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Monday, 6 December 1999
Page: 12857


Mr McMULLAN (5:53 PM) —I am pleased to have the opportunity to rise to speak on this message from the Senate in lieu of my colleague the member for Hotham, the Deputy Leader of the Opposition and shadow treasurer, who is unfortunately unavoidably detained. He asked me to say a few words about this amendment, which the opposition welcomes because the amendment to the New Business Tax System (Integrity and Other Measures) Bill 1999 reflects the consideration in detail debate held in this House on this bill on 24 November, conducted by the Treasurer and shadow treasurer. It was one of those more unorthodox circumstances in this House in which some of the debate that took place in this parliament actually affected the outcome of the laws of the land. This is not a precedent that executive government necessarily welcomes, but in this instance I think Australian business certainly welcomed the outcome. I congratulate my colleague the shadow treasurer for the negotiation which he undertook overall and, in particular, as it relates to the amendment that is before us today.

As part of the agreement between the government and the opposition on the passage of this bill, the government agreed to amend the general anti-avoidance provisions of the income tax legislation, generally known as part IVA, in order to deal with a potential problem that arises from the government's capital gains tax provisions. The underlying policy objective is to strengthen the current part IVA provisions of the income tax legislation to ensure that schemes entered into which have as their purpose a tax benefit by conversion of income to capital gains should be caught. This measure is necessary because of the potential in some circumstances for a widening of the gap between the effective capital gains tax rate and ordinary marginal tax rates. Of course, there will also be circumstances where the effective capital gains tax rate on investments will rise because of the government's changes, but that is not the situation that this amendment is aimed at.

When there is a widening of the gap there is added incentive to enter into schemes to avoid tax. Accordingly, there needs to be a stronger anti-avoidance measure to deal with such an incentive. The need for this measure has been demonstrated in the evidence before the Senate inquiry into the government's tax package. The government, in our view—and it was the finding of the Senate inquiry—has seriously underestimated what is referred to as the `conversion effect' from introducing the CGT changes without this anti-avoidance measure. They say that it will cost only $20 million in year 1, rising to $180 million in year 5. We cannot know what the actual amount of the leakage will be, but even the government admits there will be some.

Tax experts who came before the inquiry—for example, Professor Rick Krever, who worked on the Ralph review as an expert consultant, Professor Evans and Dr John Edwards—consider these estimates by the government to be ludicrously low. The tax practitioners themselves were very critical of the potential for avoidance that comes from such a measure when the anti-avoidance provisions were not being strengthened. Peter Poulos from KPMG said:

. . . if you are going to have a lower rate of capital gains tax as distinct from ordinary income then you are inviting people to look at trying to structure their affairs so that they can take their profit in a capital form rather than an income form.

Paul McNab from PriceWaterhouse said:

So the government's faced with the possibility that reducing the rate on capital gains might lead to what could be described as domestic avoidance behaviour.

Professor Robert Deutsch from the University of New South Wales said:

It will push the taxpaying community back to trying to turn income into capital where possible.

The Treasurer has accepted the proposal to strengthen part IVA—to plug this hole—resulting in this amendment, which is merely a redraft of the one moved earlier by the Deputy Leader of the Opposition. It is interesting to note that in his letter to the shadow Treasurer on 24 November, the Treasurer said:

I have received advice from the Australian Taxation Office that your proposed integrity measure would not add to the government's proposed strengthening of part 4A.

Consequently, as that `proposed strengthening' is not yet before the House, it is especially appropriate that the House agree to this important measure today. We need to remember that, when addressing the Senate inquiry looking at these issues, senior tax officials stated that it was unclear whether the new part IVA would apply to these conversion schemes. If it does not add to what the government is proposing to do by way of strengthening part IVA, then the opposition is heartened that the government is genuine in its efforts to strengthen part IVA.

Labor welcomes the fact that the government has conceded the need for an effective measure to stop the contrived schemes whereby people would convert their income into capital gains thus, for the purpose of the exercise, attracting a lower rate. (Extension of time granted) We should remember that this amendment on its own will not plug all the business tax revenue holes identified by Labor in this package. Those revenue holes can only be filled by the government doing what it has committed itself to doing—implementing all the measures in full that are not yet before the parliament and doing so in a way that can be demonstrated to reap the revenue which has been estimated in the costings.

The Treasurer has now pledged in writing that the government will introduce all the business tax changes announced in full. We will hold him to that. He cannot afford to be tagged as being any softer on tax avoiders or any softer on the revenue base, particular after his GST deal with the Democrats has shaved the cash surplus to a wafer-thin $500 million. The Treasurer's written guarantee to deliver these measures in full is therefore a crucial concession. It is in that context, and on the basis that the amendment that we are accepting is merely a technical redrafting of the amendment which was initiated and introduced by my colleague the Deputy Leader of the Opposition, that I indicate on behalf of the opposition that we support these amendments.