Transcript No. 99/71

MITCHELL:

Mr Peter Costello, good morning.

COSTELLO:

Good morning Neil.

MITCHELL:

Some criticisms of your package today – a tax bonus for millionaires aimed at the top

end of town. Can you explain to me, philosophically, why should a worker earning say $500

a week pay more tax than a multi-millionaire who lives off his capital gains?

COSTELLO:

Well they don’t.

MITCHELL:

Well they would under this

COSTELLO:

No it’s a proposal where all income is taxed the same but in relation to capital gains,

which are taxed differently at the moment, we have significant simplification.

MITCHELL:

But if I’m a multi-millionaire and I’m living off my capital gains, you’re going to tax

it at a lower rate than you do a wage earner.

COSTELLO:

We do at the moment, that’s the point.

MITCHELL:

Well narrowly, what 48.5 at the moment isn’t it?

COSTELLO:

No what we do at the moment is in relation to capital gains is you index a capital gain

for inflation so that you have a cost base and you index it for inflation.

MITCHELL:

Certainly, but you’re cutting the capital gains tax in half.

COSTELLO:

What we’re doing is we’re taking that away so that we tax a capital gain on the same

basis as income, that is the actual nominal amount …

MITCHELL:

Yeah, but you’re cutting it to 24.25.

COSTELLO:

And in return for that trade-off there’ll be a lower rate.

MITCHELL:

24.25?

COSTELLO:

24.25 for the people on …

MITCHELL:

Well how many people pay 24.25 cents in the dollar on their wage packet?

COSTELLO:

Ah probably …

MITCHELL:

Not many.

COSTELLO:

Well, no, most Australians would. Eighty percent of Australians are on a 30 per cent

income tax rate. So probably you know a large number would, but …

MITCHELL:

30 per cent?

COSTELLO:

… the important thing about it is…

MITCHELL:

But they’re working for their money and they’re paying 30 per cent.

COSTELLO:

Yeah sure.

MITCHELL:

Here you’ve got a capital gain where you’ll be paying 24.25.

COSTELLO:

Sure and …

MITCHELL:

Is that fair?

COSTELLO:

Yeah, because what is does is it puts Australia back in the league with the rest of the

world. At the moment we have the highest capital gains tax in the world. The Americans are

at about 20 per cent, we’re at 48. Now we introduced this simplification whereby we move

away from an indexation and averaging system and in return we’re able to drop the rate and

that gets us back in international competitiveness. Now the great beneficiaries of this

frankly will be the thousands, millions of Australians who may have some Telstra shares or

they might have some AMP shares or some National Mutual shares.

MITCHELL:

Sure but there are millions of people who can’t afford shares and work for a living and

work pretty hard for a living. I can understand what you’re trying to do but can you

explain to me philosophically why it is fair to have a lower tax rate on a capital gain

earned than it is on money you actually go out and dig a hole to earn?

COSTELLO:

Because this is people’s savings. People put money, savings into things like shares and

the Government wants to encourage them to put money and save and if you come along and you

tax their investment at rates of 48 per cent or higher you are discouraging saving. Now no

other country in the world does this.

MITCHELL:

But you’re still in the situation where I could make, say I make millions on the stock

market in a year, I could be paying 24.25 cents in the dollar on that capital gain.

COSTELLO:

You wouldn’t…

MITCHELL:

I go out and dig holes and make 40 grand and I’m paying 35 cents or something in the

dollar.

COSTELLO:

Well 40 grand you’d be paying 30 cents in the dollar.

MITCHELL:

Well 30 cents. I’m still paying significantly more tax than a multi-millionaire.

COSTELLO:

Well let me say at the moment you’re paying 43 cents in the dollar but under the

Government’s tax reform you’ll be paying 30 cents in the dollar. But this doesn’t apply to

people who derive their income from trading shares. I want to make that clear. If you

happen to be a share trader and you derive your income from trading shares, your income is

taxed at the same rates as other income. It’s only in relation to people who have one-off

type transactions which amounts to a capital gain. At the moment we have an incredibly

complex system with indexation and averaging and very high rates. What we’ve decided to do

is to trade that off by abolishing indexation and averaging, which would obviously get

people upset, and in return that can fund a lower rate. The lower rate is in harmony with

international rates and it encourages savings.

MITCHELL:

I’ve just got a caller who’s interested, there’s a capital gains tax on a taxi license,

is there not?

COSTELLO:

Well if a taxi driver had a license and it was part of his business and he sold it, he

would be liable for capital gains tax, yes.

MITCHELL:

Okay, how will this affect that?

COSTELLO:

Well we’re introducing new rules too for small business. At the moment if you’re in a

small business and you sell your business you are taxed on the sale of your business and

we’re introducing new provisions which will say for small business that they’ll only be

taxed on 50 per cent of the assets of their business, so that if that taxi driver is

selling his business or his plate or whatever it is, he’ll only be taxed on 50 per cent of

the gain, 50 per cent of the assets. And the reason we do that again is you find with a

taxi driver or a small business person, what they tend to do is they put all of their

assets into their business, all of their savings is ploughed back into their business.

They come to retire at 60 or 65, they haven’t set aside superannuation and they’re taxed

on the sale of their business. Now this again is a way of encouraging them to invest in

their business and give them a fair go to retire when they sell.

MITCHELL:

Well while we’re talking about business, I mean, again this looks to the average wage

earner to be philosophically unfair at least. If your top taxpayer’s paying saying 48

cents, the company rate is coming down to 30 cents in the dollar, now is it fair again

that the company rate is so much lower than the average taxpayer?

COSTELLO:

Well we’re trying to get the majority of Australians on to a 30 per cent tax rate.

MITCHELL:

Unless they earn more than $60,000?

COSTELLO:

Well we’ve got 80 per cent of Australians on a 30 per cent tax rate. If the Senate

hadn’t defeated the Government’s plan we’d have had something like 90 per cent.

MITCHELL:

Why shouldn’t the average tax payer incorporate – say okay, if I’m paying 48 cents

in the dollar, I’ll set myself up as a company and pay 30 cents in the dollar?

COSTELLO:

Well because you’ve got to compare like with like. If you’re on a company tax rate you

pay 30 cents on every dollar including your first one, if you happen to be an individual

you get $6,000 tax-free and then you get $14,000 of which you’re going to be paying 17

cents in the dollar and then you start paying 30 per cent, you get these tax-free

thresholds. So it doesn’t actually pay you to incorporate until you get much higher

amounts.

MITCHELL:

I see, well that raises the point actually of the capital gains tax. When does your

capital gains tax cut in? Can I earn a certain amount under the capital gains tax before I

have to pay any gains tax?

COSTELLO:

Yes that’s right.

MITCHELL:

How much?

COSTELLO:

It’s, well again the same thresholds. What you do is you add the gain to your income.

Let’s suppose you are somebody who had no income and you had a capital gain of a $1000,

you would still be under the tax-free threshold, you wouldn’t pay any tax and it’s as your

income or your gain increases the rate actually increases but the rates are going to be

lower than they currently are.

MITCHELL:

Why is it that depreciation changes for taxpayers, depreciation on, you won’t be able

to claim depreciation as I understand it on work-related items, say I buy a computer for

my work I won’t be able to claim that, why?

COSTELLO:

Oh yes you will. What we’re doing however is we’re saying that you ought to be able to

write it off over the life of the computer.

MITCHELL:

I see, not quickly.

COSTELLO:

Yeah and this is one of the trade-offs. You asked me before why bring the company tax

rate down? Well one of the reasons is we’re taking concessions out of the tax (inaudible).

Let me give you an example; at the moment in relation to some items although they might

last for five years you can write them off over two and what that does is that gives a

shield against paying tax for companies. Now what we’ve said is if the thing lasts for

five years write it off over five years, if it lasts for ten years write it off over ten

years. If you take out some of these tax concessions you can get a lower rate for

everybody and it’s fairer.

MITCHELL:

As you said, you’re taking indexation away from the capital gains tax, which anybody

who’s a wage earner understands what bracket creep has done to their tax take there, in

the end are you going to end up taking more or less out in capital gains tax?

COSTELLO:

In the end less.

MITCHELL:

How much less?

COSTELLO:

About $300 million.

MITCHELL:

Out of, what’s the overall take?

COSTELLO:

It’s very hard for me to tell but it’s in the billions.

MITCHELL:

So it’s not really that much of a change in terms of what we pay?

COSTELLO:

Oh well you know that could …

MITCHELL:

$300 million out of billions?

COSTELLO:

Well when I say billions I haven’t got the precise figure here but I think it’s about

20 per cent or 30 per cent. It’s low billions. It’s one or two billion.

MITCHELL:

Any change…

COSTELLO:

So it’s quite a substantive thing but the important thing, Neil, is the complexity. I

don’t know if people are doing it but at the moment if you have a share or you have

something which is an asset, even in your home, what you’re supposed to be doing is you’re

supposed to record what you bought it for, you’re supposed to then index it for inflation,

when you sell it you’re supposed to calculate the gain off the indexed cost base and then

you’re supposed to pay a full marginal rate. Now this is extraordinarily complicated and

requires record keeping on all of these assets. What we’ve said is we’ll get it, we’ll do

away with all that, do away with all that. It’s just the difference between what you

bought it for and sold it for and if it’s a lower rate and individuals won’t have all of

that complexity and they’ll have an incentive to save.

MITCHELL:

You mentioned homes then, there’s no change on the place of residence being capital

gains tax-free is there?

COSTELLO:

No it’s never been in the capital gains tax system and it’s not and anything you bought

before 1985 has never been in the capital gains tax system and it’s not. I mean it’s only

post ’85 assets.

MITCHELL:

You also said people who earn a living from say share transactions, will that include

retirees?

COSTELLO:

No it’s somebody whose business is a share trader, and this has always been in the law,

when they buy and sell shares it’s treated as income rather than capital.

MITCHELL:

Obviously the aim is to stimulate the economy, to create jobs, how many more jobs are

here do you think?

COSTELLO:

Oh I think substantial jobs. Look it’s not just capital gains, we’re increasing

investment opportunities, we are lowering company tax rates, we’ve got a whole new tax

system for small business. I think this was the greatest thing that was announced

yesterday – if you’re a small business you come into a whole new tax system, simplified

tax system. You do cash accounting, you can write off any of your purchases up to a

thousand dollars, you can pool all of your assets and depreciate them on a straight line,

you’ve got roll-overs in relation to capital gains tax. It’s got a fantastic reception

from small business and farmers because it’s so simple and it will really give new vigor

to the small business sector and create more jobs.

MITCHELL:

Okay, can I just ask you on another area, the cost of East Timor. Some are estimating

as high as a billion dollars a year if we have to stay there. Where will that come from?

COSTELLO:

Well it will have to come from the Budget. We have…

MITCHELL:

So that means cutting spending?

COSTELLO:

Well it will mean restraining spending. We have in the Budget you know about $10 or $11

billion on defence expenditures and that is expenditures really for peacetime.

MITCHELL:

Yeah.

COSTELLO:

Now we now have a force of about 2,000 troops in East Timor, we’re talking about taking

it up to

4,500, we’re raising a new brigade and all of that will cost additional money.

MITCHELL:

Have an estimate yet?

COSTELLO:

Well the estimates for this year are in the hundreds of millions, yes. That’s in this

year alone. We don’t know how long it’s going to take.

MITCHELL:

Can we afford it?

COSTELLO:

Neil we have to afford it. This is a situation where people are being murdered and

killed and a whole population has been subject to terror and Australia is leading the

international community and we have to afford it.

MITCHELL:

Will in the end it affect any of the Government’s initiatives do you think?

COSTELLO:

It won’t affect any of the initiatives we’ve announced to date. But bear this in mind

Neil and you know we spent three years getting the Budget into surplus. The Budget’s in

surplus. One of the things I always said is the reason you budget for a surplus, you never

know what’s around the corner. I didn’t know the Asian economic crisis was around the

corner but a Budget surplus steered us through. And the Budget surplus now I didn’t know

East Timor was around the corner but we have the opportunity now to fund some of these

initiatives and we have to do it for humane reasons. We can’t sit down and say we won’t do

it because we can’t afford it.

MITCHELL:

I agree but …

COSTELLO:

We will try and get contributions from other countries, I can assure you of that, to

defray some of the costs.

MITCHELL:

But will it cause us long-term problems financially?

COSTELLO:

I don’t think it will cause us long-term problems, no, but it will put a strain on

the Budget for as long as it goes.

MITCHELL:

Mr Costello if I may add something else, were you surprised by the election result in

Victoria?

COSTELLO:

Oh yes I was. I think most people were.

MITCHELL:

What do you think went wrong?

COSTELLO:

Look I think it’s too early to say and you’ve got a by-election coming up in Frankston

East so I don’t think now is the time to go over it. But obviously the Party will do a bit

of soul-searching and probably the best time to do that is after Frankston East.

MITCHELL:

Do you think it’s a matter of style, is that an issue?

COSTELLO:

Look, you’ve seen all the commentary and there are a lot of reasons and in my

experience in politics there are always multiple reasons for things and you know obviously

it’s a terrible shock to the Party and we’ll have to do an analysis but the best time to

do that’s after the by-election.

MITCHELL:

Do you think Jeff Kennett should stay on as leader?

COSTELLO:

Look I don’t want to get into any of these issues because they’re matters for the state

Party but I am sure if he wants to he will, yes of that I am sure.

MITCHELL:

He wears it thought doesn’t he, he wears the defeat, it was a very personal campaign?

COSTELLO:

Look Jeff is the obvious leader of the Liberal Party and I have no doubt whatsoever

that if he stays on as leader he will have total support because I don’t think anybody

would think for a moment of changing him.

MITCHELL:

What does it, I mean away from the political side of it, what does it mean for the

future of Victoria? Are you happy to work with Steve Bracks if he’s leading a minority

government?

COSTELLO:

Look we have to work with whoever’s in Government. We have to work with Labor Premiers

in Queensland and New South Wales and Tasmania. So we have to work with them.

MITCHELL:

But is it a negative for Victoria?

COSTELLO:

Oh I think so, look you’ve had a government in Victoria which has been in an economic

sense a very strong government and obviously Mr Bracks will not put in, if he got to the

Premiership, nearly as strong economic performance and that will affect Victoria. It will

affect the nation too to some degree. I’d rather see competent economic managers, the

Kennett Government in Victoria because not only is it better for Victoria but it’s better

for the nation.

MITCHELL:

Thank you very much for speaking to us. Are you still, like a typical Essendon

supporter, grizzling?

COSTELLO:

Oh I don’t grizzle but you know it was a shocking day all round on Saturday, a couple

of defeats which weren’t expected.

MITCHELL:

Well who’s going to win on Saturday?

COSTELLO:

Oh North. Look Carlton were, you know sorry to all you Carlton fans out there, but I

think it was a pretty lucky win. You know 19 behinds from Essendon, last kick of the day

which breaks the wrong way, I think it was a leg break rather than an off-break, and North

are a very strong team. So, I think, well I think it will be an interesting day.

MITCHELL:

Thank you very much for your time. The Federal Treasurer Peter Costello.