Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Link to this | Hansard source

I speak on this piece of legislation on behalf of the opposition. This is yet another tax omnibus bill that contains a variety of provisions. Firstly I wish to outline some aspects of the provisions contained in the Tax Laws Amendment (2006 Measures No. 4) Bill 2006. Firstly, schedule 1 deals with marriage breakdown rollover. Current law provides for the capital gains tax rollover from the sale of property caught by court order or court approved maintenance agreements occurring as a result of marriage breakdown. There is a problem with CGT treatment as a result of a binding agreement not approved by a court but still consistent with current family law.

The classic case is where a prenuptial agreement exists. This could mean that one party to the former marriage would be able to rent the former family home in a manner that would change the apportionment between the capital gains tax free component of the former family home and the assessable component in the event of a sale. One party could potentially use the current law to influence the capital gains tax treatment of the former family home to the possible detriment of the other party. The amendment is designed to ensure that both parties’ situations are taken into account when calculating how much of the property is capital gains tax free. The law also clarifies the fact that marriage breakdown settlements do not give rise to CGT liabilities. The schedule is a necessary policy change.

Schedule 2 deals with consolidation. The consolidation regime applies where two associated companies elect to be treated as a single entity for tax purposes. Companies can sometimes split or demerge. However, to protect against tax avoidance, current law provides that major transfers of assets just prior to the demerger are ignored. This was to ensure that the demerger was not used to manipulate the cost-setting rules that value assets of the group and reduce tax. In this case, the demerger would be unwound and the previous position would apply for tax purposes. However, if the demerged entity or parts of it then remerge, they would be captured by these integrity provisions and the whole transaction would be unwound for tax purposes. However, the remerger is not tax avoidance and should not be part of the integrity measures. This change modifies the integrity rules to ensure that the remerger is not caught by this provision.

The change appears to be a reasonable correction of a problem but seeks to highlight the confusing nightmare that the consolidation provisions entail. This is at least the 12th time that these matters have been refined since introduction. The repeated amendments to the consolidation regime themselves now need to be consolidated. I repeat the position that Labor have put before the parliament: it would better for a major consolidation bill to be considered by the parliament. The process of considering amendment after amendment to this complex body of tax law does not reduce complexity; it certainly increases compliance costs and is against the broad thrust of seeking to reduce the size and complexity of the tax act. If the Treasurer were serious about reducing the complexity of the act he would do well to consider this proposal.

Schedule 3 simplifies the imputation system for New Zealand companies. Many New Zealand companies operating in Australia elect to be part of the Australian imputation system. But there are problems in allowing the imputation credits to flow to Australian companies as some dividends are non-portfolio dividends—less than 10 per cent shareholding—or otherwise exempt. Harmonisation of the two imputation systems is desirable and these provisions permit the franking credit to apply to non-portfolio dividends.

The original measure to allow cross-Tasman imputation recognition did have a cost in excess of $50 million per year. This bill corrects an unforseen event and therefore gives effect to the original costing. Still, the measure as written has a cost, even if already included in a previous explanatory memorandum to a previous bill. It should have been given in the explanatory memorandum to this bill. This is yet another example of a costing deficiency in the explanatory memorandum to a tax bill.

Schedule 4 deals with non-resident capital gains tax. Schedule 4 seeks to align Australian international tax arrangements with the model OECD treaty in relation to taxation of capital gains for non-residents. Labor supports the policy intent in principle but is concerned that the reduction in the capital gains tax base for non-residents is significant.

This is a complex and controversial measure with two major impacts, and its total cost is $300 million over the forward estimates. The first measure involves a significant tax concession to foreign companies operating in Australia by restricting the capital gains tax base to real property—that is, land and income from land. Capital gains on non-resident shares are therefore now to be excluded. This is consistent with the OECD model tax treatment, and the government argues this approach is sought by other jurisdictions in tax treaty negotiations. However, there is a major compliance measure as well that is likely to be targeted at the mining and minerals exploration sector.

The basic principle of international taxation is that the host country taxes income that relates to operation in the host country, irrespective of where the company headquarters are located. So income from Australian operations is to be taxed here. But there is a major problem with so-called interposed companies. If a foreign company has a subsidiary with operations here, it pays capital gains tax if the assets are owned by an Australian subsidiary. But if the assets are held by an intermediate or interposed company then it is difficult and often impossible for Australia to effectively levy the capital gains tax on capital gains on assets held by these companies, and in some cases the right to claim this tax is disputed. Moreover, if a foreign company holds less than 10 per cent of an asset in Australia, the asset will lack a ‘necessary connection with Australia’. In this case, CGT is not levied on this company’s capital gains from the sale of Australian assets.

So there is scope for an international company group to organise its Australian assets so each of the foreign interposed entities holds less than 10 per cent of a domestic asset, even though the total of the group may well exceed this 10 per cent threshold. This result is that most of these interposed groups can escape the Australian capital gains tax net. The proposed law states that for an international entity with 50 per cent or more of total assets in Australian real property our capital gains tax regime applies. This means that the ATO can look through the international corporate veil and apply capital gains tax on all these interposed entities’ capital gains if these entities are land rich.

This bill is an example of generic problems with tax bills. There are two government amendments to schedule 4 of this bill. This in itself is justification for Labor’s reference of the bill to the committee, and it also reveals a dangerous trend in tax legislation. Time and time again imperfect bills are being put to the parliament. How many times has the parliament been forced to consider amendments to consolidation measures and the international taxation measures? An example is the international tax participation bill of 2004. The debacle of the Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Bill 2005 is still unresolved. Labor’s amendments were rejected in the morning and the bill was made subject to review in the afternoon—a review that is now eight months overdue. The legislative error rate in tax law matters is increasing all the time and it is just far too high.

Senators do not have to take my word for this; they need only hear from Justice Edmonds or the Inspector-General of Taxation, or even the minister himself, if they wish to find out how badly Treasury are being rated at the moment in terms of the production of tax law. Justice Edmonds, for example, was very critical of the way that explanatory memoranda are written, and this bill is sadly another example of the problem that Justice Edmonds referred to recently in his speech to the ATAX conference.

I want to talk about the problems with schedule 4. This schedule involves a major reduction in the capital gains tax base for non-residents. In evaluating this measure, there is of course the initial consideration of cost. The explanatory memorandum suggests a cost of $50 million to $65 million per annum. This in itself is significant, but Labor senators noted that this cost could be expected to increase substantially either as a result of proposed government amendments or as a result of prospective mergers. Such costs have to be weighed judiciously against the suggested economic benefits of increasing the attractiveness of Australia as a source of international capital. It is regrettable that this judgement was not assisted by adequate argument or modelling from the government or Treasury at the hearing. I am sure this is part of an increasing trend by this government to hide costings where it can. I do not blame the Treasury and Finance officials for this. They are under the political control of the ministers of the day. We are finding that information is being hidden and kept secret, particularly in the area of costings, where it is necessary to make a considered judgement about the worthiness of a particular piece of legislation.

In this case, the government has not put its argument with sufficient economic rigour. This may be the fault of the political process but, whatever the case is, it must be corrected. Labor calls on this Liberal government to devote more resources to making its arguments clear to the people through the parliament and through the committees, to desist from this increasing threat to openness and to ensure that costings and modelling are made publicly available.

Why doesn’t the government provide the parliament with the best analysis available? Why should Australia settle for second best in making difficult decisions of this nature? It is nothing but an attempt to undermine the parliament, particularly the role of the Senate. We have seen the increasing arrogance and contempt for the role of the parliament and the increasing domination by the executive, whether it be the Prime Minister, Mr Howard, or the arrogant Treasurer, Mr Costello. We have seen this contemptuous approach manifest in a number of ways that Labor has referred to on previous occasions, particularly now they have a Senate majority.

Labor senators considered this bill in an inquiry and put a number of questions to officials in advance of the hearing. We actually often put our questions on notice so officials have time to consider the matters, and we put questions on notice in advance of the primary hearing associated with this measure. We have sought to uncover the disadvantage to Australian firms relative to foreign firms, and if an increase in merger activity would lead to a significant cost blow-out. Labor senators were not given an answer to these questions that were put in advance of the hearing. This is not acceptable and I certainly hope that officials themselves have not been withholding information.

It is understandable that officials withhold information at the political direction of the government, which I suspect is what occurred on this occasion. There were some answers provided later but they were not adequate and were not covered in sufficient detail, and in some cases the responses were simply framed to avoid making a substantive and properly detailed answer. Labor senators did make some significant additional remarks, as did Senator Murray, the Australian Democrat shadow minister in this area. I acknowledge his active and effective contribution on these matters. I would like to endorse the broad sentiments of Senator Murray’s remarks in his additional comments.

I have noted the joint submission of the Minerals Council of Australia, the Australian Petroleum Production and Exploration Association, the Corporate Tax Association, and the comments of the Institute of Chartered Accountants in Australia at the hearing. The joint submission argued that taxable capital gains or losses on Australian real property need to be more precisely focused by specifying that only a proportion of the gain on the sale of interests in a resident or non-resident entity that is land-rich should be subject to CGT, equal to the Australian land-rich proportion. The amendment is worthy of further consideration and Labor is concerned that it was not more properly considered in the Senate report.

Labor has supported in the House of Representatives a further amendment to allow for the fact that the land-rich status of an entity may change between May 2005 and the timing of the bill. This amendment allows the ‘reset the clock’ amendment in relation to the cost base to also cover companies not land rich before May 2005 but who are now over the 50 per cent threshold. Labor notes that this further amendment at this late stage highlights again the deficiencies in the legislative process for this bill. Another amendment is expected to provide that the cost based adjustment also applies where the land-rich status of an entity has changed since May 2005, and that is a logical extension of the first amendment.

At a special briefing provided to Labor in relation to this amendment Labor reiterated its call for the two measures in schedule 4 to be disaggregated in terms of costing. How much is the cost to revenue of the reduction in the CGT non-resident cost base net and how much is the gain to revenue from the new compliance measure? We know that officials were in a position to provide that information but the minister’s office did not grant officials the authorisation to inform Labor of this measure. This is a further example of contemptuous treatment of the parliament, and of the Senate in particular, in the legitimate gathering of information by the Australian Labor Party. I know that the Australian Democrats get frustrated at times. Keeping secret vital information on costings is in defiance, I have to say, of the Treasurer’s own much vaunted charter of budget honesty. Senator Murray is nodding; he knows that the Treasurer runs around saying: ‘We have got this charter of budget honesty. We are going to give full and open costings and access.’ Yet here is another case of this arrogant Treasurer refusing to reveal costings in accordance with his own charter of budget honesty.

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

It is because they do not add up.

Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Link to this | Hansard source

I am sure that is part of the explanation, Senator Murray—you are quite right. The Treasurer, Mr Costello, has ruled out tax cuts for individuals and has expressed no interest in providing tax relief to small business, but he has found $300 million for tax breaks for foreign companies. We query the priorities of this government and they do not accord with Labor priorities. This is not the measure we would have chosen to advance at this time. However, given that this has been announced for two years—albeit continually botched and costings having been refused—and there are a number of investment proposals awaiting passage of this bill, Labor considers on balance in terms of being a responsible opposition that we will not seek to oppose the bill at this stage.

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

The Tax Laws Amendment (2006 Measures No. 4) Bill 2006 is comprised of four schedules, each with their own purpose. Schedule 1 modifies the provisions relating to capital gains tax and implications associated with asset disposals arising from marriage breakdowns. The proposed amendments extend the marriage breakdown CGT rollover to assets transferred to a spouse or former spouse. Currently the rollover applies automatically to a relevant CGT event arising from a court order under the Family Law Act or a corresponding foreign law; a court approved maintenance agreement under section 87 of the Family Law Act; or a corresponding agreement approved by a court under a corresponding foreign law or a court order under a state, territory or foreign law relating to de facto marriage breakdowns.

The proposed amendments extend the operation of the marriage breakdown rollover provisions to an additional three situations: a financial agreement binding under the Family Law Act; an arbitral award made under the Family Law Act; or a written agreement that is binding because of a state, territory or foreign law relating to de facto marriage breakdowns. According to the explanatory memorandum the financial impacts and compliance costs are expected to be ‘minimal’.

Schedule 2 contains amendments to the consolidation provisions in the Income Tax (Transitional Provisions) Act 1997 so that the integrity provision requiring certain rollovers to be ignored for tax cost setting purposes does not apply to a consolidated or multiple entry consolidated group that forms after a demerger provided that company that received the rolled-over asset does not join the same consolidated or MEC group as the company that transferred the asset.

The operation of the integrity provision is also clarified, another amendment to what I would broadly describe as the consolidation regime. The explanatory memorandum claims that the anticipated cost to revenue will be $20 million for the financial year 2006-07 and $5 million for the financial years 2007-08 to 2009-10, totalling $35 million. Despite that cost, I think that amendment is valid and necessary, and it is consistent with the intentions of the consolidation regime.

Schedule 3 contains amendments to the imputation system relating to Australian and New Zealand companies. The proposed amendments in schedule 3 aim to solve the so-called triangular tax problem and will ensure that franking distributions by a New Zealand company which are exempt or are non-assessable, non-exempt income can be passed on by the Australian company on a pro rata basis to its shareholders. The explanatory memorandum estimates that the financial impact will be zero, with minimal compliance costs, and I think that is a useful rationalisation of the arrangements between Australian and New Zealand companies.

Schedule 4 contains amendments relating to capital gains tax and its operation in connection with foreign residents. It contains proposed and consequential amendments to the Income Tax Assessment Act 1997, the Income Tax Assessment Act 1936 and the Financial Corporations (Transfer of Assets and Liabilities) Act 1993. The bill will amend the CGT regime such that the capital gain or loss made by a foreign resident from a CGT event—the event by which a capital gain or loss arises—is disregarded unless the event relates to an asset that is ‘taxable Australian property’. Previously, the asset needed a ‘necessary connection with Australia’.

Broadly, ‘taxable Australian property’ will include taxable Australian real property, which is any real property situated in Australia, plus mining, prospecting and quarrying rights; indirect Australian real property interests, which are interests held by an interposing entity or entities; assets used in carrying on a business through a permanent establishment in Australia; an option or right to acquire one of these interests; and any CGT assets covered by section 104.165(4) of the Income Tax Assessment Act 1997. Additionally, the bill defines ‘indirect Australian real property interests’ as being those interests that pass the non-portfolio interest test—a non-portfolio interest is held by a foreign resident if the direct or indirect interest held by the foreign resident and associates is 10 per cent or greater—and the principal asset test, which is satisfied when the market value of an entity’s taxable Australian real property is more than 50 per cent of the market value of the entity’s assets.

Schedule 4 also contains consequential and other amendments arising from the proposed changes to the CGT regime relating to managed fund provisions, currency calculation provisions and interests in active foreign companies. According to the explanatory memorandum, the cost of the proposal is expected to be $50 million for 2006-07 and then $65 million for each of the following years 2007-08 to 2009-10, a total of $245 million. I famously—I hope!—described that as a thumb-suck. It might be an educated thumb-suck, but it is a thumb-suck.

Before discussing some of the specific concerns raised by the various schedules of amendments, I would just like to express my concern about the apparent lack of informed public awareness of the bill, although there has been some useful commentary in the more creditable newspapers and magazines. In the Senate Standing Committee on Economics inquiry into the provisions of the bill, only four submissions were received in total, all of which came only from industry bodies and associations and all of which expressed support for the bill. As I said, there has been some media coverage; but, given that schedule 4 alone has a cost to revenue of $245 million over the years 2006-07 to 2009-10, I find the low-ish level of public awareness concerning, particularly since I think the consequences of this change will be dramatic for Australia with respect to a rapidly increased rate of foreign takeover and quite an amazing reduction, I expect, in revenue—far beyond what the government has calculated.

In terms of controversial issues, the bill is split fairly evenly down the middle. Schedule 3 relates to a technical taxation matter that was not dealt with in previous legislative efforts relating to trans-Tasman taxation arrangements. Schedule 2 is also relatively uncontroversial, although the validity of the forecast costs to revenue is always questionable in these matters. My view is that estimates by Treasury, whilst more educated than anyone else’s, are still only estimates. As those who have heard my remarks on consolidations over the years know, I have been consistently of the view that it will cost more than we anticipated. But that cost was actually necessary and justified, so there we are.

It is schedules 1 and 4 to which I wish to devote the majority of my attention, as they raise issues which merit further consideration. Schedule 1 extends the operation of certain marriage breakdown rollover provisions in relation to capital gains tax. However, as Bills Digest No. 16 notes at page 4:

Parliament may note that the measure will make no changes to availability of the roll-over relief: only heterosexual couples, married or in de-facto relationships, will benefit from the expansion of the relief. It will continue to be unavailable to same-sex couples.

As most of my Senate colleagues will be aware, under my portfolios—economics, finance, tax and those sorts of portfolios—I have long campaigned to eliminate discrimination against same-sex couples in our tax, superannuation and property laws, although unfortunately not only have these efforts not borne much fruit so far but they have gone unrecognised by the larger community. So, to anyone who thinks that these are politically motivated efforts, I can assure you I get absolutely no political benefit from them.

In my view, I have also been moving these sorts of amendments consistently with the government’s support. As I understand it, according to coalition government policy and as enunciated by the Prime Minister, the coalition does not support the continued discrimination against gay and lesbian Australians with respect to property matters. Prime Minister John Howard, in a press conference at the Commonwealth Parliamentary Offices in Sydney on 22 December 2005, said that he was strongly in favour of removing any property and other discrimination that exists against people who have same-sex relationships. Well, that strong support does not translate into policy, so I am afraid I am not impressed.

As I stated during the Senate Standing Committee on Economics inquiry into the provisions of Tax Laws Amendment (2006 Measures No. 4) Bill, the continued discrimination against homosexuals is contrary to the way in which the government is moving. It is contrary to the remarks of the Prime Minister and the minister for finance and contrary to the view of most parliamentarians I know. It may also infringe international law. Some countries such as Canada allow marriage of same-sex couples, and this discriminates against those who are married overseas.

This bill continues to exact the sort of discrimination which the Prime Minister declares he is against. This is a new rule which further entrenches discrimination against same-sex couples in tax treatment and, when the government is forced to change its position and end this discrimination, this will be yet another rule on top of the already myriad number that exist which will need to be amended. Discrimination in our tax laws against people based on their sexuality is a serious concern for the equity of the system. In this bill the government was presented with an opportunity to begin changing this position and that they chose to do nothing is frustrating. I can only hope that in time the government starts an action that will change it. There is overall community and parliamentary support for changing real property rights with relation to homosexual people.

Schedule 4, on the other hand, demonstrates that the government is able to come good on promises made to reform other aspects of our tax laws. The amendments in schedule 4 are the result of a promise by the Treasurer to deliver capital gains tax reform before the end of the 2005-06 financial year. The government contend in the explanatory memorandum that the CGT measures in the bill will further enhance Australia’s status as an attractive place for business and investment by addressing the deterrent effect for foreign investors of Australia’s current broad foreign resident CGT tax base. While this may be so, I have my doubts about the merits of this justification, especially in the light of comments by John Edwards, chief economist at Hong Kong and Shanghai Banking Corporation. Drawing on an International Monetary Fund report, Mr Edwards observed:

... over the last few years business investment in Australia has been markedly higher as a share of GDP than in the UK, the US, Germany or Japan ... Though widely believed to in a mining boom, Australia has actually been experiencing an investment boom.

It is interesting to note that all of the submissions not only expressed their support for the bill—mind you, I say all the submissions but ‘all’ was only four—but also seemingly had no reservations as to the potential negative impacts of the bill. All emphasise that the changes would bring us into line with international practice, with the Institute of Chartered Accountants also citing that the amendments will encourage greater investment, enhance our competitiveness and encourage global companies to enhance their Australian operations.

While I am always able to support measures which aid the economic wellbeing of Australia—I have a long history in this place of having done so and my party has done so—I am concerned that changes to CGT of this sort as it relates to foreigners may be giving foreigners an unfair advantage, and that is an unfair advantage over Australians. It is an issue of equity. While most of our trading partners probably do have similar tax regimes to Australia in many respects, can Treasury guarantee with any certainty that no foreigners investing in Australia will be receiving an unfair advantage over Australian investors? The answer appears to be not yet.

Treasury has so far provided no modelling, no empirical evidence, no illustrative cameos to support their claims that non-Australians will not be given an unfair competitive advantage over Australian citizens and residents. In that respect, I want to support here in the Senate the remarks made by the Labor shadow minister with respect to the unwillingness and inability of Treasury to provide the sorts of answers to questions that were asked for.

I have a view of Treasury that they are very bright, very competent and highly professional and therefore their failure to provide that sort of response is a failure as a result of political direction, not as a result of failure of the policy officers to be able to deliver such information. It is an affront, as the shadow minister rightly said, to the official opposition of the parliament and to the people of Australia when the government and its principal economic agency start to treat the parliament as if we are mushrooms, as if we do not deserve to be properly informed. When this law goes through, as it is going to, given the way in which the numbers sit, we legislators will bear the consequence of this law. We bear the responsibility, not Treasury—we bear it. Therefore we are entitled to ask to be as fully informed on these matters as possible. With respect to this particular bill, I want to record my strong displeasure and disapproval at the way in which the committee and the Senate have been treated.

It is too easy, by the way, to label concerns about schedule 4 and the possibility of foreigners being given taxation advantages over Australian residents—both foreign and Australian citizens—as ‘economic xenophobia’, as one witness did. Apart from being completely wrong with respect to my and the Democrats’ huge contribution to supporting laws, which have modernised and internationalised Australia with respect to its tax regime and the way in which it operates internationally, we recognise that foreign investment is an important part of a modern and globally integrated economy. But the Democrats and I are deeply concerned that, when we change our tax rules to give foreigners advantages our own citizens and residents do not have, it is a basic measure of equity. Once again, this is about equity and capital gains treatment of Australian citizens and noncitizens. Australian tax law must not have the effect that foreign-born residents of Australia or Australians are treated less favourably than non-Australian residents abroad. This is foolish and would be inequitable.

When these questions were put to the Treasury officials they answered, ‘We disagree; we don’t think it will be inequitable.’ The problem is that they were not able to substantiate that opinion. They were not able to provide any empirical data, any cameos or any illustrative comparisons that would enable us to accept their assurance. As bright as they are, we know from the history of this country that Treasury have got it wrong in the past. They are not perfect. We know from the history of this country that governments have got it wrong. They are not perfect. And we know from the history of this country that at times the legislature has got it wrong. We are not perfect. Therefore, we are all entitled to be given the maximum information that enables us to make a considered decision. In this case you did not provide it and therefore you have not allayed my fears. Judging by the remarks of the shadow minister, despite the fact that Labor will end up supporting this bill, they share those broad fears and are concerned at the sort of treatment we have been given.

I am unable to give this bill full Democrat support without the CGT marriage and de facto breakdown provisions being amended so that they at least remove the discrimination against de facto homosexual couples. I understand that, if they are married, the law prevents that happening. But with respect to real property issues, de facto homosexual couples should not be discriminated against. I cannot give this bill full Democrat support without addressing the schedule 4 capital gains tax issues that we are concerned with. That was my position throughout the Senate inquiry into this bill. The inquiry did not allay my concerns and my fears, and therefore it remains my and the Democrats’ position now.

Steve Fielding (Victoria, Family First Party) Share this | Link to this | Hansard source

What a rort. The Tax Laws Amendment (2006 Measures No. 4) Bill 2006 would exempt foreign residents from paying capital gains tax unless they are selling what are called ‘real property assets’ or taxable Australian property. The government says that this will make Australia a more attractive place for foreign investors. That is no surprise, when foreign investors are getting a special tax break. Using the same argument, we could make Australia a more attractive place for Australian investors if we were to abolish capital gains tax altogether. But the government is not proposing that.

The practical effect of this bill will be to give foreign companies an unfair advantage over Australian companies. I will say that again: the practical effect of this bill will be to give foreign companies an unfair advantage over Australian companies. It will give individual people from other countries a tax break that is not available to people in our own country. Australians have a very keen sense of fairness. They are prepared to give people a fair go if they follow the rules and if everyone is treated equally. But they do not like rorts, and this is a rort—where they are taxed and their government gives noncitizens a tax break. What is fair in that? What is fair when your own government taxes you for exactly the same transaction that someone else can make tax free? Ask ordinary Australians what they would think of giving special tax breaks to foreigners while continuing to tax Australians for the same thing, and they would say it is wrong, it is wrong and it is wrong. One of the government’s arguments is that the laws fit with the standards set by the Organisation for Economic Cooperation and Development. But we should never adopt laws that do not make sense. And we should never adopt laws just because some group tells us to.

So what would the practical effect of these laws be? If this rort is allowed we can expect to see a wave of international money hitting Australia in search of a fast buck. We have already seen in the last year the impact of private equity funds in Australia. For example, Kohlberg Kravis Roberts made an $18.2 billion bid for Coles Myer, which was rejected by the board. If this rort is allowed, expect to see KKR back for another go. With the sale of assets like Coles Myer, worth billions of taxpayers’ dollars, how much revenue would the Australian taxpayer lose if this rort is allowed? We do not know.

It is worth focusing for a moment on private equity funds—what are they and what do they do? Private equity funds typically look for companies they can quickly overhaul for a quick profit. They take on huge debt to make takeover bids for listed companies. They do not create and develop businesses; they simply restructure them for profit. Restructuring companies involves major changes, including cost cutting—and that means Australian jobs will go. Of course private equity funds want to make big profits. They increase company profits by fair means or foul then sell the asset. Under the rort—and it is a rort—in this bill foreign investors could pocket the capital gains as profit. Where is the fairness in that? Finance commentator Alan Kohler suggests a KKR takeover of Coles Myer would lead to thousands of Australian jobs disappearing. He has also predicted the break-up of the company, with the sale of divisions like Target and Officeworks.

Does this sort of behaviour sound familiar? It should. Private equity funds are simply leveraged buyout funds by another name. Leveraged buyouts are a familiar term from the 1980s. The character Gordon Gekko, who senators may remember from the 1987 movie Wall Street, accurately depicted 1980s corporate raiders who bought companies to strip them for their assets. With this bill to slash tax for foreign raids on companies, it is no surprise that private equity funds are interested in Australia. A representative of the Institute of Chartered Accountants told the Financial Review last month that ‘there is certainly merger and acquisition activity being delayed’ in anticipation of this bill.

Obviously this rort, handing out tax exemptions to overseas investors, will also have a financial impact on our budget. But the full financial impact is unknown. The government estimates a loss of revenue of $65 million a year, but I understand from the committee report that they have not done modelling on what the benefits would be. If the government only knows the cost and not the benefits, that suggests this bill is no more than another way to continue its ideological crusade for free market economics.

Family First supports free enterprise but not the unfettered free market. Family First will not agree to a situation where we are taxing Australians for capital gains but giving foreign investors a tax break. That is not fair. That is a rort, and Australians will not buy it. As I said before, a representative of the Institute of Chartered Accountants told the Financial Review last month that ‘there is certainly merger and acquisition activity being delayed’ in anticipation of this bill. Family First will not agree to a situation where we are taxing Australians for capital gains but giving foreign investors a tax break and I urge Labor to reconsider its position, given that, in terms of fairness and a fair go for Australian families, this is a rort. I urge senators to vote against this bill.

Barnaby Joyce (Queensland, National Party) Share this | Link to this | Hansard source

I am not going to comment on the Tax Laws Amendment (2006 Measures No. 4) Bill 2006, except for schedule 4, which I have some serious problems with. Schedule 4 is about discriminating against the Australian investor in favour of the overseas investor. Schedule 4 talks about the so-called capital-gains-tax-free world of people living overseas, which Australians do not get.

This bill is going to go through because the Labor Party support it. It is interesting that today, when we heard about Mr Rudd’s ‘fork in the road’, the first thing he will do at his fork in the road is look after people overseas at the expense of Australian investors. Apparently this fork in the road is going to be nothing more than some sort of slovenly roadside diner at which all that is dolloped out is disappointment to Australians.

It is quite clear that not only are we are about to pass a piece of legislation that discriminates against Australians but we are doing it at the behest of other people in other corners of the globe. We are here to look after other people in other corners of the globe before we start looking after our own! Some of the figures that have been put up—I have been reading through the explanatory memorandum—indicate that it is going to cost the Australian economy $50 million in 2006-07, $85 million in 2007-08, $80 million in the following year and $75 million after that.

I will give you a bit of a run-down on some of the things that are happening. We have this takeover of Coles. The bid was for $18 billion but let us call it a $16 billion takeover. Let us say they get a 20 per cent write-up on that $16 billion takeover. That is $3.2 billion. We are going to compromise $960 million of our own money in that one transaction.

The Labor Party support this and it is complete lunacy. The Coles workers go to public hospitals, send their kids to public schools and go on public roads. They are supported by a defence force and a police force. All these things are supported by the Australian taxpayer, yet the benefits of that transaction go to the United States treasury. So what are the Labor Party going to do? Are they going to send Kevin Rudd over there to knock on the door to ask for some of the money back?

Then we have Boral and Qantas which are up for takeover. How on earth did the Labor Party decide that they were going to agree with these figures? It is a peculiar day when the first thing we do at the fork in the road is follow someone else. The first thing the Labor Party have done, at the fork in the road, is to follow someone else. The Labor Party’s clear statement to the people of Parramatta and Ipswich today is that they are trying to find mates. That is what they are doing; they are trying to find mates. This is a piece of legislation to try and find mates. That is disappointing, because they had a chance to make a difference.

This legislation is going to be sneaked through. I agree with what Senator Murray said: it has not had the proper airing in the public realm that it should have had. I strongly question the numbers that have been put up. Do you know that today we have overseas equity firms that in the United States have put in a bid for Home Depot of $100 billion? They have the ability to remove $100 billion from the share market and the Labor Party is quite happy for that investment to be tax free. They are quite happy to completely desert the working class.

I will tell you what happens when these overseas equity funds buy up an Australian company—and this might be news to the Labor Party—they break them up, because they have to try to take cost-cutting measures. So the Labor Party are turbocharging the break-up of Australian companies with the loss of Australian jobs. That is what they are doing today. And then they wonder why people do not take the Labor Party seriously at their IR rallies. It is because people know that the Labor Party are not fair dinkum. They know the Labor Party are not the full bottle. Today the Labor Party are going to turbocharge the break-up of Australian companies, with the loss of Australian jobs. They have some pathetic excuse as to why they believe this is a good thing. I do not know whether this will get reported, but I hope that Labor Party constituents find out about this. I hope they bring the Labor Party to account on why they would discriminate against Australian companies, why they would exacerbate the break-up of Australian companies and why they would move Australian jobs overseas.

Why would the Labor Party, who want to get into power, do that? What is their excuse? Maybe the Kevin and Julia roadshow is getting out of here quickly so that they do not have to explain that to the Australian people. It is interesting that the first thing Mr Rudd will have to talk about at his so-called fork in the road roadside diner, the slovenly house of rhetoric, is his views about delivering this to the Australian people. Boral, at $4 billion, will be up for grabs, as will Coles. Even, I think, the market cap of BHP Billiton, our biggest company, is $164 billion. So if they can find $100 billion for a department store in the United States, I reckon they could start looking out for large sections of the Australian economy. What you are doing today is turbocharging that.

With regard to schedule 4, I will support Senator Murray in opposing that schedule. This is an issue we have brought up before. We have been trying to lobby support and get it out there in the public domain. It has been very hard to get some support, but I hope that the fourth estate is still vigilant enough to start running this scenario past people. On the argument that accountants support it: I can tell you right now that I am an accountant and I do not support it, and every other accountant I run it past cannot believe it; it just fascinates them.

Here is another bit of information: they say it is all about reciprocal agreements. I can affirm that when $1 billion is up for grabs, people might start using other tax-free companies to base their rating on. I will give you one place. It is not very far away and people might have heard of it: New Zealand. New Zealand has no capital gains tax, so you can launch from New Zealand, come into Australia, buy up Coles, hold it for a year, sell Coles, put your money in your pocket, take it back to New Zealand and not pay one cent of tax—and that is something you are agreeing to today.

Of course, you have the Bahamas, Lichtenstein and the Cayman Islands—all these are going to be assisted greatly. One would presume that Australia had a problem attracting foreign investment. I think the problem is that at times we might be attracting a bit too much of it. But there is no problem in attracting foreign investment to Australia. It is falling over itself to get in here. We have a safe, stable country; that is why they are coming here. What they are going to have now is a benefit that no-one in this chamber has, no-one in Ipswich, Queensland has, no-one in Mackay will have, no-one in Parramatta will have and that no-one in the suburbs of Perth will have. What people overseas will have is the benefit that it will now be tax free.

So if I am a reliable investor looking for a break and I know that the people of Pyongyang have a better tax advantage than the people of Sydney or that the people of Houston, Texas have a better tax advantage than the people of Sydney, the smartest thing for me to do is to move, to leave Australia and go somewhere else and invest in this country. I just cannot work out why you want to support that. I cannot work out how you could possibly think that this could go through to the keeper without someone finding out about it. Where was the glorious speech by one of our learned friends on the other side of the chamber as to why it is a great deal for the Australian voter to pay a tax they would not have to pay in an Australian company if they lived overseas? The only exemption is if you could say: ‘If the company’s more than 50 per cent real property, they’re outside the law.’ There is a fair bit of investment you can do that you can box up so that 49 per cent of your company is mining shares or 49 per cent of your company is land and 51 per cent is something else.

The vast majority of our investments, however, show that there are inactions and goodwill. If you live overseas but not in Australia, investment will be tax free. I think that it will be an interesting debate, and I challenge Mr Rudd in his new role as the glorious Leader of the Opposition to explain to the Australian people why he believes that one of his first decisions is going to be this—this is the fork in the road he has decided to follow.

Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Link to this | Hansard source

You’re in government, in case you hadn’t noticed.

Barnaby Joyce (Queensland, National Party) Share this | Link to this | Hansard source

I know it is hard and I know you are trying to deal with the issue yourself—he has probably rolled you in some caucus meeting—but there is probably something hanging out the end of it there. There is probably some promise. Maybe somebody is going to look after you favourably. But this works in a troika. You had the cross-media ownership laws, you had the mergers and acquisitions laws and now, to really help you out, we are going to make it tax free. What more can we do? What we are going to do is let you buy out our media companies through the media ownership bill, which unfortunately was supported by Senator Fielding, and then we are going to allow you to get as big as you possibly want with the mergers and acquisitions laws—we do not want to have much oversight over that. Is there anything else we can do for? Yes, we have thought of it: we will make it tax free. What a package deal! You should box the trifecta, Senator Sterle. You are complicit in it now.

Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Link to this | Hansard source

It’s your government’s legislation.

Barnaby Joyce (Queensland, National Party) Share this | Link to this | Hansard source

You have now decided to put your hands on it. I understand it perfectly, and I think you should understand it a bit better; otherwise, you are not being completely honest with us. It is not a good day for the Australian investor. It is not necessary; it is not required. The fact that it completely reflects what happens overseas is not right; in so many other countries this is not the case. It seems to state that we are somehow lacking in foreign investment, but we are not. So this is going to be an interesting time.

However, there is not a hell of lot we can do about it now. It is one of those peculiar things everybody gets to see, where the Labor Party decides that they are going to discriminate against Australian investors. This will be an interesting vote. It will go to a division. I do not know which side of the Labor Party would actually want this. Maybe you could tell me: is it the right, the centre left or the far left? Which part of the Labor Party is big on the idea of turbocharging the takeover of Australian companies to be broken up so that jobs can be moved overseas? Is that the TWU, Senator Sterle, or is there another group that wants this? I am fascinated. Maybe someone can suggest to me which side of the Labor Party wants to move jobs overseas.

With this $100 billion, if they were not investing in Home Depot and they turned their attention to Australia—we know they are out there: KKR has money to burn and that is just one of many—what would be your plan of attack after you put this through? What will be your plan of attack when they start breaking up Australian companies and losing Australian jobs? Aren’t you going to feel just a bit duplicitous when you go back to the working people, as you fondly call them, and say, ‘We’re going to fight for our laws if there are any of you left employed in Australia’?

Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Link to this | Hansard source

How did you vote on Work Choices? How is that debate going to work?

Barnaby Joyce (Queensland, National Party) Share this | Link to this | Hansard source

I know you are upset and I know you are coming out because the truth hurts.

Glenn Sterle (WA, Australian Labor Party) Share this | Link to this | Hansard source

You did the grubby deal with your side.

Barnaby Joyce (Queensland, National Party) Share this | Link to this | Hansard source

I know it is galling to you, but you should have been stronger in your caucus. You should have spoken up. You have really got yourself in a bind. What you have done is basically said that with a wink and a nod we can get this past Australian workers and the Australian people without them knowing. Well, they are going to find out today, and they are going to call you to account.

What we have here today is the turbocharging of foreign equity firms for the buyout of Australian firms to be broken up, and there does not seem to be much we are going to do about it. What we have here today is something that basically discriminates against the Australian investor for the overseas investor. What we have here today is a clear statement that if you want to get a tax break then the best place to be is not here. What we have here today is something that is being quietly moved through with bipartisan support—except for some—because it fits another agenda, which has nothing to do with capital gains tax. That agenda is one that you might be serving at the fork in the road slovenly diner. It is called currying favour. It is first on the menu. That is what is on the menu at the fork in the road diner today: currying favour with a certain group of people.

You are not going to get away with it. You are going to have to deal with it. You are going to have to think about it. The problem that I think we all have is the matter of how we actually get the Australian people to hear about this. It is a problem that Senator Murray has. There has not been a recognisable argument put up as to why this is a good thing. I have not heard one. One certainly has not been presented by the Labor Party.

I challenge the Labor Party. Today, in the reign of their new glorious leader, they have a chance to be relevant. Once more we give them a chance to be relevant. We give them a chance to be courageous. We give them a chance to stand up for the Australian worker and to stand up for the Australian investor. Today is their chance, if ever they have one, to look after the Australian investor, the Australian worker, the Australian company and the Australian ownership of Australia. Or they can roll over and be dispatched for what they are: irrelevant shadows. But all we will hear is more of this rhetorical nonsense about a fork in the road, new chapters and a bridge too far—a bridge to a farce; that is what it is. But what we get is the fork in the road diner, where the No. 1 item on the menu is currying favour.

Unfortunately, the people who will get the Christmas present are investors in Houston, investors in Paris, investors in Berlin and investors in Japan and Tokyo—not the people of Ipswich, not the people of Longreach and not the people of Parramatta. What you are doing today is rolling over. And then you are going to come in here with the theatrics and bang on about something else and think that the world is going to change and actually focus on you and take you as relevant. But it is not. It is going to take you as completely and utterly irrelevant. I challenge the Labor Party to make itself relevant today and not support schedule 4.

Nick Minchin (SA, Liberal Party, Minister for Finance and Administration) Share this | Link to this | Hansard source

I thank all those who have participated in what has, as always, been a lively and interesting debate on the Tax Laws Amendment (2006 Measures No. 4) Bill 2006. The bill has, I think, been adequately described by previous speakers. It contains some four schedules, all of which but for schedule 4 seem to have at least substantial support in this chamber. Schedule 4, as Senator Joyce in his contribution has just now made clear, is somewhat more controversial. Can I say on behalf of the government that we welcome the fact that the Labor Party is at least not going to oppose schedule 4. I welcome the fact that they have considered this properly and on its merits. The Labor Party, as the alternative government of this country, recognises the importance of this measure and of bringing Australia’s tax system properly into line with international tax arrangements. It is refreshing that at least on this issue the opposition does recognise the importance of having such consistent international tax arrangements.

Schedule 4 does do that. It is part of our ongoing efforts as a government to bring our tax system more into line with international norms and to ensure that the tax system does remain internationally competitive. The nation as a whole must remain internationally competitive. Our tax system must remain internationally competitive. The competition internationally for investment dollars is intense and immense and we must never ignore the critical importance of ensuring Australia’s policy framework is internationally competitive.

The reforms, as has been said, better target and strengthen the application of our capital gains tax regime to foreign residents. That is achieved firstly by narrowing the range of assets on which foreign residents are subject to Australian CGT, which will be restricted to Australian real property and the business assets of Australian branches of a foreign resident. As has been noted, it also strengthens the integrity of that narrower base. CGT will apply to non-portfolio interests in Australia and foreign interposed entities where more than half the value of the interposed entity’s assets is attributable to Australian real property.

It is of course one of the great virtues of the Liberal and National parties that, unlike the Labor Party, our members are free to exercise their will in relation to measures of this kind. I profoundly disagree with Senator Joyce on this issue. He and I share many views in common, and I enjoy siding with Senator Joyce on some of the great and important issues facing this country. But on this issue we do not agree, and the government party room does not agree. The government party room supports this measure for the reasons set out in the explanatory memoranda, in various government statements and in public statements as to why we should follow the international norms with respect to the way in which foreign entities are taxed on capital gains. That is what this bill seeks to do and, as I said, I am pleased that the Labor Party understands that.

I do not want to go into a particular critique of Senator Joyce’s difficulties with this bill. I do respect where he is coming from, but I do need to say that, overall, the history of this country is one that demonstrates the overwhelming virtue and importance of foreign investment. There is no way this country would have the development, extraordinary living standards and economic prosperity that we have without foreign investment.

As I said, the competition for investment dollars is extraordinarily intense. As many of the developing countries in the world improve their legal and regulatory frameworks, they will become increasingly attractive to investment. This country is one that, in its 200-year history, has never had a situation where its savings meet its investment requirements. There are a lot of reasons for that but we have always been—and, in my view, will always continue to be—reliant on foreign savings to provide the investment dollars that this country needs. To ensure that we continue to attract that foreign investment, which provides overwhelming benefits to the Australian economy, we do need an internationally competitive tax regime.

I do profoundly disagree with Senator Joyce in his assertions that foreign investment somehow costs jobs. Foreign investment creates jobs. Foreign investment in my own city of Adelaide creates thousands upon thousands of jobs in the defence and automotive industries. Without foreign investment we would not have anything like the industrial base or the employment prospects that we have in this country. So that is something with which I profoundly disagree and on all the evidence that I have ever seen those firms that are engaged internationally or are partly or wholly owned by foreign entities operating in Australia are among the most efficient. They are the companies that have most significant investments in R&D, they are the most innovative and they offer in many respects the best employment opportunities and conditions for their employees, so we do profoundly believe as a government that on balance foreign investment is good for this country and we want to continue to attract it. With those few remarks, I commend the bill to the Senate.

Question agreed to.

Bill read a second time.