Chapter 2
Tax arrangements for foreign investment in Australian agriculture
2.1
Rather than presenting a comprehensive overview of the taxation
arrangement for foreign investment, this chapter outlines the main issues
raised with the committee regarding taxation arrangements for foreign
investment in agriculture. As such, the focus is on areas that are more
problematic in terms of tax regulation and special attention is given to the
arrangements for foreign government entities. The chapter finishes with evidence
the committee received that current tax arrangements are stifling domestic
capital investment in agriculture and Australia's ability to develop the
industry to meet future global challenges.
2.2
The general principles for foreign investors reducing their tax exposure
were clearly outlined by the Australian Taxation Office (ATO):
At a high level, tax planning mechanisms seek to arbitrage
between differences in tax that may be available in relation to:
- who is taxed (eg an individual, company, trust etc),
- where something is taxed (in Australia or in a lower taxing jurisdiction),
- what is taxed (eg revenue / capital, dividend / interest,
royalty / fee etc),
- when something is taxed (bring forward losses, defer
income), or
- how something is taxed (eg rollover calculations, uplifts,
valuations etc).
With their easier access to low tax jurisdictions, foreign
owned entities are more able to take advantage of who, where, what,
when and how something is taxed by structuring transactions or
the location of their functions, assets and risks so as to ‘earn’ more in lower
taxed jurisdictions.[1]
2.3
As a result there are a number of mechanisms that foreign investors can
use to minimise the tax payable in Australia. These include 'the substitution
or creation of debt to extract additional income out of Australia and into a
lower taxed jurisdiction.' In addition, foreign companies can use 'conduit
arrangements whereby an overseas asset (say a company) is purchased through
Australia by a foreign owned entity using an Australian subsidiary that they
control.'[2]
2.4
There were three aspects of foreign taxation arrangements that the
committee found to be of particular concern: transfer pricing; capital gains
tax exemptions and passive income.
2.5
As will be shown in the evidence below, there are a number ways that
these tax arrangements are vulnerable to loopholes that may:
- result in revenue leakage for the Australian government;
- potentially distort the agricultural market by unduly favouring
foreign investment and multinational business structures; and
- cause disincentives for Australian capital investment in
agriculture.
Transfer pricing
2.6
One of the key issues raised throughout the hearings was the degree of effectiveness
of transfer pricing as a mechanism for taxing the transfer of certain products
from Australia to another country. Transfer pricing can be defined as 'the
prices charged when one entity of a multinational group buys or sells products
or services from another entity of the same group in a different country.'[3]
2.7
Mr Stuart Hamilton, Assistant Deputy Commissioner, Large Business and
International, ATO explained the four main methods of establishing the
appropriate tax arrangements for transfer pricing:
...[1.] There is the comparable uncontrolled price, so you
look at what product is available in the market at arm's length and the price
of that and how it varies over time. [2.] You can do cost plus, so given the
costs that have been incurred, what is a reasonable mark-up for the activity
undertaken. [3.] You can do resale minus, which is what it was sold at and work
back to a cost. [4.] Or you can do what is called the transactional net margin
method, which is basically a profit split, so you look at the two enterprises
involved and you work out, given the expenses, given the personnel, given the
functions, assets and risks involved, what would be a fair and reasonable
profit split between the two entities.[4]
2.8
The committee is aware that transfer pricing rules can be difficult to
enforce and that there is potential for significant tax revenue to be lost by the
Australian Government. For example, the Treasury submitted to the Economics
Legislation Committee in August 2012 that there is '$1.9 billion of tax in
dispute related to transfer pricing issues in current audits'.[5]
2.9
When asked for a perspective of the issue of possible revenue leakage
due to difficulties in enforcing transfer pricing rules, Mr Brian Wilson, Chair,
Foreign Investment Review Board (FIRB) conceded that from his experience, tax
was a major issue for companies when considering investments and therefore it
is an issue FIRB consults with the ATO on:
...I might say that one of the factors that [is] involved in
large-scale investment banking transactions is that tax is usually a major part
of the transaction. So the two of us on the board who do have an investment
banking background have probably spent many years dealing with tax lawyers and
tax barristers on domestic and cross-border tax issues.
...one of the components of the national interest test is
compliance with Australian laws and protecting Australia's revenue. It is the
role of the Foreign Investment Review Board in making its recommendations to
the Treasurer and in consulting the other parts of government, as we do, to be
aware where there may be, as a consequence of the transaction structure or
restructuring of the business, the potential for revenue leakage. We can and we
do consult with the tax office on those matters.[6]
2.10
However, the ATO acknowledged that when issues arose in terms of
prosecuting breaches of transfer pricing rules, the process was time consuming
and often difficult. As Mr Hamilton told the committee:
Our transfer pricing cases tend to take a long time. If you
are aware of the SNF case, you would be aware that we are not always successful
in raising the issue of comparability.[7]
Tax on not-for-profit agricultural
production
2.11
In examining the issue of transfer pricing, the committee looked into
the possible tax arrangements for the international transfer of not-for-profit
agricultural production. To this end the committee received evidence from the
ATO which stated that, in general, tax would not be paid in the case where:
The investment was not in relation to a business venture. For
example if the investment was in relation to a farm and there was no ultimate
sale of the goods produced in Australia and the goods were distributed to needy
persons. If there is genuinely no sale of product or profitable
purpose at any stage, an arm's length amount of the value of product leaving
Australia [an amount imputed through the transfer pricing mechanism] would not
be 'income' for the sovereign state or foreign company.[8]
2.12
The evidence from the ATO indicates that when no income is generated
(such as not-for-profit agricultural production for foreign food security,
especially by foreign government entities), no tax is payable by the relevant
entity. The committee examined this issue further through a specific
hypothetical scenario:
Senator NASH: ...Say I am a sovereign entity, I have
come over to Australia, I have bought 10 000 acres and I am growing wheat. I
export that wheat back to my home nation for humanitarian purposes, not for sale
at any point, to distribute as food. Would you provide on notice the different
ways, if there are different ways, that that sovereign entity could be taxed. I
know you have been talking about a mass of different things. I just want the
different permutations of how that could be taxed.
Mr O'Neill: I am happy to take it on notice, but I
think I can get to the point very quickly, if it is useful. The
transfer-pricing rules will apply because there is an international
transaction, in this theoretical example. The transfer-pricing rules will deem
an arms-length consideration, whether or not there is a point of sale at any
time.
Because of the deemed arms-length price, there is an
apportionment of that profit to the Australian enterprise. So if the arms-length
price is $100, having regard to the business model and the functions, assets
and risk in Australia as part of that business model, some part of that
arms-length price of $100 will be attributed to the Australian entity as
profit, whether or not there was a sale at any time.[9]
2.13
Mr O'Neill's response above appears to be inconsistent with the evidence
quoted in paragraph 2.11 and with additional evidence received in an answer to a
question on notice. This evidence also indicated that in general terms, it was
possible in the scenario above that tax may not be payable. The ATO stated:
In the farming scenario, the conditions that can give rise to
an Australian tax liability for sovereign or private investors are:
- there is a taxpayer
- the taxpayer is carrying on a business in
Australia, and
- the taxpayer derives income as a result of business
activity.
Where the transfer pricing rules adjust an amount to reflect
the arm’s length amount, it is the adjusted amount that is relevant for all
purposes of the income tax law.
Where a sovereign entity invests in an Australian farm
through an Australian company which carries on business here, the company is
taxable on its profits.
Where a sovereign entity invests directly (that is, not
through an Australian company) in an Australian farm, carries on business in
Australia and derives income, Australia’s international tax rules can apply to
tax that income. The indicators of whether or not someone is carrying a
business of primary production are discussed in detail in Taxation Ruling
TR97/11, which is available on the ATO website at www.ato.gov.au.[10]
2.14
The Taxation Ruling TR97/11 states that:
Subject to all the circumstances of a case, where an
overall profit motive appears absent and the activity does not look like it
will ever produce a profit, it is unlikely that the activity will amount to a
business. [bold in original][11]
2.15
This also appears to be consistent with evidence taken at a previous
hearing with the ATO:
Senator FAWCETT: The end point that the chair is
probably coming to is that if country X has a sovereign holding in Australia,
grows wheat—and let us assume they do not claim anything; they just self-fund
the whole operation and they grow however many tonnes of wheat—
Mr Hamilton: And they export it. Would they be
taxable? No.
CHAIR: That is the answer.
Senator NASH: So that is the answer. I am just
checking it. So there is no tax payable if they do not claim anything and then
they export the grain.
Mr Hamilton: If they are not there to make a profit
then they would not be in the income tax system, because they are not earning
income.[12]
2.16
On a related topic, the committee heard evidence that if properly
developed by the Australian agricultural sector, contributing to the global
food task on a not-for-profit basis could be both more beneficial for those
requiring humanitarian assistance and for Australian business than some
existing overseas aid programs. As Mr David Farley, Chief Executive Officer and
Managing Director, Australian Agricultural Company (AAco), told the committee:
Australia has been great at distributing dollars to
humanitarian crises around the world. Yet the smarter developed countries meet
those crises with generally finished food products. They will add value to
rice, to wheat, to meat and to peaches, plums et cetera and ensure that there
are warehouses of revolving stock. So Australia could capture the value add.
More importantly, it is very difficult to corrupt food, as opposed to dollars,
once it hits. Also, food being delivered in containers is more effective than a
pipeline of cash, which can take a month to get there. We are fortunate to know
how long we can live without water and food, and most of the time we are
fortunate enough to live under the pretext that even though the operation has
been successful the patient died. Australia should be addressing Australia's
humanitarian crisis response, and it is not dollars that answer that question;
it is adding value to revolving stocks of agricultural product within the
country.[13]
Committee view
2.17
The committee strongly supports fair and commercially orientated foreign
investment that creates wealth and jobs in the Australian agricultural sector.
However it is clear from the evidence presented above and throughout the
remainder of this report, that there are some apparent deficiencies in the
current tax arrangements for foreign investment in Australian agriculture which
require much closer examination. Accordingly, the committee is of the view that
the government should review the tax arrangements for foreign investment to
ensure Australians continue to benefit from the further development of
Australia's agricultural sector.
Recommendation 1
2.18
The committee recommends that in order to prevent tax revenue leakage
and market distortions, the government undertake an extensive review of the tax
arrangements applying to foreign investments and acquisitions in the
agricultural sector.
2.19
The committee considers that although the evidence given by the ATO regarding
transfer pricing was at times inconsistent, based on the evidence received it
is reasonable to conclude that a sovereign entity investing directly in
Australia and exporting for non-commercial purposes (such as for humanitarian
reasons) could avoid paying tax in Australia. From the ATO's answer to a
question on notice, the Tax Ruling TR97/11 and oral evidence presented to this
committee, it is reasonable to conclude that in such a scenario there is no
business undertaken and no income generated and therefore there is no tax
liability for the investor.
2.20
The committee considers that either the government should unambiguously
rule out such a possibility, or if it is unable to, it should explain why tax
revenue leakage from foreign investment in these circumstances is warranted.
The government should also estimate the future extent to which any such leakage
may occur over a five, ten, twenty and fifty year period.
2.21
The committee was concerned with how this tax arrangement could be used
by foreign governments seeking to improve their food security. Given the future
population projection in the region and the ever increasing global food task,
the committee considers that it is a realistic possibility and that such
arrangements could significantly distort future Australia's agricultural
markets. The committee considers that tax exemptions for not-for-profit
purposes arising from agricultural production from foreign government entities
have the potential to undermine Australian tax revenues and are not an
appropriate substitute for the Australian Government's foreign aid program. As
such, the committee considers that not-for-profit investment by foreign
government entities for humanitarian purposes should only be conducted when it
is explicitly part of the Australian Government's foreign aid program.
2.22
The committee is of the view that as a general principle, foreign government
entities should invest in Australian agricultural land and businesses on a
commercial basis and not for food security purposes.
2.23
The committee considers that the erosion of the tax base from
multinational companies reducing their tax liabilities is a direct threat to
Australia's sovereignty. Without strong protections against tax revenue
leakage, the Australian government's ability to provide Australians with the
public services and infrastructure that are essential for the country's future
is diminished.
2.24
The committee is aware that tax revenue leakage is a major problem well
beyond the agriculture industry. As indicated in recent press reports,
companies such as Google, Apple and eBay are using complex international
arrangements in order to pay minimal tax in Australia. In another high profile
case of tax minimisation, the ATO made an 'unsuccessful attempt to stop the
$1.4 billion reaped by the private equity group TPG from the float of Myer
leaving the country without being taxed.'[14]
2.25
The committee notes the government's current review of tax arrangements
for transfer pricing and is pleased by the Assistant Treasurer's recent
announcement that the proposed reforms 'will help Australia protect its tax
base.'[15]
The committee urges the government to ensure the protection of tax revenue
remains a key principle of any proposed amendments to Australia's tax laws that
are presented to parliament.
Recommendation 2
2.26
The committee recommends that as part of the broader review outlined in
Recommendation 1, the government should review Australia's tax laws that apply
to tax exemptions for not-for-profit activities for foreign entities. The
review should examine ways to prevent tax revenue leakage when foreign
government entities undertake agricultural production in Australia for humanitarian
purposes or for food security.
Recommendation 3
2.27
The committee recommends that the government require that any non‑commercial
production from agricultural land and businesses by foreign government entities
(including for the purposes of food security) is undertaken within relevant
Australian Government foreign aid programs.
Capital gains tax arrangements
2.28
At a general level, the committee heard evidence that capital gains tax
exemptions were one of the key ways that foreign companies may be able to
reduce their tax liability in Australia. Two examples of this tax minimisation
arrangement were given by the ATO. The first was:
...a foreign resident can disregard a capital gain or loss
unless the relevant capital gains tax asset is a direct or indirect interest in
Australian real property, or relates to a business carried on by the foreign
resident through a permanent establishment in Australia. The definition of real
property includes a lease of Australian land and mining, quarrying or
prospecting rights where the materials are situated in Australia.[16]
2.29
A second example was:
...concessions are available for certain foreign venture
capital investments which are designed to encourage foreign investment into the
Australian venture capital market and to promote the development of the
Australian venture capital industry. The measures involve the taxation of
certain venture capital institutions as "flow-through" vehicles and a
capital gains tax exemption for certain gains made by foreign residents on
venture capital investments (as well as a corresponding exemption for gains or
profits that are on revenue account) in certain cases.[17]
2.30
The ATO also informed the committee of the possible capital gains tax
arrangements available to foreign investors regarding non-commercial loans. It
also acknowledged that such circumstances may be used to avoid tax scrutiny, as
indicted in the following exchange:
CHAIR: I want to ask a question about non-commercial
loans. ...I can set up an entity in Australia and give them an interest free
facility for 30 years, with that entity having an Australian entity... But for
the purposes of foreign investment introspection they are an Australian
company. They fly under the radar. ...If I have a non-commercial arrangement that
includes a contractual agreement to revert the asset to the supplier of the
loan—who happens to be a sovereign state—what are the capital gains tax
implications of that?...
Mr O'Neill: ... I will go through some of the tax
implications prior to that 30-year point. If we are aware of the loan and the
loan was interest free then we would run two tests to rule first on whether the
company breaches the thin capitalisation ratios. ...In addition to whether the
company is too heavily debt laden, there is a question about whether the zero
pricing on the loan facility would be an arm's length price. We could impute an
interest rate to even up that situation. A third element would be whether the
transaction is in fact a loan. In some circumstances, because of either the
general anti-avoidance rules and the general doctrine of sham, the real intent
of the parties is that that is an acquisition arrangement. In using our general
anti-avoidance rule or the sham doctrine, the commissioner can look through to
the underlying reality of the transaction and that might alter the capital
gains tax consequences, for example, because there would not be a transfer in
30 years because the ownership has been there from the start.
CHAIR: ...If you [are] a country that is trying to avoid
scrutiny of sovereign funds, this sounds like a good scheme.
Mr O'Neill: It may be an attempt to fly under the
radar...[18]
2.31
The issue of minimising capital gains tax was also explored in situations
involving takeovers of Australian firms without an exchange of money. As the
evidence from the ATO showed, although in most cases the appropriate tax would
be paid, the regulation was not watertight:
CHAIR: ...I wonder about the tax implications of...capital
gains exchange. Is it possible for an Australian company to be taken over
without any money changing hands?
Mr O'Neill: It could be that money does not change
hands, but there would have to be some value shift. If there was a swap of the
share ownership, there would have to be something in return. Often there is a
share swap. If the company was sold without anything in return, that would
breach the Corporations Law and the tax law.
CHAIR: So it would not be possible—
Mr O'Neill: Very difficult.
CHAIR: to enact in year 1, instead of year 30, a
legal transaction that was going to occur in year 30 so that it was an
automatic transfer.
Mr O'Neill: I guess smart lawyers can think of all
sorts of things; it is possible.
CHAIR: That is what is worrying me.
Mr O'Neill: But that is not our experience.[19]
2.32
The scenario of a 30-year interest free loan was later discussed in a
question on notice. The committee asked the ATO to consider a potential case
where a provincial government lent a facility to a person (who may be a
government official) as a 30-year interest free loan that would revert back to
the provincial government at the end of the lease. In such a case, the ATO was
asked: 'when the asset reverts to the government, how would [the ATO] treat
that for capital gains tax purposes?' The ATO's response was:
The focus of the scenario is where the asset reverts from the
“person” to the provincial government. This is a capital gains tax event as the
asset’s ownership or at least the ability to use and enjoy that asset has
passed from the “person” to the provincial government.
There are 3 possible outcomes:
1) if the “person” (a real person or a company) is a resident
of Australia, the capital gain would be taxable;
2) if the “person” is a non-resident of Australia, they would
be taxed on any capital gains where the asset is Australian real property; or
3) if the “person” was acting as agent for the foreign
Government then the person would not have use and enjoyment in their own right
so any gain would not be taxable.[20]
Committee view
2.33
The committee is reassured by outcomes 1 and 2 listed above as these
outcomes indicate that commercial arrangements would fall properly under the
tax system. However, outcome 3 remains of concern as foreign governments and
their agencies may pursue ways of avoiding tax liabilities that would otherwise
be payable by private companies. Food security is already a key motive for
foreign investment by some countries (for example, the initial investments of
the Qatari government owned company Hassad Australia) and this will only
increase over time as the global food task increases. Therefore, the committee
is of the view that there is the potential for cases such as those outlined
above to become more prevalent and for the Australian public not receive to the
tax revenue from Australian produce and land that is warranted.
2.34
As recommend below, this issue should be considered as part of a broader
review of tax arrangements for foreign investment in Australian agriculture.
Passive income
2.35
The ATO also indicated to the committee that passive income was a
further avenue for foreign investors to avoid tax liabilities in Australia.
According to evidence received from the ATO, income tax would generally not
need to be paid if:
The income was 'passive' income, for example interest, earned
by a sovereign state from investments in Australia would be exempt from tax
under the doctrine of sovereign immunity. Similarly for income from dividends
where its investment was of a non commercial nature (for example under 10%
holding) and falls within the sovereign immunity exemption.[21]
2.36
The same evidence noted that 'running a farm for profit is not passive
income and would be taxable'.[22]
However, the committee later heard evidence from the ATO that there were
instances where the passive income exemptions for sovereigns investing in
Australia could apply to the agricultural industry:
CHAIR: ... On the passive income for a sovereign tax
exemption ...if I am a sovereignty and I finance Senator Nash in Australia into a
means of production, do I pay tax on the interest that Senator Nash pays me?
Mr O'Neill: It depends really on the form of the finance. If a
sovereign is lending into Australia, interest returned to the sovereign is
typically exempt.[23]
Committee view
2.37
The committee is of the view that aspects of both capital gains and
passive income tax arrangements for foreign investment are potential loopholes
that unfairly favour foreign investors, particularly foreign government owned
entities. This gives rise to possible market distortions that can result in
disincentives for domestic capital investment (as will be shown in more detail
below) and, in particular, foreign government owned entities avoiding full tax
liabilities in Australia.
Recommendation 4
2.38
The committee recommends that as part of the broader review outlined in
Recommendation 1, the government should investigate ways of developing more
rigorous tax liability arrangements for both government-owned and private
foreign entities, particularly in relation to capital gains and passive income.
In this regard, further efforts should be considered to limit the scope for
foreign investors to use business structures, and other possible loopholes, not
available to domestic competitors in order to reduce their tax burden.
Pathways for business – tax on domestic entities versus foreign entities
2.39
In addition to concerns about tax loopholes leading to possible revenue
leakage, the committee heard evidence that the current tax arrangements are
more favourable for foreign investors than domestic investors. Furthermore, not
only were Australian companies said to be disadvantaged, but the current tax
arrangements could also significantly undermine Australia's ability to
contribute to the global food task in the coming decades. The evidence provided
by Mr Farley was compelling and accordingly it is reproduced below quite
extensively:
...if we look at the debate about where the money comes from,
one thing that is very clear in Australian agriculture is that we are not
attractive markets to invest in our own land. We have heard this morning about
the opportunities... and why we are attractive to foreign capital, because of the
taxation advantages both on capital and working capital conditions. They can bring
capital into the country. Yet we export our capital because the taxation is
more attractive offshore than onshore. If we could finally get to this point
then of working out where taxation is, and then ultimately to the point of
where do the ASIC [Australian Securities and Investments Commission] rules,
especially whether it is under trust arrangements or under public listed or
private listed, play themselves in here, then we need to make sure we can
conduct ourselves as a country properly on top of it.[24]
2.40
The evidence from Mr Farley put foreign capital investment and
Australia's tax arrangements into an historical perspective as he noted AAco's
origins as a foreign investor in Australian agriculture. At the same time, he
argued that there were significant future opportunities in the industry, if
arrangements to encourage capital investment could be developed:
Mr
Farley:
...why do people come to Australia to invest? Because the taxation haven they
allow themselves to be in in Australia in agricultural land has an appeal to
it. I am fortunate that I am probably representing the original foreign
investor in Australian agriculture. We started in 1824 and at the time we
arrived with £1 million and a number of sheep and were given a million acres of
land in what was called the wastelands of New South Wales. Today we would
describe that wasteland as the Hunter Valley. We were successful in developing
towns, Maitland, Tamworth and others, which were all part of the station
complexes. Agriculture takes time but the more interesting thing about
agriculture today with our demographers and financial analysts is that we have
much more ability with the technical tools we have got and the intellect we
have got to predict the future. It is happening now at a lot faster rate and
with a lot smarter capital...
Senator
GALLACHER: So what you are saying is that the people with the
deeper pockets and the longer vision are not the Australian investors.
Mr
Farley:
Correct. I am also saying that the Australian investor has not got the opportunity
to enjoy the taxation breaks that the foreign investor has.[25]
2.41
The committee heard evidence that it is potentially more attractive to
invest in one of the AAco's foreign shareholders than to invest direct in AAco
in Australia due to tax arrangements:
Senator
BACK: ...It almost is the case that Australian shareholders would be
wise to invest their funds offshore through one of your foreign investors and
invest back in AAco through that foreign instrumentality to enjoy the taxation
benefits—perversely, that is the case.
Mr
Farley:
Unfortunately, you are correct, and it does seem perverse in the world we live
in today. The unfortunate part for agribusiness enlisted investors in Australia
is that, if we could share with our institutional funds and our self-regulated
funds for our retirees the same taxation benefits that are available to our
offshore shareholders, I am sure my share price and that of the other listed
agricultural entities would not be trading at a 50 per cent discount to NTA [Net
Tangible Assets] today.[26]
2.42
Mr Farley also detailed the prospects for developing large-scale
agricultural projects in Australia if the domestic taxation arrangements were
reformed. In this regard, Mr Farley compared Australia's opportunities to some
of the world's major agricultural regions:
...We do have the potential for large-scale projects, don't get
me wrong there, but first of all I do think the financial and economic playing
field or pathway needs to be equalled and levelled for Australians to
participate. Secondly, the projects are definitely there. We have the soil
types and especially the soil types that have the ability to have good water
holding characteristics. We operate uniquely in the north in what is called a
dry tropic as opposed to a wet tropic, so we have a defined period of
production. We are unique in the extent that we are a young country but we can
travel the world, whether in the [Mato Grosso] or the plains of Bahia in Brazil
or alternatively in the floodplains of Louisiana and Alabama, there are plenty
of examples around the world in the northern hemisphere geographically soil
type wise of how quickly we could put production together. Whether it is the
Kimberley region of Western Australia or whether it is the Katherine region on
the Uluru aquifer around Katherine itself in the Northern Territory or cross
into the Gulf or down onto the rolling plains in central Queensland, we have
the opportunity for large projects again.[27]
2.43
Aside from the benefits that could result in the development of large-scale
agricultural projects, Mr Farley indicated that coordinated tax and industry
reform could have significant benefits for Australia's tax revenue. To achieve
this, Mr Farley highlighted the 'gateways' that agricultural produce passes
through:
All agricultural produce in Australia has to pass through a
gateway. If it is cotton it passes through a cotton gin, a warehouse and a
port. If it is sugar it passes through a sugar mill to refine it, a warehouse
and then a port. If it is wheat it is passed through a silo complex and across
to a port. In the case of meats, whether it is chicken, pork, cattle or lamb,
it passes through an abattoir where it is broken down to its various cuts, a
distribution chain and to the market. All of those add value to it because
generally in agriculture the parts are worth more than the whole. If Australia
is only realising its income tax potential on the whole, in other words the
live cattle weight or the hot standing carcass weight in cattle, or in cotton
the module weight or module advance, we will be passing offshore a powerful
amount of revenue that has the ability to generate a tax base to further
develop and underwrite all of our society.[28]
2.44
Furthermore, Mr Farley pointed to the need to examine the role of
foreign investors who hold influential commercial positions in relation to the
gateways for Australia's agricultural produce:
I am sure that if we look at it now, considering that our
agricultural gateways in particular have been sold off to foreign
investment—our meat industry is run by a duopoly, as well as our grain and
sugar industries—and determine who is the pure price maker to Australian
producers, it is the gateway assets themselves. They are the ones who are
reporting price, making price and taking positions. Then ultimately, when those
products go out of the country and are traded two or three times, are we
realising the full opportunity to grow our nation off the toils of our
resources? We need to be aware and have a greater intimate knowledge of how the
pricing structures work and how our current taxation systems work over the
ownership of the asset, the commodity and the commodity flow.[29]
2.45
Specifically, Mr Farley suggested two key changes to assist in the
establishment of taxation arrangements that are more encouraging of Australian
investment and to 'make the playing field level' with foreign investment. The
first change relates to capital gains tax and making long-term investment by
Australian companies in Australian agriculture more attractive:
If you want to make the playing field level, you will level
it out to what the foreign investment capital can have now. I sense that that
is probably inappropriate and it is just an accident of time that those
pathways are there. I do think the most attractive point will be to ensure that
the investment exit when it happens at a point in time is treated away from the
current capital gains tax that the investment would have to pay. If it was made
more attractive that the funds as they were being realised over the life of the
horizon once the investment was complete with a little bit more appealing on
exit, I am sure it would be a lot more appealing on the entry.[30]
2.46
The second change also related to long-term investment incentives for
Australian companies (and in particular superannuation funds) by providing
broader arrangements for such companies that invested in projects that
demonstrated improvements to Australian agriculture:
...it is whether we can be balancing out the taxation of the
overall fund if a percentage of its funds over a 20- or 30-year period were
designed at developing Australia's capacity and competency and technology
within agriculture that if a fund was demonstrating to Australia that it was
putting money, that that demonstration could give them tax credits on the
performance of all their funds. I am sure there are smarter, wiser men than me
who could address the issue, but the reality is that we have one of the world's
best harvesting nets of superannuation dollars for long-term horizons, in other
words the horizons of the working life of men and women, and we should be able
to make Australian agriculture and the demand for Australian agriculture
attractive for Australians to invest in.[31]
Committee view
2.47
Although the committee has not fully examined Mr Farley's two specific
suggestions, the committee supports his general argument about the need to
improve tax incentives for domestic capital investment in Australian
agriculture. Therefore, the committee urges the Government to consider the
evidence received by the committee in order to improve Australia's long-term
agricultural development.
Recommendation 5
2.48
The committee recommends that as part of the broader review outlined in Recommendation
1, the government review the tax barriers for Australian organisations that
limit Australian investment in long-term development projects in Australian
agriculture. The review should explicitly compare tax arrangements for domestic
entities to those faced by potential foreign investors in Australian
agriculture. The review should also consider possible reforms of tax regulation
to improve incentives for Australian capital investment in agriculture.
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