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Thursday, 26 February 1987
Page: 681


Senator MICHAEL BAUME(12.26) —The Taxation Laws Amendment Bill (No. 5) proposes to put into effect three Government measures. First, for the 1987-88 and subsequent years of income, provisional tax is to be payable by quarterly instalments, rather than one lump sum as is the current practice. The second proposal is to treat as assessable income realised exchange gains, or to treat as an allowable deduction exchange losses, to the extent that these gains or losses are related to the production of assessable income or to the carrying on of a business. The third proposal is to effectively treat dividend distributions in the form of redeemable preference shares as interest rather than as dividend. The Opposition in this debate will rise to express its objection or concern about a number of provisions in relation to each of the three measures I have just mentioned.

In relation to that part of the legislation which deals with exchange gains and losses, the Opposition would like to express its concern over the undue discretionary powers which will be vested in the Commissioner of Taxation. In relation to the date on which taxpayers will have to notify the Commissioner of Taxaton of exchange contracts for the purpose of claiming a loss against assessable income, the Commissioner will be given extra discretionary powers. Taxpayers will have to rely on the good grace of the Commissioner of Taxation yet again. We will elaborate on this point in the Committee stage.

Another major concern we have with this legislation relates to the redeemable preference share provisions. This measure will ensure that dividends paid on redeemable preference shares and other shares issued as part of a short term financing arrangement for a period of two years or less will not be eligible for the intercorporate dividend rebate but will be tax deductible to the issuing company. This matter was apparently outlined by the Government in a Press release by the Treasurer (Mr Keating) on 7 April 1986, almost a year ago. It is clear that the terms of this legislation now do not coincide with the intention of that announcement almost a year ago. It is simply untrue, therefore, for the Government to pretend that this legislation simply puts into effect its April 1986 statement.

The point I make strongly is that, in relation to redeemable preference share provisions, the legislation effectively seeks to enact measures beyond the scope and meaning of the Treasurer's early Press release. While the Press release stated that the future amendments to the income tax laws would apply to redeemable preference shares issued after 5 p.m. on the date of the Press release last April, the legislation in effect seeks to cover redeemable preference shares issued before that date; hence there is a very real form of retrospectivity. The Government is well aware of our views on retrospective legislation insofar as it relates to matters other than tax evasion measures. We will be moving an amendment in the Committee stage to this part of the Bill, seeking to deny the Government the benefit of this deliberate retrospective effect.

We are also greatly concerned with the proposed changes to the provisional tax arrangements. Not only are we particularly concerned that this piece of legislation has been almost 18 months in appearing before this place since it was first proposed by the Government, but also it effectively imposes a $90m cost burden on the business sector-and that is a fairly conservative estimate. The Bills particularly impact on certain sectors of the community which are currently subject to the income averaging provisions in the income tax law which may clearly disadvantage cash flow positions of a number of businesses. The concerns of the business community about the matter we are debating today are best crystallised in a letter of February 1987 from the National Farmers Federation to the Treasurer. It reads in part:

The proposed arrangements will result in many primary producers being required to make provisional tax instalments in advance of the accumulation of the taxable income to which the tax applies. This is contrary to the fundamentals of income tax and would be an unjustified imposition on the taxpayer.

The provisions applying to primary producers in the proposed arrangements also make no allowance for the unpredictability of primary production income. Seasonal conditions affect both receipts and expenditure to the extent that taxable income cannot be estimated with any reasonable accuracy until the year is well advanced. For example summer storms or fires in a mature crop may totally alter income expectations from one day to the next. Similarly the temperature and rainfall patterns in late summer and autumn can substantially alter expenditure on stockfeed and, cultivation for crops.

NFF considers that it is impractical to require primary producers to estimate taxable income any earlier than is currently required. Earlier estimation will necessarily result in substantial errors and over or under payment of tax instalments.

The government has recognised through income averaging that separate arrangements are necessary to maintain equity for those taxpayers who have variable incomes. A large majority of those taxpayers using income averaging will also face problems under the proposed provisional tax requirements because of unevenness of income and unpredictability of income.

The Opposition will be consequently moving an amendment in regard to these expressed concerns at the Committee stage. At this second reading stage, on behalf of the Opposition, I move:

At the end of the motion, add ``, but the Senate-

(1) expresses its concern over the excessive delay in the introduction of the legislation, relating as it does to measures announced as long ago as 19 September 1985;

(2) deplores the creation of uncertainty and confusion among taxpayers and in the business community due to the failure of the Government to present these and other measures to the Parliament within a reasonable time after their announcement;

(3) condemns the Government for imposing an excessive tax burden on business, thus inhibiting new investment in productive enterprises; and

(4) further condemns the Government for its mismanagement of the Australian economy which has resulted in:

(a) huge increases in food prices, which have increased by 8.6 per cent for the 12 months to December 1986;

(b) large increases in the average home loan repayment as a proportion of medium family incomes which proportion, for the September quarter 1986, was 26.7 per cent;

(c) falling disposable incomes for the majority of Australians caused by higher taxes as a consequence of taxpayers moving into higher Keating tax brackets;

(d) low employment growth and continuing high levels of unemployment;

(e) continuing high current account deficits, averaging in excess of $1 billion per month on our balance of payments; and

(f) a record level of foreign debt, which has trebled since 1983, is currently approximately $100 billion, and is estimated to increase by a further 50 per cent over the next three years unless Government policies are changed''.

One could also add to that motion that we have now been advised by a Minister in this place that interest rates will continue to be excessively high for home owners and home seekers until at least well into 1988. The Bills that this motion is aimed at amending are yet another of the tax reform measures originally announced on 19 September 1985 in the ministerial statement on the reform of the Australian taxation system. If one were not obliged to take this tax reform seriously one would think it was a joke, because taxation reform without taxation relief is not taxation reform at all. It could be easily described as taxation reform via higher tax imposts. The use of the word `reform' when the Government means `change' is simply a part of the propaganda effort by this Government aimed at deluding the Australian people that there has been genuine reform.

These Bills could be added to the multitude of others that the Parliament has been required to debate over the last 18 months which, in the main, have increased-not decreased-the tax liability of the business community. A quick reading of these other imposts exposes the lack of seriousness on the part of the Government in its so-called tax reform program. The reality is that that tax reform program was sabotaged by the Prime Minister (Mr Hawke) in a deal in a hotel room behind the Treasurer's back in 1985.

Other imposts include the imposition of a new fringe benefits tax, the introduction of a capital gains tax, the removal of legitimate entertainment expenses as a tax deductible item, the introduction of new substantiation requirements, the introduction of the foreign tax credit system, the abolition of certain negative gearing provisions in relation to rental property investments and, last but certainly not least, the increase of the company rate of tax from 46 per cent to 49 per cent. All these measures involve an increase in the tax liability of the business sector, not a decrease. Ultimately, however, it is the consumer who pays for these new tax imposts through higher prices for goods and services. Of course, this is the perverse logic of the Government which hopes that these measures will stimulate the business sector somehow to provide greater incentive in the economy. It is strange logic indeed. The plain truth of the matter is that all these new tax imposts are deteriorating the competitiveness of the Australian taxation system and the Australian corporate system. We pay high taxes to fund government expenditure. The end result is an uncompetitive tax system. Investment, employment and economic growth are the casualties.

Let me elaborate on the effects of the competitiveness of our tax system on these previously introduced tax imposts. A major contributor to the growing uncompetitive nature of Australia's tax system has been our unacceptably high corporate rate structure. While a number of overseas countries are radically restructuring the corporate tax rate systems to allow a greater undertaking of productive investment in their respective economies, Australia institutes so-called reform in the opposite direction. The maximum corporate tax rate in the United States of America, for example, has been reduced from 46 per cent to 34 per cent, while Australia's has increased from 46 per cent to 49 per cent. The corporate tax regimes in Japan, Canada, and the United Kingdom are also being restructured to provide significant reductions in their rate structures. For example, Canada's proposals call for a reduction in the standard combined federal and provincial tax rates from 46 per cent to 39 per cent; in the small business rate from 25 per cent to 21 per cent; in the rate for manufacturing and processing from 40 per cent to 33 per cent; and the rate for small manufacturing corporations from 20 per cent to 16 per cent. I reiterate for the benefit of all honourable senators sitting opposite-in particular, the Minister for Finance (Senator Walsh), who comes from Western Australia-that, while a number of overseas countries are providing for lower nominal rates of corporate tax, Australia is in the unenviable position of increasing its company tax rate from 46 per cent to 49 per cent.

Honourable senators may recall the recent visitation to this country of a high level Japanese investment delegation. In discussions with various people around the country the most worrying problem that the leader of the delegation put forward was in relation to the recent corporate tax rate trends that I have just mentioned-of course, the Treasurer and the Minister for Finance have been propagating that in a discussion of the competitiveness of Australia's tax system vis-a-vis overseas taxation systems-that there is a need to look beyond the corporate rates of tax. This cannot be denied, although this line of argument adopted by the Government merely shows that it is running scared over this particular element of the tax debate. Of course, the effective corporate rate of tax applying in any country is important. However, it is a mistruth for the Government to put forward spurious statistics and then say that on an effective rate of tax basis, Australia's tax system is just as competitive as those applying in a number of overseas countries such as the US, Japan and Canada.


Senator Peter Baume —A mistruth.


Senator MICHAEL BAUME —A mistruth; one is not allowed to say the other word in this place. This is simply not true and I suspect that the recent Japanese investment delegation that visited this country will not be fooled by the propaganda fed to it by the Treasurer, and by all indications it appears that this is the case.

The argument, of course, can be reversed-that is, if the nominal rate of tax is unimportant in a discussion of tax competitiveness, why did the United States Government decide upon such a large reduction in its corporate rate, from 46 to 34 per cent? Using the Government's twisted logic one can only assume that the United States Government thought it would be nice to have a lower corporate rate structure but that it would not have any investment implications. Of course that is absurd. The United States Government did what it did because it will have a large beneficial impact on investment expectations and hence sustained long term economic growth. The reverse can only be true in Australia.

The fringe benefits tax is also a significant contributor to the increasing uncompetitive nature of Australia's tax system. This impost is a tax on employers' cost structures and not on revenue or income derived from carrying on a business. This taxing arrangement is completely abhorrent and contrary to long-standing taxation principles, both here in Australia and overseas. Not only does this tax impost add a few percentage points to the already staggering corporate rate of tax; it also imposes enormous compliance and administrative costs on the business sector as a whole. This all adds up to an effective corporate rate of tax in Australia which in the case of some companies could be as high as 55 to 60 per cent. So much for the assertions of the Treasurer about the real competitiveness of our tax system.

The introduction of the capital gains tax is also having a severe impact on the tax-competitive nature of this country. While a number of countries have a form of capital gains tax, it must be remembered that these countries are either traditional or emerging exporters of capital and as such the tax is not an impediment to growth in investment. However, Australia is a net importer of capital and as such we need to generate a tax and economic climate conducive to an inflow of capital investment. Further, these same countries do not have capital gains taxes as severe as Australia now has. While Australia imposes a tax liability on virtually every capital gain, with minimal exceptions, in the case of Canada, for example, there is a cumulative lifetime exemption of $500,000 of capital gains, that is $250,000 of taxable capital gains. In the case of the United States, although the Government recently increased the CGT maximum rate from 20 to 28 per cent, it is significantly lower than the rates applicable to most individuals and all companies in Australia.

As an indication of the impact of capital gains tax on Australian corporations and particularly on management and investment companies, the annual report to the Government of its own Management and Investment Companies Licensing Board severely criticises the Government's capital gains tax. The Board's annual report, recently tabled in this place, states:

The Board continues to hold a strong view that the development of a large and vital venture capital industry in Australia will be seriously jeopardised while such a high capital gains tax exists.

This report, which I regret to say has received no media attention, is a slamming indictment of the Government's capital gains tax. It continues, on page 23:

The capital gains tax diminishes the risk-reward ratio. The Board's strong view is that this tax will mitigate the success of the program.

It goes on:

A related matter of concern is the treatment to be accorded shares owned by MICs on sale. The Board believes these shares which are held for lengthy periods should be treated as capital items.

Therefore, of course, they should not be subject to the same degree of tax. I seek leave to continue my remarks later.

Leave granted; debate adjourned.