Second Reading Speech
By the Minister assisting the Treasurer, the Hon. Chris Hurford, M.P.This Bill will give effect to another of the measures in the Government's tax reform package by introducing an instalment system for the payment of provisional tax, and contains several other measures.
One of these gives effect to the decision of the Government announced by the Treasurer on 18 February 1986 to treat as assessable income certain realised foreign exchange gains of a capital nature and to allow corresponding income tax deductions for foreign exchange losses.
The Bill also contains a related amendment to the capital gains and losses provisions of the income tax law to exclude from those provisions foreign exchange gains and losses under certain hedging contracts.
It will also implement the decision announced on 7 April 1986 to treat short-term redeemable preference shares as debt for income tax purposes.
Finally, the Bill will exempt from tax the income of the British Phosphate Commissioners banaba contingency fund.
Madam Speaker, I will now outline in greater detail the proposals dealt with in the Bill.
Instalments of Provisional Tax
This Bill will provide the legislative framework for the introduction from 1987-88 of a system for the payment of provisional tax by instalments.
When the new system is fully implemented in 1988-89, taxpayers whose provisional tax for the previous year exceeds $2,000 will pay 4 instalments during the year in which the income is derived.
The earliest due dates for the instalments will be 1 September, 1 December, 1 March and 1 June respectively.
In the 1987-88 year, the earliest due date for the first instalment will be 1 December, when two quarterly instalments will be combined into one payment.
The total amount of provisional tax paid by instalments in any year will generally equal the amount that would be payable under the current single payment syste.n
Madam Speaker, by spreading the payment of provisional tax in this way, provisional taxpayers will be brought more into line with salary and wage earners, whose incomes are subject to PAYE. Tax deductions at source.
There are, of course, significant economic and monetary policy advantages in spreading provisional tax payments.
The large seasonal fluctuations in liquidity that have been an annual concomitant of the concentration of provisional tax payments from late March through the June quarter will be diminished, with beneficial effects on short-term interest rates and the exchange rate.
As a general rule, each of the first three quarterly instalments will be one-quarter of the provisional tax payable in respect of the previous year's income.
The final instalment will be calculated as the balance required to make up the taxpayer's full liability for provisional tax for that year, calculated in the same way as at present.
Where a taxpayer "self-assesses" his or her provisional tax by making an estimate of taxable income, rebates, etc. For the current year, instalments will be based on the taxpayer's estimate.
An estimate May be made for each instalment, regardless of whether estimates have also been made in respect of earlier instalments.
To ensure that estimates are reasonably based, penalty tax for substantial underestimates will be payable at the rate of 20% per annum for the period of the underestimate.
Taxpayers (for example, some primary producers) who do not derive income evenly throughout the year will be catered for by an alternative 2-instalment scheme under which one-half of the year's provisional tax will be payable no earlier than 1 February and the balance no earlier than 1 June.
To qualify for this, a taxpayer must satisfy the Commissioner of Taxation that more than three-quarters of his or her assessable income will be derived after 1 December.
The legislation contains special measures to counter possible exploitation of the 2-instalment arrangemen.i
As at present, provisional tax instalments paid in respect of the income of a year of income will be credited against the actual tax payable on assessment.
Where a taxpayer is required to pay instalments in a year of income, any balance of tax payable on an assessment for the previous year will be due for payment no earlier than 1 February.
Because full details are provided in the Explanatory Memorandum that has been circulated, I need not dwell further on the proposed system.
While the measure is revenue neutral in that it will not increase provisional tax-collections, it is estimated that collections of $90 million will be brought forward to 1987-88.
Depending on interest rate assumptions, it is also estimated that annual expenditure savings of up to $100 million will result from the need to issue fewer treasury notes.
Foreign Exchange Gains and Losses
In February this year the Treasurer announced the Government's decision to allow income tax deductions for foreign exchange losses of a capital nature and to treat as assessable income corresponding foreign exchange gains realised after 18 February 1986 in respect of borrowings or loans contracted for after that date.
Equivalent treatment was foreshadowed for gains and losses resulting from exchange rate effects between the date of acquisition or sale of assets contracted for after 18 February 1986 and the payment or receipt of the purchase money, the time delay in payment being equivalent to a loan.
The proposed amendments will mean that exchange gains and losses on borrowings or loans of a capital nature will be treated in the same way as such gains or losses on borrowings or loans of a revenue nature.
As with such gains or losses on borrowings of a revenue nature, the amendments will only apply where the borrowings are for the purpose of producing assessable income.
There are clear economic advantages in treating all foreign exchange gains and losses in respect of borrowings and loans in the same way given the economic similarity between interest payments and expected exchange rate effects over the period of a foreign currency-denominated debt contrac.a
Consistent with this, foreign exchange losses incurred on a borrowing to finance a rental property investment are to be treated in the same way as interest payable on the loan for the purpose of the negative gearing provisions relating to rental property investments, and foreign exchange gains of this kind will be treated as rental property income.
Exchange gains and losses under forward exchange contracts and other hedging contracts entered into to guard against exchange rate losses are to be treated as assessable income or allowable income tax deductions respectively in the same way as such gains and losses under the primary contract.
For the purposes of the proposed measures, the contract date of each borrowing on or after 19 February 1986 under a drawdown facility contracted for before that date is to be treated as a borrowing under a contract made on the date of the drawdown.
Corresponding treatment will be extended where a pre-19 February 1986 loan is rolled-over, or extended, on or after that date.
To avoid retrospective application, these measures are not to apply if the taxpayer was contractually bound before 19 February 1986 to make the drawdown, roll-over or extension.
The Bill includes safeguards against use of these provisions for tax avoidance purposes.
The Bill also proposes a complementary amendment to the provisions of the Income Tax Assessment Act relating to capital gains and capital losses.
This will have the effect that those provisions will not apply to a capital gain made, or a capital loss incurred, under a hedging contract entered into to guard against currency rate fluctuations in relation to another contract, where any actual gains or losses from such fluctuations on that other contract would be outside the scope of the capital gains and losses provision.
The change will apply in respect of capital gains derived at any time after the commencement (on 20 September 1985) of the capital gains tax provisions.
As regards capital losses it will only apply in respect of contracts entered into after today.
This will ensure that taxpayers are not retrospectively denied a deduction for losses incurred under contracts already entered into.
Short-Term Share-Based Financing Arrangements
On 7 April 1986, the Treasurer announced that the income tax law would be amended to remove the tax advantages arising from the use of short-term redeemable preference shares as a substitute for debt.
The Bill will give effect to that decision.
Under the existing income tax law, interest on debt finance is generally deductible to the payer and taxable to the recipient. Dividends are not deductible to a paying company, but the rebate allowable on intercorporate dividends makes them free of tax in the hands of the company receiving them.
This different tax treatment of dividends and interest has given rise to a number of share-based financing arrangements designed to attract the taxation treatment of equity for what essentially amounts to debt, with a consequential loss to the revenue.
The amendments contained in this Bill will ensure that dividends paid on shares used in arrangements for the provision of finance for a period of 2 years or less will be no longer eligible for the intercorporate dividend rebate.
Reflecting the mischief described in the Treasurer's announcement, these measures are not confined to redeemable shares strictly so-called, but will apply to any shares used in a short-term financing arrangement where it can reasonably be concluded that the dividend paid is equivalent to the payment of interest on a loan.
Dividends that are denied a rebate of tax by these amendments will be deductible to the paying company, subject to the same rules that govern the deduction of interest on borrowing.n
Trustees of corporate unit trusts and public trading trusts that are treated as companies for income tax purposes will also be subject to these new measures.
The amendments will apply to dividends paid on relevant shares issued after 5.00pm Australian eastern standard time on 7 April 1986.
Safeguarding provisions will ensure that these measures are not circumvented by the use of shares issued before the operative time in a short-term financing arrangement entered into after that time.
The revenue saving arising from these measures is indeterminate.
The Bill will amend the income tax law to exempt from tax the income of the British Phosphate Commissioners Banaba Contingency Fund.
The fund was established on 1 June 1981 to meet any future claims for compensation by former employees of the British Phosphate Commissioners in respect of phosphate mining operations on Banaba (formerly Ocean Island).
Those operations ceased in 1980.
Income of the British Phosphate Commissioners, as representatives of the Australian, New Zealand and United Kingdom Governments, is exempt from tax under the doctrine of sovereign immunity and, if the Commissioners were in a position to administer the fund, income of the fund would also be exempt.
However, the affairs of the Commissioners are in the process of being wound-up.
The amendment proposed in this Bill will provide the exemption that would otherwise be available for the contingency fund.
It will apply to income derived by the fund from its inception on 1 June 1981.
The cost of providing the exemption is estimated at $50,000 in a full year.
Madam Speaker, a detailed explanation of the provisions of the Bill is contained in the Explanatory Memorandum that has been circulated to Honourable Members.
I commend the Bill to the House.