Second Reading Speech
by the Treasurer, the Hon. P.J. Keating, M.P.This Bill will amend the taxation law in a number of ways.
It will abolish the rule, known as the 30/20 rule, that requires life assurance companies and certain superannuation funds to hold specified proportions of their assets in public and commonwealth securities.
It will amend the law to extend existing anti-tax avoidance provisions to counter further variants of avoidance schemes of the expenditure recoupment type.
It also contains the measures necessary for the phased introduction of personal income tax on Christmas Island and the introduction there of full company tax and medicare levy in accordance with our decision to fully integrate the island with mainland Australia.
The secrecy provisions of the Income Tax Law are to be amended to enable the Commissioner of Taxation to supply further information for statistical purposes to the Australian statistician.
The Bill also proposes amendments of the dependant rebate provisions of the law to ensure that the Social Security Family Income Supplement will not be treated as separate net income of a dependant.
Amendments of the pay-as-you-earn provisions of the law will give employers rights of objection and appeal in respect of certain penalties imposed for non-compliance with those provisions.
Yet further amendments will provide for interest to be paid by the Commissioner of Taxation on amounts refunded as a result of a successful objection or appeal in respect of penalties imposed for non-compliance with the pay-as-you-earn and prescribed payments provisions.
And finally some formal amendments of the Income Tax Assessment Act and the correction of a drafting error are to be effected by the Bill.
Mr Speaker, I will now briefly outline each of the more significant measures contained in the Bill.
This Bill will give effect to the Government's decision, announced on 10 September 1984, to abolish the 30/20 rule - a further step in deregulating Australia's financial system.
Compliance with the 30/20 rule is a condition placed on life assurance companies and certain superannuation funds before they qualify for special tax concessions, including in some cases complete freedom from tax.
The rule requires such companies and funds to hold at least 30 per cent of their assets in public securities, including at least 20 per cent in commonwealth securities.
In relation to life assurance companies, abolition of the 30/20 rule will mean -
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- That tax exemption in respect of investment income attributable to superannuation and other eligible policies will no longer be conditional upon observance of the rule;
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- That there will be no restriction on the rebate of tax allowable in respect of assessable dividends; and
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- That the special deduction allowable in respect of calculated liabilities will be a flat one per cent irrespective of the level of investment in public or commonwealth securities.
Two transitional rules will apply for the year of income of a life assurance company in which 11 September 1984 occurred.
Under one of those rules the calculated liabilities deduction for the year of income in which 11 September 1984 occurred will be a composite of a partial deduction under the formula in the law being repealed by this Bill and a partial deduction at the flat rate of one per cent. The granting of a composite deduction for calculated liabilities will mean that a life assurance company which at 10 September 1984 - the proposed date of abolition of the 30/20 rule - had public and commonwealth securities in excess of the amount necessary to satisfy the 30/20 rule will not lose the benefit afforded by that excess.
The other transitional rule concerns the rebate of tax on dividends that is to be allowed in the year of income in which 11 September 1984 occurred.
Mr Speaker, at this point I mention that the Government received a submission from The Life Insurance Federation of Australia on the question of appropriate transitional rules. While it has not been possible to adopt all the suggestions put forward, the rules contained in this Bill have been developed with the practical difficulties mentioned by L.I.F.A. in mind.
In relation to superannuation funds, abolition of the 30/20 rule will mean that funds presently subject to the rule will no longer have to comply with it to qualify for exemption from tax on investment income.
The other concessions presently available to superannuation funds and life assurance companies observing the 30/20 rule will, subject to their meeting other existing conditions not related to that rule, be available for the whole of the income year in which 11 September 1984 occurred, notwithstanding that the 30/20 rule may not have been complied with during the first part of the year.
The abolition of the 30/20 rule is not expected to have any discernible effect on revenue.
Expenditure Recoupment Schemes
By this Bill the specific anti-tax avoidance provisions of the Income Tax Law applicable to what are termed "expenditure recoupment" schemes will be further extended yet again.
Briefly, those provisions are designed to deny tax deductions or rebates for certain expenditure incurred after 24 September 1978 under a tax avoidance scheme entered into after that date. Under these particular schemes the taxpayer or an associate of the taxpayer obtains a benefit, the value of which, when combined with the sought for tax saving, effectively recoups the claimed expenditure. Hence the description "expenditure recoupment" scheme.
The existing provisions apply to no less than 19 variants of the basic expenditure recoupment scheme inserted on four separate occasions by amendments of the law. Measures proposed by this Bill will extend the provisions to two further variants, details of which recently became known.
The latest variants of the basic scheme seek to exploit the special income tax deduction allowable for capital expenditure incurred in respect of a unit of industrial property, and the deduction allowable for losses and outgoings incurred in gaining or producing assessable income or in carrying on a business for the purpose of producing such income.
Consistent with the statement by the former treasurer when legislative action against expenditure recoupment schemes was first announced on 24 September 1978, the amendments proposed by this Bill will apply from that date.
Specifically, the amendments will apply to expenditure incurred after 24 September 1978 under schemes entered into after that date and before 28 May 1981. That latter date was the date of effect of the general anti-tax avoidance provisions of the income tax law - Part IVA.
In conformity with the existing law, the amendments will also ensure that there will be no carry-forward to the 1978-79 and subsequent income years of prior year losses arising under any such schemes entered into on or before 24 September 1978.
Mr Speaker, it is estimated that $25M in revenue is at risk in relation to schemes of this kind entered into after 24 September 1978 and before 28 May 1981.
In proceeding with these amendments, the Government is conscious of the decision by the Federal Court late last year in the case of the Federal Commissioner of Taxation V Lau, which concerned the application of the existing expenditure recoupment provisions of the income tax law.
On the facts of that particular case, the Federal Court confirmed the Supreme Court finding that the expenditure recoupment provisions of the law did not apply to deny the deductions sought by the taxpayer.
The implications of that decision are presently being considered by the Commissioner of Taxation. The Government will, of course, consider any advice he may tender to us in relation to the implications of that decision on the expenditure recoupment provisions.
The Bill will give effect to the decision, announced by the Minister for Territories and the acting Treasurer on 10 April 1985, to phase in personal income tax on Christmas Island from the commencement of the 1985-86 year of income and to also introduce full company tax and the Medicare Levy from that time.
Extension to Christmas Island of taxation and Medicare Levy obligations is an important element in the package of measures necessary for the integration of the island with mainland Australia.
The amendments will remove existing income tax exemptions for income derived by Christmas Island residents from sources in Christmas Island, Norfolk Island, Cocos (Keeling) Islands and other ex-Australian sources. That income will be equated with income from mainland Australia, in relation to which the existing income tax exemptions do not apply.
The amendments will also include Christmas Island in income tax zone A with effect from 1 July 1985, and individuals resident there will be eligible for the special zone rebate from that date.
Christmas Island resident individuals will, for the 1985-86 year of income, be liable for 25 per cent of the full mainland tax applicable to the previously exempt income. For 1986-87 and 1987-88, the phasing will be on the basis of 50 per cent and 75 per cent respectively of mainland tax applicable to such income with full personal tax first applying in the 1988-89 income year.
As indicated in the announcement of 10 April 1985, these phasing arrangements will operate by first determining the amount of tax payable on a Christmas Island resident's total taxable income, after allowance of the special zone rebate and other concessional rebates to which the taxpayer is entitled.
The tax liability so determined, to the extent it relates to relevant income presently exempt from tax, will then be reduced - by the allowance of a special rebate proposed in this Bill - to the appropriate percentage for the particular phasing year.
The benefits of phasing will be maximised by the presently exempt income being treated as the final component of taxable income attracting tax at higher marginal rates.
Payments made to Christmas Island residents on and after 1 July 1985 in respect of unused annual leave will be taxed on the same basis as such payments are taxed on the mainland.
Other payments received by Christmas Island residents on or after 1 July 1985 on retirement from or on termination of employment will be subject, broadly, to the same rules that presently apply on the mainland in relation to payments of that type. However, relevant payments that relate to service prior to 1 July 1985 will remain exempt from tax.
The amendments will extend full company tax and the full medicare levy to the island from the commencement of the 1985-86 year.
The integration of Christmas Island with mainland Australia necessarily involves it being treated as part of the mainland for income tax purposes. This has consequential effects also for residents of Norfolk Island and Cocos (Keeling) Islands because the relevant exempting provisions of the existing law apply as though those territories and Christmas Island were the one territory.
As a consequence of this, and subject to the phasing arrangements mentioned earlier, residents of Norfolk Island and Cocos (Keeling) Islands will in future be liable to Australian Tax on income derived from sources in Christmas Island, in the same way as they are now liable to tax on income from mainland Australia. The amendments will not, however, affect the exemptions presently available to genuine residents of Norfolk Island and Cocos (Keeling) Islands in respect of income from sources in either of those territories or from other sources outside mainland Australia.
Revenue from these measures is estimated to rise from $1M in 1985-86 to $6M in 1988-89, but will be offset by the cost of other aspects of the Christmas Island integration package.
Disclosure of Additional Taxation Information to The Australian Statistician
Under the secrecy provisions of the income tax law, information as to the name, address and industry classification of an employer, as well as the number of male and female employees of an employer, can be provided to the Australian Statistician for the purposes of the census and statistics Act.
Mr Speaker, the Government has decided that some further taxation information should be made available to the statistician for the purposes of that Act.
To that end, the Bill will amend the secrecy provisions so that some of the information presently provided in respect of employers can be made available in respect of business taxpayers generally - that is, information as to the name, address and industry classification of a person carrying on business.
The amendment will also enable certain other business taxpayer information to be provided; in particular information that the statistician requires for or in connection with the conduct of periodic industry surveys and with the compilation of the Australian National Accounts.
This measure is of an administrative nature and will have no direct effect on revenue. The benefits to be derived by way of improvement to statistical information are expected to be at least commensurate with administrative costs to the Australian Taxation Office in providing, and the Australian Bureau of Statistics in receiving, this information.
The Bill will also make two amendments of the dependant rebate provisions of the income tax law.
The first of these changes will benefit families in receipt of social security family income supplement.
This supplement is an income tested payment made to low income families with children and is exempt from income tax in the hands of the recipient.
Prior to May 1984, the supplement was paid to the primary breadwinner, but since then it has been paid to the recipient of family allowances, generally the mother.
To ensure that receipt of family income supplement by a person will not affect the concessional rebate entitlement of a taxpayer who is contributing to the maintenance of that person, the Bill proposes that the supplement will not be taken into account in determining the separate net income of a dependant.
This amendment will be effective from 1 May 1984, the date from which family income supplement became payable to the recipient of family allowances.
I note that this change will not affect revenue collections in the current year. It will result in the Government forgoing estimated revenue of $6.5M in 1985-86 and $7M in a full year which would otherwise have been collected in the form of an unintended clawback through the income tax system arising from the change in the method of paying family income supplement.
The other amendment to be made in this area will correct a drafting error in the provisions enacted last year to extend eligibility for the dependant spouse rebate to de facto couples.
One of the amendments made at that time was designed to deny a taxpayer entitlement to a daughter-housekeeper rebate for any period of an income year that he or she contributed to the maintenance of a de facto spouse.
However, the provision was drafted in such a way that it effectively precludes a partial daughter-housekeeper rebate in any year of income where a taxpayer contributes to the maintenance of a spouse - legal or de facto - during any part of that year.
The measure to rectify this situation will apply with effect from 1 July 1984 - that being the operative date of the provision it amends - and will have no measurable effect on revenue.
Objection and Appeal Rights Against Certain Penalties
The Taxation Laws Amendment Act 1984 brought the penalties applicable to breaches of the pay-as-you-earn provisions into line with those applicable to breaches of the prescribed payments provisions of the income tax law.
However, by oversight that Act did not extend objection and appeal rights to certain pay-as-you-earn penalties that correspond with prescribed payments penalties in respect of which there are such rights.
This Bill will correct that oversight.
At the same time, the Bill will ensure that objection and appeal rights are not available in respect of penalties for late payment that are calculated at 20 per cent per annum.
These amendments are not expected to have any discernible effect on revenue.
Interest on Refunds of Disputed Penalties
It is now the established policy of the taxation law that amounts of tax that, on the one hand, attract penalties for late payment should, on the other hand, attract interest where they are refunded on resolution of an objection or appeal against their imposition.
This Bill will amend the Taxation (Interest on Overpayments) Act 1983 so that the Commissioner of Taxation will pay interest on refunds of penalties that are imposed for breaches of the pay-as-you-earn and prescribed payments provisions of the income tax law, but which are reduced as a result of a successful objection or appeal against their imposition.
The revenue cost of these amendments cannot be readily estimated, but is likely to be minimal.
The opportunity is being taken in this Bill to make several formal amendments of the income tax law. Most of these alter references to Ministerial or Departmental titles following changes in the machinery of Government.
One of the amendments will repeal a redundant provision relating to the rights of Commonwealth and State public servants appointed to taxation boards of review.
These formal amendments will have no effect on revenue.
Mr Speaker, a detailed technical explanation of the provisions of the Bill is contained in the usual comprehensive explanatory memorandum circulated to Honourable Members on taxation Bills.
I commend the Bill to the House.