House of Representatives

Second Reading Speech

by the Treasurer, The Hon. John Howard, M.P.

The Bill that I now bring before the House, together with an associated tax rates Bill, gives legislative form to previously announced changes in the basis of taxing income of trusts and of dependent children.

Also included in the Bill are provisions dealing with the taxation value of housing provided to employees by their employers. Previously foreshadowed measures to counter schemes of tax avoidance that seek to exploit the deduction for bad debts are another part of the Bill. The Bill will also confer tax deductions for gifts towards relief efforts in Kampuchea and East Timor.

Let me deal first with the last of these matters. The Government believes that the level of human suffering in Kampuchea and East Timor is such that we should add to Australia's support by allowing tax deductions for gifts to the appropriate appeals.

Accordingly, the special concession of a deduction for gifts of $2 or more will apply to gifts made in the current financial year to the International Disaster Emergencies Committee Kampuchean Relief Appeal and to the Australian Red Cross East Timor Appeal. The response to the appeals so far clearly indicates that the granting of tax deductions have been welcomed throughout Australia.

Honourable Members will recall that I announced broad proposals on the taxation of income of trusts and dependent children at some length on 26 July last. After a careful examination of the many responses to this announcement, from individuals and organizations, the Government decided on a number of modifications to eliminate potential anomalies and unintended consequences. Details of these were given in my statement to the House last week. Against that background, I think that I can in this speech confine myself to the main features of the proposed arrangements as reviewed and modified.

Broadly speaking, the new system applicable to income of dependent children will apply to the taxable income, whether derived directly or through trusts, of children under the age of 18 years at the end of the year of income. But there are to be several important exceptions. Thus the new system will not in any way affect children who are married at the end of the year of income or are in full time employment then. There are also to be exclusions for double orphans and handicapped children.

These exclusions will, quite properly, keep the income of a large number of children entirely outside the new system. Income not so excluded will, at base, bear tax under the proposed new system. Particular categories of income, whether derived directly or through a trust, will, however, be excluded and will attract tax only according to the tax rules applicable to individuals generally.

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Thus, income from deceased estates, or from property left to the child by a deceased person will be outside the new system.

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So too will income from the investment of other sums coming directly to a child on a person's death, such as the proceeds of a life insurance policy or a lump sum from a superannuation fund.

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Income from property transferred to a child by another person to whom the property was left by a deceased person, if transferred within 3 years after the death of that person, will be excluded if within limits set by relevant rules of intestacy.

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A child in full-time employment will, of course, be outside the new system altogether but, as regards a child not categorically excluded in this way, employment income from part-time work and income from a business conducted by the child alone or with another minor will both be outside the new system.

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Income from the investment of compensation paid for damages, for example, for loss of parental support or for personal injury is not to be subject to the new system.

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Neither is income from funds raised by public appeal for the relief of persons in necessitous circumstances.

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Income from court-ordered settlements arising as a result of divorce or judicial separation, income from the investment of a child's lottery winnings and income from the investment of savings out of any of the excluded categories of income make up the balance of the classes of income excluded from the new system.

Experience regrettably having shown that there will always be those who will seek to take unintended advantage of provisions designed, as these exceptions are, to provide relief in particular circumstances, the Bill contains a number of safeguards against exploitation of the exceptions to avoid tax intended to be charged. These safeguarding measures aim to ensure, for example, that profits are not diverted to a child's business by relatives or other persons not at arm's length, and that income from a child's investment is not inflated by similar diversions.

Income to which the new system applies - termed in the legislation "eligible" income - will for 1979-80 be taxed at a minimum marginal rate of tax of 47.07 per cent in the hands of the person who is taxable in respect of the income.

However, if the eligible income does not exceed $1,040 the special rate will not apply. That means that if the total taxable income does not exceed $3,893 and the eligible income does not exceed $1,040 no tax will be payable. If the eligible income exceeds $1,040, "shading-in" arrangements will apply so that the special rate will not be fully applicable until the eligible income exceeds $3,625. Up to that point the average rate of tax will, of course, be lower than 47.07 per cent.

As I have explained previously, if a person has other income as well as eligible income in excess of $1,040, the other income will be taxed in the normal way. This means that the zero rate will apply to the first $3,893 of other income, and the standard rate of 33.07 per cent to other income between $3,894 and $16,608.

Trust income to which a child under 18 years of age is, or is deemed to be, presently entitled is already taxable in the trustee's hands and will be taxed under the new system on the same basis as would apply if the child derived the income directly. This means that, as to trust income to which the new system applies, the trustee will be taxed at the minimum marginal rate of 47.07 per cent, subject to the $1,040 threshold and shading-in arrangements. As to other trust income, the trustee will be taxed at ordinary personal tax rates including the zero rate on income up to $3,893.

As I indicated in my statement on 14 November, the Bill will authorise relief, by way of a rebate of part or all of any increase in tax payable as a result of the new system, in respect of income arising from arrangements entered into on or before 26 July 1979. An applicant for relief will need to establish to the satisfaction of the Commissioner of Taxation that the circumstances are such that it would be unreasonable that the whole of the extra tax should be payable.

The basis for this relief in the ordinary case where one or both parents have a taxable income is spelt out in the legislation. It is to the effect that a child (or the trustee for a child) will be eligible for a rebate to the extent that the tax otherwise payable on the relevant eligible income is greater than the tax that would have been payable on that income if it had been derived by the parent, or the parent with the higher taxable income. If the child has minor brothers or sisters also in receipt of eligible income, the eligible incomes of all of them will be added to that of the relevant parent in ascertaining how much tax the income would have borne in the parent's hands.

In determining the amount of any rebate under this provision, the fact that a parent's income has been reduced by artificial tax avoidance arrangements may be taken into account by the Commissioner.

The Government believes that this rebate, together with the specific exceptions and exclusions provided in the Bill, should ensure that application of the new system will operate appropriately. However, to make doubly sure, the Commissioner will be given a discretionary power to allow a rebate of part or all of the extra tax payable as a result of the application of the new system if cases should arise where it is shown to his satisfaction that exaction of the full amount would entail serious hardship.

In both of these discretionary areas, the Commissioner's decision will be open to the usual rights of objection and appeal.

As previously foreshadowed, the Bill will, again with some exceptions, alter the arrangements for taxing accumulating trust income, that is to say, income of a trust to which no beneficiary has, or is deemed to have, a present entitlement. At present, this income is taxed in the trustee's hands, either at the maximum personal rate of tax or at ordinary personal tax rates but not including, except in relation to the first 3 years of a deceased estate, the zero rate of tax on the first $3,893 of income.

The first change proposed is that a beneficiary who has an indefeasible vested interest in accumulating trust income will be treated as being presently entitled to the income.

Other accumulating trust income will be taxed at the maximum personal tax rate, 61.07 per cent for 1979-80. However, subject to rules designed to guard against their exploitation for purposes of tax avoidance, there will be significant exceptions.

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First, the accumulating income of deceased estates will continue to be taxed as at present. That is, the income will bear ordinary personal rates of tax, including the zero rate for the first 3 years and will attract the benefit of a minimum taxable income of $417 and associated shading-in arrangements thereafter.

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Bankrupt Estates, and Trusts of moneys received as compensation for a particular event, trusts of moneys payable on the death of a person and funds raised by public appeal for persons in necessitous circumstances, will continue to have accumulating income taxed at ordinary personal rates of tax, without the zero rate but with a $417 minimum taxable income and associated shading-in arrangements.

As the legislation will not be considered in the Parliament until the autumn sittings, the Government has decided that it would not now be appropriate to impose any obligation on people concerned to pay provisional tax for 1979-80 on the basis of the proposed new arrangements. This decision means that the new arrangements could be seen as having a "double" effect when assessments on income of the year ending 30 June 1980 are made after the end of the year. These will, of course, show both tax for 1979-80 and provisional tax for 1980-81. Accordingly, taxpayers who wish to avoid this apparent "doubling-up" effect may do so by applying to have 1979-80 provisional tax varied under the existing self-assessment procedure. The Bill also provides an option, for those not otherwise liable to pay provisional tax for 1979-80, to pay that tax on the basis of the new arrangements.

I should emphasise at this point that, whilst the Government would be happy to receive representations on technical aspects of the legislation before it is considered in the autumn, we have already given very careful thought to the substance of the trust and related measures. The changes that I announced last week, and which are incorporated in this legislation, represent the Government's considered response to the representations it has received.

I come now to the subject of employees' housing.

Honourable Members may recall that on 13 June 1979, following completion by the Government of its review of the provisions dealing with taxation of the value of housing accommodation provided for employees, I foreshadowed certain changes to the provisions.

As I indicated on that occasion, the Government believes that a general provision which brings to account for taxation the value of employee benefits is a necessary part of an effective system of personal taxation. Such a provision must, of course, operate in a practical manner having regard to the many and varied circumstances which it must cover.

To assist in that direction, amendments proposed by this Bill will make it clear that the Commissioner of Taxation is to take into account all relevant matters in assessing for income tax purposes the value of any housing accommodation provided to an employee. In particular, the amendments proposed will ensure that, to the extent appropriate in the circumstances, specified matters will be brought into consideration as factors tending to reduce the amount of the taxable benefit.

Remoteness or isolation of the area in which the accommodation is located is one such factor. Any lack of choice by employees in the matter of accommodation and whether occupancy is subject to any onerous conditions imposed on the employee concerned are others. Whether the quality or size of the accommodation provided exceeds the standard of accommodation that the employee would ordinarily seek is another. All these stated factors will ensure that, as far as possible, full account is taken of those circumstances which might ordinarily reduce the value to an employee of housing benefits granted by an employer.

To the same effect will be a specific requirement for the Commissioner to take into account whether it is customary in the particular industry for employers to provide free housing for employees or to provide housing at a low rent. This matter is to form part of the valuation criteria because the Government is conscious of longstanding arrangements between employers and employees in some industries under which accommodation is customarily provided either without charge or for a charge less than the fair rental value of the accommodation. These arrangements are common in respect of industry and employment outside the capital cities and in relatively remote or isolated areas of Australia.

The valuation criteria to be expressed in the law are to apply in respect of 1977-78 and subsequent income years. The Bill will authorise amendment of assessments for 1977-78 and 1978-79 made before the Bill comes into operation where the new measures would result in a reduction of the value of housing benefits included in the assessments. Such amendments may be made whether or not the employee has exercised the rights of objection and appeal that the law provides. The back-dating to 1977-78 will not, of course, retrospectively create any liability for tax on housing benefits.

Finally, the Bill contains amendments foreshadowed in my statement of 12 June 1979 to counter tax avoidance schemes that exploit the income tax deduction for bad debts. This is done through arrangements under which the loss claimed to be suffered by way of a bad debt is effectively recouped in a non-taxable form.

Amendments to provide a counter to tax avoidance schemes of the recoupment type that exploit deductions ordinarily available for expenditure incurred in borrowing money, in discharging a mortgage, in the acquisition of trading stock or by way of interest or rent were foreshadowed in my statements of 24 September 1978 and 1 March 1979. They were approved by the House recently when it considered the Income Tax Assessment Amendment Bill (No. 4) 1979.

The amendments now proposed will extend the operation of those provisions so that they apply also to bad debt schemes.

Reflecting my statement of 12 June, the amendments will mean that a deduction will not be allowable for a bad debt where the debt is incurred in respect of a loan made after 24 September 1978 as part of a tax avoidance arrangement entered into after that date. For the amendments to apply it will be necessary that the arrangement involves the receipt by the taxpayer or an associate of a compensatory benefit the value of which, when added to the tax benefit sought in respect of the bad debt, would effectively recoup the taxpayer for the loss incurred in respect of the loan so that no real loss is suffered.

Mr Speaker, you will note that the amendments proposed by this Bill are to apply to loans made after 24 September 1978. This is the date on which the Government's intention to act against recoupment arrangements was originally announced and is in accord with the warning I gave at that time that, if further recoupment schemes were to emerge, the Government would, with effect from that day, act against them as outlined in that announcement.

My statement of 1 March 1979 with respect to schemes of this type entered into to exploit the deductions for borrowing expenses was an earnest of the Government's intention in this regard. Despite that, the bad debt schemes emerged and it has again been necessary to act.

I trust that by now the Government's determination to put an end to tax avoidance schemes in which taxpayers seek deductions for losses or outgoings which, in a practical sense, they do not bear is clear both to those promoting the schemes and to taxpayers contemplating paying fees to promoters for access to deductions under such schemes. However, should this still not be the case, I repeat again that the Government will not hesitate to amend the Income Tax Law to counter any other schemes exhibiting similar features, and with effect from 24 September 1978.

I also announced on 12 June that losses generated by bad debt schemes would not be permitted to be carried forward for deduction into a future income year. This is in accord with the policy of the Government announced on 24 May 1979 that paper losses produced by tax avoidance schemes, including recoupment schemes, are not to be allowed to be carried forward as income tax deductions. The amendments proposed will mean that losses created by bad debt schemes in 1977-78 or earlier years will not be allowed as carry-forward deductions in 1978-79 or in subsequent income years, while such losses manufactured in the 1978-79 income year will not be deductible against income of 1979-80 or subsequent years.

As is usual, the technical features of the Bill are dealt with in an explanatory memorandum. Copies of the memorandum are not yet available, but will be provided to Honourable Members within the next few days.

I commend the Bill to the House.