Annette Hurley (SA, Australian Labor Party) Share this | Hansard source

Capital protected borrowings are indeed a useful tool for conservative investment in the market. The government has recognised this and seeks to put in place a schedule of this TLAB 5 that does continue this type of investment on reasonable grounds. John Murray's excellent definition of capital protected borrowings from the Parliamentary Library Bills Digest on the Tax Laws Amendment (2010 Measures No. 5) Bill 2010 is:

Capital protected borrowings (CPBs) are financial products used for investing in shares. A CPB usually consists of a limited recourse loan and a put option. Under the terms of a limited recourse loan, a lender cannot recover more than the value of the shares if the borrower defaults on the loan. If the value of the shares has increased over the term of the loan and exceeds the loan amount, the borrower pays back the loan amount in cash. Under the ‘put option facility’ if the value of shares has decreased and is less than the loan amount, the borrower transfers the securities back to the lender in full satisfaction of the loan. The borrower’s capital (the amount invested in the product) is therefore protected against a fall in the value of the securities.

This has some loose similarity to the margin loan type system, but it protects the capital while not protecting the interest expense. Under the previous system, both the capital and the interest expense were deductible. The Australian Taxation Office moved to change this. There are very, very few investments where your capital is a deductible expense and the ATO moved against this overly generous system. Indeed, it was overly generous and the popularity of these products was high—and for very good reason: it was a tax system that was far more generous than most. The initial proposal in the 2008 budget caused a reaction against that. The government listened to the concerns in the financial market; they went back out and consulted about the proposals and came back with a different proposal. That proposal was that the interest expense would be looked at under a different way: the variable housing loan rate plus 100 basis points. This was a way to get a midrange that would reflect both a normal interest rate deductibility plus that 100 basis points that recognised the peculiar nature of added expenses in the setting up and running of these types of loans. That is a fairly reasonable rate.

The committee had a look at that and recognised that the margin loan rate was a measure that could be looked at. In the majority report of the committee, we recommended that the rate be set at between the RBA variable housing rate and the margin loan rate. The government has produced a graph that shows that the rate in this bill, of the variable housing loan rate plus 100 basis points, is at the moment exactly in the middle of that variable housing loan rate and the margin loan rate. The government makes the point that, as those rates will tend to come together as the markets settle down, the variable housing rate plus 100 basis points will actually tend towards the more generous end of the system. I take the government's point in that and also the point that the 100 basis points will continue on the more generous end. Although I see some merit in coming closer towards the margin loan rate, I accept that these two rates will converge and that the 100 basis points will be quite a generous outcome for most investors.

It is well known that in our tax system investors will go to wherever they can legally reduce their tax rate. I have no problem with this. The government has no problem with this. But we cannot create distortions in the market by being overly generous in the tax treatment. This is what the Australian tax office realised in the beginning when they withdrew this deductibility. A court case overturned that, and the government has responded in a measured fashion. Again, we have the coalition seeking to be negative about any government proposal; in fact, in this proposal it has taken the outer end of what the industry wants—the very outer end.

My understanding is that industry have indicated that they are happy with the margin loan rate as the indicator. Currently the rate proposed by the government is about 100 basis points below that and, as I have said before, it will probably come closer to the margin loan rate in the end. So the coalition have not only accepted that but have gone to the outer limits of what the industry have proposed as the outcome they wanted. This is not a sensible solution and again shows the coalition treading a more populist path. They are in opposition; they do not see any need to be responsible. I am sure they would have a different view if they were in government.