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

Finally, at last, the government has acted on the concerns of industry, state governments and those on this side of the House in relation to infrastructure financing. It has been a long wait but finally we are here. Schedule 1 of the Tax Laws Amendment (2007 Measures No. 5) Bill 2007 at long last deals with section 51AD and division 16D of the Income Tax Assessment Act. I will be commenting on schedules 1, 6, 7, 8, 10, 11 and 12 of this bill. Schedules 2, 3, 4, 5 and 9 are all sensible and non-controversial matters that the opposition will support, and I will not be detaining the House by dealing with them.

As I said, I will deal with schedule 1 first. In 1999, the Ralph review said this about section 51AD and division 16D:

Section 51AD has a severe impact where it applies because all deductions are denied to the taxpayer but the associated income is still assessable. It has been continually criticised by State Governments and infrastructure providers for its severe impact where it applies and the uncertainty it creates. Section 51AD has become even more problematical in recent years because of increased levels of privatisation and outsourcing of government services which were not contemplated when it was first conceived.

The review went on to say:

The Review recommends that section 51AD be abolished, as part of a package of reforms relating to tax exempt leasing. The Review believes that the severe treatment of arrangements that are currently subject to section 51AD is unnecessary. The Review also believes that, providing appropriate structural measures are in place, leases in similar arrangements involving tax exempts should not be treated differently simply because they are financed using non-recourse finance.

It is not hard to see why the Ralph review came to that conclusion. The Australian Council for Infrastructure Development, AusCID, which has now been subsumed by Infrastructure Partnerships Australia, said this to the review in 1998:

For well over a decade, Section 51AD of the Australian Income Tax Assessment Act has been a source of considerable difficulty, delay, frustration and unnecessary cost to private infrastructure investment in Australia.

                  …              …              …

S.51AD unnecessarily delays projects, adds significant costs and reduces the community benefit from major private sector investment in infrastructure.

AusCID went on to give examples of infrastructure projects which have been delayed because of the operation of section 51AD: the New South Wales Southern Railway or the airport line, the Eastern Distributor and the Brisbane airport line—three examples 10 years ago which the peak body relating to infrastructure in this country pointed to as being substantially delayed and causing confusion as a result of the operation of section 51AD. What did the government do in response?  The then Assistant Treasurer and Minister for Revenue, Senator Coonan, announced on 14 May 2002 that the government would implement changes to reform section 51AD and division 16D and the taxation of treatment of asset-financing arrangements with tax-exempt entities. Senator Coonan said on that date:

Further consultation on these issues will be undertaken through the course of 2002-03 and it is expected that legislation would be introduced in the Autumn 2003 sittings.

In 2003, draft exposure legislation was released for comment by interested stakeholders. On 26 June 2003 Senator Coonan stated:

These provisions are in urgent need of reform ... The Government … is committed to its early introduction into Parliament in the spring sittings, 2003.

I would hate to see something that was not urgent. I would hate to see something that the government did not really care about. It said that it was urgent in 2003 and it would legislate for it in 2003. It is now 2007 and we are debating it today. I note that the explanatory memorandum for this bill under the heading ‘Background’ claims:

This measure was announced in the then Minister for Revenue and Assistant Treasurer’s Press Release No. 081 of 13 September 2005.

Not really. This measure was in fact announced by the former Assistant Treasurer, the one before the previous one—two Assistant Treasurers ago—in 2003. The explanatory memorandum is quite cute and is arguably inaccurate.

I do acknowledge that this is a complex area. I do acknowledge that the first draft legislation released by the government was unworkable and needed to be reworked. But there is simply no excuse for the length of delays that we have seen. We have both sides of the House agreeing that there is an infrastructure problem in this country, we have every industry and business group in this country pointing to the infrastructure bottlenecks as one of the biggest economic challenges facing this country; yet one of the obstacles to infrastructure formation in this country has been the operation of the Income Tax Assessment Act. The government admitted in 2003 that it was urgent and simply has not done anything about it for four years. It simply has refused to implement this change.

In Senate estimates, Labor senators at my request asked Treasury officials why this had taken so long. We were told that there were two answers. First, it was complex. We accept and agree with that: it is complex and we do not expect it to be done overnight. Second, it has not been given the requisite amount of resources. The government has simply not considered this to be an important reform—and there we differ. We regard this as a very urgent and necessary reform and we will support it today—in fact, we think it should have been done years ago. We think this reform is long overdue and the economy and infrastructure formation in this nation has suffered as a result. A number of those submissions to the Senate Standing Committee on Economics inquiry into this bill noted the delay. The Australian Chamber of Commerce and Industry—which is not always on a unity ticket with this side of the House—said:

• ACCI is disappointed that it has taken some time to develop new rules for PPPs. It is possible that some infrastructure projects may have been delayed because the old rules for PPPs were punitive.

It is simply not good enough, given the constraints in our economy and given that both sides agree that infrastructure has been a problem, for this legislation to have taken so long. The second reading amendment I will be moving at the end of my contribution notes that and condemns the government for the delay. It is better late than never and the Labor Party does support it.

The changes will reduce a significant hurdle to infrastructure projects which Australia desperately needs. This measure should speed up the operation of projects, reduce financing risks and increase infrastructure investment. I am not convinced that this bill is perfect, and I would not rule out amendments to it in the future, but because it has taken so long I am very reluctant to move substantive amendments at this time. In particular, I note the concerns expressed by some about the limit of 55 per cent on non-recourse debt for offshore investments. There is a balancing act to be done here. On the one hand, I do acknowledge that the main focus must be on encouraging infrastructure formation in Australia. On the other hand, we must do nothing to discourage the very successful real estate investment trust operations which have developed in Australia in which people from overseas and Australia invest, through Australian real estate trusts, predominantly in overseas real estate. This has been very successful. It is a key part of Labor’s policy of creating a financial services hub for Asia in Australia.

The concerns of the property industry in relation to this bill are very serious and should be noted. Should Labor form government later this year, we will be re-examining this issue. We will need to be assured that changes in this field will be revenue neutral, positive or only a small cost. If we could be assured of that, then we would be favourably disposed to re-examining the limit on non-recourse debt for offshore investment.

I will now turn to schedule 6 of the bill, which removes the $100 million total income cap on the same business test. This, it needs to be noted, represents an extraordinary backflip from the government. When the government went down this road, Labor and the Australian Democrats opposed it. We opposed it in the Senate and it was voted down. Not only did we oppose it but also the Senate Economics Committee opposed it unanimously. Labor, Democrat and Liberal senators opposed this change; the government proceeded nonetheless. It was opposed by the Senate Economics Committee and by the Labor Party and by the Democrats because it was bad policy—bad for business and bad for infrastructure formation, once again. The report of the committee said:

… the Committee is not persuaded that there are sufficiently well established grounds for withdrawing the SBT [same business test] for companies with an income in excess of $100 million.

The report also stated:

The Committee is concerned that withdrawing the SBT may have adverse effects on important infrastructure and other projects, and on companies subject to takeovers and mergers.

The measure to remove the cap was strongly supported in submissions to the inquiry. They demonstrate that this cap should never have been introduced in the first place. The Minerals Council in their submission to the Senate inquiry stated:

This arbitrary cap was denying legitimate capital allowance business deductions—which ultimately were factored into rate of return assessments, and potentially, discouraging expansion. This at a time when there is a significant need for investment in infrastructure projects in Australia.

The Australian Chamber of Commerce and Industry stated in their submission:

... we consider that the cap was unnecessary and should not have been introduced in the first place.

Again we find ourselves in agreement with the Australian Chamber of Commerce and Industry. The CPA’s submission noted:

... CPA Australia along with other professional and industry bodies has been calling for the removal of this cap for some time ...

This government claims to be project-business but the cap brought in by this government, against the objections of this side of the House, is anti-business. Companies have been denied the ability to carry forward legitimate losses and claim a deduction for them which other businesses can claim. I am glad that the government has recognised the error of its ways and taken on Labor’s policy to remove the cap. Labor supports the measure to encourage investment in infrastructure by large private companies and to simplify the tax legislation.

I would like to turn briefly to schedule 7. Schedule 7 provides capital gains rollover relief for statutory licences. This has generally and rightly been welcomed. However, there has been some concern from irrigators in particular about the operation of the rollover in relation to the replacement of groundwater licences. These concerns were well made in the submission of the Gwydir Valley Irrigators Association to the Senate committee. They were also supported by the evidence of Mr Michael Murray, the CEO of the association. I have taken the opportunity to have a discussion with Mr Murray and I have also discussed the matter at some length with the member for New England, who has been very vocal on these issues for some time.

I do believe that the irrigators have a valid concern. Their concern is that the capital gains event is the extinguishment of the old licence and not the distribution of compensation. This also disadvantages irrigators in terms of access to the small business capital gains tax discount. Their point is well made; however, I also note the evidence of the Treasury to the committee. Mr McMahon told the committee:

If the legislation were amended in accordance with the wishes of the irrigators council, it would create a precedent for taxpayers in similar circumstances to seek a change in the timing of the CGT event so that they too could benefit where more generous tax arrangements were not available at the time that the event occurred. More generally, amending the legislation would not only represent a change in the timing of the CGT event C2 but also bring into question the timing of CGT events more generally. A more general change in the timing of the CGT events would be complex to legislate and difficult to comply with and administer—especially where the capital proceeds of a CGT event were spread over a number of years.

This is very sobering advice from Treasury, but I do think that the irrigators have a valid concern. In the face of the advice from the Treasury it would be irresponsible to proceed with a substantive amendment to the bill at this time; however, should we form a government shortly, I will sit down with the industry and Treasury and attempt to find a common-sense solution to this problem. I cannot guarantee that there will be a common-sense solution and that it will be possible, but I can indicate that we, together with the Treasury and the ATO, will use our best endeavours to meet those concerns of the irrigators council in a good faith manner. I have communicated that to the irrigators council and put that on the record in the House today.

Schedule 8 provides CGT rollover for investors in a stapled group where there has been an interposition of a unit trust between investors in the stapled group and the stapled entities. This will allow certain stapled entities, such as Australian listed property trusts or REITs, which I referred to earlier, to restructure with an interposed head trust without any capital gains tax consequences. This is a welcome but minor measure. These amendments go a very small part of the way that is required for reform of the taxation treatment of listed property trusts, real estate investment trusts and managed funds more generally in Australia.

We need to make sure that our tax system does not create unfair obstacles for this sector of the economy, which is very successful in terms of its competitiveness. The Property Council said in its submission to the Senate inquiry:

The Property Council views these reforms as the first stage of a now widely recognised need to comprehensively reform Division 6 of the Income Tax Assessment Act, particularly as it relates to real estate investment trusts (REITs).

We could not agree more. In fact, at the IFSA annual conference last month I announced that Labor are committed to reforming division 6C in particular and our first reference to the Board of Taxation will be to devise options for a new taxation regime for managed funds and listed property trusts to overcome the problems of division 6C. While the Board of Taxation examines the options, Labor would instruct the Treasury to immediately take steps to fix the more inefficient aspects of division 6C in the shorter term. Division 6C is an administrative nightmare for the financial services industry and particularly listed property trusts. Sweeping away the antiquated rules that harm the competitiveness of the financial services industry is a priority for Labor.

The Labor leader has also announced that a Rudd Labor government will halve the withholding tax that applies to non-resident investors in Australian managed funds to a flat and final 15 per cent. These policies are part of Labor’s plan to make Australia the financial services hub of Asia. Increasing the competitiveness of our financial sector and taking away the government imposed constraints makes economic sense but requires foresight and innovative reform of the tax laws—something Labor is prepared to do but something this government for 11 years has shown no interest in doing. Labor does support this schedule as a small step in the right direction.

Schedule 10 perhaps is the most controversial part of this bill. The introduction of a refundable tax offset is included for Australian expenditure in making Australian films—the producer offset, an offset of 40 per cent for film and 20 per cent for other media. The schedule also enhances the existing refundable film tax offset for Australian production expenditure—the location offset. It is increased from 12.5 per cent to 15 per cent. It also introduces a 15 per cent refundable film offset for post, digital and visual effects production in Australia—the PDV offset. Finally, it phases out by 2009 existing tax incentives provided to investors in Australian films. The offsets are designed to support and develop the Australian screen media industry. They replace the current tax incentives which have not been effective in recent years.

The independent production sector have expressed some concerns about the new producer offset, because commercial broadcasters will be able to access the 20 per cent rebate. They argue that the availability of this new offset may encourage in-house production of Australian television programs rather than the outsourcing of those programs to independent producers who sell the programs to networks. They also argue that providing a rebate to the networks effectively provides them with a subsidy to fulfil their Australian content requirements.

I do note these concerns. I have had discussions with that sector of the industry; I have also, as you would expect, had discussions with those who disagree from the commercial television stations et cetera; and I have read with interest the submissions of all the groups and the transcript of evidence from the Senate inquiry. I do have to note that there are other policies in place which strongly support the independent production sector. The Film Finance Corporation will fund only independent productions, not those produced in-house by television stations, and independently produced programs qualify for higher points under the Australian content rules that TV stations must comply with. Perhaps most importantly, television stations will continue to choose their method of production based on who has the best ideas and who has the capability of creating the most commercial value, and it is not necessarily the role of the tax system to give an advantage to one form of production over another. It is the role of the tax system, both parties would agree, to encourage Australian production of television programs for important societal and cultural reasons as well as for economic reasons. However, the independent production sector does play an important role in Australian society and the economy, and the government does need to closely monitor its viability. The second reading amendment that I will move reflects this.

On a detail matter, the length of time of animations is dealt with in this bill in relation to the tax incentives. The Senate inquiry heard evidence that the requirement that an animation run for 30 minutes is onerous, considering that many animations run for a shorter period of time. As a parent of young children, I spend a bit of time watching animations and I agree that there are few animations, particularly for children, that run for 30 minutes, because the attention span of children is considerably shorter than that. So it is of concern that the 30-minute rule will disadvantage the production of animation, and I will be moving a substantive amendment in the consideration in detail stage to deal with that.

I now turn to schedules 11 and 12. I will consider these schedules jointly, as they both deal with research and development and with innovation. Schedule 11 of this bill amends the Income Tax Assessment Act 1936 to extend the premium 175 per cent research and development concession to companies belonging to a multinational enterprise group for additional R&D expenditure carried out in Australia on behalf of a foreign company above a rolling three-year average of expenditure. The schedule also provides a specific 100 per cent base deduction for all expenditure that contributes to a company’s calculation of additional R&D expenditure in the income year. Until now, Australian companies who conduct R&D on behalf of a foreign company that chooses to hold resulting intellectual property offshore have been unable to claim the R&D tax concession.

Schedule 12 establishes a new board, Innovation Australia, combining the roles, responsibilities and functions of the Industry Research and Development Board and the Venture Capital Registration Board. I was interested in this because before I was elected to the Labor Party frontbench I was chairman of the Labor Party caucus economics committee. We released a discussion paper on innovation last year, and one of our recommendations was the creation of Innovation Australia. I am not sure that I can claim authorship; I am not sure that the government read the Labor Party’s caucus economics committee report. Although I would like to think that it was read widely on government benches, I am not sure that that is the case. But it is interesting to see the government taking up that idea. The legislation does not go as far as what the Labor Party’s caucus economics committee recommended in terms of the new body, Innovation Australia, and the roles and responsibilities that Innovation Australia should have; nevertheless, it is a step in the right direction which we support.

We support these amendments. These changes should encourage R&D to be undertaken by multinational firms in Australia. This should help Australian business to benefit from the skills gain and knowledge gain from R&D work undertaken by multinational enterprises. We have ongoing concern about the complexity already involved in the 175 per cent premium concession and we will continue to seek feedback from business about the effectiveness and efficiency of its operation and the efficiency of the application process. More than one business has said to me that the arrangements in place to apply not only for the premium concession but for the base rate concession are so complex and so onerous that companies are dissuaded from applying despite the benefits which may flow from it.

Innovation is a key driver of productivity. Labor understands this, and the government apparently does not. We have seen precious little on the innovation front from this government. The government’s major reform in R&D was to slash the R&D tax concession from 150 per cent to 125 per cent, and we saw the results immediately. Business R&D fell off a cliff when that so-called reform was instituted by the government back in 1996. R&D growth has stayed flat for a significant period and has returned only recently to 1996 levels. Recent ABS figures show that with R&D expenditure at 1.04 per cent of gross domestic product Australia’s rate of business R&D expenditure remained below the OECD average of 1.53 per cent. Over the full 11 years of the Howard government, the real rate of annual growth in business R&D has only been 5.7 per cent compared with 14.5 per cent under Labor—5.7 versus 14.5. Labor understands that the only way we can compete in a global economy is to focus on innovation—new products and new processes—and R&D is a key driver of that.

Of course, a large proportion of R&D is undertaken by multinational enterprises which can conduct that work almost anywhere. They have operations in many countries, and we must compete with many countries around the world to conduct that R&D. Our whole economy benefits when multinational firms seek to conduct that activity in Australia. For example, we are competing against Singapore, which has a 200 per cent R&D concession. We are competing against other countries around the world, and so we welcome these reforms. In fact, the Leader of the Opposition and the shadow minister for industry released a paper entitled New directions for innovation, competitiveness and productivity on 24 April this year. This paper points out:

… the OECD recommends that Australia improve opportunities for venture capital investments.

You will no doubt recall, Mr Deputy Speaker Somlyay, that earlier this year I moved an amendment to Tax Laws Amendment (2007 Measures No. 2) Bill 2007 to remove the significant restrictions on venture capital limited partnerships, which would encourage further innovation—an amendment which the government failed to adopt. This government has failed miserably to promote the venture capital industry and R&D in particular. This is yet another example of why the government is not up to the task of preparing Australia for the inevitable, eventual downturn in commodity prices. It may be some time before that downturn comes, but the Australian people will justly ask what the government did to prepare us for that downturn when it comes.

As I said in my opening remarks, the remainder of the schedules in this bill enjoy Labor’s support. These changes make sensible amendments to improve the integrity of the tax system, reduce compliance costs for certain taxpayers and extend tax concessions to certain groups. I am pleased to extend Labor’s support to those schedules, as we support each of the measures with the caveats and qualifications that I have referred to in my remarks. 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)

condemns the Government for the inexcusable delay in implementing the taxation of infrastructure financing reforms encompassed in this Bill;

(2)

recognises the producer offset, incorporated within Division 376 of the bill, could potentially impact independent program producers;

(3)

recognises the issues raised by the independent production sector in relation to Division 376 of the bill, and recognises the independent producers’ concern at the  possibility that the bill may not allow producers to retain substantial equity in their productions and build stable and sustainable production companies;

(4)

notes the contribution of the independent production sector as one  source of innovative, diverse and culturally vibrant Australian content, and recognises that Australian independent producers should have every opportunity to retain substantial equity in their productions and build stable and sustainable production companies; and

(5)

notes the need to monitor the operation of this Bill and the need to conduct a review of the viability of the independent production industry to commence within 12 months”.

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