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Wednesday, 9 March 2005
Page: 7

Senator MURRAY (10:00 AM) —The New International Tax Arrangements (Managed Funds and Other Measures) Bill 2004 is the third tranche of legislation in response to the Board of Taxation’s review of international tax arrangements. These changes are designed to improve the ability of financial service providers to hold investments in Australia as their regional headquarters. For anyone who thinks tax reform is an easy matter—and I doubt there is anyone who thinks that—we should recognise that it is now at least three years since the initiative was first taken.

On 2 May 2002, obviously after some consideration of the issues, the Treasurer announced details of a review of international taxation concentrating on at least four principal areas: the dividend imputation system’s treatment of foreign source income, the foreign source income rules, the overall treatment of what is known as conduit income, and high-level aspects of double tax agreement policy and processes. A consultation paper resulted. Then, after extensive public consultation, the Board of Taxation reported to the Treasurer and the government responded—which was about a year later. A year after that, the first two tranches came into effect in time for the financial year 2004-05. These things take time not because the bureaucracy is a slow-moving kind of beast, although sometimes it is, but because of the complexity of the arrangements affected by such changes, the complexity of the entities and the need for consultation and for double-checking as to the effect.

The Australian Democrats have supported the previous bills and we intend to support this bill too. It has three schedules. The first two schedules ensure that foreign residents who invest in Australian unit trusts are treated the same as if they owned the investments directly. Schedule 1 to this bill would make changes to the tax treatment of foreign residents who make a capital gain or loss in respect of an interest in an Australian fixed trust. Schedule 2 to the bill includes amendments to the International Tax Agreements Act 1953, aligning the tax treatment of foreign residents investing through managed funds that derive some or all of their income from sources outside Australia with the tax treatment that would apply if those foreign residents made such investments directly.

The revenue impact is stated in the explanatory memorandum to be ‘unquantifiable but insignificant’ for the first two schedules and only $5 million per year for the third schedule. We should note that the effects of the bill are likely to be far greater than the financial impact on revenue. The explanatory memorandum to this bill correctly observes:

The reforms in this bill are aimed at removing tax impediments that discourage foreign residents from investing in Australian trusts, including managed funds. This is expected to make Australia’s managed funds industry more internationally competitive, enhancing the ability of Australian funds to attract foreign investment. If, as expected, this results in an increased flow of funds into Australian funds it will increase scale and efficiencies in the Australian managed funds industry. This will put downward pressure on the cost of managed fund services which will benefit all investors in Australian managed funds.

If you decipher that, what they are effectively saying is that tinkering with the law at relatively low cost to the revenue may in fact have very considerable multiplier effects and beneficial effects economically and in business terms. Those sorts of changes are obviously to be welcomed.

On 9 May 2003 Allesandra Fabro wrote in the Financial Review that business looked to this package of international tax reforms as steps that would ‘lower the cost of capital for Australian multinationals and reduce the incentive for them to move offshore’. She also noted:

A number of surveys in recent years have decried Australia’s international tax regime as onerous and discouraging to offshore investment.

I have always thought that that threat of moving offshore is singularly overstated. I remember that at the time it was being whipped up in public debate and being repeated in here. Some time afterwards there was a survey as to how many businesses were relocating to Australia and establishing regional offices in Sydney—partly as a result, I might say, of the government’s rather good bills which encouraged Sydney to become a financial centre for our region. In fact, the reverse was happening. It was not what business was claiming—that people were going to go offshore. What was happening was that large numbers of businesses were coming onshore.

There is a salutary lesson in that for all of us who have to deal with these matters and that is that businesspeople are no different from other spruikers. If they are spruiking their particular campaign they are prone to exaggerating the points of their argument to try to encourage us to agree with them. You have to have not a cynical eye but sometimes a sceptical attitude to some of the claims they make. I feel the same way about the surveys that decry Australia’s international tax regime. In many respects we understate our competitiveness. That is not to say we should not continue to reform our law, and this is yet another step forward, which is to be welcomed.

While the Democrats support these particular initiatives and with the remarks that I have just made in mind, I want to say to the Senate that another campaign of which we should all be cautious is under way. The Democrats do not believe that Australia should participate in an illusory international race to the bottom in terms of international company tax rates. There are those who argue that in this country we should aim to be competitive with the very lowest company income tax rate in the world. From a self-interested point of view I can understand why they would say that. I have said before that we are not a party that believes in high taxation; we are a party that believes in high revenue, which is a different matter when you are referring to rates. We strongly supported reductions in company tax rates, from 36 per cent to the present 30 per cent, stepped over a number of years, because they were accompanied by base broadening, they simplified the system somewhat and delivered greater competitiveness. We see no reason at this point in Australia’s economic life to consider that company tax needs to move below the existing rate of 30 per cent, which of course is a nominal rate.

Despite the forecast $10 billion government surplus, which the newspapers were full of yesterday, our priority will always be to fund health, education, housing or infrastructure to satisfy the reasonable and legitimate needs that Australians have from their governments. It is likely that the Treasurer and the government will decide that if there is a surplus of that size they will dedicate it entirely to tax cuts. In our opinion the case has not been made that those tax cuts should be directed towards lowering the company tax rate. In our opinion it does not need to be reduced from 30 per cent at this stage, but we strongly support the view that there is a need for income tax cuts for low- and middle-income earners. In our opinion, if the government wants money to fund tax cuts for high-income earners, it can do it by simplifying the system and broadening the income tax bases. With respect to low-income earners, we think that certainty and equity in income taxation are vital. Certainty and equity should be delivered by a three-part plan, phased in over a number of years in order to ensure affordability. We recognise, of course, that selecting any threshold is arbitrary, but if you are going to deliver certainty, equity and a more acceptable income tax regime you should have objectives in mind to be implemented on a stepped basis, as affordable. We would put the priorities in this order and with these objectives in mind: a $20,000 tax-free threshold, indexation to end bracket creep, and possibly a $120,000 top rate threshold, or something of that order. That would be a structural reform to the system.

At the very least, the income tax system needs to accept that it is entirely inappropriate to tax income below $12,500, which is the estimated minimum subsistence income. In the meantime, the priority is to keep addressing the needs of low-income workers, increasing their disposable income and living standards, reducing cripplingly high effective tax rates which operate for them and moving poorer Australians from welfare to work. The best single way to do this is by raising the tax-free threshold, which has the side benefit of flowing on to all Australian taxpayers, and in that way is seen as an equitable measure.

I make those remarks about individual income tax in the context of this bill because I think the debate in business is focusing far too heavily on company tax rates and far too little on the needs of individual taxpayers. In making those remarks with respect to company tax, I always remind people that we have to remember that it is an intermediate tax, because the dividends that are ultimately paid end up in the hands of the ultimate taxpayer, which of course is the individual. We have to look at their marginal and nominal tax rates and what that dividend will be categorised as finally in the hands of the share owner. To me, in the debate about what to do with surpluses, the intermediate taxes are less important than the final taxes. With those broad-ranging remarks, I indicate that the Democrats will be supporting the bill without amendment.