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Friday, 15 June 1984
Page: 3118


Senator CRICHTON-BROWNE(11.53) —The Senate is debating the Loan (Income Equalization Deposits) Amendment Bill 1984 and the Income Tax Assessment Amendment (Income Equalization Deposits) Bill 1984. The proposals contained in these two Bills are of very great concern to me, as they are to so many rural members of my electorate. Indeed, they should be of great concern to all rural interests within Australia. In seeking to remove the tax deductibility of income lodged in income equalisation deposits accounts, this Government will not only reduce very largely the incentive of primary producers to utilise the income equalisation deposits scheme but also wipe out the original objectives of the scheme itself. The income equalisation deposits scheme was introduced in 1976 following a recommendation from the Industries Assistance Commission inquiry into rural income fluctuations.

The intention of the income equalisation deposits scheme is clearly set out in the second reading speech made on its introduction in December 1976. The speech stated:

The income equalisation deposits scheme will encourage primary producers to make deposits in years in which their incomes are high and thus provide funds to draw on when incomes fall. In this way the scheme will have a stabilising effect on the levels of rural incomes and expenditure.

The incentive for primary producers to make financial provision under the scheme is to be found mainly in the income tax deductions that will be allowable for moneys deposited.

Primary producers, to a far greater degree than any other sector of industry, are subject to enormous fluctuations in their incomes from year to year. This instability arises both on the supply side, because of variations in climatic conditions, and on the demand side, due both to changes in demand on the domestic market and changes in the demand and supply of agricultural products on international markets. Therefore, agricultural prices are extremely volatile. There is very little that a primary producer can do to offset these fluctuations . Farmers cannot destock or restock overnight. For this reason I believe it is essential that farmers have mechanisms available to them which enable them to compensate for these factors at an individual level so they can achieve some degree of income stability.

To this end the previous Government introduced the income equalisation deposit scheme. This scheme provided that in a year of high income farmers could deposit a certain portion of their income into an account and withdraw it to supplement their income when necessary, whereupon it was included in their taxable income for that year. The income so deposited was deductible from taxable income in the year it was lodged and received interest at the rate of 9.5 per cent. Thus the income equalisation deposit scheme not only provided a means for farmers to stabilise their incomes but also fulfilled the function of diminishing the taxation inequity otherwise faced by farmers on fluctuating incomes. It is self- evident that under a progressive taxation system those on incomes which vary widely from year to year will pay more tax on their earnings than those on stable incomes. The tax averaging provisions, which allow farmers to average their income over five years to determine the tax rate applicable in a particular year, do not totally remove this inequity, especially for those primary producers on extremely unstable incomes. The income equalisation deposit scheme was intended to complement the tax averaging provisions in providing some degree of fairness in the taxation treatment of primary producers. By removing the tax deductibility of income deposited under this scheme, in my view this government is really stripping away its value and is turning it into some sort of simple savings account.


Senator Jack Evans —It kills the scheme.


Senator CRICHTON-BROWNE —As Senator Jack Evans says, it kills the scheme, and with no concern for its original objectives. When the Minister for Housing and Construction, Mr Hurford, introduced the Bill he claimed that the aim of the amendments to the scheme was to remove the inequity of the old arrangements whereby 'producers on the highest marginal tax rate, that is, on the highest incomes, benefited most'. Yet it has been pointed out to the Government how that inequity could be removed without wrecking the whole scheme. That, of course, is the subject of our amendment. The amount of the deposit could be split into an investment component and a taxation deferral component; the investment company being that part of the deposit left, were the amount subject to taxation at the rate of the tax applicable to the particular producer. The total deposit would be deductible from the producer's taxable income, but only the investment component would be paid interest, thereby removing the anomaly under the old arrangement whereby those producers on a higher income received a higher effective rate of interest.

The Opposition put forward an amendment to this effect during the debate on these Bills in the House of Representatives on 9 May. When Mr Hurford rejected the amendment on behalf of the Government he said that apparently it would do ' nothing more than return to the bad old days'. Mr Hurford introduced the Bill. I suspect that a great many primary producers saw the return of the 'bad old days' , as Mr Hurford called them, upon the return of a Labor government. They must be left with the conclusion that this Government has no understanding of the difficulties-at least, it is not prepared to acknowledge and accommodate them- which arise from income instability or the need to encourage individual farmers to avail themselves of a scheme which will offset these difficulties to some degree. The benefits of such a scheme accrue not just to the individual farmer. A policy document which was released in 1981 by the National Farmers Federation entitled 'Farm Focus: The 80's' stated:

Widespread use of the (income equalisation deposit) scheme in above average income years would enable withdrawals in below average income years thus reducing the calls on, and need for, government funding in other areas, such as for drought relief.

In other words, the income equalisation deposit scheme allows farmers to help themselves to a certain degree during difficult years before seeking assistance from the Government. Widespread use of an income equalisation scheme to stabilise farm incomes has other benefits.

The Industries Assistance Commission report of 1975 entitled 'Rural Income Fluctuations-Certain Taxation Measures' pointed out that income fluctuations could impair the efficiency with which resources are used in the rural sector. Witnesses to the inquiry said that income instability itself may induce farmers to undertake irrational investments in high income years, and one of the advantages of an income equalisation scheme is, to quote the report:

. . . the deposits can serve to smooth the bunching of investment expenditure which now occurs in high income years. Some witnesses submitted that steady farm investment behaviour has external benefits on rural towns and supplying industries.

In my view the Government should be doing all it can to encourage farmers to use the income equalisation deposit scheme and I simply do not accept that the increase in the interest rate offered will in any way provide sufficient incentive for primary producers to do so. The crux of the income equalisation deposit scheme is the tax saving associated with it, which reduces the inequitable effects of a progressive tax system on taxpayers with fluctuating incomes. The Industries Assistance Commission stated in its report on rural income fluctuations:

Savings deposits or conventional bonds cannot reduce an inequitable tax burden.

Frankly, I find it incredible that the Government should be disadvantaging farmers by these changes to the income equalisation deposit scheme when the rural industry is in the grip of what can be described only as appalling long term problems. I can assume only that the breaking of the drought and inflated accounts of the rural recovery have obscured the true picture of Australia's rural economy. It is true that this past year has seen record wheat production worth $3,000m, though of course that has not been an Australia-wide success. In Western Australia, where some wheat belt areas have been suffering drought for eight years, the value of last year's wheat crop was down by over $200m compared with that of the previous year. Many sectors of the rural economy have not fared nearly so well as the grain sector. Beef and veal production fell by 13.5 per cent in 1983-84 and is expected to decline by a further 2.7 per cent next year. Production of lamb and mutton fell markedly in 1983-84, by 20 per cent down to 420,500 tonnes.

Perhaps even more indicative of the appalling state of the rural economy are the low levels of farm profitability. At the National Outlook Conference the Bureau of Agricultural Economics estimated that for all sectors of the rural economy taken as a whole, the average rate of return on investment including real capital appreciation over the period 1976-77 to 1983-84 was only 0.6 per cent. Even if one takes out the disastrous drought year of 1982-83, when the average rate of return was minus 9.5 per cent, the average rate of return is brought up to just 2 per cent.

While one can argue about the integrity of using that formula in calculating return, particularly taking into account real capital appreciation, it does give a fair assessment of the rate of return that has been received in the hands of the farmers. Of course, it will take many more good seasons before the rural sector recovers from the effects of the drought on long run real returns to investment. Farm income has certainly improved this year from the horrifying levels of 1982-83. Last year the average family income was $542. This year it will be $21,159. However, it should still be remembered that farm income per man year of family labour represents only $11,499.

Dr Stoeckel of the Bureau of Agricultural Economics stated:

Coming after a year severely affected by drought . . . this recovery may, in isolation mask an important fact. This year's performance . . . has raised real aggregate income only to its long term trend level. This trend is still downward .

Furthermore, the latest quarterly review of the rural economy by the Bureau of Agricultural Economics has forecast a fall in the net value of rural production or, put another way, aggregate farm income of 28 per cent in real terms in 1984- 85. Of course, the major underlying cause of declining farm incomes and profitability is the cost price squeeze and declining terms of trade experienced by farmers over the last 30 years. The Australian Bureau of Statistics issued a statistical summary showing an index of the prices received by farmers for their produce and an index of prices paid for inputs by farmers. Using 1980-81 as the base year, the index of prices received by farmers for the average of the three years ended 1953-54 was 37. By 1983-84 this index had risen to 113, an increase of just over 200 per cent. During the same period, the index of prices paid by farmers rose from 19 to 133, an increase of 625 per cent. In essence, while income went up 200 per cent, costs went up 625 per cent.

Another way of looking at the cost price squeeze is to compare the index ratio of prices received to prices paid, which in 1953-54 stood at 191 index points. In 1983-84, the same index ratio is 85. Therefore, agriculture's terms of trade had declined by 55 per cent over the past 30 years. This steep decline in agriculture's terms of trade has placed enormous pressure on farmers to improve their productivity. The achievements of the rural sector in the face of this harsh economic environment have been quite remarkable.

The volume of rural production doubled between 1952-53 and in 1975-76, indexed at 56 and 113 respectively. In the last 10 years the volume of rural production has risen by a further 25 per cent. Rural exports in the last 10 years have increased by almost a third in volume from an index of 97 in 1973-74 to 119 in 1983-84. The primary sector has achieved these productivity increases because, as is well recognised, it is one of the most efficient industries in Australia. Indeed, it is one of the most efficient industries in the world. However, the Balderstone report entitled 'Agricultural Policy; Issues and Options for the 1980s' stated:

In the economic environment of the 1980s, farmers will continue to be faced with strong pressures to increase productivity.

Unless this Government recognises the seriousness of the long term problems faced by the rural sector and comes up with some policies to assist farmers to meet the high and increasing costs of improving farm productivity, many farmers will simply be forced to leave the industry. In reality a number of farmers in Western Australia see this year as their last prospect. In the event that it is not a good season many farmers in parts of Western Australia will simply have to leave the land. In its recent submission to the select committee on rural hardship in Western Australia, the Primary Industry Association of Western Australia stated:

It cannot be stressed too strongly that the adverse terms of trade facing agriculture . . . combined with successive droughts in many areas throughout the State is threatening the survival of many producers.

I find it very disappointing, to say the least, that in the face of this situation the best the Government can do is to tamper with the income equalisation deposits scheme in such a way as to remove the role it has played in reducing the inequitable tax burden suffered by primary producers. I remind the Senate that in my own State of Western Australia alone, the 13,500 farms have an average level of debt of $101,700. This legislation is the latest of a series of anti-rural policies that this Government has increased. Export meat inspection charges have been increased by 200 per cent. It abandoned the bicentennial water resources program. The automatic increases in excise tax on fuel and heating oil hits the rural sector especially hard. The Government has also taken a number of other measures which clearly indirectly disadvantage the rural sector.


Senator Walsh —On a point of order, Mr Acting Deputy President. I have been very restrained for the last 10 minutes in listening to this monologue on matters that have no relevance to this Bill. The honourable senator is straying even further from the Bill. I suggest that he address himself to the subject of the Bill or terminate his speech.


The ACTING DEPUTY PRESIDENT (Senator Elstob) —There is no point of order. However, I ask you, Senator Crichton-Browne, to keep within the confines of the Bill.


Senator CRICHTON-BROWNE —Thank you, Mr Acting Deputy President. I think that it goes without saying that any measure introduced by the present Government which financially disadvantages the rural sector finds relevance in everything that I have said so far and everything that I intend to say in the next 30 seconds of my speech. It might be unpalatable to the Government, particularly Senator Walsh , to hear me say it, but it is a reality; it is the truth, and it is a fact of life. This Government simply seems unaware of the importance of the rural sector to the Australian economy. Despite the loss of traditional markets and continually worsening terms of trade, exports of rural origin still account for over 40 per cent of Australia's export income. The truth of the matter is that this Government's changes to the income equalisation deposits scheme represent yet another attack on farm incomes, which the rural sector can ill afford.