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Thursday, 14 May 1987
Page: 3192

Dr WATSON(12.51) —I rise to speak on the Taxation Laws Amendment (Company Distributions) Bill 1987 and the associated Bills. Perhaps I should begin by saying that I hope to put a more rational approach to the House rather than the arrant nonsense we just heard from the honourable member for Jagajaga (Mr Staples), a person who has benefited and who continues to benefit substantially from the capitalist system which he seems to want to tear down at every opportunity.

I begin by congratulating the Government, of which the member is a part-but one would hardly know-on moving in the right direction in attempting to reduce the taxation burden in Australia, at least in the area of removing the double tax on dividends. Many honourable members today, particularly on the Government side, will talk about the positive aspects of that move. Whilst I generally support it, I think it is the right of the Opposition-and I will take that right-to point out some of the potential defects.

Mr Deputy Speaker, in the last 18 months we have seen added to the taxation legislation in Australia about 831 pages; it has gone from about 1,200 pages to about 2,000. The amount is significant, but even more significant is the complexity which has been added to taxation legislation in Australia. My colleagues, both in universities and in public accounting, have difficulty following the recent legislation. The average person in Australia simply has no hope. For example, taking the capital gains legislation, most people who are caught by the capital gains legislation will not know until quite a number of years after the event.

Most proprietors of private companies will not be able to follow or understand the imputation legislation before the House. I refer for example to the franking account, which is going to be absolutely critical to the ability of any company to pass on the maximum benefits to its shareholders. How do franking credits arise? Let me enumerate the different ways. A franking credit arises on the day a company tax instalment is paid in respect of 1986-87 or any subsequent year. It arises when a company is served with a notice of an original or amended company tax assessment for 1986-87 or a subsequent year. It arises when it is served with a notice of determination reducing an offset of franking deficit tax against corporate tax, or a determination reducing foreign tax credit allowable. It arises when a franked dividend is received by a resident company shareholder or an event giving rise to a claim for an estimated debit terminates. A franking credit may also arise at the beginning of a franking year where at the end of the previous year a company has a franking surplus, or at the end of an income year of a trust or partnership where a company receives a distribution including franked dividends from that trust or partnership.

On the other hand are franking debits. In general, a franking debit arises on the day a company is served with a notice amending a company tax assessment for 1986-87 or a subsequent year, reducing the company tax payable; specifying that a foreign tax credit is allowable to the company or increasing such a credit; stating that all or part of a company tax instalment has been applied to reduce certain other tax payable by the company; specifying an entitlement to offset franking deficit tax against company tax assessed; or advising of a determination concerning a claim for an estimated debit. A franking debit also arises when a franked dividend is paid, or an underfranked dividend is paid.

Companies have to keep track of all those possibilities in one account, so that they can determine the appropriate franked dividend. I do not believe that most private company shareholders, most private company directors, would be able to follow all of that. But, more importantly, one has to realise that what has happened over the last 18 months has been a shift of responsibility from the Australian Taxation Office to the individual shareholder. Sometimes one has quite horrendous penalties if one gets it wrong. I refer again to the franking account. An additional tax is payable if one gets that complicated set of arrangements wrong. Additional tax by way of penalty is payable in certain circumstances where a company has, during a particular year, overfranked dividend payments made during that year. Where the franking deficit of a company at the end of a year is more than 10 per cent of the total franking credits of that year and an overfranked dividend was paid during that year, the company is liable to pay additional tax equal to 30 per cent of the company's franking deficit tax. So a 10 per cent error on one side can lead to a 30 per cent penalty. One will not know that for some time after because of the self-assessment process.

The changes to tax legislation over the last 18 months have added significant administrative costs to Australian companies. The Treasurer (Mr Keating) is fond of saying that Australia's terms of trade have gone against us to the tune of some $6 billion and the Australian economy has to react to that change. He is not so proud of revealing that in many cases our costs have gone up because of significant government actions. We are all familiar with interest rates; we are familiar with the wage rate issues in Australia; but just as important are government imposts, government taxes on the Australian community. The changes in this legislation, and in the tax legislation over the last 18 months, have added significantly to the administrative costs of individuals and companies in Australia-the fringe benefits tax, the capital gains tax, and now the imputation tax. Those costs impairs our ability to compete. They raise our costs of production, they raise the costs of our goods and services and they reduce our competitiveness on a world front.

I turn to the effect of this imputation legislation on an investor. The benefit, of course, goes to the Australian resident personal shareholder, the individual shareholder. The extent of the benefit depends upon the dividend policy of the company concerned. If a company pays out all of its assessable after-tax income as dividends what we really have is an integrated tax. The company tax in this case is merely a personal withholding tax at the company level. The companies that are going to benefit, and the people who are going to benefit, are companies with mostly Australian resident personal shareholders. As the honourable member for Jagajaga said, this represents around 15 per cent of the Australian electorate. It is going to benefit public companies, and shareholders of public companies-about 15 per cent of the Australian electorate. The greatest benefit will, of course, come with private companies, where the majority of shareholders are Australian resident personal shareholders. It should be noted that the benefits that will flow in many ways have already been paid for: They are paid for by the increase in the taxation level, from 46 to 49 per cent, as well as being paid for by the fringe benefits tax and the capital gains tax, which will fall disproportionately on private companies.

Having said that the benefits will reside with Australian resident personal shareholders, let me also point out some of the potential problems. In order for personal shareholders to get the maximum benefit companies will have to pay out the maximum franked dividends possible. This raises the potential of their running short of working and investment capital. Companies are going to have to take some action to ensure that they do not lose working capital. They are going to have to create, for example, a dividend reinvestment policy. They are going to have to have rights issues or regular share placements. Each of those alternatives is not costless. The transaction costs associated with those alternatives are significantly greater than the costs associated with simply retaining earnings. So while there is a benefit again to the personal shareholders, it does raise the costs to Australian companies of getting capital.

If a company wishes to retain earnings this raises the cost to the shareholders. Retained earnings will typically be reinvested in the company and these will then be reflected in real increases in the company's share price. We already know that when one has a real increase in a share price that real increase is going to be subject to capital gains tax. So this legislation, as has been suggested before, has shifted the double tax from dividends to retained earnings. We will have double taxation in Australia but rather than dividends being subjected to double taxation we are going to have retained earnings subjected to double taxation.

The capital gains tax on the increase in the real price of shares is only one way in which the capital gains tax will interact with the imputation tax. In fact, when companies sell assets and the sale price is above the indexed cost base they will pay capital gains tax on that difference between the indexed cost base and the sale price. They will not be paying any tax on the difference between the original cost and the indexed cost. So, when these amounts are distributed to shareholders again shareholders will be subject to personal tax. This seems to be against the spirit of the original capital gains legislation in which the Treasurer said the Government would tax only real gains. In this case, the real gains are going to get taxed in the hands of the company but the nominal gains are going to be taxed in the hands of the shareholders.

That question raises a more general issue. Not all dividends received by shareholders will be non-taxable in their hands. The honourable member for Parkes (Mr Cobb) and the honourable member for Mackellar (Mr Carlton) have already referred to the case of foreign earnings being repatriated to Australia. In general, dividends are related to accounting profits and to the company's dividend policy. However, tax is related to assessable income or taxable income. Over a period of time, in general, accounting income differs from assessable income. In general, therefore, we can expect that the dividend which will be given will be different from the amount which is tax free or, if you like, which has been franked. This is going to put companies in an interesting position. As assessable income fluctuates from year to year, they can also move their dividend policy to reflect the changes in the franked amounts available or they can keep their dividend policy constant and allow the difference to be absorbed by the shareholder.

What companies will do, of course, no one knows at this time. But if they adopt the latter course, which I believe a lot of them will simply because dividends reflect long run cash flows and earnings, shareholders-particularly low income shareholders, persons such as retired people, or persons with fluctuations in other assessable income and whose income is not subject to any averaging provisions-could see their taxation position being changed quite dramatically from one year to another.

I realise that our speaking time is restricted, so I will briefly close on a technical or perhaps even speculative issue. I was interested that in the second reading speech of the Treasurer he said the following:

The Australian imputation system is a world first. It will put Australia at the forefront of business reform, and give us one of the most advanced and efficient tax regimes in the world.

I would have thought therefore that somewhere in the speech he might have referred to our taxation agreements, our international taxation obligations. There was no such mention and I wondered what the position was going to be for shareholders resident in overseas countries. For example, I think the United Kingdom Government gives some credit for its part imputation system to Australian resident personal shareholders. Is the same facility going to be given to United Kingdom resident personal shareholders?

The United States has a taxation agreement with Australia in which there is a non-discrimination article, article 23. In that article it is fairly obvious that corporations cannot be discriminated between by the contracting states, yet it is fairly easy to come up with scenarios on where we could have branch offices of United States corporations being treated significantly different from a similar Australian company. One would have wondered whether the United States was going to extract something from Australia. After all, it extracted some things from the United Kingdom and France when the part imputation system was introduced.

I raise these issues because, invariably, when we look at this Government's taxation legislation we find that it is sloppily put together. We see unintended consequences in capital gains taxation and in the fringe benefits tax and I am sure that when we look at the imputation tax in some detail we are going to see some unintended consequences of it. One of the things that seems obvious to me is that some thought should be given to our international agreements. I thank the House.