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Monday, 18 November 2002
Page: 6650


Senator CONROY (8:50 PM) —I rise to speak on the two cognate bills, the New Business Tax System (Consolidation and Other Measures) Bill (No. 1) 2002 and the New Business Tax System (Franking Deficit Tax) Amendment Bill 2002. These bills deal with ongoing business tax reform measures arising from the Ralph review. The Labor Party have made it clear that we support the principles underlying the business tax reforms proposed in the Ralph review. Flowing from this, we support the principles underlying the bills before us today. We continue to have concerns with regard to the implementation of the reforms. I will expand on that later in the speech. But, essentially, we agree with the direction being taken in the bills and we will support them in this chamber, as we did in the House.

Let me now turn to the substantive provisions in the bills. The consolidations measure aims to implement the Ralph recommendation that groups of wholly owned entities be permitted to choose to be taxed as a single entity rather than on an entity-by-entity basis. There have been two tranches of consolidations legislation so far. The first provided a broad overview of the consolidations measure and set out ongoing rules for joining an existing consolidated group. The second set out cost-setting rules for the initial formation of the consolidated group, the treatment of attribution accounts held in relation to interests in foreign entities and the transfer and pooling of foreign tax credits.

This third tranche contains further cost-setting rules to cater for consolidated groups, linked entities joining existing consolidated groups and trusts joining or leaving a consolidated group; measures to address some revenue risks, which I will speak about in more detail later on; modifications to allow a consolidated group to continue to exist even though the head company is replaced by a new shelf head company; consequential amendments to ensure that the core rules apply in an appropriate manner to multiple entry consolidated groups, or MECs; additional rules to deal with attribution of income and deductions when a subsidiary is only in the consolidated group for part of a year; modifications to remove the existing grouping provisions to allow the continued transfer of losses between an Australian branch of a foreign bank and the head company; amendments to ensure that the thin capitalisation regime continues to operate as intended under the new consolidations regime; amendments to ensure that the income tax law's existing provisions for research and development deductions interact appropriately with the new consolidations regime; and technical corrections to the consolidations losses rules and the MEC group membership rules.

The main bill also contains further amendments to the existing income tax law arising from the new simplified imputation system. These relate to modifications to arrangements for the intercorporate dividend rebate, a broadening of the exemption from the benchmark rule for franking, provisions relating to distributions on non-share equity interests and some franking transitional rules. The amendments are not expected to have any revenue impact. These represent sensible and uncontroversial consequential reforms arising from the introduction of the new simplified imputation system, and we will support them. The minor additional bill deals with some consequential amendments relating to franking deficit tax liability. These are not expected to have any revenue impact. The original bill was only introduced at the end of May 2002, so it seems extraordinary that these changes could not have been foreseen at that time. Nonetheless, the substance of these amendments is sensible and uncontroversial, and we will support them also.

Consolidations is a very complex measure with significant revenue implications. As a whole, it is estimated to cost the revenue in excess of $1 billion over the forward estimates. It is for this reason that the opposition has sought to refer each of the tranches of legislation to the Senate Economics Legislation Committee as it has come up. Many of the overarching issues concerning the measure were considered in some detail in the public consultation process for the second tranche of legislation, which was held only a month ago. Nevertheless, the referral of the third tranche to the Senate Economics Legislation Committee has enabled further valuable exploration of the detail of the operation, revenue costs and compliance costs of the measure. Once again, the information provided in the submissions was very helpful to the committee in this exploration. I commend those involved in the inquiry process for their constructive input.

As we noted in the report, the opposition remain concerned about the impact of the consolidations measure on small to medium enterprises, particularly during the implementation phase of the measure. The submission by the Institute of Chartered Accountants described the situation as follows:

The complexity of entering into the Consolidation regime must not be under-estimated, particularly for businesses in the small to medium enterprise (SME) sector and their advisers.

... ... ...

Tax advisers face a very challenging time getting `up to speed' with the technical aspects of the Consolidation legislation. Even corporate tax specialists are finding it a challenge—for the more generalist practitioners servicing the SME sector, the legislation is overwhelming.

... ... ...

The practical implementation process of entering the Consolidation regime is very involved, even for small corporate groups. Businesses need to gather a large amount of financial data dating back many years, undertake valuations of assets and subsidiaries, and undertake potentially very complex calculations in relation to asset values and carry-forward losses. The necessary systems changes for ongoing compliance with the new regime also require careful planning.

We regard these as legitimate and continuing concerns. We call upon the government to revisit its transitional arrangements for the consolidations measure, with particular focus on reducing the compliance burden for the SME sector during this transitional period.

The committee report also noted that this bill contains provisions to address a number of revenue risks in the consolidations measure. The explanatory memorandum explains that these provisions address unintended tax benefits concerning the uplifting of the tax values of trading stock, possible double deductions for internally generated assets and the interaction between the current capital gains tax provisions and the resetting of the cost of revenue assets under consolidations. We note that this is a specific response to our concerns on these issues, as highlighted in the referral of the first tranche of consolidations to the committee.

It is a positive sign that the government has been prepared to modify its own legislation as a result of the Senate committee process only three months after the initial bill was introduced and before it has even come into effect. This shows the rigour of the parliamentary process acting as it should and emphasises yet again the critical importance of allowing time for appropriate parliamentary scrutiny of such complex legislation. We welcome these additional provisions as an appropriate protection of the revenue under this measure. In concluding, we remain concerned about aspects of the implementation of this measure but overall think that it is a positive reform, so we support these bills. I look forward to hearing Senator Murray's contribution, as I am sure he is looking forward—as I have been—to this bill. As he runs back to his chair, I will sit down.