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Thursday, 19 March 1987
Page: 1021

Senator CRICHTON-BROWNE(8.14) —The Senate is debating cognately the Taxation Laws Amendment Bill (No. 5) 1986 and the Income Tax Amendment Bill 1986. The Taxation Laws Amendment Bill (No. 5) 1986 will introduce five changes to the tax laws and the Income Tax Amendment Bill 1986, which consists of but three clauses, will be enacted in consequence of that. The five changes are: To provide for the payment of provisional tax by four quarterly instalments each year, rather than one payment; to bring into the definition of assessable income gains and losses made on certain foreign exchange transactions; to make other consequential changes to the capital gains legislation; to change the law in respect of dividends paid on short term redeemable preference shares, so as to treat those dividends as if they were interest and to tax them; and to exempt from tax income the British Phosphate Commissioners Banaba contingency fund.

Before discussing the elements of this Bill, there is one matter that ought quite properly to be raised right from the start. In my view, this Bill represents yet another example of this Government's announcement of a taxation proposal, waiting months and sometimes even years before it introduces the legislation, then backdating it to the time of the announcement. As all decent and respectable senators are, I am opposed in principle to retrospective taxation laws. Of course, I recognise that it may be necessary on special and rare occasions for governments to announce that a measure will apply from a certain time and then to pass the necessary legislation at a later date. Providing that government gives a sufficiently clear indication of the nature of its proposal, the legislation follows closely on the tail of the announcement and the legislation is not significantly different from the announcement, it is reasonable to make legislation apply from the date of an announcement when the circumstances make it absolutely imperative. Naturally, the more technical the subject and the more that is at stake, the more tightly that government must abide by those rules, particularly in terms of the detail contained in the statements. This Government has not done that.

This Government made an announcement on a highly technical subject of taxation, where there are millions and millions of dollars at stake, then it dallied for months before it revealed the legislation that it proposed to enact. The decision to make gains and losses on foreign borrowings assessable and deductible was announced on 18 February 1986, more than one year ago. Despite the fact that this legislation has not been passed by the Parliament more than one year after the decision was first announced, it is to be backdated until 18 February 1986. The amendments which are now being made in respect of short term redeemable preference shares were announced on 7 April 1986 and are to be backdated to that time.

In the case of the amendments to redeemable preference shares, the Government has compounded its sins. It has stated its position in this explanatory memorandum and then varied it again in the legislation. In the Press release of the Treasurer (Mr Keating) on 7 April 1986, the changes that the Government said it would make are narrower than the legislation it now proposes to enact. This legislation, for that reason, is purely retrospective because the taxpayers had no warning of it. It was not even government by fiat; it was government by confusion and government by legislation backdated to a date which was not the date of appointment in the first place, in terms of the announcement.

On page 4 of the Treasurer's Press release he said that the changes to the law will affect only shares issued after 5 p.m. Eastern standard time on 7 April 1986. Turning to the Bill, the definition of `debt dividend', clearly indicates that the legislation catches such shares if they were issued before 5 p.m. on 7 April. If I am wrong, I will be grateful to learn that I am wrong. The definition states that the legislation will operate to catch short term rollover finance agreements involving preference shares already issued. That is different from the Treasurer's statement which used the words `shares issued after 7 April 1986'. As a result, the Treasurer and the Government will have misled many people who unwittingly relied upon his statement. While on the subject of the Government misleading the taxpayers, I draw the Senate's attention to page 14 of the explanatory memorandum which says that where a shareholder already holds a preference share it will only be subject to this Bill if it is first issued for a short term finance arrangement after 7 April 1986. In contrast, the Bill before us indicates that it will be caught if it is used to extend a short term finance agreement, not only if it is the first time that it has been used in such an arrangement, but also if it is extended. My view is that the Government has quite improperly misled both the taxpayers and the members of this chamber on two counts; firstly, by introducing retrospective legislation far beyond the limits which we indicated in the Treasurer's Press release, and secondly, by using an explanatory memorandum which does not set out the provisions of the Bill accurately and in fact is not a reflection of the Bill itself.

The final section which has been subject to extensive delays is that which deals with provisional tax. The proposed introduction of quarterly payments of provisional tax had its genesis, as we all know, in the September 1985 tax reform statement, as it was called by the Government, and that was about 17 months ago. It is hard enough, in my view, for the average taxpayer to understand complicated tax laws, particularly small business people who, in my view, just cannot be expected fully to comprehend the implications of legislation, never mind seek to find their way through a maze of confusing and conflicting statements.

When one looks at the question of quarterly instalments, one will realise that it is almost impossible for a small business to calculate its tax liabilities so as to plan for a future without the assistance of an accountant. That is a reflection of Government legislation. Even this is not possible when Governments do not produce legislation for an accountant to examine. I suspect that every member of parliament has had representations by and from accountants asking what the Government intends and proposes to do.

I now turn to the substance of the Bill. Of the three major changes, the Opposition has no objection to the treatment of foreign exchange gains and losses as assessable income as a matter of principle. It does not object to the changes made in respect of redeemable preference shares-again on principle. In other words, we support the thrust of the proposal; but we do not support the legislation itself. While I approach any proposal to impose tax with an initial reluctance, I am only opposed to the measure in this Bill-other than the qualifications already cast-which requires provisional tax to be paid quarterly. The taxation of foreign exchange gains and losses is a recognition of the contemporary economic environment in which Australian companies now live. Raising loans overseas by companies for development and expansion is but a part of modern corporate life, and the gains and losses which go with these loans should equally be regarded as normal commercial transactions and treated in the same way as other gains and losses are treated or, for that matter, the way interest on loans is treated, provided that nothing more is cast upon them by the tax net. When gains are made under this proposal they will be taxable, and when losses are made they will be correspondingly deductible.

The payment of dividends on short term redeemable preference shares has been used as a form of taxation minimisation-as distinct from the expression that Senator Walsh would use for it. It has quite properly been used in the form which the legislation has provided, but the Government has sought to change that. In normal circumstances where a company raises a loan it receives a deduction for the interest it pays on the loan. The creditor is assessed for the interest he receives on the loan. An avoidance procedure has arisen whereby a company seeking short term funds does not raise them by a loan but by the issue of redeemable preference shares to another company. When a dividend is paid for what is in effect interest, it is not taxable because of the exemption given to inter-company transfers of dividends, thus the ordinary taxation which one would expect to be levied on interest thus accruing is avoided. If we are to have a fair taxation system it is difficult to argue against these measures in principle, rather than as this legislation proposes.

The quarterly instalments of provisional tax are viewed by the Opposition quite differently. This Bill introduces a requirement to pay provisional tax in quarterly payments on 1 September, 1 December, 1 March and 1 June each year. For the year 1987-88 the first payment will be made on 1 December for the preceding two quarters. In cases where income is received heavily bunched into one part of the year, an exception is proposed. If more than three quarters of the year's income is received after 1 December, provisional tax is to be paid in two instalments, one on 1 February and the other on 1 June. From the Government's point of view this is a particularly convenient change. It makes it easier to manage monetary and interest rate policies. It is far more advantageous to have provisional tax paid in four small amounts than to cause the liquidity rundown which occurs when it is paid in one large annual amount. However, it holds no such advantages for the businesses which have to pay the tax.

The predominant payers of provisional tax are small businessmen. This measure represents yet another broken tax promise made by the Prime Minister (Mr Hawke) and this Government to small business. I remind the Senate that on February 1983, in a document entitled `Labor's Policy for Small Business-An Action Program', a document which was issued in the run up to the 1983 election by Bob Hawke, it clearly says on page 1 that a Labor Government's action program will include `legislation to allow . . . optional quarterly provisional tax payments'. I would underline the word `optional' because if there is one thing that quarterly payments of provisional tax will not be for the vast majority of small businessmen it is optional. The Government has broken its promise because it has introduced in this legislation compulsory quarterly payments of provisional tax. It will be immediately obvious to any small businessman that the quarterly payment of provisional tax will significantly increase the cost of complying with the tax. The first hint of this comes in the explanatory memorandum to the Bill itself. When one looks at the effect it is having on Government in terms of costs, one can understand that those costs will be reflected back into the business community.

The Australian Taxation Office is to incur additional administrative costs for quarterly instalments of provisional tax of $1m for 1986-87, $7m for 1987-88, and $5.4m in the subsequent years. Taxpayers will now be responsible for making payments to the Australian Taxation Office four times per year rather than once. This will be an additional cost to them. It is almost always the case that the additional cost to business will be several times the cost to the Government of administering the tax. As with the fringe benefit tax, this is a cost which the Government chooses conveniently to ignore. It is as if the Government takes the view that because the cost is not apparent to private enterprise, it assumes that it does not exist. Naturally, there is a further cost to business with the tax and this involves the drawing forward of provisional tax payments. The financial statement attached to the Bill indicates that provisional tax payments amounting to $90m will be brought forward as a result of this measure. The Government is therefore putting additional strains on small business cash flows when businesses are battling to cope with record high interest rates-and there are record numbers, as we all know, of bankruptcies throughout this country.

Another problem is the difficulty of making an accurate estimation of future income far earlier in the year than under the present arrangements. As provisional tax now exists in general terms, a taxpayer has his income from a past year increased by 11 per cent as the basis for his provisional tax in the coming year. If he estimates that this will be more than his actual income, he is able to submit a variation form. The variation form must be submitted before provisional tax is due; that is, before March of each year. Under the new arrangements the first instalment is due in September and the taxpayer must make an estimation of his income and decide whether to submit a variation form in August. Estimates will be far more difficult to make, leaving taxpayers in the position of submitting a variation form and running the risk that their income will be higher than their estimate, exposing them to a possible penalty or to paying more provisional tax than is necessary. Of course this is typical of the history of this Government when it comes to matters attaching to small business and taxation. It is stating nothing but the obvious to say that the Hawke Government is the highest taxing Government in Australia's peacetime history.

It is worth examining how the Government has hit the small Australian taxpayer on a low income. In this category there are not only small businesses but workers also. There are those of the socialist bent who might like to believe that the increase in the taxation burden has been on those with high incomes and, in keeping with their belief that Australia should be equalised by chopping down the tall poppies, they would say that this is not a bad thing. Of course the facts are not so.

There are some things which are undeniable. Over the last 25 years, since 1961 or 1962, taxation, as a proportion of gross domestic product, has risen almost 40 per cent. This is in real terms, expressed as a percentage of gross domestic product. In 1961 the taxation paid averaged 21c for every dollar, or slightly more than 4 shillings in the pound. The present average is 31c in the dollar. The Commonwealth tax take has increased from 18.8 per cent of GDP in 1961 or 1962 to this year's Budget estimate of 25.5 per cent. This is an increase of 6.7 per cent, or about one-third of a percentage point per year on average. At the end of the coming financial year the Hawke Labor Government will have been in office for four full financial years. During this time taxation, as a percentage of GDP, has risen from 23.6 per cent at the end of 1983-84 to the Budget forecast of 25.5 per cent, a rise of 1.9 percentage points or an increase of almost two-thirds of a percentage point of gross domestic product per year.

Thus far we can say that the rate of increase in taxation imposed by the Commonwealth Government as a percentage of gross domestic product, under the present Labor Government, has been twice the average rate experienced over the preceding 20 years. As has been recognised by the Opposition parties, it is direct taxation which drains the incentive to work and to invest from both employees and employers alike. While the level of direct taxation has fallen as a percentage of total taxation imposed by State and local governments, it has risen as a proportion of Commonwealth taxation. Despite the fringe benefits tax, the capital gains tax, the abolition of negative gearing and the other tax reform measures, of which the introduction of quarterly payments of provisional tax is but one, the Government has failed in its stated objective of reducing its reliance on personal income taxes.

In the Treasurer's first Budget in 1983-84 income taxes were estimated to constitute 61.2 per cent of total Commonwealth taxation receipts. In his 1986-87 Budget they are estimated to constitute 62.9 per cent of total Commonwealth taxation receipts. So much for the supposed deal of accepting taxes such as the fringe benefits tax and the capital gains tax in return for some reduction in Commonwealth dependence on income taxes.

The same failure is revealed in terms of the effort by this Government to reduce the high rates of marginal taxation. In his tax reform statement the Treasurer said that the highest rate of marginal taxation would soon be cutting in at only one and a half times average weekly earnings. With the expected wage increases this year a person on one and a half times average weekly earnings will still be paying the top marginal rate of taxation. What is perhaps even more dramatic is that through the effects of inflation, assuming a wage increase of around 3.6 per cent-I think that is a modest calculation-almost 550,000 taxpayers will cross an income tax bracket in the first six months of this year. Over half a million taxpayers will be paying more tax this year than they were last year. Of course it is this bracket creep which puts the lie to the claims of the Prime Minister (Mr Hawke) and the Treasurer about income tax reductions. With time, despite the reductions in income tax rates, people will be paying a larger and larger percentage of their income in tax as they go into higher tax brackets.

So during the period of this Government the total Australian tax take has been inexorably and inevitably on the increase. The rate of increase under the Hawke Government has been at a higher than average rate. The fashion in which the Government has extracted that tax has been by the method which is most detrimental to incentive to work, to earn, to strive, to achieve and to seek reward; and that is through direct income tax. This applies whether a person is a small businessman or a blue collar worker. This sadly is the reality of income taxation in Australia at the moment. Under the present tax scales a person on average weekly earnings is well inside the tax bracket and, even after the Treasurer's spurious tax cuts, will be required to pay 40c tax on each extra dollar earned. In fact, we will be inside this bracket once we earn a mere $19,500 or only 85 per cent of average weekly earnings.

Finally in my discussion of income tax, I turn for a moment to those who have been described as the Aussie battlers, the people whom this Government has so often but so falsely claimed to represent. In the last 20 years the amount which a person on average weekly earnings with a wife and two dependent children pays in income tax has increased from 6 per cent of his total earnings in 1961-62 to 17.6 per cent of total earnings in 1985-86. The slice of income which is lost to taxation has almost tripled in that 20-year period. While there may be some reductions in the tax rates recently introduced, particularly in more recent times, the failure of the Government to tackle the question of bracket creep means that within one year at the outside the proportion of income forfeited to taxation will again increase. These are not wealthy people in any shape or form. Raising two children on average weekly earnings and paying off a house is perhaps now an impossibility. This can occur only with both partners working, such is the state of the average Australian family. It is, as I said, the battler-it is the person with whom the Labor Party has claimed to have some affinity- who has been hurt so much by this Government.

The Government's last Budget must now put an end to the suggestion that it is representative of the people. Fully aware of the effects which its ravenous taxation policies were having on families, it nevertheless decided that it did not have the courage to reduce spending so that it could reduce taxation. It increased spending and it increased taxation by an even greater margin, by 11 per cent in fact. This Government does not seem to have the courage to cut spending. It spent millions of taxpayers' dollars in the hope that it could cultivate unto itself support groups in the social welfare lobby and in the public sector. Perhaps that was pragmatism. I rather think that perhaps it was due to the strait-jacket of its socialistic ecological commitment. Be that as it may, the result is the same. I do not know whether it has cultivated these people. I know only that in the attempt it has been prepared to walk over Australian families and Australian business. It has killed the incentive to work and the incentive to invest. It is driving thousands of those who are already in business to the point of bankruptcy and beyond. For every one of those people I can only wonder how many more people, if taxation rates were lower, would have been prepared to start a small business. But as things are at present they cannot see sufficient return and they simply do not bother.

How many people are now out of work and who could have been employed? How many opportunities has Australia lost? How many more will it lose before it has a government which is dedicated to the reduction of government spending and the reduction of taxation? One thing is absolutely certain and it is something of which the vast majority of Australians are now conscious. It is that they will not have a government committed to proper, responsible and reasonable tax reform until there is a change of government from the socialist Government that they now have to a non-Labor government with an undertaking, a commitment and a preparedness to provide incentive to ensure that blue collar workers, middle income earners and small business people are provided with incentive to work.