Chris Bowen (Prospect, Australian Labor Party, Shadow Assistant Treasurer) Share this | Link to 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.

Alan Cadman (Mitchell, Liberal Party) Share this | Link to 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.

Craig Emerson (Rankin, Australian Labor Party, Shadow Minister for Service Economy, Small Business and Independent Contractors) Share this | Link to this | Hansard source

Another day, another taxation laws amendment bill. This legislation, the Tax Laws Amendment (2006 Measures No. 7) Bill 2006, makes a series of changes to the Income Tax Act, and we on this side of the parliament support most of those changes. We do have some questions that we would like to see resolved in relation to the exemptions from interest withholding tax. The rationale for what the government is seeking to do seems reasonable—that is, to ensure that there are clear definitions of what constitutes a debenture. In the world of modern financial instruments there is some ambiguity about that. But in clarifying that we would be very concerned if the consequence was that the cost of obtaining overseas finance, for example, for infrastructure investment in Australia were greatly increased. For those reasons, Labor would like to see this matter go to a committee so that everyone can have a say in relation to what is a complex area.

I will say, as a general position, that if the policy is reasonably clarifying an area of potential revenue leakage or averting massive revenue leakage then it would seem to have some merit. But the proof of the pudding will be in the eating here, and if on the other hand it has deleterious effects on the cost of raising finance then that certainly will need to be taken into account. That is why we argue for a committee or an inquiry that would allow relevant interests to have a say.

As the newly appointed shadow minister for the service economy, small business and independent contractors, I have great pleasure in commenting on the small business capital gains tax concessions. Labor supports those concessions. We take the view that small business is at the heart of entrepreneurship in Australia and that small business people and independent contractors make a conscious decision to go out on their own, take a chance, apply some hard work and ingenuity, and create prosperity for their families and for Australia at large. We pay tribute to the small business people of this country—interestingly, a group of people who were described after the Second World War by Prime Minister Menzies as ‘the forgotten people’. They obviously were remembered at that time, but I would have to say that, after 10½ long years of the Howard government, in many respects they have been once again forgotten. Nevertheless, Labor does support the arrangements for the clarification and extension of capital gains tax concessions for small business.

The overriding problem for small business, though, is captured in a survey that was released by MYOB just this month. It tells us a lot about how small businesses see the challenges that confront them, and how they perceive both the Commonwealth and state governments. I think it would be worth me reporting to the parliament on some of the findings of that survey. For example, nearly half of small businesses are dissatisfied with the federal government’s contribution and performance. The precise number is that 44 per cent regard the government’s performance either as very poor or as somewhat poor.

Looking at some of the industries that make up that total of 44 per cent, in the case of transport and storage 59 per cent consider that the government’s performance is very poor or somewhat poor, and in wholesale trade 53 per cent consider it poor or very poor.

Warren Truss (Wide Bay, National Party, Minister for Trade) Share this | Link to this | Hansard source

What about the states’ performance?

Craig Emerson (Rankin, Australian Labor Party, Shadow Minister for Service Economy, Small Business and Independent Contractors) Share this | Link to this | Hansard source

We cannot just continue with the blame game, Minister.

Warren Truss (Wide Bay, National Party, Minister for Trade) Share this | Link to this | Hansard source

But be honest. What did the survey say? Tell us what they think of the states.

Craig Emerson (Rankin, Australian Labor Party, Shadow Minister for Service Economy, Small Business and Independent Contractors) Share this | Link to this | Hansard source

Minister, I actually said, if you were listening at that time—it helps to listen all the way through my speeches rather than intermittently—if you keep signing your documents I will go to the state contribution—

Harry Jenkins (Scullin, Australian Labor Party) Share this | Link to this | Hansard source

Order! The honourable member will refer his remarks through the chair, and the minister will not encourage him.

Craig Emerson (Rankin, Australian Labor Party, Shadow Minister for Service Economy, Small Business and Independent Contractors) Share this | Link to this | Hansard source

because I did in fact say that I would go through the results of the survey for the states, and I will do that. And right on cue, in relation to the performance perceptions of state governments, again, in this case more than half are dissatisfied with state government performance. That is why, in part, Kevin Rudd, as newly elected Labor leader, has put federal-state issues and the rationalisation of programs and processes high on the agenda and appointed the member for Fraser as shadow minister with responsibility for that task. I look forward to working with the member for Fraser and the Labor leader Kevin Rudd on ensuring that we do everything possible, when elected to government, to rationalise the red tape and other business regulatory requirements on all businesses, but especially on small business. So that is my response to the minister. If he had waited another 30 seconds he would have had his answer.

As to the issues that are of specific concern to small business, right there at the top is interest rates. Thirty-six per cent nominated that as a very negative or a negative influence on their businesses. It would be very difficult to ascribe the problem of rising interest rates to the states, although I am sure the Prime Minister would be keen to pass that particular buck to the states. But this Prime Minister did say in the 2004 election campaign that a re-elected coalition government would keep interest rates at record low levels. He has done nothing of the sort. There have been four interest rate rises since that commitment was given, and now Australia has amongst the highest interest rates in the OECD. This is affecting small businesses, with 36 per cent nominating interest rates as a major concern.

They are the sorts of problems that confront small business, but at the same time as the release of this general survey the MYOB organisation also released a special focus report on the red-tape compliance burden. That makes for equally interesting reading, because in that survey, in ranking the red-tape issues that are a burden on small business, of those different issues that are ranked in the top three, the first two of those—by a long way—relate to the GST. The first is the BAS reporting requirements and the second is allocating GST to daily transactions. So overwhelmingly small business is saying its biggest headache, the greatest burden that confronts it, is the GST. The Treasurer and the Prime Minister have designated that the GST is an orphan tax; it is a state tax. When something is really unpopular in small business circles, and in fact anywhere else, they blame the states. But I was in this parliament, Mr Deputy Speaker, as you were and as was the minister at the table, when a very long and heated debate occurred about the GST. It was a Commonwealth tax then and it is a Commonwealth tax now. The Auditor-General has designated it as a Commonwealth tax; the Australian Bureau of Statistics has designated the GST as a Commonwealth tax. Small business knows the GST is a Commonwealth tax, and the GST remains a big headache for small business, as confirmed in this survey on the red-tape burden confronting small business released just this month.

The report goes on to tell us something very enlightening about the attitude of small business to the Commonwealth in relation to red tape. The question is about whether the government is doing enough to reduce the red-tape burden, and an overwhelming 73 per cent of respondents said no, that the government is not doing enough to ease the red-tape burden. In the area of accommodation, cafes and restaurants, a staggering 91 per cent of respondents said the government is not doing enough to ease the red-tape burden. Indeed, around three-quarters of small businesses do not believe anyone actually cares about the red-tape burden.

That brings me to the point that, although this government talks about easing the red-tape burden, it does precious little. Back in 1996, the government made a commitment that it would seek to reduce red tape by 50 per cent. It in fact got Charlie Bell, from McDonald’s, on board to do a review and then basically buried the report. It was only last year that the Productivity Commission produced a report with a very large number of recommendations about reducing business compliance costs and the regulatory burden, in response to the government finally accepting that it had not done enough—as evidenced in the report by MYOB released just this month. Small business does not believe that the government has done enough. I acknowledge that the government then committed to implementing a majority of the recommendations of the so-called Banks review; however, when you look through many of those commitments of the government, they constitute yet again another review.

The problem is that the government is regulating faster than it is reviewing. While it reviews regulations, it brings in more regulations. Its compliance with its own regulatory impact statement processes in the last financial year was the worst since that process was established in the late 1990s. The situation that I am describing is this: the Howard government talks the talk of deregulation, calls upon the Productivity Commission to do a major review of business regulation and says it will implement a majority of those recommendations, but in many cases what it is actually committing to is a review—and, at the same time as it is reviewing, it is introducing new regulation.

The impact of this enormous burden of regulation comes in two areas. One is the compliance costs. Compliance costs are big enough for larger businesses in Australia but, as a proportion of sales and certainly as a proportion of profits, compliance costs for small businesses are very high indeed. The government seems insensitive to the difficulties confronting small business in managing the red-tape burden and, most particularly—as expressed in this survey—the burden imposed by the GST and the BAS reporting requirements. The compliance costs are very high proportionately for small business compared with big business.

The second impact of this regulatory burden is to stifle the very entrepreneurship—that great spirit of having a go out on your own—that Australia relies on. We need our small businesses and our large businesses to get out there, have a go, take some risks, apply a few new ideas and innovate. That is what a market system is all about. But, if there are regulations left, right and centre, that basically sends a signal to business that if it makes a decision that turns out not to have been a good decision but at the time was a risky decision made in good faith—which is necessary in a market economy—then those businesses can legitimately be concerned that the regulators will come after them to see if the decision that was made in the commercial interests of a company was made in compliance with all these regulations. Here we have the Liberal-National Party government stifling entrepreneurship. It is stifling that spirit which is so valuable in Australia and has been displayed for decades by the people who were found by Bob Menzies so many years ago but who have been lost again by the Howard government. They are the forgotten people yet again.

All of this reminds us that it is incredibly important for small business to survive for this country to remain internationally and nationally competitive. But that is not what is happening. The skills crisis in this country has been emerging since the late 1990s. Labor spokespersons, including the member for Batman back in 1999, warned of it, yet the government have not done anything effective to resolve that skills crisis. The government should have known that problem was emerging, but they had clay feet when it did emerge and it is now causing inflationary pressures and difficulties for small business as they try to find trained and skilled staff. That is part of a bigger picture, and that bigger picture is an overall decline in Australia’s competitiveness, as reflected in declining productivity growth.

Ordinarily when we talk about declining productivity growth we refer to a small positive number, but, in the six months following the introduction of the Work Choices legislation, productivity growth has not been a disappointingly small positive number—it has been a negative number. In fact, in the three months to September productivity growth was minus 1.5 per cent. That should be sending alarm bells right through the community and certainly through the government. But the Treasurer, upon the release of revised figures on productivity growth, chortled in the parliament and said that productivity growth was now at or marginally ahead of that of the last cycle.

He was referring to the last productivity cycle, which owed a lot to the reform program implemented by the previous Labor government, where productivity growth boomed. The Treasurer believes that current productivity growth is at or marginally ahead of the record productivity growth figures of the late 1990s through to the early 2000s. And yet it is minus 1.5 per cent in a single three-month period—not in a year, but in a single three-month period. He seems to think that that is satisfactory. It is not satisfactory; it is disastrous for this country’s future. That is why the Reserve Bank has had to warn that Australians are going to need to get used to a GDP growth figure with a two in front of it; whereas we have been getting used to a figure with a four in front of it and sometimes even a five in front of it. But that is the warning of the Reserve Bank.

The Business Council of Australia is onto this. Today it released a budget submission for the upcoming budget. I will refer to a couple of the statements in this submission, because they are alarming. It says:

Australia continues to run a significant current account deficit; exports outside of resources are performing poorly; infrastructure bottlenecks are limiting activity; we are failing to manage key resources such as water; and significant pockets of entrenched community disadvantage remain. Add to these challenges the impact of an ageing population and slower productivity growth as the benefits of past reforms fade, and many conclude that slower growth in the future is inevitable for Australia.

They are referring, among others, to the Reserve Bank. They go on to say:

More worryingly, labour productivity growth has slowed sharply in Australia.

The BCA know what is going on, but the Treasurer pretends that we are still in the heyday of booming productivity growth. The submission says:

... deterioration in productivity performance is a very real concern.

So we do have huge economic challenges in this country. This is a reform-lazy government because we have a reform-lazy Treasurer. It is not only larger businesses and all those who are employed by larger businesses who will bear the consequences; small businesses in this country will bear the consequence of this government’s policy sloth and reform laziness. That problem will only be dealt with by the election of a Rudd Labor government.

Chris Hayes (Werriwa, Australian Labor Party) Share this | Link to this | Hansard source

I speak today in support of the measures contained in the Tax Laws Amendment (2006 Measures No. 7) Bill 2006. I cannot speak in favour of all of those measures, particularly those in schedule 2, as I feel that further consideration really is required to examine the full impact of those changes. While I believe that schedule 2 does require additional thought—and I think that the new shadow Assistant Treasurer adequately outlined Labor’s position in that regard—the provisions of the bill that I want to focus on, particularly in relation to the interests of people within my electorate of Werriwa, are those involving changes to the capital gains tax concessions for small business operators. Accordingly, I will make those the focus of my comments.

The rapid rise of small business operators over the last decade has resulted in quite a phenomenal transformation of the Australian economy and Australian society. As I have noted before, there are not many times that you can look through the classifieds in the Sydney Morning Herald on the weekend and see vacancies for plumbers, carpenters, painters, builders et cetera who do not hold ABNs. Essentially, those positions in those trade groups are very much in a small business category. My son is included in that. One of my sons being a carpenter, I know full well how he has to access his work as a small business person operating in my electorate.

Labor supports small business. While the Prime Minister and members opposite have gone to great lengths in this chamber trying to make out that Labor does not support small business and is its enemy, nothing could be further from the truth. That has never been the case and never will be the case. It is because Labor supports small business operators and because Labor supports real and genuine improvements to our system of taxation that Labor will support the amendments contained in schedule 1 of this bill.

There can be no doubt, when it comes to interpreting the existing capital gains laws in relation to small business, that you really do need a clear head and a willing mind, as you need to steel yourself against a battle with what can only be described as the most complex tax law. According to the view of an accountant operating in my area whose clients include many small businesses, capital gains concessions provisions on the sale of a small business, for instance, are the tax law equivalent of the Enigma code—virtually indecipherable.

While the code and the tax laws surrounding capital gains tax on the sale of a small business may have been unclear to all but the most expert in their fields, the impact of the law on small business operators is very real. As I mentioned earlier, over the last decade or so there has been a rapid and noticeable growth in the number of small business operators, particularly in the outer metropolitan areas, of which Werriwa is obviously one. Prior to these structural changes in the economy, these small business operators and independent contractors were largely employees. They knew their trades, they knew their jobs, and they worked hard. Their status, for various reasons, has changed, but their attitude to work has not. They continue to work hard to support their families. As their businesses grow, they quite possibly employ others. They do what most employees do—that is, build a retirement nest egg. Consequently, the impact of the capital gains tax levied on the sale of a business becomes extremely significant to these people, as often the proceeds of small business sales form a considerable part of the retirement savings of small business owners and operators. For this reason, among others, the changes before us today have a significant impact on the estimated 16,000 small business operators in the electorate of Werriwa and no doubt the many millions of small business operators throughout this country.

Changes that break the Enigma code, the complexities of our current regime, are particularly welcome. I would like to briefly refer to the comments made by the new shadow minister for service economy, small business and independent contractors. I believe that what the member for Rankin said about the recently released MYOB assessment of red-tape compliance is accurate. Quite clearly, when I talk to people in my electorate, two of the biggest things on the minds of small business operators are the BAS reporting and the allocation of GST on a daily transaction basis. These are very much the burdens which have been foisted upon small business operators to comply with and which have made life very complex for them.

It was only last week that one small business operator came to talk to me about issues of taxation in that regard. He has had some difficulty with the taxation office. He thought he was doing the right thing only to find that the way he was conducting his reporting was incorrect. Obviously I could not give him tax advice, but at least I could be sympathetic with this bloke. He certainly was making a genuine effort to comply, or he thought he was. This is a one-man operator in a small business looking after his family. He is taking significant time out simply to try to deal with the compliance issues now faced by that business.

The changes in the bill to the capital gains tax concessions for eligible small businesses include changes to the maximum net value assets criteria, the 15-year exemption, the retirement exemption, the small business rollover provisions, the changes to the active assets tests and changes to the significant individual test that will no doubt increase the availability of small business capital gains tax concessions. While the bill before us contains a number of good measures in relation to small business capital gains tax concessions, there is one notable exception. You will recall, Madam Deputy Speaker, that in last year’s budget the Treasurer announced that the value of the maximum net value of assets test would be raised from $5 million to $6 million. This is an important change for many small business operators because of the significant impact it could have on what an owner ultimately keeps from the proceeds of the sale of a small business.

When the Minister for Revenue and Assistant Treasurer delivered his second reading speech on 7 December last year, he was silent on the extension of this threshold. I note that he did mention once the change to the maximum net asset value test as part of a list of amendments that were contained in the bill, but at no time did he seek to explain why the provisions announced about the threshold extension had not been contained in this bill. I can only conclude that this notable absence from the bill may mean that the government intends to go back on the promise it made in the budget. Along with the many business operators who have made the decision to delay the sale of their businesses until the passage of this bill, I hope that that will not be the case. I hope the extension of that threshold will be promptly dealt with by the government.

This government has often promised but seldom delivered when it comes to cutting red tape for small business. This is something that was recently asserted by the member for Rankin, our new shadow minister for small business. But this is not just a matter of political hype. You simply need to speak to any small business operator in each electorate to know that that is the case. That is very much their view, and the view comes from the impositions they have seen foisted upon their businesses. This government went to the last election promising small business that it would do a number of things to cut red tape. Apart from giving the green light on industrial relations to unscrupulous employers to cut take-home pay and conditions, it has not done all that much to improve the lot of small business operators. This government has made many high-level promises but, when it comes to reducing red tape, its performance has been lacking.

The Prime Minister has previously given a commitment to cut red tape by 50 per cent. He said that he would do it in his first term of office. I do not know the exact level of success in this endeavour but, if I can judge success through the prism of those who have to deal with the federal government’s paperwork and regulation on a daily basis or through the experience of the many business operators that I speak to in my electorate, I would have to conclude quite frankly that it looks like this government has not applied itself to what must be regarded as a core promise. It presented itself at a federal election, claiming that one of its key provisions was to motivate and develop small business by cutting red tape in the order of 50 per cent. That clearly has not occurred.

It has been some time since the Treasurer announced that the government would introduce the Simpler Regulatory System Bill. In a press release on August 15 last year, the government announced its response to the Banks task force report on reducing regulatory burden on business. The Treasurer went to great lengths to outline the government’s commitment to reducing regulatory burden on business. He said:

The Australian Government is leading the way in reducing the burden of red tape to improve the economic environment further so that all businesses, large and small, can prosper and grow.

It is disappointing that these big claims have yet to be backed by action.

The Simpler Regulatory System Bill, which is to introduce the changes aimed at decreasing the regulatory burden on business, is yet to be introduced, though I note that it is set down for introduction sometime this session. But I have to say that the fact that it is not here now indicates the order of priority that this government gives to reducing the regulatory burden on businesses. Once again it seems that the government is willing to talk tough on cutting regulation and is willing to promise much but, sadly for business operators, particularly small business operators, who are willing to do everything they can to produce for our economy and are waiting for their compliance burden to be eased, this government has been, quite frankly, very tardy in delivering. In fact, based on the track record of this government, much like it has done with tax, this government continues down the path of increasing regulation rather than cutting it, which adds impediments for businesses, particularly small business.

While the small business capital gains tax concessions contained in this bill are welcome, there is no doubt that, when it comes to the complexity of Australia’s taxation system, a lot more can be done. Angela MacRae—someone with whom I am sure that most members opposite would be familiar, as she was a member of the government’s task force on reducing regulations on business—said last year at a seminar for Standards Australia:

Our tax act is the second-worst in the world behind the USA.

They were very strong words. That view was expressed by someone who is well versed in tax issues, given that she was the former tax director of CPA Australia.

While many in the government continue to crow about the achievements of this government when it comes to tax reform, in truth it is much ado about nothing. This government continues to introduce taxes—including the ‘never, ever’ GST. The shadow minister for small business was quite correct when he said that that is a federal tax. There is no point trying to run the very tired argument that the GST is something other than a Commonwealth tax. It is a Commonwealth tax. This government has made itself the highest taxing government in Australian history. The GST has added to the burden of compliance and regulation that faces small business operators every day and has done nothing more than make every business operator—from the corner store through to Australia’s largest companies—tax collectors.

Labor knows how important it is to have a competitive business environment. Labor knows and understands how important it is to encourage efficiency in our business community and to make Australian businesses as competitive as they can possibly be both domestically and internationally. Labor also knows that a key part of creating a competitive business environment is creating an internationally competitive tax system. Going back to Angela MacRae’s comments, she—as a former director of CPA Australia—indicated that we have the second worst tax system in the world, second only to that of the USA. So it could hardly be the case that we have an internationally competitive tax system at present. Ongoing business and personal tax reform is important in improving the barriers to investment, boosting workforce participation and rewarding effort. Unlike the government, Labor knows that it is important to build a tax system based on long-term goals rather than rushing in and introducing ad hoc changes to tax law.

I welcome the provisions of this bill, particularly those that will improve the tax environment for small business operators. The Board of Taxation noted in its October 2005 report on the post-implementation review of the effectiveness of small business capital gains tax concessions that the tax environment for small business could be improved by providing ‘incentives to small business generally to invest their capital to maximise employment, investment returns and innovation’. I could not agree more. The fact that the government accepted all but one of the recommendations of the board’s report was welcomed by small business operators—particularly the recommendation in relation to capital gains tax concessions. As I noted earlier, it will have the dual effect of increasing the availability of small business capital gains tax concessions and reducing the compliance burden on small business.

It is disappointing, however, that the government has not seen fit to include in this bill the extension of the maximum net value asset test from a maximum of $5 million to $6 million as announced in the budget. (Time expired)

Anthony Albanese (Grayndler, Australian Labor Party, Manager of Opposition Business in the House) Share this | Link to this | Hansard source

On behalf of the ALP and as the shadow minister for infrastructure, I rise to contribute to the debate on the Tax Laws Amendment (2006 Measures No. 7) Bill 2006. I am particularly concerned with provisions in schedule 2 and the consequences that they might have on the financing of Australian infrastructure. Schedule 2 concerns clarifications of exemptions from interest withholding tax. The bill proposes amendments to the Income Tax Assessment Act 1936 and seeks to clarify what is considered to be a debenture debt interest, which is eligible to be exempt from interest withholding tax. Currently the law provides an exemption for interest paid by companies on debentures that meet a public offer test. The exemption exists to reduce the cost of Australian companies obtaining capital.

The proposed amendments would modify the act to restrict the range of debt interests eligible for this interest withholding-tax exemption. In addition, the amendments introduce regulation-making powers to Treasury to exclude interest on certain financial instruments that would otherwise lead to an outcome that is not supported by the overall policy intention. The regulations would also list every debt interest other than a debenture and a non-equity share debt interest that is eligible for the exemption. It is possible that misinterpretation of the law as it currently stands has the potential to threaten the integrity of the tax system by widening the range of debentures that could qualify for exemption beyond the policy intention. However, it is contestable whether the provision of regulation-making powers to Treasury will improve the integrity of the system.

The stated aim of schedule 2 is to reduce uncertainty for taxpayers and tax administrators with the operation of sections of the act. In fact, the opposite outcome is more likely to occur for two important reasons: firstly, the policy grounds for excluding certain debt interest are far from clear. This will create uncertainty as to which financial instruments will be excluded from the exemption by the regulations in future, leaving taxpayers and financial practitioners in doubt. Secondly, the regulation-making power to exclude eligibility for the exemption is impractical if it results in long lead times in having debt interests prescribed in the regulations as being either excluded or eligible for the exemption.

From an infrastructure-financing point of view, rather than creating certainty, the amendments have the potential to create problems that could impede or inhibit the raising of debt finance. What does this mean in practical terms? Consider for a moment a company that wish to make an infrastructure investment in Australia. They have little or no certainty as to whether the type of debt they intend to use is covered by the exemption. This has the potential to slow down or prevent investment and major projects getting off the ground. While Treasury will have the power to change regulations to accommodate particular financing proposals, regulatory changes stand to further delay urgent infrastructure projects. The fact remains that regulation-making power is unnecessary if the policy setting is right. This government has done nothing to improve the tax treatment of infrastructure projects, and passage of this bill stands to make it harder to finance major infrastructure projects.

I also want to address, on a related tax issue, the issue of section 51AD and division 16D of the Income Tax Assessment Act 1997. Last year the government introduced not one, not two, but seven tax bills into this parliament, of which this is the last. But not one of them sought to reform section 51AD and division 16D of the tax act—both of which need urgent attention to address underinvestment in infrastructure.

Currently, the Income Tax Assessment Act 1997 restrains private investment in public infrastructure through the operation of section 51AD. Under this provision, certain infrastructure projects held by the private sector, controlled by government and financed through limited recourse debt do not receive tax deductions that would normally apply for capital expenditure of this type.

There is also the application of division 16D of the Income Tax Assessment Act 1997. This applies in the case of finance leases with tax exempt bodies. The lease is treated as a loan and capital deductions are disallowed. This illogical situation was first downplayed and then conveniently ignored by the Howard government. In September 2005 the then Assistant Treasurer, Mal Brough, finally conceded that the tax changes originally proposed by the government were unworkable. The minister promised legislative reform. More than a year on from that 2005 announcement, the government is yet to act.

The current tax regimes are bad for Australia’s long-term economic prosperity. Unfortunately, we have become accustomed to a government that changes policy for its own interests rather than the national interest, preferring to boost regulatory powers rather than enshrine sound policy and principles in law—policy that would boost productivity and ensure that the prosperity we currently enjoy lasts well into the future. Just last week Treasury’s own research stated that public infrastructure investment decreased from 2.5 per cent to 1.8 per cent of GDP between June 1987 and June 2006. In 2004, Australia ranked 20th out of 25 OECD countries in terms of investment in public infrastructure as a proportion of GDP.

With this bill before the House, we now are faced with the absurd situation where the federal government is not only happy to abrogate its responsibility to invest in nation-building infrastructure but also failing to address the issue that it is increasingly difficult for the private sector to invest strategically.

There is copious evidence illustrating the short- and long-term economic benefits of investment in infrastructure. The Committee for Economic Development of Australia points out that investment in infrastructure generates higher returns on investment than other areas. Treasury’s own research cites studies indicating that a one per cent increase in public infrastructure causes a 0.66 per cent increase in GDP. By overcoming the backlog in five key areas—electricity, gas, rail, roads and water—GDP would increase by 0.8 per cent, business investment by 1.2 per cent, housing investment by 1.8 per cent, exports by 1.8 per cent and improved living standards by 0.4 per cent. This spells improved employment, productivity, social welfare and international competitiveness.

The Business Council of Australia has estimated that Australia has a $90 billion shortfall in infrastructure. Now is the time for national leadership and investment in nation-building infrastructure. The economic prosperity afforded to Australia by the resources boom can be locked in to tomorrow by investment in infrastructure today. However, faced with a choice between squandering the opportunities presented by the resources boom or investing in nation-building infrastructure that will sustain our prosperity, the Howard government, sadly, has opted for the former.

Under this short-sighted, self-interested government, our national economic effort is limited by inadequate and insufficient infrastructure. The BCA, the Reserve Bank of Australia, the Australian Council for Infrastructure Development and Engineers Australia have all warned that infrastructure bottlenecks are constraining our exports and our economic growth. But, rather than show national leadership, the Howard government has been quick to shift blame to the states, pointing the finger at state and territory governments as it does in every area of its policy failure. You can be certain that, wherever there is a lack of national leadership from the national government, it will resort to blaming the states and territories.

Let us be clear: the Howard government is happy to have its coffers filled with tax returns from resource rich states, but it will not invest these returns to upgrade critical infrastructure to sustain Australia’s economic prosperity. The tax windfall for the federal government from the resources boom is not insignificant. In fact, ANZ Chief Economist, Saul Eslake, has estimated that, over the last four budgets alone, the federal budget has received an extra $263 billion in tax revenue above its original estimates because of parameter variations caused by the resources boom.

Federal budget surpluses attest to the strength of Commonwealth revenue, but we all know that accumulating infrastructure assets can make better sense than just accumulating a surplus. The Howard government has sold more assets over the last 10 years than it has built. Having massive surpluses to the exclusion of long-term investment makes no economic sense and is bad policy. The economic and social advantages of prudent investment in major infrastructure are irrefutable. Infrastructure investment and national leadership is needed now. Available infrastructure capital must be put in touch with our nation’s infrastructure priorities.

Labor has a longstanding commitment to providing national leadership for Australia’s infrastructure needs. We argue that a coordinated approach involving all three tiers of government and working in partnership with the private sector and key shareholders is the way forward. Labor has committed to establishing ‘Infrastructure Australia’, a Commonwealth statutory authority to coordinate the planning, regulation and development of infrastructure. It will report directly to the Council of Australian Governments and through COAG to state and Commonwealth infrastructure ministers. It will include representatives from the private and public sectors, academia and the relevant professions.

Infrastructure Australia will be charged with analysing, monitoring and reporting on the delivery and operation of major infrastructure projects. A coordinated and objective approach to long-term planning of and investment in nationally significant infrastructure is essential. There is too much overlap and duplication between different tiers of government. There are too many regulatory bodies, with overlapping regulation. John Howard, the Prime Minister, observed more than 10 years ago:

I’ve been struck by the need to improve the coordination of infrastructure policy at the Commonwealth-State level.

More than 10 years later, Australians are still waiting for this improvement.

As a matter of urgency, Infrastructure Australia will conduct an audit of Australia’s infrastructure to assess the adequacy, quality, capacity and condition of Australia’s infrastructure assets and to identify the gaps. Put simply, it will be a list of what we have got and a list of what we need. This list will be used to develop a national infrastructure priority list. After more than 10 years in government, the Howard government has no official, up-to-date record or database on the state of the nation’s economic infrastructure assets. If the government does not know what assets exist and where the priorities lie, how can it plan future investments or establish a sound policy framework?

Labor has also committed to using the income stream from the Future Fund for infrastructure investment. On this side of the House we have a flexible approach to infrastructure financing, recognising that both capital and expertise may be efficiently sourced from the private sector, the public sector or a combination of both. Also, superannuation investment strategies point to the opportunities for private savings to be invested in low-risk infrastructure projects. That is why getting the right policies in place that provide potential investors with certainty and minimal complexity is so important.

It is also why the tax environment created by bills such as the one we are debating today must be built on sound policy principles—sound policy principles that will ensure that, whether Labor draw on capital and expertise from the private or public sector or both, we will be driven by the community’s interest, boosting productivity and locking in Australia’s prosperity. Unlike the Howard government, the Labor Party will not be boosting productivity by asking working Australians to work even longer hours with less pay and under even worse conditions. Investing in nation-building infrastructure, not wage and condition slashing, are the building blocks of the national economy.

The opposition will move in the Senate that schedule 2 of the bill being debated here today be referred to a Senate committee for further consideration. It is critical that the Senate committee undertakes comprehensive consultation with relevant interest groups—something that has been clearly lacking in the drafting of this bill—and that it ensures that the final bill that is passed through this parliament does not include amendments that impede the financing of major projects, including infrastructure projects. No company’s ability to raise finances should be compromised by these tax laws. Australia simply cannot afford to lock out investment capital if we are going to have a prosperous future.

Michael Hatton (Blaxland, Australian Labor Party) Share this | Link to this | Hansard source

I am happy to follow the shadow minister, the member for Grayndler, in regard to the Tax Laws Amendment (2006 Measures No. 7) Bill 2006. The member for Grayndler has quite rightly pointed to the fundamental inadequacies over the past 10 years in this government’s approach to national infrastructure. It has been almost entirely absent during that whole period of time. Throughout the first and second parliaments from 1996, I was the chair of our caucus regional committee. I travelled the length and breadth of the country and I spoke to local councils in depth about their fundamental problems in terms of infrastructure.

Over that six-year period, the government simply did not address—except in the most partial way—any of their fundamental problems. Why they chose not to do so is very simple, and it is laid out in their first audit in 1996. The government do not see themselves as an active interventionist government trying to fix our fundamental infrastructure problems. They do not see themselves as a participant in that. It is always someone else’s problem, someone else’s activism—all they have to do is audit or benchmark it.

For more than 10 years, country Australia has been crying out for the kinds of funds that would boost its local infrastructure on a sustainable and sensible basis. The member for Grayndler is absolutely right: we need this kind of long-term investment to continue to bolster Australia, and that capacity should be there through not only direct investment in infrastructure but also support through our taxation system. What we find is that the government that came to power in 1996 have a mindset that their only job is to be like a mob of accountants from KPMG: just tick and cross things that are done and not done and whack the back of the hand of state governments or councils because they have not been undertaking their fundamental responsibilities. That mindset has linked in with the general mindset that has taken hold at state level—that, in order to get anywhere at all, you have to make cut after cut after cut in expenditure. We know the disciplines that had to be imposed on the states; they were imposed by the last Labor government. That actually changed the approach that many states took to their expenditure, and we did get some fundamental efficiencies out of that.

But it has become effectively a mindset in which an ideological approach virtually drives it. Coming from New South Wales, I have seen the disasters that have been caused by public-private partnerships. Travelling Australia, I have seen the disasters that will have an impact over the decades to come because state and federal governments and local councils have walked away from their fundamental responsibilities. It is not really bright not to maintain your infrastructure. It is not just about water infrastructure in the capital cities—something that has happened because of the impress of budgets at state level—but also about the manner in which this Commonwealth government has withdrawn support from the states and the notion that it is somebody else’s problem to fix up this area or that the whole thing should be privatised and then the problems will go away.

Our national infrastructure has been falling to bits or simply sold off into the care of someone else to be broken up into whatever constituent elements they like, and this federal government has led the way in abrogating its responsibilities with regard to it. The next Labor government, in setting up Infrastructure Australia, will understand that you cannot have a piecemeal approach to this. You cannot have an approach where you walk away from fundamental responsibilities and desert the Australian people in terms of things that no-one else will do—not even at what people might take to be a reasonable profit; they would want big profits to do a number of these things.

The simple fact of the matter in terms of public-private partnerships is that they are generally not a really good go. Why? Because governments can borrow at extremely good rates; there is not all that much premium. We have a AAA rating, and the economy has been running extraordinarily well. Why? Because a fundamental foundation was laid by the former member for Blaxland, my former boss Paul Keating, who had the courage to confront problems and deal with them. We faced cataclysmic change in 1985-86, and modern Australia is built on the foundations of the fundamental, bold and brave changes that Labor made. This mob have slid along on the top of them and taken the benefit of those fundamental changes, but they will not make the core ongoing changes that are needed. They will not invest in Australian infrastructure, and they will not encourage state governments to do the right thing and renew their water infrastructure properly—they will not even think about addressing the problem. But if you look at water you need to look not just at the irrigators down in the Murray-Darling; you need to look at water usage Australia wide in our capital cities and at the infrastructure in Sydney. It is not just road and rail; water infrastructure needs a dramatic amount of money to be expended on it if we are to get the efficiencies we need in order to survive.

I turn now to the more specific matters of this bill. It is an omnibus bill. Assistant treasurers always come in with a whole stack of things that need to be done. What is the motif of these? Most schedules of the bill reduce compliance costs for taxpayers, increase certainty for taxpayers—two things that we say would be reasonable to do—increase the availability of capital gains tax concessions for small business and increase the integrity of the tax laws. There is nothing there that you could gainsay, nothing where you could not say, ‘Those things are reasonable aims.’

Let us look at some of the practicalities in terms of what is being done. In general, in particular with the first one, one of the areas I am interested in is what is being done in small business. Almost all the schedules involved here arise out of a 2005 review by the taxation board, and all but one, I think, of their recommendations have been taken up by the government. What they have suggested, particularly in the small business area, is to look at small businesses and their capital gains tax treatment, in particular in the first schedule, in a different way. Instead of looking at just a mum and dad business, where currently you have to prove a series of different things, one of the things you have to do in order to gain the concessions is to have a 50 per cent controlling interest. Normally this is a partnership of two; there are two people who have 50 per cent. That is the model in front of us in the current legislation. The only area where you can have less than that is if you have a controlling partner with 50 per cent. A spouse can simply have a one per cent interest in the entity and that spouse will be covered by it.

These changes recommend a 20 per cent significant interest instead of a 50 per cent controlling interest. When you first look at that, you may think: why, if it is a small business where it is a straight-out partnership—that is clear and reasonable—are we down to just a 20 per cent participation made up of indirect and direct percentages? If you put the spouse aside, why are up to eight people going to be part of this? I think it is recognition that the nature of a lot of small businesses has changed. It is not just traditional partnerships; there are a number of entities, including in my electorate of Blaxland, where there is multiple ownership. Within the current law, they are not able to access any of those concessions whatsoever; it is reasonable that they should be able to do so. This is not only a clarification of the law but also a sensible set of steps.

Small business is not the engine room of change in the economy, because, as my former boss was wont to say, although it is 60 per cent of the economy, it exists on the margin of that engine room. The economy’s engine room will always be our major businesses, and the small and medium enterprises will come in after that; that is the core of the activity. But employment in Australia is largely within those small businesses. Running them effectively and properly under the aegis of the taxation law is something we can do efficiently. If we look at this generally, the amendments are supportable; they finetune the application.

These amendments do not raise the net asset threshold, though, from $5 million to $6 million. That is something that has been announced and will have to be done later. As the shadow Assistant Treasurer, the member for Prospect, pointed out, there was a bit of press release stuff in here. It was announced that in the 2007-08 income year there would be an increase in that threshold. That will have to be dealt with in some other way, but there is no fundamental problem with that. Likewise, the other tests—the 15-year test and the rest of them—have been adjusted.

I want to broaden this debate a bit to look at the impact of this on small business. It is a very significant sector of our economy. It is extremely important and, despite the admonitions from the member for North Sydney over many years, it is one in which a number of people on this side have experience—either themselves directly or, as with the member for Hunter, in their families. In my family, there is a history and a combination of people either managing or giving their labour to others primarily in a small business context. For 25 years, my mother ran the Bambi Day Nursery, a child-minding centre in Bankstown. She had worked for others previously and she has a wealth of experience. I have a fair amount of experience—I was unpaid labour when I would help out after school.

I have a fairly good insight into not only the compliance problems but also other issues. As one of the very early settlers in the area, my grandfather on my father’s side had a small business selling fruit and confectionary in Bankstown before 1920. He then changed to a very significant business supplying building materials—concrete, coal, ice runs, you name it—post World War II. Throughout my family there is small business experience. Virtually all of my uncles are involved in small business. My uncle John is a carpet layer. My uncle Eris owns his own furniture shop in Armidale; it is a very significant business there.

Tony Windsor (New England, Independent) Share this | Link to this | Hansard source

Hear, hear!

Michael Hatton (Blaxland, Australian Labor Party) Share this | Link to this | Hansard source

It is a good place; the member for New England knows Eris well. Apart from being mad on rugby, joeys and all that stuff, he is a very substantial person in Armidale. The member for New England knows just how significant Eris is. My uncle Tom and most of my uncles are in their own businesses. It is very important to understand that Labor Party people do understand the pressures on people in small business. From my family experience, I certainly do. They let me know what pressures are on them or the impact of what the government is doing. It is also key that people in small business are marginal in the same sense as people who simply give their labour and work in factories, shops and so on. It is tough in small business, as it is tough on those who do not have resources other than to expend their labour.

However significant these measures in themselves may be for small business, we should look at the general things they want to do. Reduce compliance costs? Fine. Increase certainty? Fine. Increase the availability of the concessions? Fine. Increase the integrity of the tax laws? Fine. As I said before, you can actually do a great deal more for small business in this country if you change the GST laws. If you want to reduce compliance costs for taxpayers and reduce the compliance burden and significant on-costs for small business—if you want to make it easier for people to do their business and easier for them to report—you do not just look at the reporting mechanisms and say, ‘They have to report four times a year and we make things a bit easier for them by way of what they have to put in.’

If you wanted to make things easier, you would actually grab the GST by the throat—given that it exists in all its coalition glory as a result of this Prime Minister breaking his word and giving us that GST—and make it a retail sales tax. You would make it a tax that was not a 1960s paper-driven behemoth. You would make it a tax that was a 21st century retail sales tax where the only point in the cycle where the tax would be imposed would be at the final retail point. You would not have the inanity of a 1960s British and European model where every scrap of paper from the very start of the process to that very end—generating mountains of paperwork and work for people involved in every level of the chain of activity in business—had to be there for audit and reporting.

The current system is to cover the fact that you impose a tax at one level and pass it on to the next level. Having imposed it at the very first level, you can claim it back and get your inputs back. So there is a direct cost to business at every step of the GST chain. You say, ‘Business is fine, because although this tax has been imposed, they get their input cost back.’ That is given that the business is big enough and that its turnover is great enough.

The compliance costs of running this whole GST behemoth—the reporting and the paperwork that have to be done—are enormous. The big winners from the GST are Australia’s accountants; they have done extremely well. Anyone in small business who wanted to do their own books—unless they are accountants themselves—has had to give that work to someone else, because the load on them is enormous. The load on small business, which is being reduced by these measures, will be infinitesimal compared with the load on them now and on the community at large as a result of having this really dumb GST—a 1960s version, before fundamental computerisation, before mainframes could contain all the information needed to run and audit a system on the basis of real activity within an industry.

Whatever the industry—be it statistics or education—as with everything else, there is a simple thing called a bell curve. In a bell curve you get 10 per cent of activity up the top, the next 20 per cent of activity below that, 40 per cent of activity in the middle, which is the dominant range of activity, a further 20 per cent of activity below that and 10 per cent of activity down the bottom. You get that pattern of distribution; it is very simple. You do not need a million pieces of paperwork shuffled backwards and forward. You do not need the imposition of a GST 10 or 20 times during the process. You do not need the nightmare administrative load. You can audit businesses by saying, ‘Let’s look at the average activity, income and costs of a business. We can work that out, not just on an individual business basis but industry wide.’ The Tax Office certainly has the capacity to do that. Once you do that, and you set those standards, the auditing process becomes simple. Anyone who wants to rort the GST system will stick out easily. If you want to closely monitor people who are doing that, you will see that they are outside the norms of a particular industry, region or area—taking account of all the possible variables. What a dumb government we have to impose on the whole country, on every small business person, the enormous weight of an old and dumb GST, with all of its capacity to bury innovative activity.

This has not been taken up as Labor policy, and I am probably the one person in the joint who really believes in the utility of this, but I will continue to argue for it. In 1985, Paul Keating put up ‘Option C’, a central part of which, as recommended by Treasury, was a retail sales tax. Why? A retail sales tax was recommended because they did not think a full-blown GST could be brought in within a term. I have spoken to Ken Henry about this at length. I used to work with him. We have a dumb system in place. We could release Australian productivity if we dramatically changed our tax laws, got rid of the GST overburden and replaced it with a retail sales tax, which would be efficient, direct and effective. Small business and everybody else would benefit as a result.

Tony Windsor (New England, Independent) Share this | Link to this | Hansard source

I listened to the comments of the previous speaker, the member for Blaxland, Mr Hatton, about the goods and services tax and I would be interested in having a discussion with him on the issue. The Tax Laws Amendment (2006 Measures No. 7) Bill 2006 is, essentially, an omnibus bill. I will be supporting the legislation.

Schedule 1 of the bill amends the capital gains tax concessions for small business. I would like to raise, under the auspices of the bill, the implications of current government policy on capital gains tax and income tax in relation to groundwater users in New South Wales. The Prime Minister has a 10-year, $10 billion water plan. Some issues were raised a few years ago regarding the process of adjusting to a sustainable level of groundwater use in six valleys across New South Wales. Those issues are pertinent to the ongoing debate about the over-allocation problems and the Murray-Darling. More importantly, they are pertinent to the credibility of the current government as to how those problems are to be addressed and how those who do have current water entitlements will be treated.

Yesterday I raised this matter by way of having a historical look at the operations of the current government in the cooperative processes with the states regarding the National Water Initiative and other intergovernmental agreements and blueprints that have been in place. In that context, the New South Wales government and the federal agreement agreed to a compensation package. It was a three-way split—$50 million from the Commonwealth, $50 million from the states and $50 million in kind from the irrigators for the loss of their entitlements. At the time I congratulated both governments because I thought, ‘Here we have the resolution of a difficult problem where no-one is really to blame.’ Water had been allocated by a range of state governments over many years, over-allocation in the groundwater systems had been recognised and there had to be an adjustment process to bring it to a sustainable level. I will cite a number of documents in regard to that.

Suffice to say that the irrigators—the water entitlement holders—agreed to this plan for sustainability. There are certain parallels between that and what the Prime Minister is saying now on other areas of water reform where there has to be an agreement between the entitlement holders and governments or jurisdictions to come to a sustainable level of environmental and other uses.

As part of that process, and on agreement between the farmers, the irrigators, and the state and federal governments, this $155 million package—I think there was $5 million for other matters—was put together. It was applauded as a first in terms of the Commonwealth and the states working together. In fact, it was not a first; there had been a not dissimilar scheme for a pipeline in South Australia, I think, some years earlier. As part of that process irrigators were told that there would be a compensation package made available to them, and some months later an absolute shock was sent through the system: on receipt of those compensation moneys—the $50 million from the state and the $50 million from the Commonwealth—it would not be considered as loss of a capital asset. I am pleased to see the minister here, because he is very aware of this issue and very slow in rectifying it.

Irrigators were told that, on receipt of the compensation, those moneys would not be considered as being for loss of capital assets, although everybody in this place, including the Prime Minister, agrees that it is the loss of capital assets. And the Premier of New South Wales, at the Prime Minister’s water meeting last year, said that it was, in his mind, the loss of a capital asset, but the Commonwealth is still treating the payment of those moneys—the $100 million to groundwater irrigators across the six valleys—as income in the year of receipt. Obviously, individuals have different taxation arrangements, but theoretically it is possible for 47 per cent of that money to be clawed back by the Commonwealth. So the Commonwealth can actually make a donation in a compensation package and then take a considerable amount of it back in the year of receipt as income.

Looking at the capital gains arrangements in this legislation, the government seems unable to deal with this issue and has been unable to explain to me—in the parliament on a range of questions—and, more importantly, the water entitlement holders why it cannot do anything with this particular issue. The Prime Minister has a 10-point plan and says, ‘We’re going to go out there.’ I agree with removing the state borders as impediments to water reform—I think most people would—but there is a severe lack of credibility in terms of the historical context of what the government has done when it has gone out to embrace water entitlement holders and the sustainability issues of groundwater and surface water systems and in the way it is treating those people who have to make the adjustment—the water entitlement holders.

So there are great concerns out there, Minister, given its poor performance on this particular issue, about whether the government can be trusted in the takeover of water entitlements. There has been a blame game played in this place. I have raised it a number of times and you, as minister, have been in receipt of some of those issues and questions. Time and time again the Commonwealth says: ‘They are the states’ problems; the states have caused the problems. If they had written the document a different way the tax office would have been able to consider it as capital rather than as income and that would have an impact on cash flows to those people in receipt of compensation arrangements.’ And the states say, ‘No, they have been the Commonwealth’s problems; they are in charge of the tax office, and they have the tax act et cetera.’

So this continual blame game has gone on for nearly two years while these people out there were trying to make these adjustments and trying to do what the Prime Minister is now talking about on a broader basis and come to grips with sustainability. They have been doing it in a voluntary way and then, when the agreement was made, no-one told them that they could lose up to 47 per cent of it through the tax act as income in the year of receipt.

I approached the then parliamentary secretary, Malcolm Turnbull, last year in about November and said, ‘Malcolm, we’ve really got a dilemma here.’ I thought he was having a real go at trying to solve the problem. I said, ‘We have this continual blame shift and the victims are left out there wondering what is going to happen. If I organise a meeting with the Premier of New South Wales, will you attend and sit across a desk from this guy and let us find out who is to blame?’ At the same time, and even previous to that, I had an FOI request in for the documents, to find out who was to blame—but that is a story in itself.

I approached the then parliamentary secretary and asked him that question. He seemed almost petrified about the politics of doing that. I would have thought, particularly given his utterances over the last few days, that he is about bringing people together to solve some of the sustainability issues. So I was quite disappointed when he said that he would not meet with the Premier because he believed it was under control. We have not heard the control levers being pulled here. We have not seen this issue resolved with the tax office. I am delighted that the Assistant Treasurer is here because he might be able to make the announcement that there has been some active work done at a government level to solve this dilemma.

In the absence of Malcolm Turnbull—I neglected to say a moment ago that the Premier agreed to that meeting between himself, Malcolm Turnbull and me as the broker of the meeting—I had that meeting, not with the Premier but with the New South Wales Minister for Primary Industries, Ian Macdonald, only last week, and I received a couple of documents. I have an FOI request in with the New South Wales government now for those documents and I am told they will be forthcoming. I am told that the intergovernmental agreement—and the minister might like to comment on this—was driven by the Commonwealth Solicitor-General. I will be waiting eagerly to see who is to blame in relation to the writing of this document that has essentially classified it as income rather than as capital.

I would like to take the opportunity to read into Hansard two things—one in relation to the freedom of information request. I made a request to the government, particularly in terms of the former federal minister John Anderson and his conversations, letters et cetera with former state minister Craig Knowles. I think they did a good job because the two of them actually sat down and tried to work out a process which would lead to sustainability and compensate those people who were going to be impacted by the change or allow them to adjust. There was no mention of being charged income tax. It was the loss of a capital asset that was in everybody’s mind.

I made a request for the various communications in my quest to find out who is to blame. If it is the state, let us flog them to death; if it is the Commonwealth, they deserve the same fate. The FOI request went in and, strange as it may seem, the morning before I met with New South Wales minister Ian Macdonald last week, I received a letter. Before dealing with that, I will read out essentially what my FOI request was:

Correspondence (letters, faxes, emails, memos) between Federal Minister John Anderson and NSW State Minister Craig Knowles and their respective Departments with regard to the “Achieving Sustainable Groundwater Entitlements” ... Program jointly announced by the Prime Minister and then NSW Premier Bob Carr on June 9 2005. Further, I seek any correspondence about this matter between the Department and the Prime Minister’s office and the Treasurer’s office. Dates between 2001 and the present are requested.

The decision that has come back to me reads:

Section 24A – Requests may be refused if documents cannot be found or do not exist

Section 24A of the FOI Act ... provides that:

24A Requests may be refused if documents cannot be found or do not exist

An agency or Minister may refuse a request for access to a document if:

(a)

all reasonable steps have been taken to find the document; and

(b)

the agency or Minister is satisfied that the document:

(i)

is in the agency’s or Minister’s possession but cannot be found;

Section 24A of the FOI act provides that a request for access to documents may be refused where those documents are in the department’s possession but cannot be found. Before coming to the conclusion that the documents cannot be found, the department must take all reasonable steps to find the documents. The steps taken to locate the documents to which you are seeking access have been interrogations of all files on which the documents may have been located, including searches of electronic filing systems, searches of desks, filing cabinets, drawers, safes, cupboards, files by staff in the Western NSW Regional Office Regional Partnerships Branch and Strategic Projects Division, searches of backup tapes of electronic records by Ms Marie Cooper, Western NSW Regional Office and Mr Roger Fisher, Strategic Projects Division, searches of all archived documents from the Western NSW Regional Office and Strategic Projects Division and searches of the registry. Despite the searches undertaken, no documents could be found.

The document actually says ‘no documents could not be found’—there might be more truth in the actual wording of it. It goes on:

I am satisfied that all reasonable steps have been taken to locate the documents in question and that no documents can be located in the department at this time, and I am unable to provide you with any documents as per your request.

Strangely enough, that afternoon I happened to meet with the state minister. Somewhat contradictory to what was being said in terms of the FOI request, he was able to give me a few documents in relation to this process, the discussions between the Hon. John Anderson and Craig Knowles. As I said, I have subsequently put in an FOI request for all the documents, including the intergovernmental agreement, because I think it has great significance in terms of what the Prime Minister is trying to do with the Murray-Darling.

One of those letters is from the state minister, writing to the Treasurer. I seek leave to table the letters so I do not have to read them out.

Leave granted.

I thank the minister in the chair. The first letter is from Ian Macdonald, the state minister, written on 20 March 2006, nearly a year ago. I will quote it a little bit:

The purpose of this letter is to seek your urgent reconsideration of the proposed taxation of the payments to be made under the program—

that is the Achieving Sustainable Groundwater Entitlements Program—

To eligible licence holders for a reduction in their irrigation water assets.

…            …            …

I believe that it would be against the spirit of our original agreement—

that was the agreement between Knowles and Anderson—

for the Australian Government to retain up to $47 million, or almost 85% of its total support as a result of income tax, when the clear intention was for the program to be equally funded by both the NSW and Australian Governments.

There is also a letter from the Hon. Peter Dutton MP written on 14 June. I will table this as well, if I can.

Leave granted.

The Hon. Peter Dutton responded on behalf of the Treasurer to this particular issue, where he raises the issue of a grant. There was no mention of it before. The letter reads:

Under the income tax law, a grant received in relation to carrying on a business is assessable income.

It goes on to say that these people are carrying on a business, and even though it was never mentioned on prior occasions that it would be taxed up to the rate of 47 per cent, the government, in his view—representing the Treasurer—believed that they should be taxed.

A number of issues have been raised since then, and the parliamentary secretary Malcolm Turnbull, now Minister for the Environment and Water Resources, has been playing a role and there have been a number of people at a state level. I will be waiting with interest, because I think I will receive the documents within the next few days, to see how that intergovernmental agreement was actually put together and why these water entitlement holders have been subjected to this massacre of their capital asset and then a massacre of their income base or their income-earning capacity. If the government is serious about the Murray-Darling, and really serious about putting in place policy rather than politics on coming to grips with this issue of over-allocation, it has the ideal way to display that here and now: recognise those who are going to give up their entitlement and bear in mind the property rights arrangements in the original COAG agreement back in 1995. Those who are going to give up these entitlements for the greater good of the nation should be encouraged, and not penalised in the way in which the current government is perpetrating this act of bastardry upon them.

Peter Dutton (Dickson, Liberal Party, Minister for Revenue and Assistant Treasurer) Share this | Link to this | Hansard source

in reply—Can I start by thanking those members who have taken part in the debate on the Tax Laws Amendment (2006 Measures No. 7) Bill 2006. In particular, can I thank those who have provided some comment or input on the measures that are actually contained within the bill. I am happy to address some of those concerns now.

Firstly, I wanted to address some of the concerns raised by the member for Prospect. The member for Prospect commented that the ALP may seek to refer this bill to a Senate committee for consideration. I want to make the point very clearly to him and to the House that the government actually offered to refer the bill to such a committee. I am not sure how the handover went when he took up his current position; I am not sure if he is in the same faction as Joel Fitzgibbon or not. I do not know what happened, but the decision from the ALP at the time, along with the other minor parties, was that this bill did not need to be referred to a Senate committee. He has put himself forward as the bright star of the ALP and come up with this wonderful revelation that it should be sent to a Senate committee; well, the government has offered it. The ALP rejected it, so if they are now reproposing that then that is for the ALP. But one has to wonder: is it merely a political stunt, or is the real reason that the ALP are still at a complete loss on these matters of taxation and generally running the economy, as they were in the late eighties and early nineties?

The government cannot now agree to the referral of this bill at such a late stage. The government does not want to delay businesses from accessing the benefits, and if the ALP are serious about their support of business, as they are currently saying they are, then I would have thought it would be in their best interests not to pursue this political agenda to the cost of business.

The member for Prospect has raised concerns that the government announced an increase of the net asset value threshold from $5 million to $6 million. That has not been included in the bill and does not apply from 1 July 2006, similar to the amendments in schedule 1. To that, I say these amendments are in response to the Board of Taxation’s recommendations coming out of the review of the small business CGT concessions, and these amendments apply from 1 July 2006. The government is separately introducing a new small business framework. The framework will align the small business thresholds throughout the income tax law. Due to the significance of this reform, the relevant changes will commence as announced on 1 July 2007 to allow sufficient time for the new framework to undergo appropriate consideration and consultation.

The member for Prospect was also concerned that the government did not consult on the amendments to interest withholding tax contained in schedule 2. Of course, again, that is not true. The government in fact consulted widely with a number of industry parties and stakeholders before the measure was introduced. The government also appointed an independent consultant. I note for the benefit of members that the government is not reversing its reforms to this area of law but is simply ensuring that the law reflects the parliament’s intent. These amendments correct an inadvertent error of short duration and would not be expected to cause any detriment to Australian companies who access offshore capital.

What should be noted as part of this debate is that this government cannot be accused of not consulting with business, engaging with business or engaging with the stakeholders on these policies that we propose. In fact, the feedback that I get as I move around the country talking to businesses both big and small—and I am sure the same message is being conveyed to my shadow minister opposite—is that this government is operating its consultative process as well as we ever have. If there are issues that arise in relation to bills, we will continue to consult and make appropriate amendments where we need to. But the government is serious about consulting, and we will continue to embark on that path. We are not going to be pushed to one side by a political agenda run by a Labor Party desperate to make itself relevant to the business community.

While supporting these amendments, the member for Prospect noted in relation to the statutory cap on the effective life of tractors and harvesters that these amendments are inconsistent with agreed Ralph recommendations. The government continues to support the Ralph recommendations on effective life, but as noted by the member this is an exceptional circumstance which required acknowledgement of the dire circumstances faced by our farmers, who around the country are encountering the worst drought in our country’s history. This government is committed to continuing its assistance to people in the bush, and the member for New England, who is here to contribute to this debate, would be the first to acknowledge, surely, that this government has provided exceptional circumstance assistance to farmers in a time of exceptional need. When you compare it to the states, you see it is an appalling situation that the states have put themselves in. They have deserted farmers in their hour of need at a time when the Australian federal government is providing phenomenal support to people who are very worthy of it.

The measure in relation to capital protected borrowings drew more whingeing from the member for Prospect about how long it has taken to implement an announced measure. But this is at the same time that he says that we should be consulting more. The opposition cannot have both short consultation times and long consultation times. They cannot have measures introduced tomorrow that require lengthy consultations. That needs to be a message that is sent to Labor and to the business community, when we have Labor running around saying that they will consult but saying at the same time that they will introduce legislation the next day. Both cannot happen. One has to give way. Although we are committed to introducing legislation in a timely fashion, we are committed to consulting with business to make sure that we provide the best outcomes not just to business but to consumers and to stakeholders in this portfolio and to make sure that we as a government continue to manage the Australian economy well so that the prosperous times in this country continue to roll.

This bill makes a number of important changes that will assist small business. The changes will support primary producers and will improve certainty for taxpayers. Firstly, the bill amends the capital gains tax concessions for small businesses to increase the availability of these concessions and reduce the compliance costs of small business. The amendments are in response to the recommendations of the Board of Taxation and will improve the operation of the small business CGT concessions by making changes to the maximum net asset value test, the active asset test, the 15-year exemption, the retirement exemption, the small business rollover and how the concessions apply to partnerships.

The bill also clarifies the interest withholding tax exemptions by more closely specifying the types of financial instruments the parliament intended to be eligible for the exemption. These amendments will reduce uncertainty for taxpayers and the tax office by confirming the policy intent in relation to dead interest. The intent, though, is broadly that Australian business should not face a greater cost of capital due to interest withholding tax. I repeat my statement that the government is committed to continuing our process of consultation on this aspect of the bill and other aspects, both those that are before the House at the moment and those that are under consideration by government. We will continue to make amendments where we need to. We will continue to listen to business. We will continue to act in the best interest of the nation and of our economy. Today, we recommit ourselves to doing that.

The bill also gives effect to the government’s 2006-07 budget announcement that it will enhance philanthropy by streamlining the integrity arrangements and reducing the compliance burdens that apply to deductible gift recipients or DGRs. The gift fund requirement for certain DGRs will be removed and the consolidation of multiple gift funds will be allowed for others. However, all DGRs will be required to maintain adequate records to show that the deductible public donations they receive are used appropriately and indeed how they are used. The amendments also align the integrity arrangements across all DGRs by allowing the Commissioner of Taxation to review whether an entity listed in the law continues to be eligible to receive deductible gifts, in the same way that the commissioner can review the eligibility of those entities that require the commissioner’s endorsement. Additionally, the bill amends the list of deductible gift recipients in the Income Tax Assessment Act 1997 by extending the time period for which four particular entities can receive tax deductible donations. Extending the deductible gift recipient status will assist those organisations to continue to attract public support for their activities.

The Howard government is committed to helping Australian farmers struggling under this drought. This bill makes two important changes to the tax law to help farmers. The bill preserves the depreciation rate that applies to tractors and harvesters used in the primary production sector. With the drought affecting farmers and their families across Australia, the last thing that they need is a change in the tax treatment of their valuable farm equipment. That is why the government has implemented a statutory cap which will mean no change to the income tax treatment on harvesters and tractors. The government is also amending the Farm Management Deposits scheme to increase the non-primary production income threshold from $50,000 to $65,000 and the total deposit limit from $300,000 to $400,000. Increasing these thresholds will assist primary producers to cope in this time of hardship.

This bill will provide certainty as to the tax treatment of capital protected borrowings. Under a typical capital protected product the investor is protected from a fall in the price of the shares, as the loan facility includes a capital protection feature that gives the investor the right to transfer the shares back to the lender for the amount outstanding on the loan. The full Federal Court of Australia ruled that the component of interest applicable to the cost of the capital protection feature is deductible when paid. The amendments will ensure that part of the expense on a capital protected product attributed to the cost of the capital protection feature is not interest and is not deductible where this cost is capital in nature. The measure restores the general principle underpinning the current law: that any revenue loss or outgoing in producing assessable income is deductible, while a capital loss or outgoing is not deductible. The measure also ensures that all borrowers who utilise a capital protection feature are treated in the same way for taxation purposes, whether or not the capital protection feature is purchased separately or included within so-called interest on the loan.

I recommend this bill to the House.

Question agreed to.

Bill read a second time.