The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Peter Costello

Peter Costello

Treasurer

11 March 1996 - 3 December 2007

Transcript of 24/02/99

Transcript No. 99/09
Treasurer
Hon Peter Costello MP

Doorstop Interview
Wednesday, 24 February 1999
Interview with Matt Peacock AM
8.00 am

E&EO

SUBJECTS: Ralph Review, Fringe Benefits Tax, Corporate Tax, US pension funds, One Nation.

PRESENTER:

But first the 1,000,000 employees earning fringe benefits as part of their salary package can breathe a little easier this morning. The Treasurer, Peter Costello, has spiked a key recommendation of the Ralph Report on Business Taxation which would have seen employees themselves forced to pay the FBT. Yesterday business generally applauded this option, but this morning Mr Costello says the Government would be reticent to increase the number of tax collectors from the 70,000 employers to 1,000,000 employees. He also said the Government believed that the lower rate of tax was a better policy than allowing concessions. He told Matt Peacock the manufacturing and mining industries, which are concerned about possible changes to the accelerated depreciation concession would also enjoy benefits from the introduction of a GST.

TREASURER:

You can either have higher rates with tax concessions, or you can take out tax concessions and have lower rates.

PEACOCK:

So, what about accelerated depreciation, I mean he singles that out, doesnt he?

TREASURER:

He does, and thats, thats, I put that in the category of tax concession. Accelerated depreciation says, as a concessionary measure you can write off something faster than its actually losing its value. It, it gives you an acceleration on, on the real accounting position.

PEACOCK:

And would you rather leave that in than have a lower company rate, because he says again, twice, that essentially at the end of the day its a matter of judgement by the Government. Its a political decision not really one that he can . . .

TREASURER:

Well, thats right. You can, you can either have tax concessions, which means you have higher rates, or you can have lower rates without the tax concession where everyone gets the benefit, not just those that are subject to the tax concession. Now, as a general taxation principal, weve favoured the way of going, of having, not concessions, but lower rates. We favoured that in relation to the broad-based indirect tax. We are favouring that in relation to income taxes and as a general principle in relation to business taxes as well. You get less distortions if you have that kind of tax system, everybody gets the benefit of the lower rate.

PEACOCK:

So any feeling of sympathy though for the mining industry? I mean, would they be perhaps given a guernsey there?

TREASURER:

Oh very much so. The, the industries that at the moment are able to utilise these concessions more, are mining, manufacturing industries. Dont forget theyre also, particularly the manufacturing industry, thats getting the benefit of the indirect tax changes. Bear this in mind, the wholesale sales tax penalises manufacturing. Theyre big winners out of broadening the indirect tax base and lowering the rate. But, what weve said in relation to this report is, lets put it out to business, lets see if we can get a consensus from business in relation to this. But, to have a company tax rate around 30 percent would be a great thing . . .

PEACOCK:

But youre . . .

TREASURER:

. . . for business generally.

PEACOCK:

. . . unlikely to get a consensus when some sectors of business are going to be hurt by that and others are going to think its great?

TREASURER:

Well, at the end of the day the Government will take a policy and will make the decision.

PEACOCK:

Ok, Mr Ralph identified some loopholes where people can avoid tax currently with things like the chain of loss making companies, the assignment of leases and their debts. He also mentions possible strategic exploitation of the transitional arrangements for trusts. Now youve said that youll close them off. What exactly? Just those three incidents?

TREASURER:

Those, those areas of abuse which have been identified - if anybody tries to take advantage of them, they are on notice. I made the statement yesterday that well be putting in place mechanism to make sure that anyone who tries to utilise them or abuse them, it will be subject to the provisions of the law which will backdate to cope with that. Now, we couldve gone the other way, we couldve said, well look, dont identify the current deficiencies because people might abuse them. But I think its important that we take people into our confidence in this and that we have transitional rules which will protect the position until we can amend the law.

PEACOCK:

Well, you, can, can you clarify then exactly what youre going to be backdating? I mean, theres a whole chapter on trusts, for example.

TREASURER:

No, well, in particular the, the matters that Mr Ralph brought to our attention, which, some of which we had already identified by the way in relation to the multiplication of capital losses - where you get, for tax purposes, double and triple and quadruple counting over an economic purpose. And these are the things that hes particularly highlighted and anyone who seeks to do that after the release of the report is now on notice.

PEACOCK:

The law for fringe benefits tax gets the employer to pay it at the moment. This would seem to suggest that employees should be paying it - do you agree with that?

TREASURER:

Well, Mr Ralph raises as one of the options, taking fringe benefits taxation off employers and putting it onto employees. I think there are about 70,000 employers that are subject to it at the moment, about 1,000,000 employees. So you could understand thered be a lot of reticence from taking it off a smaller group and putting it onto a larger group, particularly, when at the end of the day the revenue and the tax is the same.

PEACOCK:

And theyd presumably want higher wages to make up for it?

TREASURER:

Well, dont forget before the fringe benefits tax was introduced, the liability fell on the employee. So, you would be travelling right back down the time tunnel again and taking the liability off a small number and putting it on a large number. Whats more taking it off relatively sophisticated taxpayers and putting it on less sophisticated taxpayers. So, Im happy for that to go out for debate but you could understand thered be a lot of reticence about such a change.

PEACOCK:

It would seem to be a political dead duck?

TREASURER:

Well, let, let me say a, a, reticent duck.

PEACOCK:

Now, youve spoken, Mr Howard spoke of the great adventure, youre talking locomotives trains in tunnels the Senate and the, the pesky Democrats and Senator Harradine have all said that they want to see the colour of your money as far as cracking down on avoidance schemes, this area in the top end of town, before they go ahead with a GST that might hurt the battlers. I mean, have you got a siding somewhere there in the tunnel to organise this?

TREASURER:

Well, we have cracked down on the tax avoidance. I dont, I dont think anybody could say that they had a better record than the Governments shown in relation to the R & D syndicates, in relation to the infrastructure bonds, the superannuation surcharge . . .

PEACOCK:

No mention of R & D in this report by the way . . .

TREASURER:

. . . the superannuation surcharge, so we, weve got the credentials on the board. But what Ive said to Senator Harradine and the Democrats, and I say to everybody is the reason why the business tax changes have to be revenue neutral is so that we can be assured that there will be no net transfer of tax liability from the business sector to the individuals. In fact, what we are trying to do is dramatically lessen taxation on individuals. With income tax cuts, individuals are going to be paying less tax. So, theres no suggestion that you could somehow swap the burden of taxation out into the business area, the business area is going to be revenue neutral and the Senate can go ahead and it can deal with the changes to indirect tax and income tax and the assurance that they are fully self-funding and the business taxation changes will also be self-funding.

PEACOCK:

Capital gains tax, Treasurer, youve mentioned the Mums and Dads, but whats in this for the biggest investors in the world, the US pension funds?

TREASURER:

Well, US pension funds have privileged taxation treatment under US law and they also are investors in Australia. Can I say this, that whilst we welcome foreign investment in Australia, we also are entitled to ask foreign investors to pay some tax in this country.

PEACOCK:

Were one of the few countries that actually do subject non-residents to a capital gains tax, arent we? I mean, its said that any extension of this would be a further disincentive?

TREASURER:

Well, its said that US pension funds can get more attractive investment in the US than they can in Australia. Nonetheless, they keep coming and investing in Australia. The reason they do that is we have good stocks. Now, I dont think its outside the realms of good policy to ask them to pay some tax on their earnings in Australia. I think most Australians would say, why should we all pay tax when foreign investors dont? I think were entitled to ask foreign investors to pay some tax in this country on their earnings in Australia and I think, that probably 17,000,000 Australians would agree with me.

PEACOCK:

Now a number of CEOs in recent weeks have been threatening to withdraw their company from Australia because of the tax regime. Is there anything in this report that appeals to you to prevent that kind of a, a threat or that move?

TREASURER:

Well, to the degree that youve got a simpler system, to the degree that youve got lower corporate tax rates, to the degree youve also got lower income tax rates, you make it much more attractive to do business in this country. And I think the Governments overall tax reform, all of it, the reform to indirect tax, to personal income tax and to business tax makes this a much better place to live, much better place to do business, much better place to create jobs and thats why we are reforming the taxation system. This, this will make Australia a better place for business and a better place for jobs, and thats the ultimate aim.

PEACOCK:

What about Australian companies that make profits overseas? I mean, there is a suggestion that theres difficulty in terms of people getting money back here and being double taxed in effect.

TREASURER:

Well, one of the reasons for that, particularly in relation to people that are earning in the US, is that the US tax system is so high. You have to remember this, that the, in the United States they dont even operate a full imputation system. You pay tax both at the company level and on dividends and sometimes as a withholding tax as well. Now there are Australian companies that feel very penalised by the US tax system and as youve pointed out, weve got to make sure we keep working on those double taxation treaties to get a better deal for Australian companies overseas. Its not just a question of making sure that they get a better deal here - which is what this review is all about, but that we get a better deal when were negotiating overseas as well.

PEACOCK:

Quick final question, Treasurer, One Nation looks like the incredible disappearing act of politics in Australia, do you think its all over bar the shouting?

TREASURER:

I think there will be a lot of people that will feel that when they cast their vote for One Nation they were deceived, and they were. Now One Nation was a ragtag group of people that came along and said they could solve all the problems of Australia. They couldnt solve their own. They were a political party that couldnt even hold itself together, let alone make one nation. Fragmented party, fragmented nation. And I say to the people that voted for them that their trust was betrayed, it was always going to happen and in many respects I think the evidence is now out there for all to see. We only wish that it had been as clear before the election.

PEACOCK:

Treasurer, thanks for joining us.

TREASURER:

Thanks.

PRESENTER:

Mr Costello speaking there to our chief political correspondent, Matt Peacock.