Sussan Ley (Farrer, Liberal Party, Shadow Assistant Treasurer) Share this | Hansard source

I am pleased to speak today on the Tax Laws Amendment (2009 Measures No. 6) Bill 2009 and in so doing cover some of the issues that are raised in the six unrelated schedules to the bill. Schedule 1 proposes changes to the capital gains tax provisions to abolish the trust cloning exemptions of the Income Tax Act 1997 and provide for the rollover of CGT when transferring assets between certain non-discretionary trusts. This is probably the most contentious schedule to the bill. Before I discuss the different measures, I should make the point at the outset that the former minister for finance, on behalf of the opposition, referred the bill to a Senate inquiry in November 2009. We await the deliberations of the experts on our Senate Economics Legislation Committee, which are due on 25 February. The opposition will tailor its response to the bill accordingly. As I said, there are some quite technical provisions and they raise some interesting questions.

It is fair to say—again in preliminary remarks—that in picking up the previous government’s tax reform agenda when they came to government just over a couple of years ago, the promise was that they would make very few changes. Therefore, it is substantially the previous government’s agenda that has gone forward. But when that arrives at the legislative stage—when the rubber hits the road—due to the responses by the ministers to the consultation, which was extensive and positive, we may see different legislative provisions than those we would have enacted. That is why we will scrutinise the final legislation very carefully. To maintain our support, we need a positive reform agenda that looks after business interests.

Schedule 1 talks about trust cloning, which I suppose is the vernacular for the process where a new trust is created over assets that have been transferred with the same terms and beneficiaries of the original trust. Generally, capital gains arising from the increased value of such assets are taxed when the economic ownership of the asset changes. But a change of economic ownership usually occurs where assets are transferred between trusts or where a trust is created over an asset. For example, where a family trust transfers one asset to another unrelated family trust, a change in economic ownership occurs and capital gains tax liability arises. Where a trust is created over a new asset for the first time, a change of economic ownership occurs and capital gains tax liability also arises. I guess the distinction is between the legal and the economic ownership changing, and that is probably one of the points of this provision. It is critical that we make sure that we do not introduce new capital gains tax provisions where there is not that change of economic underlying ownership and it is just a change in legal ownership.

At the moment under the law there are two exceptions to this general rule, and the provisions under those exceptions are that a capital gains tax event does not occur and therefore no liability arises when a taxpayer is a sole beneficiary of a trust that was created over the asset or into which the asset was transferred; the taxpayer is absolutely entitled to the asset in question against the trustee; the trust in question is not a unit trust; or, and the fourth provision is critical, where the asset is transferred from an existing trust into a new trust, whether the new trust was created by this transfer of the asset or was an existing trust and the beneficiaries in terms of both trusts are the same. The last point is where I suppose potential tax mischief may arise, and the government has stated that it considers that these exceptions are being used to allow the transfer of assets between individuals that result in less or no tax being paid in circumstances that would normally give rise to a much larger capital gains tax liability.

The last point I mentioned of the four allows the capital gains tax free transfer of assets between trusts that have many beneficiaries none of whom are necessarily entitled to the asset in question. These are discretionary trusts where it is up to the discretion of the trustee how those assets are distributed. It is quite possible for somebody to contribute an asset to the trust or have a trust purchase the asset with funds contributed by them and have other individuals receive the benefits arising from the asset, but of course the distribution can change from year to year so such benefits could be received free of any CGT liability. It has been noted that in extreme cases it is possible for an asset to be transferred into a new trust under these provisions and then immediately sold and that would completely avoid any tax being paid.

There is a need to review these provisions, and that is what this bill does, but I also note that in making submissions to the Senate inquiry various tax organisations and the industry have expressed quite serious concern. I imagine that that concern may well be reflected in the senators’ final report. Specifically, there is concern that the rollover provisions are too narrow and they will prevent the transfer of assets between trusts in circumstances where there actually is not a change in economic ownership and there is no way of justifying that that has not indeed happened. That would introduce uncertainty into the tax profession.

There are legitimate uses for trust cloning which this bill seeks to recognise, and that is good. We all recognise that there are legitimate uses of trust cloning that really do not have anything to do with the tax provisions; they would relate to family business succession planning, a business protecting its assets and diversifying its risks, and the need to restructure property within trusts. The proposed changes do address those non-tax reasons for trust cloning by stating that, where there is a sole beneficiary, that beneficiary is absolutely entitled to the asset in question and the receiving trust is not a unit trust, the proposed provisions may be used in succession planning for a family business et cetera. My concern at this stage is that the rollover provisions are in fact too narrow and may need to be reviewed. Capital gains tax considerations must not be an impediment to the restructure of trusts and there should not be inappropriate consequences.

The policy development for this particular provision and indeed the whole bill has been substantial and I acknowledge the work that all have done since this was first a paper delivered by the ATO in April 2008. There has been a long and iterative process since then. Industry submissions to the Treasury in response to release of the exposure draft generally did acknowledge that the current provisions were too wide and may well lead to avoidance of capital gains tax. That is not good, of course, but the submissions generally considered that the proposed changes to recognise that fact are too narrow and would prevent many particularly discretionary trusts from taking advantage of the proposed relief provisions upon the transfer of assets. So, once again, we will see what the Senate Standing Committee on Economics comes back with on 25 February.

The second schedule that I want to talk about in some detail is probably the other main one in the bill, and that concerns loss relief for emerging superannuation funds. The schedule inserts a new division into the income tax act to deal with the transfer of capital and income losses to funds when two separate superannuation funds merge. Typically if you transfer assets from one fund to another, that would trigger a capital gains tax event and of course the realisation of capital gains, or capital losses, for the receiving or transferring fund as appropriate. This new provision will allow the transfer of losses to a successor fund when two superannuation funds merge. We should note that the proposed changes are temporary measures applying to mergers that occur between December 2008 and June 2011.

I appreciate that the reason for that is that the government has stated that it will review this measure after it has considered the report of its Australia’s Future Tax System Review. Leaving aside all the points that I could make about the nonrelease of that future tax system review report, the fact that the industry does not know at this stage whether this particular measure is going to continue is surely going to act as a disincentive for any mergers that it might be contemplating. Certainly, if we look at figures provided by APRA about the number of mergers between superannuation funds, particularly the main ones, over the years between 2005 and 2009—corporate funds, industry funds and retail funds would be the three main sectors, and there is also the public sector—we see that there has been significant merging of superannuation funds. That excludes all of the small super funds, but the main funds are involved in very steady ongoing merging operations.

I think the reasons behind that are positive, because there are great advantages to members and fund providers, most particularly with economies of scale. Bigger funds, of course, have access to a much wider range of investment opportunity and can adopt a longer term, more stable approach in their investment strategies. The regulatory requirements of APRA, I think it is fair to say, can be quite onerous for a small fund. The other very important thing for everybody who has their money in super funds—and that is all of us—is, I think, that larger funds can demand lower service fees from service providers. There has certainly been quite a bit in the press this week about the quantum of fees that fund managers are asking. Some commentary I read this morning—I am sorry; I cannot attribute it—said that, if fund managers cut their costs by 50 per cent, we would all have more money in super. If this measure can assist, it is certainly a good one.

The commitment began in December 2008, when the Minister for Superannuation and Corporate Law announced that the government would provide an optional capital gains tax rollover for capital losses arising when funds with at least five members merged before 1 July 2010. Again, with this measure, there has been extensive consultation, and I think it has been a good consultative process. Generally, industry groups have welcomed the changes and noted that they will benefit the industry, but several groups have requested that the scope of the proposed changes be further extended to include a wider range of situations. It is important, if we are going to take these steps and make these changes for a particular purpose, that the legislation we put forward actually does achieve that.

Some of the concerns that have been raised in the context of the Senate inquiry include, as I have already mentioned, the sunset date coming up in 2011, which I believe is far too soon. It is not reasonable that the industry should bear the cost of uncertainty of the government’s dragging its heels on the Henry tax review. Other concerns are with the two different approaches for obtaining rollover relief, one of which is rollover relief in transferring the members and one of which is transferring the losses. The first option for rollover relief enables the new fund to take up the cost base of the assets as they applied in the fund which is winding up, but it is only available if the transfer of members in the winding up of that fund occurs in a single tax year, and transfers may often occur over two tax years for a variety of reasons. It may well be that the legislation needs to reflect that as an option. There will be circumstances where a transfer can legitimately occur over more than one tax year. If that were the case, the rollover relief would not be available.

The other approach is to transfer the losses from one fund directly into another. Apparently, under the legislation as drafted, losses arising after the last member transfers cannot be transferred. The recommendation, there, is that it should be possible for losses that are incurred by the old fund after the last member transfers relating to the realisation of assets and other costs associated with the transfer of members and the wind-up of the fund—which clearly would come after the last members transferred—to also be transferred to a continuing fund.

Another concern raised was that the bill should be clarified to ensure that rollover relief can apply to assets transferred to the continuing fund even if other assets have been sold to a third party. An example might be if assets were realised for cash and sold to a third party but there would be further transfer of assets remaining that would then be moved into the new fund. It is apparently not crystal clear that they would all be covered by the provisions of the bill, even though I am sure it was designed that they should be.

That is schedule 2, which deals with those transfers of losses between super funds. I think it is reasonable to say in summary that the changes probably do not go as far as the superannuation industry would like but they do remove significant impediments to the merger of funds over the set time period.

Schedule 3 concerns exempt annuity business of life insurance companies. It is fairly straightforward and non-controversial. I am not going to tie myself up in knots, because I know that anyone tuned into this broadcast is tuning out rapidly at the in-depth discussion of tax matters! Essentially, the third schedule is a clear legislative commitment to exempt all superannuation based income from income tax if the recipient is over 60 years of age and the benefits were previously taxed within the fund. Where annuities were paid, we have to clarify that they are in fact from a non-assessable, non-exempt source. Schedule 3 is totally uncontroversial.

Schedule 4 concerns deductible gift recipients. From time to time, the Assistant Treasurer adds different individuals or organisations onto the deductible gift register. Two are being added. One is the Dymocks charity and one is the Green Institute Ltd. I am compelled to state that I am concerned about an organisation as political as the Green Institute Ltd, which is—from checking its website—an arm of the green movement. It makes highly political statements. It is quite entitled to do that. It is entitled to carry out a political agenda, as is any organisation, but I do not know that it is reasonable that it should be ahead of so many others in receiving deductible gifts. It is certainly not in the same category as most of the other organisations on that list. As somebody who, as a local member of parliament, has tried—as we all have—to have listed our local organisations that, for example, are raising money for a family that has been left homeless or children who have been affected by the loss of parents and so on and are doing really good work in their local community, I know that they do not always get accepted onto this list, whereas an organisation as blatantly political as the Green Institute has been accepted. That is clearly a political decision by this government and one of which we do not approve.

Schedule 5 of the bill concerns the north-western Queensland floods. It is there to ensure that the particular amounts that were paid to the victims of the north-western Queensland floods in early 2009 are not subject to income tax and not included in separate net income of a person receiving these payments—in other words, there are no tax consequences of those payments.

The final schedule of the bill relates to spirit blending—these spirits, I hasten to say, are not consumer spirits. This schedule amends the Excise Act to ensure that the blending of certain high-strength neutral spirits—those with greater than 10 per cent volume of alcohol—are treated as excise manufacture to ensure that those spirits, when imported, qualify in the same manner as domestic spirits for the concessional spirits regime under the Excise Act. I should note that they are used for industrial, manufacturing, scientific, medical, veterinary or educational purposes.

In conclusion, can I thank the Parliamentary Library, in particular Leslie Nielson from the economics section, for the terrific work they do in assisting all of us who wish to speak on tax matters, and indeed economics matters, in the House, and for their help on this particular occasion. And may I again reiterate that the opposition will consider its position on the provisions of this bill following the Senate inquiry in the other place.

See this speech in context