Ursula Stephens (NSW, Australian Labor Party, Shadow Parliamentary Secretary to the Leader of the Opposition (Social and Community Affairs)) Share this | Hansard source

I rise to speak on the Tax Laws Amendment (2007 Measures No. 1) Bill 2007 and the Tax Laws Amendment (2006 Measures No. 7) Bill 2006. I say at the outset that Labor will be supporting both bills. Labor welcomes the government backflip in removing schedule 2 of the Tax Laws Amendment (2006 Measures No. 7) Bill 2006, which was the subject of an inquiry by the Senate Standing Committee on Economics. I note that the government has taken up Labor’s recommendation that schedule 2 be removed from the bill. Schedule 2 proposed amendments to the Income Tax Assessment Act 1936 to supposedly clarify the types of financial instruments which are eligible for the exemption from withholding tax. Tax is withheld from the payment of interest to nonresidents, subject to some exemptions. The exemptions exist to reduce the cost of Australian companies obtaining capital. Schedule 2 proposed to restrict the range of debt interest eligible for this withholding tax exemption. Schedule 2 proposed to introduce a regulation-giving power to sections to allow the minister to specify which instruments would qualify for the exemptions and which would not. Labor was certainly concerned that this change was more than a clarification and would change what could be claimed as an exemption in a substantive and substantial way and impede the ability of Australian companies to raise cost-effective finance.

Schedule 2 of the bill was referred to the committee at the insistence of Labor. In his summing up speech in the House of Representatives, the Minister for Revenue and Assistant Treasurer stated that he would not refer the bill to a committee—but we witnessed a backflip on that, with the bill referred the very next day. As evidenced by the submissions to the committee, there were concerns that the amendments might particularly affect the ability of Australian firms to participate in syndicated loans, for example. As noted in the submission by the Australian Bankers Association:

... the Bill will unreasonably impede access by borrowers to international debt markets ... the proposed amendments will prejudice the ability of Australian firms to participate in the syndicated loan market ...

Labor was also very concerned about the lack of consultation that had gone into framing this schedule. The economics committee report demonstrated Minister Dutton’s total failure to properly consult with key stakeholders on changes to tax laws, resulting in what really was substandard legislation. The ABA’s submission noted:

... a breakdown occurred in the consultation process in relation to the proposed IWT amendments.

This comes after Minister Dutton’s failure to consult with affected industries over the taxation treatment of non-forestry managed investment schemes. It is incredible that we had to insist that this schedule be referred to a Senate committee to conduct the consultations that the government should have conducted itself. As a result of Minister Dutton’s failure to consult, flawed legislation was brought to the parliament. It was thanks to Labor’s insistence that it was referred to the Senate committee and that key stakeholders had the opportunity to express their concerns with the legislation.

The committee heard that the government’s proposed changes could cause widespread damage and uncertainty to the loan market, impacting on the ability of Australian companies to raise finance. The committee also heard that the proposed legislation would have imposed high compliance costs on business—this from a government that claims to cut red tape and be pro business. The inquiry also highlighted that the bill might have a retrospective application. ABA’s submission stated:

... the Bill will be retrospective and will effectively impose cost (via interest withholding tax “gross up” clauses) on Australian borrowers who negotiated loan arrangements in good faith based on current law.

I will go to the report of the committee. The uncertainty that was demonstrated by the witnesses who appeared before the committee was based on the fact that the regulations that the government was going to rely upon were not available, even in draft form. So it was very unclear as to what debenture and debt interests were going to be excluded from and entitled to the interest withholding tax exemption.

This was a very frustrating process and the Australian Financial Markets Association argued that such a scenario would create uncertainty and generate additional compliance costs, which, contrary to the statement in the explanatory memorandum, would not be negligible. That was a very serious point of debate during the committee hearings. As a result, Labor members of the economics committee recommended with the support of Senator Murray that the Assistant Treasurer withdraw this schedule from the bill. The government members of the committee recommended that the Senate pass the bill. Today we see an amendment put to the Senate to remove schedule 2 of the bill—effectively agreeing with Labor’s position. Thank heavens that the Assistant Treasurer has actually seen some sense, after listening properly to affected parties, but it should have been done before the legislation was introduced.

I will now turn to the schedules of the bill that remain. Schedule 1 deals with an expansion of the small business exemptions for capital gains. These largely arise out of the Board of Taxation review of 2005, and are supported by the opposition. These recommended changes show that the process of having the Board of Taxation review elements of the tax act is a worthwhile process. Item 39 of the bill proposes to replace the current controlling individual 50 per cent test with a new significant individual 20 per cent test. That is to say, an individual will no longer have to own 50 per cent of the enterprise to gain the capital gains tax concession but will now only need to own 20 per cent of the enterprise. The 20 per cent participation percentage does not need to be entirely direct holdings but can include indirect holdings. These changes will certainly increase the availability of the small business concessions. The new significant individual test would enable up to eight taxpayers to access the small business capital gains concessions. More people with a substantial interest in a small business will be eligible for the concessions, which is good for the small business sector.

The bill also proposes changes to the maximum net asset value test to determine eligibility for the small business concessions. This test is satisfied if the sum of the net value of all capital gains tax assets of the taxpayer, an entity connected with that taxpayer, any small business capital gains tax affiliate of that taxpayer or entities connected with that person’s small business capital gains tax affiliates does not exceed $5 million. The proposed amendments to the maximum net value test would allow more small businesses to become eligible for the concessions by allowing more liabilities to be included in calculating whether the business breaches the $5 million threshold.

There are other changes which make it easier to gain the small business tax concession included in this bill. The definition of an active asset is clarified and the restrictions on the ownership of an asset for which a 15-year exemption is claimed are eased. In respect of the small business rollover concession, which allows a taxpayer to defer the making of a capital gain from a capital gains tax event happening in relation to a small business asset if the taxpayer acquires replacement assets, the proposed changes will abolish some of the current prerequisites for the rollover to make the rules to access this concession clearer and extend this concession to more taxpayers.

Proposed section 152-80 will make rules for the treatment of the capital gains tax assets that are part of the estate of a deceased person. Currently no rules exist. A legal personal representative of the beneficiary will now be allowed to access the same concessions that would have been available to the deceased. These are measures which improve the availability of the small business capital gains tax exemption, and Labor supports them all.

Of course, small business is deserving of the support of parliament and the treatment of small businesses when they are sold for either retirement or to be rolled over into new small businesses is an integral part of that support. Accordingly the Labor Party has no hesitation in supporting these changes.

Schedule 3 proposes amendments to remove the requirement for certain deductible gift recipients to maintain a gift fund. It also aims to standardise and improve integrity arrangements for deductible gift recipients. Further, Schedule 3 proposes changes to provisions in the Tax Administration Act 1953 to enhance the DGR integrity arrangements. Proposed changes will provide the Commissioner of Taxation with the power to request information from both endorsed and listed DGRs, thus aligning the integrity arrangements applicable to both types of DGR. Currently, the commissioner can only review endorsed DGRs to determine if they continue to meet the requirements for holding DGR status. Listed DGRs cannot be reviewed. These are sensible changes, which both reduce the compliance burden on charitable organisations and improve the integrity measures available to the ATO. Labor is happy to support these measures too.

Schedule 4 proposes amendments to extend the periods during which deductions will be permitted to certain DGRs. These include the Dunn and Lewis Youth Development Foundation, the Rotary Leadership Victoria Australian Embassy for Timor-Leste Fund, the St George’s Cathedral Restoration Fund and the St Michael’s Church Restoration Fund. Labor supports these measures and wishes these bodies well.

Schedule 5 proposes amendments to insert a statutory cap of 6⅔ years for tractors and harvesters used in the primary production sector. The commissioner is currently reviewing the effective life of assets in the primary production sector and, therefore, may increase the current safe harbour effective life of tractors and harvesters, which would be disadvantageous to taxpayers claiming the decline in the value of these assets for a deduction. By adding a statutory cap for tractors and harvesters, taxpayers who choose to have the effective life of these assets determined by the commissioner will be limited to an effective life of 6⅔ years.

I note that this measure is inconsistent with the recommendations of the Ralph Review of Business Taxation, which abolished accelerated depreciation. We do not oppose this measure. Farmers deserve all the support and certainty that they can get in this difficult time. However, it does need to be noted that this measure is contrary to the recommendations of the Ralph review and, if the government does go on making changes to the effective life regime in an ad hoc way, it will be undermining the integrity of the Ralph reforms and will add complexity to the tax law by treating certain assets differently.

The bill proposes to make changes to the Farm Management Deposits scheme to increase farmers’ eligibility for this scheme. The bill proposes to increase the threshold of non-primary production income from $50,000 to $65,000 and increase the deposit limit from $300,000 to $400,000. The FMD scheme allows primary producers to, in effect, shift income from good to bad years in order to deal with adverse economic events and seasonal fluctuations. The scheme allows primary producers to claim a deduction for farm management deposits made in the year of deposit, and to reduce their PAYG instalment income accordingly. When the farm management deposit is withdrawn, the amount of deduction previously allowed is included in both their PAYG instalment income and their assessable income in the repayment year. Labor supports the proposal to allow more primary producers to become eligible for the FMD scheme to assist in times of drought. The income threshold and deposit limit have not been increased since 1999.

The final schedule in this bill relates to capital protected borrowings. The changes would prevent a taxpayer from claiming a deduction for the part of the expense of a capital protected borrowing that is attributed to capital protection. Capital protected borrowings allow people to borrow money to buy shares and then, in effect, sell the shares back to the lender at a price no lower than what they paid for them should the price of the shares fall. The lender charges a premium on the interest rate to deal with this transfer of risk.

The ATO has previously taken the view that interest payable on capital protected borrowings used to purchase shares is not allowable to the extent that it exceeds the amount of the benchmark interest rates set out on the ATO website—that is, that the premium charged for risk transfer is not deductible. This view was successfully challenged in the case of the Commissioner of Taxation v Firth in 2002. The government announced that it would make changes to override the Firth case in April 2003. The interim methodology was announced by the then Minister for Revenue and Assistant Treasurer in May 2003.

It is extraordinary that the government could announce legislative changes in 2003 and yet it is 2007 before we are debating them. It is true that the government flagged these changes and that the ATO warned people that the government would be legislating retrospectively, but for the government to wait four years before providing certainty and introducing this legislation is gross incompetence. This government has taken legislation by press release to a new level. It is simply not good enough. Labor will be supporting this measure, which comes much too late but which should be supported. The amendments provide certainty about the tax treatment of CPBs, and for that reason and because this is an integrity measure Labor supports the amendments.

Labor support the bill. We are not happy with the government’s performance on schedule 2 but we will not be standing in the way of the significant benefits which will flow to small business in this bill, and we will support it. However, the government will need to account for any adverse effects on the ability to raise capital that flow from these changes.

Labor is also supporting the second bill before us, the Tax Laws Amendment (2006 Measures No. 7) Bill 2006. Schedule 1 makes amendments to the secrecy and disclosure provisions of the Taxation Administration Act 1953 to allow the Commissioner of Taxation to disclose taxpayer information to Operation Wickenby task force officers and to officers of future compliance operations.

Operation Wickenby is a multi-agency crackdown on offshore tax fraud. It was established in 2004 and is led by the ATO. Other agencies involved are the Australian Crime Commission, the Australian Federal Police and the Australian Securities and Investments Commission. Allowing the commissioner to share information with other government agencies involved in Operation Wickenby should help compliance task forces investigate tax evasion and enforce the law. The amendments will allow the commissioner to disclose information to officers of Operation Wickenby task force agencies for any purpose related to the task force; allow the commissioner to disclose information to officers of the agencies of any future prescribed task forces established to protect Australia’s revenue; and allow an officer of any task force agency who receives such information to disclose the information to other task force officers and legal counsel. A sunset clause restricts the ATO from disclosing information to the agencies of the Operation Wickenby task force after 30 June 2012 as this is when funding for the task force runs out. Labor supports Operation Wickenby and other efforts by the ATO to address tax avoidance and evasion to increase fairness in the tax system and protect revenue.

The government has made a significant financial commitment to Operation Wickenby. Over $300 million has been allocated to the project over seven years. The 2006-07 budget estimates increased revenue as a result of the operation to $323 million over four years. I note that taxation commissioner Mr D’Ascenzo stated in additional estimates two weeks ago that he is confident the $323 million figure will be reached through increased compliance as a result of the operation. Labor hopes this is the case.

Schedule 2 of the bill proposes amendments to the Superannuation Guarantee (Administration) Act 1992 to enable the Commissioner of Taxation or an ATO officer to provide information to an employee in response to a superannuation guarantee complaint against their employer. The secrecy provisions of the superannuation guarantee act prohibit the disclosure of information about the progress of any action in relation to any person. This prevents the ATO from providing information to employees on the progress of their superannuation guarantee complaints. The amendments will allow the ATO to provide information to an employee in response to the employee’s complaint that their employer has not complied with its superannuation guarantee obligations. The information the ATO may provide under the amendments is: steps taken to investigate the complaint, actions taken in relation to the complaint, and steps taken to recover any superannuation guarantee charge from the employer. Labor supports the proposal.

Schedule 3 of the bill proposes amendments to a number of tax acts to extend employee share schemes and related capital gains tax treatment to stapled securities. The amendments allow the ESS concessions to apply to stapled securities and rights to acquire stapled securities that include an ordinary share listed on the ASX. The capital gains provisions that refer to ESS shares and rights will apply to stapled securities. Fringe benefit tax treatment of stapled securities provided under ESS will also be made consistent with the treatment of ESS shares and rights. Labor recognises that these are two important financial pieces of legislation that, having been amended, are deserving of support in the interests of good fiscal management and transparency of taxation arrangements. Mr Dutton has saved himself and many stakeholders a great deal of angst. I certainly look forward to considering what will come before us again as amended schedule 2 in a new form when it is finally recommitted to the Senate.