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Tuesday, 10 December 2002
Page: 7635


Senator MURRAY (10:33 PM) —As the finance and taxation spokesperson for the Australian Democrats, I am constantly faced with the cry for more money. This government, like all of its predecessors, has no option but to keep raising revenue for legitimate Australian needs—for more to be spent on upgrading national security, creating jobs, improving health and education services and investing in the environment for a sustainable future. Revenue prospects are affected by growth prospects. The federal government faces some difficult budgetary challenges in the near future. The precise economic effects of the drought remain unknown but are likely to be substantial; the global economic climate is uncertain; and, if the Iraq crisis blows up, oil prices will go through the roof.

It is important to secure additional revenue sources to cover a very problematic future, and the fairest way to do that is by reducing unfair tax concessions, eliminating tax rorts and cutting wasteful tax expenditure. In this climate, the government needs to examine its revenue base to determine whether there are any sources from which additional revenue could reasonably be derived. For five years now I have been urging the government to address the unfair and costly tax loss that results from a number of super-club businesses abusing the mutuality principle. The mutuality principle was designed as a tax concession to help community services, not to give big businesses a tax lurk. Conservative estimates suggest that closing this loophole could generate at least $200 million in revenue annually.

I fully endorse the principle of mutuality when it is properly applied. The mutuality principle provides that, where a number of persons contribute to a common fund that is created and managed as a common interest, any excess earnings that are generated from the use of the fund are not to be considered income for the purposes of taxation. This affords the private licensed registered club industry in Australia tax-free status on income derived from members. This system offers significant benefits to the Australian community. It allows many community organisations, such as small sporting clubs, to consolidate their financial position. These community based clubs often have very limited resources. This concessional tax treatment enhances their ability to continue to contribute to the community for the common good.

This is an excellent system but it is only excellent where it is not abused—and it is abused, to the benefit of big businesses. Large, big business clubs throughout Australia have diversified into a broad range of commercial activities that are way outside the intention of their original community based charter. Apart from the exceptionally large salaries that seem to float around in these big businesses, the big business club sector is involved in operating accommodation properties, ski lodges, cinemas, IMAX theatres, gymnasiums, travel agencies, bus services, hairdressing businesses, bakeries and butcher shops—all with huge taxpayer subsidies. In the process, such big businesses are not only not paying their fair share of tax but also hurting small and local taxpaying businesses unable to compete with their larger, tax-free competitors.

I start from the premise that, where possible, tax laws should look to the substance rather than the form of commercial arrangements. The fact is that some clubs are major multimillion dollar commercial enterprises. They are clubs in form but commercial enterprises in substance. They should be taxed accordingly as businesses. I will use one example for this speech: a club that has been in the news for other reasons recently. There are many other examples, some of which I have used in the past. The Bulldogs Rugby League Club's audited annual financial reports for the year ended 31 October 2001 show that the tax payable for that year was a net $1,181,494 on a profit before tax that was declared of $5,585,154. In theory, this would represent a 21.1 per cent tax rate. But this profit does not include grants paid by the club totalling $6,745,000 for the year. There is no further notation in the accounts as to how or where these grants were paid. It is unclear from the financial reports whether the grants should have been fully tax deductible. If we look at total profits before allocating any grants, the profit would then be $12,330,154 and the tax rate 9.6 per cent.

While the precise detail of the club's taxation situation is not clear from the financial reports—and that in itself is an issue—it can be estimated that the tax rate was somewhere between 10 and 20 per cent. This is a very low to low tax rate and a good example of the revenue shortfall that government could instead be gaining and devoting to health, education or other areas of community need. This is not the local tennis club that is being concessionally taxed. It is a big business—a major commercial enterprise that is given a special unfair advantage over its competitors.

Let us examine another tax lurk they enjoy. Consider the difference between the gaming machine taxes paid by hoteliers to that of their club counterparts under the New South Wales Gaming Machine Tax Act. On the first $1 million of gaming machine profits, a hotelier is liable for $216,600 while a registered club will pay $87,280. On $2 million profit, a hotelier will pay $525,700 while a registered club will pay only $156,600. The fact that large clubs pay less tax on their gaming operations means that other operations of these big business clubs can be subsidised, including food and beverages, entertainment and accommodation, along with undertaking further activities and capital expenditure. The benefits for an elite group of members and guests in accessing cheap big business club operations subsidised by the rest of us, including dining and bar facilities, gym and entertainment, are to the detriment of both much needed revenue for other purposes and fair competition.

Concern has also been expressed at the fact that the level of community contributions from clubs is not accurately measured. The role of clubs should be to support community projects in sport or welfare. Many do, and the Democrats and I strongly support the continuation of that community service; but there are many cases in which it can be shown that big business clubs are paying nothing or a very small percentage of their profit back to the community. This is an unacceptable distortion and manipulation of the tax system. The commercial activities of private licensed registered clubs operating as businesses should be subject to company tax, as with any other business enterprise. Clubs should also be obliged to pay a mandatory sum to community organisations as part of their charter. Apparent constraints on the Taxation Office and the courts to effectively interpret the current taxation exemption in respect of clubs should be removed by both legislative change and a more vigorous enforcement and evaluation procedure.

One proposal I am aware of is that section 50-45 of the Income Tax Assessment Act should give effect to a test that a club show that the principal activity of that club is in accordance with the original objectives of the club. The effect of this change would be that, where clubs have a principal activity relating to social activity as distinct from sporting or community activities, there would be definitive guidelines whereby the tax office would be in a position to review those clubs in order to reassess their taxation exemptions. I support the notion of community based organisations and clubs and view smaller, tax-exempt club enterprises as legitimate and desirable community subsidised organisations. The large superclub big businesses, however, are clearly major multimillion dollar commercial enterprises that should be taxed appropriately.

The current situation has a severe effect on the hotel and other associated hospitality and service industries. If left unchecked, it will undoubtedly result in reduced investment in those industries, many of which are small businesses. This will be to the detriment of Australia as a whole. I have previously moved amendments in the Senate to try to remove the loopholes that have created this problem. There are of course many views about how best to reform the mutuality principle, and I am not committed to any particular model. I ask again that the government review this situation as a matter of urgency, and I say again that there is about $200 million out there that they could get. It is necessary to assist small business competitors that are being unfairly disadvantaged and to provide revenue to assist in meeting the substantial budgetary needs not just of this government but of future governments.