Greg Combet (Charlton, Australian Labor Party, Parliamentary Secretary for Defence Procurement) Share this | Hansard source

I rise to speak on the Tax Laws Amendment (2008 Measures No. 5) Bill 2008. This is a bill that will contribute to the long-term viability of Australia’s finance and insurance sector. It is important to ensure that, in the midst of the financial crisis, we put in place policy settings to ensure the finance sector is globally competitive. The government has implemented a number of measures to date to meet the challenges of the global financial crisis, including the Economic Security Strategy and $10.4 billion of payments to members of the community, pensioners in particular. There has also been a decision taken by the Treasurer to purchase residential mortgage securities to the extent of $4 billion to endeavour to provide whatever support is possible to the residential housing sector. This bill is important in the context of the global financial crisis to ensure, as I said, that the finance sector remains globally competitive and improves its competitiveness.

The legislation is also important in making it easier for state and territory governments to raise money through the issuance of bonds. This will strengthen our financial market and make it easier for state and territory governments to raise capital to fund infrastructure projects. The area of infrastructure is one of the areas that were profoundly neglected by the previous government but one that is a priority for the Rudd Labor government. As part of the government’s response to the global financial crisis the government has also indicated that it wishes to bring forward priority infrastructure projects to get underway within the Australian economy.

The third key initiative of this bill is to close a loophole in the operation of the goods and services tax, thereby improving the integrity of the GST tax base. This tax integrity measure will raise revenue over the next four years, helping state and territory governments—who of course are the fundamental recipients of the proceeds of the GST. The two other initiatives in this bill increase the integrity of the taxation system. Maintaining a sound fiscal base is essential if we are to weather the current global financial crisis, so this is an important bill in the current economic context.

I will now go to the details of the bill. The bill makes five substantive changes. The first is an amendment to the legislation governing the goods and services tax to maintain the integrity of the GST base. This will address a loophole in the GST law that enabled some property developers to avoid GST and obtain what we consider to be an unfair advantage over their competitors. The problem arose due to the interaction of the special rules for calculating GST on real property, known as the margin scheme, and the provisions that allow the GST-free sale of an ongoing business and farmland. The margin scheme means that GST is only levied on the margin by which the value of the property has increased each time it is sold by a GST-registered entity. It is generally used for new residential property developments from 1 July 2000.

However, the increase in value between when property was purchased and when it was sold as a going concern or as farmland was not subject to GST. If the property was subsequently sold under the margin scheme, only the value added after its sale as a going concern or farmland was taxed. This allowed some developers to structure property deals in such a way as to minimise the operation of the goods and services tax. Schedule 1 of this bill will address these deficiencies by including in the margin the value added to the property by the supplier of the GST-free going concern or farmland after the property entered the GST system. This change will not have a significant impact on the price of new housing as the affected segment is small compared to the entire housing market. However, this important measure will increase allocative efficiency in the market by removing the incentive to avoid GST, which was distorting the property market. Of course, ensuring the tax system operates in a way that improves the efficient allocation of resources is an important objective.

This integrity measure is expected to result in an extra half a billion dollars over the next four years in GST revenue. As with all GST revenue, this will be allocated to the states and territories, which will be welcome assistance to them as they respond to the global economic slowdown caused by the international financial crisis. Australia is in a good position to weather the crisis because of prudential economic management, and this integrity measure is an extremely good example of that approach—that is, the sound position that the country is in.

Schedule 2 of the bill deals with thin capitalisation, which occurs when multinational entities reduce their Australian tax liabilities by allocating an excessive amount of debt to their Australian operations. The thin capitalisation regime is a tax integrity measure that disallows a proportion of deductible interest on debt used to fund the Australian operations of a multinational entity when it exceeds certain limits. Schedule 2 of this bill modifies the thin capitalisation regime to enable entities to vary from the accounting standards in identifying and valuing their assets and liabilities for thin capitalisation purposes. As with the first schedule, this is a tax integrity measure that is very important in the context of the current financial circumstance.

Schedule 3 of the bill deals with interest withholding tax. Schedule 3 will insert a new subsection into the Income Tax Assessment Act 1936 to enable bonds issued in Australia by state and territory central borrowing authorities to be eligible for exemption from interest withholding tax. This is part of the initiatives announced by the Treasurer earlier this year to bolster Australia’s financial markets. Removing the interest withholding tax will allow the states to unify their bond issuances into one pool of funds, improving the depth and liquidity in the market. It will make state government bonds more attractive to foreign investors. In this time of global financial crisis, investors will be looking for low-risk opportunities for investment and this will make Australia more attractive as an investment location. This should lead to a lower cost of capital and, eventually, to lower financing costs for state infrastructure projects that are financed by the issuance of bonds.

This is obviously very important in the current economic climate. As important as this is the long-term support that it will provide to Labor’s nation-building agenda. Infrastructure investment by state governments is a necessary complement to the Rudd government’s $76 billion nation-building agenda. Estimates by various organisations in the business community suggest that extremely significant levels of infrastructure investment are necessary if we are to provide the economic stimulus that is required not only in these circumstances but for long-term future economic development. In fact, it is estimated by a number of agencies that the failure of the previous government to provide leadership in nation building and infrastructure investment has had a negative impact not only on jobs and GDP growth but also on productivity within the domestic economy. All measures that can be taken to support and encourage infrastructure investment at all levels of government are going to be extremely important for the future economic development of this country: the development of skills, the improvement of productivity, the expansion of the economy and the creation of employment.

Schedule 4 of the bill relates to the operation of the fringe benefits tax. Schedule 4 is another tax integrity measure that will improve the fairness and integrity of the fringe benefits tax. The purpose of this schedule is to rectify an incongruity in the fringe benefits tax law around the term ‘otherwise deductible’. The anomaly gave rise to salary-sacrificing opportunities in relation to investment properties held jointly by an employee and their associates. The effect of the ‘otherwise deductible’ rule was to reduce the fringe benefits tax liability of the individual salary sacrificing to nil as the benefit, such as the interest charged, is associated with an income-earning asset and would be fully tax deductible. The end result of this is that an employee would effectively receive a 100 per cent tax deduction for the rental expenses despite owning only half of the asset. Schedule 4 of this bill removes this anomaly and improves the fairness and integrity of the FBT system.

Schedule 5 of the bill deals with the operation of managed funds. In February this year the government asked the Board of Taxation to review the taxation arrangements applying to managed investment trusts to enhance the international competitiveness of the Australian funds management industry. Pending the outcome of this review, the government announced some interim reforms to streamline and simplify the operation of division 6C of the Income Tax Assessment Act 1936 in the 2008-09 budget. Schedule 5 implements part of this announcement and is part of the government’s strategy to make Australia a funds management hub in the Asia-Pacific region. With the global financial crisis severely hitting the equity markets and the funds management industry, it is vital that we support the most competitive Australian funds management industry that is possible. This is not only to ensure the sustainability of the managed funds industry right now, but also to put Australia in an excellent position when the global financial market bounces back. It is worth noting that the funds management industry in Australia operates within a sound prudential regulation environment, something which, in the current circumstances and with the international experience, is extremely important to encourage.

The amendments contained in schedule 5 have the following effect: firstly, to clarify the scope and meaning of investment in land for the purpose of deriving rent; secondly, to introduce a 25 per cent safe harbour allowance for non-rental, non-trading income from investments in land; thirdly, to expand the range of financial instruments that a managed fund may invest in or trade; and, fourthly, to provide a two per cent safe harbour allowance at the whole-of-trust level for other non-trading income. These amendments are important interim reforms to division 6C and will modernise and clarify the eligible investment business rules to lower compliance costs for managed investment trusts. That is an extremely important initiative.

Notwithstanding the current crisis in global financial markets, the government is committed to transforming Australia into a funds management hub for the Asia-Pacific region. We must put in place the foundations for the industry to thrive once the current situation normalises. Thanks in significant part to the reforms of the last Labor government, Australia now has the fourth-largest onshore managed fund market in the world. In 2007 Australia had $1.36 trillion in consolidated funds under management, including $128 billion in Australian property trusts. Last year the finance sector was in fact the third-largest industry in the Australian economy behind manufacturing and property and business services, employing no fewer than 400,000 people and contributing $30 billion in tax revenue. Just imagine, had the reforms not been taken in the 1980s and 1990s to encourage the growth of the industry, the structure of the economy at this point in time and its vulnerability to the changes in the international marketplace that we are experiencing.

Lateral Economics estimated that the funds management industry in fact now constitutes over three per cent of GDP. Australia enjoys a very skilled financial services workforce; we are strategically placed in the Asian time zone, have a stable economic environment and, as I noted before, have put in place a well-respected regulatory regime. The attractiveness of that regulatory regime for investors coming out of the current global financial crisis should not be underestimated.

Beyond the current crisis, the biggest challenge is that less than three per cent of the fees derived by Australian managed funds are attributable to foreign investment. According to the Australian Bureau of Statistics, this ranks the financial sector as 27th out of 35 industries in terms of export performance—and clearly that is something that the government wishes to see improve. Earlier this year the government took steps, by reducing the withholding tax rate to 15 per cent, to make this more attractive as an investment option for foreign investment. The changes contained in schedule 5 of this bill will complement this and increase the competitiveness of the Australian managed funds industry. In my past experience as a superannuation trustee of a $30 billion fund and as a director of a bank, also with approximately $30 billion in funds under management and about half of that in wholesale funds management activity, I can attest to the importance of these initiatives and in particular to the importance of us making Australia a more attractive destination for foreign investment in the managed funds sector.

In conclusion, this bill, as I have indicated, contains five schedules: schedules 1, 2 and 4 are tax integrity measures, schedule 3 is a nation-building reform and schedule 5 will assist in growing the Australian managed funds industry. All of these changes are important, but they are not particularly controversial. The question has to be asked: why didn’t we see these reforms in the 12 years that the coalition occupied the treasury bench? Why did they not act to fix some of the obvious loopholes that I have referred to in the tax regime?

In contrast to that, this being the anniversary of the election of the Rudd Labor government, it is important to emphasise that the government has demonstrated its commitment to prudent fiscal policy and to ensuring that all Australians pay their fair share of taxes. As important as that is, our nation-building commitment and schedule 3 of this bill will support our infrastructure investment by reducing borrowing costs for the state and territory governments, who are crucial partners in this agenda. Establishing Australia as the Asia-Pacific hub for the funds management industry was an election commitment of the government. The reforms contained within schedule 5, on top of the legislation that has been previously introduced to this House by the government touching on this issue, will contribute to this goal. For these reasons, I support and commend to the House the Tax Laws Amendment (2008 Measures No. 5) Bill 2008.

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