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Tuesday, 13 October 1970


Mr SPEAKER - Order! There is far too much audible conversation in the chamber and it is not fair to any honourable member who has to speak to a subject in these circumstances.


Mr CREAN - To begin with, it is a highly technical measure, and I want to indicate immediately that it is the Opposition's intention to oppose it. We do this for very good reasons. In many respects the Bill is a bit of a gimmick. I should like to recall the words of the previous Treasurer now the Minister for External Affairs (Mr McMahon), who made a statement in this House I think at least 12 months ago. Mr Speaker, could I ask again for your indulgence to request a little silence in the chamber?


Mr SPEAKER - Order! I ask the honourable member for Banks and some other honourable members on the same side of the House as the Opposition speaker who is endeavouring to address the House, to remain silent. The honourable member for Oxley will behave himself.


Mr Hayden - Well, there are some members over there.


Mr SPEAKER - Order! The honourable member will behave himself. 1 think it is only reasonable that the honourable member for Melbourne Ports should be heard in silence on this important matter, from the point of view of his colleagues and also honourable members on the Government side. I have asked previously for the co-operation of honourable members in this regard, and I will insist upon it.


Mr CREAN - 1 am not quite sure of the date of this statement but it was made at least a year ago. The former Treasurer said:

It will not be practicable for the amending legislation - which, because of the intricate nature of the subject, will require some time in the drafting - to be introduced before the House rises.

The legislation has been before us now for a month or more. AgainI should like to make an appeal to the Government which is still in charge of the drafting of tax legislation. Many of these matters are exceedingly complex in their nature, and sufficient opportunity is not given for representations to be made by people who are either for or against the particular legislation. I think it is a very serious breach in the system. After all, income collection - and this relates to income tax which is imposed on both individuals and companies - will amount to a little less than$5,000m in aggregate this year. Approximately $3,000m will be collected in income tax on individuals and approximately $ 1,500m will be collected in company income tax.

The question of what is taxed, what is not taxed and the rate at which the tax is imposed is of some significance. In essence, a convertible note is a sort of half-way house between a share, on the one hand, and a debenture on the other hand. If it were a pure bred instead of a hybrid, if it were a debenture, let us say, at one extreme, there would not be any argument but that interest paid on it would be allowed as a deduction before computing the tax of the company. But it is not pure bred; it is something in between. If it were a share the profit of the company would be computed and if a dividend were paid it would not rank as a tax deduction. Tax would be paid out on whatever profits are computed.

The convertible note which existed in this country prior to 1960,I think it was, went out of existence. It was in that sort of speculative area at the time when it was convenient for certain organisations to float or to get new capital. If people were honest there was not much doubt but that it was a share. But because it was called a convertible note it was treated as a debenture. It was treated as a debenture rather than a share and whatever was paid on it was regarded as a deduction before computing the profit.

The thing had reached such a stage that it had become - and I do not use the word offensively - a racket. Therefore, to protect the revenue, the Government acted so as to treat a convertible note in essence not as a debenture any more but as a share. The situation has rested there in between.

But there has been a great deal of agitation. Again this is one of the areas where it is difficult to know who is right and who is wrong and what the facts of the situations are. Apparently sufficient pressure has been put upon the Government to reverse the decision made nearly 10 years ago and to regard the convertible note now as a legitimate form of commercial transaction. But so many fences have been put around it that it seems to me - candidly I must say that I am glad that the fences have been put around it - they are so high that it is a little difficult to know whether those who wanted the convertible note restored to its old form are very happy about the restoration.

Here is one of the areas where the income tax law is being asked to do something that, in a sense, has nothing to do directly with the revenue. It relates to something else altogether. It relates to the totality of investment in the community. Mr Deputy Speaker, might I ask again for a little silence?

Mr DEPUTY SPEAKER (Mr Drury)Order!I ask that the level of conversation in the chamber be reduced. It is not fair to the honourable member who is on his feet.


Mr CREAN - I can understand the difficulties involved in following this sort of legislation and I regret the lateness of the hour at which the Bill is being debated. That is not my fault. Surely I am entitled to make all the observations that I have to make in at least reasonable tranquility.

We have dealt with this area in regard to mining legislation, particularly petroleum and we have had it in relation to life insurance legislation, where the Income Tax Act is asked to bear something which is outside the field of income tax directly as such. A lot of it has to do with the rates of tax which are applicable. This is certainly the case as far as convertible notes are concerned. 1 must confess that, originally, when I looked at this proposal, I thought that the fences that had been put up were sufficient in themselves. But after having discussions with other people within my own Party, with certain people outside the Party and with certain members of the stock exchange concerned with these investigations I have come to the conclusion that on balance the proposed legislation is bad rather than good. It is for this reason that we decided to oppose it.

As I understand it, one of the reasons given - I think that this is implicit enough in the second reading speech of the Treasurer (Mr Bury) - 'and one of the arguments advanced for this sort of legislation were that it would favour the expansion of Australian equity in ventures in Australia, particularly mining ventures, and that the foreigner would be placed at a disadvantage. After making considerable inquiries, it seems to us that the foreigner is placed in a better position. This is a highly technical matter. If it is debated, I would be pleased to hear the issue cleared up. It seems to me that the foreign investor, if I may so describe him, is in a better position than the Australian investor because the sorts of barriers do not apply to him that apply to the internal investor. These matters are quite technical and are within the scope of the legislation itself. Again, those outside the Party to whom I have talked suggest that the people who really will take advantage of the convertible notes will be the capital hungry in Australia but on a relatively small scale and inclined to be in the more dubious type of venture. I suggest that, if this is the case - and I would like to hear an answer given about it - this is something that ought to be resisted.

I asked a question here the other day. It had nothing to do with this measure. It had to do with certain insurance ventures in Australia. There is not much doubt that in Australia at the moment - and I hope that the Commonwealth acts pretty quickly on this situation - any sort of enterprise can set itself up as an insurance company. It cannot in the life insurance field because at least this has been covered. But this is not asked of a company that indulges in, say, motor vehicle insurance. This is where the issue is the most serious. No barrier is erected against an enterprise engaging in this field of insurance. After all, if a company collects a premium for motor vehicle insurance from a man, he could have an accident the following day. If a company is writing business reasonably quickly, it might be able to cover the risk. But, in my view, anyone who has written premiums to the extent, let us say, of Sim should have something like Sim in reserve to cover all his contingencies. This is not the case.

Let me illustrate what I am suggesting with regard to the fences around this convertible note type of venture. I appreciate the interest of the Taxation Branch in this matter. I think it is doing what it ought to do. I think that the Government is too. It is protecting the revenue. Nevertheless, it has opened the gate that has been closed for a long time, but it has introduced certain severe restrictions. I doubt whether big companies like Broken Hill Co. Pty Ltd, Alcoa of Australia Ltd or any of the other large firms will be very interested in the prospect of the convertible note. I do not think that they are. What has not been told to this House by the Treasurer or by the Minister for Immigration (Mr Lynch) who is Minister assisting the Treasurer is, which are the sorts of companies that are likely to be advantaged by this new device or by the opening of the gate to the convertible note once more.

What is the position if the big are out and the little may be dubious? I am not one of those who think that the field should be mads pleasant enough for those who arc big enough, but I think in terms of people who are likely to invest. I have quoted in this House before the famous line of T. S. Eliot: 'All men are ready to invest but most men expect dividends'. Surely this is a prudent ground on which one should look at this matter. 1 ask this categorically of the Government: First, which does it think will be the sort of interest which will avail itself of the convertible note? Secondly, is it true as my advice suggests that, despite what the Treasurer has said - that is. that this will make it easier for local equities as against foreign equity - this legislation is more advantageous in its application to the foreign investor than lo the local investor? lt seems to me that these things are fundamental in the proposition. I have tried to read the literature that is available in this field. I must confess it is pretty limited. I quote one article which is 2 years old. There has been a blank in the field from I960 to the present time because I think most people, once the door had been closed, turned to other devices. The article which 1 shall quote appears in the 'Australian Security Analysts Journal'. I do not quite know what that journal represents, but it must serve a fairly limited field of people who are called security ana lysts. The issue of June 1968 contains an article by one K. J. Hedley, B.Com., F.F.A., F.A.I. I., Principal of K. J. Hedley & Co., Sydney. He wrote:

There is some artificiality in the clearcut division between interest paid on funds provided by way of loans and dividends paid on funds provided in the form of ordinary and preference capital. Interest is treated as an expense in the earning of the company income to be taxed whilst dividends are treated as a disbursement of the net profits left after payment of company tax.

He is simply posing there the essential difference between a debenture and a share. Then he goes on to argue:.

A manufacturing enterprise may need a certain volume of resources to carry out its activities, and logically these resources (apart from seasonal fluctuations) should be wholly provided by shareholders. The present company tax system almost forces the enterprise to borrow as much as possible of the needed resources, and this can introduce a degree of instability into its operations and financial results.

The smaller sort of activity would be encouraged into that sort of resort to capital by this particular kind of easing of the law. He goes on to say:

There arc many possible variations, but basically there are two types of convertible notes:

a.   Those that are automatically and compulsorily converted into ordinary shares at the end of a period. At worst these are merely a vehicle for lax avoidance-

I think this was the reason for the closing of the doors in about 1 960 - the company really needs additional share capital but makes a temporary saving in annual taxation through this subterfuge. lt is that subterfuge that was closed up by the Act of I960. The article continues:

The company as a whole makes a gain, but lo an extent this is indirectly at the expense of those of ils shareholders who are -

1.   Australian companies receiving taxable interest instead of rebatable dividend income or forced because of this taxation situation to decline to invest in notes and so to reduce their ultimate equity percentage, as against,

2.   individuals and foreign companies no', rela tively disadvantaged by the tax position.

My advice is that it is the foreign company that is still put at an advantage. The article goes on to mention the next group:

b.   Those that are really a borrowing for a term of years but which have an associated option or conversion right that could be exercised by the holder at the end of the period. lt is somewhere in between those two grounds that the legislation seems to have been struck. There are so many reservations or gates put against it that, 1 am told, what you are likely to close the door against if you are not careful is the type of transaction where one can apply for a share and, as one of the conditions of receiving the share, agree not to take a dividend for a period of years. Honourable members opposite believe in private enterprise in which risk is supposed to be an element of the game. Whilst it is nice to remove the element of risk by means of precautions such as tax assistance I still believe that an important matter needing careful consideration is that Australia has a limited amount of overall resources. Therefore such capital as is invested should be sifted into those ventures that are likely to yield, not merely the best return, but the return that will be most advantageous to our national development.

In the past there have been two sorts of areas. The big enterprises have been able to look after themselves. As often as not they pre-empted certain resources that could have been better used in the middle area. On the other hand were the small and perhaps rather dubious ventures. I have in mind what happened to the Reid Murray organisation and its effect on the Australian economy. Capital was funnelled into ventures that simply did not have the entrepreneurial capacity to handle it. One of the great difficulties of the Reid Murray group was that it started off as a merchandising sort of activity and then branched out into areas such as land development in which it did not have the necessary expertise and got into trouble. That is the kind of thing we have to be careful about in studying this legislation.

The Labor Party has looked rather carefully at this type of legislation. I think it can be summed up in this way: Probably the Taxation Branch was not very happy to open this door at all. Certain pressures on the Government persuaded it that the door should be opened. I must say that it is to the credit of the Taxation Branch that it made passage through the door rather tough, in fact so tough that those people who were enthusiastic about convertible notes in the first instance are now not nearly so enthusiastic. In reply I am not looking for a generalised statement. I would like to have from the Minister assisting the Treasurer, who is now at the table, an indication of the kinds of ven tures he thinks will be encouraged by this legislative device. Unless they are to be substantial sorts of ventures I cannot see much purpose in the legislation. Surely nobody can fairly say that in the period of nearly 10 years in which this barrier has operated a lot of venture capital has not been forthcoming in Australia. I would like to know what new doors will be unlocked by this legislation. What sorts of new fields will be entered?

I must confess that in the first instance I was persuaded by an assurance of the Treasurer, who introduced this legislation. One of his assertions was that this measure would be in line with the ideas of the Prime Minister (Mr Gorton) about the guidelines we should use in doing our best to encourage local equity rather than foreign equity, particularly in mining ventures. Such resources as are avail* able to me - and they are very limited when compared with the resources that are open to the Government - suggest that this legislation as it is drawn favours the foreign investor rather than the local investor of capital. Perhaps that point could be answered in the course of the debate. My colleagues - the honourable member for Banks (Mr Martin), the honourable member for Adelaide (Mr Hurford), and the honourable member for Cunningham (Mr Connor) - and I, and others in our Party, have had quite substantial discussions about this matter. On balance we have come to the conclusion that we should oppose this legislation and leave the situation as it has been for something like the last 10 years, because we are not convinced that a serious case has been put up on the advantages of this legislation. I leave it at that.

I am sorry that the matter should have come on at this late hour. I have had a busy day on other things and I think it is a little hard when one is asked to make 2 serious speeches in one day, even though I cannot complain that I have not had sufficient notice. When matters have been on the notice paper for a couple of months and one is given 3 or 4 of them and told, You will do these in the next couple of days', I do not think it is very conducive to their serious presentation. This is one of those matters that in the long run have not a great deal to do with the amount of revenue collected: rather is it protecting the evasion of revenue. I think there is a very good case for this sort of legislation to be referred to a committee - 1 would prefer a select committee of the House - where the details can be scrutinised and where representatives from both inside and outside the department can argue the pros and cons of it. Otherwise most of us who are laymen in this field find it a little difficult to comprehend and we are voting blindly on what really are pretty significant matters.







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