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Monday, 23 June 2003
Page: 17237


Ms LEY (6:49 PM) —I rise in support of the New Business Tax System (Taxation of Financial Arrangements) Bill (No. 1) 2003. This bill contains two key measures: the first removes the taxing point on conversion or exchange of traditional securities and the second concerns the taxation of foreign currency exchange gains and losses. The bill was issued as exposure draft legislation on 17 December 2002 to allow public comment and consultation. The measures in the bill represent the second stage of reforms to the taxation of financial arrangements recommended by the Ralph Review of Business Taxation. The first stage, dealing with the borderline between debt and equity, was implemented in July 2001. As the chairman, John Ralph, observed in his introduction to the final report, Review of business taxationa tax system redesigned:

We are living in a time of unparalleled change. Australia must have a tax system which equips it for the coming decades, not for those that have passed. If we do not achieve this, Australians will not enjoy the standard of living that this nation has the potential to deliver.

Ralph goes on to say that the main objective of the review is to design a tax system that will best contribute to economic growth.

As this country becomes more globalised, we find ourselves becoming more competitive. Far from being a force that we should somehow brace ourselves against, this is an opportunity for us to engage with energy and a positive outlook. We cannot build a modern intelligent nation without a well functioning tax system. Our tax system—far from being a passive collection mechanism that siphons a few dollars off the top here and there, trying to be equitable and trying to be simple—must in fact be a central feature of our economic base that contributes to our international competitiveness and gives this country the best opportunities for growth.

A tax system redesigned sets out to accomplish a number of outcomes: a tax system that is fair, efficient, transparent and certain; a framework, a foundation, that can be built upon and, at the same time, can be flexible as laws and circumstances change; continued external involvement with the Board of Taxation; a tax system that is easy to understand and comply with; and a competitive capital gains tax regime—and this is very important in the context of business taxation. Without this, we will not be in a position to attract capital to Australia and to encourage entrepreneurs in Australia to start businesses here. I am proud to say that this government is developing a framework which balances revenue protection, certainty, flexibility, compliance costs, and profit and loss implications.

In the area of taxation of financial arrangements, it is particularly important that the tax treatment for the issuer and the holder be symmetrical and that foreign exchange gains and losses be taxed on a realisation basis. The approach this government has taken has clearly contributed to the economic miracle we have in this country. The words `economic miracle' are not mine; they come from an article in the Economist, which in part, says:

The country—

Australia—

is now in its 12th year of uninterrupted economic expansion, having shrugged off both the East Asian crisis of 1997-98 and the global downturn in 2001.

... ... ...

Not surprisingly, the OECD declared the Australian economy to be one of the rich world's best performers.

That is the context in which this bill is set. The bill will remove the taxation point on traditional securities when converting into or being exchanged for ordinary shares, introduce new foreign exchange gains and losses realisation points, and introduce new foreign currency conversion rules.

Currently, it is possible for investors to be taxed when, for instance, they choose to convert a convertible note into shares, even though they have not, in effect, realised their investment. From 14 May 2002 such conversions will not crystallise into a taxation liability. This implements one of the recommendations of the review of business tax, recommendation 9.7(b)(i). Recommendation 9.7 talks about a general disposal principle that `as a general rule a disposal occurs when a taxpayer ceases to hold a financial asset or to be subject to a financial liability, whether in part or whole, by sale, transfer, exchange, maturity or other alienation, extinguishment or synthetic disposal' and that `a disposal not occur on conversion of a convertible or converting instrument'.

With respect to the taxation of foreign currency exchange gains and losses, the amendments introduce a general translation rule into income tax law that converts foreign currency denominated accounts into Australian dollars so that Australian income tax liability is calculated with reference to a common unit of account. The amendments introduce functional currency rules, under which the net income or loss of an entity that functions mainly in a particular foreign currency can, under certain circumstances, be determined in that currency, with the net amount at the end of the process being converted into Australian dollars.

The core realisation principle and the translation rule mean that foreign currency gains and losses are brought to account when realised, whether or not there is a conversion of foreign currency amounts into Australian dollars. Uncertainties and anomalies are addressed. This ensures that foreign exchange gains and losses have a revenue character. The bill will also change the time when foreign exchange gains and losses are realised. The divisions will treat foreign exchange gains and losses as assessable and deductible upon the occurrence of three new realisation events: when an entity disposes of foreign currency or of a right it has to receive foreign currency; when an entity's right to foreign currency is satisfied; and when an entity stops having a liability to pay foreign currency.

A new universal set of provisions will be introduced that dovetail the foreign exchange gain and loss provisions. The core conversion rule requires conversion of foreign currency denominated amounts into Australian currency at the following times. The cost of depreciating assets is to be converted at the exchange rate prevailing when the taxpayer begins to hold the depreciating asset or on satisfying the liability to pay for it, whichever occurs first. An amount relevant to the CGT provisions is to be converted at the exchange rate prevailing at the time of the CGT event or transaction as determined under the CGT law. Ordinary income is to be converted at the exchange rate prevailing at the time that the income is derived or received, whichever occurs first. Non-CGT statutory income is to be converted at the exchange rate prevailing at the time the amount must be first returned as income or on receipt, whichever comes first. Deductible amounts not falling within the depreciating asset provisions must be converted at the exchange rate prevailing at the time the amount becomes deductible or at the time of payment, whichever occurs first. Other receipts or payments not referred to above must be converted at the exchange rate prevailing at the time of the receipt or payment. Also, a liability in foreign currency must be converted to Australian currency at the tax recognition time, as this defines the point in time when exchange gains or losses are measured.

Despite the core conversion rule, in certain circumstances a taxpayer may treat a foreign currency as their functional currency, converting all other currencies into that currency as if it were Australian currency, for the purposes of the core conversion rule and otherwise keeping their tax records and doing their tax calculations. To be able to choose a foreign currency as the functional currency, that currency must be the sole or predominant currency in which the relevant taxpayer conducts their business activities and keeps their accounts at that time.

In conclusion, I urge this place and the other place to support the New Business Tax System (Taxation of Financial Arrangements) Bill (No. 1) 2003. I emphasise the way in which this does contribute to a modern, fairer, more competitive financial and economic system for Australia. I commend the bill to the House.