Julie Owens (Parramatta, Australian Labor Party) Share this | Link to this | Hansard source

On behalf of the Standing Committee on Economics I present the committee's report entitled Advisory report on the Tax Laws Amendment (2011 Measures No. 8) Bill 2011 and the Pay As You Go Withholding Non-compliance Tax Bill 2011, incorporating a dissenting report, together with the minutes of proceedings.

I ask leave of the House to make a short statement in connection with the report.

Leave granted.

The Tax Laws Amendment (2011 Measures No. 8) Bill 2011 and the Pay As You Go Withholding Non-compliance Tax Bill 2011 propose four sets of changes to the tax laws. Two of these changes generated stakeholder interest and were pursued by the committee in the inquiry. The first item of interest was the changes to the petroleum resource rent tax, which has been the subject of dispute between Exxon Mobil and the Australian Taxation Office. The dispute revolves around the definition of a marketable petroleum commodity, which affects where the taxing point occurs. The later the taxing point, the more valuable the commodity being taxed.

Since the petroleum resource rent tax is a tax on profits, a later taxing point involves more tax. The issue about these amendments is that they apply back to 1990-91, which raises the question of whether this retrospectivity is warranted. Parliaments do legislate retrospectively from time to time. The important point is that retrospective legislation should be fair and provide certainty. In this case, the committee is confident that this applies. The bills implement the original policy intent, which applied 20 years ago, and reflect how the PRRT has operated since that time, including how Exxon Mobil has lodged its tax returns and paid tax. Further, Treasury provided the committee with a time line of the dispute, which demonstrates that successive governments have consistently interpreted the legislation in this way.

The second aspect to the bills was the changes to tax penalties for company directors for the superannuation guarantee charge, which had been motivated by the activities of phoenix operators. These companies build up debt, become insolvent, liquidate their debts and then continue the business through a new company that will eventually go through the same process. The problem addressed in these bills is that the companies are insolvent partly because they are carrying debts for their staff entitlements, including superannuation. Millions of dollars of employees' superannuation is lost every year through this practice. The ATO is on the record stating that it has insufficient legal powers to enforce the superannuation guarantee charge. Recovering the amounts is also difficult in practice because of the long delay in the ATO becoming aware of the nonpayment.

Phoenix operators enjoy an unfair competitive advantage over their competitors who do the right thing. The crude nature of this business model is reminiscent of the bottom-of-the-harbour schemes of the early 1980s. Broadly, the bills make company directors liable for their company's superannuation guarantee debt. The bills also remove the requirement for the ATO to issue a 21-day director penalty notice before commencing legal action on a company director. The 21-day period is problematic because phoenix operators promptly cause their company to go into voluntary administration shortly after receiving their notice, which prevents the ATO taking further action against them. In general the committee supports these provisions because they take penalties that already successfully apply to the PAYG system and extend them to superannuation. Employers' obligations in relation to super remain the same; what will change is that these obligations will now be more rigorously enforced.

However, at the hearing, business groups expressed concerns about the provisions because they wanted to ensure that honest company directors would not be caught up in them by accident. The committee accepts that directors who act in good faith should have some comfort that they will not be subject to the provisions. The committee recommended that the government investigate whether the Tax Laws Amendment (2011 Measures No. 8) Bill 2011 should specifically better target phoenix operators and whether the defences in the bill should be expanded. Because of the work involved in this the committee has recommended that schedule 3 of the Tax Laws Amendment (2011 Measures No. 8) Bill 2011, which contains the phoenixing provisions, should be deleted so that the remainder of the bill may pass and that the Pay As You Go Withholding Non-compliance Tax Bill 2011 should remain pending while the government completes its investigations.

I thank the organisations which assisted the committee during the inquiry through submissions or participating in the hearing in Canberra. I thank the secretariat, who did some extraordinary work under very short timeframes. I also thank my colleagues on the committee for their contribution to the report.

Kelly O'Dwyer (Higgins, Liberal Party) Share this | Link to this | Hansard source

by leave—I rise to speak on the report into the Tax Laws Amendment (2011 Measures No. 8) Bill 2011 and the Pay As You Go Withholding Non-compliance Tax Bill 2011. I speak on behalf of the coalition members of this committee. I endorse the comments that were made by the chair in that the secretariat of the committee has worked incredibly hard in a very short space of time to be able to deliver the report and to conduct the inquiry. We do thank them for their work on that.

Schedule 1 of the bill relates to the commissioner's discretion regarding certain income of primary production trusts. The coalition does support schedule 1 of this bill giving the tax commissioner discretion in relation to taxation of income from primary production trusts. I note that this amendment to the tax laws is an amendment which the opposition recommended to the government, and we commend the government for taking up our suggestion and acting in good faith in progressing it. In context, this schedule returns the law to the position prior to the introduction of the Income Tax Assessment Act 1997. It relates to sections 385E, 385F and 385G of the Income Tax Assessment Act 1997, which amongst other things allows primary production trusts to defer taxation liabilities on profits from the sale of livestock in years where they have been affected by drought, flood, fire or disease.

Under the current law, if any beneficiary of a trust dies, then this tax liability cannot continue to be deferred. In effect this means that a primary production trust can be liable for a large and unexpected tax liability in the event of an untimely death. A tax liability is triggered on the death of any beneficiary of the trust regardless of whether the deceased beneficiary is presently entitled to the income from the deferral. This would seem to serve no public policy interest and instead compound personal grief.

Under the previous 1936 Income Tax Assessment Act the Commissioner of Taxation had discretion over whether a death would trigger a tax liability. The change to remove the discretion was made as part of a general limiting of discretion but has led to unforeseen and harsh consequences for family farm enterprises. This change to the taxation law was proposed by the opposition, as I have mentioned before, to correct this. The government has accepted this change as sensible, and, again, we do commend the government for that.

Before moving to schedules 2 and 3, I go to schedule 4 where we are also in agreement with the government. Schedule 4 is a consequential amendment regarding the tax on gaseous fuel. Schedule 4 seeks to clarify the treatment of LPG (liquefied petroleum gas), LNG (liquefied natural gas) and CNG (compressed natural gas) following the introduction of the taxation of alternative fuels legislative package, which received royal assent on 29 June 2011. In particular the changes confirm that excise does not apply to CNG for transport use manufactured in a home refuelling unit on a non-commercial scale. It confirms that fuel tax credits are available to distributors of LPG in a wider range of circumstances. It is a clarification which the coalition supports.

I now move onto where the coalition members diverge from the government members on this committee. I turn to schedule 2, the taxing point for the petroleum resource rent tax. The petroleum resource rent tax is a profit-based tax which is levied on petroleum projects, except the North West Shelf project, in Commonwealth waters. Schedule 2 of the bill seeks to clarify the taxation point of the existing PRRT regime in two main respects: firstly, in amending the definition of a 'marketable petroleum commodity' and, secondly, in applying that definition retrospectively from 1 July 1990.

The Bass Strait ExxonMobil project is the only project that will be affected by this change. Since the Bass Strait project was brought into the PRRT regime in 1990-91, the taxation point and other matters have been the subject of an ongoing dispute between the Australian Taxation Office and Esso Australia Resources Pty Ltd, which is a wholly owned subsidiary of ExxonMobil Australia Pty Ltd. Earlier this year the Federal Court handed down a judgment in favour of the ATO. The single-judge decision is the subject of an appeal by Esso. A directions hearing of the full Federal Court has been set for the week of 7 November 2011. Before the coalition lost office in 2007, the fiscal position of the government was strong. The coalition left no net debt for the incoming Labor government, having eliminated the $96 billion of net debt it had inherited from the previous Labor government. The coalition instead left a surplus of $20 billion and a $60 billion investment in the Future Fund. In the May budget 2010-2011, the Treasurer announced a deficit of $49.4 billion and net debt of $107 billion. At the time that the Treasurer announced his fourth deficit, he also announced his intention to legislate retrospectively on the disputed taxation point of the PRRT.

The government claims that there will be no fiscal impact if the bill is passed. This is only half correct. Evidence was provided to committee that Esso has been paying the PRRT on a conservative basis while pursuing its dispute with the ATO through the legal process. Esso provided evidence that, if the bill is not passed and they are ultimately successful in their legal appeal, there will be very real fiscal implications for the government—that is, the ATO may be forced to refund up to $323 million of paid tax to Esso. Esso's partner, BHP, would also be entitled to a refund of a similar amount. It concerns the coalition members that the government appears to be interfering in a long-running legal dispute motivated by a need to shore up its fiscal position. The coalition notes that the fiscal position of the government has deteriorated over the last four years due to the government's poor economic management.

It is a longstanding principle in tax law that tax legislation should apply prospectively, not retrospectively. Mr Yasser El-Ansary, Tax Counsel of the Institute of Chartered Accountants in Australia, the ICAA, stated in evidence that schedule 2 of the bill:

... threatens the longstanding principle of protecting taxpayers from the need to introduce retrospective tax laws when they have attempted to comply in good faith with the spirit of the law that has been in existence.

Evidence was provided that, while there are some examples of retrospective tax laws, they are unusual and generally fall into one of two categories: first, blatant anti-avoidance cases; and, second, being retrospective only insofar as it applies from the date of announcement rather than the date of enactment.

The Chairman of ExxonMobil, Mr Dashwood, stated in evidence to the committee that schedule 2:

...effectively curtails ongoing litigation between the ATO and Esso. The 2011 budget announcement seeks to reach back 21 years and change the law retrospectively.

Neither the Law Council nor the ICAA could point to an occasion in Australia's recent history where the parliament has sought to pass legislation to amend the law as far back as 21 years.

Another issue raised in evidence was that pertaining to sovereign risk. The Law Council, the Business Council of Australia, the Tax Institute, ICAA and the Australian Institute of Company Directors all provided evidence to the committee that the retrospective nature of the tax change, and the fact that the change goes back 21 years, is unprecedented. A number of organisations and individuals, including the Australian Petroleum Production and Exploration Association, also gave evidence and provided submissions that significant retrospective tax laws give rise to sovereign risk concerns.

This evidence is best summarised by Mr Dashwood from Esso, who stated that schedule 2 of the bill:

... disregards consistent advice received by governments past and present about retrospectivity in tax legislation and will damage Australia's international reputation and perceptions of sovereign risk in this country. It may well cause some investors to consider whether Australia is an appropriate destination for the mobile capital, especially at a time when international capital markets are extremely tight.

This, of course, is not the first time that concerns have been raised about sovereign risk and tax legislation. At the recent Commonwealth Business Forum in Perth, the Chief Executive of South African goldminer AngloGold Ashanti, Mark Cutifani, was the latest business figure to voice concern, stating that Australia is:

... one of the top sovereign-risk countries in the world on the basis of government policy and its demonstrated behaviour in terms of taxation policy and its inconsistency in policy.

The coalition notes that a perception that Australia is subject to sovereign risk concerns will damage our ability to attract capital investment, thus damaging our economy.

The final point about this schedule that was of concern to the coalition committee members is the fact that there is legal action currently afoot. It is highly unusual for a government to intervene in an ongoing legal dispute when that dispute is in the final stages of appeal. The ICAA argued that the government would be clearly:

... usurp [ing] the role of the judiciary by amending tax laws partway through a major litigation that is seeking to test certain key concepts embedded in the PRRT regime.

The ICAA also noted in its submission:

... the separation of powers as between the legislature and the judiciary is a fundamental doctrine embedded within the constitutional arrangements that underpins the integrity of Australia's governance arrangements. For the most part this separation doctrine has been adhered to by parliaments, the judiciary and the executive for many decades.

In order to protect the separation doctrine, it would be more appropriate for the government to allow the current litigation to be concluded and then to determine what course of action may be appropriate at that point in time. Not allowing the judicial process to reach its natural conclusion is seen by the Institute as an inappropriate interference in due process, which we believe would set a problematic and perilous precedent for further action of a similar nature in the future.

The Business Council of Australia cautioned that such an intervention would create a 'grave precedent'. Given that no explanation has been provided to the committee by the government as to why it has intervened in this way, at this time the coalition shares the concerns that have been expressed.

This leads to our first recommendation in the dissenting report:

The Coalition believes that schedule 2 of the bill violates a long standing principal in tax law, namely that tax laws should, with few exceptions, be prospective rather than retrospective.

The Coalition is concerned that capital investment in Australia may be impacted by sovereign risk concerns as a result of the Bill's retrospective application of the tax law going back 21 years.

Finally, the Coalition believe that the long running legal dispute between Esso and the ATO should be allowed to run its course through the court process.

For the reasons outlined above, the coalition recommends, and we will be moving an amendment, that schedule 2 be removed from the bill.

I now turn to schedule 3, where directors are to be made personally liable for unpaid superannuation and PAYG withholding tax. The coalition members do agree with the government members that fraudulent phoenix activity is abhorrent, as is the deliberate nonpayment of employee superannuation entitlements. The coalition members also agree with government members that the bill as currently drafted may result in unintended consequences and requires further work to address concerns raised by the Council of Small Business of Australia, the Institute of Chartered Accountants in Australia and the Australian Institute of Company Directors in particular.

For those reasons, the coalition recommends that, until that work has been completed and the concerns satisfied, schedule 3 be removed from the bill to allow the government to address the issues raised by stakeholders. A further schedule can be brought forward when another tax bill comes before the House.

In conclusion, this is the view of the minority: the coalition members on the House of Representatives Standing Committee on Economics. Again I place on the record my thanks to the chair and to my fellow committee members for taking the time and doing the hard work, along with the staff of the secretariat, who supported our committee to ensure that we were able to meet the time line set by the government.