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Tuesday, 8 October 1985
Page: 855


Senator MICHAEL BAUME(10.50) —I want to raise two matters of major concern emerging from the Government's new tax proposals. These matters of concern emerged particularly from statements made in the Senate today at Question Time. One relates to the Government's clear misunderstanding of the nature of goodwill. It might be because the Treasurer (Mr Keating) clearly does not understand goodwill, never having had any. The other matter relates to the increasing discretion of the Commissioner of Taxation which in fact is being granted apparently under what we understand of the new tax arrangements. The general principle in tax law is that the less discretion given the better because the one vital element of tax law must be uncertainty before that law. The more uncertainty there is, the worse that tax law and of course the greater discretion given to a tax commissioner by definition the more uncertainty will abound.

I would like to raise, first of all, this question of goodwill because it is this lack of understanding of goodwill which demonstrates, I think, one of the Government's enormous failures in its approach to what it calls tax reform. I must say I object to the words `tax reform' when in fact it is change in this instance for the worse. To call everything that is changed `reform' is a gross misuse of that word. The question of goodwill and the impact of the Government's measures on it can readily be seen from the simple reality that when a small business is started from scratch, particularly in a country town-which is where I have come across most elements of it-the volume of assets in that business can well be minimal. That business can be built up by hard work, not necessarily by the agglomeration of funds returned into that business, which Senator Walsh mentioned apparently was the only way a business could be built up. So ultimately, many years later, when that business is sold it will hopefully be sold for far more than the net assets value of the business. In other words, the price to be received will be greater than the value of the specific and identifiable assets there.

The reason I go to the trouble of making this point is that the difference between the value of the assets and the price received is goodwill. That is simple definition of goodwill. It is an accepted, well known and recognised proposition which I regret to say the Minister for Finance (Senator Walsh) has apparently never heard of. I mention that because-


Senator Grimes —You heard of it when you left Patrick Partners. Tell me about the goodwill you left in Patrick Partners.


Senator MICHAEL BAUME —Mr President, I am not surprised by interjections such as that. I had hoped that I would, in this instance, be able to encourage the Labor members of the Senate to lift the nature of the tax debate in this House by dealing with the issues rather than relying on personal abuse of participants in debate in this place. I do not mind Senator Grimes finding he has no other answer than to be involved-


Senator Grimes —I raise a point of order. I point out that I in fact conducted a small business myself which involved goodwill. The only thing was that the goodwill went up and did not go down as did the goodwill which was concerned with the practice the present speaker was involved in. If my practice can be compared to Patrick Partners I will quite happily have that debated here any time, any place.


The PRESIDENT —Order! There is no point of order.


Senator MICHAEL BAUME —Thank you, Mr President. I accept the kind challenge by the honourable senator and remind him of the fact that at no stage did I ever own any goodwill in Patrick Partners or any other partnership because I was never an owner.


Senator Grimes —You were a partner and you knew it.


Senator MICHAEL BAUME —Perhaps the honourable senator would like to be quiet for just a minute and allow some facts to impose themselves on his mind. It would be very nice if he would listen and hear that my status was clearly stated to be a non-owner partner. I was described as a staff partner; I was not entitled to any of the assets of the firm, nor was I responsible for any of the liabilities of the firm. Now I know facts do not rest well with Senator Grimes and as a result I take up his offer and I will debate with him the facts of any matter in this area that he wishes to debate, but it would be nice if he stuck to the facts. I presume he has access to them. If he does not, I will facilitate that matter and provide him with facts. They are available, for example, in the Masterman report which cleared me. But if the honourable senator has any special access to `facts' I am only too willing to lead him into the ways of righteousness and truth. I know that he will find that an unusual territory, but I will lead him with righteousness and truth.


Senator Grimes —Pontius Pilate said the same thing: `I wash my hands'.


The PRESIDENT —Order! There are far too many interjections.


Senator MICHAEL BAUME —Thank you, Mr President. I was endeavouring to lift the nature of the tax debate.


Senator Grimes —Pontius Pilate.


Senator Peter Baume —I raise a point of order. In the last interjection Senator Grimes said `Pontius Pilate' referring to Senator Michael Baume. I suggest that that is now transgressing standing order 418. If he is referring to the honourable senator in any way by the phrase `Pontius Pilate' I ask him to withdraw that.


The PRESIDENT —Order! If Senator Michael Baume took exception, I would ask the Minister to withdraw, but at this stage Senator Michael Baume has not sought a withdrawal. If he does seek a withdrawal I would ask the Minister to withdraw.


Senator MICHAEL BAUME —Mr President, I think it would be better if the honourable senator could elevate the level of discussion. As a result, I suggest that it would be pleasant of him to withdraw.


The PRESIDENT —I ask the Minister to withdraw that remark.


Senator Grimes —I have never asked anyone to withdraw any remark made about me in this place. With respect to the Senate I will withdraw as you, Mr President, have requested me to do so. But I think it is incredible that someone should be asked to withdraw such a statement.


The PRESIDENT —Order! Senator Grimes has withdrawn that remark.


Senator Grimes —I will hand Senator Michael Baume a towel to wash his hands at a later stage.


Senator MICHAEL BAUME —Thank you, Mr President. At least when I wash my hands they will be clean.


The PRESIDENT —Order! Can we get back to the adjournment debate and stop the chit chat across the table.


Senator MICHAEL BAUME —Yes, Mr President, I would much prefer to do so because there are major matters which obviously the Government does not wish to discuss here in terms of fact. This latest little diversion of Senator Grimes is a clear indication of a reluctance to deal with the consequences of these tax matters which have, unfortunately, imposed themselves upon a surprised community.

The community has been surprised because in dribs and drabs things are now coming up. We find that, with a little business in a country town, which for example, started with nothing and which ends up being sold with its major asset as goodwill, on that sale the goodwill will be totally taxable. In other words, under the scheme which allegedly indexes the asset for inflation-the major asset in small business is goodwill which makes up the bulk of the sale price-goodwill will be totally taxed unindexed because one recognises that if at the beginning of the business there is no goodwill one can hardly index nothing for inflation. This seems to have escaped the geniuses opposite who have developed this incredible tax legislation. That is why it was so important this afternoon when Senator Messner asked his question that the Minister responding did not know what good will meant and said that there was no way of measuring it.

It seems to me that Senator Messner's question required a coherent answer just as so many of the problems facing the community require a coherent answer. But in Question Time this afternoon Senator Walsh said: `I do not know how anybody objectively measures what is good will'. He said that at the heart of most tax avoidance schemes is the conversion of what was notionally income and should have been taxed as income into some form of capital gain. There is no question of income in the goodwill element. Goodwill is the value of the business that has been built up as a result of the hard work of the participants in the business.


Senator Crichton-Browne —And its real assets.


Senator MICHAEL BAUME —Goodwill is added to the assets when sold. As I mentioned, it is the difference between the value of the net assets of the firm and the price received for the firm. For a Minister as senior as the Minister for Finance totally to misunderstand this proposition is incredible. It explains why this Government is going to tax at 100 per cent the good-will built up in small businesses whereas if the asset were a boiler, a desk of any such fixed asset it would be taxed only at the net amount after indexing for inflation. This discriminatory attack on small business by this Government in its proposals, particularly on small business because that is where the good will element is, the attack on small partnerships in country towns, on people who have the work ethic, if you like, and who seek to improve themselves-I must say I hope these proposals never become legislation-is appalling, as revealed today at Question Time. For the Government to have revealed today at Question Time that it did not understand what it was doing, that it did not know the gun was loaded, is absolutely disgraceful after so much discussion of the problems relating to the new tax package.

I now deal with another matter, which relates to the increasing discretion apparently to be given to the Commissioner of Taxation by these new proposals. I was astounded to hear the Minister for Finance respond to my question at Question Time today. I asked where one draws the line in deciding which functions involving meals are deductible and which are not. I outlined, as you remember, Mr President, perhaps too many alternative ways where this question would be raised. I asked, for example, whether if someone took the Special Minister of State (Mr Young) to lunch he would really be having entertainment or would it perhaps be more of a seminar.


Senator Peter Baume —It would be purgatory.


Senator MICHAEL BAUME —One could describe it as purgatory although I think long lunches are now out. I wonder whether one of the reasons long lunches are out is what happened to Mick Young. There are so many of these situations. I mentioned in my question a seminar to be addressed by the Treasurer (Mr Keating) which was advertised as being tax deductible, although lunch and refreshments were to be served. Eventually, after the usual amount of personal insult, the Minister for Finance replied:

. . . such matters as Senator Baume has referred to, as is customary for many provisions of the taxation Act, will I expect be left to the discretion of the Commissioner of Taxation to determine.

That backed up a statement made in the latest issue of Inside Canberra which quotes the Treasurer as saying that there will be a different handling by the Taxation Commissioner of seminars depending on the individual set of conditions on each occasion. In other words, there will be a clear discretion available to the Commissioner to decide which is which. There will be uncertainty. What I really want to say tonight in the first place is that the planned law is apparently based on a total misunderstanding of what is goodwill. The law in respect of entertainment, seminars and so on is based on a total misunderstanding of what is good tax law; in other words, it is a question of certainty. We have a situation where a bribe will be tax deductible but a lunch will not.

I do not know to what extent the Government really intends to encourage businesses to go into bribes. Certainly bribes are customary in some South East Asian countries. If this Government is trying to encourage a new level of business morality in Australia by discouraging people from doing business over lunch and encouraging them to bribe people to do business with them, I suppose that can be claimed as another great tax reform. I put it to the Government that in both of these areas it really should have a serious look at what it has done.

I conclude by mentioning that Inside Canberra quite rightly points out that those in the business of running seminars will be able to deduct fully charges imposed by hotels, including meals, but, unfortunately for non-profit organisations, we understand they will still be liable for the 49 per cent tax for meals. Inside Canberra states:

Thus when a MTIA or CAI holds its annual meeting and dinner, the cost of the dinner will be subjected to a 49 percent fringe benefits tax. It seems ludricrous that a W.D. Scott business organisation can fully deduct the cost of meals and refreshments associated with its seminars run commercially, yet non-profit industry organisations will be hit with a 49 percent fringe benefit tax.

It concludes by saying:

Treasury officials admit the Tax Office is going to have a big problem in policing the new policy.

I simply ask the Government at this point to recognise that the uncertainty created is causing problems not only for the Tax Office but also for business, and in the area of goodwill a far more disastrous problem is being created. That is a problem that I believe will lead to the destruction of many small firms, to the discouraging of many people from being energetic and pursuing their right to have individual firms and, by building up the goodwill in their business, to prepare themselves for their retirement rather than having to rely on the State. It seems to me that the legislation that the Government appears to have in mind is destructive both of our society, in the sense of seeking to destroy the small businessman, and of good tax law in creating unnecessary uncertainty.