Gerard Rennick (Queensland, Liberal Party) Share this | Hansard source

I move:

That the following matter be referred to the Economics References Committee for inquiry and report by 10 December 2024:

Australia's taxation system, with particular reference to:

(a) the social and economic impact of taxing people who earn less than the cost of living;

(b) assumptions used by Treasury in modelling income tax cuts;

(c) the tax arbitrage between onshore and offshore profits that encourage domestic profits to be transferred offshore rather than retained in Australia;

(d) the tax arbitrage between onshore and offshore profits that puts companies domiciled in Australia at a competitive disadvantage to companies domiciled offshore;

(e) the abolition of numerous tax loopholes that favour special interest groups, in particular foreign interests;

(f) the actual net company tax rate after franking credits have been refunded;

(g) the cost of recycling franking credits to and from Canberra;

(h) whether capital gains tax concessions for passive investment cause a misallocation of capital into the non-productive economy which has to be offset by higher taxes on active income which drives down productivity and the velocity of money; and

(i) related matters.

I'm pleased to rise to speak to this motion today because tax reform is desperately needed in this country. Yesterday I addressed the issue of bureaucratic inefficiency, but we also need to change the way in which our taxation system works because we currently have a system that punishes those people who are productive and rewards those who sit back on their wealth. It can be lazy wealth, and it's not earning an income.

We also have a system in this country where, for some reason, we seem to want to tax domestic earnings much higher than offshore earnings. That, of course, encourages retained earnings to be sent offshore, only to be replaced by foreign debt, and, yet again, there is even a special provision in the tax act that allows the interest you pay on this foreign debt to actually be exempt from tax. I became aware of that section of the tax act, and I've mentioned it many times before. It's section 128F of the 1936 act: the publicly offered test. It was the moment I thought, 'I'm going to have to make a run for politics here because there is no-one else in this country who will actually be aware of what this act is, why it's there and the impact it has on this country.

I will start off on that slightly obscure but very important section because that publicly offered test is not a publicly offered test at all. What it says is that if you offer a bond in the primary market to at least 10 participants you don't have to pay withholding tax and, of course, anyone that knows anything about the Treasury bond market knows that not anyone in the public can just walk up and issue a bond in the Treasury bond market. I think it was half a million in my time; it might be a million today. That's the minimum parcel you need to issue a bond in the bond market. The sort of people that pay withholding tax, of course, are foreigners. I knew straightaway from my Treasury experience that this was a section in the tax act that allowed foreign banks to avoid having to pay tax on the interest that we pay them offshore.

I thought to myself, 'I wonder how people who earn interest income in this country would feel knowing that foreign banks don't have to pay tax on the interest that we pay to them.' Many hardworking Australians, pensioners in particular, and retirees who earn interest on their bank account do want to earn interest on their bank account as they don't necessarily want to have their money in the stock market as they get older. They don't want to suddenly wake up one morning to find out the Dow Jones has collapsed and the value of their equities has rapidly diminished. Many older people don't want to take risks and do like to invest in fixed interest. Well, guess what? You've got to pay tax, but foreign banks don't.

I want to address many other issues in this area. I know I'm going to run out of time, but it's important that I do address it. One of the other things that really grinds my gears in this country is the fact that people on low income who earn less than the cost of living have to pay income tax on that cost of living. I have to pay income tax on my income. All that does is actually drive these people further into poverty. My view is that if you get out of bed every day and put your nose to the grindstone—I don't care whether you're earning 40 grand or a 100 grand—that first 40 to 50 grand on your income should be tax-free. Currently, if you earn, say, $50,000, you're paying about $10,000 tax, you're paying about $6,000 in superannuation and you're just about to start paying HECS. You are effectively losing $16,000. So you are going from earning $50,000 to having take-home pay of $34,000. It's highly likely that unless you're still living at home with your parents—even then you would probably struggle to live on $34,000—you are going to go back below the poverty line.

I think that we tax low earners at too high a rate in this country, and it needs to be reduced. Ideally, it needs to be reduced to zero. I think we also need to call out Treasury for the way that they model these tax cuts, because they effectively don't assume secondary impacts. That discriminates against income tax for low-income earners, because, if you are a low-income earner and you did get a tax cut of $1000, it's highly likely that most of that money will end up back in the Treasury within the next 12 months. We need to look at why we tax low-income earners at 16 cents in the dollar. It was previously 19 cents in the dollar. We need to ask ourselves why those low-income earners are playing 16 cents on the dollar plus two per cent Medicare plus 12 per cent super while you can have money in superannuation uncapped. You can have millions of dollars in superannuation. You could be earning $150,000 in superannuation, and the most you're paying on your earnings is 15 cents. I fail to see why someone earning less than $45,000 has pay 18 cents including Medicare plus 12 per cent super, while someone who's a multimillionaire and has millions of dollars in super only pays 15 cents on their earnings. If it's a capital gain and they have held it for longer than a year they only pay 10 cents.

Yet again we have arbitrage between different trust structures or different corporate structures. If you've got your money in a superannuation fund, which is effectively a trust, you're paying a lower rate of tax than someone who is trying to get ahead by getting out of bed and trying to earn that through an active wage. Many of low-income earners work very, very hard. They travel the furthest to work. They're doing the menial jobs like cleaning, cooking or working in aged care. These aren't easy jobs, and someone has to do them. We really need to look at the way we go about taxing low-income earners.

There's another thing that we need to look at. There is a big hoo-ha at the moment over the fact that Treasury want to bring in a system whereby if you have more than $3 million in assets in superannuation, you would pay 30 cents in the dollar, while if you have less than $3 million in assets, you would pay 15 cents in the dollar. It's really strange that with superannuation for some reason tax is based on your balance and not on your income. You could have $2.8 million in superannuation and earn a five per cent return, so you could earn $140,000. Or you could have $3,000,001 in super and earn three per cent, or $90,000, and pay a higher rate of tax on $90,000, because that particular year your rate of return on your asset was less than someone else's rate of return on their asset. So you would pay a higher tax rate than someone who actually earned more than you.

I often think it's being used to mask the significant superannuation tax concessions, which are just shy of $50 billion. If you look at the tax expenditure statement, that $50 billion goes mainly to the upper 25 per cent. Nearly all of it goes to the upper 25 per cent, while we still have the pension, and it costs $54 billion. That tax expenditure statement has actually forecast that tax concessions for superannuation, which mainly go to the upper 25 per cent, are going to very quickly exceed the cost of the pension itself.

This is another issue that we need to have a look at, because it is completely dysfunctional. There is no symmetry in any of this whereby we have a flatter tax rate. Different people, depending on their income, can have the same income and pay different amounts of tax, and that's completely dysfunctional. What we want is a system where we have a very simple tax system and everybody pays the same rate of tax based on the level of income they earn, regardless of whether it's in superannuation or not. It should be taxed at a flat rate on the same amount of money. I think that we need to seriously look at taxing superannuation based on income levels, and I would suggest that your first $20,000 to $30,000 in superannuation is tax-free. You can add that on top of your first $40,000 outside of superannuation, and there you go. You've still got a very generous tax-free income if you're retired, but after that you go back to your marginal rate, rather than just have a flat 15 per cent in superannuation.

The other thing we need to look at in this country is that we have an onshore tax rate of 30c, and that's before franking credits, which I'll come to in a minute. Depending on the withholding tax treaty that you're dealing with and depending on where that money is sent, that withholding tax rate on profits transferred offshore can be between zero and 15c in the dollar if it's with one of our recognised trading partners. That is basically encouraging any company to either set up a subsidiary offshore or transfer their profits offshore. That is ridiculous.

We saw it a few years ago with the iron ore companies. Obviously, if they kept their earnings here in Australia, they'd pay 30c, so they decided to set up a marketing hub in Singapore whereby they could pay marketing fees to Singapore. What Singapore knows about marketing iron ore is beyond me—it's not like they've ever had any iron ore—but suddenly BHP, Rio and Fortescue decided that they needed to set up a marketing hub in Singapore. Of course, that was nothing more than a tax dodge. I'm glad to say that the tax office did get onto those iron ore companies about it and they've shut them down.

But this sort of behaviour goes on all the time. We've seen it with Pfizer, for example. Their operating profit ratio is seven per cent, despite the fact that their worldwide operating profit is 40 per cent. Of their $1.4 billion in sales, about $1 billion of it got transferred to Ireland. Why Ireland? Why that money needed to go to Pfizer Ireland, who I doubt would actually have a manufacturing plant, is beyond me—other than the fact that Ireland has a company tax rate of 12 per cent. So it's very simple logic. If you get a tax deduction here, you save 30c in the dollar. If you send the money to a low-income tax jurisdiction, you pay 12c there.

Many people will say, 'You can't have withholding tax on profits sent offshore because you'll have double taxation.' That's not the way it works. What you've actually got to look at is the cumulative rate of taxation. If there's a withholding tax rate of 10c here in Australia, on profit-centre Ireland, which has a company tax rate of 12c, the cumulative rate of taxation is 10c plus 12c, which is 22c. It's less than 30c. So there's an eight-cent arbitrage there—for the sake of paying a lawyer to set up a subsidiary, putting an office over there and effectively transferring profits offshore. That sort of behaviour goes on quite a lot. While I know the tax office does a very good job and tries very hard to crack down on it, they literally cannot keep up with the amount of international transactions going on.

That is why the very easy way to do all this and deal with this in a heartbeat is to effectively increase the rate of withholding tax on all profits sent offshore. There are more tax treaties than you can poke a stick at, unfortunately. I haven't been able go through all of them, even though after I finished my masters of tax law I actually went back and did another subject at the University of Sydney just to come up to speed with it. But you just can't keep up with this sort of stuff.

Put a higher withholding tax rate offshore and lower the company tax here so that we encourage people and companies to retain their earnings here in Australia rather than shift the profits offshore. You will find that, like anyone that understands a balance sheet, if you increase your retained earnings, you'll have a higher capital account and you'll need less debt. So it's actually one of these things that will help reduce foreign debt in this country.

The other thing we need to look at is the amount of churn and the real company tax rate here in Australia. Imputation tax credits have had two iterations in this country. The first time was when Paul Keating introduced imputation tax credits, and the second time was when Peter Costello decided that he would refund tax credits. Of course, what that did was create a massive churn in the economy. I've worked on both sides of the ledger here, first of all as a company tax accountant, where you would pay company tax down to the ATO in Canberra and then, six months later, the shareholders would lodge their tax return and the ATO would refund the company tax paid to Canberra back to the shareholder.

Australia, I think, is the only country—or one of two or three countries in the world—that refunds franking credits. It's a very inefficient system of churning money through Canberra. It requires companies to keep franking accounts and streaming accounts, and they've got to watch how they frank their dividends and everything like that. Then it creates a whole heap of work on the other side for the public accountants, who have to go through and work out all the franking credits and all the rules around that. You're much better off having—and I'm pretty sure the states do this—a rebate of 10c. That way, you don't actually have to repay the money once it's been sent to Canberra.

We need to have a look at that, because our net company tax rate is now below 15c as a result of the balance in superannuation funds going from about $500 million, when Costello introduced the refund of franking credits, to now $3½ trillion, and it's forecast to hit $9 trillion by 2050 or 2060. So, we're just churning money through these superannuation funds, only to repay it later on. Let's get rid of this, yet again, arbitrage between these different legal structures in which taxable income is declared. But, long story short: if we want to increase productivity in this country, we need to look at lowering taxes on active income, we need to look at lowering taxes on income earned here in Australia and we need to look at actually retaining our earnings and encouraging productivity, which our current tax act does not do.