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Tuesday, 5 November 1985
Page: 1542


Senator SIDDONS(4.48) —The Liberal Party of Australia has adopted a flat-footed opposition to capital gains tax. It is opposing it outright. It has not attempted to come up with any constructive or innovative suggestions as to how the worst aspects of capital gains tax could be ameliorated. It is under considerable difficulty in this particular tactic. It is opposing capital gains taxation outright in the face of the fact that all Western countries have a capital gains tax. We are debating an urgency motion which says that a capital gains tax will destroy incentive. A capital gains tax has not destroyed incentive in the United States of America or in the United Kingdom, so the Opposition has the task ahead of it to establish its case. I do not believe that it has done so yet.

The concern of the Australian Democrats has always been to ensure that if there were to be a capital gains tax, it would not be punitive, it would not discourage investment and enterprise, and it would not fall unfairly on any one section of taxpayers or any one section of the economy. In this respect, I believe we have had considerable success. However, is it possible for this economy to progress without some attention being drawn to the very great burden that is being placed on the pay as you earn taxpayer? The fact of the matter is that in 1982, 80 per cent of the Government's tax revenue was gathered from the PAYE taxpayer. Honourable senators should compare that with 1965, when it was only 65 per cent. The burden on the PAYE taxpayer has reached crippling proportions and something has to be done about it.

Why has this burden on the ordinary individual wage and salary earner become so great? There are two reasons. The first is that income tax has not been indexed and therefore marginal rates of tax on the average Australian-the tradesman, the nurse and the school teacher-have reached the incredible level of 46 per cent. That marginal rate of tax, designed 20 years ago to catch the millionaire, is now being applied to the average Australian. That is one reason why 80 per cent of the government revenue burden is on the backs of the PAYE taxpayer. The other reason is that the non-PAYE taxpayer has been able to avoid paying tax through a variety of ways of converting income to capital gains. As a percentage of tax, revenue from the non-PAYE taxpayer has fallen progressively.

So the strategy that the Australian Democrats have adopted has been borne out as being the right one. Because of our activity the capital gains tax we are looking at now is indexed for inflation-a very innovative strategy. Very few capital gains taxes in the Western world are indexed for inflation. Without the Democrats that would not be the case. It has been claimed by the Opposition that a flat rate capital gains tax would be preferable. The fact of the matter is that a capital gains tax at the marginal rate of taxation but indexed for inflation is a milder tax than a flat rate capital gains tax as applies in the United States. So to that extent we are better off.

It is at the insistence of the Democrats that the family home will not be included in a capital gains tax. That means that the average Australian, whose capital is in his home, will now not be affected by this capital gains tax. Surely that has been a worthwhile initiative and one for which the Democrats can be thanked. The Democrats insisted that the death provision of the proposed capital gains tax should not apply. This provision would have impacted very badly on the family farm and on the family business, but it has now been eliminated. We have insisted that no retrospectivity should apply to any tax, particularly a capital gains tax. That view has been taken notice of by the Government. We believe it is indefensible to say that there should be no capital gains tax in this country. It is a very unimaginative approach, an approach that gets us nowhere and an approach that flies in the face of all the evidence in the Western world.

In spite of the notice that the Government has taken about many aspects of the capital gains tax, which the Democrats have been advocating for many years, we are still unhappy about many aspects of the proposed tax. We are particularly unhappy with the impact of a capital gains tax on small business. There is no doubt that small business is the productive sector of the economy and should receive special consideration by the Government. Small business is built up by blood, sweat and tears over a long time. Right now the Government is proposing that the profits from the sale of a small business, in which a lifetime's work has been invested, be taxed at the marginal rate of capital gains tax that applies in that particular year. There are no averaging provisions at present for the capital gains tax, and for that reason it will impact very heavily on small business.

There is another problem area, and again it will impact particularly on small business. I refer to the fact that the present capital gains tax package gives no consideration to goodwill. Goodwill is an intangible asset and it is built up by the owner of a business being constantly efficient, reliable and helpful. It is the personal element of a business. Many small businessmen are content to work very long hours and they are flexible in their approach to clients. This contrasts markedly with big business, which is rigid and set about by all kinds of strictures on wage rates and so forth. So, because no goodwill will be taken notice of, this great effort that small business people are prepared to put into building up their business is not to be recognised when the sale of the business takes place. We suggest that goodwill is an asset shown in the balance sheet and it is a factor that could readily be taken notice of by the Government. A percentage of the sale price of a business could reasonably be considered as a goodwill element and allowed as a deduction.

The last aspect of the capital gains tax about which the Democrats are particularly concerned is its effect on employee share ownership. Senator Messner briefly commented that perhaps I was concerned about that. I am very concerned about it. I have long advocated in this chamber that if we really want to get incentive back into industry, if we want to get employees participating in the success of the enterprise of which they are a part, the way to do that is to give those employees a slice of the action, a stake in the enterprise in which they work. The best way to do that is through employee share ownership. The unfortunate facts of the matter are that, as this legislation applies at the moment, the employee shareholder will be very seriously disadvantaged. I want to spend a minute outlining how serious this is. It is normal practice for companies to issue shares to employees at a discount on the market or assessed value of those shares.

The Government, I think rightly, says that if an employee is issued shares below the market value, this is in effect a remuneration to the employee and as such should be taxed. We agree with that. It should be taxed, as a remuneration, at the marginal rate of tax applying to the individual at the time the shares are issued. But the Government has gone further than that. It has said that it will not consider that the employee owns the shares at the time that they are issued to him, even though the employee is receiving the dividends and in effect has ownership of the shares; it will wait until he has paid off those shares, which may be in five years or ten years time, and then it will tax him on the difference between the issued price and the market price in five or ten years time. Those shares could well appreciate quite considerably in that time and the employee will be asked by the Government to pay tax at the marginal rate on the appreciated value of the shares over a five year period. This is a very punitive tax. It means that the employee is paying a capital gains tax and also a personal tax on those shares. We will be taking up this matter with the Treasurer (Mr Keating)-in fact, we have already done so-to see whether section 26AAC of the Income Tax Assessment Act can be changed so that employees who receive shares at a discount pay for that discounted price at the marginal rate of tax but the capital appreciation on the shares applies as any other capital gain would.

We are not happy about other aspects of the capital gains tax. There is a problem with retained earnings and there is certainly a problem for farmers in that the family home is to be exempt-there is to be no upper limit on that-but the family farm is to be taxed at the full capital gains rate. We believe that there is unfair differentiation between the metropolitan home and the family farm in this respect, and that is an area to which the Government should give attention.

In conclusion, let me summarise in this way: A capital gains tax is vital if resources are to be invested in productive areas of the economy and if we are to get away from this tendency to chase paper profits, which has been so much a factor of the Australian economy over recent years. We believe that the capital gains tax is now in a form that will not be unduly destructive to the economy by and large. We are pleased that the Government has taken note of the Democrats initiatives that have been advocated for many years, some of them since the Democrats were first formed. That particularly applies to taking inflation into account in a capital gains tax. But if the Government is to get complete community support and if it is not to make a rod for its own back once the capital gains tax is applied, it must take note of the very serious anomalies that exist, particularly the anomalies that apply to business, and to the goodwill aspect of business in particular. Unless we can come up with initiatives that encourage small business this country will not solve its unemployment problems and its balance of payments problems. It is up to the Government in drafting the legislation to take note of real concerns about a capital gains tax. I think that if it does it will have made a great contribution to the reform of the tax system in this country.