NEW BUSINESS TAX SYSTEM (CONSOLIDATION, VALUE SHIFTING, DEMERGERS AND OTHER MEASURES) BILL 2002: Second Reading
Mr CADMAN (Mitchell) (6.42 p.m.) —I too support this legislation, the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002. It is complex and it is large.
The explanatory memorandum and the legislation itself are substantial. The bill is a further continuance of the government's proposal to upgrade and change corporate taxation. I am pleased that the government has moved ahead because the calls for tax reform from businesses are continuing. Businesses have completely rejected the proposals for the tax valuing method proposed as part of the Ralph inquiry but they still want and are still requesting of the government a highly competitive, transparent, easily administered and sound tax system for corporations and business. This sounds simple but it is hard to do. Everybody is out there trying to get their edge, wherever possible, in the tax regime. Their whole purpose is to minimise costs and taxation is a burden that all businesses wear. All businesses seek to pay what is lawfully required of them but not more. So we have this constant pressure for a simpler tax system but one which is fair to all and which allows Australian businesses to be competitive.
I would have to say that this legislation is pretty demanding for a layperson, but it is broken up into a number of areas which I intend to deal with one by one and then look at what this legislation does overall. I think there are a number of factors that need to be weighed up: the complexity and clarity of the legislation, its relative merits and fairness when one weighs up the large number of small businesses that are taxed compared with the smaller number of large businesses, and whether there is fairness and equity in the system.
The first part of the bill deals with the implementation of the consolidation regime. This will cost approximately $1.17 billion over a period stretching out to 2005-06, and it relates largely to the transitional concessions which allow groups to use their losses faster than is allowed under the current law. I have read the details of this bill and I know that there are a number of technical provisions that cover cost-setting rules, formation rules, transitional rules and the removal of lost transfer concessions.
I would have thought that, for that amount of money, we could have a pretty big impact on what is happening in business. I remain to be convinced—even though this was part of the government's reform provisions—that the impact will be as great as expected. Consolidation applies to a limited number of companies and the cost is high. I have yet to be convinced that the overall benefits will be significant in the Australian economy.
The second part of the legislation deals with a simplified imputation system, consequential amendments and exempting and former exempting entity provisions. This provision commenced on 1 July 2000, and it is a simplified imputation system. It will have no revenue impact. It is designed to reduce compliance costs incurred by businesses by providing for simpler processes and increased flexibility. All I can say is: I hope so. I shudder when I read the words `simplification' and `saving costs'. I see that the member for Curtin is in the chamber, and I think that she shares my healthy excitement with these words. Usually when we see the outcome, in moving around the electorate talking to business groups, `simplification', `improved compliance processes' and similar words usually mean increased complexity and reduced flexibility. [start page 5682]
Ms Julie Bishop —That is the issue.
Mr CADMAN —That is the issue: does this legislation fulfil the stated goals? Often the stated goals are not met, and we have significantly weighty legislation, backed up by tables and charts, and only a few concrete examples, which makes it hard to administer when you are dealing with self-assessment. On a self-assessment basis the client has to be absolutely sure that they understand the process that is in the mind of the drafter. I do share with the opposition spokesman the hope that the Senate committee does do a good job on this and does bring some simplification and increased flexibility into this legislation.
The second provision is the general value shifting regime. There is expected to be an increase in revenue, and it is estimated to be something like $450 million to $500 million over the years to 2005-06. The compliance cost impact will be small, at least initially, and there will be costs associated with coming to terms with the new legislative regime. In some instances, the low value transaction exclusions and safe harbours in the new law will mean a reduction in compliance cost for some taxpayers compared with the existing law. Also, those entities that consolidate will not be subject to the general value shifting regime.
Then we come to demerger relief. The financial impact is unquantifiable, but there is shareholder capital gains tax relief. There is a capital gains tax exemption at the corporate level, and there is shareholder relief from dividend rules, subject to an integrity rule. So there are factors with the demerger process, and I will deal with that shortly. That really does amount to the processes of the legislation that we are looking at tonight.
The finetuning of the new tax regime goes on, and the Assistant Treasurer, Senator Coonan, has revealed some changes that have caused concern in some areas, but I note that Frank Drenth, of the Corporate Tax Association, has said that he welcomed the legislation, which tightens generous transitional rules that could have allowed significant windfall gains relating to trading stock, pre-capital gains tax assets and goodwill when companies move to the new regime. He is pleased that there has been a tightening of that process. A spokesman for Ernst &Young, Tony Stolarek, said that `the increased integrity measures in the consolidation laws were necessary to ensure consolidation stayed within revenue forecasts.' That is reasonable.
The tightening process is fine. I would like to see the government and the minister actively making sure that the reforms give adequate details, protect the revenue and achieve the goals of simplicity that we are looking for. The taxation reforms that we are looking at here fall into a number of groups. I intend to deal with them as they arise. First of all, the demerger proposals are creating a lot of attention. Coles-Myer now has an opportunity, if it wishes, to restructure and spin off its non-food businesses. There is comment in the financial press about whether John Fletcher will make sure, as he said he would, that the restructuring takes place if the company desires. There is a limitation on the way that can be done, because there is obviously a huge penalty in the application of capital gains tax to new entities if demergers take place.
I am very interested in the way this is drafted. It appears that there is favouritism towards the large corporations rather than a capital gains penalty through changes in status for small businesses or even for individuals. We are very rigorous in chasing capital gains that may be made through holdings in foreign companies and demutualisation decisions taken offshore, and in chasing the dollars for individual taxpayers, but here we seem to be providing a comfort for large corporations. Somehow or other—I am not able to quite put my hand on it—I think there is an inconsistency in the way in which we approach these issues. We tend to favour that which is sought by large corporations in Australia but we ignore the benefits that should be accruing to smaller taxpayers or smaller businesses.
I also note that the Western Mining Corporation plan to split their alumina operations from their nickel and copper businesses later this year. That was in the statement in May, although there appears to be some confusion as the time approaches. In some reports, Western Mining are saying that they are not sure whether the advantages first spelled out are what they expected. There are a number of other companies that are looking at a demerger. There is an interesting concept whereby CSR and the Mayne Group have indicated they want to hive off their various businesses and to not suffer a capital gains penalty for doing so. Surely just the basic restructuring of an organisation should not bring about a capital gains penalty, even if that restructuring seems to propose to the market a better result and it means that companies can be more effectively managed and earn in a much more realistic way.
In an article in the Sydney Morning Herald on Saturday, 17 August, Jane Counsel said:
Some corporate tax lawyers describe the legislation as being “better than Christmas” because it will prevent companies from being taxed on capital gains generated when the parent group sells or spins out 80 per cent or more of itself. In Western Mining's case, the relief will enable the company to finally move ahead with a planned spin-off of its core alumina business as a defence against a hostile $10.20 share takeover proposal from its US aluminium partner, Alcoa.
That is beneficial to Australia, as far as I can see. There are other reports that seem to indicate that there is not as much enthusiasm for the demerger as originally thought. John Morschell said that the conglomerate would split into two separately listed Australian entities by mid-year 2003 but only if parliament passes legislation this year to give capital gains tax relief to investors in such demergers. He said: `No legislation, no demerger. If they do not change the law, it will just cost too much.' [start page 5683]
I would like to delve into the new value-shifting regime to see whether it really does propose changes. I see reports from the Institute of Taxation that it is not quite all that it is held up to be, but I will watch the developments as evidence is taken before Senate committees and we move into fine analysis of what the new value-shifting regime will mean. The new value-shifting rules require action along these lines. The rules apply to any of the operations or transactions. They apply to the methods they may use to affect the consequences, to their record-keeping processes and whether they adequately capture and retain the necessary information, and to the alteration of rights attached to existing entities or loan interest in companies or trusts. It is all about whether or not arms-length and proper values are held.
I conclude by saying: big focus on big business. For the small business area, we have to look at the proposals that the government has introduced for taxation advantages on the processes small businesses use on end-of-year taxation and the value of their products. Whether or not the consolidations that have occurred there adequately compensate small business, I am unsure, but I do think the focus on large business needs to be balanced. I look forward to the further refinement of this legislation, because I am sure it is inevitable.
Author: Alan Cadman MP
Source: House Hansard - 28th August 2002
Release Date: 2 Sep 2002