Second Reading Speech
by the Minister for Finance Senator the Honourable Peter WalshI move that the Bill be now read a second time.
Mr President, this Bill amends the taxation laws in a number of respects.
This Bill contains the measures announced in the 1989-90 Budget for a new tax collection system for companies, complying superannuation funds, complying approved deposit funds and pooled superannuation trusts, in conjunction with a move to full self-assessment. The changes also apply to trustees of unit trusts that are taxed as companies.
Other Budget announcements that the Bill deals with extend income tax deductions for fees paid to professional tax advisers and for expenses incurred by life assurance companies in gaining the investment component of certain premium income. Another Budget measure recognises the nature of certain share based financing arrangements as loans rather than as equity investments for tax purposes.
The Bill also proposes amendments on the subjects of superannuation tax, approved deposit funds, the gift provisions and the prescribed payment system. Minor amendments as a consequence of earlier changes to the Social Security Act, and of the reduction in the top marginal rate of personal income tax on 1 January 1990, are also included.
Mr President, since the Budget, detailed consideration has been given to the most appropriate arrangements for the payment of tax by companies and superannuation funds.
In this process, the Government has considered the submissions of leading business organisations and professional bodies.
In the light of these further deliberations, the arrangements contained in this Bill differ in several respects from those outlined in the Budget Papers.
These differences address concerns expressed about the original proposal and were the subject of announcements by the Treasurer on 2 November 1989 and by the Acting Treasurer on 22 November 1989.
The major modifications announced respond in a significant way to the submissions of the business and professional bodies whilst preserving the fundamental basis of the new tax arrangements for companies and superannuation funds as an important initiative in improving the equity of the tax system.
I turn now to the details.
The new system will first apply to assessments in respect of income of the year of income ending on 30 June 1990.
An initial payment of tax is to be due by the 28th day of the first month after the end of the income year - generally 28 July - equal to 85 per cent of the notional tax amount, that is, broadly, the tax payable on income of the preceding year at the current year rate, or 85 per cent of the taxpayer's estimate of the actual tax liability.
Payment of the balance of tax due for the relevant year is to be made by the 15th day of the ninth month after the end of that year - generally 15 March.
For early balancing companies and funds, payments are to be due on equivalent dates after the end of the substituted accounting period, but no initial payment will be due earlier than 28 January following the end of an accounting period.
Late balancing companies and funds will be on the same relative footing as all other entities that are subject to the measures.
Specifically, the dates for their initial and final payments of tax will be determined on the basis of their substituted accounting period, but in all cases final payment will be required not later than 15 June of the year of payment.
For tax payments attributable to the 1989-90 income year, or substituted accounting period, companies and funds with a notional tax in the range $1,000 to $400,000, or that have a notional tax of $400,000 or more but estimate their actual liability to be within that range will be given an option as to the basis of payig t month and the 15th day of the ninth month as outlined earlier or they may pay their total liability on the 15th day of the sixth month after the end of the year of income, or substituted accounting period.
In subsequent income years, the option to choose either of the two methods of payment will be available to companies or funds with a notional tax in the range of $1,000 to $20,000, or that have a notional tax of $20,000 or more but estimate their actual liability to be within that range. There will be no liability to make an initial payment of tax where the notional tax or estimated total tax is less than $1,000.
Companies and funds in this situation will pay their total tax liability by the 15th day of the ninth month following the end of the income year, or substituted accounting period, subject to the payment being not later than 15 June of the year of payment. The gain to revenue from the new system of collecting tax is estimated at $855 million in 1989-90 and $150 million in 1990-91.
Under self-assessment of income tax returns, which has operated since 1986, taxpayers lodge a return which is not generally subject to technical scrutiny and determine their taxable income. The Commissioner of Taxation simply calculates the tax payable and issues an assessment. The changes announced in the Budget merely take the present arrangements one step further for companies and funds under the new collection arrangements.
These entities will calculate their own tax payable and pay this amount to the Commissioner, in an instalment, if applicable, and a balancing payment with their return of income. An assessment, which will retain all existing rights of objection or appeal, will be deemed to be made on the day the return is lodged. To facilitate this change, the Bill makes provision for the self determination of foreign tax credits, and the offset of franking deficit tax against company tax liability.
These are not significant changes to the existing self-assessment system, but they do present an opportunity for other major improvements, to which I now turn.
Amendment of assessmentsIn debate over self-assessment, calls have been made for a review of the concept of "full and true disclosure" which exists in the present rules for amendment of assessments.
The Government accepts that this concept has reduced relevance in the context of a system of self-assessment, and has decided to remove it from the amendment rules for all taxpayers. The Bill will give effect to this decision and will alter to four years in all cases the limitation period applying generally to amendments increasing a taxpayer's liability, other than in cases of fraud or evasion or other special provisions where the right to amend at any time is retained. The Commissioner will be able to seek an extension of this new four year statutory limit from the Federal Court of Australia, or by agreement of the taxpayer.
Consistent with this change, the period in which an amendment may be made to reduce a taxpayer's liability is to be increased from three to four years.
In line with the changes to the time limits for amending assessments, records relating to tax information will berequired to be kept for only five years, instead of the present seven years. This period will be extended where the period for amendment is extended by the Court or under agreement with the taxpayer. The rules for the keeping of records are also being modified to require companies and funds subject to the new collection and self-assessment arrangements to retain for subsequent review documents used to calculate their taxable income and tax payable that they do not have to provide in simplified returns.
Some related matters raised by the new system are under review. Of particular importance are reviews being undertaken by the Commissioner of Taxation in relation to the information currently required to be furnished with returns generally, the tax agents' lodgment program, and the operation of present arrangements for the remission of penalties.
Under existing arrangements, a taxpayer in doubt about the proper tax treatment of a particular matter may request advice from the Commissioner. The Commissioner is also reviewing the question of providing an avenue - by means of the remission of interest payable where an assessment is amended - to encourage entities subject to the new self-assessment system to lodge these requests ahead of their returns, and will release further information on this matter as soon as possible.
Some other issues which have been raised in the context of self-assessment are nearing settlement. In particular, you will be aware that the professional bodies have been working closely with the Commissioner on audit access guidelines and they have now been released.
Hand in hand with these arrangements goes the Budget proposal to allow tax deductibility for the management and administration of a taxpayer's income tax affairs, which also will be given effect in this Bill.
Examples of expenditure that will be an allowable deduction are fees paid to a recognised professional tax adviser for income tax advice, costs of disputing an assessment such as tribunal fees and court costs, and costs associated with an audit of a taxpayer's affairs by the Taxation Office. Deductions will not be allowed for capital expenditure but depreciation of items, such as a computer, used in connection with the management or administration of a taxpayer's income tax affairs will be allowable.
No deduction will be allowed for expenditure incurred in relation to an offence under a law of the Commonwealth, a State or Territory or of a foreign country.A related amendment will permit taxpayers to have amounts paid for professional advice concerning the impact of taxes on the acquisition or disposal of an asset included in the cost base used to calculate the taxpayer's capital gain or loss on the asset. These changes will apply to expenditure incurred on or after 1 July 1989 and the cost to revenue is estimated to be $40 million per annum, commencing in 1990-91.
As announced in the Budget life assurance companies are to be allowed a taxation deduction for expenditure incurred on or after 1 January 1990 in gaining the investment component of life insurance premium income. This measure will put life assurance companies on an equal footing with other investment mediums but it does not extend to friendly societies and other registered organisations which benefit from a lower tax rate. The revenue costs of this proposal are estimated at $30 million in 1991-92 and $125 million in 1992-93.
Share based financing arrangements
Share based financing arrangements entered into to obtain finance are more appropriately regarded as lending arrangements than as investments of share capital. It follows that dividends paid under such arrangements ought to be treated in an equivalent manner to payments of interest on loans. Consistent with that concept, and as announced in the Budget, the dividend imputation system is to be modified so that all dividends paid in respect of shares issued under share based financing arrangements carry no entitlement to imputation credits or the intercorporate dividend rebate.
This measure will apply to dividends paid on shares issued on or after 16 August 1989 or under finance arrangements entered into on or after that date, and will prevent losses of revenue the potential size of which cannot be quantified but could have become substantial.
Tax exemption for approved deposit funds
The Bill also gives effect to a measure, announced on 26 June 1989, to enable more people to take advantage of the special tax exemption given to qualifying fixed interest approved deposit funds under the May 1988 changes to the tax arrangements for superannuation.
The amount of exempt income of a qualifying approved deposit fund is calculated by reference to balances that remain from time to time of amounts that were on deposit for eligible depositors at 25 May 1988. To assist people who may have withdrawn amounts from an approved deposit fund after 25 May 1988 before the special exemption was announced, the existing law treats withdrawn amounts that were redeposited in the same approved deposit fund before 1 July 1989 as though they were on deposit on 25 May 1988. An amendment in this Bill extends the 1 July 1989 deadline for redepositing such moneys to 1 September 1989.
As details of people who took advantage of this extension are unavailable it is not possible to estimate the revenue effect of this measure.
Taxable contributions to superannuation funds
The Bill will also correct a technical deficiency in the superannuation tax provisions.
The amendment, announced on 16 October 1989, will ensure that fully funded complying superannuation funds cannot avoid tax on contributions by exploiting the tax exemption intended to cover cases where an employer does not fund benefits until retirement. Under the exemption, the fund is not assessed on the contributions and the benefits paid are treated as 'untaxed' benefits and subject to a higher rate of tax. This aspect of the law was drawn to the Government's attention because of concerns at the potential effect on the superannuation industry.
The intention of the law in this area has always been clear, and the amendment to the Bill is therefore to apply from the commencement of the new arrangement for superannuation funds on 1 July 1988.
An amendment to the gift provisions of the income tax law is proposed by the Bill to allow gifts of the value of $2 or more made on or after 7 April 1989 to funds that provide money for the acquisition, construction or maintenance of hostels for school students from rural areas.
The proposal is part of the Government's $637 million Education and Training Strategy for Rural Australia announced in April by the Minister for Employment, Education and Training and the Minister for Primary Industries and Energy.
The revenue cost of the proposal is estimated to be less than $500,000 in a full financial year.
Finally, the Bill will modify the prescribed payment system provisions of the law to ensure that a householder will not be treated as an owner-builder if the actual work on a major part of a domestic construction project is actually carried out by a builder or by others on his or her part.
I present the Explanatory Memorandum, which contains more detailed explanations of the provisions of the Bill.
I commend the Bill to the Senate.
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