Mathias Cormann (WA, Liberal Party, Shadow Assistant Treasurer) Share this | Hansard source

The Tax Laws Amendment (2010 Measures No. 5) Bill 2010 makes a number of changes to Australian taxation law. The bill extends the main residence capital gains tax exemption to a capital gains tax event that is a compulsory acquisition of part of the adjacent land or structure of the main residence without the compulsory acquisition applying to the dwelling. The bill also allows non-profit subentities to access goods and services tax concessions available to a parent entity, including the higher registration turnover threshold available for non-profit bodies. It also provides that it will not be mandatory for the Commissioner for Taxation to apply a payment credit for running a balance account surplus against a tax debt that is a business activity statement amount unless that amount is due and payable.

The previous two issues flow from recommendations made by the Board of Taxation in its review of the legal framework for the administration of the GST. The bill makes two further changes to the eligibility criteria for accessing the film tax offsets, reducing the qualifying expenditure threshold for the post digital and visual effects offset from $5 million to $500,000 and removing the local production expen­diture requirements for films between $15 million and $50 million.

The bill also changes the rules surrounding deductions in relation to benefit for terminal medical conditions, allowing costs associated with providing terminal medical condition benefits to become tax deductible. Furthermore, the bill includes school uniforms and a range of eligible expenses for the education expenses tax offset from 1 July 2011. The measures I have listed so far are measures which the coalition will support.

We have a further aspect to this bill which involves a broad variety of issues. The final change that is proposed in this bill is a change to the benchmark interest rate for capital protected borrowings. This issue was first proposed in the 2008 budget. This is another issue where the government made a real mess of things by not thinking things through properly. After the government decided to reduce the benchmark interest rate for capital protected borrowings in the 2008 budget, this particular segment of the market just completely collapsed. It is, again, an example of where the government did not think things through before acting. The consequences in the marketplace were immediate. We know that this government is addicted to new and ad hoc tax increases. This is just another one of those examples.

Capital protected borrowings are generally associated with the purchase and holding of shares, units in a unit trust or stapled securities such as instalment warrants. These financial products allow an investor to borrow money to purchase shares, units or stapled securities. These then become security for the loan. These products are used almost exclusively by individuals to access the equity, mainly Australian, or unit trust markets in a relatively prudent way. Industry, yet again, had not been consulted at all about the change and has made strong representations to the government post the May 2008 budget to have the original decision changed.

Since then the government has delayed proposing legislation to implement the change on a number of occasions—in effect, for a period of three years now. In the May 2010 budget, the government then undertook to amend its proposal, changing its preferred benchmark rate by increasing it by 100 basis points. At current interest rate levels, this would be about nine per cent—about six percentage points below the personal unsecured lending rate. This measure, according to the budget papers, cost the government $28 million.

Schedule 2 of this bill amends the Income Tax Assessment Act 1997 and the Income Tax (Transitional Provisions) Act 1997 to adjust the benchmark interest rate used to determine the cost of capital protection on a capital protected borrowing. The benchmark rate is to be the RBA's indicator lending rate for standard variable housing loans plus the 100 basis points, as I have mentioned. The change would be effective for capital protected borrowings entered into from 13 May 2008, although there have not been all that many of them, given the absolutely incompetent way in which the government sought to introduce the proposal back in 2008.

Stakeholders understand that apportion­ment of deductible interest expenses involves a measure of discretion and subjectivity, but they maintain that the housing loan rate, even plus 100 basis points, is way too low. There is evidence, as I have mentioned, that capital protected borrowings have completely dried up since May 2008, which in turn has impaired the ability of individual investors to access the share market. The Senate Economics Committee inquired into this issue and its report was tabled on 25 March 2011. I want to commend the work done, in particular, by Senator David Bushby, in putting together a very sound argument in the coalition senators' dissenting report as to why what the government is proposing to do is not in the public interest. Evidence from Mr Duncan Fairweather, Executive Director of the Australian Financial Markets Association, revealed the scale of the collapse in these types of financial products. He said 'capital protected loans have fallen by over 45 per cent since the May 2008 budget announcement'.

It is clear that the benchmark rates will be set at an arbitrary threshold. The govern­ment's 2008 budget decision was clearly wrong, which is why they have subsequently walked away from it. The 100 basis point change contained in this legislation is an attempt by the government to salvage a mess that they have created by offering some sort of compromise. However, as I mentioned, stakeholders and experts in the industry argue that it is set way too low to reflect the economics of this market. The Tax Institute, in its submission to the inquiry, argued that the government's approach 'could produce inequitable and distortive outcomes'. More persuasive is the establishment of a benchmark rate at the midpoint between the indicator rates for standard variable rate housing loans and personal unsecured variable rate loans, as was recommended by the Australian Financial Markets Association.

The amendment that the coalition will seek to move during the committee stage is an attempt to set a level for this benchmark interest rate under capital protected borrowings that equates the cost of the component required for capital protection equivalent to the cost of acquiring separate protection. Given that this was the original goal of the legislation in establishing a threshold, it would seem to the coalition to be the more sensible approach. I appreciate that this is all very technical. However, the consequences in the marketplace have been real and immediate. It is not in our national interest for this sort of gung-ho, ad hoc approach by government to prevent people from accessing the share market in a prudent way where they essentially provide insurance for themselves in the context of their investments. The coalition amendment would establish that the benchmark interest rate for capital protected borrowings would be at the midpoint between the indicator rates for standard variable rate housing loans and the personal unsecured variable rate loans as published by the Reserve Bank. We think that this is a more appropriate compromise position between the status quo and what the government has been trying to do since May 2008.

Evidence presented to the inquiry by Treasury suggests that the government's revenue estimates in relation to the original proposal and this amendment are highly overstated and unlikely to be achieved. In an exchange between Senator Bushby and Treasury, Senator Bushby asked:

Have you done any seat-of-the-pants calculations on what you think the impact that might have?

Dr Lynch said:

… we advised Treasury in 2008, that the market would fall back substantially. It has done that.

So the government knew that the market was going to fall back substantially and they still pressed ahead. Dr Lynch continued:

Further, the level of activity in the income generator within that part of the industry has declined commensurately. Also the number of people employed in that part of the industry has been reduced. For a variety of reasons we think revenue certainly will not meet the expectations that are in the forecast. We cannot be precise with those numbers because I do not have the full basis behind the Treasury estimates.

Dr Lynch further said:

Looking at the longer term, if the market continues in the direction it is going at the present, there will not be very much revenue collected at all through this process.

As such, the fiscal impact of the proposed coalition amendment is assessed as minimal, which is consistent with the AFMA's evidence to the committee. I appreciate tax laws amendment bills are mostly very technical in nature. This bill deals with a broad cross-section of issues. All but one will be supported by the coalition. We will seek to make an amendment to the benchmark interest rate for capital protected borrowings, consistent with what I have outlined.