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Standing Committee on Economics
16/12/2011

BIGNELL, Mr Phil, Senior Adviser, Treasury

[11:14]

CHAIR: Although the committee does not require you to give evidence on oath, I should advise you that these hearings are legal proceedings of the parliament and therefore have the same standing as proceedings of the respective houses. Do you wish to make an opening statement to the committee or simply comment on the testimony provided just now by the institute?

Mr Bignell : Yes, I will make an opening statement. Thank you for the opportunity. Firstly, schedule 4 of the bill addresses a legislative deficiency in the GST law as has been identified by the full Federal Court in the decision in Gloxinia last year. The purpose of the amendments is to restore the intended policy outcome concerning new residential premises that arises from the decision of the full Federal Court in Gloxinia. The government has undertaken quite an extensive public consultation process in the development of the final product of legislation that has been introduced into parliament. Firstly this involved the release of a discussion paper in January 2011. Ten submissions were received from a range of industry groups in relation to the information set out in that consultation paper. In September 2011 that was followed by the release of exposure draft legislation, again for public consultation. Seven submissions were received in relation to that exposure draft legislation. All the submissions that were received were considered in the development of the final product.

As I mentioned, we consider that the amendments address the problems identified by the Federal Court in Gloxinia. We believe that they are fairly widely supported by stakeholders in the form that they have been contained. We believe that the Institute of Chartered Accountants' suggestion of changes would have wider policy ramifications. We think that they would lead to some uncertainty and potentially some wider policy outcomes that are wider than intended. We consider that the proposal from the Institute of Chartered Accountants would result in a greater number of residential premises remaining subject to GST after their first sale or supply by long-term lease. Treasury considered a broader principled change in response to the Gloxinia decision. We put that out for public consultation in the Treasury discussion paper released earlier in the year. Most submissions did not support the broader approach that the institute has proposed. Treasury looked very closely at that at the time. For the reasons that I have indicated, Treasury did not feel satisfied that the wider approach would address the issue without having a wider change of policy and potential revenue implications.

In relation to the treatment of barter transactions, that has been specifically addressed in the explanatory memorandum. The Property Council of Australia has raised that issue. Treasury worked with the Property Council of Australia to address the issue of barter transactions and to specifically include wording in the explanatory memorandum that would make it clear how the amendments applied in relation to barter transactions.

CHAIR: Thank you very much.

Dr LEIGH: I just want to follow up on this with the institute. As I understand it, you are not concerned with the general notion that the state of the law pre-Gloxinia should be upheld. The question is how to get to that. Isn't that right?

Mr Evans : Yes, that is correct. Our view comes from an acceptance of the stated policy and the policy reiterated in Gloxinia that the sale of newly constructed premises should be subject to full GST when they go into consumption. We accept that it appears that the proposed response to the deficiency highlighted in Gloxinia only addresses the Gloxinia situation, yet it is still stated that the policy intention is that newly constructed residential premises will be subject to full tax. If the policy is that that will only apply in the circumstances of Gloxinia, then we could have no complaint with these amendments.

Dr LEIGH: In restoring the general understanding of the state of the law, the legislation has that taking effect from 27 January 2011. Do you think that is appropriate?

Mr Evans : From memory, and I stand to be corrected by Mr Bignell, I think that was the date of the announcement by the Assistant Treasurer of the proposal to change the law to overcome the impact of Gloxinia. In that context, that is not a retrospective change, but I think that is the reason for the choice of 27 January this year.

Mr Bignell : That is my understanding.

Dr LEIGH: I have no argument with what you said, except where you said it was not a retrospective change. By definition, we are talking about a date that has gone, so it is retrospective.

Mr Evans : Yes, I qualified it on the basis that at least on one view it is not retrospective. There are other transitional arrangements in there to protect persons who had entered into or committed to such arrangements prior to 27 January.

Dr LEIGH: I understand. It is just that in an earlier hearing of this committee where the issue of retrospective changes to clarify the state of the tax laws arose there was a very strong view put forward by the institute that the tax changes should not be retrospective. I guess I am mildly surprised to see that changing in this instance.

Mr Evans : The institute has a very strong view that there ought not to be retrospective legislation. Having been in this tax policy and advisory industry for 40 years, I do recall the very heated debates back in the early eighties about retrospective taxation and legislation by press release. I support entirely the idea that one ought not to change the law until such time as parliament attends to the change.

Dr LEIGH: Now I am confused. When do you believe the date of issue should take effect?

Mr Evans : We believe this particular issue is not raising a concern over the application of these amendments from the date of the announcement.

Dr LEIGH: In your view, what is the ideal point at which this change should take effect?

Mr Evans : The difficulty in a GST arrangement—and this goes to our second concern—is that the area in which the explanatory memorandum changes the way in which the commissioner had administered the law is in relation to the treatment of this barter transaction. So, by putting in the EM that these barter transactions were taxable and creditable on the transaction between the developer and the Crown agency granting long-term lease, that is a retrospective view, because that was not announced at 27 January and, in the institute's view, is not necessarily the case in these types of transactions. But our observation is that that barter transaction within the explanatory memorandum is inconsistent with the way the commissioner had administered law until he withdrew the law in 2008 and was not a matter that was addressed in the press release of 27 January. So, to that extent, that is a change that, to the institute at least, was unexpected until the bill was introduced with the explanatory memorandum. In the broader context of whether or not the amendment should apply to transactions entered into after the date of the press release, the institute is not taking an objection to that date of effect.

Dr LEIGH: You have left me, though, with the sense that the institute's view on retrospectivity is that changes you do not like should not be retrospective and changes you do like can be retrospective.

CHAIR: They like this one, so I think we will move on.

Ms O'DWYER: It is gratuitous.

CHAIR: Again I am going back to the office, where it is time to sit down and do the accounts. You are saying that from your perspective you support the reinstatement of the original intent, you are sitting down to a situation similar to Gloxinia and you are totally clear about what that means. What kinds of circumstances would there be in which you would not be sure how this change should be interpreted?

Mr Evans : I think we will always be sure because this amendment, unlike the hire-purchase proposals, is quite specific in where it applies. I do know that, if I am basically on all fours with the Gloxinia, the law changed from 27 January 2011. So there is not an uncertainty. Our only proposition for this amendment is that if the policy intent is to tax newly constructed residential premises then, consistent with Justice Dowsett's observation, Gloxinia is only one circumstance.

CHAIR: That is my question, I guess: what circumstances do you believe should be covered by this amendment but are not?

Mr Evans : Any circumstance in which newly constructed premises are sold from one business to another and are yet to be occupied.

CHAIR: Okay. Mr Bignell, is there a gap in this amendment?

Mr Bignell : As I have said, the policy intent has been to remedy the defect that the full Federal Court decided was there in relation to Gloxinia. We believe these amendments fully achieve that purpose. There may be other areas of the law that will need to be looked at under their facts and circumstances. We did not intend to make comprehensive changes to the taxation of new residential premises. We felt that the Gloxinia decision related somewhat to the circumstances of it, because the wholesale type transactions with the development lease allowed there to be earlier supplies that were treated as supplies of new residential premises such that the later, effectively retail, supplies, where there were sales or assignments perhaps to the final owners of the properties, were not to be taxed. Really, it was a decision that came down on the facts of the particular circumstances of these development leases. We would not expect that it would have an impact in these other areas. That was the reason for addressing the specific circumstances that arose in relation to the development leases and how they resulted in a misapplication of the policy intent. We did not feel that we needed to address other areas of the law and we were concerned that the ICAA proposal would have other unintended consequences and would change the base. Most other stakeholders that gave submissions did not favour a broader formulation of a response to Gloxinia.

CHAIR: You are suggesting that there may be other areas that will come up at a later time?

Mr Bignell : The GST is a relatively new law, having been in place for 11 years, compared with our income tax, which has been a much more settled system. In recent years we have had many cases coming before the courts to test that new law, so it is certainly possible that there will be additional matters that will arise in the future with new areas of the law. Those certainly cannot be ruled out.

CHAIR: Mr Evans and Ms Bagnall, would you like to expand a little bit on your views about how this amendment interacts with public sector infrastructure projects?

Mr Evans : The institute's submission, which raises this, goes to the commentary in the explanatory memorandum about how GST impacts not on the sale by Gloxinia but on the carrying out of building works as a condition of the granting of the lease. As you will know, there were many public sector infrastructure projects where, as a condition of the granting of an infrastructure entitlement project—be it a toll road, a hospital or a waste treatment plant—the developer/operator would be granted the licence or the right to conduct those operations on the condition that the infrastructure was built according to quite specific requirements and on particular timelines. The approach to the interpretation of that type of transaction—that is, the grant of a right and the imposition of conditions on that right—is not, as I understand it, generally regarded as being a taxable supply, and value for the taxable supply, by the government. To do that creates very large amounts of GST, payable and creditable.

Our concern is that the commissioner's ruling of 2008 describes those conditions as not being supplies nor consideration for supplies. That issue was not addressed and was not the subject of discussion in Gloxinia. Yet the position explained in the explanatory memorandum takes the view that there is a supply of the long-term lease in consideration of the carrying out of the commission. We do not believe that that will always be the case; it will be very case specific. The description of that in the explanatory memorandum is inconsistent, it seems to us, with the view that the commissioner had taken of infrastructure projects, up until now.

The difficulty is that when we have large amounts of GST payable and a large amount creditable we can get asymmetrical treatment by taxpayers and therefore risks to the revenue. I think the Treasury has observed in relation to other matters that these large payments of GST, only to be credited to the other party, are to some extent great integrity issues for the working of the GST system. From our perspective, these are just descriptions in the explanatory memorandum of how it might apply to these projects. We do not consider that those are necessarily correct in the instance that the legislation applies to, nor more broadly. A clarification in the explanatory memorandum might be of benefit to those persons who have been or intend to be involved in Gloxinia type arrangements. It seems to the institute that it would be better to have those matters addressed, as they were in 2008, in a ruling to say when and how these matters become taxable and creditable, so that the commissioner can establish his view of the transaction and how it applies in the broader context.

CHAIR: I think we are going to finish early. Would either of you like to make closing statements? Mr Bignell?

Mr Bignell : Perhaps if we allow Mr Evans to make a statement first.

Mr Evans : I do not think Donna and I have a further statement.

Mr Bignell : I have no statement then.

CHAIR: Thank you for your attendance and your evidence. You will be sent a copy of the transcript of your evidence, to which you can make corrections of grammar and fact.

Resolved (on motion by Ms O'Dwyer):

That this committee authorises publication, including publication on the parliamentary database, of the transcript of the evidence given before it at public hearing this day.

Committee adjourned at 11 : 34