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Wednesday, 20 June 2012
Page: 7180


Mr HOCKEY (North Sydney) (09:27): This package of bills before the House deals with a range of measures. Schedule 1 of the Tax Laws Amendment (2012 Measures No. 2) Bill 2012 and Pay As You Go Withholding Non-compliance Tax Bill 2012 seek to make directors personally liable for unpaid superannuation. Directors' penalties cannot be discharged by placing the company into administration and directors and associates are liable for PAYG withholding non-compliance tax where a company has failed to pay.

Schedule 2 of the tax laws amendment bill seeks to retrospectively legislate changes to the taxation financial arrangement scheme, which includes related changes to consolidation tax cost-settings arrangements outlined in schedule 3 of the bill. Finally, schedule 4 of the tax laws amendment bill and the Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill seeks to double the final withholding tax on managed investment trusts from 7½ per cent to 15 per cent. I can state at the outset that the coalition will not be supporting the passage of this legislation through the House.

Firstly, I want to deal with schedule 1 of the Tax Laws Amendment (2012 Measures No. 2) Bill and Pay as You Go Withholding Non-compliance Tax Bill 2012. As I outline the coalition case for opposition to this package of bills, I will do so sequentially, starting with schedule 1 of the tax law amendment bill and the related pay as you go bill, which contain provisions dealing with director penalties and phoenixing activities. The changes being put forward in relation to director liability and phoenixing activities seek to (1) expand the application of the director penalty regime to unpaid superannuation guarantee charges—and this is what I said before, (2) ensure that directors cannot discharge their director penalties by placing their company into administration or liquidation when PAYG withholding or superannuation guarantee remains unpaid and unreported three months after the due date and (3) in some instances makes directors and their associates liable for PAYG withholding non-compliance tax where the company has failed to pay amounts withheld to the commissioner.

This is the second time that the government has moved to legislate this issue. The first was in November last year, when the government moved an amendment to excise the provisions from TLAB 8 and the associated Pay As You Go Withholding Non-compliance Tax Bill. This was after a House Standing Committee on Economics inquiry noted concerns from the business community that these bills could apply to all directors, whether engaged in phoenix activity or not. The committee made a bipartisan recommendation that the government should seek to tighten the provisions in those bills to better target actual phoenix activity.

The House economics committee has now inquired into the provisions of the government's second legislative attempt. The coalition have noted in our dissenting report to the House economics committee that this legislation still fails to appropriately target phoenix activity. When is the government going to get it right? We have expressed concerns that 'liability would apply indiscriminately to all directors, including those of charities and not-for-profits that are limited by guarantee'. This is a classic example of further red-tape burdens on business and now further red-tape burdens on charities, and the coalition still views this as a considerable impediment to getting on with the job of life.

The coalition condemns the practice of phoenixing—we always have—which involves a company intentionally accumulating debts to improve cash flows or wealth and then liquidating to avoid repaying the debt. As I have noted to the House previously, phoenix activities are actions by directors to strip out assets to a new company with the intention of liquidating the old company, which is left with net debts. The directors use the corporate veil to protect themselves against any personal liability for the old company's debts. The directors then run the old business through the new company. The old operation rises up from the ashes. The coalition is concerned about the effects of this activity and we recognise the need for legislative safeguards in order to prevent it from occurring.

However, just as the government failed to address our concerns last time, this bill fails to implement protective action that is directed and focused on phoenix activity. The coalition still views these reforms as sweeping changes to deal with a relatively small number of criminally minded individuals. The possibility is very real that innocent directors will be caught in the net. As I said before, I say again: when will the government and ASIC properly use and explain the existing powers and where the existing powers have failed rather than introducing more red tape, more regulation, more legislation? It is smashing a nut with a sledgehammer.

Schedules 2 and 3 of the Tax Laws Amendment (2012 Measures No. 2) Bill 2012 retrospectively deal with changes to the taxation of financial arrangements, TOFA, and consolidation tax cost setting arrangements. Schedule 2 of the bill deals with the taxation of financial arrangements in the context of tax consolidation. The TOFA legislation which commenced on 26 August 2009 contains tax-timing rules applying to accruals and realisations relating to financial arrangements. The TOFA provisions generally apply to financial arrangements that a TOFA taxpayer entered into during income years commencing on or after 1 July 2010 unless the taxpayer elected to have the TOFA provisions apply early. The amendments in schedule 2 are to be applied retrospectively to 26 March 2009.

The background appears to be the May 2011 Board of Taxation report to the Assistant Treasurer, Review of the consolidation rights to future income and residual tax cost setting rules, which examined the issue of liabilities in the tax consolidation regime. The Board of Taxation noted that there may be some circumstances in which it would be appropriate for a future tax deduction to be denied for the amount of a liability of a joining entity. Schedule 2 will affect the taxation treatment applying to TOFA liabilities that are assumed by a head company, or a lead company, when it acquires another entity joining the consolidated group. The effect of the amendment will be to deny a deduction to the head company when the liability is eventually discharged.

What makes this retrospective change worse is the fact that it will have an even greater impact on one set of consolidated groups in respect of their pre-TOFA acquisitions. Those most disadvantaged are those consolidated groups that made an election to apply TOFA rules to corporate acquisitions of joining entities they had effected before the TOFA legislation started. This is referred to as ungrandfathering. Taxpayers, advisors and professional bodies are aggrieved at the retrospective nature of these amendments. There will be some corporate groups who have made important investment decisions based on the law as it stood when TOFA commenced. There will be some that made the important election whether to apply TOFA to their existing financial arrangements based on the law as it then stood.

Again, in the wake, in the last 24 hours, of the government's retrospective amendments to transfer pricing, here is legislation that is dealing with retrospectivity, further creating sovereign risk. The submission by Deloitte to the exposure draft on the proposed changes to the consolidation regime noted that it was unfair to deny deduction in the circumstances. It said:

The retrospective application of the proposed changes to TOFA and consolidation interaction provisions 26 March 2009 is unfair to taxpayers who relied on the existing tax legislation when making significant business decisions on acquisitions or deciding whether or not to make a transitional election to apply the TOFA rules to their existing financial arrangements. These taxpayers would have acted on the belief that they would be entitled to certain deductions which will not be available if the proposed changes apply retrospectively.

In this place last night we had divisions because the government was going back seven years to change the law in relation to transfer pricing. Here we have businesses that entered into agreements in good faith relating to transfer-pricing arrangements and the government says, 'Look, even though the law didn't exist at the time, we're going to retrospectively change the law to make things that you thought complied with the law unlawful, even though that law did not exist at the time.'!

Now, within 24 hours, here we are again—Groundhog Day!—retrospective tax legislation, in this case going back to 26 March 2009—and in this case, even after the tax office had given private rulings approving of transactions. Even now the government are saying: 'Look, we're going back. We are changing the rules. We can't claim enough tax from people going forward; we're gonna claim tax off people going backwards.'! This government just can't get enough tax out of you. So they are not only going to claim more tax out of you for all you do tomorrow; the government are going to claim more tax out of you for what you did yesterday, because what they are getting today just isn't enough to meet their wasteful ways.

Then they say to us, 'You guys are responsible for negativity out there.' That is what they say to us. They blame us for negative consumer sentiment. They blame us for negative business sentiment. It is all our fault. It's all Tony Abbott's fault; it's all Joe Hockey's fault—as if we write the speeches for Ivan Glasenberg in London when he says, 'We are getting greater business certainty out of Congo than we are getting out of Australia.' Or Marius Kloppers or Jac Nasser at BHP when they warn of uncertain business times in Australia. As I said yesterday, we do not write the press releases for Gerry Harvey, John Singleton or John Symond. We do not write those releases, they do, because they have to deal with this type of legislation—retrospective tax legislation. They have to deal with it. How can anyone have confidence about the future when there is a government that is changing today's laws tomorrow? Why would you take a risk? Why would you go out and borrow money to buy a new house? Why would you do that in this environment? Fewer and fewer people are doing it, because they are nervous about the government.

There is a sovereign risk, and before the House for the second day in a row we have retrospective tax legislation. No wonder people are afraid to take a risk. How do you price-risk when a government says, 'We're going to change yesterday's laws'? How do you do that? And where are the accountable people in the Treasury or in the Australian Taxation Office? Who are the people that are going to be held accountable for what is deemed to be original drafting errors? Where are they? What heads have rolled? Because, if you are writing retrospective tax legislation that involves billions of dollars of back taxes being claimed at a time when there were legitimate business investments, someone is going to be sacked out there. People are going to lose their jobs. Of course they are. Where billions of dollars are transferred from the private sector to the public sector, someone is going to have to pay. Of course there will be job losses. There will be investments that will stall. Who is accountable in the government? If it occurred under a previous coalition government and now it occurs under the Labor Party, who are the public servants that were responsible for these drafting errors? Is the minister going to answer that? This is serious stuff. It involves billions of dollars, as I understand it, and yet there is no accountability. They think: 'Oh well, we'll just shuffle it through the House of Reps and the Senate. It'll be okay.'

But out there real people will lose their jobs. They have to, so who is going to be accountable here? This is what kills confidence. The government kills confidence. It kills confidence when it changes the laws that applied yesterday, but also it kills confidence when it changes the laws as they stand. We have seen it in relation to company tax, carbon tax, mining tax, superannuation tax, taxation of employee share schemes and now it seems there is an endless list of retrospective taxes. The mountain that we have to climb if there is a change of government is just getting bigger and bigger every day.

Schedule 3 is another complex amendment to the tax consolidation legislation. At Senate estimates last month in response to coalition question, Treasury advised that the amendments in schedule 3 addressed issues that arose out of amendments to the tax legislation enacted on 3 June 2010. Treasury's advice was that there had been extensive public consultation over a number of years prior to the 2010 amendments being passed. Despite that, the Board of Taxation noted in its report I referred to earlier that in 2011 the ATO were aware of claims and potential claims by consolidated groups for deductions of over $30 billion in respect to the 2010 amendments. This amount did not include interest or the revenue associated with transactions that have taken place since 30 June 2010.

The Treasury is to be commended for carrying out an internal examination of why the revenue risk associated with the amendments was not recognised prior to passage. But there are questions that remain. The fact that the amendments took effect from the commencement of the consolidation regime on 1 July 2002 only partly explains the quantum of the claims. Evidence given by Treasury at estimates was that the information given to Treasury through the consultation process did not fully draw out the downside risks with the legislation.

Quality control in relation to taxation legislation is crucial. This is even more so where transactions are large and involve considerable commercial complexity. Tax consolidation legislation is almost a category of its own. Quality control starts with competent and capable personnel. It involves appropriate supervision and monitoring of compliance with the department's standards, having regard to the huge sum of revenue associated with the claimed deductions. There must be careful oversight by Treasury into the quality and risk processes associated with developing tax policy, drafting the requisite legislation, and ensuring that consultation is open and frank, including the participation of the ATO.

This process would not have been helped by the fact that the government has had no less than five Assistant Treasurers since coming to office only 4½ years ago—five Assistant Treasurers in 4½ years! The pick-up and put-down of legislative priorities for this particular portfolio by the various ministers wandering through the revolving door of the Labor ministry seems to have negatively impacted the consultation processes, reviews, stakeholder feedback and deadlines for taxation legislation. Quite simply, this is not the way to run a country. It is not the way to run a taxation system.

In summary, the changes contained in schedule 3 seek to modify the consolidation tax cost setting arrangements and rights to future income rules so that tax outcomes for consolidated groups are more consistent, in the view of the government, with the tax outcomes that arise when assets are required outside of the consolidation regime.

This raises a number of concerns, given that the government is retrospectively amending the consolidation tax cost setting arrangements according to the time when the corporate acquisition took place. The changes within the bill will impact acquisitions that took place on various dates. The first period is prior to 12 May 2010, being the date when the amending legislation was passed by both houses of parliament, when what are referred to as the 'pre rules' will apply. The second time period is after 30 March 2011, being the date the Board of Taxation was asked to review the 2010 amendments, and referred to as the 'prospective rules'. The final period is the intervening period, known as the 'interim rules'. Did you hear that? And this is a government committed to simplification! Given that the changes passed on 12 May 2010 relates to amendments that date back to 2002, some of the amendments related to consolidation within this bill will have effect from 2002—that is, 10 years of retrospectivity. They are cheering out there in business land. Ten years of retrospectivity!

Entities affected by the proposed changes in schedule 3 will be adversely impacted by the retrospective changes, in particular, those changes editing the acquired rights to future income. This is because, for tax purposes, many of these rights will now have a cost base of zero, as opposed to those entities outside the consolidation's regime with a cost base equal to that of the purchase price. The resetting of the cost base to nil for entities of the consolidation regime, combined with its retrospective application, will disadvantage taxpayers that have elected to be in the consolidation regime.

The coalition opposes retrospective application. That is a position that we on this side of the House uphold. In its submission to the House Standing Committee on Economics, the Tax Institute referred to a number of factors that weigh against the retrospective amendments proposed in schedule 3. Another relevant point, made by CPA Australia, that it is inequitable that a taxpayer who has lodged a ruling or amendment request prior to 31 March 2011 receives a different treatment simply because it is not actioned by the relevant cut-off time, which at the time of the lodgement was not a factor. They said:

Taxpayers should not receive differing treatment in circumstances where they have no control over the outcome.

It is because of their retrospective application that the coalition will not support the measures contained in schedules 2 and 3.

Schedule 4 of the Tax Laws Amendment (2012 Measures No. 2) Bill, along with the Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2012, seeks to double the final withholding tax on management investment trusts from 7½ to 15 per cent from 1 July 2012. The coalition understands the minister is going to be moving an amendment to excise schedule 4 of the tax law amendment bill and the related managed investment trust withholding tax bill. How about that? After announcing it in the budget, the government rushes in the legislation and now are they going to excise it! I am sorry, is this meant to be a key budget initiative?

This is the third backflip from the government and the financial year has not even started! It seems like yesterday that the Treasurer delivered the budget—now we have got the third major amendment to the budget. The first is that they were dumping the company tax cuts, but now they are back on the table—those tax cuts that were only recently dumped in the budget are an article of faith, according to the Prime Minister. The second one is the passenger movement charge, remember that? The government has now dumped the CPI increases that they said were a part of the budget. The CPI increases have now gone. Now, there is the third factor—three strikes. The third one is that they are now dumping their determination to increase the withholding tax on managed investment trusts from 7½ per cent to 15 per cent.

You wonder why people are uncertain and why business is confused. Look no further than the actions at the hands of the government over the last three weeks alone. We had already announced that we would be opposing the measure after the Labor government previously reducing interest on withholding tax—which we praised. They reduced it and now they want to double it. What does that say to investors? The government make a decision—it is the same political party; it is the same Treasurer—and they reduce the interest withholding tax and then they wake up one day and decide, 'We are going to double it'. And you wonder why people like Ivan Glasenberg are giving speeches in London, saying that it is easier to deal with the Congo than it is to deal with the Australian government. Well, there is the evidence.

David Denison, President and CEO of the Canada Pension Plan Investment Board stated—and this is what we hear all the time:

In this era of fiscal restraint and additional direct and indirect taxes, we are becoming increasingly concerned that some risks associated with ownership of infrastructure are expanding. For instance, it is easy to envision the regulatory rate setting process becoming politicized instead of objective and fair. The same could occur with taxes—in fact, Australia’s budget that was tabled last week effectively doubled the tax burden on our real estate and infrastructure holdings in that country.

If we conclude that these kinds of risks within any country become significant enough to call into question the predictability and stability of cash flows that are at the heart of the investment rationale for infrastructure, our response will be very quick and rational—we will simply stop investing there.

That was the head of the Canada Pension Plan Investment Board. He is saying it is too hard to do business. I did not write that speech. Tony Abbott did not write that speech. These are international investors that are saying, 'Hang on; this sort of sovereign risk in Australia is becoming just too hard. We will stop investing in infrastructure.'

The chopping and changing of the MIT withholding tax has yet again reduced our predictability, our stability and our certainty in the eyes of international investors when they want to come here. They want to come here. They want a stable place to invest for the long term, and Australia as a net importer of capital needs that. But they have a government that keep screwing it up. In 2008 they reduced the interest withholding tax from 30 per cent to 7½ per cent, and now they want to double it, as they announced in the budget: 'Sorry, we've changed our minds; now we're taking it out'. Why? Why can't the government hold a policy position? Forget four years, three years or two years; why can't they hold a policy position for three weeks? Why can't they hold a policy position for two months?

I know the minister at the table is one who frets about this. He was sent out into the coalface and told to sell a carbon tax package that the Labor Party promised they would never deliver—but, of course, they have. And they wonder why there is uncertainty. The coalition does not support the doubling of final withholding tax on managed investment trusts from 7½ per cent to 15 per cent. We are going to ask the minister at the table, who is responsible when this amendment is being moved by the government, to explain himself. Why can't the government hold a tax policy together? Why does the government now go deep into retrospective tax legislation in order to try and fund its budget?

As I stated earlier, the coalition will not be supporting the passage of this package of bills through the parliament. We believe on many fronts that the government has failed to listen to the community. We believe that the government gives lip service to consultation with stakeholders. We keep getting this feedback, saying, 'Oh, the Treasury, the Australian Taxation Office and the government have consulted with the business community.' The business community is over that feigned, pretend consultation. It does not seem to move the government during what is meant to be a fair dinkum consultation process. No, the government is so determined to proceed that it then goes and announces initiatives in the budget, goes and introduces legislation into the parliament, and then changes its mind.

What a dysfunctional rabble we have running the place in Canberra. This is tax policy. This is not tens of millions of dollars or a program here and a program there; it is billions and billions of dollars. It involves international confidence in our nation. The more the Treasurer and the Prime Minister talk about Australia and the Australian way, the more they are ridiculed by their actions—their actions in having retrospective tax legislation yesterday going back seven years, in having retrospective tax legislation today going back 10 years, in announcing policy in relation to interest withholding tax and then changing their mind a few weeks later, in the passenger movement charge and in the company tax cuts. This is a government that cannot be trusted. It is an embarrassment, and the Minister for Resources and Energy knows how embarrassing it is to be a part of a government that cannot keep its promises or make up its mind. (Time expired)