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

The Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 deals with three issues. The first issue that it deals with is the issue of employee share schemes. Members of the House will recall the complete shemozzle and chaos six months ago of the government’s budget announcement on employee share schemes. Now six months down the track, after numerous U-turns, reviews and eventually seeing the catastrophe for what it was, the government is introducing this legislation, which is markedly different from its proposal on budget night.

On budget night the government announced the immediate removal of tax deferral on employee share schemes, effective from budget night. It meant that every person in every employee share scheme was required to pay the tax upfront, irrespective of whether they were able to sell the shares. So you had scenarios devised by the government where someone working in a business who had been provided with some shares as part of an employee share scheme, given those shares and in a position of not being able to sell them for a couple of years, which is a typical case, was required under the government’s legislation to pay that tax upfront. You can just imagine the scenario of someone working hard for a business being told that they were being awarded some shares that they could sell in two or three years time, but under the government’s new rules would be required to pay the tax on them upfront. The budget measure also limited the $1,000 concession to those earning less than $60,000.

It was a big controversy at the time. The government told us there was a problem with nondisclosure that needed to be fixed, that some taxpayers were not fully disclosing the receipt on shares and options. But their solution was to make every single employee who was receiving shares from their employers pay tax upfront. Because of the lack of detail, it was unclear whether those that paid upfront tax but never actually ended up receiving anything in the future would even be able to claim back the tax they had paid.

I have said before, and I say again, the coalition has a strong and demonstrated record of maintaining the integrity of the tax system. We believe that everyone must pay their fair share of tax. We also recognise integrity measures must be exactly that: measures to improve the integrity of the tax system, not to shut down an entire sector of it as the original announcement had the effect of doing. That is precisely what happened: the effect of the government’s budget night announcement was to instantaneously snap-freeze employee share schemes right across Australia, to snap-freeze them for employees on every income level. When those schemes were frozen, employee share schemes in Australia came to a halt.

As I said at the outset, it has been six months and the government’s handling of this issue has provided a very good window into their failure to produce sensible policy and their failure to correct errors when they are blindingly obvious for everyone to see. If you go back to the period after the budget announcement, within two days it was quite obvious that the government’s announcement had had the effect of freezing employee share schemes right across Australia. It was quite obvious. No-one thought that was the government’s intent. No-one thought that those in the Treasury and the tax office and those in the minister’s office had a deliberate policy to end employee share ownership schemes in Australia. It was clear that they had made a monumental error; it was clear that there was absolute incompetence on a grand scale. The Financial Review carried the chaos most prominently, as you would expect. It carried it, from memory, on its front page within two days of the budget, and it certainly carried it on its front page for at least six of the next seven days.

And what was the government’s response to this? Its first response was to deny there was a problem. Being confronted with an absolute catastrophe of its own making, the government’s initial instinctive response was to simply pretend it did not exist—that is, having been confronted with this problem, instead of accepting that they had made a monumental error, the government’s first instinct was to pretend it did not exist and to let the chaos reign. Absolutely irresponsible on a grand scale. Faced with the fact that employee share schemes had been shut down across Australia, having the knowledge that their budget night announcement had caused the chaos, the response from senior ministers from the Prime Minister down was to pretend it did not matter. Having seen those schemes shut down, their response was, ‘Let’s just ignore the problem.’

We saw it in the days after the budget. We saw it for two weeks, when all the government did was duck, weave and try and spin its way out of the chaos. The Prime Minister, knowing that the announcement had been a catastrophe, still insisted days after the budget that it was ‘the right decision’. He said:

Though many of these decisions will be unpopular, I accept that.

The week after the budget, the Minister for Finance and Deregulation said that the changes were needed to stop a tax rort by those ‘at the very big end of town’. But the snap-freezing of employee share schemes of course affected more people than the finance minister suggested: it affected every single employee who participated in an employee share scheme. When the finance minister made those remarks, he would have known that—and, if he did not know, that just doubles his incompetence. At the time, the Treasurer said:

… we don’t expect average punters to pay for a lot of tax breaks going to people who earn significant income

In fact, as I have explained, it was the average punter who was paying for the incompetence of the government, because every person at every income level with an employee share scheme entitlement or offer was affected by the government’s chaotic decision.

This stonewalling and refusal to accept what was obvious to everyone continued even when the union movement began to express outrage. You can just imagine them holding their tongues and their noses, thinking, ‘This is so chaotic we won’t need to attack our political brothers in the parliamentary party; they will come to their senses.’ But, only when it became obvious that that was not about to happen, within two weeks of the budget the union movement began belling the cat on the Labor Party. Look at some of the quotes at the time from those in the business community, pleading with the government to realise the error of its ways and to act to fix it. Gary Scarrabelotti of the Employee Ownership Group said:

Rudd Labor has ensured that Australian workers will never become co-owners of the businesses in which they work …

Geoff Price from Computershare said:

They—

meaning the Labor government—

just don’t seem to get it.

He went on to say:

The proposed changes simply render the vast majority of plans uneconomic.

The finance director at Woolworths said:

My concern is that the government hasn’t thought through the changes to employee share ownership. It has effectively frozen employee share schemes.

The company secretary at Fairfax Holdings summed it up in fewer words:

It looks as though they haven’t a clue what they’ve done.

This is what we saw in the aftermath of the budget.

Finally, after two chaotic weeks, while the government’s instinct was to ignore the problem, deny the problem and attack anyone who criticised what they had done, the Treasurer of the country admitted that ‘mistakes have been made’ and the government began consulting. Then, after 50 days, some changes were announced by the Assistant Treasurer. As we on this side of the House said at the time, we and everyone who had an entitlement to an employee share plan and anyone working for a firm offering shares began to witness the long, slow, humiliating U-turn—a U-turn in slow motion. After all of that denial, spin and, finally, quiet acceptance of the chaos that had been caused, here we are today with legislation that is vastly different to that which was presented to the House on budget night.

Labor did everything it could to avoid bringing this legislation to the parliament. Its instinct after introducing the budget measure was to stick with it. When this legislation is said and done—and, as I have made clear in other forums, we will not be opposing the legislation—the employees of Australia will have come to know what the Australian Labor Party really thought of employee share ownership, and I do not believe they will forget it.

I will run through some of the detail of the bill. The amendments mean that the $1,000 upfront tax concession will be available to those on incomes of up to $180,000, which is a significant change from the original budget announcement, and that tax can be deferred when the employee share scheme meets the real risk of forfeiture test which has been introduced. For schemes that meet the real risk of forfeiture test, the tax will be deferred for seven years unless either the employee can sell the shares or exercise the options or the employee ceases their employment. Schedule 1 will also allow employees to defer the tax on up to $5,000 worth of shares under certain salary sacrifice schemes. Schemes operating under salary sacrifice arrangements do not have to meet the real risk of forfeiture test. It will also introduce new annual reporting requirements for employers along with additional withholding tax for employees that do not provide their tax file number. It contains amendments that will allow employees who pay upfront tax and whose shares or options are forfeited to get a refund for the tax that they have paid under certain conditions.

We have all along made it clear that we wanted the government to fix this problem. We wanted to see the schemes restart. We have been listening to businesses and employee groups across Australia and the message we get back is that, whilst this legislation is much better than the catastrophe that was handed down on budget night, it is by no means perfect. It is a vast improvement and the message we have been getting is that those businesses want to restart their schemes. They want to unfreeze them and get on with it.

We note that the Board of Taxation is due to provide its report on employee share schemes to the government by the end of February next year and, of course, the Productivity Commission is due to provide a report soon on executive remuneration. Overlying all of that is the wider and comprehensive review of tax being undertaken by Dr Ken Henry, which is due to the government very soon. Whilst the arrangements are not perfect, in light of all of this the coalition will not be opposing this schedule or, indeed, any other schedule within this bill.

The second schedule contains another measure announced on budget night and that is the change or amendment to the rules relating to non-commercial losses. Of course, the rules containing the four tests relating to the deductibility of non-commercial losses began operating under the former government back in July 2000. They were introduced by the former government because we on this side of the House recognised that there were integrity issues regarding certain unprofitable activities being carried on by some taxpayers. Under those changes, losses were deductible against other assessable income only if the businesses satisfied one of the four tests that were introduced then and which remain in operation today. The first is that the business has an assessable income of at least $20,000; the second that the value of property owned and used by the business is at least $500,000; the third that the value of the business assets owned and used to carry on the business is at least $100,000; and, finally, the business has a profit assessable income greater than deductions in three of the last five years, including the current year. Businesses after July 2000 had to satisfy just one of those tests. Under these changes—and these are the amendments in schedule 2—whilst those four tests will remain generally for those on incomes of $250,000 or more, the intention is that effectively people on those incomes will be able to deduct a business lost only if they apply to and are granted discretionary exemption from the Commissioner of Taxation. So, whilst the four tests will remain in operation for taxpayers below the $250,000 threshold, those earning more than $250,000 will need to apply to the tax commissioner.

I note that the Senate Standing Committee on Economics is due to table its report today, if it has not already done so. It had an inquiry and public hearing earlier this month, on 9 November, and it was important to hear some of the evidence that came forward from the witnesses. The hearing revealed that the government expects to raise revenue from this measure from around 11,000 taxpayers—that is, 11,000 taxpayers earning more than $250,000 who are currently claiming losses and who will now apply for the commissioner’s discretion. We also note that applications for the commissioner’s discretion are apparently to be processed within 28 days. The inquiry heard a number of concerns with respect to the administration as well as to the design features. Some witnesses expressed concern about the accuracy of the revenue projections, the $250,000 threshold going forward, the commissioner’s discretion and the impact of the proposed changes on rural communities.

Given the government’s track record so far, we will of course closely monitor the implementation of this part of the schedule. We will not be opposing this schedule. As I have said, we will not be opposing this bill, but given the government’s track record—and I have outlined in major detail the track record with respect to employee shares, and that is a story that still in our view has a way to go—by next budget it will still be very much a policy area being cleaned up. We will have a sceptical eye on the government’s plans and the tax commissioner’s administration of this. Obviously, the government is assuming that those 11,000 taxpayers will not be applying in large measure for decisions from the tax commissioner. The government is assuming that the Taxation Office is nimble, prepared and able to process these in a timely fashion. The government is on notice—we are not opposing the measure—that it is responsible for the administration of this measure. This government has to realise that just announcing measures and putting out a press release and having a news conference is not policy implementation. Across the board, when it comes to policy implementation, that is where this government is falling down.

Whether it is school halls under the Minister for Education, who has become the master of disaster on policy implementation, no matter which policy area you look at, when it comes to implementation the political leaders of the government lose interest as soon as they have issued the press release. What the government is saying here to the people of Australia is that it has learned from its errors and this will be administered seamlessly, without delay and with a tax office that is fully resourced to look at all of these on a case-by-case basis and, what is more, to do so in an efficient and timely manner. Down the track, if that does not happen, it is on this government’s head for not having the policy administration in mind on such an issue. We are sceptical, but if the government manages to implement this in an efficient, professional way that does not create chaos we will give it credit, but it will be the first time we are giving it credit because it will be the first time it has occurred.

In conclusion, the third schedule of this bill—and this will not take long at all—amends the tax law to require superannuation funds to transfer the money in accounts that are unclaimed or belong to lost members to the Australian tax office if the balance of those accounts is less than $200. It requires that accounts must have been inactive for at least five years and that the superannuation fund must be satisfied they will not be able to find the owners of the accounts. Of course, this is a housekeeping measure. It is a measure that you would expect to see in a tax law amendment bill of this type. It has been some time in the making and, of course, it has our support. As I said at the outset, the coalition will not be opposing the measures in this bill.

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

I speak in support of the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 and related legislation before the House. As the shadow minister said, there are three schedules in relation to this legislation. Schedule 1 deals with fairness and integrity with respect to the tax laws relating to employee share schemes. I must say that I am comfortable with the legislation as it is currently before the House. I am a supporter of employee share schemes. Under existing arrangements, employees who take part in an employee share scheme are required to pay tax on any discount on the market value of a share or right they receive from their employer.

Employee share schemes are good because they allow working people the opportunity to be involved in decision making with respect to ownership of companies, and that is a good thing to engender enthusiasm, commitment and motivation to a workforce. So anything we do to support employee share schemes through tax concessions should be lauded and supported. We cannot, however, upset the balance and allow people to evade tax. The government, after much consultation with unions, stakeholders, employees and employers, have finally got the balance right. I say this because I think that when we do things, say things and announce things in politics, we need to think carefully about it. The government’s intention in the budget was good, noble and right, and I think the legislation before the House today is a better piece of legislation in relation to this particular matter than that which was announced earlier. People who earn $60,000 do not consider themselves rich. We need to give incentives to ensure that employees take ownership of the companies that they work for and that they can participate and get the benefits that employers do.

The legislation ensures that there is means-testing with respect to the $1,000 upfront tax exemption. It provides that the tax exemption will be available to taxpayers with an adjusted taxable income of less than $180,000. Deferral arrangements that apply to a capped salary sacrifice scheme will be limited to $5,000 worth of shares. Eligibility for deferral treatment will flow from the structure of the scheme rather than any choice that an employee makes. The minister and the government have said that removing the employee’s election to defer will decrease the ability to avoid taxation. There is a limitation with respect to the maximum time for deferral of tax from 10 years to seven years. I commend the government for the better reporting measures with respect to shares and rights acquired under employee share schemes at issue and the employee taxing point. That is better. Of course, there is an onus on employees to do that, but that needs to be done by employers if we want to maintain these types of schemes that are beneficial to employees and if we want to maintain the integrity of the tax system. We want to make sure that it is fair and that it supports jobs and investment in nation building and infrastructure. That is the reason that we need to raise taxes. This measure will raise money for the government which will assist people in my local community as well as across the country.

The measures will have effect from 1 July this year. Employees who have already entered into a share scheme under existing law will be covered by transitional arrangements in the legislation. The shadow minister was quite critical of us in relation to this measure, but we have listened and learnt. The consultation process was important. A comprehensive process was undertaken to develop these reforms. We have worked with many people to develop the most effective method by which tax can be paid and not evaded, as was allowed by the previous government.

Schedule 2 deals with non-commercial losses. The proposal is to ensure that non-commercial losses are tightened for high-income earners. One of the experiences I had when I was practising as a lawyer was that many people would come to see me in relation to tax or litigation matters. I would get statements of assets and liabilities. For example, if I were acting in a personal injuries claim or, indeed, a family law dispute or a property settlement, you would find on numerous occasions that they were quite high-income earners, but they had, by virtue of their lifestyle, hobby farms, avocado farms or banana plantations, or they decided that they would run commercial aircraft, because, for example, they had an interest in aircraft and had previously been a pilot so they could do that. But many of these very high-income earners for whom I acted when I was involved in cases were quite open about the fact that they intended to solely make losses with these enterprises. It was solely to offset against the high income they earned from their other businesses or other salaries and entitlements that they got from employers. It was a means by which they could reduce their taxable income.

The truth is they should have been paying tax; they should not have been allowed to do this. We want to make sure by this legislation that only those businesses which are commercial in nature and likely to make a profit are allowed to operate in a way so that people can offset tax losses in those businesses against income earned elsewhere. We do not want the manipulation which can easily happen by high-income earners. They can, by the miracles of modern accountancy and by the fact they have resources available, adjust their affairs in such a way so they can avoid tax that all of us PAYE taxpayers pay.

The integrity of the tax system is at stake. We are not about trying to change genuine business activities. We are not about trying to prevent people who want to pursue avocado farms or banana plantations or run commercial aircraft in a way to make a profit. It is not about that; it is about simply ensuring the integrity of the tax system. It is about treating all Australians equally I think in the circumstances and it is about fairness and justice for all of us.

The four tests do remain. I am not going to repeat those four tests. The shadow minister went through that at length. The existing rules do remain for all taxpayers with an adjusted taxable income below $250,000, and the existing exemptions for primary production and professional artists remain as well. That is important, particularly in an electorate like mine—Blair in South-East Queensland, which is a rural and regional seat that is becoming more regional and rural with the redistribution, although it is taking in more of the city of Ipswich. Having the current arrangements apply to those earning less than $250,000 is important. It means that low-income, middle-income and, indeed, high-income earners can pursue genuine commercial activities, but excessive income earners—if I can put it like that; those earning way above $250,000—will be prevented from manipulating the system.

There is a discretion that the Commissioner of Taxation has. If the business is objectively assessed as being commercial in nature—not just a hobby farm and not just a lifestyle choice but something that is there to make a profit—the offsets can take place. They are entitled to make that application and I think they are entitled to expect the Commissioner of Taxation to deal with that application in a timely way.

This measure will, on the evidence that is before the House, raise hundreds of millions of dollars. Those hundreds of millions of dollars are necessary to do a lot of things, including our community infrastructure package. In my electorate, for example, there is $34.7 million for constructing and repairing social housing, the $124,900 that was recently announced for the Lake Dyer bikeway circuit, the $3.4 million that was recently announced for the lagoon project in Ipswich and even the $2.5 billion for the upgrade of the Ipswich Motorway. We cannot afford these types of things unless we have integrity, fairness and justice in our tax system.

The final thing I want to talk about relates to the third schedule, which is very uncontroversial in the circumstances. It really is about lost members’ superannuation. There is a growing problem as people move from job to job and pick up superannuation in little bits and pieces. They have very small amounts of superannuation, which are lost or often eaten up by fees, charges and administration costs. It is estimated that the reforms in this schedule will mean that government revenues will benefit by $238 million over the forward estimates.

People who have lost superannuation can get it back, but superannuation providers will be required to transfer that lost member’s account from the Commissioner of Taxation to the government. If the superannuation account is lower than $200, as is specified in the schedule, it is going to be chewed up easily by administration fees and just wither away, so transferring it to consolidated revenue is a sensible way to go about it. It does not mean that former holders cannot claim. It does not mean that they cannot get their money back. It does mean that there are some long-term benefits to the Australian taxpayer.

This legislation before the House is not particularly controversial. It does bring about some justice and fairness in the tax system and improves integrity. It means that higher income earners cannot adjust their affairs in a way that low-income earners cannot. It means also, with respect to employee share schemes, we have a better balance when giving incentives to employees to participate and have ownership in businesses, which is a great thing in the free market system that we have. It also means that people cannot manipulate their employee share schemes in a way that evades tax.

Most of the legislation that we put forward in this House in relation to tax is noncontroversial but it does improve the tax system, and that is good for all of us. Any way that we can reduce the Income Tax Assessment Act and improve the tax legislation in this country is of benefit to us and those who come after us. I commend the legislation before the House.

Craig Emerson (Rankin, Australian Labor Party, Minister Assisting the Finance Minister on Deregulation) Share this | Link to this | Hansard source

I would like to thank those members who contributed to this debate on the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 and the Income Tax (TFN Withholding Tax (ESS)) Bill 2009. Schedule 1 of the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 amends the tax laws to improve the fairness and integrity of the taxation rules that apply to shares or rights granted under an employee share scheme. The government has consulted extensively on these reforms and worked with stakeholders to develop the most effective and workable reforms while maintaining the current support for employee share ownership schemes, particularly for low- and middle-income workers. Tax on the discount for shares and rights acquired under an employee share scheme will be paid upfront, except where there is a real risk of forfeiture or where it comes from a capped salary sacrifice base scheme and the scheme satisfies the existing conditions for a qualifying employee share scheme.

These reforms will better target the employee share scheme tax concessions to low- and middle-income earners and decrease taxpayers’ ability to evade or avoid tax. The new rules will also protect Commonwealth revenues, which are vital to supporting jobs and investing in nation building. The changes will boost integrity through reporting. Employers will be required to report shares and rights acquired under an employee share scheme both at issue and at an employee’s taxing point. The new measures better target support to low- and middle-income earners by introducing an income test to the upfront concession. The $1,000 upfront tax exemption will be means tested and will only be available to taxpayers with an adjusted taxable income of less than $180,000 a year, in line with the top marginal tax bracket.

Corporate governance will be improved by requiring schemes to feature a real risk of forfeiture to gain access to the deferral tax concessions. Eligibility for the deferral treatment will flow from the structure of the scheme rather than from a choice made by an employee. Removing the employee’s election to defer will decrease the employee’s ability to avoid tax.

Schedule 2 protects the integrity of the taxation system by preventing abuse of the non-commercial losses rules. This measure was announced by the Treasurer in the 2009-10 budget. Taxpayers with an adjustable taxable income over $250,000 will no longer be able to automatically apply losses from non-commercial business activities against their other income. They will now have to apply to the Commissioner of Taxation and demonstrate that their business is commercial in nature. The bill and the explanatory memorandum provide certainty to taxpayers about what information they can use when applying for discretion and what factors the commissioner will look at to determine whether a business is commercial in nature. The Income Tax (Transitional Provisions) Act 1997 is also amended to clarify the status of discretions granted before the commencement of this schedule and to recognise the government’s small business and general business tax breaks.

Schedule 3 requires superannuation providers to transfer the balance of a lost member’s account to the Commissioner of Taxation where the account balance is less than $200 or where the account has been inactive for a period of five years and the provider is satisfied that it will never be possible to pay an amount to the member. This measure excludes accounts that support or relate to a defined benefit interest. The first transfer will occur early in the 2010-11 income year. At present, lost account balances are only paid to the commissioner in very limited circumstances. This measure will help to address the growing problem of lost superannuation accounts, potentially reducing the number of such accounts by 40 per cent. This measure also assists providers, as they will no longer need to administer or apply member protection to small accounts that are transferred. This will improve equity for other fund members. Individuals who have their accounts transferred to unclaimed moneys will be able to reclaim these amounts from the commissioner. The mechanism proposed to achieve the payment of lost superannuation accounts to unclaimed money is similar to that currently used for the payment of unclaimed money from superannuation providers to the Commissioner of Taxation. This measure will result in a gain to government revenues estimated at $238 million over the forward estimates by bringing forward the payment to unclaimed moneys of accounts which are unlikely to be claimed. I commend this bill to the House.

Question agreed to.

Bill read a second time.

Message from the Governor-General recommending appropriation announced.