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Thursday, 8 December 1960

Mr CAIRNS (Yarra) .- This legislation was discussed last evening at the second-reading stage, and I think the first point that emerged was that the method adopted by the Government to achieve the purpose of regulating the funds obtained by certain financial institutions is a fairly inflexible one. It is the tax weapon applied to companies of particular kinds. Clause 4 of the bill excludes from the operation of the legislation defined companies and other concerns, of which there will be a large number. The provision which attempts to regulate the funds borrowed by financial concerns has been made necessary because the application of the banking power to trading banks only has allowed a large number of other concerns to escape any kind of regulation.

We were told during the second-reading debate what consequences have flowed from this. There has been an extraordinary increase in the amount of money obtained and lent by unregulated finance companies, while the regulated concerns, the trading banks, have increased their borrowings and lendings to a relatively far lesser extent. In its attempts to deal with a situation in which a portion of the financial system is unregulated and a portion is regulated to a certain extent, the Government has chosen the method of disallowing as a deduction for taxation purposes interest paid by certain financial concerns. It has excluded from the operation of this provision a considerable number of concerns which are defined in clause 4 of the bill, which amends section 51 of the act. The concerns to be excluded will be paying interest which will be called excepted interest.

What are these concerns? First of all, a bank is such a concern. The second group includes a company or body in respect of which, on the day on which notice of the assessment of the amount of the taxable income for the income year ending on 30th June, 1961, is served, there is in force a declaration by the Treasurer (Mr. Harold Holt), made after consultation with the Reserve Bank Board, declaring the company or body to be a declared pastoral finance company, or a declared dealer in the short-term money market. So, in addition to banks, there are also declared pastoral companies and declared dealers in the short-term money market. These two kinds of concerns include companies handling a great deal of money. In the first place, many of the pastoral companies are lending institutions, the activities of which are identical with those of finance companies that are being affected by this legislation. Some of them are borrowing at high rates and lending at high rates. With the establishment of the short-term money market, many of the dealers in that market are playing an increasing part in the financial operations of the country.

The next type of concern which is excluded is a body registered as a building society or as a co-operative housing society under the law of a State or Territory of the Commonwealth. Included also are companies registered under the law of a State or Territory relating to co-operative companies, the principal business of which is the provision of housing or of finance for housing.

The real financial problem that has arisen in respect of these concerns springs from the fact that there has been partial regulation in the past. The expansion of the money supply has been regulated in such a way that in a certain section of the economy it has been kept under some kind of control. This, in part, has been the reason why there has been an undue expansion, almost an explosion, in the provision of finance in the unregulated parts of the financial sphere.

The first point I want to make about this method of using a flat tax exemption is that it still leaves the economy partly controlled and partly uncontrolled. This is said to be an interim measure, although if any one who had hopes that it would apply for only a short period heard the Treasurer last night, I do not think he would now be nearly so hopeful. The right honorable gentleman said that permanent measures were being devised, and I suggest that when this is being done, instead of using the method set out in clause 4 of the bill of excluding by definition certain concerns, the Government should, if it is going to use the tax weapon as a method of control and regulation of money raising and money lending, use it selectively. Instead of applying it to some companies which are set out by definition, and withholding its application from others which are also defined, it should apply it to all in relation to the interest that they pay and claim as a tax deduction. In other words, low-interest rates should be allowed as a tax deduction but high, excessive interest rates should not. Instead of excluding some companies, they should all be included, banks as well. If interest charged at less than a certain rate were allowed as a tax deduction or on a sliding scale, relating the interest charged to the tax deduction - a much more flexible instrument than this and one that would not require much thought to devise - a more effective and appropriate method of regulation would result.

I suggest this method because what is needed here is selective control. The point I tried to make last night in answer to the honorable member for Wentworth (Mr. Bury) was that the concern here is not so much the high profits that these people make as the fact that they are able, in the circumstances of full employment and an inflated economy, to charge very high rates of interest. In this sense, they are inefficient. Efficiency in capitalism is tested by the rate charged for services or by the relative cost of goods produced. These hire-purchase companies, which are now coming within the provisions of the bill, are inefficient on that test. They are charging and are able to charge high prices for the service they provide of lending money. That, on the fundamental test that this system applies, is inefficient.

In disallowing interest charged as a tax deduction, we have a most effective means of dealing with the situation. We can, in effect, force efficiency out of the lending institutions, instead of allowing them to be completely free to charge whatever an expanding inflated economy can be made to pay. Here is a very effective instrument, if it is used selectively. The whole problem here is to achieve a selective control of lending. There is no natural supply and demand factor, as a law of nature, which solves these problems, as the honorable member for Mitchell (Mr. Wheeler) seemed to imply last night. All these things are the result of what we do.

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