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

On indulgence, I would like to briefly remark on the address we just heard from the member for Cowan and say how much I will miss him from this House. I have not served with him for as long as some other members, but it has been one of the honours of the last three years to serve with a man of his calibre. We will certainly miss him. I would prefer that he go on as the member for Cowan in perpetuity, but that cannot be the case. I am certainly sure he will enjoy his retirement.

We will be voting for the Tax Laws Amendment (2007 Measures No. 4) Bill 2007, but I will be moving a second reading amendment and a substantive amendment in the consideration in detail stage. Schedule 1 of this bill repeals the existing foreign loss and tax credit quarantining rules and replaces them with a simplified foreign tax offset arrangement. The main measure is the abolition of the foreign loss and foreign tax credit quarantining and the rewriting of the remaining complex foreign tax credit rules as part of the Income Tax Assessment Act 1997.

Here we go again. We are debating elements which arose out of a Board of Taxation report of 2003, which were announced by the government in 2005 and which are being legislated in the final period of the term which ends in 2007. These amendments mean that taxpayers will no longer be required to quarantine assessable foreign income amounts into four separate classes. Rather, a taxpayer can combine all assessable foreign income amounts when working out a tax offset entitlement, allowing the taxpayer a greater averaging capacity than under the old foreign tax credit rules. This greater averaging capacity will minimise the amount of foreign tax income that goes unrelieved. Consequently, the mechanism allowing the carrying forward of excess foreign tax income will be removed and the foreign tax credits still cannot be used against domestic sourced income. This provides for a sensible balance which we will support. It reduces compliance costs for taxpayers and increases concessions while minimising the effect on government revenue.

Taxpayers who earn attributed income through controlled foreign companies will no longer be able to quarantine revenue losses into separate classes. The amendments introduce a de minimis cap, which is a sensible simplification measure. A taxpayer does not need to calculate the foreign tax offset cap if they elect to use the $1,000 de minimis cap. In this case, of course, they cannot claim more than $1,000 of foreign income tax. The amendments also mean that economic double taxation arising as a result of transfer pricing adjustment by another country will no longer be remedied by foreign tax credit. Instead, Australia will adopt OECD practice and allow the Commissioner of Taxation to adjust a taxpayer’s taxable income or tax loss in the event of a transfer pricing adjustment in another country so as to relieve potential double taxation.

The bill also allows taxpayers with a minority interest in foreign companies to choose to calculate attributable income using the CFC branch equivalent rules rather than the foreign investment fund rules. This should reduce compliance costs for taxpayers and financial institutions that have to deal with the notoriously complex FIF rules and allow Australian investors to take advantage of existing exemptions and concessions of CFC measures.

I note that the new legislation is 67 pages long, with 17 pages of transitional rules, 19 pages of new legislation and 30 pages of consequential amendments. This does not take into account the ATO rulings and determinations which will be needed to flesh out this new legislation. It is hard to characterise this bill as a major step forward in tax simplification.

I was astounded to read in the explanatory memorandum the government’s characterisation of this bill as promoting the competitiveness of Australian funds. The explanatory memorandum says:

It will also improve the competitiveness of Australian managed funds in attracting the management of funds from other countries.

You might say, ‘Fair enough’, but it is extraordinary for this government to claim that it even cares. It is extraordinary for this government to make sweeping statements about attracting more foreign funds into our managed funds when it has refused point-blank to give Australia a competitive tax regime when it comes to this area. It has absolutely refused to give Australia a 15 per cent flat and final withholding tax rate. It has refused to give this country bipartisan agreement on reducing our tax on overseas investors coming into Australian managed funds in order to make Australia the financial services hub of Asia. It claims that this is a major reform but it has completely ignored what industry wants.

This also rings hollow when you consider that, after 11 years in office, this government has singularly failed to act on the moribund division 6C of the tax act, the thing that causes the most compliance grief for Australian managed funds. Last week I announced that the first reference to the Board of Taxation from a Rudd Labor government would be the operation of division 6C and the implementation of a purpose-built managed fund and REIT tax regime and that we would instruct the Treasury to sit down with industry in the meantime and work through sensible solutions to the administrative inefficiency of division 6C as it stands.

There was deafening silence from the government in response. They have had 11 years to fix the issue and they have done nothing. Instead, we see claims in this bill that this is a major step forward in making Australia a financial services hub. This bill is welcome. We certainly do not oppose it, but this government have simply refused to do what industry has been asking them to. Industry has been asking for a competitive withholding tax rate. The government have simply refused. Industry has been asking for a sensible approach to division 6C of the tax act. The government have refused.

It is particularly interesting that the government trumpets this bill as being important to the future of Australia as a financial services centre when you look at some of the submissions to the Senate inquiry. The submission of the Australian Bankers Association says:

... the ABA believes the amendments as they impact Offshore Banking Units is in conflict with the policy intent behind the offshore banking regime, instead weakening Australia’s attractiveness as a financial centre.

The explanatory memorandum says that it is a boost, a great addition to our plans to make Australia a financial centre. The ABA says that it will weaken Australia’s attractiveness as a financial centre. When it comes to this issue, I think that on balance the ABA has got it right and the government has got it wrong. The government is undermining Australia’s attractiveness as a financial centre and letting industry down. By its policy failures it is continuing a situation in which Australia’s financial services industry is burdened with an uncompetitive tax regime. We continue to run trade deficits in this sector of the economy, which is bigger than agriculture but which exports a measly proportion of its services. When you look at all the competitive advantages we as a nation have in funds management and the provision of financial services, you see that this government stands in the way of exporting more of those services. As I have said before, this is not about picking winners; it is about getting the monkey of government off this industry’s back and letting them do their job. This government fails to do that.

I move:

That all words after ‘That’ be omitted with a view to substituting the following words: ‘whilst not declining to give the bill a second reading, the House:

(1)

expresses concern that Offshore Banking Units are not included in schedule 1 of this bill;

(2)

notes the concern of the Australian Bakers Association that this omission will weaken Australia’s attractiveness as a financial centre; and

(3)

condemns the Government for failing to embrace policies which will promote Australia as a financial services hub such as a flat and final 15% withholding tax rate and the introduction of a managed funds tax regime’.

This is about promoting Australian exports and giving young Australians highly skilled, well-paid jobs. This is about ensuring that when the commodity boom ends, as it eventually and inevitably will, Australia has something to fall back on. When that happens the Australian people will ask what this government did to support industries such as the managed funds industry, which is doing such a good job—and the answer will be, ‘Not much.’ I call on the government to reflect on the omission of the offshore banking units regime from this bill and to fix it. They will have bipartisan support to do so. They have done it before; they did it on section 128F. They came into the House, admitted that they were wrong and got the bipartisan support of the opposition to fix the issue. Again, that issue was a major stumbling block for the banking and financial services industry in this country. It made their job a lot harder. We pointed that out. The government admitted their mistake, begrudgingly, and amended the bill. It would be quite easy to do so in this case as well.

Schedule 2 of the bill proposes to provide a capital gains tax rollover for membership interests in medical defence organisations, or MDOs. This rollover will generally be available when a membership interest in an MDO is replaced with a similar membership interest in another MDO and both MDOs are companies limited by guarantee. Labor support this as a sensible measure which will remove a tax impediment to mergers and takeovers of MDOs when the market prefers such takeovers or mergers. Schedule 3 of the bill contains an amendment to the Superannuation Industry (Supervision) Act 1993 to provide an exemption from the borrowing prohibition to allow superannuation funds to invest in instalment warrants so long as certain borrowing criteria are met. An in-house asset rule contained in the Superannuation Industry (Supervision) Act 1993 is also amended to allow for the purchase of an interest in a related trust forming part of an instalment warrant if certain conditions are met. This measure overcomes the view of the Australian Taxation Office and APRA that instalment warrant arrangements constitute a borrowing and that an investment by a self-managed superannuation fund in an instalment warrant is an in-house asset and therefore breaches the borrowings provisions and in-house assets rules of the Superannuation Industry (Supervision) Act. Labor believe this proposal will assist superannuation funds to grow their assets to support Australians in their retirement. As a result we support that measure.

Schedule 4 amends the Income Tax Assessment Act 1936 so that trustees of closely held trusts are no longer required to report to the Commissioner of Taxation the details of the trust’s ultimate beneficiaries. Instead, trustees of closely held trusts are now only required to report details of the trust’s trustee beneficiaries. The ultimate beneficiary rules require the trustee of a closely held trust to provide the commissioner with an ultimate beneficiary statement where one or more trustee beneficiaries are interposed between the closely held trust and its ultimate beneficiaries. That statement must disclose the identity of the ultimate beneficiaries in respect of the trust’s net income. In order to meet this requirement, the trustee must trace these through trustee beneficiaries to ultimate beneficiaries. This is an antiavoidance measure designed to prevent the use of a chain of trusts to hide income. It alerts the ATO to the amount of income a beneficiary will receive from a trust to check that they report this income. The ultimate beneficiary rules were introduced by this government in 1999 as an antiavoidance measure. They were aimed at preventing complex chains of trusts being used to avoid or indefinitely defer tax. This measure undoubtedly waters down the government’s own 1999 closely held unit trust integrity measures.

We will not be opposing this measure, but I do indicate that the opposition reserves the right to closely monitor its operation. I note that the government has estimated a zero cost for this measure. I am not sure if that is correct. I am willing, for the purposes of this debate, to give the government the benefit of the doubt, take it at face value in good faith and assume that it is a zero cost measure. If that is the case, we will support it on that basis. However, I do make it clear—as I have said—that we will be closely monitoring the operation of this section. We are reluctant to support the watering down of antiavoidance measures generally where there is evidence that they were introduced to fix a mischief in the first place. We will be ensuring through that monitoring that this does not impinge on the operation or the integrity of the tax base.

Schedule 5 amends various acts to assist in the smooth transition to the simplified superannuation regime and ensure the intended policy outcome is reflected in the legislation. Schedule 5 makes the following minor amendments to the superannuation rules: to limit strategies which could circumvent the minimum drawdown requirements for account based pensions; to facilitate the provision of tax file numbers to superannuation and retirement savings account providers; to change the treatment of ‘no tax file number’ contributions income under the pay as you go regime; and to revise the application of the small business capital gains tax relief amendments. The amendments also improve the readability of provisions rewritten as part of the simplified superannuation reforms and clarify the intended operation of the reforms. This is to improve the new superannuation regime, which builds on Labor’s superannuation policy of the 1980s and 1990s—which the coalition opposed. These are sensible measures which enjoy Labor’s support.

Schedule 6 amends the Income Tax Assessment Act to update the list of deductible gift recipients or DGRs. It adds the following organisations: the Australian Peacekeeping Memorial Project and Social Ventures Australia. It also reflects the name change of a specifically listed DGR—that is, Mawson’s Huts Foundation. Social Ventures Australia seeks to improve the effectiveness of other charitable organisations by providing financial support, business skills and development mentoring. The Australian Peacekeeping Memorial Project was established for the construction of a national memorial in Canberra to commemorate and celebrate Australian peacekeeping. Labor supports this schedule and wishes those organisations well.

Schedule 7 of the bill makes various minor amendments to the taxation laws. The amendments rectify errors such as duplicate definitions, missing asterisks from defined terms and inoperative references. Other amendments include providing for the income tax deductibility of gifts to certain scholarship funds for masters or doctoral theses, as originally intended; correcting the formula—as Dr Emerson would support—for calculating the fringe benefits tax depreciation rate for a car to align it with the income tax diminishing value capital allowance figure, which is currently 200 per cent rather than the previous 150 per cent; preventing the unintended tax file number withholding from payments to exempt foreign superannuation contributions; and preventing an unintended capital gains tax exemption for certain not-for-profit mutual organisations. These updates and clarifications also enjoy Labor’s support.

I will now turn to the final schedule, which the Labor Party cannot support. I will be moving a substantive amendment removing schedule 8 from the bill. Schedule 8 provides more flexibility to family trusts by allowing trust election to be varied or revoked in a broader range of circumstances and expands the definition of ‘family’ to include lineal descendants of nieces and nephews, amongst others. Also, distributions to former spouses, widows and widowers and former stepchildren will be exempt from family distributions tax. These measures come at a cost to revenue of $8 million a year. The issue of taxation of family trusts has been an ongoing issue that this government has grappled with over the last 11 years. Put simply, the government has not made a case for these changes. The explanatory memorandum indicates a cost of $34 million over the forward estimates. That is not an insubstantial amount of money. We believe that there are better ways to spend that money.

Labor does not see this as a priority for tax reform. We support tax reform which promotes the productive capacity of the Australian economy. We support tax reform which promotes the competitiveness of the Australian economy and we support simplification in a holistic way. As I said, we support, for example, the reduction of the withholding tax to 15 per cent—flat and final. We believe those sorts of things are the priorities for tax reform in this country. It would be nice to see this government giving priority to section 51AD and division 6D of the Income Tax Assessment Act, for example. We do not believe that schedule 8 should be a priority for government. This is not a matter of attacking the government and saying, for example, that family trusts are a complete rort or that family trusts should be closed down. This is about priorities. We do not believe that expanding the operation of family trusts and making them available to more people—more lineal descendants such as great nieces and nephews and great-great nieces and nephews, for example—should be a priority for government. We do not support it and we will be closely monitoring the operation of that particular section. As I said, in the consideration in detail stage I will be moving a substantive amendment. I have already moved the second reading amendment that stands in my name.

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