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Wednesday, 14 October 1970

Mr HURFORD (Adelaide) - We are debating a Bill for an Act to amend the law relating to income tax in respect of convertible notes. The honourable member for Curtin (Mr Garland) merely had to fill in the 2 or 3 minutes which were still due to him. I listened to his speech last night with a great deal of interest to see whether he could take up what had gone by default in the second reading speech of the Treasurer (Mr Bury), namely, arguments in favour of supporting the Bill. I hope I am being reasonably charitable to the honourable member when I say that he did a very workmanlike job in repeating the Treas urer's second reading speech and outlining the Bill without telling us why the Bill is before the House. In his concluding remarks he has attempted to throw the onus back onto this side of the House to prove why we are opposing the Bill. My argument is that the onus is on the Government to tell us what are the pressures that are forcing it to bring this Bill before the House.

I will first of all attempt to explain what are convertible notes, to make sure we are talking on the same subject. As far as I am concerned, they are a hybrid - a combination - of unsecured notes on the one hand and equity capital on the other hand. What is achieved by this capital instrument can be achieved by unsecured notes and equity capital issued separately in the market. This capital market instrument, 1 concede, is available elsewhere in the world in developed money markets, but certainly not, as 1 understand it, in the form that the Government is proposing in this amendment to the Income Tax Assessment Act. The other point that I would like to make about convertible notes is that there is nothing to stop them being issued in this country at the present time. All that we are debating at the moment is whether the interest which is payable by the companies to the holders of these convertible notes should be a taxation deduction before primary tax is applied to the taxable income of companies. So there is nothing prohibiting convertible notes being issued.

The question is whether the Government should encourage the issue of convertible notes by allowing taxation deductions for the interest paid to the holders of them. I want to elaborate on the points made by the honourable member for Melbourne Ports (Mr Crean), the shadow Treasurer, last night and explain that there are 3 main reasons why the Opposition is opposing the Bill at the present time. The first is because we think there ought to be better arguments proposed by the Government in support of this Bill than we have been able to hear from the Government or find out from Government supporters and other people knowledgeable in this sphere. We think there ought to be better arguments put forward before we allow the erosion of the tax base, which erosion will take place if the interest payable on convertible notes is an allowable deduction.

I repeat that the case has gone so far by default. I have pointed to the speech of the Treasurer. 1 have pointed to the speech of the honourable member for Curtin. I invite anybody to look at those speeches and tell us who is going to use these convertible notes. It is my knowledge of the capital market that certainly the large companies in this country will not want to use them. When I turn to appropriate literature - J refer to such magazines as 'Taxation in Australia', the monthly magazine of the Taxation Institute of Australia, and the financial Press - I find that there is some speculation. Perhaps the medium sized or smaller companies in our community will want to use these convertible notes, but nowhere that I have been able to see has anybody written that convertible notes in the form being put forward by the Government at the present time will be used by them

Let me refer to the article in 'Taxation in Australia' by Mr Sam Denton, a chartered accountant of my own State, or to an article which I think appeared in the Australian Financial Review, a year ago when the possibility of this Bill was first intimated. The article arose from a speech made to the Institute of Directors by another person known to rae, Mr Michael Gleeson White of the firm of Ord, Minnett, which is a firm of stockbrokers and which is also in a reasonably large way in the underwriting field. In every case where we have been able to find the written word on this subject of convertible notes nobody has justified the limitations imposed on them by the Government. This is not to criticise those limitations in any way because I believe they are necessary in order to avoid the sort of excesses that took place prior to November 1960 when the then Treasurer, the late Mr Harold Holt, brought in a Bill altering once again the Income Tax Assessment Act, this time prohibiting interest on convertible notes as a deduction. I believe that in trying to find the reasons for this Bill the answer perhaps lies in it being the thin edge of the wedge, although it would not be used by many people now. But at least it has brought these sections back into the Income Tax Asssessment Act where they can easily be amended later so that they will be more acceptable to members of the community who want to use convertible notes. But the onus is on the Government to prove that in the form in which they appear in this Bill they are of great use to our community in encouraging investment and for the other purposes which have been mentioned in a very vague sort of way.

The second reason why the Opposition opposes this Bill is the effect it has on interest rates. 1 hardly need outline the hardships being caused in the community at the present time by the high rate of interest which we are suffering. We have only to look at the interest rate on mortgage loans to understand this. We have only to see how savings banks are forced to reduce the amount of home mortgage loans to applicants because of the present monetary policies, and how building societies are experiencing difficulties, to know that the monetary policies of this Government are creating great hardships in the community. 1 submit that in encouraging a new form of investment and a greater demand for savings in the community which are in short supply the Bill will merely increase interest rates and the demand for money and thus the cost of money. I think this is another worthwhile reason to put forward for the reticence of the Opposition to support this Bill at the present time. I would like to draw to the attention of the House the words of the late Mr Harold Holt in his second reading speech on the Income Tax and Social Services Contribution Assessment Bill (No. 3) 1960 when interest was removed from the list of allowable deductions for taxation purposes. He said:

In my statement I outlined why the Government had decided upon these measures.

That is, removing interest rates on convertible notes from the list of allowable deductions. He continued:

I pointed out how the bidding of higher and higher rates of interest for borrowed morley had been working to the disadvantage of governments and other public authorities and, through them, to the disadvantage of the general taxpayer. This was because the less governments could borrow on reasonable terms the more they had to obtain in taxation to finance basic developmental works and the provision of community services.

I also went on to say that the bidding-up of interest rates imposed a burden on productive enterprises and added to costs generally. Industry, in general, seeks to raise finance as Cheaply as it can, especially when it wants the money for longterm investment and when it has to engage in strenuous competition to sett its products either on local markets or overseas.

I will not quote any more of the words of the late Mr Harold Holt other than when he said, after developing this argument:

This unrestrained competition for capital is not good for the economy . . .

I suggest that a measure such as this - unsupported, I will admit, by evidence of where it is required - can have no result other than to encourage investment and add to the demand for investment capital and so increase its cost. I list this as another reason why the measure should be treated with a great deal of reticence.

The third reason for opposing this Bill lies in the very wording of the Bill. There are 13 pages of extremely complicated provisions in order to arrive at the result that we have today. The explanatory memorandum goes to over 24 pages. I use this opportunity to object to the making of what is already a stupidly complicated Act into a ridiculous Act. which engages the activities of too many intelligent people for too great a length of time. This Bill merely makes this position worse by these provisions. This is not to criticise those who had to draft this Bill. I know how difficult it is to include these measures in the Act without leaving any loopholes. But I list it as another reason why T am opposing the Bill at this time. I will use this and any other occasion given to me to say that it is high time that we looked at this Act as a whole. It has about SOO sections. It covers about 425 reasonably sized pages. It has become an absurd Act to master - an Act which is doing nothing but retard productivity in the community in as much as so many intelligent people are involved in finding all sorts of ways through and around it. I do not want to do anything to add to this occupation. But I want to be constructive at the same time.

It is high time we in Australia had a royal commission into this field of taxation. Canada has recently had a royal commission - the Carter Commission. It is not a panacaea, I agree, but it at least brings together many people who are knowledgeable and interested in this complicated sphere to examine the whole field of taxation rather than the ad hoc way the Act is being examined at this present time. I believe the report of such a commission should at least set the sights on where we should be heading in the field of taxation over 5 or even 10 years. At the same time

I advocate that we should have an Australian taxation foundation such as already exists in Canada, a body of people outside our Taxation Branch who are knowledgeable in this field - lawyers, accountants and people in business - and who are interested in this field which is vital to the welfare of our nation and vital to our level of economic activity. At the moment the only research being undertaken is either within the Taxation Branch or on an ad hoc basis at an odd faculty of economics or commerce in various universities throughout Australia. The taxation foundation would be a continuing body. The Government should help to finance it just as the Canadian Government helps to finance the Canadian taxation foundation. We have the nucleus at the moment for such a body in the form of the Taxation Institute of Australia, of which I am a member on the South Australian Council. This is a body of lawyers and accountants who are interested in this field and who are using their spare time to do what they can to improve their knowledge of this Act and its application. We also have, of course, the Law Society of Australia, the Institute of Chartered Accountants and the Australian Society of Accountants. If these organisations were correctly stimulated by the Government I believe that they would take part in an Australian taxation foundation. However, this would not be a substitute for the work of a Royal Commission which would set the sights and show us where we were going in this field. Such a foundation would provide the knowledge which would stimulate what is taking place in this field within the Taxation Department and it would guard from day to day, month to month and year to year the interests of the taxpayers.

There are plenty of precedents for a proposal such as the one I have suggested. I draw the attention of the House to the Institute of Economic and Social Welfare which has been set up in the United Kingdom and subsidised by that Government. That Institute is financed in part by commerce and industry. It houses a number of economists, social scientists and political scientists who are working on a lot of the subjects that are being dealt with within the British Treasury, the British Department of Health and the Department of Social Services. In effect that Institute is an alternative body of knowledge and thought to that which obtains within the Government.

In the short time that is left to me in this debate 1 want to repeat the 3 reasons why the Opposition opposes this Bill at this time. Firstly, the onus is on the Government to prove who wants these convertible notes. We have not heard anything about this so far. We on this side believe that this is the thin end of the wedge. Secondly, there is the effect of interest rates on the community. Thirdly, difficulties are being created in what is already an absurd Act. Finally, I would like to take up a point made by the honourable member for Curtin when he facetiously said that at least the Opposition is not on this occasion referring the matter to a committee. My reply to him is: What a pity that it is not. I believe that there is not one member of this House with any deep knowledge of the underwriting field. What a pity it is that those few people who are interested in (his subject are not able to sit around a committee table to inquire into this Bill. The Bill could be referred to a select committee which could confer with people like Mr Denton and Mr Gleeson White whom I mentioned, perhaps with the Managing Director of Australian United Corporation and with others who know underwriting or who take an academic interest in it. We may be able to learn more and to justify what is before us at present. We do not have such a system at present but I believe that we should have it. I hope that even honourable members on the Government side would believe that if we could debate a Bill such as this one with more expert knowledge on the subject it would add to the status of this House.

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