Tuesday, 12 February 2019
Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018, Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2018, Income Tax Rates Amendment (Sovereign Entities) Bill 2018; Second Reading
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 notes:
(1) the then Treasurer's shock decision on 14 September 2017 to ban the build-to-rent sector, which had multi-billion dollar ramifications for the Australian property market;
(2) the then Treasurer's failure to reverse the decision, seeing significant damage to Australia's build-to-rent sector before finally capitulating on 26 July last year;
(3) that the same incompetent approach to policy-making saw snap rule changes affecting investors in student accommodation; and
(4) that failure to address the Government's mistakes in student accommodation could see more international students competing with Australians in the rental market".
Labor will support these bills, including the government amendment. I will quickly cover the elements of the bills and address the, frankly, insouciant approach to policy in regard to build-to-rent housing and commercial student accommodation.
Labor never had any particular concern with the majority of the measures in these bills, which seek to implement the government's 2018-19 budget measure 'Stapled structures—tightening concessions for foreign investors'. These bills do four things: they increase the managed investment trust withholding rate on fund payments that are attributable to non-concessional managed investment trust income to 30 per cent; they modify the thin capitalisation rules to prevent double-gearing structures; they limit the withholding tax exemption for superannuation funds for foreign residents; and they codify and limit the scope of the sovereign immunity tax exception. Collectively the measures in the bills have been estimated by Treasury to have a positive revenue impact of $400 million over the forward estimates.
According to the government, the measures in the bills are designed to improve the integrity of the tax laws relating to stapled structures. A stapled structure, as members would be aware, is an arrangement involving two or more commonly owned entities, with at least one of them being a flow-through entity, including managed investment trusts, that are legally bound together so the interest in them cannot be bought or sold separately. The tax office has raised concerns that, while this access to concessional taxation was intentional for passive forms of investment, tax integrity issues arise when a stapled structure deliberately recharacterises active income—that is, income from day-to-day operations, which should be taxed at the company rate—as passive income, to be taxed at a concessional rate through the flow-through entity in the staple. The unintended consequence of that is that some foreign institutional investors are being taxed somewhere between zero and 15 per cent rather than at the corporate tax rate of 30 per cent for large firms.
Schedules 1 and 5 increase the managed investment trust withholding rate on fund payments attributable to non-concessional managed investment trust income to 30 per cent. That applies to income which is managed investment trust cross-staple arrangement income, trading trust income, agricultural income or residential housing income. Transitional arrangements are proposed for existing investments, where the existing 15 per cent rate will continue to apply until a certain date, depending on the type of income involved, and these transitional arrangements are relatively long dated; in one case they go up to 1 July 2034.
The thin capitalisation rules apply to foreign controlled Australian entities, Australian entities that operate internationally and foreign entities operating in Australia. They broadly deny deductions for debt financing expenses if the entity's debt exceeds certain limits. Foreign investors have been entering into double-gearing structures that allow them to convert more of their active business income to interest income, which is then subject to a 10 per cent interest withholding tax, or less in some cases. Double-gearing structures involve multiple layers of flow-through holding entities, being trusts or partnerships, that each issue debt against the same underlying asset. This allows investors to provide a greater proportion of their capital as investor debt and gear higher than the thin-capitalisation limits allow. As a result, investors are able to maintain and deduct higher levels of debt financing expenditure.
Schedule 2 of the bill lowers the associate entity threshold from 50 per cent to 10 per cent. In addition, in determining the arms-length debt amount, an entity must consider the debt-to-equity ratios in entities that are relevant to the considerations of an independent lender or borrower. That said, what this bill does not do on thin capitalisation is address one of the largest and most glaring multinational tax loopholes, which has to do with debt shifting. Large firms can still artificially load debt onto Australia and thus claim large deductions for their interest payments, because the government refuses to take full action on debt deduction loopholes. Labor announced in 2015, in the first half of our first term in opposition, how we would go about fully closing debt deduction loopholes. Our plans have been costed to deliver approximately $3 billion over the decade to the budget bottom line.
I turn now to limiting the withholding tax exemption for superannuation funds for foreign residents. A foreign resident deriving dividends or interest paid by an Australian resident generally has a liability to withholding tax in respect of the payment. But such a liability does not arise for superannuation funds for foreign residents, which are exempt from income tax in the country they reside in. This makes it attractive for these superannuation funds to gear their Australian equity investments by using investor debt to lower their overall tax bill. Schedule 3 will limit this exemption by ensuring that these superannuation funds will not be liable to withholding tax on amounts of interest, dividends or non-share dividends that they receive from an Australian entity only if, first, the income derived by the superannuation fund is exempt from income tax in the country in which it resides; second, the superannuation fund has a portfolio-like interest in the entity that pays the dividends, non-share dividends or interest to it; and third, the superannuation fund does not have influence, directly or indirectly, over decisions that comprise the control and directions of the operation of the entity that pays the dividends, non-share dividends or interest to it.
Turning to sovereign immunity, certain income and gains from Australian investments are currently exempt from Australian tax law if they are derived by a foreign government or by a foreign entity that's wholly owned by a foreign government—commonly known as sovereign wealth funds. This is based on the international law doctrine of sovereign immunity. The current practice is that the tax office exempts investment income and gains derived by foreign governments and foreign government agencies from tax where the moneys invested are and will remain government moneys and the income is derived from a non-commercial activity.
Schedule 4 of the bill codifies and limits the scope of this tax exemption. Under the government's proposal, an amount of ordinary income or statutory income of a sovereign entity will be non-assessable, non-exempt income if, broadly, the amount is a return on a portfolio-like membership interest, debt interest or non-share equity interest in an Australian company or managed investment trust and if no member of the sovereign entity group has influence, directly or indirectly, over divisions that comprise the control and directions of the operation of the Australian company or managed investment trust. The amount of ordinary income or statutory income that is non-assessable, non-exempt income of a sovereign entity is also exempt from withholding tax. Unless another provision in the Income Tax Rates Act 1986 applies to set a different rate, a sovereign entity will be liable to pay income tax on its taxable income at a rate of 30 per cent.
I turn now to the issue of the government's bungling of student accommodation and build-to-rent, the issues canvassed in my second reading amendment—as we've seen, the then Treasurer's shock decision on 14 September 2017 to ban the build-to-rent sector, which had multibillion-dollar ramifications for the Australian property market. The then Treasurer failed to reverse the decision, seeing significant damage to the build-to-rent sector before finally capitulating on 26 July last year.
We've seen a government which has, for a while at least, feigned an interest in housing affordability, but, extraordinarily, it is now running two different scare campaigns. It is saying that somehow house price declines under it are good—nothing to be scared about there—and then, conversely, that if Labor were to win office house prices would decline and that would be a very, very bad thing. This is contrary to Treasury advice, which says that any impact of Labor's grandfathered negative gearing and capital gains tax reforms on property prices would be modest at most. We have a government which has jumped the shark, is running outrageous scare campaigns on the opposition and has, indeed, begun setting up House economics committee inquiries into the opposition. You know you're ready to take your policies to the Australian people when the very government of Australia is treating you like the government and behaving like the opposition. 'Apoplectic and apocalyptic' would be its new three-word slogan.
Instead of all this overheated hyperbole, the government could at least have taken build-to-rent seriously as part of their policy toolkit on housing affordability. As the shadow Treasurer, Chris Bowen, has pointed out, build-to-rent remains too small in Australia. It has potential—$300 billion worth of residential assets, according to CBRE—but the then Treasurer's approach to the build-to-rent sector has seen that nascent sector stymied. On 14 September 2017, then Treasurer Morrison and the member for Deakin announced that managed investment trusts would no longer be able to invest in residential property, with the exception of affordable housing. That policy completely ambushed the property and construction sector. The bizarre banning of managed investment trust purchases of residential property would have directly hit housing supply, and it came at a time when the rest of the world was embracing build-to-rent. While now Prime Minister Morrison was banning investment in affordable housing, Britain had 17,000 build-to-rent units completed just that month, with another 24,000 under construction and nearly 55,000 granted planning permission. Tumbleweeds rolled on for 10 months, and the former Treasurer Morrison then had an epiphany. He waited until after the close of business on 26 July 2018 to announce a backdown and then tried to bury that backdown in the next stage of a consultation process on stapled security. I don't think the word 'lackadaisical' has been used as much in Hansard of any government before the Abbott-Turnbull-Morrison government. Perhaps we should get the Parliamentary Library to check.
But it isn't just lackadaisical, because the managed investment trust debacle didn't end there. We saw purpose-built student accommodation arbitrarily cut out of eligibility for the concessional managed investment trust regime. As part of a Senate inquiry into the bill, concerns were raised that the bill not allow off-site student accommodation to be treated as commercial residential properties and, as such, to face a typical 30 per cent withholding tax, compared to the concessional rate of 15 per cent. A second concern raised was that the transitional arrangements only apply where a project had a construction contract signed on or before the date the legislation was introduced into parliament. Stakeholders raised concerns that, while some projects had not reached the later stage of signing a construction contract, significant commitments such as the purchase of land and project development work had been made under the assumption of a 15 per cent withholding rate. These are significant issues. They have potentially damaging effects on the international student market and on the housing market generally. When you add to housing supply in one sector you push out the housing supply curve right across the board, and you ensure that housing becomes more affordable.
Australia now has a homeownership rate that's the lowest it's been in six decades. It places us in the bottom third of the OECD for homeownership. Back in the early 1980s, the ratio of house price to disposable household income was two. Now it's gone to five, even after some of the recent softening that has occurred under this government. We still have a situation in Australia where young couples of modest means, such as a couple who might be a teacher and a police officer, struggle to break into the housing market in many of our capital cities. Yes, prices have come off, particularly in Sydney and Melbourne, but the decline in prices that we've seen over the last year has been dwarfed by the increase in prices over the prior decade.
We understand that the government will be moving amendments that will fix the problems that this regime created for the build-to-rent sector and for student accommodation. We're pleased that the government has come to this sensible position, which ensures we maintain the tax integrity of the measure and that the student accommodation sector is not unfairly affected. That's vital, given that education is now Australia's third-largest export and that students living away from home, whether they be Australian students or foreign students, have basic needs to be met. Safe, convenient, cheap and suitable accommodation is at or near the top of that list.
I have visited many university campuses in Australia. One of the major focuses for our higher education market is ensuring the quality of student accommodation. That's vital as our universities are increasingly relying on overseas students as part of their business model. It's important too, as we try to build a more competitive university sector in which Australian students are willing to consider not just universities in their home town but universities right across Australia. We get the accommodation piece of that right and we get a better functioning student choice market in which students are able to pick an institution that is best suited for them and their talents.
Labor will be supporting this bill. We're pleased that the government has come to its senses on the issue of build-to-rent and student accommodation. It is absolutely vital that we close tax loopholes. I commend to the government Labor's multinational tax plan, cracking down on tax havens and multinational profit-shifting. This bill takes a step towards improving the integrity of our tax system, but it's a very small step in contrast with Labor's robust, carefully costed multinational tax plan.
It's always a pleasure to see you there in the chair, Mr Deputy Speaker Vasta, ruling over this parliament with an iron fist. It's a good opportunity to get up and speak not just about the issue at hand around the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018, the Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2018 and the Income Tax Rates Amendment (Sovereign Entities) Bill 2018 but about the broader challenges upon which they sit.
I pick up from where the previous speaker made reference to the challenges of tax reform, but he seemed to be mostly focused on corporate tax reform and seeking to target and demonise some sectors of the economy rather than looking at the even bigger picture of the task and challenge we confront. As was mentioned by the previous speaker, despite his wanting to make it self-referential: yes, the Economics Committee is currently completing an inquiry into the implications of removing franking credits, but it's not an investigation into opposition policy; it's an inquiry into the issue and the opportunity to have a dialogue and a discussion about the challenges of dividend imputation, the structure of retirement planning, how the tax system can seek to advantage some and not others, and, critically, when and at what point and at what stage of people's lives they should make contributions to the tax system, when they should get deductions and when they should not.
A simple point to which those on the other side of the chamber seem to be completely oblivious is that a franking credit is a tax credit reflecting tax paid. Remove the tax credit and only tax is paid, which is why I and others talk about Labor's retirement tax and what it's going to do for a million Australian retirees who are going to have their overpaid tax stolen from them, should there be a change of government. The impact of this, by the way, is very real. We've heard witness statement after witness statement, testimony after testimony, going specifically through examples of these people's experiences—what it means for them and their lived experience. I know that isn't the core focus of this bill but it is part of the tax system and challenges we face.
One of the most interesting things, when you talk about these issues with people affected by dividend imputation and refundable franking credits, is how many of them say, 'What we really want is comprehensive tax reform.' We recognise there's got to be a change in the system and structure. People talk regularly about the challenges faced around corporate taxation, whether it's efficient and whether it meets the expectations of the Australian community, whether the tax revenue that's collected is sufficient, whether people are using loopholes or privileges to minimise their tax obligation. But they also go through why they feel they're being targeted if they simply get rid of removing refundable franking credits. I've got many of them here, witness statements and examples of people who have serious issues as a consequence. And some of them are quite difficult.
Mr Thistlethwaite interjecting—
It's quite disappointing that the deputy chair of the committee is deriding the witness testimony of people like Chris Sparks. He was at the Merimbula hearing on 4 February 2019 and heard it directly. This is his statement:
Thank you, committee. My name is Chris Sparks. I live in Kalaru and I'm here today with my wife, Wendy. Those astute members of you will note that I sit in front of you today in a wheelchair—a very stylish custom-made ultralight wheelchair. That's because I was injured when I was three years old and had a spinal cord injury. In spite of my injury, I've been lucky enough to work in open employment since the age of 19. I'm now 59 and I'm moving into my latter years and retiring.
I worked initially in the world of information technology and went on to run small and large businesses. I ran a corporate entity for a US company in Australia and up in Asia. I've led a great life. The sad reality, though, of ageing with a spinal cord injury, particularly when you've had one for as long as me, is you can add 10 years to your life—so, at 59, I probably have the abilities to get around of a 69-year-old able-bodied bloke. I can't travel independently anymore, and maintaining my business life is proving increasingly difficult. So we're heading for retirement.
Like many of the accused here—
His words, not mine—
I've got a self-managed super fund. I consulted my accountant last week. We'll probably be wrapping up our business next year, as I turn 60 in October. You're all welcome to come to my birthday at the Tathra pub.
That was his comment. By the way, I'm sure if you make an investigation you'll be able to find out about it.
These people are the victims of removing refundable franking credits. I, literally, have hundreds of them. They're not people confected; they're not people who just send in proforma submissions; they're real Australians who have come to voice their concerns. Some of the concerns people have raised are not just about why they're being discriminated against, why they're being targeted, why there hasn't been a focus on comprehensive tax reform but also, quite legitimately amongst the Australian community, concerns about what is being done to deal with multinational tax avoidance and investor avoidance as well as large company tax avoidance and why that isn't being focused on.
We know this government actually has quite a proud record of doing so. At the start of this term, we introduced a series of measures to close loopholes and put extra obligations on multinational companies who do business in Australia and shift their assets and investments overseas and minimise their tax obligations. This presents us with a whole host of challenges around competitiveness, of which tax is an important part. It blows me away that some members of the opposition don't seem to understand that competitiveness in the tax system, in a global economy, is important. Therefore, the only solution—I said it in my first speech, I've said it a hundred times before in this House and I'll continue to say it, and I don't care whether it conflicts or is consistent with government policy—is wholesale tax reform. And we need a rebasing of the tax system not just about who's paying tax. It needs to be about what stages of life they're at and making sure that people can't find ways to avoid it.
There's an excellent book on this by a fellow by the name of Charles Adams, called For Good and Evil: the Impact of Taxes on the Course of Civilisation. I'll buy you a copy, if you like, Deputy Speaker, not to influence you but because it's a genuinely good read. It looks at the history of tax and the failure of tax reform, and it looks at how bad tax systems become worse and dramatically undermine the structure of a society and an economy. There are a number of lessons out of the thesis that's been done, looking at historical examples. What does it say? Taxes should generally be low so that people don't want to avoid them. Taxes should be simple to remove opportunities that can be exploited. And, of course, it's to make sure that as many people as possible pay tax. This is a point that former Treasurer Peter Costello regularly made. He always talked about the failure of different approaches—particularly when the opposition were in government; they took the approach of trying to minimise the number of people who were paying tax and maximise the number of people who were relieved of tax obligations.
I make no apology: I fundamentally believe that everybody should pay at least some contribution to the tax system. If you can take out of it, you should be expected to contribute to it. Everybody should have an equal investment in society. Everybody should have a want to perpetuate it. Everybody should expect a sense of responsibility for the country that we live in and cherish and love and should not be able to avoid that responsibility. And that includes multinationals who take advantage and seek opportunity in this country. I think that's an utterly fair and consistent approach. What we need to do is make sure that people can't take advantage of the tax system to take advantage of Australians. Of course, in the end, the only way that's truly achieved, to be contrarian, is to look at things like broad based tax reform, particularly consumption based taxes, which companies find more difficult to avoid, rather than simply try to focus energy and resources on having an extremely complicated, unnecessarily complicated, tax system. I don't want it to be taken that I'm some sort of deserter, running off and supporting New Zealand, but their tax system is a lot simpler than ours, and I have to say it has a few strengths too.
What do we have before us? We have some bills to at least close some loopholes, to start to address some of the challenges around tax reform for Australia, to minimise the opportunity for companies to take advantage of Australia and take revenue offshore, unchecked. We have a number of proposals within the legislation, the broad principles of which I think most members agree with, despite them putting forward an amendment. The bill stops double gearing so that foreign investors can't shift profits to avoid tax. Tick. It stops foreign investors from getting tax concessions on stapled structures to achieve tax rates of 15 per cent or less—or in some cases almost tax free—on Australian business income. Tick. The bill has measures to tax foreign investors' income from Australian agricultural land and Australian residential property, other than affordable housing, in managed investment trusts at the top corporate tax rate. Tick. There is a measure to provide transition periods of up to seven and 15 years for existing investments—and that's critical if we want to continue to be an attractive destination for capital so that we can create job opportunities for the next generation of Australians. It allows for a 15-year concessional rate for investments in new, nationally significant infrastructure, as determined by the Treasurer, and implements the government's budget commitments to supporting affordable rental housing by providing a 15 per cent tax rate. All the measures are good. All the measures are critical.
The final point I want to pick up on—and it's one the previous speaker raised as well—is that, more than anything else, what we need to do is drive investment in the housing market. Housing affordability is one of the most foundational principles on which a healthy society prospers. Yes, it creates jobs, and that's very important. But, as observed by Hernando de Soto Polar, the Peruvian economist, in one of the great lessons of the French Revolution, if people don't have an investment in society, they will not seek to conserve the status quo. And he's right. We should want every Australian to own their own home, or aspire to own their own home, and to be in a position to secure so. This government has done quite a lot in making sure, through housing agreements, we can help that pathway on its way. I know the opposition have policies too, and they're welcome to. I at least appreciate the fact that they have an appreciation for the challenge and the issue. But this requires a whole-of-government, whole-of-nation response, because it is in the best interests of the country. You'll hear me say this time and time again, and I say it for deeply philosophical, committed reasons—