Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Hansard source

We are dealing with the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 a little earlier than the Labor opposition and I anticipated. We have to some extent debated the circumstances of us dealing with this a little earlier than we anticipated, but I want to strongly reject the comments made by Senator Bob Brown and the implications of some of his comments in his contribution a few moments ago. He referred to the Labor Party as being compliant. I have already outlined the circumstances in which we believe it is reasonable that we now move to this piece of legislation. It is not a matter of compliance on the part of the Labor opposition. Senator Brown used the word ‘compliance’ and that implies unreasonable acceptance. It is not unreasonable in the circumstances we are faced with in dealing with the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 and in dealing with the other legislation when it comes along once the running sheet has been dealt with. Senator Brown accuses the Labor opposition of shrugging its shoulders and complying with the Prime Minister’s wishes. That is not the case. No-one has fought harder to hold this Liberal Howard government accountable on a whole range of fronts, particularly since the government gained a majority in the Senate, than the Labor opposition has.

Once again, we saw the pique of Senator Brown on display earlier when he advanced an unfair and unreasonable argument. That is what we usually see from Senator Brown. He is the centre of the world, he is the one holding the government to account and no-one else is doing their job. That is totally wrong, and I reject that on behalf of the Australian Labor Party. I would have thought Senator Brown would have learned a lesson from the election last Saturday. I would have thought he would have learned a lesson in graciousness and manners in terms of politics. Unfortunately, he is not here in the chamber, and I do not want to unnecessarily prolong the debate tonight.

However, when a senator has to go to hospital and is ill and is vitally interested in a piece of legislation, it is not unreasonable to defer that legislation. What would Senator Brown have us do if he were ill and had to go to hospital and he wanted to make a contribution on a piece of legislation? I certainly believe the Labor Party would give that reasonable consideration and agree to deferring a piece of legislation that he was vitally interested in. That is why we have had the flow-on consequences and have had to defer the earlier legislation and move on to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006.

Let me move to the bill. Firstly, Labor will be moving an amendment to this legislation in the committee stage. I want to deal very briefly with the amendment in principle that I will be dealing with in detail in the committee stage. Labor has chosen the Tax Laws Amendment (2006 Measures No. 1) Bill to move an amendment designed to close a loophole in the tax law that might permit an AWB type kickback payment to receive a tax concession. We have had a massive scandal in recent months. It would have to be the most significant bribery case, I think, in the history of Australia. The very fact that kickbacks of such significance have taken place at all is extremely embarrassing for this Liberal government. Funding the former Iraqi regime while Australian troops were deployed against it through bribes for guns, effectively, is absurd and is an extremely serious matter.

What has come to the light in the Cole inquiry is that the AWB claimed its $300 million kickback as a tax deduction. This is absolutely outrageous in any moral or ethical terms, as the payments made were clearly bribes in the ordinary, commonly understood sense of the word. But what is even more concerning is that this payment is attracting a tax deduction. We spent some time on this issue at the recent Senate estimates. The payments made were claimed as an expense. Although the Taxation Office could not go into the detail of the specific case, we spent some time at estimates examining this issue in principle—and I think Senator Murray, who is in the chamber, was there at the time. The AWB over a number of years would have claimed these payments that are effectively bribes as a tax deduction, deductible against a number of their years of annual tax returns.

I note from that evidence that the tax office sent an official to spend some days, I think, sitting in on the Cole inquiry. I can only presume that is to get first-hand some of the evidence being presented to establish prima facie that, once the Cole inquiry is completed, whatever those findings may be, the tax office will be required to take further action and certainly, I hope, readjust the tax claims for the relevant years in which bribes were paid and collect the tax owing on behalf of the Australian people. Including the penalty, that will be a very significant sum of money.

Australia is a signatory to the OECD anti-bribery convention of 1997, which calls on bribes to be made illegal; therefore, of course they are not tax deductible. The convention raises significant criticisms of so-called facilitation payments. The words used in the convention are that such payments are a ‘corrosive phenomenon’. Such payments are effectively small bribes used to smooth the wheels of government. When the government gave effect to the anti-bribery convention and made amendments to the Criminal Code and the tax law in 2000, it permitted a facilitation payment to be a defence against the criminal charge of bribery, sufficient to make such an expense deductible.

The tax act and Criminal Code mirror each other identically except for two points. This could prove crucial in any reassessment of AWB. The two points are that the Criminal Code requires that the payment be minor in value and records be kept. The tax act has the same definition in it but no monetary restriction or record-keeping references. This has been noted by the OECD. It has not just been noted by the Labor opposition. The issue of record keeping is something that the ATO has been specifically asked to address by the OECD. This is not an amendment that the Labor Party is arguing for without supporting evidence. It is the OECD—a very credible and authoritative organisation that we hear much of and that is quoted from time to time by the current government—that has drawn Australia’s attention to what on the face of it are quite small differences between the Criminal Code and the tax act.

The OECD has indicated there is no reason why the tax act would not include ‘minor in value’ in the definition of facilitation payments. This language is present in the convention, and failure to replicate it in Australian law places Australia in technical breach of the convention. What is more concerning is the obvious point as to why anyone would oppose the clear argument that for such kickbacks not to be deemed bribes they must be minor in value. Without this a $300 million AWB type payment could possibly be deductible. This is of great concern to the Labor opposition.

We know the government will not agree to this. They rejected Labor’s amendment in the other place earlier this evening. They have decided that facilitation payments need not be minor in value for the tax act but must be minor in value for the Criminal Code. This is a strange asymmetry that simply creates confusion and uncertainty which does not exist in comparable jurisdictions like the United Kingdom. The government have rejected Labor’s amendment in the House to align the codes. They say they do not support AWB’s behaviour, but this appears to the Labor opposition to be no more than hollow rhetoric. We have seen a lot of that from the government in respect of AWB over the last few months. Labor will be strongly pressing its amendment in respect of this issue later when we get to the committee stage.

The Minister for Revenue and Assistant Treasurer, Mr Dutton, in the House indicated that the tax commissioner believes that the language ‘routine in nature’ in the tax act is enough to restrict the issue to payments that are minor in value. This is a strange point. Something can clearly be minor in nature, like a port fee, but high in value, like $300 million. The UK tax act does not have a specific and different definition for facilitation but only uses the definition in the crimes act. This is clearly the better model.

I will deal briefly with the schedules in this legislation. The first schedule in the bill seeks to remove the harsh penalties and permits for, and give additional concessions to, nonresidents working in Australia in relation to their foreign source income. Australia currently imposes punitive measures on nonresidents or temporary residents who work in Australia but have significant foreign source income. These tough provisions have had a negative impact on foreign sourced executives and some high-skilled professionals. Under the current provisions a resident who becomes a nonresident triggers a capital gains tax event and deemed disposal rules apply. Unrealised gains on assets without a connection to Australia are deemed to be realised and capital gains tax applies.

An exemption applies for short-term residents of less than five of the last 10 years. Tax can be deferred until realisation with subsequent gains assessable. Under the UK and US double tax treaties such gains subsequent to a residency change are not assessable. In the Taxation Laws Amendment Bill (No. 4) 2002 the government introduced an exemption for temporary residents from Australian tax on foreign source income, including interest withholding and capital gains, for four years. The relevant schedule was removed from the bill in the Senate and the amendment bill passed in the House.

The rationale for the government’s proposal was that the high marginal tax rate in Australia meant that the Australian tax on foreign source income was higher than the tax the expatriate would pay overseas on the same income. This could undermine attempts to attract key personnel from offshore, something which many businesses have been forced to do because of the government’s inaction in respect of local skills shortages. If we cannot get local labour then we must look overseas, but the tax penalties, certainly for some occupations, make it extremely difficult to do this.

The current bill has three impacts: (a) it removes the deemed disposal rules for temporary residents for assets without a concession to Australia without the five of 10 year rule outlined above, (b) foreign source income from temporary residents is excluded for income taxation indefinitely, and (c) temporary residents do not pay tax on interest income received overseas. These measures have the strong support of the business community. The Labor Party has considered them on their merits and likewise believes they should be supported. Moreover, their implementation will ease the current skills crisis we are facing as a nation. There are also economic benefits associated with reducing impediments to skilled foreign employees taking up positions in Australia. This will in some measure boost labour productivity in important sectors.

The second schedule targets black hole expenditures, which are expenses of a capital nature usually excluded from deductibility but for which a special case for deductibility can be made. The bill really extends deductibility for expenses associated with setting up a now defunct or changed entity. This measure is not about loss carry-forward provisions but about deductibility of expenses for an entity that is now nonexistent. The expenses do not meet the loss carry-forward provisions. Some tests still need to be met to claim the deductions. Labor believes the bill has been written with James Hardie in mind to provide that the James Hardie payments to the compensation fund for asbestos victims will be eligible for a tax deduction. Labor supports this because it clarifies a significant uncertainty in tax law.

The third schedule is about tax promoter penalties. It is the measure to empower the Commissioner of Taxation to impose penalties on promoters of tax minimisation schemes. At the moment the commissioner cannot do this but can only hit the victims of such schemes after the event. This has led to the debacle of mass-marketed tax schemes and employee benefit arrangements, where thousands of taxpayers have been victims of exploitation from aggressive tax minimisation strategies with penalties attached. The bill now empowers the tax commissioner to seek significant fines from the actual marketeers of the schemes and to get an injunction from the Federal Court to stop the schemes being promoted. This gives no relief to previous victims and the 60,000 taxpayers who have been adversely affected by schemes. It comes some five years too late.

The major problem with the current measure is the uncertainty it creates. Advisers who advocate legitimate tax reduction arrangements will now be forced to seek a tax ruling to ensure that they are not covered by the arrangements and slip from being an adviser to a promoter. This will significantly increase ATO costs. The current estimate of an extra $7 million per year in costs could prove to be conservative. Labor would like some indication about whether there is sufficient funding to ensure the rulings sought could be dealt with expeditiously.

While I am on this matter, it is about time the tax office paid greater attention to self-managed superannuation funds. I know it is a different issue, but we have recently had the appalling scandal of Westpoint, where a number of promoters—planners—encouraged individuals, through self-managed superannuation funds, to invest in Westpoint entities. Some hundreds of people were, I think, very poorly advised—and that is a mild description—and the tax office to date has not bothered to check one of those self-managed superannuation funds to see if they complied with the current law in respect of Westpoint. This is a very serious issue indeed. There has been significant comment about it in the media and it will continue due to what is, I think, poor oversight across the board, including by the tax office.

The fourth schedule is about the GST on prepaid phones. Prepaid mobile phones often provide a myriad conditional benefits, such as free SMS, discounts or cash-back deals. This has created some uncertainty as to how to levy the GST on these products, which are essentially vouchers to make a certain number of calls at varying rates and at varying times. The easy way to deal with this is to simply specify that the stated value of the voucher is the GST taxable supply.

In conclusion, Labor supports this bill. It makes necessary clarification and it will increase GST revenue by about $10 million a year. Senator Murray may be able to help me because he is an expert on the GST. We are up to about 1,693 amendments to the GST. Senator Murray, we could have had fewer if you had been on the ball when you agreed to the GST. Nevertheless, we continue to clean up that mess all these years later. Labor will be supporting the bill and we will be arguing for our amendment in the committee stage. I think Senator Murray is moving an amendment and I will comment on that in the committee stage as well.