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

I note for the record that, although I lost that previous amendment, I am aware that many of those who voted against it actually support the ending of discrimination against same-sex couples, and I look forward to the government making rapid progress in that area—I am ever hopeful, Minister; I am a hopeful person. The Democrats oppose schedule 4 in the following terms:

(1)    Schedule 4, page 14 (line 2) to page 45 (line 12), TO BE OPPOSED.

As I did for the earlier amendment I want to refer to my minority report, or part of it. In that minority report I said:

Much fuss has been made about the supposed fact that this—

change in this bill—

brings Australia into line with international and OECD standards and guidelines.  The EM for the Bill ... contends that the changes will:

further enhance Australia’s status as an attractive place for business and investment by addressing the deterrent effect for foreign investors of Australia’s current broad based CGT tax base.

I did not say in my minority report but I should add: will it or what! People are certainly going to jump on the bandwagon. Back to my minority report, which states:

I have seen no empirical evidence produced that a deterrent effect exists for foreign investment in Australia. To the contrary, my impression has been that foreign investment has been at a high level. The Investment and Financial Services Association Ltd (IFSA) obviously disagree with me. IFSA commented:

Historically, there are number of reasons why the flow of funds from non-resident investors into Australia has been relatively low. In this regard, any significant enhancement to the international tax regime, such as the proposed changes to capital gains tax and non-residents, are a step in the right direction.

‘Relatively low’ implies some credible form of benchmarking, and I would like to see that before I accept this proposition. I am not aware that Australia has had a problem attracting foreign investment – indeed many Australians have expressed concern at a high level of foreign investment and ownership of Australian assets.

Interestingly, there is evidence to support the capital gains tax is an unimportant or even irrelevant consideration for investors when choosing their investment or business location.

As an authority I quote H Wunder, 2001, ‘The effect of international tax policy on business location decisions’, 24 Tax Notes International 1331, which sets out the results of a survey which confirmed this. The survey has been recently cited with approval in A Eason, 2004, Tax Incentives for Foreign Direct Investment, Kluwer Law International, The Hague, page 57. My minority report further states:

In their ‘Comment’, the Bills Digest says:

Foreign investors holding shares in Australian companies will gain significant benefits from this measure—

and the Digest refers to a 30 June 2006 Legal Update from Corrs Chambers Westgarth Lawyers saying this will provide a good stimulus for mergers and acquisitions ...

Yet reforms to Corporations Law and Tax laws (particularly the ‘consolidations’ measures), all supported by the Democrats, have in 2005/6 produced the highest level of merger and acquisition market activity in Australia’s history, of which a very high percentage is foreign. Current reports indicate that 2006/7 will prove even stronger.

I go back to the obvious question that arises: why then the need for a further tax concession that may give foreigners tax advantages that Australian residents and citizens do not share? My minority report says:

In the same ‘Comment’ section the Digest also quotes from law firm Minter Ellison’s legal update of 20 July 2006 which envisages far more activity by [foreign] non-residents. Reforming tax law for foreigners resident in Australia is a different matter, but the case or justification for this tax concession for foreign non-residents is not made, based on the material before us in this Inquiry.

In the same section of the EM quoted above, the EM goes on to state that:

... the amendments will encourage investment in Australia by aligning Australian law more consistently with international practice. This results in greater certainty and generally lower compliance costs for investors.

Whilst it is true that a significant degree of foreign investment in Australia continues to be desirable, lowering or removing foreigners’ potential CGT liability may also mean that we are giving foreigners an advantage over Australian citizens. This is another equity consideration, that the Government has seemingly failed to address adequately.

Why do I use the word may? Is it possible for the Government to show that foreigners will not be advantaged over Australians as a result of these changes? Or that some will and some won’t? CGT regimes differ across countries. Raising this matter at the Inquiry Hearing resulted in an allegation by Mr Ali Noroozi, Tax Counsel at the Institute of Chartered Accountants in Australia ... that it reflected an attitude of “economic xenophobia”.

I took the opportunity to remind Mr Noroozi that what is at issue is a matter of equity and basic principle—namely that Australian law must not have the effect that Australians are treated less favourably than foreigners under our tax laws, or that non-Australians are given an unjustifiable competitive advantage over Australian citizens and residents.

At the Hearing I did not find the assurances of Treasury persuasive—they assert that Australians will not be treated less favourably than foreigners under our tax laws, and that non-Australians will not be given an unjustifiable competitive advantage over Australians. Treasury had no evidence, modelling or cameos that could justify their assertions.

At the very least the Treasury could have provided illustrative sets of cameos showing how these provisions affected citizens and residents from our five largest countries sourcing foreign investment in Australia.

A number of journalists who specialise in these matters of finance and taxation have examined this issue. One of them, a very credible and highly regarded journalist for the BRW, is Adele Ferguson, who, in the BRW, 9 November to 13 December 2006, said:

If the recent bout of takeover activity by overseas companies and private equity funds is putting more Australian brands and assets into overseas hands, a bill removing capital gains tax (CGT) from most forms of foreign investment in Australia will make Australian companies even bigger sitting ducks.

There are those who applauded any tax reform that makes Australia more attractive for direct overseas investment, but the problem with this line of thought is that it is too focused on the short term. It fails to take into account the long-term tax implications for Australia, as well as the implications of creating an uneven playing field for overseas investors at the expense of Australian investors who still have to pay CGT.

To be specific: overseas investors will no longer have to pay CGT on Australian shares or businesses that have less than 50 per cent of their assets in property.

If takeover activity continues at this rapid pace, Australia will end up owning only banks, toll roads, an airline and a few mines. Besides being a dull place to invest, there will be little tax revenue coming in.

Overseas private equity firms are already playing round with Australia’s corporate tax revenue. For starters, they leverage a business to at least 70 per cent, which means they have higher interest costs and lower profits. It also means they pay a much lower corporate tax rate than Australian listed companies, which have far more modest gearing.

The new bill will further reduce the amount of tax that overseas private equity firms pay in Australia because it eliminates CGT on most forms of overseas investment. When any investor looks at an investment proposition, costings such as tax are always factored in. This puts Australian investors at a distinct tax disadvantage.

I have quoted Adele Ferguson at length and you are welcome to look at the rest of the article, which I thought was on the button. She has highlighted the two fundamental concerns that arise from this. Firstly, there is the issue of equity: Australian investors are at a disadvantage in tax terms to foreign investors. Secondly, there is the issue of revenue and, as you would recall, I have described the Treasury estimates as an educated thumb-suck but a thumb-suck nevertheless. She indicates a sense that I find in many of those opposed to this provision that the revenue losses will be long term and much more significant than the explanatory memorandum outlines.

Before closing off on my motivation, I want to draw your attention to another area where I have concerns, and that is the massive investment bubble/boom being induced through private equity funds not only in Australia but worldwide. I was most interested recently in an ASIC media release of Monday, 4 December 2006, No. 06-418, headed ‘Former Gribbles CEO charged’. I rather like the fact that this man has been charged because I believe that he used to be a tax barrister who used to give the ATO a going-over for their ‘dreadful’ behaviour. It is rather nice to see a little bit of payback by the authorities with respect to his own dealings. This man—and I should not presume his guilt because he is entitled to be seen as innocent until he is found guilty—is subject to 35 charges following an investigation by the Australian Securities and Investments Commission.

However, that is not my main interest. My main interest in drawing this to your attention is that one of the charges is that he dishonestly failed to inform Gribbles bankers of his interest in the Gribbles shares when asked, with an intention to gain an advantage for himself by keeping secret the true nature of his interest. On page 2 of the press release it says:

As part of its application, ASIC sought that ECMI’s Gribbles shareholding be vested in ASIC in the event that the ultimate owners of the shares were not disclosed to the market.

Now why have I brought that to your attention? A fundamental principle of the equity market of the ASX is that the beneficial owners shall be identified. As you know, Corporations Law requires the top 20 investors to be identified, and here is a man who disguised where the shares were held and by whom and who is therefore having those shareholdings vested in ASIC as an immediate penalty for doing so.

I turn to the question of private equity funds. I asked a question, No 257 on 19 October 2006, of the Treasurer. Item 2 of my question said:

(a) As media is formally determined a ‘sensitive market’, and as major media can be bought by foreign private equity funds under the new media laws, will investors in such funds, in particular beneficial owners, appear on a register and be readily identifiable.

(b) Can the Minister outline what powers under the Foreign Acquisitions and Takeovers Act 1975 allow the Treasurer to identify the beneficial owners of private equity funds.

(c) If it is not possible to identify investors or beneficial owners in private equity funds, can the Minister assure the Senate that none of our media could end up controlled by funds that are influenced or backed by criminal money, money sourced from anti-democratic groups, from theocratic or fundamentalist groups, or from proscribed organisations: (i) if the Minister is unable to give that assurance, then what does the Minister intend to do about this matter, and (ii) if the Minister can give that assurance, can details be provided of the means or measures available to identify beneficial owners or investors.

The answer to that question was:

(2)

(a)

As with all different types of foreign entities that invest in Australia, this will depend on the regulatory framework in the entity’s home jurisdiction.

(b)

Section 36 of the Foreign Acquisitions and Takeovers Act 1975 allows the Treasurer to serve a notice on any person requiring that person to furnish information or documents relevant to the exercise of the Treasurer’s powers under the Act.

(c)

See response to (2)(b).

Now, why I am I drawing this to your attention? This provision will give tax advantages to the private equity fund boom and will accelerate their activities. On the one hand, we have Corporations Law stressing that we need to know who the beneficial owners behind private equity funds are and, on the other hand, we have the Treasurer unable to spell out in public who the beneficial owners of private equity funds are. He might do so in private; he might not. We have no protections.

I believe that most funds tied up in private equity funds are perfectly legitimate and proper. They are tied back to superannuation funds and so on. So I do not infer that all or most private equity fund sources have an improper background, but I do state clearly and on the record that the beneficial ownership of private equity funds is not going to be known to the Australian people, yet these owners are capable of taking over our very largest corporations and giving them away to foreign investors and at the same time getting a foreign tax benefit which would not be available to Australian investors if they had such an investment. So these are issues that need to be considered when we are discussing these matters. The Democrats oppose schedule 4 in the following terms:

(1)

Schedule 4, page 14 (line 2) to page 45 (line 12), TO BE OPPOSED.