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Partial transcript of interview between Dr John Hewson MP and representatives of the National Australia Bank



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Leader of the Opposition

PARTIAL TRANSCRIPT OF INTERVIEW BETWEEN DR JOHN HEWSON MP AND REPRESENTATIVES OF THE NATIONAL AUSTRALIA BANK, MELBOURNE 29 JANUARY 1991

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Jralst i

One of the things in your policy platform is a shift to a

Consumption Tax and with that, changes to the income tax base, including, possibly a flat rate of income tax. What does that mean for company tax under a Hewson government, given the Company Tax so often linked to personal income tax rates?

Hewson:

Well, we haven't announced the details, but if you take by way of an example a conceptual alternative, that is you are moving towards taxing expenditure rather than income, consistent with that approach, you're looking to a world where Company Tax is

lower. Whether we will actually do that in our first 3-year term or not, we will announce in due course. But if you can go to the conceptual ideal of an expenditure tax system, you wouldn't have any company tax. But we are a long way from that - we are moving

towards it. I think there is some need for comparability between the Company Tax rate, though the top personal tax rate. In

saying that, I am not promising a top personal tax rate of 39 cents or anything like that at this stage.

But if you leave a permanent gap, in favour of incorporation, you create a loophole for tax avoidance. And so many individuals have found ways to corporatise themselves rather than operate as salary and wage employees or non-corporate entities. So that is the overriding constraint, but my preference is to obviously get taxes as low as possible which you'll only achieve by getting the

size of government as low as possible.

Jralst:

Sticking with tax, another proposed change is the abolition of Capital Gains Tax and its replacement with what you'd call a Speculative Gains Tax - what's the difference and isn't there a

danger that we will go back to a situation where there is

incentives for seeking assets which provide capital gain rather than assets which produce income and so there is a distortion opening up again the tax system?

Parliament House, Canberra, A.C.T. 2600 Phone 277 4022 COMMONWEALTH PARLIAMENTARY LIBRARY MIC AH

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Hewson:

Well, the difference is that the present capital gains tax system taxes realised capital gains at, in many cases, the top marginal personal tax rate. It is a very high rate of capital taxation by world standards and the system has some real anomalies. Pre September 1985 assets are tax free and there are minimal

allowances for goodwill or rollover in the case of a business terminating or rolled from one form to another and investment being rolled from one form to another. So it is a very heavy

rate of tax in the context of inflation and a tax system that favours debt rather than equity. You have seen a massive bias in favour of debt. You've seen a massive property and debt

gearing boom as a consequence of that sort of system, in an

inflationary environment. The alternative which we propose is that capital gains tax would be phased down to zero over 5 years - i.e. we would focus on taxing short term speculative gains but give people a positive incentive to put their money at risk in the medium to longer term in equity related investments. Tax as we have described it, would 100% of an assets value but a gain

in an assets value would be taxed if the gain was realised within 12 months, 80% within 2 years, 60% within 3, 40%, 20% and then nothing after the fifth year. We believe that it is balance between dealing with a short-term speculative problem which tends

to have the heavy focus on property and unproductive investment and trying to get people to put their money at risk medium term, in equity investment. I think there is a bit of a trend around the world to lower taxation of long term capital gains. A lot of countries do not tax them after even much shorter periods depending on whether it is shares, property or whatever, but I think it is a world trend to have lower Capital Gains Tax and

lower taxes on long term capital gains which is the sort of

balance that countries have tried to strike.

I think you have also got to look at the rollover and goodwill provisions if you do rollover within 5 years. We are also doing that at the present time. There a lot of anomalies in the

present system in relation to genuine business transactions within 5 years. The other thing you have seen in recent years with investment that has taken place - although, we have had a heavy investment period, a lot of that investment has gone into

the non-traded goods sector, property, computer equipment which really has done much for our import replacement capacity or our export capacity. So, obviously there is a lot wrong with the current system. And I think a key element of it has been

Capital Gains Tax which itself has significantly distorted, in an inflationary environment, the choice between debt and equity.