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Wednesday, 16 March 2005
Page: 12


Senator MURRAY (9:53 AM) —The Tax Laws Amendment (2004 Measures No. 7) Bill 2005 is largely a technical bill. It contains, however, 11 distinct schedules and another 120 pages of taxation law, coupled with 201 pages of explanatory memorandum. So although it is technical, it is certainly not simple. It is about the same size as the Tax Laws Amendment (2004 Measures No. 6) Bill 2005 the Senate passed last week, adding to the piles of legislation in this field.

The Australian Democrats believe that the only really controversial schedules in this bill are schedules 1 and 5. These schedules were subject to the scrutiny of the Senate Economics Legislation Committee last month, which was very helpful. Before turning to those schedules and to prolong the suspense—as I am sure everybody is in suspense!—as to our position on these two schedules, I will briefly outline the merits of the other nine schedules.

Schedule 2 allows small business to use accrual accounting and the simplified tax system. The so-called ‘simplified tax system’ was introduced from 1 July 2001 as a measure to reduce compliance costs for small business. It allows application of a simplified depreciation system and simplified treatment of trading stock. Additionally, the simplified tax system required taxpayers to use the cash method of accounting. This schedule allows small business to use the accruals method if they consider it more appropriate for their business. The revenue cost of this proposal is estimated to be $125 million for the 2006-07 financial year and $130 million for the 2007-08 year, but obviously this is mostly a simple timing issue. Despite some reservations that this proposal overly complicates a supposedly simple regime, it will have Democrat support.

Schedule 3 to this bill amends the Income Tax Assessment Act 1936 in the event of a corporate restructure to allow taxpayers who have deferred the income tax liability on a discount received on shares acquired under an employee share scheme to postpone their taxing point. The revenue cost of this measure is considered unquantifiable but likely to be small.

Schedule 4 amends a fringe benefits tax exemption for long service leave awards. The current exemption is for $500 for 15 years of service, and this amendment will double this to $1,000. The Democrats support this measure. We should be encouraging employees to stay with employers who do the right thing and encourage commitment. We should not be taxing employers who generously reward their long-term staff.

Schedule 6 contains yet another consolidation measure. It clarifies some of the consolidation laws and ensures that the regime interacts with other aspects of the income tax law. Schedule 7 is another measure aimed at the simplified tax system. This schedule ensures that the rollover relief available for partnerships under the uniform capital allowances regime is also available in relation to depreciation assets allocated to simplified tax system pools. Again I draw attention to how complex this simplified tax system is becoming. This measure has a cost to revenue of around $5 million a year.

Schedule 8 provides greater flexibility and reduces compliance costs and ongoing uncertainty surrounding family trust elections and interposed entity elections. This measure has no revenue impact. Schedule 9 corrects a minor technical defect in the treatment of non-commercial loans. Schedule 10 to this bill makes minor corrections and amendments to the taxation laws. The explanatory memorandum states:

These corrections and amendments are part of the Government’s ongoing commitment to improve the quality of the taxation laws. They fix errors such as duplications of definitions, missing asterisks from defined terms, incorrect numbering and referencing and outdated guide material.

Those things are very helpful, but it is tempting to have some fun at their expense. There are pages of those sorts of amendments—maybe 20 pages—with some delightful components. For example, page 105 of the bill, at item 242, says:

Items 6 and 7 of Schedule 1

The items are taken never to have had effect.

You find items in the bill which say:

Omit “*company”, substitute “company”.

You find acres of statements about Australian residents which say:

Omit “not an Australian resident”, substitute “a foreign resident”.

This is the stuff of a technical draftsperson’s nightmares, to make sure that they have tidied up all the typos, mistakes, errors and contradictions that are in the law. But, I guess, behind making fun of that is the serious intent of pointing to the need to do the tidying up effort, and it has to be done.

Obviously, and I have long said so, the tax laws should be simplified. By broadening the base, by strengthening the anti-avoidance provisions and by reducing rates, you can achieve a greater simplification. But, unfortunately, simplification will require a complicated process. It is a disgrace that the income tax laws are still contained within two acts: the 1936 act and the 1997 act. These two acts overlap, interact and duplicate each other to determine a taxpayer’s final tax position. This may be fantastic for the accounting and taxation advisory industry, who earn a fortune off the back of it, but it does not give ordinary Australians much confidence in the system or much confidence that they are correctly meeting their tax liabilities.

Schedule 11 makes a minor technical amendment to the refundable film tax offset. The Democrats obviously welcome any attempts by the government to promote and encourage the Australian Film Industry, but this measure does not have any revenue impact.

As I mentioned earlier, the controversial aspects of this bill are schedules 1 and 5. Both schedules were subject to Senate Economics Legislation Committee scrutiny, and the evidence indicates why the Australian Democrats have decided to oppose schedule 1. Schedule 1 contains the 25 per cent entrepreneurs tax offset. The evidence to the Senate committee showed that not only is the legislation overly complex and, in my opinion, somewhat badly drafted but most of all it is bad tax policy. There is no evidence whatsoever for its need. There is no evidence whatsoever that Australian micro and small business lack sufficient entrepreneur spirit or that their numbers have been held back by lack of entrepreneur spirit. In fact, the reverse is the case.

There is a shortage of workers in a number of trades—for example, plumbers, bricklayers, boilermakers and carpenters. No evidence was provided that the entrepreneurs tax offset would encourage workers into these areas, particularly due to the limitation of a $75,000 turnover threshold. Of course, to obtain the full tax offset, a business must have a turnover of less than $50,000. Evidence provided to the committee by the Australian Taxation Office indicated that less than a third of plumbers, bricklayers and carpenters would meet the $75,000 turnover limitation anyway, so there is no entrepreneurial motivation, apparently, for the remaining two-thirds of those small businesses. This is an untargeted measure, generated in the heat of an election campaign, that will apply equally to all classes of micro and small business—some 300,000 apparently—whether the goods and services they provide are in excess or in short supply.

As I asked in my Senate minority report: why is this incentive not just targeted at micro and small business areas that are in short supply? The answer is that this policy is not an incentive at all; it is a political gift. There is no evidence that schedule 1 will result in further entrepreneurial activity being encouraged, although, prima facie, it will make businesses that falls within the threshold more profitable. This measure creates yet another class of what Treasurer Costello calls rent seekers. The coalition’s entire income tax strategy seems at present to consist of parcelling out income tax concessions to targeted constituencies in an apparent attempt to secure their vote. That may be in the coalition’s political self-interest, but it is not in the national interest and it is certainly not in the interest of a simpler and more effective tax system.

Fortunately, some coalition backbenchers are starting to rebel against blatant political pork-barrelling and are focusing on the bigger policy issue. They include Mr Malcolm Turnbull, with his recent remarks, and what is becoming known as the ginger group—who I would hope recognise this legislation as bad law and bad policy. Unfortunately, I very much doubt that the Liberal backbench campaign for structural income tax reform would extend to crossing the floor on issues like these, and I also very much doubt that Labor will find the energy to really knock over bad policy like this.

Changes to the Income Tax Act such as this only serve to further complicate an already excessively complicated income tax system. This schedule may only be nine pages long, but it could only be followed by an accountant with a good understanding of taxation law and it is likely to result in additional compliance costs. No estimation has been made of the compliance costs for taxpayers or for the Taxation Office. I do not want to fully explain how the offset works in this short address but I would like to quote from the speech made in the second reading debate in the House by Labor’s Mr Tony Burke. I will just repeat a small portion of his explanation as to how the offset works:

You are then asked whether your STS group turnover equals $50,000. If the answer is yes, you multiply A by the STS percentage; if the answer is no, you calculate the STS phase-out fraction by subtracting the STS group turnover from $75,000 and then divide the result by $25,000. Having done that, if you went through the first path, where it was equal to $50,000—and you multiplied A by the STS percentage—then at that point you have the ‘entrepreneurs’ tax offset’. If you went through the other path, where you performed the fraction that divided by $25,000, you then finally multiply A by the STS percentage and by the STS phase-out fraction to get the entrepreneurs’ tax offset.

You can only think, ‘Phew!’ when you hear that. The House of Representatives Hansard records that at that point Mr Alan Cadman, the Liberal MP for Mitchell, interjected with the comment, ‘Mind numbing.’ I cannot help but concur with Mr Cadman’s comment about his own government’s legislation.

One journalist, Peter Switzer, reported on this bill in the Australian on 15 February 2005 under the heading ‘Accountants the victors in tax offset’. He quotes a chartered accountant who thinks it will take one to two hours to sit with a new client to determine their eligibility for the tax offset. The estimated cost of around $400 would be payable irrespective of whether the small business owner is actually eligible for the offset. All of this serves to again emphasise that what is needed in income tax reform is not these kinds of confusing and complex political gifts but major structural reform. Tinkering at the edges just will not do. The income tax system must be simplified and tax concessions that feed rent seekers and create inequities must be done away with, because this creates yet another class of privileged taxpayers who do not deserve that particular privilege and political gift.

The Democrats strongly support the comments of people like Mr Malcolm Turnbull with respect to the need for tax reform. In fact I cannot help but feel that he and other Liberal backbenchers have been not only reading our tax policy but following the campaign that I have been running for the last few years. It is gratifying that this is now starting to get the sort of attention that, in our view, has been needed for a long time. Simplifying the system and broadening the income tax base would free up money for genuine tax cuts and greater equity. Certainty and equity in income taxation are vital. Certainty and equity should be delivered by a three-part plan phased in over a number of years in order to ensure affordability.

With these objectives in mind, my priorities would be a $20,000 tax-free threshold, indexation to end bracket creep and possibly a $120,000 top rate threshold—all of which should be aimed at over a number of years and as they become affordable, but in that order. At the very least the government needs to accept that it is entirely inappropriate to tax income below $12,500, which is the estimated minimum subsistence income. In the meantime, the Democrats’ priority is to keep addressing the needs of low-income workers, to try and get their disposable income increased and their living standards improved, to reduce their cripplingly high effective tax rates and to help poorer Australians move from welfare to work. We would hope that one day the government will adopt that simple kind of approach to restoring equity to our tax system.

We think the best single way to restore equity and to deliver structural reform is to start by raising the tax-free threshold. This has a side benefit of flowing on to all Australian taxpayers, not just a favoured few, but it has the main benefit of having its principal effect on low-income and middle-income Australians. It is also a policy which is easily understood by taxpayers, which is a core need in any tax reform. I and others are well aware that there are alternative methods by which you can tackle tax reform, but we need to focus on the psychology of taxpayers, on their need for things that they can understand, that they understand to be fair, which are easily discussed and easily understood. Our income tax system is not easily understood. That is an important part of a tax system. If people think they are getting a fair go, if the psychology is attended to as well as the economics, then you are likely to have far less tax avoidance than we have at present and a far cleaner and easier to administer system.

The Democrats say that this bill’s complicated, unnecessary and unfair tax cut for a selectively limited group should be shared by all taxpayers. The evidence presented to the committee demonstrated that the entrepreneurs’ tax offset in schedule 1 is unduly complicated. Further, neither the Treasury nor Taxation Office representatives could demonstrate any measurable economic or social benefit from the proposal. Our preference is to redirect the $400 million a year Treasury estimated cost of this proposal to increase the tax-free threshold from $6,000 to $6,260. At an estimated cost of $398 million a year, this would provide Australia’s nearly nine million taxpayers with a $44.20 a year tax cut, or around 85c a week. The 2003 budget tax cuts were referred to as the sandwich and milkshake tax cuts. Our redirection of this unnecessary, ill-conceived and badly targeted proposal would provide all Australians with a Freddo Frog tax cut.

We are also concerned about the possible tax avoidance opportunities, as the legislation makes it clear that taxpayers may claim more than one tax offset. Arguably a relatively well-off taxpayer could restructure their affairs so that they run a diverse range of businesses, each with a turnover under $75,000, and claim an entrepreneurs’ tax offset on each. It has often been stated that the three elements of an ideal tax system are efficiency, simplicity and equity. In our opinion the entrepreneurs’ tax offset meets none of these criteria and arguably makes all three worse. The Australian Democrats will be opposing schedule 1 and we will introduce an amendment, as I have outlined, to provide an income tax cut for all Australian taxpayers. The cost of both proposals is the same, so senators can choose between an ill-conceived, unnecessary and complex tax incentive for a small, exclusive group in the government proposal or the alternative, our proposal for a simple small tax cut for all Australian taxpayers. This would at least send a message as to the Senate’s views on priorities for future tax cuts.

In respect of schedule 5, the petroleum exploration incentive, I will not deal with that at length. I was surprised that the estimated cost of $17 million over three years would have any industry benefit. The evidence provided to the Senate was to the contrary. However, no consideration was made as to the degree to which Australia’s long-term greenhouse mitigation costs may or may not increase as a result of this $17 million additional investment in oil and gas exploration through the PRRT system, which, as we know, is offshore. The Australian Democrats have a history of supporting prospecting and research and development measures. We opposed the government’s cost-cutting in this area, and later data has proved us right. We do not oppose schedule 5, which allows a 150 per cent uplift to certain exploration expenditure conducted in the first term of an exploration permit in a designated frontier area. For my further views on that matter I refer the chamber to my minority report. Whilst I still have the time, I want to move my second reading amendment, which has been circulated in the chamber. I move:

At the end of the motion, add:

“but the Senate calls on the Government to commit to further incentives for the renewable energy industry, as an even-handed offset to match the benefit provided to fossil fuel industries through the frontier areas exploration tax benefits established by this legislation”.

In conclusion, I return to schedule 5. I for one would like to see much more gas found, particularly as gas is a direct competitor to coal for electricity generation. (Time expired)