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

I move:

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

Australia's taxation system, with particular reference to:

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

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

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

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

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

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

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

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

(i) related matters.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Malcolm Roberts (Queensland, Pauline Hanson's One Nation Party) Share this | Link to this | Hansard source

In my first speech, in 2016, and many times since, I've called for comprehensive tax reform. The tax system in Australia as it exists is our country's most destructive system, and not just exorbitant tax rates. I'll give you some figures from the late 1990s and early 2000s. Someone on the average income paid 68 per cent of their income to government in the form of rates levies, fees, charges, special charges and special levies—68 per cent. That means someone's working from Monday to mid-morning Thursday to pay the government.

Since then, it's got much more complex and more absurd, and some of the data I'll give you is more recent. Some of the figures are indicative, not definitive. The ABS average income figure is $100,000. The median income figure is $67,000. Life is tough for people on the median. In 2015 Joe Hockey said that a typical person in Australia pays 50 per cent in tax—works from January to June to pay the government, and then gets to keep from July to December. Basically, as I said, people are working at least half the year—probably 68 per cent of the year—for government.

Then we think about the tax. Tax on a house, according to a News Corporation article a few years ago and according to recent figures, is 45 to 50 per cent of the house price, The effective tax rate is 80 to 100 per cent. International accountant and auditor Derek Smith in Queensland says that 50 per cent of the price of bread is tax, which is an effective tax rate of 100 per cent. Petrol excise and tax varies. At 70 per cent, the effective tax rate is 230 per cent. So, a worker on the average income on payday gives 21 per cent of his or her gross income to the government. With what's left—that's 79 per cent—she the next day wakes up in her house and pays 80 to 100 per cent to have that house and makes some sandwiches because food is too expensive to purchase wherever she works. So, that's a tax of 100 per cent. Then she fills up at the petrol station on her way to work, and that costs her 230 per cent tax.

Then we have GST. GST can be levied on bills, including stamp duty, so we've got a tax on a tax. So, there are three aspects. First, there's the total tax paid. Second, how is it levied? And third, is it enforced fairly? Ultimately, the people pay a tax in the form of higher prices. So, it doesn't matter if a company is being taxed or if another entity is being taxed; they pass it on to the customers.

Cost of living, inflation, overregulation and many other factors make sure that today's system of government impositions—government cost recovery—is highly regressive. Look at the carbon dioxide tax and offsets—a UN tax, driven by the UN, introduced by the Liberals-Nationals in 2015 under Greg Hunt and Malcolm Turnbull and now ramped up under this government with Chris Bowen and Anthony Albanese. We've got a highly regressive imposition of taxation and other charges by the government. The Australian Bureau of Statistics showed that the median income is $67,000. People on that median income are doing it extremely tough because of government and the mishmash that's evolved in the taxation system.

That takes care of terms of reference (a) and (b) in Senator Rennick's motion. I agree with them; in fact, I agree with his whole motion, and I thank him for his motion. I've raised the need for comprehensive tax reform many times, so I support this motion.

Then we see the core, one of the bedrocks of our federal system and Constitution—competitive federalism. That is being converted under the current tax system to competitive welfarism, destroying productivity in this country. The way competitive federalism should work is it promotes competition between the states—not cut-throat competition, just competition for efficiency. As I said yesterday, Joh Bjelke-Petersen, as Premier of Queensland, abolished death duties in Queensland and people moved to Queensland to retire, which developed the Gold Coast. The other states then saw their people were leaving, so they abolished death duties too. Now we've got Labor—and the Greens, I think—wanting to put in place a central death duty as a state duty—centrally imposed, no competition, no accountability. When you have a marketplace in governance because the state can't operate according to their needs and the needs best suited to their constituents, then you have competitive federalism, a marketplace in governance, and that is priceless. One of the reasons we've got such low accountability in state and federal parliament is it's too easy for the states to blame the feds and the feds to blame the states, as I said yesterday. The GST undoes competitive federalism and replaces it with competitive welfarism. It's a reward for states like Tasmania and South Australia to be inefficient and not use their resources and, instead, bludge off of Western Australia.

I mentioned yesterday that systems drive behaviour and behaviour shapes attitude, and the combination of behaviour and attitudes along with values and leadership and symbols determine the culture, which is the most important determinant of productivity, security and accountability. Energy prices, as I said, are a huge regressive tax on the poor. Massive record immigration is a huge regressive tax on housing, especially on the poor. As I list some of these examples, as Senator Rennick listed some of his examples, I urge you to think about the impact on our culture in this country.

The tax system is Australia's most destructive system. What behaviours does it drive? We've got the best and brightest accountants and lawyers in this country fighting the government, not helping our producers to fight our competitors overseas—the Koreans, the Japanese, the Chinese, the Americans. We've now got a tax system that's grown-up like Topsy; it's a mishmash of dishonest promises to various vested interests for favours. What behaviours does that drive? Is that productive? It's certainly not productive. Inefficient or suboptimal allocation of capital, allocation of resources, leads to inefficient or suboptimal decisions and a waste of resources and inefficient allocation to minimise tax rather than to maximise wealth and value.

Then we have the ATO in a position where it can level complaints against people and businesses—small businesses particularly, because they don't have the lawyers to back them up. In addition to prosecuting those cases, they adjudicate on those cases. How can that be justice? It's not justice. It leads to corruption—and we saw that in the Australian Taxation Office just a few years ago.

There is the complexity of various structures that Senator Rennick mentioned; he's got far more experience in that than I have. They're unfair to people who can't set up structures. Senator Rennick discussed some of the modern structures in the technologies that have come up. That increases the appeal for workarounds.

Then we've got something that Senator Hanson has talked about for many years, since 1996: multinationals basically pay no or little company tax. These use their resources for free. We've got the world's biggest freeloader, the biggest tax avoider in the world, Chevron, taking our gas and sending it overseas, using our infrastructure, using our security forces, using our education system and not paying much at all for the gas. This is a figure I got from Jim Killaly, the former Deputy Commissioner of Taxation, Large Business and International, who retired in 2015 or 2016. I've met him. He said in both the nineties and in 2010—and it's quoted in the newspapers—that 90 per cent of Australia's large businesses are foreign-owned and since 1953 have paid little or no company tax. Who's paying that share of tax? It's the men and women of Australia, working families.

Since 1953, when we had double taxation legislation enacted by the Menzies Liberal government, we've had foreign companies paying little or no company tax. In the 1980s, we had Labor, with the petroleum resource rent tax, making sure that large companies such as Chevron pay little or no tax when exporting our gas from the North West Shelf. Then we had transfer pricing rorts and so many other rorts, which Senator Rennick went into. So terms of reference (c) and (d) are definitely worth keeping.

The tax reform, while it's necessary and arguably one of the most important things in this country, is difficult because the uniparty, Liberal and Labor, sees new ideas, seizes on new ideas and then basically tells lies and misrepresents to destroy our tax system. Paul Keating, as Treasurer to Bob Hawke, introduced the concept of the GST. Later, when John Hewson raised it as opposition leader, who smashed it? Paul Keating smashed it. He destroyed the GST concept even though he'd come so close to putting it over the line in Australia.

When Pauline Hanson, who wasn't a senator at the time, got hold of the transaction tax, it was also sent to Costello by the originators of that taxation system and taxation proposal. Peter Costello, as Treasurer—and a good treasurer—was asked about it and he said: 'Sounds like a good system. We must have a look at it.' Then Senator Hanson introduced it to the public, and he used it to try to destroy her.

And look at my motion for stopping bracket creep—a motion on a Labor bill for stopping bracket creep. Labor stood right up there and said it supports work to remove indexing of bracket creep, but it voted against it. The LNP, the Liberals and Nationals, did something similar. They stood up—Senator Hume, I think it was—and said, 'We support removal of bracket creep, the stealth tax, the hidden tax, the deceit tax,' but they voted against the indexation of bracket creep. Barely a few weeks later, Senator Sharma, in his first speech, said that one of his goals was to get rid of bracket creep. Well, pile on, but just a few weeks earlier he had voted against removing bracket creep.

As Senator Rennick has already mentioned, the tax system has been wangled and mismanaged to protect special interest groups feeding off tax loopholes. The terms of reference (e), (f), (g) and (h) are all necessary. Tax is the cost of government. That's necessary. But it's now got to the point where tax, in this country of ours, is the cost of excess government interference and excess waste—well, all waste. It's the cost of poor governance, and it's the poor who pay regressively for it.

I support Senator Rennick's motion as a step to exposing the harm and inefficiency of the tax system. Because of the complexities of the tax system and because of the politics around it, I think the first thing to do is to get an agreement to understand that the tax system is so destructive and so inefficient. Senator Rennick's motion is a commendable first step to exposing the inefficiencies and the unfairness in the tax system. Once there's an agreement on the inefficiencies, then we need to develop principles—not a system but principles: for example, simplicity; efficiency, so the tax system actually collects more than the cost of implementing that tax; fairness; objectivity; and the fact that it's inescapable, so we don't have multinational companies coming here, stealing our resources and assets, using our infrastructure and our people, and skipping the country without paying their fair share. So we develop principles and get agreement on them, and then, once that's done, the specific system falls out.

I see Senator Rennick's motion as leading to an important first step in identifying the problems and some of the solutions and then, ultimately, we can take the next step: comprehensive tax reform, defining the ultimate system and the transition of baby steps to getting there. I support Senator Rennick's motion.

Question agreed to.