House debates

Wednesday, 23 June 2010

Tax Laws Amendment (Foreign Source Income Deferral) Bill (No. 1) 2010

Second Reading

11:40 pm

Photo of Bernie RipollBernie Ripoll (Oxley, Australian Labor Party) Share this | Hansard source

I too rise to speak on the Tax Laws Amendment (Foreign Source Income Deferral) Bill (No. 1) 2010. At the outset I want to congratulate the Assistant Treasurer and also the Treasury and the Board of Taxation for the work they have done in this area. This amendment bill does a range of things. In particular it amends the Income Tax Assessment Act 1936 to repeal the foreign investment fund, FIF, and the deemed present entitlement, DPE, rules. The schedule also makes consequential amendments to the Income Tax Assessment Act and the Superannuation Industry (Supervision) Act 1993 that are required as a result of the changes in the foreign investment fund and the deemed present entitlement rules.

The repeal of the FIF and the DPE rules were announced, in the 2009-10 budget, as part of a wider reform program that we have taken on in terms of Australia’s foreign source income and anti-tax-deferral attribution rules. The wider program has been initiated by the government since 2007 to ensure that we have the appropriate regulations and rules in place to protect consumers but at the same time, very importantly, ensure we do not have unjustifiable avoidance by a range of people of taxation responsibilities in this country. We are ensuring through these good reforms that people pay the appropriate amounts—their fair contribution—to the tax system and on behalf of all taxpayers. We are certainly trying to make sure that, while we do that, we do not put in place specific burdens or compliance costs or extra hurdles for small business. It is important to get that balance right. We acknowledge that in a whole range of areas. It is not limited to this particular amendment bill, although it is certainly an important element of it. You will see it in a whole range of reviews, from the Henry review in terms of general taxation right across the board to what Jeremy Cooper is doing in terms of superannuation.

Mr Cooper is due to report by the end of this month. There are some significant changes, amendments and reforms that can come out of that review. I look forward very much to that report being handed to government on 30 June because of the significant contribution that superannuation makes in this country and the very important role it will continue to have in the future—and I might speak a little more about that in relation to this specific bill before us in a moment. The changes in this bill will mean a modernising of Australia’s financial services sector, looking specifically at the issues of foreign income sources and how to most appropriately deal with income that is received by Australian residents and nonresidents from any foreign source they have.

It is also important to note that while these changes are of a technical nature they are quite significant. They form part of some major steps that we are taking as a government to modernise our internal systems and to make sure that Australia remains competitive on a global platform. We need to remain competitive after these sorts of changes. We need to continue the good work to ensure that Australia becomes a financial services hub.

I want to take the opportunity to congratulate Mark Johnson on his review and the government on its response. There is great potential growth in the financial services sector in the future of this country. We will export our widely regarded skills and expertise in these areas. The Johnson review covered a whole range of opportunities for Australia in the future. It has been a big part of my interest and the work that I have been doing in chairing the Parliamentary Joint Committee on Corporations and Financial Services. We need to ensure that any of the reforms that we make and any of the changes that come about have a focus on Australia being a financial services hub. We need to be an exporter in the areas in which we are very strong. We are well regarded internationally in terms of our capacity and skills. In fact, Australia rates about fifth largest in terms of funds under management in the world. We are recognised for the capacity that we have, our expertise, our good corporate governance and our ability to deliver in all of these areas. We ought to take the opportunity and convert it into a stronger and larger export market.

To do those things, you need to take reform right across a particular sector and not reform just one area. That is what we are doing with the bill that we have in front of us. What these reforms will deliver is significant compliance change and cost savings. They will also simplify what is a complex set of rules, rules which normally stream across a range of particular acts. It is important to get those right, and we have done that here. The changes will consolidate two acts in particular, one from 1936 and one from 1997—the income tax acts. These changes will bring us a significant step closer to consolidating those two acts.

Over time—as is the nature of things—communities, industries and sectors have changed. This has led to a whole range of inefficiencies, unforseen consequences and other problems that were not part of the debate at the time of the inception of those particular acts. What that means is that the operation of the attribution regime has become highly inefficient. In the light of that rising global interaction—it is a very different global market—and technological chance, an extensive range of exemptions now apply. Those exemptions operate to accommodate a range of those changes. But exemptions are not the best method or the most appropriate way to solve these problems. Those exemptions set up a compliance cost burden on people who operate in this area, particularly on people who manage funds. It is a disadvantage to Australian fund managers. For some time there have been discussions about what those disadvantages mean. They involve not just extra cost but the loss of business for Australian fund managers.

From a government perspective, there is always concern about making sure that people pay their fair share of taxation. You always need to review specific areas to make sure that people are making their obligations. A foreign investment fund relates to either a foreign trust or a foreign company. They can be foreign investment funds or foreign life assurance policies as well. They were designed in the first instance to reduce tax. We want to reduce tax avoidance opportunities for Australian residents who accumulate passive income in offshore investment funds over which they have no control. They are often in low-tax regimes or even tax-free countries. There needs to be a balance. People should be able to legitimately use specific funds or other mechanisms but should not use them to deliberately and unjustifiably reduce their tax liability in Australia or defer their tax liability without any justification.

These changes will apply to a taxpayer who was an Australian resident any time in a particular income year and who had either an interest in a foreign investment fund at the end of that income year or at any other time during that income year or an interest in a foreign life assurance policy at any time during that income year. However, instead of the usual income year period, a taxpayer may elect a different time period. That needs to be understood in context. While in Australia we have a financial year spanning 1 July to 30 June, it is the case in other jurisdictions—other countries—that different periods apply. Some use a calendar year; others use other time periods. So we need to take that into account in the way that we formulate our rules and the measures that we put in place.

In these anti rollup fund measures, we have specifically replaced the foreign investment fund rules and targeted the most abusive of deferral cases, such as accumulation funds located in low-tax jurisdictions that reinvest low-risk returns. The anti rollup rule is scheduled to be introduced into parliament later this year. I look forward to its introduction and its support by the opposition. I know that the review of this area, which started in October 2006, was taken on board by the previous government. We are supportive of that review. The Board of Taxation took on that review and also released a positions paper and several other issues papers on these matters.

Finally, in 2008, the board released its report to the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs, under the Rudd government, and we have acted upon that. We have taken that advice, we have gone through the consultation process and we have taken on board what is some good regulatory change. The board recommended that the Foreign Investment Fund provisions be repealed and replaced with specific anti-roll-up fund measures, which targeted very specifically accumulation funds that reinvest interest-like returns. It also recommended that closely held fixed trusts should also be brought into the controlled foreign company rules, the CFC rules, and that the deemed present entitlement rules should also be repealed. They are the two main elements of this amendment.

What the board’s recommendations demonstrate is the desire for us to increase our attractiveness as a financial services hub. We need to do that in a range of ways. Tax-withholding interest, for example, is one. We want to make sure that we look attractive as an investment destination, encourage Australian businesses to be more productive and competitive, and reduce compliance costs for managed funds, industry and other investors. This is a massive opportunity for Australia. This is an area where we can make enormous change in the future and really grow what is a vibrant high-employing sector in Australia—the financial services sector.

It is good to note that in the short 2½ years that this government has been in power we have taken on board many reviews in this area. While some outside may think these reviews are in some way independent—and they all are absolutely independent—they are also strategically linked. We can look at the work my committee, the Parliamentary Joint Committee on Corporations and Financial Services, has done, the extensive work that Henry has done through the independent tax review, the work that is being done by Jeremy Cooper on superannuation or, just as importantly, the work being done by Mark Johnson on Australia as a financial services hub. If you take all of those together and look at the very strategic financial services path that this government is setting for Australia, you can actually make sense of all of these. It is important to get them right.

There is one more report that I have not mentioned, which probably ties all these in together really well, and that is the Intergenerational report. Significantly, the reports states that by 2050—in a mere 40 years time—Australia will have twice as many 65-year-olds as we have today. Frighteningly, depending on which way you look at it, there will be four times as many 85-year-olds—we will be living longer. It is also important to note that today there are five people in the workforce for every person aged over 65 years of age, but by 2050 the number of people in the workforce aged over 65 will only be 2.7. If governments today do not take heed of those warnings, then we are being derelict in our responsibilities to the people of Australia. If you take that information and look at the reform agenda that this government has put in place—fiscal responsibility, balancing budgets, sustaining health budgets into the future and making sure you do not just govern for the present but also govern for the future—then you can start seeing the link between those significant reviews we have done, some of the reforms we have already put into place and ensuring that we have the appropriate regulation in place. There should be not too much or too little but just the right amount you need to get the job done properly. You should reduce the compliance costs on small business—those regulatory burdens.


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