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Wednesday, 11 February 2009
Page: 967


Mr ANTHONY SMITH (4:53 PM) —The opposition fully supports the passage of the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008, which implements stages 3 and 4 of longstanding tax reform of financial arrangements. The measures in this bill are the final stages of the reforms that began under the former coalition government. These final reforms will remove complexity and distortions that arise from the current requirement in the law to distinguish between capital and revenue. The bill will provide certainty on the tax treatment of financial arrangements by defining in legislation the characteristics of a financial arrangement.

The reforms will mean that the tax treatment of financial arrangements will be based on their economic substance rather than their strict legal definition, which can lead to market distortions. This will of course result in a more equitable and genuine tax treatment of financial arrangements. Currently the tax treatment often differs from the accounting treatment. The reforms will allow taxpayers to elect to align the tax treatment with the accruals based system used for accounting purposes. This will lead to administrative and compliance cost-savings for applicable taxpayers. The reforms allow taxpayers to align the character and tax timing of eligible hedging arrangements as well, which will lead to better risk management by improving the tax treatment of hedging.

The reforms will be compulsory for certain taxpayers, as the Minister for Competition Policy and Consumer Affairs and Assistant Treasurer has outlined, and optional for others. As has been widely spoken about during the consultation period, they will be compulsory for approved deposit-taking institutions and all other entities that have a requirement to register under the Financial Services (Collection of Data) Act 2001 if their annual turnover exceeds $20 million. As we know from the explanatory memorandum and the bill, they will also be compulsory for superannuation funds and managed investment schemes with assets exceeding $100 million, entities with financial assets exceeding $100 million, entities with an annual turnover exceeding $100 million and entities with assets exceeding $300 million. Of course, all other taxpayers may elect to make use of these reforms if they wish.

As I said at the outset, these reforms began under the previous coalition government. The whole TOFA process of reform has been going for a decade or more. Stage 1 of these reforms, which related to debt and equity measures, was legislated back in 2001. Stage 2, which related to foreign currency conversion rules and the realisation of foreign currency gains and losses, was legislated two years later in 2003. The previous government released draft legislation on the final stages in 2005, after which followed extensive consultation with the relevant taxpayers, industry groups and professional associations before those reforms were introduced in legislation into this place in September 2007. But of course that bill lapsed due to the calling of the federal election a month or so later. The reforms in each stage have been developed following extensive consultation and over a number of years. These reforms reflect the coalition side’s longstanding commitment to ensuring the integrity and operation of our tax system. As I said at the start, we will, naturally, be fully supporting the reforms in this bill—reforms which we began and which we introduced into this House prior to the last election.

As we know from the minister’s second reading speech, from the substance of the explanatory memorandum and from the bill itself, the bill defines what a financial arrangement is. The definition will cover the taxation treatment for a wide range of financial instruments that currently exist. The definition will provide certainty for taxpayers as financial arrangements develop over time. This will greatly assist taxpayers in determining their obligations and their tax affairs. In addition, the bill contains rules relating to the interaction of the reforms with the existing tax consolidation regime.

As members speaking in this debate and those who have been part of the consultation will know, the bill provides six methods that a taxpayer can apply to determine their tax. They are broken into two general classes: elective and non-elective. The non-elective methods will be used by taxpayers who do not wish to use one of the four elective methods, which I will outline in some detail for the benefit of those participating in the debate. The non-elective methods are simply the accruals method or the realisation method, methods that obviously exist at present. As for the non-elective methods, the bill will introduce four, as I said: the elective hedging method, the elective financial reports method, the elective fair value method and, finally, the elective foreign exchange retranslation method.

Just briefly: taxpayers can only use the first method, the hedging method, if their financial reports are prepared and audited according to existing standards. This will remove any post-tax mismatch that may arise from gains and losses being included in taxable income at different times and will align gains and losses to the tax treatment of the item that is being hedged. Similarly, if a hedged item is of a revenue nature then the hedging arrangement will be treated as such. It will allow for the consistent tax treatment of the hedging financial arrangement and the hedged item. The second method, the financial reports method, allows taxpayers to simply use their financial reports for assessing gains and losses arising from financial arrangements and, in that case, the taxpayer must meet a specific set of standards to be able to rely on their financial reports. The third method, the fair value method, is an existing accounting method. Finally, the fourth method, the foreign exchange retranslation method, is relevant for taxpayers who denominate the gains and losses arising from currency exchange rates in a foreign currency or a non-functional currency. This method only deals with gains and losses that arise from changes in foreign currency exchange rates and is based on Australian Accounting Standard AASB 121—‘The Effects of Changes in Foreign Exchange Rates’. Taxpayers will not be able to change the method used over the duration of the financial arrangement.

In conclusion, this bill and this set of reforms are complex and that is why there has been considerable consultation. This is an area of law that has not kept up with the modernisation of financial arrangements. As I said, we are fully supporting this in both houses.

There is an inquiry being held into the provisions of this bill by the Senate Standing Committee on Economics, to which the bill was referred back in December. That committee is scheduled to hold some hearings on, I think, 16 February and to report just a few days later. Given the complexity of these reforms, and even though there has been widespread consultation, it is important that the committee provide an avenue for taxpayers to put in submissions on some of the technical aspects of the bill. I am advised that the committee has received nine submissions from Treasury, tax advisers and professional associations. I know there is broad support for this bill to be passed by parliament, and it is also recognised that there will be future amendments, once this bill has passed, dealing with technical issues.

Many of those who have made submissions or who have been part of the consultation have stressed that the implementation will inevitably reveal just that—the need for further technical amendments. It is in that light that the Senate committee is well placed to consider any arguments on technical issues that may arise, and these would be of a finetuning nature rather than of a substantive nature. In that light, if anything arises in the Senate committee’s inquiry it will enable the government to consider that, but it will not obviate our support for the bill in the Senate as well. Should this arise, of course, these issues will be considered. Even if some issues do arise that require technical further amendment, it is, as I said just a few minutes ago, quite inevitable with such a complex area of law that, down the track, there will be some amendments to this. But the substance of the reforms has the support of both sides of this House and I commend the bill to the House.