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Monday, 16 September 1985
Page: 557

Senator MAGUIRE(3.34) —I wish to speak to the matter of public importance concerning a capital gains tax and the taxation of fringe benefits which has been brought on for debate by Senator Chaney on behalf of the Opposition. This matter of public importance is a travesty. Quite frankly, the Opposition is jumping the gun. The details of the policies on taxation and its effects are not yet known. The package has not been released and will not be released, I understand, until Thursday of this week. So this Parliament will not know what is in that package until Thursday. How can the Leader of the Opposition today claim in this chamber that the package will have a devastating effect? It is just an absolute nonsense argument for him to debate this matter of public importance and claim that a taxation package, which has not yet been decided, will have devastating effects. The fact is that the elements of that package are not known at this stage; the decision has not been made on that package. The Opposition should have waited for a decision to be made before raising this matter of public importance, jumping in off the deep end and claiming that certain taxation packages would have a devastating effect on certain sections of the Australian community.

It is very important to get this whole debate into some perspective. As part of his nine principles of taxation, the Prime Minister (Mr Hawke) made it very clear that as a result of the taxation reform process there would be no overall increase in the taxation burden. Senator Chaney, for most of his speech today, has implied that as a result of certain items that have been discussed as part of this taxation package there would be an increase in the overall Australian taxation burden. The Prime Minister has made it abundantly clear for months that as a result of taxation reform in this country there is to be no increase in the overall tax burden. That is something that must be kept in mind in this debate today. It has been repeated on many occasions by senior Government Ministers that the so-called trilogy commitments-that is commitments in regard to government expenditure, taxation and the Budget deficit-will be met. One of those commitments is that the share of taxation in terms of gross domestic product-that is, Australia's gross national income-should not rise. So let us debate this subject this afternoon in that context.

The Prime Minister has made it clear that the taxation review process will result in tax redistribution, not tax increases. The overall tax burden will not be increased. That is consistent with the trilogy commitment that the share of taxation revenue to gross domestic product will not be increased under this Government. Senator Chaney has also tried to suggest that some of these taxes are totally new taxes. I certainly got the distinct impression from his address this afternoon that capital gains taxation in Australia was totally new. He is obviously not aware that there are two existing sections in the Income Tax Assessment Act which tax capital gains at present and have taxed capital gains for many years. In fact, under the Liberal Government taxation applied to capital gains in two key areas. Senator Chaney has tried to create the impression today that somehow capital gains taxation in this country is a bolt from the blue when we have had it for at least a decade. Under the Fraser Government, if assets were bought and sold within a 12-month period they were subject to a capital gains tax under the Income Tax Assessment Act. If assets were purchased with the intention of resale they were also taxed as capital gains under the Income Tax Assessment Act. That is what happened under the Liberal Government of this country. Senator Chaney should not suggest that somehow a radical new tax will be introduced. We are simply talking about specific provisions relating to capital gains over and above the current provisions of the Income Tax Assessment Act.

Proposals to extend capital gains taxation were very strongly endorsed at the national taxation summit. That should be made very clear to the Australian community this afternoon. There was also very wide support from a range of organisations in support of capital gains taxation. I suggest that those opposite who push special barrows and who make the special pleadings for the big interests should in fact acquaint themselves with the widespread public support at the national taxation summit for capital gains tax. It was quite clearly expressed at that summit that wage and salary earners, through the pay as you earn system, are paying too much tax in this country and the burden has to be re-allocated. The commitment to capital gains taxation was also part of the historic accord with the trade union movement, an accord which has delivered over 10 per cent of record real economic growth in this country in the last two financial years. While Senator Chaney may be making a range of special points in regard to small business, the fact remains that the overwhelming beneficial impact for small business in this country has come from the real economic growth this country has achieved in the last two years. That is another point that should be made in keeping this debate in perspective.

A specific tax on capital gains will at last bring Australia into line with most industrial countries of the Western world. When we have a capital gains tax we will be on a similar basis to the developed Western countries of the world. In fact, of all the countries which are members of the Paris-based Organisation for Economic Co-operation and Development only one-that is the Netherlands-apart from Australia, has not got a capital gains tax. So we are in a minority of two at present. The United States of America, the so-called home of free enterprise which is supported by those on the opposite benches, has taxed capital gains for many years, as has the United Kingdom. But the point remains that while tax rates have been reduced in recent years in the United States, small business has prospered under a regime of capital gains tax. That point cannot be denied. Incidentally, in regard to all the hysteria regarding taxing capital gains on a deemed realisation at death basis, all but two countries which tax capital gains in fact operate them on that basis. The two countries which are exceptions have death duties. That is a very clear difference from the current situation we face in Australia.

I believe that capital gains specifically should be taxed. After all, they add to a person's economic welfare and to the ability to consume; they are just another form of income. It is very important that all forms of income be treated more equally instead of having a situation where direct taxes are essentially taxes on wages and salary earners. That is what they really boil down to-taxes on wage and salary earners. Consequently we have a very unfair tax system.

A number of problems facing the Australian economy have been caused by the lack of a capital gains tax. I refer, for example, to over-investment in property. There has been a strong demand for assets in limited supply. Assets likely to rise in price have been favoured and investment in those sorts of areas has been favoured by the absence of a capital gains tax. The absence of such a tax has resulted in there being far too little investment in plant and equipment, particularly in the manufacturing sector, and it has tended to channel investment away from the productive areas into property development and speculative activities. Growth in manufacturing industry in my State of South Australia, and probably in other major manufacturing States such as Victoria and New South Wales, has been retarded by a lack of investment because investment has been channelled into other areas of the economy. The Leader of the Opposition, Senator Chaney, talked about the need to generate jobs. If we had a specific capital gains tax the manufacturing sector would get a shot in the arm because more investment would be channelled into that sector and less into speculative areas such as property. Therefore a capital gains tax would help make Australia's economy more efficient.

One of the key reasons why a capital gains tax has been discussed in recent months is that the absence of such a tax provides an avenue for tax avoidance. Millions of dollars of tax revenue has been lost because Australia has no comprehensive tax on capital gains. We have seen in this country the practice of converting income, which is taxable, into gains, which are not taxable. Various schemes and devices have been marketed to encourage people to invest in activities to obtain capital appreciation and little income and so avoid paying income tax. By itself a capital gains tax would not generate vast amounts of revenue but it would significantly reduce haemorrhaging in the income tax system. It would help plug the gaps created by this ability to convert income into untaxed gains. So it is important when considering such taxes to look at how a capital gains tax would reduce the incentive for certain taxpayers to look for tax free investment avenues. Overall I believe that the introduction of a capital gains tax should help boost productive employment and investment in employment generating areas. It is no wonder that at the taxation summit in July the Business Council of Australia and the Victorian Chamber of Manufactures both endorsed a capital gains tax. They were two key business organisations at the taxation summit that supported such a tax. They certainly did not think that it would hit investment in industry; they did not seem to believe that it would reduce employment.

How might a capital gains tax operate in this country? As I indicated at the beginning of my address, I do not yet have the details of what is in the tax package. Certainly the Leader of the Opposition does not. He has jumped the gun; he is debating a subject about which a decision has not yet been made. I make the following comments about what would probably be included in a taxation package involving a capital gains tax. It has been made clear by the Prime Minister that any capital gains tax introduced in Australia would involve indexing for inflation; that is, only the real gains would be taxable. Citizens would be able to deduct gains in the asset value due to inflation before paying tax. Only the gain after inflation is taken into account would be taxed. That is a very generous arrangement. Wage and salary earners do not have their tax brackets adjusted every year for inflation; so on that basis the taxation of capital gains would be extremely generous, and certainly it would be generous when compared with capital gains taxes in other countries. As Senator Robertson would know, the great majority of countries which tax capital gains make absolutely no allowance for the effect of inflation on asset values. That is an important point to bear in mind.

It is possible that the capital gains tax would apply on a realisation basis; that is, gains would be taxed only when the asset was sold or disposed of. In such a circumstance it is more likely that small businesses and similar organisations would be in a more liquid position; they would have more funds available with which to pay the tax. The alternative system is to tax on an accrual basis, or on a tax as you gain basis, but that has certain administrative difficulties and certainly it would create liquidity problems for a number of small businesses. The Prime Minister has made it clear on many occasions that under the proposed capital gains tax the family home would be exempt. That is a very generous provision. The principal residence is the major asset for most Australian families and it would appear that under the proposals put forward the family home will be free from tax. That is a much more generous arrangement than that which applied in certain instances under the income tax system of the Fraser Government because, as I pointed out at the beginning, assets bought and sold within a 12-month period were subject to tax at the full marginal tax rate.

Senator Messner —That was brought in by Whitlam.

Senator MAGUIRE —It was never repealed by the Liberal Party of Australia. For many years the coalition Government operated a system whereby if a family home was bought and sold within a 12-month period-that does happen-those who sold that dwelling would pay tax at the full marginal tax rate with no adjustment for inflation on the increase in the value of the dwelling. So in that situation the proposal for a capital gains tax which has been circulated recently would be much more generous than previous arrangements.

It has been made clear that the tax would not be a retrospective tax; it would begin to apply from a valuation date. Citizens would be able to consult share prices and various other asset values on that date to value their assets. That point must be borne in mind. My understanding is that there would be a full offset of capital losses against any gains made so that those who paid the capital gains tax in fact would be paying tax on the net gain after losses were taken into account. I thought that those on the Opposition benches who champion taking risks would be in favour of such a proposal because, surely, if losses are offset against gains the risk of investment is reduced. That is an important point to be borne in mind.

We should explore what the Opposition would do following the introduction of a capital gains tax. For example, I have indicated that I believe that a capital gains tax would make the economy more efficient; it would get investment out of speculative areas and into more productive job generating areas. That is an important point to start with. We would have a more efficient and fairer tax system as a result of the introduction of a capital gains tax. One wonders what the Liberal Party would do with a capital gains tax in the unlikely event that it came to power in the near future. Recently we saw a video featuring Mr John Valder, who said that the Liberal Party was rather grateful that the ALP was taking a number of the hard decisions in the Australian community. I wonder whether he was referring to the introduction of a capital gains tax. On the other hand, last year the former Leader of the Opposition campaigned against the introduction of a capital gains tax. Now it seems that the policies of the Opposition are to be reviewed. They are up for grabs.

I was rather interested to read the front page story of the Canberra Times yesterday in which Mr Neil Brown, the Deputy Leader of the Opposition, was on the record as saying that Liberal Party policies were to be revised. I wonder whether that means, that among other things, a capital gains tax would be acceptable to the Liberal Party and would be retained in the unlikely event that it occupies the Government benches in the other place. I would be very surprised if the Opposition were to get rid of a capital gains tax. It knows that such a tax would bring Australia well into line with all the other developed countries of the world with which we normally compare ourselves. Of all the other developed countries, only the Netherlands does not have a capital gains tax. The United States of America, the home of free enterprise and small business, has had a capital gains tax for many years. Apparently small business in the United States has prospered under a capital gains tax. A result of a capital gains tax being introduced into this country would be a fairer tax system in which the tax burden would not be borne largely by the wage and salary earners but would be shared more fairly by the whole community. However, whatever happens, it has been made abundantly clear that the forthcoming tax reform will mean no increase in the overall tax burden.

The ACTING DEPUTY PRESIDENT (Senator Elstob) —Order! The honourable senator's time has expired.