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Wednesday, 3 September 2008
Page: 4355


Senator COONAN (9:31 AM) —I am addressing these remarks in respect of the Tax Laws Amendment (2008 Measures No. 4) Bill 2008 and I have to inform the Senate that the coalition will be supporting schedules 1 and 3. This bill has three schedules. Schedule 1 amends the Income Tax Assessment Act 1936 to exempt private health insurance holders from capital gains tax if they receive shares or cash when their not-for-profit insurer demutualises to a for-profit insurer. Schedule 2 amends the Income Tax Assessment Act 1936 to limit the definition of family by changing lineal descendants to children or grandchildren of the test individual or the test individual’s spouse. Schedule 2 limits the ability for family trusts to make a variation to the test individual except in the case of marriage breakdown. Schedule 3 makes a variety of minor amendments to taxation law to remove minor errors including incorrect terminology and typographical errors—it is a clean-up schedule. The coalition, as I said, supports 1 and 3. However, we do not support schedule 2, but I will deal in a little more detail with schedules 1 and 3 first.

Schedule 1 is a specific response to the demutualisation of NIB last year and of MBF this year. The object of this schedule is to provide capital gains tax relief for private health insurance policyholders who receive a cash payment when their insurer demutualises. When an insurer demutualises, the accumulated surplus from the fund is distributed to existing members of that fund, and policyholders receive a share of the profit. When this happens, though, the recipients of this profit are subject to capital gains tax. Schedule 1 is a very sensible measure because it exempts the recipients from capital gains tax. This is entirely appropriate as those people who have invested in their own health cover should not be slugged with additional capital gains tax. Unlike the Labor government, which seems intent on dismantling private health insurance, we in the coalition actually support people who have private health cover and the private health insurance industry more generally, and thus we are pleased to support this schedule.

Schedule 3 of this bill is, as I said, a non-controversial administrative measure. It makes relatively straightforward and minor changes to existing tax laws to promote their intended operation and clarification and it does have the coalition’s support. We are, however, opposed to schedule 2 of this legislation as, in our very firm view, it is a regressive step in tax law that does not have either community or industry support. I foreshadow that I intend to move an amendment during the Committee of the Whole to excise schedule 2 of this bill so that the Senate will be able to quickly pass schedules 1 and 3 whilst also having the opportunity to consider the merits of schedule 2 in a separate measure at a later stage.

Schedule 2 to this bill amends schedule 2F to the Income Tax Assessment Act 1936. Schedule 2F of the act deals with trust loss measures. Basically, the trust loss measures prevent the transfer of tax benefits on the recoupment of a trust’s tax losses to persons who did not bear the economic loss when it was incurred. Family trusts are considered as accepted trusts for the purpose of the trust loss rules and measures in schedule 2F. To be eligible to be a family trust, the trustee must make a family trust election in respect of an individual—the so-called test individual. When a family trust election is made, distributions can be made to the family group without penalty tax, which is currently imposed at the top marginal tax rate of 46.5 per cent.

The object of this schedule is to limit the definition of lineal descendants of the test individual or of the test individual’s spouse and remove the ability for a family trust to make a one-off variation to the test individual specified in a family trust election. This measure seeks to reverse the changes made last year by the former coalition government. The amendments made by the coalition government reduced the restrictions and compliance burdens placed on small business, farmers and professionals who use family trusts for legitimate purposes, including asset protection and business succession planning.

Last year the changes received widespread support within the community, although they were opposed by Labor, who it seems retain some sort of ideological objection to family trusts. By seeking to reverse the coalition’s amendments the government will substantially increase the compliance burden on all those small businesses, farmers and professionals who use family trusts for legitimate purposes. The coalition notes that the increased compliance burden that these people will have to bear is very much the unintended but inevitable consequence of this schedule. It is because of the increased compliance burden, for apparently little gain to the revenue, that the coalition opposes the changes to the definitions of ‘family’ and ‘lineal descendants’ in a family trust.

We have to ask why the Labor government is making this regressive decision even though it clearly does not have community or industry support to do so. The Labor government is addicted to raising taxes and Labor does have, as I mentioned, an ideological objection to the concept of a family trust. If you want proof of this you only need to look at the Assistant Treasurer’s second reading speech. On 26 June the Assistant Treasurer made a most extraordinary claim about why the government was pushing ahead with the restriction of the definition of ‘family’ in the family trust election rules. In the other place, the Assistant Treasurer said that the purpose of schedule 2 was to reduce the scope for family trusts to be used to lower income tax. You did hear correctly—the purpose of this schedule according to the Assistant Treasurer is to stop families legally and legitimately lowering their tax burden.

You really have to wonder then what motivates the Labor government. Their ideological opposition to lower taxes and family friendly policies is just astonishing in my view. We have a government that wants to restrict families from lowering their tax burden. What happened to the phrase ‘working families’? Now that the election has passed it seems that the government wants to distance itself from working families and from the mantra of economic conservatism. Raising taxes on Australian families is not economic conservatism and nor is it helpful for families who arrange their affairs through a family trust. It is mean spirited and ill conceived and simply distorts the tax system.

We now know from the Senate inquiry that the expected savings from the change to lineal descendants will be around $1 million a year. You have to ask yourself if a saving of $1 million is, or could be, worth all the extra compliance, red tape costs and confusion that are associated with yet another change in this measure. The government talks constantly of motherhood statements like ‘the need to cut red tape’. But obviously they do not really believe in it because if they did they would not be putting this measure forward in this form. The compliance burden, as heard by the Senate inquiry, will, of course, only see money flow into the pockets of advisers and professionals such as accountants and lawyers. You have to ask: what is the point then of this legislation if it will be almost revenue neutral but will punish some families for no broader public benefit? The old saying about Labor’s commitment to cutting red tape, I think, has to be seen in the light of not listening to what they say but looking at what they do, which is a very different story.

The evidence provided by Treasury to the Senate Standing Committee on Economics indicates that the compliance costs will likely outweigh the relatively paltry revenue savings. The Senate inquiry received seven submissions from leading industry groups and experienced practitioners—not from those ideologically bent on dismantling and punishing certain families—and each expressed their condemnation for these changes. Yet, unfortunately, but I think rather predictably, the government members on the committee used the report to support the bill. Despite all submissions opposing the change, the Labor senators’ ideological objection to family trusts was front and centre in their approach to the report. I do find it quite disappointing that the government members of the Senate economics committee have chosen to simply ignore all the evidence presented to the inquiry, to support their original position and to waste taxpayers’ money in the process.

There is the clear hypocrisy here of the government claiming that this schedule is being proposed as a revenue-saving measure—there is no tax loophole here—and then spending taxpayers’ funds on a Senate inquiry only to ignore all the evidence presented and just rubber-stamp government policy. I do not think it does those senators credit, either as an intellectual or as a practical exercise. If the government members are so concerned with taxpayers’ money being wasted, one has to ask why they deliberately ignore all the evidence presented to the Senate inquiry and continue to push ahead with this proposal even though it should be condemned as a useless piece of sophistry and an unacceptable burden of increased red tape.

As I have said, we do support schedules 1 and 3 of this bill and we do support an ongoing program of sensible tax reform that clarifies the law and reduces the compliance burden. We will, however, be moving an amendment to excise schedule 2 from the bill so that the rest of the non-controversial elements can be passed quickly. I do hope that the crossbench senators will agree that families are more diverse than just children and grandchildren. Families come in many shapes, forms and configurations and I certainly hope that the crossbench senators will support what I submit to the Senate as a very sensible and defensible coalition amendment.