Andrew Murray (WA, Australian Democrats) Share this | Hansard source

The Tax Laws Amendment (2005 Measures No. 6) Bill 2005 is a conglomeration of amendments that pertain to the 1936 and 1997 income tax assessment acts. The Democrats support this bill. Arranged into five schedules, the bill deals with amendments to loss utilisation, the mutuality principle for not-for-profit entities, changes to child-care tax offset provisions, an update to the medical expense offset and changes to the status of deductible gift recipients.

Schedule 1 amends the legislation governing loss utilisation. Specifically, the amendment seeks to clarify the rounding method to be used for the available fraction method of loss utilisation for amalgamating and consolidating corporate entities. I must admit to being surprised to note that the seemingly innocuous clarification of assigning a three decimal place rule and standard rounding provisions can lead to a cost to revenue of $7 million over three years. Indeed, this figure is a reminder of the scale of potential losses that companies seek to utilise for taxation purposes. For, if a simple amendment to the third and fourth decimal places of the rate at which the head company of a consolidated group can recoup adjoining entities’ losses can lead to a $7 million cost to revenue over three years, one can only speculate on the dollar value of significant changes to this rate.

Schedule 2 clarifies the application of the mutuality principle for not-for-profit entities. The mutuality principle provides that, where a number of persons contribute to a common fund that is created and managed as a common interest, any excess earnings that are generated from the use of the fund are not to be considered income for the purposes of taxation. The mutuality principle recognises that amounts are not derived for income tax purposes unless they are received from an external source—that is, amounts contributed by associate members of a not-for-profit entity should be tax exempt.

The legislative amendments in schedule 2 stem from the outcome of the Coleambally Irrigation Mutual Cooperative Ltd v Commissioner of Taxation case—otherwise known as the ‘collywobbles’ case; no, it’s not! In this case, it was ruled that Coleambally could not rely on the mutuality principle to reduce their assessable income derived from sinking fund contributions. According to the findings of the Federal Court:

... where there was a lack of identity between the contributors and participants in the co-operative the mutuality principle did not apply, and the sinking fund levy contributions were assessable income …

This lack of identity between contributors and participants resulted from the use of an intermediary NFP—not-for-profit—organis-ation between the members and the Coleambally cooperative. According to the government, this is in direct conflict with the intent behind the mutuality principle to provide tax relief for mutual type transactions made by not-for-profit organisations. In this particular case, while that may be so—and I have an open mind on whether it is so—the concern that I and the Democrats wish to raise is the increased potential for rorting that the loosening of the definition for distributing surplus funds may create. What the court was saying, in fact, is that the mutuality principles are too loose—and I agree. According to the explanatory memorandum to the bill:

These amendments ensure that not-for-profit entities are not subject to income tax on ordinary income from their members solely because they are prohibited from distributing surplus funds to members. Ordinary income of a not-for-profit entity from members that, but for clauses prohibiting distribution of funds to members, would have been mutual receipts is non-assessable non-exempt income.

It is extremely dangerous territory when you start to see mutuality principles allowing for surplus funds to go to members, because that is a means of providing tax exempt income. I think this is a very dangerous concept.

A core feature of the efficient and virtuous functioning of mutuality is the prevention of distributing surplus funds to members. Those funds should in fact remain within the entity unless the entity is closed down. By creating a loophole in the law to allow for an exemption to this core feature of mutuality, the government is unnecessarily risking further abuse of the system. Despite its problems, the Democrats and I do consider the provisions of the mutuality principle to be a necessary and beneficial tax concession for thousands of community based organisations, and we do support that tax concession continuing, but to my mind it is these small community based organisations for which the application of the mutuality principle was originally intended. However, we also believe that it is a very costly tax abuse in the hands of otherwise very large commercial business enterprises.

For over eight years, I and the Democrats have been campaigning for tax reform in this area. I draw the attention of the chamber to previous adjournment and other speeches I have made on this matter and the prospect of a recovery of probably between $200 million and $350 million to revenue if the mutuality principle were tightened up. And if the Super League and other enterprises operating effectively as businesses were taxed as the private sector is taxed, as they should be taxed, then we would have a saving and a tighter regime. The Democrats have got nowhere with this campaign because this government does not have the courage to address a system which is being rorted. I consider it to be an inequitable abuse of a necessary tax concession which should apply to ordinary not-for-profit entities.

The mutuality principle needs to be defined and administered much more tightly, not relaxed and opened up to yet more abuse and misapplication. The net effect is that, because this government supports a continuation of a tax concession abuse, even though it is legal—an abuse of the spirit and intention of the mutuality principle—the rest of Australia ends up paying more tax than they should or not having the revenue available to spend on more services.

I encourage the Labor Party to have a much deeper and closer look at how the mutuality principle operates in effect. There is no reason in my mind why clubs and others that have multistorey hotels, shops, businesses and offices all over the world and that generate huge incomes should be benefiting from the mutuality principle, which in my mind is available to help junior soccer clubs and that sort of activity.

Schedule 3 proposes a concession to the recently introduced child-care tax offset. Eligibility for the child-care tax offset is dependent on contemporaneously meeting the eligibility test for child-care benefit as updated by the Family and Community Services Legislation Amendment (Welfare to Work) Bill 2005. Before I give a brief analysis of the schedule, I must digress to highlight the fact that we are here today reviewing two pieces of legislation that were passed by the coalition government through this place no less than four months ago. ‘As you sow, so shall you reap’ is an apt phrase for ‘if you push through legislation without proper review’, because we are again in the process of fixing up legislation which in some respects was poorly constructed. It did not benefit from a strong Senate review process, and it is a piece of legislation that does require amending because the government has disdain for due process in this place and is determined to have its way without regard to the very effective and beneficial mechanisms of a full Senate review. That is a waste of resources, it is an inefficient mechanism and it does cause angst among affected members of the business community and ordinary communities who unnecessarily suffer when confusion and corrections result from what I would describe as a policy of unilateralism. It is not a credit to the Howard government that that is occurring.

As I have already stated, the amendment proposed by this bill seeks to introduce a concession to the eligibility requirements for the child-care tax offset by way of exempting families who would have been eligible for the offset but for the introduction of the more onerous eligibility test introduced by the Welfare to Work bill. Otherwise stated, the government now acknowledge the harshness of the new eligibility regime that they themselves introduced, and they are seeking to dilute its effect. At least they have had the good grace to recognise the problem and address it.