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Tuesday, 8 October 1985
Page: 769


Senator MESSNER —My question is addressed to the Minister representing the Treasurer. In connection with the recent tax package, will goodwill built up by the founder of a business be subject to the full marginal rate of capital gains tax on the sale of a business? Will this have the effect of demolishing by about half the life's work of small businessmen, thereby destroying the incentive for people to develop the businesses which currently employ about 60 per cent of the private work force?


Senator WALSH —I do not know how anybody objectively measures what is goodwill.


Senator Chaney —But it is saleable, isn't it?


Senator WALSH —I said an objective measurement. One can give opinions about anything at all. Of course, we know that the Opposition is opposed to a capital gains tax on realised gains being applied at the marginal income tax rate, because the Opposition is in favour of tax avoidance. The Opposition presided over an epidemic of tax avoidance that went on unchecked for year after year until such time as the Fraser Government saw its political survival as being threatened. At the heart of most tax avoidance schemes was the conversion of what was notionally income, and should have been taxed as income, into some form of capital gains.

To stamp out that anti-social practice it is essential not only that there be a capital gains tax but also, to put an effective net under the income tax system, that that tax be applied at the marginal personal rate. We know that the Opposition is opposed to that because the Opposition is in favour of tax avoidance in opposition just as it condoned and allowed an epidemic of tax avoidance to flourish when it was in government. We also know, of course, that the Opposition sees alternative methods of raising finance, or at least it used to. The Opposition said that it would shift the emphasis on revenue raising from income tax to a consumption tax or an extension of indirect taxation. But we now read in today's Australian Financial Review that that policy, espoused for a period of several years by the now Leader of the Opposition, was yesterday torpedoed and buried by Senator Messner.


Senator Durack —Answer the question.


Senator WALSH —I am about to do that. Let me respond to the interjection from the former Attorney-General, who left a tax avoider's file to gather dust and mould in the bottom drawer for five years, which was completely consistent with the policy of the former Government of allowing tax avoidance to flourish and enormous erosion of the income tax base to occur. On properties or businesses sold after 19 September and subsequently resold, a tax will be levied at the personal rate for any real gain which has accrued. In the case of a private business I know that it is argued by many people that the proprietor, rather than drawing personal income from the business, reinvests accrued profits year by year and ultimately harvests those profits, accrued tax free over many years, in the final business sale price. Previously these people have avoided paying tax on that tax free income deferred over very many years. It is true that that practice will no longer be possible for businesses which change hands after 19 September or are established after 19 September and are subsequently sold.

It is claimed by some that it is unfair to tax at the personal marginal rate what are effectively earnings on which the tax is deferred year by year. The answer to that ultimately is a mathematical one and it depends on the length of time for which the asset is held. But let us assume that a particular asset has been held for 20 years or that gains have been accruing year by year over a 20-year period. An alternative to applying the personal tax rate on the real gain in the year of realisation would be to tax notionally the gains on an accrual basis and, of course, then to apply compound interest at the bond rate to the tax which accrued, but was not levied, in those years. If that system were to apply over a 20-year period, the effective rate of tax which would be applied on average would be seven times the marginal tax rate which would have applied in the year in which the gain accrued. Since the difference between the present or prospective marginal tax rate and the lowest marginal tax rate and the highest marginal tax rate is just over two, that actual tax rate is highly concessional compared with a tax rate with accrued interest of seven times the marginal tax rate in the particular years.

In conclusion, it is worth saying again that the Opposition is in favour of tax avoidance. It allowed tax avoidance to flourish when it was in government and it continues to support tax avoiders now that it is in opposition. It has also given a spurious or specious undertaking to its ragbag clientele out in the electorate that, if it is ever elected to government, it will repeal the capital gains tax legislation, knowing full well that that is an undertaking upon which it will not be able to deliver because, even if it had a majority in the House of Representatives, it would require a majority in the Senate and a majority in the Senate it will not have.


Senator MESSNER —Mr President, I ask a supplementary question because, obviously, the Minister has no idea what he is talking about. The point needs to be made-


The PRESIDENT —Order! Will the honourable senator ask his question?


Senator MESSNER —I ask the question again: How is goodwill of a business created from virtually nothing to be taxed under the capital gains tax legislation? Will that be taxed at the full marginal rate of tax? What will be the effect of that upon the person who has built up that business over a lifetime?


Senator WALSH —I repeat-I would have thought that even Senator Messner might be able to understand this-that there is no formula which can measure goodwill. Indeed, goodwill is somewhat nebulous. To the extent that goodwill is said to be related to the effort put in by an individual over many years, it could be argued that that effort has earned income except that the income was not taken at the time it was earned but was capitalised in the business. Under those circumstances, the proposition which Senator Messner is putting up is that the tax on income earned should not only be deferred but should be deferred forever in order that it would not be taxed when the business is ultimately disposed of.


Senator Messner —You just don't understand it.


Senator WALSH —I concede to Senator Messner that I do not understand as much about tax avoidance as he and his colleagues did. Half of them were up to their ears in it and the other half were supporting them. What the Opposition wants is to return to the dark days of the 1970s when there was massive tax avoidance because members of the Opposition and all their friends followed the practice of converting what should have been income, and taxed as income, into a tax free capital gain. It is into that dark age that the Opposition wishes the country to return.