Scrutiny of Bills Fifth Report of 1998


Scrutiny of Bills Fifth Report of 1998

13 May 1998

ISSN 0729-6258

MEMBERS OF THE COMMITTEE

Senator B Cooney (Chairman)

Senator W Crane (Deputy Chairman)

Senator J Ferris

Senator S Macdonald

Senator A Murray

Senator J Quirke

TERMS OF REFERENCE

Extract from Standing Order 24

(1)

(a) At the commencement of each Parliament, a Standing Committee for the Scrutiny of Bills shall be appointed to report, in respect of the clauses of bills introduced into the Senate, and in respect of Acts of the Parliament, whether such bills or Acts, by express words or otherwise:

(i) trespass unduly on personal rights and liberties;

(ii) make rights, liberties or obligations unduly dependent upon insufficiently defined administrative powers;

(iii) make rights, liberties or obligations unduly dependent upon non-reviewable decisions;

(iv) inappropriately delegate legislative powers; or

(v) insufficiently subject the exercise of legislative power to parliamentary scrutiny.

(b) The Committee, for the purpose of reporting upon the clauses of a bill when the bill has been introduced into the Senate, may consider any proposed law or other document or information available to it, notwithstanding that such proposed law, document or information has not been presented to the Senate.

FIFTH REPORT OF 1998

The Committee presents its Fifth Report of 1998 to the Senate.

The Committee draws the attention of the Senate to clauses of the following bill which contains provisions that the Committee considers may fall within principles 1(a)(i) to 1(a)(v) of Standing Order 24:

Taxation Laws Amendment Bill (No. 6) 1997

Taxation Laws Amendment Bill (No. 6) 1997

This bill was introduced into the House of Representatives on 29 October 1997 by the Parliamentary Secretary (Cabinet) to the Prime Minister. [Portfolio responsibility: Treasury]

The bill proposes to amend the following Acts:

  • Income Tax Assessment Act 1936 to:
    • deny the ability to offset against capital gains certain capital losses created by an arrangement entered into before 3pm on 29 April 1997 and to prevent companies using capital losses artificially created through an arrangement entered into after that time;
    • allow instalment taxpayers classified as small to pay their likely tax on 15 December following their income year and the balance, if any, of their tax liability on the following 15 March, and make consequential amendments;
    • prevent franking credits or debits arising from the payment or refund of tax where those amounts are attributable to the retirement savings account business of a life assurance company;
    • ensure that taxpayers must reduce the cost base or indexed cost base of an asset to the extent of any net deductions allowable for expenditures included in the cost base;
    • replace the formulae used to determine the passive income of the controlled foreign companies of life and general insurance companies;
    • require life companies to use average calculated liabilities, rather than calculated liabilities at the end of the year of income as the basis for determining exempt income that relates to immediate annuity business and apportioning income and capital gains; and
    • clarify the operation of the depreciation provisions in circumstances when an entity the income of which is exempt becomes, for any reason, subject to tax on any part of its income under the provisions of the Act;
  • Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 to extend to companies two concessional tracing rules which are available to trusts under trust loss measures;
  • Fringe Benefits Tax Assessment Act 1986, Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 to extend the existing exemption for taxi travel beginning or ending at an employee's place of work and to introduce a new exemption from FBT for car parking benefits for certain small business owners; and
  • Sales Tax Assessment Act 1992 to ensure that goods imported into Australia under a temporary importation exemption, used in Australia, exported and then re-imported are subject to sales tax at the time of the later importation.

The Committee dealt with this bill in Alert Digests Nos. 16 and 17 of 1997.

In Alert Digest No 16 of 1997, the Committee raised a number of issues concerning the retrospective application of various proposed amendments. A letter was forwarded to the Treasurer on 13 November 1997 inviting a response, and a letter dated 3 December 1997 was subsequently received from the Assistant Treasurer. The Committee thanked the Assistant Treasurer for this response in Report No 1 of 1998.

In Alert Digest No 17, the Committee dealt with matters raised in a submission from KPMG, Chartered Accountants. This submission raised a number of further issues in relation to the retrospective effect of the legislation. A letter was forwarded to the Treasurer on 27 November 1997 inviting a response in relation to the KPMG submission, and a letter dated 6 February 1998 was subsequently received from the Assistant Treasurer. The Committee thanked the Assistant Treasurer for this response in its Third Report of 1998 and requested some additional comment on the effect of the provisions on early balancing companies.

A further response dated 8 May 1998 has now been received from the Assistant Treasurer. A copy of that letter is attached to this Report and relevant parts of the response are discussed below.

Extract from Alert Digest No 17 of 1997

Retrospectivity
KPMG submission

The KPMG submission, however, raises issues in relation to the retrospective effect of the legislation which escaped the committee's notice. In particular, the submission suggests that:

  • the bill would deny the use of certain capital losses that were incurred, but not utilised, at any time after 19 September 1995;
  • the circumstances differ from 'the bottom of the harbour schemes' in that there has been no illegal evasion of tax; and
  • early balancing companies may be unfairly treated

The Committee notes that the KPMG submission has been forwarded to the Treasurer. Nevertheless, the committee seeks the Treasurer's advice on the issues raised in this submission.

Pending the Treasurer's advice, the committee drew Senators' attention to the provisions, as they may be considered to trespass unduly on personal rights and liberties, in breach of principle 1(a)(i) of the committee's terms of reference.

The Assistant Treasurer responded to the KPMG submission as follows:

You sought the Treasurer's advice in relation to a submission given to you by KPMG concerning the proposed measures contained in the Taxation Laws Amendment Bill (No 6) dealing with artificially created capital losses.

The KPMG submission claimed that the measures are retrospective, that such an effect is unjustified and that their retrospective application to early balancing companies is unfair. As a result, you were concerned that the provisions may be considered to trespass unduly on personal rights and liberties, in breach of principle 1(a)(i) of the committee's terms of reference.

The proposed legislation is not retrospective and will not unduly trespass upon the personal rights and liberties of taxpayers. The legislation is designed to close a loophole under which corporate groups could use the capital gains tax (CGT) roll over provisions to obtain capital losses far in excess of the actual economic loss suffered by the group. The legislation is designed to allow the corporate group the benefit of the actual economic loss while denying the use of any excess loss. For losses created prior to 3pm 29 April 1997 (the time of announcement of the measures), the legislation does this by identifying the amount by which the capital losses created by a company, as a result of the roll over, exceeds the losses that would have been available to that company if the roll over had not occurred. Consequently, the proposed legislation does not reverse any offsetting of a capital gain with an artificial loss which occurred in a previous income year.

The measures do not apply to losses already offset by a company with a 30 June balancing date against capital gains in the 1995-96 or an earlier year of income. Contrary to being unfair to early balancing companies, the proposed legislation contains a concession for early balancing companies. Such companies are able to offset capital losses created prior to 3pm 29 April 1997 against capital gains in the 1996-97 income year as well, provided they have lodged their tax returns for that year before 3pm 29 April 1997. The legislation thereby gives companies in this category an additional income year, compared to ordinary balancing companies, in which to offset the artificial losses, provided that the returns have been furnished before the announcement of these measures.

I should point out that while the schemes used to create these capital losses may not be as objectionable as the `bottom of the harbour schemes', they will in most cases involve a deliberate tax avoidance motive. The creation of artificial capital losses of this type involves a deliberate series of steps and would not, ordinarily, be an innocent occurrence. Even if the additional capital losses, over and above the actual economic loss, were innocently created, the fact remains that they are not genuine economic losses.

Moreover, the amount of losses artificially created by these schemes pose a serious and continuing risk to the integrity of the revenue base. They allow corporate groups to artificially avoid their fair share of the tax burden.

In its Third Report of 1998, the Committee thanked the Assistant Treasurer for this response and for his assistance with the Bill. The Committee noted from the response that the proposed legislation was said to contain a concession for early balancing companies. Such companies were additionally able to offset capital losses created prior to 3pm on 29 April 1997 against capital gains in the 1996-97 income year, provided that they lodged their tax returns for that year before 3pm on 29April 1997.

However, the Committee understood from the KPMG submission that some early balancing companies might not have lodged their tax returns so soon after the end of their substituted tax year.

Therefore the Committee continued to draw Senators' attention to the provision, as it may be considered to trespass unduly on personal rights and liberties, including those of shareholders, in breach of principle 1(a)(i) of the committee's terms of reference.

On 8 May 1998 the Assistant Treasurer provided a further response as follows:

The Senate Standing Committee for the Scrutiny of Bills, in its Third Report of 1988 (25 March) (at page 57), expressed concerns regarding the alleged retrospective effect of the proposed measures contained in the Taxation Laws Amendment Bill (No. 6) dealing with artificially created capital losses. Further to my letter of 6 February 1998, I am writing to assure the Committee that the issued raised by KPMG in relation to the proposed measures are unfounded. The Committee continues to be concerned that some early balancing companies may not have lodged their tax returns so soon after the end of their substituted tax year.

As explained in my earlier letter, rather than being unfair to early balancing companies, the proposed legislation contains a concession for such companies. Early balancing companies are able to offset eligible rollover losses created before the Government announced the measurers, at 3 pm 29 April 1997 against capital gains in the 1996-97 income year, provided that they lodged their tax returns for that year before the Government announced the measurers, at 3 pm on 29 April 1997. This is in contrast to companies with a 30 June balancing date which are not able to offset such capital losses against capital gains in the 1996-97 income year.

However, early balancing companies that did not lodge their tax returns before the legislation was announced should not be given the opportunity to use eligible rollover losses in returns for the 1996-97 income year lodged after the announcement. They will still have the same benefit of artificial losses used in earlier income years that is available to companies with later balancing dates. In my opinion there is no justification for extending the concession to such companies.

The Committee thanks the Assistant Treasurer for this response.

Barney Cooney

Chairman