Tax Laws Amendment (2006 Measures No. 7) Bill 2006
7 February 2007
ALBANESE (Grayndler) (10.58 am)—On behalf of the ALP and as the shadow minister for infrastructure, I rise to contribute to the debate on the Tax Laws Amendment (2006 Measures No. 7) Bill 2006. I am particularly concerned with provisions in schedule 2 and the consequences that they might have on the financing of Australian infrastructure. Schedule 2 concerns clarifications of exemptions from interest withholding tax. The bill proposes amendments to the Income Tax Assessment Act 1936 and seeks to clarify what is considered to be a debenture debt interest, which is eligible to be exempt from interest withholding tax. Currently the law provides an exemption for interest paid by companies on debentures that meet a public offer test. The exemption exists to reduce the cost of Australian companies obtaining capital.
The proposed amendments would modify the act to restrict the range of debt interests eligible for this interest withholding tax exemption. In addition, the amendments introduce regulation-making powers to Treasury to exclude interest on certain financial instruments that would otherwise lead to an outcome that is not supported by the overall policy intention. The regulations would also list every debt interest other than a debenture and a non-equity share debt interest that is eligible for the exemption. It is possible that misinterpretation of the law, as it currently stands, has the potential to threaten the integrity of the tax system by widening the range of debentures that could qualify for exemption beyond the policy intention. However, it is contestable whether the provision of regulation-making powers to Treasury will improve the integrity of the system.
The stated aim of schedule 2 is to reduce uncertainty for taxpayers and tax administrators with the operation of sections of the act. In fact, the opposite outcome is more likely to occur for two important reasons: firstly, the policy grounds for excluding certain debt interest are far from clear. This will create uncertainty as to which financial instruments will be excluded from the exemption by the regulations in future, leaving taxpayers and financial practitioners in doubt. Secondly, the regulation-making power to exclude eligibility for the exemption is impractical if it results in long lead times in having debt interests prescribed in the regulations as being either excluded or eligible for the exemption.
From an infrastructure financing point of view, rather than creating certainty, the amendments have the potential to create problems that could impede or inhibit the raising of debt finance. What does this mean in practical terms? Consider for a moment a company that wishes to make an infrastructure investment in Australia. They have little or no certainty as to whether the type of debt they intend to use is covered by the exemption. This has the potential to slow down or prevent investment and major projects getting off the ground. While Treasury will have the power to change regulations to accommodate particular financing proposals, regulatory changes stand to further delay urgent infrastructure projects. The fact remains that regulation-making power is unnecessary if the policy setting is right. This government has done nothing to improve the tax treatment of infrastructure projects, and passage of this bill stands to make it harder to finance major infrastructure projects.
I also want to address, on a related tax issue, the issue of section 51AD and division 16D of the Income Tax Assessment Act 1997. Last year the government introduced not one, not two, but seven tax bills into this parliament, of which this is the last. But not one of them sought to reform section 5IAD and division 16D of the tax act—both of which need urgent attention to address underinvestment in infrastructure.
Currently, the Income Tax Assessment Act 1997 restrains private investment in public infrastructure through the operation of section 51AD. Under this provision, certain infrastructure projects held by the private sector, controlled by government and financed through limited recourse debt do not receive tax deductions that would normally apply for capital expenditure of this type.
There is also the application of division 16D of the Income Tax Assessment Act 1997. This applies in the case of finance leases with tax exempt bodies. The lease is treated as a loan and capital deductions are disallowed. This illogical situation was first downplayed and then conveniently ignored by the Howard government. In September 2005 the then Assistant Treasurer, Mal Brough, finally conceded that the tax changes originally proposed by the government were unworkable. The minister promised legislative reform. More than a year on from that 2005 announcement, the government is yet to act.
The current tax regimes are bad for Australia’s long-term economic prosperity. Unfortunately, we have become accustomed to a government that changes policy for its own interests rather than the national interest, preferring to boost regulatory powers rather than enshrine sound policy and principles in law—policy that would boost productivity and ensure that the prosperity we currently enjoy lasts well into the future. Just last week Treasury’s own research stated that public infrastructure investment decreased from 2.5 per cent to 1.8 per cent of GDP between June 1987 and June 2006. In 2004, Australia ranked 20th out of 25 OECD countries in terms of investment in public infrastructure as a proportion of GDP.
With this bill before the House, we now are faced with the absurd situation where not only is the federal government happy to abrogate its responsibility to invest in nation-building infrastructure, but it is also failing to address the issue that it is increasingly difficult for the private sector to invest strategically.
There is copious evidence illustrating the short and long-term economic benefits of investment in infrastructure. The Committee for Economic Development of Australia points out that investment in infrastructure generates higher returns on investment than other areas. Treasury’s own research cites studies indicating that a one per cent increase in public infrastructure causes a 0.66 per cent increase in GDP. By overcoming the backlog in five key areas—electricity, gas, rail, roads and water—GDP would increase by 0.8 per cent, business investment by 1.2 per cent, housing investment by 1.8 per cent, exports by 1.8 per cent and improved living standards by 0.4 per cent. This spells improved employment, productivity, social welfare and international competitiveness.
The Business Council of Australia has estimated that Australia has a $90 billion shortfall in infrastructure. Now is the time for national leadership and investment in nation-building infrastructure. The economic prosperity afforded to Australia by the resource boom can be locked in to tomorrow by investment in infrastructure today. However, faced with a choice between squandering the opportunities presented by the resource boom or investing in nation-building infrastructure that will sustain our prosperity, the Howard government, sadly, has opted for the former.