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Thursday, 2 June 1994
Page: 1162

Senator WATSON (10.14 a.m.) —Madam Acting Deputy President, last evening in the debate on the omnibus Taxation Laws Amendment Bill (No. 2) 1994 we were looking at the never-ending saga of changes to entertainment allowances. The amendment before us today actually reduces the taxable value of a benefit where the employer makes a payment or reimbursement to an employee to cover expenses incurred by the employee in entertaining clients or other persons on behalf of the employer.

  In effect, the taxable value will be reduced by the amount of expenditure incurred by the employee in the entertaining of those persons. The result is that only part of the payment or reimbursement relating to the expenditure by the employee or associate will be included in the taxable value. This bill is really a corrective measure and an admission by this government to a serious oversight in the grossing-up changes to the tax laws.

  Employers have major problems in the area of entertainment expenses and tax. It is an administrative nightmare for employers because of the different rules relating to it. Employers have problems with expenditure on in-house provision of sustenance or entertainment versus outside sustenance or entertainment, as well as problems with reimbursement versus credit cards and allowances for direct payments.

  The rules for employers and clients are really quite confusing. In addition, we have this distinction between what we believe to be sustenance and what might be entertainment. We have this distinction about whether the sandwiches and the chocolate cake are entertainment or sustenance. It is quite absurd when employers have to make these sorts of distinctions. It is no wonder that we have grey areas. It is no wonder that two days ago in the House of Representatives the assistant minister ran into trouble when trying to make a black and white categorisation in what is after all a very grey area.

  I remind the Senate that as a result of this push-pull by the government to get this extra money arising from the previous legislation some of these after tax costs can be quite high. These costs can be as high as 129.85 per cent for taxable companies, or 193.8 per cent for taxable companies which have current year losses. I believe that this is going a little too far.

  There was some clarification in a tax determination on 31 July—just one month after the previous announcement—which provided a per head basis for apportionment. That clarified the position a little. But I have many concerns about the government's approach to entertainment and to the FBT generally. The only plausible explanation for the government's approach to entertainment expenses is that it has lost sight of its original policy for FBT. The government now has this unquenchable thirst for what I call the FBT dollars.

  The government has been astute in observing that it is really a big money spinner. If we look at the budget figures we notice that there is a 131 per cent increase to a massive $2.32 billion predicted for 1994-95. Of course, this money that is coming out of employers' pockets could be spent on investment and employing people. Instead of the money going into productive investment—which is not happening in this country—employers are having to pay it out in FBT taxes.

  I congratulate the Treasurer, Mr Willis, on the review of the compliance cost. It sounds great, but unless he is prepared to forgo a certain amount of revenue, I cannot see anything substantial happening in this area. Business is being crippled by the FBT, which is levied at 48.4 per cent—the highest marginal tax rate.

  I would like the tax office and the government to take note of one very important point. FBT returns must be lodged by 28 April, a mere 28 days after the end of the FBT year. I ask the press to take particular note of this: being such a big money earner, this legislation is so complex, is such an onerous burden—given the substantiation requirements—and is such a drain on the cash resources particularly of small business that FBT returns desperately need to be brought into line with income tax return lodgement time. Partnerships and trusts must lodge their returns by 31 October, or four months after balance date where a substituted accounting period is used.

  This would relieve a lot of pressure from small business. Small business cannot afford the accountants which are required to prepare the many types of returns, all of which—FBT, income tax and sales tax—have different lodgement dates. So there is a need for both an extension and some rationalisation because it is a major problem, and I use this opportunity to draw that problem to the attention of the minister, who I hope will pass it on to his esteemed colleague.

  Naturally, time does not permit a full discussion of many of the other measures in the legislation such as offshore banking, units, depreciation of employee amenities and foreign investment funds. However, I turn quickly to the development and general investment allowance. Pleasingly, the allowances are being extended to expenditure on plant, such as railways and pipelines.

  I am pleased about the tax decision to change the $3,000 limit on partnerships, which is not in this legislation but was announced recently by Senator Schacht. In qualifying for that investment allowance, each partner will not have to contribute the $3,000. Honourable senators may recall that this was something of an anomaly.

  I now turn to the capital gains provisions. These were announced on 12 January and have been the subject of some industry consultation; but, not surprisingly, they failed to meet the unanimous approval of the business sector. They cover many aspects, including share value shifting arrangements, transfers between related companies, amendments of assessment, transfer of group company losses and rebate dividend adjustment.

  My immediate question to the government is: why are these provisions necessary when there already exist extensive anti-avoidance measures within our complex tax system? One of the consequences is to make conservative practitioners, who do not carry out artificial transactions at which the provisions are targeted, seem incompetent in the eyes of some of their clients because others within the profession have engaged in these sorts of things, and apparently get away with it until the law is amended. Not attacking it through the general part 4A provision is a bad administrative application by the Taxation Office.

  I am pleased that the government has introduced a series of amendments, particularly CGT ones, which will tend to overcome some of the serious misgivings in the original amendment bill. So we have an amendment bill and then a series of amendments trying to correct some of those worst features. I will just concentrate on this point a little more.

  It is rather abhorrent that people on the fringe edge of the accountancy profession are given something like three or four years grace before the government introduces amending legislation. The government should try to enforce the existing law before it brings in these sorts of things because it only encourages tax avoidance. I have spoken about this matter to the Commissioner of Taxation because there is an administrative problem in not enforcing the law by allowing these people free time of up to three or four years before change occurs.

  Division 16E seeks to overcome a tax deferral advantage associated with the index securities compared with the variable content securities. The only reason I am not putting up amendments to these particular provisions is that they are only of a short-term measure anyway because the government has already issued a consultative document, and down the track there will be quite extensive amendments to securities generally.

  So, given that it is only a part-time feature, I do have this abhorrence to the daily internal rate of return basis applicable here. But, seeing it is only on a six-month basis, it is not quite so abhorrent as the daily internal rate of return which can take up to 14 pages of substantiation, which is ridiculous at a time when the government is talking about tax simplicity.

  Why is this amendment necessary? It is necessary because the government's statutory corporations and agencies have been involved in a tax deferral scheme and a scam. Government-owned public utilities have been involved in a tax scam of deferring their liability. That is why we have this amendment, which again is going to affect all taxpayers, including the private sector. The present rule brings to account the fixed component of a variable return security evenly over its term. This will no longer apply because the amendments before us today will require the whole return—both the fixed and the variable components—to be brought to account on a six-monthly compounding basis, consistent with the existing rules of 16E, which apply to the fixed return securities.

  There is a flaw in the logic of this. The logic says that we have to get the economic substance, and that is why the concept of a six-monthly internal rate of return is necessary; but if the government is going to use that argument it should also use an inflation factor adjustment. We do not see that here. We are bringing forward the collection of this revenue on an economic theory purist argument without following through the whole of the argument. If we are going to use that argument we should use an inflation adjustment factor.

  I will not go into further detail on 16E because I believe that it will be only a short-term measure and that there will be substantive adjustments. It is necessary to distinguish between banking operations and other sector operations; it is necessary to distinguish between interest and discounts and what I call valuation-type securities or derivative-type securities. (Time expired)