Donaldson, Helen (SEN)
From:	Marcus Wigan [mwigan@vaxc.cc.monash.edu.au]
Sent:	Friday, 29 October 1999 9:29 AM
To:	fpa.sen@aph.gov.au
Subject:	Submission
To The Secretary, Senate Finance and Public Affairs Reference Committee 
 Parliament House Canberra Email: fpa@sen@aph.gov.au 
 Tel: 02 6277 3530 Fax 02 6277 5809 

Enquiry into the Business tax regime defined by the Ralph Report 

As an Australian resident who was working overseas throughout July-Early October 1999, I was not in touch with the debates on Capital Gains Tax that resulted from the Treasurers statement of 21 September 1999. The changes in the CGT regime would appear to have a number of serious weaknesses, and some of the issues could well not have been raised. Due to the very short space of time between my return and the closure of this enquiry, this submission is brief and focussed on the issues that appear to have been minimised or treated cavalierly. 

Unfortunately, the downloaded Acrobat and .zip files on the rbt site repeatedly failed to read correctly in my attempts to gain access to the basic documentation, Acrobat files being repeatedly reported as faulty and the .zip files missing key decoding information so my comments are based on the few .html sections that it was possible to work through in the time available.  

My thanks to the public servants for pointing me towards the online documents so that I could check at least some of the assertions made about the report. 

o Those who purchased assets early in the CGT regime (1985-1986) will be at a rapidly increasing disadvantage due to the deletion of indexation from 30 Sept 1999, and the apparent insistence on setting the cost base for CGT at the original purchase price irrespective of how long the asset had been held. From now on they will be suffering a rapid decline in their base assets by the rate of inflation (possibly plus any user surcharge that might be payable) due to the inability to use the deflated cost base as at 30 September and the fast declining value or this base vis a vis the 50% abatement available to anyone who bought on the day after 30 SeptemberŠ. 

o These issues clearly require some moderation in treatment, as individuals will be taxed not on the real value of their assets but the inflation reduced assets valued as if inflation had not occurred.. 

o In the case of income tax this is the phenomenon of fiscal drag, and its Ralph-endorsed adoption will be likewise a major -if classical - source of ballooning government revenue by stealth.  

o The 50% abatement will apply only for those who purchased assets recently, and the rules applied in Ralph are designed to force early redemption and of these assets. Only stockbrokers will benefit from this, and in an increasingly uncertain market, many non-professional investors (now the majority in the market place) may sell solid long term assets as a result of this pressure and thus lose the benefits of patient investment. When inflation rises again, the 50% abatement (for those few who can access it) will still only provide a limited protection. 

o The lack of automatic indexation of income tax thresholds is a major source of dishonesty and misrepresentation to the community on the Government taxation strategy. For any serious Charter of Budget Honesty fiscal drag by inflation should be the first item on the list to include if credibility and transparency were to be seriously considered as credible basis for such a document. I believe that such a document is a government commitment. 

o The addition of CGT to this is a major and fundamentally alarming development, as the combination of fiscal drag on both types of income provide an overwhelming temptation to governments to run inflation at just that slightly higher rate, and thereby gain real revenue by taxing inflation-diminished assets as if they were still of the same value. 
  
o The Ralph report has clearly brought down a report of great benefit to large businesses, with a few crumbs for some smaller businesses (and less for the vastly numerous microbusiness on whom even Ralph concedes the whole impact of the compliance is acknowledged to be most acute) - and evidently wishes to ensure that individuals and microbusiness pays for it. 

o If Ralph had been really serious about encouraging investment, especially by individuals (admittedly individuals were no part of the Ralph remit: that is Parliaments' responsibility), then the CGT  regime of the UK should have been seriously considered and not have been dismissively disposed of in a single short phrase: namely that CGT rates drop progressively with the length of time an asset is held, reducing to zero after 10 years. 

o The much overestimated increased trading effect touted in the Ralph report as a compensation for attacking the real value of savings (induced both by the need to stem inflation diminished real values by individuals and by short term gain benefits that Ralph wishes business to obtain) will still arise, but at a slightly later date, when it is clearer to individuals that it is to their benefit, rather than the punitive regime advocated by Ralph. Once again, a closely focussed professional business orientation on the recommendations, largely discounting the individual impacts.  

o As many individuals have held CGT liable for 14-15 years, this straightforward policy would also induce the trading enhancements that Ralph advocates - but this time by rewarding patient capital and no doubt immediately invoking the prompt trading activity that is claimed to be derived from the Ralph model. It appears that serious consideration of these effects has been omitted from consideration. It should be reassessed by the Senate as it is clear that consultation has been strongly focussed on the business community and business impacts (as required by the terms of reference) and not to those that impact the entire community (which is the concern of the Senate). 

o The Ralph 50% abatement over short terms where inflation does not eat up the real gains is pitched perfectly at 2-5 year speculative business investments: it actually penalises the patient capital that is so essential for re-establishing a sound basis for many Australian enterprise developments and R&D - many of which still depend largely on family and friends for the key initial seed capital.. 

o The proposed CGT regime is flawed and disequitable in several critical directions, as indeed its terms of reference seemed almost designed to ensure. Consequently the more positive alternatives to imposing declining real values on assets and savings have equally clearly not been seriously considered. The UK model should be carefully reviewed by the Senate enquiry to ensure that at least one other model is tested against the assumptions and assertions of the Ralph report.. 

o Not only the pernicious fiscal drag be removed from the Ralph proposals - but so too should it be from income tax thresholds. We are moving in exactly the wrong direction for a transparent, credible and sustainable tax policy. 

o At the very least, the indexed base values at 30 Sept 1999 should be applied as the base for all assets held at that time to avoid the distortions that the present proposals introduce. 

Dr Marcus R Wigan GPO Box 126 Heidelberg Vic 3084  
Email mwigan@vaxc.cc.monash.edu.au