Tony Smith (Casey, Liberal Party, Shadow Assistant Treasurer) Share this | Link to 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.

Shayne Neumann (Blair, Australian Labor Party) Share this | Link to this | Hansard source

When I was writing this speech on the Tax Laws Amendment (2008 Measures No. 5) Bill 2008 it was quite late in the evening and I was considering the Australian economy. I was thinking about Simon and Garfunkel, strange though it may be. The words to one of their songs were, ‘I am a rock; I am an island,’ or something along those lines. I cannot be as entertaining as the member for Forde, and I certainly cannot sing anywhere near as well as the member for Forde, but those words reminded me of the Australian economy—because Australia might be an island geographically but it is not financially. We have seen the impact of the global financial crisis nationally and domestically.

We would love to be able to isolate our economy and not worry about the fact that the subprime market in America might have collapsed and about its impacts on our economy. We would love to be able to isolate ourselves, but we cannot. That is a Hansonite approach that does not face the economic reality that we confront. Maintaining the integrity of our taxation system in this sort of climate is crucial. Every day, constituents or friends of mine have spoken to me about the impact of the global financial crisis upon their personal lives—their superannuation entitlements, the value of their real estate and their personal financial security. The bill before us today is about maintaining the financial security of our markets, of our economy and of our taxation system. We cannot deliver for our people, we cannot deliver hospitals, we cannot deliver schools and we could not deliver the Economic Security Strategy that we have announced, without our taxation system being viable, consistent and just and fair to everyone—that is, individuals and companies.

We have announced a huge package of $10.4 billion in our Economic Security Strategy, which will help constituents across the country but also in my electorate of Blair, around Ipswich, the Lockyer Valley and the old Boonah Shire. They would think it a great strategy, and certainly that has been the feedback. But I also think that they would think that this bill—this omnibus bill, which like so many of its predecessors introduced earlier this year amends our taxation laws—is a fair and just measure. It has used the device, as the member for Casey said, of a schedule to improve the integrity of the scheme. It is important to note that our taxation scheme is one which has bipartisan support. If we have at this time confrontation and conflict in our economy, with it facing the global financial crisis, then we are going to go backwards as a country. The measure of us as a country and a community is in this time of challenge and controversy. This is not a time of comfort and convenience for us as a country. This is a time of real difficulty. So we have to make sure that government internal revenues can provide for the Economic Security Strategy and can provide for roads, schools and hospitals. We have to make sure that it is viable. We have to get sufficient money to do this. This is what this is all about. We have to do it in a fair and just way.

The Minister for Competition Policy and Consumer Affairs, the Assistant Treasurer, said concerning the first schedule in his second reading speech on 25 September 2008 that this bill is about ‘maintaining the integrity of the GST tax base’. It is about overcoming deficiencies with respect to the GST system as it applies to real property—that is, ‘land’ in common parlance. Budget Paper No. 2 talked about the scope of the proposed changes. I will quote it because I think it is worth quoting:

The GST provisions dealing with real property are intended to ensure that GST is payable on the value added to land once it enters the GST system. The margin scheme achieves this outcome by applying GST to the ‘margin’, that is, the difference between the purchase price paid by the seller and the price paid by the buyer. This measure provides that, where the margin scheme is used after a GST free or non-taxable supply, the value added by the registered entity which made that supply is included in determining the GST subsequently payable under the margin scheme. The measure will also strengthen the GST anti-avoidance provisions to ensure that they can apply to contrived arrangements entered into to avoid GST.

Schedule 1 ensures that the margin scheme provisions and associated provisions to do with farm land are not to be used by developers to structure their sales of real estate to limit GST on or after 1 July. The supply of subdivided farm land and land for farming is GST-free. Presently, an entity which acquires real estate and then sells it under the margin scheme pays the GST on the value added by itself. The value added by the supplying registered entity is not included for GST purposes. This anomaly will be overcome. It will be made plain that the GST is payable only on the incremental value. It is only on an increase that it is payable, and it is only paid when there is a connected series of transactions. The GST is only paid on the increase. It is only paid on the increase of the value of a property sold after 1 July 2000. The bill overcomes that problem by preventing the application of the margin scheme and by ensuring that land is treated as a taxable supply for GST purposes.

There are further amendments to ensure that if the margin scheme is used following a GST-free sale of a going concern—for example, an artificial or a contrived scheme to enable registered entities to avoid GST—then the Commissioner of Taxation can negative any benefit for GST purposes. This is not about denying legitimate concessions. This schedule is concerned with schemes which are designed to avoid the payment of GST. The current law is unfair because some property developers can take advantage of the margin scheme to avoid GST while others cannot. I do not anticipate that there will be any significant increase in the price of housing and land as a result of these changes. The explanatory memorandum makes that clear. Where I live, there is property development everywhere, and I cannot imagine that the Ripley Valley, Springfield, Walloon, Rosewood or Flinders View are going to see a major increase in the value of land and housing as a result of these changes.

Schedule 2 reforms what is called thin capitalisation. That is about where debt exceeds the prescribed level under the Income Tax Assessment Act. The entity is then said to be thinly capitalised—that is what it really is about. This schedule reforms the thin capitalisation regime in relation to the Income Tax Assessment Act concerning accounting standards for identifying and valuing a registered entity’s assets, liability and equity capital. The intention is to adjust for certain impacts the adoption in 2005 of the Australian equivalents to the International Financial Reporting Standards. The thin capitalisation regime is basic to our tax system. It ensures companies, Australian and foreign, do not set about reducing their tax liabilities under the Income Tax Assessment Act by setting aside an excessive amount of their debts to their business dealings in Australia—in other words, that they do not say, ‘This debt is in Australia; therefore I can reduce the tax which I pay in Australia.’ This will ensure that those companies pay their fair share of tax in Australia, which is good for our economy and our capacity as a government to provide for the people of Australia.

Schedule 3 ensures that defined bonds issued by our state and territory governments are eligible for exemption from interest withholding tax. This measure was first announced by the Treasurer on 20 May 2008 in the context of reforms to assist our financial markets. What we have seen overseas in the last few months indicates how crucial the viability of our financial markets is to the continuing prosperity of our economy and our people.

Our state government bond issuance is crucial to the integrity of our financial markets in the global financial crisis. If our state bond markets work better, with enhanced interest in these types of securities, this will add to our economic security and viability, and it is likely to result in a greater pool of funds available to state and territory governments. Improved liquidity of the market and getting more people—individuals and companies—involved in these types of investments improves the financial capacity of our states to provide for law and order, hospitals, schools and other essential services in our states and territories. It is crucial that we enhance confidence in our markets, financial and otherwise, to ensure that our economy, our companies—both large and small—and our individuals have confidence not just in the government but in the future prosperity of our country. Improving the financial security of our state and territory governments, and therefore their capacity to spend money on essential infrastructure, is important both nationally and particularly in South-East Queensland, where I live and where one in seven people in Australia reside.

Schedule 4 relates to arrangements where an employer gives a fringe benefit to its employee and associate—almost invariably a spouse in the circumstances—when the two of them are, for example, engaged in jointly acquiring an income-producing asset, for example a rental home, a rental unit or some shares. It is very common today for people to own rental units, rental properties generally and shares. We are a country that really is interested in these types of things. When I was a boy, these were not the things that the average Australian was particularly interested in, but nowadays this type of investment is crucial to our long-term security. The days when we could rely on or guarantee the pension are well and truly gone. We really need to provide for those who are disadvantaged in old age through the provision of pensions, but we also need to provide for old age through our superannuation and other investments.

The reform in schedule 4 relates to what is commonly called the otherwise deductible rule. The member for Casey talked about a very curious court decision in a matter involving the National Australia Bank and the federal Commissioner of Taxation in what has become known colloquially as the NAB case. In that case, the employer provided some low-interest loans jointly to an employee husband and his wife. That is a pretty common occurrence. Those joint low-interest loans were invested in a jointly held investment property. In other words, it was a loan fringe benefit. Very strangely, the Federal Court held that the employee was the sole recipient of the loan fringe benefit. It 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 be entitled to a deduction for the expense. In other words, the otherwise deductible rule under section 19 of the legislation meant that the taxable value of the loan fringe benefit was reduced to nil so that the employee had no fringe benefit tax liability arising from the loan fringe benefit provided to both the employee and his spouse.

This outcome is really a legal nonsense and it is entirely inconsistent with the operation of the otherwise deductible rule. The amendments in the legislation before the House overcome this very bizarre decision of the Federal Court, and I commend that particular part of the legislation which overcomes the very weird decision of the Federal Court in relation to taxation. For agreements between employer and employee entered into before 13 May 2008, they will still be able to use the current law, but we are giving until 31 March 2009 to allow employers and employees—

Harry Jenkins (Speaker) Share this | Link to this | Hansard source

Order! It being 2 pm, the debate is interrupted in accordance with standing order 97. The debate may be resumed at a later hour and the member will have leave to continue speaking when the debate is resumed.