Andrew Laming (Bowman, Liberal Party) Share this | Hansard source

In supporting these five unrelated and relatively non-controversial amendments, I would like to add some comments to each of the parts of the Tax Laws Amendment (2008 Measures No. 5) Bill 2008. Just to recap, of those five measures before the House, schedule 1 seeks to amend A New Tax System—the GST act from 1999—to overcome tax minimisation that had been occurring involving the use of margin schemes and the sale of real property. Effectively, schedule 1 is a tax integrity measure and the savings, which are significant, have been outlined in the papers presented. Schedule 1 also seeks to align the anti-avoidance provisions in the GST act with the anti-avoidance provisions in the Income Tax Assessment Act 1936.

Schedule 2 seeks to effect changes to the thin capitalisation regime in Australian tax law to recognise changes that occurred with the Australian Accounting Standards when we adopted the Australian equivalents to the IFRS in 2005. Schedule 3 seeks to extend the interest withholding tax exemption to state and territory government bonds to bring about a better functioning of those state and territory bond markets. Schedule 4 will ensure that the full value of the benefit that is being provided to an employee and an associate in relation to jointly held assets will be subject to FBT. That is, essentially, a tax integrity measure. Schedule 5 is seeking changes to the eligible business investment rules in division 6C of the Income Tax Assessment Act 1936, to remove impediments to commercial practice in respect of public unit trusts. That is a change to help grow the managed fund industry.

I will address each of those in order, and most of my focus will be on schedule 1. This is an integrity measure that has already been proposed in the budget papers and pertains to the sale of real property. It is directed at ensuring that interactions between a number of provisions in GST law do not allow real property transactions to be structured in a way that enables those involved to reduce their GST liability using a margin scheme.

To give you an overview of that, division 75 of the A New Tax System (Goods and Services Tax) Act 1999 allows an entity to use the margin scheme to bring within the GST system the entity’s real property—that is, its supply of freehold interests in land, of stratum units or of long-term leases. It is that subsection that provides that the margin scheme can only apply if the supplier and the recipient have both agreed that the margin scheme should apply. There is the potential to avoid the paying of GST because it is only paid on the margin, which is the difference between the purchase and the sale price of a property. People can obviously learn more about this, but this is effectively a GST integrity measure. The savings have also been spelt out over the forward estimates as being in excess of $400 million a year—so, not an insignificant amount.

I also wanted to refer to the fact that the amendments are intended to make sure that the going concern, farmland and associate provisions under the margin scheme are not used in a way that allows property sales to be structured so that GST does not apply after 1 July 2000. That is a very important change. There are a couple of items I want to draw the House’s attention to, such as the insertion of references to ‘supply of real property’—in particular, where real property was acquired by the supplier from an entity as part of the supply of a going concern that was originally GST free, where the supplier was registered or required to be registered at the time of the acquisition and where the supplier had acquired the real property through a taxable supply on which the GST was worked out without applying the margin scheme. It is that last condition that ensures that the supply of real property that was ineligible for the margin scheme previously—because it was acquired as a going concern which was GST free—does not suddenly become eligible for the margin scheme subsequently. The other two elements of these changes pertain to the acquisition of farmland under particular conditions and also the acquisition from an associate under certain conditions. They have been spelt out, but, in short, they ensure that the supply of real property that was ineligible for the margin scheme previously does not become so subsequently.

Now, margins for the supply of real property that is acquired through several acquisitions are also important because, under current law, an entity that acquires real property and subsequently can sell it under the margin scheme is only paying GST on the value the entity has added, and the value added by that entity that has acquired the real property is not subject to GST. That is what will change with the implementation of this amendment. In addition, GST and its anti-avoidance provisions are strengthened by the anti-avoidance element of the bill, and the division is aimed at artificial or contrived schemes that give entities benefits that allow them to reduce their GST to increase refunds or to alter the timing of the payment of their GST or refunds. Division 165 of the GST act is not intended to apply where parties merely take advantage of concessions such as the margin scheme.

Schedule 2 refers to thin capitalisation, and this dates back to announcements made by the Treasurer and the Assistant Treasurer earlier this year. Division 820 of Income Tax Assessment Act 1997 sets out the rules of thin capitalisation and applies to foreign controlled Australian entities, Australian entities that operate internationally and foreign entities that operate in Australia. The object of that division is to ensure that these entities do not reduce their Australian tax liabilities by using an excessive amount of debt capital by paying large amounts of interest to both finance their operations in Australia and reduce their tax obligations. Financing expenses that an entity can otherwise deduct from assessable income—highly geared investments with high levels of interest are an example—may be disallowed under division 820 under certain circumstances when the entity is thinly capitalised. If an entity is not an authorised deposit-taking institution—referred to as an ADI—for the purposes of the Banking Act and the entity’s debt exceeds the prescribed level, the entity is effectively ‘thinly capitalised’.

The Bills Digest sets out the rules for authorised deposit-taking institutions and the proposed subsections that are relevant to those rules. Some subsections under the ITAA Act require compliance with accounting standards in relation to the recognition of assets and liabilities of an entity, so in the bill under division 820 there are insertions to modify the application of accounting standards in the recognition of deferred tax assets and deferred tax liabilities. There is a proposed subsection that provides that an entity must not recognise deferred tax liabilities and deferred tax assets for the purposes of division 820 in working out the application of thin capitalisation rules. Certain Australian accounting standards would have otherwise required the recognition of these deferred tax liabilities and deferred tax assets.

Another subsection under division 820 of the ITAA Act defines an outward investing ADI and an inward investing ADI. It is an outward investing ADI if it controls one or more foreign entities, whether or not that entity is controlled by foreign interests; if it has a permanent establishment overseas; and if it is an Australian entity or an associate of another entity that is an outward investing. The expression ‘inward investing ADI’ applies if the entity is a foreign bank that carries on its business in Australia at or through one of its Australian permanent establishments.

A number of proposed subsections under division 820 pertain to the recognition of internally generated intangible assets. They provide that an entity may choose to recognise an internally generated asset where its recognition is precluded by Australian accounting standard 138. It also applies to internally generated intangible assets, other than internally generated goodwill, that cannot be recognised under accounting standard 138. These include internally generated brands, mastheads, customer lists and other items that appear in the fine detail of that accounting standard, at paragraph 63.

An entity can also revalue certain intangible assets. Another proposed subsection provides that, notwithstanding the prohibition in Australian accounting standard 138 from revaluing certain intangible assets, an entity may choose to do so, and it provides that the choice is not available to an entity that is an outward investing ADI or an inward investing ADI. The financial implications of this schedule are not clear; they are described as ‘unquantifiable’.

Schedule 3 of this tax laws amendment bill refers to IWT, interest withholding tax, and state government bonds. Interest withholding tax is currently deductible under section 128B(2) of the Income Tax Assessment Act where interest is payable by a resident to a nonresident unless an exemption applies. That is imposed under the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 at a flat rate of 10 per cent of the gross amount of interest paid unless a different rate is specified.

The possible exemption of government securities from interest withholding tax goes back in discussions as far as the Ralph review in 1999, which said:

In the context of the revenue neutrality constraint applying to its recommendations, the Review does not consider extending IWT exemption of sufficient priority to recommend the exemption.

The financial impact to this schedule is also a $64 million shortfall over the forward estimates.

The background to schedule 4 and the fringe benefits tax changes also deserve some mention. Currently, subsection 138 of the Fringe Benefits Tax Assessment Act 1986 provides that, for the purpose of the act, where an employer provides a benefit jointly to an employee and one or more associates of the employee, the benefit is deemed to be provided only to the employee. As has already been referred to by the member for Fadden when he spoke earlier in this debate, the anomaly has been caused by the Federal Court decision in the NAB case on the interaction of low-interest loans being provided to one of the parties. The operation of that subsection and the otherwise deductible rule was considered by the Federal Court. In that case, an employer provided low-interest loans jointly to an employee husband and to his wife which were invested jointly in a loan fringe benefit investment property. The Federal Court held that, as a result of this subsection, the employee was the sole recipient of the loan fringe benefit, hence the need for schedule 4 being brought to the parliament today. The court further held that, as the sole recipient of the loan and the sole investor of the proceeds, if the employee husband had incurred and paid unreimbursed interest on the loan he would have been entitled to a deduction for that expense. Thus, under the otherwise deductible rule of section 19, the taxable value of the loan fringe benefit was reduced to nil so that the employer had no FBT liability arising from that fringe benefit.

The last schedule, schedule 5, makes a change to the eligible investment business rules contained in division 6 as they apply to managed investment funds. The measures of this schedule, subject to certain conditions, include a definition of the term ‘investing in land’ to include fixtures, chattels and moveable property. The schedule also expands the range of financial instruments in which a managed investment trust can invest from the current specified investments that are listed in division 6C. The schedule introduces a number of safe harbours: a two per cent safe harbour for non-trading income set as 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.

I think it is also pertinent to make reference to some recent debate regarding schedule 1 and the integrity measures that have been brought to parliament today regarding the sale of real property. There have been concerns raised by one group in particular regarding the potential impact of these GST changes on housing affordability, predominantly because of the concern that significant impacts may occur in the future costs of housing developments as a result of what is in effect potentially an increased tax on new housing developments which can only be passed on to homebuyers through higher prices. These exemptions have not been applied to all land transactions, so it is difficult to estimate the percentage of development projects that would be affected by the changes we are debating today. But as the UDIA pointed out, major developers have calculated the cost impact of the measure and fear that it ranges from $4,800 per lot for a mixed townhouse and land development up to as much as $11,000 per lot on an infill development.

Of course, since that submission was made by the UDIA there have been further changes to the first home owners grant. On the other hand, we have had views from Treasury as well as to what the net impact may well be on housing prices. Treasury’s view was that they did not expect the GST integrity measures to have a significant impact on housing prices. Treasury commented that the housing industry is ‘currently experiencing difficult conditions’, with falls in construction approvals by 8.6 per cent over the year to August 2008 and 16.7 per cent since they peaked last November. But they went on to say:

Nonetheless, the downturn has so far been relatively moderate by past standards. Approvals remain around 20 per cent above the troughs that have been reached in previous housing downturns.

Also since the submission was made, there has been the full effect of the Reserve Bank changes in cash rates, to seven per cent in October 2008, with other changes forecast. And there are further complexities to calculating what the impact will be on borrowers from the commercial banks’ forecasted falls in interest rates in the future and the impact that that will have on home loan affordability. One would expect that this would improve the situation. In addition, the increase in the first home owners grant is also likely to counter the measures that are being discussed today. So it can be concluded that, while there are some disincentives at the level of new development because of the impact on that of the GST integrity measures, that may well be counterbalanced by other changes that are occurring in the economy at the moment. We are also mindful of Treasury’s submission in that regard.

What is important is that the unintended tax minimisation opportunities had to be addressed. Had they not been, there would have been continuing distortions in GST treatment between entities that structure their activities to take advantage of deficiencies in the law and those that do not operate in that way. Further, if they had not been addressed, these opportunities would have been expected to be increasingly taken up by entities in the property development sector, which would represent a significant and growing risk to revenue. The integrity measures for GST and the sale of real property will ensure that GST is always collected in the way that it was intended to be. We certainly hope it will not have a significant negative impact on housing affordability. It would be a major concern if that were to happen. I think those concerns have been allayed.

We also note that the Board of Taxation is currently conducting a review of tax arrangements that apply to managed funds that operate as managed investment trusts. We are looking forward to seeing that report in mid-2009 and, on a broader level, the Henry review of taxation, which will come at a similar time. This bill has been considered by the Senate Standing Committee on Economics, having been referred to the committee by Senator Coonan. The standing committee is obviously well placed to consider the impacts of these measures. The committee held a hearing on 28 October and received a number of submissions, and it reported as recently as three weeks ago. With those issues having been considered by the committee best placed to examine them, I commend the bill to the House and the schedules contained herein.

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