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Bills Digest No. 190 1999-2000New Business Tax System (Income Tax Rates) Bill (No. 2) 1999

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WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details

Passage History

New Business Tax System (Income Tax Rates) Bill (No. 2) 1999

Date Introduced: 25 November 1999

House: House of Representatives

Portfolio: Treasury

Commencement: On Royal Assent (10 December 1999).

Purpose

To amend the Income Tax Rates Act 1986 to remove averaging of capital gains for individuals and certain trustees after 21 September 1999.

Background

Passage of the Bill

On 21 September 1999 the Treasurer announced the Government's response to the Ralph Report on the Review of Business Taxation.⁽¹⁾ He foreshadowed that legislation to implement stage 1 of the recommendations of the Ralph Report⁽²⁾ would be introduced into Parliament in two phases. The first package of legislation involved the following four bills and was introduced into the House of Representatives on 21 October 1999:

New Business Tax System (Integrity and other Measures) Bill 1999⁽³⁾
New Business Tax System (Capital Allowances) Bill 1999⁽⁴⁾
New Business Tax System (Income Tax Rates) Bill (No. 1) 1999,⁽⁵⁾ and
New Business Tax System (Former Subsidiary Tax Imposition) Bill 1999.⁽⁶⁾

These four bills passed the House of Representatives on 24 November 1999.

The following day (25 November 1999) the Government introduced into the House of Representatives its second package of legislation to implement stage 1 of the new business tax system. This package involved the following two bills:

New Business Tax System (Capital Gains Tax) Bill 1999,⁽⁷⁾ and
New Business Tax System (Income Tax Rates) Bill (No. 2) 1999.

These two bills passed the House of Representatives on 25 November 1999. The Opposition agreed with the Government to expedite the passage of these two bills 'to enable consideration of the total part of stage 1 [of the business tax package] when the matter goes before the Senate'.⁽⁸⁾ The six bills to implement stage 1 of the New Business Tax System were introduced into the Senate on 26 November 1999 and passed on 29 November 1999.⁽⁹⁾

Changes to the Capital Gains Tax Regime

The following three bills implemented the changes to the Capital Gains Tax regime:

New Business Tax System (Integrity and Other Measures) Bill 1999
New Business Tax System (Income Tax Rates) Bill (No. 2) 1999, and
New Business Tax System (Capital Gains Tax) Bill 1999.

The New Business Tax System (Income Tax Rates) Bill (No. 2) 1999 removed the averaging concession which applied to Capital Gains Tax for individuals and certain trusts. Averaging was applied in recognition of the inequity that might arise when a capital gain that accrued to an individual over a number of years was taxed at progressive rates. Averaging was used to determine the marginal tax rate that applied to a net capital gain, regardless of the length of time that asset was held. In broad terms, averaging was applied by working out the amount of tax that would be payable if only 20% of the capital gains component was included in taxable income, and multiplying that amount by 5. The resulting amount was the tax payable on the net capital gain. Averaging did not provide any benefit if the capital gains component did not cause the taxpayer's income to cross a marginal tax threshold.⁽¹⁰⁾

The Review of Business Taxation (the Ralph Review) recommended the removal of capital gains tax averaging.⁽¹¹⁾ It identified the averaging provisions as doing little to encourage investment or remove inflexibilities in capital markets while reducing revenue substantially.⁽¹²⁾ According to the Ralph Review, averaging provisions were used by a section of the asset-holding community to reduce capital gains taxation to zero, or near to zero, while others who were not in a position to engineer the same benefit carried the burden of taxation at close to their full marginal rate.⁽¹³⁾

The Review recommended the exclusion from assessable income of 50 % of capital gains for eligible assets held for a year or more by individuals. The Review argued that this would increase significantly the attractiveness of investing in capital-gains-bearing assets by individuals because it would reduce the effective top marginal rate on capital gains income to 24.25%. However, in order to deliver such a reduction in effective rates within the constraint of revenue neutrality, the Review recommended the removal of the averaging concession.⁽¹⁴⁾

Averaging provisions were abolished from the date of the Treasurer's announcement (21 September 1999). This was also a recommendation of the Ralph Review. It recognised that many taxpayers might seek to structure their affairs in order to take full advantage of averaging in 1999-2000 while the concession remained available. The Review argued that, while the abolition might create some complexity in the transition year for certain taxpayers and in the administration of the tax law, the potential disruption to tax collections otherwise justified this one-time complexity.⁽¹⁵⁾

Main Provisions

The Bill was debated in the House of Representatives on 25 November 1999, and in the Senate on 26 and 29 November 1999. No amendments were proposed.

Endnotes

Costello, Hon Peter, 'The New Business Tax System, Press release no. 58, 21 September 1999.
Review of Business Taxation, A tax system redesigned: more certain, equitable and durable: report [Ralph Report], Canberra, Review of Business Taxation, 1999. The Report is in 3 volumes: Vol. 1. Overview, recommendations, estimated impacts; Vol. 2. Draft legislation; Vol. 3. Explanatory notes.
See Bills Digest no. 80, 1999-2000
http://www.aph.gov.au/library/pubs/bd/1999-2000/2000BD080.htm.
See Bills Digest no. 85, 1999-2000
http://www.aph.gov.au/library/pubs/bd/1999-2000/2000BD085.htm.
See Bills Digest no. 84, 1999-2000
http://www.aph.gov.au/library/pubs/bd/1999-2000/2000BD084.htm.
See Bills Digest no. 81, 1999-2000
http://www.aph.gov.au/library/pubs/bd/1999-2000/2000BD081.htm.
See Bills Digest no. 189, 1999-2000
http://www.aph.gov.au/library/pubs/bd/1999-2000/2000BD189.htm.
Crean, Hon Simon, MP, 'Second Reading Speech, New Business Tax System (Income Tax Rates) Bill (No. 2) 1999', House of Representatives, Debates, 25 November 1999, p. 12717.
New Business Tax System (Integrity and Other Measures) Bill 1999 was amended in the Senate. The House of Representatives agreed to the Senate amendment on 6 December 1999. Senate Bills List as at 1 February 2000, p. 76-77.
Australian Master Tax Guide 1999, CCH Australia Limited, Sydney, 1999, p. 526-7.
Recommendation 18.1(a) 'That, from the date of announcement, averaging of capital gains cease in respect of disposals of assets contracted for from that date.' Review of Business Taxation, op. cit., Vol. 1, p. 595.
ibid., Vol. 1, p. 599.
ibid., Vol 1, p. 599.
ibid., Vol. 1, p. 599.
ibid., Vol. 1, p. 600.

Contact Officer and Copyright Details

Rosemary Bell
19 June 2000
Bills Digest Service
Information and Research Services

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Published by the Department of the Parliamentary Library, 2000.