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Monday, 16 November 2009
Page: 11733

Mr ANTHONY SMITH (6:45 PM) —The Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 deals with three issues. The first issue that it deals with is the issue of employee share schemes. Members of the House will recall the complete shemozzle and chaos six months ago of the government’s budget announcement on employee share schemes. Now six months down the track, after numerous U-turns, reviews and eventually seeing the catastrophe for what it was, the government is introducing this legislation, which is markedly different from its proposal on budget night.

On budget night the government announced the immediate removal of tax deferral on employee share schemes, effective from budget night. It meant that every person in every employee share scheme was required to pay the tax upfront, irrespective of whether they were able to sell the shares. So you had scenarios devised by the government where someone working in a business who had been provided with some shares as part of an employee share scheme, given those shares and in a position of not being able to sell them for a couple of years, which is a typical case, was required under the government’s legislation to pay that tax upfront. You can just imagine the scenario of someone working hard for a business being told that they were being awarded some shares that they could sell in two or three years time, but under the government’s new rules would be required to pay the tax on them upfront. The budget measure also limited the $1,000 concession to those earning less than $60,000.

It was a big controversy at the time. The government told us there was a problem with nondisclosure that needed to be fixed, that some taxpayers were not fully disclosing the receipt on shares and options. But their solution was to make every single employee who was receiving shares from their employers pay tax upfront. Because of the lack of detail, it was unclear whether those that paid upfront tax but never actually ended up receiving anything in the future would even be able to claim back the tax they had paid.

I have said before, and I say again, the coalition has a strong and demonstrated record of maintaining the integrity of the tax system. We believe that everyone must pay their fair share of tax. We also recognise integrity measures must be exactly that: measures to improve the integrity of the tax system, not to shut down an entire sector of it as the original announcement had the effect of doing. That is precisely what happened: the effect of the government’s budget night announcement was to instantaneously snap-freeze employee share schemes right across Australia, to snap-freeze them for employees on every income level. When those schemes were frozen, employee share schemes in Australia came to a halt.

As I said at the outset, it has been six months and the government’s handling of this issue has provided a very good window into their failure to produce sensible policy and their failure to correct errors when they are blindingly obvious for everyone to see. If you go back to the period after the budget announcement, within two days it was quite obvious that the government’s announcement had had the effect of freezing employee share schemes right across Australia. It was quite obvious. No-one thought that was the government’s intent. No-one thought that those in the Treasury and the tax office and those in the minister’s office had a deliberate policy to end employee share ownership schemes in Australia. It was clear that they had made a monumental error; it was clear that there was absolute incompetence on a grand scale. The Financial Review carried the chaos most prominently, as you would expect. It carried it, from memory, on its front page within two days of the budget, and it certainly carried it on its front page for at least six of the next seven days.

And what was the government’s response to this? Its first response was to deny there was a problem. Being confronted with an absolute catastrophe of its own making, the government’s initial instinctive response was to simply pretend it did not exist—that is, having been confronted with this problem, instead of accepting that they had made a monumental error, the government’s first instinct was to pretend it did not exist and to let the chaos reign. Absolutely irresponsible on a grand scale. Faced with the fact that employee share schemes had been shut down across Australia, having the knowledge that their budget night announcement had caused the chaos, the response from senior ministers from the Prime Minister down was to pretend it did not matter. Having seen those schemes shut down, their response was, ‘Let’s just ignore the problem.’

We saw it in the days after the budget. We saw it for two weeks, when all the government did was duck, weave and try and spin its way out of the chaos. The Prime Minister, knowing that the announcement had been a catastrophe, still insisted days after the budget that it was ‘the right decision’. He said:

Though many of these decisions will be unpopular, I accept that.

The week after the budget, the Minister for Finance and Deregulation said that the changes were needed to stop a tax rort by those ‘at the very big end of town’. But the snap-freezing of employee share schemes of course affected more people than the finance minister suggested: it affected every single employee who participated in an employee share scheme. When the finance minister made those remarks, he would have known that—and, if he did not know, that just doubles his incompetence. At the time, the Treasurer said:

… we don’t expect average punters to pay for a lot of tax breaks going to people who earn significant income

In fact, as I have explained, it was the average punter who was paying for the incompetence of the government, because every person at every income level with an employee share scheme entitlement or offer was affected by the government’s chaotic decision.

This stonewalling and refusal to accept what was obvious to everyone continued even when the union movement began to express outrage. You can just imagine them holding their tongues and their noses, thinking, ‘This is so chaotic we won’t need to attack our political brothers in the parliamentary party; they will come to their senses.’ But, only when it became obvious that that was not about to happen, within two weeks of the budget the union movement began belling the cat on the Labor Party. Look at some of the quotes at the time from those in the business community, pleading with the government to realise the error of its ways and to act to fix it. Gary Scarrabelotti of the Employee Ownership Group said:

Rudd Labor has ensured that Australian workers will never become co-owners of the businesses in which they work …

Geoff Price from Computershare said:


meaning the Labor government—

just don’t seem to get it.

He went on to say:

The proposed changes simply render the vast majority of plans uneconomic.

The finance director at Woolworths said:

My concern is that the government hasn’t thought through the changes to employee share ownership. It has effectively frozen employee share schemes.

The company secretary at Fairfax Holdings summed it up in fewer words:

It looks as though they haven’t a clue what they’ve done.

This is what we saw in the aftermath of the budget.

Finally, after two chaotic weeks, while the government’s instinct was to ignore the problem, deny the problem and attack anyone who criticised what they had done, the Treasurer of the country admitted that ‘mistakes have been made’ and the government began consulting. Then, after 50 days, some changes were announced by the Assistant Treasurer. As we on this side of the House said at the time, we and everyone who had an entitlement to an employee share plan and anyone working for a firm offering shares began to witness the long, slow, humiliating U-turn—a U-turn in slow motion. After all of that denial, spin and, finally, quiet acceptance of the chaos that had been caused, here we are today with legislation that is vastly different to that which was presented to the House on budget night.

Labor did everything it could to avoid bringing this legislation to the parliament. Its instinct after introducing the budget measure was to stick with it. When this legislation is said and done—and, as I have made clear in other forums, we will not be opposing the legislation—the employees of Australia will have come to know what the Australian Labor Party really thought of employee share ownership, and I do not believe they will forget it.

I will run through some of the detail of the bill. The amendments mean that the $1,000 upfront tax concession will be available to those on incomes of up to $180,000, which is a significant change from the original budget announcement, and that tax can be deferred when the employee share scheme meets the real risk of forfeiture test which has been introduced. For schemes that meet the real risk of forfeiture test, the tax will be deferred for seven years unless either the employee can sell the shares or exercise the options or the employee ceases their employment. Schedule 1 will also allow employees to defer the tax on up to $5,000 worth of shares under certain salary sacrifice schemes. Schemes operating under salary sacrifice arrangements do not have to meet the real risk of forfeiture test. It will also introduce new annual reporting requirements for employers along with additional withholding tax for employees that do not provide their tax file number. It contains amendments that will allow employees who pay upfront tax and whose shares or options are forfeited to get a refund for the tax that they have paid under certain conditions.

We have all along made it clear that we wanted the government to fix this problem. We wanted to see the schemes restart. We have been listening to businesses and employee groups across Australia and the message we get back is that, whilst this legislation is much better than the catastrophe that was handed down on budget night, it is by no means perfect. It is a vast improvement and the message we have been getting is that those businesses want to restart their schemes. They want to unfreeze them and get on with it.

We note that the Board of Taxation is due to provide its report on employee share schemes to the government by the end of February next year and, of course, the Productivity Commission is due to provide a report soon on executive remuneration. Overlying all of that is the wider and comprehensive review of tax being undertaken by Dr Ken Henry, which is due to the government very soon. Whilst the arrangements are not perfect, in light of all of this the coalition will not be opposing this schedule or, indeed, any other schedule within this bill.

The second schedule contains another measure announced on budget night and that is the change or amendment to the rules relating to non-commercial losses. Of course, the rules containing the four tests relating to the deductibility of non-commercial losses began operating under the former government back in July 2000. They were introduced by the former government because we on this side of the House recognised that there were integrity issues regarding certain unprofitable activities being carried on by some taxpayers. Under those changes, losses were deductible against other assessable income only if the businesses satisfied one of the four tests that were introduced then and which remain in operation today. The first is that the business has an assessable income of at least $20,000; the second that the value of property owned and used by the business is at least $500,000; the third that the value of the business assets owned and used to carry on the business is at least $100,000; and, finally, the business has a profit assessable income greater than deductions in three of the last five years, including the current year. Businesses after July 2000 had to satisfy just one of those tests. Under these changes—and these are the amendments in schedule 2—whilst those four tests will not remain generally for those on incomes of $250,000 or more, the intention is that effectively people on those incomes will be able to deduct a business loss only if they apply to and are granted discretionary exemption from the Commissioner of Taxation. So, whilst the four tests will remain in operation for taxpayers below the $250,000 threshold, those earning more than $250,000 will need to apply to the tax commissioner.

I note that the Senate Standing Committee on Economics is due to table its report today, if it has not already done so. It had an inquiry and public hearing earlier this month, on 9 November, and it was important to hear some of the evidence that came forward from the witnesses. The hearing revealed that the government expects to raise revenue from this measure from around 11,000 taxpayers—that is, 11,000 taxpayers earning more than $250,000 who are currently claiming losses and who will now apply for the commissioner’s discretion. We also note that applications for the commissioner’s discretion are apparently to be processed within 28 days. The inquiry heard a number of concerns with respect to the administration as well as to the design features. Some witnesses expressed concern about the accuracy of the revenue projections, the $250,000 threshold going forward, the commissioner’s discretion and the impact of the proposed changes on rural communities.

Given the government’s track record so far, we will of course closely monitor the implementation of this part of the schedule. We will not be opposing this schedule. As I have said, we will not be opposing this bill, but given the government’s track record—and I have outlined in major detail the track record with respect to employee shares, and that is a story that still in our view has a way to go—by next budget it will still be very much a policy area being cleaned up. We will have a sceptical eye on the government’s plans and the tax commissioner’s administration of this. Obviously, the government is assuming that those 11,000 taxpayers will not be applying in large measure for decisions from the tax commissioner. The government is assuming that the Taxation Office is nimble, prepared and able to process these in a timely fashion. The government is on notice—we are not opposing the measure—that it is responsible for the administration of this measure. This government has to realise that just announcing measures and putting out a press release and having a news conference is not policy implementation. Across the board, when it comes to policy implementation, that is where this government is falling down.

Whether it is school halls under the Minister for Education, who has become the master of disaster on policy implementation, no matter which policy area you look at, when it comes to implementation the political leaders of the government lose interest as soon as they have issued the press release. What the government is saying here to the people of Australia is that it has learned from its errors and this will be administered seamlessly, without delay and with a tax office that is fully resourced to look at all of these on a case-by-case basis and, what is more, to do so in an efficient and timely manner. Down the track, if that does not happen, it is on this government’s head for not having the policy administration in mind on such an issue. We are sceptical, but if the government manages to implement this in an efficient, professional way that does not create chaos we will give it credit, but it will be the first time we are giving it credit because it will be the first time it has occurred.

In conclusion, the third schedule of this bill—and this will not take long at all—amends the tax law to require superannuation funds to transfer the money in accounts that are unclaimed or belong to lost members to the Australian tax office if the balance of those accounts is less than $200. It requires that accounts must have been inactive for at least five years and that the superannuation fund must be satisfied they will not be able to find the owners of the accounts. Of course, this is a housekeeping measure. It is a measure that you would expect to see in a tax law amendment bill of this type. It has been some time in the making and, of course, it has our support. As I said at the outset, the coalition will not be opposing the measures in this bill.