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Wednesday, 7 December 1960


Mr CREAN (Melbourne Ports) . - The bill before the House introduces an amendment to the Income Tax and Social Services Contribution Assessment Act. As the Treasurer (Mr. Harold Holt) said last night, this amendment varies a long-standing taxation practice. The Treasurer circulated an explanatory memorandum, which set out the main purposes of the bill as follows: -

1.   To specify limits to the deductibility in 1960-61 of interest incurred by companies in excess of the interest payable at 15th November, 1960, or the interest paid in 1959-60.

2.   To discontinue the deduction for interest incurred by companies on convertible notes issued after 15th November, 1960, except where the terms of issue of the notes were announced on or before that date, or the company was, on or before that date, bound by agreement to borrow the money represented by the convertible notes.

As the Treasurer stated, this varies a longstanding practice in taxation, under which the cost of any moneys received by a company by borrowing - that is, any moneys received other than the company's own share capital - is deducted before computing the taxable income.

I think at this point it is necessary to look at the reasons why the Treasurer has made these changes. In his second-reading speech he refers to the growth in the community of what he calls fringe institutions through which funds are channelled for consumer credit and real estate promotions and, he goes on to say, "the less useful types of financing operations generally". The measure is a recognition of a fundamental change in the economic system with regard to the raising of money to promote the expansion of individual companies. Basically, the radical change that has taken place has been conditioned by the existence of the tax laws that have operated in Australia.

In order to see the picture in proper perspective it is necessary to go back some years, to show where the significant change has taken place. Perhaps I can allay any doubts that the House may have by indicating at the outset that the Opposition intends to support this measure. The criticism we make of it is that it is a measure that has been taken very much too late. As has been the case with many other trends in the economy, the trend in this instance has been evident for a long time, and action with regard to it should have been taken by a responsible government long ago. The nature of this significant change is very clearly shown by the figures given in a pamphlet published fortnightly entitled "Current Affairs Bulletin'*. The volume I have before me is dated 31st October, 1960, and the title of the feature article is, "Australia's Changing Financial Structure". On page 199 of this document is given a tabulation of new capital raisings by Australian companies, expressed in millions of pounds, from 1948-49 to 1957- 58. I have added the figures for the years 1958-59 and 1959-60 as T have obtained them from the October, 1960, issue of the statistical bulletin of the Reserve Bank of Australia.

The table divides the new capital raisings into two categories; the first is shares - that is. direct subscription by individuals who have the status of owners in a company, and the second category is debentures, notes, &c, which again represent capital subscribed by members of the public, but who, in this case, have no proprietary right within the entity. For the year 1948-49. new capital in the form of shares was worth £30.100.000, while the second category, debentures, notes. &c, accounted for £300,000. In other words, debentures and notes were almost non-existent; of a total capital raising of £30,400,000, no less than £30,100,000 represented direct subscriptions to shares in companies.


Mr Thompson - When was that?


Mr CREAN - That was in 1948-49, roughly thirteen years ago. I now come to 1950-51. I do not want to quote the figures for all the years, and I take 1950-51 next, because that was more or less the time when this Government had become, let us say, established in office. In that year, of a total new capital raising of £75,100,000, £67,400,000 was raised by shares and £7,700,000 by debentures. This, again, showed the typical form of money raising by shares directly, which represented £67,400.000 out of a total of £75,100,000.

I now take 1953-54, three years later, when total new capital raisings had fallen to £58,100,000, with shares accounting for £42,600,000 and debentures £15,500,000. There had been a significant increase in the value of debentures and notes, but the typical form of raising new money was still by way of shares.

In 1955-56 the total raisings amounted to £115,000,000, of which £59,200,000 was provided directly by shares, and £55,800,000 by debentures, notes, &c. In other words, the debenture method was becoming more and more popular as a way of getting new money for the various companies. In 1956-57, of total new money of £100.100,000, shares accounted for only £43,700,000. and the value of debentures, notes. &c. had increased to £56,400,000.


Mr Haylen - That was the first time the debentures were significantly in the lead.


Mr CREAN - Yes. In 1957-58 the total raisings amounted to £117,300,000, of which shares provided only £35,300,000, and the value of debentures, notes, &c, had increased to £82,000,000. In other words, of every £5 raised, shares accounted for less than £2 and debentures for more than £3. In 1958-59 the total new capital had increased substantially to £188,200,000. Only £48,700,000 came from shares, but debentures had risen to £139,500,000. In other words, the ratio of shares to debentures was approximately 1 to 3; out of every £4 raised, £1 came from shares and £3 from debentures. In 1959-60, the last year for which complete figures are available, the total had increased to £241,800,000, of which £48,200,000 or £1 in £5 came from shares and £193,600,000 from debentures, notes, &c.

This shows the significant change that has taken place over a period of twelve or thirteen years. I repeat that in 1948-49, of total raisings of £30,400,000, £30,100,000 came from shares, and debentures, notes, &c, scarcely existed. In 1959-60, at the other end of the chain, the total had increased eight times from £30,000,000 to £240,000,000. Although previously the amount had been raised almost entirely by shares, now shares provided only one-fifth of the total of £48,200,000, as against £193,600,000 from debentures, notes, &c.

The point that I wish to make is that really this new type of financing arose purely because of the taxation law in respect of companies. It should be observed that both kinds of finance are provided by the public. Whether it be shares or debentures and notes, it is money subscribed by the public, handed to these institutions to be invested and to be put to work by managers and entrepreneurs. But traditionally there has been a significantly different treatment of them as regards both taxation and what is sometimes vaguely called the laws of the capitalist system. The person who invested in shares was regarded as bold, venturesome and risk-taking. The person who invested in debentures, preference shares or the new notes was a more cautious person looking for a lower rate of interest but regarding his investment as somewhat more secure than ordinary shares. Of course, in an inflationary situation, shares are in fact no less safe than are debentures, and a shareholder, as such, has virtually no more say in the management of the large concerns in which his money is invested than has the non-proprietary form of subscriber, the debenture or note holder. At least, in the law as it is now to be written, there is a recognition of this fundamental change.

Why has this change taken place? It has taken place because, apart from the first £5,000 of profit made by the public companies, tax is at the flat rate of 7s. 6d. in the £1. Previously, the tax laws had treated shares and debentures differently.

Under the old rule, before computing profit, any interest charged in respect of debentures or the new notes was deducted as a cost of conducting the undertaking, and tax was levied only on the residue. The effect was that those who managed a concern for the owners could carefully calculate the interest that they had to pay, the tax effects and the likely earning position. As far as future transactions were concerned, they would know just how much they could offer for this outside money. As the Treasurer pointed out, when tax at 7s. 6d. in the £1, recently increased to 8s., was taken into account, money that purported to cost these people 8 per cent, in effect cost only 5 per cent. That, I submit, is the reason why this fundamental change has taken place in the method by which new money has been raised by companies.

There are really three ways in which companies can obtain money. They can obtain it by seeking a new issue of shares; by this new form of getting people outside the company, who do not want to keep their money in the company for all time, to pledge it in return for a given rate of interest; or by charging so much for goods and services that after allowing for all expenses, including interest, taxes and dividends on share capital, an amount called undistributed profits still remains. This last method has become a fairly significant form of raising new capital in Australia. It is not dealt with in the statistics, but it also is a factor that has contributed to the inflationary situation as we find it now.

The measure with which we are now dealing and other measures recently taken by the Government, including increased sales tax on motor cars, the projected legislation concerning insurance companies and changes in interest rates payable on overdrafts and fixed deposits in. the banking system, are all part of the plan which the Government has adopted to combat inflation. These measures could be commended if it were not for the fact that the inflationary situation is not new. The inflationary situation has long continued in the Australian economy, and the very device adopted by company promoters, who took cognisance of the tax laws, must have been or should have been noted bv the Government years ago. 1 should just like to quote from the annual report of the Stock Exchange of Melbourne, which has just recently been published. It is dated November, 1960. At page 5, attention is directed to some of the tables that are contained in this very informative and very well-produced document. The report lists several features of the tables which require definition and then directs attention to other features of the tables. The fourth of these features is -

The increased use of debenture loans by public companies, particularly during the 1950's.

The figures that I quoted earlier show that that trend was evident at least from the financial year 1951-52, although we have had to wait until 1 959-60 for overt action to be taken. The fifth feature was stated in these terms -

The introduction of the unsecured note in 1950 and the very rapid acceptance of this class of issue.

I maintain that the reason for the rapid acceptance of this class of issue, as the report puts it, was that this was a very shrewd device in terms of the existing tax law. I emphasize that that began in the 1950's. The sixth feature of the tables listed in this report is -

The introduction of options associated with unsecured note issues.

This procedure of options is a procedure under which a person puts money into a company at one stage without acquiring any proprietary right, on the understanding that after a period he will acquire an option to take out a proprietary right in the organization. That option in itself has a cash value which is known rather generally as a capital gain element.

The seventh feature of the tables is -

The comparative movement during the 1950's away from preference share capital.

That, also, is a point of some significance. Prior to this movement, when companies wanted to acquire new capital, but felt that they were earning a fairly good rate of return on their investment, they resorted, rather than take others in at a full equity, to the device of the preference share, which had a limited return by way of dividend. Prior to the 1950's, that was quite a common way of getting additional capital. That capital was share capital and was treated for tax purposes in the same way as the profits of companies are treated to-day so far as the shareholders are concerned. But because the rate of company tax was progressively increased, the preference share was suspended as an economic proposition by the managerial elements of our community, and in its place there came the new device of the debenture, note, or unsecured note, in its various forms.

I think that this historical excursus is necessary, because this is a trend that has been evident in the Australian economy for nearly ten years. It is a trend that has continued only because the existing tax treatment was maintained. As a consequence of it, there has been an attempt by companies to outbid others in offering high rates of interest on investments over short terms. The effect on the economy at large has been a spectacular rise in the flow of new money from £30,000,000 in 1948-49 to £240,000,000 in 1959-60. We have seen a change in emphasis. Where, previously, the new money had all been basically share capital, about four-fifths of it is now in this new form of securities rather than in the old-established form of share equity. As a result, as companies have raised their interest rates relative to those offered by other companies, taking into account, I suppose, the cupidity of individuals and their desire to get as much as they can for their various investments, and taking into account, also, the inflationary situation, in which money has not held its value anyway, the tendency has been for people to seek for their investments the greatest possible yield without necessarily paying very much attention to the social consequences.

In order to show the stage that had been reached prior to the introduction of this bill, I refer to a monthly circular distributed by a particular firm of stock and share brokers, which I shall not name. This Sydney firm, in its circular for December, 1960. under the heading " Higher Rates for Fixed Interest Money ", lists the rates of interest offered by a number of companies and the terms which those companies are offering for the sort of investments that I have been talking about. For money at call - that is, money merely lodged for from 30 to 60 days - I merely cite the first company listed - the Alliance Acceptance Company Limited offers 4i per cent, for 60 days. It offers 6i per cent, for eighteen months and 8 per cent, for terms of five years and longer.

I think that at this point we ought to ask: What is a fair return for people to expect on their investments? I regard interest at the rate of 8 per cent, over a five-year term for money merely put to work by somebody else as immoral in the light of its effect on the community at large.


Mr Haylen - It is usurious.


Mr CREAN - It is a usurious rate. Yet rates have been rising incessantly over the last few years towards this level. Just contrast the present rate of 4i per cent, for money lodged for 60 days with the rate of 3i per cent, on money invested in giltedged securities over a ten-year term which prevailed when this Government came into office. I do not regard the 3i per cent, as unreasonable for a gilt-edged investment, but I do regard 4i per cent, for 60 days as an immoral rate in the light of its significance for the community at large.

These immoral interest rates have provoked organizations which are sometimes called institutional investors to seek the same sort of rates themselves in order to provide what is called a hedge against inflation. If you subject the picturesque term " a hedge against inflation " to serious analysis, it means simply an attempt by one section of the community to protect itself, at the expense of the rest of the community, against an inflationary situation. I submit that the Government's purpose should be to look after the community as a whole and to protect it against that section which profits by inflation. In this measure, at any rate, we have one of the first moves made by the Government to deal with this highly immoral situation which exists in the community at present. I hope that some one will try to explain why an interest rate of 4i per cent, on an investment made over a term of 60 days ought to be considered a tenable rate and why 8 per cent, over five years on what are reasonably safe investments should be regarded as justified.

The Australian Labour Party, of which on this occasion I am the spokesman, believes that the community as a whole should progressively reduce the rates of interest current in the community. Because one section is shrewd enough to see that loop-holes in the law enable it to attract money at higher rates of interest, others should not find themselves unable to get any money. Money should not be used for the production of more mouse traps when it ought to be used for the construction of more schools. We suggest that the logical and rational thing to do is to ask why this money is going into this sometimes - I do not say " always " - frivolous sort of activity when government bonds, semigovernment bonds and other essential forms of investment are lacking. In my opinion, an attempt should be made to bring down these usurious rates in preference to increasing the rate on gilt-edged government securities.


Mr Wilson - Tell us how you would reduce the rates.


Mr CREAN - This measure ought to have some effect in that direction.


Mr Wilson - But tell us how you would do it.


Mr CREAN - First, let me say that I would have taken this step five or six years ago when the rate was not 8 per cent., but only 5 per cent, or 6 per cent. Even then it was too high. I would not have let it get to the stage at which the lid blows off, then become apprehensive about it and take the kind of step that is proposed now. I submit that this is just another case of too little action being taken too late, and I believe that within a short time the Government's epitaph will be, "Too little too late". I commend the Government for having moved in the right direction, even though it has moved much later than it should have done.

I have very little sympathy with those who shed crocodile tears about the hirepurchase companies. To hear some of these supporters of the hire-purchase companies would almost lead one to feel that they were public benefactors. If they are public benefactors, they are also most certainly private benefactors to those who control them. I look at this question of hire purchase from the public benefaction side. A critical analysis of the bill reveals that, in effect, all that the Treasurer is doing is freezing the activities of these concerns at the level they had attained by 15th November, 1960. That level is not being prejudiced, although I believe that it was too high in certain instances. It would seem that the real thought at the back of the Treasurer's mind is that too much money has gone into the hire-purchase companies and too little into more desirable channels. My only criticism of that is that the Treasurer has awakened to the position too late. I do not propose to say what the relative ratio between public and private investment should be, but there are times when the community has to decide whether it is better to have more television sets or better schools, hospitals, and so on. One way of ensuring that we have the better schools and hospitals is to have a properly adjusted tax system.

Let me quote now from a booklet which "was circulated to honorable members recently. It is " The Philosophy of Hire Purchase", written by one Vernon H. Stanley Low, chairman of the Victorian Division of the Australian Hire Purchase Conference. On page 13 of that document, we find this justification for the hirepurchase industry -

The ready public acceptance of the industry is shown by the fact that between 1951 and 1956 public borrowing jumped just over £11,000,000 to nearly £59,000,000. By the end of the last financial year-

Looking at the tables, I think he is referring to the year 1958-59- the issued capital of finance companies listed on the leading Australian exchanges approached £50,000,000.

He is referring there to issued capital as distinct from this new variety of capital to which I referred earlier, and which is being accepted by the tax laws in their present form. The article continues -

Borrowings by these companies would approximate a further £150,000,000. This represents a total investment of £200,000,000 apart from the retained profits used to swell income earning funds.

The huge demand for money by the hire purchase companies in recent years has resulted in the public being offered sound fixed interest rates.

They are very sound, and they have been relatively fixed up till now, which leads me to the belief that this protest by the companies is more in the nature of shedding crocodile tears than the voicing of a real complaint. The passage goes on -

But the bulk of finance for new business-

I emphasize that this is a publication issued by the hire-purchase companies, not by me - comes from repayments on previous hire purchase contracts. In 1957-58 the amount provided by hire purchase companies was £234,000,000.


Mr Freeth - Why are you opposing the measure?


Mr CREAN - We support it, as the Minister would have heard had he been here earlier. All I am asking is why it was not done years ago, before you got into the Ministry. You are a comparative junior, but you could have pointed out the need for it from the back bench.


Mr Freeth - I bow to your years of experience.


Mr CREAN - They may not be years of experience, but I hope they are certainly years of discretion. The statement continues -

Of this £177,000,000 (76 per cent.) was financed by repayments.

That represents £3 out of every £4 -

The sum of £57,000,000, or 24 per cent., was new money, made up of capital issues, public debentures and new issues and deposit moneys lodged by the public. None of this new money was provided by trading bank advances.

If that is the true picture I fail to see why this legislation should have evoked the opposition that it has from these companies. It still allows them to continue with the same level of borrowings that they had reached at 15th November, I960, provided that they can retain their investors. I suppose the rub is that when they begin to want new money they will have to offer less favorable terms because of the tax concession. But bearing in mind that there is no restriction on the level of borrowings already reached, and that it has been stated that £3 out of every £4 that the companies lend represents a recirculation of repayments, I fail to see why the measure should be met with the great display of weeping that we have seen.

Finally, whilst I do not wish to appear to be an echo of the Treasurer on this matter, I would like to repeat a statement that he made. He said that he regarded this as an interim measure. However, his remarks did not carry the implication that it would be removed very shortly but rather that it would be re-imposed in different forms after he had had time to contemplate it. I hope that he will not let the lid off once he has made an endeavour to put it on. The right honorable gentleman further said -

Perhaps I may re-emphasize here two points: One is that it should not be assumed that the continuing scheme-

That is after he has had time to look at it closely - will bear any close similarity to the interim scheme now being introduced. The second is that our broad aim will be to reduce as far as possible the advantages which deductibility of interest provides for companies which seek to borrow excessive amount of money at excessive rates of interest--

I suggest that it is not so much the money as the command which this will give over physical resources that is important. The Treasurer's statement represented a belated recognition that sometimes excessive amounts of money may go where they are not necessarily socially desirable. Another implication is that more desirable avenues suffer in consequence.

The second point that is noted is that there can be excessive rates of interest. I have described some of them - and I stick to the term - as immoral rates because I can see no warrant, when very little risk is attached to a transaction, for charging usurious interest. I hope that this measure will have the effect which I think it will have over a long period. It may at least lead to lower rates being offered in this field which will make existing rates in other fields more attractive than they have been. In this way, we shall clip the wings of the unofficial banking system about which the Government will not take any constitutional or legal action although it is not sure that it cannot do this. We shall restrict the undesirable activities of that part of the economy.







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