Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Link to 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”.

Andrew Murray (WA, Australian Democrats) Share this | Link to this | Hansard source

The Tax Laws Amendment (2007 Measures No. 3) Bill 2007 brings together a diverse range of matters to amend various pieces of taxation legislation. The bill is an omnibus bill with 10 schedules. It amends the Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997, the Fringe Benefits Tax Assessment Act 1986, the Income Tax (Transitional Provisions) Act 1997 and the Taxation Administration Act 1953. Some brave souls periodically recommend overhauling the taxation system completely, but we always go back to piecemeal picking at the edges of the taxation system. Better than leaving well alone, I guess, simply because all is not well.

The Tax Laws Amendment (2007 Measures No. 3) Bill 2007 implements the following changes to Australia’s taxation system in 10 schedules: distributions to entities connected with a private company and related issues, a non-concessional contributions cap during the simplified superannuation transitional period, assessment of capital gains of testamentary trusts, superannuation death benefits of certain defence and police personnel, extension of the transitional period relating to the application of accounting standards under the thin capitalisation rules, repeal of dividend tainting rules, interest withholding tax exemption, investments and disposal of interests in forestry managed investment schemes, Australian trust distributions to non-resident trustees and new withholding arrangements for managed fund distributions to foreign residents.

This bill was referred to the Senate Standing Committee on Economics for report and, as usual, the government gave it a very short time frame in which to receive submissions, to hold a hearing and to prepare a report. Given the short time frame, it was not surprising that only 11 submissions were received which dealt with only a couple of the schedules. This could be evidence that all the other schedules are so wonderful that no-one has a problem with them or it could be evidence that people and organisations very pressed for time and resources were unable to make submissions on time. Be that as it may, and we are unfortunately getting used to these hurried committee timetables, I can only comment on the evidence before me.

I would like to say how grateful I was for the expedition of Hansard in providing us with a record of the hearing. It was in my email inbox by Friday afternoon following a Friday morning hearing. Also the secretariat has to be commended for the swift turnaround of the Senate economics committee draft report. It at least gave those of us interested in writing a minority report time to consider the matter. The chair of the committee is to be thanked for his quick work in clearing his draft. His consideration of other committee members is a welcome change. There was robust debate during the hearings but the chair was courteous, fair and helpful.

Although there are 10 schedules to this bill, I am only going to deal with those which were subject to the committee hearings—in particular, schedule 10, which was the most contentious. I do want to briefly remark on schedule 7, which had been contentious, and the shadow minister has covered his summary of the events which led to schedule 7.

• Schedule 7 to this Bill amends sections 128F and 128FA of the Income Tax Assessment Act 1936 (ITAA 1936) to more closely specify those debt interests that are eligible for exemption from interest withholding tax (IWT) ...
• These amendments correct an unintended broadening of the exemption that occurred following the New International Tax Arrangements (Managed Fund and Other Measures) Act 2005 (2005 amendments). Closer specification of the range of debt interests eligible for the exemption realigns the exemption to the Government’s policy intent and enhances the integrity of the tax system.
• The amendments specify that non-debenture debt interests that are non-equity shares (including those subject to the related scheme rules in Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997)) and syndicated loans are eligible for exemption from IWT. They also introduce a regulation-making power to prescribe further types of eligible debt interests.

Those listening in the Treasury benches will recognise that as a quote from the explanatory memorandum and my compliments to the Treasury officials concerned for correcting that schedule and enabling us all to support it.

According to the explanatory memorandum, schedule 10 amendments are intended to improve the efficiency of the managed funds industry in respect of the collection of tax from distributions to foreign residents. As noted in the committee report, of the 11 submissions that were received, six commented on schedule 10 and they all made the same or a similar point: while the new withholding tax regime was a great improvement, the 30 per cent withholding tax rate proposed in the bill was too high and made Australia uncompetitive internationally. The main contention from those making submissions was that many countries in our region and outside our region only attract a 15 per cent tax rate or less. The committee’s evidence from written submissions and the public hearing supports Labor’s policy of having a flat and final withholding tax rather than a deductible headline nominal rate, and the rate for the withholding tax itself being 15 per cent. The ALP 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. I think they are right.

There is no doubt, and this was acknowledged by those giving evidence, that there remains a way to structure the investments so that what is perceived as a high rate is not paid at the end of the day. The committee heard evidence that large institutions and entities—not smaller ones because they do not have the resources—can do just that. That in itself is discriminatory. The evidence was that they can structure the investment through different vehicles and claim deductions to ensure that they are paying, in some cases, no more than a final rate of 12½ per cent. The Treasury indicated that not many do that, from which I conclude that most would rather pay up than go to the trouble and cost of structuring, gearing and putting in annual tax returns and getting their money in a year to 18 months later. It is all too complex, costly and hard. Or they can take their money elsewhere, which is a real and growing option in this fast moving dynamic capital market, especially when our headline rate of 30 per cent stands out as uncompetitive. I take issue with the shadow minister’s remark that in this regard he was in fact referring to Australia’s strength in this area historically. The indications are that the prospect of that strength is unlikely to be maintained unless we adjust the rate.

Mr Speed, chairman of the Speed and Stracey legal firm, criticised the bill not only for the 30 per cent rate but also for the fact that it was a headline rate of tax rather than a final and flat withholding tax rate. He said that when he was on the phone to overseas investors and told them the rate of tax was 30 per cent, the phone metaphorically went dead. He intimated that it stopped people in their tracks and that often overseas investors would then look to similar investment in other countries where the rate was lower. The committee heard that, on the whole, overseas investors are not persuaded to structure their companies differently for a tax benefit in Australia when they can pick up the phone and do a deal with Singapore without going through the hoops of setting up different corporate structures and where they do not have to lodge tax returns to claim back tax paid. If there was a choice of going somewhere where the fixed and final rate was lower and you did not need to jump through administrative hoops and have a year or more delay in getting money issues resolved, I do not know many market participants who would not say, ‘Let’s go with the lower tax rate and the easiest structure.’

The witnesses at the table brought up the point that Australia is currently well regarded in this market. They also said that Australia has the potential to become a financial hub for this style of investment, if the rate is right. But the reality is that countries in our region, like Singapore and Japan, are just as stable as Australia in these terms. They have lower rates and will attract overseas investment at the expense of Australia unless we adjust our regime.

I recognise that the Treasury have said that the market has grown very well over the last couple of years, and they are accurate in saying so. They also said that Australia has done well, and they are accurate in saying that too. But that is in the past; the market is moving on and Australia should continue to move with it. The evidence is that in this bill the Treasury have done a good job of simplifying and streamlining the taxation regime in this area, and they were rightly complimented on that fact.

But, most of all, the rate will determine investment. If we wait—as was suggested in the majority report—and just keep an eye on how things are developing, then there is a chance that we will be left behind. Getting tax relief for investors from particular countries as a result of new double taxation treaties is a very slow process. We all know how long it takes to negotiate a double tax treaty, as was recommended by the majority report. Once the terms of the treaty have been finalised and it has been ratified, there has to be legislation drafted to incorporate the treaty into Australian law. That legislation must then pass through parliament. That is too slow and bureaucratic for a fast-moving capital market. It is too slow, and more agile neighbours will react to the marketplace realities.

I support Labor’s recommendations, firstly, that the rate should be a flat and final rate so that investors do not face the complexity and cost of structuring and gearing and also do not have to wait years while tax returns are processed and, secondly, that the rate should be 15 per cent—which is at the upper end of rates—so that Australia remains competitive in this area of investment. If the government were not willing to accept the 15 per cent rate, then I think they at least should consider a flat and final rate based on the effective tax rate, which they know—or at least have a feeling as to what it is. Of course, we do not have a feeling as to what it is because we were not given the figures.

I now have a few remarks to make on the other schedules. These were either discussed by the committee or submissions were received on them. Schedule 8 streamlines the taxation for forestry managed investment schemes in the Income Tax Assessment Act 1997. It entitles investors to immediate up-front tax deductibility for all expenditure. As the Minister for Revenue and Assistant Treasurer has stated, these proposed arrangements will provide greater certainty for investors in forestry, will see the continued expansion of Australia’s plantation estates and will reduce reliance on both native forests and overseas imports. However, as I have said before—and it bears repeating—the policy principle behind the streamlining of these investment incentives should be rational and transparent.

Are these investment incentives—these tax concessions—good for both economic and environmental reasons? Personally I am not so sure. Why do some trees and not others qualify for a tax concession? Why eucalypts but not walnuts? Why pines but not olives? If the Prime Minister wanted to prove his green credentials then maybe investment in all trees, and not simply managed investment forestry schemes, should be supported with taxation concessions. If he wants to prove his economic credentials then maybe investment in all trees, and not simply managed investment forestry schemes, should be supported with taxation concessions.

I have argued in the past that from an economic perspective tax concessions are only appropriate for infant industries that we wish to encourage. They should be time limited unless the industry is of national strategic significance. On environmental grounds, it is possible to argue that forestry is of national significance now. Even the tired, sceptical, climate-warming deniers that constitute some members of our federal government accept that trees are an intrinsic good in this respect. So why not include all trees that are commercially viable? Why just include forestry plantations? If a farmer invests a large amount in planting trees to combat salinity on his property in southern Western Australia, does it not make sense that these tax concessions should be extended to that farmer?

There was only one submission to the committee regarding this schedule. It was a joint submission from the National Association of Forest Industries, Tree Plantations Australia, Treefarm Investment Managers Australia, and the Australian Plantation Products and Paper Industry Council. Needless to say, these entities supported the legislation as it resolved ‘10 years of instability and uncertainty about the future ongoing taxation arrangements for retail forestry’. That, of course, is a virtue of the legislation: it does indeed get rid of the uncertainty which has dogged the industry.

I note that there were no submissions from environmental groups or non-profit sustainability groups or farming groups—not, I guess, because they have nothing to say on the issue but because this committee process was rushed. So the government gets a cheer from those involved in forestry managed investment schemes but it leaves unanswered the questions that I have asked.

As everyone in the Senate knows, I am all for consistency in tax matters. That is why schedule 4 has me puzzled. The schedule applies to police officers and members of the defence forces who die in the line of duty. As was pointed out by the United Firefighters Union of Australia in its submission, firefighters are not included in the categories of persons who can take advantage of this benefit. Yet many would say that they have put their lives on the line in similar ways to defence personnel and police officers, when they are faced with danger. Many emergency workers—paid and voluntary—are at risk at their work. Ambulance drivers are unfortunately often attacked when they attend at nightclub brawls or domestic disputes. All of these people should surely be afforded similar treatment to that given to police officers and defence personnel if the tax concession were to be granted because people may be harmed or die in the line of duty. Perhaps police officers and defence personnel are being given this preferential treatment because they are deployed overseas. But Australian firefighters regularly assist overseas, as do aid workers and many others. There have been some very unfortunate instances of overseas aid workers being killed in the line of duty, and yet they will not get this particular concession. It is totally unclear.

I think that proper and thorough consideration should have been given to this matter and consistency of tax policy applied. There is no evidence that I could see in the explanatory memorandum to satisfactorily explain the reasoning behind this amendment and why it was limited to defence personnel and police officers. All that Treasury said to the hearing was that it was a policy matter on which they could not comment. To put it another way, they were just following orders.

In conclusion, as you know, Madam Deputy President Kirk, this is a cognate debate, with the Tax Laws Amendment (Small Business) Bill 2007 to be considered. I wish to make some remarks and to ask a question on that bill, so I would seek to ensure that there will be a committee stage following the second reading debate. I hope you will ensure that that occurs.

John Watson (Tasmania, Liberal Party) Share this | Link to this | Hansard source

The Tax Laws Amendment (2007 Measures No. 3) Bill 2007 is an omnibus bill dealing with 10 issues. However, given the limited time of this debate, I have only the time to discuss three matters about which I have had a close, continuing interest. The first is an amendment to the anti-avoidance measures under division 7A of the Income Tax Assessment Act, an amendment which overcomes some quite punitive provisions which date from 1996. It is indeed very pleasing that the government has recognised the problems faced by a lot of small businesses in often unavoidable situations where there may have been an honest mistake but at the same time with no loss to the revenue, no mischief and no benefit to an individual or to a group of individuals, who were, however, severely penalised.

I therefore wish to take this opportunity, Minister at the table, to express my thanks to the Treasurer, the Treasury, the tax commissioner and the government, because I have been working to rectify these problems for perhaps to 12 to 18 months. The overriding problem with division 7A was often referred to in the profession as the ‘drop dead’ provisions, because there was no commissioner discretion. Therefore, the retrospective amendments dating to 2001-02 are indeed good for many people. In the main, the changes take effect from 1 July 2006. However, the commissioner’s discretion is retrospective and can be utilised in respect of 2001-02 and later years. The fringe benefits tax amendments are from 1 April 2007. The retrospective nature of the amendments is indeed unusual but gratefully received.

Difficulties and issues surrounding division 7A have been numerous, with many accountants facing litigation from their clients arising from the 1996 legislation. Allow me the opportunity of explaining some of those difficulties that previously faced the profession and why they were so keen to get these amendments through. One example is the automatic debiting of a company’s franking credit account where a deemed dividend arises under division 7A. The amendments we are debating today now provide the Commissioner of Taxation with the discretion of disregarding the deemed dividend that has arisen in circumstances of an honest mistake or omission by a taxpayer, providing a greater flexibility in the administration of the process.

Innocent transgressions also often involved intragroup transfers or transactions where there was no economic benefit to the shareholders or associated persons, such as a country bookkeeper drawing from a wrong account or drawing a cheque on advice from a banker to purchase a tractor from what may have been deemed the incorrect account. Quite often such transactions were not detected until the books went to a more sophisticated tax accountant after the year of income when preparing the annual return. There were problems of refinancing shareholders through paying a deemed dividend. For example, a loan from a solicitor being refinanced by a bank could have got caught. In addition, certain shareholder loans could be refinanced without triggering the deemed dividend.

The drafters of the legislation therefore had to navigate some very difficult legal precedents. For example, loans made by private companies to shareholders or associated were caught by division 7A if that loan was not repaid before 30 June of the relevant year or was not the subject of a complying loan agreement entered into before the loan was made. A general principle of taxation is that only economic gains are taxed. However, division 7A imposed the harshest possible tax impact on transactions that had no long-term economic impact—for example, a loan made from a private company to another related entity in June 2003 and repaid in July 2003 in the absence, for example, of a recent loan agreement would suffer an income tax of effectively 48.5 per cent plus a loss of franking credits, which carries a further tax penalty.

An identical transaction undertaken in June 2005, ironically, would have attracted no such tax. Hence the importance of this amendment. Taxpayers without the slightest intention of obtaining a taxation advantage were being levied with substantial taxation imposts without the opportunity or mechanism to undo or correct their situation. Division 7A’s original intent was to ensure that private companies would no longer be able to make tax-free distributions of profits to shareholders in the form of repayment of loans. While this intent was understood and respected, the legislation was interpreted, unfortunately, far wider than its original intent. Here is a warning for future tax legislation.

The second measure that I wish to address tonight in this omnibus bill includes the requirement that investors in forestry plantation schemes meet a 70 per cent direct forestry expenditure test—an initiative strongly supported by the forestry industry, which I am a little bit surprised about. The 70 per cent test will have to be read in relation to a number of other measures, some of which are included in the bill.

There is also another piece of legislation which I refer to as the ‘tax promoters legislation’ that one has to be careful of in navigating this scenario. The schedule also provides for the establishment of a secondary market, which I believe will give original investors the opportunity of selling before harvesting, providing the investment was for at least four years. This measure, I believe, will add a new level of transparency that will ensure costs are contained rather than inflated, which is an important part of this test.

I believe the forestry plantation arrangements that seek to make use of the 70 per cent direct forest expenditure fundraising mechanism—and the emphasis is on ‘direct’—should only be used by those corporations with long experience in forestry and staffed by people with great qualifications, including actuarial qualifications. I issue this warning because I can see many potholes along the life of a project, starting from the initial investment to the harvesting of the plantation, its marketing and final distribution.

Honourable senators would be aware of the 1964 precedent in the Cecil Brothers High Court decision that was decided against the Australian Taxation Office by denying the office the right to substitute a different price to the one actually charged. Cecil Brothers was a shoe retailer which purchased certain stock from a related company at a price higher than the market price charged by the usual suppliers. Legislation therefore had to overcome the possibility of a like situation in the forestry industry, whereby, for example, a box of seedlings that cost $3 by one arm of the promoting company could be sold to another within the corporate structure for a price of $25, or the employment of contractors by an associate company and charged back to the forestry operation at a price grossly exceeding the market price—a mechanism to inflate the value of direct forest expenditure. How did the drafters overcome that? They inserted what was known as an arms-length market price test to overcome the precedent in the Cecil Brothers case.

I believe that the 70 per cent direct forest expenditure is available only for forestry plantations where it is for the long term, for experienced operators and, I also add, the brave. Records have to be kept for the life of the plan plus five years. The problems will occur when the forest company falls short of an ATO audit in four or five years time. Not only do all of the forest corporations incur severe penalties should they breach the 70 per cent test, but the investors will have the indignity of their tax returns being amended by denying the initial deduction for the investment. The mind boggles, Senator Brandis, the minister at the table, at the potential legal ramification for such an event. I ask honourable senators to remember that we are dealing with projected future costs with a seven- or 12-year life, and these costs must be discounted to present values and the records have to be kept for the life of the plan.

Discounting recognises that a dollar today is not the same as a dollar in the future because, even in the absence of inflation, today’s dollar can be invested. Not only does the plantation company have to work out very carefully its direct—not its overhead, not its indirect, but its direct—forestry expenditure, but there are a number of what I call contestable fringe costs that may be subject to challenge in an audit. The company must be familiar with this counter cash flow technique, thus the potential for error could be high for those who are not prepared, those who do not fully understand the costs and ramifications of legislation. Otherwise, they may fall below the 70 per cent limit with all of the dire consequences that I referred to. So I also issue a caution to financial planners therefore to treat such projects with high caution as they may also get caught up in the future legal consequences or ramifications.

I wish to spend the remainder of my available time addressing scheduled 10 of the bill, which concerns the new withholding arrangements for managed fund distributions for foreign residents. The legislation effectively puts into legislative form the Australian tax office’s administrative arrangements, which currently carry different rates from 29 per cent to 47.5 per cent. For example, there is a 30 per cent corporate rate, an individual 29 per cent rate and a 47.5 per cent superannuation noncomplying rate. The measure before us tonight removes the uncertainty and reduces the compliance burden by having to address different types of income and different types of recipients of that income. To put it quite simply: this measure does provide for a high degree of certainty.

Currently, managed investment trusts and their intermediaries have to clarify the nature of the foreign investor as an individual, a company, a trustee or a foreign superannuation fund. So the focus on these amendments is on the foreign residents with Australian sourced income. The Australian sourced income comprises rents, capital gains and some foreign exchange gains, but not interest or dividends because these classes of income are already subject to a separate withholding rule. So trustees will withhold a common 30 per cent from all distributions to foreign residents. However, this is the nub that the Labor Party have not realised: these foreign investors do have the opportunity of lodging an Australian tax return to get a credit for the 30 per cent tax against their tax liability of their net income—that is, the distribution less deductions such as sums borrowed to invest in the property trust. This is in contrast to the ALP’s proposed amendment as a 15 per cent final tax without deductions.

The proposal for a 15 per cent withholding tax has the effect of creating a tax concession to a group of people but which are not available to those who make direct investments. So it is the same income, but if it is made by a person who makes a direct investment they do not get this final 15 per cent. So you have got a situation where there is a breach of a principle of taxation—that is, that taxpayers on the same incomes from the same source should pay the same tax. The ALP amendment does not achieve this outcome. You have got that disparity. We have got enough of these problems that we are trying to correct, and yet the Labor Party wants to perpetuate these sorts of problems. So if a tax rate does result in a greater foreign investment, I believe this is likely to flow to an already mature Australian property market. These are the consequences.

This may have the effect of creating Australian investors out of the Australian property market. Therefore, the ALP’s property owners proposal has potential to further overheat the Australian property market at this time at the expense of ordinary Australian investments and, indirectly—here is the problem—to ordinary homeowners by jacking up the price. Originally, I had some sympathy with a 15 per cent rate. It has simplicity, and this would have had the effect of matching Australia’s withholding tax rate with those of a number of other countries. On the other hand, it would have created an environment of income being taxed differently to direct investment, and I think that is indeed unfortunate. We also have to consider the affordability issue for Australian investors and individuals, because the crowding effect would assist foreign investors to the detriment of Australians.

Questions have been asked about the competitiveness of the Australian property trusts industry. It is one of the most sophisticated in the world and has done very well and is very well managed. But headline rates do not seem to have affected the growth in the Australian listed public trust in recent years. Nor do I believe this legislation will make any change. Evidence suggests that, in recent years, these foreign resident investors in Australian property trusts, which are known in the industry as REITs, have not lodged many tax returns, as they are entitled to do, despite Australia property income having been taxed by withholding the corporate rate of 30 per cent. So the sky is not going to fall in as a result not passing the Labor Party amendments.

The Australian property trust industry is, I believe, one of the world’s largest property trust markets, representing something like 15 per cent of global real estate property trust market capitalisation, and there has been no evidence of a flight in capital, and nor do I believe there will be as a result of this legislation. I know the financial services industry has lobbied strongly in support of the Labor Party amendment, but I have to point out that the industry is a very sophisticated one. It has a very good growth record; it has strong management and strong leadership; and it puts Australia at the forefront in financial services and contributes to Australia being a regional financial centre, particularly in this part of this world and in this time zone, which includes countries like Singapore, Hong Kong and Japan.

In fact, in 2005, 70 per cent of all funds raised were invested offshore and foreign investment in property trusts has also increased to about 15 per cent of the total equity in property trusts—a very good and commendable record. It also must be remembered—and this is the important point—that Australia does not tax the foreign income, only the income derived by the trust in Australia, which is merely a portion of the total. Therefore, this measure is only concerned with Australian sourced income paid to foreign residents. That is the limitation of the bill before us. For example—and I think this will clarify the position—if an Australian property trust invests in both Australian property and New Zealand property and distributes the income to a UK investor, there is no tax on the income from the New Zealand property because Australia only taxes foreign residents on the Australian sourced income.

The government decided not to support the Labor Party amendment to introduce a final flat rate of tax on non-royalty, non-dividend, non-interest overseas payments—I gave the list earlier—because the government regarded this as a measure to protect the revenue. Everybody wants tax concessions for some group or other, but there has to be a limit and a degree of responsibility in managing the budget, and that is why the Howard-Costello team has been so successful in leading Australia through some fairly difficult decisions to the prosperity we now enjoy. The government’s first responsibility is to protect the revenue—and Labor’s amendment would have cost a lot of revenue.

My final comment is associated with accessing financial advice. I support the government’s measure to assist investors to get access to appropriate financial advice—and some very good measures are included in the bill. But there is still some way to go. For example, for some time I have supported the notion of an up-front deduction for fees paid to a financial planner for financial advice. But the irony of the situation is that, while these up-front amounts paid to a financial planner for investment advice are not tax deductible, the trail commissions, many of which not only apply to the initial investment but can trail on for years and years, are tax deductible. So again you have this unequal playing field. I have spent a lot of my time in tax over many years in trying to make sure that we have tax equity. I think this is one area where we can not only create tax equity but help to encourage the concept of paying up-front fees rather than trail commissions, which I know some members of the superannuation committee had some problems with some years ago. I commend the bill to the Senate.

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

As outlined by Senator Sherry, the Labor Party supports most of the measures in the Tax Laws Amendment (2007 Measures No. 3) Bill 2007. Schedule 10 deals with taxation of managed investment trusts, and most public comment has been received in that area. For my part, I want to deal exclusively with this area of the bill.

Managed investment trusts as discussed in this bill are funds that are held by an Australian entity and managed by trustees. Most are unit trusts that distribute their income fully and have investments across a wide range of assets such as property, shares and bonds. The funds affected by schedule 10 of this bill are largely listed property funds or real estate investment trusts. The Australian funds are now generally sophisticated and competitive and have attracted offshore investors. These investors are varied but include institutions such as large pension funds and other funds managers.

Until recently, these trusts have largely grown by investing in Australian assets and harnessing Australian funds. Their success attracted overseas investors, but now there is competition from other managed investment trusts in other parts of the world such as Hong Kong and Japan. This is where I would differ from Senator Watson, who says that the market has been very successful in Australia and therefore investors will not be deterred from investing in Australian funds. Other countries have now seen the value and importance of these funds and are doing their best to take over Australia’s share in these kinds of managed investment trusts.

Labor’s view is that the Australian financial sector should be encouraged and that Australia could and should be a financial hub in the Asia-Pacific area. We have the talent, innovation and expertise to make that happen. This is a view shared by the industry, and there is ample room for improvement in the services sector. Australia’s services contribute over 70 per cent of GDP. The contribution to export, on the other hand, is difficult to determine but is around 20 per cent. So there is a great disparity here. With the fast-growing Asian economies, demand over the next decade or so should be strong, and Australia is well placed to provide the high-quality service that these countries require. The growth of the financial services sector in Australia has been exponential in the last 20 years or so. This, of course, was largely to do with the opening up of the financial sector and the financial markets in the 1980s by Treasurer and then Prime Minister Paul Keating. The financial sector now contributes 7.2 per cent, or $68 billion, of GDP.

Initiatives in superannuation—the super guarantee put in place by Mr Keating—have also ensured a strong flow of capital into funds in Australia. This is one policy that Mr Keating—unfortunately, in my view—did not address in his Lateline interview last Friday night when discussing his time as Treasurer and Prime Minister. I believe that this policy and its flow-on effects resulted in a major benefit to Australia’s economic future and to the wellbeing of its citizens, and this will continue for many decades to come. Australia is, therefore, very well poised to be a major financial services provider.

We are now riding well in current economic terms but there will come a time when the terms of trade will decline and we will look to other sectors to cover the reduction in export income from the mining sector. How long have we in this country talked about the need to get away from exporting primary industries? The progress has been slow but we certainly need to put in place now, when the economy is booming from the benefits of the resources industry, the building blocks that will take us through to an equally prosperous future. Continued growth in the financial services sector presents an opportunity for Australia—like the UK, the US, Singapore and Ireland—to deliver substantial gains in economic activity from this area. It will not be easy, of course, because Australia, as I have said, faces strong competition from other aspirants in the region—Japan, Singapore and Hong Kong.

Having expressed its strong support for the financial services sector, the Labor Party announced its policy on taxation of managed investment trusts. Labor’s taxation policy is framed to ensure that Australia will not be competitively disadvantaged compared with other countries that are becoming active in this market. Schedule 10 of the bill represents a measure that will have an important effect on the financial services sector and managed investment trusts in particular. Labor supports the broad change proposed—that is, the introduction of a withholding tax. Previous arrangements meant that foreign investors had to lodge Australian tax returns and pay tax at a variable rate, depending on their investments, of between 29 and 45 per cent. This made the taxation regime difficult and complex. The fact that the investors were based in foreign jurisdictions and sometimes acted through intermediaries meant that compliance was also very difficult.

Payment of a flat withholding tax by the managed trust will simplify and streamline taxation arrangements. Where Labor differs is in the rate at which the withholding tax is set. The Tax Laws Amendment (2007 Measures No. 3) Bill 2007 proposes a 30 per cent tax rate. From evidence given to the Senate Standing Committee on Economics inquiry into this bill, it was clear that the government expects that this is not going to be the effective rate in the end, for two reasons: firstly, that as time goes on reciprocal tax treaties will ensure that this rate is reduced; and, secondly, foreign investors will be able to gear their investments so as to claim deductions and reduce their tax rate.

Most Australians are familiar with the negative gearing allowed for housing where an investor buys a house other than his own home, rents it out and is then allowed to claim the interest as a tax deduction. The same principle applies to foreign investors in Australian real estate trusts. They often deal in large sums like $100 million rather than the couple of hundred thousand dollars that individual investors deal in, but the principle is the same. Those involved in managed trusts indicate that most foreign investors in trusts use this method of getting their effective taxation rate down to 15 per cent or less. Labor says that, if this is the effective rate, why not acknowledge this fact and make the withholding tax a flat and final 15 per cent without any deductions? This would further clarify, simplify and streamline investments in these trusts. Furthermore, it would put Australia in line with its major competitors in this market.

The 30 per cent headline rate of taxation is a disincentive for foreign investors, and it is recommended that the flat and final rate be 15 per cent or less. This is consistent with areas such as Hong Kong, Singapore and Japan, which, at this time, have much lower rates than that. In practice, the need to gear, which I have described, is a disincentive for foreign investors to invest in the Australian market. Mr Robin Speed, a lawyer, explained this to the economics committee. He said:

So, as soon as you say, ‘You’re going to be hit with a 30 per cent withholding tax,’ they say, ‘Gee, that’s a major problem for us. If it was 10 per cent, like Singapore, we can live with it, but we can’t live with 30 per cent.’

…            …            …

As soon as they are faced with a 30 per cent withholding tax, they will not lodge an Australian tax return. You just do not do that ... The great bulk of people out there simply do not do that and simply tune out.

Investors prefer to pay a final tax rate, as they do in other countries. They invest much larger sums in other countries where they do not have to structure their affairs; therefore, they are reluctant to gear the relatively small sums they might invest in the Australian real estate market because it costs money to set up the structure and to claim the gearing that is required. Industry representatives at the committee all argued that the combination of the high headline rate, the absence of a final rate and the perceived administrative difficulties with gearing were enough to cause potential foreign investors in Australia to look elsewhere.

I want to talk briefly about the government’s costing of Labor’s proposal to reduce the rate to 15 per cent. That costing has no credibility attached to it as the Treasury rate for overseas investment in trust does not assume any gearing. We know, from evidence to the committee, that most foreign investors do gear. If they want to claim the interest deduction and get their tax rate down to the return that the government is talking about through gearing, they have to gear. Yet Treasury does not allow any costing for that in its estimates.

John Watson (Tasmania, Liberal Party) Share this | Link to this | Hansard source

Because very few people put in a tax return.

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

Very few people put in a tax return because it is complex and they avoid it, and they will avoid it in future. That is precisely the point that the Labor Party is making—that you are turning off foreign investors by making it too difficult. The 30 per cent withholding rate is one step in advance, but we want two steps in advance to take it to a flat and final rate of taxation which will make us competitive with others in our area. It is a very simple premise and one which should not be too difficult for the government to grasp.

Senator Watson talked about protecting revenue. I think it was pretty much conclusively proven, although Treasury was unable to give us decent figures on this—unable or unwilling, I am not sure which—that the revenue would not be as dramatically affected as the Treasury described, because they do not take into account any gearing. So we know that their figures have to be wrong.

There was also talk about Australian investment in domestic assets now being fairly mature and that many of the funds are now investing offshore, which, of course, is not subject to taxation. But the question is: do we want to put any kind of cap on investment in Australian assets? The answer surely has to be ‘no’. Surely we have to give investors the kind of flexibility they choose and we have to allow the flexibility for capital funds to flow into the Australian investment market. Foreign capital coming in to support our assets and our investments is something that we in Australia have always relied on since we began as a colony.

The critically important fact is that, given the complexity and the compliance costs of the government’s proposed tax regime, Labor counteracts that with a proposal to abolish the need for overseas investors to pay withholding tax or to lodge a tax return and claim debt as a deduction by making the flat tax a final rate. This flat and final rate will remove a significant burden that is threatening to hold back Australia’s funds management industry from capitalising on the growth of funds under management in the region. Australia’s fund management industry is well regarded across the globe and is well placed geographically to become a financial hub for the Asia-Pacific region. A 30 per cent withholding rate could hamper the potential growth of our funds industry and I strongly support the Labor amendment on the issue.

Grant Chapman (SA, Liberal Party) Share this | Link to this | Hansard source

This evening in this cognate debate I particularly want to support the Tax Laws Amendment (Small Business) Bill 2007. The main objective of the bill is to make it simpler for small business to determine eligibility for small business tax concessions.

In October 2005 the Prime Minister and the Treasurer announced the appointment of a task force to identify practical options for alleviating the compliance burden on business from Commonwealth government regulation. The task force was to examine ‘those areas in which regulation should be removed or significantly reduced as a matter of priority’. On 7 April last year the task force released its report, and recommendation 5.43 stated:

The Australian Government should take steps to align and/or rationalise different definitions in the tax law including ‘small business’, ‘employee’, ‘salary and wages’ and ‘associate’.

The government’s response agreed in principle with this recommendation.  It noted that the 2006 federal budget increased various thresholds applying to small business tax obligations. On the recommendation of the Selection of Bills Committee, the Senate referred this bill to the Standing Committee on Economics, of which I am a member, for inquiry and report by 6 June this year. Our committee received a submission from the Small Business Development Corporation and I thank the corporation for its input and the committee secretariat for its work in relation to our inquiry on this very important legislation.

In the last decade the Howard government has recognised and supported small business very strongly.  Australia’s small businesses are vital to our economy, accounting for 58 per cent of employment growth over the last six years.  There are more than 1.2 million small businesses in Australia and they employ 3.3 million people. Over the past decade the number of small businesses has grown 3.5 per cent each year on average. This sector generates 30 per cent of our economic production. Forty per cent of all Australian small businesses are in regional areas. That is a very important aspect of small business.

The changes in this bill, together with the new small business entity framework, significantly increase the ability of small businesses in my home state of South Australia to gain access to various small business concessions and to reduce compliance costs, which is a major factor for businesses wishing to access these concessions. While large employers, big businesses, frequently get the majority of media headlines, in reality it is the small business sector which forms the backbone of South Australia’s economy. The mining boom is creating wealth, but small business is the driving force in many regional communities across my home state. Small businesses which employ fewer than 20 people make up more than 96 per cent of South Australian firms and employ 235,000 people—more than half of our state’s workforce. Many of South Australia’s 80,000 small businesses also have growth potential.  The changes that this bill brings about will further increase the size and efficiency of the small business sector in South Australia.

These changes will reduce the compliance costs for many Australian small businesses. They will substantially simplify the tax law to make it easier for small businesses to determine eligibility for a number of concessions, and they are part of this government’s 2006-07 budget announcements.

This bill introduces a standard eligibility criterion that applies across the small business tax concessions. Entities that satisfy an aggregated turnover test of $2 million per annum are able to utilise those concessions that meet their business needs—if they also satisfy any additional conditions, not related to the business size, that currently apply to those particular concessions.

This bill also implements several 2006-07 budget announcements: the increase in the capital gains tax maximum net assets threshold from $5 million to $6 million, the extension of the rollover relief available under the uniform capital allowance system to small business entities, an increase in the simplified tax system—STS—turnover threshold from $1 million to $2 million, the removal of the $3 million depreciating assets test from the STS eligibility requirements, and an increase in the goods and services tax cash accounting turnover threshold from $1 million to $2 million.

The current tax laws contain a number of special arrangements for smaller businesses, defined in a number of ways. In the past, there have been different threshold criteria for determining what is a small business for particular concessions. The differences, albeit sensible when considered individually, have been a source of complexity and unnecessary compliance costs for small businesses. This bill amends the income tax law to create a single definition of ‘small business’, based on aggregated annual turnover of less than $2 million. Entities that do not meet the small business entity definition can still test their eligibility for small business concessions according to existing methods for capital gains tax, fringe benefits tax and pay-as-you-go instalments.

The Australian Chamber of Commerce and Industry has welcomed the changes, as has the Council of Small Business Organisations of Australia, as the new definition replaces a set of complex and hard to understand rules, with each tax having a different test for small business. I have read out the tests; there was a multiplicity of less than $1 million through to $10 million under the previous regime. They are now all consistent. The Institute of Chartered Accountants, which recently published its own research on the small business definition in tax law, has welcomed the change. The institute has said that these changes would improve access to tax concessions and reduce compliance costs, which will also have flow-on benefits to business.

The new definitions build a strong platform of tax initiatives that this government has delivered for small business. This strong platform includes the entrepreneurs tax discount, which is delivering $1.2 billion in tax cuts for more than 500,000 small businesses, enabling them to reinvest in their business or take a well-earned dividend. The government also has directed the Board of Taxation to inquire into where small business compliance costs can be further cut. So the government is on the job—moving ahead, changing tax law, simplifying the process and requiring the Board of Taxation to make further inquiries where further improvements can be achieved. The board is a consultative board—it is not owned by the Commissioner of Taxation—and it is comprised of people who have a knowledge of small business and can assess whether the changes are beneficial.

There are currently separate eligibility tests for the goods and services tax, the simplified tax system, the capital gains tax, the fringe benefits tax, pay-as-you-go tax instalments and small business concessions. This bill is about making things easier for small businesses in Australia by getting rid of those separate eligibility tests. The bill will standardise the eligibility criteria for small business tax concessions from 1 July this year. It will create just one eligibility test to obtain a range of small business concessions. Any business—subject to satisfying existing eligibility criteria not related to business size—with an aggregated annual turnover of less than $2 million will be eligible. The bill will allow small businesses to choose the concessions that meet their business needs. Businesses will not be obliged to adopt any concessions not suited to their particular requirements.

The concessions include a 15-year asset exemption from capital gains tax, a 50 per cent active asset reduction of capital gains tax, a retirement exemption from capital gains tax, rollover provisions for capital gains tax, simpler depreciation rules and trading stock rules, immediate deductions for certain prepaid business expenses, the choice to account for goods and services tax on a cash basis, and the choice to pay GST by instalments. The concession is also an annual apportionment of input tax credits for acquisitions and importations that are partly creditable. The bill provides for a car-parking exemption from fringe benefits tax, and pay-as-you-go instalments based on notional tax. There will be a two-year amendment period for the implementation of this bill.

The bill includes other elements. The existing eligibility thresholds for accessing capital gains tax, fringe benefits tax and pay-as-you-go instalment concessions will be retained. As I mentioned earlier, the bill will increase the maximum net asset value test for accessing capital gains tax concessions from $5 million to $6 million. And it will extend the rollover relief available under the uniform capital allowance regime to any business with a turnover of less than $2 million that chooses to deduct amounts for depreciating assets. So the bill makes a number of concessions for small business. It demonstrates the government’s continued commitment to reducing red tape and compliance costs for small businesses.

Small business brings great benefits to Australia. Businesses with fewer than 20 employees is the usual definition for ‘small business’, and there are approximately 1,888,000 small businesses in Australia. Ninety-six per cent of all businesses are small businesses with fewer than 20 employees. It is estimated that 39 per cent of Australia’s economic production is generated by the small business sector. Small businesses provide employment for some 3.7 million people—that is, almost half of all private sector employment is in small businesses. Those figures exclude small business employees in the finance and insurance industries, of which there are also large numbers. The growth in small business was approximately 25,700 in 2005-06, so small business is, indeed, on the march.

Since June 2003 the number of employing small businesses has grown by 31.7 per cent. Small business exits are not necessarily due to bankruptcies or problems; a huge number are for positive reasons, and possibly only 2.5 per cent exit due to lack of financial success. This is an excellent result and of course reflects the strong economy resulting from the Howard government’s sound economic management. Small business, as a result of our strong economy and its own initiative, is growing fast, having great success, employing about half of our population and having a positive result on the economy. Interestingly, 96 per cent per cent of small business owners have a computer and 90 per cent are connected to the internet. So there is a high degree of dependence on technology in small business today.

I referred earlier to the economics committee’s examination of this legislation. We received a submission from the Small Business Development Corporation, an independent statutory authority established to assist small businesses in Western Australia. This corporation supported the bill and noted that the single definition of small businesses is consistent with its recommendation to the Commonwealth regulation task force in November 2005. The corporation argued in its submission:

... the proposed amendments will be beneficial overall to many small businesses ...

And:

... it is unlikely that any small businesses would be worse off under the proposed Bill as no additional compliance burden should be created.

Having said that, and having indicated my strong support for the legislation, I also indicate that I am extremely concerned about an issue raised with me in relation to this legislation by a leading national advisory firm. This issue is that land-holding entities leasing a parcel of land to a related entity to conduct a business—which is a relatively common structure, especially in the case of farming enterprises—are not regarded as small business entities in themselves and therefore will not come under the extension of the alignment of the eligibility criteria. I believe this is quite unacceptable. Many farmers hold their land in a separate entity for valid asset protection reasons, while having another entity to conduct their farming enterprise. These entities are all related. There is absolutely no valid reason for excluding the asset-holding entity from the benefits of this legislation.

I believe the government must have another look at this issue. They must extend the new rules to those entities who hold assets that are leased by a related entity to conduct the business and must change the legislation to allow those entities to access these provisions. As I said, this is particularly important to the farming community. Many farmers these days hold their land assets in entities separate from those from which they conduct their farming operations. It is grossly unfair for farmers not to be able to access these concessions simply because of that asset protection provision which they maintain. Having said that, I support the legislation but I strongly urge the government to reconsider this matter and in short order introduce an amendment to allow the issue that I have raised to be solved.

Kerry O'Brien (Tasmania, Australian Labor Party, Shadow Minister for Primary Industries, Fisheries and Forestry) Share this | Link to this | Hansard source

The reason I rise to speak in this debate on the Tax Laws Amendment (2007 Measures No. 3) Bill 2007 and the Tax Laws Amendment (Small Business) Bill 2007 is that the bills contain provisions relating to forestry managed investment schemes, and it is the issues of plantation forestry and MIS, managed investment schemes, that I now wish to discuss. In response to these bills I will touch on Labor’s continued commitment to Australia’s plantation forestry industry and I will go on to discuss the government’s consistent failure to consult on the changes to managed investment schemes and failure to understand what the effect of their decisions have been and will be on rural and regional communities.

One of the most exciting aspects for the forestry industry in the past 10 years has been the growth of plantations. Over the past 10 years, plantation forestry has grown at around 70,000 hectares of new plantation area each year. This has resulted in growth in total production from one million hectares in 1994 to over 1.7 million hectares by 2005. This strong growth has been accompanied by strong investment from the private sector in forestry. Many of us will recall the days when plantation investment was largely a government responsibility. This is no longer the case, and the role of the private sector in the forestry industry, and particularly in plantation forestry, has become critical to future expansion. The private sector has not only brought new investment; it has brought with it new ideas, new varieties of trees, new products, new long-term jobs and the prospect of a long-term forestry industry.

One of the most exciting aspects of the emergence of private sector investment in plantations has been the growth in hardwood plantations. Hardwood plantation production grew from a very low base in the early 1990s to almost three-quarters of a million hectares in 2005. This led to a greater diversification of opportunities within the forestry industry, and particularly in downstream processing. A critical factor to consider in this regard is the balance of trade in paper products. While Australia exports about $2.1 billion worth of wood and paper products, Australia imports around $4.1 billion worth of wood and paper products. This represents a trade deficit of around $2 billion, most of which is paper products. The growth of hardwood and the diversification of species opens the opportunity to increase exports and to increase production in wood and paper products to reduce Australia’s reliance on imports. Our main export markets are Japan, Hong Kong, China and New Zealand. A greater diversity of species and value adding will expand these markets and open up new markets to Australia’s wood products.

In relation to other managed investment schemes, and particularly the non-forestry managed investment schemes, the government has been consistently failing Australia. The government has consistently and deliberately neglected to consult with the industries and the rural and regional communities that will be affected by its changes to managed investment schemes. Firstly, the government attempted to bury its decision to end non-forestry managed investment schemes back in February 2007. The Assistant Treasurer, Mr Dutton, issued a press release announcing the government’s decision at eight minutes to seven on the evening of Tuesday, 6 February this year. If the government was comfortable with this decision on this matter, why would it attempt to hide it by issuing the announcement at eight minutes to seven on a Tuesday night? Maybe the government was hoping no-one would notice and it could sneak this one through without anyone having anything to say about it. Maybe the government just did not fully appreciate the impact of its decision. Or perhaps it just did not care.

The February 2007 decision gave the industry less than five months before it would effectively be put out of business. The government undertook no consultation with the industry and in fact discouraged those who sought consultation, saying ‘it was not time for consultation’. It undertook no consultation with affected communities. Haven’t those communities been around Parliament House making members and senators aware of the drastic effects they have been suffering with that decision?

In February this year at Senate estimates it was revealed that the Department of Agriculture, Fisheries and Forestry had undertaken no research on the issue and had provided no advice to the minister. When the government made the decision to end non-forestry managed investment schemes they did not know how many jobs would be affected, they did not know how much investment would be lost and they did not know what the effect on Australia’s rural exports would be. The government used its numbers in the Senate to block a Senate inquiry which would have looked into those aspects of the government’s decision. The inquiry proposed by Labor offered the opportunity to determine what the effects of ending non-forestry managed investment schemes would be, but the government did not want to know and did not care. A few senior ministers in the government were determined to get rid of non-forestry managed investment schemes. Regardless of the merits of the decision they were going to end those schemes.

Then we had the spectacle of Minister McGauran blaming investors for the uncertainty and job losses arising from his own government’s inept decision in an article in the Weekly Times. With no consultation and no examination by government of the consequences of their decision, the managed investment scheme industry and rural and regional communities were rightly outraged.

The government has since given a one-year reprieve to non-forestry managed investment schemes after its own back bench revolted at the decision, but it does little to allay the real concerns about job losses and lost investment for rural and regional Australia. Those communities are now dependent on a test case which the industry will take to determine whether the so-called tax ruling, which puts the industry that their livelihoods depend on out of business, is a valid one. One would have thought that there were better ways to deal with the uncertainty created by this decision. Cynics suggest that, if the tax office is beaten in the test case, the government will take further action to close the schemes down. That is not what the government has said, but there is a strong belief that that will be the case in those communities.

I turn back to the government’s response to forestry managed investment schemes in this legislation. The forestry MIS industry received consultation prior to the December 2006 announcement of the changes to the laws regulating those schemes that are now contained in this bill. However, having spoken to the forest industry, I can tell the Senate that the decision announced in December 2006 was not a component of the discussions that they held with the government. The forestry industry was taken by surprise when the government announced that 70 per cent of expenditure must be attributable to establishing, tending and felling trees for harvest.

During the recent budget estimates, neither the Department of Agriculture, Fisheries and Forestry nor Treasury could indicate where the figure of 70 per cent came from. Indeed, the Department of Agriculture, Fisheries and Forestry indicated that it did not know if the forestry industry could operate under the 70 per cent requirement. It appears that the 70 per cent requirement was plucked from thin air within the minister’s office and not through any consultation process. Certainly, that is the only conclusion that I can reach on the information that has been given to me by the industry and by the departments through Senate estimates.

Concerns have also been raised with me about the four-year limitation before secondary markets can begin. The opposition welcomes the secondary market approach and is quite prepared to support the concept that there ought to be the opportunity to trade in the products of the managed investment scheme before the investment has reached maturity. It is, of course, quite possible for the market to assess the strength of the investment, the potential future value and put a price on it during the interim stage of the growth of a plantation. With proper information that will actually place a discipline on those who promote the schemes to indicate reliable and reasonable rates of return because, if the investments in those schemes are sought to be marketed after four years, then one would expect a commercial rate of return by that time factored against the long-term return of the investment—just as with any other financial product. If the scheme is not returning a reasonable rate, then the investors are entitled to take the view that they have not been properly advised. That might have consequences not only in relation to the future business of certain advisers but also in a legal sense for some advisers depending on how they have represented themselves and the product that they are promoting in those considerations. We support the concept. However, concerns have been raised with me about the four-year limitation before secondary markets begin as this may act as a disincentive to invest in long-rotation plantations.

Representatives of the forest industry have indicated that a four-year period before secondary markets begin may be too short a time frame. It may not give sufficient time for long-rotation trees to reach a sufficient point of maturity to be assessed. So there are varying views about this, and one would have thought that the government would have had a very rigorous basis for the four-year proposal and for the 70 per cent minimum allocation of the funds invested towards the growing of the trees. But that is not apparent from the material that has been made available to the opposition and, indeed, the public through Senate estimates.

So we have a problem, where there is a lack of confidence in the industry in the regime that the government is proposing—or, if it is not a lack of confidence, then a degree of uncertainty about how the industry will be able to operate for the future with those sorts of arrangements. Clearly the government has some work to do to bring the industry along with it, with the regime that is proposed in this legislation.

From Labor’s point of view, of course, we will continue to pay close attention to the way that the regime in this legislation with respect to forest managed investment schemes plays out. We would like to ensure that, if it is possible, longer term rotation plantations are not disadvantaged, because they may create some significant opportunities for high-value processed timber coming from plantations. Some people said, historically, that we were never going to get sawn timber from plantations. We now know that that view was wrong. Sawn timber is being recovered from the Eucalyptus nitens species at the Forest Enterprises mill in northern Tasmania—a development that some of my colleagues back in the early nineties said would never happen. It is happening now. We need to ensure that there is an incentive for long-term rotation plantations, long-term growth, larger trees, better quality timber and the proper milling and seasoning methods to make sure that we get the highest possible value from those timbers. That is a major concern that we need to have factored into any review of this legislation, and that is the approach that Labor will be taking.

Although there are concerns about the forest managed investment scheme aspects of this bill, Labor believes that these changes do provide a degree of certainty to the forest industry which unfortunately the government has denied to the non-forest managed investment scheme industry and the thousands of people employed by non-forest managed investment schemes. In summary, we can say that we will be supporting this legislation. Indeed, we will be supporting the plantation forest industry into the future. It is important to note that this is in the context where this government continues to fail when it comes to managed investment schemes. It has failed to properly consult with the industry. It certainly has failed to consult with the communities affected. It had no understanding of the impact of the decision that it proposed to make in relation to non-forest managed investment schemes—and probably in relation to forestry managed investment schemes. It refused to permit the Senate to inquire to better inform it in relation to the effect of its decisions in both of those regards, and it has a policy clearly driven by a handful of ministers who had an ideological determination to bring to an end non-forest managed investment schemes.

We will be supporting this legislation in relation to the managed investment scheme provisions. We do think the government could have done a lot better for the people in rural and regional Australia whose livelihoods depend upon these schemes. In the future, a more enlightened view of these schemes will provide a better opportunity for these regional economies to gain the benefit of the significant investment that managed investment schemes deliver, basically to rural and regional Australia. I have to say that many Australians believe that what this government has done in shaking off some of that investment will wreak great harm in rural and regional Australia for many years to come.

Ruth Webber (WA, Australian Labor Party) Share this | Link to this | Hansard source

I rise to briefly make some remarks—particularly given the hour of the evening—on the Tax Laws Amendment (2007 Measures No. 3) Bill 2007 and the Tax Laws Amendment (Small Business) Bill 2007. I begin firstly by commending to the chamber the minority report signed by those Labor members and the Democrat member of the Senate Standing Committee on Economics, and I support Labor’s second reading amendment. As has been canvassed by other speakers in this debate, our main concerns in this legislation—apart from the contribution of my colleague Senator O’Brien, obviously—go to schedule 10 of the Tax Laws Amendment (2007 Measures No. 3) Bill.

As has been outlined before, Labor supports the framework of a flat rate applying to all types of nonresidents, as this measure provides, as it creates certainty and simplicity. As a result of this measure, there would be one withholding outcome for distributions of income—other than dividend, interest and royalty income—by Australian managed investment trusts and Australian intermediaries: withholding at the company tax rate, regardless of whether the foreign resident is an individual, company, trustee or foreign superannuation fund. However, Labor does not support a 30 per cent rate. Rather, as has been outlined by our leader, Kevin Rudd, Labor supports an amendment to apply a lower flat and final 15 per cent rate.

It is our view that applying a flat rate to all types of beneficiaries of managed investment schemes provides the Australian property trust sector with compliance savings by having a single rate applied to distributions to different types of entities. This reduces compliance costs associated with tracing different types of income and different types of recipients of that income, as is currently the case. A flat rate to all beneficiaries removes the need for managed investment trusts and intermediaries to classify the nature of the foreign investor as individual, company, trustee or foreign superannuation fund. Consequently, the measure will also reduce the uncertainty regarding the obligations of managed investment trusts and intermediaries to withhold amounts from distributions to foreign residents. This in turn would improve Australian property trusts as a destination for foreign capital.

These compliance cost savings and reduced uncertainty would have the effect of increasing the efficiency of the Australian managed funds industry in providing funds management services to foreign residents. This results in the greater ability of the Australian managed funds industry to compete against foreign managed funds industries for the management of the investment of foreign residents’ savings. As has been outlined by my colleague Senator Hurley, this is a sector of our diverse economy where competition is growing. Whilst Australia, as was outlined at the committee hearings, has quite a mature sector, there are other economies that are choosing to follow our lead and diversify. It is therefore beholden on all of us to come up with a regime that maintains our competitive edge whilst restricting any impropriety that may take place in the market.

Labor was disturbed with some of the evidence given at the Senate hearings, particularly from Treasury, about the lack of consideration of gearing when costing Labor’s proposals. Something else that was not given much consideration, when I was having discussions about this with some of the industry, was the role of wholly owned Australian subsidiaries in the market. If company B, which is a wholly owned subsidiary, borrows from company A, the offshore company, to invest in the market, then takes all the income it gets and repays it to company A as interest, it is not caught in the current regime. It will not be paying the 30 per cent flat rate. It is our view that the 30 per cent flat rate encourages that kind of behaviour, whereas a 15 per cent flat rate would make us more competitive and would remove the incentive to behave like that.

I echo Senator Murray’s concerns about some other aspects of the bill. Whilst Labor will support the bill, I am personally concerned about the lack of consultation when it comes to the special recognition that we are giving to police and defence personnel. As with the more generous spirit that Australians these days show in some of the crises that occur in our region, it is not just the AFP and defence that these days governments of all persuasions choose to put in harm’s way. We choose to send other emergency service personnel overseas and aid workers overseas. Australia itself has been the beneficiary of emergency service personnel coming to assist us in our time of need, firefighters being a classic example. We have had US firefighters come here and we have sent ours to other countries. Whilst I do not want in any way to diminish the contribution that our AFP and defence personnel make, it seems to be unnecessarily harsh not to consider the contribution that some of our aid workers and other emergency services personnel make when governments—as I said, governments of all persuasions—choose to send them overseas to risk their lives in line with government decisions. With that brief contribution I commend to the Senate the minority report and Labor’s second reading amendment.

Michael Ronaldson (Victoria, Liberal Party) Share this | Link to this | Hansard source

Could I first let the Opposition Deputy Whip know that there have been some brief discussions about me making some very short comments in line with the comments she made. In my view the majority report very aptly sums up what was a very interesting debate, and I thank Senator Murray for his comments earlier. It was a willing debate but a matter of great importance. With regard to withholding tax, I think the Senate should be aware that the Leader of the Opposition gave a speech in relation to this matter justifying what I think will end up being the opposition’s second reading amendment. In justifying his position he made a very interesting comment in his speech. Talking about Labor’s proposed changes, he said:

Greater investment would also flow into Australia for Australian funds managers to invest globally. For example, a Japanese resident could place their funds for management with an Australian funds manager for investment in an appropriate third country market.

Guess what? There is no tax. In the example that underpinned this issue, the rationale for attracting greater inflow of funds, in the speech of the Leader of the Opposition, there is no tax payable. How could the Leader of the Opposition in relation to a matter he views as important as this give an example of why we should adopt Labor’s position and attract greater inflows by a reduction when there is no tax payable? What extraordinary ignorance of the current situation. As one of my colleagues said, clearly no focus group was involved in this. So if it was not a focus group driving Labor’s policy, who was driving it? Who was advising the Leader of the Opposition to justify a policy change which had no substance? I do not think it was Senator Sherry. I hope it was not. I would be surprised if it were. The Leader of the Opposition, in his desperation to cobble something together for a budget reply speech or the outcome of it, has completely misunderstood the principle of withholding tax. If he cannot be trusted in relation to something as simple as this, how can the Australian people possibly trust him in relation to the running of the economy? This is a tax on domestically generated income. The example given by the Leader of the Opposition is not taxed, will not be taxed and has not been taxed in the past, so the justification for this policy change has fallen at the first hurdle.

It was also a very interesting debate with Treasury. What evidence did we hear during the 3½ to four hours of the committee hearing? We heard that, since 2004 when the commissioner effectively put in a process at 30 per cent, to my recollection, the inflow of funds went from $100 billion to $150 billion. This is a policy that apparently is stopping the inflow of funds into this country and yet it went from $100 billion to $150 billion.

The other issue from a policy point of view that the Labor Party has to address is: why are they prepared to effectively subsidise foreign treasuries to the detriment of the Australian taxpayer? What possible justification can the Australian Labor Party give to the Australian taxpayer for subsidising foreign treasuries to the detriment of the Australian taxpayer? The recommendation of the committee was that, when it suited this country when negotiating double taxation agreements, we could negotiate other rates. Did the US demand during our recent discussions with them that we reduce our rate? No, they did not. They did not demand that we reduce it from 30 to 15.

This is a sovereignty issue. This is a tax issue. The Australian Labor Party is asking this chamber and the Australian people to deny us the right to negotiate a reduction in this tax that suits this country and suits our domestic purposes. By moving this amendment, and by driving forward with the opposition leader’s false premise for a change, they are effectively asking Australian taxpayers to put their hands in their pockets and potentially provide more to foreign treasuries.

I am aware of the hour of the night, but as chair of that committee I did want to make some comments. I am sorry that I do not have another 12 or 15 minutes in which to do so. I thank the chamber most sincerely. There was a difficulty with the speakers list, but I thank the opposition for their indulgence in relation to this matter.

Richard Colbeck (Tasmania, Liberal Party, Parliamentary Secretary to the Minister for Finance and Administration) Share this | Link to this | Hansard source

I would like to thank senators who have taken part in the debate. I will hopefully get my comments sorted out before 10 o’clock, although we will be back tomorrow to complete this by the look of things now. I will try to be brief. The Tax Laws Amendment (Small Business) Bill 2007 amends the law to make it simpler for up to two million Australian businesses to determine their eligibility for a wide range of small business tax concessions. The bill also delivers on a number of the government’s 2006-07 budget measures. The measures in this bill demonstrate the government’s ongoing commitment to reducing red tape and compliance costs for small business.

Schedule 1 of the Tax Laws Amendment (2007 Measures No. 3) Bill 2007 amends the tax integrity rules concerning private company distributions to reduce the overly punitive nature of the existing provisions and to reduce the extent to which taxpayers can inadvertently trigger a deemed dividend. Schedule 2 will ensure that certain superannuation contributions made during the period of 8 December 2006 to 30 Jan 2007, such as those made by a friend, are included in the non-concessional contributions cap calculation that covers that period. Schedule 3 will improve the taxation of Australian resident testamentary trusts by ensuring that an income beneficiary of such a trust need not be assessed on capital gains of a trust from which they will not benefit. Schedule 4 will allow nondependants of a member of the Australian Defence Force or any Australian police force or protective service killed in the line of duty to access the same concessional tax treatment for lump sum superannuation death benefits as dependants. Schedule 5 will extend an existing transitional period under the thin capitalisation rules by one year to enable a thorough assessment of the impact of the thin capitalisation rules of adopting Australian equivalents to international financial reporting standards. Schedule 6 of this bill will reduce the compliance costs for companies by repealing the dividend tainting rules, which are no longer necessary following the introduction of the consolidation regime and simplified imputation system. Schedule 7 of this bill clarifies the existing interest withholding tax exemptions by more closely specifying the types of financial instruments that will be eligible for the exemption. Schedule 8 inserts new rules to ensure that investment in forestry managed investment schemes is encouraged to facilitate the continued expansion of our plantation forestry estate. Schedule 9 makes amendments to require Australian trustees to collect tax on trust taxable income payable to the trustee of a foreign trust. Schedule 10 of this bill enables Australian managed funds to collect a non-final withholding at a single rate, the company tax rate, on distributions of Australian source income to nonresidents that are not dividends, interest or royalties.

I commend the comments of the previous speaker on the opposition amendment. I again thank those who have participated in the debate and commend the bill to the Senate.

Question negatived.

Original question agreed to.

Bills read a second time.