Matthew Canavan (Queensland, Liberal National Party) Share this | Link to this | Hansard source

I move:

That the bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows—

TAX LAWS AMENDMENT (NEW TAX SYSTEM FOR MANAGED INVESTMENT TRUSTS) BILL 2015

This Bill is part of a broader package of Bills that amend various taxation laws to introduce a new system for taxing managed investment trusts (MITs).

The new rules will modernise the tax rules applying to eligible MITs, increase certainty for MITs and their investors, and reduce complexity. It will reduce compliance costs by $30 million per year for MITs and their investors. These reforms will enhance the competitiveness of Australia's funds management industry.

Our managed funds industry is one of the largest and most sophisticated in the world. As of 30 June 2015, Australia had $2.6 trillion in funds under management, larger than Australia's gross domestic product and the capitalisation of the Australian Stock Exchange. It is one of the largest pools of managed funds in the world, and contributes jobs to the broader financial and insurance services industry, which employs over 400,000 people in Australia. We need to ensure that this industry continues to support Australian jobs, and remains efficient and internationally competitive.

Managed investment trusts are used by many Australians. Most of us are investors in MITs, either directly or indirectly through our superannuation funds. MITs are used to invest in a diverse range of assets, including shares, property, bonds and cash.

The current taxation arrangements applying to trusts are complex and uncertain. This is unacceptable for an industry so significant to the economy and the financial security of Australians. This Bill will ensure that the funds management industry is able to operate more effectively through trust structures.

This new tax system will also provide an opportunity for Australia's managed funds industry to grow by exporting more of its expertise and attracting additional international investment. This will in turn increase growth and jobs.

The Government's new tax rules for eligible MITs follows recommendations made by the Board of Taxation in its Report on the Review of the Tax Arrangements Applying to Managed Investment Trusts.

In its review, the Board found that current tax arrangements applying to trusts create undue complexity and uncertainty for MITs. Specifically, trust tax rules have not kept pace with the growing use of trusts as collective investment vehicles. The Board recommended the creation of new tax rules for eligible MITs.

The new tax system has been actively sought by the funds management industry. Key stakeholders have been extensively consulted during the development of the new tax system.

The new rules will apply from 1 July 2016. However, trustees can choose to opt in earlier and apply the rules for income years starting on or after 1 July 2015.

The new tax system will apply where the members of the trust have clearly defined interests in relation to income and capital of the trust and the trustee of the MIT makes a choice to apply the new rules.

Trusts that are not eligible or choose not to apply the new tax system will continue to apply the general trust tax rules.

The Bill will provide for taxation at the investor level, rather than at the entity level. Investors will generally be taxed on amounts as if they had derived the income directly.

Members will be taxed only on amounts 'attributed' to them. This amount is determined by the trustee according to the member's interest as set out in the constituent documents of the trust. The tax characteristics applying to that income will flow through to members.

The introduction of the attribution model will provide greater certainty for trustees and members, by more closely aligning the commercial and tax consequences of activities of a managed investment trust.

Under the new rules, trustees will continue to provide statements to their members shortly after the end of each income year to assist members to complete their tax returns. However, trustees may not have final information from entities that they invest in by the time they have to report to members. This means they often need to make estimates in the statements issued to members and then make adjustments at a later point in time when more information is available.

This can be administratively onerous. Because of this these Bills will give the trustee a choice to reconcile the variance in the income year it is discovered, or to reissue statements to members for the income year to which the variance relates. If the trustee reconciles the variance in the discovery year, members will not have to seek amendments to their income tax assessments. This will reduce compliance costs for MITs and their members, as well as administrative costs for the ATO. This approach is consistent with current industry practice. Associated integrity rules will encourage MITs to bring income to account in a timely way.

These Bills also introduce a new rule so that multi-class MITs will be able to elect to treat each class as a separate trust for the purposes of the new MITs tax system. The effect is that gains and losses within a class will be quarantined to those members. Currently, gains and losses relating to one class can affect another class of interests within the same trust. This amendment means that fund managers will be able to offer a range of different investment options through a single trust, rather than incurring higher costs from establishing multiple trusts to achieve the same outcome.

These Bills also remove the incidence of double tax for members of attribution MITs that currently arises under the capital gains tax rules. Where amounts distributed to members differ to the taxable income of the MIT, members will now be able to adjust the cost base of their investments so that they are not taxed twice. The current law required reductions in cost base where amount received by the member exceeds the taxable component of the distribution. However, there is no corresponding upwards adjustment to the cost base if the amount received is less than the taxable component of the distribution. The amendments will now allow upwards adjustments to the cost base in certain situations.

The Government will also introduce transitional provisions and consequential amendments as part of this package of Bills relating to the new tax system for MITs. This includes consequential amendments to ensure the MIT withholding tax rules apply appropriately under the new attribution model of taxation.

In addition, this package contains an arm's length rule that was recommended by the Board of Taxation. This rule will discourage MITs from shifting profits from an active business of a related party to the attribution MIT. The Commissioner of Taxation will be given powers to make a determination where a MIT has derived non-arm's length income. The trustee of a MIT will be liable to pay tax at the corporate rate on this income and other administrative penalties may apply. This will protect the integrity of the corporate tax base.

The 20 per cent tracing rule applying to certain unit trusts will also be amended so that superannuation funds and certain other exempt entities will be excluded. This will reduce compliance costs and allow trusts to avoid being taxed as a company simply because certain entities, such as superannuation funds, own more than 20 per cent interest in the trust.

Further, rules that tax corporate unit trusts as companies will be repealed. These rules were introduced when Australia had a classical tax system to discourage companies from restructuring as trusts. Companies had an incentive to restructure as shareholders faced the prospect of double taxation, due to the lack of imputation. Since the introduction of imputation, the integrity rules for corporate unit trusts are considered to be no longer necessary and will be repealed.

Together, the measures contained in this package of Bills will reduce complexity, increase certainty and minimise compliance costs.

In conclusion, this package of Bills recognises the commercial needs of the industry and the growing use of trusts as commercial investment vehicles. Greater certainty will benefit investors and the managed fund industry.

It will improve the attractiveness of Australian MITs to international investors. It will assist our managed funds industry to develop and export more of their services. This should increase growth and jobs.

The new tax system for MITs has been actively sought by the managed investment funds industry. The Government has listened to this. The Government has undertaken extensive consultation with industry representatives and other key stakeholders in the development of this new MITs tax system.

The new rules will ensure that the managed funds industry is able to continue to operate through trust structures having regard to the commercial needs of industry, the needs of investors, and the need to ensure appropriate integrity, and minimise compliance and administrative costs.

As a result, the Government is confident that these new amendments will modernise the tax law applying to MITs. The measures contained in these Bills are vital to ensuring that Australians have the best opportunity to grow their income. The measures will also enhance Australia's managed funds industry and promote the greater export of Australia's funds management expertise.

Full details of the new tax system for MITs are contained in the explanatory memorandum.

INCOME TAX RATES AMENDMENT (MANAGED INVESTMENT TRUSTS) BILL 2015

The Income Tax Rates Amendment (Managed Investment Trusts) Bill 2015 forms part of a package of Bills to introduce a new system for taxing managed investment trusts (MITs).

This Bill specifies the rate of tax payable by trustees of attribution MITs in some circumstances. Under the new tax system, investors are generally taxed on amounts attributed to them by the trustee of a MIT, as if they had invested directly. In limited circumstances, tax may occur at the trustee level instead of at the investor level to ensure that correct tax outcomes occur. This primarily occurs if the trustee does not attribute all income to members. In this case, the trustee is taxed on the unattributed income, to ensure that this income does not escape taxation. The unattributed income is generally taxed in the hands of the trustee at the highest individual marginal tax rate, plus Medicare Levy.

Further details of the Bill and the new tax system applying to MITs are set out in the explanatory memorandum for the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015.

MEDICARE LEVY AMENDMENT (ATTRIBUTION MANAGED INVESTMENT TRUSTS) BILL 2015

The Medicare Levy Amendment (Attribution Managed Investment Trusts) Bill 2015 forms part of a package of Bills to introduce a new system for taxing managed investment trusts (MITs).

This Bill amends the Medicare Levy Act 1986 to impose the two per cent Medicare Levy on trustees of attribution MITs in some circumstances. Under the new tax system, tax is generally applied at the investor level. However, tax may be applied at the trustee level to ensure that correct tax outcomes occur. This primarily occurs if the trustee does not attribute all income to members. Where this is the case, the trustee will be taxed on the unattributed income at the highest individual marginal tax rate plus the Medicare Levy in certain circumstances. This operates to ensure that income does not escape taxation.

Further details of the Bill and the new tax system applying to MITs are set out in the explanatory memorandum for the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015.

INCOME TAX (ATTRIBUTION MANAGED INVESTMENT TRUSTS—OFFSETS) BILL 2015

The Income Tax Rates Amendment (Attribution Managed Investment Trusts-Offsets) Bill 2015 forms part of a package of bills to introduce a new system for taxing managed investment trusts (MITs).

This bill imposes income tax on trustees of attribution MITs where they attribute excess tax offsets to members in some circumstances. This can happen if the trustee overestimates the amount of offsets it has available to attribute to members in an income year. This means that members are able to reduce their tax liability more than they otherwise would, had they not been attributed excess offsets.

Tax will be payable by trustees of attribution MITs on the amount of the excess tax offsets at a rate of 100 per cent. This has the effect of clawing back excess tax offsets and neutralising the impact on tax revenue. This is consistent with outcomes that arise when a company passes out excess franking credits.

Further details of the bill and the new tax system applying to MITs are set out in the explanatory memorandum for the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015.

Sam Dastyari (NSW, Australian Labor Party) Share this | Link to this | Hansard source

I rise to speak on Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and the three related bills on behalf the opposition. At the outset and following the report of the inquiry by the Senate Economics Legislation Committee I am pleased to indicate that the opposition will be supporting this bill.

Labor announced its intention for a new tax regime for managed investment trusts in 2010, and with the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015, the Abbott-Turnbull government is proceeding with work started under Labor. Because this bill advances work that was commenced under the Labor government, we support its intent and many aspects of it. However, we had concerns about a number of specific provisions following our consultations with stakeholders since the bill was first tabled in the other place. We, therefore, referred the bill to the Senate Economics Legislation Committee for further scrutiny. The opposition reserved its final position on this package until the committee reported. As a consequence of the committee report, I can now inform the chamber that we will be supporting this bill without amendment.

The committee report states that while submissions were generally supportive of the new tax system for AMITs, a few stakeholders raised significant concerns, in relation to the effect of the reforms on custodians and the feasibility of the commencement date. Having noted the concerns of some stakeholders, the committee was satisfied that any unforeseen or unintended consequences that may arise during the implementation process will dealt with by the government quickly. The opposition regards this as welcome news and particularly endorses the recommendation of the committee that there be a review of the new tax system within 24 months of commencement, in order to provide an avenue through which stakeholders can also express concerns. The Committee recommended:

That a comprehensive and formal post-implementation review of the legislation and operation of the tax system for attribution managed investment trusts be undertaken by Treasury and completed by 1 July 2018.

I understand the government has agreed with this recommendation.

Managed investment trusts are an important part of Australia's financial services landscape. The introduction of a new tax system for certain managed investment trusts follows the recommendations made by the Board of Taxation in its report on the Review of the taxation arrangements applying to managed investment trusts in August 2009. The underlying taxation legislation that currently applies to managed investment trusts relates to trusts more generally. The Board of Taxation was tasked with providing options for introducing a specific tax regime for managed investment trusts, MITs, which would enable Australia to become the financial services hub of Asia.

The board concluded that the current taxation arrangements applying to trusts create a level of complexity and uncertainty for managed investment trusts that is unacceptable for an industry of its significance to the economy. This is, primarily, the result of the current trust taxation provision in division 6 of part III of the Income Tax Assessment Act 1936 (ITAA 1936) being largely developed at a time before trusts were used in Australia as widely-held, commercially operated, collective investment vehicles.

A key element of the bills before the Senate is that managed investment trusts that choose to apply the new tax system will be known as attribution managed investment trusts, or AMITs. This has important consequences for managed investment trusts where trustees choose to apply the new system, as the choice is irrevocable and will therefore apply in future income years.

The opposition welcomes the potential for changes in the tax treatment of managed investment trusts that can help grow the managed funds sector. Appropriate changes could make Australian trusts more attractive for both local investors and foreign investors. As a capital-importing nation, this is absolutely critical for Australia. The Australian finance and insurance sector employs in excess of 400,000 people. To put it in perspective, that is around twice as many people as the mining industry employs. The value of the funds managed in Australia is about $2.6 trillion. Within that pool, approximately $92 billion is managed by Australian fund managers on behalf of overseas investors. The proportion of foreign funds being managed may appear small, given the sheer scale of funds managed under our compulsory superannuation scheme, but nonetheless it is an area that has significant room for growth.

Managed investment trusts pool funds to generate financial returns for investors who do not have day-to-day control over the trust. That means that typical investors are superannuation funds, life insurance companies and sovereign wealth funds. In 2010, when former Assistant Treasurer Nick Sherry was originally proposing the changes that we are considering in this bill, he said:

Many millions of Australians are investors in MITs, either directly or indirectly through their retirement savings.

In 2010, the Labor government introduced an amendment to expand the definition of a 'managed investment trust' in relation to withholding-tax rules. In the subsequent three years, the funds flowing into the managed investment trust sector increased by nearly 78 per cent, demonstrating that clear and well-developed policy can have excellent results. Two-thirds of the funds flowing in came from the Asia-Pacific region, yet another reminder of the role that the region plays in Australia's success, as epitomized in the former government's Australia in the Asian century white paper.

Former Assistant Treasurer Sherry knew from extensive discussions that Australia's tax rules around managed investment trusts were 'complex, uncertain and unsustainable in the modern economy'. Currently, managed investment trust income is allocated and taxed in aggregate. At the end of the financial year, members of a trust receive an allocation of the net income a trust earns relative to their stake in the trust. This amount is then added to their individual taxable income. The trustee of a trust is then taxed on any remaining net income that has not been distributed to members.

In essence, the package we are considering provides flow-through tax treatment for different types of income in a way that means investors in a trust receive broadly the same benefits they would have if they held the trust assets directly. It is a good example of an area in which government can simplify rules in a way that benefits industry, investors and the economy.

That is certainly the intention of the bill, but we have to get the detail right to make sure that the intent becomes a reality and does not create unintended consequences. According to some stakeholders consulted by the opposition, there is a risk that the current drafting of provisions relating to the treatment of trusts with different classes of membership interests creates scope for abuse of the managed investment trust withholding-tax regime by large foreign investors. The explanatory memorandum for the bill acknowledges that this is a possibility, stating:

An attribution MIT may have more than one class of membership interests if, for example, different members have exposure to different groups of assets of the attribution MIT. As a result, the tax attributes of a particular class of assets can effectively be ring-fenced to a particular class of membership interests. In this regard, it is possible for a class to have just one member.

When it comes to tax, the opposition has a strong record of closing loopholes. We introduced measures to plug loopholes in Australia's transfer-pricing rules and anti-avoidance provisions. The Liberals, by contrast, voted against the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013. When the current Leader of the Opposition, Bill Shorten, was Minister for Financial Services and Superannuation, he championed the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012. The Liberals, by contrast, tried to block the measure, which was designed to crack down on companies that overvalued assets in international transactions.

One of the Abbott-Turnbull government's first actions upon returning to office was to set about dismantling the good work that Labor had done to improve the offshore banking unit regime and tackle excessive debt loading. By ditching Labor's proposals, in effect one of the first acts of the Abbott-Turnbull government was to hand $1.1 billion back to giant multinational firms. On this side of the house, we are determined to make sure that we reduce the number of loopholes and that we do not create new ones.

Stakeholders have also raised concerns about the obligations this package places on custodians to pay withholding-tax liabilities when no actual cash distributions have taken place. It is another issue that deserves a second look. There is no requirement in the draft bill for AMIT trustees to distribute enough cash to cover tax liabilities arising from attributed income. Stakeholders have asserted that this can create unacceptable risk for custodians, as they may be faced with tax liabilities which they cannot later recover from their clients and which may inadvertently lead to fewer custodians engaging with the AMIT regime. As we started the process to create attributed managed investment trusts, we are all too aware of how keen the financial services sector is to have this new regime running. On this side of the chamber, the opposition also understands that it would be hasty and irresponsible to proceed without ensuring that this new regime has the necessary integrity and functions that are intended. That is what good tax reform requires.

Australia has come to a time when we need good economic leadership. One of the promises of Prime Minister Turnbull when he deposed Prime Minister Abbott was that he would put in place economic leadership. If you look at the economic challenges that Australia faces, you can see the need for that. Consumer sentiment has fallen; we have seen downgrades on growth since the last election; unemployment is up; and public sector construction has fallen every quarter since the election and is now near an all-time low. We have per capita Australian income down two per cent since 2013. This is not a widely recognised fact, because we tend to use GDP to measure living standards. But GDP does not divide by population and, for the country with the most rapid population growth in the advanced world, that means GDP can be a misleading measure of living standards. Simply look at disposable per capita income: it is lower now than when the Abbott government won office. We look across the ASX and we see dividend payout ratios in excess of 60 per cent—well above the ratios that you see in similar advanced countries. Only six per cent of ASX 300 firms believe Australia is a 'highly innovative' nation.

Looking globally, we face challenges such as the one of what happens when interest rates begin to rise from their 5,000-year lows. We have unprecedented levels of instability in certain parts of the world. Geopolitical instability and economic fragility demand a government with a long-term vision for tax reform, but instead we have seen the junking of the tax reform process by this government. The 'Re:think' discussion paper, brought down last year, called on community groups, regular Australians and business groups to put in their submissions. More than 800 did so, costing thousands of hours of time and millions of dollars—the secretariat alone cost over $600,000—and yet the Prime Minister has now junked all of that process. The promised tax white paper, which was supposed to be delivered within the first two years of the Abbott-Turnbull government, now looks as though it will not be delivered at all. We do not even know when the green paper—which is supposed to precede a white paper—is coming.

In place of careful and consistent tax reforms, we are instead getting ad hoc thought bubbles. The latest one, yesterday, comes from the Assistant Treasurer—the third Assistant Treasurer in just two years. Instead of cracking down on multinational tax, the Assistant Treasurer has suggested that perhaps employees should snitch on their bosses in return for a cut of the tax take. A government which has cut 4,700 jobs out of the tax office, which rejects the opposition's multinational tax plan and which does not believe in tax transparency instead suggests that we are going to garner more tax by encouraging employees to snitch on their bosses. It is indeed bizarre that a government which voted for less tax transparency last year now has plans for employees to spill tax secrets in exchange for cash.

Getting tough on multinational taxation requires robust tax laws—tax laws such as the proposal produced by the opposition, informed by work from the OECD, costed by the Parliamentary Budget Office, adding $7.2 billion to the budget bottom line over the course of the decade and grounded in good economic intuition. If you are deducting debt, you should do it based on sound economics, rather than ad hoc thresholds. That is what good multinational tax reform requires, rather than a dibber-dobber plan.

On this side of the chamber we are deeply committed to tax reform. But, as with all tax legislation that is debated in this parliament, it is absolutely incumbent on the government to be transparent about the ramifications these changes to the managed investment trust regime will have. The last thing the opposition wants is another tax loophole that can be exploited to deny the Australian community a fair share of tax.

Following the report of the Senate Economics Legislation Committee, the opposition agrees with the view of the committee that the new tax system for attribution managed investment trusts is long overdue and will modernise the tax treatment of managed investment trusts. These reforms will make Australia more competitive in the funds management industry and allow Australian funds to participate in the Asia Region Funds Passport.

I reiterate that, having noted the concerns of some stakeholders, the committee was satisfied that any unforeseen or unintended consequences that may arise during the implementation process will be dealt with by the government quickly. The opposition regards this as welcome news and particularly endorses the recommendation of the committee that there be a review of the new tax system within 24 months of commencement in order to provide an avenue through which stakeholders can also express their concerns.

With this, the opposition supports the bill.

Matthew Canavan (Queensland, Liberal National Party) Share this | Link to this | Hansard source

I have here that I should thank all those senators who have contributed to this debate, but I think I only need to thank Senator Dastyari for his considered, enthusiastic and passionate contribution to this debate and particularly for his support for these very important bills to do with managed investment trusts. The package of bills before us amends various taxation laws to introduce a new tax system for eligible managed investment trusts. Passing these bills is critical, as noted in the submissions to the committee.

As at 30 June 2015, the managed investment trusts industry had grown to $2.6 trillion and, given its size, Australia's funds management industry is significant to our economy and the financial security of many Australians. In its report, the committee recognised that the new tax system is long overdue and will modernise the tax treatment of managed investment trusts. These amendments update the trust regime so that it meets the commercial needs of fund managers and millions of Australian investors who invest in them directly or through their superannuation funds and enhance the competitiveness of the funds management industry.

This package of bills introduces an attribution model of taxation, which taxes members as if they had derived the income directly. The new rules recognise the use of trusts as collective investment vehicles and replace the general trust rules that are uncertain. The new tax system will reduce the compliance burden on trustees and investors by $30 million per year. Trustees will now have the option to recognise variances in income attributed to members in the year it is discovered. This is easier than reissuing statements to affected members. In addition, changes to the treatment of multiclass managed investment trusts will give trustees greater flexibility and reduce the costs associated with offering additional investment options through the one trust. The bills further contain an arms-length rule to prevent profit shifting from related parties to strengthen the integrity of the new regime.

These amendments have been actively sought by the funds management industry. The industry has also been actively involved in the development of the new law, which was noted by industry in submissions to the committee. As these changes are significant, Treasury will also complete a post-implementation review of this new tax system by 1 July 2018, consistent with the recommendation of the committee, to ensure that the new rules operate as intended. The committee only made two recommendations—the other that the Senate should pass this package of bills.

The bills bring the managed investment trust regime into the modern era and will reduce complexity, increase certainly and minimise compliance costs for managed investment trusts and their investors. The rules will also enhance the competitiveness of Australia's fund management industry. With that, I commend this package of bills to the Senate.

Question agreed to.

Bills read a second time.