House of Representatives

Second Reading Speech

Mr Slipper (Parliamentary Secretary to the Minister for Finance and Administration)

I move:

That the bill be now read a second time.

The New Business Tax System (Debt and Equity) Bill 2001 introduces a new approach for determining what constitutes equity in a company and what constitutes debt in an entity. The new rules implement the general approach recommended by the Ralph Review of Business Taxation for distinguishing debt from equity.

The debt-equity rules provide greater certainty and coherence than is attainable under the current law.

Importantly, the bill explains how the debt-equity borderline is drawn for tax purposes. The rules determine whether returns on an interest may be frankable or may be deductible.

The test for distinguishing debt interests from equity interests focuses on a single organising principle-the effective obligation of an issuer to return to the investor an amount at least equal to the amount invested. This test seeks to minimise uncertainty and provide a more coherent, economic substance based test that is less reliant on the legal form of a particular arrangement.

There is an extended definition of equity based on economic substance-broadly speaking, interests that raise finance and provide returns contingent on the economic performance of a company constitute equity, subject to the debt test. The definition of debt interest also constitutes a key component of the proposed thin capitalisation regime- contained in the New Business Tax System (Thin Capitalisation) Bill 2001-since it is used to determine what deductions may be disallowed.

This bill amends the dividend and interest withholding tax provisions so that the borderline between the provisions is consistent with the new debt-equity borderline. The rules also apply to the characterisation of payments from non-resident entities. There has been extensive consultation relating to this subject, commencing from the review of business taxation to the release of exposure draft legislation in February 2001 and subsequently.

The measures will apply from 1 July 2001. However, a transitional rule is available to companies to elect that the current rules apply until 1 July 2004 for interests that were issued before 21 February 2001. This election provides for continuity in private sector decision making and allows issuers sufficient time to redeem issued instruments in an orderly manner. Full details of the measures in this bill are contained in the explanatory memorandum. I commend the bill and present the explanatory memorandum.

Debate (on motion by Mr Swan) adjourned.