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

We are considering Tax Laws Amendment (2007 Measures No. 3) Bill 2007 and Tax Laws Amendment (Small Business) Bill 2007 in a cognate debate. The measures No. 3 bill contains 10 measures, three of which I would like to concentrate on in my contribution tonight, and in particular schedule 10, which proposes new withholding arrangements for managed fund distributions to foreign residents.

Schedule 1 reduces the punitive impact on certain distributions to entities connected with a private company. Labor supports this measure to reduce compliance costs for private companies and reduce tax penalties, particularly for inadvertent breaches of the ‘deemed dividend’ provisions of the tax law.

Schedule 2 of this bill is a revenue protection measure necessary for the proper implementation of the simplified superannuation reforms. Labor supports this proposal to close a loophole that gives an unfair advantage to certain taxpayers—I believe it is by gifting in order to attempt to circumvent the contribution limits.

Schedule 3 of this bill allows a trustee of a resident testamentary trust to choose to be assessed on capital gains of the trust which would otherwise be assessed to an income beneficiary who cannot receive the benefit of the capital gains. Labor supports this proposal to introduce more fairness in the taxation of testamentary trusts income.

Schedule 4 of this bill makes lump sum superannuation death benefits paid to nondependants of ADF personnel, Australian police force members or Australian Protective Service officers who die in the line of duty tax free. Labor supports this proposal, which recognises the valuable role played by defence personnel and police in maintaining the safety and security of the community.

Schedule 5 of this bill extends the transitional period relating to the application of accounting standards under the thin capitalisation rules. Labor supports this proposal to assist business adjusting to the new accounting standards and their impact on the thin capitalisation.

Schedule 6 repeals the dividend tainting rules. Labor supports this proposal, which comes about as a result of the removal of the intercorporate dividend rebate and the introduction of the consolidation regime.

Schedule 7 of this bill more closely specifies which debt interests are eligible for exemption from interest withholding tax in sections 128F and 128FA of the 1936 Income Tax Assessment Act. Tax is withheld from the payment of interest to nonresidents at a rate of 10 per cent, subject to a number of exceptions. Sections 128F and 128FA of the 1936 act provide an exemption for interest paid by companies on debentures that meet a public offer test. The exemption exists to reduce the cost of Australian companies obtaining capital. The amendments specify that non-debenture debt interests that are non-equity shares and syndicated loans are eligible for exemption from IWT. They also introduce a regulation-making power to prescribe further types of eligible debt interests within the exemption.

The new schedule represents a significant backdown by the current Liberal government. These amendments have an interesting history of change reversal by the current government. It started with legislative amendments in 2005 to extend the exemption from interest on a debenture to interest on a debenture or a debt interest in order to reflect changes to Australia’s debt/equity rules in 2001. The 2005 amendments unintentionally resulted in the exemption being potentially available to all debt interests. The definition of ‘debt interest’ is too broad, and interest on financial instruments not intended to be included may be covered by the exemption.

Amendments to fix this were proposed in schedule 2 to the Tax Laws Amendment (2006 Measures No. 7) Bill 2007. The bill was referred to the Senate Economics Legislation Committee at Labor’s insistence to examine the interest withholding exemption. Labor expressed concerns that the bill created uncertainty and practical problems that could inhibit raising debt finance. The Assistant Treasurer initially stated that he would not refer the bill to the committee. But the next day the Assistant Treasurer backflipped and referred the bill to the Senate Economics Legislation Committee. Submissions to the committee demonstrated the appalling lack of consultation undertaken by the government on this measure in TLAB No. 7. As the Australian Bankers Association noted in its submission, ‘a breakdown occurred in the consultation process in relation to the IWT amendments’, and that is putting it very mildly.

The committee inquiry exposed the substandard legislation that the Assistant Treasurer had put to the parliament. The ABA’s submission stated:

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

Labor senators recommended in their additional remarks to the report on the bill:

• as a minimum, the Bill be split with schedule 2 of the Bill to be considered at a later time once the legislation or once the regulations that will accompany the legislation are completed. Further, the Government should amend schedule 2 to give Treasury by regulation, the power to prescribe financial instruments which will not receive the withholding tax exemption rather than those that will.

…            …            …

• Schedule 2 be dealt with before the end of the 2006-07 financial year.

Labor is certainly delighted that the Assistant Treasurer finally agreed with the Labor senators’ recommendations from the committee inquiry rather than taking on his own party’s committee members’ recommendation, which was to allow the bill through without alteration. However, I have to say, so that people understand, that in this process the government parties’ committee members I am sure would have been dutifully following the instructions of the Assistant Treasurer. But he appeared to have yet another change of thought and, having already instructed his Senate colleagues to take one line and oppose Labor’s line of recommendation, he changed his mind within 24 hours and totally abandoned his own colleagues. So Labor supports the changes proposed in this schedule to help ensure that Australian business does not face a higher cost of capital due to interest withholding tax.

Schedule 8 of the Tax Laws Amendment (2007 Measures No. 3) Bill 2007 inserts a specific deduction in the tax law to provide that initial investors in a forestry management investment scheme will receive a tax deduction for their contributions. Subsequent investors will receive a tax deduction for their ongoing contributions to forestry schemes provided that at least 70 per cent of the scheme manager’s expenditure under the scheme is direct forestry expenditure. The schedule also provides rules governing the taxation consequences of trading forest scheme interests. This schedule comes about as a result of the ATO revisiting its views on the tax deductability of investors’ contributions to forestry schemes. This bill provides a deduction under a separate statutory provision. This means that it will no longer be necessary for taxpayers to demonstrate that they are carrying on a business in order to access the statutory deduction. The specific deduction provision ensures that initial investors in forestry schemes will receive a tax deduction for their contributions and that secondary investors will receive a tax deduction for their ongoing contributions, provided that there is a reasonable expectation that at least 70 per cent of the scheme manager’s expenditure under the scheme, at arm’s-length prices, is expenditure attributable to direct forestry expenditure.

Schedule 8 of the bill also amends the Income Tax Assessment Act 1997 and the Income Tax Assessment Act 1936 to allow secondary investors to obtain deductions for ongoing contributions to forest scheme arrangements. The issue of deductability of forestry MISs has been around for some time now. It has been a matter of considerable public controversy. The 2005-06 budget announced that the government would review the taxation treatment of plantation forestry. That review has not been made public. The arrangements before us today were announced in December 2006. The government also announced in December 2006 that it would consider the issue of taxation arrangements for non-forestry MISs in the new year. In February 2007, the Assistant Treasurer announced that the government would not introduce specific deductability provisions in the tax law for non-forestry MISs as it will do for forestry MISs. The lack of consultation that went into—or, rather, did not go into—the issue of tax deductability of nonforestry is disturbing and fits a pattern of a lack of consultation and general incompetence by the Assistant Treasurer.

My colleague Senator O’Brien moved a motion in the Senate to hold an inquiry into the non-forestry MISs—a motion which the government voted down. However, Labor supports the proposal to provide a specific deduction for forestry MISs. The proposals strike a balance between ensuring that Australia has a sustainable plantation industry while addressing tax integrity issues. Labor recognises the important role that MISs provide in rural and regional areas and in the way of jobs and investment. Importantly, there are a number of downstream jobs such as those in nurseries and of irrigators, fencers et cetera that are reliant on MISs. I note that plantation forestry also plays an important role in sequestering greenhouse gases.

Schedule 9 amends the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 to ensure that a trustee can be taxed on the net income of the trust in relation to a non-resident trustee beneficiary. This makes the tax treatment of non-resident trustees consistent with the treatment of non-resident company and individual beneficiaries. Labor supports the proposals to close this loophole.

Schedule 10 to this bill proposes to implement a new withholding regime for distribution to foreign residents of net income of managed investment trusts attributable to Australian sources either directly or through certain Australian intermediaries. Income that consists of dividends, interest or royalty outcome is generally excluded from this measure, as are capital gains on assets other than taxable Australian property. This schedule was recently discussed at length at a Senate Standing Committee on Economics inquiry into this bill. Labor proposed a flat and final withholding tax rather than a deductable headline nominal rate, the rate being 15 per cent. Labor believes that imposing a withholding tax of 30 per cent would act as a disincentive to foreign investment in Australian managed funds and Australian property trusts. All of the submissions relating to schedule 10 of the bill argued that the 30 per cent headline rate of taxation is a disincentive for foreign investors and recommended a flat and final rate of 15 per cent or less. Labor’s suggested rate of 15 per cent was based on the expert evidence of a broad range of participants in the financial services market that this rate was consistent with our main competitors for foreign investment in Asia, in centres such as Hong Kong, Singapore and Japan. The submission of the Property Council of Australia stated:

If passed, this legislation will raise significant barriers to Australia’s competitiveness as a manager of global funds. It will also be harder to build on our strengths as a regional financial hub.

Labor does not believe that the cost, estimated by Treasury, of reducing the rate to 15 per cent is accurate. The government’s claim that Labor’s proposal to halve the withholding tax on distributions to overseas residents from Australian managed funds would cost $100 million a year was not supported by evidence presented to the Senate economics committee. The $100 million costing assumed a gearing ratio for investments in Australian managed funds of zero. This contrasts with evidence given to the committee by industry experts, who advised that nearly all foreign institutions looking at investing in Australian managed funds were gearing. Although foreign investors have the option of lodging an Australian tax return and gearing their investment to lower than the 30 per cent headline rate of withholding tax, investors do not wish to engage with the complexity and compliance cost of claiming deductions.

I will be moving a second reading amendment to halve the 30 per cent withholding tax on distributions from Australian managed funds to non-resident investors. This amendment will place Australian fund managers in a much better position to compete to manage the global pool of managed funds. The 30 per cent withholding rate could hamper the potential growth of our funds industry when funds under management in Asia are expected to grow by 14 per cent per year over the medium to long term. Labor’s amendment—and this is acknowledged by industry—will build on the strength of Australia’s funds management industry to make Australia the financial hub for the Asia-Pacific region.

Amazingly, Australia has some $1 trillion in superannuation. By total volume of savings and investment in this vehicle, we are the fourth-largest funds management country in the world. I think the United States, France and Luxembourg are the only three countries that exceed Australia in total funds under management. We have total funds under management in excess of countries like Canada, Switzerland, the United Kingdom and Japan. If you look at our population and economic base compared to those countries, we are a world major league player in funds management, and Labor believes we should be doing more to encourage exports and growth in this regard, particularly into the Asian region.

I turn to the Tax Laws Amendment (Small Business) Bill 2007, which Labor supports. The bill introduces the long-awaited standard eligibility criteria that applies across the small business tax concessions announced in the 2006-07 budget. The bill also implements several other 2006-07 budget announcements relating to small business, all of which enjoy Labor’s support.

Schedule 1 provides a single definition of a small business entity for the purpose of accessing any of the small business tax concessions. The current tax laws provide for a number of small business concessions, including the simplified tax system, the goods and services tax concessions, capital gains tax concessions and fringe benefits tax concessions. Each concession has its own set of eligibility criteria with the definition of small business, which is a source of complexity and unnecessary compliance costs for small businesses. The bill proposes a new small business framework which introduces a single test about the size of the business. The test provides a single definition of turnover and the amount of turnover: $2 million. Entities that satisfy an aggregated turnover test of $2 million per annum are able to utilise the various small business concessions. Small businesses will be able to access these concessions provided they also satisfy any additional criteria that currently apply to each concession that do not relate to determining whether the taxpayer is a small business.

Schedule 7 to the bill extends the rollover relief available under the uniform capital allowance system to small business entities that choose to deduct amounts for depreciating assets under the special rules for capital allowances for small business entities—simplified tax system. This will provide more flexibility for STS taxpayers wishing to restructure their business.

Schedules 2 to 6 and 8 to this bill amend a number of acts to give effect to the 2006-07 budget announcements to increase the capital gains tax maximum net assets threshold from $5 million to $6 million, increase the simplified tax system turnover threshold from $1 million to $2 million, remove the $3 million depreciating assets test from the STS eligibility requirements and increase the goods and services tax cash accounting turnover threshold from $1 million to $2 million. The result of these amendments, together with schedule 1, is that the GST cash accounting threshold will be increased to $2 million. The bill will align the simplified tax system—STS—and GST definitions of turnover for small business.

Speaking of the GST, I note that the coalition adopted Labor’s policy to increase the GST registration turnover threshold to $75,000 for businesses. This Labor policy was announced by the Leader of the Opposition in his address to the Press Club last month and is in line with recommendation 5.38 of Rethinking regulation: report of the taskforce on reducing regulatory burdens on business. Labor welcomes the adoption by the government of Labor policy.

The bill will result in the following changes to the STS. It will increase the STS average annual turnover threshold from $1 million to $2 million, remove the $3 million depreciating assets test from the STS eligibility requirements and give STS taxpayers access to the capital gains tax small business concessions, fringe benefits tax exemption for car parking benefits and the payment of quarterly pay-as-you-go instalments on the basis of gross domestic product adjusted notional tax.

The bill will increase the maximum net asset value for accessing the small business CGT concessions from $5 million to $6 million, and STS taxpayers would have access to the small business CGT concessions. These CGT changes come in addition to the recent amendments to the CGT small business concessions to make the requirements clearer and to lower the bar to qualify for the concessions in Taxation Laws Amendment Act (No. 7). Labor is a strong supporter of such concessions for small business. The bill gives exemption to STS taxpayers’ access to the FBT car parking exemption and STS taxpayers’ access to PAYG instalments based on GDP adjusted notional tax. Labor supports these measures to assist small business. The measures reduced compliance costs and increase the availability of such tax concessions for small business.

In conclusion, I move Labor’s second reading amendment:

At the end of the motion, add:

“but the Senate condemns the Government for its lack of commitment to the Australian managed funds industry and its lack of commitment to ensure Australia becomes an Asian financial services hub and calls on the Government to reduce the withholding rate applied to non dividend, royalty and interest distributions from managed investment funds to non-residents to a flat and final rate of 15 per cent”.