Kelvin Thomson (Wills, Australian Labor Party, Shadow Minister for Public Accountability and Human Services) Share this | Hansard source

Thank you, Mr Deputy Speaker. The member for Hunter suggested that the government should support his foreshadowed amendment. He said that, if the government only wanted to support their own ideas, he invited them to come back later with their own amendment and the opposition would be very happy to support it. I support his remarks. He further went on to say:

... I have to remind the House that Australia is a signatory to the OECD antibribery convention of 1997, which calls on bribes to be made illegal and therefore not tax deductible. The convention raises significant criticisms of so-called facilitation payments. The words used in the convention are that such payments are ‘a corrosive phenomena’. Such payments are effectively small bribes used to smooth the wheels of government.

It needs to be made clear that AWB type payments of high value cannot be deductions; they are already illegal under the Crimes Act, and we want to make sure that the tax act is aligned with those provisions.

There are four schedules to this bill. The first of those schedules relates to tax changes for nonresidents. It is designed to remove some harsh penalties and to permit some additional concessions for nonresidents working in Australia in relation to their foreign sourced income. While the principal targets of the proposed changes are foreign sourced executives, some high-skilled professionals have also been impacted on by the current tough provisions. The current law has two prime effects: imposing a tax on certain unrealised capital gains for temporary residents leaving Australia and giving a tax-free status to foreign sourced income for temporary residents for four years.

The current provisions work as follows. When a resident for taxation purposes becomes a non-resident—for tax purposes, usually after 12 months—a capital gains tax event is triggered and what are referred to as the deemed disposal rules apply. Unrealised gains on assets without a connection to Australia are deemed to be realised and capital gains tax applies. An exception applies for short-term residents—that is to say, people who have been here for less than five of the last 10 years; the tax can be deferred until realisation, with subsequent gains being assessable. Under the United Kingdom and United States double-tax treaties, such gains subsequent to a residency change are not assessable.

Secondly, back in 2002, the government introduced an exemption to temporary residents from Australian tax on foreign sourced income, including interest withholding and capital gains, for four years. The relevant schedule was removed from the bill in the Senate and the amended bill passed the House. The rationale for the government’s proposal was that the high marginal tax rate in Australia meant that Australian tax on foreign sourced income was higher than the tax the expatriate would pay overseas on the same income. This could inhibit attempts to attract key personnel from offshore.

The current bill has three effects. Firstly, it removes the deemed disposal rules for temporary residents for assets without a connection to Australia, excluding employment income in Australia, without that five- to 10-year rule which I referred to earlier. Secondly, foreign sourced income for temporary residents is excluded for income tax indefinitely, for more than the current four years. And, thirdly, temporary residents do not pay tax on interest income received overseas.

The current measures go beyond the 2005-06 budget commitments by abolishing all time limits and extending the withholding tax exemption to income from all foreign liabilities for temporary residents. It does not reduce the compliance costs but it does extend the concessions in some cases.

There are economic benefits associated with reducing impediments to skilled foreign employees taking up positions in Australia. We hope that this will, in some measure, boost labour productivity in important sectors. However, I express my regret—as I have done previously and as some of my colleagues have done on other occasions—that this government has not made the kind of investment in skills training that we would want to see which would ensure that the need for skilled migrants is minimised. We should be doing better by way of training our own. Regrettably, this government has failed in that important national task and has dramatically ramped up skilled migration in order to meet its own shortcomings.

The second schedule refers to ‘black hole expenditures’, which were targeted for relief in the Ralph Review of Business Taxation. They were to be dealt with under the now abandoned tax value method. Black hole expenditures are those which were basically considered legitimate but fell outside current rules for deductibility. The current bill really only extends deductibility for expenses associated with setting up a now defunct or changed entity. This is not a measure about loss carry forward provisions but about deductibility of expenses for an entity which is not now existent. The expenses do not meet the loss carry forward provisions. Some tests still need to be met in order to claim the deductions.

Labor has asked the government for advice as to whether the payments by James Hardie to the compensation fund for asbestos victims are covered by this provision. The tax commissioner has rejected the deduction under current law. This is because the compensation fund is not the same legal entity as the James Hardie corporation as it currently exists. We think this schedule should be supported because it clarifies a significant uncertainty in tax law.

The third schedule goes to empowering the Commissioner of Taxation to impose penalties on promoters of tax minimisation schemes. Currently, the commissioner cannot do this but can only hit the victims of such schemes after the event. This has resulted in something of a debacle in relation to mass marketed tax schemes and employee benefit arrangements, where thousands of taxpayers have become victims of exploitation from aggressive tax minimisation strategies, with penalties attached.

This schedule now empowers the tax commissioner to seek fines of significant value from the actual marketers of the schemes and to get an injunction from the Federal Court to stop the schemes being promoted. This gives no relief to previous victims and it ought to be noted that some 60,000 taxpayers remain adversely affected. I think there is also a fair case for arguing that this scheme comes a number of years too late.

It seems that an accountant who advises a client on one of these schemes will not be affected unless they positively devise or market the scheme. So it is possible that some unscrupulous tax advisers will escape the net by couching the language of their advice in a manner that is not technically a marketing of the scheme. This ambiguity is a problem for the government. Expanding the definition of tax promotion would no doubt be difficult, legislatively, to achieve.

The major problem with the current measure is the uncertainty it creates. Advisers who advocate legitimate tax reduction arrangements will now be forced to seek a tax ruling in order to ensure that they are not covered by the arrangements and slip from being an adviser to a promoter. This would significantly increase tax office costs. The current estimate of an extra $7 million per year in costs may prove conservative. I think we ought to be looking for a guarantee from the government that funding would be available to the tax office to ensure that any ruling can be dealt with expeditiously. The bottom line, I guess, is that this measure is a step back from the draft of the bill. We are supporting it.

The fourth schedule concerns the GST on prepaid phones. Prepaid phone deals, usually to do with mobiles, often promise myriad conditional benefits—such as free SMS discounts or cash-back deals. This has led to some uncertainty as to how to levy GST on these products, which are essentially vouchers to use a certain number of calls at varying rates at varying times. The easy way to deal with this is to simply specify that the stated value of the voucher is the GST taxable supply. The bill makes this necessary clarification, which increases GST revenue by $10 million per year.

I want to reiterate, as I indicated at the start, Labor’s intention to move an amendment. That amendment is to align the definition of facilitation payments in the Criminal Code and the tax act so that we can take action about the potential tax deductibility of facilitation payments.

I think that people right around Australia were outraged to learn that some of the kickbacks—the bribes—being paid by AWB were potentially tax deductible and that we have loopholes in our legislation that might enable that tax deductibility to be provided. We on this side of the House think that is absolutely scandalous. We want to make sure that there is no possibility of this happening in future by aligning the definition of ‘facilitation payments’ in the Criminal Code Act with that of the tax act.

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