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

The Tax Laws Amendment (2008 Measures No. 5) Bill 2008 is a tax law amendment bill that has five schedules. I am up to the fifth schedule so there is not terribly much to go. The fifth schedule deals with managed funds and changes to eligible investment business rules. We foreshadowed this amendment during the last election campaign and we announced it in the 2008-09 budget.

The amendments are to the eligible investment rules for managed investment trusts, which are contained in division 6C of the Income Tax Assessment Act. These amendments clarify the scope and meaning of investment in land for the purpose of deriving rent and introduce a 25 per cent safe-harbour allowance for non-rental, non-trading income from investments in land. They also expand the range of financial instruments which a managed fund can invest in or trade, and they provide a two per cent safe-harbour allowance for other non-trading income. They are part of our strategy to make Australia a funds management hub for the Asia-Pacific region. We face a lot of competition in that regard from Hong Kong and from Singapore, which seems to have a march on us in many respects.

The amendments are about modernising and clarifying the business rules for investment in relation to managed investment trusts. This is about restoring the integrity and promoting the efficiency of our taxation system. If we do not get this right we will not have the tax revenue to ensure that our economy remains vibrant, our investments in health and education will not be completed and the people in my electorate will not get the kind of financial assistance which they really need at this particular time.

We have had tremendous floods in my area in the last week or so, and people are crying out for financial assistance. By making these sorts of taxation amendments we improve the revenue base for our economy, which improves the capacity of the government to meet emergencies such as we have experienced in the last week, and my electors will benefit. In fact, 43,701 households in my electorate will benefit from the economic security strategy which we are handing down and from which the people will receive money in early December. I have conducted 31 mobile offices in the week since parliament last met, and I can assure you that the people in my area are looking forward to that money. They will need it to meet their commitments. In the circumstances I commend the bill to the House because it will benefit my electors a great deal.

Chris Trevor (Flynn, Australian Labor Party) Share this | Link to this | Hansard source

I rise today to speak on the Tax Laws Amendment (2008 Measures No. 5) Bill 2008. This bill is broken into five separate schedules and aims to clear up previous shades of grey within our very own tax system. I feel personally that this is an important bill and one that can only strengthen Australia’s footing, particularly at a time of global financial crisis. Each of the five schedules in this bill carries different aspects and implications and I would like to speak today regarding each of these five schedules briefly.

Schedule 1 will introduce changes to the manner in which GST and the sale of real property is treated. This schedule amends the A New Tax System (Goods and Services Tax) Act 1999, which was introduced, of course, by the former Howard government. With schedule 1 of this bill my government will introduce an integrity measure to the GST that had been overlooked by the former government with regard to the sale of property. GST, when introduced back in 2000, was always intended to apply to increases in the value of real property such as land, with important exceptions—for example, farmland. However, because of technical defects within the original legislation it has been possible for some to avoid paying their fair share of GST when entering into contracts for the sale of property. This has been possible due to what has been termed in GST legislation as a ‘margin scheme’, which applies to the sale of real property, and how this margin scheme interacts with the following three exemption scenarios: (1) provisions that allow the GST-free sale of a ‘going concern’—for example, a business or shop, (2) the GST-free sale of farmland and (3) provisions dealing with associated entities.

This new bill will tighten the rules with regard to these three exemption scenarios to ensure that real property transactions cannot be unfairly structured in a way to reduce the GST liability of a taxpayer who was not technically eligible for a GST exemption and would otherwise have claimed an unfair advantage over others who choose to follow the intent of the tax law. As Chairman of the Prime Minister’s Country Task Force and as a representative of many primary producers in my electorate of Flynn, I strongly support the continued exemption on the sale of farmland from GST. However, this schedule will ensure that it is applied only in legitimate circumstances, as was always intended.

Schedule 2 of the Tax Laws Amendment (2008 Measures No. 5) Bill 2008 modifies the rules in relation to the application of accounting standards and in particular the thin capitalisation regime. Schedule 2 adjusts the system to better equip Australia after our adoption in 2005 of the equivalent of the international financial reporting standards and the thin capitalisation positions of businesses. Schedule 2 will help ensure that both Australian and foreign owned multinational businesses operating in Australia cannot unfairly reduce their Australian tax liabilities by allocating excessive amounts of debt to their Australian operations.

Schedule 3 of this bill is an important measure and one aimed to assist our state government counterparts to lower the cost of their capital and financing arrangements for state infrastructure projects—an essential move given today’s funding environment and economic conditions. Schedule 3 will amend the Income Tax Assessment Act 1936 to exempt bonds issued in Australia by state and territory central borrowing authorities from the interest withholding tax. This aspect of the bill is also designed to make state government issued bonds more attractive to overseas investors and ease some of the burden currently faced by the Commonwealth government securities market. To be eligible for this exemption of interest withholding tax, a bond must pass the public offer test and can include debenture stock and notes.

Schedule 4 of the bill deals with the fringe benefits tax. A loophole has emerged in the fringe benefits tax legislation and arrangements regarding an employee and their partner who jointly hold an income-producing asset, such as an investment property or shares. The loophole was that the partner situated in the highest marginal tax bracket could enter into salary-sacrificing arrangements with their employer to reduce their taxable income by an amount equal to the expenses that had been incurred as a result of owning the income-producing asset. By using the ‘otherwise deductible’ rule, fringe benefits tax could be reduced to zero and the employee in the higher of the two tax brackets effectively received 100 per cent of the tax deductible expenses but in reality only owned a proportion of the asset and should only have been entitled to a corresponding amount of the expenses incurred. Schedule 4 of this bill will make it clear and fair that deductions from jointly held assets should only be allocated according to the taxpayer’s share of that asset and end the practice of being able to claim 100 per cent of the deductions while only owning a share of the corresponding asset.

Lastly, schedule 5 of this bill is part of the Rudd Labor government’s agenda to promote Australia as a funds management hub in the Asia-Pacific region. In order to create this hub, the government will need to enhance the competitiveness of the Australian funds management industry on the international stage. In order to achieve this, the Rudd Labor government has commissioned a review of taxation policy that applies to managed investment trusts. Once this review is completed, which is due by mid-2009, the government will introduce a specific tax regime to apply to this industry that will ensure Australia is an attractive place for investment in managed funds.

Pending this more involved review of the competitiveness of the Australian managed funds industry, the government, through this bill, will modernise and clarify the eligible investment business rules to lower compliance costs for managed investment trusts. These interim measures will include: clarifying the scope and meaning of investment in land for the purpose of deriving rent; introducing a 25 per cent safe harbour allowance for non-rental, non-trading income from investment land and a two per cent safe harbour at the whole-of-trust level for non-trading income; and increasing the scope of financial instruments that may be traded by a managed fund.

These five schedules represent various changes to our tax system, but I welcome any move by my government to increase the consistency and fairness of the tax system—after all that is what Australia is renowned for: a fair go. I also welcome any move that will make Australia more competitive on the international stage and more attractive to foreign investment. This is particularly important given the current set of economic circumstances that our economy now operates in. I believe that the Tax Laws Amendment (2008 Measures No. 5) Bill 2008 does just that. I congratulate the Rudd Labor government for its outstanding leadership on this issue and commend this bill to the House.

Greg Combet (Charlton, Australian Labor Party, Parliamentary Secretary for Defence Procurement) Share this | Link to this | Hansard source

I rise to speak on the Tax Laws Amendment (2008 Measures No. 5) Bill 2008. This is a bill that will contribute to the long-term viability of Australia’s finance and insurance sector. It is important to ensure that, in the midst of the financial crisis, we put in place policy settings to ensure the finance sector is globally competitive. The government has implemented a number of measures to date to meet the challenges of the global financial crisis, including the Economic Security Strategy and $10.4 billion of payments to members of the community, pensioners in particular. There has also been a decision taken by the Treasurer to purchase residential mortgage securities to the extent of $4 billion to endeavour to provide whatever support is possible to the residential housing sector. This bill is important in the context of the global financial crisis to ensure, as I said, that the finance sector remains globally competitive and improves its competitiveness.

The legislation is also important in making it easier for state and territory governments to raise money through the issuance of bonds. This will strengthen our financial market and make it easier for state and territory governments to raise capital to fund infrastructure projects. The area of infrastructure is one of the areas that were profoundly neglected by the previous government but one that is a priority for the Rudd Labor government. As part of the government’s response to the global financial crisis the government has also indicated that it wishes to bring forward priority infrastructure projects to get underway within the Australian economy.

The third key initiative of this bill is to close a loophole in the operation of the goods and services tax, thereby improving the integrity of the GST tax base. This tax integrity measure will raise revenue over the next four years, helping state and territory governments—who of course are the fundamental recipients of the proceeds of the GST. The two other initiatives in this bill increase the integrity of the taxation system. Maintaining a sound fiscal base is essential if we are to weather the current global financial crisis, so this is an important bill in the current economic context.

I will now go to the details of the bill. The bill makes five substantive changes. The first is an amendment to the legislation governing the goods and services tax to maintain the integrity of the GST base. This will address a loophole in the GST law that enabled some property developers to avoid GST and obtain what we consider to be an unfair advantage over their competitors. The problem arose due to the interaction of the special rules for calculating GST on real property, known as the margin scheme, and the provisions that allow the GST-free sale of an ongoing business and farmland. The margin scheme means that GST is only levied on the margin by which the value of the property has increased each time it is sold by a GST-registered entity. It is generally used for new residential property developments from 1 July 2000.

However, the increase in value between when property was purchased and when it was sold as a going concern or as farmland was not subject to GST. If the property was subsequently sold under the margin scheme, only the value added after its sale as a going concern or farmland was taxed. This allowed some developers to structure property deals in such a way as to minimise the operation of the goods and services tax. Schedule 1 of this bill will address these deficiencies by including in the margin the value added to the property by the supplier of the GST-free going concern or farmland after the property entered the GST system. This change will not have a significant impact on the price of new housing as the affected segment is small compared to the entire housing market. However, this important measure will increase allocative efficiency in the market by removing the incentive to avoid GST, which was distorting the property market. Of course, ensuring the tax system operates in a way that improves the efficient allocation of resources is an important objective.

This integrity measure is expected to result in an extra half a billion dollars over the next four years in GST revenue. As with all GST revenue, this will be allocated to the states and territories, which will be welcome assistance to them as they respond to the global economic slowdown caused by the international financial crisis. Australia is in a good position to weather the crisis because of prudential economic management, and this integrity measure is an extremely good example of that approach—that is, the sound position that the country is in.

Schedule 2 of the bill deals with thin capitalisation, which occurs when multinational entities reduce their Australian tax liabilities by allocating an excessive amount of debt to their Australian operations. The thin capitalisation regime is a tax integrity measure that disallows a proportion of deductible interest on debt used to fund the Australian operations of a multinational entity when it exceeds certain limits. Schedule 2 of this bill modifies the thin capitalisation regime to enable entities to vary from the accounting standards in identifying and valuing their assets and liabilities for thin capitalisation purposes. As with the first schedule, this is a tax integrity measure that is very important in the context of the current financial circumstance.

Schedule 3 of the bill deals with interest withholding tax. Schedule 3 will insert a new subsection into the Income Tax Assessment Act 1936 to enable bonds issued in Australia by state and territory central borrowing authorities to be eligible for exemption from interest withholding tax. This is part of the initiatives announced by the Treasurer earlier this year to bolster Australia’s financial markets. Removing the interest withholding tax will allow the states to unify their bond issuances into one pool of funds, improving the depth and liquidity in the market. It will make state government bonds more attractive to foreign investors. In this time of global financial crisis, investors will be looking for low-risk opportunities for investment and this will make Australia more attractive as an investment location. This should lead to a lower cost of capital and, eventually, to lower financing costs for state infrastructure projects that are financed by the issuance of bonds.

This is obviously very important in the current economic climate. As important as this is the long-term support that it will provide to Labor’s nation-building agenda. Infrastructure investment by state governments is a necessary complement to the Rudd government’s $76 billion nation-building agenda. Estimates by various organisations in the business community suggest that extremely significant levels of infrastructure investment are necessary if we are to provide the economic stimulus that is required not only in these circumstances but for long-term future economic development. In fact, it is estimated by a number of agencies that the failure of the previous government to provide leadership in nation building and infrastructure investment has had a negative impact not only on jobs and GDP growth but also on productivity within the domestic economy. All measures that can be taken to support and encourage infrastructure investment at all levels of government are going to be extremely important for the future economic development of this country: the development of skills, the improvement of productivity, the expansion of the economy and the creation of employment.

Schedule 4 of the bill relates to the operation of the fringe benefits tax. Schedule 4 is another tax integrity measure that will improve the fairness and integrity of the fringe benefits tax. The purpose of this schedule is to rectify an incongruity in the fringe benefits tax law around the term ‘otherwise deductible’. The anomaly gave rise to salary-sacrificing opportunities in relation to investment properties held jointly by an employee and their associates. The effect of the ‘otherwise deductible’ rule was to reduce the fringe benefits tax liability of the individual salary sacrificing to nil as the benefit, such as the interest charged, is associated with an income-earning asset and would be fully tax deductible. The end result of this is that an employee would effectively receive a 100 per cent tax deduction for the rental expenses despite owning only half of the asset. Schedule 4 of this bill removes this anomaly and improves the fairness and integrity of the FBT system.

Schedule 5 of the bill deals with the operation of managed funds. In February this year the government asked the Board of Taxation to review the taxation arrangements applying to managed investment trusts to enhance the international competitiveness of the Australian funds management industry. Pending the outcome of this review, the government announced some interim reforms to streamline and simplify the operation of division 6C of the Income Tax Assessment Act 1936 in the 2008-09 budget. Schedule 5 implements part of this announcement and is part of the government’s strategy to make Australia a funds management hub in the Asia-Pacific region. With the global financial crisis severely hitting the equity markets and the funds management industry, it is vital that we support the most competitive Australian funds management industry that is possible. This is not only to ensure the sustainability of the managed funds industry right now, but also to put Australia in an excellent position when the global financial market bounces back. It is worth noting that the funds management industry in Australia operates within a sound prudential regulation environment, something which, in the current circumstances and with the international experience, is extremely important to encourage.

The amendments contained in schedule 5 have the following effect: firstly, to clarify the scope and meaning of investment in land for the purpose of deriving rent; secondly, to introduce a 25 per cent safe harbour allowance for non-rental, non-trading income from investments in land; thirdly, to expand the range of financial instruments that a managed fund may invest in or trade; and, fourthly, to provide a two per cent safe harbour allowance at the whole-of-trust level for other non-trading income. These amendments are important interim reforms to division 6C and will modernise and clarify the eligible investment business rules to lower compliance costs for managed investment trusts. That is an extremely important initiative.

Notwithstanding the current crisis in global financial markets, the government is committed to transforming Australia into a funds management hub for the Asia-Pacific region. We must put in place the foundations for the industry to thrive once the current situation normalises. Thanks in significant part to the reforms of the last Labor government, Australia now has the fourth-largest onshore managed fund market in the world. In 2007 Australia had $1.36 trillion in consolidated funds under management, including $128 billion in Australian property trusts. Last year the finance sector was in fact the third-largest industry in the Australian economy behind manufacturing and property and business services, employing no fewer than 400,000 people and contributing $30 billion in tax revenue. Just imagine, had the reforms not been taken in the 1980s and 1990s to encourage the growth of the industry, the structure of the economy at this point in time and its vulnerability to the changes in the international marketplace that we are experiencing.

Lateral Economics estimated that the funds management industry in fact now constitutes over three per cent of GDP. Australia enjoys a very skilled financial services workforce; we are strategically placed in the Asian time zone, have a stable economic environment and, as I noted before, have put in place a well-respected regulatory regime. The attractiveness of that regulatory regime for investors coming out of the current global financial crisis should not be underestimated.

Beyond the current crisis, the biggest challenge is that less than three per cent of the fees derived by Australian managed funds are attributable to foreign investment. According to the Australian Bureau of Statistics, this ranks the financial sector as 27th out of 35 industries in terms of export performance—and clearly that is something that the government wishes to see improve. Earlier this year the government took steps, by reducing the withholding tax rate to 15 per cent, to make this more attractive as an investment option for foreign investment. The changes contained in schedule 5 of this bill will complement this and increase the competitiveness of the Australian managed funds industry. In my past experience as a superannuation trustee of a $30 billion fund and as a director of a bank, also with approximately $30 billion in funds under management and about half of that in wholesale funds management activity, I can attest to the importance of these initiatives and in particular to the importance of us making Australia a more attractive destination for foreign investment in the managed funds sector.

In conclusion, this bill, as I have indicated, contains five schedules: schedules 1, 2 and 4 are tax integrity measures, schedule 3 is a nation-building reform and schedule 5 will assist in growing the Australian managed funds industry. All of these changes are important, but they are not particularly controversial. The question has to be asked: why didn’t we see these reforms in the 12 years that the coalition occupied the treasury bench? Why did they not act to fix some of the obvious loopholes that I have referred to in the tax regime?

In contrast to that, this being the anniversary of the election of the Rudd Labor government, it is important to emphasise that the government has demonstrated its commitment to prudent fiscal policy and to ensuring that all Australians pay their fair share of taxes. As important as that is, our nation-building commitment and schedule 3 of this bill will support our infrastructure investment by reducing borrowing costs for the state and territory governments, who are crucial partners in this agenda. Establishing Australia as the Asia-Pacific hub for the funds management industry was an election commitment of the government. The reforms contained within schedule 5, on top of the legislation that has been previously introduced to this House by the government touching on this issue, will contribute to this goal. For these reasons, I support and commend to the House the Tax Laws Amendment (2008 Measures No. 5) Bill 2008.

Stuart Robert (Fadden, Liberal Party) Share this | Link to this | Hansard source

I rise to address the Tax Laws Amendment (2008 Measures No. 5) Bill 2008. This bill looks to address five areas of tax law. Firstly, schedule 1 looks to the operations of the GST margin scheme as it applies to sales and acquisitions of real property. It is important that the application of GST be as fair as possible, and that is why the coalition is supporting this schedule, which aims to remove a loophole from current legislation to ensure property developers are paying their fair share of GST revenue.

As it stands now, the way the margin scheme is currently operating allows for some manipulation that can dramatically decrease the level of GST payable on the transfer of real property. It is something the coalition had acknowledged as far back as the 2005 budget speech, when the then Treasurer, the member for Higgins, announced that the government would be working towards closing a range of loopholes that permitted manipulation by certain entities via elements of GST law, including the margin scheme, with the effect of reducing the GST payable on the transfer of real property. Once this problem was first raised, thankfully the changes were not rushed, and consultation and investigation were initiated to ensure there were no unintended consequences. That consultation was being finalised at the time of the 2007 federal election. There was concern that the changes could impact, without intention, other transactions that incur a GST liability. Yet, thanks to the extensive consultation from Treasury, the focus of schedule 1 of this bill is solely on real property, and the coalition is satisfied that there will be no further unintended consequence.

The coalition is also pleased to see that the retroactive elements previously announced by the Rudd government have been quite rightly abandoned. These measures will only apply to future transactions regarding real property dating from the date of royal assent, not property that is already purchased or subject to an option to purchase. The margin scheme is a method of calculating the GST payable on the sale of freehold interest in land, the sale of a stratum unit, and granting or selling a long-term lease. Normally GST is one-eleventh of the price of the supply. However, if the margin scheme is chosen to calculate the amount of GST payable for supplies of real property, the GST payable is one-eleventh of the margin for the supply. The margin for GST purposes is the difference between the purchase price and the sale price. This schedule disallows a practice that saw some manipulation of the margin scheme to reduce consequential GST liabilities.

Schedule 2 ensures the correct operation of Australian equivalents to International Financial Reporting Standards adopted in 2005 under the previous, Howard government. The adherence to the IFRS is important to ensure correct information in international markets and of course to prevent global fraud. One of the key definitions is that of ‘thin capitalisation’, which is defined as the difference between a firm whose debt to equity ratio shows greater levels of debt than equity. The change being made to schedule 2 will be of interest to both those bearing the solvency risk of any firm and of course the Australian Taxation Office. A highly geared firm has the potential to use interest payments to reduce its tax liabilities dramatically. This change will amend the levels of debt allowed to be used as deductions. It will also close the gap between whether it is more profitable to use equity or debt to fund expansion of a business.

Further, schedule 3 amends section 128F of the Income Tax Assessment Act 1936 to provide an exemption from interest withholding tax to bonds issued in Australia by state and territory government authorities. This addresses anomalies in the state and territory bond markets. Interest withholding tax is paid at the rate of 10 per cent on interest paid from Australia to nonresidents overseas. The section of the Income Tax Assessment Act in question gives an exemption to the issuers of debentures or certain other debt instruments if issued outside Australia and dates back to changes to the act made in 1999. These exemptions did not apply to state and territory governments and the changes in schedule 3 seek to rectify this situation. As it stands now, there is a benefit for the state and territory governments to issue bonds offshore rather than raise capital within Australian borders, taking the example of the exemption for issuers outside of Australia.

Schedule 3 will amend the interest withholding tax exemption to include bonds issued within Australia and should increase liquidity and reduce the cost of borrowing for state and territory governments, which I suggest is a good thing, considering the cost of borrowing for state governments has just risen substantially and the ill-conceived unlimited bank guarantee and wholesale funding guarantee announced by the Rudd government. This has effectively made federal government bonds more attractive because they come with a full government guarantee as opposed to state government bonds, which do not come with any guarantees and are therefore less attractive. In a market, that will lead to a higher cost of borrowing for the states. As so many of our state governments move towards deficit budgets—and indeed as this federal government moves towards deficit budgets if Access Economics is to be believed today—it is an understandable consideration. The amount of state government budget debt is currently approaching $80 billion. In my state of Queensland, debt is approaching $30 billion. Interest payments are currently $5 million a day and rapidly increasing to $10 million a day, which the people of Queensland have to pay because of the Queensland Labor government.

Schedule 4 of the bill addresses the treatment of jointly held assets by fringe benefits tax. Currently, employers can use the ‘otherwise deductible’ rule when calculating their FBT liability to reduce the figure to nil when applying a fringe benefit to both an employee and their associate, be they a business partner, husband or wife. This is clearly unintended and it is right to have the situation addressed. This issue arose after the Federal Court ruling on National Australia Bank v FC of T93 where a husband and wife were receiving low-interest loans from the NAB as a fringe benefit and, as the ruling determined the husband was the sole recipient of the fringe benefit and was entitled to claim tax deductions on unreimbursed interest on the loan, the FBT liability for the NAB could be reduced to zero under the ‘otherwise deductible’ rule. This raised several inconsistencies with other legislation and indeed the intent of the use of the rule. Under the proposed legislation, an employer must adjust the taxable value of a fringe benefit provided jointly in relation to an income-earning asset jointly owned by an employee and their associate, so the taxable value of the fringe benefit is reduced only by the employee’s percentage of interest in the asset. The ‘otherwise deductible’ rule will be changed to reflect the situation that is desired.

Finally, schedule 5 changes the eligible business rules for managed investment funds. The measures, of course 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, whilst also introducing 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 or for the purpose of deriving rent. The Board of Taxation is currently conducting a review of tax arrangements applying to managed funds that operate as managed investment trusts, and the operation of division 6C is included in this review which the board is due to deliver by the middle of 2009.

Whilst the former, coalition government identified the need for action in these areas and maintained in-principle support for integrity measures, legislative action was delayed so that further consultations could be undertaken in recognition of the implications for the property sector. The Senate Standing Committee on Economics is best placed to identify any unintended consequences of the amendments and to further examine the effect on the property sector and housing affordability generally, given that the proposal expects to raise $523 million over the forward estimates.

David Bradbury (Lindsay, Australian Labor Party) Share this | Link to this | Hansard source

I rise in support of the Tax Laws Amendment (2008 Measures No. 5) Bill 2008. I wish to comment on the schedules contained therein and, in particular, I would like to focus my comments on schedules 4 and 5, which relate to the fringe benefits tax amendments in respect of jointly held assets and the amendments in relation to managed investment trusts.

It is worth acknowledging that the first schedule to the bill is largely an integrity measure and addresses one of the shortcomings of the current operation of the goods and services tax law. In particular, it deals with the margin scheme, a very important component of the GST law that recognises the need to tax only incremental gains in relation to real property rather than imposing the added tax burden of a tax on the entire property at each stage of the disposal process along what is inevitably a chain of disposals. The schedule deals with the interaction between the margin scheme and the GST-free provisions in relation to the sale of a business as a going concern and also GST-free sales of farmland. It also involves the interaction of the provisions dealing with suppliers between associated entities.

The way in which the law has operated has given rise to a situation where some taxpayers have been able to not realise a GST liability throughout the process of the development of land. Largely, that has occurred by allowing an increase in the value of the land to occur but not to be brought to account in GST terms as a result of using these GST provisions in relation to the sale of a going concern or the GST-free sale of farmland. This measure will ensure that for taxpayers in like situations, regardless of whether or not they seek to take advantage of a going concern in farmland provisions or alternatively the associated entities provisions, like treatment will be attributed as would normally be the case for any other taxpayer utilising the margin scheme. It is a measure that will yield some revenue for the government, but it is a measure that is largely one of equity and integrity to make sure that like taxpayers are treated equally.

In relation to schedule 2 and the changes proposed to the thin capitalisation regime, it is worth noting that, with the introduction of the Australian equivalent of the International Financial Reporting Standards, there were some implications that flowed through to the thin capitalisation regime. It is important for us to recognise that there is some benefit in allowing a departure from the accounting standards in order to better reflect the factors that the government believes should be taken into account when determining the extent to which the thin capitalisation regime should apply. Thin capitalisation is the means by which, in the case of excessive leveraging—excessive use of debt through investments by multinationals—the interest deductions available can be reduced, therefore ensuring that companies do not unduly and disproportionately have a greater proportion of debt rather than equity in the investments that are operating within Australia. Obviously, allowing a greater proportion of investment to be debt funded allows greater deductions for interest expenses, and that comes at a cost to revenue. These measures largely take into account changes that are precipitated by monitoring the operation of the Australian equivalent of the International Financial Reporting Standards.

The interest withholding tax provisions seek to extend an exemption that is currently provided in respect of withholding tax on interest payments to state and territory government bonds. Contrary to what the member for Fadden may have been trying to suggest, this is in no way connected with the government’s guarantee for both retail deposits and wholesale term funding. I am not really sure what argument the member was seeking to make there, but there is clearly no connection between the government’s decision to introduce the guarantees and the need for this particular initiative. In fact, if we go back and have a look at the genesis of this particular proposal, it was announced by the Treasurer back in May of this year at the same time the Treasurer announced the Commonwealth’s commitment to increase Commonwealth government securities on offer. This was a measure that was undertaken well and truly in advance of any of those more recent measures. Let it be put on the record that the suggestion made by the member for Fadden that somehow this is a response to those imperatives is clearly not correct and does not stand up to more thorough examination.

That brings us to schedule 4 and the fringe benefits tax in relation to benefits jointly held. These amendments address an area of the law that has been open for exploitation and close a loophole in relation to section 138(3) of the Fringe Benefits Tax Assessment Act which deems a benefit provided jointly to an employee and one or more associates of the employee to be provided solely to the employee. There is an interaction between that provision and the ‘otherwise deductible’ provision which is prevalent throughout the FBT regime.

Clearly, this has given rise to a situation where some individual employees have entered into salary-sacrificing arrangements and have purchased an investment property jointly with a partner or a spouse. They have used pre-tax dollars through that salary-sacrificing arrangement to cover the costs of the interest expenses that have been incurred in relation to the borrowings on the investment property. Those interest expenses would otherwise be deductible because they are expenses incurred in the course of producing assessable income in the form of rental income derived from the investment property. In establishing that, they bring themselves within the ‘otherwise deductible’ rule.

That should be viewed in parallel with section 138(3), which provides that a benefit provided jointly to an employee will be for the purposes of fringe benefits tax considered to be a benefit provided solely to that employee. The effect of this is that the employee under such an arrangement is able to obtain the benefit of the salary-sacrificing arrangement so as to claim in effect a 100 per cent deduction for the interest expense that has been incurred in respect of the investment property. Clearly, in the scenario where employees have not taken advantage of this loophole, that interest expense would need to be apportioned and, in a joint tenancy arrangement, a deduction would only be available for 50 per cent of the interest expense. So this measure will go a long way towards plugging that hole. Once again, as with the other measures in this bill, it will provide for greater equity between taxpayers in relation to how in this case the fringe benefits tax impacts upon them and their taxation affairs.

I now turn to schedule 5. This is the schedule in the bill that is of greatest interest to me. This is a further instalment in the government’s attempts to establish Australia as a regional financial services hub. I know it was said previously by one speaker in this debate that one can only ask why it has taken so long for these measures to be implemented. That is a valid question to ask, and one to which I have not heard a satisfactory response. Division 6C of the Income Tax Assessment Act 1936 is one area of the law which has for a very long time needed some close attention and reform. That is why this government is committed to achieving that reform. The measures proposed in this bill are only one instalment in achieving that reform. The Board of Taxation is currently undertaking a review of division 6C. A discussion paper for the purposes of consultation has been released. I know that industry is being widely consulted to ensure that the outcome of that process achieves wide-ranging reform in relation to the impact of division 6C.

Division 6C was introduced back in 1985. It was designed to ensure that public unit trusts carrying on active business activities would be taxed in the same way as a company. It was essentially a regime that was created to ensure that, rather than taxation treatment being determined purely by the legal entity involved in the economic activity, there would be closer analysis of the underlying economic realities of the business being carried on by that entity. So just because it is a trust need not mean that it should receive the beneficial tax treatment that a trust might receive in many respects over a company.

As a result of the introduction of division 6C we saw a system emerge which allowed the characterisation of certain trusts as ‘public trading trusts’. If a trust were determined to be a public trading trust, the trust would then be taxed in the same way as a company, recognising the underlying economic realities that it was undertaking business activities probably in competition with other companies in the marketplace that would be taxed accordingly. Provided that it is a widely held trust—and that is an important requirement—and it is a trust that is involved in passive investments then the trust may avoid being characterised as a public trading trust and as a result will not attract the company taxation treatment that would otherwise apply to a public trading trust.

The income of a unit trust that in relation to a year of income meets the tests to become a public trading trust will be taxed at the company rate of 30 per cent. To avoid becoming a public trading trust in a year, a public trust must engage only or wholly in eligible investment business for that year. Section 102M of the act defines ‘eligible investment business’. Much of the need for reform of this division relates to the definition and the provisions set out in section 102M of the act. ‘Eligible investment business’ is defined to mean either or both of (a) investing in land for the purpose, or primarily for the purpose, of deriving rent or (b) investing or trading in any or all of the range of securities and instruments that are set out in the act.

The first limb in relation to investing in land has been a problematic area of the law for some time. The provisions set out in this bill will go a long way towards addressing those problems. I turn to some of the commentary in the industry consultation paper released by Treasury entitled ‘Potential changes to the eligible investment rules for managed funds, including property trusts’. Under the heading ‘Concerns of industry’, it says:

The current operation of Division 6C can create difficulties for real estate investment trusts due to inherent uncertainties and ambiguities in the law, and because the law has not kept pace with commercial developments in property trusts since the 1980s.

There is some uncertainty about what constitutes ‘eligible investment business’ (EIB), which consists solely of investing in land for the purpose, or primarily for the purpose, of deriving rent, or of investing or trading in a range of financial securities and instruments listed in its provisions, or any combination of these activities. Industry is concerned that the definition of EIB is not clear and is too narrowly defined.

That is certainly a legitimate concern expressed in that Treasury document on behalf of industry, but this is something that I know many people within the sector have pointed to for a long time. One piece of evidence to support that proposition is one of the interpretive decisions handed down by the Australian Taxation Office back in 2003: ATO ID 2003/73. In that particular interpretive decision, the issue in question was:

Is a resident unit trust deriving income from rent and the provision of secretarial services, a ‘trading trust’ for the purposes of section 102N of Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936)?

The answer to that was ‘Yes, it is.’ In this particular case, the facts that were provided in the interpretive decision indicated that it was a resident unit trust carrying on a business which constituted leasing of premises from a third party, providing these premises as fitted out premises for rent and providing secretarial services to tenants of these premises. The trust derived its income from renting the premises and from the provision of those secretarial services to the tenants. The income derived from the provision of the secretarial services to tenants represented approximately 25 per cent of the total income derived by the trust each year.

It was on the basis of this 25 per cent of overall income figure that the commissioner, through the interpretive decision, held that the trust was carrying on a trading business and was therefore to be characterised as a public trading trust. That gave rise to considerable uncertainty within the industry and did not really clarify the position in relation to what eligible investment business was other than to suggest that secretarial services accounting for 25 per cent of overall gross income of a trust would therefore tip it over the limit and make it a public trading trust.

That begged the question: how much income of an incidental nature to the rental purpose of the particular property would be permitted? Clearly, those secretarial services were deemed to be incidental but they were of a scale that seemed to tip it over the limit. It raised the question of what an appropriate limit would be. I am very pleased to see in the proposals contained within the bill before the House that there is the introduction of a new safe-harbour limit, which goes a very long way towards addressing this particular concern.

The safe-harbour rule, which is proposed in clause 102MB(2), reads:

For the purposes of this Division, an entity’s investments in land are taken to be for the purpose, or primarily for the purpose, of deriving rent during a year of income if:

(a)

each of those investments is for purposes (other than the purpose of trading) that include a purpose of deriving rent; and

(b)

at least 75% of the gross revenue from those investments for the year of income consists of rent (except excluded rent); and

(c)

none of the remaining gross revenue from those investments for the year of income is:

(i)

excluded rent; or

(ii)

from the carrying on of a business that is not incidental and relevant to the renting of the land.

There is this nexus with the revenue being incidental to the renting of the land, but there is also this new notion of excluded rent which has been introduced into the regime. Excluded rent is defined elsewhere in the bill to include those particular profit based formulas that might be rent in name but in form something more akin to a profit based formulation. This is very much in keeping with the philosophy of what division 6C is intending to achieve—that is, some equity between various entities, whatever their legal forms, based on a recognition of the economic realities that underpin them.

These measures will go a very long way. They are only interim measures but combined with the ongoing commitment to consultation and delivering a radically reformed division 6C, this government will be able to move one step closer towards achieving its goal of setting up Australia as a regional hub for financial services. This is something that we are well placed to do and now, with these amendments to the law, we will be even better placed to achieve.

Andrew Laming (Bowman, Liberal Party) Share this | Link to 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.

James Bidgood (Dawson, Australian Labor Party) Share this | Link to this | Hansard source

I rise to speak to the Tax Laws Amendment (2008 Measures No. 5) Bill 2008. The Tax Laws Amendment (2008 Measures No. 5) Bill 2008 will extend eligibility for exemption from interest withholding tax to bonds issued in Australia by state and territory central borrowing authorities. This measure in the bill is part of a broader suite of government initiatives aimed at bolstering Australia’s financial markets. This measure was part of a broader package of measures announced by the government to strengthen Australia’s financial markets in the face of current pressures. Industry expects this measure will be in effect before the end of 2008. The bill will insert new subsection 128F(5B) into the Income Tax Assessment Act 1936 to enable bonds issued in Australia by state and territory central borrowing authorities to be eligible for exemption from interest withholding tax, providing the bond issue satisfies the requirements of the public offer test.

For the purposes of the new subsection 128F(5B), ‘bond’ is defined as including debenture stock and notes. Defining bond in this way will provide greater certainty to market participants and ensure that it is not interpreted in a manner that would hamper the effective operation of this measure. Removing IWT is expected to result in the states unifying their bond issuances into one pool of funds, thereby improving depth and liquidity in the market and broadening the potential investor base. Ultimately, this should lead to a lower cost of capital and hence financing cost for state infrastructure projects.

Further, it is anticipated that by making state government bonds more attractive to foreign investors some of the pressures facing the Commonwealth government securities—otherwise known as CGS—in this market will be eased. The bill also amends the eligible investment business rules and division 6C of the Income Tax Assessment Act 1936. It is a government priority to make Australia a funds management hub in the Asia-Pacific region by streamlining and simplifying the operation of the eligible investment business rules in division 6C. This is a key part of the government’s plan to bolster the Australian economy.

Labor is about building the economy, building infrastructure and creating jobs. We are making the decisions now to keep the economy strong. The Rudd Labor government is tackling the global financial crisis. Through this bill and others, we are providing leadership while those opposite seek only to oppose for the sake of it and to take the focus away from a leader who has vision. They are taking cheap shots during a time of economic priority for the nation. We on this side are taking leadership. We are managing the economy to see us through difficult economic times.

We have shown leadership by releasing an economic security package worth $10.4 billion, money that will be invested into the economy. We will, on 8 December, issue $1,400 to every single aged pensioner and $2,100 to every aged pensioner couple. This money is much needed by our aged citizens and this money is being released direct as a lump sum so as to avoid the complications for those who are in aged care homes where certain contracts provide that up to a maximum of 85 per cent could be withheld by the business running those homes. By giving it directly to the individuals and to the couples, we empower our aged citizens to have 100 per cent of that money, thereby enabling them to spend all of that money as and how they choose. What more appropriate time than just before Christmas?

I am sure it is going to bring much cheer to our elderly folk in this country and to their families that our aged citizens will be able to afford to buy Christmas presents for their loved ones and that they will be able to fix those little things around the house which perhaps up until recently it has been impossible to find the money for. This empowerment by this government gives to the people who really need the money, and what more appropriate time than at Christmas time?

In this $10.4 billion economic package we have also addressed our younger citizens—those who are leaving home, leaving university and, for the first time, wish to enter the housing market. We are enabling first-time home buyers who are buying an already constructed home an increased incentive from $7,000 to $14,000 to encourage our young people and first home buyers to enter into the great Australian dream of owning their own home. This is something which we on this side see as a priority, empowering young people to purchase a home and to have control and ownership over their own destiny in terms of accommodation, and we are doing our bit to help facilitate that.

We also wish to stimulate new construction in the housing market. With this in mind, this government has again shown leadership. We have decided to give an incentive of $21,000 to each person buying a newly constructed home or a home under construction as an incentive to buy new homes. This in itself helps add to the housing stock of the nation. People going into a newly constructed home free up other accommodation, whether it be rented or whether it be something that has already been owned. In effect this helps stimulate new homes being constructed and frees up current stock. The sum of $21,000 is certainly a big incentive to get started on a new home construction.

As part of this $10.4 billion economic stimulus package is a package designed to create an extra 56,000 training places. That is 56,000 on top of the 50,000 training places already allocated in the budget of May 2008. It is one thing to want to build new homes, it is one thing to stimulate the economy, but we also need a well-skilled, well-trained, well-educated workforce in the trades and in the professions in order to help construct the new homes and the new economy we are building. To double the number of training places is indeed an investment in the future not only of the nation’s economy but also in the capital asset base of people’s skills in this nation. What greater way to do that than to teach someone a trade or a profession and to move them in a new direction?

As part of our $10.4 billion package we know that it is important that people take hold of these stimuli and actually go into the marketplace to take action: to invest in homes; to take up the new training places; and for the elderly to use that money wisely to do whatever they wish, and that in itself will keep business rolling. This all comes with the backdrop of a two per cent drop in interest rates due to the global financial circumstances, which in itself will help people who are paying their mortgages. This is a substantial saving for the people of this nation. When you put this against the backdrop of the tax cuts that were brought forward on 1 July from the budget in May 2008, you will see that someone on a very minimum average wage of $50,000 a year has $20 a week cash in their hand to spend however they wish. That is an extra $20 note in the hand to put food on the table, petrol in the car, help with the kids clothing or whatever it is they choose to do with it. Twenty dollars a week cash in the hand to someone on $50,000 a year is a helping hand. The role of a Labor government is to help those in greatest need. It has always been my philosophy in politics that we should bring about the greatest benefit to the greatest number of people, especially those with the greatest need. Our tax measures and our stimulus to the economy have helped do that.

I know that bringing forward infrastructure spending is going to be a major stimulus to our local governments in providing basic, much-needed road infrastructure, particularly in my seat of Dawson, where this government has committed, I am proud to say, $150 million on the Bruce Highway from Mackay through to Townsville. That is something that the people of Dawson have been crying out about for years and years and years. And yet their cries were not answered—or perhaps it was chosen that they not be heard. But this government has said. ‘Yes, we will deliver basic road infrastructure for the people of Dawson, particularly on the Bruce Highway.’ Not only that but this government has committed to a major infrastructure project in southern Townsville on the port access road. I was very pleased to accompany the Prime Minister, Kevin Rudd; the Minister for Infrastructure, Transport, Regional Development and Local Government, Anthony Albanese; the state minister for infrastructure, Warren Pitt; and local representatives from the Townsville City Council in turning the first sod a couple of months ago in this $95 million project.

That project has been on the table for over 30 years. For over 30 years, the Townsville enterprise committee had been calling for action to build this port access road to streamline the movements of goods and services from out west to the port and thereby bypass the urban area and improve everybody’s quality of life, as well as improving efficiency in delivery of those goods and services to the port of Townsville. It was this government that delivered for the people of Dawson in southern Townsville. It was this government that said: ‘Yes, we can see the long-term benefit not only to the locality but to the bottom line of the nation’s economy, because we have a big vision that is not short-termism. We have a vision that looks down the corridor of time and sees the benefit of investing massively in major infrastructure now so that future generations can benefit from the long-lasting roads, rail, ports and services.’ This all comes through a political determination to invest, and we are investing in the future economy and future infrastructure and helping to stimulate the economy through these difficult global financial times.

It is pleasing to know that this nation can stand proud amongst our global leaders and competitors in saying that we have the fourth best regulated banking system in the world. No. 1 is Canada. I find it quite interesting from a demographic point of view that the demographics of Canada, with 30 million people and a large geographic landmass with a diverse mix, are just like those of Australia, with 20 million people, a large geographic mass, huge distances to travel from one community to another, different communities and an indigenous population, and that they, like us, have a banking system among the best regulated in the world, because we know that that is the way forward. I think we can take great pride in that.

I commend the way that this Treasurer, Wayne Swan, and this Prime Minister, Kevin Rudd, have handled the global economic crisis. It is with such leadership and such vision that we will walk with our heads held high saying that we did what was needed and what was right for these times. This taxation amendment brings forward very important measures which will enable, stimulate and encourage people to invest here in Australia, because there is a safe and sound banking system where they know their money will be safe in this country. So, without any further ado, I commend this bill to the House.

Kevin Andrews (Menzies, Liberal Party) Share this | Link to this | Hansard source

I was interested to note the previous speaker, the member for Dawson, encouraging Australians to spend and invest in the current circumstances. Of course, for that to occur there are at least two preconditions that most people would want to see: firstly, adequate regulation of the financial and, indeed, taxation systems, which the Tax Laws Amendment (2008 Measures No. 5) Bill 2008 goes to; and, secondly, competent economic management of the finances of the nation. In that context, it is interesting to note that in the past few weeks, far from having solved some financial crisis, the current government has actually created one by guaranteeing banks but not other financial institutions, leading to a run of funds from those other financial institutions to banks. Indeed, with many financial institutions around this country in which Australians—elderly Australians in particular—have funds invested in a variety of ways, they are finding that those deposits have been frozen. It is hardly the mark of economic competence in a government to actually bring about a financial crisis where none existed, so far as Australia was concerned in this regard, in the first place.

The provisions in this bill, I suppose, would be regarded by most Australians as rather arcane, but given the events of the past few weeks I suppose proper and appropriate regulation is something which is ultimately of importance to all of us in terms of the way in which the taxation and financial systems in Australia operate. We can see the problems that have occurred elsewhere around the world without adequate regulation, particularly in the United States of America, where the failure to regulate, for example, the subprime mortgage market in a way which did not occur here has contributed to the problems in the United States, just as other measures that have been taken over quite a few years in that country, particularly in saying to people who could not otherwise afford loans that there were financial institutions that should provide loans to them—effectively without any equity or any real means by which people could repay those loans—have led to major problems so far as the United States is concerned. Turning to the provisions of this bill, these are measures which in large part have their origin in work commenced by the previous government, the Howard government, but which, due to time constraints with the election and the term coming to its conclusion and in order to ensure that there was proper and adequate consultation in relation to these measures, were not introduced prior to the election just over a year ago and which now are being introduced.

There are five schedules that contain the important provisions of this bill. Without going into them in a huge amount of detail, I will say something briefly about each of those schedules. The first, schedule 1, as other speakers have pointed out, is an integrity measure which goes to matters relating or pertaining to real property. It amends the A New Tax System (Goods and Services Tax) Act 1999. The object of the schedule is to ensure that GST is applied to value added to real property after 1 July 2000 where there is an interaction between the margin scheme and the going concern, farmland and associates provisions. Schedule 1 makes changes to the GST margin scheme to prevent equities manipulating their affairs relating to real property so as to reduce their GST liability. The first aspect of this schedule ensures that where the margin scheme is applied to real property that was previously acquired on a GST-free basis then 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.

The second aspect of this schedule ensures that where the eligibility to use the margin scheme is removed the eligibility to use the margin scheme cannot be reinstated by interposing a GST-free or non-taxable sale. Currently, the eligibility to supply real property under the margin scheme can be reinstated by interposing a GST-free or non-taxable supply. The third aspect strengthens the GST general anti-avoidance provisions to apply to schemes that are entered into with the sole or dominant purpose of gaining a GST benefit. This schedule was initiated under the coalition government and builds on the coalition’s strong record of demonstrated commitment to maintaining the integrity, the base and the operation of the GST. Indeed, in Australia, in terms of regulation of not only the taxation scheme in this country but the financial scheme, I think the situation we are in compared to, for example, that in the United States is very much a credit to the work that was done over the previous term of the Howard government in this country.

Turning to schedule 2, this schedule to the 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 capitalisation position of complying entities for certain specific impacts due to the adoption of the Australian equivalence to International Financial Reporting Standards in 2005. Schedule 2 modifies the accounting standards treatment of specified assets and liabilities. The schedule amends the accounting standards relating to the thin capitalisation regime for identifying and valuing an entity’s assets liabilities and equity capital. The measure was initiated by the adoption of the Australian equivalence to the International Financial Reporting Standards in 2005. The current form of this schedule is a result of extensive consultation with industry stakeholders, and there have been significant improvements since the exposure draft was initially released.

Schedule 3 to the 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 to the bill amends the Fringe Benefits Tax Benefits Assessment Act 1986. Schedule 4 affects the fringe benefits tax treatment of benefits jointly held by an employee and a third party. The requirement for these measures was brought about by a decision in the Federal Court in the case of the National Australia Bank Ltd and the Federal Commissioner of Taxation. The court ruled that an employer could reduce the entire taxable value of their fringe benefit provided jointly to an employee and third party, typically their partner, in relation to an income-earning asset. This was inconsistent with the general principles of income and deductions. The measures 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, schedule 5 of the bill amends division 6C of the Income Tax Assessment Act 1936. The object of this schedule is to make changes to the eligible investment business rules for managed funds. The measures, subject to certain conditions, include a definition of the term ‘investing in land’ to include fixtures, chattels and moveable property. This schedule also expands the range of financial instruments in which a managed investment trust can invest. It also introduces a number of safe harbours, which I will not go into at this stage. The Board of Taxation is currently conducting a review of tax arrangements applying to managed funds that operate as managed investment funds, and division 6C is included in this review. The Board of Taxation is due to report on its review by the middle of next year.

As I indicated, the former coalition government identified the need for action in this area and maintained in principle support for integrity measures. Legislative action was delayed so that further consultations could be undertaken in recognition of the implications of any changes for the property sector in Australia. These are sensible changes. They are changes that were initiated by the former government and they have my support. I commend the bill to the House.

David Hawker (Wannon, Liberal Party) Share this | Link to this | Hansard source

In joining in this debate on the Tax Laws Amendment (2008 Measures No. 5) Bill 2008 I certainly concur with the comments of the previous speaker, my colleague the member for Menzies, who I think covered some of the main points. I would like to reiterate some of them. The important point about this legislation is that it comes from some work that was done by the previous government and in fact was flagged by an earlier speaker, the honourable member for Higgins, Mr Peter Costello. It certainly shows that the coalition were onto the issues but, as the member for Menzies pointed out, we believed that full consultation was very important in getting the legislation right. Of course, even on that point, there have been changes since the announcement that the current Treasurer made in the 2008 budget on the first schedule. So it has been shown that it is very important. The Senate Standing Committee on Economics has been looking at this legislation as well because it is clearly important that we do get this sort of legislation right.

I was listening to the comments of the member for Dawson in this debate and I must admit it did rather amaze me when he talked about some aspects of the legislation. Yes, he did start talking about the whole question of schedule 1 and what it would mean for people being able to manipulate their affairs relating to GST on property and in particular how one assesses the value added to real property after 1 July 2000 where there was a margin scheme involved. The legislation makes the point that it is important to make sure that people cannot manipulate their affairs to reduce their GST liability and, in particular, where there is a margin scheme that was previously acquired on a GST-free basis that the value added on the GST-free sale is included in calculating GST under the margin scheme. Of course, the legislation goes on further to ensure that this cannot be repeated so that, if a margin scheme were to be reinstated, this would not be a means of avoiding the GST on the sale. The legislation picks up on those very important points.

Getting back to the comments the member for Dawson made about the government introducing an extension of the first home buyers grant to those who buy new homes under construction or to be constructed, I would say that, when we talk about what is going to encourage people to buy homes, probably at one level if house prices themselves start to fall that would make them more attractive to buy. But the second point that one has to look at very closely is the whole question of confidence, and I think that is really quite worrying. I was looking at an article in today’s Australian entitled ‘Property price fall the worst in 25 years’. It talks about what has happened to property prices in Western Australia and in other capital cities and it says:

Real Estate Institute of Western Australia president Rob Druitt said the Perth market was moving into uncharted territory with a combination of falling house prices and dwindling sales.

The article went on to say:

While some correction had been expected, Mr Druitt said Perth had not experienced anything like the current downturn since 1982, when the median house price fell 10.5 per cent in a year.

When we listen to the member for Dawson talking about the impact of first home buyer incentives we then look at what has happened to residential auctions in the capital cities over the last 12 months. If you look at the clearance rates, which are a good indicator of what people are looking at when they want to buy a home, you see that in Sydney the clearance rate has dropped from over 60 per cent a year ago to 43½ per cent. In Melbourne it has gone from 76 per cent down to just over 44 per cent. In Adelaide it is even more dramatic. It has gone from 70.2 per cent down to 38.1 per cent. Then in Brisbane we see that the clearance rate has dropped from 52.8 per cent down to 25 per cent. It is very significant, but even more significant when you consider that the number of auctions in most of those places had increased in some cases by as much as double.

It was interesting to hear the government members’ approach to the whole question of what is happening in the economy. On the one hand, the member for Dawson was talking about being Father Christmas and about assistance to first home buyers and about assistance to pensioners for Christmas time, but then he went on to talk about how important it was to see interest rates falling, implying that this was another part of the current Labor government’s approach to managing the economy and making life better for everyone. He was talking about the role of a Labor government in claiming credit for this, the role of spending and the shrinking surplus. Remarkably, as so many old-timers have said to me over the years, ‘You can’t trust Labor with the money,’ and I think of the Labor budget surplus and how quickly it is shrinking. The government has not actually delivered a surplus yet, but I think someone is now running a book as to when the surplus will totally disappear. That comes back to what the old-timers said about not trusting Labor with the money.

When we look at the management of the economy—and this comes back to the point about confidence—we look at the whole question of the banking deposit scheme. In about a month we have seen the government change its position three times. At one stage it was critical of the opposition saying that deposit guarantees should be lifted. The government said the suggestion of $100,000 from the Leader of the Opposition was irresponsible. It then did a backflip and said, ‘No, we will do better than that; we are going to guarantee all banking deposits.’ It made a remarkable decision when clearly not even the Reserve Bank was directly consulted on that. I would have thought that was fairly important. Very quickly it was realised that this was having a massive distortion on the market, so we saw another position—again, within a couple of weeks—of its suddenly saying for any deposit over $1 million there would be a fee. The disruption that has meant—this comes back to the whole question of assisting people to buy homes—has been quite massive, because this is all about confidence and if you start to undermine confidence in the way you are managing the economy then home buyers will be even more hesitant.

We look at the impact of the management of this approach to supporting deposits in banks and we see that other institutions—and I can think of at least one in my area, a very reputable institution but one which operates outside the APRA approval and operates, I think, very responsibly—have been affected by the whole question of deposits drying up. Not surprisingly, good clients are very hesitant when there is no guarantee. This is a reflection of the way that the current government is not really too sure about what it is doing. I am reminded of a cartoon that was in the Herald Sun recently of a car going along stop, start, stop, start with the Prime Minister and the Treasurer in the car and the comment from the observer is, ‘Well, they’ve only got the L plates on so clearly they do have a bit of time to learn.’ The unfortunate thing about it, though, is that if that does happen—and a lot of people are going to get hurt—then the government will be held responsible. Make no bones about it: this is a very important part of the role of the opposition. That is why, when the Leader of the Opposition has been bringing to the attention of the government the importance of managing some of the challenges that we are facing in the current financial system, it should be done in a responsible and effective way. There is very real doubt that particularly the Treasurer is on top of his portfolio, and so when we look at what is in prospect I think we see that a lot of Australians are extremely concerned about the management of this government.

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. The member for Wannon will have leave to continue speaking when the debate is resumed.