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

I speak on this piece of legislation on behalf of the opposition. This is yet another tax omnibus bill that contains a variety of provisions. Firstly I wish to outline some aspects of the provisions contained in the Tax Laws Amendment (2006 Measures No. 4) Bill 2006. Firstly, schedule 1 deals with marriage breakdown rollover. Current law provides for the capital gains tax rollover from the sale of property caught by court order or court approved maintenance agreements occurring as a result of marriage breakdown. There is a problem with CGT treatment as a result of a binding agreement not approved by a court but still consistent with current family law.

The classic case is where a prenuptial agreement exists. This could mean that one party to the former marriage would be able to rent the former family home in a manner that would change the apportionment between the capital gains tax free component of the former family home and the assessable component in the event of a sale. One party could potentially use the current law to influence the capital gains tax treatment of the former family home to the possible detriment of the other party. The amendment is designed to ensure that both parties’ situations are taken into account when calculating how much of the property is capital gains tax free. The law also clarifies the fact that marriage breakdown settlements do not give rise to CGT liabilities. The schedule is a necessary policy change.

Schedule 2 deals with consolidation. The consolidation regime applies where two associated companies elect to be treated as a single entity for tax purposes. Companies can sometimes split or demerge. However, to protect against tax avoidance, current law provides that major transfers of assets just prior to the demerger are ignored. This was to ensure that the demerger was not used to manipulate the cost-setting rules that value assets of the group and reduce tax. In this case, the demerger would be unwound and the previous position would apply for tax purposes. However, if the demerged entity or parts of it then remerge, they would be captured by these integrity provisions and the whole transaction would be unwound for tax purposes. However, the remerger is not tax avoidance and should not be part of the integrity measures. This change modifies the integrity rules to ensure that the remerger is not caught by this provision.

The change appears to be a reasonable correction of a problem but seeks to highlight the confusing nightmare that the consolidation provisions entail. This is at least the 12th time that these matters have been refined since introduction. The repeated amendments to the consolidation regime themselves now need to be consolidated. I repeat the position that Labor have put before the parliament: it would better for a major consolidation bill to be considered by the parliament. The process of considering amendment after amendment to this complex body of tax law does not reduce complexity; it certainly increases compliance costs and is against the broad thrust of seeking to reduce the size and complexity of the tax act. If the Treasurer were serious about reducing the complexity of the act he would do well to consider this proposal.

Schedule 3 simplifies the imputation system for New Zealand companies. Many New Zealand companies operating in Australia elect to be part of the Australian imputation system. But there are problems in allowing the imputation credits to flow to Australian companies as some dividends are non-portfolio dividends—less than 10 per cent shareholding—or otherwise exempt. Harmonisation of the two imputation systems is desirable and these provisions permit the franking credit to apply to non-portfolio dividends.

The original measure to allow cross-Tasman imputation recognition did have a cost in excess of $50 million per year. This bill corrects an unforseen event and therefore gives effect to the original costing. Still, the measure as written has a cost, even if already included in a previous explanatory memorandum to a previous bill. It should have been given in the explanatory memorandum to this bill. This is yet another example of a costing deficiency in the explanatory memorandum to a tax bill.

Schedule 4 deals with non-resident capital gains tax. Schedule 4 seeks to align Australian international tax arrangements with the model OECD treaty in relation to taxation of capital gains for non-residents. Labor supports the policy intent in principle but is concerned that the reduction in the capital gains tax base for non-residents is significant.

This is a complex and controversial measure with two major impacts, and its total cost is $300 million over the forward estimates. The first measure involves a significant tax concession to foreign companies operating in Australia by restricting the capital gains tax base to real property—that is, land and income from land. Capital gains on non-resident shares are therefore now to be excluded. This is consistent with the OECD model tax treatment, and the government argues this approach is sought by other jurisdictions in tax treaty negotiations. However, there is a major compliance measure as well that is likely to be targeted at the mining and minerals exploration sector.

The basic principle of international taxation is that the host country taxes income that relates to operation in the host country, irrespective of where the company headquarters are located. So income from Australian operations is to be taxed here. But there is a major problem with so-called interposed companies. If a foreign company has a subsidiary with operations here, it pays capital gains tax if the assets are owned by an Australian subsidiary. But if the assets are held by an intermediate or interposed company then it is difficult and often impossible for Australia to effectively levy the capital gains tax on capital gains on assets held by these companies, and in some cases the right to claim this tax is disputed. Moreover, if a foreign company holds less than 10 per cent of an asset in Australia, the asset will lack a ‘necessary connection with Australia’. In this case, CGT is not levied on this company’s capital gains from the sale of Australian assets.

So there is scope for an international company group to organise its Australian assets so each of the foreign interposed entities holds less than 10 per cent of a domestic asset, even though the total of the group may well exceed this 10 per cent threshold. This result is that most of these interposed groups can escape the Australian capital gains tax net. The proposed law states that for an international entity with 50 per cent or more of total assets in Australian real property our capital gains tax regime applies. This means that the ATO can look through the international corporate veil and apply capital gains tax on all these interposed entities’ capital gains if these entities are land rich.

This bill is an example of generic problems with tax bills. There are two government amendments to schedule 4 of this bill. This in itself is justification for Labor’s reference of the bill to the committee, and it also reveals a dangerous trend in tax legislation. Time and time again imperfect bills are being put to the parliament. How many times has the parliament been forced to consider amendments to consolidation measures and the international taxation measures? An example is the international tax participation bill of 2004. The debacle of the Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Bill 2005 is still unresolved. Labor’s amendments were rejected in the morning and the bill was made subject to review in the afternoon—a review that is now eight months overdue. The legislative error rate in tax law matters is increasing all the time and it is just far too high.

Senators do not have to take my word for this; they need only hear from Justice Edmonds or the Inspector-General of Taxation, or even the minister himself, if they wish to find out how badly Treasury are being rated at the moment in terms of the production of tax law. Justice Edmonds, for example, was very critical of the way that explanatory memoranda are written, and this bill is sadly another example of the problem that Justice Edmonds referred to recently in his speech to the ATAX conference.

I want to talk about the problems with schedule 4. This schedule involves a major reduction in the capital gains tax base for non-residents. In evaluating this measure, there is of course the initial consideration of cost. The explanatory memorandum suggests a cost of $50 million to $65 million per annum. This in itself is significant, but Labor senators noted that this cost could be expected to increase substantially either as a result of proposed government amendments or as a result of prospective mergers. Such costs have to be weighed judiciously against the suggested economic benefits of increasing the attractiveness of Australia as a source of international capital. It is regrettable that this judgement was not assisted by adequate argument or modelling from the government or Treasury at the hearing. I am sure this is part of an increasing trend by this government to hide costings where it can. I do not blame the Treasury and Finance officials for this. They are under the political control of the ministers of the day. We are finding that information is being hidden and kept secret, particularly in the area of costings, where it is necessary to make a considered judgement about the worthiness of a particular piece of legislation.

In this case, the government has not put its argument with sufficient economic rigour. This may be the fault of the political process but, whatever the case is, it must be corrected. Labor calls on this Liberal government to devote more resources to making its arguments clear to the people through the parliament and through the committees, to desist from this increasing threat to openness and to ensure that costings and modelling are made publicly available.

Why doesn’t the government provide the parliament with the best analysis available? Why should Australia settle for second best in making difficult decisions of this nature? It is nothing but an attempt to undermine the parliament, particularly the role of the Senate. We have seen the increasing arrogance and contempt for the role of the parliament and the increasing domination by the executive, whether it be the Prime Minister, Mr Howard, or the arrogant Treasurer, Mr Costello. We have seen this contemptuous approach manifest in a number of ways that Labor has referred to on previous occasions, particularly now they have a Senate majority.

Labor senators considered this bill in an inquiry and put a number of questions to officials in advance of the hearing. We actually often put our questions on notice so officials have time to consider the matters, and we put questions on notice in advance of the primary hearing associated with this measure. We have sought to uncover the disadvantage to Australian firms relative to foreign firms, and if an increase in merger activity would lead to a significant cost blow-out. Labor senators were not given an answer to these questions that were put in advance of the hearing. This is not acceptable and I certainly hope that officials themselves have not been withholding information.

It is understandable that officials withhold information at the political direction of the government, which I suspect is what occurred on this occasion. There were some answers provided later but they were not adequate and were not covered in sufficient detail, and in some cases the responses were simply framed to avoid making a substantive and properly detailed answer. Labor senators did make some significant additional remarks, as did Senator Murray, the Australian Democrat shadow minister in this area. I acknowledge his active and effective contribution on these matters. I would like to endorse the broad sentiments of Senator Murray’s remarks in his additional comments.

I have noted the joint submission of the Minerals Council of Australia, the Australian Petroleum Production and Exploration Association, the Corporate Tax Association, and the comments of the Institute of Chartered Accountants in Australia at the hearing. The joint submission argued that taxable capital gains or losses on Australian real property need to be more precisely focused by specifying that only a proportion of the gain on the sale of interests in a resident or non-resident entity that is land-rich should be subject to CGT, equal to the Australian land-rich proportion. The amendment is worthy of further consideration and Labor is concerned that it was not more properly considered in the Senate report.

Labor has supported in the House of Representatives a further amendment to allow for the fact that the land-rich status of an entity may change between May 2005 and the timing of the bill. This amendment allows the ‘reset the clock’ amendment in relation to the cost base to also cover companies not land rich before May 2005 but who are now over the 50 per cent threshold. Labor notes that this further amendment at this late stage highlights again the deficiencies in the legislative process for this bill. Another amendment is expected to provide that the cost based adjustment also applies where the land-rich status of an entity has changed since May 2005, and that is a logical extension of the first amendment.

At a special briefing provided to Labor in relation to this amendment Labor reiterated its call for the two measures in schedule 4 to be disaggregated in terms of costing. How much is the cost to revenue of the reduction in the CGT non-resident cost base net and how much is the gain to revenue from the new compliance measure? We know that officials were in a position to provide that information but the minister’s office did not grant officials the authorisation to inform Labor of this measure. This is a further example of contemptuous treatment of the parliament, and of the Senate in particular, in the legitimate gathering of information by the Australian Labor Party. I know that the Australian Democrats get frustrated at times. Keeping secret vital information on costings is in defiance, I have to say, of the Treasurer’s own much vaunted charter of budget honesty. Senator Murray is nodding; he knows that the Treasurer runs around saying: ‘We have got this charter of budget honesty. We are going to give full and open costings and access.’ Yet here is another case of this arrogant Treasurer refusing to reveal costings in accordance with his own charter of budget honesty.