Second Reading Speech
Mr Howard (Bennelong - Treasurer)(3.17)-I move:That the Bill be now read a second time.
The major purpose of this and associated Bills I shall shortly introduce is to give effect to the Government's income tax proposals announced in my Budget Speech. Before proceeding to the matters dealt with in this Bill I mention one of the Budget proposals to which effect will be given by the Income Tax (Rates) Amendment Bill which I will be introducing shortly. This is the proposal to increase, for this year only, the standard rate of personal income tax by 1 1/2 percentage points from 32 per cent to 33 1/2 per cent, with corresponding increases to 47 1/2 per cent and 61 1/2 per cent at higher income levels. I mention it now because of its importance and because it has technical and other implications for items in this Bill. As I indicated in my Budget Speech, it is necessary to raise substantial additional revenue for 1978-79 and this is one of the measures chosen to do this in the most equitable and economically responsible manner. \
Lump sum retirement payments for unused leave
One of the Budget proposals dealt with in the Bill is the changed basis of assessing lump sums received on retirement for unused annual and long service leave. At present, only 5 per cent of such a lump sum qualifying subject to tax and this can act as something of an encouragement not to take the leave during a taxpayer's working life. The Government considers that the tax system should not have this effect. Accordingly, the Bill provides that the full amount of any lump sum payment for annual leave that is made on retirement after 15 August 1978 - Budget day - is to be taxed. The payments to be taxed in this way will include any bonus or loading relating to the unused leave.
In the Budget Speech I said:
After tonight, the whole of lump sum payments for unused annual leave will be taxed in full as ordinary income.
In certain cases the accrued annual arrangements pay if combined with ordinary income would have pushed the taxpayer into a different tax bracket. To prevent this occurring the Government has decided that unused annual leave payments should be taxed at no more than the standard rate, namely, 33.5 per cent in 1978-79. Whilst the Government's decision on annual leave will have altered the expectations of some who had accumulated annual leave entitlements at Budget time, it is incorrect to claim, as some have, that the Budget decision is a retrospective change to the law.
Such a change is one which backdates a change to the law and retrospectively alters a previously enjoyed right. The right in question is that of an employee to accumulate annual leave entitlements and to take those entitlements in a lump sum at the rate of tax applicable when the lump sum is paid. This right is maintained. In no case will the decision affect a lump sum payment made before 15 August 1978 although as I have acknowledged it will result in persons who had accumulated annual leave prior to the Budget paying a higher rate of tax when the lump sum is received than they might have anticipated at the time the accumulation took place.
The law regarding the taxation of lump sum payments due to long service leave has been altered. The Bill treats separately entitlements earned before the Budget and since the Budget. These changes apply in cases where payment is made and retirement, or termination, takes effect after 15 August 1978. In the case of entitlements earned up to Budget day, the situation remains the same. Only 5 per cent of the part of the lump sum attributable to the period up to 15 August 1978 is counted as assessable income. On the other hand, the part of a lump sum that is attributable to the period between 15 August 1978 and the date of retirement is to be fully assessable, but the rate is not to exceed the standard rate, namely, 33.5 per cent for 1978-79. The limitation on the rate for both annual and long service r leave lump sums will overcome any bunching effect that might otherwise have arisen from the inclusion of these amounts in the taxable income of a single year.
The changes will not apply to payments made to a dependant or legal personal representative of a deceased employee. These are to remain free of tax. Pay-as-you-earn deduction at the standard rate of tax will be made from assessable lump sum payments made on or after 1 November 1978.
Averaging for primary producers
In continuation of the Government's measures to achieve a fairer tax system, the Bill will adjust the averaging system for primary producers so as to confine its benefits more directly to income from primary production. Under the new system, average income will continue to be calculated on the basis of the taxable incomes of the relevant years. It will not be calculated only on the basis of primary production income. Income derived from primary production will continue to qualify for averaging benefits no matter how much other income is derived. Only a limited amount of non-primary production income may, however, qualify for the benefits for 1978-79 and later years. Non-primary production income up to $5,000 net will continue to qualify, but this amount is to be shaded out by one dollar for each dollar over $5,000 so that non-primary production income of $10,000 or more will not be subject to any averaging benefit.
To achieve this result the Bill adopts the technique of providing a tax rebate for a primary producer whose average income is less than his or her taxable income. Where non-primary production income is $5,000 or less, allowance of the rebate will attain the same result as the present averaging system. In other cases, non-primary production income up to $5,000 will be treated as primary production income and the new averaging benefit will be the part of the amount of the benefit calculated under the present system as bears to that amount the same proportion as primary production income (including the up-to-$5,000 allowance) included in taxable income bears to the whole taxable income.
These changes will reduce the use of tax avoidance schemes based on primary producer status, but retain for genuine primary producers the averaging benefit needed by them to compensate for fluctuating primary production income.
Self-assessment of provisional tax
Some changes to the system of self-assessment of provisional tax are to be effected by this Bill. They are designed to overcome losses of revenue due to the practice of some taxpayers of knowingly under-estimating current year income so as to reduce provisional tax payments. Existing self-assessment provisions may be exploited in this way in the knowledge that the additional tax for which the law makes provision in cases of under-estimation will not be payable if the estimate is not less than 80 per cent of the taxable income of either the current or the previous year.
This will be changed for 1978-79 and later years so that additional tax will be payable where the estimated income in respect of which provisional tax is payable - that is, income other than salary or wages - turns out to be more than 10 per cent below the actual income, other than salary or wages, for the year. The Commissioner of Taxation will, as at present, be able to remit the additional tax where an under-estimate is due to circumstances which were not apparent when it was made.
Rebate on concessional expenditures exceeding $1,590
At present, the rate of rebate for certain concessional expenditure in excess of $1,590 on items such as medical and education expenses, life assurance and superannuation, municipal rates, etc., is equal to the standard rate of tax of 32 per cent. As a consequence of the temporary increase in the standard rate for 1978-79 this rebate rate is to be increased to 33 1/2 per cent for that year.
Provisions in the Bill will terminate the housing loan interest deduction with effect from 1 November 1978. Accordingly, the deduction in respect of housing loan interest for the 1978-79 income year will be based on interest accrued up to 31 October 1978 that is paid by 30 June 1979. Employers are being instructed not to give effect to housing loan interest claims in pay-as-you-earn deductions after 1 November.
Commonwealth post-graduate awards
The Bill provides for the withdrawal of the exemption of income derived after 31 October 1978 under the Commonwealth post-graduate awards scheme. An associated amendment will provide for living allowances paid under this scheme to be included in the PAYE system as from 1 November 1978.
Rebates for dependants residing overseas
The Bill also provides for the withdrawal-as from 1 November 1978-of rebates for the maintenance of dependants resident overseas. This measure, which is in line with the views expressed in the report of the review of post-arrival programs and services to migrants, was made necessary by the mounting abuse of the existing provisions with substantial costs to revenue. The amendment will not affect rebates for dependants temporarily overseas who continue to be residents of Australia for taxation purposes. Nor will it affect rebates for wives and children awaiting migration to Australia. As the rebate is being discontinued as from 1 November 1978, a partial rebate, equal to one-third of the rebate otherwise allowable on a full-year basis, will be allowed for qualifying dependants who were non-residents in the period up to 31 October 1978.
Gifts to World Wildlife Fund Australia
The World Wildlife Fund Australia is to be brought within the gift provisions of the income tax law so that donations of $2 or more to the fund will be tax deductible.
As part of the major changes to health care arrangements announced in my Budget Speech the health insurance levy is to be terminated with effect from 1 November 1978. Measures to give effect to this proposal are included in this Bill and y in the associated Health Insurance Levy Bill 1978. People who are fully covered by private health insurance or other arrangements during the period 1 July 1978 to 31 October 1978 will be exempt from the levy for 1978-79. Those who are not so exempt will pay levy on their taxable incomes for the whole of 1978-79, but at a rate equal to one-third of the full year rate of 2.5 per cent and subject to levy ceilings equal to one-third of those that have applied for a full year.
Calculations of 1978-79 provisional tax
Provision is made in the Bill for the amount of the temporary increase of 1 1/2 per cent in the standard rate for 1978-79 to be taken into account in calculating provisional tax for that period. The health insurance levy component of provisional tax is to be reduced by two-thirds of the amount payable for 1977-78 so as to reflect the abolition of the levy as from 1 November 1978.
A feature of this Government's tax policy has been a vigorous assault on tax avoidance practices. As I said in my Budget Speech 'the time is long since past when governments or the community should tolerate the blatant, artificial and contrived means whereby certain sections of the community seek to pay little or no tax to the detriment of the general body of taxpayers and the equity of the tax system'. The pressure against tax avoidance will be resolutely maintained this financial year. As new forms of tax avoidance are identified, announcements indicating that appropriate legislation is to be introduced will be made and that legislation will be effective from the date of such announcements.
It is impossible to quantify precisely the cost to revenue of tax avoidance schemes and practices. However, there can be little doubt that the actions of this Government in recent months have prevented a loss to revenue of hundreds of millions of dollars. During the past 12 months alone, the Government has introduced or foreshadowed legislation dealing with many tax h avoidance practices including the following: The so-called Curran scheme, current year losses, abuse of averaging provisions, dividend stripping, trust stripping, pre-paid rent and interest, abuse of gift provisions, share trading loss schemes, sales tax avoidance practices and schemes involving the abuse of deductions for mortgage payments, trading stock and interest and rent.
The Government believes there is widespread community support for action to curb tax avoidance. Tax avoidance on the scale practised in recent years has been an affront not only to the average wage earner who has little capacity to participate in such schemes but also to numerous high income earners who, having both the capacity and the incentive to participate in such schemes, have consciously chosen not to do so. The warning to those who promote tax avoidance schemes should be clear enough. This Government is determined to clamp down on those schemes as vigorously as possible.
Details of the various measures in the Bill are contained in the explanatory memorandum that is now being circulated. I commend the Bill to the House.
Debate (on motion by Mr Willis) adjourned.