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Wednesday, 18 March 1987
Page: 853

Senator MICHAEL BAUME(10.15) —When this debate was adjourned a few weeks ago I was criticising what is in effect in this legislation a de facto increase in the taxation burden of Australian business. I was pointing out that this followed simply a whole range of additional burdens imposed on business at a time when there was an urgent need for expanded investment and increased growth and, therefore, the capacity to provide increased employment in Australian business, particularly in view of the dreadful balance of payments crisis now facing this nation, largely as a result of the Government's deliberate economic policies. I was pointing out that among these imposts was the capital gains tax introduced by this Government, which is doing so much to limit the growth of Australian business. I was quoting from the annual report of a government body-the 1985-86 annual report of the Management and Investment Companies Licensing Board, which was recently tabled in this Parliament-in which there was strong criticism of the impact of the capital gains tax. I quote from this report:

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.

The report goes on:

Venture capitalists everywhere in the world achieve their profits from realising capital gains. The foreshadowed capital gains tax structure in Australia is higher than all countries with active and successful venture capital industries. Even worse, as presently structured, high risk venture investments may receive more adverse treatment than conservative investment.

This sort of criticism by a government body of the Government's taxation measures against business is, I believe, enormously persuasive. This report goes on:

The situation as it affects the MIC Program is anomalous. On the one hand, the Government is providing a tax incentive to the investor in an MIC, designed to attract funds for investment by MICs in young, high growth businesses. At the same time, the venture capitalist (the MIC) on whose performance future investment and the long-term health of the industry will be based, suffers a disadvantage. Venture funds are invested into high risk areas that traditional financial sources have not served. The Board predicts that the proposed capital gains tax will favour investments in inflation-paced activities and seriously retard the growth of the venture capital industry.

That report to the Government by one of its own bodies has been studiously ignored. We have not heard any comment from the Government on that report and, of course, we will not because the report is so critical of this Government's anti-business tax program, of which this latest legislation is a secret additional factor. The Board, in its report to the Government, contrasted likely developments in Australia with past tax policies in the United States of America and in the United Kingdom. A report by the United States Treasury has acknowledged that the two-stage reduction-I underline the word `reduction'-of the capital gains tax rate in 1978 and 1981 led directly to increased capital formation and, strangely, increased taxation revenues in the long run, even though the rate of tax was reduced. The report states:

There has also been in the USA a significant differential between the rates of income tax and capital gains tax levied upon individuals which has encouraged some entrepreneurial managers to direct their energies to wealth creation rather than to income earning activities. The Board will watch with interest the impact of proposed tax changes in the US.

The report continued:

Following a recent report on the UK Business Expansion Scheme (BES) introduced to stimulate investment in small business by way of tax relief for investors, the UK government early in 1986 complemented the BES by deciding that capital gains tax will not be levied on the first sale of BES related shares.

There is a trend overseas towards reductions in or, in fact, the elimination of capital gains tax in specific instances, particularly in this area. In Australia, the Government is going down the track of continual attack on the private sector through the tax system. The MICL Board, in its report to the Government, stated that it:

. . . considers that favourable taxation treatment of genuine venture capital activities would greatly stimulate the development of the non-MIC venture capital market in Australia.

The report is very persuasive. It says exactly what the Opposition has been saying. It concludes in these terms:

Since an MIC's profit is incurred by realised capital gains, the very existence of the present capital gains tax mitigates strongly against the raising of additional funds outside the Program in its present immature state. The Board believes that the present capital gains tax is the most substantial factor mitigating against the success of the Program, as investment in venture capital aspires to compete for investment dollars.

It is heartening for the Opposition to see that an expert body such as the MICLB, which was appointed by the Government, has advised the Government of the stupidity of the policy with which the Government is determinedly persisting. However, the Government has not responded to this report. The Government appears to have no intention whatsoever of listening to the very wise words of advice that it has been getting from the Opposition on this score over such a long time.

The Government has also been attacking the business community through the foreign tax credits system. The introduction of the foreign tax credits scheme is another in the long list of factors contributing to our deteriorating position as a tax competitive nation. With the growing internationalisation of the Australian corporate sector, it is paramount that the Government attract corporate assets to this country to provide valuable investment opportunities and employment growth potential. This is particularly so at a time when the Government, following the devaluation of the dollar, is encouraging business to try to increase its capacity to replace imports. However, its whole tax policy appears to be directed in the other way; that is, to discourage investment in this area.

By requiring Australian multinationals to pay the full Australian company rate of tax which is already calculated on a company rate of tax far in excess of those applying in a number of other countries, the Government is in effect increasing the tax liability of those companies. This can only have the effect of forcing those Australian multinational corporations to relocate domestic operations off-shore with consequent disastrous implications for investment and employment. That is another example of the Government's inability to understand economic reality and of its determination to hit the one sector of the economy on which our future survival depends-that is, the private enterprise sector.

There is also the non-deduction of business entertainment expenses. We have heard all about the free lunches, and so on. Let us look at this in a less emotional way than the Treasurer (Mr Keating) has. I must say that, in his talk about lunches and brown paper bags, he has demeaned what is a very serious issue. This measure, which was initially announced by the Government in its statement entitled `Reform of the Australian Taxation System', is severely impacting on the profitability of the business sector. In trying to curtail possible abuses in this area which were allowed to continue in the past, the Government has reacted by imposing yet another one of its blanket approaches to issues such as this. It is not really tax reform; it is just madness. It is completely illogical for the Government to implement such a measure knowing full well the implications for investment and profitability of the business sector. It is only a single-minded obsession by the Government to crush every single ounce of tax blood out of the business sector that has prompted it to act on this matter and on the others that I have mentioned. There is no doubt there was some abuse of the previous tax arrangement but one does not solve the problem simply by blocking such expenses altogether. It is absurd to say that some expenses are good and some expenses are bad even though they are all clearly involved in the earning of income. Of course, that should be the criterion involved in tax deductions.

The quarantining of negative gearing provisions for rental property investments has also proved to be another cost burden for business. This measure has virtually wiped out the private rental market and has contributed to the effective doubling of the queues for housing commission homes in this country. Honourable senators may have heard Mr Walker, the New South Wales Minister for Housing, this morning being roundly critical of this Government on this very score. And he is a left wing member of the New South Wales Government. We can see that in this area the Government has made another of its monumental bloomers because it has been obsessive about attacking the private sector rather than concentrating on building it up so that it can, by its increased profitability, contribute even more to the tax cake.

I mention the Government's proposals to introduce a system of dividend imputation for individual shareholders. When one considers them in isolation from all other legislative provisions, one may think that the proposed dividend imputation system will benefit shareholders and companies alike. However, when one considers them in conjunction with the foreign tax credit system, one can see that the dividend imputation system may, in fact, severely disadvantage domestic companies in their investment decisions by increasing their overall tax liabilities. This country urgently needs to generate the greatest amount of investment undertaking, either from domestic sources or from overseas sources. Further, the Australian corporate sector is seeking ways to become more internationally oriented; that is, to seek investments in overseas countries as an adjunct to domestic operations in order to capitalise on the growing investment opportunities being presented in the international arena. For this to be achieved, Australia must possess an attractive investment environment and, hence, taxation and other legislative matters should not unduly impact upon domestic or foreign decisions to invest.

All these measures add up to the inescapable truth that Australia is becoming a tax uncompetitive nation and, hence, we shall not realise the investment and growth potential of which we are capable. This is because the Government continues to bludgeon the business sector with its anti-investment and anti-incentive taxes. The Government forgets that businessmen can look at the rest of the world and see how much better off they would be if only they were not in Australia. They can see how much more sensible it would be for them to expand in other nations and not to invest in Australia, despite the benefits of devaluation which exist. Of course, this is only part of the disaster that Australian business is facing but it is a disaster deliberately brought about by the Government's tax policies of which this legislation is simply another burden.