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Monday, 6 December 1999
Page: 12859

Mr RUDD (6:04 PM) —This is an important Labor amendment to the government's business tax reform package. It is important because one of Labor's stated and fundamental preconditions for the passage of the Ralph legislation is that the anti-avoidance measures contained within the legislation be as robust as possible. Anti-avoidance is important not just because it is a question of fundamental taxation justice but in addition because of our overall concern about the overall revenue neutrality of the package as a whole.

This Boucher amendment is designed specifically to strengthen the provisions of part IVA of the act. Mr Boucher, the former Tax Commissioner, is no slouch on questions of anti-avoidance. He is a gentleman who takes this matter seriously.

Mr Emerson —Boucher's no sloucher!

Mr RUDD —Boucher, as my colleague the member for Rankin notes from these benches, is no sloucher. His language was put forward to the Treasurer and, subject to some deliberation on the part of the Senate, it has come back to us in the form of the language contained in the current amendment, which is acceptable to the opposition. This exercise demonstrates what constructive opposition can be all about, and we have taken that responsibility most seriously.

The Senate inquiry, recently concluded, into certain aspects of the business taxation package has also dealt with the specific issue of anti-avoidance and arbitrage in some detail. There is a specific recognition of this problem in the Ralph report itself. In the printed text of the Ralph report, there is a recognition that losses to revenue of $20 million, occurring as a consequence of arbitrage between income and capital gains, would occur in the first year, but rising most seriously—at their admission, in their numbers—to $180 million in year 5. That is a total of some $500 million in revenue lost to the Commonwealth as a consequence of arbitrage activities over five years. Again, I emphasise these are the government's own figures. We are talking about those which the Treasury prefers as opposed to the commentary which has come from beyond the Treasury which has been highly critical of these assumptions.

In looking briefly at some of the commentary on this question which has been referred to in the Senate committee report, we look at the observations of Professor Chris Evans. I will quote from page 32 of the Senate report because I think it is instructive to the debate. The report says:

Professor Chris Evans addressed the issue of conversion of income to capital in his submission to the committee and noted that it seemed `highly contentious' that the arbitrage effect related to the conversion of income to capital would be as low as $500 million over five years. He pointed out that there was very little detail in the Ralph Report to show how the figures were arrived at. He assumed that the figure was based entirely on the increased incentive for shareholders to realise capital gains on shares rather than to receive the income as dividends. He therefore concluded that the Ralph Report figures did not include the impact upon PAYE receipts.

That is a most significant observation from Professor Chris Evans and creates some of the basis on which we as a constructive opposition acted in proposing the amendment which we have put forward. Professor Krever also in the Senate committee report has noted in his evidence the additional potential impact of Australia's negative gearing regime, noting that the majority of overseas countries with which this package has been compared do not allow for such a negative gearing regime.

In fact, when you look at the overall implications for revenue and you take both these sets of measures together—that is, the questionable level of realisations from the changes in the capital gains tax regime, which has been the subject of considerable debate in this chamber, as well as doubts over the leakage arising from the conversion of income to capital—there is in fact the beginnings of the emergence of a significant problem in terms of the overall revenue neutrality of the package. Again, it is worth reflecting on some of Professor Evans's observations on page 30 of the report where he submitted that:

. . . by varying the assumptions about responsiveness of CGT realisations to changes in the CGT rate (and by adopting different assumptions about the propensity of taxpayers to convert highly taxed income to preferentially taxed capital gains) very different revenue outcomes are achieved.

A sensitivity analysis has been conducted which shows that over the five year period covered by the Review, the estimates of the small (positive) revenue impact of $350 million could be transformed (in a worst case scenario) to a very significant revenue leakage of up to $5.5 billion.

These observations and conclusions of the Senate report demonstrate the wisdom of this amendment moved by the Labor Party and why we support it. (Time expired)