Joel Fitzgibbon (Hunter, Australian Labor Party, Shadow Assistant Treasurer and Revenue) Share this | Hansard source

I thank the House, and I thank the member for Batman for his enthusiastic support for the amendment. The Tax Laws Amendment (2006 Measures No. 4) Bill 2006 is, as usual, a complex tax bill. It contains four schedules, each of which the opposition will be supporting. But, as the second reading amendment makes clear, the opposition is disappointed that this bill seems to be a continuation of a disjointed approach to tax reform. In particular, it is a bill that does not seem to be underpinned by the argument and sort of data that we as an opposition require to make considered decisions about the appropriateness of a bill. That is the reason for the second reading amendment, an amendment which will give members an opportunity to make a free-ranging contribution to the debate.

Schedule 1 of the bill deals with capital gains tax rollover in the case of marriage breakdown. Current law provides for the capital gains tax rollover from the sale of property caused by a court order or court approved maintenance agreement occurring as a result of marriage breakdown. But there exists a problem with capital gains tax treatment in the case of a binding agreement—for example, one not approved by a court but still consistent with current family law. The classic case is where a prenuptial agreement exists.

This could mean that one party to the broken marriage would be able to rent the former family home in a manner that would change the apportionment between the capital gains tax free component of the former family home and the assessable component in the event of a sale. One party could therefore potentially use the current law to influence the capital gains tax treatment of the former family home to the possible detriment of the other party. This schedule is designed to ensure that both parties’ situations are taken into account when calculating how much of the property is capital gains tax free. The law also clarifies the fact that marriage breakdown settlements do not give rise to capital gains tax liabilities. This schedule is a necessary policy change. On that basis, it enjoys the support of the opposition.

Schedule 2 deals with the consolidation rules. The consolidation regime applies when two associated companies elect to be treated as a single entity for tax purposes. Companies can sometimes split or demerge. However, to protect against tax avoidance, current law provides that major transfers of assets just prior to the demerger are ignored. This was to ensure that the demerger was not used to manipulate the cost-setting rules that value assets of the group and reduce tax. In this case, the demerger would be unwound and the previous position would apply for tax purposes. However, if the demerged entity, or parts of it, then remerge, they would be captured by these integrity provisions and the whole transaction would be unwound for tax purposes. However, the remerger is not tax avoidance and should not be part of the integrity measures. This change modifies the integrity rules to ensure that the remerger is not caught by this provision.

The change appears to be a reasonable correction of a problem but serves to highlight the confusing nightmare that the consolidation provisions entail. This is at least the 12th time that they have been refined since the introduction of the consolidation rules. These perpetual amendments to the consolidation regime themselves need to be consolidated. I repeat a position that I have put to the House before: it would be better for a major consolidation bill to be considered by the parliament. The process of considering amendment after amendment to this complex body of tax law does not reduce complexity. Indeed, it increases compliance costs and is against the broad thrust of seeking to reduce the size and complexity of the tax act. If the Treasurer is serious about reducing the complexity of the act, he would do well to consider my proposal.

Schedule 3 of the bill deals with the simplified imputation system for New Zealand companies. Many New Zealand companies operating in Australia elect to be part of the Australian imputation system. But there are problems in allowing the imputation credits to flow to Australian companies as some dividends are non-portfolio dividends—that is, they constitute less than 10 per cent of a shareholding—or are otherwise exempt. Harmonisation of the two imputations systems is desirable and these provisions permit the franking credit to apply to non-portfolio dividends. On this basis, this measure also enjoys the support of the opposition.

However, I want to note for the House that the original measures to allow cross-Tasman imputation recognition had a cost in excess of $50 million per year. This bill corrects an unforeseen event and therefore gives effect to the original costing. This is why Treasury has not booked a cost to this measure: as it has of course already been booked. Still, the measure as written has a cost, even if one already included in a previous explanatory memorandum to a previous bill. It should have been given in the EM to this current bill. If I am wrong in that assumption, I invite the Assistant Treasurer to correct me when he provides a summary of this debate.

I now turn to schedule 4, which deals with non-resident capital gains tax. This is a complex and controversial measure with two major impacts and a total cost of some $250 million over the course of the forward estimates. The first measure involves a significant tax concession to foreign residents—mostly companies—operating in Australia by restricting the capital gains tax base to real property, which means land and income from land. Capital gains on non-resident shares are therefore now to be excluded. This, I accept, is consistent with the OECD-model tax treatment. The government argues that this approach is sought by other jurisdictions in treaty negotiations. However, the schedule also contains a major compliance measure which is likely to be targeted at the mining and minerals exploration sector. A little bit later, I want to say something about that.

The basic principle of international taxation is that the host country taxes income that relates to operations in the host country, irrespective of where the company headquarters are located. So income from Australian operations is to be taxed here. But there is a major problem with so-called interposed companies. If a foreign company has a subsidiary with operations here, it pays capital gains tax. But if the assets are held by an intermediate company then the capacity of the Australian tax office to levy the tax is suspect even if in reality the operations are Australian based. Non-portfolio dividends—that is, those constituting less than 10 per cent control—are tax exempt. Companies have the capacity to divide assets to put less than 10 per cent in a resident subsidiary, even though, say, 60 per cent may relate to its Australian operations. This is a means of evading Australian tax.

The new law states that, for non-portfolio holdings where the assets are effectively 50 per cent in Australia, our capital gains tax regime will apply. This means that the Australian Taxation Office can look through the international corporate veil and come up with a notional figure for whether or not the company is in effect really only a non-portfolio shareholder—for example, a foreign small holder of BHP shares—or in reality a major player.

The schedule has been considered by a Senate committee. The opposition requested that that inquiry be undertaken. Treasury officials have indicated that two government amendments will be made to the bill. I assume those amendments will be moved in the in-detail section of this debate. While this in itself is justification for Labor’s reference of the bill to the committee, it also reveals a dangerous trend in tax legislation in this parliament. Time and again, imperfect bills are put to both this House and the Senate. I have to ask the question: how many times has the parliament been forced to consider amendments to consolidation measures? How many times have we been forced to consider amendments to the international tax regime—for example, the international tax participation exemption bill 2004? The debacle of the Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Bill 2005 is still unresolved. Labor’s amendments were rejected in the morning, but the bill was made subject to review by that afternoon. The result of the review is now eight months overdue.

The legislative error rate is becoming appallingly high in taxation matters. I know this is a concern not only to the opposition but also to business and industry peak bodies. I have a table of some of the errors that the opposition has had to highlight from time to time in this place. I will seek the opportunity to table that document later in my remarks. This will give the parliamentary secretary some time to consider that request.

With respect to this schedule, Labor senators did make some additional remarks—as did Senator Murray, I should note. I would like in turn to endorse the broad sentiment of Senator Murray’s remarks in his additional comments as that is something he often so generously does for me in the other place. This schedule involves a major reduction in the capital gains tax base for nonresidents. In evaluating this measure, there is, of course, an initial consideration of cost. The explanatory memorandum posits a cost of around $65 million per annum. This in itself is significant, but Labor senators noted that this cost could be expected to increase substantially as a result of either proposed government amendments or prospective mergers, especially the hostile takeover bid of which Coles is currently the subject. Such costs have to be weighed judiciously against the suggested economic benefits of increasing the attractiveness of Australia as a source of international capital.

It is regrettable that this judgement was not assisted by adequate argument or modelling from the government or Treasury in the committee hearing. Decisions of this nature by the parliament require the highest levels of analysis this country can afford. In this case, the government has not put its argument with sufficient economic rigour. This may be the fault of the political process or perhaps of the officials. Whatever is the case, it must be corrected and opposition senators call upon the government to devote more resources to making its argument before these bills are put to the parliament. The opposition cannot be expected to properly consider these bills if it is not provided with justification to support the bills.

Why doesn’t the government make this analysis available to the parliament? Is this just another extension of the arrogance of a government that has been in power for 10 years and controls both houses of parliament? If that is the case, I suggest that the government needs to have another look at its approach and be more cooperative in consulting with the opposition, the Senate and, indeed, the House on these tax measures.

Schedule 4 of the bill seeks to align Australian international tax arrangements with the model OECD treatment in relation to taxation of capital gains for nonresidents. The opposition supports the policy intent in principle, but it is concerned that the reduction in the capital gains tax base for nonresidents is very significant. An additional major concern of the opposition relates to whether this bill will actually disadvantage resident capital gains tax taxpayers compared to non-resident capital gains tax taxpayers.

With this in mind, the opposition forwarded to the Senate Standing Committee on Economics a number of questions for officials well in advance of the hearing. These questions were primarily associated with whether these measures would lead to a disadvantage for Australian firms relative to foreign firms and also whether any takeover—for example, of Coles—would lead to significant cost blowouts. Opposition senators were not granted answers to these questions at the hearing. This is not acceptable to us. We see this as a significant breach of the process. Moreover, I have been informed that the questions were dealt with in a dismissive fashion at the hearing. This is deeply disturbing. Further, officials had to be pressed to take questions on notice. Just to add salt to the wound, there was a failure to answer these questions in time for consideration of the Senate report. The questions were eventually answered, but not in time for consideration in the final report.

I now call for an explanation for this unacceptable conduct. This conduct is unacceptable to all opposition parties in the Senate. We do, I think, need to remind the House that it is important that the resources of government are properly used to properly inform opposition parties. That is the best way of ensuring the most efficient legislative outcomes in this place, regardless of whether the government feels it has total control and capacity to move these bills through the parliament notwithstanding the views of opposition parties.

I have noted the joint submission of the Minerals Council of Australia, the Australian Petroleum Production and Exploration Association and the Corporate Tax Association, and, indeed, the comments of the Institute of Chartered Accountants in Australia at the hearing. The joint submission argued that taxable CGT gains or losses on Australian real property need to be more precisely focused by specifying that only a proportion of the gain on the sale of interests in a resident or non-resident entity that is land-rich should be subject to CGT equal to the Australian land-rich proportion. This amendment is worthy of further consideration and the opposition is concerned that it was not properly considered within the context of the Senate report. Again, the reason was that the information the opposition sought was not provided on that occasion. I now seek leave to present the table I made reference to, which highlights the major legislative errors we have had to deal with in this House over the course of the last two years.

Leave granted.

I do not propose to speak at length on this bill, but I need to report to the House that Labor had considered moving amendments to this bill which went to the James Hardie issue. It is well known in this place and indeed outside this parliament that the compensation due to victims of James Hardie is not yet set in concrete. There is no assurance yet that the compensation fund will carry forward and therefore there is no guarantee that victims and their families will get the compensation that they are due and entitled to, because of a dispute between the government and the tax office. The dispute was not about the tax deductible status of James Hardie payments into the fund—that was, of course, dealt with in this place by way of amendments to the black hole expenditure provisions—but about the tax treatment of both the income from James Hardie into the fund and, of course, any earnings the fund makes along the way before the final disbursement of all those funds.

Labor has been very disappointed at the Treasurer’s insistence that the fund not be given better tax treatment, notwithstanding the fact that the company has already been given favourable tax treatment. We foreshadowed our determination to further that case by moving amendments to this bill that would have extended, if you like, charitable status to the fund, which would have given the fund the tax status it requires to be sustainable and therefore deliver adequate compensation to victims and their families.

The opposition has now decided not to move those amendments. It has decided not to move those amendments for all the right reasons. My advice is that hopefully the tax office and James Hardie are inching very close to a resolution of the stand-off, and that would be very good news for us all, in particular for the victims and their families. The opposition has no desire to unnecessarily make a political case of this. We will hold our fire on any such amendments to the tax law and will collectively hope and pray that the agreement between the tax office and James Hardie can be reached to ensure that those compensation payments are forthcoming. Of course, if the negotiations fall over, then the opposition will be back in here very quickly at the first opportunity and will move the amendments that are required to provide appropriate tax status for the fund to ensure that those people receive the money that is due to them. So, in the spirit of cooperation, I will not move those amendments this evening.

I trust that the tax office will now use all the resources available to it and interpret the tax laws in an appropriate fashion to ensure that it does all it can to reach an adequate agreement with the James Hardie company or the managers of the fund. Again, if, for whatever reason—whether it is the fault of the tax office or any party to the discussions—that final agreement is not able to be reached, we will be back in here very quickly seeking to move the amendments that are required to ensure, in law, that the fund receives the tax treatment that is necessary to make it sustainable.

The opposition like to think that the pressure we put on throughout the course of this campaign is causing the tax office to inch closer to an agreement within the confines of the law with which it is operating, but we acknowledge and recognise that it can only operate with the laws that the parliament has made available to it and that it must do so fiercely independently of the government or any other political pressures. I wish the tax office well in those endeavours. If it is not able to do the job under current law, the opposition will be back in here changing the law to provide it with the opportunity to do so.

See this speech in context