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Monday, 20 June 2011
Page: 3252


Senator HURLEY (South Australia) (11:19): Capital protected borrowings are indeed a useful tool for conservative investment in the market. The government has recognised this and seeks to put in place a schedule of this TLAB 5 that does continue this type of investment on reasonable grounds. John Murray's excellent definition of capital protected borrowings from the Parliamentary Library Bills Digest on the Tax Laws Amendment (2010 Measures No. 5) Bill 2010 is:

Capital protected borrowings (CPBs) are financial products used for investing in shares. A CPB usually consists of a limited recourse loan and a put option. Under the terms of a limited recourse loan, a lender cannot recover more than the value of the shares if the borrower defaults on the loan. If the value of the shares has increased over the term of the loan and exceeds the loan amount, the borrower pays back the loan amount in cash. Under the ‘put option facility’ if the value of shares has decreased and is less than the loan amount, the borrower transfers the securities back to the lender in full satisfaction of the loan. The borrower’s capital (the amount invested in the product) is therefore protected against a fall in the value of the securities.

This has some loose similarity to the margin loan type system, but it protects the capital while not protecting the interest expense. Under the previous system, both the capital and the interest expense were deductible. The Australian Taxation Office moved to change this. There are very, very few investments where your capital is a deductible expense and the ATO moved against this overly generous system. Indeed, it was overly generous and the popularity of these products was high—and for very good reason: it was a tax system that was far more generous than most. The initial proposal in the 2008 budget caused a reaction against that. The government listened to the concerns in the financial market; they went back out and consulted about the proposals and came back with a different proposal. That proposal was that the interest expense would be looked at under a different way: the variable housing loan rate plus 100 basis points. This was a way to get a midrange that would reflect both a normal interest rate deductibility plus that 100 basis points that recognised the peculiar nature of added expenses in the setting up and running of these types of loans. That is a fairly reasonable rate.

The committee had a look at that and recognised that the margin loan rate was a measure that could be looked at. In the majority report of the committee, we recommended that the rate be set at between the RBA variable housing rate and the margin loan rate. The government has produced a graph that shows that the rate in this bill, of the variable housing loan rate plus 100 basis points, is at the moment exactly in the middle of that variable housing loan rate and the margin loan rate. The government makes the point that, as those rates will tend to come together as the markets settle down, the variable housing rate plus 100 basis points will actually tend towards the more generous end of the system. I take the government's point in that and also the point that the 100 basis points will continue on the more generous end. Although I see some merit in coming closer towards the margin loan rate, I accept that these two rates will converge and that the 100 basis points will be quite a generous outcome for most investors.

It is well known that in our tax system investors will go to wherever they can legally reduce their tax rate. I have no problem with this. The government has no problem with this. But we cannot create distortions in the market by being overly generous in the tax treatment. This is what the Australian tax office realised in the beginning when they withdrew this deductibility. A court case overturned that, and the government has responded in a measured fashion. Again, we have the coalition seeking to be negative about any government proposal; in fact, in this proposal it has taken the outer end of what the industry wants—the very outer end.

My understanding is that industry have indicated that they are happy with the margin loan rate as the indicator. Currently the rate proposed by the government is about 100 basis points below that and, as I have said before, it will probably come closer to the margin loan rate in the end. So the coalition have not only accepted that but have gone to the outer limits of what the industry have proposed as the outcome they wanted. This is not a sensible solution and again shows the coalition treading a more populist path. They are in opposition; they do not see any need to be responsible. I am sure they would have a different view if they were in government.

Senator CORMANN: We were in government; we put a better rate.

Senator HURLEY: The coalition have put in the outer limit of what the industry wanted. The industry have indicated that they would be satisfied with the margin loan rate, which, as of April 2011, was just under 10 per cent. The rate that the coalition are looking for is nearly 12 per cent, which is two per cent above the margin loan rate. So it is an extreme position, done to garner a bit of support and to tread the populist line, when in fact there is a sensible solution.

I am sure that the government position will be supported by an increase in the amount of these capital protected borrowings that come about. Of course we want to make it a possible option, but we do not want to make it so attractive that it is used for tax evasion, and that is the whole point of this schedule. As I said, the committee leaned towards the possibility of bringing it up towards the margin loan rate, but in the end I am happy to accept that what the government has done is a more practical and reasonable solution. It gives certainty to the markets, and it does give that little bit of recognition of the extra expense and uncertainty in setting up these kinds of financial instruĀ­ments. I am happy that this is a reasonable bill and that schedule 2 is a reasonable response to industry concerns. I commend the government for not proceeding with its original proposal but listening to industry response and coming back with a measured compromise.

Before I finish my remarks I want to commend the government on another part of the schedule of this TLIP 5 bill, and that is the tax deductibility of school uniforms. Additional education expenses have mounted considerably over the years, certainly since I went to school. Even in public schools, a lot of parents find themselves paying extra in school fees, extra in excursions, extra in a number of other areas, and this creates a great deal of pressure on families. The expenses tend to occur at the beginning of the year, when it is quite difficult because of expenses arising from school holidays and the Christmas festive period. Parents are hit with a number of expenses at the beginning of the school year and, indeed, all through the school year. I am very pleased that the Gillard government, in recognition of its election policy, has put in place the tax deductibility of school uniforms. It is not only private schools that have school uniforms now; most public schools have school uniforms. My son went to what was then Elizabeth Fields Primary School in the Davoren Park area. It was a public school, and at that time the schools were working very hard to get their children to buy school uniforms.

First of all, it does give that sense of school pride and school identification, which is extremely good for a school. Secondly, it means that to a large extent there is no difference in the dress of the pupils in the school. So it sounds like a very small measure, but it can be very important to pupils. The Elizabeth Fields school that my son went to was in a very low socioeconomic area—one of the lowest in the state, if not the country—but, nevertheless, there were still a range of income levels in the school. There were working parents, single parents who did and who did not work—there was quite a range.

These days there is quite a lot of competition—I suppose there always has been—between children about how they are dressed and whether they are dressed in the latest clothes advertised on TV and so on. I think a school uniform provides equality between children and takes away one of those aspects that can cause embarrassment to children. So I am a big supporter of school uniforms. I think they are a very valuable part of a school and I really think they contribute to the sense of school pride. I have noticed more and more public schools—certainly in the northern area—tend to go towards having school uniforms.

The tax deductibility, of course, benefits those people who are working. The tax deduction applies only to them. But non-working parents get other supports that have been put in place for families of schoolchildren. So I think it is a reasonable response. When we talk about working families in some of the lower socioeconomic areas, we are talking about people often on an income of perhaps only around $30,000 a year. I think it is clear to all of us here what a difficult struggle it is. There are a number of people in the area where I used to live—in and around Davoren Park and Andrews Farm—who are on incomes of around $30,000, $40,000 or $50,000 a year. They are buying a house or paying rent and they are paying their rising utility bills on that amount of money, and it is a difficult struggle to keep going. Tax deductibility of school uniforms will be a great help to them.

I think it generally reflects the Gillard government's commitment to education. Julia Gillard herself, of course, is demonstrably committed to equal opportunity in education and to the improvement of our education system. It gives me great satisfaction to work under a Prime Minister who has that commitment. It is very important, not just in social terms but in economic terms as well, that we have a well-educated population. With the increasing level of robotics and computer aided technology in all areas, including manufacturing but extending right throughout our working life, and with the increased demands of occupational health and safety and training, it is very important that we have a well-educated population. Therefore, it is critical that our government have that focus on education. Small measures such as tax deductibility do add up to a very important demonstration of support for education and support for families to continue to encourage their children to go as far as possible in their education.

So I am delighted to see this measure in this bill. Generally speaking, I think the other measures are pretty uniformly non-controversial, and it is good to see that the government is tidying up areas such as the film tax offsets. We take great pride in this country in the quality of our filmmaking. There is always debate about how best to do it. In fact, when we were in opposition one of my first economics committee meetings was a debate about the change in the tax arrangements for supporting filming in Australia. It is quite interesting that this will perhaps be one of my last contributions as well. This film tax offset will indeed make things easier and clearer for the film industry.

The other measures in schedule 3, 4, 5 and 6 are general tidying up of the tax system that the economics committee looks at regularly. I want to thank the other members of the committee and the secretariat for the work that they did on these hearings. Many people find these tax issues quite dry. We on the economics committee enjoy them immensely and enjoy going through some of this detail. We are very well assisted by members of the financial community. They are very generous in giving their time and explaining to members of the committee in their hearings some of these tricky details of how the system works. I thank them for their contribution and their assistance in all these measures.