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Wednesday, 9 March 2005
Page: 5


Senator SHERRY (9:51 AM) —In the 2002-03 budget the Liberal government announced a range of reforms to Australia’s international tax regime and reforms to international taxation. Those reforms had three broad aims: encouraging foreign investment in Australia, encouraging companies to set up regional headquarters in Australia and removing impediments to the competitiveness of Australian multinationals operating overseas. The New International Tax Arrangements (Managed Funds and Other Measures) Bill 2004 represents the final tranche of legislation implementing these reforms.

Schedule 1 deals with capital gains tax and foreign residents. Currently, foreign residents investing in Australian assets directly or through a foreign resident fund are given more favourable taxation treatment than foreign residents investing through Australian managed funds or fixed trusts. The tax law therefore discourages foreign residents from investing in assets through Australian managed funds, and this impedes the employment growth in the managed fund industry in Australia.

The amendments in this bill aim to more closely align the capital gains tax treatment of investments made by foreign residents directly, or through foreign managed funds, and investments made through Australian managed funds. Clearly, if a foreign resident disposes of an interest in an Australian managed fund, a capital gains tax event is triggered. This occurs even where the underlying assets of that fund are without the necessary connection to Australia to trigger a capital gains tax event if those assets were held directly. Foreigners are therefore penalised for investing in the assets through Australian managed funds, rather than investing directly in those assets. The changes will result in a capital gains tax event being triggered only if more than 10 per cent of underlying assets of an Australian managed fund has the necessary connection with Australia to trigger a capital gains tax event. This will provide closer alignment between the tax treatment of foreigners investing directly and foreigners investing through Australian managed funds.

In addition, capital gains or losses made by foreign residents due to the disposal of assets by an Australian fund will also be disregarded where the gain or loss relates to an asset without the necessary connection to Australia. This change will again ensure that foreign residents are not penalised for holding assets through Australian managed funds. A CGT exemption will also be provided where distributions of foreign source income are made from a fund to a foreign resident. This effectively allows foreign income to flow through an Australian managed fund to a foreign resident. This is appropriate as foreign residents investing directly in assets generating foreign source income are in general not subject to capital gains tax.

Schedule 2 deals with treaty source rules. Schedule 2 will ensure that foreign residents are taxed in the same way on foreign source income derived from foreign assets held through Australian managed funds as they are taxed on income from directly held foreign assets. These amendments effectively allow foreign income to flow through an Australian managed fund to a foreign investor without being subject to Australian tax. These amendments will improve the competitiveness of Australian managed funds in providing services to foreign investors. Schedule 3 deals with interest withholding tax. Withholding tax is generally applied to interest payments made to overseas creditors. This effectively increases the cost of capital for Australian firms, which reduces their profits, investment and employment.

The bill contains three amendments to the imposition of interest withholding tax. The first amendment broadens the range of financial instruments eligible for IWT exemption by including debt interests. The second amendment complements the government’s decision to treat certain upper tier 2 capital instruments as debt interests for taxation purposes by ensuring that non-capital payments on such instruments are treated as interest for IWT purposes. The third amendment allows assets and debts to be transferred from Australian subsidiaries of foreign banks to their Australian branches without losing IWT exemptions.

The Australian Labor Party, which I am speaking on behalf of in this chamber today, is committed to the process of international tax reform. My colleague the shadow Assistant Treasurer in the other place, Mr Joel Fitzgibbon, in a recent speech to the Sydney Institute raised the issue of international tax arrangements acting as a barrier to attracting the best and the brightest minds and entrepreneurs to this country.

For the reasons that I have outlined, Labor will be supporting the international tax arrangements bill. We believe there are some other issues that need some examination. One important matter is the capital gains tax deemed disposal rule that applies to certain foreign citizens—presumably foreign residents—working in Australia. The rule means that, after a period of five years residing in Australia, if they become a nonresident they incur a capital gains tax liability, irrespective of whether they have disposed of specific foreign held assets. This does not appear to be good tax design.

The issue has been pursued through the UK and US double tax treaties. To date, the Liberal government has not done a great deal on the matter. It needs to have more attention paid to it. It impacts on the so-called brain drain from this country, and further action is needed to eliminate tax impediments to attracting the best people back to Australia or non-Australians into Australia. This is becoming a more critical issue due to our productivity performance. There has been a great deal of public debate about some disappointing economic news in recent times. The public debate has focused on some of the causal issues and possible solutions. Amongst those is the need for Australian industry to retain and attract the brightest and most knowledgeable persons who can contribute to restarting the growth of the Australian economy, which in the last quarter was almost zero.

More attention needs to be paid to the couple of matters that I have touched on by the current government as part of a much more comprehensive approach to restoring economic growth and to reducing our national debt and our current account debt. The national debt has reached record proportions and carries with it serious consequences. Having made those comments, I conclude by saying that the Labor Party will be supporting the bill.