Education in schools.
This new concession will apply in respect of gifts made on or after 1 July 1979.
The Government will be seeking passage of this and the associated Bills in the present sittings. I acknowledge that that will be a departure from the recent practice of allowing taxation legislation in respect of tax avoidance schemes to remain before the house for a considerable time to allow interested parties to study the provisions and offer comments on them. This is not practicable on thsr occasion mainly because of the need to enact legislation dealing with income tax payable for the current year. However, so far as the anti-avoidance provisions of the Bill are concerned, I undertake that any representations made in respect of them will be most carefully examined and any deficiency revealed by the representations will be remedied.
The Bill also proposes some minor technical amendments, including one to the Income Tax (Arrangements With The States) Act 1978. This is designed to make it clear that, if a state were to impose an income tax in accordance with that Act, the Commonwealth would have authority to make the necessary paye deductions from the wages or salaries of its own employees.
Details of the various measures in the Bill are contained in the Explanatory Memorandum that will be circulated shortly.
I commend the Bill to the House.