Alan Cadman (Mitchell, Liberal Party) Share this | Hansard source

I rise to speak on the Tax Laws Amendment (2006 Measures No. 7) Bill 2006. I wish to make a few general remarks before commencing my examination of the details of the legislation. This is another bill which reforms taxation. The government has consistently decided that taxation has needed dramatic reform. In the 10 years of this government there have been reforms and changes beneficial to taxpayers in the areas of personal income tax, business tax and superannuation, in particular. This demonstrates that good management and a growing economy can provide benefits for the whole community. More jobs for Australians means there are more taxpayers. This reduces costs to the taxpayer because the government does not have to borrow but can store funds for rainy days. Less debt means there is less interest to be paid and the prospect of reduced taxation. So, by the process of good management and a growing economy, the government has been able to introduce significant changes advantageous to all Australians.

Most of the changes have been in two areas: reform and changes to existing taxation. The reform has been the introduction of a long overdue broad based consumer tax. This was first raised by the Prime Minister over 20 years ago as being a necessary reform for Australia. It was endorsed in 1984 by the then Treasurer Paul Keating, who said that he wanted a broad based consumer tax. He was never able to get it, of course. Instead, the budget of 1985 introduced a tax on superannuation and a tax on capital gains. We are dealing with capital gains taxes today. It has taken 20 years to undo some of the disastrous decisions of the Hawke government. Both the former Treasurer Mr Keating and Mr Howard agreed that the reforms introduced by this government were long overdue, yet for political purposes disastrous decisions had been made by the Hawke government.

Imposing a broad based consumer tax was a difficult decision for the current government, coming to an election, but the Australian people had a say on the issue, and they decided that they would back the good management of the government and the promise of benefits in the future from the reforms. Those benefits generally have been delivered. There has been lower personal taxation, massive changes to personal tax scales, greater benefits for families and support for families with children, better consideration for business and changes to superannuation, which mitigate the damaging and disastrous impacts of the introduction of a tax on superannuation in 1984 and 1985. The Labor Party had made ‘rock-solid’ promises that both of the changes that occurred in 1984 and 1985 would never occur. I remind the Australian community that ‘rock-solid’ promises in taxation areas requiring careful management are seldom observed by the ALP—one only has to look at its disastrous management of New South Wales.

After reform, the next objective of the incoming government in 1996 was to change those tax features which were most objectionable. Gradually those changes have taken place. The ALP had imposed damage and had indulged in thoughtless adventurism. Unemployment and sky-high interest rates, preventing people from becoming homebuyers; bankruptcies; and closures were the legacy of those days. Those decisions took 10 years to take effect, and it has taken 10 years to unscramble them. The changes made by this government were absolutely necessary. Today we are debating further change to a complex and difficult tax imposed by the Australian Labor Party back in those times—capital gains tax. A minor advice on capital gains tax, due to the complexity of the tax and its imposition on individuals and businesses, will cost a minimum of $6,000. No accountant will risk giving advice on capital gains tax without very careful consideration and consultation with specialists.

Today’s bill deals with capital gains tax and other issues such as the small business capital gains tax concession, the exemptions from interest withholding tax and integrity arrangements for deductible gift recipients. It deals with the deductible gift recipient status of certain organisations, with depreciation rules applicable to the life of tractors and harvesters, with non-primary-production income thresholds, with the total deposit limit for farm management deposits, and with the capital protected borrowing rules. Those seven different measures are diverse. I would like to deal, in particular, with the capital gains tax. The area of capital gains tax was referred to the Australian Board of Taxation. The very introduction of a board of taxation was an innovation of this government. The value of such an organisation, with the capacity to examine the details of tax, must on this issue alone be justified. Having taken evidence, the board stated that division 152 provides concessions but also restrictions. The board made a decision that there should be a change. It concluded that the finetuning of a small number of provisions relating to the application of the eligibility criteria was needed to improve the current outcomes of the legislation. It also decided that there was a need for minor legislative changes to address unintended consequences and for administrative changes to assist in the understanding of the law.

The board considered that the tax environment in which small business operates could be improved, providing ‘incentives to small business generally to invest their capital to maximise employment, investment returns and innovation’. A comment in the Canberra Sunday Times on 19 November said:

One of the most complex pieces of legislation pertains to the CGT small business concessions that apply when a business is sold. Originally enacted in 1999, that legislation has attracted criticism for its complicated matrix of rules that require a very clear head to decipher. This was nonsense because the Government wanted small business to be eligible to the concessions.

The CGT small business concessions cause a capital gain made on a sale of a business to be tax-free. But because of the many tests that must be satisfied, many small business proprietors tripped at the last hurdle and failed to enjoy the concession.

One would have to speculate whether it was the consideration of the tax office that there should be any real concessions to the capital gains tax, but the legislation went through. It was an effort to assist small business. The complexity, as I have said, has been massive and now there has been a rectification of that process as instigated by the Board of Taxation and its review.

To give the Treasurer full credit, immediately he had that report he announced in the following budget—last year’s budget—that the government would be proceeding to make changes. The government has adopted all but one, I believe, of the recommendations of the Board of Taxation. Today we are considering those changes to tax. The amendments will improve the operation of the small business capital gains tax concessions by making changes to the maximum net asset value test, the 15-year exemption, the retirement exemption, the small business rollover, and how the concessions apply to partnerships and deceased estates. The amendments will also replace the controlling individual 50 per cent test with the significant individual 20 per cent test that can be satisfied either directly or indirectly through one or more interposed entities.

These changes will apply to the current taxation year, 2006-07, and in years to come. One amendment that is transitional, however, ensures that the small business rollover operates as intended for the capital gains tax events that happened in the 1998-99 to 2005-06 income years, which is also a welcome change. Total cost to revenue is approximately $100 million per year over the next five years. The compliance costs are expected to be minimal.

On examining the bill it is interesting to observe in the explanatory memorandum useful advice that laypeople can browse. They can come to a conclusion about the applicability of these concessions to their own small businesses. I refer to explanatory memorandum pages 15 to 19, which give a series of examples about how these changes may apply to the ownership of discretionary trusts and companies, firms and operating companies. It is a very easily understood process. I want to congratulate the tax office on the way in which these are presented, because not everything in taxation can be simply explained. Complexity seems to be the order of the day on some occasions but not in this instance. It is a very useful and helpful addition to the understanding of the bill.

A comparison is also contained in the explanatory memorandum. It is a comparison of the key features of the new law and the current law. Some of the changes come under the headings of the controlling or significant individual test; the maximum net asset value test; the active asset test; additional requirements for shares or trusts—that is an innovation which I think is a good one; the 15-year exemption; retirement exemptions, which take into account the 55-year current provision and modify that in a sensible manner; the small business rollover; and the deceased estates applicability.

All of those are great improvements to the way in which this legislation can be understood. In particular, the maximum net asset value test is interesting in that, for the first time, it takes into account negative net asset values. Where a property or capital had lost value, under the old rules that negative value—the loss of asset or capital—was never taken into account. So it was completely unfair because everything was considered to be a positive gain or no gain. In this instance, if there has been a loss that is taken into account. The maximum net asset value test takes into account the assets and related liabilities. And some of those liabilities will include things like annual leave, long service leave, unearned income and tax liabilities, which always should have been considered as part of calculating what the capital value of an asset is, but are included here now only for the first time.

The new law in regard to a partnership applies to the individual partners and not to the partnership of the whole. That is another change that is welcomed by those people who operate in partnerships, as many small businesses do. Often a part of a dwelling is used as an office or a participating part of a business. Under the old legislation which is being replaced, the value test included the entire value of a dwelling, and that dwelling had to be totally used for income-generating purposes; whereas under this change only that portion of a dwelling that was used for income-producing purposes need be considered. So if there is a home office or something like that, and there has been a capital appreciation, it is only that proportion which is used for the calculation of the capital gains tax and not the whole dwelling. That is a much needed change.

With the active assets test, the asset does not need to be active just before the CGT event. That means that, again, for an asset—it may be a business—it need not be applied at the time of the sale or the realisation of the asset but can have occurred at some time in the past. The 15-year exemption required a controlling individual of a company or trust for the entire period of ownership. Things fluctuate and people can have controlling interests for part or some of the time as their circumstances change. The current proposal requires a significant individual of a company or trust only for any period or periods totalling 15 years during the period of ownership. I think the deceased estate changes and the rest of it are extremely good.

It just shows that, if governments are prepared to be sensible and make changes, big improvements can be made. This government has been reforming and improving taxation, again, in all the areas that we see today. I only hope that some of the challenges confronting my own state can be dealt with in the same way. There is negative economic growth, unemployment is worse there than in the rest of Australia, people are leaving the state for other states, there is greater competition coming from other states and there is the highest level of state and local government taxation in Australia. Taxation reform is a significant area where changes can produce an economic impact that is beneficial to all. There has been a massive growth in the payroll tax and land tax, and the business perceptions in New South Wales are that the state is underperforming.

There is a lesson to be learned from the legislation that is before us today on capital gains tax. If sensible management and economic growth can be established then you can give concessions that will encourage further investment, jobs and opportunities for people. I would like to see my state adopt that process. The state of Queensland, on the other hand, seems to be going in another direction. It was, I would have to contend, established by Joh Bjelke-Petersen. My colleague across the room, the member for Rankin, may not consider that right, but I have to say that Joh laid the foundations. Mr Beattie has been able to continue in some areas—not all areas; there are some dangerous areas in health and places like that where he is not going so well. The water infrastructure could do with a bit of attention also.

My own state needs to have a really good look at some of the issues that have been dealt with by us federally where we have unscrambled those terrible decisions of the mid-eighties on superannuation and capital gains tax and made other changes to the tax system because we have been able to develop the means to do so. That has come through reform and change, and that is the only way New South Wales is going to go ahead—by reform and change.

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