Craig Emerson (Rankin, Australian Labor Party) Share this | Hansard source

It is another parliamentary sitting week and we have another tax laws amendment bill, the Tax Laws Amendment (2006 Measures No. 4) Bill 2006. Madam Deputy Speaker Bishop, I know that in your capacity as a member of one of the parliamentary committees you get frustrated at the complexity of the income tax system and its administration. While I do not share every view with you on that matter, I do share a concern about the ever-increasing complexity of the income tax system, as witnessed by yet another amendment bill and, further, an amendment to the amendment bill which is now before us. This further amendment bill, incidentally, adds to the total cost of the proposed changes to the capital gains tax regime a further $55 million over four years, a very substantial amount of money, about which we cannot have a proper debate because this amendment to the amendment bill is a very recent development.

As to the original amendment bill, I want to concentrate my comments on schedule 4, which relates to the treatment of capital gains tax for nonresidents. The proposal before the parliament is to restrict the capital gains tax base to real property, which means land and income from land, and to exempt from capital gains tax nonresidents’ shares. This will poke a very substantial hole in the income tax base—more than $250 million. If we add the exercise of the amendment to the amendment bill, we have well over $300 million in revenue losses. The Senate has had the opportunity to have a very brief look at these proposals, and the Labor senators continue to express their concerns about the rationale behind them and the lack of any genuine economic modelling to give a better understanding of the full implications of these measures. That is also a concern of mine.

It is worth recalling why we have a capital gains tax in the first place. There was no capital gains tax prior to 19 September 1985. The Hawke government, having been re-elected after the 1984 election, had undertaken to hold a tax summit. The purpose of that summit was to seek to build a consensus around a number of controversial issues, one of which was repairing the income tax base by the introduction of a capital gains tax, a fringe benefits tax and a number of other smaller measures. The other was the issue of a broadly based consumption tax, which was hotly debated at the time and rejected. The repairing of the income tax base was accepted by the government after listening to the arguments of all and sundry. The reason that the government considered it important to implement a capital gains tax was that there was a rampant practice of converting income into capital gains and thereby avoiding income tax. That allowed those with the capacity to make that conversion to avoid tax, whereas ordinary wage and salary earners who did not have such opportunities could not avail themselves of that capacity to minimise their tax.

As a consequence, Australia had a very unfair tax system. Not only was it unfair but it was very distorting of economic behaviour because so much investment was going into activities that enabled the conversion of income into capital gains, thereby minimising tax. So capital gains tax was introduced, effective from 19 September 1985, and along with it a fringe benefits tax with a similar rationale—that is, that particularly better-off people were converting their income into fringe benefits, whether it was private school fees, golf course subscriptions or expensive motor vehicles. All manner of fringe benefits were being taken. The declared income was greatly reduced and therefore income tax was also greatly reduced. So that second great hole in the income tax space was plugged through the fringe benefits tax.

The main purpose of doing that was to fund cuts in income tax rates. The great irony is that the coalition parades itself as the party of individual liberty, freedom, incentive and reward for effort, but in fact the incoming Labor government inherited a top personal income tax rate of 60c in the dollar. I thought that was a very high rate—and, Madam Deputy Speaker Bishop, I suspect that in your private moments you might agree with that—until I looked more closely at the history of the Fraser government and found that 60c was not the highest personal income tax rate through the period of the Fraser government. Indeed, it was more than 62 per cent. Admittedly, the income level at which that high rate cut in was many multiples of the income level at which the pre-existing top rate—until the most recent changes were made—had cut in, but it was a very high rate. The proceeds from the capital gains tax and the fringe benefits tax and the greater integrity of the income tax system were used to cut that rate and also the second highest rate.

Why do I dwell on that? The answer is that genuine tax reform must always involve repairing the income tax base in order to fund reductions in high effective tax rates. What this government has done is to use the proceeds of two large windfalls, from its point of view—namely, a productivity bonus and a resources boom—not to cut income tax rates but to lift the thresholds at which those rates come in. The cute trick with that is that it then allows bracket creep to recommence its insidious work so that before too long people at a particular level of income are confronted again with moving to a higher threshold and therefore to a higher income tax bracket, paying a higher income tax rate.

Then the government say, ‘We will provide income tax cuts,’ again, not by way of cutting the rates but by lifting the thresholds and making heroes of themselves in the community. That is not the way to go. The way to go is to repair the base to cut the rates. But the government have not done that. They have enjoyed a windfall estimated by the ANZ Bank to be more than $260 billion—not $260 million but $260 thousand million.

See this speech in context