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Thursday, 5 December 2002
Page: 9721


Dr EMERSON (11:48 AM) —The Taxation Laws Amendment (Venture Capital) Bill 2002 and the Venture Capital Bill 2002 extend an exemption from capital gains tax to a wider range of pension funds than the US pension funds originally legislated. The reason for the expansion of the coverage to other countries and more generous treatment in terms of the width of this exemption from capital gains tax is that it has been observed that, despite prophecies that money would come rushing into the Australian venture capital market from US pension funds, that has not been the case. So the argument is that, in order to unlock this massive flow of venture capital funds into Australia, we need to be even more generous in the exemption from capital gains tax of investments from those funds.

I hear this all the time in relation to capital gains tax, as if it were some insidious tax that sucks all the incentive out of a market economy. This tax was introduced in 1985 by the previous Labor government. The tax rate was at the full marginal rate, but the base was indexed—that is, the base of the tax was adjusted for inflation. As introduced in 1985, it was a concessionary tax. It was designed to stop the conversion of income into capital gains as a vehicle for avoiding tax. I remember when the estimates of the revenue that would be generated were first presented; they were of the order of $25 million a year. In fact, many multiples of that are being collected through the capital gains tax. The reason is that the amount of conversions of income into capital gains going on at that time was much larger than had been anticipated and estimated by Treasury. In fact, Treasury conceded that the figure that they had put in was nothing more than a guess. The capital gains tax has been collecting a lot of revenue because of that capacity and disposition within the Australian community to seek to convert income into capital gains.

In its review of the business taxation system, the government came to the conclusion that this capital gains tax, which was already concessionary, should be made even more concessionary and as a result halved the rate of tax—though it did remove the indexation so that the capital gains tax would be assessable on nominal gains, not on real capital gains. We were told then that this halving of the capital gains tax rate would unleash a new flurry of investment activity, including at the more speculative end—the venture capital end. That has not really transpired either. So, after having legislated the exemption from capital gains tax of venture capital obtained from US pension funds, we are now back in the parliament to widen that exemption.

I support the bill but I do not share the optimism of the government in terms of the flurry of international investment that it expects will be created as a result of changes to the capital gains tax. I would like to see Australian investors and the Australian government take a more realistic position in relation to the capital gains tax. It is not an insidious tax that stifles all incentive in this country; it is a very reasonable tax. I do not want to be in this place too often defending further and wider exemptions from capital gains tax.

I know that is the philosophy of the coalition government. It has never liked the capital gains tax in this country. It opposed the introduction of the capital gains tax in 1985. If it possibly could, I am sure it would seek to abolish it altogether. That would allow a reversion to the practice of converting income into capital gains and thereby avoiding all tax, such as the capacity the minister for taxation has in her arrangements: if there is a tax, it is fair game to avoid it. That is not the approach of the Labor Party. We believe that taxation should be paid fairly and people at the higher end of the income spectrum should not get concessionary treatment in relation to taxation. The minister for taxation should certainly not get concessionary treatment in relation to taxation.


Mr Cox —The Minister for Employment and Workplace Relations said they were just inadvertent mistakes.


Dr EMERSON —Inadvertent mistakes of course, as the shadow minister has just pointed out to me, can be very profitable. If you manage to type the wrong entry into your pecuniary interest declaration or in relation to an enrolment, you can possibly get a windfall gain as a result of such inadvertent mistakes. Surprise surprise, the windfall gain in relation to stamp duty or land tax is very substantial indeed.


The DEPUTY SPEAKER (Mr Lindsay) —The member will return to the substance.


Dr EMERSON —We are dealing with capital gains tax. We know that it appears there will be capital gains tax liability in relation to this particular property, but that will be upon realisation. We know that the capital gains tax introduced on 19 September 1985 is a tax on realisation. If they ever move out of Paradise Road, we know that the tax commissioner will be there with a full assessment of capital gains tax liability and that is as it should be.


Ms Worth —Mr Deputy Speaker, I rise on a point of order as to relevance. The member opposite has other opportunities to raise allegations against ministers. I suggest that he take that form rather than include it in debate on other legislation.


The DEPUTY SPEAKER —I thank the parliamentary secretary. I understand the member for Rankin had recognised that and was moving on.


Dr EMERSON —I have said all I wish to say in relation to that matter. As I was saying, when the parliamentary secretary stood up, I want to move on. It is to these matters I wish to move.


Mr Cox —To issues of integrity in the capital gains tax regime.


Dr EMERSON —Yes. They are important issues which deserve a full and thorough debate in this parliament, and I have made a contribution to that. The purpose of this legislation is to encourage the venture capital market in Australia. The venture capital market has grown quite substantially over the last few years. I hear from representatives in parts of the industry that there is a big imperfection in the venture capital market in Australia. Therefore, the venture capital market needs massive new subsidies. It needs relief from taxation and, of course, from that insidious capital gains tax. The fact is the Australian venture capital market was a small market about 10 years ago but it has grown very substantially since then. It could be bigger and it would probably be in Australia's interest if it were.

Talking to representatives of superannuation funds, by way of example, they say to me that there is money for venture capital in Australia but there are not enough good projects to put it into. I hear that all the time. However, I hear from project proponents that there are all these good ideas but there is not enough money to fund them. It is worth contemplating the possibility that some of the ideas that are put forward might not necessarily warrant funding through the venture capital market. If there is an imperfection, it may well be the disconnect between the very early research into a possible scientific break-through and the couple of hundred thousand dollars—the pre-seed funding, the seed funding—to take that to another stage.

Overall, the venture capital market, which is a further stage involving possibly millions of dollars, has come along in leaps and bounds in this country. On the face of it, I do not see cases for further taxation concessions in relation to venture capital. I also point out that, because of Labor's superannuation policies and the reforms that were implemented in the Hawke-Keating years, there is now a total of around $577 billion in superannuation fund savings in this country. Of that, in the order of $200 billion is invested overseas, so things have changed quite dramatically in the last 15 to 20 years. When we were very short of capital 15 to 20 years ago, there was not much of a domestic savings pool. The current account deficits were widening because we needed to borrow more money from overseas to finance domestic investments in Australia. That has changed quite fundamentally to the point where $200 billion of Australian savings are going overseas for want of investment opportunities in this country.

A problem with all this is that superannuation fund managers do not have the time or the capacity to go around looking at each and every project that is seeking, perhaps, $100,000. The energy and time involved mean that superannuation funds simply will not do that. In my policy discussion paper Thriving industries in an innovative Australia, I suggest that maybe there is a way of linking entrepreneurs with that early stage of scientific research on university campuses. That is something that I would urge the government to do, because the scientists themselves are not commercially oriented and perhaps do not see the commercial potential in what they are doing or, alternatively, are not aware of how they could modify the scientific work that they are doing to attract commercial funding.

I also propose the formation of two or three major new or expanded science parks, where we do get a better interaction between the private sector scientific community and the academic community. There is a weakness in this country in the interaction between the two. Mr Deputy Speaker Lindsay, I know that in another capacity you are the member for Herbert. James Cook University in Townsville in your electorate would be a good example of where great gains could be made through the greater commercialisation of the scientific research that is going on there. The parliament as a whole should think about ways of getting that closer merging of interests between the commercial world and the academic world.

Another suggestion that I have raised in relation to the 125 per cent government R&D tax concession is the idea of extending eligibility for that tax concession to private sector spending on the salaries of academic researchers. Whether it would be a consultancy or paying half their wages or paying all of their wages, that outlay by private sector business could be eligible for the 125 per cent R&D tax concession or the premium rate of 175 per cent. We float the possibility of a premium rate of 200 per cent.

These are some positive, constructive ideas that are floated in this policy discussion paper, about which I am now receiving a lot of comment from industry, industry associations and the scientific community. We need to develop well-considered policies that are not based on voodoo economics—the sort of mysticism that, if we just reduce the capital gains tax rate a little bit, all these fantastic creative forces will be unleashed in this country. I do not believe that sort of mantra holds very much credibility under proper analysis.

The government is seeking to do something in relation to venture capital through this particular piece of legislation, but I would describe its efforts in relation to innovation in this country as, at best, half-hearted. I will point out a number of atrocities on the part of this government in relation to promoting private sector research and development in this country. In 1997, in its first budget, the government cut the 150 per cent R&D tax concession to 125 per cent. In relation to exports, it put a cap on the Export Market Development Grants Scheme. A program that was already in place matching business angels with the scientific work going on in this community was abolished. More recently, the R&D Start program was stopped. Now it has started again. As I have said recently, this stop, start, stop—or is it start, stop, start?—approach to the R&D Start program means that investors who are looking at expanding their R&D activities in small and medium sized enterprises cannot plan this sort of research and development activity with any certainty whatsoever. If the government feels it is running a bit short of money, it is just as likely to freeze the R&D Start program again.

With much fanfare, of course, the minister announced just the other day that the R&D Start program would be restarted after having been stopped. What the minister did not reveal was that, at the same time, the government had made the decision to cut the COMET program. What is COMET? It is the Commercialising Emerging Technologies program. It is the old story: what the government gives with one hand it takes away with the other. It has got a research and development encouragement program for small and medium enterprises called the R&D Start program. Commercialising Emerging Technologies is directed at the same concern; that is, the need to provide greater encouragement for small and medium enterprises that are investing in innovation in this country. The government restarts the R&D Start program and at the same time it reduces the COMET program, cutting the number of business advisers from 17 to 10. The government said, `Oh, that was just because we had an overlap in the scheme.' In July of last year, before the election, again with much fanfare, the then Minister for Industry, Science and Resources, Senator Minchin, announced that the COMET program was being expanded from 10 to 17 advisers. Now that the program has been cut back, he is trying to pretend to the Australian community that somehow that expansion was never to take place. What the government gives with one hand it takes with the other. That is what is happening in the research and development community of this country. They are looking at the government and cannot understand what is going on in terms of any sort of coherence in support for research and development in Australia.

The Productivity Commission has just brought down its interim report in relation to the Pharmaceuticals Industry Investment Program—PIIP. It has effectively recommended its abolition. Here is another program that is supposed to be supporting innovation, this time in the pharmaceutical industry, and the Productivity Commission is recommending that it be abolished.

What is the net impact of all this? The fact is that, under the previous Labor government, private spending on research and development rose strongly in each and every year as a proportion of GDP up to 1996. If I had the graph with me, it would be quite clear, because there is a steep climb. The peak is reached in 1996. Then in 1997, upon the government's announcement that it would be cutting the 150 per cent R&D tax concession back to 125 per cent, Australian private spending on research and development began to fall, and it has fallen in each and every year of this government at the same time that other countries have been expanding their investment in research and development activity.

In 2000-01, spending on R&D did rise a bit as a proportion of GDP but the Australian Bureau of Statistics official forecasts are for it to fall again as a share of GDP this year, all the while the rest of the OECD is surging ahead. We are falling behind in the innovation stakes; we are falling behind alarmingly. An index that we prepared shows that Australia scores five out of 10, ranking us behind 16 OECD countries. The reason that we even get a five is that we are quite good at absorbing overseas technologies. We are quite bad at developing our own technology and are very bad in terms of research and development spending by the private sector.

I call on the government to have a fresh look at Backing Australia's Ability. It should not be back-ending Australia's ability as it presently is. There should be a genuine commitment to research and development in this country. We support this legislation, though I have to say I remain somewhat sceptical about the claimed benefits of providing further exemptions from capital gains tax for the venture capital market, because the venture capital market has come on in leaps and bounds in the last 10 years.