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Wednesday, 9 October 1985
Page: 913

Senator SIDDONS(4.01) —The Australian Democrats are not happy with all aspects of the Government's tax package. Later in my remarks I will detail some of the aspects that we are not too happy about. Having said that, I am bound to point out that the Democrats welcome the broad thrust of the Government's changes to the tax system. This is, in fact, the boldest move on the part of any government in the tax area since John Curtin took income tax away from the States in the dark days of the 1940s. For the past 20 years the Australian tax system has progressively come apart at the seams and the sticky tape solutions that have been applied have not solved this disintegrating process.

The tax package that the Government has introduced will, we believe, bring some sort of equity to Australian society. For too long there has been discrimination in favour of those who have been able to gain their income from property via capital gains, at the expense of the millions of ordinary pay as you earn taxpayers. The ability to gain income, tax free via capital gains, has spawned a whole new industry of highly intelligent lawyers and accountants who have done nothing but spend their days dreaming up schemes to avoid tax via capital gains so that the wealthy can avoid the inconvenience of having to pay any income tax at all in many cases.

We welcome the general thrust of the government's tax package. Thanks to the Democrats, the capital gains tax will not affect the majority of Australians. The main capital asset most Australians own is the family home, and that will be exempt from the tax. Thanks to the Democrats, the mooted death element to tax has been withdrawn. The welfare of farmers and small business people has been safeguarded as the capital gains tax is to be indexed for inflation. Capital losses are to be offset against capital gains and the tax will apply only upon realisation. These are all initiatives which the Democrats championed and spoke about during election campaigns and which the Government has taken up. There will be no retrospective element in the capital gains tax whatsoever. The fact that capital gains will be levied at the marginal rate of tax will mean that there is no incentive at all to convert capital gains into earned income, or vice versa.

The capital gains tax is, in fact, a mild one. It taxes real gains only after inflation has been taken into account. Some of the critics of the capital gains aspect of the tax package have thrown up their hands in horror and said that it is outrageous. It is outrageous because it is levied at the marginal rate of tax of the individual and not, as is the case in the United States of America and Canada, at a flat rate of capital gain. However, the critics in this case are wrong. Countries which levy a flat rate of capital gains do not have that flat rate indexed or the capital gains indexed for inflation. In fact, the flat rate capital gains taxes in Canada and in the United States are more punitive than the capital gains tax that this Government is proposing. The incentive for speculation and the disincentive for productive investments, which have been the basic elements of the tax hitherto, will be eliminated and the emphasis will be placed on productive investment and away from non-productive speculation in housing and land. Shares in companies that produce income will be attractive and so those companies will be able to raise capital more readily. Genuine small business will be encouraged to grow. Their taxes will no longer be used to subsidise the lurks of the few.

I now turn to the problems we see in the capital gains tax package at the moment. Firstly, there is differential treatment of the family home and the family farm. The family home or principal residence is to be excluded from any capital gains tax at all irrespective of whether it is a $1m house or not. This means that the farmer, whose home is generally taken as part of his property, is discriminated against. The curtilage system of imputing the capital to the family farm residence will not solve this problem. We suggest that the Government look at the inequity between the treatment of the large domestic home in the city and the family farm. Senator Chaney pointed out that goodwill should not be included in a capital gains tax. Goodwill can be accurately measured. It is a balance sheet item and represents the value of forgone profits particularly for small businessmen who have sacrificed--

Senator Messner —That is tax evasion, according to him.

Senator SIDDONS —Yes, indeed. Small businessmen often sacrifice wages so that they can build up goodwill. But not taking into account this aspect we believe that the Government is discriminating against the hard working small businessman. We hope that the Government will give serious consideration to exempting goodwill on a fair and equitable basis.

We believe there should have been averaging provisions in the tax so that the tax paid is based on the normal marginal rate rather than the highest tax rate when a substantial gain is realised. We believe that there should be some consideration for superannuation in capital gains, particularly again as it applies to small businesses. Many businessmen put all their available cash into their business and then sell it on retirement. We believe an exemption could be made for a superannuation component of that sale so that at least part of the sale is treated in the same way as a lump sum superannuation payment. We believe the gifting realisation could be unfair to many people, especially to farmers who wish to pass their properties on to their children. These are some of the aspects which we are still very concerned about in the capital gains area. We are also concerned about fringe benefits. I will be making specific proposals about that later.

I turn to wholesale taxes. We welcome the fact that wholesale taxes have been rationalised but point out that there will be exceptions that the Government should take into account. For instance, the Government is now proposing to tax solar heaters at a rate of 20 per cent. This is a new industry, a sunrise industry, that is developing a renewable energy source. We cannot see the sense in the Government suddenly imposing a 20 per cent tax on this sort of industry. We are also critical of the Government for having picked up its bat and ball so quickly on the question of a consumption tax. We believe that at the national taxation summit there was considerable support for a consumption tax. The Australian Democrats certainly would have supported a consumption tax if it were reasonably applied-not necessarily at 12 1/2 per cent-and took account of the necessities of life. The Democrats and I believe that such a tax would have been worthwhile and would have received a large measure of community support

I turn to fringe benefits. We believe that this is the aspect that will cause most concern in the community generally. We do not object to fringe benefits being taxed. We support it. They have been a tax rort until now. However, we object to the manner in which the fringe benefits tax is to be applied. I have spoken previously on the fact that it is to be applied entirely to the employer. A $500m additional tax is to be imposed on businesses. Some say it will be as high as a billion dollars. That is an additional tax on business that cannot readily be absorbed. It will have a very depressing effect, particularly in the small business area.

What would be a fairer approach? We suggest that a logical, objective look should be taken at each fringe benefit and a decision made as to whether the tax should apply to the employer or the employee. I give some examples of how this sort of approach could be applied and made more equitable. Let us take the company car, for instance. We believe that the company car should be taxed in the hands of the employer. Further, we believe that the Government's formula for taxing the company car is satisfactory. We support it. There is no doubt that the supplying of a company car is of benefit to an employer. Therefore, it should be taxed in the employer's hands.

Subsidised rental accommodation likewise should be taxed in the hands of the employer. There is no doubt that in remote areas it is absolutely essential that free or subsidised housing be given to workers if they are to be attracted to those areas. So, in our opinion, subsidised rental accommodation should also be taxed in the hands of the employer. Goods and services supplied to employees which are a part of the output of an enterprise should also be taxed in the hands of the employer. However, there are fringe benefits that are not related in any way to the employment of the individual. We believe that those sorts of benefits should be taxed in the hands of the employee. I instance low interest loans. Generally, they have nothing to do with the individual's employment. They are not work-related in any way. So why should not the employee be taxed on that benefit? It is his benefit and responsibility, surely. So we suggest that, after a certain date, any new low interest loans be taxed in the hands of the employee. I do not refer to those loans which already have been granted-we would never support a retrospective tax-but to any new low interest loans. Why cannot they be taxed in the hands of the employee?

I turn to entertainment expenses. The Treasurer, Mr Keating, is trying to have us believe that legitimate entertainment expenses should not be incurred in running a business. We do not accept that at all. I suggest that the Government could well consider entertainment expenses being made tax deductible to the value of, say, 20c in the dollar. This would have to be substantiated, but at least it would be fairer than the method that is proposed at the moment by the Government. It would certainly lessen the impact of this tax on the restaurant industry. I believe that it has to be taken into account.

Senator Chipp —And heavy penalties against those caught cheating.

Senator SIDDONS —Very heavy penalties should be brought against those caught cheating, as Senator Chipp suggests. In summary, we congratulate the Government on the braveness and boldness of its tax package and its general thrust. We support it. However, we implore the Government to take note of the anomalies we have listed. It is not too late to discuss them or to look at equitable, fair ways of correcting them. The Democrats suggest that, if that is done, the community support for this package will be very great and, undoubtedly, it will go to the credit of the Government. This bold attempt to restructure the whole tax package is a milestone in Australia's history. To that degree we support the general thrust of what the Government is doing and congratulate the Government on it.