Second Reading Speech
By The Treasurer, The Hon. John Howard, M.P.This Bill contains measures to give legislative effect to three decisions that have been announced by the Government.
One set of measures will deny income tax deductions for paper losses created by tax avoidance schemes initiated in a year of income and, because of insufficiency of income in that year to absorb them, carried forward to later years. Another will ease some limits on deductions for income equalization deposits and the third will change arrangements for the transition from the 40 per cent phase of the investment allowance to the 20 per cent phase.
Carry-forward of Tax Avoidance Losses
I announced this major initiative against tax avoidance on 24 May 1979 in this House. Its implementation will mean that paper losses generated in earlier years by tax avoidance schemes against which the Government has acted, but which were entered into before the operative date of the relevant remedial legislation, will not be allowed as income tax deductions. As I indicated in my original statement, this is necessary to prevent the substantial losses to the revenue in 1979-80 and later years that there would be if claims to carry forward these purely artificial deductions were conceded.
The impact of tax avoidance activity on revenue collections, despite rigorous action by the Government to control the problem, is shown in the estimated revenue loss of some $230m in 1978-79 that is attributable to the activity. Of potentially greater significance in the particular context of this Bill, however, is the fact that claims exceeding $1600m have been made to the Commissioner of Taxation for the deduction of paper losses from tax avoidance schemes carried out in 1977-78 and against which the Government has acted. The greater part of this amount - some $1000m - would, if the claims were to succeed and in the absence of the measures proposed in this Bill, be carried forward for deduction against income of the 1978-79 income year and later years.
The size of the threatened loss is noteworthy in itself, but there is also cause for concern in the fact that a relatively few taxpayers have, to such an extent, sought to manufacture tax deductions of a magnitude that would, if the schemes were effective, shield them from tax liability for many years ahead.
As I made plain in my announcement on 24 May, the Government could not accept this position, having regard to the interests of other taxpayers and of the community generally.
I do not think that I need to speak at length about the range of carry-forward losses that the present Bill deals with. An explanatory memorandum contains details of the proposals and it seems enough in this introductory speech to say that the Bill will debar the carry-forward from one year to another of paper losses generated in, to use convenient shorthand terms, "Curran" type schemes, trading stock schemes, pre-payment schemes and expenditure recoupment schemes.
The amendments will mean that losses generated in such schemes in the 1977-78 or prior income years, and before the applicable operative date of relevant remedial legislation, will not be deductible as carry-forward losses in 1978-79 or any later income year. As the applicable operative date of some of the remedial measures falls in 1978-79, the Bill will also debar carry-forward loss deductions for paper losses created in 1978-79 and before that date.
I add that the Bill also contains necessary safeguarding measures to ensure that the denial of carry-forward deductions is not circumvented by arrangements designed to give a formally different character to paper losses that have been generated by the particular tax avoidance scheme.a
On 14 June 1979 I announced the Government's decision to change certain terms and conditions applying to income equalization deposits arrangements for primary producers.
Income equalization deposits are a means of helping primary producers to set aside funds in good years so as to have them available in a year or years when income is significantly lower. For this purpose, income tax deductions are, with certain limitations, available for amounts deposited. Corresponding amounts are included in assessable income in an income year in which deposits are withdrawn.
The present limitations on deductions allowable for deposits are to be eased in two respects. First, the limit on deductions allowable in any one year will be increased from 40 to 60 per cent of the producer's gross receipts from primary production.
Secondly, the present limit of $100,000 on total deductions in respect of holdings of income equalization deposits and drought bonds at any one time will be increased to $250,000.
Both of these changes are to apply in respect of the 1978-79 income year and subsequent years.
The Bill also contains provisions to implement the Government's decision that I announced jointly with the Minister for Industrial Relations on 3 June last to amend arrangements for the transition from the 40 per cent to the 20 per cent phase of the investment allowance.
As the law stands, the 40 per cent rate applies where plant ordered, or commenced to be constructed by the taxpayer, by 30 June 1978 was completed and in use for income producing purposes by 30 June 1979. The lower rate applies for plant not brought into use by 30 June 1979. This means that a delay in installation of even a few days could result in the allowance on the entire cost of new plant being halved.
In these circumstances, employers stood to be seriously disadvantaged by unreasonable industrial demands during the latter stages of completion of new plant projects as 30 June 1979 approached. The decision announced on 3 June was designed to ensure that pressure of this kind did not have that result.
The amendment proposes that, where eligible plant was ordered by 30 June 1978 or its construction by the taxpayer commenced by that date, the 40 per cent rate is to apply to the extent to which expenditure incurred on the plant by the date of the announcement - 3 June 1979 - is attributable to the part of the plant installed in its operating position by that date.
As is the case under the existing law, the deduction will be allowable in the year in which the plant is first used or installed ready for use and held in reserve.
Mr Speaker, I mention at this point that the Government will, in the committee stages of the related Income Tax Assessment Amendment Bill (No. 4) 1979, be proposing certain technical amendments of that Bill. Because of the inter-relationship between the two Bills, and as the Government will be proposing that they be dealt with in cognate debate, it is appropriate that I should now foreshadow the amendments to the (No. 4) Bill.
When I brought that Bill before the House I invited comment from interested outside groups. Comments received have been valuable and have led the Government to propose several amendments that will clarify certain provisions of the Bill.
Foreshadowed amendments are now available to Honourable Members. They include some others of a technical kind that on review have been found necessary or desirable. One of these is consequential on the general prohibition against the carry-forward of paper losses that is a subject of the present Bill.
The explanatory memorandum that I referred to earlier gives detailed explanations of all the provisions of the Bill and there is also available a supplementary explanatory memorandum dealing with te amendments to be proposed to the (No. 4) Bill.
I commend the Bill to the House.