Tony Smith (Casey, Liberal Party, Shadow Assistant Treasurer) Share this | Hansard source

The Tax Laws Amendment (2008 Measures No. 5) Bill 2008 contains five—essentially unrelated—schedules. The opposition will be supporting this bill. I will go through each of those schedules in some detail. Schedule 1 of the bill, as we know from the explanatory memorandum, amends the A New Tax System (Goods and Services Tax) Act 1999 and the object of the schedule is to ensure that the goods and services tax is applied to the value added to real property after 1 July 2000, where there is an interaction between the margin scheme and going concern farmland and associated provisions.

Schedule 2 of this bill makes changes to the thin capitalisation regime provisions in division 820 of the Income Tax Assessment Act 1997. The object of this schedule is to make changes to the thin cap position of complying entities for certain specific impacts due to the adoption of the Australian equivalents to the International Financial Reporting Standards in 2005. We also know from this bill that schedule 3 of this bill amends section 128F of the Income Tax Assessment Act 1936. The object of this schedule is to provide an exemption from interest withholding tax for bonds issued by state and territory central borrowing authorities in Australia. Schedule 4 amends the Fringe Benefits Tax Assessment Act 1986 to ensure the correct operation of the ‘otherwise deductible’ rule in relation to investments held by an employee with a third party. The final schedule, schedule 5, amends division 6C of the Income Tax Assessment Act 1936 in order to make changes to the eligible investment business rules for managed funds.

I will begin with schedule 1. Schedule 1 deals with the GST margin scheme. This is quite a substantive and technical set of amendments. It is designed to prevent entities manipulating their affairs relating to real property so they can reduce their GST liability. The schedule essentially corrects the uses of the GST margin scheme that were not intended in the original purpose of that provision. The first aspect of the schedule ensures that, where the margin scheme is applied to real property that was previously acquired on a GST-free basis, the value added by the entity that made the GST-free sale is included in calculating the GST payable under the margin scheme. This is consistent with the intent of the goods and services tax to apply to value that is added to real property. The explanatory memorandum, I might point out, explains this in great detail and has a number of examples about the use of the margin scheme, how it operates or can operate presently and how it would operate in the future as a result of these changes.

The second aspect ensures that where the eligibility to use the margin scheme is removed, the eligibility cannot then be reinstated by interposing a GST-free or non-taxable sale. This is a significant change to the current law and how it has been operating. Currently, the eligibility to supply real property under the scheme can possibly be reinstated by interposing a GST-free or non-taxable supply. The third aspect of the schedule strengthens the general GST anti-avoidance provisions to apply to schemes that are entered into with the sole or dominant purpose of gaining a GST benefit.

There is some history, as is often the case, with schedules in these tax laws amendments bills. The development of the approach that has been taken commenced some years ago and builds on the previous, coalition government’s demonstrated commitment to maintaining the integrity, base and operation of the goods and services tax—a very important, reforming tax introduced just over eight years ago. The essence of these measures addressing the GST margin scheme was initially announced in 2005. While parliament was considering the Tax Laws Amendment (2005 Measures No. 2) Bill 2005, it proposed amendments to the GST margin scheme and the former Treasurer, the member for Higgins, announced some intended changes on budget night in May 2005, in Budget Paper No. 3, which said:

The Government will prevent entities manipulating certain elements of the GST law (such as the margin scheme, the grouping, associates, joint venture, going concerns or farm land provisions) to reduce the GST liability on supplies of real property.

In recognition of the significant impact on a range of stakeholders, including the property industry, the then coalition government undertook extensive and widespread consultation to ensure that any changes would not have any unintended effects. The measures announced by the previous coalition government were intended to restrict the property owners from incorrectly reducing their GST liability when selling their property under the margin scheme. On 7 June 2005 the then Minister for Revenue and Assistant Treasurer, the Hon. Mal Brough MP, announced that, following some consultation, amendments had been made to the bill and the government would undertake further consultation on the proposed rules in the future. Due to the complexity of the measure and in the interests of ensuring the integrity of the recently introduced GST, the former Treasurer, the member for Higgins, announced in the 2006-07 Budget Paper No. 3:

The Government has deferred the tax integrity measure concerning the interaction of the margin scheme with the GST-free going concern and the GST-free farm land provisions.

He also announced that consultations would continue on this matter, which they did, with the aim of ensuring that there would not be any unintended or adverse effects. It is the case that prior to the last federal election the then coalition government and Treasury were in the process of further consultations. As a result of that long-running consultation process, the new government this year announced its intention to introduce these measures on budget night.

Since budget night the measures have undergone further consultation under the new government’s watch. There have been some changes to what was initially announced on budget night, and those changes have occurred as a result of the consultation. We on this side of the House think that that consultation and some of the changes that have occurred are good, and it has improved the measures that will operate. Most notably, it has removed any retrospective elements that would have applied from budget night.

The measures will be entirely prospective from the date of royal assent and will not apply to real property that has already been purchased or to real property that is subject to an option to purchase at the moment. This area of GST law, as I said, was in contemplation for a number of years. It is a technical area and there has been a long period of consultation. The intent, as I have said, is to ensure the correct operation of the goods and services tax, which of course the former coalition government strongly supported and introduced and which we now presume the current government also supports as strongly as we did back in the year 2000.

Schedule 2, as I said before, modifies the accounting standards treatment of specified assets and liabilities by amending standards relating to the thin capitalisation regime. The measure was initiated by the adoption of the Australian equivalents to International Financial Reporting Standards in 2005. The current form of this schedule is, we are told, the result of extensive consultation with industry stakeholders. There have been some improvements made through that consultation process—for instance, it provides subject to specific conditions that for thin capitalisation purposes certain entities: will not be allowed to recognise deferred tax assets or deferred tax liabilities or assets or liabilities from defined benefit plans; will be allowed to revalue intangible assets that cannot currently be revalued because they do not satisfy the intangible assets accounting standard in AASB No. 138 for the only reason that there is no active market for valuation; and will be allowed to recognise internally generated intangible assets if they do not satisfy the intangible assets accounting standard for the only reason that they cannot be reliably costed.

Schedule 3 extends the exemption, under section 128F of the Income Tax Assessment Act 1936, from interest withholding tax for state central borrowing authorities when they issue bonds. Schedule 4 deals with FBT. The necessity, the requirement or the need for this schedule and for action in this area was brought about by the Federal Court decision in National Australia Bank Ltd v Federal Commissioner of Taxation. The court ruled that an employer could reduce the entire taxable value of a fringe benefit provided jointly to an employee and third party—typically their partner—in relation to an income-generating asset. This was clearly inconsistent with the general principles of income and deductions. The measures, once they take effect when this bill is passed and given royal assent, will require an employer to adjust the taxable value of the fringe benefit according to the proportion of the jointly held asset that the employee owns.

Finally, the last schedule, schedule 5, makes changes to the eligible investment business rules contained in division 6C as they apply to managed investment funds. The measures in this schedule, subject to certain conditions, include a definition of the term ‘investing in land’ to include fixtures, chattels and movable property. The schedule also expands the range of financial instruments in which a managed investment trust can invest from the current specified instruments that are listed in division 6C. The schedule introduces the following safe harbours: a two per cent safe harbour for non-trading income set at a whole-of-trust level and a 25 per cent safe harbour for non-rental, non-trading income from investments in land for public unit trusts investing in land for the purpose of deriving rent.

We note that the Board of Taxation is currently conducting a review of tax arrangements applying to managed funds that operate as managed investment trusts. We look forward to reading that report, which is due to be delivered some time early next year or by the middle of next year. We also, on a broader level, look forward to the Henry review of tax over that same time frame. In conclusion, I note that the bill was referred to the Senate Standing Committee on Economics on 25 September 2008 by Senator the Hon. Helen Coonan. The Senate Standing Committee on Economics was well placed to examine the effect of these measures. The Senate committee held a hearing in Canberra on 28 October, received several submissions and reported just recently—in fact last Monday, 10 November. Having dealt with all of the issues and having noted some issues and some concerns, their recommendation is that the bill be passed by the Senate. I commend the bill to the House.

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