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Monday, 29 February 2016
Page: 1241

Senator MOORE (Queensland) (10:56): As Senator Ketter has pointed out, Labor is supporting the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016. One of the major issues is our ongoing interest in, support for and consultation with small businesses across this country. I particularly want to put on record the work of people like Gai Brodtmann and Julie Owens, two of our lower house members who have worked extensively over the last several years with small businesses, particularly in their local communities, and listened to them to clearly understand the pressures, the challenges and the concerns that have been raised by small businesses about certainty for their future.

It is particularly important for small businesses to have certainty about the circumstances in which they will operate. It has been a particularly difficult time over the last few years. You would remember, Mr Acting Deputy President Bernardi, some of the contributions in this place during the period of the global financial crisis. Amidst all the debate that was going on about the overall impact in the community and some of the terrible information that was discussed in this place about some of the large companies and their exposure to the international financial markets, one of the clear issues that came out consistently was that small businesses often seem to be vulnerable to all the financial activities that are going on in the community. Small businesses were concerned that their own needs and their own plans were sometimes forgotten by governments who were focused in the large-picture area. We always said, Mr Acting Deputy President—as I hope you would remember—that, in terms of discussing Australia's economic strength and the strength of our wider community, the interests of small business were paramount in terms of local community and interaction.

This particular bill in front of us, while some people would say it is a small measure—I have heard that mentioned a couple of times in some of the contributions on this bill—nonetheless deals with a really important issue: listening again to what small businesses are saying they need to be able to continue to operate effectively. I know other people have put on record what, in fact, the bill does. But, because economics is not an area in which I often contribute, I think it is important that I also look at how this particular bill operates.

We know about the small business contribution in the community, the data around more than two million small businesses in Australia, and the discussions around employment of over 4.7 million people, totally reliant on the effective operation of small business. This bill allows small businesses with revenue under $2 million to defer gains or losses that would otherwise be made when transferring business assets from one type of entity to another. The bill amends the Income Tax Assessment Act 1997 to provide this greater flexibility for small businesses when changing their legal structure. The amendments allow deferral of gains or losses that would otherwise be incurred when the business assets are transferred from one type of entity to another.

The current law under which we operate can create an obstacle to small businesses restructuring, because they may incur a significant tax liability in the process. This has been discussed with us in many of the fora that local MPs have been involved in across the country. This would again be a further impost on small business operators, and a significant tax liability. As people who operate in this area know, any tax liability is difficult. It compounds the complications in this area. The bill would ensure that this tax liability could be removed.

Currently, rollover relief is available in only limited circumstances for business restructures, and these limited circumstances involve great interaction between the small-business owner and their legal representatives—and we know that those costs can grow. For example, rollovers are available for restructures involving the transfer of a capital gains tax asset or all the assets of a business from an individual, trustee or partner to another wholly owned company. However, no rollover is available for a restructure that transfers business assets from a company to a sole trader, partnership or trust. These definitions are incredibly important, and in the legal system there can be some confusion even now about what the particular definitions are.

Under the proposed changes in the bill we are debating today, businesses with less than $2 million in annual revenue would be able to roll over gains and losses arising from the transfer of capital-gains-tax-eligible assets, trading stock, revenue assets and depreciating assets. Rollover eligibility only applies to transfers that do not result in a change in the ultimate economic ownership of the assets. The key aspect here is that there is flexibility to make decisions within the business as long as those parameters are met. The same ultimate economic ownership of the assets remains the important element in legal terms.

The bill sets out a 'genuine restructure principle'—that is the term—which is designed to separate legitimate business restructures from artificial tax avoidance schemes. In this place, over the years, we have had a number of debates about tax avoidance schemes, and I think we as a parliament are committed to ensuring that there is an understanding of what is appropriate in terms of genuine tax minimisation processes. I know the definition of tax minimisation is paying a responsible and reasonable amount of tax without going down the track of artificial tax avoidance schemes. That is important element of any form of tax reform in our country. We need to have a genuine commitment to making sure that there is an understanding of the tax process, and businesses in our country—it does not matter whether you are a small business or a large business—have an absolute commitment to ensuring that they have appropriate, transparent taxation arrangements.

There has been a lot of discussion in the media recently about large, particularly overseas-owned companies and ensuring that there are appropriate tax provisions made for them in the legislation. That has been widely supported by the community. In fact, some of the demand that governments ensure that there is effective tax law in this country has come from the community. Many times over the last years, there have been concerns raised about multinational organisations and the fact that some do not pay appropriate levels of tax. In fact, we are finding out it is more than some. As the cover of secrecy has been removed from a number of these organisations about their tax arrangements in Australia, the community is finding out that a large number of multinational companies seem to have set up processes so they are not paying what many Australians expect would be their fair share of tax. That principle also covers small business, in that there is an expectation from the community that as businesses they have a fair taxation arrangement.

It is very clear that the bill before us is not intended to have any process that would allow artificial tax avoidance schemes to be put in place. As I spelt out, the kind of flexibility in arrangements that could take place in moving capital and cost between different elements will always be allowable. The important thing is that there be no sense that it is an artificial tax avoidance scheme, which means that there would be less commitment to paying appropriate taxation.

A restructure will be considered to meet this genuine restructure principle when, for example, the business continues to operate, following the transfer, through a different entity structure but with the same economic ownership, which must always be the end result; when the transferred assets continue to be used in the business; or the transfer does not represent a divestment or preliminary step to facilitate the realisation of the value of the assets. That is very clear, I think. It is very clear what the intent is; it is very clear what the parameters are as well. The ability of small businesses to be flexible in their arrangements, to not have an unreasonable tax liability and to have minimal intrusion into the process so they can take ownership of their own business affairs and make effective decisions depending on their own economic situation, the demands of the trade, the demands of the business and the demands of the local economy. That will be protected. However, the overriding principle must always be that the business continue to be under the ownership of the original business.

Another element is that, to be eligible for the rollover, both the transferrer and the transferee of the assets must be residents of Australia for tax purposes. I think that we have become very sensitive to these issues, with due cause. The protection elements of the bill in front of us are focused on businesses that are owned or operating in and paying tax in Australia, so this particular piece of legislation could not be seen to be part of any scheme which could be seen to minimise tax payments in Australia. The clause that has specifically been put in the bill would mean that the flexibility arrangements would apply only if both the transferor and the transferee are residents of Australia for tax purposes.

In assessing the transaction that takes place when assets are transferred from one business structure to another, the income tax law will apply as if the transfer takes place for the asset's rollover cost—this is the transferor's cost of the asset for income tax purposes—such that the transfer would result in no gain or loss for the transferor, so that it is clear in the record that there is no gain or loss for the person or entity making the transfer—that is, the transferor. The transferee will be taken to have acquired each asset for an amount that equals the transferor's cost just before the transfer. This is intended to result in a neutral outcome for tax purposes. The interaction between the business and the tax office has to be transparent, and there has to be effective documentation that clearly points out each step of the way, so that the whole history of the process is clear.

Small businesses will continue to incur capital gains tax liabilities if they dispose of assets outside a genuine restructure. Again, in this way an organisation will be able to prove to the tax office that the process of restructuring is genuine and that the activities that have taken place are part of that restructure. Also, assessing the rollover relief at the point of a restructure will not exempt small businesses from future capital gains tax liabilities if those assets are later sold outside the business.

These are the mechanics of the process. They ensure, as I have said, that small businesses can have absolute certainty that their transactions are understood to be part of the restructure that is taking place within their organisation. Within the general debate in the community at the moment it is important that we have the opportunity to work through processes such as we have done to arrive at this piece of legislation—where we can reach agreement on something of concern to small businesses and that has been raised by the Small Business Association in various discussions, make a conclusion and then move on into the wider debate.

I know other contributors to this debate have given information about the general tax environment in which we are operating at the moment. There are concerns that there is no clarity around what the future direction of the government's tax policy is at the moment. This creates uncertainty. It creates worry that other changes that people will not understand will be coming and that there will be things rushed through in the lead-up to an election this year. It is important that when we have the opportunity to come to an agreement in what is a straightforward area that it is it clearly understood and that the people who are involved will understand what is going on. That is a positive result.

Nonetheless Labor has said that, considering that this is a new change and is a dynamic part of our economic make-up, there should be, within a reasonable time, a review of the flexibilities that have been built into this agreement, any documentation that is shared through the process and any case law which develops along the way once this particular change is agreed. I am not exactly sure whether a two-year program in this area is considered to be long enough to ensure that any vagaries in the system could be identified and effective responses built in, but we are saying that there needs to be such a review.

It is my understanding that the government is supportive of a review, because, as we all know, no matter how clearly you think through a piece of legislation, there can always be consequences which may not have been fully understood before the processes were put in place. We are very keen that there is a review built into the process, and I am sure the minister will let us know about that when he sums up the arguments. That is a standard expectation. It does not matter whether it is tax law, social security law—with which I am much more familiar—or anything that impacts on people's lives, there should be an effective review process built into the legislation.

We believe that the capital gains tax rollover provisions in the bill are a small but positive step by the government that will be part of keeping the conversation alive with small business groups across the nation. As I said earlier in my contribution, when citizens are working so hard to ensure a living for themselves, particularly the over 4.7 million people who are employed in this sector, it is very important and valuable that, when they come to their government and say that there is something that they think would be a practical way of achieving a result, the government is then able to say that they have heard them and will make changes that will work effectively with them. That is what we hope to achieve. Certainly, when we were in government, we took our responsibilities to the small business community very seriously and built up a range of communication networks in that space.

In terms of this particular piece of legislation, I am happy to say that we will be supporting it. We acknowledge the work that went into ensuring that it would be as simple as any piece of tax legislation could ever be. We also value the information that we will receive about an effective and engaging review process to ensure that will work as we would hope. The intent is that small business will work effectively, professionally and, I hope, with great profitability in our economy.