Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and cognate debate
10 February 2016
Labor announced its intention for a new tax regime for managed investment trusts in 2010, and with the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 the Abbott-Turnbull government is proceeding with work started under Labor. Because this bill advances work that was commenced under the Labor government, we support its intent and many aspects of it. However, we are concerned about a number of specific provisions following our consultations with stakeholders since the tabling of the bill. We therefore refer the bill to the Senate Economics Legislation Committee for further scrutiny. Labor reserves our final position on this package until the Senate Economics Legislation Committee reports. We leave open the possibility of moving amendments in the Senate.
Labor welcomes the potential for changes in the tax treatment of managed investment trusts that can help grow the managed funds sector. Appropriate changes could make Australian trusts more attractive for both local investors and foreign investors. As a capital importing nation, that is absolutely critical for Australia. The Australian finance and insurance sector employs in excess of 400,000 people. To put it in perspective: that is around twice as many people as the mining industry employs. The value of funds managed in Australia is about $2.6 trillion. Within that pool, approximately $92 billion is managed by Australian fund managers on behalf of overseas investors. The proportion of foreign funds being managed may appear small, given the sheer scale of funds managed under our compulsory superannuation scheme; but, nonetheless, it is an area that has significant room for growth.
Managed investment trusts pool funds to generate financial returns for investors who do not have day-to-day control over the trust—that means typical investors are superannuation funds, life insurance companies and sovereign wealth funds. In 2010, when former Assistant Treasurer Nick Sherry was originally proposing the changes that we are considering in this bill, he said:
Many millions of Australians are investors in MITs, either directly or indirectly through their retirement savings.
In 2010 the Labor government introduced an amendment to expand the definition of a 'managed investment trust' in relation to withholding tax rules. In the subsequent three years, the funds flowing into the managed investment trust sector increased by 78 per cent—demonstrating that clear and well-developed policy can have excellent results. Two-thirds of the funds flowing in came from the Asia-Pacific region—yet another reminder of the role that the region plays in Australia's success, as epitomized in the former government's 'Australia in the Asian Century' white paper.
Former Assistant Treasurer Sherry knew from extensive discussions that Australia's tax rules around managed investment trusts were 'complex, uncertain and unsustainable in the modern economy'. Currently, managed investment trust income is allocated and taxed in aggregate. At the end of the financial year, members of a trust receive an allocation of the net income a trust earns relative to their stake in the trust. This amount is then added to their individual taxable income. The trustee of a trust is then taxed on any remaining net income that has not been distributed to members.
In essence, the package we are considering provides flow-through tax treatment for different types of income in a way that means investors in a trust receive broadly the same benefits they would have if they held the trust assets directly. It is a good example of an area in which government can simplify rules in a way that benefits industry, investors and the economy. That is certainly the intention of the bill, but we have to get the detail right to make sure that intent becomes a reality and does not create unintended consequences.
We are disappointed on this side of the House that the submissions made to Treasury's consultations and the exposure draft to the bill have not been released. We know that, while some stakeholders broadly support the intent of the bill, concerns remain about several provisions that could undermine the intent of the tax regime. Without public access to these submissions, those sitting on this side of the House cannot clearly gauge how widely held concerns with this bill are. This goes to the heart of a cause that Labor has been fighting hard for: making sure everyone pays their fair share of tax. Thanks to Labor's tax transparency laws, we now know that one in four big public companies are not paying any tax. There is serious concern about the tax practices of high net worth individuals. Labor is therefore keen to ensure that this new tax system does not open up another loophole for revenue to drain away through.
According to some stakeholders consulted by Labor, there is a risk that the current drafting of provisions relating to the treatment of trusts with different classes of membership interests creates scope for abuse of the managed investment trust withholding tax regime by large foreign investors. The explanatory memorandum for the bill acknowledges that this is a possibility, stating:
An attribution MIT may have more than one class of membership interests if, for example, different members have exposure to different groups of assets of the attribution MIT. As a result, the tax attributes of a particular class of assets can effectively be ring-fenced to a particular class of membership interests. In this regard, it is possible for a class to have just one member.
When it comes to tax, Labor has a strong record of closing loopholes. We introduced measures to plug loopholes in Australia's transfer pricing rules and anti-avoidance provisions. The Liberals by contrast voted against the countering tax avoidance and multinational profit shifting bill 2013. When the current Leader of the Opposition, Bill Shorten, was Minister for Financial Services and Superannuation, he championed the cross-border transfer pricing bill 2012
The Liberals by contrast tried to block that measure, which was designed to crack down on companies that overvalued assets in international transactions. One of the Abbott-Turnbull government's first actions upon returning to office was to set about dismantling the good work that Labor had done to improve the offshore banking unit regime and tackle excessive debt loading. By ditching Labor's proposals, in effect one of the first acts in government of the Abbott-Turnbull government was to hand $1.1 billion back to giant multinational firms.
On this side of the House, we are determined to make sure that we reduce the number of loopholes and that we do not create new ones. Stakeholders have also raised concerns about the obligations this package places on custodians to pay withholding tax liabilities when no actual cash distributions have taken place. It is another issue that deserves a second look. There is no requirement in the draft bill for AMIT trustees to distribute enough cash to cover tax liabilities arising from attributed income. Stakeholders have asserted that this can create unacceptable risk for custodians, as they may be faced with tax liabilities, which they cannot later recover from their clients and which may inadvertently lead to fewer custodians engaging with the AMIT regime. As we started the process to create attributed managed investment trusts, we are all too aware of how keen the financial services sector is to have this new regime running. On this side of the House, Labor also understands that it would be hasty and irresponsible to proceed without ensuring that this new regime has the necessary integrity and functions that are intended. That is what good tax reform requires.
Australia has come to a time when we need good economic leadership. One of the promises of Prime Minister Turnbull when he deposed Prime Minister Abbott was that he would put in place economic leadership. If you look at the economic challenges that Australia faces, you can see the need for that. Consumer sentiment has fallen; we have seen downgrades on growth since the last election; unemployment is up; and public sector construction has fallen every quarter since the election and is now near an all-time low. We have per capita Australian incomes down two per cent since 2013. This is not a widely recognised fact because we tend to use GDP to measure living standards. But GDP does not divide by population and, as the country in the advanced world with the most rapid population growth, that means that GDP can be a misleading measure of living standards. Simply look at disposable per capita income: it is lower now than when the Abbott-Turnbull government won office. We look across the ASX and we see dividend payout ratios in excess of 60 per cent—well above the ratios that you see in similar advanced countries. Only six per cent of ASX 300 firms believe Australia is a highly innovative nation.
Looking globally, we face challenges such as the one of what happens when interest rates begin to rise from their 5,000-year lows. We have unprecedented levels of instability in certain parts of the world. Geopolitical instability and economic fragility demand a government with a long-term vision for tax reform, but instead we have seen the junking of the tax reform process from this government. The Re:think discussion paper, brought down last year, called on community groups, regular Australians and business groups to put in their submissions. More than 800 did so, costing thousands of hours of time and millions of dollars—the secretariat alone cost over $600,000—and yet the Prime Minister has now junked all of that process. The promised tax white paper, which was supposed to be delivered within the first two years of the Abbott-Turnbull government, now looks as though it will not be delivered at all. We do not even know when the green paper—which is supposed to precede a white paper—is coming.
In place of careful and consistent tax reform we are instead getting ad hoc thought bubbles. The latest one today comes from the Assistant Treasurer—the third Assistant Treasurer in just two years. Instead of cracking down on multinational tax, the Assistant Treasurer has suggested that perhaps employees should snitch on their bosses in return for a cut of the tax take. A government which has cut 4,700 jobs out of the tax office, which rejects Labor's multinational tax plan and which does not believe in tax transparency instead suggests that we are going to garner more tax by encouraging employees to snitch on their bosses. It is indeed bizarre that a government which voted for less tax transparency last year now has plans for employees to spill tax secrets in exchange for cash.
Getting tough on multinational taxation requires robust tax laws—tax laws such as the proposal produced by Labor, informed by work from the OECD, costed by the Parliamentary Budget Office, adding $7.2 billion to the budget bottom line over the course of the decade and grounded in good economic intuition. If you are deducting debt, you should do it based on sound economics, rather than ad hoc thresholds. That is what good multinational tax reform requires, rather than a dibber-dobber plan.
We also have the GST debate rolling on. On Sunday we had the Prime Minister say 'maybe not' and the cabinet secretary say 'maybe'. We know there are plenty of those in the coalition party room who would like to see the GST basal rate increased. In 2005 the member for Wentworth, then a backbencher, proposed 281 tax ideas. We are still having that same philosophy today from the member for Wentworth. The 281 ideas from 2005 have translated a decade later into a 'let every flower bloom' approach to tax reform. The philosophy of tax reform requires careful and coherent engagement with business and community groups—the sort of process that Labor engaged in through the Henry tax review. The stock market may be back to where it was a decade ago, but surely the member for Wentworth's thoughts on tax reform might have moved on since then.
On this side of the House we are deeply committed to tax reform. We support the intent of this legislation but we have concerns about the design. By airing our concern that stakeholder submissions have not been made public we are demonstrating our willingness to have a constructive and credible conversation about tax reform. It is absolutely incumbent on the government to be transparent with this parliament about the ramifications these changes to the managed investment trust regime will have. The last thing Labor wants is another tax loophole that can be exploited to deny the Australian community a fair share of tax. In keeping with our longstanding campaign for more integrity in the tax system, we will refer this bill to the Senate Economics Legislation Committee and we reserve the right to seek appropriate amendments in the Senate after the committee reports.