Second Reading Speech
By the Minister for Finance Senator the Honourable Peter Walsh I move that the Bill be now read a second time.The Bill will amend the taxation laws in a number of ways.
It will implement several major changes announced by the Treasurer on 25 May 1988 as part of the May economic statement, and on 23 August 1988 as part of the 1988-89 budget.
In particular, it will remove, subject to phasing-in arrangements, the present income tax exemption that applies to income from gold mining.
It will also exclude from assessability under the income tax law up to $200 per year of discounts on shares or rights acquired under certain employee share acquisition schemes.
Other 1988 May economic statement income tax measures contained in the Bill will reduce the rate of deduction for investment in Australian films from 120 to 100 per cent, and modify the imputation provisions as they relate to dividends paid before 1 July 1989 by early balancing companies.
Budget measures contained in the Bill will provide a rebate of tax for lump sum payments in arrears of certain kinds of income, and deductibility for gifts to the Australian National Gallery Foundation.
Other amendments of the income tax law proposed by this Bill will ensure that certain "prepaid" research and development expenditure will be deductible over the period during which relevant services are provided, and will exempt certain cash grants made under the defence service homes scheme.
Some minor amendments are also proposed to the Fringe Benefits Tax law.
Finally, the Bill contains measures to clarify the refund provisions of the sales tax law.
I turn now to a more detailed discussion of these measures.
Tax Exemption for Gold Mining Income
In accordance with the 1988 May economic statement, the Bill will remove the current exemption from taxation of income from gold mining, subject to certain phasing-in arrangements.
The Government will honour its commitment to the gold industry by allowing the existing exemption to apply until 1 January 1991. From that date, the Bill will terminate:
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- The tax exemption of income from gold mining; and
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- The exemption for income derived from the sale of gold by the Gold Producers' Association Ltd.
The impact of these changes will be further eased by allowing certain expenditures incurred prior to 1 January 1991 to be carried forward for deduction after that date.
In particular, the Bill contains transitional arrangements to calculate notional deductions for capital expenditure incurred by gold miners prior to 1 January 1991 in order to determine actual deductions for such expenditure from that date for gold miners that continue to be engaged in mining operations.
Notional deductions will be calculated either on the basis of write-off rates specified in the mining provisions of the income tax law or the 5/3 accelerated depreciation provisions.
A separate transitional arrangement will apply to exploration expenditure for gold incurred between 25 May 1988 and 1 January 1991 which will be carried forward and deducted against income from 1 January 1991 for up to 7 years from the year in which it is incurred.
As is the case in relation to claims for deductions for expenses generally, claims by gold miners for deductions allowed under the transitional arrangements will need to be supported by adequate records.
The tax exemption for income from the sale of rights to mine for gold by bona fide prospectors will be retained, subject to an amendment to confine the exemption to arm's length transactions, as for other minerals.
Also consistent with the existing law, the amount of exploration expenditure carried forward during the transitional period will be appropriately reduced in the event of a tax exempt sale of a mining right before 1 January 1991.
In respect of other gold mining assets acquired after 19 September 1985, the capital gains tax will only apply to that part of any gain on disposal of such an asset that accrues after 31 December 1990.
This will ensure than any capital gains tax liability on disposal of such assets is entirely prospective.
In relation to income derived or expenditure incurred from 1 January 1991, gold miners will otherwise be subject to tax on the same basis as other miners. These changes are expected to produce revenue savings of $870 million in 1991-1992 and $300 million per annum in later income years.
The Bill provides for a rebate of tax to be allowed where certain income accrued in years earlier than the year of receipt is received in a lump sum.
The rebate will limit the tax payable on the arrears component of the lump sum to an amount comparable to the tax that would have been payable if the income had been received when it accrued.
Lump sum payments of workers' and accident compensation, certain pensions, benefits and allowances and, in limited circumstances, payments of salary or wages will be eligible for the rebate.
At present, such lump sums are wholly taxable as income of the year in which they are received and this can result in taxpayers paying a higher amount of tax than if the income had been received in each of the years in which it accrued.
The rebate will be available for lump sums received on or after 1 July 1986 where the amount of the accrued income is not less than 10% of the taxpayer's taxable income of the year of receipt, as adjusted for certain kinds of income of an irregular nature.
The kinds of income that will be excluded in applying the eligibility test are those parts of the lump sums that accrued in prior years together with any capital gains, abnormal income or lump sums paid on termination of employment.
The rebate will be calculated by reference to the income of the two most recent years, prior to the year of receipt, over which the lump sum accrued.
Where the lump sum accrued no earlier than those two years the taxation position of a taxpayer as a consequence of the rebate will be the same as if the income had been received in the income years in which it accrues.
Where the lump sum accrued over a longer period, the tax payable in respect of the arrears that accrued in those earlier years will be determined broadly on the basis of the rates of tax that it would have been borne in the two most recent years before the year of receipt.
The estimated cost of providing this rebate is $3 million in 1988-89 and $1 million in subsequent financial years.
Employee Share Acquisition Schemes
This Bill gives effect to the proposal announced in the 1988 May economic statement to exclude from income tax up to $200 of discounts on shares or rights acquired by employees under certain employee share acquisition schemes.
To qualify for the proposed exclusion, the employee share acquisition scheme will need to be open, on a non-discriminatory basis, to all full-time or permanent part-time employees of at least 12 months service.
In addition, shares or rights acquired under a scheme will need to be held for a minimum of three years except where employment terminates.
The Bill will also ensure that, for capital gains tax purposes, the cost base of the shares or rights will be reduced by any discount that is excluded from assessable income.
These changes will apply to shares or rights acquired on or after 1 July 1988, and are expected to-have a revenue cost of $5 million for each of the first 3 years, but to decline in subsequent years.
Transitional Imputation Arrangements
The Bill contains the transitional measures announced by the Treasurer in the 1988 May economic statement to prevent franked dividends paid by early balancing companies with imputation credits calculated on the basis of the 39 per cent company tax rate, from being channelled through later balancing companies which, as the law presently stands, could effectively pass those dividends on to individual shareholders with higher imputation credits based on the 49 per cent company tax rate.
This situation will be addressed by deeming dividends paid by early balancing companies between 1 January and 30 June 1989 to a resident company that could pay dividends franked on the basis of the 49 per cent company tax rate to be received by that company, for imputation purposes, on the first day of the franking year that corresponds to its 1989-90 tax year, generally, 1 July 1989.
Where, however, the company receiving dividends that have been affected by the deeming provisions has a franking deficit at the end of its 1988-89 franking year, the Bill allows these dividends to be applied to the reduction or elimination of that deficit.
Where necessary, up to two-thirds of such dividends May be applied against the franking deficit in this way.
The overall cost of the reduction of the company tax, excluding life companies, with which this transitional measure is associated, is $110m in 1988-89 and $1,850m in 1989-90.
Prepaid Research and Development Expenditure
The Bill will change the timing of deductions for research and development expenditure that is incurred in advance of the provision of the services to which the expenditure relates.
Instead of being fully deductible when incurred, deductions for the expenditure will be pro-rated over the period during which the services are provided.
Immediate deductibility will continue to be available if all of the services are provided within 13 months of incurring the expenditure; if the expenditure is less than $1000 or if it is required to be incurred by law.
Additionally, preferred treatment will be given to expenditure incurred to an approved research institute or a registered research agency, and to expenditure incurred on syndication projects for which a company is registered by the Industry Research and Development Board.
For expenditure of this kind, deductions that would be allowable in the second and subsequent years of income will be advanced to the preceding year of income.
The amendments will apply to expenditure incurred after 20 November 1987.
As part of the restructuring of the Government's support for the film industry, the Bill reduces the deduction for investments in qualifying Australian films from 120 per cent to 100 per cent, with no exemption from tax for income from such investments.
The reduction, which was announced by the Treasurer in the 1988 May economic statement, will apply to expenditure under contracts entered into on or after 25 May 1988.
The Bill also contains transitional provisions to preserve temporarily the higher rates of deduction for films substantially in production or underwritten before 25 May 1988, provided that certain conditions are met.
The estimated cost of the proposed amendments is $90m over a four year period commencing with the 1989-90 financial year.
Future government assistance to the film industry will be given primarily through the Australian Film Finance Corporation Pty Limited which has been established as a wholly Commonwealth owned company to fund qualifying Australian films.
Corporate Restructure (Debt Creation) Rules
The Bill will effect a minor amendment to the income tax law to correct a technical deficiency in the corporate restructure (debt creation) rules which, it is argued, presently grant an exemption from the legislation in a way that was not intended. The amendment will ensure that the exempting provisions do not extend to corporate restructure arrangements under which shares held by a non-resident in one resident company are sold to another company controlled by the non-resident.
Although designed to do no more than clarify the intended operation of the debt creation rules that apply from 1 July 1987, to remove any suggestion of retrospectivity, this measure will apply to relevant transactions entered into after 3 November 1988.
This change will have a negligible impact on revenue.
As foreshadowed in the budget, this Bill will amend the gift provisions of the income tax law to allow deductions for gifts made on and after 26 September 1988 to the Australian National Gallery Foundation.
The estimated cost of admitting the foundation to the gift provisions is $500,000 in 1988-89 and subsequent years.
Cash Grants Under the Defence Service Homes Scheme
The Bill will exempt from income tax certain cash payments made instead of low-interest mortgage loans under the Defence Service Homes Scheme.
The payments were made under transitional arrangements that applied between 16 September 1987 and 9 December 1987 inclusive.
The cost to revenue of the exemption is estimated to be $350,000 in 1988-89 and s50,000 in 1989-90.
The Bill contains some minor fine-tuning amendments of the Fringe Benefits Tax law that are of a concessional nature in relation to the operation of the so-called "otherwise-deductible" rule.
These amendments will have negligible revenue effect.
Finally, the refund provisions of the sales tax law will be clarified to ensure that, where tax has been passed on to customers, refunds of overpaid tax are available only if the person who ultimately bore the tax has been recompensed.
I present the Explanatory Memorandum and commend the Bill to the Senate.