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Tuesday, 24 November 1959

Mr CREAN (Melbourne Ports) . - For the convenience of the House, may I suggest, Mr. Speaker, that this bill and the Income Tax and Social Services Contribution Bill (No. 2) 1959 and the Income Tax (International Agreements) Bill 1959, which are cognate measures, be debated together. The major matter is the imposition of a withholding tax in respect of dividends. There are one or two other matters, but that is the principal one.

Mr. SPEAKER (Hon. John McLeay).Honorablemembers are agreeable to that course being followed.

Mr CREAN - A memorandum relating to these measures has been circulated by the Treasurer (Mr. Harold Holt) in which he indicates that they embody three principal matters. Two of them do not appear to honorable members on this side of the House to be controversial, but the third contains matters of some deep significance and has implications which I will endeavour to show are not to the benefit of the Australian economy generally. The first of the two matters is the provision which makes taxable the increment which arises from the new seasonal security recently introduced by the Government. The first of these securities is on sale at the moment. In the press during last week an advertisement appeared indicating that people could tenderfor these particular bills at a certain amount and if they held them until maturity they would receive an increment. One of the purposes of this measure is to make that increment taxable because it is an interest payment and, as such, ought to be subject to income tax. The second smaller matter deals with the premiums payable on the new type of special bond. This bond was rather belatedly introduced by this Government, despite the fact that members on this side of the House many years ago indicated the need for it. It is a security which ensures to its holder, provided he holds it for a minimum period of about six months, that he cannot lose the amount of capital and that he will get a steady rate of interest returned.

One of the essential pieces of machinerv to guarantee the capital integrity, as it were, is to make the premium to be payable on this bond at maturity. Again, because it apparently comes within the province of a capital gain, there would seem to be some possibility that it would be subject to tax, although that was not the intention. The purpose of this particular amendment is therefore to secure that the capital gain or the premium payable on redemption of these bonds will not be subject to tax. As I say, they are matters of comparatively small moment, really.

But the other matter with which I propose to deal at some length is the proposal to institute what is called a withholding tax in respect of dividends which are paid by companies in Australia to shareholders, whether they be individuals or other companies, who have some equity in those companies. This measure proposes that where a dividend is so paid, the person to whom payment will ultimately go can opt, if he so desires, to have a certain amount taken out and so obviate having to lodge a taxation return. That sounds simple enough, if it were not for some of the implications that are not really very definitely brought out in the Treasurer's speech. There is contained here the whole question of taxation on dividends derived by non-residents, or foreigners if we like to use the term, from companies which operate or secure their profit by selling goods in Australia. Linked with that is the whole question of what we broadly describe as foreign investment.

From time to time this Government has endeavoured to take great credit to itself for the amount of foreign investment which is flowing into this country. It presumes that it is a very good thing for the Australian community that that is taking place. But when we subject some of the statistics which are available to critical examination, it is seen that the benefits are not quite of the kind that is made out. They were certainly not very definitely underlined by the Treasurer when he introduced this measure a few days ago. It is true that when he brought down his Budget he indicated that this legislation would come before Parliament. Apparently, certain people in other parts of the world realized the implications of it but it was not really realized by everybody here. For the information of honorable members, I should like to quote from an article which appeared in the London "Times" as recently as 17th August, 1959. It is headed, "Australian Shares After Budget Tax Option".

I would suggest that there are one or two matters here which are of quite a degree of interest for the Australian taxpaying community. The article begins -

The Australian Budget proposal to introduce an optional withholding tax- that is the matter we are discussing now - on dividends seems likely to have distinct advantages for United Kingdom investors. Large institutional investors who place part of their portfolios in Australia in pursuance of geographical diversification policies should find it especially helpful.

These investors are not primarily interested in helping the Australian economy but from their own profit point of view. The article continues -

Investors drawing only a small dividend income from Australia will not be greatly affected. But the large investor in Australian Ordinary shares will benefit substantially by opting for the withholding tax. . . . For him there is a double benefit. First he is saved the inconvenience and cost of an Australian income tax return, while reclaiming Australian tax payments under double tax relief is simplified and expedited. Secondly, insofar as the withholding tax is at a lower rate than his present levels of direct income tax on Australian income, he will pay less Australian tax.

Then the article goes on to give some examples of how this will work, which, again, I think ought to be of interest to honorable members. It reads -

However much the United Kingdom investor draws on ordinary Australian dividends in any year, direct Australian income tax need not exceed 15s. per cent.

That is 3s. in the £1. Whether he derives dividends as low as £1,000 or as high as £100,000, he will not pay anything more than 3s. in the £1, after the passage of this particular piece of legislation. That is, if he takes the option of withholding tax. Then the article gives this kind of example -

As most Australian companies pay company income tax at about 7s. 6d. in the £, the ordinary shareholder in the United Kingdom is credited with having paid that tax-

That is. the ordinary tax of 7s. 6d. in the £1- as well as the 15 per cent. For every £A.5,000-

So they are not talking about small people. The article continues - of Australian ordinary dividends he will pay £A.750 withholding tax and receive credit against United Kingdom tax of £A.750, plus £A.3,000 company tax paid. Thus, his yield on Australian shares is raised by £A.3,000 in effect, provided his United Kingdom tax on the £A,8,000 gross income amounts to at least £A.3,750 - i.e., his average rate is at least 9s. 6d. in the £.

The article continues -

Even if his United Kingdom rate is only 7s. 9d. he will receive credit for most of this extra £A.3,000.

The article publishes a table based on the assumption that the legislation we are now considering has been passed, and indicating how beneficial it will be for individuals in the United Kingdom not to put their money into new investment in Australia, but to put it into old, well-established firms operating here. The article lists these particular companies. They include Australian Paper Manufacturers Limited, which has been established here for many years, British Australasian Tobacco Company Proprietary Limited, Broken Hill Proprietary Company Limited, Colonial Sugar Refining Company Limited, E.Z. Industries, G. J. Coles and Company Limited and Imperial Chemical Industries of Australia and New Zealand Limited. None of those is pioneering new fields in Australia at the moment, and all that these people are endeavouring to do is to buy on the Australian stock exchange shares that are being turned over on the market from day to day. This is the effect that this proposition has - that in August, 1959, an Australian investor investing in Australian Paper Manufacturers could expect to get what is called the market yield of 6.1 per cent.; but the United Kingdom investor, because of the effect of this legislation coupled with the tax advantages in his own country, where he will be paying the standard rate of 9s. 6d. in the £1, instead of getting a yield of 6.1 per cent, will get a yield of 9.8 per cent. Where the Australian investor in the British Australasian Tobacco Company can look for a yield of 5 per cent, the British investor will get a yield of 8 per cent. B.H.P. will yield the low percentage of 2.7 to the Australian investor, but this will be enhanced to 4.3 per cent, for the United Kingdom investor. The Colonial Sugar Refining Company Limited yield of 2.6 per cent, to the Australian investor rises to 4.2 per cent, for the United Kingdom investor. The E.Z. Industries yield of 5.2 in Australia is inflated to 8.3 per cent, for the British investor. The G. J. Coles yield of 2.7 in Australia rises to 4.4 per cent, for the

United Kingdom investor. I.C.I.A.N.Z., 2.7 per cent, in Australia, yields 4.3 per cent, for the United Kingdom investor.

Now, that is one of the effects that this legislation will have. I submit that there is a great confusion on the part of the Government between what it is prepared to call foreign investment and what is really after all only the net position of Australian overseas exchange at the end of the year - and apparently that is the only factor that seems to disturb the Government. There seems to be no feeling on the part of this Government that there is anything wrong in the fact that already well-established industries in Australia which we believe to be either wholly or mainly Australian-owned should, by this process of tax concession, be able to become foreign companies. There seems to be no consideration of that aspect at all. The only thing in the mind of the Government seems to be that if somebody in Great Britain spends £100,000 on shares in Australia, well, £100,000 is added to the Australian exchange position. I submit that that is the whole approach of this Government. So long as the London fund position looks good it gives no scrutiny whatsoever to what is taking place in the structure and the fabric of Australian industry as a consequence. I submit that these matters are of distinct concern to the Australian community.

One of the ironies of this particular kind of concession is that the more concession you give in Australia to the United Kingdom investor - and that means the more revenue you lose on the dividend, also ironically enough - the more does the United Kingdom collect at the other end. We are giving a kind of indirect subsidy to the United Kingdom Treasury. The net position of the United Kingdom investor is still better after taking the two taxes into account. He is paying less Australian tax and more United Kingdom tax. Yet we are told that this is a good thing from the Australian point of view. I suggest that the word " fantastic " used by the Prime Minister the other day with regard to capital inflow is a very appropriate word. The situation is fantastic. It is fantastic when you find applause for this kind of thing. I have not seen an article anywhere in the Australian press indicating that this is the effect of this particular proposition on the finances of Australia or on the investment fate of United Kingdom investors in Australia. Why do we not have a little more clarity and a little more honesty as to what is involved?

Sir Wilfrid Kent Hughes - May I ask the honorable gentleman a question, Mr. Speaker?

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