Mr PROSSER (10:48 AM) —The current RPS, PAYE and PPS tax arrangements impact on most Australian businesses. They are resource intensive, time consuming and lack the flexibility to cater for the increasing demand of electronic commerce. In addition, 10 per cent of businesses have obligations in more than one withholding arrangement. The Taxation Laws Amendment Bill (No. 7)1997 is aimed at relieving the burden that these arrangements place on business and bringing the method of tax payment by large withholders into line with modern business practices.

These changes represent an important step towards reducing the range of withholding tax systems imposed on business with a view to establishing an efficient interface between the Australian Taxation Office and the business taxpaying community.

Under this bill, remittance obligations of withholders under the RPS, PPS and PAYE systems are being rationalised by combining them under one set of arrangements. While these new arrangements are based on the existing PAYE obligations, there are some important differences introduced by this bill.

For large remitters, the bill requires that they remit, on average, every seven days instead of the present 14 days. Large remitters will also be required to remit electronically—a major step in modernising the tax payment system. In addition to improving the security of tax payments, the cost of paying electronically is less than the transaction charge for cheque payments, illustrated by an estimated 95 per cent of large remitters who currently pay salaries electronically.

In terms of compliance cost, five per cent of large remitters will incur an initial cost in acquiring the software to facilitate electronic payments. This cost has been estimated to large remitters as being between $75 and $440, depending on the financial institution.

For approximately 311,000 small remitters, the bill provides for them to remit on a quarterly basis rather than once a month, increasing their cashflow benefits. The small remitter threshold has also been increased from $10,000 to $25,000.

The net effect of these changes on small remitters is an estimated saving of $18 million per year. The bill removes the requirements for a person to apply for small remitter status, deeming all remitters to be small remitters unless they are required to remit as a medium or large remitter. More than 80 per cent of all remitters fall into this small remitter category.

For small business, this represents a significant reduction in compliance costs and reduces the frequency of their transactions with the Australian Taxation Office. For medium remitters, those whose total deductions under the three systems is more than $25,000 and less than $1 million per annum, the bill aligns the remittance dates for RPS and PPS to the same monthly date for PAYE remittance. The administrative savings from these measures is estimated at $9 million next year and $11 million in subsequent years for the ATO.

The bill also simplifies the capital gains tax payment system through the introduction of an asset register. This bill allows taxpayers to transfer some or all of the information contained in the records they must keep for CGT purposes to an asset register.

The asset register will greatly reduce the burden on capital gains tax payers by giving them greater flexibility in how they keep their records. The asset register allows taxpayers who transfer information contained in records required under current law to dispose of those documents five years after that entry is certified by a third party.

The bill is aimed at increasing the efficiency of the Australian taxation system and reducing the compliance cost to Australian taxpayers. While these amendments are welcomed by taxpayers, the pace of tax reform has the potential to be increased still further. This is particular true in the area of capital gains tax. A considerable body of evidence suggests that lowering the rate of capital gains tax would stimulate economic growth, improving the fairness of the taxation system and increasing tax revenues by encouraging individuals to unlock gains that they have been unwilling to realise due to the high rates of CGT. William Beach, a visiting fellow in tax analysis at the Heritage Foundation, in a paper entitled `How a capital gains tax cut would boost state revenues', said:

Reducing the tax rate for capital gains actually increases tax revenues from taxpayers who own appreciated assets. Changes in capital gains tax rates strongly indicate that rate decreases produce more declarations of capital gains and more capital gains taxes. Owners of appreciated assets who face high tax rates generally hold on to or `lock up' their assets.

That is, capital gains declarations increase when the rate of CGT decreases.

The potential increase in revenue caused by the freeing up of capital assets and the corresponding increase in tax payments is staggering. In the United States, economists estimate that trillions of dollars in unrealised or locked up capital gains exist in the portfolios of American taxpayers—perhaps as high as $US7.5 trillion. Two leading tax economists at the US Congressional Budget Office estimate taxpayer response to capital gains rate reductions as being in the order of six to one. In other words, for every one per cent drop in the rate of capital gains tax, capital gains realisations would rise by six per cent.

On 17 March this year, Britain's Chancellor of the Exchequer announced a comprehensive package of measures designed to promote enterprise and encourage investment in Britain. Among these changes were reforms to capital gains tax designed to encourage longer term investment. Britain has introduced a capital gains tax taper aimed at reducing the capital gains tax charge on the disposal of long-held business assets. These and other reforms are a response to what Britain has identified as a key economic challenge for the 21st century: responding to globalisation and increasing global competition.

There are many benefits to be gained by tax reform, including lowering the rate of CGT. The current unwillingness to realise capital gains distorts the market and inhibits growth and employment in Australia. Businesses are being distracted from pursuing investment opportunities by the desire to reduce their capital gains tax liabilities. Australia's high rate of CGT taxes economic activity. A high rate of CGT distorts normal business practices, inhibits the rationalisation of capital holdings, delays a firm's removal of non-core assets and alters the correct response to outgrowing a firm's property—all by the desire to avoid paying higher rates of CGT.

When the United States introduced a luxury tax in 1990 it was targeted towards, amongst other things, the wealthy yacht buyer, yet the burden of this tax fell on the yacht builders, who went bankrupt, and their employees, who went out of work. The wealthy yacht buyers either curtailed the purchase of yachts or purchased them overseas. Something similar occurs, of course, with capital gains tax.

A high rate of CGT restricts capital formation, hurting the greatest job creator in the economy—new business. In the United States between 1982 and 1988, when the capital gains tax rate was 20 per cent, new business incorporations rose by 4.4 per cent a year. Between 1987 and 1993, with a capital gains tax rate of 28 per cent, new business incorporations rose by less than 0.1 per cent annually. In other words, when the rate of CGT was increased by eight per cent, America's new business incorporations dropped from 4.4 per cent per year to less than 0.1 per cent per year. This is significant because most new businesses are small businesses. Last September, the ABS Business Longitudinal Survey revealed that 65 per cent of the 211,000 jobs created during 1995-96 came from the small business sector, that is, 137,000 jobs were created by small business.

The government has responded to problems facing small business with the introduction of capital gains tax rollover relief. This tax reform package provided small business with relief from CGT where a taxpayer realised a capital gain on the disposal of an asset, then reinvested the proceeds in the same or another business. This capital gains tax rollover relief was an important step in removing some of the barriers to investment. Australia's modern economy demands that we look at dismantling other barriers to investment such as implementing further reforms to disposal of appreciated assets for medium and larger businesses.

A reduction in CGT is not a tax break for the rich because the target of a tax and the burden of the tax are not necessarily the same, as in the case of the wealthy yacht buyer. A high rate of CGT prevents the economy from operating at its optimum level, discouraging investment and hampering the creation of new jobs. A more competitive rate of CGT would make the allocation of capital more efficient, enabling investors to make decisions based on the opportunity rather than the tax liabilities.

Furthermore, at more acceptable rates of CGT owners of appreciated assets would be more likely to realise their capital gain through the sale of those assets, thereby increasing CGT revenues. Removing the barriers to the sale of frozen assets will provide the incentive to invest in new ventures and also result in a higher level of capital formation. This will be an important element in stimulating new investment, improving productivity, enhancing Australia's competitiveness and creating jobs.

At the global level, Australia's high rate of CGT makes Australia a less attractive home for venture capital. Firms in a competitive trading environment are more likely to invest their capital in countries where CGT rates are globally competitive.

The Mortimer report of July 1997 made particular reference to the impact of Australia's capital gains tax on attracting venture capital. In reference to the merits of lowering the CGT rate on venture capital investment as a step towards increasing Australia's level of venture capital, the report said:

Differential tax treatment is likely to cause venture capital to flow to low-tax countries in America and Asia at the expense of Australia.

Foreign pension funds, particularly those in the United States, are the main exporters of venture capital. This venture capital goes to countries where the taxation system offers similar or better tax concessions than those in the United States.

Exemption from capital gains tax is the main attraction for pension funds investing in venture capital. As these investments are generally long term, the income forgone during the early years of investment is usually compensated by high capital gains realised in later years when the investment returns a profit. Accordingly, these venture capital funds search for tax regimes where the capital gain on the disposal of venture capital investments is exempt from capital gains tax.

Mr Deputy Speaker, Australia could attract a greater volume of venture capital funds if further CGT reform was undertaken. The irony is that the Income Tax Assessment Act 1936 realised the benefits of attracting venture capital and exempted interest and dividends received by foreign superannuation funds from income tax. However, US pension funds—a major source of venture capital—for commercial reasons choose either a limited partnership or a unit trust for investing in venture capital projects. When resulting dividends and interest are taxed through the limited partnership, capital gains tax liabilities are incurred.

The Income Tax Assessment Act 1936 failed to recognise that a limited partnership was merely a conduit for investment made by foreign superannuation funds. When Taxation Laws Amendment Bill (No. 6) was introduced in 1992, it taxed limited partnerships as companies. So, instead of the partnerships being taxed on the partnership profit or loss, limited partnerships became taxable entities in their own right. This does not encourage the inflow of venture capital to Australia.

Taxation Laws Amendment Bill (No. 7) is one element of the government's plan to reduce the burden of excessive taxation compliance and, in so doing, dismantle some of the barriers to conducting business. The introduction of the CGT assets register and the simplification of remittance obligations are part of the government's commitment to tax reform aimed at easing the burden of record keeping on business, simplifying existing taxation laws and establishing a modern interface between the ATO and Australian taxpayers.