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Monday, 20 June 2011
Page: 3301


Senator CORMANN (Western Australia) (17:23): I seek leave to move the two coalition amendments which have been circulated in the chamber together.

Leave granted.

Senator CORMANN: I now move the two coalition amendments to this bill which relate specifically to the issue of capital protected borrowings and more specifically the benchmark interest rate:

(1)   Schedule 2, item 7, page 7 (lines 12 to 15), omit subsection 247-20(5), substitute:

   (5)   The rate (the adjusted loan rate), at a particular time, is the midpoint at that time between the Reserve Bank of Australia’s Indicator Lending Rate for Standard Variable Housing Loans and Indicator Lending Rate for Personal Unsecured Loans — Variable Rate.

[adjusted loan rate]

(2)   Schedule 2, item 12, page 10 (lines 15 to 18), omit subsection 247-80(4), substitute:

   (4)   The rate (the adjusted loan rate), at a particular time, is the midpoint at that time between the Reserve Bank of Australia’s Indicator Lending Rate for Standard Variable Housing Loans and Indicator Lending Rate for Personal Unsecured Loans — Variable Rate.

[adjusted loan rate]

I have a few comments in response to Senator Hurley's contribution to the debate earlier. I acknowledge that Senator Hurley recognised that capital protected borrowings are indeed a useful tool for conservative investment, which, of course, they are. Where I disagree with Senator Hurley is with her following contribution when she asserted that the industry was happy with the ultimate compromise the government ended up with—they are not—and her assertion that we are being a populist opposition not focused on what we would do if we were in government. Let me just assure the chamber and people across Australia that what the coalition are proposing with our amendments here in relation to the capital protected borrowings issue, which is a very technical issue, is indeed what we would be doing in government.

In order to put all this into a bit more context it is useful to go through some of the history around this issue, which was elaborated on in the report by the Senate Economics Committee. Capital protected borrowings were first developed and marketed in Australia in the early 1990s. I am reading here from the coalition senators' dissenting report in relation to this issue in the inquiry report by the Economics Committee—

1.6 Originally, all the interest on these products was tax deductible.

1.7 In the late 1990s

the then Howard government—

... limited the fraction of interest that could be claimed as a tax deduction. Part of the interest was allocated as an investment expense (deductible) and the other a capital expense (not deductible).

1.8 This practice was challenged successfully in the courts. In 2002 the full bench of the Federal Court ruled that the component of 'interest' applicable to the cost of capital protection is deductible. The High Court later refused any appeal from the Tax Commissioner.

1.9 This required a legislative solution. In early 2003 the Treasurer and Assistant Treasurer ... introduced an 'interim methodology' for apportioning deductibility for capital protected borrowings, and opened a consultation process to determine a longer term methodology.

1.10 The new methodology was introduced from 1 July 2007. Any interest paid in excess of the Reserve Bank's Indicator Rate for personal unsecured loans would not be deductible (would be considered to be payment for capital protection). Government and industry were content although Treasury had argued for a lower rate.

But in comes the Rudd Labor government and decides to further lower the level of deductible interest rates to the point where the market in relation to capital protected borrowing completely collapsed. The Rudd Labor government was quite shocked at the immediate impact its ill-thought-out proposal had back in May 2008, which is why they did not progress this proposal at the time. The compromise proposal the government came up with eventually was just to use this arbitrary figure of adding 100 basis points to the rate originally announced in May 2008. There is absolutely no basis for that.

Evidence submitted to the Senate inquiry indicated that the 100 basis points arbitrary decision would not restore the market that was completely destroyed by the actions of the Rudd Labor government. I am quoting here from the AFMA submission.

The proposed 100 basis point increase above the rate originally announced in May 2008 acknowledges the concerns raised by the industry in this regard but it does not satisfactorily address the problems identified.

It should be remembered that industry agreed with the government that the original rate set for these products was too high and that there was scope to come to a more appropriate arrangement. However, the government's approach has been completely inconsistent. In this context I point to evidence from the Tax Institute, which pointed out a very important issue in their submission to the inquiry:

... the purpose of the provision is to deny a deduction for the amount that is comparable to the cost of acquiring separate and explicit protection. The rate chosen should be the rate most appropriate to determine that cost.

   …    …

However, the approach set out in the EM appears to be the reverse. That is, the EM appears to set out an approach intended to limit a borrower's deductions to an amount reflecting the issuer's cost of funds and assumed credit risk.

The purpose is to provide an adequate level of capital protection so as not to distort the market. So clearly the government has got it wrong up until now. They got it wrong in May 2008 and they still have it wrong by coming up with their arbitrary addition of 100 basis points. That, of course, will not address this issue satisfactorily. I suspect that the government and the minister may have to come back in six months and fix this up yet again if the coalition amendment is not successful. The coalition is seeking to assist the government and to prevent embarras­s­ment for the government in six to 12 months time when, no doubt, they will have to come up with an amendment similar or equivalent to that which the coalition is putting forward today. So I urge senators to consider this issue very carefully, look at the impact that the government's ham-fisted approach to this issue has had on the capital protected borrowings market over the last three years and join the coalition in a more sensible, appropriate and balanced approach to this issue, which, of course, is completely supported by the industry.

As Senator Hurley said, capital protected borrowings are a useful tool for conservative investment, and I do not know why the chair of the economics committee in her con­tribution started to say that making it more generous than what the government has put on the table so far would somehow encourage tax evasion. No, it will not encourage tax evasion. These are deductions of costs incurred by investors and unless Senator Hurley is suggesting that claiming appropriate deductions for costs incurred is tax evasion I do not really understand where she was coming from there.

With those few remarks, I move the two amendments that have been circulated by the coalition, and I commend them to the Senate as a more appropriate methodology for calculating the benchmark interest rate in the context of capital protected borrowings.