Senator Andrew Murray: Australian
Democrats - Minority Report
Senate Standing Committee on
Economics October 2006
Tax Laws Amendment (2006 Measures No.
4) Bill 2006
The Tax Laws Amendment (2006
Measures No. 4) Bill 2006 (‘the Bill’)
contains four schedules, each with their own purpose but all relating to
various aspects of Australia’s tax law regime.
Briefly, Schedule One modifies
provisions relating to capital gains tax (CGT) implications associated with
asset disposals arising from marriage breakdowns. Schedule Two contains
amendments which modify the interaction between the consolidation rules and
demerger rules. Schedule Three amends the simplified imputation system that
exists between Australia and New Zealand. Schedule Four significantly alters the application of Australia’s CGT rules as they apply to
foreigners (including both residents and non-residents).
Schedule Two relates to changing the
operation of some demerger and consolidation rules. These provisions seem
fairly uncontroversial, perhaps with the exception of the modelling of the
costs. The Explanatory Memorandum (EM) has the negative financial impact at
$35m over four years, but the cost estimates are undoubtedly just that,
estimates.
Mr Brown—.....He really
wants some kind of breakdown of the basis of that particular costing of the
consolidation change in schedule 2.
Senator MURRAY—Yes, because, essentially, it anticipates market
activity, specifically in demerger circumstances, and I really do not know how
you compute that.
Mr Brown—Such costings
are an estimate and they are based on average levels of activity that have been
observed in the past. As with any costing, actual activity will determine
whether or not the cost is as set out.
Senator MURRAY—Yes. As you know, the difference between Treasury
estimates and those elsewhere is that it is an educated thumb that they suck,
but it is still a thumb-suck![1]
The estimates will have had to
heavily rely on a forecast trend, otherwise how else can the number and value
of mergers and consolidations be calculated into the future. However, costing
often involves assumptions like these, so it is perhaps more just the accuracy
of the amounts arrived at which can be questioned.
Schedule Three seems relatively
uncontroversial and appears to relate to a technical taxation matter that was
unintentionally not dealt with appropriately previously.
Contentious issues are present in
both Schedules One and Four.
A point that merits noting is the
apparent lack of informed public awareness concerning this bill, as judged by
the few submissions received, although there has been some media commentary on
these proposed amendments. The Senate Standing Committee on Economics’ Inquiry
into the Bill only received five submissions in
total from various industry bodies and associations. All expressed support for
the Bill. Given that Schedule Four alone has
an estimated cost to revenue of $245m over the financial years 2006-07 to
2009-10, a lowish level of public awareness is concerning.
The key question arising is: given
other competing priorities for Government funds, are these new tax concessions
really necessary?
Schedule One
Schedule One extends the existing Capital Gains Tax
CGT rollover relief as it applies to marriage breakdowns so that the CGT
rollover applies to the main residence exemption and marriage breakdown
settlements do not result in CGT liabilities.
Currently, the roll-over 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.
Schedule One extends the operation of
the marriage breakdown roll-over 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.
As the Bills Digest notes[2]
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.
This represents the continuation of
on-going tax discrimination against homosexuals, and is thus a violation of
equity.
It is one thing to take time to phase
in changes to laws that are explicitly discriminatory, but which are costly
and/or complicated to unravel. It is quite another thing to introduce new or
extended discrimination, which this bill does. I can think of only one of
three reasons for this to have occurred:
-
it was an
oversight;
-
there are (as
yet) unexplained (and justifiable) reasons why this is necessary; or
-
the Government is
homophobic.
I hope the first reason is the one.
As for the second possible reason, I cannot see any possible justification
which would merit extending discrimination through this legislative action -
certainly not the Minister’s ‘it’s not the right time and this isn’t the right
vehicle’ argument.[3]
As for the third possibility – if the
first two possible reasons fall away, then this third reason remains.
I recognise that recent legislated
changes to the Australian federal definition of marriage may mean that same-sex
couples may find it difficult to seek to be on the same statutory basis with
respect to CGT events as married couples. However, Schedule One also
covers de facto relationship breakdowns, so same-sex couples are
entitled to seek to be on the same basis with respect to CGT events as de
facto heterosexual couples.
My question on notice[4]
on this matter was addressed by Treasury as follows:
My question is a very
simple one: to address the issue of providing the same marriage breakdown
rollover provisional law changes proposed in this bill to de facto same-sex couples,
would that require a change in law? Would that actually require an amendment?
Answer: Yes to both
questions.
This continuation of official
discriminatory behaviour is frustrating because this is a new rule, and rather
than extending discrimination, this legislation should be used as an ‘engine of
change’. As I understand Coalition Government policy, including as enunciated
by the Prime Minister, the Coalition do not support continued discrimination
against gay and lesbian Australians with respect to property matters.
Prime Minister Howard has said that he is
Strongly in favour...of
removing any property and other discrimination that exists against people who
have same-sex relationships.[5]
One of the few witnesses to the
Inquiry, The Institute of Chartered Accountants, had no taxation objections
to this discrimination being overturned. At the public inquiry into this Bill, following a discussion on this same-sex couples
issue, I asked on notice[6]:
Would the Institute of Chartered Accountants have any in-principle objection to
the roll-over provisions applying generally to the break-up of couples?
Answer: Whilst, from a
purely technical taxation perspective, The Institute of Chartered Accountants
in Australia has no in-principle objection to the roll-over provisions applying
generally to the break-up of couples, it is also clearly acknowledged that
there may be other policy considerations involved on which the Institute is not
competent to comment.
The Human Rights and Equal
Opportunities Commission is conducting a National Inquiry into
Discrimination against People in Same-Sex Relationships. They note[7]
that same-sex couples do not attract the tax concessions available in relation
to property transfers following family breakdowns that are available to
heterosexual families.
The measures attempting to be
introduced by the Bill will only apply to heterosexual
couples who are either married or in a de-facto relationship:
...this 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 is contrary to the views of
most parliamentarians I know. It may also infringe international law. Some
countries, such as Canada
actually allow marriage of same-sex couples.[8]
Schedule Four
Schedule Four proposes amendments
which will heavily modify the CGT regime as it applies to both (Australian)
resident and non-resident foreigners. Schedule Four narrows the range of assets
subject to the Australian CGT regime as it applies to foreign residents and
strengthens the application of CGT to foreign residents by applying CGT to
non-portfolio interests in interposed entities under certain conditions
As the amendments currently stand,
the Bill will substantially narrow the range
of assets on which a foreigner will be liable for CGT. It replaces the
‘necessary connection with Australia test’ of an asset with a test of ‘taxable
Australian property’, which is limited to including taxable Australian real
property (any real property situated in Australia, plus mining, prospecting and
quarrying rights); indirect Australian real property interests (interests held
through 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 subsection
104-165(4) of the Income Tax Assessment Act 1997.
Much fuss has been made about the
supposed fact that this brings Australia into
line with international and OECD standards and guidelines. The EM for the Bill[9] contends that the changes 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 based CGT tax base.
I have seen no empirical evidence
produced that a deterrent effect exists for foreign investment in Australia. To the contrary, my impression has
been that foreign investment has been at a high level. The Investment and
Financial Services Association Ltd (IFSA) obviously disagree with me. IFSA
commented:
Historically, there
are number of reasons why the flow of funds from non-resident investors into Australia has been relatively low. In this
regard, any significant enhancement to the international tax regime, such as
the proposed changes to capital gains tax and non-residents, are a step in the
right direction.[10]
‘Relatively low’ implies some
credible form of benchmarking, and I would like to see that before I accept
this proposition. I am not aware that Australia has had a problem attracting foreign investment – indeed many
Australians have expressed concern at a high level of foreign investment and
ownership of Australian assets.
Interestingly, there is evidence to
suggest that CGT is an unimportant or even irrelevant consideration for
investors when choosing their investment or business location.[11]
In their ‘Comment’[12]
the Bills Digest says Foreign investors holding shares in Australian
companies will gain significant benefits from this measure and the Digest
refers to a 30 June 2006 Legal Update from Corrs Chambers Westgarth Lawyers
saying this will provide a good stimulus for mergers and acquisitions [by
foreigners].
Yet reforms to Corporations Law and
Tax laws (particularly the ‘consolidations’ measures), all supported by the
Democrats, have in 2005/6 produced the highest level of merger and acquisition
market activity in Australia’s history, of which a very high
percentage is foreign. Current reports indicate that 2006/7 will prove even
stronger.
Back then to the obvious question
that arises: why the need for a further tax concession that may give
foreigners tax advantages that Australian residents and citizens do not share?
In the same ‘Comment’ section the Digest also quotes from law
firm Minter Ellison’s legal update of 20 July 2006 which envisages far more activity by
[foreign] non-residents. Reforming tax law for foreigners resident in Australia is a different matter, but the case
or justification for this tax concession for foreign non-residents is not made,
based on the material before us in this Inquiry.
In the same section of the EM quoted
above, the EM goes on to state that:
...the amendments will
encourage investment in Australia
by aligning Australian law more consistently with international practice. This
results in greater certainty and generally lower compliance costs for
investors.
Whilst it is true that a significant
degree of foreign investment in Australia continues to be desirable, lowering or removing foreigners’ potential
CGT liability may also mean that we are giving foreigners an advantage
over Australian citizens. This is another equity consideration, that the
Government has seemingly failed to address adequately.
Why do I use the word may? Is
it possible for the Government to show that foreigners will not be advantaged
over Australians as a result of these changes? Or that some will and some
won’t? CGT regimes differ across countries. Raising this matter at the
Inquiry Hearing resulted in an allegation by Mr Ali Noroozi, Tax Counsel at the Institute of Chartered Accountants in Australia[13] that it reflected an attitude of
“economic xenophobia”.
I took the opportunity to remind Mr
Noroozi that what is at issue is a matter of equity and basic principle - namely
that Australian law must not have the effect that Australians are treated less
favourably than foreigners under our tax laws, or that non-Australians are
given an unjustifiable competitive advantage over Australian citizens and
residents.
At the Hearing I did not find the
assurances of Treasury persuasive – they assert that Australians will not be
treated less favourably than foreigners under our tax laws, and that
non-Australians will not be given an unjustifiable competitive advantage over
Australians. Treasury had no evidence, modelling or cameos that could justify
their assertions.
At the very least the Treasury could
have provided illustrative sets of cameos showing how these provisions affected
citizens and residents from our five largest countries sourcing foreign
investment in Australia.
As for the globe itself - the fact is
that it is very difficult to model such a cross-country, cross-regime scenario
over the world’s 200+ countries and their residents: there would be a huge
amount of data needed, there are different laws and legal regimes in place that
are continually subject to change, as well as differing economic conditions and
innumerable situations to be accounted for.
Senator Andrew Murray
Navigation: Previous Page | Contents | Next Page