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Thursday, 3 June 2004
Page: 30116

Mr HATTON (1:19 PM) —In regard to these two pieces of legislation, Tax Laws Amendment (2004 Measures No. 2) Bill 2004 is an omnibus bill and deals with a range of different changes. These changes affect a number of employees in semi-government organisations in South Australia and the problems they have in terms of the loss of their particular status under the legislation. The changes also deal with the question of consolidation of assets, problems with life insurance companies and so on.

As the member for Rankin has indicated, and as argued previously by the member for Kingston at length in dealing with the provisions of this bill, this bill is not only omnibus but covers an extraordinary range of changes to the existing provisions of the Income Tax Act. Those changes add to the complexity of that act and they add to the difficulty of interpretation. It would be and it should be a goal to make that tax act simpler and more accessible.

The only group of people that the member for Rankin left out were economists and accountants. Certainly Treasury and the tax office have employed enough of those over time. They are growth industries if ever there were any. If we look at the move from the wholesale sales tax regime, where Australia took in $6 billion a year of income, to the GST based regime—based on the 1960s model—which was a $32 billion tax regime when it was initiated, the amount of time and effort by economists, tax accountants, lawyers and other specialists in regard to this increased greatly, because of the BAS and so on.

If you look at the bulk of the amendments made here in these two bills—with the omnibus bill being No. 2—they deal with a lot of things that need changes because they have not worked well enough in their original form or alternatively because there is disagreement among those people who specialise in interpreting these things as to what they really mean and therefore the law needs to be clarified in regard to that.

I do not want to speak at length on the Tax Laws Amendment (2004 Measures No. 2) Bill 2004, given that it involves areas I do not have all that much association with. I do want to deal with what the Parliamentary Secretary to the Treasurer dealt with at length, the Tax Laws Amendment (2004 Measures No. 3) Bill 2004. That has two fundamental parts. The second part, which he alluded to in his speech, concerns worker entitlements. The first part deals with venture capital and the difficulties we have in attracting venture capital from overseas in significant enough quantities and with directed purpose so that we are able to get the funds we need to allow Australia to expand.

The Tax Laws Amendment (2004 Measures No. 3) Bill 2004 seeks to address some fundamental failings of the operation of the act that was put into place in July 2002. It is not the fault of the people who put it together or who thought up the ideas. It is a question of what happens when you aggregate all of the previous approaches that have been taken to try to attract venture capital to Australia and when you look at the significant problems that Australia has compared to other countries which exercise a great deal in the venture capital area—in particular, the United States. The greatest example of the operation of venture capital in the United States is Silicon Valley. We have seen in Singapore, in particular, and also in the developments in Malaysia, attempts to mirror the activity that has occurred in the United States. Likewise, in a number of places in Australia there have been attempts by new industries, particularly knowledge industries, to duplicate the kinds of approaches that the Americans have taken to venture capital.

We have learned that we have a series of interconnected problems, which this parliament has attempted to address. They lie not only in research and development but also in attracting appropriate funding for new companies and in trying to ensure that they are able to grow from small and medium enterprises into much bigger ones. We have the R&D Start initiative and a series of others, which are directed towards helping very small companies to get onto the first stage of growth and development.

Two of the parliament's committees that I have been involved in over the period from 1999 until now—the industry, science and resources committee, which is now the industry and resources committee, and the science and innovation committee—have examined research and development done within Australia and in report after report have addressed the problems we have of not having enough business research and development and having too much on the government side. One of the first such reports, which came from the industry, science and resources committee in August 1999, was The effect of certain public policy changes on Australia's R&D. We have recently seen another report by that committee in this parliament, dealing with the lack of R&D in the mining industry and impediments to Australia's growth in that area, where there has been a dramatic downturn.

One of the other key focuses has been on venture capital. In particular, it was a recommendation of that committee that Australia look at flow-through schemes such as that operated in Canada—one of our chief competitors in trying to attract funding. The recommendation is that we seek to draw on that Canadian experience. After taking extensive evidence, the committee said: `Yes, this is a fundamental problem. There's not enough current venture capital. There are ways in which you can address this. Venture capital schemes in Australia have not operated to the benefit of the mining industry and are really not as applicable there as they might be. Therefore, the flow-through schemes bear close looking at by the government.' Unless we can effectively compete with Canada and other countries for new money to come into risky ventures, we have no real chance of succeeding.

There are also a series of other areas of the Australian economy where we have extremely small companies operating. There are many one- to two-person operations, through to those with eight, 10, 15, 20 or even 50 people, in areas of the creative arts. I am involved with another committee, the communications committee, which is currently finalising its report into the whole question of how we are best able to assist newer industries in the digital area to push through. From the publicly available evidence that came to that committee, one of the problems they have is that there is simply not enough venture capital available for them to be able to access funds on a ready basis and take up the opportunities that are there. They are stuck with the problem of having to rely on their own resources and, particularly in the games area—where they can end up making far more profit that you would ever make from a film—they can be stuck with the problem that the up-front costs are very high and that the pool of venture capital in Australia is very small. Although that venture capital pool has grown somewhat over the years, it is still not as sophisticated or as broad as what is available overseas, in particular in the United States. Most of the work that Australia does in the games industry—the tens of millions of dollars that come back to Australia in the games industry, for instance—is being done for overseas markets. Because of the success of our Australian product, the industry have been able to draw some funds from overseas.

The amendments to the original operation of the Venture Capital Act of July 2002 addressed in this bill run to the fundamental problem of where the big money is and the question of what we were really trying to attract. Was it just individual venture capital companies or also the really big money? The really big money is held in the United States pension funds. When this bill came forward in July 2002 there was an express hope that a very small part of those funds, which are in the billions of dollars, might be available in Australia for risky ventures. Although you might think those funds would be staid, given that the money that goes into them comes from the pockets of American workers who contribute to their pensions throughout their working lives, Americans show entrepreneurship, competitiveness and, indeed, venturesomeness.

Americans realise that they need not only a balance of stable and productive assets in the manufacturing and property areas but also a part of their portfolio to be at the cutting edge—most innovative and risky—of things in order to obtain larger benefits. That is the case, despite the fact that we know that the dotcom boom had a dramatic effect on the way that not only US pension funds but also other investors in the United States and, indeed, venture capitalists saw the whole area of digital activity. They overreacted tremendously. The dotcom boom burst and dramatically affected the amount of money that was available. Too much had been committed to something with poor prospects. The reality is that, as everyone involved in venture capital knows, out of the number of projects that money goes into, some will perform extremely badly, others will perform moderately and others will be investment stars. That is the business they are in: getting investments stars identified.

One of the ways in which this bill attempts to address the current perceived problems is to do away with the prohibition on holding companies. The existing bill says that, in order for companies to access the provisions of this bill and therefore be eligible for what this bill allows, they must approach it in the right way. An eligible taxpayer, including US pension funds and registered venture capital partnerships, would be exempted from Australian income and capital gains taxes on Australian investments. That is a very significant thing to put out to people, to say: `We want you to come and invest in our country. You won't be treated like an Australian company, subject to capital gains tax and company tax. We won't treat you that way. We want your money. We really need it in these areas where Australians have been incapable of adequately providing money.' But, being careful, the original bill said that it was only registered venture capital partnerships or funds like pension funds that it was really after and that there were big questions about holding funds.

The reason there are big questions is explained appropriately in the explanatory memoranda. It is a question of what is normally the primary activity of a holding fund—that is, the receipt of dividends and interest. If it is the case that the primary definition of a holding company is that it just gets the dividends and the interest coming in, then its primary activity is not one of the three tested areas within the original bill and within the specific changes here. They are: (1) that 75 per cent of the assets of a company are primarily used for those activities, (2) that 75 per cent of employees are engaged primarily in those activities or (3) that 75 per cent of total assessable income is derived from those activities—those activities that would seek to get the benefit in areas that, shall I say the almost Shakespearean but certainly inelegant way that the bill puts it, are `not ineligible'. The bill deals not with `eligible' activities or entities but with those that are `not ineligible'. What are they? If they are low risk or low innovation, they do not get a guernsey here—that is, property development, finance, insurance, construction and investments that generate passive income; the bulk of the activity in the economy, and the bulk of the activity, of course, venture capital should not repay. We want to promote the hard edged, innovative activity.

It should be noted that it is possible for the pooled development funds that are looking at the proposals that are being put forward either by venture capital partnerships or by US pension funds to make an assessment that, even if two out of the three criteria are failed—even though they are fundamental criteria in terms of the predominant activities—they can still make a decision that the investment could continue. If it were decided that 75 per cent of the total income or of the employees were not engaged in the primary activity of a fund, they can still say that this investment is of such importance that the fact that 75 per cent of the assets of the company are involved in this area is what is most significant. This is an indication of how much Australia needs those venture capital funds and how much the government is willing to put forward a case to say: `The initial bill so far certainly hasn't attracted the funds that we thought it would. Therefore, we want to clarify the situation and to send a very strong message to US pension funds that we're open for business in this area.'

I am not sure—and the Parliamentary Secretary to the Minister for Industry, Tourism and Resources may choose to clarify this—if the question is whether or not we are dealing with Australian registered holding funds. I can think of one holding company—an investment company—that has done reasonably well. Its activity has certainly been primarily the receipt of dividends and interest. It is a company called Berkshire Hathaway, which is run by Warren Buffett. Warren Buffett is one of the most wealthy people in the world. He started with nothing, and he has now got something like $42 billion in personal wealth, built out of a holding company that invested in other companies, taking dividends and investments back in. It invests primarily in a range of companies that would not normally be part of this venture capital bill, because the companies have been a lot safer and surer in their performance. Berkshire Hathaway as part of its portfolio has, in relation to some items, been more innovative in what it has done. I take it that, in relation to the sort of activity that this bill is contemplating, if a company of that type were registered in Australia and were doing it in this way, it would be able to undertake its activities. Berkshire Hathaway is so big and if most of what it is involved in—certainly more than 25 per cent of what it is involved in—is not innovative so it might not succeed. But the model is right. If the company is constructed in such a way that it wants to get involved in these more venturesome things then it can do it.

I welcome the fact that the government has been willing to face this situation. After putting together the original Venture Capital Bill almost two years ago—which has not operated successfully in drawing in strong funding surges, particularly from the United States—the government is willing to make the situation absolutely plain to foreign investors in order to encourage them to put their money into our more risky activities. We are forced to do this because of the history of Australian investment. We are a country that is dependent upon investment from overseas, and that has been the case since first settlement. We are a country where there has been an antipathy towards foreign ownership of some of our assets. The countries, the people and the entities have changed over time, but the reality is that we cannot develop this continent on our own. We cannot, on our own resources, develop the new industries that will take us further forward in the 21st century. Through our own superannuation funds, we have gone some part of the way towards building a fundamental financial foundation that we can draw on to attract foreign investors into more risky ventures, to support Australian companies, young people, SMEs—who are working in the digital area, for instance—or to support the mining area more directly, or our other sources of investment through venture capital. That will do its work in the future; it is already up $600 billion and will be working its way through. I commend the changes in this bill—(Time expired)