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Thursday, 14 May 1987
Page: 3197


Mr ADERMANN(1.20) —Today we are discussing no less than five fairly complex taxation amendment Bills and, as the shadow Treasurer, the honourable member for Mackellar (Mr Carlton), has already mentioned, adding another 100 pages to an already lengthy and complex Act. It would seem that already something like 800 pages of additions have been the epitaph of this Government. It would seem that the aim of the Treasurer (Mr Keating) is to see whether he can double an already lengthy and complex Act.

Since my election to this Parliament in 1972 I have had two very strong criticisms about iniquities in our taxation system. I am pleased, therefore, that this legislation goes some way to redress both of those criticisms. The first was directed at the operation of Division 7 of the Income Tax Assessment Act, and I will have something to say about that later on. The other target of criticism has been the double taxation of dividends and the imputation package goes some way to redressing that.

This legislation, of course, is mark 4 of the proposed imputation system. The mark 1 version was that outlined in the Treasurer's statement on the Reform of the Australian taxation system on 19 September 1985. A principal feature of that system, as was outlined at the time, was the proposed compensatory tax to be paid at the same time as the payment of the dividends. Then we had mark 2. That arose as a result of an additional statement made by the Treasurer, and that was released with the 1986 Budget Papers. That statement was principally concerned with the timing of the then proposed compensatory tax proposals. Then, on 10 December 1986, we had mark 3, which served two purposes: It indicated that the Government had decided to abandon the compensatory tax collection process and it provided for the first time an attempt to provide a comprehensive description of the new system, which was to operate in respect of dividends paid after 30 June 1987. So with this legislation we now have mark 4.

The imputation system as now proposed has this rationale: Dividends which are paid out of profits which have borne tax at the 49 per cent rate will be called franked or qualifying dividends. Australian resident individuals who receive franked dividends will obtain a taxation credit for the company tax paid on the profits out of which the dividend is paid, and that is called the imputation credit. The credit can be applied against tax levied on both ordinary income and capital gains. The amount of the franked dividend, plus the imputation credit, is included in an individual's assessable income. That process is referred to as the grossing up of a dividend, and already we have seen the unfair incidence of that grossing up when it is applied to the calculation of the Medicare levy. I repeat that concern and I repeat that criticism without repeating at length the argument that has already been given.

The expenses incurred in relation to the derivation of franked dividends such as interest on funds borrowed to acquire the shares should, and I believe under the legislation will, be allowed as deductions and will not reduce the imputation credit. It is interesting that this system will mean that no longer will shares need to be the subject of income splitting arrangements within the family in order to reduce tax payable in regard to them. Rather, so long as family arrangements are involved, the emphasis will be switched to ensuring that the maximum advantage is taken of the imputation system. For example if one spouse, not being subject to the maximum marginal tax rate, were in receipt of non-dividend income, it would be advantageous to divert dividend income from the other spouse so as to shelter that other income from tax. In fact, as has already been pointed out in the debate today, given the new marginal tax rates, it will be possible for a taxpayer to receive, combined, $12,200 in non-dividend income and $5,000 in dividend income tax free, although of course the individual still being subject to payment of the Medicare levy.

The compensatory tax which was first floated would have, of course, affected three classes of company. As far as loss companies are concerned, it was more likely that a compensatory tax liability would have arisen as a result of having to service preference share funding, rather than as a result of paying ordinary dividends. Mining companies would also have suffered-gold companies, because they derive exempt income; others because of the tax deductions for exploration and development expenditure available to the mining industry. The third class of companies were those which derived substantial foreign-sourced income, because they would not have had sufficient Australian tax liabilities to offset compensatory tax liabilities. That, of course, would very much discourage aggressive tax planning or overseas ventures by companies which were effectively committed to providing a regular dividend flow to individual shareholders. The heart of the revised system, the imputation system, is the concept of a qualifying dividend account. That has already been discussed in this debate. Only dividends that are paid out of company income which has borne company tax at the 49 per cent rate-which would include 1986-87 income-would be relieved by way of imputation credit, of the payment of further tax.

The Treasurer's statement and the legislation relevant thereto, except insofar as bonus shares are concerned, leave me a little confused. I must admit that there is so much legislation that it has been difficult fully to assess and digest every aspect. Thus, I am not sure of the answers to certain questions. I pose them to the Treasurer accordingly, I hope that he will answer them in his reply to the debate. I ask: What are to be regarded as dividends for the purposes of the imputation system? It would seem that this would extend to all amounts deemed to be dividends for the purposes of section 6, which includes amounts distributed or credited by a company to its shareholders as shareholders. However, will the system extend to those payments deemed to be dividends by section 108, that is, loans to shareholders, and section 109, payments to shareholders and directors?

I was interested in the remarks of the honourable member for Ballarat (Mr Mildren), who preceded me in this debate. He made such statements as `The Government's tax reform proposals are moving investment towards growth' and `They are enhancing business growth'. That seems to be to be quite peculiar. I think the answer to that is picked up in one of the points in the amendment that has been moved by the shadow Treasurer, who notes that the Government's so-called tax reform proposals have imposed an additional tax burden on business of in excess of $2,000m and as well, the ordinary taxpayer and family have had to pay more tax. I simply ask: Is that moving investment towards growth? I cannot comprehend how it could. Is it enhancing business growth? I cannot comprehend how it could do that either.

I am very pleased that division 7 of the Act is to disappear, because it imposes additional tax, at a 50 per cent rate, on those private companies which fail to make within a prescribed period a sufficient distribution for the purposes of the Act. Sufficient distribution is calculated by deducting from a company's distributable income-broadly assessable income less primary tax-a retention allowance. Currently, that aggregates the following amounts: Private company dividend income, none of which is allowed to be retained in the calculation; other property income, only 10 per cent of which can be retained; and other trading or business income, only 80 per cent of which can be retained. I have always maintained that the operation of division 7 was unfair to private companies. It prevented them from providing, out of profits, for purchases for capital expansion. It also prevented them from providing against possible adversity without facing the threat of a very savage-as it was when I first entered this Parliament-undistributed profits surcharge tax. Over the years we have nibbled away at that. We have gradually taken out some of its teeth but at last it is to be, subject to transitional rules, eliminated.

When we look at the imputation legislation, we notice that the Government has attacked the matter in exactly the same way as it has attacked other so-called tax reforms. It has followed its usual procedure. We have witnessed time after time the spectacle of announcements being made, with flair and fanfare, that there will be tax cuts, only to find that a cut in one area has been more than nullified, or compensated for, by increases in others or the introduction of savage new taxes. For instance, we are being told about the tax cuts that we are going to get on 1 July. Of course, the cost is going to be recouped from taxes that have already been put into operation-taxes such as capital gains, fringe benefits and substantiation. Of course before these came the assets test. So the long promised imputation legislation carries in it a barb-that company tax is to be increased from 46 per cent to 49 per cent. That is a very savage rate of taxation. Taxation, and the incidence of heavy taxation, have already killed investment capability and perhaps have been the trigger for many takeovers in this country. We are told that the cost to revenue of this legislation will be $775m, and that it will be offset by an increase in the yield from company tax of $475m. Theoretically, we should be $300m better off, but the company tax rate of 46 per cent is a savage rate indeed.

We have to attract as much investment as we can. We have to attract it from Australians; we have to attract it from overseas. Therefore, comparative rates of company tax are definitely important. Investments will not be made in Australia while our company tax is higher than that of other countries. In the United Kingdom, for instance, the company tax rate is 35 per cent. In the United States of America, it is 34 per cent. In Singapore the percentage is, I believe, in the twenties. In Hong Kong it is 18 per cent. In Japan it is a little closer to our rate at 42 per cent. I repeat, investments will not be made in Australia while our company tax rate is high compared to that of other Western countries. Certainly, a high company tax rate inhibits profitability significantly and hits growth and capacity to employ. It also reduces competitiveness. It kills incentive. Taxation is a very heavy element in the cost of production. It is a very heavy cost to overcome in striving to make a profit. If the already heavy load of taxation is to be made even heavier, it will not only kill incentive. It will also contribute to price increases as businesses struggle against a daunting cost structure.

Also, the truth of the comment by the Government that we will be $300m better off depends on the accuracy of its arithmetic, which in times past has been very suspect indeed. We were also given an estimate of the revenue to be derived from the capital gains tax and the fringe benefits tax but, lo and behold, the amount that will be reaped from those pernicious taxes is hundreds of per cent greater than was ever indicated to this Parliament. I hope that the Government's mathematics this time will at least prove more reliable than they have in the past.

I wish to comment again on the Medicare levy, the National Party's attitude to which is well known.


Mr Rocher —The Government claims that it is not an income tax!


Mr ADERMANN —That is right. Medicare is an albatross around the neck of every decent Australian and, in most cases, is looked upon as a small issue but the levy is to be imposed on the grossed up figure, not the cash dividends received. To add insult to injury, excess imputation credits may not be offset against the Medicare levy. I believe that that is totally unjust, totally unfair and wrong in principle.


Mr Millar —And illogical.


Mr ADERMANN —And illogical, as the honourable member for Wide Bay says. I would like to say much more but I notice that there is a long list of speakers and I do not want to cover in any depth or detail arguments that have already been put to this House. However, I do wish to make a brief reference to one section of the Bill, that which relates to the Commissioner of Taxation's gathering and access powers. It seems fairly innocuous, I suppose, to require that persons shall provide reasonable facilities and assistance to the Commissioner when he is exercising his powers of access. The words look all right. Already, of course, and quite understandably documents and records have to be made available. But unfortunately there is a very wide gulf between what the Commissioner regards as reasonable powers of access and facilities and what the taxpayer might consider them to be. What is reasonable? Is it reasonable to require that an office be made available to the auditors, at their convenience, while they are interviewing the taxpayer and looking at his affairs? Is it reasonable that business phones should have to be made available? Is it reasonable that pro- prietors should have to tie up half their staff, so that their business comes to a standstill?


Mr Braithwaite —And not be paid anything for it.


Mr ADERMANN —That is so. I notice that our colleagues of the Liberal Party have suggested as an amendment that those costs be recouped. The National Party intends to oppose completely the insertion of the provision to which I have referred. Additionally, the taxpayer under audit must be given the right to insist on the presence and assistance of his accountant or tax agent. I suppose theoretically that can happen now but in actual practice it is very much discouraged by the Taxation Office and the auditors. Even the tax form that we fill in invites people to insert a private phone number-so that the tax accountant or tax agent will be kept out of the picture. I believe, mainly because of the record and attitude of the Australian Taxation Office, that such provisions as I have described ought not be a part of the legislation. I have said in the House many times that the attitudes of the Taxation Office are distressing, often arbitrary and even threatening. I suppose that many of the representations that come to me-and probably a few more come to me than to other honourable members who have not a history of accounting--


Mr Rocher —I get a few.


Mr ADERMANN —Yes, I am sure that the honourable member would. Every member would, but I seem to get a sack full of them. Very many of the representations that come to me make such allegations about the Taxation Office. The people who come to me are not those that we hear about in this House-the rorters, the big fellows, the fellows that are ripping off the system. They are good, old, honest but confused taxpayers who get a missive from the Taxation Office that is couched in threatening language and as a result, suffer considerable and very unnecessary distress. Therefore, I ask honourable members to please excuse my cynicism when I see in this legislation a requirement that persons provide for the Commissioner reasonable facilities and assistance. I want to know what that means, what it requires.


Mr Braithwaite —What about a piece of rope to hang themselves with?


Mr ADERMANN —That is the next thing. Might I repeat, as I said at the beginning, Mr Deputy Speaker, that I am glad of at least of two things: That the double taxation of dividends has been addressed and that division 7 will be given a decent and dignified burial.