Thursday, 27 November 2008
Tax Laws Amendment (2008 Measures No. 5) Bill 2008
Debate resumed from 25 November, on motion by Senator Ludwig:
That this bill be now read a second time.
I rise tonight to support the Tax Laws Amendment (2008 Measures No. 5) Bill 2008. Like many of the TLABs that come before the Senate, this bill contains a number of unrelated schedules that make minor amendments to taxation law with the intent of improving the operation of the Australian tax system. The bill has five schedules, and I will deal briefly with each schedule.
Schedule 1 is an integrity measure that seeks to amend the 1999 GST act by making changes to the GST margin scheme to prevent entities manipulating their affairs so as to reduce their GST liability. Like a number of schedules in TLABs that have come before the Senate this year, this schedule is based on the work undertaken by the previous coalition government. I will briefly discuss the background to this schedule. The measures addressing the GST margin scheme were initially announced in 2005 as part of the Tax Laws Amendment (2005 Measures No. 2) Bill 2005. That bill proposed amendments to the GST margin scheme which the former Treasurer announced on budget night in May 2005 in Budget Paper No. 3. The coalition, after the announcement, embarked on extensive and widespread consultation regarding the changes. Following consultation, on 7 June 2005, the then Minister for Revenue and Assistant Treasurer, the Hon. Mal Brough, foreshadowed amendments to the bill and the coalition government deferred the tax integrity measure so that there could be further consultation. The consultations continued after the change of government, leading to the amendments seen in the bill that we are debating today. The point is, of course, that this has had a very long gestation.
The GST margin scheme essentially allows for the GST on certain taxable supplies of real property to be calculated on the margin—the margin being the difference between the purchase price and the sale price. The first aspect of schedule 1 ensures that, where the margin scheme is applied to real property that was previously acquired on a GST-free basis, the value added by the entity that made the GST-free sale is included in calculating the GST payable under the margin scheme. This ensures that the rules are brought back into line with the original intent of the legislation. The second aspect of schedule 1 ensures that the eligibility to use the margin scheme cannot be reinstated by interposing a GST or non-taxable sale. The third aspect of the schedule strengthens general anti-avoidance provisions for schemes that are entered into with the sole or dominant purpose of gaining a GST benefit. According to the explanatory memorandum, schedule 1 is expected to have a positive impact on revenue collections of $523 million over the forward estimates.
Schedule 2 is a noncontroversial schedule that amends accounting standards in relation to the thin capitalisation regime. Specifically, it modifies the accounting treatment of specified assets and liabilities in relation to thin cap provisions. This amendment was necessary because of the adoption of the Australian equivalents of international accounting standards in 2005.
Schedule 3 is another noncontroversial schedule that extends an exemption from interest withholding tax for state and territory government bonds. This schedule amends section 128F of the Income Tax Assessment Act 1936 and is expected to see a reduction of $64 million in revenue over the forward estimates.
Schedule 4 is also a noncontroversial schedule that makes changes to the fringe benefits tax treatment of jointly-held benefits. In National Australia Bank Ltd v Federal Commissioner of Taxation, the court held that an employer could reduce the entire taxable value of a fringe benefit provided jointly to an employee and third party—typically their partner—in relation to an income-generating asset. This was a significant departure from the generally held tax principles of income and deductions. Schedule 4 seeks to address this anomaly by requiring an employer to adjust the taxable value of the fringe benefit according to the proportion of the jointly-held asset that the employee owns. This schedule is expected to deliver a revenue-positive amount of $49 million over the forward estimates.
The last schedule in this bill, schedule 5, amends division 6C of the Income Tax Assessment Act 1936 to change the eligible investment business rules for managed investment funds. This is likely to be an interim measure. The measures in 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 instruments that are listed in division 6C. The schedule also introduces the following safe harbours: a two per cent safe harbour for non-trading income set at a whole-of-trust level and a 25 per cent safe harbour for non-rental, non-trading income from investments in land for public unit trusts investing in land for the purpose of deriving rent.
This bill was referred to the Senate Standing Committee on Economics for inquiry and recommendation. The committee received six submissions and also held a public hearing in Canberra on 28 October 2008. And I should record my thanks to the committee for their usual diligence and good work—with, I must say, an enormous workload in looking at many bills. During this inquiry, only schedule 1 attracted any significant criticism, which was why I spent a little more time on it earlier in my remarks. The committee, likewise, also paid attention to the detail of schedule 1 in its report.
The Urban Development Institute of Australia and the Property Council of Australia both expressed concern that the proposed legislation would act as ‘an increased tax on new housing developments’, thus ultimately being passed on to the home buyer. Treasury, however, disagreed and suggested that groups like the Urban Development Institute of Australia and the Property Council of Australia had overstated the effect that the proposed changes would have on house prices and housing supply. Interestingly, the committee’s view of this was:
The committee agreed with the Treasury that the proposed changes to the legislation would not have a significant impact on the cost of housing. The measures—
in schedule 1—
only affected a very small proportion of the housing market. Moreover, only a proportion of the cost would be passed onto homebuyers, with some passed back to the suppliers of land and some borne by the property development sector in reduced profits.
So, obviously, I have put some weight on the committee’s finding. It was the recommendation of the committee that the Senate support the bill, and that is a view that I share. Again, on behalf of the coalition, I indicate our support for this bill.
I think Senator Coonan has outlined very clearly the schedules involved in the Tax Laws Amendment (2008 Measures No. 5) Bill 2008. Indeed, as Senator Coonan said, the Senate Standing Committee on Economics spent most time looking at schedule 1, which was the subject of the submissions to our committee. Schedule 1 seeks to amend the GST act—A New Tax System (Goods and Services Tax) Act 1999—to overcome tax minimisation involving the use of the margin scheme and the sale of real property as a tax integrity measure. There is no suggestion that people have been acting illegally in the past, but there was concern that it might have become an avoidance measure under the act. This schedule seeks to align the antiavoidance provisions in the GST act with the antiavoidance provisions in part IVA of the Income Tax Assessment Act.
This arose because special rules existed for real property that allowed taxpayers an alternative means of calculating GST. These rules became known as the margin scheme. The margin scheme was generally used for new residential property developments. The example was given that party A, a GST registered party, sold land under the margin scheme to party B, a GST registered property developer. Party B began construction on new residential premises on the land and then sold to a third party as a GST-free going concern. The third party then completed the construction and sold to the consumer. In this case, the only GST collected from the transactions between A, B and C and the final consumer left a loophole where no GST was paid in the interim period. That had some justification, I think, because the example used was where farmers, for example, developed land to a certain stage and then on sold it. There was no suggestion that the farmer as a going business should pay GST on the partly developed land, but there was a concern that it had developed into an avoidance provision.
There was then the concern, as Senator Coonan mentioned, that the measure to close the loophole might add to the cost of housing property. Of course, at this particular time, this is a great concern. So the committee did consider this in detail. The committee did accept the Treasury’s position that it would not cause a significant increase in property prices. The ABS data of building activity in Australia indicates that only 1.5 per cent of all residential property sales will be affected by the amendment, thus counteracting any concerns as to housing affordability. So there would be a minimal impact on house prices from this measure. It will ensure a level playing field for those in the property industry; whereas, under the current scheme, there may be an opportunity for above normal profits for certain property developers. The committee agreed that this measure overcame an anomaly in the GST act. The financial impact of the proposed change will be a total of $523 million over the next four years. This is within the context of the total taxable value of new residential property, which is estimated at least $120 billion over four years. I think this small proportion of properties that would be affected allayed the committee’s concerns about any impact on housing prices arising out of this measure.
The other schedule which attracted some interest from submissions was schedule 3, which seeks to extend the interest withholding tax exemption to state and territory government bonds to bring about a better functioning state and territory bond market. This was strongly supported by two submissions and does indeed allow state and territory governments to have a better functioning bond market. The main concerns of the state central borrowing authorities were that the current arrangement segments the market, reduces liquidity and efficiency for the state markets and causes some hampering of the role of the state bond market. The extension of the eligibility for the interest withholding tax to domestically issued state government bonds was welcomed by operators within that market and, so I understand, state governments. I commend this bill to the Senate and am pleased to support all the schedules contained within it.
I thank all honourable senators who have made a contribution to this debate on the Tax Laws Amendment (2008 Measures No. 5) Bill 2008. The GST and sale of real property measure was announced in the 2008-09 budget. This measure will ensure that the GST law is consistent with the policy intent that GST applies to value added to real property by registered entities from 1 July 2000. The bill was referred to the Senate Standing Committee on Economics. The committee reported on 10 November 2008 and recommended that the bill be passed by the Senate.
The committee agreed that the proposed GST and real property amendments would not have a significant impact on the cost of housing. Further, the committee noted that if the amendments did not proceed there was a risk that property development transactions would be structured in a way that would give rise to a significant and inequitable loss of GST revenue. The GST and real property measure is an important integrity measure that will ensure that the appropriate amount of GST is collected on sales of real property. The changes will only apply prospectively from the date of royal assent so as not to impact on existing contractual arrangements.
Schedule 2 modifies the thin capitalisation rules to allow entities, when identifying and valuing assets and liabilities for thin capitalisation purposes, to depart in certain circumstances from the treatment provided by Australian accounting standards. The amendments are necessary to adjust for certain impacts of the adoption of Australian equivalents of the International Financial Reporting Standards on the thin capitalisation position of complying entities.
Schedule 3 makes bonds issued in Australia by state and territory central borrowing authorities eligible for exemption from interest withholding tax. This amendment will result in the states and territories being able to bring their offshore bond issuances onshore, unifying their issuances into one pool of funds, and improving depth and liquidity in the market. This should lead to a lower cost of capital and financing costs for the states and territories and aid in easing some of the pressures currently facing the Commonwealth government securities market.
Schedule 4 rectifies an anomaly in the fringe benefits tax law to ensure that fringe benefits associated with jointly held investment assets are calculated appropriately. Under certain salary sacrificing arrangements, associates of employees can receive a share of a fringe benefit made available to an employee. The current anomaly is that the associate’s share of the fringe benefit may often not be considered in the calculation of fringe benefits tax. As a result of these changes the fringe benefits tax law will now recognise the benefit being provided to associates of employees who hold investment assets jointly with the employees. The measure will have effect from 7.30 pm Australian Eastern Standard Time on 13 May 2008. However, there will be a transitional period for employees who have already entered into salary sacrificing arrangements with their employer. Arrangements that were put in place prior to announcement in this year’s budget will be able to continue under the existing law until 1 April 2009—that is, the end of the current FBT year. This will provide time for employers and employees to adjust salary packages as appropriate for those private arrangements.
Schedule 5 implements amendments to the eligible investment business rules for managed funds contained in division 6C of the Income Tax Assessment Act 1936. These amendments were designed following extensive consultation with the managed funds industry and with professional bodies. The safe harbours address industry concern with the operation of division 6C by making it easier for managed funds to comply with the eligible investment business rules. The amendments reduce the scope for funds to breach these rules inadvertently, thus lowering their compliance costs.
These amendments are part of the government’s plan to make Australia a financial services hub in the Asia-Pacific region. To date, the government has taken action on a number of fronts to further this objective, including reducing the level of withholding tax on distributions from Australian managed funds to non-resident investors. The government has also asked the Board of Taxation to review the taxation arrangements applying to managed investment funds. The board is due to report to government by the middle of 2009. These amendments are an initial reform, pending the outcome of the board’s review. I commend this bill to the Senate.
Question agreed to.
Bill read a second time.
Ordered that consideration of this bill in Committee of the Whole be made an order of the day for the next day of sitting.