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Monday, 23 June 2003
Page: 17235


Mr COX (6:43 PM) —The New Business Tax System (Taxation of Financial Arrangements) Bill (No. 1) 2003 provides for the removal of the taxing point when traditional securities are converted into, or exchanged for, ordinary shares. It provides a new taxation regime for dealing with the taxation of foreign currency gains and losses and a regime for the translation of amounts into Australian or functional currencies. The Howard government has brought this bill on at extremely short notice, as it did last week with Taxation Laws Amendment Bill (No. 6) 2003. These tax bills contain some complex provisions that require an appropriate level of scrutiny. If that scrutiny cannot be provided in this place—and it cannot, in such a short space of time—then it will have to be done in the Senate. Labor will be referring this bill and Taxation Laws Amendment Bill (No. 6) 2003 to the Senate Economics Legislation Committee so that they can be properly examined during the parliamentary break. If we did not do that, I have little doubt that the government would attempt to obtain passage of both bills through both houses this week.


Mr Slipper —Why not?


Mr COX —You would. The Howard government treats the parliament with contempt in the manner in which it deals with taxation legislation. In February the government introduced Taxation Laws Amendment Bill (No. 4) 2003, which, amongst other things, provides an FBT exemption for certain legitimate payments to employee entitlement funds to meet a 1 April deadline set by a tax ruling issued in 1999. The government had four years to act on that matter and left it to less than two months before the exemption was required. That bill poses significant problems for all the affected parties because of the short notice. Nobody in the building industry can actually comply with it. I am still in negotiation with the Treasurer, trying to resolve that with some transitional and other amendments.

Now we have two more attempts to get complex tax legislation through the parliament at short notice. The difference with these pieces of legislation is that they may not reduce the amount of tax avoidance; some aspects of them may facilitate it. That is why Labor will take its time and look at them closely. As to the specifics, under the current law there is a taxation point when securities are exchanged for, or converted into, shares. The cost of the security is compared with the value of the shares to determine whether there is any assessable income. Where there is a tax liability, that creates a cash flow problem, because the gain is not realised in cash. Removing the tax event at that point will make instruments that have this conversion or exchange feature more attractive. Convertible instruments convert into shares in the issuer; exchangeable instruments exchange into shares in a company other than the issuer. Convertible instruments are useful for companies raising capital, as they typically have lower initial servicing costs than other debt instruments because of the conversion feature. The taxpayer is investing in that entity when the security is purchased, and the removal of the taxing point on conversion has obvious merit. The case for removing the taxing point for exchangeable instruments is not as strong, since the shares are not those of the issuer of the security. This is an issue that needs some closer examination because of the precedent it may set for similar treatment of other types of instruments that do not represent a continuous investment in a particular entity.

The other issue I want to take up this evening is the revenue implications of this measure. The explanatory memorandum says:

This measure is estimated to have no impact on the revenue over the forward estimates period. This is because convertible/exchangeable interests typically have a minimum term of 4 years and the proposed amendments apply only to traditional securities that are convertible interests or exchangeable interests issued after 7.30 pm, by legal time in the Australian Capital Territory, on 14 May 2002. After this period, the measure may have a negative impact on revenue due to more concessional taxation of gains on conversion or exchange under the capital gains tax provisions and due to the deferral of the taxing point.

What we have got is a measure that the government is conveniently able to say is going to have no implication in the forward estimates period, but it cannot give us even an indicative indication of what its financial implications are going to be thereafter. It makes one of the simpler and more profound statements for any document coming out of the Treasury in relation to tax; that is:

... tax is deferred until the ultimate sale of the shares (possibly many years in the future), which imposes a cost on the Commonwealth due to the time value of money.


Mr Slipper —Didn't you work in Treasury once?


Mr COX —I did not work in Treasury once; I worked for a couple of Treasurers and I worked for a couple of finance ministers. The simple expression we always used to use was `tax deferred is tax avoided'. The explanatory memorandum confirms that. We owe it to the parliament and we particularly owe it to all taxpayers and all people who rely on tax revenues for various things in this country to go into the revenue implications of this measure in some considerable detail, and we will do that at length in the parliamentary break.