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Thursday, 17 February 2000
Page: 13744


Mr RUDD (11:20 AM) —I rise specifically to address the bills before the House, the New Business Tax System (Miscellaneous) Bill 1999 and the New Business Tax System (Venture Capital Deficit Tax) Bill 1999. My comments will principally go to the latter rather than to the former. These bills, as the House is aware, have the support of the Australian Labor Party. The principle of bipartisanship has been applied to this set of bills because it is the collective view of the Labor Party that they represent a positive contribution to business tax reform. This has been to the great chagrin of the Australian Treasurer, Mr Costello, who throughout the debate on business tax reform in this chamber and in the broader community had in his heart of hearts a great hope that the ALP would oppose the business tax reform so that he could simply position us as being oppositionists in the political marketplace. Regrettably, we did not accommodate the Treasurer's political strategy, because the view within the Australian Labor Party was that the overall requirements of business tax reform in this country are pressing and go beyond the immediate partisan divide.

There is also a clear contrast between the Labor Party's approach to business tax reform and the issues which arise in that other element of so-called taxation reform which has been before the parliament, namely, the GST. My colleague the member for Rankin has just addressed elements of it. The key differentiation in our evaluation of these two sets of legislation is as follows: there has been absolutely no evidence produced through any of the Senate inquiries conducted into the goods and services tax in the course of 1999 that that tax reform of itself will generate any measurable additional increment to economic growth in Australia. Quite apart from its deleterious impact in terms of social justice and equity, there was, purely on the economic argument alone, no convincing set of evidence before any of the Senate committees that a consumption tax would produce a growth dividend other than that which would be produced in the normal set of circumstancesconsistent with the business cycle of the time.

By contrast, when we look at this set of proposals for business tax reform, there is some evidence that the implementation of this raft of measures will in fact add to the overall level of investment activity in the economy and therefore provide an additional increment to growth. That constitutes, in the evaluation of the Labor Party, the key distinguishing principle as to why we oppose the GST yet support this raft of measures which are wrapped up in the Ralph set of reforms. However, Labor Party support for this set of initiatives is not an unconditional one. It has always been advanced on the basis of a clear principle of revenue neutrality. We have yet to see before this parliament clear evidence from the government, from the Treasurer—from Botswana Pete—that those integrity measures which have been outlined in the Ralph package of reforms will in fact be introduced. That is essential from our perspective to ensure that any revenue gap emerging in the budget will be closed by the introduction of these measures.

The Labor Party has adopted the posture of a constructive opposition, notwithstanding the daily demonisation in this place that we are simply a pack of oppositionists out to score political points. Our view on this matter, on business tax reform, has been a considered and constructive one based on lengthy evaluation of the proposals contained within the package, including those currently before this chamber, within the internal debates of the party.

Turning to the specific bills which are before the House and in particular the one concerning venture capital, it is legitimate to ask this question in the debate: what does the venture capital deficit tax bill do in terms of its impact on international and domestic investment perceptions of investment opportunities in this country, and what as a consequence will occur in terms of added activity in the economy? Ralph in his set of proposals recommended CGT exemption for non-resident superannuation funds, including US pension funds, which invest in so-called pooled development funds, on the condition that such funds enjoy tax exempt status in their country of origin. The government response, supported by Labor, accepted this recommendation and to extend the CGT exemption to Australian super and similar bodies, making them able to receive both tax exempt franked dividends from PDFs and to claim a refundable credit for any company tax on those dividends, assuming that this had not already been used to offset other liabilities.

Interestingly, pooled development funds as such were a product of a previous exercise in business tax reform in this parliament during the period of the Labor government. In 1992, the PDF Act was specifically brought into being to provide tax concessions for investors in risk capital in small to medium enterprises not able to generate sufficient capital from the general capital markets. The rationale behind the pooled development fund proposal contained in Labor's 1992 act was twofold: to unlock the growth potential of new ideas, new business opportunities, new growth potential for small to medium enterprises and, in effect, to partially subsidise this growth by offering a tax concession to venture capitalists as a price premium to in fact offset the extra business risk associated with this sort of investment activity. This is of course particularly critical in the start-up period for new SMEs in which the return on capital could never compete with the expectations of general capital markets in terms of a normal and acceptable rate of return, let alone a rate of return which would be necessary to warrant an extension of bank credit to such enterprises in the form of a normal bank loan. In other words, the traditional formula of debt and equity to fund business activity in this sector through the traditional institutions managing these instruments was insufficient.

It is worth reflecting on what has occurred in the six years or so in which PDFs have been operating in this country as a consequence of that Labor government business tax reform of 1992. In the period since then some $328 million has been raised by Australian PDFs, and $215 million of this equity has already been invested in 185 separate investee companies. If we look at the sectoral breakdown of this activity it is equally interesting. Thirty-eight per cent of the total available investable funds which have gone into enterprises already have gone into the service sector, 31 per cent into manufacturing and six per cent into agriculture. This data has been provided by the PDF registration board. What we have therefore seen with pooled development funds is a great start to the development of venture capital markets in Australia. It now of course needs to be taken to a new level by reducing the CGT liability facing Australian super and similar fund investments in pooled development funds and, secondly, by expanding massively the quantity of available capital to Australian SMEs by providing a CGT-exempt regime for overseas super and similar funds.

Therefore, this set of reforms which we have in this legislation before the House and that which preceded it in the latter part of last year are entirely consistent with Labor's historical record of business tax reform. They are consistent with Labor's 1992 policy initiatives in business tax reform with the establishment of PDFs in the first place. They are also consistent with the sorts of recommendations that the Labor Party took to the Australian community in the 1998 federal election.

A further matter which is relevant to this debate is what will be the impact of this new taxation system as it relates to venture capital on real additional activity in the economy. It is worth reflecting in this debate that there is a diversity of opinion in the Australian business community as to what is now likely to occur. Deloittes, interestingly, undertook a survey in 1999I think, from memory, in conjunction with the Venture Capital Management Fund Associationof some 32 overseas venture capital organisations, both in the United States and the United Kingdom. The survey asked a simple set of questions: namely, what was impeding the operation of those venture capital funds into Australia and what would be necessary to unlock their investor interest in Australian equities in the venture capital SME sector.

The conclusion of that survey by Deloittes was that Australia was missing out on some $600 million to $1.9 billion of potential venture capital because of the previous taxation regime. A second conclusion was that total CGT exemption would be necessary to bring about taxation neutrality with other tax environments with which those US and UK funds were operating in order to change the attitude of those venture capitalists to direct equity investments in this high risk sector in Australia. According to the survey, 75 per cent of those venture capitalists who were interviewed said that, unless the CGT rate came down to zero and there was a total exemption, they would still not consider investing here, even if there was a partial exemption.

When we look at surveys like this we must attach a degree of scepticism to the interests which drive such surveys. After all, if you are sitting in London or New York and someone walks in from Australian Deloittes and says, `We have a survey here which says, “What do you need to do in order to come to Australia to invest in high risk venture capital activity in small to medium size enterprises down under. Would you like a partial capital gains tax exemption or a total capital gains tax exemption?”' you do not have to be Einstein to conclude which way they would answer. When self-interest is in a race you always know that it is trying and always likely to have its nose ahead.

It also raises the question of international comparisons of various taxation rates, not just in terms of capital gains but company tax and broader tax levels in general. This is a broader debate which is of enduring importance not just to this nation but internationally. I refer to the question of jurisdiction shopping, driven by taxation rates in different jurisdictions around the world. Plainly, this debate on capital gains tax as it affects US super funds in particular and the debate we have also had in this chamber about our headline company tax rate are driven in large part by international tax comparisons, couched in terms of international tax competitiveness, as the means by which continued international investor activity in this economy must be sustained.

It is parallel to the debate we have had in this country for some decades about jurisdiction shopping between the various states of Australia in terms of the state taxes and charges which they offer to different investors, both domestic and foreign, seeking to set up businesses in this country.

It is also parallel to what is emerging as a great international debate about the so-called `race to the bottom'a race to the bottom across developed and developing economies in terms of tax rates, a race to the bottom in terms of labour standards, a race to the bottom in terms of environmental standards. All of these matters are serious matters indeed which require serious and separate debate, and are not to be simply dismissed. Both this CGT debate, which we are partly having today, and the company tax debate, are recent and graphic illustrations in this country of how international tax competitivenessthe danger of jurisdiction shoppingactually drives the taxation debate here as in other countries. It raises a very legitimate question for all of us in this chamberleft, right, centre, wherever we come from across the political spectrumand it is this: where does this race stop? Ultimately, the interest of global capital is to have as minimal or as negligible a taxation regime imposed on it as possible. The unstated agenda of global capital is to transfer the entire taxation burden, if at all possible and if political jurisdictions agree, to either income or consumption. On that latter point in particular we have seen a graphic illustration of that switch in the taxation mix in this country with the introduction of a consumption tax by the government.

This broader debate about the race to the bottom, about international tax competition and where it all leads in the long term, about our respective parties' ability to continue to generate enough revenue in this country to fund the legitimate social policy objectives of government, is a debate which we as a nation must have.

When we turn to the specific questions alive in this particular legislation, however, we must come back to what precise impact this set of measures regarding CGT exemption will have in terms of real additional economic activity. It is worth looking also at other people who have examined this matter in some detail. I refer to a recent publication by Peter Chapman in the Australian CPA journal of July last year entitled `Venture capital: financing growth'. One of the interesting things which he concludes concerns the role of venture capital small risk companies in generating disproportionately high levels of employment growth and export growth relative to other economic actors within the Australian economy. I quote:

In 1997, the Coopers & Lybrand public policy and economics unit conducted the first study of the economic impact of venture capital in Australia. The key findings of this study, based on data from more than 100 small- and medium-sized venture-capital-backed companies, was that between 1992 and 1996 venture capital backed companies increased staff numbers by an average of 20 per cent compared to average employment growth of two per cent in the top 100 Australian companies. They also experienced sales growth of 42 per cent per annum (with export growth of 27 per cent per year ) compared to six per cent sales growth for the top 100 Australian companies.

Mr Chapman goes on:

Exploitation of new technology is not the only way that venture capital helps to generate economic growth. Venture capitalists also provide capital for management buy-outs where management acquire, perhaps from a large corporation, mature businesses which are no longer central to the plans of the present owners. Frequently, the result of the transfer of ownership from absentee landlords to incumbent management is that businesses which may have been languishing, are reinvigorated.

We can see, therefore, from the professional literature on the subject, that there is a direct correlation between a vibrant venture capital market investing in higher risk SME activity with higher rates of employment growth and export growth. It also provides business managers who have been active in companies which have been the subject of substantial ACA activity the opportunity to take out from the original parent company a useful and discrete business unit and to develop that further by using capital provided by a market which is sensitive to their immediate requirements. The literature also offers some scepticism, however, about whether in fact we have a drought of venture capital in this country and whether part of the problem lies in the ability of the marketplace to organise, throw up, distil or effectively broker sufficiently mature business opportunities for venture capital markets to consider. I quote from Mr Chapman:

A 1998 survey of venture capital by Arthur Andersen covered 22 Australian-based professional venture capital managers with over $1.4 billion under management. For the second year, the surprising discovery was that this group had over $700 million of capital available but not committed to business opportunities. Several foreign venture capitalists, not covered by this survey, have also announced unused availability of more than $500 million for the Australian marketplace.

Mr Chapman continues:

We need to change the mind-set that venture capital is not available in Australia and focus instead on how to help businesses become `investment ready' and able to access the available capital. It would be more productive if those currently focusing their energies on a perceived lack of capital helped to bring together business opportunities and the existing sources of capital.

Those are interesting observations, the essential logic being that there is already a quantum of investment capital out there and the actual problem in the marketplace at present partly consists of an inability to throw up in bite-sized chunks and well-developed and mature business opportunities companies which are in direct need of capital injection and which have a reasonable prospect of generating growth from an injection of funds from existing sources of capital.

Therefore, it is very important to have a balanced view about all this. Plainly, the logic underpinning the bill is that by unlocking international sources of capital we will add to the total pool of available funds for investment. That is necessary. That is useful. It will also provide added internal competitiveness within existing venture capital markets. But the challenge facing the Australian business community is the development of a new niche in the service industry to prove up potential projects that will be able to tap into these funds.

As I said at the beginning of my address to the House, the Labor Party supports the logic which underpins this set of bills before the parliament. It has done so in a spirit of bipartisanship, because we are ultimately persuaded of the logic that this will add to a growth of the Australian economy which would not otherwise occur. It stands in stark contrast to a consumption tax which does the reverse. (Time expired)