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Thursday, 14 May 1987
Page: 3179


Mr MOUNTFORD(11.37) —I am pleased to enter this cognate debate on the introduction of the Australian Labor Party's tax imputation reforms-reforms in the very truest sense of the word, in that it has long been recognised by all political parties in this country that too many lurks and inequities existed in the system, and that these needed to be changed. Whereas Labor has addressed itself to total reform, designed to broaden the tax base, ensure that all sectors of the community pay their fair share of tax, and cut the incidence of avoidance and fraud, our opponents on the other side of the House have only one policy in mind, and that is to reduce the amount paid overall by their wealthy supporters. This is the only linking thread that runs through their multitude of tax promises, whether it be the 25 per cent flat tax or the consumption tax. The ultimate beneficiaries are the wealthy, and the ones who make up the shortfall are lower and middle income earners. Yet these same people would claim that Labor's reforms are just as much directed against business as their own are directed to helping the high and mighty. The legislation before us today is stark testimony that Labor stands for real reform which will benefit all Australians, and ensure that all Australian taxpayers are treated fairly.

The difficulty which imputation seeks to redress is the long-standing problem of double payment on taxation of company dividend income. This is effectively taxed twice, once in the hands of the company and again in the hands of the shareholder. It should be noted, especially by honourable members opposite, that the full imputation system which will eliminate this unfair anomaly will be a world first. No other nation has attempted this very necessary reform. Britain and France have only partial imputation, while Germany's split rate system does not relieve completely the personal tax burden. The benefits, not only to shareholders who will receive the preliminary advantages, but to the Australian economy as a whole, are many. Small business people especially will be better off, in that their tax will be reduced from as much as 78c in the dollar to no more than 49c.

Effectively, imputation abolishes company tax for closely held private companies. Shareholders can ensure that they pay only personal income tax on company income simply by distributing all of the company's after tax income as dividends. The tax paid by the company is then fully creditable against the personal tax liabilities of the shareholders through the imputation credit. The income will effectively bear only personal tax.

The legislation will redress the imbalance of the present system which favours debt over equity. We now tax interest income once, and dividends twice. By eliminating the relatively favourable tax treatment of debt, this Government has put competition back into financial institutions, thus restoring to the sharemarket the role of determining economic activity, and reinstituting it as a source of both borrowing and lending. This is completely in tune with our policy of financial deregulation, and our wish on this side of the House to see real, effective competition reintroduced. The pre-imputation system had a built in incentive for private companies to not distribute profits, due to the fact that they would only increase the recipient's tax liability. In an attempt to curtail this retention, Division 7 was introduced imposing a minimum proportion distribution on taxable income.

This tendency to hold on to earnings rather than distribute was a direct result of the double taxation of equity. The object of the exercise was to save the earnings for an eventual distribution as untaxed capital. Such companies were therefore ripe takeover targets, with big potential earnings for the raiding company. Imputation eliminates the advantages of retaining earnings, and so effectively dissuades companies from operating in such as way as to make themselves attractive targets. In the longer term we can expect fewer takeovers, and a higher proportion of takeovers which improve productivity. The changes proposed by imputation remove this opportunity for tax minimisation, and allow private company retention policies to be decided more on economic grounds. Division 7 is thus to be abolished creating a much simpler tax system. Simplicity is the keynote of the imputation legislation. Not only does the Taxation Laws Amendment (Company Distributors) Bill before us eliminate a serious distortion in our tax regimen, but it does so neatly and clearly, with a minimum of fuss.

A qualifying dividend account-QDA-is established on each company's profits to be distributed. Tax already paid at the company level is calculated and QDA distributed dividends will be franked to indicate the tax has been paid on them. The franked amount can be written off against personal income. Unfranked dividends paid out of remaining profits will have no such credit attached, and will attract both the effective company rate and marginal rate of the shareholder. The beauty of the systems is that no matter what the effective company rate, the shareholder always pays his own marginal rate, while the Government knows that credits are matched exactly to tax already paid. The Income Tax (Franking Deficit) Bill 1987 before us today introduces penalties for companies which frank dividends in excess of their credit.

I would now like to say a word on the increase in company tax rates from 46 to 49 per cent, a move necessitated by the potential income losses which the imputation tax will involve. Our opponents have attempted to portray the new 49 per cent company tax as an insufferable burden to business. Yet when we do a quick comparison between Australia and other Western nations, the reality is in fact quite different. As recently as last Saturday in the Sydney Morning Herald Ross Gittens stated:

When you take account of all these factors, Australia's effective level of company tax is quite comparable with those in other OECD countries-which is hardly surprising, when you think about it, since the public sectors they have to finance are roughly the same size as ours, if not bigger.

Why is there a difference between countries of as much as 15 per cent? The short answer is that 35 per cent tax rates which exist in places such as Britain, Canada and the United States of America, at the moment can only be sustained because of their broadening of the corporate tax base and by abolishing several other tax concessions. Thus, the recent United States cut in company tax from 46 per cent to 34 per cent is only possible because of an abolition of the investment tax credit and a complete re-evaluation of depreciation provisions; the closure of tax shelters; a statutory minimum tax of 20 per cent on company profits; and, most notable of all, a higher capital gains tax.

Let me digress at that point for a moment. The honourable member for Bennelong (Mr Howard) has promised us that if he were to be Prime Minister, there would be no capital gains tax. That must sit well with his traditional constituents, but it is hardly in the forefront of contemporary taxation thinking. The United States is not the greatest exponent of socialist economic theory, and one might expect that when the honourable member for Bennelong seeks inspiration for his tax policy, he might care to look at a nation such as America and its taxation policy in toto; in fact, on many issues he does. The validity of the capital gains tax is accepted by the United States and most of the Organisation for Co-operation and Development nations. But when it comes to presenting tax policy, members of the Opposition have no problem with making concessions to all sorts of different groups, negotiating the integrity out of their plan through short term political pandering. Capital gains tax might be a responsible and sensible move, but it goes against the wishes of their masters in the New Right, and some sections of the business community, and thus for those who sit opposite the capital gains tax goes by the board. So clearly the rhetoric that Australia's company tax rates are too high is just that-rhetoric. The facts are that we remain in the same category as our OECD colleagues.

I would like now to address the complaint that the imputation measures are aiding the wealthy at a time when the Government is attempting to urge restraint on all Australians. I note Max Walsh's article in the Sydney Morning Herald of 27 April where he questions the wisdom of taxation trail blazing for the benefits of the rich. Yet if we look at the recipients themselves, and the long term effects of the system, we get a different picture. The fact is that imputation benefits directly not so much the companies, but the shareholders. Private investment accounts for only about 15 per cent on all dividends paid during 1984-85. Many areas will not receive imputation credits, such as shareholders in gold mining companies which are exempt anyway; certain companies drawing overseas profits; companies with profits from capital gains; operations with substantial tax deductions from research and development or accelerated depreciation, and shareholders in companies with losses. Of those shareholders who will benefit, some are on lower marginal rates. Imputation will have the advantage of helping keep their personal tax down, as franked dividends can be offset against income from other sources.

I am informed that already retirement investment advisers are recommending share dividends to their clients as a long term investment. In many cases imputation will be of great benefit. The biggest winners of all, however, will be the small business people, those in small incorporated firms. The double taxing of the former system led to rates in the order of 78c in the dollar; now they will come back to 49c. In all their promises, none of the non-labor parties have ever been able to present a reform to the small business sector which gives them an advantage. But note, it is not an advantage bought at the expense of anyone else in the community; rather it is an advantage which has been given by making the system more just. That is real tax reform. That is making the system fair.

At present, share ownership is identified with higher income earners. But full imputation will change that in the long term. The advantages of imputation will be advantages to all Australians who wish to take them up. An article in the Economist of 7 March stated:

This is the fairest imputation system in the world. If applied to Britain, it would probably do more to promote small shareholding than the flotation of British Telecom and British Gas put together.

This then is the imputation system. At heart, its objective is the same as all the other Hawke Government reforms-the establishment of a fair tax system. The particular wrong it addresses is the double taxation of share dividends. It does it neatly and simply, without additional paperwork and without undue bureaucratic intervention. In so doing it returns $775m to Australian taxpayers, and benefits especially small businesses and small investors. It fits well with the reforms which have already guaranteed $4.5 billion in tax cuts to all Australians. This is our achievement-a fair system which produces results. What does the Opposition present? So far, only vague promises of a flat tax, which in reality would disadvantage 80 per cent of Australians, or a consumption tax which would make each one of us worse off. It also makes promises concerning the need for less tax through a program of expenditure cuts, mainly in welfare, education, health and social security. It is no fight, really-substantial tax cuts and a fairer system versus the economics of despair.

If honourable members really want to see the type of leadership our opponents could potentially provide, they should look no further than Mr John Elliott of Elders IXL Ltd. Mr Elliott does not like our tax reforms. Mr Elliott is one of the greatest beneficiaries of an unfair system, as Max Walsh said in the same article I cited before. He said:

John Elliott has been one of the shrewdest minimisers of corporate tax. His ability to exploit the tax system is part of the reason for his success as a corporate raider.

Mr Elliott realises that the laxness in the system which previously existed will not be tolerated by us, so he has threatened to pack up his company and leave, taking the jobs, the investment and the money with him. The country where he made his start, from which he based his success, is no longer the easily plucked goose it once was, so he may be leaving. Mr Elliott, as is well known, would like to be the Liberal Prime Minister of Australia; many others in his Party would like him to try for it as well. His commitment to the Australian economy, and the nation's future, goes no further than what he can get out of it. Make no mistake that his commitment to Australia's people would be any greater.

Fortunately, the Opposition's chances of ever rising to government are quickly diminishing. In the foreseeable future, Labor will be setting the agenda, with just legislation like the imputation laws before us. I commend the Bills to the House.