Transcript No. 99/67

Peter Costello a windfall on company tax, a windfall on capital gains tax. It’s

all supposed to yield dividends in a greater flow of investment into the Australian

economy but will it be productive investment or to some degree indiscriminate investment?

TREASURER:

Well I think it will be productive Kerry. What we’ve done in relation to company

tax is we’ve broadened the base and lowered the rate so that you take out some of the

concessions so that those that were previously taking advantage of the concessions and

could get in to a concession could get out of the company tax rate. You take out the

concession, you bring more activity into the tax net, but because you’re bringing

more activity you can lower the rate. People now make decisions not based on how they can

skew to concessions but how they can get an overall economic benefit. So that’s good.

Secondly, in relation to capital gains, what we say is only 50 per cent of the gain

will be taxable and as a trade-off for that, you’re operating capital gains on

nominals, you don’t have to index your base and you take out averaging. So again,

wider base, lower rate. We move to small business and we have a magnificent package for

small business which is going to help those small businesses, particularly the farmers,

who have turnover of $1 million or less, going to give them the advantage of lower rates

and simplified system. And again, that’s good for economic activity.

O’BRIEN:

Amongst the commentary today were lines like that to some degree it takes you back to

the 80s in the sense that negative gearing investment in real estate is going to be more

attractive; that negative gearing in shares is going to be more attractive; and that

you’ll see, you’ll see more trading, faster trading, faster turnover for profit

on the sharemarket. Now is that the kind of investment that you want?

TREASURER:

I make this point in relation to capital gains, that these are cuts in capital gains

for individuals. Now you won’t find people negatively gearing as individuals unless

they’re prepared to open themselves up to risk. Quite often when you negatively gear

and you borrow in excess of what you’ve got the capacity to service you do it through

a company because you want some limited liability. So there’s a downside. But at the

end of all of that, if we do promote people buying and selling shares and more activity,

on more activity with lower rates you get the same revenue. It works out as a benefit.

Let’s come back to the capital gains, we are now the second largest share owning

nation in the world as a result of Telstra and the AMP demutualisation. We’ve got

another Telstra privatisation going out to the market. Australia could become the largest

share owning country in the world and that’s because mums and dads, individuals,

buying their Telstra shares or getting their AMP shares are now share owners. What this

does is it says in relation to those shares that they’re going to get some relief

from the capital gains tax and we actually think it’s a good thing to encourage them

to come into the stockmarket. We’re trying to encourage them to come into the

stockmarket, it’s good for Australia.

JOURNALIST:

The Australian Council of Social Security (sic), you’ve heard what they’ve

said, that under your tax regime millionaires will pay a lower rate of tax for part of

their income than average taxpayers, people between $20,000 to $50,000. They’d pay a

marginal tax rate of 30 per cent, but high income earners would only pay 24 per cent on

their windfall gains.

TREASURER:

Well, they’ll pay the same rate on income. Everybody pays the same rate, every

individual pays the same rate on income. The question then becomes, what do people pay in

relation to capital gains? Now in Australia we had top capital gains rates for individuals

at 48 per cent, the highest in the developed world. What we are saying is, that if we tax

nominal gains, bear in mind we were only taxing real gains, you used to have to index

every year for the base, enormous complexity. If we just tax the capital gain at its

nominal value, we can afford to tax it at half the rate. What that does is it puts us back

in the ball game. It means that our rates our now equivalent to those in the U.S. and the

U.K. We become in-line with the international community again. And that’s been a big

part of this business tax reform, we want to make sure that Australia is in-line with the

international community. Come back to company tax. We’ve got a company tax rate of 36

per cent, we can make it at 30 per cent. On that company tax rate we can go lower than

Britain, lower than the United States. Not the lowest in the region, Hong Kong and

Singapore would still beat us. But we can beat most of the other countries in the region.

Why do want to do that? We want people to invest and grow businesses in Australia. We want

the jobs here and the economic activity here, and building an internationally competitive

tax system is a big part of that.

JOURNALIST:

You always said that your business tax reforms would be revenue neutral. But that

promise is a little bit rubbery on today’s information, is it not?

TREASURER:

No, it’s not. Because what you actually find in the first year, it’s revenue

positive. And then in the second year we go back the other way. I should say, the first

year it’s revenue negative and the second year it’s revenue positive. In the

third year it’s again revenue negative, but we have some further measures which can

make up the difference and after that it’s basically almost status quo as you go

across the forward estimates. Now, we want to be in a position where we can keep the

business taxation raising the same amounts of revenue. If we can do that on lower rates

with a broader base and more activity and more jobs, why wouldn’t we try and do it?

JOURNALIST:

You’ve estimated $800 million, well $1.4 billion in tax avoidance, but $800

million of that we don’t know exactly how you’re going to raise it.

TREASURER:

Oh yes we do.

JOURNALIST:

Well you haven’t made the, you haven’t actually bitten the bullet on it yet,

have you?

TREASURER:

Oh yes we have. We’ve announced today the two largest funding measures,

accelerated depreciation and prepayments. We’ve also announced, by the way, some tax,

anti-tax avoidance measures which are backdated to the 22^nd of February. And

we’ve said as part of a second round, there are two additional measures that are on

the table. Both of which we’re prepared to agree to in principle, but are going to

take some discussion as to how you implement them in practice. Now when you add those

measures back in, they again produce additional revenue. This is on a . . .

JOURNALIST:

The thing is, if there is tax being avoided that you can stamp out, why wouldn’t

you stamp that out anyway? Why would that be an offset for business tax cuts?

TREASURER:

Well, we are stamping it out. Where there’s tax avoidance we’re stamping it

out as from the 22^nd of February. Where there are lawful techniques that are

being engaged in, which we think should be restricted but have to be restricted in a fine

way so that you don’t actually penalise legitimate activity. What we want to do is,

do it in a fine way. And that’s why we’ve got that out for consultation and

that’s why we’ll be very careful in drawing the legislation.

JOURNALIST:

Very briefly, Mr Costello, because we’re close to time, the Victorian election.

The crunch that Jeff Kennett faces, whether he gets back to Government or not, is one that

most people agree, it seems including Jeff Kennett, would severely restrict any further

reforms in the Victorian economy. What is left for governments in terms of reform agendas

if you can draw a line from the message from Victoria?

TREASURER:

Well, I think there’s a lot of work to be done at the Commonwealth level and

that’s what I’m looking at, obviously. We’ve got to complete tax reform.

So, we’ve got indirect tax, personal income tax, business tax. We are reforming

family entitlements. There’s more work to be done in relation to welfare reform. We

are privatising Telstra and retiring government debt, there’s more work to be done in

relation to that. There’s more work to be done in relation to industrial relations,

we’ve got a second wave of industrial relations reforms coming on-stream.

JOURNALIST:

The message from Victoria is, that there is a lot more work in selling the message too.

TREASURER:

Well, you know, I don’t think you can say that there were federal issues in the

Victorian election. I think everyone agrees with that, Mr Kennett, everyone agrees on

that. That was fought on state issues and it was decided on state issues. But we have a

strong reform agenda. We’ve had a strong economy, that’s the benefit of past

reform. It’s the reforms of today which will give us the opportunity of tomorrow. And

I actually think that the great benefit nationally is going to be falling unemployment.

Unemployment is now low and can go lower.

JOURNALIST:

And I’m sorry, I’m going to have to cut you off there before I get cut off by

the programmers. Peter Costello, thanks for talking with us.

TREASURER:

Thanks Kerry.