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Monday, 21 October 2002
Page: 5523


Senator CONROY (5:36 PM) —The New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002 brings forward a further series of measures from the Ralph Review of Business Taxation. The opposition indicated clearly in the House that we support the principles underlying this bill. However, we asked for it to be referred to the Senate Economics Legislation Committee to enable more detailed scrutiny of this extremely complex legislation. Senators would be aware that the committee report was tabled today.

Having considered the evidence presented to the committee, the opposition continues to have reservations about the implementation of some of these reforms. In particular, we remain concerned about the impact of the compliance costs of both the new consolidations and the value-shifting regimes. We also remain concerned about the overall revenue impacts of the business tax reform package. I will speak in more detail about these reservations shortly; however, on balance, we consider that the evidence provided to the committee suggests that these measures will make a positive contribution to business tax reform. On this basis, the opposition is willing to support the bill. We will of course keep a watching brief on the continuing issues of concern as the measures come into operation.

Let me now make some overview comments about each of the individual measures before turning to our continuing concerns in further detail. The consolidations measure, a key recommendation of the Ralph review, will allow groups of wholly owned entities to choose to be taxed as a single entity rather than on an entity by entity basis. The second tranche of consolidation provisions in this bill sets out cost-setting rules for the initial formation of the consolidated group. It also deals with the treatment of attribution accounts held in relation to interests in foreign entities and with the transfer and pooling of foreign tax credits. Overall, the consolidation measure is expected to cost approximately a billion dollars over the forward estimates period. I note that this second tranche modifies a number of the ongoing rules set out in the initial tranche of legislation, addressing the revenue integrity concerns pursued by the opposition in both houses and through the Senate committee process.

These changes are welcome, as are the further integrity measures set out in the third tranche, which was passed by the House last week. As I indicated during the debate on the first tranche of consolidations, the opposition has consistently supported the principles underlying this reform to minimise compliance costs and to strengthen the integrity of the tax system. We continue to support those principles. This bill also introduces a general value-shifting regime, GVSR, which is another recommendation of the Ralph review. The regime applies mainly to interests in companies and trusts that are not consolidated but meet control or common ownership tests. The value-shifting regime targets arrangements that distort the relationship between an asset's market value and its relevant tax cost base. The GVSR is expected to result in a gain to the revenue of $480 million over the forward estimates. The opposition supports this reform in principle to strengthen the integrity of the tax system.

The bill also contains provisions to provide tax relief for demergers. These aim to ensure that there is no capital gains tax event for a restructuring that leaves the underlying economic position unchanged. This measure also originates from a recommendation of the Ralph review. However, the actual provisions in the bill go significantly beyond the original recommendations. The revenue cost of this measure is listed as `unquantifiable' due to the difficulty in estimating the extent of behavioural change induced by the measure. The opposition supports the principle of this reform to ensure that taxation does not unnecessarily drive the choice of structure in which a business chooses to operate. Finally, the bill contains some consequential amendments that arise from the government's new imputation system. These will ensure that entities effectively owned by nonresidents and tax-exempt entities cannot trade the benefits of the franking credits. The new imputation system is not expected to have any revenue impact. This is an uncontroversial reform, and Labor supports it.

Against this background of in-principle support for the measures, let me now turn to some remaining areas of concern regarding the detail of the legislation. Many witnesses providing evidence to the committee highlighted the high degree of complexity of these business tax measures. It is no wonder they did so: the three tranches of bills containing consolidations by themselves come to more than 650 pages of new legislation and nearly 900 pages of explanatory memoranda. In its submission the Council of Small Business Organisations of Australia noted that `the legislation appears difficult to understand, in particular trying to match up both the 1936 and 1997 tax acts which themselves do not necessarily fit well together'. Mr John Morgan, of Freehills, noted that `the detail set out below is horribly technical' and went on to say that `this is revealing in itself about the complexity of the legislation'.

Of course, I recognise that consolidation is a major measure and that the bills have also covered some other substantive measures, such as the new value-shifting regime. Dealing with complex taxation concepts and transactions must, by necessity, introduce a base level of complexity into the drafting, but the sheer volume and intricacy of the provisions being brought forward in this area mean that a general, interested taxpayer cannot possibly understand anything more than the highest-level summary of the legislation. Evidence provided to the committee suggests that tax agents are not that much better placed, particularly since they are still coming to terms with the continuing debacle of the so-called `simplified tax system'.

I repeat the call of the shadow Treasurer in the other place for the government to give proper attention to clearer, plain-English expositions of the tax principles in the legislation itself and in the explanatory material prepared for the parliament. It is high time the government recognised the damage this increasing complexity is causing. It is the single most important reason behind the continuing anger about the compliance burden imposed by the tax system on Australian business. With regard to the current legislation, a great deal of concern was expressed to the committee regarding the start-up compliance costs imposed by this new consolidations regime, especially for small business. For example, Mr Paul Drum, from CPA Australia, noted in oral evidence:

... the feedback from our members is that it costs between $25,000 to $30,000 to work through the exercise on whether or not you should consolidate. The answer at the end of the day might be no, you should not, but you still have to do the work to determine what best suits your group.

Mr Ken Mansell, from the Institute of Chartered Accountants Australia, stated in evidence:

The cost that we were looking at—and we are talking about a large listed organisation—was up to around $50,000 or $100,000 because we had a large group of companies, but I would not imagine that you could do the process for less than $10,000 if you are talking about a series of companies with a number of assets in those companies.

The evidence is clear that the main costs would be at start-up and that compliance costs for many groups may decrease once they are in the consolidations regime itself. However, this begs the question—if, as Mr Tony Stolarek remarked, the start-up costs are like `the valley of death that the light horsemen charged through'—just how many small businesses the government is prepared to sacrifice in the charge.

I note that the committee received somewhat mixed evidence on how many small to medium enterprises would be affected by the new consolidations regime. However, even on the conservative figuring of the Treasury, it would seem that the number eligible to consolidate will be approximately 35,000 groups, with roughly 100,000 entities. As noted previously, the start-up costs will likely be incurred by all eligible groups, just to check whether or not they need to consolidate. So this suggests that the start-up compliance costs across the SME sector alone could be in the order of $875 million to $1,050 million. The opposition believes that this is a serious concern and calls upon the government to re-examine its transitional arrangements for small business. Options were provided to the committee to lessen this initial impact on small business by providing a permanent small business carve-out from the consolidations regime or by extending the transitional period by another year. In the absence of detailed consideration of the full ramifications of these proposals, the opposition is not in a position to endorse either option. However, it is a particularly pressing issue in light of concerns raised with the committee regarding the extra compliance costs imposed by the new value-shifting regime as well.

The committee processes focused attention yet again on the revenue implications of the overall business tax reforms. As I indicated in the debate on the previous tranche of consolidations, Labor's support for the Ralph reform package has always been on the clear condition of revenue neutrality. Of course, we all know that this condition has not been met—just another in a long list of Howard-Costello government broken promises. The government has been trying to hide this broken promise through an increasingly cursory treatment of the costings of the major tax expenditure measures in this and similar business tax bills. For example, for the first tranche of consolidations, the parliament was then being asked to pass a billion dollar measure on the basis of a 50-word costing— $20 million a word! At least on that occasion, further detail on the costings for the measure was provided, on request, through the committee process.

However, a similar level of detail has still not been forthcoming on the revenue questions posed regarding the demergers measure. This is not an accident, and Senator Murray will know this because he attends the same estimates hearings I do. We have consistently asked Treasury for a costing of the revenue position of the entire Ralph package. We have consistently asked for it. We have consistently been fobbed off at estimates because the government know they have ratted on their commitment, in writing, by the Treasurer to Simon Crean, the then shadow Treasurer. They have ratted, and they do not want to tell the Australian community, this parliament, the true cost of the Ralph package as it stands now following the ratting. It is not an acceptable position to have Treasury fobbing us off, it is not an acceptable position for the Australian parliament not to be in possession of vital information before it passes this bill and it is certainly not acceptable for the bureaucrats to just stonewall because it is embarrassing to their political masters. They have a duty to this parliament, they have a duty to the Senate estimates process on accountability, to provide the information to the parliament when the parliament asks for it.

As I said, the revenue cost of this measure was simply listed as `unquantifiable' in the explanatory memorandum, apparently due to the difficulty in estimating the extent of behavioural change introduced by the measure. Evidence provided to the committee by the Treasury indicated that the `costing would be quite small' and `the measure itself is trying to remove tax impediments that stop corporate restructures that would not have otherwise occurred'. However, this clearly does not address the amount of tax forgone on the corporate restructures if they do occur under this new regime. This may be considered a nominal cost, but the opposition considers that it would have helped to form a fuller picture of the impacts of the measure. In particular, given that the demergers measures go substantially beyond what was proposed in the Ralph review, the opposition considers that it would have been appropriate for the committee to have been given some indication of the scale of these extra concessions. Although the evidence to the committee presented a reasonable economic case for each of the extensions, there was no chance to judge the real trade-offs involved because of the lack of information on revenue costs.

The concern remains that business groups are too willing to cherry-pick the Ralph reforms, losing the careful balance stuck at the time to maintain revenue neutrality. I note that a recent article in the Sydney Morning Herald by Jane Counsel states:

... without the tax relief, potential acquirers of either WMC's alumina or minerals arms could have faced a capital gains bill of up to $1 billion.

This is a serious nominal cost and arises from only one of several high-profile potential demergers. We will be watching this new benchmark for the costing of tax expenditures very carefully. We will see if the Treasury displays this free and easy acceptance of the `behavioural change' argument when it comes to tax expenditures proposals in other sectors.

The other outstanding issue from the committee process that I would like to take up is whether demerger relief should be extended to participants in employee share ownership schemes. Labor considers that genuine employee share ownership plans open the way for direct ownership and control by working people of the productive capital to which their labour is tied. They help to emphasise democracy in the workplace, participation by employees in decision making and, ultimately, the cooperative sharing of the benefits of economic success. The evidence provided to the committee suggests that considerable discussion has already taken place at an officials level on this issue. I also note that the minister has flagged that there will be a further announcement regarding the tax treatment of employee share schemes in the context of the government's response to the House of Representatives inquiry into employee share ownership in Australia. I urge the minister to move quickly on this issue to ensure that members of genuine employee share ownership schemes are not disadvantaged in the high-profile demergers which are foreshadowed to occur soon after the passage of this legislation.

We believe that the committee process has made a valuable contribution in providing proper parliamentary scrutiny to the bill. It has brought to light some significant difficulties hidden away in the detail of this very complex legislation regarding compliance and revenue costs in particular. Notwithstanding these concerns of detail, however, we consider that this bill makes a positive contribution to the process of business tax reform. Accordingly, Labor support the bill.