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Thursday, 14 May 1987
Page: 3181

Mr COBB(11.52) —This morning we are dealing with a mass of five Bills relating to taxation-the Taxation Laws Amendment (Company Distributions) Bill, the Income Tax (Franking Deficit) Bill, the Income Tax Rates Amendment Bill, the Taxation Laws Amendment Bill (No. 2) and the Bank Account Debits Tax Amendment Bill. As the National Party of Australia spokesman responsible for Treasury matters, I want especially to deal with the imputation aspects that my colleague the honourable member for Mackellar (Mr Carlton) dealt with this morning, the car log book substantiation requirements for employers and the extension of powers for the tax gatherers, which the National Party will be opposing. In the Committee stage, I will move an amendment to omit sub-section 263 (3) dealing with the draconian increase in tax gathering powers. That sub-section is a horrible piece of legislation with enormous detrimental practical effects, and it should be omitted from the Bill.

I wish first to deal with the imputation aspects of the legislation. Currently, company dividends distributed to shareholders are taxed twice, firstly at the company level of 46c in the dollar. Therefore, if a dollar dividend is distributed to a shareholder, 46c is taken out of it and the shareholder receives 54c in his hot little hand. Secondly, the shareholder has to pay tax on the dividend. If he happens to be in the top marginal bracket of 60c in the dollar, as it has been in the past, another 60 per cent will be knocked off the 54c company tax paid dividend, thus reducing it to 21.6c. Therefore, the original dollar has come down to 21.6c, which gives an effective tax rate of 78.4 per cent. I think that honourable members on both sides of the chamber would agree that that is an unreasonable burden.

After imputation, the original dollar will have 49c taken off it, so the shareholder will receive 51c in his hot little hand. As he will not have to pay any further tax, instead of having 21.6c he will have 51c. His tax rate will then have fallen from 78.4 per cent to 49 per cent.

Mr Martin —Is that good arithmetic?

Mr COBB —Yes. The mechanism used will be that the tax paid by the company will be imputed to the dividends it pays. That simply means that each dividend will have a tax credit either allocated to it, attached to it, attributed to it, ascribed to it or credited to it, and it will be called a franked dividend. For example, as we have franked letters on which postage has been paid, dividends will be franked, which means that the tax will have been paid on them. When the shareholder finally receives his dividend, if it is fully franked the tax will already have been paid at the top rate of 49c in the dollar. Therefore, no further tax will be payable because the 49c will be equivalent to the highest personal rate of tax payable after 1 July 1987. The extent of the franking must be fully declared by the company, and it must be done the day before the dividend is distributed.

At first blush, the whole scheme appears quite marvellous, eminently sensible, simple, fair and so on. We are probably all wondering why we did not introduce the imputation scheme years ago. However, it is from here onwards that I believe I can explain why the imputation package that the Government is giving us, even though it has many desirable points, is in many ways a fraud, a con and certainly not what it is cracked up to be. In short, imputation Keating style is very much a let down. The first thing to note is that the company tax rate will rise from 46c in the dollar to 49c in the dollar. The rest of the world is going the other way and reducing company tax levels, but we are raising ours, and that is something about which we should be concerned. The rise from 46c to 49c alone will cost businesses $475m, and so cause them to have less profit to distribute to shareholders in the first place.

Mr Millar —That is a contradiction.

Mr COBB —As the honourable members said, it is a contradiction. The next thing to note about the legislation is that it will benefit only a small minority of shareholders. Most people in the community will probably think that imputation on dividends will benefit 100 per cent of shareholders, but that is not so. For example, the top 20 shareholders in any reputable public company are almost all tax free institutions or other corporations. They will gain no benefit from imputation as they do not pay tax anyway. The tax credits franked to the dividends they receive are useless. No doubt, at some stage further down the track, a growth industry will emerge with those companies trying to convert that potential asset into some tangible form, such as convertible notes.

In effect, on average only 15 per cent of shareholders are private individuals, which means that 85 per cent of shareholders are disadvantaged by the legislation because the company tax has risen from 46 per cent to 49 per cent. Let us think of the minority 15 per cent, and work out just how much they will benefit. Even here, I do not think that we can be fully satisfied. If those shareholders are paying less than 49c in the dollar-that is, earning less than $35,000 a year after 1 July-the imputation credits they receive with their dividends will exceed the tax they would need to pay on the franked amounts of the dividends. That means that they will have excess rebates, but they can now be offset against other income, including capital gains income-which is as it should be. However, if, for some reason, the shareholder does not have enough other income against which to offset his excess rebate, he must forfeit it. He cannot write to the Treasurer and get a refund, nor can he offset it against, for example, his Medicare levy. I think that that is an anomaly. In other words, this is not 100 per cent fair dinkum imputation legislation. It may well be a step in the right direction, but it is not 100 per cent fair dinkum.

Businesses that suffer a loss will also lose the advantage of dividend income. Quite obviously, low income earners will be the most adversely affected by having to forfeit the benefit of the excess rebate. Surely the Government did not have that intention in mind when it introduced the system. If there is excess rebate that cannot be used, I do not necessarily think that there should be a refund from the Government but at least the shareholders should be allowed to carry over the unused portion of the franked rebate to the next year.

The big gainers from the imputation legislation will be the individuals who depend on dividend income as a large portion of their total income. The group which immediately comes to mind is the retirees. They will benefit substantially from this legislation. It is not hard to see a growth industry springing up in this area. For example, if a shareholder gets a dividend income of $5,000, because tax has already been paid on it, the shareholder can earn another $12,200 in round figures before he has to start paying tax at all. In other words, he can earn a total income of $17,200 which will be totally tax free. Before this imputation legislation was brought in such a person would have had to pay tax at the level of $3,134. So, obviously these people will benefit. Retirement income planners will love this legislation.

However, there are quite a few anomalies. I have said that one cannot offset any excess rebate one has against the Medicare levy. An outrageous aspect of this legislation is that the Medicare levy must be paid on the value of what is called the `grossed up' dividend. Let me explain. If one gets, say, $51 of dividend in one's hand, one has to add the $49 tax portion to it in the calculations and pay the Medicare levy on the final grossed up value of $100.

Mr Conquest —It's a con job.

Mr COBB —It is. In other words, one has received $51 in one's hand and one has to pay the Medicare levy on $100. In effect, this means a de facto doubling of the Medicare levy from 1 1/4 per cent to 2 1/2 per cent because $100 is close to double $51.

Mr Millar —Surely that's not correct.

Mr COBB —It is correct, although it is hard to believe. Another anomaly is that the indexed portion of a capital gain is taxable if it is distributed to shareholders. For example, if a company bought an asset for $100,000 and, five years later, sold it for $150,000 and there was inflation over that period, the consumer price index having risen by 20 per cent, normally $20,000 of the $50,000 capital gain would be exempt from income tax. However, if it is distributed to shareholders such as if the company were winding up or if it just wanted to distribute it to shareholders, the company would have to pay a capital gains tax, in effect, on the full $50,000. So shareholders, who will get the dividend, must pay tax on the indexed portion of the capital gain. This is quite clearly contrary to the spirit of the capital gains tax legislation, which is that income tax should be levied only on real gains. Forty-nine cents in the dollar on $20,000 adds up to a considerable amount of money in this example-namely, $9,800.

Another anomaly which has been mentioned this morning is that companies with overseas interests are badly treated. The example of Elders IXL Ltd comes to mind. I do not expect people in this chamber or around Australia to pull out their handkerchiefs and shed tears for Elders. I use its name because it has been bandied around in the Press a lot lately. Elders, for example, earns 50 per cent of its income off-shore. If it earned profit in England and wanted to bring back that profit to Australia, it would pay tax in England at 35c in the dollar; it would then bring it back here and, before Elders could distribute it, it would have to be topped up to 49c in the dollar by paying an extra 14c in the dollar. There is nothing wrong with that. But when Elders distributed it to its Australian shareholders it could pass on only the franking credits on the 14c in the dollar portion. Obviously, that is a disadvantage to Australian shareholders.

The Government uses the tax haven argument, saying that Australian companies will go off-shore to tax havens. I do not think that argument stands up to the full extent the Government has in mind. It is not so easy to go into tax havens. The point to be made about tax havens is that normal business countries, such as England and the United States of America, et cetera, have, in effect, become tax havens relative to Australia because their company tax rate is much lower than ours. To be consistent, foreign tax paid should give rise to a credit to a company's franking account. If not, these companies will do one or more of a number of things. For example, Australian companies with a substantial portion of their operations overseas will tend to move off-shore totally. If this happens, less overseas income will eventually come back into Australia. Overseas investors will tend to invest only in Australian companies which make most of their income in Australia. Another consequence could be that Australian companies which want to maintain high, fully franked pay-outs to their shareholders will be discouraged from investing overseas. So the consequences will be that we will lose the opportunity for new markets and forfeit the chance for an economy of scale because Australia is only a small market.

For overseas residents receiving dividends the franked amount will be exempt from dividend withholding tax. This will cost Australian revenue $280m. The anomaly is that, if franked dividends are paid to the non-resident trust-in other words, a trust in off-shore Australia-which then distributes them back to an Australian resident beneficiary, that Australian resident will not get the benefit. I believe that some sort of tracing mechanism should be put in this legislation so that imputation credit is carried with the dividend overseas and back to the Australian citizen. At present the credit is lost as soon as it goes overseas.

Another bad part of this legislation-I admit that it is unavoidable-is that companies will now have to keep a franking account record. No forms are out yet. It will cost a considerable amount, especially for small business. Many small businesses have accounting bills of as low as $1,000 or so. This legislation will double those bills because penalties for under-franking and for over-franking the account will mean that accounting records will have to be absolutely spot on. So considerable work will need to be done.

Because the 49c maximum rate operating for personal income tax will now operate for company tax, there will be no reason to operate as a sole proprietor a partnership or a trust, which is not necessarily a bad thing. But let us consider companies with low tax payments. They will have little franked dividend to provide to their shareholders. As a result, they will tend to look to taking over companies which have more franking dividend income than they can use. Such companies can accumulate franking credits and so will become takeover targets. I am not saying that is a bad thing but it will be a consequence of the legislation, and something to watch. So a Bond Corporation, and Elders or a gold mining company, with little franking credit, could take over one of these institutions or a Phillip Morris type company, turn the excess franking credits into a tangible asset if it can find the mechanism to do so, such as by issuing preference shares, and effectively distribute it to their shareholders. Clearly, the ramifications of this imputation legislation will be anything but simple.

What of companies which pay low dividends? For example, mining companies would seem to be disadvantaged by this legislation. That will not necessarily prove to be a big disadvantage because shareholders who buy shares in these companies tend to do so not for dividend income but with the intention of getting capital appreciation. One thing that concerns me, though, is that the value of tax benefits and incentives given to companies will be eroded under imputation because they reduce the taxable income a company pays. These companies will earn less taxable income and, therefore, may not have enough franking credits to distribute with their dividends to their shareholders. In practice, if companies start distributing dividends to shareholders with less than the full franking amount paid, it will make shareholders pretty unhappy. It will work especially against sunrise companies and smallish, entrepreneurial companies, such as those in high technology areas, which have high research and development outlays which are now tax deductible. Some of our most successful computer software houses have set up successful sales operations overseas. Shareholders in Australia who have taken a risk and supported these companies will now have to pay tax on at least part of their dividends.

To sum up, the National Party's thoughts on this imputation legislation are that it has many good points and is a step forward in an attempt to eliminate double taxation, which is commendable. However, the legislation is very much a Clayton's imputation package. Despite popular belief, it will benefit only a minority. It is only half-hearted in its attempt to restore tax equity in the shareholder dividend area. It is riddled with anomalies, some of them quite blatantly wrong in their impact. A mass of changes and refinements will undoubtedly be necessary to this legislation in the future. In short, imputation Keating-style is like a shiny red apple that when bitten open reveals inside not a grub but half a grub. We are left lamenting as to what could have been.

In the short time I have left, I will talk briefly about the substantiation of log-books. There are some benefits in the legislation regarding this dreadful keeping of log-book records. The Government has quite rightly taken up many of the Opposition's suggestions.

Mr Peter Fisher —It took a long time.

Mr COBB —I admit that it did, but at least it has done so. I give the Government credit for that. Rather than having to keep receipts to verify fuel and oil expenses, the recording can be done by using odometer readings. People can switch from one method of deduction to another from one year to another. That is a commendable step forward. Instead of having to keep logbooks all the time, they will have to be kept for only a 12-week period. That can carry on forever, provided the claims do not vary up or down by more than 10 per cent. If one's business costs increase by more than 10 per cent one has to establish a new 12-week logbook period if one wishes to claim. If there is an increase in the number of cars in one's fleet, one has to establish a new 12-week logbook period for each car. Records have to be kept for between 3 1/2 years and seven years, depending on what is being claimed.

One good thing for the farming community is the provision for unregistered cars. This is something for which we pushed very hard. If one has an unregistered old car, such as a jeep or a utility, on a farm and it is used substantially for business purposes, one does not have to keep a logbook record for it, and that is good.

Tax concessions for Australian films are another provision in this legislation. If films have a significant Australian content, they have generous tax concessions. If they have a significant non-Australian content, that is also taken into account. I hope that that is not following the line of Actors Equity in trying to stop top actors who have audience appeal coming out here.

At the Committee stage I want to talk particularly about the information gathering and access powers that are given to the Commissioner of Taxation. I think these are quite wrong. Overall, the imputation package is quite extensive. There are some good things in it and there are some bad things in it. It is a pity that the Government could not have spent a little more time on it and got it correct in the first place-

Mr DEPUTY SPEAKER (Mr Cowan) —Order! The honourable member's time has expired.