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Monday, 29 November 1999
Page: 10892


Senator GIBSON (1:26 PM) —I rise to talk on these new business tax system bills. I believe they are probably the most important bills to go through this place for a very long time because they affect the very heart of how the economy works in Australia—not how the government works but how the economy works. I remind the Senate and listeners that government accounts for about one-third of the Australian economy. The Commonwealth collects about 25 per cent of GDP, the states about 7½ and local government about 1½, so about 33 per cent of the economy is run by government. The other two-thirds is run by private enterprise and by business. It is the health of business on which the government third depends, so we have to encourage the growth of business enterprises in Australia.

We have known for a very long time that the taxation system in Australia has been a mess. There have been many attempts to have thorough taxation reform. The Asprey committee reported back in the 1970s that the Australian tax system was a mess. Why? Because it was designed in the 1930s and then just patched and built on, bit by bit. It ended up being extremely complicated. Today, there are 4,000 pages of tax act. The Asprey committee led to no political action. The Hawke government tried to reform tax in the mid-1980s with the famous option C, but that was shot down by combined work be tween the former Prime Minister Mr Hawke and the ACTU. In 1992-93 we had the coalition attempt with Fightback, which failed with the electorate.

Just over two years ago, in August 1997, the Prime Minister, Mr Howard, announced that this government was going to have the guts and the determination to see through taxation reform for Australia. Shortly thereafter I had the honour of being made chairman of a coalition committee which sought input from the Australian community as to what was actually wrong with the Australian tax system and, secondly, suggestions for change. We started our investigations in September 1997 and reported to the government in March-April 1998.

Without going over personal income tax and consumption tax, with regard to business tax what were the main findings of the input into the committee that I had the honour of chairing? The recommendation from business and anyone to do with business was, first of all, that our tax system was too long and far too complicated. Its administration was not as efficient as it might be. Its structure was wrong and not based on principles. It had very high compliance costs. Avoidance was fairly common, even though this government in particular had tackled avoidance very strongly indeed. The amount of avoidance was directly related to the amount of complexity. We had to do something about the very complex act.

The final recommendation resulting from those inputs nearly a year and a half ago was that we had to make our business tax rates competitive relative to the rest of the world, because we wanted investment, jobs and growth in income. Australia has a very long history of being reliant on foreigners to provide capital into Australia so that the Australian economy can continue to grow. We in Australia for a very long time have spent more each year than we have actually earned. We rely on the savings of foreigners to make up the difference.

The government took the inputs from the committee I chaired and came up with its recommendations in August last year with the big report, Tax reform, not a new tax system. That report went out into the community well before the election last year. The system put forward by the government with regard to business tax—leaving the other bits and pieces aside—was to lower both company tax and capital gains tax to make them internationally competitive with rates in the rest of the world and to simplify the business tax system. We won the election; we were voted back in to go ahead with tax reform. The government has already achieved great milestones by getting the income tax reforms, the diesel tax reforms and the GST through the parliament.

Shortly after the election last year, the Treasurer appointed the Ralph committee, and I want to pay tribute to three great Australians, in particular the chairman John Ralph, Mr Rick Allert and Mr Robert Joss, who were the committee that formed the group that produced the Ralph report. They have done an enormous amount of work. I must also pay tribute to the public servants and consultants who worked with that group, night and day since late last year right through until August this year, doing magnificent work for Australia.

They produced three interim reports. Firstly, there was one on process, criticising the process of tax reform in the past and recommending a process of structure based on principles and not ad hocery. They commissioned a second report making international comparisons of our tax system with those of all our main trading partners around the world. That was done in December last year. Then they produced a draft report earlier this year with their draft recommendations and sought input from the community, particularly the business community, and then produced their final report in August this year. It is a very large, comprehensive report, an absolutely excellent job well done by everyone involved with it.

Again I stress what Mr Ralph recommended: a return to simplicity, to a tax system based on principles. If you do that and get rid of complexity you get rid of the opportunities for avoidance, because people who are smart and who can afford to engage the appropriate lawyers and accountants can make use of the complexity that is in the system to avoid tax. Mr Ralph recommended that we retreat and base our tax system on a much simpler structure.

One of the key items that had a lot of discussion, particularly during the hearings of our Senate Finance and Public Administration Committee, chaired by Senator Campbell, was the capital gains tax regime. Again, what have the government put forward—thankfully, supported by the Labor Party? We have put forward a structure which is internationally competitive. Let me go back through the history of the main capital trading nations of the world over the last few years to see what has happened. First of all, in the USA the Clinton administration reduced capital gains tax from 28 per cent to 20 per cent about 2½ years ago. In response, the UK Blair administration about two years ago announced that it was reducing its capital gains tax regime. Essentially, for high income people and for passive investment—in other words, arms-length investments in commercial buildings or shares, for example—the capital gains tax regime in the UK reduced from 40 per cent to 24 per cent over a 10-year period. It came down substantially. But more importantly for small business, it reduced the capital gains tax regime from 20 per cent to 10 per cent over a 10-year period—in other words, a stepped regime.

Australia, with about 1½ per cent of the equity capital of the world market, cannot stand outside this system—we have to be competitive. We had to respond. I note that, following the UK example, Ireland reduced capital gains tax from 40 per cent to 20 per cent. A recent report from Ireland showed that, with that reduction in capital gains tax, the tax collections by the revenue office from capital gains tax actually went up the following year by 75 per cent. I note that only three weeks ago the Blair government announced that it was further reducing its capital gains tax regime, and instead of having a 10-year stepped regime—from 40 down to 24 or 20 down to 10—they are going to reduce that to a five-year stepped rate, again to make it competitive with regard to the rest of the capital world. We are talking about a world where capital is very mobile. The USA market accounts for about half the equities market in the world, Britain about 15 per cent and Australia about 1½ per cent. We are tiny and we really have to fit in if we want capital to continue to flow into the Australian economy—and we do.

So the government has put forward an internationally competitive capital gains tax regime and company tax regime. More importantly, it has recommended simplifying the tax act, and one of the recommendations to do that is to tax trusts as companies. This is called entity taxation. That will greatly simplify the tax structure.

The government has also taken up the Ralph committee's recommendations in following anti-avoidance procedures. The government has announced several anti-avoidance procedures to basically strengthen the hand of the tax office and to make sure that people do pay their fair share of taxation. These measures will have a very big impact on the structure of the Australian economy, though not tomorrow. I note the comment my colleague Senator Sherry from the opposition made that he was looking forward to seeing whether or not these changes in structure might have any impact on the Australian economy. You cannot expect changes in tax structure to have an immediate impact. What we are trying to do is set the structure that will have an impact in five to 20 years from now so that Australia does grow and we do provide investments, jobs and incomes for our children and our grandchildren into the future.

This is an extremely important change in the legal structure in Australia that is proposed in these bills. I give one quote from evidence that was given to the Senate Finance and Public Administration References Committee recently. It is from Mr Reynolds, who is an expert on capital gains tax and did a review of capital gains tax changes in the USA where, in the recent past, in the last 20 years, they had had increases in capital gains tax followed by decreases in capital gains tax. When the capital gains tax was increased, revenue went down; when capital gains tax was decreased, revenue went up. In his evidence to this committee Mr Reynolds said:

I think that what you are proposing to do on capital gains tax is the single most important tax change in Australian history.

One of the reasons is the reason you are speaking of: that it brings you out of the mining business, which I greatly respect, into the age of the knowledge industry. Rather than sending your people to Silicon Valley, you will be bringing some of Silicon Valley to Australia.

That is what this is all about, and that is why, when these bills go through the Senate—and I am pleased that the Labor Party has decided to support the government's initiatives in this regard and the Democrats have also in large measure agreed with the government's proposals—they are going to have a very fundamental effect on the structure for Australian business, the two-thirds of the Australian economy which we want to keep growing: growing jobs, growing investment and growing income for everybody. This means that governments can take their third of the economy out of those incomes and do those things for health, education and welfare in looking after those who need looking after.

As I said earlier, these are probably the most important bills with regard to the structure of the economy of Australia that this parliament has seen for many a long day, and I applaud the government for its work with those bills.