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Thursday, 14 May 1987
Page: 3174


Mr CARLTON(11.07) —Well, here we are talking about tax again, and this is another instalment of the great Keating tax reforms. At the completion of the reforms as at 1 July this year the average family will be paying $37 a week more tax than it paid under the Fraser Government. It will pay $37 a week more tax now, and when the reforms are complete on 1 July it will continue to pay $102 a week in tax. So much for the impact on families of these reforms. The package being considered today adds another 100 pages to taxation law. I remind honourable members, as I have on each previous occasion when one of these immense packages of tax changes has come in, just where we stand on the table. Since 19 September 1985, when the Treasurer (Mr Keating) produced his reform of the Australian taxation system-otherwise well known as RATS-an additional 831 complicated pages of taxation legislation has been produced, since 19 September 1985, an increase of nearly 70 per cent on what we had before. The general burden of all that has fallen on the community, in particular on the business community. On behalf of the Opposition I move the following amendment to the Taxation Laws Amendment (Company Distributions) Bill:

That all the words after `That' be omitted with a view to substituting the following words:

`whilst not declining to give the Bill a second reading, the House-

(1) condemns the Hawke Labor Government for raising the company tax rate from 46 per cent to 49 per cent at a time when company tax rates around the world are being lowered;

(2) notes that the Government's so called `tax reform' proposals have imposed an additional tax burden on business in excess of $2,000 million;

(3) notes that these new business taxes have been imposed at a time when the level of business investment in this country has fallen to an appallingly low level and there is a rising tide of bankruptcies;

(4) notes with concern that the interaction of the proposals in the Bill with the foreign tax credit system and the new capital gains tax imposes a tax disadvantage on companies and on their shareholders;

(5) notes that the Bill also contains unnecessarily complex administrative and compliance procedures for companies, and therefore

(6) calls upon the Government to restore the incentive to invest by pursuing a more balanced economic policy and reducing the taxation and administrative burden on business'.

This amendment will be seconded at the appropriate time by my colleague the honourable member for Parkes (Mr Cobb). I will deal first with the Taxation Laws Amendment (Company Distributions) Bill 1987, which is better known as the imputation legislation. We note from the whole package of measures brought in on 19 September 1985 that the overall additional burden to business is about $2 billion.


Mr Slipper —Shocking!


Mr CARLTON —As the honourable member for Fisher correctly says, it is shocking-absolutely shocking at a time when we are looking for business to invest in new productive enterprises. It is little wonder that there is a lot of takeover activity, a lot of investment off shore and tremendous concern about the lack of investment in new productive enterprises. It is only through investment in new productive enterprises that we will create jobs and wealth. Of course, without the creation of wealth we cannot distribute wealth to families and we cannot levy the taxes that we need to look after the disadvantaged, the pensioners and welfare beneficia-ries. Investment in Australia is, therefore, critical to Australia's prosperity.

In the whole of the package in 1985 there were only two measures which could remotely be said to promote investment or to help the taxpayer. The first of those measures was the reduction in marginal rates of tax which, although insufficient, was still welcome, although I must say parenthetically that the impact of it on the family receiving average weekly earnings, will be zero on 1 July. It will be nil, absolutely nothing. Nevertheless, it is welcome. The other measure which is welcome in the sense that it brings taxation relief to shareholders is the imputation system, which is the measure contained in this Bill. Therefore, on behalf of the Opposition, I say that we welcome the tax relief to shareholders of private and public companies who pay tax. Of course, in this case those shareholders who are not liable to pay tax get no benefit; but we welcome the benefit from this Bill for those who are liable to pay tax.

However, there are some implications of the package to which I must draw attention. We are told by the Treasurer (Mr Keating) that the total cost to revenue of the imputation system and related measures is $775m but that will be offset by increasing the company tax rate from 46 per cent to 49 per cent so that the net cost is expected to be $50m in 1987-88 and $300m thereafter. In other words, whilst shareholders will get some benefit, there will be a consider-able additional burden on companies. I shall refer to that and to the effect it will have on our international competitiveness in more detail later in my speech.

There are some aspects of the imputation provisions that do not help companies and their shareholders. I would like to draw attention to those. The first one relates to the interaction of the foreign tax credits system, already introduced by the Government, with imputation. It will prejudice those companies with substantial earnings from overseas operations. These companies will not be able to pay fully tax free dividends from this off-shore income, thus ma-king off-shore direct investment less desirable at a time when the Government is supposedly encouraging such investment. I am talking about the Australian multinational companies, those companies that are sufficiently energetic and innovative to be establishing companies overseas, earning income overseas and repatriating the profits to Australia for the good of Australia. They are the companies that we are talking about. We should encourage them. But this interaction between imputation and foreign tax credits does not help them; indeed the foreign tax credits system itself does not help them.

For example, if a company pays 35 per cent tax in the United Kingdom, the foreign tax credits system will require an additional 14 per cent tax to be paid in Australia on profits repatriated to Australia. It is only this 14 per cent Australian tax paid amount, grossed up by 51 over 49, that can be paid as a franked-that is, a tax free-dividend to resident Australian shareholders. The 35 per cent-that is, the United Kingdom tax-grossed up by 51 over 49 would be fully taxable in the hands of individual shareholders if paid as a dividend. So, clearly, the interaction of another one of the Treasurer's impositions with this benefit has an adverse effect on companies based in Australia and operating overseas.

There is also a problem with the interaction with our old friend the capital gains tax. The benefit of the indexation of capital gains under the new capital gains tax will largely be lost as it is not possible to pay a tax free dividend out of the indexed portion of a capital gain. For example, if an asset were purchased for $100,000 and sold subsequently for $150,000 and the consumer price index had risen 20 percentage points over that period, the sale proceeds would be $150,000 and the indexed cost on that would be $120,000, leaving a taxable gain of $30,000. If we apply tax at 49 per cent to that, the company would pay $14,700 in tax. The company then credits to its franking account-to be available to be paid out to shareholders as a tax free dividend-that amount of tax, that is, $14,700 multiplied by 51 over 49, leaving $15,300 in that franking account.

Of course under law the company is able to distribute dividends based on this capital sale unrelated to the indexation provisions of the capital gains tax. In that case, the proceeds in cash are $150,000 and the cost of the asset is $100,000, which leaves $50,000 profit less the tax paid of $14,700 so $35,300 is available for distribution. If this full $35,300 were paid out as a dividend, only $15,300 would be tax free and the entire indexed portion of $20,000 would be fully taxed in the hands of individual shareholders. So there we have an interaction between the capital gains tax and the new imputation proposals which disadvantages companies and shareholders where there is a capital gain subject to indexation.


Mr Cleeland —Stop your whinging and give us your policy.


Mr CARLTON —I know that is a little complicated for the honourable member for McEwen but I had to get it into Hansard so that, hopefully, it will be understood when he reads it tomorrow, although I have very grave doubts about that. If the honourable member for McEwen wishes to keep interjecting, as he always does during these tax speeches, I give him notice that I will ignore him totally for the rest of my speech.

A third problem is that, whilst the benefit of imputation rebates will pass through companies, trusts and partnerships that are shareholders to the ultimate individuals, this will not occur for trusts that are in a loss for the year situation. In other words, if a company or partnership is experiencing a loss, the benefit of the imputation rebates on dividends paid by the company in which shares are held will still be available whilst for a trust shareholder in a loss position the imputation rebate will be entirely lost. To my mind there is no logic to this distinction. Other aspects of this Bill, including the removal of branch profits tax and dividend withholding tax, follow on automatically and sensibly from the imputation system. There are also changes to the taxation of liquidations, with which we have no objection.

The next Bill is the Income Tax (Franking Deficit) Bill which formally imposes the franking deficit tax contained within the imputation legislation. Again, we have no objection to that.

The Income Tax Rates Amendment Bill 1987 is the killer. This is the Bill that increases the company tax rate from 46 per cent to 49 per cent. This puts Australia way down the league in terms of international competitiveness. Albert Smith wrote a thoughtful article which appeared in the Australian Financial Review on Wednesday, 29 April, under the heading `The land of the Ned Kelly taxes'. Mr Smith thoughtfully provided a comparison of corporate tax systems. People might ask: `Why must we worry about the company tax rate?' After all, why should not a family that is struggling to pay the present Treasurer's enormously high income taxes say: `I would rather companies paid a lot more tax and I paid less'. On the face of it, that seems a reasonable argument. However, when those people look at it more closely, as the socialists never do but we on this side of the House have to do-I must say that the Minister for Sport, Recreation and Tourism (Mr John Brown), who is at the table, has looked at it more closely because he was a businessman in his former incarnation-they realise that if Australia has company tax rates which are too high, companies will not operate here. They will not be formed. People will not bother to set up a company or start up a business. They will not bother to employ people, earn profits and pay tax, and the whole country will become impoverished.


Mr Cobb —That is what is happening.


Mr CARLTON —As the honourable member for Parkes so correctly says, that is happening now. The world is a very difficult and competitive place. It is important that Australia attract as much investment as it can, not only from foreign companies but also from its own citizens, in the hope that they will invest more here rather than overseas and that they will set up new enterprises. People who wish to invest money, be they a group of shareholders-that is, a company board acting on behalf of shareholders-or individuals wanting to set up a company, sensibly will look around the world to see where their money might best be invested or, alternatively, they might decide, if it is not worth investing domestically but they do not want to go overseas, to put their money into ordinary investments which give an interest payment with virtually no risk and no effort on their part. They can just sit back and get the dividends, but they do not engage in productive investment and job creation directly-which is precisely what we want people to do. That is why it is important to examine a comparison between Australia's company tax rate and those of other countries. So I am not arguing for lower company tax rates just because I want to see rich people get more profits. I argue for lower rates because it is sensible in the interests of all Australians to promote more investment so that we can get more wealth, more prosperity and more jobs for ordinary people.

According to Mr Albert Smith's comparison, Australia's corporate tax rate is 49 per cent. The tax rate in the United Kingdom has been lowered by Mrs Thatcher to 35 per cent. On 11 June we will see whether the citizens of the United Kingdom approve of Mrs Thatcher's moves in attracting more investment in the United Kingdom. I think that she will be given a resounding victory. In the United States of America, the corporate tax rate is 34c in the dollar. New Zealand's Labor Government has just increased the rate to 48 per cent.


Mr Cobb —It is still lower than ours.


Mr CARLTON —That is correct; it is one point lower than our rate. In Japan, it is 42 per cent; Hong Kong, 18 per cent; and Singapore, 43 per cent. One rate which beats ours is that of the Federal Republic of Germany, which is 56 per cent. France has a similar rate to ours; its rate is 50 per cent. In Canada it is 46 per cent, which is the rate we had before this Labor Government increased it by three per cent. That is a sample of the rates that apply in other countries. Honourable members will see that, in most cases, the company tax rate is lower than ours. In the interpretation of that table, Mr Smith quoted comments made by Mr Peter Knox, director of taxes for Arthur Young and company of Sydney:

. . . a valid comparison of relative tax advantages had been provided by the work his firm did for offshore companies considering investing in Australia and for domestic companies investing outside Australia.

So this is right in the middle of the problem about which we are talking. Arthur Young and company is a very big, professional accounting firm and it knows its stuff. It has been asked to do the very thing I have been talking about; that is, to look around on behalf of foreign investors and Australians wanting to invest in Australia to see what the competitive position is in terms of tax. Mr Knox continued:

From that perspective, Australia is not a favourable place for offshore investment . . .

A US company investing in Australia can look to keeping only 51 per cent of its earnings as against approximately 66 per cent in the US, perhaps a little less after allowing a little for regional taxes.

When companies in America keep 66 per cent of their earnings and those in Australia keep only 51 per cent, why would they want to invest here? Similarly, an Australian company, which might pay 34 per cent on its United States earnings under the foreign tax credit system, has to top up its United States taxes with an additional 15 per cent to bring them up to Australian domestic tax rates. However, in franking dividends under imputation, the company would only be allowed to frank dividends to the extent of the Australian tax and would not be given any credit for United States tax already paid. Mr Knox continued:

. . . the foreign tax credit and imputation were hurting smaller, high-technology private companies which had promising markets in overseas countries.


Mr Cobb —Sunrise industries.


Mr CARLTON —The sunrise industries which we are trying to promote. Mr Knox said something that is quite telling:

This amounts to a tax on ingenuity.

It would take all the genius of the honourable member for Blaxland, our present Treasurer, to devise a tax against ingenuity, but he has managed to do so. Having dealt with the international comparison on tax, let me turn to where we stand overall in terms of the tax burden. Earlier I mentioned that an additional $2,000m had been levied on the business community in taxes. Again, a person might say: `I am an ordinary taxpayer. I am struggling to pay my weekly tax bill. Why should I worry if business is taxed by an additional $2 billion? I would rather businesses were taxed to that additional extent so that I can pay less tax'. Again, the present Treasurer has the extraordinary distinction of taxing businesses an extra $2 billion as well as adding taxes to ordinary families. For a family on average weekly earnings with dependent children, under this Government the average tax rate has gone up from 17 1/2 per cent to 20 1/2 per cent. Even after all the tax reforms, the top marginal rate of tax for a family on average weekly earnings has gone up from 30c in the dollar to 40c in the dollar. It is not a question of businesses being taxed more so that people can pay less; it is a case of both businesses and people being taxed more to fund the extraordinary extravagance of this Government. That is the fact.

The other reason people should query whether it is a good idea to add $2 billion to business taxes is that it is not only the company tax rate that inhibits investment; it is the total burden of tax in all its forms. If we look at the whole range of so-called tax reforms which were announced by the Treasurer in his statement on 19 September 1985, we find the fringe benefits tax, which amounted to 139 pages of immense complication and an extra $575m, and the capital gains tax, which amounted to 103 pages of legislation, said to raise only $25m after five years, but which we now find will raise between $125m and $160m next year. That will be a major imposition. Then 55 pages of legislation relate to the non-deductibility of entertainment expenses, and that will raise $330m. For the negative gearing provisions, which have absolutely destroyed the rental housing market and added tens of thousands of people to the housing commission lists, there are 47 pages of complicated legislation. This will produce revenue of $100m, increasing to $195m by 1990-91. For quarterly provisional tax payments, 28 pages of legislation are provided, and this measure will raise $90m in additional tax. Substantiation requirements will produce $105m, raising to $200m after four years. The 49 per cent company tax will raise $475m, but actually only two pages of legislation apply to that. Thus, some of the biggest taxes, the biggest hits on the business community, are covered by the fewest number of pages of legislation. The annual total of those so-called reforms comes to over $2 billion, and that is apart from the company tax rate, in addition to the table put forward by Mr Smith. The Australian Financial Review headline `The land of Ned Kelly taxes' applies with double effect when one reads the rest of those impositions.

This package of Bills also includes the Taxation Laws Amendment Bill (No. 2), which does several things, a couple of which I will refer to in my limited time. The Bill relates to the substantiation of car expenses. This reminds us of our old friend, the fringe benefits tax, under which there were horrendous provisions requiring people to keep log books, and so on. There was a great outcry about this, and the Treasurer said that log books need be kept for only three months. However, if a person changed his car and had a different vehicle, he had to do it all again. We now find that the Treasurer has overlooked self-employed people and employees using their own cars for income producing purposes. No statutory formula is available to such people. One method they can use to make their contribution is to have a log book, and this measure brings the new log book provisions of the fringe benefits tax to the self-employed and employees using their cars for income producing purposes. We have no objection to that; it is merely a reminder of the fringe benefits tax and large numbers of people, particularly in small business, are continuing to be concerned about that tax.

The abolition of Division 7 is a necessary follow-on from the imputation system. We agree with the technical amendment to section 40 relating to rebate changes. There are changes to the taxation of bonus shares of corporate unit trusts and public trading trusts, and also a change relating to Australian films. Under the existing provisions, a 120 per cent tax deduction is available for capital contributed to an Australian film, where the Minister issues a certificate that it is a qualifying Australian film. To qualify, it must have a significant Australian content. Although a film may have significant Australian content it may also have significant non-Australian content. This amendment provides that the Minister may treat a film as not qualifying where it has significant non-Australian content, notwithstanding that it also has significant Australian content.

This provision is included to try to get the Minister for Arts, Heritage and Environment (Mr Cohen) off the hook for some dreadful decisions he has made, in particular relating to a film called The Return of Captain Invincible. In this terrible saga, the film was sent overseas to the United States of America for cutting to make it suitable for the American audience. That was said to be a foreign content, and therefore the Minister denied the tax deduction. In the court, the judge severely criticised the Minister's action. It is clearly sensible for Australian films to be cut in the country in which they are shown-countries such as Japan or the United States-to make them suitable for local showing. We want an assurance-probably from the Minister for Arts, Heritage and Environment rather than the Treasurer in this case-that this provision will not be used in a way that harms film investors where there is a significant cost of cutting the film to make it suitable for distribution in export countries.

I have not had time to deal with the matter of added powers to the Commissioner of Taxation to require assistance from taxpayers when investigations are in progress. We believe that in this case the Commissioner already has an entitlement to inspect documents and so on, but this provision requires the taxpayer to assist the Commissioner. I have moved a second reading amendment that will ask the Government to reimburse the taxpayer for costs. We considered the possibility of voting against this provision, but on balance we have decided to ask that the cost be reimbursed. My colleagues will deal with this matter in greater detail.

To summarise, we have before us another 100 pages of complicated legislation from the Treasurer that will be an additional burden on business and another death blow to investment in Australia.


Madam DEPUTY SPEAKER (Mrs Darling) -Order! The honourable member's time has expired. Is the amendment seconded?


Mr Cobb —I second the amendment and reserve my right to speak.