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Wednesday, 19 June 1996
Page: 1846

Senator WATSON(4.58 p.m.) —Senator Sherry has a very short memory because in terms of the legislation the 10 per cent fallback figure has been there. I think the Labor Party introduced that concept. We are honest. We want to review it each year and, given the prevailing circumstances, if it can be lowered from the current six per cent we will certainly lower it next year with the full support of business.

The hypocrisy of the people opposite is somewhat astounding. The legislation concerns three amendments that I want to address. There is reducing the provisional uplift factor, which has been very well received, contrary to the earlier remarks. There are the off-market share buybacks and the deduction for gifts. I want to confine my remarks essentially to the first two aspects, the provisional uplift factor and the off-market share buybacks. The reduction of the uplift factor on calculated provisional tax is the fulfilment of an election promise that this government gave to small business. It has been well received, contrary to earlier remarks.

We went to the election on 2 March on a promise that we would reduce the uplift factor for small business. The coalition's policy document, A new deal for small business, released on 18 February 1996, announced that there would be a reduction in the uplift factor from eight to six per cent for the purpose of calculating the 1996-97 provisional tax, and that is exactly what the government is doing in this bill. That is 100 per cent commitment.

By contrast, the Labor Party went to the election of 1993 and said that they would not increase taxation. They were not committed to reducing it; they just promised that there would be no increase in taxes. But, as we all know, they did not even hold themselves to that. Not only did they not reduce it; they actually put up taxes.

The coalition gave the electorate a commitment, not simply to keep taxes at the same level. It gave a commitment to reduce the tax burden in relation to provisional tax, and now we are keeping that commitment. It believes in honouring promises. It is reducing the provisional tax from eight per cent set in previous years under the previous government to six per cent in the 1996-97 financial year. If no legislation was being introduced, provisional taxpayers would be paying 10 per cent under the legislation designed by the Labor Party—the default level if parliament does not provide otherwise. The coalition will not allow that default 10 per cent to operate in the 1996-97 financial year. It is delivering on its promise. It will not allow the default to operate next year either, unless the Senate intervenes.

Small businesses are the backbone of our economy. The potential for job growth is greatest in the small business sector, but they need encouragement. In 1995, the number of bankruptcies in Australia increased at an alarming rate under the previous government, from 3,305 in December 1994 to 4,050 in December 1995—a 22.5 per cent increase. Businesses desperately needed to be relieved of the onerous and unfair taxation measures. The application of this bill will go some way to alleviating their plight.

Labor's record in this field has been appalling. The uplift factor they set was quite out of proportion to any realistic measures of ability to pay or prediction of economic growth. Senate committee reports have examined this from time to time. It was just another way in which the Labor Party grabbed revenue from those making an honest living to fund the Labor Party's ill-managed government expenditure. Under Labor, the provisional uplift factor exceeded the actual rate of growth in income subject to provisional tax in every year between 1991 and 1994-95. The provisional uplift factor was set by the previous Labor government at eight per cent for each of the last four years, including 1994-95.

The level of aggregate income that should be subject to provisional tax can be difficult to predict. We all acknowledge that. Therefore, in regard to the uplift factor for subsequent years after the 1996-97 financial year, the new coalition government will set it when the most accurate information is available, and that is the right time to set it. It will be set at what is a realistic figure for the time and the circumstances so that small business people, self- funded retirees and other provisional taxpayers will be treated fairly.

We will not lock those people into situations where they may be penalised because of changing economic circumstances merely to get revenue for government but, rather, we will set a rate which is a reasonable reflection of the growth in income of provisional taxpayers. This is actually what is being done for the 1996-97 financial year. For subsequent years, an assessment of the economic circumstances will be made at the appropriate time.

The report on the consideration of provisions of Taxation Laws Amendment Bill (No. 1) by the Economics Legislation Committee recommends that the bill be agreed to. Unfortunately, I think the terms of reference for that particular inquiry were a little bit limited. However, all members of the committee wholeheartedly endorsed the reduction of the uplift factor from eight per cent to six per cent. The report draws attention to the fact that the amount of tax for which provisional taxpayers are finally liable will not be affected in dollar terms by the uplift factor, regardless of the amount or the form. What is at issue is the timing of the payment to the tax office. It is this aspect which can be a deterrent or an incentive for small business.

If provisional taxpayers think their income will not increase by the predicted uplift factor or that their taxable income will decline during the remainder of the forthcoming year, taxpayers of course can lodge an application to vary their provisional tax. A penalty, however, is incurred if that variation understates actual income by more than 15 per cent, unless the taxpayer can justify why his or her income was underestimated.

Three submissions were received by the committee in relation to this question of the uplift factor—all of which applauded the reduction to six per cent. Concerns that it will revert to 10 per cent in the absence of parliamentary provisions otherwise naturally were expressed. What needs to be more clearly understood is that it is the government's intention to review the circumstances each year, according to the economic prevailing circumstances. The default 10 per cent may never be imposed. The intention is to review the factor in the appropriate economic climate, as was the practice of past Labor governments—it is not surprising that Senator Sherry has now left the chamber—although they seldom moved that rate, and this was the interesting factor, as reflected in the various determinants of unearned income.

The minority report from the Labor members of the committee condemns the 10 per cent after 1997. What they chose to ignore for their own political purposes is that the government has quite appropriately left open the option to review the factor. My Labor colleagues would have us locked in without any possibility of adjustment in the light of changing economic factors. There must be provision for more flexibility. For that reason, we will not be supporting the Labor Party amendment.

A submission from the Australian Society of Certified Practising Accountants drew the committee's attention to the fact that provisional taxpayers are often reluctant to submit a provisional tax variation as the cost of doing so—doing the appropriate estimates—coupled with the 15 per cent variation tolerance allowed is a real deterrent. A submission from the Association of Independent Retirees expressed a similar psychological factor which may cause anxiety, especially amongst the elderly. It must be remembered—I think it was during the Labor Party administration—that the factor was previously 20 per cent in terms of the estimates and was reduced some time ago to 15 per cent.

The Australian Society of Certified Practising Accountants actually suggests that the uplift factor be linked with the economic growth factor put forward by the Treasury in its budget consideration each year. An alternative suggestion put forward by the Taxation Institute was that the factor should be automatically linked with the rate of inflation. Both of these suggestions are worthy of more serious consideration in the future deliberations on the uplift factor. The important thing is that the coalition seeks to provide flexibility and a determinant at the most appropriate time when all the circumstances are best known.

The second aspect of the bill that I want to address is in relation to the off-market share buybacks. These will apply to off-market share buyers. The amendments are intended to deter companies from avoiding tax by arranging off-market share buybacks. The amendment will ensure that the full buyback price of off-market shares is treated as consideration for ordinary income tax purposes and for calculating any gain or loss on the disposal of the shares. Relief from double taxation is provided by reducing the amount of the buyback price that is a dividend included in assessable income or paid out of profits, not including revaluation reserves.

Under the previous law tax could be reduced by the amount of the buyback that was treated as a dividend, even if the dividend was exempt or paid from an untaxed source. Companies could gain a tax advantage by buying back off-market at a higher or lower price than the market value of the share. They could also create artificial capital losses and allowable deductions or these could be increased by rebatable dividends in certain circumstances.

The proposed amendments that our government is putting forward will not change the calculation of that part of the purchase price of a share in an off-market buyback that is a dividend. What will change, however, is the amount that is to be treated as disposable consideration for the purposes of calculating ordinary income or capital gain or loss. If there is a difference between the purchase price in respect of an off-market buyback and the market value of a share at the time of the buyback, a market value rule will apply. The share's market value at the time of the buyback is the amount which would have been the market value of the share at the time if the buyback never occurred and was never intended.

If the purchase price of the share is less than the market value of the share, the difference between that price and the market value will be treated as consideration for ordinary income and capital gains purposes. It will not be treated as a dividend. This means that the taxable gain will not be artificially reduced and a tax loss will therefore not be created. If the purchase price is more than the market value of the share, the amount of the purchase price that is treated as a dividend is the amount that exceeds the sum of the paid-up capital of the share and the amount debited to a share premium account. The dividend component of the purchase price which is attributable to the excess over the market value of the share, however, will not be frankable, no matter from where the funds used to buy back the shares are sourced.

This proposal was announced by the former Labor government on 9 May 1995 as part of its 1995-96 budget. In this bill it is proposed that the closing of this loophole take effect quickly and will apply to all share buybacks that took place after 7.30 p.m. on 9 May 1995. Arrangements which were announced and which were acted on well before this date will be exempt.

It is important that a taxation scheme does not encourage Australian investors to send their money outside Australia. This measure, amongst other things, will deter resident shareholders receiving tax exempt dividends from the off-market buyback of shares held in a foreign company where the dividend is not paid out of profits.

Those on the other side have made much of a hyped-up speculation of possible cuts to this or that government expenditure over the past few weeks. They have carefully skirted the reasons for which savings in government expenditure will have to be made. They ignore the fact that the coalition government inherited this $8 billion deficit which must be funded. Under good management, good controls and greater confidence in our ability to manage, that figure is now substantially less than $8 billion and will continue to fall over the next few years. The Labor mismanagement of government finances over the last 13 years means that the government is now faced with a huge debt and a huge interest bill on our borrowings.

This opportunity for dodging tax should have been closed quite a number of years ago. In the Taxation Institute of Australia's submission to the Economics Legislation Committee the suggestion was made that the market value of the share at the date of the agreement under which the share buyback took place be adopted. If the market value is to be adopted, it should be set at this earlier period. I think there is some substance in the suggestion. I commend it to the minister. The institute suggested that this would avoid the unintended consequence where there is an arms-length transaction involved in situations where the market value differs from the actual consideration provided.

The institute submits that the adoption of a market value in the buyback provisions should be subject to an arms-length exclusion. A taxpayer should not be assessed on an arms-length transaction on an amount that may never be received. If, for example, the share buyback price is set in advance under an agreement, there may be subsequent fluctuations in the market value of the shares. If the share price increases, the share buyback provisions will be automatically attracted.

The institute's submission also draws attention to a problem which may arise as a result of the application of the legislation to many employee share acquisition schemes. There may be a need for specific exemption in the share buyback provisions for these schemes to avoid a situation where the employee will derive a gain on the differential between the market value at the date of the share buyback and the original acquisition price.

I say to the minister that both these points do have merit and I believe they should be given further consideration. They do not, however, conflict with the general thrust of this legislation, which is to close loopholes in the taxation system whereby clever companies and their advisers can avoid their taxation obligations by making special arrangements with regard to their off-market buyback arrangements.

I therefore support the legislation. I seek your comments, minister, on my suggestions that were originally put forward by the tax institute. I thank the Senate for its attention.