NEW BUSINESS TAX SYSTEM (CONSOLIDATION) BILL (NO. 1) 2002: Second Reading
Mr CADMAN (Mitchell) (1.45 p.m.) —I reject any comments that have been made about this government not being a reformist government. Today we are entering into the first part of a two-stage process to reform the taxation of business.
The clear objectives in this process seek not only simplification and cost-effectiveness for business but also to close down loopholes. There is a benefit for business and there is a benefit for the community in the objectives of the government in this New Business Tax System (Consolidation) Bill (No. 1) 2002. It certainly is complex—there is no doubt about that—and there has been a great deal of concern expressed by various spokesmen for business who are saying that they do not quite understand what the government is up to. But to say that this government is not one of reform is absolutely inaccurate.
What this government has done since coming to office is, first of all, establish a sound economy—that was its No. 1 objective—so that people had a growing opportunity to enjoy the chance to work, to have an improved opportunity to pay off their house and to make sure that the weekly grocery bill was predictable, not rising with inflation. That had to be done first of all. The government then reined back the huge and profligate spending of the previous government that resulted in a $10 billion deficit year on year but, in all, a total overseas debt of $90 billion—two-thirds of which has been paid off. So those were the prime objectives of the incoming government, and a step by step approach has been adopted together with the changes to industrial relations—another important part of reform.
Having done that, we then looked at the tax system to see how we could reduce personal income tax. The government reduced personal income tax and substituted a broad based consumer tax which, I would remind the House, is the thing that the states collect and forget to mention. The states have got more money now than they have ever had in their lives and they still whinge about not having enough money to do all the things that they dream up, especially coming into an election campaign. Having transformed the economy, workplace relations and the tax system in Australia, next in line is business tax. I would remind the House that, unless Australia is efficient in its tax system, we bear an unnecessary cost as compared with other nations. This is a vital and necessary step. It is one of simplification—it is called consolidation; that is a good description—and it seeks to close loopholes. [start page 2436]
Wide ranging comment has been made by various commentators on the government's agenda, but I really do need to set the record straight when I notice that there have been some claims that there is no third-term agenda and there is no reform. The reform is running because Australia needs to continue on a process of change, continue on a process of bringing itself forward and continue the lead it has established as a nation in the region. In fact, in world terms, it is a lead that Australia has established as compared with many similar nations. In fact, Australia has the soundest economy of all developed countries. Things are going well for this nation. But if you take your eye off the ball, what happens is that you start to lose the focus and you start to lose the advantages that you have, and that must not happen. This bill today seeks to reform business taxation as part of that process; it is the first part of a continuing process.
It is the goal of the government, which has consulted with the business community about these changes, to have the change take place smoothly and over a period of time. Therefore, very careful thought has been given to the implementation. The first thing that needs to be recognised is that this legislation does not start on 1 July; it comes into effect on 1 July but gives businesses one year to decide on the processes which they want to have in the consolidation and simplification process. So they have until 30 June 2003 before they actually have to declare to the Australian Taxation Office the precise formula that they have chosen.
For some businesses—and here I refer to the opposition's spokesman on Treasury matters—it is going to be an expensive process because there are valuations that are required. Coordinating accounts and bookkeeping processes into a central unit is required by this consolidation measure and that requires companies and divisions of organisations to keep separate accounts—and these organisations are residents of Australia—and it requires them to consolidate that process. It is not an easy process. Some estimates I have seen indicate that the cost to businesses of doing this will be about $1 billion. To consolidate, this is a typical tax bill in some ways. Simplifying it means that it is going to cost more just to begin with, and then over a period it gets better. That is what businesses really do think about this.
I know that our colleagues in New Zealand have been very successful in this regard. I notice in the gallery some distinguished visitors from New Zealand who have had great experience in the consolidation of taxation measures. I refer in particular to the wonderful leadership shown by the Labor Party in New Zealand—quite unlike that of the Labor Party here in Australia, which has refused to recognise the advantages of a goods and services tax. It has refused to recognise the advantages of a better business tax system. It has consistently obstructed the efforts of this government to make changes that will benefit every man, woman and child in this nation. The changes are not designed for the big corporates; they are designed for average Aussies. But the Australian Labor Party, unlike its New Zealand colleagues, will not have a bar of it. Unfortunately, we have had this constant obstructionism in the Senate as we have tried to make changes.
We have achieved substantial changes over the past five to six years in economic, industrial and tax terms. The ones that we are considering now represent the most massive ones that the business community has seen. I have outlined that there is a 12-month period during which businesses can make the changes. Some of the things that are in line to be considered are part of the second stage of this package. I understand that some aspects of the second stage of the legislation will be introduced before the end of the financial year and some will be considered during the first part of the spring session of the parliament.
Some of the areas that still need to be considered are further cost setting rules, including those applying to the formation of a consolidated group, transitional rules, the joining of other consolidated groups, MEC groups and trusts, core rules applying to MEC groups, life insurance, interaction of a consolidated regime with international tax provisions, treatment of attribution accounts and foreign tax credits, interposition of a non-operating head company, and the removal of intercorporate dividend rebate. These terms would make your head spin. No wonder it is going to take a period for business to deal with the issues. No wonder the process may cost up to $1 billion.
The bill that we are dealing with today has some very clear objectives. It will allow wholly owned groups of entities to make a choice to consolidate. This means if you have got a group of organisations under the same control, you can consolidate all of your accounts and organisations. That has not happened before. Companies have been able to play off against one another processes that have allowed them to unfairly reduce taxation. It has allowed them to build a tiering-down process whereby they pass on, to entity after entity, tax advantages that have minimised, in a most irregular way in some instances, their requirement to pay tax.
This measure will stop that. It will allow wholly owned groups to make a choice to consolidate. There will be a one-off chance. If they do not take this chance, it will have gone forever. Those groups that decide not to consolidate will then face the prospect, as has been said by some, of tighter enforcement of regulation. I noticed in some of the material I have read that one of the down sides to this process for those that choose not to consolidate will be a tighter regulatory regime which may make it harder for them to operate and more difficult to meet the compliance requirements of the tax office. [start page 2437]
Under this legislation, there is a need to determine the membership of a consolidated group, including the membership of certain groups with a single non-resident head company. That is an innovation that needs to be watched. We need to be careful about that because we do not want to be giving advantages to an overseas company or a non-resident head company. I know that that is covered in the detail of the legislation.
There is provision to determine the cost of assets for income tax liability purposes, including membership interest in relation to consolidated groups. That is the valuation of the whole consolidated group, which is expensive and time consuming, but it is a necessary part of the consolidation process. It allows in certain circumstances pre-consolidation losses to be transferred to the head company of a consolidated group and for the prescription of how these losses may subsequently be used by the head company. This could mean that there is a reduction in income tax for those consolidating groups. Whilst it may be hard to calculate, the way in which losses are managed is a very important feature that I know the ATO will be looking at as the consolidation takes place.
The legislation allows for the transfer of franking credits to a consolidated group and for the provision of PAYG instalments for consolidated groups. This process, pay-as-you-go taxation, means that they pay tax as one entity as they go. It will determine the tax liability for income tax payments within a consolidated group where a head company fails to pay on time. It removes the existing grouping provisions, including those allowing transfer of losses and CGT rollover relief for the transfer of assets between wholly owned company groups.
I reiterate my earlier comments that the government is implementing reforms. The target that we are dealing with today is the consolidation of taxation. It is a reform that will provide simplification for businesses and reduce their costs, having regard to the type of method they choose to make their tax payments. I therefore commend this legislation to the House and seek leave to continue my remarks later.
The SPEAKER —It being 2 p.m., the debate is interrupted in accordance with standing order 101A. The debate may be resumed at a later hour. The honourable member for Mitchell will have leave to continue speaking when the debate is resumed.
Author: Alan Cadman MP
Source: House Hansard - 29th May 2002
Release Date: 10 Jun 2002