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Thursday, 30 August 2001
Page: 30650

Mr McCLELLAND (12:49 PM) —The opposition proposes an amendment to the second reading motion for the Bankruptcy Legislation Amendment Bill 2001. I move:

That all 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 government for introducing a tax system that has caused a significant increase in the number of bankruptcies;

(2) condemns the government for failing to prevent the excesses of some sections of corporate Australia but scapegoating those ordinary citizens and unincorporated small businesses who are unable to pay their debts by virtue of the GST;

(3) condemns the government for failing to act to stop tax avoidance by virtue of the improper use of the bankruptcy laws; and

(4) calls on the government to act to stamp out illegal tax avoidance in all its forms.”

The stated aim of the government in proposing the present package of measures is to counter community perceptions that it is too easy to become bankrupt, and it is encouraging people contemplating bankruptcy to consider the seriousness of the step they are about to take and to try alternatives to avoid bankruptcy. The opposition will be supporting this legislation in great part because obviously it is desirable to try to encourage people to take alternatives to bankruptcy.

The final reason given by the Attorney-General was the need to restore community confidence in the bankruptcy system by clamping down on `those who use bankruptcy in a mischievous or improper way'. That is typical of what we have seen from this government in so many areas: scapegoating those who in many instances—albeit not in all instances—and in particular in the last financial year have become bankrupt because of government policies, and in particular, and most significantly, in respect of the implementation of the GST.

In assessing the impact of this legislation it is necessary to ask who constitute bankruptcies. Clearly there will be individuals who have cranked up too much credit card debt and like. People desiring to acquire more and more without rationally considering the means to pay is an unfortunate feature of our society. That must sensibly be acknowledged. But, equally, there are so many others who have gone bankrupt through no fault of their own, because of extraneous circumstances. That would include, for instance, the GST, the collapse of HIH and the collapse of One.Tel. There are many victims of extraneous circumstances. If you are in a business relationship with a company or an individual who goes bankrupt and you are owed a lot of money by them, bankruptcies so very often have a flow-on consequence.

In the context where the Attorney-General is on the record as saying that the GST has not contributed to bankruptcies, I want to put on the record very firmly that there is a lot of evidence that the GST has indeed placed so much pressure on businesses by drawing cash flow away from them that it has resulted in bankruptcies. For instance, the Financial Review on 5 June reported Dun & Bradstreet saying that there was a 32 per cent rise in bankruptcies for the first quarter of 2000 and that, by and large, they were businesses with a turnover of $1 million or less. The Financial Review on 30 May, under the heading `GST: dealing with the stress', says:

The senior tax adviser at the National Tax & Accountants Association, Andrew Gardiner, reports higher than expected compliance costs and record keeping as important factors in small business bankrupts.

Andrew Gardiner is also quoted in the article as saying:

People are devoting too much time to getting their records correct and there was so much change so quickly that we have seen more bankruptcies. We need to make our tax system simpler.

This I note, by way of an aside, is something that the Labor Party very much proposes. In the Financial Review article there is also a reference to the general manager of business customers at the Commonwealth Bank, James Price, saying:

... small business customers are beginning to dip into their overdrafts as other costs in the economy put added pressure on the `mismatch' in cash flow already imposed by the GST.

So here again is someone at the coalface. I am putting these articles on the record in some number just to emphasise the expert opinion that there is that the GST has and is contributing to bankruptcies in the community. The Financial Review of 22 May reports that the Dun & Bradstreet survey shows a 22 per cent rise in bankruptcies for the first quarter of the year compared with the previous three months. But, compared with the same period last year, the figures are much worse, rising by 32.9 per cent.

Indeed, in the article there is a reference to the number of debt collection claims by Dun & Bradstreet also increasing by 111 per cent in the March quarter and that, in dollar terms, the amount of the average debt claim rose steeply from $1,255 in 1999 to $4,699 in 2000. There is a reference to a quote from the Dun & Bradstreet Australia's managing director, Ms Christine Christian, who said that she believed that much of the increase was made up of small, unincorporated businesses—that is, those businesses that will be the subject of this bankruptcy legislation, as opposed to the Corporations Law. The Age of 22 May also addresses the issue. It also refers to the Dun & Bradstreet records showing that their books:

... skyrocketed 227 per cent in the 12 months to November 30, 2000, over a year earlier.

The figures also coincide with the latest statistics from the Australian Securities and Investments Commission, which show that business failures are continuing to grow at an alarming rate.

It must be conceded that ASIC's figures relate to corporations as opposed to sole traders or unincorporated bodies; nonetheless, the flow-on consequences of corporations going insolvent, as I have indicated, so often flows through to the small business community. The article from the Age says:

The number of receiver-managers appointed jumped nearly 121 per cent, while companies placed under voluntary administration soared more than 47 per cent in March, compared with the same period last year.

That is a dramatic increase in insolvency. There is again reference to Dun & Bradstreet figures showing that the number of days taken to pay creditors—again a significant indicator of cash flow problems—has blown out to a four-month high of 66 days. Ms Christian, whom I referred to earlier, is quoted as saying:

It would seem that many business owners have simply run out of cash in the bid to meet their quarterly tax obligations and pay their creditors on time.

There is also reference to her saying:

These figures, when stacked up against a 32.9 per cent increase in bankruptcies over the same period would seem to confirm the post-GST pain in the community.

Again, these are experts at the coalface showing what a drastic and dramatic effect the GST has had on cash flow problems and the consequent rise in corporate insolvencies and bankruptcies. The Australian of 16 July reports on a national task force to examine GST-sparked bankruptcies in small businesses, pushed by the National Tax and Accountants Association. According to Ray Regan from that association, their figures show a year-on-year increase of 78 per cent in bankruptcies in the June quarter.

Mr Regan is reported as saying that there was evidence that the GST had destroyed many small businesses and put thousands of employees out of work—again, someone intimately connected with the day-to-day operation of small businesses. The Sydney Morning Herald of 10 July reported the same story—a 78.5 per cent increase in bankruptcies in the three months to June, compared with the same period in 2000. The article goes on to say:

All up, business bankruptcies rose 18.6 per cent to 4,440 in the first year of the GST, suggesting the pace of insolvencies has picked up as the year progressed.

There is a reference in the article to Mr Michael Dwyer, the President of the Insolvency Practitioners Association of Australia. He is quoted as saying:

The GST has had an impact in that it has certainly added to the administrative burden as well as having a cashflow impact.

If we as members of parliament are honest with ourselves, we will say that we have all received those sorts of reports from our own constituents. The government cannot bury its head to the fact that the increasing class of persons who are becoming bankrupt and subject to this legislation is small business proprietors—mums and dads, if you like; not corporations—who have gone under because of the additional administrative burden and the additional cash flow problems caused by the GST.

On 9 July the Australian Financial Review indicated that more small companies and sole traders are going to the wall as the full force of the GST hits the business community. It referred to figures showing that business bankruptcies blew out by 177 per cent in the last quarter compared with the same period last year, according to data from the Insolvency and Trustee Service of Australia. There is a reference to a quote from Mr Paul Leroy, a personal insolvency expert from Hall Chadwick chartered accountants. He says:

These figures are a reflection of the suffering of small business owners and sole traders—

and, to use his words, which I used previously—

the mums and dads and families.

So there is no doubt that the GST has hit most hard the mums and dads and families who are struggling to survive with a small business. The facts of the matter are that, as a result of the government's policies, there is a class of persons that is benefiting, and that is insolvency practitioners. On 3 July this year the Australian Financial Review reported that Australia's 150 or so insolvency practitioners are reporting a very busy year as small businesses crumple under the weight of the GST and the erratic cash flows caused by higher than expected prices, squeezed margins, bad debts, higher insurance premiums and compliance costs. Again, the GST is featuring prominently in the fact that their business is rising so dramatically, that is, the business of insolvency practitioners.

On 28 June the Sydney Morning Herald referred to one business, Walker Insolvency Lawyers, having doubled in size since the beginning of this year. Another company, Knights Insolvency Administration, has increased staff levels by 20 per cent in anticipation of a boom in their work, that is, insolvency work. There is a reference to the fact that since the GST Dun & Bradstreet's debt collection business in outstanding claims has increased—and I gave his figure earlier—by some 227 per cent. Again, there is reference to Ms Christian, to whom I have already referred, who was saying that these are small businesses that are going under. Her reasons are that, `Because they are at the end of the food chain, there are many small business firms that will not survive,' that is, not survive under the GST system.

Finally on this issue, there was a further reference in the Australian Financial Review on 12 March showing that a partner in Walker Insolvency Lawyers, David Purcell, said the GST system had caused a cash flow crunch. He is reported as follows:

`Insolvency accountants are gearing up for the flood,' said Mr Purcell, whose firm has doubled in size ...

We are still yet to see the flood of bankruptcies, and there is no doubt that there is a flood because of the government's GST policies. In addition to that, we of course have many businesses suffering because of the HIH collapse and the One.Tel collapse. While perhaps legislation introduced by the government has not caused those collapses to occur, questions of oversight of APRA in the insurance industry have certainly been raised. However, the point is that businesses in a financial relationship with those major companies and, indeed, major suppliers of those companies that are owed money by those companies that have gone under are clearly in trouble. The ripple effect has been started. Those ripples have not by any means reached their extremity. Indeed, they are probably not even one-tenth of the way to their final circumference in terms of who is going to be swamped by these insolvencies.

I note a more recent article, which appeared in the Sydney Morning Herald on Tuesday, 28 August. It is in a similar vein to the theme that I have gone through in some detail and is headed `Debt collectors are excited but tough GST regime is pushing up bankruptcies'. The article refers also to the debt collection agency Dun & Bradstreet having increased their business by 227 per cent since the GST. The article also refers to Collection House, one of Australia's biggest debt collectors, reporting a 271 per cent jump in its annual profits. So we concede that some companies are doing very, very well under the government's GST. But they are debt collection agencies, and the victims of the system are small businesses. So it is in that context that I am attacking the government.

Mr McCLELLAND —I am attacking the government for introducing legislation that victimises or scapegoats, if you like—

Mr McCLELLAND —Thank you.

Mr McCLELLAND —Fair enough. In terms of some double standards, I think that I am entitled to raise this issue. One questions whether it would have been necessary for those bankruptcies to occur if the businesses had not complied with the GST. I believe that we are entitled to ask: are there double standards in the circumstances of the Groom FEC? It put on a fundraising function raising $18,350 with one-eleventh of the proceeds of that function—$1,668—being the GST. But, after being caught out, the Groom FEC eventually paid back some $751 to the taxation office. We are entitled to say that, if other small businesses had been able to achieve such an income, they would not have had such a cash flow crisis.

What appears to have occurred is that the Liberal Party—and indeed the Treasurer, the Prime Minister and the Minister for Small Business in numerous instances—are saying that our attack on the government, our accusations of a scam, indicates our ignorance of the taxation laws. The code for that is that what was done was lawful. What was done was that the Groom branch of the FEC, being a subentity of the larger organisation, the Liberal Party, earned less than $100,000 a year, according to the taxation records.

The explanatory memorandum of the GST legislation states that, if a non-profit subentity with an annual turnover below the turnover threshold decides not to register, it will not be liable for the GST and will not be liable to claim input tax credits. So, by using the example of the Groom FEC, if an entity earns less than $100,000, that entity is not obliged to remit the GST—in this case, on the takings of the dinner, $18,350. But, quite explicitly, the explanatory memorandum states that it cannot claim a GST input. The explanatory memorandum goes on to state on page 37 that, equally, the `core entity'— that is, the Queensland Liberal Party—will not be liable for the GST and `will not be entitled to claim the input tax credits of the unregistered non-profit subentity'. So the Queensland Liberal Party said, `We as a substantial entity, registered under the business activity statement system, are an organisation that receives in excess of $100,000 a year. We are entitled to claim input tax credits on expenditures that we incur in achieving our income.' In this case, the input tax credit was claimed on the GST charged by the caterer to the function—I think a bill of slightly over $9,000, with $800-odd being charged by that company for the GST.

So what happened was that the Queensland Liberal Party charged the input tax credit to get the benefit of it. They were using the ruse, if you like, of then changing steps and saying, `All right, we are standing here as the Queensland Liberal Party, but standing over here we are standing in the shoes of the Groom FEC and we did not have to remit the GST input. But hold on, I am going back here as the Queensland branch of the Liberal Party and yes, please give me the GST input tax credit.' Clearly, on the explanatory memorandum—as would have been pointed out to them by the Treasurer after he was notified in February—they have said, `You cannot do that. Clearly the explanatory memorandum shows the purpose and intent. If the Groom FEC cannot claim an input tax credit, you cannot either.' So they said, `We had better fix this up. We had better pay back what we received by way of the input tax credit.' But even then they got it wrong. They paid back $751 when they should have been paying, I think, about $826. So they effectively stuffed up the cover-up. But at no time did the Treasurer, the Prime Minister or the Minister for Small Business say that what was in place there was a scheme to hasten or obtain an input tax credit and then avoid remitting the actual GST at the end.

I say all that as a long-winded way of saying that there are two standards. How many small businesses would have survived if they had been able to get away with such a scheme, setting themselves up as a whole lot of subentities fractured around the place to avoid paying the GST and, indeed, to get their primary entity to suck in GST input tax credits? Even if we assume that the benefit existed for only a three-month period, that is, they had the benefit of this input tax credit from about December to March, that still—if it had been implemented across industry— would have relieved a significant burden from small businesses by giving them more cash up front before they had to meet other liabilities. So whichever way we look at it— illegal, immoral, or simply a scheme under part 165 of the GST legislation—it is double standards, and small businesses do not like that. If they are suffering under a burden causing so many bankruptcies, as I have indicated, they do not like seeing a government applying a different standard to itself.

I have made these points by saying, `Look, what are the classes of persons you are looking at when you are looking at this legislation?' As I indicated in my opening remarks, the Attorney-General, in answer to a question without notice and in his second reading speech, said, `Look, people are, if you like, misusing bankruptcy provisions, going bankrupt to avoid their debts.' There is no doubt that that is a phenomenon which we recognise—and realistically recognise. Indeed, there have been some outrageous incidents where members of my own profession, the legal profession—particularly at the bar, I have to say—have avoided paying their income tax obligations by taking advantage of bankruptcy laws, despite having made over a period literally millions of dollars. Those situations need to be addressed.

Mr McCLELLAND —That is probably right. But in terms of the impact of this legislation that we are concerned about, it is an impact on those who have not gone bankrupt as a result of their deliberate action or, if you like, mismanagement. There are many victims of our system—whether it be the GST system, the taxation system, or whether it be the HIH collapse or the One.Tel collapse— who become bankrupt through no fault of their own.

We note the concerns expressed by a number of credit counselling organisations, which do a tremendous job in the community. Even though there is now quite an extensive network of community legal services, this is an area which requires addressing, that is, the inadequacy of very useful credit counselling organisations. The Wesley Community Legal Service, which provides such a counselling service, has expressed its concerns about the lack of consultation that the government had with that financial counselling sector—that is, counselling of the poor—before introducing this legislation. We do note that and express our concerns.

Before I address the two primary areas where we will be moving amendments, I note that we also have concerns with expanding the cooling-off period before someone becomes bankrupt from seven days to 30 days. We are not sure that that will have any realistic effect in causing people to go into alternatives. As the Law Council pointed out:

What will happen is that people will simply file their debtor's petition, go away and forget about it, and 30 days later they will be bankrupt and they will be none the wiser and the creditors will be none the better off.

We think that that is substantially going to be the case, but nonetheless we are not standing in the way of that legislation.

The two areas where we will be proposing amendments are in respect of the government's proposal to remove the early discharge provisions which were introduced in 1995 by then Senator Bob McMullan. He spoke of the inequity in that those with sufficient resources to commence proceedings in the Federal Court were able to obtain an abbreviation of the period that they became bankrupt but those who were more vulnerable and without those resources were a victim to remain bankrupt for the entire three-year period. That was the purpose of those provisions. There were clear limitations. It applied only to low income earners who did not have the capacity to pay back any amount of money to their creditors. It also applied only in respect of the first bankruptcy. It was not available in respect of second and subsequent bankruptcies, if you like, to have serial rorting of bankruptcy laws.

We do have concerns about that. We are not convinced that the government has put forward sufficient evidence. As was indicated, we believe in the evidence of Donald Costello, the Acting Adviser of the Insolvency and Trustee Service of Australia, who said that there are no statistics available to help make a decision, but that was basically based on anecdotal evidence. We do not think that is good enough when you are taking away rights. Nonetheless, we accept that given concerns in the community it may be too easy to go bankrupt. We are proposing what I understood had been considered, that is, a two-year period. I will address that in our amendments.

The other amendment which I will also be speaking to shortly in the consideration in detail stage is our concern about removing section 265(8), which imposes a penalty for someone incurring a debt of in excess of $500 in circumstances where they realise they have little likelihood of repaying that debt. We believe that fails to acknowledge the reality of the essentials of life—rent, water, medical bills and dentistry bills—that individuals face. You cannot put individuals in the same category as corporations. So we propose an amendment to exclude those necessities of life. I will speak to those amendments in greater detail during the consideration in detail stage.

Mr DEPUTY SPEAKER (Mr Andrews)—Is the amendment seconded?

Mr Kerr —I second the amendment.