House of Representatives

Second Reading Speech

Mr JONES (Whitlam - Assistant Treasurer and Minister for Financial Services)

I move:

That this bill be now read a second time.

This bill contains a number of important integrity measures to ensure both our financial service and tax system are working as intended.

Schedule 1 to the bill fixes a deficiency in the existing law which could have led to accidental compliance breaches by financial advisers in relation to their registration obligations.

It also allows the corporations regulator ASIC to use assisted decision-making processes when processing and considering applications for financial advisers to be registered. The use of assisted decision-making processes, including computer automated and computer assisted decision-making, will enable ASIC to deliver a high standard of service in an effective and efficient manner.

Schedule 2 to the bill lays the necessary foundations to allow the implementation of sustainability reporting standards in Australia.

Growing awareness of the financial risks and opportunities of climate change and broader sustainability issues has prompted a range of international financial system responses. Many key markets for Australian companies are introducing measures to improve transparency, manage systemic risks and align capital flows towards climate and sustainability goals. A common and important component of this is company disclosure of sustainability and climate-related financial risks and information.

The Albanese government has committed to ensuring large businesses provide Australians and investors with greater transparency and accountability when it comes to their climate-related plans, financial risks and opportunities. The ASIC Act currently does not explicitly grant our standards bodies the function to develop and formulate sustainability standards.

Schedule 2 amends the law to provide the Australian Accounting Standards Board with functions to develop sustainability standards, and clarifies that the Auditing and Assurance Standards Board can develop and maintain relevant assurance standards for sustainability purposes. It also empowers the Financial Reporting Council to provide strategic oversight and governance functions in relation to these sustainability standards functions.

Sustainability standards developed and issued by the AASB will not be enforceable until further legislative changes are made to apply the standards. Treasury is consulting on the initial policy design and parameters that will inform this application.

The Legislative and Governance Forum on Corporations was notified in relation to the amendments in schedules 1 and 2 as required under the Corporations Agreement 2002.

Schedule 3 of the bill increases the independence and effectiveness of the Tax Practitioners Board to ensure high standards of ethics and competency in the tax profession and streamline the regulation of tax practitioners.

These changes will implement recommendations from the final report of the Tax Practitioners Board review and uphold high standards in the tax profession, enhancing community confidence in the regulation of tax practitioners and the integrity of the system as a whole.

The Albanese government is a government of consultation - we want to consult with the tax profession about improving the tax system, but we can't do that if they use that information for commercial benefit. We can't be consulting with industry, particularly with tax professionals, for the purpose of improving the technical operation of the law if the tax practitioners involved in that consultation then go and use that information for a commercial benefit ahead of any changes in the law. We've put the industry on notice - there can't be a repeat of recent confidentiality breaches. These long overdue reforms to the TPB are an important start but they won't be the end of it. The previous government turned a blind eye to these issues. The Albanese government will not.

These are just the first steps in that process. We'll be consulting in coming months on further changes to ensure our regulators can appropriately respond to emerging issues.

I'll talk about schedule 4. It aligns the tax treatment of off-market share buybacks with the tax treatment of on-market share buybacks for listed public companies.

Currently, listed public companies can split the purchase price it pays for an off-market share buyback into a capital component and a franked dividend component. Companies factor the franking credits attached to the dividends into the purchase price, which facilitates them paying a below-market price for these shares. To maximise the discount, companies maximise the franked dividend component and minimise the capital gain component, thereby reducing the capital gains tax that would otherwise be paid on the sale.

This is simply not possible if they were to do it with an on-market trade. The reduced capital gains tax and the franking credits effectively amount to a subsidy from the budget to help fund companies' acquisition of their own shares at a discounted price.

Aligning the tax treatment of share buybacks will enhance the integrity of the tax system. Listed public companies will no longer be able to exploit the tax rules to buy back their own shares at a discount subsidised by the Australian taxpayer.

In recent years, the incidence of off-market share buybacks has been irregular, but the value of these shares purchased has been very large. Allowing the current tax treatment to continue presents an ongoing risk to revenue if it is not addressed. We intend to address it.

Schedule 5 of the bill prevents companies from raising capital for no commercial purpose, and using this capital to fund special franked dividends to shareholders. This again comes at a cost to the budget.

These distributions occur on an ad hoc basis, outside of established business or industry practice. The proposed changes are in response to concerns that have been raised by the Australian Taxation Office and, interestingly, the previous coalition government also raised the fact that this activity needed to stop. In fact, it issued a warning and flagged that it was going to move on it, but it didn't.

The proposal does not make changes to the imputation system. Rather it improves its integrity by ensuring that companies are unable to enter into contrived arrangements to artificially distribute excess franking credits.

This is not how our franking credit system was intended to work, and companies should be investing and distributing profits based on sound economic and commercial reasoning - not because there is a tax loophole there to exploit.

Full details of the measure are contained in the explanatory memorandum.

Debate adjourned.