Chris Bowen (Prospect, Australian Labor Party, Shadow Assistant Treasurer) Share this | Hansard source

The Labor Party will support the Tax Laws Amendment (2006 Measures No. 7) Bill 2006. However, the opposition does have significant concerns in relation to schedule 2 of the bill, and I will shortly deal with how the opposition intends to address those concerns. Schedule 1 of the bill deals with an expansion of the small business exemptions for capital gains tax. These largely arise out of the Board of Taxation review of 2005 and are supported by the opposition. These recommended changes show the value of the Board of Taxation reviews and that they are a worthwhile process.

Item 39 of the bill proposes to replace the current controlling individual test, or 50 per cent test, with a new significant individual test, or 20 per cent, test. That is to say that an individual will no longer need to own 50 per cent of the enterprise to gain the capital gains tax concession but will now only need to own 20 per cent of that enterprise. The 20 per cent participation percentage does not need to consist entirely of direct holdings but can also include indirect holdings. These changes will increase the availability of the exemption and the small business concessions. The new significant individual test will enable up to eight taxpayers to access the small business capital gains concession. More people with a substantial interest in small business will be able to gain this concession, which is good for small business.

The bill also proposes changes to the maximum net asset value test to determine the eligibility for the small business concessions. This test is satisfied if the sum of the net value of all capital gains tax assets of the taxpayer, any entity connected with the taxpayer, any small business affiliate of the taxpayer or any entities connected with the person’s small business CGT affiliates does not exceed $5 million. The proposed amendments to the net asset value test mean that more liabilities can be included in calculating whether a business breaches the threshold.

I note that the government flagged in the last budget that they would be increasing this threshold from $5 million to $6 million, but they have not yet legislated to do this. I acknowledge that the government indicated that they would be introducing this change effective from 1 July this year, so there is certainly time to introduce this legislation. But I simply make the point that it would have been better, for simplicity’s sake, to include the increase in the threshold in the legislation currently before the House. The failure to do so increases the confusion faced by small business operators in relation to these changes.

This confusion was ably highlighted by Mr Peter Switzer in the Weekend Australian on 30 December last year. The article leads:

Recent federal government changes to help small businesses sell their businesses in a tax-effective way is leaving many accountants scratching their heads about how to interpret the reforms.

Mr Switzer, of course, was referring primarily to the changes in the 50 per cent test which I referred to earlier, on which businesses and accountants have been tested as to whether they should implement the law as it stands or the law which the government has indicated it intends to change. I call on the Assistant Treasurer to reduce any further confusion by introducing legislation to the House to change the threshold as soon as possible.

There are other changes included in this bill which make it easier to gain the small business tax concession. The definition of an active asset is clarified, and restrictions on the ownership of an asset for which a 15-year exemption is claimed are eased. Other changes will make it easier to roll over assets and make more asset rollovers eligible for the concession. This bill also introduces rules to deal with a deceased estate in relation to a small business where currently no rules exist. A legal personal representative of the beneficiary will now be allowed to access the same concessions that would have been available to the deceased. This is a suite of options which improve the availability of the small business capital gains tax exemption, and Labor supports all of them.

It would be a stretch to say that this is a simplification, because it is not. But it does clarify certain matters, which is welcome. Of course, small business is deserving of the support of the parliament, and the treatment of small businesses when they are sold, either to be rolled over or for retirement purposes, is an integral part of that support. The Labor Party has no hesitation in supporting these changes. My colleague the shadow minister for small business will be adding to these remarks later in the debate.

I now turn to schedule 2 of the bill, which is altogether a less happy enterprise. The schedule 2 amendments proposed change the Income Tax Assessment Act 1936 to supposedly clarify the types of financial instruments which are eligible to be exempt from withholding tax. The exemption exists to reduce the cost of Australian companies obtaining capital. The proposed amendments would modify sections 128F and 128FA of the act to restrict the range of debt interests eligible for this withholding tax exemption by specifying more closely the debenture or debt interests that are eligible by adding two conditions. Under the new conditions, to qualify for the exemption the interest must be on a non-debenture debt interest that is also a non-equity share or the non-debenture debt interest has been prescribed by regulation.

The ALP is concerned that this change is more than a clarification. These changes can be construed in a way which is substantive and substantial. I am also concerned that these changes will have a real impact on the benefit to and the availability of businesses raising finance for major projects including infrastructure projects. As a nation facing an infrastructure crisis or, at the very least, significant infrastructure bottlenecks, that is the last thing that we need. These changes go a long way to reversing the reforms that this government introduced in 2005.

The New International Tax Arrangements (Managed Funds and Other Measures) Act 2005 broadened the range of financial instruments available for withholding tax exemption by including debt interest. Previously, only debentures were included. The then Assistant Treasurer said in a speech in the House:

These changes will allow Australian businesses generally to take advantage of global opportunities to lower their cost of debt and to facilitate efficient business structures.

We now see the government substantially walking away from those reforms. The current Assistant Treasurer should come into the House when he sums up debate on this matter and explain why he believes his predecessor got it wrong. He certainly did not do so in his second reading debate speech. He needs to do so when he sums up the debate.

I am also concerned about the lack of consultation that has gone into this measure. The Assistant Treasurer knows, or he should know, that there is considerable anger in the industry and in the financial services sector about the lack of consultation which has gone into framing of this schedule of the legislation. The Assistant Treasurer should come into the House and withdraw this schedule for further consultation. In the absence of that happening, I foreshadow that the opposition will move to refer this bill to a Senate committee in the other place.

The Senate committee will need to examine, in particular, the impediments that these changes might have on the financing of major projects, particularly infrastructure projects. The government has done nothing to improve the tax treatment of infrastructure projects and is now proposing to potentially make this harder. This comes on top of the government’s complete failure to do anything about section 51AD or division 16D of the tax act. The government has admitted that these sections are a potential impediment to infrastructure financing. The then Assistant Treasurer, Senator Coonan, issued a press release on 26 June 2003, which said:

... the Government is committed to reforming the Income Tax Assessment Act 1936 provisions (Section 51AD and the associated Division 16D), which have particular relevance to financing arrangements in the infrastructure industry ...

The quote continues:

These provisions are in need of urgent reform ...

So the Assistant Treasurer of the day—not this Assistant Treasurer, not the Assistant Treasurer before him, but the one before that—said that the government would be moving urgently to reform this provision of the tax act. That was 2003. Since then, there has been nothing. Since then, no legislation has been introduced to the House and there have been no more press releases from the government. There has been nothing but stone cold silence—a gross negligence—leaving the infrastructure industry in this country hanging on a thread, with all they can rely on being a press release. This government has taken legislation by press release to a new level. But, of course, a press release does nothing to improve the taxation treatment of infrastructure in this country. Last year, this government introduced seven tax bills into this House—this is the seventh—and not one of them dealt with section 51AD or division 16D of the tax act. The government has done nothing about this important area of taxation reform, so the infrastructure industry has every right to be sceptical about the government’s approach in this matter.

The other thing the Senate committee needs to have a look at in relation to this schedule is the power of the Treasury to make regulations about which type of debt will be exempt from withholding tax. I am concerned that this has the potential to add even more complexity to the tax act. This has the potential to slow down major projects as proponents wait to see whether the type of debt they propose will be included in a regulation proposed by the Treasury. Of concern is not only the amount of time it will inevitably take Treasury to prepare the regulations but also the amount of time that the regulations will lie on the table of the House being able to be disallowed by the House—again, increasing the uncertainty and delays for financiers and proponents of major projects.

We say that, if you get the policy settings right, you do not need to give Treasury the power to make regulations. If this parliament gets it right, there is no need to give Treasury power to bring in regulations, in the national interest, to fix up mistakes which occur in this bill. But I fear that the parliament will not be getting it right if this schedule is passed in its current form and if this government does not allow this schedule to be referred to a committee in the other place to allow the Senate to conduct consultations that this government should have conducted—to allow the Senate to do this government’s job.

The explanatory memorandum makes no reference to any particular urgency in relation to this schedule. It does say that there is potential for people or bodies to take undue advantage of this provision, but it does not say that this is happening at the moment. In any event, this schedule, even if it is passed by the House today and by the other house tomorrow, will not come into place until 1 July, so I am not interested in unduly delaying the other positive elements of this bill; there will be no delay to those. However, if a government sits on its hands for four years and does nothing about tax reform in relation to infrastructure, I think it is perfectly reasonable for members on this side of the House to say that we want this schedule referred to a committee in the other place. The government could have avoided this measure if it had consulted more widely and better with the finance services industry and the infrastructure industry earlier in the process. If the government refuses this referral, it will be held to account for the results; it will be held to account for the potential impact on the infrastructure industry in this nation.

Labor stand ready to support genuine integrity measures, providing they have been properly aired in the community, providing there has been proper consultation and providing we on this side of the House can be reassured that there are no or minimal unintended consequences. That is not the case in relation to schedule 2 of this bill, and we will be moving in the other place to have it referred to a Senate committee for further investigation. We will, of course, be endeavouring to ensure that that investigation happens quickly so that the other measures in the bill are not unduly delayed and that there is certainty in the industry.

I will now move on to the other schedules. Schedule 3 proposes amendments to remove the requirement for certain deductible gift recipients—DGRs—to maintain a gift fund. It also aims to standardise and improve integrity measures for these DGRs. Further, schedule 3 proposes changes to the provisions in the Taxation Administration Act 1953 to enhance the DGR integrity arrangements. The proposed changes will give the Commissioner of Taxation the power to request information from both endorsed and listed DGRs, thus aligning the integrity arrangements applicable to both types of organisation. Currently, of course, the commissioner can only require this type of information from one of those types of organisations. These are sensible changes which meet with the support of the opposition. They both reduce the compliance burden on these charitable organisations and improve integrity. As I said before, this side of the House stands ready to support genuine measures to improve the integrity of the tax system, on which there have been proper consultations and which have no unintended consequences.

Schedule 4 proposes amendments to extend the periods during which deductions will be permitted to certain DGRs. These include the Dunn Lewis Youth Development Foundation, the Rotary Leadership Victoria Australian Embassy for Timor-Leste Fund, the St George’s Cathedral Restoration Fund and the St Michael’s Church Restoration Fund. Labor supports these measures and wishes these bodies well.

Schedule 5 proposes amendments to insert a statutory cap of 6⅔ years for tractors and harvesters used in the primary production sector. The commissioner is currently reviewing the effective life of the primary production sector implements and, therefore, may increase the current safe harbour effective life of tractors and harvesters, which would be disadvantageous to taxpayers claiming the decline in the value of these goods over the current 6⅔ years. Taxpayers who choose to have the effective life of these assets determined by the commissioner will be limited to an effective life of 6⅔ years.

I note that this measure is not consistent with the Ralph recommendations, which this government accepted, and it undoes some of the reforms recommended by the Ralph review. The government has done this before and will no doubt do it again, increasing the complexity of the tax system. However, we do not oppose this measure; on the contrary, we support it. Farmers deserve all the support they can get in this difficult time. However, it needs to be noted that this measure is contrary to the recommendations of the Ralph review and, if the government goes on making changes to the effective life regime in this ad hoc way, it will be undermining the integrity of the Ralph reforms. We recognise that there are circumstances for case-by-case reviews, as in this case, where we support the reforms. But we are also keen to ensure in future that the Ralph reforms are respected and that their integrity is not undermined by an ad hoc approach taken by this government.

The bill proposes to make changes to the Farm Management Deposits scheme to increase farmers’ eligibility for this scheme. The bill proposes to increase the threshold of non-primary-production income from $50,000 to $65,000 and to increase the deposit limit from $300,000 to $400,000. The FMD scheme allows primary producers to, in effect, shift income from good years to bad years in order to deal with adverse economic events and seasonal fluctuations. The scheme allows primary producers to claim a deduction for farm management deposits made in the year of deposit. When the farm management deposit is withdrawn, the amount of deduction previously allowed is included in both their PAYG instalment income and their assessable income in the repayment year. Labor supports this proposal to allow more primary producers to become eligible for the FMD scheme and to assist in times of drought. I note that the income threshold and the deposit limit have not been increased since 1999; this is a timely measure.

The final schedule in this bill relates to the capital protected borrowings scheme. These changes would prevent a taxpayer from claiming a deduction for the part of the expense of a capital protected borrowing that is attributed to capital protection. Capital protected borrowings are a reasonably popular measure in which people borrow money to buy shares or other financial instruments, and they have the right to sell them back to the lender at no less than the price they paid for them. It is a transfer of risk from the borrower to the lender. Of course, the lender charges a premium to compensate them for taking this risk. The ATO has previously taken the view that this premium should not be tax deductible and that interest payable on capital protected borrowings used to purchase shares is not allowable to the extent that it exceeds the amount of the benchmark interest rate set out on the ATO website—that is, the premium charged for risk transfer is not deductible. Labor supports this approach.

However, this view was successfully challenged in the case of Commissioner of Taxation v Firth in 2002. The government announced that it would make changes to override the Firth case in April 2003. The interim methodology was announced by the then Minister for Revenue and Assistant Treasurer in May 2003. It is the same old story. I find it extraordinary that the government announced this legislative change in 2003 and yet we are in 2007 when it is finally introduced. We again have the situation that these changes were not announced by this Assistant Treasurer, were certainly not announced by the member for Longman, but were announced by Senator Coonan four years ago and yet it is now, in 2007, that we are finally debating them.

It is true to say that the government did flag these changes in 2003 and warned people that the government would be legislating retrospectively. Again, people are entitled to ask: do they comply with the law of the land as it is laid down by the courts or with a government press release? For the government to wait four years before bringing this legislation into the House is gross incompetence. This government has taken legislation by press release to a new level. Labor will be supporting this measure; though it comes four years too late, it nevertheless deserves our support. The amendments at last provide some certainty to tax payers in relation to the capital protected borrowing scheme.

All in all, most of the measures in this bill are sensible. As I have said, we will be seeking in the other house to refer this bill to a committee to more closely examine schedule 2. If the government chooses to block this referral in an arrogant manner, we will not be standing in the way of the significant benefits to small businesses which are contained in this bill, and we will support it. But it is the government that will be held to account for the adverse impacts of schedule 2 should these eventuate. It is the government that will be held to account for its lack of consultation. It is this minister who will be held to account for ramming it through the other house, if that is what he chooses to do, and for failing to adopt Labor’s approach of more consultation with the industry to ensure that infrastructure financing can continue in this nation to reduce the infrastructure bottlenecks we see across the country. It is the government that will be held to account for that. I hope the Minister for Revenue and Assistant Treasurer accepts Labor’s proposal to refer this bill to a Senate committee for some brief consultations. If he does not, the government will be held to account for that arrogance.

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