Ursula Stephens (NSW, Australian Labor Party, Shadow Parliamentary Secretary for Science and Water) Share this | Hansard source

I want to speak briefly to the Tax Laws Amendment (2005 Measures No. 6) Bill 2005. I begin by endorsing wholeheartedly the comments that Senator Murray has made about the state of dental health care in Australia and the need for us all to focus clearly on delivering some outcomes in that area for people with needs. This tax laws amendment bill has a number of purposes. We know that it is designed to modify and update the Income Tax Act 1936 and the Income Tax Assessment Act 1997. We have heard already from several speakers about the issues that are being addressed in the bill. Basically, they are consolidation, available action for lost utilisation purposes, extension of the mutuality principle, the child-care tax offset, the medical expenses offset and the exclusion of solely cosmetic procedures, and an expansion of the deductible gifts register.

Schedule 1, as we have heard, recognises the losses from merging companies based on the proportion of the company’s market value. When companies merge, carrying forward that loss is a very critical issue and one that many businesses have raised with me as this bill has been considered. If the new company is worth less than half a per cent of the total group value then the losses cannot be recouped. Senator Murray described how important it is to take this to the third decimal point. I will not try to explain the issue any further, but it does have quite a significant impact on those companies operating, merging and trying to carry forward a loss. Senator Sherry made the important point that this is actually the 12th amendment to consolidation rules in two years. I think that the amendment moved by Senator Sherry tries to emphasise the importance of that fact and the need to have the consolidation measures in a single, comprehensive bill.

Schedule 2, which we have also heard quite a lot about but which I want to speak extensively about today, is vital to the survival of not just registered clubs but, just as importantly, not-for-profit organisations affected so recently by the court decision that has been mentioned. Up until the Federal Court decision that was known as the Coleambally case, the proportion of a club’s income which related to members was considered to be tax free. But the decision in the Coleambally case ruled that this should apply only where the members’ funds are distributed to members when the entity is being wound up and where the articles of association, or the charter of the club, indicate that that is the case.

This bill clarifies that, since the decision on 1 July 2000, the tax-free status is not determined by the restriction on winding up. The schedule is important in ways that many people in this chamber might not be aware of. The Coleambally Irrigation Mutual Cooperative Ltd was established and registered as a non-trading cooperative in 2002 under the Co-operatives Act 1992 of New South Wales. Its charter is to construct, own and maintain all new irrigation infrastructure assets in the Coleambally district for the benefit of their community. It is financed by a sinking fund levy which is made up of contributions from irrigator members. When Coleambally Irrigation applied to the Australian Taxation Office for a private binding ruling in 2002 to have their sinking fund contributions recognised as non-assessable income, the application was rejected on the basis that the mutuality principle did not apply to their circumstances.

This interpretation has since been applied to other organisations, but the implications for Coleambally Irrigation were substantial, not only in terms of their annual financial liability but also because of the retrospectivity implications. The ruling created a major hurdle for thousands of clubs and not-for-profit organisations with similar non-profit winding-up clauses but without an exemption under section 23 of the Income Tax Assessment Act. These clubs include, as we have heard, registered clubs, but also workers’ clubs, a range of cooperatives, rural financial counselling services, motoring organisations, business associations, environmental groups, some child-care centres, housing cooperatives, some community libraries and other local services, and many incorporated associations, non-trading cooperatives and companies.

Under the mutuality principle, membership subscriptions and receipts from other mutual dealings with members are not usually included in taxable income. The number of not-for-profit entities that benefit from the mutuality principle is huge. Schedule 2 ensures, therefore, that not-for-profit entities are not subject to income tax on their ordinary income from their members solely because they are prohibited from distributing surplus funds to members.

The third schedule ensures that the new activity test for the child-care benefit does not restrict eligibility for the new child-care tax offset. The government has made changes to the activity test requiring a work test or study-training test of 15 hours a week. At the time that that occurred, Labor pointed out that that would actually restrict eligibility for the new child-care tax offset, which the government has now accepted. So the bill maintains the work, training and study requirements for eligibility for the child-care tax offset at the same level as they were before the introduction last year of the Welfare to Work legislation. That makes a lot of sense for us, so we will be supporting this schedule of the bill.

The fourth schedule, which Senator Murray spoke quite extensively about, amends the medical expenses offset so that purely cosmetic and dental expenses are ineligible medical expenses and cannot be claimed under the medical expenses offset. The idea that this could continue to be the case when we have escalating health care costs and huge waiting lists around the country seems to me to show that this is an amendment that makes a lot of sense. Labor supports the clarification of that schedule.

Schedule 5 proposes that new organisations be added to the list of deductible gift recipients and also extends the time for which deductions are allowed for gifts to a fund that has time limited DGR status. Organisations that will benefit from this amendment include the CEW Bean Foundation, which wants to build a memorial and develop an honour roll in tribute to war correspondents killed in conflicts since 1885. The Australian Red Cross and the Salvation Army, which set up the Hurricane Katrina appeal to help in the disaster relief effort in the aftermath of Katrina, are also included. The amendment will see the Xanana Vocational Education Trust added to the deductible gifts register. This trust develops vocational education and training in East Timor by subsidising education and awarding scholarships to young people.

I will briefly speak to the amendment moved by Senator Sherry. I consider the important aspect of the amendment to be the proposal to close the loophole that currently allows deductions for fuzzy payments being used to facilitate deals. We have heard much in the media in the last few weeks about what is going on with the AWB. But, currently, facilitation payments are loosely defined and exempt from the normal bribery provisions of the Income Tax Assessment Act. In light of the burden currently being shouldered by Australian wheat farmers, due to the many payments made by the AWB to Saddam Hussein’s regime to facilitate trade, it is a shame that that loophole was not closed years ago. Had it been closed, the AWB would not have been able to describe up to $300 million as ‘facilitation payments’ and thus be entitled to multimillion-dollar rebates, courtesy of the Australian taxpayer.

Just as the government has received many international warnings about the kickbacks made to Saddam Hussein, so has the government received international warnings about this particular loophole in our tax law. As recently as January this year, the OECD report on the application of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions found that Australia’s defence of facilitation payments was also identified for further monitoring because of concerns such as the practical effectiveness of the record-keeping requirements.

Labor’s proposed amendment would prohibit AWB style deductions. The evidence before the Cole inquiry suggests that that is a loophole that we should be fixing very quickly. We are not alone in thinking that facilitation payments should cease to enjoy tax deductibility. It is not rocket science to know that as soon as you support facilitation payments you are entering into the culture of bribery and kickbacks which has done this nation’s trading reputation extraordinary harm.

I note Senator Murray’s comments about the fact that we are amending two pieces of legislation that we passed only a short time ago and his point that we rue the day when we have to amend such poorly drafted legislation which has been drafted in such haste. I have spoken at other times in this chamber about considering both the effects and the consequences of legislation. I think what we are seeing here is some consideration of those two issues.