Transcript No. 99/08

Hon Peter Costello MP

Doorstop Interview

Melbourne

Monday 22 February 1999

12.30 pm

E&EO

SUBJECTS: Tax reform, Review of Business Taxation

TREASURER:

Well, I welcome the release this morning of the Review of Business Taxation Discussion Paper. I think it is a very valuable contribution to the tax reform process that the Government has engaged in. Now, people should bear in mind that this seeks further consultation, the Review has not come to any firm decisions, but it has put out a menu of options that can be considered in this context. The Review has also highlighted some areas where the tax law is clearly deficient, and where business can take advantage of some of those deficiencies, and recommended to me that transitional rules be introduced, all back-dated rules be introduced to today, to cover those deficiencies if anybody should try to take advantage of them. And the Government will be doing that. If anybody tries to take advantages of any of those deficiencies that are highlighted in the Report as from today, they are on notice that the Government will be moving with either special transitional rules or rules as from today, to ensure that such advantage cannot be taken. I emphasise that this is part of a Government desire to change the whole overall tax system in Australia. We now have a proposal to completely reform 70 years of wholesale sales tax, a proposal to dramatically reduce income tax rates. We now have the biggest overall reform of Commonwealth/State financial relations in Federal history. We now have the reform of welfare benefits, and collapsing them into simpler benefits, which are more generous. And the last peg in the Government tax reform strategy is to reform the business taxation system. Now, some of the objectives that we should be punting towards are, lowering corporate tax rate in this country. If we lower the corporate tax rate in this country it can make Australia a great place for doing business in the region and we can also make this a much better place for investment. One of the proposals that is raised, for example, in the Review is the possibility of exempting little investors from small capital gains that are currently taxable, the $1,000 threshold.

If we could introduce such a rule you could get all those mums and dads investors that are currently caught up in the capital gains tax system out of the capital gains tax system, make it easier for them to invest, and that would help the Governments policy of encouraging shareholder and wider shareholding in this country. So that would be great for small investors. But we have a number of exciting possibilities in this review, and I call on business to positively contribute to the discussions.

Do you have any preferences on the capital gains tax options handed down by Ralph?

Well, there are a number of good ones in there. I mean, we asked Mr Ralph specifically to look at capping the capital gains tax. We asked him to look specifically, at what we call the scrip for scrip exchange whereby if theres a merger and you give up shares in one company in return for another, at the end of the day all you have really got is the same shares. But you can have a capital gains tax coming into the equation, and I think that is a very positive suggestion. And the other suggestion which I think would be beneficial to the mums and dads of Australia is a $1,000 exemption on capital gains. Theres a lot of people now who have Commonwealth Bank shares, they might have some Telstra shares, they might have some jewellery or something like that. On very small amounts they can get caught up in the capital gains tax system. It requires record keeping over a long period of time, indexing your cost base, all of these sorts of things. And if you have a threshold below which youre outside the systems, I think that would be great for mum and dad investors, and thats what the $1,000 exemption is all about.

And would any changes to capital gains tax, be revenue neutral, in other words if you soften along some of those lines that youre talking about, would you pick up some of the recommendations that Ralph made to extend?

Well, the overall business taxation changes should be revenue neutral. There will be some areas where you give tax relief, which will cost the revenue to be made up by other areas where there might be concessions that are no longer serving their purpose, which if you treat those concessions you will get more revenue. But let me explain where our thinking on this is coming from. At the end of the day after this Government has put the Budget back into surplus, we are not going to kick it back into deficit. We are not going to put the Australian Budget back into deficit, we are not going to put at risk our low interest rate regime. So that, weve got to make sure when we change business taxes, we have modern and efficient business taxes. But weve got to make sure that we also keep the Budget in surplus. And thats why I talk about having a revenue neutral outcome in relation to this.

Do you think it is going to be possible to get the corporate tax rate down to 30 per cent, provided the complexities of doing that?

Well, I hope it is.

A corporate tax rate at 30 per cent would make Australia one of the best regimes in Asia, if not in the world. Hong Kong would probably have a lower tax regime, but we would be competitive against Singapore, the United States, other countries, and what it would say to the world is: if you want to do business in this time zone in the Asia pacific, the place to do it is Australia. Now, weve come through a time in our history when the whole of this region is now in recession, outside China; Hong Kong, Singapore, New Zealand, Malaysia, Indonesia. Japan in depression. People are looking at Australia, and theyre saying: why is it that Australia has done so well? Well, part of it is the economic policy that the Government has pursued. But if you can make this a base for business, it is good for business, but thats good for jobs. It is the jobs of young Australians that well be creating in 10, 15, 20 years time that we are now looking at.

Will you be adopting that recommendation to reduce the tax to 30 per cent?

Well, at the moment this is a policy for discussion, and it outlines some of the choices that you would have to make to reduce company tax to 30 per cent. And what we now want to do is we want to engage business. And we want to say to business: what is your response to this? Personally I think that would be a great outcome if we could get to a 30 per cent company tax rate. But it is all out there. Everybody is on notice. We are now calling on business to come back with its response. This Inquiry will report by the 30^th June, and than the Government will make its decisions. But this is giving you some kind of blueprint as to whats required to accomplish the goals. I think the goals are worth it myself, I think theyre great goals.

Treasurer, why the backdown on cash management trusts?

Well, its not a backdown at all. Its a recognition that in a revenue neutral way you can have flow through treatment in relation to cash management trusts. The alternative, which Ralph looked at, was the proposal to take tax out, make the after-tax distribution, and the investor would come back and get the excess imputation credit. Why do something in two stages when you can do it in one. Its revenue neutral, there were no revenue consequences. We asked for that to be looked at, it was looked at. There were no down sides in not having a flow through treatment in relation to cash management trusts, so well do it.

And what about the impact of full imputation on foreign investors in Australia? You talk about the need to make Australia attractive, that seems to go against that.

I dont think so. I think properly looked at, and the Report discusses this in quite some depth, properly looked at you can operate a full imputation system, and have it made attractive. The question that arises is, whether or not you will get full credit for the tax thats taken out under the double taxation treaties. Now, there are a couple of proposals that are in that Report, as to how you can treat those double taxation treaties, and get credit, or alternatively how you can renegotiate them.

And of course, keeping the negotiations up to date is something we have to look at in any event. I think actually that what the Report does, is it shows you, I think, in a quite detailed way how you can operate a full imputation system and make foreign shareholders, foreign shareholding in Australian companies quite attractive.

Is this the price of getting the GST up? Do you see them as intertwined, the GST and the business tax reform, but you cant really have one without the other?

I see business tax reform as the last undone area. We reform the indirect tax system, we reform the income tax system, we reform the allowance system, we reform Federal/State financial relations, and then we do business tax. But its all got to flow in sequence. Its like a train going through a tunnel. If the first carriage gets stuck in the tunnel, the other four are not going to get through. So the carriage that we currently have in the Senate tunnel at the moment, is indirect tax reform, and income tax reductions. We clear the tunnel, we move onto the next part; welfare reform, increase pensions, family allowances, increased amounts, reduce taper rates, aged persons saving bonus, we do that. Move that through the tunnel, we go to business tax. We make Australia a vibrant, competitive, efficient business tax regime, we start developing job opportunities. But weve got to do it in an order. Weve laid out the order. This is big reform. This is the tax reform of the century, as we have always said. We have got to do it in a disciplined and an ordered way, and unfortunately any blockage by minority Senators or obstructionist oppositions delays everything. So weve just got to clear the tunnel to get progress in the country.

Do you agree with Ralphs $100 million estimate for the revenue effect of exempting collective investment trusts, from those crackdown on trusts?

No no, youve got to be very careful when you talk about this. A flow through treatment of cash management trusts has no revenue implications, right, no revenue implications. Because a cash management trust, which is taxed in the hands of the shareholder, is precisely the same as taking out a corporate rate and then giving a credit for excess imputation. In relation to the listed property trusts, a flow through taxation treatment raises the next question, is, what do you do with tax preferred income? Now, Ralph says, if you have full franking on tax preferred income, no revenue consequences. If you want to introduce a new and generous benefit, a benefit which doesnt exist at the moment, which is not clawing back all tax preferred income, you would get a $100 million revenue effect. But thats, I havent agreed to that, I havent agreed to that by a long shot. Thats one of the options that Ralph puts up, which if it were accepted would lead to a decision on the other side of the ledger somewhere for another $100 million. So, flow through treatment on cash management trusts, no revenue considerations, an efficiency consideration, and thats the announcement I make today. Flow through treatment in relation to property trusts leads to a second question of tax preferred income, no decision on that, one of the many options in Ralph which has a revenue consequence and would require an offsetting decision.

Thank you.