House of Representatives

Second Reading Speech

Mr Bowen (Minister for Financial Services, Superannuation and Corporate Law and Minister for Human Services)

I move:

That this bill be now read a second time.

This bill amends various taxation and superannuation laws to implement a range of improvements to Australia's tax laws. As such this bill is an important part of our commitment to clear the decks of outstanding announced tax measures for taxpayer and community certainty.

Schedule 1 amends various superannuation laws to deliver on the government's 2007 election commitment to introduce an optional superannuation clearing house service that will be free of charge to eligible small businesses (those with fewer than 20 employees).

Following the passage of this bill, a regulation will be made prescribing Medicare Australia as the approved clearing house for this purpose. The service will be available from July 2010.

This measure will reduce the red tape for small businesses associated with meeting their superannuation obligations, while not imposing any new fees and charges on them. In particular, it will remove the need for small businesses to deal with numerous different superannuation funds where their employees elect to exercise choice and, consistent with the government's election commitment, it will enable small businesses to discharge their super guarantee (SG) obligations once the payment is received by the clearing house.

Currently, contributions are only considered to have been made for SG purposes when they are paid into a complying fund.

This schedule also extends the conditions under which contributions for the benefit of an employee are made in compliance with the choice of fund rules to cover situations where contributions are made through an approved clearing house, and allows for the disclosure of taxpayer information to an approved clearing house for the purpose of performing its functions.

To minimise the impact of the measure on existing commercial clearing house arrangements, the approved clearing house service will only be available to businesses with fewer than 20 employees.

Schedule 2 amends the tax law to protect the tax deductions of around 19,000 investors in forestry managed investment schemes from an unintended and adverse tax outcome.

Currently, investors in forestry managed investment schemes can claim an immediate tax deduction for expenditure incurred in the scheme, subject to certain conditions.

The Income Tax Assessment Act 1997 covers schemes for which amounts are paid by investors on or after 1 July 2007.

The Income Tax Assessment Act 1936 contains the conditions for deductions relating to schemes in which expenditure is incurred between 2 October 2001 and 30 June 2008.

In order for an initial investor in a forestry scheme to claim and retain a deduction, a capital gains tax event must not happen in relation to the investor's forestry interest within four years after the end of the income year in which an amount is first paid by the 1936 act.

This rule is known as the 'four-year holding rule', as it has the effect of requiring the initial investor to hold their forestry interest for at least four years.

This minimum holding rule period is an integrity measure designed to prevent taxpayers from disposing of their interest shortly after claiming their upfront tax deduction.

Under the current law, the Commissioner of Taxation has no discretion to allow a deduction in these circumstances, even where the reason for the capital gains tax event happening is outside the taxpayer's control. For investors in some schemes, this could lead to their deductions being clawed back.

The government considers that this would unduly penalise investors for events that are outside their control.

Further, many of the investments in question were made before the four-year holding rule was put in place-at the time they decided to invest, these investors had no way of knowing that their deductions were at risk.

On 21 October 2009, the government announced that it would amend the four-year holding rule so that it cannot be failed for reasons outside the investor's control.

A capital gains tax event is considered to be outside an investor's control if it could not have been reasonably anticipated by the investor at the time they acquired their interest.

Events that could be outside the control of the investor include the insolvency of the managed investment scheme manager, the death of the investor or where a managed investment scheme interest is cancelled, for example because of trees being destroyed by fire, flood or drought.

This new condition applies to schemes covered by the 1997 act or the 1936 act.

Finally, schedule 2 also amends the promoter penalty provisions in the Taxation Administration Act 1953 to ensure they continue to apply to the promoters of forestry schemes in cases where the investors' deductions are allowed to stand because of the amendments to the four-year holding rule.

The promoter penalty provisions are an important integrity measure designed to discourage the implementation of schemes covered by an Australian Taxation Office product ruling in a way that is materially different from the product ruling.

This amendment ensures that the law continues to apply to forestry managed investment schemes, notwithstanding the amendment to the four-year holding rule.

These amendments strike the right balance between protecting certain investors' deductions and discouraging excessively risky behaviour.

They ensure that taxpayers are not unfairly affected as a result of events outside their control, while maintaining robust integrity provisions.

Schedule 3 amends the tax law to allow managed investment trusts to make an irrevocable election to apply the capital gains tax regime to gains and losses on disposals of certain assets, primarily shares, units and real property. As announced by the government in the 2009-10 budget, this amendment has effect from the 2008-09 income year.

Under the current law, gains and losses on disposal of investments may be on revenue or capital account depending on the facts and circumstances, including the nature of the business or investment activity. Gains on revenue account are treated as ordinary income and investors are not entitled to the capital gains tax discount (or exemption for non-residents).

Under these amendments, investors will have certainty about when they can access capital gains tax concessions on gains distributed by managed investment trusts. In particular, non-resident investors are exempt from Australian tax on distributions of gains on disposal of eligible assets, unless the gains relate to assets that are taxable Australian property.

If an eligible managed investment trust does not make an irrevocable choice to have capital account treatment, then gains and losses on disposals of shares and units will be treated on revenue account.

The amendments also provide taxpayers with certainty about prior year assessments. The commissioner cannot, without the consent of the taxpayer, amend prior year assessments, in respect of a re-characterisation of gains or losses from eligible assets from capital to revenue or vice versa.

These amendments will also clarify the taxation treatment of 'carried interest' units in managed investment trusts. Distributions of amounts to a carried interest holder and proceeds from the disposal of a carried interest held in a managed investment trust will be treated on revenue account in the hands of the unit holder.

These amendments, which are an important part of the government's efforts to promote Australia as a financial centre, will reduce complexity and compliance costs and improve the global competitiveness of the Australian funds management services industry.

Schedule 4 amends the Income Tax Assessment Act 1997 by introducing an income test into the eligibility criteria for the entrepreneurs' tax offset, or ETO.

The ETO provides eligible taxpayers with a maximum tax offset of 25 per cent of their income tax liability that is attributable to their net small business income for the income year. The ETO begins to phase out at aggregated turnovers of $50,000 and eligibility ceases when aggregated turnover reaches $75,000.

Eligibility for the ETO is not currently restricted to taxpayers who have significant sources of income other than the income derived from their small business. This measure will address this by restricting eligibility to the ETO for single individuals whose income is over $70,000 and members of families whose incomes are over $120,000.

Schedule 5 makes important amendments to the corporate consolidation regime in the Income Tax Assessment Act 1997.

The consolidation regime applies primarily to a group of Australian resident entities wholly owned by an Australian resident company that choose to form a consolidated group. Specific rules provide for the membership of certain resident wholly owned subsidiaries of a foreign holding company which can choose to form a multiple entry consolidated group.

Members of a consolidated group are treated as a single entity for income tax purposes. Subsidiary entities lose their individual income tax identity on entry into the group and are treated as part of the head company.

A number of issues have arisen from the practical operation of the consolidation regime since its introduction in 2002. These amendments respond to those issues by clarifying the operation of certain aspects of the consolidation regime and improving interactions with other parts of the law.

In this regard, the amendments clarify the operation of the tax cost setting rules that apply when an entity joins or leaves a consolidated group and ensure that the tax cost setting amount allocated to an asset can be used for subsequent tax purposes. The tax cost setting rules are also being modified to ensure that non-membership equity interests issued by an entity that joins or leaves a consolidated group are properly taken into account.

The amendments also modify the mechanism for making various choices in relation to the formation of, or changes to, a consolidated group. This will ensure that a choice to form a consolidated group remains effective despite, for example, a clerical mistake in completing the form to advise the Commissioner of Taxation that the choice has been made.

Several of the amendments will reduce compliance costs for consolidated groups. In particular, the amendments which ensure that minimal tax consequences arise when a consolidated group converts to a multiple entry consolidated group, or vice versa, will result in significant compliance cost savings for groups that restructure.

Compliance cost savings will also arise as a result of the amendments to treat units in cash management trusts and certain rights to future income as retained cost base assets; the amendments to modify the mechanism for working out the taxable income of consolidated groups that have members which are life insurance companies; the amendments which repeal the provision that causes a capital gain to arise when the value of a liability of an entity that leaves the group is different to the value that was taken into account when it joined the group; and the amendments to improve the operation of the inter-entity loss multiplication rules for widely held companies.

The amendments improve the interaction with the capital gains tax rules by removing difficulties that arise when a capital gains tax event which straddles the time that an entity joins or leaves a consolidated group happens to an asset.

In addition, the amendments assist small business corporate groups that wish to consolidate by improving the treatment of pre-capital gains tax membership interests that are held in a joining entity.

Finally, other changes improve the operation of the consolidation regime by removing some minor technical anomalies that arise under the existing law.

Many of the amendments are beneficial to taxpayers and apply from 1 July 2002. Others apply from various dates of announcement or from today.

Lastly, schedule 6 includes miscellaneous amendments to the tax laws.

These amendments ensure that the law operates as intended by correcting technical or drafting defects, removing anomalies, and addressing unintended outcomes. These amendments are part of the government's commitment to the care and maintenance of the tax law.

This package also includes some legislative issues raised by the public through the Tax Issues Entry System, or TIES.

Full details of the measures in this bill are contained in the explanatory memorandum. I commend the bill to the House.

Debate (on motion by Mrs Gash) adjourned.