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Tuesday, 6 December 1960


Mr HAROLD HOLT (HigginsTreasurer) . - by leave - I move -

That the bill be now read a second time.

This bill seeks to give effect, by way of amendments to the Income Tax Assessment Act, to two of the proposals I announced in my statement of 15th November on economic measures. These proposals relate respectively to the treatment for income tax purposes of interest on borrowings in general by certain classes of companies, and to interest on convertible notes.

In my statement 1 outlined why the Government had decided upon these measures. I pointed out how the bidding of higher and higher rates of interest for borrowed money had been working to the disadvantage of governments and other public authorities and, through them, to the disadvantage of the general taxpayer. This was because the less governments could borrow on reasonable terms the more they had to obtain in taxation to finance basic developmental works and the provision of community services.

I also went on to say that the biddingup of interest rates imposed a burden on productive enterprises and added to costs generally. Industry, in general, seeks to raise finance as cheaply as it can, especially when it wants the money for long-term investment and when it has to engage in strenuous competition to sell its products either on local markets or overseas. But in recent years there has grown up a class of borrowers who are not too much inhibited by those considerations. They have found opportunities for using money on a large scale in various fields of activity. The largest field so far has been hire-purchase finance and various other forms of consumer credit; but there are others which have rapidly grown in importance. Some of these borrowers are engaged in lending to small businesses, orto other people who need money for some purpose but who do not have access to ordinary sources of funds.

Others are taking part in speculative real estate operations or in speculative building and similar activities where they expect a quick turnover of their funds and early and rich profits. When I speak of speculative real estate in building activity, I want to make it clear that the Government does not regard all such activity as speculative. Indeed, it recognizes that most building activity and development is highly desirable and serves a vitally important economic function and community purpose. On the other hand, some of it is undoubtedly speculative.

Irrespective of the element of speculation, the overall demands now being made on the building industry are considered to be excessive and to warrant reduction to a lower level. But it is the more speculative activity that I am referring to at the moment. Because some borrowers can find soft marks for lending money at high rates, and because they can make quick and easy profits on turnover, they are prepared to bid aggressively for the money which is their principal stock in trade. They are prepared to outbid other borrowers, public and private alike, who have to keep a more careful watch on costs and who are not in a position to pass higher interest charges on.

This unrestrained competition for capital is not good for the economy, either in the short term or the long. It leads, as I have said, to a forcing up of interest costs both on industry and on governments. It causes taxation to be higher than it need be. It leads also to a diversion of resources away from the sounder and more enduring forms of production and commerce into speculative and even predatory forms of activity. There can be no question but that such activities have contributed much to the prevailing boom.

This readiness on the part of some organizations to borrow large sums at relatively high rates and to outdistance other borrowers in the prices they offer for money, has undoubtedly been encouraged by the fact that, under the income tax law as it stands, interest paid on borrowings for purposes of a business is regarded as an expense of earning income and as such is deductible in full when taxable income is computed. The saving in net cost of borrowing which this provision allows is quite substantial, and it becomes more marked the higher the rates paid for money. As I pointed out in my statement to the House, with the general rate of company tax at 8s. in the £1, the net interest cost of an 8 per cent, loan is only 4.8 per cent. The net cost of a 10 per cent, loan would be only 6 per cent.; and so on.

To allow deductions of interest as a business expense has, of course, been a long-standing practice in taxation. We would have had no thought of disturbing it had it not so clearly been contributing to the harmful developments of which I have spoken. and had we had access to effective alternative measures. We have had the matter under consideration for some time and have reached the view that, in the interests of the public finances, of the general taxpayer, and of the great majority of enterprises in industry and commerce, some modification in the practice ought to be made.

It is, of course, no easy matter to devise amendments to the law which would meet the general objectives we have in view and at the same time be capable of practical administration. We have given a great deal of thought to the subject and have carried investigations to some length. The task has not been made easier by our inability up till now to seek information outside government circles or to consult, as widely as we would have wished, authorities in the world of business at large. But the policy having been announced, we are free to do that now.

Whatever may be our decisions about the form a more permanent scheme should take, it has seemed to us necessary in the meantime to take some form of holding action and this for special reasons. As part of our general plan of action for relaxing some of the pressures on the economy, we are convinced that there must be a sharp reduction in the flow of funds to certain forms of investment, and especially in the funds which are being channelled through the socalled fringe institutions into consumer credit, real estate promotions and the less useful types of financing operations generally. Several of our measures are directed to that end. It is a particular aid, for example, of the selective restriction of bank advances which has been requested by the Reserve Bank of Australia, and it is also one of the main purposes for which trading bank interest rates, and especially deposit rates, have been raised. But, as pointed out in my general statement, the effects of these forms of action could be largely, if not wholly, nullified if the institutions whose access to funds we are trying to limit were left in a position to bid up rates of interest as freely as they have done in the past.

We have therefore decided to bring down an interim measure and it is that which this legislation embodies. Its main purpose is to put an immediate curb on the kind of competition for money we are endeavouring to subdue during the period while a continuing scheme is drawn up and presented to Parliament. We intend to bring such a scheme forward as soon as we possibly can. In saying that, I would like it to be realized that the difficulties are quite formidable. Nevertheless we are conscious of the need to push the matter forward with all possible despatch.

Naturally, some honorable members would like me to say as much as I can about the general nature of the continuing scheme we have in view. At the same time they will appreciate that the Government 'cannot commit itself on points of detail which may yet require a lot of further investigation. In my earlier comments I have given some indication of the general purposes the Government has in view. Perhaps I may reemphasize here two points: One is that it should not be assumed that the continuing scheme will bear any close similarity to the interim scheme now being introduced. The second is that our broad aim will be to reduce as far as possible the advantages which deductibility of interest provides for companies which seek to borrow excessive amounts of money at excessive rates of interest - the accent here being very much on the term "excessive ". This is something which those now tempted to follow either course should carefully ponder.

I expect also that, like the interim scheme now before the House, it will be confined to interest on borrowings by companies. We have provided this in the interim scheme because, as a general rule, the largest and most aggressive borrowers are not found amongst individuals and organizations other than companies. There are, no doubt, a few exceptions, and others could arise, but probably not on a sufficient scale to warrant extension of the scheme beyond the range of company borrowings.

I shall take up now some other features of the interim scheme, lt provides that interest on borrowings by or from certain classes of companies shall remain fully deductible. These companies include banks, pastoral finance companies, approved short-term money market dealers, certain classes of building or co-operative housing societies and companies engaged in the utility services of supplying gas, electricity and water. Interest on loans from governments or public authorities or guaranteed by such bodies will also continue to be fully deductible. The chief reason for making these exceptions is that in most, if not all, cases, coming within the defined categories, rates of interest are subject to some degree of official control or supervision.

We have also wished to ensure that the scheme does not act in any way retrospectively, and that is the reason for a special provision in the bill which gives companies an option as to the basis for calculating the amount of interest for which they may seek deductions in the income year 1960-61. They may deduct up to the amount of interest for which they were liable in the income year 1959-60, or alternatively, elect to deduct the amount of the annual interest liability as at 15th November last, which was of course the date on which I announced the proposal. Besides this, the bill covers the position of companies which had at 15th November entered into firm commitments to borrow particular sums of money, or had actually invited applications for the loan of particular amounts of money. We have taken account of the position of small companies or companies coming on the market, some perhaps for the first time, for modest amounts of loan money. These cases should, we think, be reasonably met by the provision that full deductibility will be allowed for amounts of interest up to £10,000. We have, however, included safeguards against the inappropriate use of this provision.

It has seemed reasonable, too, to make some concession for cases where companies which, in the preceding income period, were relying to some extent on bank finance but have since had to replace that bank finance wholly or in part by borrowings from other sources. The bill provides in effect that for purposes of assessing the deductible amount interest payable by a company in 1959-60 and 1960-61, or the substituted periods, shall not be taken to include bank interest in either period. When, however, bank interest in the second period is less than in the first, the amount of other interest payments eligible for deduction in the second period will be increased to that extent. These are the main features of the bill to which I need call attention at this stage so far as it relates to deductibility of interest in general.

The bill also deals with our proposal to disallow henceforth interest on convertible notes. Unlike the interim scheme on deductibility in general, which has application only to income tax assessed in respect of 1960-61, the provisions relating to convertible notes are intended to have effect indefinitely. I would first mention that the provision will not apply to interest on notes issued on or before 15th November, 1960. Nor will it apply to interest on notes issued after that date if the terms of issue were announced by the company before that date, or the company was, at that date, bound by agreement to issue the notes. The purpose of the new provision is to ensure that deductions are not allowed for amounts raised by a company as borrowings but which are really designed to be a permanent investment in the company and ultimately converted into share capital.

There has recently been a strong trend for companies to issue convertible notes in lieu of shares, and by this means they have been obtaining a deduction for interest paid on the notes. If, however, they had issued share capital, any dividends paid on that share capital would not have been allowed as a deduction in arriving at their taxable income. The notes have in substance more in common with the permanent capital of the company than they have with either short term or long term borrowings. The holders of the notes are, very often if not invariably, given rights corresponding very closely with those of shareholders. It is in these circumstances that the Government has decided that in arriving at the taxable incomes of companies that issue convertible notes in the future, the interest on the notes will not be deductible.

A memorandum explaining each of the clauses of the bill will be made available to honorable members and in these circumstances I do not propose, at this stage, to discuss in detail the technical aspects of the bill which I now commend to honorable members.

Debate (on motion by Mr. Crean) adjourned.







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