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Tuesday, 7 December 2004
Page: 130

Senator MURRAY (9:34 PM) —The incorporated speech read as follows—

The Tax Laws Amendment (Small Business Measures) Bill 2004 was originally introduced into the Senate as the Indirect Tax Legislation (Small Business Measures) Bill 2004 but lapsed when Parliament was prorogued due to the recent Federal election.

It has come back with a new name but is substantially the same.

The first measure gives small businesses and not-for-profit bodies that are voluntarily registered for the GST the option of reporting and paying GST on an annual basis.

Businesses that take up this option will be able to prepare and lodge annual GST returns at the same time as they prepare their annual income tax returns. A business will make a single payment of any GST owing at the time it lodges its returns with the Commissioner of Taxation. This seems a sensible proposal.

The second initiative gives businesses with an annual turnover of $2 million or less the option to make an annual apportionment of input tax credits relating to acquisitions used partly for business and partly for non-business purposes.

For most of the year, these businesses will disregard non-business use of most of their acquisitions or importations in determining the amount of input tax credit they can claim in their monthly or quarterly GST returns. They will then make a single adjustment after the end of the financial year.

Businesses required to determine the extent of non-business use of acquisitions or importations for income tax return purposes will be able to use the same determination for GST purposes.

The third initiative aims to reduce compliance costs for small businesses by simplifying the election rules relating to the option to pay GST by instalments, and to lodge an annual GST return. An eligible business will no longer be required to make and lodge an annual election with the Commissioner of Taxation. Once a valid election has been made it will remain in force until the business chooses to leave the instalment system or it is no longer eligible.

The annual lodgement and annual apportionment initiatives will apply from 1 October 2004 for entities with quarterly tax periods and 1 November 2004 for entities with monthly tax periods.

Due to the delay in passing this Bill as a result of the Federal Election, the commencement date for the option to pay GST by instalments has been deferred from 1 July 2004 until 1 July 2005.

We will be supporting this Bill. It aims to reduce the compliance burden on small business and this is a principle that the Democrats support.

We have always supported a simple, efficient and fair tax system, but like every other political party that has had a hand in tax legislation, we continue to fail the simplicity test. However we continue to try hard on efficiency and fairness.

One of the tax areas that matters a great deal to small business is capital gains tax.

Capital gains tax was one of the tax subjects outlined in the Australian Chamber of Commerce and Industry's Taxation Reform Blueprint, issued in November 2004.

The ACCI said:

“While the Australian Government substantially reduced CGT with reforms in 1999, other countries such as the UK and the US have since implemented CGT changes to attract greater investment. Australia's CGT system is no longer competitive with these countries and is limiting the potential investment in research and development and in innovation.

“Therefore, it is necessary to revisit some of the alternative methods canvassed by the 1999 Ralph Review of Business Taxation but not accepted by the Government...”

On the 26 November Crikey picked up the ACCI agenda describing it as one of a number “of wizard wheezes:

Further reductions in Capital Gains Taxes (CGT) to promote innovation and entrepreneurship including the introduction of a `stepped rate' CGT where the percentage of gains subject to the tax reduces the longer an asset is held.”

Then they quoted ACCI chief executive, Peter Hendy, discussing the subject with finance correspondent, Stephen Long, on ABC AM:

“PETER HENDY: We need a capital gains tax regime like they have recently introduced in the UK, where you have a step-rate capital gains tax regime where you reduce the burden of tax the older an asset it is, because we need to boost private sector investment in research and development.

STEPHEN LONG: So you're saying—introduce a new capital gains regime where the longer an asset was held, the less capital gains tax an organisation or an individual would pay?

HENDY: Yes —turn it more into a speculative gains tax, so the longer an asset is held, the lower the burden of taxation.

LONG: And presumably that would shift some of the investment out of property speculation into investment in industry?

HENDY: We think it would. We think it would actually decrease the amount of property speculation, it would actually put it to more productive uses that the money that's being used in property speculation. . . put it into research and development and innovation investment.”

It is for this reason that we opposed the massive reduction in Capital Gains Tax back in 1999.

As any economist will tell you, by creating distortions in the tax system, you create distortions in the economy. We have witnessed this with the housing bubble in over the past four years.

I have spoken many times in this place about the tax distortion that has created the housing boom —the negative gearing rules, the capital gains discount and overly generous depreciation rules.

Others have agreed with me.

Alan Kohler, writing in The Age, in an article titled `Blind Freddie can see why house prices have soared' wrote:

“Five years ago, Treasurer Peter Costello told Australians: `work for a living and we'll tax you at close to 50 cents in the dollar. Speculate and we'll only take 25 cents. Not only that, but as a special deal—while stocks last —we'll pay half your speculating costs.

Naturally 1 million Australians started speculating on real estate. When the money ran out, they borrowed more. Prices doubled, so did debt.”

This is a succinct summary of the impact of the Government's change to Capital Gains Tax.

They have been warned by the Productivity Council and the Reserve Bank that the rules should change but Treasurer Costello has done nothing.

He continues to stubbornly ignore the problems that an overheating housing market causes. In their `Taxation Reform Blueprint: A Strategy for the Australian Taxation System 2004 to 2014', ACCI argue that Australia should have a stepped rate CGT.

In one respect perhaps this is not surprising. Corporate Australia did not benefit that much from the CGT discounts that were given to individuals and trusts.

In fact, due to the removal of indexation, corporate Australia is now faced with paying tax on increased notional capital gains albeit at lower tax rates.

The idea of a stepped-rate capital gains tax was a suggestion that the Democrats made at the time of the Ralph Review.

Following the Senate Finance and Public Administration Committee's Inquiry into Business Taxation Reform Report, tabled in November 1999, the Democrats attempted to amend the Bill to introduce a stepped CGT rate.

Labor and the Coalition of course voted us down.

How right we were!

Our basic proposition was that speculative short-term investment should attract a higher Capital Gains Tax than longer-term productive investment.

In my supplementary report in November 1999 I remarked that:

“The Democrats do not believe that the business tax package, as it stands, will be revenue neutral. We have concluded that the behavioural assumptions on the capital gains tax cuts provide for an over-optimistic estimate of likely revenue gains which knocks more than $2.5 billion out of the forward estimates, leaving the Budget in the red by around $1.49 billion over five years.

We also conclude that the capital gains tax cuts in their current form are likely to lead to considerable tax avoidance, more than that allowed for by Treasury.

As outlined in the main committee report, the key weakness in the revenue figuring behind the Ralph Report lies in the Capital Gains Tax proposals, particularly in the treatment of realisations.

The generosity of the lower capital gains tax is also likely to lead to an increase in tax avoidance, particularly because of the retention of a 100 per cent deduction for negative gearing despite only a 50 per cent capital gains tax. Professor Rick Krever, economist Dr John Edwards and US proponent of capital gains tax cuts, Alan Reynolds, in evidence, warned that this combination was likely to lead to an increase in tax avoidance. Dr Edwards warned that negative gearing was in fact on the rise in the equities market: negative gearing is now, even with the current capital gains tax, a hugely popular strategy. In most banking institutions, for example, marginal lending into equities is the most rapidly growing part of their business. You can see it in the housing finance figures. There are huge increases in individual credits lent on the security of houses which are going into the stock market or into other properties.

The Ralph Report, in dealing with the ability to negatively gear non-commercial losses, originally carved out a continuing exemption for rental properties, but not shares. The Government, in its Stage 2 response, broadened this out to also include shares, without any indication of why, or any adjustment of the revenue costing.

Professor Chris Evans in evidence suggested that even a slight movement in tax planning from earned income to capital gains would reduce the revenue take considerably. He found that a one per cent movement of converting income to capital would cost $359 million in annual revenue, based on 1996-97 figures. In 1996-97, negative gearing cost the tax system around $937 million in tax foregone on losses on rental properties alone. Just a ten per cent increase in negative gearing would cost around $94 million a year. Professor Krever and Dr Edwards also warned that the tax arbitrage effect was likely to be higher than predicted by Treasury.

Given these sorts of risks, the Democrats believe that the tax arbitrage effect allowed for in the Ralph estimates of a maximum of $180 million a year in lost tax due to conversion of income to capital is likely be an understatement given the size of this capital gains tax cut. For the purposes of this exercise, we believe it would be prudent to increase the revenue lost allowance by at least 50 per cent.

The result of the changes to the realisation and tax arbitrage effects are included in the table below. The effect is to convert the capital gains tax measures from being net revenue positive to net negative, and the package as a whole from net positive to net negative.

The Democrats conclude that the capital gains tax gains to revenue have been overstated and that the loss to revenue has been understated. By correcting for these effects, we conclude that the package, rather than being revenue positive by $1.267 billion as claimed by the Government, is in fact revenue negative to the tune of $1.49 billion.”

So, almost exactly 5 years ago, the Democrats were warning that reducing capital gains tax would cause problems.

I must obviously acknowledge that the Australian economy has been extraordinarily successful in the past five years.

We have had increased employment, wage growth with low inflation and reasonably low real interest rates.

But it must be acknowledged that there are warning signs beginning to develop. Economic black clouds are on the horizon in the form of the massive current account deficit, high personal debt, linked to heavy property investment.

These need careful watching.

The Democrats warned that the changes to the capital gains tax system would cause problems.

We feel vindicated.

It would also be good to see the Government report on the difference between its 1999 forecasts, and what has actually transpired.

It would also be good to see them respond to the Democrats stepped capital gains tax proposal, now that the ACCI have taken it up. We urge the Government to simultaneously consider reforms to negative gearing to ensure that asset price bubbles do not become an ongoing feature of future economic cycles.