Thursday, 28 August 2008
Tax Laws Amendment (2008 Measures No. 4) Bill 2008
Debate resumed from 26 August, on motion by Mr Bowen:
That this bill be now read a second time.
I rise to talk about the Tax Laws Amendment (2008 Measures No. 4) Bill 2008. The bill before us contains three separate schedules. Schedules 1 and 3 are pretty straightforward, but schedule 2 is perhaps one of the silliest and most destructive of the changes that this government has proposed for the tax system so far. I say that because the stated rationale for proposing this measure, which is allegedly savings, has been completely exposed by the Senate Standing Committee on Economics, yet the government still barrels headlong into making these amendments for no apparent reason. I will deal with schedules 1 and 3 first, and then I will move on to talk about schedule 2.
Schedule 1 of this bill amends the Income Tax Assessment Act 1997. The object of this schedule is to provide capital gains tax relief for private health insurance policyholders who receive a cash payment when their insurer demutualises. It is specifically a response to the demutualisation of NIB last year and MBF this year. This is a sensible schedule. It builds on the coalition’s strong record and demonstrated commitment to providing all Australians with the choice of adopting private health insurance—a commitment that the government obviously does not share.
Schedule 3 of this bill amends existing taxation laws to ensure the proper operation of the taxation system. It makes relatively straightforward and minor changes to existing taxation laws to promote their intended operation, and it does have the coalition’s support.
I will move to schedule 2, which is the schedule within this bill that deals with family trusts. This schedule amends schedule 2F of the Income Tax Assessment Act 1936. The object of this schedule is to limit the definition of lineal descendants of the test individual or of the test individual’s spouse and remove the ability for a family trust to make a one-off variation of the test individual specified in a family trust election. This schedule is another very clear example of the Labor government’s inability to understand Australia’s tax system.
After extensive consultation, the coalition government introduced amendments in 2007 that updated the definition of ‘family’ to reflect the evolution of Australian family dynamics. These changes received widespread support throughout the community, although they were opposed at the time by the Labor Party, who seem to retain some sort of ideological objection to family trusts. The amendments made by the coalition government reduced the restrictions and compliance burdens that were placed on small business, farmers and professionals who use family trusts for perfectly legitimate purposes, including asset protection and business succession planning. The amendments included changes to the definition of lineal descendants, former spouses and widows, among others, and allowed family trust elections to be varied or revoked in certain circumstances, including the death of a particular individual. The coalition’s amendments received very broad support from a range of stakeholders across the country. Reversing the coalition’s amendments will substantially increase the compliance burden on all those small businesses, farmers and professionals who use family trusts, as I said, for perfectly legitimate purposes.
We often hear from the Labor government that they are concerned about red tape, they are concerned about compliance costs and they want to simplify the tax system. Yet time and time again we see that when they talk of cutting red tape or simplifying the tax system all they are really doing is repeating motherhood statements and slogans while they continually do the opposite—that is, increase bureaucracy, increase red tape and increase compliance costs. Schedule 2 of this bill is a great example of that. There are over 400,000 family trusts in Australia. The amendments in this legislation will burden a substantial portion of those and will increase compliance costs and potential penalties and taxes.
The Labor government has justified these changes—rather absurdly, I think—as a savings measure. I say ‘rather absurdly’ because this rationale has been completely demolished by the Senate economics committee and by those who gave evidence before that committee when they were conducting hearings into this bill.
Indeed, the evidence that was presented there by the government’s Treasury indicates that the compliance costs with this measure will be enormous, whereas the savings will be paltry. Treasury believes that the savings for the amendments relating to lineal descendants will be around $1 million over the forward estimates. Yet, as we see from the evidence presented to the committee, the compliance costs will be enormous. So the government might save $1 million, but they are pushing literally tens of millions of dollars, perhaps hundreds of millions of dollars, of compliance costs with this measure onto the Australian community. That is the absolute absurdity of what we are debating here today.
I want to take this opportunity to inform the House about some of the evidence that was given to this Senate committee and to quote some specific passages from the dissenting report that was submitted by Senators Eggleston, Joyce and Bushby and which completely demolishes the rationale for this schedule in this bill. This passage relates to the alleged savings that occur within this bill. The dissenting report says:
... the methodology for calculating the quantum of savings was seen to be less than rigorous and, at least as far as it extended to the proposed amendment relating to lineal descendants, almost entirely absent ...
I will also quote from one of the Treasury officials who appeared before the committee, talking about where they found these alleged savings:
The costing of this represents the reversal of the earlier measure, so it is based essentially on the earlier costing of the changes to family trusts and family trust elections.
… … …
My recollection of the costing of this is that the lineal descendants, over the forward estimates period, is a very small part, probably around $1 million.
So the government is prepared to push all of these compliance costs onto people in the Australian community—and there are 400,000 family trusts in Australia—for a saving of $1 million. How absolutely ridiculous. Evidence that was received from other witnesses suggests strongly that there will actually be no savings from the amendment relating to lineal descendants. So you really need to ask yourself: why are we debating this here today? The government says it is a revenue-saving measure. All the evidence suggests that there will be minor savings, if any, yet the government still barrels headlong into pushing this through the parliament. For what rationale? I certainly have not heard the answer from the government and I will be interested if other speakers in this debate are able to provide any even remotely sensible reason as to why they want this legislation to pass this House.
I will read a little further from this evidence, because it is very compelling. I quote again from the dissenting report:
Despite the questionable calculations of savings, any savings that may be achieved as a result of the proposed changes will be well and truly lost by the cost that so many of the 400 to 500 thousand trusts will have to incur in order to re-adjust for the changes with no economic gain to the economy from this expenditure.
So the government seem happy to talk about how they want to reduce red tape and attack compliance costs within the economy yet, every time they are presented with the opportunity to do so, they do the exact opposite. Of course, like so much with the Rudd government, all that ever happens with these things is talk; it never translates into any meaningful action.
The Senate evidence, and the fact that the government have not been able to provide a rationale for making these changes, further highlights the incompetence of this administration in managing Australia’s tax system. I think that with these proposals the government have demonstrated a whole new level of incompetence. They have introduced a tax measure that will allegedly provide for greater revenue to the government. Of course, we find out that it hardly does that. What it will do is provide greater revenue to accountants, advisers and lawyers, who will be forced to advise confused Australians who are having to contend with these ridiculous changes to the administration of family trusts.
Like a lot of what this government do—and again a big song and dance was made in the lead-up to the last election by the then shadow Assistant Treasurer, the now Assistant Treasurer, about how they were going to consult widely when they introduced changes to the tax system—these measures were introduced without any consultation at all. This is so typical of this government. They always talk a big game, but it never, never translates into action.
There is very wide agreement within the industry about these two measures. What the industry say, and what they have said to the Senate economics committee inquiring into this bill, is that these two measures will create substantial compliance difficulties for families involved in small businesses and farming in particular and will not deliver revenue savings to the government.
The Senate committee received seven submissions from leading industry groups and experienced practitioners, each expressing condemnation of these changes. For the benefit of the House I will read the names of those who made submissions, because it is a pretty impressive list of stakeholders who deal in taxation in Australia. The individuals and institutions who made submissions opposing this measure include: the Institute of Chartered Accountants in Australia, CPA Australia, the Taxation Institute of Australia, Family Business Australia, the Financial Planning Association of Australia, Mr Mark Leibler of Arnold Bloch Leibler and Halperin and Co. Pty Ltd—seven submissions, all of them strongly opposing this absurd measure.
Typically, trusts will have a vesting period of between 80 to 100 years. The measure limiting the definition of family falls short of the expected duration of trusts, which will lead lineal descendants outside the proposed definition to be subject to a penalty tax, family trust distribution tax, of 46½ per cent. This is another example of Labor’s high-taxing policy agenda for Australia’s tax system.
Because people have an increasing life expectancy in Australia, many people now live to enjoy watching further generations of their family grow up. It is foolish in the extreme to then limit the use of family trusts to two generations at best and only a single generation in some circumstances. I would just like to provide the House with an example of how silly this measure will be. A brother and a sister carry on a business under a family trust, where the sister is the nominated test individual. The proposed measures will mean that only the grandchildren of the sister and children of the brother are included. This excludes the grandchildren of the brother and the great-grandchildren of either. The absurdity of this schedule is that it penalises the family when the test individual passes away.
As illustrated, the proposed measures will intentionally introduce a taxation anomaly to Australia’s tax system, and these measures simply cannot be justified as an integrity measure. The government has really proposed a de facto inheritance tax at the top marginal rate to all those Australians who have set up family trusts to provide certainty for future generations. These measures jeopardise the main instrument used for business succession and protecting family assets for future generations. The proposed measures will create complicated hurdles for family businesses to be passed through the family.
Labor’s national platform states that they will ensure that we have a taxation system that minimises compliance in collection costs. Again, we hear members of the government talk about this all the time. They talk about cutting red tape, they talk about reducing compliance costs, but never do we ever see this government’s good intentions translated into action. These proposed measures show that either Labor is incompetent in understanding the consequences of what they propose for Australia’s tax system or they have become so arrogant since the last election that they are just going to push measures through that are patently absurd when the rationale for those measures has been demolished by an independent inquiry in the Senate.
The coalition is not going to be part of this farce. We are going to oppose unnecessary complications of our tax system. I would like to inform the House that we did give the government an opportunity to excise this silly schedule from this bill so that the House could pass schedules 1 and 3, which we support because they are sensible schedules. The shadow Treasurer wrote to the Treasurer on 25 August offering to do just that. I am happy to table a copy of his letter for the benefit of the House.
I am happy to supply a copy of the letter to the Attorney-General, who will find that there is nothing particularly concerning in it. It was a sensible offer from the shadow Treasurer to excise schedule 2 from this legislation. We opposed schedule 2 because it is just a silly schedule that does not do what it says it is going to do.
Thank you for your guidance, Mr Deputy Speaker. I note that the government has not bothered to formally reply to our letter, although I understand that it did do so verbally. Given that the government has failed to take our sensible suggestion to excise schedule 2—this silly measure that increases compliance costs that will increase the burden on many hundreds of thousands of Australians who use family trusts as a legitimate vehicle—we have no choice but to oppose this whole bill. I would urge members opposite to take a look at the report that the Senate economics committee tabled earlier in the week in the other place. I urge them to have a look at that report because the report and those who gave evidence before the committee completely exposed these changes for the farce that they are.
The coalition will oppose this whole bill. We would have liked to have had the opportunity to pass schedules 1 and 3. As I said, we offered that opportunity to the government but they failed to take it. So we will oppose this bill in the House and then we will take our case to the other place. Of course, in the other place the government will not be able to rely just on the strength of numbers to force this legislation through; they will be forced to mount an argument defending this nonsense. I do not doubt for a second that when they come to do that they will fail. The emperor well and truly has no clothes on these measures. The rationale for them has been completely exposed by the Senate. It is opposed by every submission that was made to the committee on this legislation. I would urge the House to consider that when we come to vote on these particular measures.
I am pleased to speak in support of the Tax Laws Amendment (2008 Measures No. 4) Bill 2008. I am particularly pleased to see that the member for Stirling has gone on the public record indicating to all of the NIB and MBF members that they will pay capital gains tax on this.
because they were prudent enough to look after their private health insurance. That is a disgusting attack on the people of my electorate and all over Australia who have been prudent enough to have private health insurance.
The demutualisation of private health insurance funds has been a surprising bonus for policyholders. The accumulated surplus from the fund is distributed to existing members of that fund, and people like my mum and my sister will receive a bit of a windfall profit because they have been prudent enough to take out health insurance and have been financially able to do so. The downside is that the recipients of this profit are subject to capital gains tax. As the opposition has indicated, that is something they will have to put up with. The Rudd government was fair minded in trying to look after these people by bringing to the parliament this amendment that says that health insurance policyholders will not be subject to capital gains tax when their health fund demutualises. Obviously the opposition has indicated that this is not a smart way to do things. Instead, it is going to slap a capital gains tax on people who are already doing it a bit tough.
In the government’s eyes, this is great news for MBF and NIB policyholders. These funds were demutualised in the last financial year, so the policyholders who have received shares or a cash payment under these demutualisations would have had to include a capital gains tax in their 2007-08 tax return. However, as the government’s amendments are retrospective, people who have already lodged their return before this legislation is enacted will be entitled to have their assessments amended. As a lawyer, and with the Attorney-General in the House, we sometimes have concerns about retrospectivity, but this is a great piece of legislation in bringing in some retrospectivity—although, as the member for Stirling has indicated, there will be some problems in the Senate with trying to protect those people who had taken out private health insurance.
This gives certainty to policyholders of health insurance funds that have demutualised—all of those policyholders of NIB, MBF and others who might be going down that road. Under the Rudd government’s plan, they can have confidence that they will not incur any capital gains tax for the shares or payments they received. However, the member for Stirling and the coalition have obviously got some explaining to do in arguing that policyholders should pay capital gains tax.
The government is not taking this measure because Treasury decided to be extra generous. Rather, it is a vote of confidence in private health insurers and recognition of the sacrifices that people make to maintain their private health cover. As I indicated at the start—and to declare a possible conflict of interest—my mum and my sister are in MBF, so they would have received these benefits. I, too, have maintained private health cover for my family, both in good times and when people are ill. I am with Teachers Union Health, a closed fund. I know many Australians make sacrifices to have private health insurance for lots of reasons.
The Rudd government recognises that a viable private hospital system is essential to the delivery of quality health care in Australia. The private hospital system makes a significant contribution to the health system. In 2005-06, close to 40 per cent, or more than seven million, hospital separations took place in private facilities in Australia. This lines up with the number of Australians who have private hospital cover, which in March 2008 reached 9.5 million people, or 44.6 per cent of the population. Many of those would be in NIB and MBF. In the year ending March 2008 private hospital admissions reached 2.4 million. This removes a significant burden from public hospitals.
The Rudd government is also working with states and territories to strengthen our public health system. One of the most appalling legacies of the Howard-Costello government is its gross underfunding of the public healthcare system. Over the life of the Howard-Costello government, it left state governments billions of dollars out of pocket on public health through the funding administered by the Australian healthcare agreements. In June 2007 state and territory health ministers released Caring for our health? A report card on the Australian government’s performance on health care. This report found that, around the nation, the Howard-Costello government was ripping off the public health system by around $1.1 billion every year. That equates to about 350,000 additional admissions each year.
Under the terms of the current agreement, my home state of Queensland was short-changed around $2.6 billion. I do not have to tell you, Mr Deputy Speaker Scott, with your country constituents, that $2.6 billion buys a lot of surgeries, a lot of cataract operations, a lot of hip replacements, a lot of knee reconstructions and a lot of angioplasties—procedures that can change and save lives. It funds thousands of desperately needed doctors, nurses and allied health professionals, and it helps build and maintain modern health infrastructure that patients and staff deserve.
The Caring for our health? report also found a massive increase in patient numbers in Australian public hospitals. Between 1999-2000 and 2004-05, inpatient admissions increased by around 10 per cent, from 3.88 million to 4.28 million. The report found the coalition government was paying a smaller and smaller share of public hospital costs each year. In 2000 it contributed 50 per cent of the cost of running and maintaining public hospitals but, by 2005, that share had dropped to 45 per cent. Real people suffer because of the Howard-Costello ideological agenda, and the members opposite should be ashamed of themselves. The fact is that over 11 years the Howard government refused to face up to its responsibilities and effectively ripped the heart out of the nation’s public healthcare system.
This Rudd government is turning the tide. We are meeting our COAG commitment of $1 billion to be paid to the states to relieve pressure on public hospitals—hospitals like the PA hospital, which is across the road from my electorate; the QE II hospital, right in the middle of my electorate; and the Logan Hospital, which also services a lot of people in my electorate. We are negotiating a new, fairer healthcare agreement with the states and territories. All states and territories, along with the federal government, have committed to work together to ensure health funding delivers the best possible outcome for public health services throughout Australia. It is a new era of partnership when it comes to health. Isn’t it great to see state and territory governments working in true partnership with the Commonwealth—and I say that having worked for a state health minister in a former calling? The reality is Australians do not care where the money comes from. They do not care who is to blame. All they want is for the job to be fixed.
Could I just remind the member for Moreton of the context of the bill before the House. I know that there have been wide ranging debates on many bills before the House over many decades, but I would remind him of the bill before the House and to make his comments relevant to the bill. I would remind him to link that to what he is saying and then I will be happy not to interrupt him again, but I would like to ensure that he comes back to the bill before the House.
Thank you. The bill before the House is dealing with private health insurance and the demutualisation of those funds. So obviously health care is a big part of the legislation before the House, with respect. But I will take your guidance.
Australians just want to know that their families will have access to affordable health care—whether it be the public or the private healthcare system—where and when they need it.
I thank the Assistant Treasurer for bringing this bill to the House and for recognising that it will benefit a large number of people in receipt of payments following the demutualisation of private health insurers. I would ask the member for Stirling to talk to his colleagues in the Liberal caucus room to make sure that NIB and MBF policyholders do not have to pay capital gains tax. Please do not put an unnecessary tax burden on those doing it tough in my electorate and throughout Australia. I hope that you can talk to your Liberal colleagues in the Senate and get this through.
I commend the bill to the House.
It is interesting that we find ourselves in the House this morning debating a range of bills that I think demonstrate Labor’s true colours. The Trade Practices Legislation Amendment Bill will come forward this afternoon. It seeks to roll back section 46 (1A) of the Trade Practices Act and reinstate the market-power test rather than the market-share test. Fifty per cent of Australians are employed by small businesses and Labor is seeking to roll back a reform that will directly impact them because of the predatory pricing of larger institutions. But it gets better. Not only does Labor want to wipe out small business in that respect; later on today we have the Families, Housing, Community Services and Indigenous Affairs and Other Legislation Amendment (Emergency Response Consolidation) Bill 2008 whereby the Labor government is seeking to allow pornography back into Indigenous communities in the north. As if the Little children are sacred report—which showed the direct linkage between child sexual assault and pornography in communities—was not enough, this Labor government wants to allow it back in again. That brings us to our current piece of legislation, the Tax Laws Amendment (2008 Measures No. 4) Bill 2008, which actually wants to roll back—
I am simply bringing to the House’s attention three bills that demonstrate Labor’s true colours in affecting small and medium enterprises and adversely impacting Indigenous brothers and sisters by allowing pornography back in again, and now through adversely affecting those who hold trusts. The coalition, of course, was intending to support schedules 1 and 3 of the bill and wrote to the government to say: ‘Remove schedule 2, which is unfair. It is unjust. It is proposed on a false premise.’ It was proposed as a budgetary saving measure. Treasury, within the Senate inquiry, made it very clear that the savings would be $1 million or perhaps a little more. Schedule 2 was promoted on a farce. In the words of the member for Kalgoorlie, it is ‘a complete dud’ of a schedule proposed by ‘a complete dud’ of a government. So the coalition, through some degree of generosity, said, ‘Remove schedule 2, which seeks to disadvantage Australians with trusts and to disadvantage those in rural and regional areas.’ But the government, in its arrogance, in its hubris, refused to do so, leaving the coalition no choice but to oppose the bill in its entirety.
The Australian people need to understand that we are now forced to oppose this bill because of the bloody-mindedness of a dud government that will not see the impact of schedule 2 on those who run trusts, and especially the intergenerational passing of those trusts. Schedule 2, of course, seeks to repeal two of the family trust changes made by the coalition government in 2007. A financial impact of $20 million over the forward estimates was put forward, but this has now quite clearly been shown to be a sham and a farce—as much of Labor’s legislation is slowly appearing to be. Treasury noticed that they could not justify that figure and that the savings would be considerably less.
There are two measures within this second schedule. The first proposes that the definition of family reverts to the previous definition, noting it will limit lineal descendants to children or grandchildren of the test individual or the test individual’s spouse. The second measure will remove the ability of the test individual specified in a family trust election to be changed. These changes were brought about in 2007 by the coalition government after enormous consultation to reduce the restrictions and compliance burdens placed on small to medium taxpayers. The key thing here is that the coalition brought in this piece of legislation after enormous consultation. Let us compare that to the budget measures that the Labor government brought in—an assault of over $2 billion on the condensate industry that will have a direct impact on the LNG industry. Was the LNG industry consulted? Were they asked for their input? Or in one fell swoop was that industry and indeed the sovereign rights that attached to it and to all exploration in this nation swept aside because of a Treasury measure?
Indeed, Woodside, at 1 pm yesterday, announced that they would pass on that full $2½ billion in increased gas costs to taxpayers in WA. That is the impact of implementing legislative changes without any consultation. And it continues with a raft of other measures: alcopops tax, tax increases on luxury cars, $19.7 billion worth of taxes put upon the Australian people—a fraud enacted upon the people of the Commonwealth that they were not told about prior to the election. Whenever this farce of a government walks in here holding aloft and claiming a mandate to implement changes, may I remind those opposite that they have no mandate to increase taxes by $19.7 billion. They did not consult widely with the Australian people. They perpetuated a fraud on the Australian people and they will stand condemned for that fraud. So it is no wonder that a responsible opposition are saying to the Australian people: we are going to look at these fraudulent tax increases and we will make a considered opinion as to which ones should be allowed through and which ones should be voted on in the Senate.
Coming back to this fraudulent schedule No. 2, this Labor government has sought to justify the change as a revenue-saving measure—‘It is all right; we are going to stuff with the full lineal descendent nature of trusts because we are going to save taxpayers some money.’ This government rolled out a figure of about $20 million. It would be interesting to know where indeed it plucked that number from. Let me go to the dissenting report from the coalition senators—because, of course, on 12 August the Senate Standing Committee on Economics had a hearing to see and test the veracity of what this government is doing. It is becoming increasingly necessary to test the veracity of everything that this fraudulent dud government is seeking to do. The dissenting report says:
In brief, this schedule makes changes to the lineal descendents laws for Family Trusts ...
The current moves against changes to family trusts have little to do with closing loop holes and are far more, it appears, a move to transition trusts to entity taxation laws. The move to restrict the inter-generational nature of trusts works against the implicit nature of why we have trusts.
Trusts are as much a relationship as they are an entity. Trusts are designed as a relationship within families to hold assets and to pass those assets down within families. Trusts are predicated upon keeping families and assets within them strong and passing them down. An assault on a trust is an assault on families. Mr Julian Cheng of the Institute of Chartered Accountants said during the inquiry:
... a lot of trusts have a typical vesting period of around 80 years. In practice, they can typically cover four generations. The proposed amendment to limit the definition of family is out of line with the expected life span of trusts.
The report continues:
The issue with the change to the test individual is that it starts to limit the lifespan of the trust and forces the trust to an event horizon where either the trust vests or the penalty tax is paid at 46.5 per cent—
the current top marginal rate. It goes on:
As that is at a premium to the corporate tax rate, then the trust will become obsolete and companies will take their place. The benefit to the treasury is the long term removal of the tax advantage of discretionary trusts.
As discretionary trusts are one of the major ownership vehicles in family assets, especially rural land, then all current ownership structures will have to be reviewed, which has already started. For the discerning—
and I will note that does not include the Labor government—
majority non-real property asset structures will be moved overseas, for the majority of trusts, however, they will, for no apparent reason, have the tax nature of their asset changed.
So the question is: why an assault on family trusts? Why an assault on the basic nature of the family and their desire to pass assets down? During the inquiry, the chair asked Mr Cicchini from the Treasury:
Are you aware of any groups of people who form family trusts—for example, in rural areas ...
The witness from Treasury replied:
... I understand that there are in the area of the rural communities. It would mainly be in the farming sector, where the land may be held separately to the business ... it might be because you want to segregate and control your assets in succession planning.
The rationale, it appears, for reversing these amendments was stated in the explanatory memorandum as being a savings measure. The explanatory memorandum says:
The trust loss measures protect the integrity of the income tax system by preventing the tax benefits arising from the recoupment of a trust’s tax losses and bad debt deductions being transferred to persons who did not bear the economic loss or bad debt when it was incurred.
This is perhaps noble if one were to take the words at face value, which I would caution the Australian people not to do when it comes to this government; yet evidence from Treasury indicated that, when this announcement was made by the government, it was announced as a savings measure. But when pushed Treasury said:
The costing of this represents the reversal of the earlier measure, so it is based essentially on the earlier costing of the changes to family trusts and family trust elections ...
My recollection of the costing of this is that the lineal descendants, over the forward estimates period, is a very small part, probably around $1 million.
That is what the inquiry showed—that this is all about saving $1 million. The compliance costs for close to half a million trusts in this country will have to be reviewed and looked at to save $1 million. What if half a million trusts spent a few thousand dollars on accountants and lawyers to look at the compliance and the impact of these changes on their lineal descendants? The tens of millions of dollars of compliance costs on ordinary Australians—and in particular rural, remote and regional Australians—clearly bear no interest or no concern from this Labor government. It just wants to come out in the politics of envy and attack those who have trusts. Clearly, it is not a savings measure. You are saving $1 million and putting compliance costs of tens of millions of dollars upon Australians, so it is not a savings measure.
So why doesn’t the government call it as it is, as did the good minister at the desk, the Minister for the Environment, Heritage and the Arts, the member for Kingsford Smith, when he said, ‘When we get in, we will change it all’? That is exactly what this moribund, egregious piece of legislation is seeking to do. It is seeking to detrimentally harm rural, remote and regional Australians, particularly those with land, notwithstanding other Australians who hold trusts, to take away their opportunity and, indeed, right as a family to protect assets down family lines. The government wants to sweep that away because that does not fit in with its left-wing ideological bias. There is no other reason I can come up with, because the savings measure is only $1million yet the compliance costs will be far greater. There is no other logical conclusion that can possibly be reached. Indeed, the minister at the table was correct: ‘Once we get in, we’ll just change it all.’ No word of the $19.7 billion in tax increases and no engagement with the community—‘We’ll just get in in a duplicitous, conniving manner and we’ll just change it all.’
Schedule 2 of the legislation is appalling. The government was given the opportunity to pull schedule 2 out for the benefit of Australia, to allow schedules 1 and 3 to come in. This arrogant government, who said that when it got in it would change it all, has decided not to pull it out. We have no choice, then, but to protect Australian interests, to protect Australian families from this duplicitous government, and reject the entire bill. Be it on the head of this government, because when it got in it indeed changed it all.
I am very pleased to rise in support of the Tax Laws Amendment (2008 Measures No. 4) Bill 2008. In particular, I would like to comment on schedules 1 and 2 of the bill. I note that the amendments proposed in schedule 3 of the bill are largely of a technical nature. They are not so much substantive but directed towards correcting some minor drafting difficulties that have existed in the past.
Schedule 1 is a significant proposal that will affect many people throughout our community. I should in the interests of full disclosure acknowledge that my wife and I are policyholders with the MBF, which is obviously one of those entities that would be affected by the proposals currently before the House. In relation to demutualisation, the mutuality principle is a very well-known concept in the taxation context. Those members or participants in a mutual fund contribute to the fund and continue to retain an interest in the funds of the fund. Ultimately, where there is a decision taken by the common fund to divest the accumulated surplus of that fund, that is the process that we describe as demutualisation. Essentially, the interests, the rights and entitlements, that each of those individuals or entities have in the common fund are surrendered and, as a result of that, there is a distribution of the surplus funds contained within the fund.
In the absence of any statutory provision to provide relief from capital gains tax, capital gains tax would ordinarily apply in respect of those distributions. I think it would be accepted that the notion of distributing funds back to the policyholders is by its nature a CGT event and triggers a taxation liability, whether that be in the form of a gain or a loss. These proposals are directed towards ensuring that those policyholders, those participants in the health insurance sphere, when a surplus is distributed as a result of demutualisation, will have any gains or losses from a capital gains tax perspective disregarded. This is not an uncommon treatment of this type of arrangement. If we look at it in the context of other insurers, general insurers and life insurers, for example, there is clearly a precedent for this type of treatment. This bill merely seeks to clarify the position in relation to private health insurance, which, in the context of what has occurred in the past with NIB and, more recently, MBF, is of real concern and real interest to many policyholders who are expecting to receive some of that distributed surplus but may be uncertain as to the taxation implications of those events. So it is important from that perspective—it is critical, in fact—that this parliament passes this legislation, to give certainty to policyholders so that they can be clear on what their taxation obligations are in respect of that demutualisation and all other demutualisations that occur in this context into the future.
In relation to the treatment of any shares issued or any rights granted as a result of the demutualisation process, these proposals will ensure that those shares or rights, those interests, will be passed back into the hands of the individual or entity. But, for capital gains tax purposes, those interests will have a deemed market value as their cost base, which will ultimately be of significance for those individuals that later dispose of those interests and trigger a subsequent tax liability. There will be greater certainty about the quantum of that liability because through this proposal we are clarifying what the cost base is.
There is one further aspect of schedule 1 that I wish to comment on, in relation to ensuring that, in the case of a policyholder dying during the demutualisation process, the tax treatment of any interests that they are entitled to are passed on and similar tax treatment is provided to the executor or beneficiaries of their estate. That might seem like an unusual set of circumstances, but, considering the large number of policyholders of some of these mutuals, throughout that process—which can sometimes take some time—there will no doubt be cases where people fall into those categories. I certainly commend the bill and schedule 1 in respect of those changes.
In respect of the much vexed schedule 2, as previous speakers have indicated, it has been the subject of much discussion in the Senate and by the Senate Economics Committee’s report on this bill. To briefly outline the significance of the proposals, the amendments before us address the essential concern that the current definition of ‘family’ and the ability of family trusts to make a one-off variation to the ‘test individual’ specified in a family trust election—‘test individual’ being a concept set out in the legislation—provide more scope for family trusts to transfer the benefits of tax losses to future generations to lower their income tax. These amendments seek to change the definition of ‘family’ in the family trust election rules to limit lineal descendants to children or grandchildren of the test individual or of the test individual’s spouse. There was much discussion before the Senate committee about what ultimately the revenue impact or the savings impact of this might be.
As to the significance of this, I think one would be somewhat misinformed to approach this simply from a revenue perspective, because essentially there is a common-sense test that needs to be applied here. I think that what we are talking about, in the context of these rules, is where losses have been generated by an individual or by an entity. A fairly fundamental principle of taxation law is that, as to the benefit of losses—and losses do carry a benefit in taxation terms because they can be used to offset gains—where losses are incurred by an individual or an entity then that individual or entity has some ownership over those losses. It is not unreasonable for that individual or that entity to get the benefit of those losses to be offset against other income.
But it is a different proposition to start providing for transfers of those losses to others that might not have borne the real economic loss. Where that is done we start to get into some of the avoidance issues that emerge right across the tax system. That is why at the company level we clearly have rules in place—for example, the continuity of ownership test and the same business test—to ensure that there is not trafficking of losses, that individuals or entities that did not bear the economic cost of the losses are not the beneficiaries of those losses. In a sense this is, at a theoretical level, the argument that should have occurred before the Senate committee, but unfortunately there was what I think was a disproportionate focus on the revenue aspects. I want to go through and look at a couple of the comments made. In fact, I want to refer to one of the comments that was made in the dissenting committee report by coalition senators. It is on page 11: The current moves against changes to family trusts have little to do with closing loop holes and are far more, it appears,—
to do with—
a move to transition trusts to entity taxation laws.
I will come back to entity taxation laws a little bit later. I will move on and look at some extracts from the transcript of the committee hearing. In particular I am interested in this following extract where Senator Bushby said:
For every extra that you earn over a certain point, you will still be paying the top individual tax rate.
Then Mr Noroozi of the Institute of Chartered Accountants in Australia replied:
I am happy to answer that question. Can I just make one point first: there may be some question over the way trusts are taxed at the moment; should the trust laws and the taxing of them be the way they are? I do not think that is a question for this committee on this legislation at the moment. That question was addressed. There was some talk some years ago as to whether trusts should be taxed like companies and the board of tax addressed that issue. There was long-term discussion—
And then Senator Bushby says:
I do not want to raise that as an issue.
I can understand why he would not want to raise that as an issue even though it came up in the context of the comments that were originally made by Senator Bushby. But I think it shines a little bit of light on what used to be the policy of the former government, for various parts of their time in government, on the vexed issue of entity taxation, which we all know was one of the subjects of the very strong recommendations of the review of business taxation, the Ralph review. In fact, the then Treasurer, the member for Higgins, indicated at the time that the government was prepared to adopt the recommendations of the Ralph review. We then had the situation where clearly there was a bit of strong-arming going on, particularly by the National Party. We hear all these stories about the ‘once-mighty’ member for Higgins and how the emerging economic contagion that confronts the world economy can only be confronted by bringing back and drafting the ‘once-great’ Treasurer. You would think that, in the face of not much more than a few whimpers at the time from the National Party, that the ‘once-great’ Treasurer would have been able to withstand the blowtorch of the likes of the National Party. But, unfortunately, as the historic record shows, he was not able to do that.
We saw what I think is one of the most ignominious examples of a minister, in particular a Treasurer, backing down on a policy that he had committed his government to. On 11 November 1999, the then Treasurer distanced himself from entity taxation, and that was after having previously adopted the recommendations of the Ralph review. I am most interested to note his justification for walking away from entity taxation. Clearly, as we all know, behind the scenes there was the great threat that the National Party posed. Let us look at what reasons were ostensibly offered up at the time by the then Treasurer. He said:
As outlined in the Government’s 21 September announcement on business taxation reform, the consistent tax treatment of trusts and companies will commence from 1 July 2001 . The commencement of entity taxation was deferred—
to begin with it was deferred; the decision was not taken to can it straightaway—
in recognition of the current demand on business associated with the need to address Y2K compliance needs—
There was a lot of hysteria in the lead-up to the so-called arrival of the millennium bug. We all know that a lot of efforts went into preparing for that, but it really fizzled out. It seems to me that the lasting legacy of the threat posed by the Y2K bug was that it hammered the final nail in the coffin of entity taxation. The once great former Treasurer was brought to his knees by the Y2K bug, and that was the end of entity taxation. It seems that it also signalled, once again, the dominance of the National Party in driving economic policy within the former coalition government. It is a sad record. I am not surprised that Senator Bushby did not want to go any further down that line of questioning, but it is one that inevitably emerges in discussion of the current position of the opposition in relation to this set of measures.
There is one final extract from the discussion that I wish to refer to. I think this is relevant for a few reasons. This is also in an exchange between Senator Bushby and Mr Noroozi. Senator Bushby says:
… You mentioned earlier that one of the advantages of the legislation that was passed last year was that it made it easier for small businesses to carry forward losses and to deal with those in an appropriate manner, but you suggested that there were a number of hoops that they would have to go through if that legislation had not been passed.
Mr Noroozi—I am sorry; I may have misled you. I was saying that, for trusts generally to utilise their losses—forget family trusts for a minute; just trusts generally—there are a number of hoops they have to go through. The rationale is that the underlying individuals or whoever, taxpayers, who incurred the loss should be able to also recoup it—the same individuals. However, with family trusts, because you know that the beneficiaries are usually members of the same family, there is a presumption that the same people that incurred the loss will also be—this is putting it very simply and perhaps not accurately. Basically with election to be a family trust—
And he goes on. The essential point that he is making there is the point I was making earlier. Where a loss is incurred, the value of that loss should only be available to the individual or the entity that incurred the true economic cost of that loss.
The amendments that were introduced that brought about this situation extended the scope of the definition of family and brought individuals such as the lineal descendants of nephews into the picture. There may be some families where there is an argument that a nephew’s descendant is so inextricably linked into the economic unit of the uncle or the aunty that they should legitimately be able to obtain the benefit of the loss—because in some way they incurred the economic cost—but I would think that that would be an absolute and very small minority of cases. That is what we are talking about here. It is a perversion of one of the most fundamental principles of our taxation system, and that is that losses should only be available to be utilised by those that incurred the economic cost.
Those on the other side who want to lecture those of us in the government about economic management, about economic purity, should have a good hard look at themselves, because, frankly, in going down the populist path that they are going down, pandering to the National Party, they are simply surrendering the last vestiges of the credibility that they once had. They do not have a lot of credibility on this issue. The member for Higgins and his dismal performance in relation to entity taxation is a perfect example of where, when it comes to confronting real economic reform in this country, vested interests—more often than not the National Party—unfortunately get in the way.
I want to quote from a Financial Review editorial. I note that the Financial Review do not always agree with things that I say, but on this occasion I agree with something that they said back on Friday, 8 December 2000. The heading to this editorial was ‘Tax reform left in the lurch’. The comment that begins the editorial is salient:
The failure to push the Federal Government’s new tax treatment for trusts through Parliament this week represents another blow to the once ambitious business tax reform agenda that promised “a new tax system” rather than just a new tax.
With the benefit of hindsight, we all know that the charade that was the review of business taxation and the charade that was the new tax system were about one thing alone—delivering a new tax.
Those on the other side have surrendered their reform credentials and their economic credentials. If they are prepared once again to succumb to vested interests, not to support an election commitment of this government and to do what they have done on so many other fronts—to block significant revenue measures that will produce a significant part of our budget surplus—then once again they are demonstrating that they have lost touch with the central economic challenge facing this country. I commend the bill to the House.
in reply—I thank all members who have contributed to this debate: the member for Lindsay for his usual well-considered and erudite contribution, the member for Moreton likewise, the member for Stirling and the member for Fadden. I recognise the cross-party support for schedule 1 of the Tax Laws Amendment (2008 Measures No. 4) Bill 2008. Schedule 1 provides relief from capital gains tax for policyholders of private health insurers that convert from a not-for-profit insurer to a profit insurer by demutualising. The amendments will facilitate the demutualisation of private health insurers and will apply from 1 July 2007. These amendments disregard any capital gains or losses that arise to policyholders under the insurer’s demutualisation. The amendments also ensure that no other tax consequences will arise to policyholders from their receiving a cash payment or an issue of shares under the demutualisation. Policyholders who receive shares in the demutualised insurer will receive a market value cost base for those shares. These amendments will also allow shares issued under the insurer’s demutualisation to be held on trust and then transferred to or sold on behalf of policyholders who are unable to directly receive their shares without capital gains tax consequences for the trustee.
In relation to schedule 2, I note that this has not been an area of agreement between the two sides of the House. I must take this opportunity, in summing up, to correct some of the misstatements from members opposite. I am sure they are genuinely misguided. I am sure they are not deliberately misleading the House but they are misleading the House nonetheless. Firstly, on the issue of costings, the member for Stirling, the shadow Assistant Treasurer, said that the change in the lineal descendants mechanism would save the government $1 million over the forward estimates. He quoted extensively from the Senate inquiry evidence and alleged that this would save $1 million over the forwards. I need to correct the record and refer to the evidence from the Treasury to the Senate inquiry. Mr Brown, who is a Treasury official, said:
My recollection of the costing of this is that the lineal descendants, over the forward estimates period, is a very small part, probably around $1 million.
The evidence continues:
Senator Bushby—$1 million out of the $20 million?
Mr Cicchini—Each year.
Mr Brown—Each year.
Senator BUSHBY—$1 million each year?
Mr Brown—Each year.
It is not $1 million over the forward estimates; it is $1 million each year—a fundamental mistake by my honourable friend the shadow Assistant Treasurer. Mr Brown went on to say:
But that number outside of the forward estimates period would grow.
That is a fundamental point. It is not simply about savings over the forward estimates but also about protecting the integrity of the tax system going forward. It is about protecting the revenue base going forward to ensure that we continue to have a fundamentally robust revenue base and that changes made by the previous government do not undermine that revenue base. That is the first mistake from the shadow Assistant Treasurer, who, once again, was not completely on top of his brief.
Secondly, we had an allegation from members opposite that the government should have split this bill and that, because we have arrogantly refused to split the bill, they are forced to vote against it. Tax bills are omnibus bills. It is the way it has worked for time immemorial. The government puts a range of measures in tax bills. The job for members opposite, as it was for me when I was the shadow Assistant Treasurer, is to recommend and to determine whether to support or oppose the bill as a whole. And may I introduce members opposite to the concept of an amendment. If you do not like part of the bill you amend the bill. You propose an amendment. You move that a schedule be removed or you propose other changes. The government then accepts or rejects the amendment and the House votes. That is how it works.
The opposition are constantly calling on the government to split bills so that they can vote for parts that they like and so that the other parts can be put in a separate bill. That is not generally how it works. I am happy to split bills if there are timing issues—if there are particular parts that the opposition genuinely want more time to examine if it would have an implication for the timing of other bills. I am always happy to consider those requests on their merits. But, where the opposition oppose part of a bill but support the other part of the bill, they have to make the call. It is not our job to make the call for them. They have to make the call. They can move an amendment if they wish. If that amendment fails in either house, they have to make a judgement on balance as to whether to support the whole bill. That is a matter for them. That is what we used to do when I was shadow Assistant Treasurer: we would move amendments if we did not like parts of the bill and then, if those amendments failed—as they regularly did—we would make a call as to whether to support or oppose the bill. That is what you do.
I think the opposition have indicated that they oppose this bill. That is fine. They have made a judgement that, while they will support schedule 1—
As I was saying, they have made a judgement, as I understand it, on balance, that they oppose the bill. That is fine. That is their right. They have made the judgement that opposing schedule 2 is more important than supporting schedule 1—that protecting the lineal descendants of family trusts is more important than providing capital gains tax relief for members of health funds which demutualise. That is fine. That is their judgement. We disagree. It will go to a vote and the House will decide. When it goes to the other place, every senator is entitled to move an amendment. We will not be splitting bills if the opposition decide that they support bits of a bill and oppose other bits. They have to move the amendments and then vote accordingly.
This bill represents a clear election commitment by the now government. It is part of our savings plan. It saves $19 million over four years. Those were the estimates prepared by Treasury. They cannot have it both ways. They say that the Treasury estimate is wrong. These were the Treasury estimates that were put in the bill when the previous government proposed it. They are the same estimates—
No, the shadow Assistant Treasurer is again incorrect. The new government did not proceed with reversing all of the changes. The ones of a technical nature which made eminent sense, relating to family breakdowns, are excluded. So the shadow Assistant Treasurer is again, unfortunately, not on top of his brief. This was a clear election commitment and an important part of our savings package. I commend the bill to the House.
That this bill be now read a second time.
Bill read a second time.