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Thursday, 25 August 1994
Page: 428

Senator WATSON (6.41 p.m.) —I will preface my comments by saying that the public hearings of the Senate Standing Committee on Finance and Public Administration provide an invaluable opportunity to canvass a series of topical and technical questions on a variety of issues such as rulings, capital gains, sales tax, tax law improvement projects, the child support system and controversial tax rulings. The hearings are, I believe, a mutually useful exchange of views between the Australian Taxation Office and the community, through this parliament.

  I did note that, unlike in similar hearings in previous years, not as many big ticket issues were raised on this occasion. I think this reflects favourably on Mr Carmody and his staff at the Taxation Office, in addressing in a timely manner issues which are raised in these technical forums. I must also thank Mr Nolan, head of the tax law improvement project, for the length of his explanations about compliance costs to business and the simplification of the Income Tax Assessment Act.

  I now wish to take a few minutes of the Senate's time to address a number of unanswered and outstanding issues. Thresholds may remain unchanged for many years and, thus far, the Taxation Office has not had in place a mechanism to automatically review thresholds as time passes. The only way that thresholds can retain any true meaning is to index them automatically with movements in such indexes as the consumer price index and keeping vigilant about them as time passes.

   The second matter relates to the fast-tracking procedures implemented by the Taxation Office. Comments made by the office about objections against assessments or amended assessments being fast-tracked in the same manner as contemplated for objections against private rulings were beneficial in explaining the views held by the Taxation Office on this issue. However, I do have strong reservations about whether those involved in the fast-tracking process agree with the views expressed. I will be paying particular attention to Taxation officers' conduct with respect to this issue to determine whether my belief will be vilified.

  Next, I would put on the record that during the hearings I sought an explanation of the considerable delays in obtaining rulings about the Australian horticultural project, which newspapers have termed the `wildflower project' in Western Australia. Much to my disappointment, my concerns were unanswered, owing to section 16, the privacy provisions of the Income Tax Act, since they were essentially private rulings.

  I am concerned about two aspects of the matter: firstly, the six-year delay in providing the ruling; and, secondly, the ruling was retrospective in seeking to deny deductions which were previously accepted in investor returns. The Taxation Office did indicate that it has some problems as there were requests for rulings by promoters of schemes for passing on to others when the Taxation Office does not know the circumstances and the purpose of each particular investor. I remind the Senate that private rulings can only be used by the particular person receiving the benefit of the tax ruling.

  I am really concerned that the problems now being faced by investors in that project will not be repeated in other schemes such as forestry investments, which are often advertised as tax minimisation, and other high yielding sorts of projects. Investors and project managers, I warn, need to be aware that many tax shelters may fail to deliver on their central promise of being the big tax deductions for expenses, such as prepayment of expenses for agricultural projects. I urge everyone entering into such projects to heed such advice and approach such investments with caution.

  The time constraints of the hearing did not allow me to adequately pursue another important issue; namely, section 51AD. During the hearing I referred to a series of draft rulings, including TR94/D27. I raised that it had been suggested that `the rulings could cause some taxpayers to be technically insolvent, although they have not intentionally sought to benefit from a prescribed tax mischief'.

  I remind the Senate that section 51AD was apparently introduced to overcome abuses by financiers obtaining leveraged property deductions where the real economic ownership of the property rested in a non-taxable entity. The difficulty is that the legislation applies to circumstances far wider than originally intended. For example, if an ordinary mum and dad acquire a residential investment in a special purpose entity—say, in a company or a trust—and use more than 50 per cent debt, then section 51AD will automatically apply.

  Section 51AD is particularly onerous as it disallows deductions in all years. I call for the government to urgently review the operations, particularly the wider ambits, of section 51AD. Many thousands of ordinary taxpayers have serious section 51AD problems that they may not necessarily be aware of.

  Another matter which I raised during the hearing and which requires further comment relates to my questions about the inequity of taxing friendly societies at rates greater than those paid by their investors. I have been informed that the friendly society industry undertook a study in 1992-93 which revealed that over 40 per cent of investor members of friendly societies received a pension payment and that the percentage of friendly society members who are pensioners can be expected to increase. The study also revealed that the average income of friendly society investors who were pensioners was $9,903, whereas the average income for investor members of friendly societies was $18,357.

  The ATO also indicated that it would take into consideration the idea of certification of low income giving access to concessionally treated savings in relation to friendly societies. I call on the government to give this matter serious consideration.

  Another issue which is not resolved relates to the operation of the Taxation Relief Hardship Board. I raised my concerns about the large delays in processing applications. The number of applications per year is falling. The tax office's response was disturbing. It showed that the board has met on fewer occasions in recent years, justifying this on the basis that meetings were difficult to arrange owing to differing priorities and activities of the other departments from which representatives forming the board are drawn. This is not a satisfactory explanation for those taxpayers who have made an application and who must wait in limbo for quite a considerable period.

  I am pleased to say that, following a meeting this afternoon with the managing director and other officers of the research and development tax concession branch, many of the concerns which I sought to raise during that hearing about the Industry Research and Development Board, and in particular syndicated research, have been allayed. I will take a few minutes to draw the Senate's attention to the issues raised.

  The objective of the 150 per cent tax concession for research and development is to encourage increased investment in R&D by Australian companies in order to make them more innovative and to increase their international competitiveness. I remind the Senate that the concession is a permanent and a positive provision of the Income Tax Assessment Act. The white paper has introduced a number of initiatives to the tax concessions for syndication, including lowering the R&D expenditure threshold for participation in the R&D syndication from $1 million to $500,000 and reducing administration costs by developing a generic syndicate structure to facilitate access to the scheme by SMEs.

  During the meeting I pointed out that there was a belief that the board and the ATO were rejecting finance schemes which involved tax loss companies—schemes which were readily approved in the past. The general manager of the branch advised that there were a number of reasons for the low approval rate: firstly, there was a higher than usual inflow of applications due to the 30 June timing of that particular meeting; secondly, that seven out of the 20 applicants were new structures and arrived after the cut-off date for receipt of the papers; and, thirdly, that a number of the schemes had interposed entities which had the effect of a tax benefit without making a prescribed benefit to R&D. However, I was assured that the schemes were not knocked out because they were tax loss companies. In fact, the whole purpose of the arrangement is to encourage tax loss companies to participate.

  I also raised the issue that there seemed to be a change in attitude in relation to what is an acceptable period for the `commensurate period' and that an almost non-negotiable period of seven years was a board and ATO requirement. During this afternoon's meeting, I was advised that the board can appreciate problems, particularly in the areas of communications and information technologies, and that a shorter period may be appropriate. I was also advised that this is an issue that the board will raise with the Taxation Office and that there is really nothing that specifies the seven-year time period. I strongly urge the ATO to be more flexible in its attitude.

  I understand that the Bureau of Industry Economics has concluded a review of the 150 per cent tax concession and that the rigidity of what is known as the PUT option could, it acknowledges, disadvantage some researchers. During the meeting I also sought clarification of the government's policy in relation to participation of tax exempt bodies other than those on the register of commercial and general bodies. The officers informed me that the changes brought about by the 1992 budget had the desired effect of excluding tax exempt bodies in the public sector from participating where there was a guaranteed return.

  Mr Acting Deputy President, in view of the fact that the remainder of my speech is only one page in length and contains issues I want to put on the record, I seek leave to incorporate the rest of my speech in Hansard.

  Leave granted.

  The speech read as follows

I also queried the Board about the perceived differences in interpretation of government policy by the Board and the ATO. The Board advise that it was not aware that the ATO has rejected syndicated projects that the Board has approved because most syndicate promoters have a joint approach to both the ATO and the Board. The role of the Board is to issue certificates—as to R & D—yes or no.

The Board also briefed me on its staffing arrangements. With increased staffing why were there backlogs and delays. The Board advised that sometimes it was difficult to get a quorum as there was a conflict of interest with absence of Board members creating problems in getting a quorum for meetings.

I shall conclude this evening with probably the most controversial view expressed by the ATO during the hearing relating to the position where you have a public ruling and contrary case law. The Acting Chief Tax Counsel advised that a public ruling continues in operation despite contrary case law. The application of that view is inequitable to the ordinary taxpayer. A taxpayer is only in a position to self-amend in such a situation if they are aware of case law and matters being appealed. Taxpayers do not—and should not be required to—keep abreast of developments in taxation legislation and how the legislation is to be interpreted through tax rulings and determinations, meetings of the ATO liaison group meetings et cetera.

By continuing to enforce a public ruling whilst a matter is proceeding through the Court, the Australian Taxation Office appears to be taking advantage of the "information gap" facing taxpayers and extracting taxation revenue, which may not have to be gathered. This position needs to be addressed immediately to restore fairness to the system.

I again thank the officers of the Australian Taxation Office for attending the hearing and hope that they give my comments the serious consideration they require.

  Question resolved in the affirmative.