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Thursday, 6 December 1973

Senator GUILFOYLE (Victoria) - I understood that Income Tax Assessment Bill (No. 4) and Income Tax Assessment Bill (No. 5) would be dealt with cognately. Is it in order for me to proceed on that basis?

The ACTING DEPUTY PRESIDENT (Senator Marriott)- Is it the wish of the Senate that there be a cognate debate on the 2 Bills? There being no objection, that course will be followed.

Senator GUILFOYLE - I address some very brief remarks to the Income Tax Assessment Bill (No. 4) which is designed to make provisions with regard to the territories of Australia. In general terms, it was introduced to avoid the use of the territories as tax havens, as they have been used in the past. We do not oppose the Bill, but I make the general comment that I believe that in implementing this Bill, some difficulties are being avoided. I would not like to see developed the situation in which genuine trading companies which are earning income in the territories but which are Australian owned are disadvantaged in comparison with companies which are essentially local companies. I make that general comment because it seems to me that we should not be relating the provision which prevents the use of the territories as tax havens to income genuinely earned in a permanent way in the territory concerned.

I turn now to Income Tax Assessment Bill (No. 5), which was introduced by the Treasurer (Mr Crean) to make many alterations to the Income Tax Assessment Act. It contains provisions with regard to profit on the sale of a dwelling within 1 year of purchase. Part of this provision relates to the sale of a taxpayer's home and the other part relates to the sale of general property. I would like to make some further comments on that subject later.

There are other provisions in the Bill which relate to the withdrawal of exemption of income from mining and prospecting, and the Bill also contains provisions with regard to taxation of certain pensions and a change in the method of valuation of the trading stock of a wine maker. The Bill also contains provisions with regard to dividends and other matters. There is a provision which terminates the investment allowance. The Opposition is concerned about many of these provisions, but because we have adopted the general approach that what is contained in this Bill is the way in which the Treasurer seeks to raise the income to carry out this year's budgetary proposals, we are not opposing it. However, we have disquiet with regard to the implications of some of the clauses of the Bill. For instance, the provision which terminates the investment allowance is one that concerns me, if it is considered in relation to its long term effect on the investment which is made by a manufacturing company in plant and equipment and which in general gives the company the opportunity to make long term plans for improvements in productivity and efficiency. I feel that the termination of this allowance shows the short term attitude adopted on the part of the Government. It could have long term consequences, if seen in the light of efficiency and even in the light of the capacity to effect improvements in the cost structure.

However, I want to relate my remarks more specifically to clause 6 of the Bill which deals with the assessability of profits made from a property purchased and sold within 12 months. Clause 6 seeks to insert in the Income Tax Assessment Bill (No. 5 ) a new section 26aaa. my remarks with regard to this proposed new section are designed to draw attention to some difficulties which could arise in interpretation and in the application of the new provisions which are introduced at this stage. In general terms I want to express my feeling that there could be some inequity in the application of this section, particularly as it provides that where a property is sold within 12 months of acquisition the transfer is deemed to constitute a sale and any profit made thereon is assessable for taxation purposes. I feel the inequity arises in the fact that, even if the property were not acquired for profit making purposes, upon its sale any profit made would attract assessability, in spite of the fact that no losses are allowable as tax deductions under this 12 months rule, if that be the experience of the person who held the property. It seems to me inequitable that profits should be regarded as assessable income when losses are not regarded as allowable deductions. At some later stage I would like an expression from the AttorneyGeneral (Senator Murphy) with regard to my contention of inequity in the provisions which have been introduced.

Some parts of this proposed new section are a Utile unclear. I want to address some remarks to them to see whether I can draw from the Minister an expression of the intent of the Government with regard to their application. Proposed new section 26aaa. ( 1) (f) as presently drafted could have some significant consequences on the securities market, which might not be intended by the Government. Certainly they are not desirable in the interests of a stable securities market. For this reason I want to put the point of view that some sales of property under this section could have some difficulties. I refer in particular to the sale of rights of bonus issue shares. I wonder whether it would be possible to have an expression of intent on the part of the Government with regard to the sale of this particular type of property. Referring to sub-section (7) of proposed new section 26aaa, it seems to me that there could be an opportunity for expression to be given as to whether the sale of rights of bonus issue shares would attract taxability under this provision. There is an expression with regard to bonus issue shares, but there is no clear expression as to what would be the situation if the sale of rights of bonus issue shares took place within the 12-months period. I would ask the Minister to give an expression of intent with regard to that.

The shareholders of a public company which becomes the object of a takeover who have purchased their shares entirely for investment purposes within 12 months of any takeover becoming effective will be faced with a tax liability when the situation in which they are placed is not entirely of their own choosing. I am speaking of the normal commercial operations of restructuring companies and effecting takeovers and amalgamations. Such a situation is not necessarily the intention of the shareholder who is a genuine investor but becomes involved in something because of a restructuring of the companies in which he holds shares. Some of the people involved could be within the 10 per cent minority of shareholders whose shares would be compulsorily acquired in a takeover, without the intention on their part to sell their property and without any attitude in the holding of the property that would lead them into the situation in which their profit on that sale is assessed as taxable income.

The danger with regard to this proposition is that there could be frustration in the restructuring of companies in future, because if more than 10 per cent of the shareholders withstand an offer by a takeover company in order to avoid attracting the tax which would be payable on this assessable income, this could be frustrating in the restructuring of companies when such restructuring may be in the interests of all of the shareholders. For this reason I think that we should have some expression as to whether this was the intention of the provision, particularly as it seems quite clear from figures which I have seen that most industrial companies experience a 10 per cent or 15 per cent turnover in the shareholders in their companies in any one year. This would lead me to say that almost any company which is involved in restructuring, amalgamation or takeover could find that its shareholders attracted tax under this provision, and it would seem to me that those same shareholders could frustrate the intention of the company in its restructuring in order to avoid paying tax under this section.

The other area in which I feel some difficulty will be experienced is related to those shareholders who are genuine investors, who attract taxation under this section but do not have the same opportunity to avoid it as those people who do state their intent as investors in the first place and thereby have the opportunity to take advantage of profits and losses. I feel that this section ought to have some relativity to that other section whereby it is possible to elect whether to deduct the losses which are sustained in the sale of properties in these instances.

The market consequences of this provision, to which I referred earlier, are undesirable. There could be the creation of a false market in a company's shares because investor shareholders may be led to seek a higher price for any shares that they do exchange than is strictly warranted, simply to cover an anticipated tax liability. In other words, when they are negotiating they will be talking about the after tax price for the shares instead of, as they do now, a price which is more related to the real value of the shares. This seems to me not to be in the interests of commercial enterprise. I wonder whether that was recognised also at the time that this new clause was drawn up by the Treasurer.

There is another difficulty with regard to the situation of private company shareholders. This concerns those shareholders who become so by reason of the incorporation of a partnership or a sole trader business or by acceptance of another private company's shares in the event of amalgamation, re-organisation or sale. We could argue that any transactions of this nature could be delayed until the end of a 12 month period so that they would not be caught within this provision. But I think that it would be agreed that business seldom waits for a particular date. It is the case of business negotiation taking a certain course of events and a delaying procedure to eliminate this 12 month period would not seem to me to be the normal way in which business transactions ought to be conducted. A shareholder who accepts private company shares cannot sell them readily and in general circumstances he probably could not sell them at all under the contemplation of this issue. Unless he has separate resources which most of the medium and smaller private company shareholders do not, any appreciable tax liability could cause financial hardship and, in an extreme case, the abandonment of a business or enterprise. These seem to me to be difficulties which the introduction of this provision will create. I would like the Minister to make some comment on them in his reply.

Given that the Government does wish to maintain this principle of taxability of profits arising from property purchased and sold within a 12 month period, it is recommended that this proposed new section 26aaa be amended to the extent that there is deemed to be no profit arising by reason of an exchange or issue of shares or other securities where such an exchange is related to a takeover by one company of another whether this is to be done by amalgamation, reorganisation or reconstruction. This is recommended so that the transactions which I have mentioned which fall within a 12 month period would not come within the provision of this section. I am not seeking to have this matter discussed in the formal Committee stage because as I mentioned earlier the Opposition is not opposing this Bill in total or in detail. But I want to draw attention to the application of proposed new section 26aaa in the hope that we may avoid some problems which would be affecting the smaller, genuine investor in the futuresomething that may not have been the Government's intent when this Bill was drafted.

In particular I would hope that I will receive some response from the Minister with regard to the sale of rights on bonus shares and the application of this section to such a transaction. In stressing that the Opposition does not oppose these Bills, I state that I am aware that many of my colleagues in the other place have pointed out the difficulties that will be occasioned to primary and secondary industries of Australia by the introduction of some provisions in these Bills. We have not in the other place moved formal amendments to the Bill. We simply draw the attention of the Government to the difficulties which will be created by this method of attracting the nation's income in this year in the hope that at some future stage the Treasurer may understand that long term planning in primary and secondary industries needs some of the measures which have been removed by these Bills.

Debate interrupted.

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