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Tuesday, 15 October 1985
Page: 1259


Senator MICHAEL BAUME(8.22) —I want to deal with several matters raised in the Taxation Laws Amendment Bill (No. 2), a compendium Bill, the Income Tax (Individuals) Bill and the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Bill, and in particular the Medicare Levy Bill. I will start by dealing with the Medicare Levy Bill. This Bill relates to a real problem that the nation is facing right now. There is no doubt that Medicare is causing us a great deal of problems. Last year the levy paid for roughly half the cost of Medicare and this year it will pay for about a third. As I understand it, this year Medicare will cost about $3.6 billion and the levy will raise about $1.28 billion. So for all but low income earners, the Medicare levy is now a one per cent addition to the income tax rate, particularly now that the earlier suggestions that it was simply a specific levy have been destroyed by the fact that the Government has removed the upper limit so that it is simply an extra one per cent tax. Now when the Government talks about a 49 per cent tax rate under its new arrangements it is, of course, talking about a 50 per cent tax rate for everyone and it would be nice if it were honest enough to say so.

The interesting point I was making about the Medicare levy is that it is funding a smaller and smaller proportion of the health care budget because of the rocketing cost of Medicare. It is not that Medicare is providing a better and better service. On the contrary, it is providing a worse and worse service. It is interesting to look at what the Minister for Health (Dr Blewett) said when he introduced Medicare. He said:

The introduction of Medicare is the biggest step taken by an Australian government to ensure that every Australian has the best and cheapest medical and hospital care.

One can look back at that as if it were some kind of sick joke. The reality is that the Government has not by any means delivered the best, and certainly not the cheapest, medical and hospital care. It is obviously the worst and the most expensive that this nation has seen since the original Medibank. One can have a look around in our society and see, as Mr Porter, the shadow Minister in another place, said when dealing with Medicare quite recently:

Medicare and the Medicare levy have forced a large number of people to give up private health insurance and become reliant on the already overloaded public hospital system. Nurses are resigning from public hospitals in droves as a result of the pressure caused by the overwhelming demand on the public hospital system under Medicare. Hospital beds are being closed as a consequence of these staff shortages. The result is growing queues of people waiting for hospital beds. Under Medicare the queues have more than doubled. In Victoria alone the queues have risen from around 8,000 people to around 25,000 people waiting for hospital beds. Doctors and doctors' organisations such as the Australian Medical Association have expressed concern about the deterioration in the standard of service provided in the public hospital system.

There is no doubt about that element, the service element. Now let us look at the cost element. Obviously, that has been going up enormously even though the increased revenue that this change in the levy will make will go nowhere near meeting those additional costs. There is no doubt that the Government does have a responsibility to improve this whole Medicare system. Mucking around with the levy at the fringes, as in this Bill, will not make anything like a fundamental improvement.

The Government must permit people to opt out of Medicare and choose their health insurance from a genuinely competitive private sector. Medicare's appetite, as was described by Mr Porter, for medical benefits at the expense of the hospital system we simply cannot afford any more. Nor can we afford to allow the private system to atrophy as the public system teeters on the brink of disaster due, of course, to the overwhelming burden of Medicare. This Bill removes the $70,000 ceiling on incomes on which the levy is chargeable and so removes any pretence that this was in fact a levy simply to fund proper requirements for a medical service. It is no more than a tax. I hope that the Government ceases pretending that somehow it should be distinguished from the rest of the tax system because, as I said, it will be going to meet only one third of that cost anyway. It is, in fact, simply an addition to the revenue. It is a simple tax.

I think, though, it is worth mentioning that the Medicare levy arrangements at the moment create the most extraordinary anomalies. Some instances were outlined in the other place. People on similar family incomes pay enormously different Medicare levies depending on the composition of their family income. There was one instance, for example, where the family income for two different families was $30,000 but the levy in the first case was $300 and in the second case was $254. We have other instances in which one family which was earning a total of $12,425 paid a levy of $124, which was exactly the same levy as that for another family which was earning $19,500. These anomalies go on. There is no doubt that something should be done by the Government to clean this up. In fact, another example outlined in the other place referred to one family with an income of $28,000 paying $140 as a levy, another with the same family income paying $104 and a third family paying $210. They all had the same family income of $28,000. That enormous range from $104 to $210 for families earning the same income but paying different amounts because of their different composition does strike me as being inequitable. I hope that the Government will do something about it.

The Taxation Laws Amendment Bill (No. 2) deals with a most interesting arrangement. It relates to non-leveraged finance leasing and similar arangements. This, of course, involves the Federal Labor Government preventing the New South Wales State Labor Government from organising a tax fiddle relating to the Eraring power station. We certainly have no objection to the Government proceeding in this way, but it is a curious matter that the Federal Labor Government found that it had to do this.

The proposal to change the statutory investment rules so that income tax concessions applicable to the income of, and contributions to, employer sponsored superannuation funds will be conditional upon not more than 10 per cent of the fund's assets-that is measured at cost-being invested with the employer or an associate of the employer causes me some problems. A sound case can be made out that one of the greatest incentives for employees to seek to maximise returns and to increase the performance of their company, is if that company's success will benefit them on their retirement. Obviously, if the company does well the company's superannuation fund will benefit.

I concede that there may be some point in limiting the amount at which superannuation funds should be at risk. Obviously, if the great bulk of the superannuation fund's assets are put back one way or another by investment, in particular in equities or loans to that company, there is no doubt that the employees are at a degree of risk. I think Waltons in Sydney one way or another had the bulk of its employee superannuation funds in the company. When Waltons' fortunes rose the employees did well; unfortunately, when Waltons' fortunes went the other way, of course there was to a certain extent a lottery in that employees who left the company at that time did not do as well. Nonetheless, I think it is important not to limit to only 10 per cent the opportunity for employees to participate through their superannuation fund in the profits that are available from the company for which they work. I hope that the Government will reconsider this extraordinarily low figure of 10 per cent.

I think the General Motors superannuation fund in the United States is the biggest single shareholder in General Motors. I am not aware of whether that shareholding is larger than 10 per cent of the superannuation fund's total funds. All I know is that it is a useful and proper procedure for a company to have its own superannuation fund as a major investor in the company. I hope there is nothing in this legislation which suggests that it is somehow improper for a company's superannuation fund to invest in that company. On the contrary, I think it should be stated with some vigour that it is a useful form of employee participation in the benefits, if any, of a company.

The next part of the Bill relates to superannuation arrangements for the self-employed and increases the deduction from $1,200 to $1,500 a year from this year. I mentioned this briefly the other night when pointing out that the then Leader of the Opposition, Mr Hayden, objected to the introduction of this scheme in 1980 when Mr Howard was Treasurer and introduced it. Mr Hayden referred to it as a rort, a rip-off and something that would benefit, I think his polite expression was, the bankrollers of the Liberal Party. As I pointed out last night, it is counterproductive to use that kind of offensive language in any event but it is even more silly when the Party that uses that kind of pejorative language is increasing that concession because it now recognises, once it is in power, the merit that it could not see when in opposition. I should not be surprised, having seen how much this Government has totally reversed its policies across such a large area-for example, foreign banks-that it has changed its position in its entirety and is supporting what it sought to attack in a fairly ridiculous way for cheap political point scoring in 1980.

However, one thing that concerns me is that while on the one hand the Government is providing additional assistance on top of the assistance already granted by the coalition when in government to self-employed people, at the same time it is more than removing that benefit by its dreadful capital gains tax. We have a situation where the Government is saying on the one hand: `Yes, we believe it is right that self-employed people should be entitled to prepare for their retirement by having a superannuation scheme'. Yet on the other hand it is destroying the capacity of many such people to sell their small businesses, for example, and retire on the proceeds without being hit with a very severe capital gains tax. I know the Government will say that it is not a severe capital gains tax but for small business it is a severe capital gains tax. I stress that because of the ridiculously anomalous situation that emerges when one looks at the goodwill factor, the factor that Senator Walsh is still unable to understand.

I should tell the Senate, very simply, that there is a definition of goodwill, despite what Senator Walsh or anyone else on the Labor benches says. Goodwill is the difference between the sale price of an enterprise and its net tangible assets backing. The difference between the value of the assets and the sale price is goodwill. Among the many things that disturb me about the Government's proposal for a capital gains tax this stands out because of its unfair and unreasonable impact on small business. For example, I looked at the instances on page 47 of the statement by the Treasurer (Mr Keating), the so-called `Reform of the Australian Taxation System'. It intrigues me that change is always translated into reform in Labor Party jargon. Page 47 of the statement outlines an example in which if the proceeds from the disposal of an asset are $22,500 one deducts from that amount the original cost which, in this example, is $10,000, and increases it for inflation between the date of purchase and the date of sale which would amount to 200 per cent. The cost of the asset then increases from $10,000 to $20,000 leaving a net taxable gain of $2,500 on which tax of $1,225 is payable. That looks like a 100 per cent increase; I am overstating the inflation rate. Obviously, I was taking the inflation rate of the year after next, rather than next year's. There is no doubt that inflation will rise under this Government's current policies.

I come back to the point in hand. The interesting thing that the Treasurer's statement does not indicate is what would happen if the value of the business went up not because of inflation affecting the value of the assets but only because the people had made a success of that business. In other words, if there is a large gap between the assets and the sale price which results simply from the fact that the business was sold because it had the capacity to make money and the person purchasing it was prepared to pay, that total amount will be fully taxed at the marginal rate. In effect the goodwill element will be totally taxed.


Senator Messner —It is a tax on success.


Senator MICHAEL BAUME —As my friend Senator Messner says, it is a tax on success. It would seem to me that this tax is doubly anomalous because if in fact the purchaser of that business had bought goodwill in the first place, that goodwill would be indexed because it would be one of the costs of acquisition of the business. So, goodwill that is purchased and then increases is subject to the indexation that the Government says will apply to this matter, but goodwill that was not purchased-in other words, if some people simply started a little business, worked their guts out and paid no goodwill-cannot be indexed upwards because there was no goodwill to start with and, as a result, will be totally taxable at the marginal rate.

It is extraordinary that this concept has yet to penetrate the Labor corridors of power. However, I wish that a more equitable arrangement could at least be examined by the Government. At least when we ask questions about this matter we could be given an indication that the Government is aware of the problem and certainly aware of the impact that it will have on people who have set up a business from scratch and have worked their hearts out. Clearly, if the Government is going to index a capital gains tax, of course a benefit should accrue to people who have acquired goodwill. To that extent the purchase of goodwill is properly indexed upwards. However, we have not had any sort of coherent response on the many occasions that we have raised this question of goodwill. I think it is about time that the Government woke up to that fact. It should be prepared to cease acting in an arrogant way about a matter that affects small businesses throughout this nation and particularly, of course, small businesses in country towns which are suffering enough.


Senator MacGibbon —They aren't interested in the bush.


Senator MICHAEL BAUME —I accept what Senator MacGibbon says. The Government is certainly not interested in the bush. It seems to me, having gone to a rally at Werris Creek, at which, I must say, the locals showed sufficient recognition of reality to solidly boo the Minister for Primary Industry (Mr Kerin), that there is a growing feeling of disillusionment and depression among people in rural areas not simply because of the impact of this Government's policies on farmers but also because of the impact of them on small business people, particularly those in country towns.

The next matter I wanted to raise was the wiping out of the $2,000 concessional expenditure rebate and replacing it with a medical expenses rebate. Of course, one will have to pay medical expenses of over $1,000 to merit a rebate at all. It seems to me that the principle of wiping the concessional rebate is a very difficult one. I concede that concessional deductions are of benefit more to those on higher incomes than those on lower incomes. Perhaps it may be appropriate for the Government to replace the concessional expenditure with rebates. However, we are to have a fixed level of rebate which I think is unreasonable and is not responsive to the reality of what people's expenditure patterns really are. The Government, of course, says that only 6 per cent of people benefited from the concessional expenditure rebate, and I concede that. However, I believe that there is a great deal of merit in allowing some items to be treated as deductions one way or another, either by way of concessional deduction or by rebate. I hope that when this Government departs a government that is more responsive to people's real expenditure patterns will correct this situation.

The next item to which I wish to refer is a quaint quinella. I refer to the exemption from tax of animal racing clubs and the allowing of deductions for depreciation of livestock. The fact that this has come at the same time as the Government has quarantined rural income probably removes the so-called benefit that many people in the racing industry were cheering about. I have to admit that there is no doubt that before this change was announced New Zealand was receiving an unfair benefit in respect of the racing industry, and that was evident from the extraordinary number of Australian horsebreeders who, in effect, looked to New Zealand as a source of horses to race in Australia. There is no doubt that there had been a run-down in the Australian industry. As we have closer and closer economic ties with New Zealand it seems reasonable that our racing industry should not be put at a disadvantage against the New Zealand industry. However, it is interesting to note that what the Treasurer giveth the Treasurer also taketh away in a different way.

The next matter that I want to raise in the few remaining minutes of my time relates to provisional tax and the manner in which this tax is to be raised. The Government this year will increase by 11 per cent its assumption of the increase in the incomes of provisional taxpayers. I must say that I found that curious when I looked at the Budget Papers because I remember that there was a massive overstating of provisional tax last year. I might say that I took a role in warning the Australian people that in fact there had been a major overstatement, and that turned out to be true. That warning was, of course, issued by the then Deputy Leader of the Opposition, the honourable member for Bennelong (Mr Howard), when last year's Budget was being considered. It seems to me that when we are facing a fall in farm incomes this year of something like 22 per cent in real terms it is fairly quaint that the item that made up the previous year's biggest rise-I understand that that was farm incomes-will not rise this year at anything like the same amount, and will in fact fall. This seems to suggest to me that increasing the assumption under which provisional tax will be raised to 11 per cent is, at best, heroic. While it is true that this may well apply to a large proportion of business incomes-the incomes of unincorporated businesses and so on-it seems to me that the negative impact and the worsening performance of the rural sector, where, no doubt, there will be many exemptions and many applications for the 11 per cent rise not to be applied, will damage the prospects of an overall increase of 11 per cent. I wonder whether that figure will be achieved. On the other hand, the rate of inflation is going to be so high in Australia that maybe the Treasury knows more than we do and maybe 11 per cent is an unreasonably low figure in view of the fact that the Government clearly has a vested interest in the levels of inflation to help it overcome some of its budgetary problems.

People are more concerned about the manner in which provisional tax is to be gathered than they are about the increase in provisional tax. It sounds reasonable to have quarterly payments of provisional tax. However, can I remind the Senate that one consequence of this is that within the first 12 months of this proposal commencing the ordinary provisional taxpayer will in fact pay, I think, 175 per cent in provisional tax. In other words he will pay 100 per cent of his provisional tax in April. He will then pay 50 per cent in the following December and another 50 per cent at the beginning of March. So within the 12-month period the impact on his cash flow will be fairly severe. Obviously the impact will be severe because the Government has said that this proposal will be of benefit to the Government in the sense of $55m not having to be spent on the interest bill to float Treasury funding-treasury notes and so on.

If in fact it is going to save the Government $50m I can assure the Senate that it will be costing the private sector a hell of a lot more. The cost to the private sector of borrowing money or failing to earn money on that cash will be far greater. There is a cash flow burden that will be met. I accept the fact that to an extent the Government is kindly diminishing that impact by not having the first payment until December so that the two are lumped in one; otherwise it would have been much more unreasonable.

I finish by returning to the capital gains tax problem, which I think was raised by Senator Messner a little earlier, relating to the acquiring of leased equipment and the tax which would have to be paid when leased equipment was acquired by the hirer at the end of the lease arrangement in order to trade it in on a new item. Capital gains tax would be paid on the difference between the end of lease value and the trade-in price. It seems that what is desperately needed is a simple entitlement to roll-over in the same sort of equipment as Americans do in housing. The tax exemption, if there is a roll-over into similar equipment, would be a very simple way of avoiding an unjust consequence of the capital gains tax in that area.

In general the Opposition does not intend to oppose any of these Bills, but we certainly have some complaints about the way the Government has gone about its so-called tax reform. I feel certain that the people of Australia will recognise, as the package proceeds, how unfair and unreasonable it is in so many ways.