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Thursday, 19 March 1987
Page: 967

Senator WATSON(12.10) —Yesterday, when addressing the Senate on the Taxation Laws Amendment Bill (No. 5) 1986, a Bill which seeks to amend matters relating to provisional tax payments, exchange gains and losses and redeemable preference shares, I especially warned the Senate of the inordinately complex nature of the amendments affecting provisional tax. That we now have four definitions of a variant of provisional tax is rather difficult to comprehend. If we look at one of those definitions relating to variable income tax, it requires reference to four separate income tax sections. Fancy a definition requiring a cross reference to four different income tax sections. What hope has the layman of trying to comprehend this extraordinarily complex provisional tax payments legislation proposed by this Labor Government?

Where previously one payment was made, generally on 31 March, four instalments will now generally be required from many taxpayers. These payments will be required on 1 September, 1 December, 1 March and 1 June. But in the introductory year 1987-88, two instalments will be combined and payment will be due on 1 December 1987. The first instalment will be omitted and will be added to the December instalment. While the Government has taken great pains to emphasise the point that the implementation of this Bill would not derive any new revenue, it is completely misleading of the Government to say that it is revenue neutral. This is just another of the Hawke-Keating measures designed to transfer costs from the Government sector to individuals in the private sector.

The Minister for Finance (Senator Walsh) acknowledged in his second reading speech that the collection of $90m would be brought forward to 1987-88 and that there would be annual expenditure savings to the Government totalling some $100m resulting from the need to issue fewer Treasury notes. Who is financing this saving? It is the private sector. What we see as a masquerade for tax reform will not benefit taxpayers at all but rather is another exercise by this Government of extracting tax revenue from ordinary individuals, as if they are not taxed high enough. Such a saving on the issue of Treasury notes will presumably be derived from a reduction in interest payable by the Government on these notes. It is quite considerable. Given that the current interest rates on Treasury notes is in the vicinity of about 13-odd per cent, resulting in savings of $100m, the total borrowings by the private sector-because it cannot borrow on such generous terms and at such low rates as the Government sector-is going to be considerably higher. It will be a staggering figure and a staggering cost to small business and to private individuals.

If the Government is going to save $100m, logically a lot more money is going to have to be found and financed by the private sector. The important theme that the Government seems to have lost sight of, I repeat, is that this Government has the capacity to borrow a lot cheaper than the private sector which is effectively going to be in for another tax slug. I believe that it requires only an elementary deduction to realise that such an impost on the private sector, which is already reeling under the taxation system of the Hawke Government, will have a significant impact on business operations and on private people.

To cope with these additional costs, the private sector will be forced to consider a number of options. Firstly, it will be forced to increase the price of consumer goods and services, a move that is going to aggravate the already unacceptably high inflation rate of this Government. Secondly, the private sector will be forced to reduce staff. Thirdly, in some cases it will be forced to cut investment. Australia's weakened economy cannot afford any of these three options. They are being forced upon us by this greedy Government which seems incapable of understanding the impact of its tax decisions on ordinary people. The problems inherent in the imposition of provisional tax instalments really do not cease here. As we have seen in the simplest examples, where an assessment is received prior to 1 December, tax will be paid in four instalments. However, I think most honourable senators will appreciate that there are situations where income is not derived uniformly throughout the year.

Let us look at a few examples. Farmers do not receive their incomes uniformly throughout the year as pay as you earn people do, or as Senator Walsh does with his salary. For such people as authors, builders and consultants the formula laid down in the legislation will lead to major cash flow problems. The Bill only goes part of the way to solving situations where income is derived in lump sums or a series of lump sum type amounts. We acknowledge that there is this so-called 75 per cent rule in the Bill-just listen to this, in section 221yba (2c); that is how complicated this Government has made this Income Tax Act-which provides that the taxpayer must satisfy the Commissioner of Taxation that more than 75 per cent of his assessable income will be derived after 1 December in the year of income, and payment in two instalments would follow such advice.

The big problem for most people is to predict with the degree of accuracy required by this Government how much income will be derived over the next 12 months because, particularly for those whose incomes fluctuate according to factors which are entirely beyond their control, it is a near impossibility. For example, in the agricultural sector we have problems with fluctuating commodity prices and unseasonal weather conditions. These factors-I could name a lot more-can really alter income expectations, which is what we must look at, quite drastically. In many cases the previous year's income does not necessarily cast a mould for the incomes that will follow in subsequent years. The guidelines in section 221yba (2c) simply are not good enough because they do not protect people with fluctuating incomes from paying tax on income which they have not yet received.

It is for these reasons that we believe that taxpayers with variable incomes should not be subject to instalments of provisional tax, particularly those who are governed by Divisions 16 and 16a-the people whose incomes are subject to the averaging provisions; the farmers, authors, inventors and so on. Therefore, I support the amendment moved by the Opposition which will provide that these sorts of people whose incomes are subject to averaging will not be subject to quarterly payment instalments, but rather that provisional tax will be paid in accordance with the traditional system. The cumbersome nature of the system that will be required for the implementation of this provisional tax by instalments scheme is also a matter of great concern to accountants, lawyers and businessmen. In effect, the Australian Taxation Office will have to administer two systems concurrently. In fact if one looks at the variation in levying provisional tax, one sees that there will be more than two systems.

In the first instance, as detailed in the Bill at hand, payments will be levied by instalment where the taxpayer's provisional tax liability in respect of the previous year's income exceeds $2,000. In the second instance, those taxpayers whose provisional income is $1,000 or more but whose tax liability is below $2,000 will be required to pay provisional tax on an annual basis. It is estimated that half of the 1.6 million taxpayers in Australia will continue to pay provisional tax on an annual basis.

The important question to ask is this: How is the Tax Office going to cope with an even more complex system to administer when it is already experiencing extreme difficulty in trying to administer the current legislation? More skilled staff will be required. We have already seen a great exit of accountants from the accounting profession because of the complexity of the tax law and the complexity of company law. The position is getting beyond the comprehension of most ordinary people. That is to be regretted. There are long delays in the processing of assessments. What is needed in this country is genuine tax reform and a simplification of the taxation system. The Government is always talking about trying to simplify the tax laws. However, we find that under this Government the tax laws are becoming more convoluted than ever before. I say to the Government: How about trying to devise a simple tax system? Then its credibility will start to rise.

Senator Walsh —When you get into government you will impose a VAT.

Senator WATSON —We will be in government after the next election, Senator, and we will have a tax proposal before the Australian people. That will provide some choice; it will get Australia working again and it will provide some incentive for people to go out and earn a living. Currently, the provisional tax liability is determined from the previous year's assessment. In most cases it is not unreasonable to expect an assessment to be completed by the due date for the payment of provisional tax-that is, 31 March. However, under the Taxation Laws Amendment Bill (No. 5)-that cumbersome piece of legislation that very few people can understand-provisional tax liability for the year will continue to be defined under yet another section-section 221ya of the principal Act. Given the enormity of the task, the capacity of the Tax Office to have completed assessments in time for the calculation of the first instalment of provisional tax must surely be in doubt. That is the point. I would like the Minister to respond to that issue.

Increasingly, under the new proposals taxpayers will be required to self-assess their provisional tax income, upon which instalments will be calculated. As we have already said, in certain occupations such predictions will be fairly difficult given the fluctuating nature of income. The accuracy of the estimates takes on particular importance in the light of-here is another good section-section 221ydb 1aa. Under this section, where an instalment is based on an underestimate of taxable income of more than 10 per cent-that is not much when we consider the fluctuating incomes of those to whom I have referred-additional tax will be payable at a rate of 20 per cent on the short fall from the due date for payment of that instalment to the due date of the next payment. Many people will get caught, and are getting caught, under that. So if a person underestimates his tax he will be penalised by that additional 20 per cent.

I submit to the Senate that the penalty is far too harsh given that many people will experience genuine difficulty in predicting their income accurately. I am not talking about tax avoiders. Under those circumstances, I submit that a 10 per cent discrepancy would not seem to qualify as a substantial underestimate as Senator Walsh claimed in his second reading speech. How can one say that 10 per cent is a substantial underestimate? That is what is implied in his speech. The Hawke Government must try to appreciate and understand that ordinary taxpayers are not criminals, as it makes them out to be, and they should not be treated as such by the Government. I wonder whether the Government will be as diligent in the return of overpayments of provisional tax as it is in countering possible exploitation of the system. Even under the present system, it can take up to 18 months to make repayments where necessary.

The next amendment affects redeemable preference shares and short term share-based financing arrangements. Proposed new section 46c of the Bill is basically a technique to stop tax avoidance by providing for the treatment of short term redeemable preference shares as debt for income tax purposes. In effect, proposed new section 46c will amend section 46 of the Act which concerns a rebate on dividends. Perhaps, as a genuine reform, the Government might like to look at section 46. Then it might overcome many of its subsequent problems. It should be noted that the provisions of proposed new section 46c are short term expedients to overcome practices that have been costly to revenue. We acknowledge that. But the point is that they will have a fairly limited lifespan given that 1 July 1987 is the date set for the introduction of an imputation of company tax. It will not last very long.

Senator Walsh —But the lifespan of the amendment is 7 April 1986.

Senator WATSON —No, the application of section 46 must inevitably have a lifespan. Senator Walsh would agree with that, would he not?

Senator Walsh —The lifespan of the amendment is from 7 April 1986.

Senator WATSON —That is right but with imputation on 1 July 1987 the effectiveness of redeemable preference shares will go out the door. The Minister has to acknowledge that. He would be up to scratch with that, surely. At this time, financing mechanisms such as short term redeemable preference shares will disappear.

Senator Walsh —Yes.

Senator WATSON —Right; so under the existing law, companies paying interest on debt finance are entitled to use it as a deduction for income tax purposes, while the company receiving the dividend is effectively taxed on it. Dividends are not deductible to the paying company, but under section 46 they are subject to a rebate that makes them free of tax, effectively, to the company receiving them. We acknowledge that some companies have been financing their operations by using short term redeemable preference shares as a substitute for debt in order to minimise their taxation burden. Therefore, we are now faced with legislation designed to remove the rebate eligibility on any share dividends used as part of the financing arrangements for an effective term of two years or less.

The idea to try to overcome the problem is commendable. It is the sort of thing that a Liberal government would have done, and has done repeatedly in the past. However, I think that we should issue a warning. Again, this warning will have a fairly limited impact because of the nature of the imputation which is due to come in next year. In order to protect the position of shareholders, all companies should be made aware of the necessity of specifying a date in excess of two years before issuing redeemable preference shares. Companies may find themselves forgoing the dividend rebate automatically should they fail to stipulate a specific day. In respect of the provision of section 46c, I therefore would have to support the amendment which has been put forward by Senator Messner.

It is our intention to submit this provision to the Senate Standing Committee on Finance and Government Operations because unfortunately we find that in the seven-month interim period between the official statement of the Treasurer (Mr Keating) on 7 April 1986 and 28 November, when the Bill first appeared in the House of Representatives-it is now March before the Senate has even looked at it-the Government's announced intentions with regard to the tax have undergone quite a significant transformation. Provisions of the new income tax legislation represent a significant departure from what any reasonable person reading the Treasurer's official statement could have expected. This is bad principle, it is bad government and it is bad law. When people are told of a foreshadowed change the subsequent legislation should reflect in detail and accurately that original statement. This legislation does not reflect that original intention and for that reason we should put it to a committee for further evaluation and further review. Contrary to what the ministerial statement suggests, the provisions of the legislation are not confined to redeemable shares in the strict and limited sense, but it will apply to any shares used as part of a financing arrangement for any effective term of two years or less. These flagrant differences between the ministerial statement and this legislation before this Parliament are to be condemned and deplored and they reflect gravely on the integrity of the Treasurer and of this Labor Party.

Senator Messner —Didn't the Senate Standing Committee for the Scrutiny of Bills raise this question, too?

Senator WATSON —It was also raised by the Scrutiny of Bills Committee, a bipartisan Committee of this Senate. There is no mention at all of the inclusion of such things as rollovers, draw-downs or extensions of facilities in the April statement. However, all these mechanisms do appear in the legislation that we have before the Senate at the moment. I draw the Senate's attention to proposed section 46c, paragraphs (a), (b) and (c). The point is that if a taxpayer took steps in April to bring financing practices into line with the Government's new directives, he would have understandably been somewhat taken aback to find that these conventional arrangements are now subject to the legislation. That is bad when that happens and it is a reflection on the Government. In practice, what this transformation means is that we are faced with a piece of retrospective legislation. Companies which entered into short term financing arrangements involving rollovers, draw-downs and extension facilities between April 1986 and 28 November are now penalised as they are no longer able to incorporate dividend rebates by the revision of the law which they could not have seen without referring to a crystal ball. I think that clock is wrong, Mr Acting Deputy President.

The ACTING DEPUTY PRESIDENT (Senator Elstob) —The time is as indicated. Senator Watson, you had 25 minutes remaining for the continuation of your speech. The time has now expired.

Senator Watson —I seek an extension of time.

The ACTING DEPUTY PRESIDENT — Order! Senator Watson, your time has expired. I call Senator Sanders.