Chris Bowen (Prospect, Australian Labor Party, Shadow Assistant Treasurer) Share this | Hansard source

The Tax Laws Amendment (2007 Measures No. 2) Bill 2007 is an omnibus bill which the opposition will support. I will be moving a second reading amendment in relation to the venture capital provisions when I turn to them later in the proceedings. Schedule 1 of the bill deals with the effective life provisions of mining rights. The amendments included in this bill clarify the law so that it reflects the original policy intent. The changes mean that a taxpayer acquiring a mining right from a prior holder will be able to estimate the remaining life, rather than the whole life, of the existing or proposed mine to which the right relates, as with other assets. The amendments provide that taxpayers can work out the effective life of their mining right themselves by estimating the period until the end of the life of the mine, quarry or petroleum field. Taxpayers holding mining rights will have the choice of using either the prime cost or the diminishing value method in calculating the decline in value, as with other assets. Once the life of the mine has been estimated there will be no requirement for a yearly or periodic restoration of the effective life of the mining right. However, a taxpayer can reassess the effective life if the original estimate is no longer accurate.

These amendments apply from 1 July 2001. This is retrospective because the 2003 amendments were also retrospective to 1 July 2001. This will ensure that the policy intent is reflected in the law since the introduction of division 40 into the 1997 act. Labor supports this move to clarify the law and provide certainty to taxpayers. I do note that it has been some time in coming. This is a regular refrain from me because it is a common problem. The government are very slow to correct drafting anomalies that are pointed out to them. I note, in passing, that last night’s budget included a cut in the number of staff for Treasury. I certainly hope that will not be the staff who are involved in drafting tax laws amendment bills, because I believe that, if anything, that area needs more resources, not fewer.

Schedule 2 of the bill proposes to allow deductions for boating expenses to taxpayers who do not use their boat for specific business activities. The current income tax law allows only people who are carrying on a business with their boat to claim deductions. The tax law denies deductions for taxpayers who use or hold their boats to earn ‘passive’ income. For example, a boat owner who occasionally rents out their boat for income is assessed on that income but is not able to claim any deductions. As the opposition agree that this is unfair, we support this measure. It is a fundamental principle, in my view, that if you are assessed on income you should be able to claim deductions relating to generating that income. The amendments will allow deductions for expenses relating to earning income from boats even where the owners are not carrying on a specified type of business.

The proposed changes will allow taxpayers who cannot demonstrate that they are carrying on a business using a boat to deduct expenditure relating to their boating activity up to the level of income they generate in that year from the boating activity. They will also allow excess deductions to be carried forward and deducted against future boating income activities. A taxpayer will be able to deduct the expenses to acquire a boat; retain ownership; acquire rights to use a boat; retain the rights to use a boat; use, operate, maintain or repair a boat in relation to any obligation associated with that boat or any obligation associated with the taxpayer’s right to use that boat.

Expenditure in relation to a fringe benefit will be exempt from the quarantining rule so that expenditure by an employer in providing a boat as a fringe benefit as part of a salary package is deductible to the employer regardless of the employee’s boating income. This is consistent with the general treatment under income tax law of expenses in relation to fringe benefits. Labor supports this measure. The amendments should ensure that taxpayers who generate an income stream using their boat are not treated unfairly compared to other taxpayers.

Schedule 3 of the bill proposes amendments to the tax law relating to research and development tax concessions. It makes 10 technical amendments to clarify the law, remove unintended consequences and ensure the law accurately reflects the original policy intent of the R&D provisions. The amendments proposed by this schedule include provisions so that companies will be able to object to the amount of R&D tax offset allowed by the tax commissioner if they are dissatisfied with the amount allowed. Currently companies can only object to an assessment when they owe money to the tax office. The bill will also allow companies who do not choose the R&D offset to amend their tax return to claim it by writing to the commissioner. Currently a company must choose the R&D offset instead of the deduction in the company’s tax return for the year. Once it chooses the offset, it cannot claim the deduction for that year. For the accelerated deduction, expenses incurred in having an outside body perform R&D activities for the company are deductible at the accelerated rate. The $20,000 minimum spend threshold does not apply. This bill extends this to companies wishing to claim the R&D tax offset for the amount of the contracted expenditure.

The R&D tax offset provisions may not cover all companies in a group as it refers to ‘taxpayers’, which is too narrow to cover certain companies that the original policy intended to cover. References to ‘taxpayers’ will be replaced by references to ‘persons’ to cover all companies in a group. This is important because, to reach the R&D expenditure threshold of $20,000, eligibility applies to all R&D expenditure in a group of companies. Further, currently a group of companies may be eligible for an amount of the premium deduction without any firm in the group being eligible for the allocation of that amount. This situation arises where a group of companies have collective R&D expenditure greater than the rolling three-year average of the group and are therefore entitled to the deduction but no individual company has increased their R&D expenditure over the previous year’s expenditure. This is because the premium deduction is only available for a member of a corporate group that must have increased its R&D expenditure above its three-year average. Also, at least one member in that group must have increased its R&D expenditure over the immediate previous year. This was an anomaly in the legislation. We welcome its correction.

The bill will eliminate the criterion that an R&D group have at least one member of the group whose expenditure for the year is greater than its R&D expenditure in the prior income year to access the premium so that the R&D group will only have to have increased its R&D expenditure above the average for the past three years to be eligible for the premium deduction. Currently an entire group of companies becomes automatically eligible for the premium deduction if a newly acquired company can establish eligibility due to expenditure incurred prior to joining the group. This bill will restrict eligibility to expenditure that is incurred during the company’s membership of the group so that a group will not be eligible for the premium concession based on expenditure incurred by a company when it was not a member of the group.

As a result of the method for calculating the 175 per cent premium concession, it is possible that the premium concession will be negative in certain circumstances. As this concession should only provide a benefit to companies, the calculation will be taken to be zero. We welcome these technical and detailed amendments to the R&D tax concessions. However, I make the point that it is time for more than technical amendments. It is time for root and branch amendments to the R&D tax concessions. It is time that this government re-examined its very shortsighted decision to slash R&D tax concessions when it came to office in 1996.

Since that decision we have seen the average annual growth rate of real business investment in R&D plummet from 11.4 per cent in the period from 1986-87 to 1995-96 to 5.1 per cent in a similar period 10 years later. For manufacturing the story is even worse, with the average annual growth rate slipping from 10.6 per cent to only 1.9 per cent. At 1.76 per cent—already half a percentage point below the OECD average—Australia’s overall R&D effort is set to be overtaken by China’s in the next few years unless urgent action is taken. Following the government’s 1996 changes, R&D as a share of output plummeted from about 3.3 per cent to only about 2.8 per cent. We can only speculate about what would be different today if the government had not taken its shortsighted decision back in 1996. We can only speculate as to what our R&D rates would be. We can only speculate as to whether we would have had over 50 consecutive trade deficits. We can only speculate as to whether last night’s budget would have still predicted that the current account deficit would blow out to six per cent of GDP—as it did—one of the highest figures encountered in Australia’s history. We have 10 years of wasted R&D opportunities, 10 years of failure to invest in the future. It is time for more than technical amendments; it is time for a complete re-examination of this government’s approach.

Schedule 4 of the bill amends the tax law to allow for a deduction for donations of small parcels of shares in listed public companies to deductible gift recipients. The amendments will allow taxpayers a tax deduction where they make a gift to a DGR of shares in a listed public company where those shares were acquired more than 12 months before making the gift and are valued at less than $5,000. This is eminently sensible and it meets with our support.

The bill also amends the Income Tax Assessment Act 1997 to update the list of deductible gift recipients. Schedule 5 adds the American Australian Association Ltd and the Bunbury Diocese Cathedral Rebuilding Fund to the list of specifically listed DGRs, and we welcome this. The American Australian Association do good work—and have done for many years—promoting good relations between our two great countries. They played an important role in having the American memorial erected here in Canberra and they continue to play an important role in the annual commemorations of the Battle of the Coral Sea, as well as doing much other good work. Tax deductibility for donations to this group is eminently sensible and supportable, as are those for the cathedral rebuilding fund. Schedule 5 also extends the DGR listing until 27 August 2007 of the Finding Sydney Foundation—which of course does good work in trying to find that battleship and those who went down on her—and reflects the name change of a specifically listed DGR. Again, Labor supports each of these measures.

Schedule 6 extends eligibility for tax deductions for contributions to DGRs where there is a minor benefit in return for their donation. In other words, where a fundraising function is held—a dinner, a ball or some other sort of function—and there is a minor benefit received in return, such as the dinner on the night or some other form of minor benefit for attending the function. Schedule 6 proposes to relax the eligibility thresholds for minor benefits to allow deductions for contributions of more than $150—it is currently $250—where the market value of the minor benefit is no more than that. We support this. Fundraising functions and dinners are very important parts of a charity’s fundraising activities. Just a couple of weeks ago I was delighted to host the Learning Links charity ball in Bossley Park, which raised almost $50,000 for Learning Links. I am sure that Learning Links and other charities appreciate this amendment, and, of course, we will be supporting it.

Schedule 7 corrects a defect in the definition of ‘exempt entity’ by ensuring the definition covers all entities exempt from tax under the tax law. This bill will change the definition of ‘exempt entity’ in the Income Tax Assessment Act to include any entity if all of its income is exempted by any Commonwealth legislation or if it is an untaxable Commonwealth entity. This will ensure that ancillary funds and prescribed private funds can donate to tax exempt state, territory and Commonwealth bodies such as public ambulance services, research authorities and cultural institutions. This was the original intent of TLAB (No. 3) of 2005, which made changes to public ancillary funds and prescribed private funds. I note that various institutions, including the Opera House, made submissions to the Senate inquiry welcoming this, and of course we join them in that.

I now turn to the venture capital section of the bill. A healthy venture capital sector is vital to the strength of the Australian economy. Venture capitalists take risks—they invest in things which may or may not produce them a return—and the tax system recognises this. The OECD notes in its Economic policy reforms: going for growth paper of last year that Australia’s venture capital investment rate, as a percentage of GDP, is below the OECD average and is very significantly below the rates for the United Kingdom, Canada and the United States. The government enacted the Venture Capital Bill 2002 and the Taxation Laws Amendment (Venture Capital) Bill 2002 to improve the tax treatment of venture capital. This has had a questionable impact. Only 15 VCLPs and 15 PDFs have been registered since that time.

The government then appointed the Watson review to look at the treatment of venture capital in our taxation system. The government says that this bill adopts the recommendations and meets the concerns of the Watson review, which it received in December 2005. I say: ‘That’s great. I would rather come to that conclusion myself; I would rather make that decision for myself.’ It would be helpful if I and other members could read the Watson review. It would be helpful if the government would actually release the review that they commissioned. When the Assistant Treasurer comes into the House to sum up this debate I ask him to enlighten the House as to why he, the industry minister and presumably other cabinet ministers are the only people in Australia entitled to read the Watson review. Why has that privilege not been extended to members of the opposition or to any other person in this country so that Australia can make the decision and individuals can make the judgement about whether this government is adopting all the recommendations of the Watson review?

I suspect the government are reluctant to release the Watson review because it shows that their previous reforms have been less than successful. When a government commissions a report that finds that something they have done has been less than successful, they actually get points for fessing up, being honest about it and releasing the report. They get zero points for keeping it hidden and for refusing to release it. And they certainly get zero points for bringing in legislation which is meant to comply with the recommendations of the report and not giving the parliament of this nation the chance to read the report to make that assessment for itself. So the Assistant Treasurer today has an opportunity to explain to the House why that report has not been released. Indeed, he has an opportunity today to release it so that this House can make that judgement.

I also note that last night the budget announced further changes to venture capital provisions. These changes were announced in last year’s budget. The day after this budget, we are finally debating them. In the meantime, more have been announced. This reinforces the point that the government is very good at making announcements on budget night but is very poor in implementing them.

I think there are 10 separate measures that were announced in the 2006 budget which, the day after the 2007 budget, we are still to see introduced into this House. I hope for the sake of the Australian economy that some of the measures announced last night are introduced into this House a good deal quicker than that. For instance, I hope that the change to the $100 million cap—which my predecessor, the previous shadow Assistant Treasurer, moved an amendment in the Senate to achieve two years ago, and which the government finally announced last night—is introduced a good deal more quickly than 12 months down the track. My point is: what confidence do we have that these measures will achieve the government’s objectives when, before they were even introduced into the House of Representatives, further measures were announced last night?

Schedule 8 amends the venture capital provisions to relax the eligibility requirements for the concessional treatment of foreign residents investing in venture capital limited partnerships or VCLPs. It also introduces a new investment vehicle—the ‘early stage venture capital limited partnership’ or ESVCLP. The aim of the tax concessions is to provide equity capital for a relatively high-risk and expanding business that finds it difficult to attract investment through normal commercial mechanisms.

Schedule 8 relaxes the restrictions on VCLPs. It does that in the following ways. It removes restrictions on the investor’s country of residence. People in this sector have been calling for this for some time and we welcome it. It allows the VCLPs to invest in unit trusts and convertible notes, whereas currently investments must be in the form of shares or options in companies. It reduces the minimum partnership capital required for registration from $20 million to $10 million. And it allows the appointment of auditors to be delayed until the end of the financial year of the investment; currently an auditor is required on an ongoing basis.

Schedule 8 also relaxes the ‘Australian nexus’ test, which currently requires that the investee entity—the company the VCLP invests in—be a company resident of Australia and that 50 per cent of the assets and employees of the investee entity be located in Australia for 12 months following the investment. The changes allow some investments—up to 20 per cent of the committed capital—to be in companies and unit trusts that are not in Australia.

However, this bill maintains the restriction on VCLPs that target investees must have less than $250 million in assets—a restriction generally not imposed in other jurisdictions. I will be dealing with this in my second reading amendment.

As I indicated earlier, this bill also establishes a new investment vehicle—the early stage venture capital vehicle—which will progressively replace the existing pooled development funds or PDFs, which were established in that 2002 legislation and which have had, at best, patchy success. These new vehicles will be flow-through tax vehicles, like VCLPs; however, the income and capital gains tax earned by these vehicles will be exempt from any Australian tax. This exemption will apply to both resident and non-resident investors.

However, the attractiveness of these concessions must be measured by the following restrictions that will apply to these vehicles. The maximum size of the fund administered by an ESVCLP is $100 million. They will not be able to invest in investee entities having total assets exceeding $50 million; this restriction already applies to PDFs. Losses from these new partnerships will not be deductible by the partners. And once the total assets of the entity invested in by an ESVCLP exceed $250 million, the vehicle must divest itself of that entity.

I now move:

That all words after “That” be omitted with a view to substituting the following words: “whilst not declining to give the bill a second reading, the House condemns the Government for its failure to promote the venture capital industry and calls on the Government to:

(1)

increase to $500 million the value of assets of an entity invested in by an Early Stage Venture Capital Limited Partnership (ESVCLP) beyond which ESVCLP must divest itself of an interest in the entity;

(2)

increase the time allowed for a partnership to divest an investment from 9 months to 12 months; and

(3)

increase the value of assets target investees of Venture Capital Limited Partnership can have, to $500 million”.

This amendment calls on the government to remove the significant requirement that ESVCLPs must divest themselves of an organisation which has assets of more than $250 million. As a step in that direction, it calls on the government to change that threshold from $250 million to $500 million, and to increase the amount of time allowed for an ESVCLP to divest itself of that interest from six months—which can be extended by three months—to a flat 12 months.

Increasing the threshold to $500 million would encourage more investment in early stage venture capital vehicles and more investment in innovative businesses in Australia. This is something which has been raised with me consistently in my consultations with the venture capital industry on this bill. I know the Assistant Treasurer likes to talk about consultation but doesn’t like to actually do much of it, whereas I have been to various capital cities of this nation and consulted directly with venture capitalists about the implications of this bill, and this is a concern which has been raised with me directly. I do not imagine that it has been raised directly with the Assistant Treasurer, because I know he believes more in the rhetoric of consultation than in actually doing it.

This is a step that the Labor Party is calling on the government to adopt today. I indicate that, should we be honoured with government later in the year, this is something we would be reviewing in office. We would be examining this threshold and the amount of time that is given to ESVCLPs to divest themselves of those assets. We would be reviewing those things and having a very close look at them. But, as we stand today, we think it would be a sensible measure for the government to lift this threshold, which does not apply in many other jurisdictions and which does not give these venture capital partnerships long, in real terms, to divest themselves of these assets. So, while I welcome these reforms generally, I remain concerned about the restrictions on the assets that can be held by both investment vehicles: VCLPs and the new early stage vehicles.

As I have said, the government is making these changes because the venture capital regime it introduced in 2002 is not working properly and has failed to boost the venture capital industry by an acceptable amount. The removal of some of the restrictions on VCLPs and the new vehicles are positive and welcome. However, as I have said, they do not go far enough. I fear that, unless the government adopts Labor’s amendment today, we will be back here in one, two or three years time amending this legislation yet again. Just as we are today amending the 2002 legislation, just as the government last night announced further changes—which we will be amending sometime in the next 12 months, I presume—we will be coming back again to amend this legislation because the government, through its lack of consultation, has failed to take it up.

Generally, I support this bill. I note that the government of its own volition referred it to a Senate committee. I presume that is because of the farce that we saw last time with Tax Laws Amendment (2006 Measures No. 7) Bill 2007, where the government refused to refer it to a Senate committee, backflipped and accepted Labor’s referral to a Senate committee and then finally had to accept the recommendation of Labor senators to amend the bill. I assume that the government thought, ‘We’ll avoid all that rigmarole this time and just refer it straightaway to a Senate committee.’ I welcome that. I do not think every tax laws amendment bill has to be referred to a Senate committee—may I let the Assistant Treasurer know—only those which cause some concern. The measures in this bill are generally supported. I commend the bill and the amendment to the House.

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