Chapter 8
THE COMMITTEE'S CONCLUSIONS
8.1 On the 14 October 1999 the Senate established terms of reference for the Senate
Finance and Public Administration References Committee to inquire into and report on
certain aspects of the Government's proposed business tax changes by the 22 November 1999.
8.2 There is agreement that business tax reforms have to be revenue neutral. This is a
necessary consequence of the passage of the GST.
8.3 Before the Senate inquiry both Labor and the Democrats argued that the Government's
proposals didn't add up.
8.4 The main task of the Committee was to closely examine the assumptions underlying
the Government's proposals in order to come to a conclusion about what the fiscal and
economic impact would be.
8.5 The Committee considers that the package at this stage is incomplete as it
involves:
- some legislation in the House of Representatives relating to stage 1 with the balance of
announcements still not before the Parliament;
- various proposals from the ANTS package which the Government has stated it will modify
significantly both in scope and in timing; and
- a variety of announcements from stage 2 which are still subject to consultations to
settle the fine detail.
8.6 The stage 1 announcements are not revenue neutral. Even if the revenue estimates
are met, which is doubtful, there is still a huge funding gap of around $3.8 billion from
these measures.
8.7 Progress towards revenue neutrality has been made by the stage 2 announcements.
However, the delay in announcing stage 2 ensured that the detail of these measures could
not be examined at all by the committee and there is no indication as to when the
legislation will be released by the Government.
8.8 Furthermore, the very limited time available for the committee to consider the
stage 1 issues has proven inadequate to allow for a full examination of the scope of the
reform proposals, especially in terms of modelling the economic effects.
8.9 Notwithstanding this timing constraint, considerable doubt was cast over the
revenue neutrality of the whole package by evidence provided about the realisation
elasticities assumed by the Government, and the potential tax avoidance, arising from the
capital gains tax proposals.
8.10 The committee is particularly concerned by the evidence from a senior Tax Office
official that it was `unclear' whether the proposed new General Anti-Avoidance Rules
(GAAR) would apply to arrangements which seek to exploit differences between tax rates on
capital gains and on other income.
8.11 The Committee notes in this context Associate Professor Chris Evans' submission
that `by adopting different assumptions about the propensity of taxpayers to convert
highly taxed income to preferentially taxed capital gains very different revenue outcomes
are achieved'. [1]
8.12 The fact still remains that unless the proposals are revenue neutral they cannot
be supported by any party.
8.13 Labor believes revenue neutrality can be achieved, but from the evidence provided
to the Committee this has not yet been achieved.
8.14 The final package can achieve revenue neutrality if:
- there is no further watering down of measures already announced in ANTS and the other
stage 1 proposals;
- the revenue hole from the overestimation of asset realisations is filled;
- there are effective anti-avoidance measures to prevent the large scale conversion of
income into capital gains; and
- the stage 2 in-principle announcements are not watered down when the final detail is
settled, and therefore achieve their revenue targets.
8.15 Until the above conditions are met it is not possible to conclude that the package
meets the test of revenue neutrality. The onus was on the Government to prove that its
proposals meet the test – it has not yet done so.
8.16 Accordingly, the Senate should only pass the package when it is certain the detail
of all measures are settled and can be assessed in their totality.
Senator George Campbell
Chairman
Footnotes
[1] Submissions and Documents, p. 131.
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