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Wednesday, 16 March 2005
Page: 8


Senator SHERRY (9:34 AM) —The bill under consideration today is the Tax Laws Amendment (2004 Measures No. 7) Bill 2005. On the whole, Labor supports the measures in this bill but notes certain reservations which, in the case of schedule 1 of this bill, were sufficient to warrant further inquiry by a committee of the Senate. That committee has now reported, and I will address its findings shortly.

Schedule 1 creates the entrepreneurial tax concession announced in the election campaign by the Liberal government. Labor accepts the government can claim what is known as a mandate for the broad policy intent of the measure outlined in the election campaign. However, the announcement of an election commitment is not carte blanche to implement a bill that may have adverse and perhaps unintended consequences. Labor sees a potential threat to the tax base in this measure by unintentionally creating opportunities for tax avoidance.

Schedule 1 introduces a 25 per cent entrepreneurs tax offset on the income tax liability attributable to business income for small businesses in the simplified tax system that have an annual turnover of $75,000 or less. Where the simplified tax system, or STS, turnover is greater than $50,000, the offset will be phased out so that the offset ceases once the STS turnover reaches $75,000. In relation to this measure, the explanatory memorandum to the bill concedes that the taxpayer may be able to enjoy the concession more than once, as an individual or as a member of a partnership beneficiary to a trust or shareholder. The turnover threshold is low, at $50,000 to $75,000, apparently designed to restrict the concession to home based organisations. But the question can be asked whether a taxpayer might be able to split income in order to receive the concession on more than one occasion. Three hundred thousand persons are estimated to be affected, leading to an annual cost of some $400 million. If compliance issues resulted in tax avoidance by further income splitting, this cost could expand significantly.

This measure has been put together in haste. It appeared in the last session. There is a case for questioning Treasury further as to what safeguards exist to ensure that this concession will be effectively targeted to genuine small-scale entrepreneurs and will not be used as a tax loophole for higher income households. The safety mechanism in the bill against this occurring is that which applies to the simplified tax system—namely, in order to be eligible for the offset, the grouped activities of associated entities are aggregated for the purposes of consideration of the turnover threshold. Those grouping rules for schedule 1 are those that apply to the simplified tax system. Such rules have been designed to apply to a turnover threshold of $1 million. The question can be asked as to whether the same rules should also be applied to a much lower turnover threshold of income of $50,000 to $75,000—the government’s own identified area—or whether stricter rules should apply. The Labor Party is not presenting amendments to the Senate in this regard, but it is an issue about which we forewarn the Senate and the government in terms of any future activity problems that may arise.

In the debate in the other place, my colleague the member for Hunter and shadow Assistant Treasurer, Mr Fitzgibbon, invited the minister to address the question about whether the phase-out of the turnover threshold between $50,000 and $75,000 would also create a modest increase in the effective marginal tax rates. I would be seeking an assurance that this phasing out of the measure will entail no significant disincentives. I put on notice that in the minister’s reply to the second reading debate or in the committee stage we would like a response on that issue. The minister in the other place did not respond, in summing up, to the question posed by my colleague Mr Fitzgibbon. I would ask the minister to address this point.

The shadow Assistant Treasurer, Mr Fitzgibbon, also asked the minister to consider whether certain further measures might be warranted to ensure that this measure is better targeted at activities that represent genuine innovation or entrepreneurial activity. On the face of it, this is not really an entrepreneurial offset but an offset for a certain class of taxpayers who may or may not be engaging in entrepreneurial activity. This brings us to the complexity of the system, as it has been proposed, which is aimed fairly and squarely at what are sometimes referred to as microbusinesses. Many of these home based businesses are owned by people who do their own business activity statements and their own tax returns to try to avoid the expense of using an accountant, for example. We have to remember that the limits of $50,000 at the beginning of the phase-out and $75,000 at the end are not profit figures but turnover figures.

This presents a set of complexities, problems and subsequent amendments that this parliament had to deal with in respect of the BAS, the business activity statement. Do we really think that people who previously were not using an accountant are going to be able to work their way through the formula proposed in this bill without having to seek formal professional advice? I would suggest that the chances of them needing to seek formal professional advice are much greater. Therefore, the costs to the entrepreneurial activity or business will be increased. How much net money will they receive, having consulted with an accountant? If they shift to an accountant for advice, how much of the end benefit will they receive in net terms? By and large, many of the businesses that are targeted by this measure could effectively miss out on the net benefit, or that benefit could be used to counterbalance accountants’ fees. So to a large extent this could effectively be a subsidy for accountants.

Eligibility for this system is based on turnover, which means that home based businesses with high input costs are put at a huge disadvantage when compared with home based businesses that are delivering a service. For example, if you are a retired executive and are consulting from home, there will be very few input costs. There will be very little difference between your turnover figure and the profit figure on which your taxable income is based. That means that, with the same profit margin, some people are going to find themselves ineligible at a much earlier stage than people who have a service based home business. We fail to understand why the government has decided that, if you are a home based business with very few input costs, you will effectively be given a much better tax advantage than if you are a home based business with high input costs.

I would now like to put forward Labor’s response to the Senate Economics Legislation Committee’s report on the bill. Firstly, Labor thanks the officials from Treasury and the Australian Taxation Office, whose cooperation and assistance to the committee was prompt and extremely useful. We do not in any way criticise those officials for the explanatory memorandum being removed from the web site before the committee hearing had begun. I find some of the abuses, frankly, that are being carried out by this government to reduce accountability quite extraordinary. We will see more of these after 1 July. Removing the explanatory memorandum makes it harder for members of the Labor opposition and presumably my colleague Senator Murray to effectively question and receive detailed, accountable responses. It is made much more difficult if the explanatory memorandum is taken out from under your nose and taken off the web site. We do not blame the public servants for that. The fault lies with the minister. This is just another example in a series of quite deliberate frustrations associated with Assistant Treasurer Brough’s handling of recent taxation legislation.

The committee considered evidence from Treasury and the ATO in relation to the compliance concerns that Labor raised with regard to this measure. As I have indicated, Labor remains concerned about the capacity to use this offset as an income splitting device to avoid tax. The evidence presented to the committee by Treasury and the ATO was not completely consistent. Mr O’Connor, from the Department of the Treasury, indicated that Treasury ‘does not anticipate this measure giving rise to people seeking to split businesses’. Mr O’Connor considered the STS grouping rules to be a robust and adequate defence against tax avoidance by income splitting. However, Mr Konza of the ATO—and I must say that the ATO are at the cutting edge of this sort of undesirable activity—indicated:

We also saw a risk that the same income might be split and people might try to claim the offset a couple of times.

Mr Konza noted that the ATO was developing computer testing software to identify such cases. So we had, on the one hand, Treasury appearing to show no great concern about—perhaps no great understanding of—the level of abuse that could occur. On the other hand, the ATO, obviously having a greater understanding because it is at the cutting edge of taxation avoidance and minimisation schemes, takes the matter more seriously.

I was disturbed during Senate estimates to hear evidence, in a number of other areas, about significant problems the ATO had with their computer software in delivering surveillance of a number of different, mainly noncontentious, programs. I do hope that the ATO, if they are relying on computer testing software to be a line of defence against this undesirable activity, actually get it right and ensure that the problems that have been experienced in the ATO—admitted by Mr Carmody, the head of the ATO, who was obviously very concerned and agitated about it—are addressed and that the computer testing software is effective in minimising abuse in this area. The bottom line is that these STS grouping rules are relatively recent compliance measures and their effectiveness has not really been evaluated.

Labor believes that the government should consider a review of the measure’s effectiveness after a two-year period. Again, I invite the minister to respond to this proposal. Labor agrees with the comments made by Democrat Senator Murray in the minority report of the legislation committee that an a priori case for a subsidy for entrepreneurs has not been made. Labor is concerned that this measure is not directed at effectively fostering entrepreneurial activity but is a tax cut promised in the heat of an election campaign for election purposes. However, Labor will not be seeking to amend the schedule, as I mentioned. A review of the effectiveness, or otherwise, of this legislation—and what it promises to deliver—is, Labor believes, an appropriate way to examine its long-term effectiveness and any issues relating to tax minimisation/avoidance.

Schedule 2 of the bill extends the simplified tax system by removing the requirement that taxpayers must use the STS accounting method—generally referred to as a cash basis of accounting. This is meritorious in that it eliminates the need for an entity to maintain two sets of accounts under different bases—cash and accrual. Schedule 3 provides for rollover of income for shareholders in employee share schemes where there has been a merger or consolidation of a business entity. It allows taxpayers who have deferred income tax liability on a discount received on shares or rights acquired under an employee share scheme to roll over a taxing point that would otherwise occur because of a corporate restructure. This is a useful mechanism to improve labour market flexibility in the case of corporate mergers where such schemes exist.

Schedule 4 allows a fringe benefits tax exemption threshold for long service award benefits. It increases the fringe benefits tax, FBT, exemption thresholds for long service award benefits. This concession is an anomaly that exists from the introduction of the FBT regime. Schedule 5 provides for a tax concession for petroleum exploration. It allows the minister to allocate up to 20 per cent of the annual offshore petroleum acreage release areas as designated frontier areas. It also applies a 150 per cent uplift to certain exploration expenditure conducted in the first term of an exploration permit in a designated frontier area. I might add that there is an issue of disclosure in relation to the costing of this measure. The newly released tax expenditure statement indicated a cost profile of this measure over each relevant year of the forward estimates. However, in the explanatory memorandum of the bill an aggregate is provided only over the four years. I ask the minister to explain this apparent oversight—or is the minister seeking to avoid disclosure of the cost of this measure in the explanatory memorandum?

Schedule 6 involves further finetuning of the consolidation regime. It ensures that certain liabilities taken into account when an entity leaves a consolidated group that correspond to liabilities brought into a consolidated group with a joining entity have the same value at the leaving time as at the joining time. Without this measure there would be potentially more than one basis for calculating liabilities. The schedule also ensures that there is no double reduction in cost base on consolidation, where an entity joins a consolidated group, by removing the requirement to reduce accrued undistributed profits to the extent that they have recouped particular sorts of losses. The schedule also ensures that the rollover relief available for partnerships under the standard capital depreciation allowances regime is available also to depreciating assets allocated to the simplified tax system.

Schedule 8 involves mere technical corrections and amendments. Schedule 9 involves a minor amendment to the refundable film tax offset to allow companies to apply for the tax offset where unused provisional certificates in respect of certain film projects remain in force. This allows companies who have applied for the special depreciation regime for domestic film production to apply for the foreign film tax offset. Although Labor understands that this measure is likely to apply to very few, if any, taxpayers, Labor does not oppose it. We would like responses to the three questions I have posed to the minister, either in the minister’s summing up or in the committee stage. I understand there will be a committee stage, because Senator Murray has flagged some amendments. With those comments, I indicate that Labor will be supporting this bill.