Chapter 8

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.