Annette Hurley (SA, Australian Labor Party) Share this | Hansard source

As Senator Coonan said, the taxation of financial arrangements has been a longstanding area of reform for consecutive governments. The changes in the taxation of income from financial arrangements were first announced by the Keating government in 1992. Then in 1999 the review of business taxation, the Ralph review, recommended that the taxation of financial arrangements be changed. Stage 1 of those reforms, distinguishing between debt and equity, was introduced in 2001. Stage 2 of the reforms, clarifying the taxation of foreign currency gains and losses, was introduced in 2003. Further reforms recommended by the Ralph review concerning the tax treatment of commodity hedges were announced in 2005. The Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 implements stages 3 and 4 of the taxation of financial arrangements reforms dealing with hedges and tax timing of other arrangements. It is a complicated but important part of fiscal law. Treasury believes it will bring our treatment of taxation of financial arrangements up to par with other major developed countries.

For the purposes of this bill, a ‘financial arrangement’ is a right to receive or an obligation to provide a benefit that is monetary in nature, non-monetary in nature but may be settled by money or a money equivalent or is in substance and effect monetary in nature. The above definition seeks to cover the elements common to a wide range of modern financial instruments such as futures, options, credit swaps, forward agreements and other financial products. It also covers more established arrangements like loans, promissory notes and debentures. Notwithstanding some of the problems that those instruments have created recently, I am sure that the financial markets will make full use of these and other instruments in future. New financial products have been devised and used by business and industry at a rapid pace over the past two decades. The use of modern financial instruments such as futures, or hybrid debt/equity securities, has increased as business has sought new ways to protect itself from the risks of an increasingly global market. It is recognised that innovations in financial markets have outpaced the taxation framework governing them and that what is required is a reform of tax laws that shifts the emphasis from the legal form to the substance of financial arrangements. The current emphasis on the legal form of the arrangements has favoured the use of some types of financial arrangements over others due to more favourable tax treatment, adversely affecting pricing, risk management and the efficient allocation of financial resources.

This bill amends the Income Tax Assessment Act 1997 so that the taxation of various financial arrangements occurs by an appropriate method. I will not go into the specific ways in which the legislation does this. I simply say that the legislation does not generally apply to individuals or superannuation funds with assets under $100 million. It does not apply to authorised deposit-taking institutions with an annual turnover under $20 million and other entities with an annual turnover under $100 million, financial assets under $100 million and total assets under $300 million. The ATO estimates that there are around 1,800 businesses with turnover exceeding $100 million to which this legislation will apply. Whilst they may incur some initial costs in changing software and paying advisers, they should also reap gains from aligning tax and accounting reporting and from hedging arrangements being less subject to disruptive tax effects.

The committee considered the impact of this legislation on smaller businesses. Government members of the committee think that these kinds of arrangements and the limits set are sufficient to deal with concerns expressed during the committee process. The government undertook an extensive consultation process over a 12-month period before the committee process. The government listened during that consultation period and that resulted in a number of changes to the legislation that effectually dealt with a lot of the concerns arising out of the bill. The bill is very complex; however, it affects only large taxpayers and, given the extensive consultation process that was implemented, those affected will have gained some familiarity with it. The ATO is putting in place procedures to advise on and assist taxpayers in complying with the new requirements.

Most of the people consulted during the committee process were very supportive of the immediate passage of the bill. Many submitters to the Senate Standing Committee on Economics inquiry noted that some review process of the bill should occur after implementation to allow for later technical amendments. This has been acknowledged by the government, with the minister noting that, given the complexity of the law, monitoring the implementation of the reform would be required and any refinements needed would be dealt with as they arose. The Tax Laws Amendment (Taxation of Financial Arrangements) Bill introduces a comprehensive new framework for the taxation of financial arrangements. It is designed to reduce tax induced distortions in investment and financing, facilitate efficient risk management and reduce compliance and administration costs. It is a significant bill which will provide certainty, clarity and equity to the tax treatment of financial arrangements. It represents the final stage of reform in this area undertaken by two previous governments. I commend the bill to the Senate.

(Quorum formed)