Tony Smith (Casey, Liberal Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

The opposition fully supports the passage of the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008, which implements stages 3 and 4 of longstanding tax reform of financial arrangements. The measures in this bill are the final stages of the reforms that began under the former coalition government. These final reforms will remove complexity and distortions that arise from the current requirement in the law to distinguish between capital and revenue. The bill will provide certainty on the tax treatment of financial arrangements by defining in legislation the characteristics of a financial arrangement.

The reforms will mean that the tax treatment of financial arrangements will be based on their economic substance rather than their strict legal definition, which can lead to market distortions. This will of course result in a more equitable and genuine tax treatment of financial arrangements. Currently the tax treatment often differs from the accounting treatment. The reforms will allow taxpayers to elect to align the tax treatment with the accruals based system used for accounting purposes. This will lead to administrative and compliance cost-savings for applicable taxpayers. The reforms allow taxpayers to align the character and tax timing of eligible hedging arrangements as well, which will lead to better risk management by improving the tax treatment of hedging.

The reforms will be compulsory for certain taxpayers, as the Minister for Competition Policy and Consumer Affairs and Assistant Treasurer has outlined, and optional for others. As has been widely spoken about during the consultation period, they will be compulsory for approved deposit-taking institutions and all other entities that have a requirement to register under the Financial Services (Collection of Data) Act 2001 if their annual turnover exceeds $20 million. As we know from the explanatory memorandum and the bill, they will also be compulsory for superannuation funds and managed investment schemes with assets exceeding $100 million, entities with financial assets exceeding $100 million, entities with an annual turnover exceeding $100 million and entities with assets exceeding $300 million. Of course, all other taxpayers may elect to make use of these reforms if they wish.

As I said at the outset, these reforms began under the previous coalition government. The whole TOFA process of reform has been going for a decade or more. Stage 1 of these reforms, which related to debt and equity measures, was legislated back in 2001. Stage 2, which related to foreign currency conversion rules and the realisation of foreign currency gains and losses, was legislated two years later in 2003. The previous government released draft legislation on the final stages in 2005, after which followed extensive consultation with the relevant taxpayers, industry groups and professional associations before those reforms were introduced in legislation into this place in September 2007. But of course that bill lapsed due to the calling of the federal election a month or so later. The reforms in each stage have been developed following extensive consultation and over a number of years. These reforms reflect the coalition side’s longstanding commitment to ensuring the integrity and operation of our tax system. As I said at the start, we will, naturally, be fully supporting the reforms in this bill—reforms which we began and which we introduced into this House prior to the last election.

As we know from the minister’s second reading speech, from the substance of the explanatory memorandum and from the bill itself, the bill defines what a financial arrangement is. The definition will cover the taxation treatment for a wide range of financial instruments that currently exist. The definition will provide certainty for taxpayers as financial arrangements develop over time. This will greatly assist taxpayers in determining their obligations and their tax affairs. In addition, the bill contains rules relating to the interaction of the reforms with the existing tax consolidation regime.

As members speaking in this debate and those who have been part of the consultation will know, the bill provides six methods that a taxpayer can apply to determine their tax. They are broken into two general classes: elective and non-elective. The non-elective methods will be used by taxpayers who do not wish to use one of the four elective methods, which I will outline in some detail for the benefit of those participating in the debate. The non-elective methods are simply the accruals method or the realisation method, methods that obviously exist at present. As for the non-elective methods, the bill will introduce four, as I said: the elective hedging method, the elective financial reports method, the elective fair value method and, finally, the elective foreign exchange retranslation method.

Just briefly: taxpayers can only use the first method, the hedging method, if their financial reports are prepared and audited according to existing standards. This will remove any post-tax mismatch that may arise from gains and losses being included in taxable income at different times and will align gains and losses to the tax treatment of the item that is being hedged. Similarly, if a hedged item is of a revenue nature then the hedging arrangement will be treated as such. It will allow for the consistent tax treatment of the hedging financial arrangement and the hedged item. The second method, the financial reports method, allows taxpayers to simply use their financial reports for assessing gains and losses arising from financial arrangements and, in that case, the taxpayer must meet a specific set of standards to be able to rely on their financial reports. The third method, the fair value method, is an existing accounting method. Finally, the fourth method, the foreign exchange retranslation method, is relevant for taxpayers who denominate the gains and losses arising from currency exchange rates in a foreign currency or a non-functional currency. This method only deals with gains and losses that arise from changes in foreign currency exchange rates and is based on Australian Accounting Standard AASB 121—‘The Effects of Changes in Foreign Exchange Rates’. Taxpayers will not be able to change the method used over the duration of the financial arrangement.

In conclusion, this bill and this set of reforms are complex and that is why there has been considerable consultation. This is an area of law that has not kept up with the modernisation of financial arrangements. As I said, we are fully supporting this in both houses.

There is an inquiry being held into the provisions of this bill by the Senate Standing Committee on Economics, to which the bill was referred back in December. That committee is scheduled to hold some hearings on, I think, 16 February and to report just a few days later. Given the complexity of these reforms, and even though there has been widespread consultation, it is important that the committee provide an avenue for taxpayers to put in submissions on some of the technical aspects of the bill. I am advised that the committee has received nine submissions from Treasury, tax advisers and professional associations. I know there is broad support for this bill to be passed by parliament, and it is also recognised that there will be future amendments, once this bill has passed, dealing with technical issues.

Many of those who have made submissions or who have been part of the consultation have stressed that the implementation will inevitably reveal just that—the need for further technical amendments. It is in that light that the Senate committee is well placed to consider any arguments on technical issues that may arise, and these would be of a finetuning nature rather than of a substantive nature. In that light, if anything arises in the Senate committee’s inquiry it will enable the government to consider that, but it will not obviate our support for the bill in the Senate as well. Should this arise, of course, these issues will be considered. Even if some issues do arise that require technical further amendment, it is, as I said just a few minutes ago, quite inevitable with such a complex area of law that, down the track, there will be some amendments to this. But the substance of the reforms has the support of both sides of this House and I commend the bill to the House.

Shayne Neumann (Blair, Australian Labor Party) Share this | Link to this | Hansard source

I speak in support of the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008. This piece of legislation has been a long time coming, like so many other pieces of legislation that the Rudd Labor government has brought to this chamber. This came back to this chamber after a lot of procrastination. I mean, we talked about the review of business taxation commonly known as the Ralph review; that urged change in 1999. The Howard government’s bill lapsed when parliament was prorogued back before the 2007 election.

This is a bill which on the surface of it does not look particularly exciting or interesting, but there will be accountants and businesses all over the country that will be very happy with what is a very business-friendly and economically savvy piece of legislation which will allow proper accounting methods to be used in the taxation of the vast array of financial arrangements which the Australian public now engages in. It is true to say that words like ‘options’ and ‘futures’ are ones that our parents and grandparents and their parents before them would never have imagined; they are like something out of science fiction. But for businesses today those types of terms are things they know about and deal with every day.

Our response as a parliament to tax reform has been erratic. There seems to be little consistency in our treatment of the types of products that I referred to. The way we deal with the taxation of financial arrangements really does not reflect business reality. There is a great deal of inconsistency in how we treat these financial arrangements from a taxation point of view. So we need effectively a new code—we have called it a new division here—an all-encompassing definition of a financial arrangement, and some consistency. So we have the new proposed division 230. This is really the third and fourth stages of the reforms. The earlier amendments were done in 2001, when the debt equity rules, division 974, were introduced—that is known as stage 1—and in 2003, when the foreign currency gains and loss provisions, division 775, were introduced; that is known as stage 2. Stage 3 governs the treatment of hedges for taxation purposes, and stage 4 deals with the tax timing in relation to financial arrangements other than hedges.

This amendment will go a long way to ensure we have certainty, specificity and coherence in the way we treat our financial arrangements. It is a very good reform. Accruals calculations can be very difficult for business and accounting purposes. They are complex and there are significant compliance costs for businesses every single day of their operation. For more than 20 years, before I got elected to parliament in 2007, I ran a business. It frustrates people in business enormously to have to deal with the Taxation Office. We all know we have to pay our fair share of tax, because that is how we get hospitals, roads and schools, but making sure people are taxed fairly and justly and making sure there is efficiency in the system is extremely important. Aligning the character and timing of eligible hedging arrangements is important. Having a definition of a financial arrangement is extremely important for accountancy purposes.

We have got broad support. The Institute of Chartered Accountants in Australia on 20 January this year came out in support of this piece of legislation. The institute commended the government for introducing the bill. The institute expressed strongly its pleasure that the government had adopted a number of recommendations raised by the institute and other professional and industry bodies during the extensive consultation process following the exposure draft released by the Assistant Treasurer—who is in the House at the moment—on 1 October 2008. The institute foreshadowed there would be a number of other reforms as the legislation worked in reality for businesses in this country, and it said there would be a need to examine how the complex financial arrangements would interact with other provisions of the income tax law.

We need to be a financial hub in South-East Asia. Our competitors—places like Hong Kong and Singapore—have really stolen the march on us in so many respects. We need our businesses, in a time of global financial crisis, to be as efficient and effective as possible and to ensure that, when they engage in financial arrangements, they know with certainty how tax will be treated, how capital and income will be treated for taxation purposes.

It is extremely important that we also ensure that accountancy standards are used when we line up our tax laws. I commend the minister for ensuring that the Australian accounting standards—with respect to financial instruments and their recognition and measurement; with respect to the effects of changes in foreign exchange rates; and with respect to consolidated and separate financial statements—have been taken into consideration and aligned for the purposes of taxation and accountancy law.

It is extremely important that we pass this amendment. It is extremely important for businesses such as the business that I ran and others to ensure that we have the proper arrangements in place so that we have alternative methods for bringing gains and losses arising from financial arrangements to account for taxation purposes. This is not, as I say, the kind of bill that most people would like to speak on in this House, but I think, as someone who was in business for a long time, it is important that we get our tax laws and our business laws aligned. Anything we can do to streamline the efficient and effective payment of tax in this country is good for business, good for the people of Australia and particularly good for the people of my electorate, who speak to me all the time about these types of issues. I commend the minister for bringing this bill to the House, I commend the government for what they have done in relation to reform in the area of taxation law and I warmly welcome the legislation that is before the House.

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

in reply—I thank the honourable member for Casey and the honourable member for Blair for their contributions. The Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 represents an important reform to Australia’s financial taxation system. In fact, it represents a complete rewriting of the taxation of Australia’s financial arrangements. The passage of this bill will enhance efficiency in financial decision making by taxing financial arrangements according to their economic substance rather than their legal form. It will reduce tax distortions to managing financial risk by introducing extensive tax timing and character hedging rules and will reduce compliance costs by increasing the certainty of tax treatment of financial arrangements and by more closely aligning tax and finance accounting outcomes. The TOFA rules will not be applied on a mandatory basis to individual and small business taxpayers except where significant deferral of income is involved.

The bill has benefited from very extensive consultation with industry and professional associations and is much anticipated in the business sector. One of the results of this consultation which has been very extensive over the last 12 months was the government’s decision to implement a soft and hard start date. In the current environment, there are a lot of businesses very keen to get the benefits of the reduction in compliance costs and increased certainty. There are others who, while looking forward to embracing the regime in the longer run, need more time to adjust. This decision was a result of the consultation that was held with the industry and is reflected in the bill before the House.

Passage through the House of Representatives today will be another step forward in the TOFA process, which was first announced by Treasurer Dawkins in 1992. It is good to see the implementation of a budget measure in relation to that process—not a measure from the last budget, or the budget before, but from 1992.

As the member for Casey correctly pointed out to the House, this is a complex bill and it will need close monitoring. There will be reason to monitor its implementation and to make minor amendments as we go. The government fully recognises that and accepts that. There are likely to be finetuning issues that arise, and we stand ready to implement those on a case-by-case and needs basis. But, having had this around since 1992, the government certainly took the view that there was no good reason to delay any further, that those issues really needed to be fleshed out in the implementation and that the time for talk had finished; the time had come to introduce the TOFA legislation. I commend this very important bill to the House.

Question agreed to.

Bill read a second time.