Andrew Murray (WA, Australian Democrats) Share this | Hansard source

The Tax Laws Amendment (2006 Measures No. 7) Bill 2006 and the Tax Laws Amendment (2007 Measures No. 1) Bill 2007 propose changes to the 1936 and the 1997 Income Tax Assessment Act, the Income Tax (Transitional Provisions) Act 1997 and the Taxation Administration Act 1953. Additionally, the Tax Laws Amendment (2007 Measures No. 1) Bill 2007 proposes legislative amendments to the Administrative Decisions (Judicial Review) Act, the Freedom of Information Act, the Superannuation Guarantee (Administration) Act, the Fringe Benefits Tax Assessment Act and A New Tax System (Goods and Services Tax) Act 1999.

The measures proposed by the Tax Laws Amendment (2007 Measures No. 1) Bill 2007 are contained within three schedules. Schedule 1 pertains to Project Wickenby. Schedule 2 addresses disclosure of information relating to superannuation guarantee complaints. Schedule 3 proposes changes to employee share schemes and stapled securities.

Schedule 1 amends secrecy and disclosure provisions to enable the Commissioner of Taxation to lawfully make disclosures of taxpayer information to Project Wickenby task force officers and in so doing empowers the task force to undertake their investigative duties to their full capacity. Many millions of honest, hardworking Australians pay their taxes and in so doing fulfil their social responsibility to the state and its people. Many millions of taxpayers means that the overwhelming majority of Australians affected by tax law are lower and middle-income earners. Whilst I am sure that paying taxes is not everyone’s favourite pastime, it is done and we all pay them because it is a universal experience. When it comes to the payment of taxes, ‘we are in it together’—just as, when it comes to deriving the benefits of taxation, all Australians enjoy them together.

Wickenby targets those high-income earners, those lucky few Australians, who can actually afford to pay their taxes and still be left with plenty in the bank but see themselves as above and beyond this universal experience. Many wealthy Australians expend vast amounts of energy and resources in an attempt to limit the amount of taxation they have to pay, and sometimes this activity turns out to be unlawful. Investigating tax avoidance and evasion involving the use of offshore entities by a number of high-income earners in Australia has been the focus of Project Wickenby. Project Wickenby has my full support, and I hope that the outcome of this endeavour is a timely reminder to those affluent Australians who do this sort of thing that amassing a fortune does not separate and isolate oneself from the crowd to the extent that one is above other Australians and therefore exempt from taxation.

Schedule 2 is a non-contentious amendment to the Superannuation Guarantee (Administration) Act 1992 that, similar to schedule 1 of this bill, proposes changes to taxation disclosure laws to enable the Commissioner of Taxation to update employees about the progress of superannuation guarantee complaints. This is a much needed new responsive service, and I am grateful to the government for doing this.

Schedule 3 proposes extending extant taxation and capital gains tax provisions that apply to employee share schemes to stapled securities. Employee share schemes are an excellent means of encouraging Australian employees to invest, save and participate in the ownership and therefore the wealth of the companies for whom they work. It is a proposal that has the Democrats’ support.

The Tax Laws Amendment (2006 Measures No 7) Bill 2006 is a conglomeration of amendments arranged into seven schedules. Schedule 1 deals with amendments to small business capital gains tax concessions and compliance costs. Schedule 2 proposes changes to interest withholding tax exemptions, while schedules 3 and 4 update the status of deductible gift recipients and their associated compliance requirements. Changes to depreciation rules and farm management deposits of primary producers are contained in schedules 5 and 6 respectively. Finally, a clarifying amendment to capital protected borrowings is included in this bill as schedule 7. A genuine omnibus bill, in other words.

Schedule 1 proposes amending the 1936 Income Tax Assessment Act, the 1997 Income Tax Assessment Act and the Income Tax (Transitional Provisions) Act 1997 in order to increase the availability of certain capital gains tax concessions and to reduce compliance costs of small businesses. Specifically, the bill proposes reducing the business ownership test from 50 per cent to 20 per cent, thereby increasing the number of small business owners who can validly take advantage of this tax concession. This proposition represents a further concession to a number of small business owners who will therefore be able to avoid capital gains tax on the sale of the business or sale of capital invested in the business, assuming that the maximum net asset threshold of $5 million is not exceeded. As with the original concession, the question that remains is whether this provision is equitable and appropriate, giving, as it does, a number of individuals a generous provision with its associated cost to our tax revenue base. According to the explanatory memorandum, the financial impact of these amendments will be a cost to revenue of $303 million during the period 2007-08 to 2009-10, but I would suggest that this is a very conservative figure. It is a high cost.

Considering the window of opportunity that is about to open with the assent to the government’s simplified superannuation legislation, whereby superannuation investors are able to invest up to $1 million into their super funds before 1 July 2007, I would not be surprised to see a large number of existing business owners trying to cash in on this short-lived potential windfall. While I have always been supportive of measures that ensure small business owners do not bear an unfair tax burden and are properly incentivised, I do not automatically support large windfalls for a small section of the community because of circumstances knowingly designed by the government of the day, for it does fall upon the remainder to carry the cost.

In a broader context, this change to the small business CGT percentage ownership test is part of the government’s $52 billion mixed bag of tax concessions that have been announced and which in part are designed to shore up support in various sections of the community. Looking at the age demographic that ultimately stands to gain from a number of these concessions—that is, older and wealthy Australians of or around retirement age—it is upon the backs of younger Australians that the burden of any cost to tax revenue will often fall.

One of the greatest challenges facing future governments will be how to sustain their revenue base. I would hope that future governments do review the merit of each and every tax concession on a periodic and regular basis. Broadening the base does have the merit that you can then lower rate. That is why I will hesitate to automatically support measures that establish tax concessions as it is this form of legislation that we will have to revisit as parliamentarians whenever we have to rectify unforeseen leakages. In my view it is not the specific legislation that is ever the problem but, rather, the underlying policy and extent supporting the multitude of tax concessions that now exist throughout our taxation system.

For more than a decade the Democrats have argued that welfare for the wealthy must end—that is a large part of what broadening the base means. The Democrats’ five-pillar structural income tax reform plan consists of raising the tax-free threshold significantly, indexing the rates, broadening the base and reforming the tax/welfare intersects, and only after that is done considering issues such as raising the top tax threshold.

Schedule 2 of this bill amends the Income Tax Assessment Act 1936 to clarify sections 128F and 128FA, which both relate to interest withholding tax exemptions. These amendments will ensure that financial instruments eligible for interest withholding tax exemption status are correctly classified as a debenture for the purposes of the 1936 act. These measures were intended to protect the integrity of the tax system, which the government believes is open to some abuse through the liberal interpretation of what constitutes a debenture.

Thankfully, this schedule was the subject of a Senate committee hearing. It was here I was persuaded that schedule 2 may negatively affect Australian firms’ ability to participate in syndicated loans and impede access by borrowers to international debt markets. The submissions also raised concerns that significant compliance costs would be imposed on business as a result of uncertainty, producing risk pricing. The Labor senators and I said that schedule 2 should be pulled and reintroduced once the issues raised in the committee were resolved. The government senators rather recklessly said: ‘Pass the bill.’ The Treasurer was smarter than that and has pulled the schedule. Well done, Treasurer; well done, Treasury.

Schedules 3 and 4 of the bill pertain to the regulation and status of deductible gift recipients respectively. Schedule 3 amends both the Income Tax Assessment Act 1997 and the Taxation Administration Act 1953 in order to streamline the regulatory arrangements of deductible gift recipients and thereby reduce their compliance costs. The ITAA 1997 amendments will remove the requirements for entities that are DGRs to operate a separate gift fund. Entities that only operate as DGRs will still be required to operate a separate gift fund but they will be allowed to consolidate multiple funds into a single gift fund.

Administratively this legislative amendment is a positive step since excessive red tape can be an onerous duty and an added expense for any DGRs. However it should be noted that DGRs and the not-for-profit sector in general are poorly regulated and open to serious abuse by unscrupulous organisations. The whole area of charities, not-for-profits and so on is unfinished business and I hope that the next government will tackle this area with some comprehensive plan.

The trade-off inherent in this schedule, as it applies to DGRs, is a reduction in onerous administrative duties but it does represent an increased risk of a misuse of funds. Since the organisation that functions exclusively as a DGR will only be required to maintain a single fund but may operate several contemporaneous and discrete not-for-profit activities each receiving donations via DGR status, funds received on the premise of being used in one particular project may still be misappropriated for another unrelated project. When people make donations to organisations they assume that the money given will be used for the purpose it is donated. If it is donated to build wells in Africa, then most people would prefer to know that it is actually used for that purpose rather than to rent offices in the CBD of a large Australian city. Research by the organisation Giving Australia supports the contention that most people like to know where their money is going and preferably how it is going to be used when they donate it. Some people take it as a matter of faith that the money will be used to support a specific cause. They do not assume it will go to ancillary services provided by a DGR.

However, DGRs in general are not legally required to provide such financial information—and I will draw the attention of the chamber to a very good report last September by the Institute of Chartered Accountants, which tried to lift the standards with respect to financial statements by DGRs and charities. For every organisation that provides relevant financial information there are many that do not, so Australia has a lightly regulated not-for-profit system where some organisations take their financial responsibilities and reporting to donors and grantors seriously while others fall in the middle and still others take for granted their donors’ faith that their money is being used appropriately and do not report as they should. Donors to DGRs must know where their money is going. Whether it is going to produce CDs or build a church, provide water to African people who are in difficulty or lobby for change to free trade agreements to protect a section of rainforest—or even if it is dedicated to electing a member of parliament—donors must know where their money is going.

Currently there are few ways for a donor to find out how their money is used and no way to assess whether the organisation to which they donate uses it more or less effectively than another organisation doing the same type of work—in other words, there is no benchmarking. This needs to change. Freeing up DGRs from the regulatory burden of maintaining independent gift funds is a positive move as it reduces administrative expenses, but I must reiterate that in isolation this move just compounds the general difficulty with the not-for-profit sector, which in general requires much improved, much more consistent and much simplified regulatory controls.

Bearing this thought in mind, I acknowledge the amendments to the TAA 1953 proposed by this schedule, which expand the powers of the Commissioner of Taxation to review the activity of DGRs. More specifically, the Commissioner of Taxation will be able to review all DGRs, as opposed to only ‘endorsed DGRs’ as is presently the case, to determine if they continue to meet the requirements for holding DGR status. In other words, it is a move to try to keep them honest. Similarly, schedule 3 also contains amendments requiring all DGRs to maintain adequate accounting records, and in that respect I remind the chamber that the Australian Accounting Standards Board is currently looking at an accounting standard which will be specific to not-for-profits. This is a welcome amendment which, in conjunction with the relaxed regulatory environment, sends a positive message to DGRs, which is that, in return for providing greater flexibility, these increased powers will be used to check on DGRs that do not play by the rules.

As I have stated, schedule 4 also relates to DGRs. It amends the ITAA 1997 to extend the period for which deductions are allowed for gifts to a number of specific funds that have time-limited DGR status. They include the following named ones: Dunn and Lewis Youth Development Foundation Ltd, Rotary Leadership Victoria Australian Embassy for Timor-Leste Fund Ltd, St George’s Cathedral Restoration Fund and St Michael’s Church Restoration Fund. While I am not a strong adherent to religion, nevertheless I do very much enjoy the results of the funds invested in restoring these magnificent buildings. They are great assets to many cities. The extension of time to operate with DGR status will enable these organisations to complete their work. According to the explanatory memorandum, the financial impact will be a cost to revenue of $4.3 million over the years 2007-08 to 2009-10. There are not any expected compliance costs.

Schedules 5 and 6 are concessions to farmers affected by drought. On an equity basis, other small businesses have not received the same level of financial support as farmers even though they are in the same regions but, considering the exceptional circumstances created by drought, these measures may indeed be warranted. Australia will continue to be prone to drought. Very few people begrudge exceptional, emergency or shorter term aid to these regions and their farmers, but many ask whether taxpayers should continue to support that minority of marginal farmers and businesses in the longer term in this way.

Schedule 5 amends the ITAA 1997 by applying a capped effective life of six years and eight months to tractors and harvesters used in the primary production sector. This amendment preserves the current period over which tractors and harvesters used in the primary production sector are depreciated.

Schedule 6 amends the ITAA 1936 to increase the non primary production income threshold from $50,000 to $65,000 per income year and the total amount a primary producer can hold in a farm management deposit from $300,000 to $400,000. The explanatory memorandum says that the financial impact of schedule 6 will be a cost to revenue of $72 million for the years 2006-07 to 2010-11 and that there will be ‘small transitional costs’—for the Australian tax office, tax agents and software developers—‘but no increase in ongoing compliance costs’.

Schedule 7 amends the ITAA 1997 in relation to the taxation of capital protected borrowings, or CPBs. Currently, a borrower with a CPB that does not have a separately identifiable capital protection feature is able to gain an income tax deduction for what might actually be a capital cost. The amendments seek to implement equivalent tax treatment of capital protection on a CPB whether or not the capital protection is explicitly or implicitly provided for. To do this, schedule 7 also includes methodologies to determine the amount reasonably attributable to the cost of capital protection. The explanatory memorandum says that the financial impact is nil and that the compliance cost impact should see a reduction in compliance costs for both issuers and borrowers of CPBs. The clarifying amendment ensures that certain capital protected borrowing costs, a form of equity investment with a guaranteed downside protection, that are not expenses and are of a capital cost nature cannot be claimed as a tax deduction. This closes a potential tax loophole and has my and the Democrats’ support. In conclusion, I indicate that with both these bills you should take into account the note of caution I have outlined, given my concerns as to unfinished business and some wariness about the costs of these measures. Nevertheless, the Democrats will support these bills.