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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I move:

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

(1)

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

(2)

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

(3)

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

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

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

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

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

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

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

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

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

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

Phillip Barresi (Deakin, Liberal Party) Share this | Link to this | Hansard source

Is the amendment seconded?

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

The amendment is seconded, Mr Deputy Speaker. I thought I would take the opportunity of raising the tone of the House by dressing up for the occasion in my dinner suit. I also have a commitment, as I know the member for Prospect does, with the Australian Industry Group—our friends in the manufacturing and service industries. I hope you will forgive me. I hope I am not in violation of any dress code. I thank the duty minister, the Parliamentary Secretary to the Treasurer, for his mercy in not taking action against me.

The Tax Laws Amendment (2007 Measures No. 4) Bill 2007 and cognate bills before us tonight are complex. We do support most of the legislation with the exception of the broadening of the definition of ‘family’ in respect of disbursements from family trusts. I want to concentrate the time that I have on that provision, but before I do I want to make some general remarks about the complexity of the tax system. The member for Prospect has informed the House of the volume of the legislation that is before us tonight. It reminds us of the increasing complexity of the income tax system in this country. The Treasurer undertook an exercise that he described as ‘simplifying the tax system’ and as a result of that exercise he thought it was a terrific outcome that the government had removed a couple of thousand pages of redundant provisions from the Income Tax Assessment Act. It is not the redundant provisions that are the problem but the operative provisions. I doubt that implementing changes that remove redundant provisions actually constitutes genuine tax simplification. Since I have been in this parliament, from 1998, probably on a fortnightly basis we have been confronted with incredibly complex taxation law amendment bills. This is yet another and it adds to the complexity of the income tax system. There have been many opportunities for the government to simplify the tax system. Indeed, the great tax adventure, launched by the Prime Minister before the 1998 election, was supposed to be the ultimate in simplification. The Treasurer, from 1999 through 2000, described this endeavour as a ‘streamlined new tax system for a new century’. Streamlined? The government never streamlined the tax system. It introduced a monster new tax, the GST, itself involving many kilos of legislation. And we know that the GST is anything but a simplified tax.

Since that time, the government has had an enormous amount of revenue at its disposal. It is revenue that initially was generated by the productivity surge built on the reform program of the previous Labor government—and carried forward, in some places, by the coalition—and more recently through the bounty of the mining boom. You would have thought that, in the 11 years it has had, the government would have seized the opportunity to use those proceeds to implement genuine tax reform. It had the opportunity to set out what it considered to be the ultimate tax system. It could have used the proceeds to march towards that goal. At least the Australian public would have known what was in the minds of the Prime Minister and the Treasurer and would have seen that destination getting closer and closer.

The government, though, for pretty base political reasons, declined that opportunity. It would have perhaps limited the capacity of the government to make tax cuts in areas which were of the greatest political benefit. That has been the constant driver of this government. Rather than introducing tax reform, the government has sought to harvest political benefit from targeting particular groups at particular times—usually much closer to elections—and giving them back some of the bracket creep that they have been paying because of the operation of inflation on the income tax brackets. They then say: ‘What jolly good fellows we are. We have given back some of the tax that we have taken from you. Now we deserve to be re-elected.’ The Australian people are well and truly awake to that caper. They are sick and tired of the ever-increasing complexity of the income tax system and the cynicism of the Howard government in providing tax cuts, but not tax reform, close to elections. This legislation, though in the intent expressed is mostly laudable, does surely fail the test of simplicity.

The member for Prospect has spoken eloquently on the second reading amendment. We are disappointed that this legislation does not take the opportunity to implement Labor policy that offshore banking units be included in this bill. We note that the Australian Bankers Association has expressed concern that this omission will weaken Australia’s attractiveness as a financial centre and we condemn the government for failing to embrace policies such as a flat and final 15 per cent withholding tax rate and the introduction of a managed funds tax regime, which would promote Australia as a financial services hub. I commend the member for Prospect for developing these policies and for being resolute in his determination to have them properly debated in this parliament. The relevant industries know the importance of these and they know that they pass a vital test—that is, to boost the productivity and competitiveness of Australian industry. A key criterion for any reform relating to the business tax system in Australia is that it should in some way or another boost productivity. And, in relation to the personal tax system, wherever possible rates should be reduced to ameliorate the incentive-crushing effects of the personal income tax system.

While we are on the issue of passing the test of boosting productivity or in some way increasing overall the prosperity of our great nation, I now take the ruler to that provision with which we do not agree—that is, that the definition of ‘family’ under the family trust system be broadened to include lineal descendants of family members. This would expand the definition of family to include any lineal descendant of a nephew, niece or child of the relevant individual, or that individual’s spouse. Obviously, this considerably expands the number of people who can receive distributions from family trusts.

The amount involved—$8 million per year—is substantial. With $8 million a year you could do a lot towards the overall exercise of the tax reforms that have been proposed by the member for Prospect, just by way of example. I would be fascinated to hear from the minister how he considers this to be good for the nation as a whole. Obviously, it would be good for the beneficiaries of family trusts. We are, in this case, putting our money where our mouth is. We do not think that this is a priority and therefore think that the money could be better spent elsewhere. As a consequence, we are moving a substantive amendment to remove this particular provision from the bill.

Around the year 2000, following the Ralph Review of Business Taxation, the government announced that it was going to implement recommendations of the Ralph review relating not only to the alienation of personal services income but to changes to the taxation laws as they related to trusts. Indeed, I remember that I was sitting in the chair now occupied by the member for Gorton. The then Leader of the Opposition, the member for Hotham, was sitting in the chair next to him and the Treasurer was sitting in the chair opposite, now occupied by the member for Aston. Over the table there was a conversation in which basically the Treasurer put the proposition that Labor agree to a reduction in the corporate tax rate from 36 per cent to 30 per cent on the condition that it was revenue neutral. He asked whether we would, and we said that, so long as the government proceeded with measures dealing with the alienation of personal services income and with trusts—as announced by the government—that would be fine by us.

Just to be sure—because you do need to be sure with the Treasurer—we sought that commitment in writing. By the end of the day, the commitment was provided in writing, signed by the Treasurer and soon thereafter completely repudiated by him with no apology or explanation other than that he either rolled himself or got rolled in the cabinet room. I remembered the then member for New England, Stuart St Sinclair, had led the charge, and the Treasurer of the country got knocked over by the member for New England on this matter. It is now history that the company income tax rate was cut from 36 to 30 per cent—we still support that—but, shamelessly, the Treasurer reneged not only on an undertaking given across the table but on a signed undertaking.

This measure before us tonight goes even further. It does not by any standard pass the test of improving productivity and improving the overall prosperity of the nation. It is good for one small group. We believe that there are higher priorities for changes to the tax system in this country, priorities that would in fact support our export industry and our growth industries. That is why we consider that the $8 million a year could be better spent elsewhere. It is for that reason that I have great pleasure in seconding the amendment. I commend the amendment to the House.

Chris Pearce (Aston, Liberal Party, Parliamentary Secretary to the Treasurer) Share this | Link to this | Hansard source

I would like to thank all the members who have taken part in the debate on the Tax Laws Amendment (2007 Measures No. 4) Bill 2007 and the associated imposition bills, the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 1) 2007 and the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 2) 2007.

The measures proposed by the Taxation Laws Amendment (2007 Measures No. 4) Bill 2007 are contained within eight schedules. Schedule 1 gives effect to the government’s announcement in the 2005-06 budget that it would abolish foreign loss and foreign tax credit quarantining and streamline the remaining foreign tax credit rules. This is achieved by repealing the existing arrangements and replacing them with new, simplified foreign income tax offset rules. These amendments also include transitional rules for the treatment of existing foreign losses and credits. By reducing tax complexity and compliance costs, these changes will assist businesses of all sizes operating, or seeking to grow, internationally. They build on the previous reforms undertaken by the review of international taxation arrangements to ensure Australia has a competitive international tax system.

Schedule 2 to this bill will ensure that capital gains tax need not be an impediment to mergers or takeovers of medical defence organisations that are also companies limited by guarantee. This schedule provides a capital gains tax rollover, similar to the scrip-for-scrip rollover, for membership interests in companies limited by guarantee that are also medical defence organisations. Schedule 3 will allow superannuation funds to continue to invest in instalment warrants, consistent with longstanding practice. Such warrants must be of a limited recourse nature and can be held over any asset a fund would be permitted to invest in directly.

Schedule 4 to this bill introduces simplified trustee beneficiary reporting rules that will reduce compliance costs for trustees of closely held trusts whilst maintaining the integrity of the tax system applying to trusts. Under the new rules, trustees of closely held trusts will be required to report only the details of trustee beneficiaries that are presently entitled to income of the trust and tax-preferred amounts, rather than trace through amounts to ultimate beneficiaries. Furthermore, family trusts will be excluded from the new reporting requirements and the commissioner will be given a determination-making power not to require annual reporting for some trusts where he considers it unnecessary. The new arrangements demonstrate the government’s commitment to reducing red tape and regulatory burdens whilst maintaining the integrity of the tax system.

Schedule 5 will assist in the smooth transition to the simplified superannuation regime, known as Better Super, and ensure the intended policy outcomes are reflected in the legislation. Schedule 6 amends the list of deductible gift recipients in the Income Tax Assessment Act 1997. Deductible gift recipient status will assist the listed organisations to attract public support for their activities. Schedule 7 implements various technical amendments and also some general improvements to the law of a minor nature. These amendments are an important part of the government’s commitment to improving the quality of the taxation laws and, again, reducing their complexity.

Finally, schedule 8 amends the trust loss rules which apply to family trusts. The amendments allow family trust elections to be varied or revoked in a broader range of circumstances. The amendments also expand the definition of ‘family’ to include lineal descendants. Furthermore, distributions to former spouses, widows or widowers and former stepchildren will be exempt from family trust distribution tax.

The amendments in this bill are part of the government’s ongoing commitment to improving the quality of the tax laws and reducing compliance costs for taxpayers. I again thank those members who have participated in the debate and I commend the bills to the House.

Alex Somlyay (Fairfax, Liberal Party) Share this | Link to this | Hansard source

The original question was that the bill be now read a second time. To this the honourable member for Prospect has moved as an amendment that all words after ‘That’ be omitted with a view to substituting other words. The question now is that the words proposed to be omitted stand part of the question.

Question agreed to.

Original question agreed to.

Bill read a second time.