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Monday, 21 November 2011
Page: 12970


Mr HOCKEY (North Sydney) (17:15): I rise to speak on the Tax Laws Amendment (2011 Measures No. 8) Bill 2011. This bill, along with the Pay As You Go Withholding Non-compliance Tax Bill 2011, was referred to the House of Representatives Standing Committee on Economics on 13 October. The report of that committee was released on 3 November. The House of Reps Standing Committee on Economics addressed substantial issues within the package of bills, including a recommendation that the government delete schedule 3 of the tax laws amendment bill and associated provisions. It is in fact a rare moment that a government controlled committee would advise against the government's own bill, but that tends to be the trend with hastily prepared bills.

The bill before the House has four schedules. Two of these, schedules 1 and 4, are sensible changes relating to the provision of the commissioner's discretion for primary production elections and consequent amendments relating to the taxation of gaseous fuels. The coalition view both these schedules as reasonable, and I can state at the outset that we will be supporting those schedules.

The other two schedules, schedules 2 and 3, seek to clarify the taxing point on the petroleum resource rent tax, as well as to implement further obligations on company directors in relation to noncompliance with PAYG withholding and the superannuation guarantee obligations. The coalition have reservations in relation to both schedules 2 and 3 and will be seeking to remove them from this bill for reasons that I will outline to the House shortly. I understand the government is removing one of those schedules, but, if both are not removed, we will be voting against this bill.

As stated earlier, the House of Representatives economics committee recommended that the government remove schedule 3, and I understand the government will be moving that amendment. I note the decision was made late last week by the government to follow the advice of the committee to remove schedule 3. We agree with that, but we obviously have different reasons from the government's for that. I can also foreshadow that the coalition will be moving an amendment to omit schedule 2 from the bill.

The first schedule seeks to provide the Commissioner of Taxation with discretion to disregard particular events that would otherwise trigger assessments of income for primary production trusts. The second schedule, as I said, amends the PRRT to provide statutory reinforcement on how the taxing point is determined for the purposes of the tax. The third schedule aims to strengthen directors' obligations to cause their company to comply with its pay-as-you-go withholding and superannuation guarantee obligations through extending the director penalty regime to make directors personally liable for their company's unpaid superannuation guarantee amounts—which I am sure is something that the Assistant Treasurer himself came up with, given he is so anti business—and, in some instances, making directors and their associates liable to pay PAYG withholding non-compliance tax where the company has failed to pay amounts withheld to the commissioner. The fourth schedule of the bill makes minor amendments to the tax arrangements for gaseous fuels to ensure the legislation applies as intended and that excessive compliance costs are not imposed on industry.

I am particularly going to look today at schedule 2 and also refer to schedule 3. The changes outlined in schedule 2 seek to provide statutory reinforcement in relation to the taxing point and the way it is determined for the purposes of the PRRT. These proposed changes will have retrospective application to 1 July 1990. The bill's explanatory memorandum states:

The amendments apply retrospectively to remove any doubt about the long-established operation of the PRRT.

They do not impose any new tax burden, as the amendments merely clarify and confirm the current application of the PRRT, consistent with the policy intent.

The coalition have long had reservations on the implementation of retrospective legislation that potentially creates a disadvantage, and we oppose this attempt to retrospectively amend a taxation law. The government try to justify the retrospectivity on the grounds that the amendment simply confirms, in their view, the long-established operation of the legislation. The coalition notes that submissions received by the House committee on economics from a range of bodies all oppose the retrospectivity of the changes put forward. These bodies include the Business Council of Australia, the Law Council of Australia, the Institute of Chartered Accountants in Australia, the Corporate Tax Association and the Tax Institute.

The Corporate Tax Association's submission to the Senate committee now inquiring into this bill addresses the government's claim that the bill merely clarifies the law. I quote:

Intention can be an elusive concept, and is often in the eye of the beholder. Assurances regarding intention are generally no more than unsubstantiated assertions or wishful thinking, and should be vigorously tested-particularly where they are made by the revenue authority as is the case here.

Contrary to the disclaimer provided by the government that no new tax burden will be created by this legislation, the government is in fact desperately trying everything it can to pre-empt the outcome of a case that is currently before the full bench of the Federal Court. It fears this court decision will create a significant hole in its taxation receipts. Earlier this month, the full Federal Court of Australia heard an appeal by Esso Australia Resources in relation to the PRRT. The appeal is against a Federal Court judgment that was given on 13 April this year. The Commissioner of Taxation, the other party in this litigation, won that case. The case is about one of the central concepts of the taxing point of the PRRT. This is the point at which the petroleum project's assessable receipts are calculated for the levying of the tax. Given its fundamental importance, you can understand that there could be different opinions about how to interpret the legislative words used to define this concept. Under our system of law, a company has the right to appeal against an unfavourable court judgment, even if the judgment is significant to the government's budget position. It should be entirely irrelevant in the whole debate. This is the way it should be, despite what the other side of the argument thinks about the validity or otherwise of the point to be appealed. If schedule 2 of this bill is enacted, the right to proceed in the courts will effectively have been removed.

The House should be aware that the commissioner, not long before the appeal was due to be heard, applied to the full court to have the appeal adjourned. The ATO argued that, because it was highly likely this bill before the House would be passed, the appeal would be 'a pointless and wasteful exercise'. We see that as a rather ironic statement by the Commissioner of Taxation: as if waste was ever a consideration of this government, let alone a wasteful exercise! The court unanimously gave the ATO's adjournment application short shrift—and rather appropriately so. I quote from the court's judgment to reject the ATO's adjournment application:

... there is much to be said for the view that it is not appropriate for a Court to take into account as a controlling factor the prospect of a substantive legislative amendment which would accrue for the benefit of one party.

Of course, if the government had been serious in trying to prevent wasteful spending on this appeal, it could have acted much more quickly. The government announced the measure at the time of the budget. So the government had the opportunity to introduce this amendment well before the appeal was to be heard earlier this month. That would have saved some legal costs. But the government sat on its hands. It could have drafted this one-page amendment and tried to have it passed, but it did nothing.

On 19 July, when the date was set for the appeal, the commissioner informed the court of the government's proposal to amend the PRRT. But the government did nothing to bring the measure forward. They did nothing until they put the bill into the House on 13 October. This is a government that pretends to be concerned about costs yet it did absolutely nothing to prevent them being incurred—or the heartache, I might add.

This schedule is retrospective to 1990. The schedule should be omitted because it is seeking to pre-empt an appeal to a superior court in Australia. The court is the appropriate forum in which the matter of legitimate dispute about statutory interpretation should be decided. Despite the retrospective operation in schedule 2, the House Standing Committee on Economics has concluded—in a majority report only—that the schedule should remain. The committee also appears to have thought it significant that the schedule reflect how Esso Australia has been lodging its tax returns and paying tax. The point is based on the committee's total misunderstanding of how many conservative or risk-averse taxpayers manage taxation disputes.

A conservative taxpayer will prepare their return in conformity with the commissioner's view about how a particular matter should be treated. The taxpayer will take this approach even though they disagree with the commissioner. A conservative taxpayer will pay the tax, including the amount that relates to the matter they disagree with, but will then lodge an objection. The objection is the means by which the matter in dispute is brought to the commissioner's attention. I might add that it is pretty hard to bring issues to his attention. The objection and appeal process is the statutory mechanism by which tax disputes are resolved. This conservative approach should not be seen as compromising the validity of a taxpayer's view about the specific matter they want to dispute.

Finally, I observe that there is an unhappy trend developing in relation to retrospective tax legislation. Since the introduction of this bill, the Assistant Treasurer has announced the government's intention to amend the tax law affecting international transactions, amendments that will also be retrospective. The proposed amendments would take effect from July 2004. This will, of course, continue to damage Australia's sovereign reputation, because retrospective legislation creates uncertainty. Investors will be reluctant to invest in a country where the tax system is uncertain and the government and the taxation commissioner have a habit of looking at issues retrospectively.

This brings me to schedule 3. The government will now need to respond to the House of Representatives report on this package of bills and specifically about schedule 3. If it is to be excluded, the coalition will obviously support that amendment. Schedule 3 was originally announced in this year's budget. The budget describes the measure as:

... tax compliance countering phoenix activities by company directors.

The stated aim was to:

... counter fraudulent phoenix activity, which involves a company intentionally accumulating debts to improve cash flow or wealth and then liquidating to avoid paying the debt.

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. Some directors have tried to use this 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. Treasury's discussion paper on this topic in 2009 noted:

Defining … what constitutes phoenix activity is inherently difficult.

ASIC sees the key distinction hinging on intent. Some directors deliberately structure the company's operations so as to avoid its obligations. The ATO's definition of 'phoenix activity' is similar, because it emphasises evasion, which is also based on intent. It is defined as:

… the evasion of tax through the deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities.

I do not believe that anybody would object to changes which render directors liable for the obligations of deliberate phoenix companies. However, schedule 3 of this bill is a sweeping change 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. It could be, for example, that directors who have innocently misunderstood the complex superannuation law, or who have inadequate management systems in place, will potentially be exposed to personal liability for the superannuation guarantee payments.

The issue of independent contractors versus employees could also cause significant difficulties. This bill exposes directors to personal liability for payments in respect of people who have been treated as contractors for a long period of time but who later are found to be employees, and where the company has not or cannot make the superannuation guarantee payments. This exposure is not restricted to circumstances where the company and the punitive contractors have not been dealing at arm's length or have a relationship that is based on a nod and a wink.

In practice, the borderline between a company's employees and its contractors can be very blurred. Determining whether a person is an employee for the purposes of the superannuation guarantee can be a difficult and technical issue. In the recent Roy Morgan case the full Federal Court had to examine whether interviewers were independent contractors or employees of Roy Morgan for superannuation guarantee purposes. Despite being hired by Roy Morgan as independent contractors, the court found that they were employees. Roy Morgan was thus liable for the superannuation guarantee for the individuals concerned.

It is extremely harsh to make all directors automatically personally liable for superannuation debts without affording the director any grace period to remedy the matter. It is harsh to do so where there is no intent involved in the underpayment of entitlements.

There were some other measures in schedule 3 which also caused difficulty. One measure dealt with speeding up the process that the commissioner could follow in starting court action to recover director penalties when the amounts were unpaid and unreported three months after the due delay. That would have been another assistant treasurer intervention. The coalition would have opposed the proposed new recovery methods because they were not restricted to directors and companies that have engaged in phoenix activities.

The other measure would make directors and their associates liable for a pay-as-you-go withholding non-compliance tax. The coalition would have opposed this measure because it would impose a liability on a new director as well as pre-existing directors where liabilities of the company have not been discharged within 14 days of becoming a director. The measures should only apply to liabilities of the company that arose subsequent to the person becoming a director. So the coalition supports the removal of schedule 3 from this legislation and will seek to move to remove it in the instance that the government fails to do so.

The other two schedules in the bill—schedules 1 and 4—are not contentious. The coalition welcomes the changes in schedule 1 in this bill. They will make improvements to the laws relating to primary production trusts. Under current taxation laws primary production trusts can defer taxation liabilities on profits from the sale of livestock in years where they have been affected by drought, flood, fire or disease. However, if any beneficiary of a trust dies then this tax liability cannot continue to be deferred. In effect, this means that a primary production trust can be liable for a large and unexpected tax liability in the event of an untimely death.

A tax liability is triggered on the death of any beneficiary of the trust, regardless of whether the deceased beneficiary is presently entitled to the income from the deferral. To the coalition this clearly appears to be an unfair implementation of tax law. The death of a beneficiary can sometimes be that of a mother, a son or a close relative, any of which would trigger a potentially large tax liability. This outcome seems to serve no public policy interest but compounds personal grief. The government has introduced this change to give the commissioner more discretion to waive the tax liability in these circumstances. On this occasion, the coalition welcomes the government's understanding on this issue and supports the change.

Schedule 4 contains minor consequential amendments to the taxation arrangements for gaseous fuels. The changes seek to ensure that the legislation relating to the taxation of gaseous fuels operates as intended, and that it does not impose excessive compliance costs on industry. The point of contrast from the changes contained in schedule 2 is that the changes in schedule 4 do not have retrospective application. These amendments apply from 1 December 2011. The gaseous fuels are liquefied petroleum gas, liquefied natural gas and compressed natural gas.

The minor changes to the taxation arrangements for these gaseous fuels include ensuring that excise duty does not apply to compressed natural gas for transport use where it is manufactured in a home review unit or units that collectively have no commercial capacity, ensuring entitlements to fuel tax credits are available to distributors of liquefied petroleum gases in a wider range of circumstances and ensuring that the content of liquefied petroleum gases are prescribed in regulations only. So the coalition supports the changes contained within schedule 4 of this bill.

So to be perfectly clear in the presence of the Assistant Treasurer, we do support schedules 1 and 4. We are strongly opposed to schedules 2 and 3, and if wisdom does not prevail in the government—and I fear that it will not—then we will seek to amend this legislation to remove schedules 2 and 3. And if those schedules are not removed then we will oppose this bill. Otherwise, the rest of the bill has our strong support.