Mr ROCHER (12:40 PM) —Before getting into the nitty-gritty of this legislation, the Taxation Laws Amendment Bill (No. 7) 1997, I must confer my backhanded congratulations to the government for its success in cramming into one bill so many substantial and complex changes to the Income Tax Assessment Act 1936. In doing so, I offer the opinion that the government has set a new standard in the hijacking of parliamentary debate in the House of Representatives—because the breadth of the changes that deserve thorough scrutiny simply cannot be adequately dealt with in the time allotted for the second reading. I am certain that this is no accident on the part of those who drafted the bill and others who pressed for the inclusion of some of its provisions. Add to that the fact that the minister at the table, the Minister for Transport and Regional Development (Mr Vaile), does not have carriage of this legislation so he will not be summing up the second reading debate, the gentleman responsible presumably will do so without the benefit of listening to the debate of myself and my colleagues on all sides of the House, and there have been no advisers in the box for much of this debate so they will not be able to bring the absent minister with carriage up to date, and I suggest to you, Mr Deputy Speaker, that this is disdain bordering on contempt for this parliament.

I am particularly concerned about the provisions of schedule 8. The contents of this bill were not made public until more than six months after the initial announcement in the 1997-98 budget papers. The uncertainty caused by that was compounded by the fact that there were other measures announced about franking credits on budget night that are yet to be put into any form of legislation. The Taxation Institute of Australia, the TIA, has called on the government to remove schedule 8 from this bill and to draft new legislation that deals with the proposed changes to franking credits in their entirety, so that the matter can be dealt with in a `sensible, coordinated and cohesive fashion', to use their words. Just this morning we have seen another bill which includes amendments to franking credits brought into the House. The view of the TIA seems to contain a perfectly rational recommendation and the government stands condemned for its failure to act on it.

There are four schedules, out of a total of 10, that I intend to speak to today. They are schedules 4, 5, 8 and 9. Schedule 9 seeks to incorporate new division 7A into the 1936 act. This division is being introduced in an effort to ensure that all credits, loans and advances by private companies to shareholders are deemed to be assessable dividends to the extent that they are realised or unrealised company profits. There are both strengths and weaknesses inherent in this proposal but, before I elaborate on the specifics, I wish to make an observation about the general nature of change proposed in schedule 9.

Less than 12 months ago the tax law improvement team—that is the TLIP team—finalised the new and arguably improved version of parts of the 1936 act. Members may recall that the purpose behind this 1997 revision was to produce tax legislation that was more streamlined and simple to understand than the original, and therefore more user friendly for tax experts and the general public.

One wonders why the amendments in schedule 9 proposed in this bill have not been made to the 1997 Income Tax Assessment Act, but rather to the Income Tax Assessment Act 1936. As Mr Colin Munro, partner with Decons Graham and James law firm in Western Australia, stated in a recent address, `It is a pity that this legislation matrix has been used.' Mr Munro pointed out that while section 108 will not be repealed by these amendments it is no longer relevant to tax law if new division 7A applies to private company distributions. Why not get rid of it?

This is also the position of the TIA, which argues for the termination of section 108 on the grounds that if there is residual operation other than for December 1997 events `taxpayers will be left in confusion and there will be no certainty'. Despite the fact that it is section 108 that is most familiar to the tax fraternity, those bureaucrats responsible for the drafting of this legislation chose to ignore them and have proceeded to implement change that undermines the impetus of the tax simplification project. That is plainly ridiculous.

Three outcomes of this schedule warrant closer attention by the government: the potential for a double taxation effect in the debiting of franking accounts; an increase in company compliance costs; and the reduced tax effectiveness of corporate trusts. Let me first address the issue of a more costly compliance regime for Australian business.

While the government would have us believe that any increase in compliance costs will be minimal, the explanatory memorandum predicts an increase of around $2 million in the 1997-98 financial year. That is disputed by industry. At present, section 108 provides for the Commissioner of Taxation to use his or her discretion on the tax treatment of loans to shareholders during an audit. In contrast, this bill will automatically treat the abovementioned distribution as a dividend.

While increased certainty in a tax ruling is desirable, Mr Munro points out that the new requirements for loan formality will also `undoubtedly lead to increased compliance costs for taxpayers'. He disputes the government's claim that it is high wealth individuals intent on minimising their tax obligations who will be hit hardest by this measure, but rather suggests that it is small businesses which generally have a need to access funds from private companies for private purposes and which will therefore bear the brunt of compliance.

The introduction of new division 7A will bring a greater degree of certainty and objectivity in the definition of when company payments to shareholders are deemed to be dividends and when they are not. That is to be commended. However, the redefining of many key words and phrases will mean that taxpayers will have to reflect changes in the value of assets and liabilities by adjustments to their accounting records and systems. Mr Munro also noted:

This may be simple enough to do in the case of easily comparable assets such as marketable securities, but what about real estate?

He also asks whether shares in other private companies will also present valuation difficulties, as this will certainly see an increase in compliance costs.

It is a bit rich for a government that is yet to fulfil its commitment to a 50 per cent reduction in the compliance burden on businesses to be exacerbating that same burden by successive taxation legislation. The issue of double taxation or the doubling-up effect that Mr Munro referred to in his address on 29 January 1998 is also relevant to schedule 8. Under the amendments in this section, all amounts treated as dividends will not be frankable dividends. Further, the deemed amount will create a franking debit to a private company. According to Mr Munro:

This is another example of `doubling up', which again evidences the attitude of officialdom to taxation.

The government's proposed changes to the distributions from private companies is also raising eyebrows among some members of the elite team of tax experts who are providing feedback to the government on the tax law improvement project.

One member of that team, Mr John Kirkwood, a senior partner in taxation at Ernst and Young, has labelled this schedule an overkill. Mr Kirkwood observed that while it is one thing to treat an amount as if it is a dividend, it is quite another to deny the recipient the benefits of the formal payment of a dividend. On the one hand, we have the very logical argument put by Mr Kirkwood suggesting:

If the payment should be treated as a dividend, then it should also be a dividend for all purposes, including the utilisation of frankable credits.

On the other hand, we have Treasury and the Australian Taxation Office wanting two bob either way. The summation that this legislation is just another example of the ATO dominating the legislative process with its blunderbuss approach is right on the mark. It was the case with trust losses, the superannuation surcharge and the R&D syndication, and now the ATO is at it again.

I am interested to hear the coalition's position on this issue and whether it now acknowledges that this legislation could see the doubling-up effect of the debiting of franking accounts. I also ask that the government come clean on the proposed application of this provision to benefits that would ordinarily be subject to fringe benefits tax and to superannuation contributions. Does the coalition really expect to be able to tax these benefits as if they were dividends?

Rather than working in tandem with the FBT rules, this legislation will supersede them and create an untenable situation—one that must be corrected. As for the impact of new division 7A on trusts, one Western Australian legal practitioner said:

All in all, this line of approach tends very substantially to `atrophy' the discretionary trust and indeed make it unworkable.

It is clear that the amendments proposed here are consistent with the ongoing attack by Treasury and the ATO on perfectly legitimate trust structures. Owing to time restrictions, I do not intend to dwell on this point except to restate my long held position that, until Australians embrace a thorough overhaul of our tax system and until there is greater parity between the top marginal personal income tax rate and the company tax rate, vehicles such as trusts will always pose a potential threat to revenue.

Another alarming aspect of the proposed changes to the franking of dividends and other distributions is the fact that the content of this legislation goes way beyond what was first foreshadowed at the time of the 1997-98 budget. Section 8.1 of the explanatory memorandum tells us that the threshold for the new general anti-avoidance provision will employ an `other than incidental purpose' test which will have a much broader application than the current `dominant purpose' minimum. As Mr Gordon Thring, a member of the Australian Society of Certified Practising Accountants, claims, the ATO is going to have a big stick to apply against a transaction which may be a quite normal commercial transaction.

The upshot of that is that it is not just those who might—and I stress the word `might'—be abusing the current streaming provisions who will be caught by these changes. Legitimate commercial transactions, including every distribution to shareholders other than a straight cash dividend, could be hit under the proposed wide ranging powers. One tax manager has labelled this move a `tightening of part IVA of the 1936 tax act by stealth' and went on to observe that `sound commercial transactions that satisfy prescriptive areas of the law can now be subject to a new veto power of the commissioner'. Mr Bob Bryant, Executive Director of the Corporate Tax Association, says that the new general anti-avoidance measures are `much wider than is necessary to address the perceived abuses'. The Tax Institute of Australia accords with that position and submits that these rules should be redrafted in a fashion that addresses a mischief perceived by the government and the ATO, but not in such a way as to effectively stifle normal, everyday transactions.

The tax community is understandably uncomfortable with the `trust us' style of approach that characterises this new provision. It is not acceptable that the commissioner should have such widespread discretionary powers to decide if and when the anti-avoidance provision will be applied. The government should be averse to delegating legislative power to the tax commissioner, yet this is essentially what is being sanctioned in this bill. One does not have to improve the certainty of the tax act by increasing the opportunity for the tax commissioner to form subjective determinations rather than working within set parameters.

Mr Munro is also reported as having said recently to the West Australian newspaper that the example set out in the explanatory memorandum of how the new provisions will apply to trusts is quite frightening. He notes that, because the extensive new powers will affect any person with an interest in a share—I stress `an interest in a share'—this could adversely impact on anyone who is a trust beneficiary. Under the government's plan, trust beneficiaries will not be able to utilise franking credits of shares owned by the trust unless they have an underlying interest.

Importantly, discretionary trust beneficiaries can get the benefit of franking credits on the condition that the trust nominates to revert to a family trust. That is an interesting proposition because, if unit trust beneficiaries do adopt the family trust structure, they may well benefit in the case of retaining franking credits, but they will play right into the hands of the tax office in another respect. Anyone who has taken an interest in the coalition's attempts to stop the so-called rorting of trust losses will recall that many tax experts are concerned about the restrictive definition of `family' as described in the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 .

Specifically, individuals who are dependants for superannuation purposes and who could have responsibilities under the Child Support (Assessment) Act and may benefit from an inheritance from a deceased estate will be deemed to be not members of family trusts according to the government's definition of `family'. The government's treatment of trust losses will see small businesses being obliged to decide whether to remove key family members from having stakes in the beneficial ownership of businesses or lose potential tax losses incurred during periods of downturn in their business.

In allowing discretionary trusts to continue to benefit from franking credits if they adopt the more restrictive family trust structure, the government appears to be making a concession to small business. The reality is that the clear winners here will not be small business proprietors, but rather the Treasury and the ATO. As one leading adviser suggested, many companies are frustrated that the likely outcome of any short-sighted legislation will only be a large legal bill in restructuring the group with no lasting benefit to the shareholders.

In an article in the Australian Financial Review on 30 July 1997, Mr Neil Wilson, a tax partner at Coopers and Lybrand, outlined yet another consequence of this measure. He noted that shareholders of public companies using dividend access shares for legitimate purposes would be caught up in the terms of schedule 8. Mr Wilson is reported to have said that most companies were `actually moving tax within a group to the holding company, not trying to differentially stream credits to shareholders'. Mr Wilson went on to write, `Unless a distinction is made for access shares within wholly owned company groups, perfectly legitimate transactions would be denied the tax benefit of franking dividends.' While it is anticipated that ordinary share purchases will not be targeted by the Commissioner of Taxation under the proposed rules, the doubt that has been created by such extensive provisions will do nothing to encourage investment in Australia by ordinary Australians and will do a great deal to dissuade it.

Because I intend during the detail stage to make further remarks on other schedules, I will simply finish on the note that, for reasons either already touched on or to be given later in the detail stage, I call on the government to slow down the passage of relevant schedules in this bill, to revisit the concerns of industry about distributions from companies, the tax treatment of franking dividends and the choice of superannuation funds, and to revise this legislation as is subsequently necessary after that re-examination.