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Wednesday, 6 November 1985
Page: 1629

Senator MAGUIRE(10.55) —In 1936, when the United States Presi- dent, Roosevelt, was campaigning for re-election, in a famous speech he said:

Taxes are the dues that we pay for the privileges of membership in an organised society.

I think that is a very appropriate quotation on taxation. That certainly was the case in earlier years in Australia, but more recently the problem has been that a number of Australians simply have not been paying those dues for membership in an organised society. In fact, a number of Australians have been using government-provided services, but certainly not wanting to pay for them. That was becoming very evident. Addressing that particular problem is essentially what the Government's tax reform package seeks to do. The Government's package constitutes the most major reform of the Australian tax system in the post-war period. I believe it is the most significant change to taxation arrangements in our country since the State governments ceased to collect income tax during World War II. Unlike the Liberal Opposition, the Government is committed to income redistribution. The Government is also committed to the accord with the trade union movement as the basis of its economic strategy. It is very important to note that this taxation package guarantees the continued success of the accord. The Australian Council of Trade Unions is very happy indeed with the tax package. The Government is committed, in its platform to:

. . . basing the tax system firmly on the capacity to pay, on the need for an adequate minimum standard of living, and on the desirability of reducing inequality in the Australian community.

The notions of redistribution and capacity to pay are tied to an understanding of equity. The idea of equity is usually viewed as having two components-horizontal equity and vertical equity. Horizontal equity means that those with an equal capacity to pay tax should in fact pay an equal proportion of their income in tax. Vertical equity implies that those whose capacity to pay is greater should pay a greater proportion of their income in tax.

The Government's package of tax reforms makes the tax system far more equitable. The package has achieved this by taking a serious look at what is meant by the concept of capacity to pay. Previously, money income has been virtually the sole measure of capacity to pay tax. As a result, those who have received their income in the form of capital gains, or fringe benefits of numerous kinds, have paid tax far below their personal capacity to pay. Previously, I regret to say, it had become common practice, especially by wealthy groups, to convert income which was taxable into capital gains which were not taxed. It had also become a common practice for employers to offer non-taxable fringe benefits to their employees in lieu of taxable wages and salaries. For just one 12-month period of which I am aware, the Australian Bureau of Statistics has indicated that there was an 18 per cent growth in the number of Australians receiving entertainment allowances. Nobody can convince me that the Australian economy had changed by 18 per cent in that 12-month period. Clearly, that growth in those particular payments was a tax avoidance device. It is fair to say that some employers have been, in effect, working with employees to help them to avoid paying their income tax. There is no doubt about that. Unfortunately, it has also been a very common practice to divert funds into the various tax havens or shelters which have proliferated in recent years. I refer to hobby farming, film investment and rental properties. The aim of these arrangements-that is the only word that can be used to describe them-has been to shelter a person's principal income from the tax which was properly due on that income.

The combination of all these avoidance mechanisms, together with the narrowness of the taxation base in Australia, has meant that more and more of the tax burden has been borne by low to middle income wage and salary earners. That is the group in the community who have received most or all of their welfare in the form of money income and not capital gains or fringe benefits. They are the people who have borne a disproportionate share of the Australian taxation burden. The Labor Government has set about remedying this situation.

The Government approached the task of tax reform within the framework of nine principles outlined last year by the Prime Minister (Mr Hawke). Together with these nine principles, the Government announced a commitment to the economic trilogy. In regard to taxation that commitment meant that there would be no increase in the overall level of taxation in relation to Australia's gross domestic product. In summary, the nine principles of taxation reform include commitments to broaden the direct tax base, close off tax shelters and avoidance loopholes, reduce marginal tax rates, rationalise the wholesale sales tax system and reduce the incidence of poverty traps. I will go into the last point in more detail later because I believe that it has not been adequately addressed in this chamber and it has been totally ignored by the Opposition. The Government has addressed all of these items and more.

The tax package provides significant taxation relief. When fully in force, the package will cost the Government $4,500m and only $1,500m will be raised by the other reforms in the total package. So overall there will be some $3,000m in tax cuts to be financed from general revenue. As a result of the tax package the Australian taxation system will be simpler, fairer and more efficient. The package certainly helps to implement the Government's redistributive and equity objectives by reducing the burden of personal income tax rates and broadening the tax base to ensure that upper income earners can no longer avoid meeting their proper taxation obligations. The tax package provides substantial benefits to low and middle income earners. The September tax reform package is the second and major instalment in the Government's three-year program of taxation reform. Some measures, of course, are already in force; some other aspects of the package are yet to be finalised.

The tax cuts to be introduced from September next year complement those introduced by the Government last November. In November 1984 taxpayers with weekly incomes of between $240 and $538 received a weekly tax cut of $7.60. The standard or bottom tax rate was reduced from 30c in the dollar to 25c in the dollar. Those tax cuts represented stage one of Labor's planned tax cuts for low and middle income earners. From September next year the tax free threshold will be increased from its current level of $4,595 to $5,100. The 25c in the dollar tax rate will be reduced to 24c, the 30c rate to 29c and the 46c rate to 43c. I think it is very important that all honourable senators note that as a result of this taxation package the lowest marginal tax rate which will apply under the Labor Administration will be 24c in the dollar. The best that the people on the other side of the chamber could manage was 30c in the dollar. That is one of the principal differences in taxation between this Government and the Opposition. The lowest tax rate in all the years of the Fraser Administration was 30c in the dollar, and under this Government it will be reduced to 24c in the dollar. We clearly are the low tax party in this country.

As a result of these marginal tax rate changes, in combination with the higher tax free threshold, a taxpayer on average weekly earnings will receive next September a tax cut of around $6 a week. In addition, I am pleased to say, 130,000 taxpayers throughout Australia will be totally freed from any taxation liability as a result of the increased tax free threshold. In July 1987 the 43c in the dollar marginal rate will be further reduced to 40c in the dollar. This will give additional taxation reductions to middle income earners. Overall, middle income earners will find that from July 1987 they will be paying taxation at a rate of 40c in the dollar on their extra income, on their marginal income, whereas at present the rate they pay is 46c in the dollar. Changes announced by the Government to the Medicare levy threshold and the ceiling for Medicare levy contributions will complement these tax cuts and will further emphasise the redistributive nature of the Government's taxation package. For example, individuals with taxable incomes below $7,526 and families or sole parents with incomes of $12,504 or less will now be completely exempt from paying the Medicare levy.

It is very important to note that a single income earning couple with two children, if they have income below $15,564, will now no longer be liable for the Medicare levy. On my calculation-as I am sure it is on Senator Robert Ray's calculation-$15,564 is by no means a bottom income in Australia these days. To reiterate, below that figure a single income earning couple with two children will now no longer be liable for the Medicare levy. On figures provided to me it is estimated that around 280,000 Australian taxpayers will benefit from the new arrangements in regard to the Medicare levy. The new arrangements in regard to the Medicare levy will mean that over a quarter of a million Australian taxpayers will benefit.

The Government has announced a number of measures-both in the September tax statement and also in the August Budget-to reduce poverty traps. Poverty traps occur when those on income tested welfare payments face very high effective marginal tax rates on additional earings. In addition to being income tested, most pensions and benefits are also subject to personal income tax. The combination of the income test and personal income tax means that some pensioners and beneficiaries face effective marginal tax rates of over 100 per cent. They can actually lose more in pensions and benefits than they actually earn in extra income. Of course, a 100 per cent marginal tax rate is well above the highest marginal tax rate, even under the Liberals, of 60c in the dollar faced by employed members of the community.

As a result of these high effective marginal tax rates, welfare beneficiaries may feel trapped in a situation where the opportunity and desire to work are present but the economic rationale for doing so is not. In terms of the response of the Liberals, low income households have little incentive under the present arrangements. In listening to an urgency motion moved by the Opposition yesterday, I was rather struck by the fact that in all of the speeches from Opposition members about incentive there was absolutely no reference made to incentive for low income Australians. The debate was all on the assumption that there should be incentives for the big people in the community. It just shows the groups in the community to whom the Opposition believes it owes allegiance because there was absolutely no reference in any of the speeches for the need to provide incentive for low income Australians.

I am going to spend some time now enlightening the Senate, particularly Senator Messner who is completely ignorant of these arrangements, as to just what the Government has done to give incentive to low income Australians-the forgotten group under the Liberals, the group that Senator Messner and his colleagues ignored yesterday in moving a motion in this place about incentive. The Government has taken a number of measures to remedy the severity of poverty trap situations in Australia. For example, taxation rebates for unemployed persons and other persons receiving social security benefits are to be increased from $75 a year to $220 a year for a married couple and from $50 annually to $175 annually for single unemployed or social security beneficiaries. As a result of that particular change, those persons wholly or mainly dependent on social welfare benefits will pay no tax in this financial year. They will certainly have greater incentive, but there was absolutely no reference made to that yesterday by Opposition spokespersons. Recipients of social welfare benefits will be able to earn more private income before their total income is subject to tax; hence, the easing of the so-called poverty traps.

A further measure announced by this particular Government to apply from May 1986 is that the income test-free area for unemployed and other benefits will increase from $20 a week to $30 a week-a 50 per cent increase from May next year in the allowable income of unemployed and other persons receiving social security benefits before their benefits are reduced. From November 1986 the income test-free area for pensioners is to increase from $30 a week to $40 a week for single pensioners and from $50 a week to $70 a week for couples. These are all measures that boost incentive, none of which has been referred to by the Opposition in this place. From November 1986 the amount of extra income disregarded for pensioners with children will be doubled from the present $6 a week to $12 a week per child. Most importantly, there will be now no longer a separate income test for rental assistance. At present in Australia rental assistance is available for persons who are receiving pensions and who are renting from private landlords. There is a separate rent income test to receive that assistance. We have abolished that income test and that will mean an increase in the disposable income of Australian households receiving social security payments of up to $15 a week from next year. That is a very, very large increase for low income families.

These five measures, which will dramatically reduce the extent of poverty traps in Australia, are expected to assist about one million low income Australians in the next two years. I think that is a very significant group, a group which was totally ignored yesterday by the Opposition in all its rhetoric about incentive. We are the party which has done something about incentive. The Opposition chooses to ignore that particular fact. It can be estimated that a sole parent pensioner with two children renting a property from a private landlord, and perhaps having $70 a week of non-pension income, will be $26 a week better off as a result of these changes made by the Government. What an incentive we have provided households in those particular circumstances! I believe that those particular measures to ease poverty traps will help ease the transition from a person being on welfare to full time work. They are progressive taxation reforms designed to lessen the Australian tax burden on those households least able to pay.

With the introduction in Australia of a capital gains tax, as I pointed out yesterday, Australia at last has joined the other developed countries of the world in the twentieth century because for many years most of the developed countries in the world--

Senator Button —Not Senator Messner though.

Senator MAGUIRE —No. I think he is a seventeenth century patrician. Of all of the developed countries in the world, only the Netherlands and Australia had no capital gains tax. The capital gains tax which has been introduced by this Government is very mild. It is totally prospective. It applies only to assets purchased from 20 September onwards. It does not apply to farms and small business assets and other assets owned before 20 September. The only gains that will be taxed under the capitals gains tax will be real gains. A person will be able to look at the consumer price index, calculate how much of the apparent gain in the asset value is due to the consumer price index and deduct that before calculating the tax which is payable on the gain. That is a very generous provision, as I pointed out yesterday. It is certainly far more generous than that handed out to persons who receive most of their income through wages and salaries because the fact is that there is no indexation of taxation brackets for wage and salary incomes. Those whose economic welfare comes principally from buying and selling assets and from increases in asset values will receive favourable treatment compared with wage and salary earners. Of course, capital losses can be offset against capital gains. That means that in the case of some investments, because the loss is fully deductible against the gain, there is a reduced risk of loss on the investment. Family homes will be completely exempt from the tax and the capital gains tax is estimated to raise some $25m per annum in its fifth year of operation. However, despite the small revenue that is to be raised from the capital gains tax, it should stem the growth in the practice of converting taxable income into untaxed capital gains. As I pointed out earlier this morning, this practice has provided the basis for many of the big tax avoidance schemes of recent years in Australia. As a result of closing off loopholes in the income tax system and the introduction of the capital gains tax, much more revenue will now be collected through that tax system. I believe we will be able to collect hundreds of millions of dollars more in taxes through the income tax system as a result of the introduction of the capital gains tax.

As I pointed out today, the practice of providing remuneration in the form of non-taxable fringe benefits has escalated in recent years. I detailed to the Senate the fact that in a 12-month period there was an 18 per cent rise in the number of Australians receiving entertainment allowances. Clearly that was an element of tax avoidance, where entertainment allowances were being provided to employees in lieu of wages and salaries. In recent years employers have offered employment packages which have included company cars, low interest loans, cheap air fares, credit cards and payment of children's fees at private schools. A lot of these devices have been used in recent years to provide remuneration to employees in such a form that they were not subject to the Income Tax Assessment Act. I take the view that if employers wish to continue offering such benefits to employees they now have to pay tax on them. Hopefully if employers do not take that road, they will increase wages and salaries instead. The lower marginal tax rates, announced by this Government, will remove much of the attraction of making remuneration in the form of fringe benefits.

The Treasurer (Mr Keating) has made it clear that he believes that the fringe benefits tax will have little effect on the car industry in Australia. Possibly there will be a shift to smaller cars. Certainly one of the major producers of motor vehicles in my State, Mitsubishi, is very happy with the arrangements. I believe that if motor vehicles are genuinely necessary for the performance of business, they will continue to be purchased. As a result of the very large tax cuts made by the Government some Australians will now be able to purchase their own car for the first time with their higher disposable income. I repeat that there is to be no overall lift in tax as a result of this taxation package, so many more taxpayers will be able to increase their expenditure as a result of their higher disposable income after taxation.

The practice of lavish entertainment by business people being written off as a tax deduction had to stop. We in the Government certainly do not believe in the free lunch-led economic recovery as do the Liberals apparently. Entertainment was a clear abuse of the taxation system which was available to a small privileged section of the taxpayer population. Low to middle income taxpayers will no longer be forced to subsidise the social activities of well-off people. The only effective way to prevent abuse of the system was to abolish completely deductions for entertainment. Having read the papers avidly since this particular rort was abolished, I note that nobody, in trying to defend it, has ever said there were no abuses. Every person who has made a statement calling for changes has admitted there were abuses under the system. It is possible there might be some job losses in the entertainment and hospitality industries as a result of these changes, but this is by no means certain. Naturally this matter would be of concern to me as a member of the Labor Party if it happened. I believe that restaurants will have to change their target clientele groups.

I commend a leading Adelaide restaurant which has already responded appropriately to the Government's tax package and changed its approach to marketing. I believe it is doing very well indeed. The large tax cuts provided in the tax package will allow a greater cross-section of taxpayers to spend more money on entertainment-from their own pockets and not from the community's pocket. There have been some very good responses in the overall community to the Government's tax package. I noted the comment made by a leading Adelaide restaurateur, Mrs Jill Heaven, who manages the very prestigious Ayers House restaurant. She said that the legitimate business lunch will live on, but of course restaurants will need to adjust. A comment was made by Mr Harold Lasky, the Managing Director of Diners Club Ltd. Most of his business comes from the entertainment area of the community. He said:

I think the people who are genuinely involved in a lunch to discuss business will continue to do so.

I quote now from a response to the changed tax arrangements for company cars. Mr Graham Longbottom, Deputy Managing Director of Mitsubishi Australia, said:

Mitsubishi could be unscathed as fleet owners, looking for more value for money, could move down to smaller cars.

He said that this would suit Mitsubishi, which offers cars in the small car range. In regard to the claims made about the impact of the tax package on the farm sector, I simply refer to a comment by Mr Jim McCarter, the rural affairs editor of the Adelaide Advertiser. He said:

Land values generally do not increase at a rate much different from the inflation rate, so farmers are likely to pay little or no capital gains tax.

He is saying that because this Government, in its wisdom, has provided for land and asset values to be indexed for inflation for capital gains tax purposes, because rural land values do not rise on average over the medium to long term faster than the inflation rate, there will be little effect on the rural sector as a result of the Government's tax package. The removal of the double taxation of dividends from July 1987 is expected to increase the role of company dividends in the economy. I am pleased to note that there will be more investment in solid industrial companies paying dividends, as against speculative activity. I am sure that will benefit business, particularly in my State of South Australia where the company base is more in the industrial area. I believe that the capital gains tax will discourage speculative investment in property, asset prices will reflect more the incomes produced by the assets and the capital gains tax will encourage investment in more productive employment-generating areas such as manufacturing.

As I have indicated, it is possible that there may be job losses in some industries as a result of the Government's tax package. However, as I pointed out at the beginning of my speech, overall the tax package will not lead to a loss of jobs because the tax changes are essentially of a redistributive nature, that is, changing the tax burden between members of the community and not increasing the overall taxation burden. There will be no increase in the level of taxation in relation to Australia's gross domestic product. I think it is very hard for the argument to be sustained that overall there will be job losses as a result of the tax package. A number of Australians will receive significant tax reductions as a result of the package, and as a result of the extra expenditure by those Australians jobs will be created in other areas.

Overall I believe that the Government's tax package has been very well received by the public. The holding of the National Taxation Summit in July played a very big role in that response. I think it raised the consciousness of Australians about the abuses going on under the present tax arrangements. It certainly increased the understanding in the general community about taxation in our country. The tax package is seen by the electorate as constituting a genuine attack on tax avoidance. It will result in the Australian taxation burden being placed more on the person's ability to pay tax and income will no longer effectively be the sole determinant of a person's capacity to pay tax. The scale of tax shelters will be reduced and the Australian taxation system will be fairer and more equitable and taxation will no longer be voluntary for the wealthy.