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Thursday, 14 May 1987
Page: 3272

Mr LAMB(9.10) —This clutch or group of taxation Bills is part of the very wide package of taxation reforms introduced with the Government's White Paper and carried out over time and into effect. It essentially ends double taxation on income from dividends. This reform was recommended by the reports of the Asprey Taxation Review Committee 1975 and by the Campbell Committee of Inquiry into the Australian Financial System some six years later, yet the Opposition, then the Government, decided not to do anything on the matter and did not take up the reforms. Not once since the Liberal Party became the Opposition have we heard of any action in this area; nor indeed have we heard any details of any taxation policy. If we were to wait any longer, I am sure that the males in this House would have long beards. The Bills will put an end to double taxation on dividend income. Honourable members know that dividend income is currently taxed twice-first as company profits and then as personal income. The reform will cost the Government some $300m in taxation forgone, and it complements the huge tax reforms, the tax reductions of $4,500m which this Government has brought into effect flowing from that White Paper.

If I can explain it in one sentence or so, the imputation of dividends means that shareholders' dividends will be credited with the tax paid by the company on its profits before distribution. It is a very pure form of imputation; it is probably as pure as any in the world, matched only by West Germany. West Germany also has full imputation, but there the company rate of tax is 56c in the dollar, whereas in Australia it will be 7c less at 49c. Shareholders will receive imputation credit to the point where they will receive the benefit of substantial tax reductions. When the Liberal Party was in government, for every $1 distributed by way of dividends, shareholders received only 54c as the 46c, the rate of company tax, was deducted. At the top marginal rate of tax then in existence-60c in the dollar-they ended up with 21.6c; in other words, just over 20 per cent of the total distributed dividends. The effective tax rate then was 78.4c in the dollar; but under this Government, not only have we reduced the top marginal rate of tax to 49c, but we have also allowed for imputation of the new rate of tax by companies-49c-so that we can get almost a 40 per cent reduction in the tax paid on dividends distributed under the new taxation arrangements. But for those on lower marginal rates of tax-say, pensioners, retirees, and those few people who, even though on low incomes, have managed to put a small nest egg aside for shares-will almost have their tax bills wiped out. Some will even end up with a tax credit that they will be able to use to offset the tax they would otherwise have paid on other forms of income.

Right now, pensioners are discouraged from investing their life savings to earn revenue from shares. Their financial advisers persuade them not to do it; but here the whole scene has been changed. They will be able to offset the tax credits through the imputation of dividends against other income, and I think we will find that a broader range of people will acquire shares and reap the benefits of this tax reform. It will give a much wider choice of investment to those in retirement. The honourable member for Richmond (Mr Blunt) was rather scathing on the fact that, if you offset the tax credits against other income and still had tax credits to go, you could not carry it forward. While the Government is not deliberately working against negative gearing in the acquisition of shares, the benefit of not being able to carry it forward from the tax equity point of view is that people will be somewhat discouraged from negative gearing their share acquisitions and being able to carry forward tax credits to minimise their income to the point where they have a negative income. That is undesirable from the tax equity point of view. The honourable member for Richmond, together with his mates who are very much into negative gearing, might find that it is undesirable but, as a reformist government which wants equity in tax, we find it very desirable that a person cannot carry on those tax credits ad infinitum.

The honourable member for Parkes (Mr Cobb) made the point that the Government had increased company tax from 46c in the dollar to 49c and had thus paid for this reform. However, I think that tax reforms which redistribute the tax burden and which are revenue neutral are very desirable. Over the past decade or so we have seen the contribution by companies to total government tax revenue drop from some 13 per cent to 7 or 8 per cent. This measure will reverse that trend slightly so that we will get a more equitable contribution from companies, and thus they will bear their fair share of the tax burden. The increase in the rate of 46c to 49c is a desirable move. Moreover, instead of investors and companies concentrating on tax minimisation, because the two levels-a 49 per cent top marginal rate of tax for personal income tax and 49c for company tax-are the same, both investors and company managers will be able to concentrate on performance, on the allocation of resources, and on the way in which their companies are run. We can expect an improvement in managerial competence, instead of concentration being directed solely towards how to minimise tax. Australia will be the beneficiary of this; we will have extra growth and we will be able to concentrate on the desirable side of company production.

It has also been said that through this measure we will assist the wealthy. It has been calculated-and I think the honourable member for Jagajaga (Mr Staples) pointed this out-that only very few in the community, some 9 per cent, hold shares, and that much of that shareholding is concentrated in very few hands, perhaps 5 per cent. In considering the portfolios that people hold, and when we consider that people have insurance policies and that many of them are thereby shareholders, one finds that shareholding is far more widespread. The surveys which indicated this small concentration of share ownership did not consider the area in relation to which people were unaware that they were actually benefiting from being shareholders and policy holders at the same time.

The sort of charge that has come from the Opposition, that this Labor Government, this government of reform, is acting on behalf of the rich only, overlooks several important factors. Indeed, the people who will benefit most from these reforms will be those involved in small business. For those people who have incorporated a business-and businesses incorporate for many reasons, to limit their liability, and so on-those who have formed a limited company, and it may be that a person is a sole shareholder, will, through this tax reform, be able to slash their tax bills by some 40 per cent. They will be the big winners; they have been waiting for some 30 years for this reform. However, the Opposition, which was in government for some 24 or 25 of those 30 years, did nothing. Yet members of the Opposition argue that they are the champions of small business, that they are the only ones who have the interests of small business at heart. Yet it is this Government which has the runs on the board. Our record shows that we believe in fair and equitable tax, and we are the only government actually to give, not tax shelters and not improper incentives to business, but proper incentives developed on the profit motive, on reward for effort-not involving the sleazy way to profits, namely, through the back door of tax rorts.

The low income earners, with small holdings, will actually get the biggest benefits from this reform. In other words, it is a progressive tax. I shall explain that. Someone on average weekly earnings, earning say $450 a week, or $23,500 a year, with, say, $1,000 of income from shares, will get a tax cut of almost $577-that is, a tax credit that he will be able to offset against his other income. The lower the marginal rate of tax-that is, the lower the income-the greater the benefit to a shareholder from the imputation on tax, or from the end to double taxation on dividends.

Small business will also benefit from the allied provision of the change to Divison 7-that is, retained or non-distributed earnings will no longer be taxed. Small businesses will be able to build up their equity, their capital, without a tax disadvantage. They will be able to resist takeovers, they will no longer be highly geared and they will no longer be rich in their retained earnings and therefore ripe for takeovers. Small business, through this tax reform, will be able to compete on a more equal footing with bigger business. I do not think we should underestimate the value of this reform to small business.

The imputation system will also cut the bias amongst companies in favour of debt over equity. Under the Liberals' form of taxation, when double taxation of dividends was in operation, expansion and takeovers were financed largely by borrowings. If one borrowed locally one forced up the rate of interest as one competed for available funds. If one borrowed overseas one forced up the foreign debt. I remind the House that 60 per cent of our foreign debt is sourced privately, not publicly, as the Opposition would like people to believe. This reform removes that bias and attracts equity borrowing. In other words, capital will be gathered through share distribution. No longer will we have a bias in favour of enlarging, expanding, through debt borrowing; it will be done through equity.

These are very desirable consequences. The legislation will make it easier to raise venture capital. It will reward new ideas. It will reward initiative. There will be greater growth. There will be more to share with pensioners, low income people and so on. This reform will encourage Australians to invest in Australian companies. We will have `own Australian' as well as `buy Australian'. Management, as I said earlier, will be forced to concentrate on its efficiency and its performance rather than just minimising its tax. As the honourable member for Jagajaga said, we have given business a $300m drop kick to the forward line and business has marked it in the goal square, but we now want it to turn around and put it through the big sticks. We now want it to invest more in Australian companies. We want it to invest in production. We want it to turn on the engine of Australia's production. We now expect business to respond, investment to increase, employment to increase and unemployment to decrease, so Australia will become a wealthier nation as a result. Our value added exports will increase. Our products will be able to compete with imports. Our balance of payments will improve and our foreign debt will decrease. These are very desirable reforms. I compliment the Treasurer (Mr Keating) on them. They form part of a most comprehensive package of tax reform, and I commend the Bills to the House.