ADDISON, Mr Matthew, Chair, Council of Small Business Organisations Australia ALEXANDER, Mr David, Chief, Policy and Advocacy, Australian Chamber of Commerce and Industry BLACK, Mr Bran, Chief Executive Officer, Business Council of Australia CAPPUCCIO, Ms Skye, Chief Executive Officer, Council of Small Business Organisations Australia GRIST, Mr Peter, Chief Economist, Australian Chamber of Commerce and Industry STOJANOVSKI, Mr Pero, Chief Economist, Business Council of Australia [15:59] CHAIR: Welcome. I understand that information on parliamentary privilege and the protection of witnesses giving evidence to Senate committees has been provided to you. I now invite each of you to make a short opening statement, and, at the conclusion of any remarks, I'll invite members of the committee to ask questions. Who'd like to go first? Ms Cappuccio : I'm more than happy to. Chair, senators, thank you for the opportunity to appear today. COSBOA is the peak body representing Australia's 2.7 million small businesses. We support genuine tax reform that is fair, simple and growth enabling. However, we are deeply concerned that the proposed changes to capital gains tax, as presented in the bill, risk undermining entrepreneurship, investment and business growth at a time when Australia is already facing significant productivity challenges. The proposed reforms change the risk-and-reward equation for those Australians who choose to start, build and grow a business. The changes disproportionately affect founders who start with little capital and who have created value through hard work, innovation and persistence, even more so if the business successfully grew at a relatively high rate—that is, where value was created, not purchased. These are the small-business owners like the one I met with recently whose capital investment was a $700 laptop and who, 11 years later, turns over $7 million to $8 million a year, employing multiple staff across the country. These are exactly the people that Australia should be encouraging. We already know that many small-business owners have interpreted the proposed CGT change as a reason to pause or rethink planned investment in growing their business. For many small-business owners, the business is not simply an investment; it is their life's work, their retirement plan and the result of years, often decades, of personal sacrifice, reinvestment and financial risk. Many have forgone wages, superannuation and financial security to build something of value. If the bill is passed in its current form, these small-business owners, who are not eligible to access the small-business CGT concessions, will perceive their retirement savings to be at risk. Many can expect to have a higher tax bill than they would otherwise have had when they eventually sell their business. Whilst, pleasingly, the government has committed to retaining existing small-business CGT concessions, those concessions have not kept pace with modern business realities. The current eligibility thresholds are outdated and haven't been raised in nearly 20 years. Of note is that the tax board recommended seven years ago that the turnover threshold for these concessions be raised from $2 million to $10 million. There are approximately 180,000 small businesses in Australia who fall in that bracket, with a turnover of between $2 million and $10 million. Mr Addison : COSBOA notes the outcomes from the recent Economic Reform Roundtable, where the government committed to modernising the tax system through long-term reform. This was a welcome commitment. COSBOA and the small-business community we represent seek consideration, we seek certainty and we seek to ensure effective implementation of tax reform where we minimise unintended consequences and the disincentives to running a small business—or running any business. COSBOA proposes that the committee recommend that the legislation not proceed as drafted. At a minimum, a more comprehensive period of consultation and inquiry is necessary to ensure that the potential impacts of the bill on economic growth and productivity are clearly understood. It is preferable to have a consultative approach to developing more comprehensive tax reform that makes improved productivity a key priority. Regardless of whether the bill is passed, it is important that government modernises and increases the eligibility thresholds for the small-business capital gains tax concessions. As mentioned, we recommend updating the threshold to a $10 million turnover, and, if the asset test is retained, then a threshold of at least $12 million. Tax reform should encourage ambition, investment and growth. Our concern is that, as currently drafted, these measures risk doing the opposite. Thank you. CHAIR: Thank you. Mr Black. Mr Black : Chair and members of the committee, thank you for the opportunity to appear today. The Business Council of Australia comprises Australia's largest employers—organisations that are critical to the investment, productivity and wage growth that underpin Australian living standards. The BCA do not support this bill or the process surrounding it, and we urge the committee to recommend it not proceed. Our concern is that—at a time when Australia needs more investment, not less, to improve our productivity—the changes proposed to capital gains tax and negative gearing will reduce investment and add significant complexity and compliance burdens to an already-complex system. The BCA participated in the Economic Reform Roundtable with the clear position that any tax reform must increase business investment. This bill does not meet that test. This is not the kind of tax reform that is needed to grow the pie, to lift investment, wages and living standards. It is a rushed, piecemeal process that bypasses the comprehensive policy development that Australians deserve for major reform. This means presenting the community with the full range of options, with clarity about their benefits and their trade-offs. The FBT provisions in schedule 4 compound these concerns. The effective removal of the otherwise deductible rule for salary packaged benefits will impose unquantified, but probably substantial, costs on businesses and workers. This has not been addressed. We want to be clear, however, that our opposition to this bill is not a rejection of difficult reform. The government has shown genuine courage in other major parts of its budget agenda. The NDIS reforms, aimed at returning the scheme to its original intent, are difficult and are essential for the long-term fiscal sustainability of a scheme that Australians depend on and for the sustainability of the budget more broadly. We welcome those significant reforms. We also welcome the productivity package and its focus on cutting unnecessary or duplicative red tape, which reflects exactly the kind of reform that can meaningfully lift investment, growth and living standards. This is the standard against which we measure all reform: does it make Australia more productive, more competitive and ultimately, for all Australians, more prosperous? On that test, this bill does not pass. We are happy to take questions of course. Thank you. CHAIR: Thank you. Mr Alexander : The Australian Chamber of Commerce and Industry has serious concerns about this bill, which we believe will have a significant and sustained negative impact on investment and productivity. At the big-picture level, this is a very large new tax, raising more than $40 billion over 10 years, a significant amount of which will impact on investment in business. This huge new revenue source is designed to play catch-up with blowouts in government spending, which is moving to a historic high of 26.8 per cent of GDP. The effect of the tax increase will be to lock in large, wasteful and inefficient government. The growing transfer of resources from the high-productivity private sector to the low-productivity public sector will act as a drag on the economy. There is no compelling economic reason why tax reform should require higher taxes on investment in business. That is the logical error at the heart of these changes. We actually need more investment in Australian businesses, not less, if we want to secure future prosperity. There is no other path to having ongoing First World wages than to have a thriving business sector paying those wages, but that can't happen if they are being dragged down with higher taxes. An extra perversity of the proposed capital gains tax changes is that the design entails punishing the highest productivity firms the most. Think of all those businesses—small, medium or large, across any industry—whose operations are best practice. Under the proposed system, because these businesses make the biggest capital gain, they will suffer a disproportionate increase in tax. The more the gain, the more the pain. It's a tax on productivity. It's very disappointing that such a consequential and complex bill is being rushed, because this means maximising the risk of poor legislation. We urge senators to consider the bill and reject the increases in tax on investment in business. Thank you. CHAIR: Thank you. We'll go to Senator Chandler first. Senator CHANDLER: First of all to COSBOA: I'm interested in understanding how many small businesses have turned to you, following the budget, trying to understand the implications of the budget on their business viability and what level of concern you're seeing amongst your members. Ms Cappuccio : I think it's important to begin by pointing out that our members are other peak associations, so they are peak associations who have large numbers of small businesses amongst their membership. Nonetheless, we, daily, receive messages from small businesses who are reaching out, who have concerns and want a place to put those concerns and are really looking for somebody to advocate for them in what they see as a situation that is now quite detrimental to them. As well as their concerns about a negative impact on their business or on their local economy, they're also raising concerns with us about confusion and lack of certainty. We are certainly hearing from many small businesses who are talking about postponing investment decisions, or perhaps were thinking of selling and now are reconsidering, because they're waiting for that certainty around where these arrangements will land. Senator CHANDLER: That's certainly consistent with what I've heard too. Some small-business owners rely on putting their home up as collateral for their business—is that correct? They'll draw low incomes in operational years and then use the capital gain on sale as a form of succession or retirement planning. Is that a common practice in the small-business sector? Ms Cappuccio : I think it's a very common practice for small-business owners to be paying themselves, particularly in those early years, very low wages. They are often not paying themselves superannuation. I think the best data we have suggests that only about 50 per cent of small-business owners are paying themselves superannuation in any year. A survey we did at the end of last year suggested that, in the previous 12 months, 60 per cent of small-business owners had had at least a period where they weren't paying themselves at all. Senator CHANDLER: The regulatory impact statement for these changes, which is pretty lacklustre in my opinion, suggests that the economy-wide regulatory cost of these changes will be $88 million per annum. How much do you expect the average small business will spend to understand not just the tax implications of these changes but also any potential legal, accounting or valuation costs that might be associated with them? Mr Addison : As the Senate is aware, there are regulations still to come. There are legislative instruments still to come. So there's a whole lot of understanding about how to implement these changes that is unknown. We'll refer the committee to the CPA research—I understand you'll be hearing from them tomorrow—where they have costed quite intensely the actual impact cost and the implementation cost. What we've heard from some businesses anecdotally at this stage is numbers between $10,000 and $30,000 to deal with the consideration of these tax changes heading for 1 July 2027, and then we can open up the can of worms about 1 July 2028. Senator CHANDLER: So they're anticipating they'll have to pay that over again the next year as well? Mr Addison : There's lots of good-quality advice they will need to embrace these changes properly, especially if they are new to business or looking to alter the way they conduct business to fit with the new regime. Senator CHANDLER: One of the claims that we've heard from the Treasurer is that the existing CGT concessions for small businesses will be sufficient to address any financial concerns that they might have. Do you believe that that's the case? Ms Cappuccio : I think it's important to understand that the existing concessions have thresholds in order to access them. There are four different eligibility criteria, but predominantly you need to be turning over less than $2 million a year or you need to have a net asset value—which is not a simple test; it's quite complex—of less than $6 million. We understand there are about 2.5 million small businesses in Australia who would be eligible. There are another 180,000 who fall between $2 million and $10 million a year in turnover, who are not in any way eligible for those concessions. It's also important to understand that the concessions in many ways interact with the existing CGT discount, so they're not entirely unaffected by these changes. Senator CHANDLER: Do you think that, if the changes come into effect, the concessions will be a disincentive for businesses to grow if, as the Treasurer has sort of alluded to, businesses are going to have to rely on them for their own financial viability? Ms Cappuccio : I had one of those phone calls this morning, in fact. One of my colleagues had just got off a phone call with a farmer who was ringing to say: 'Well, now I definitely need to make sure I keep my turnover under $2 million. I was creeping over that, but now there's an added disincentive for me to creep over that.' So, in that sense, it's very much discouraging growth, which is why we are arguing that, if the changes do go ahead, those thresholds need to be lifted to at least $10 million. Senator CHANDLER: The Treasurer has also said that the carve-outs will be narrow in scope, with the budget papers only referring to investment in early-stage and startup businesses. Do you support the specific carve-outs? What has the consultation process from Treasury to you been like in relation to carve-outs? Ms Cappuccio : We've been having conversations with the Treasurer's office and with Treasury about some of the carve-outs, for lack of a better word, that we think need to happen. Our priority is focused on supporting the current small-business CGT concessions being contemporised, particularly to lift those thresholds. Senator CHANDLER: Great. How long have I got, Chair? CHAIR: You still have about four minutes. Senator CHANDLER: Wonderful. I have a couple of questions to the BCA and ACCI, and I am interested in both of your perspectives on these. We know that business investment is already pretty weak. I'm interested in understanding from you what you think these tax changes will do to investment decisions in Australia. I know there have been some that have suggested that these changes will make Australia the least competitive environment in terms of business investment in the OECD. I'm interested in your perspectives on that. Mr Black : We do have concerns with respect to these changes and what they do to Australia's competitiveness from an investment standpoint. We know from OECD analysis that we are already an uncompetitive jurisdiction for the purposes of tax settings. For our own analysis—that is, BCA analysis—we release a report which we call our Global Investment Competitiveness Index. We measure Australia's performance against 41 other economies. We rank 21st out of 42 on all of the seven settings when you combine them, but on tax we rank 38th out of 42. We are already behind the eight ball when it comes to investment attraction. What is clear from the budget papers is that, ultimately, these changes operate to increase government revenue, which means that it is a burden, an overall burden, an overall increased burden on business and therefore likely to reduce investment. That again comes through from the budget papers because we see with respect to property that there is a decline in the number of produced dwellings. So that reflects the fact that we're already envisaging that these changes will ultimately reduce investment and our economy at a time that we need more. To your point, we are close to 30-year lows with respect to business investment. It represents 12.5 per cent, or thereabout, of GDP. That comes off an average of about 14½ per cent of GDP and it comes off a high of about 18½ per cent of GDP. So we need to dramatically increase business investment. It is the fundamental pathway towards achieving higher living standards and a better way of life for all Australians. Senator CHANDLER: Mr Alexander, do you have anything to add? Mr Alexander : Yes. Well, we also think that the large impost of tax about to be put on cannot but weigh on business investment decisions. We are uncompetitive internationally on tax settings. This is only going to exacerbate that problem. It really speaks to—this goes back awhile—a lack of appreciation of the importance of having competitive tax settings for investment. So what we're seeing is a gradual erosion of investment, because our tax settings are becoming less favourable. Some of that is purely through inaction. For example, the company tax rate has been at 30 per cent for 25 years or so. It's other countries that have been reducing their company tax rate to make ours less competitive over time. And so this capital gains tax measure forms another piece, alongside the company tax rate, that just makes us less attractive to invest in. If we're not attracting investment, we're not going to grow the businesses of the future. We're not going to be able to innovate, provide jobs or maintain high wages into the future. Senator CHANDLER: We tried to get some responses out of Treasury to these questions at estimates a couple of weeks ago, but, as for the 47 per cent meme that I'm sure everyone has seen on their social media feeds, can someone walk me through how a zero cost base would occur in practice and whether the 47 per cent meme is actually accurate? Mr Addison : When you index zero, you can multiply it by lots of indexes and end up with zero. If I start my business from zero, I'm going to pay capital gains tax on everything that I add value to and eventually make that sale. Now, that's a minimum of 30 per cent, but, if I'm on the top marginal rate, that's 47 per cent. So I build this business from zero. I make my value at sale. The government takes 47 per cent. That's where it comes from. Senator CHANDLER: It's a very simple explanation. I'm mightily confused why we didn't get that explanation out of the relevant government department when we asked at estimates two weeks ago. Thank you, Mr Addison. CHAIR: Senator Pocock. Senator DAVID POCOCK: Thank you for your time this afternoon. I will start by asking what your engagement with the government has been like. Have you had a fair hearing on the concerns that have been raised? Mr Addison : We have met with ministers. We've met with Treasury. I believe they've listened. We haven't got a feedback loop at this point in time. Mr Black : I would say that the fundamental challenge that we've got in terms of these reforms and the process so far is the timing associated with the way in which they're proceeding. To put this in a little bit of context: we've got effectively 22 days of inquiry with respect to these reforms, and yet about a year ago we had nine months of inquiry into the question as to whether or not we should remove nuisance tariffs on mushrooms, yarn and horsehair. So it seems to me that, given that these changes are described as the most consequential tax changes in a quarter of a century, there is more time that is required in order to consider them properly. Mr Stojanovski : I should clarify that the tariff ones are ongoing right now. They just started on budget night as well. Mr Alexander : Yes, we've had meetings with the Treasurer's office and Treasury, and they have listened respectfully to our views. We've been making suggestions about how the bill could be improved. The government's signalled publicly that it sees some problem areas arising out of its legislation, and it's named particular areas such as the tech industry and startups as matters of concern. We've been keen to urge them to consider that this is a problem that's much wider. Its wider than tech. I mean, tech is in every industry now anyway, so it's a false distinction to single out tech as worthy of some sort of exemption—and even startups. This is beyond startups. It's not just a low starting base; it's where you finish up. If you make a gain, you're going to get hit with this extra new tax. So we're saying let's not think that ameliorating the damage from the bill is adequate. We shouldn't be talking about damage to the business community for a start. We need a supportive environment for investment in business in Australia. So the starting point is all wrong if you think that we need to encumber businesses with higher taxes. Senator DAVID POCOCK: Has anyone been asked to sign an NDA as part of these discussions, or has the government not done that this time? No? That's good. And have you had input into this paper that the Treasurer is reportedly going to release later this week, looking at potential carve-outs for tech and biotech startups? Ms Cappuccio : We've had background consultative discussions about what our concerns are and what our suggestions are if this does go ahead but no direct input into the paper. Senator DAVID POCOCK: In terms of startups, does the early-stage innovation company status provide a framework for protecting investment in those businesses? Mr Addison : Mr Alexander and Mr Black have just referred to the speed of this legislation hitting us, and I think your question goes directly to why we're concerned about the speed of rushed legislation. We don't know the answer to your question. We haven't had a chance to look at the framework, evaluate it in terms of this and evaluate it going forward. The start date is 1 July 2027. That's close but a long way away. Let's not rush this legislation quickly. Let's spend some time actually understanding it and, hopefully, improving it. Senator DAVID POCOCK: Mr Black, in terms of the level of detail in this legislation, you've said a couple of times that you're concerned about the speed. Can you give us a sense of how comfortable you are with what the government has said they will legislate and then what they said they will consult on and put through delegated legislation? Mr Black : We think that, because of the nature of this legislation—as I mentioned before, it's been described by the government as the most consequential tax reform in 25 years—the less that you can leave to delegated instruments, the better. We would want to see as much clarified upfront. In terms of the process once more, one of the things that concern us is that, by virtue of the speed, we haven't had a chance to fully consider the implications of the legislation. Mr Addison referred a little bit earlier to CPA's submission, but I think that's quite illustrative of a couple of points. First, CPA make the point that, whilst Treasury indicates compliance costs to be in the order of $88 million on an ongoing basis, they consider that compliance costs on an ongoing basis will be between $295 million and $542 million and on a once-off transitional basis of $675 million and $825 million. What they say is their estimate is therefore three to six times Treasury's estimate. Now, that is fundamentally material because, if we're calculating who wins and who loses as a consequence of these changes, particularly in circumstances where we know that around a quarter of individuals with exposure to the CGT system report a gain of less than $100, we know that that calculation of who wins and loses can change very significantly if compliance costs are increased. We also know from the CPA submission that they've identified six errors in the explanatory memorandum in terms of how those particular details are articulated. Then there are differential views with respect to the impact of these changes on rents, with, of course, Treasury saying $2 a week, and you will have heard earlier that Master Builders and the Property Council say it's $9 per week. The reality is that one of those might be right and the other might be wrong or they could both be wrong, but because this whole process is rushed we don't know. Senator DAVID POCOCK: Have you quantified the risk of companies taking their business offshore if there aren't carve-outs for startups? Have you surveyed members about the level of concern? Mr Black : In the time that we've had available, we haven't. We had six working days within which to prepare our submission. Senator DAVID POCOCK: How do you respond to Robyn Denholm's comments that Australian startup founders need to stop 'whingeing' about government policies and to focus on building globally competitive companies for the artificial intelligence era? Mr Black : I would respectfully disagree with that. My view is—and this is based on the countless conversations that I have across my membership but also with businesses right around the country—that they want to invest money here, but frequently they find that the settings are more competitive overseas, so they are taking their money offshore. You see that with large companies, increasingly. Some public examples that have been well referenced include Woodside and BHP, and we saw just two weeks ago that AirTrunk, the data centre operator, invested $42 billion in India. This is money that we would like to see invested in Australia, and, unfortunately, consistently the feedback I hear is that our settings aren't sufficiently competitive to earn that investment. Senator DAVID POCOCK: There are a couple for COSBOA if that's alright with time. You're calling for eligibility thresholds for the small-business CGT concessions to be increased to an annual turnover of $10 million and net capital assets under $12 million. What does that do in terms of the number of small businesses that would be eligible or would fit under those caps? Ms Cappuccio : Currently, $10 million annual turnover is the definition that the ATO puts down for a small business. We would argue that there are 2.7 million businesses that are defined as small businesses that turnover less than $10 million. There are 2.5 million who turn over less than $2 million. So the difference between that is about 180,000 businesses that will be caught in that turnover change. Mr Addison : The asset value is, again, a different threshold that will remove some of those 2.7 million out of the eligibility because their asset value has increased above the current $6 million, which we're proposing go to at least $12 million. Senator DAVID POCOCK: What are the other concerns for small businesses outside of definitions and making sure people are covered? Mr Addison : I can give you a couple of case studies that have come to us personally about individual businesses. An engineering firm south of Perth were on a growth trajectory. They were looking and had plans to employ another five staff. The budget happened. They cut those plans straightaway. In fact, their mindset went to 'I'm so worried about what CGT does that I'm now looking to sack staff so that the business will remain viable and I will meet my retirement plans of growing the value of the business'. I was talking to various partners of a pharmacy, and a young person looking to buy into that pharmacy said: 'The budget has disrupted my thinking. Should I buy into a business right now?' But the owners had also come back and gone, 'We don't know what the CGT laws do to our sale.' There's a 1 July 2027 valuation date—and we can talk about the costs and impracticality of every business in Australia being valued on 1 July 2027—and the owners have gone, 'Let's just delay our sale-of-business decisions now because we don't know what the regime will look like.' Senator DAVID POCOCK: Are there that many pharmacists turning over more than $10 million, though? Ms Cappuccio : Turning over more than $2 million. Senator DAVID POCOCK: So you're arguing for it to go up to $10 million? Okay. CHAIR: You're at 10 minutes, Senator Pocock. Do you have any more? Senator DAVID POCOCK: Just one more if that's alright. Mr Black, I note that the BCA has said that restricting negative gearing and increasing CGT will discourage investment in new housing. I'm just wondering how you justify that, given that there's a carve-out for new supply. Mr Black : We are, I think, relying to a significant degree on the reality that if you increase the tax burden on business you are going to produce less investment, or the result will be less investment, and that is apparent from Treasury's own analysis within the budget, where it says that over the course of the decade you will see 35,000 fewer homes developed as a consequence of these changes alone. What's interesting about that is that we've been arguing for some time that the best thing we can do as a country, if we are intent on delivering greater housing affordability, is increase supply, and in the budget it is clear that the supply-side measures, specifically the investment in connecting infrastructure, add 65,000 more homes. Our position would be that there are so many levers from a supply-side perspective that the government could pull more—or, indeed, hasn't pulled yet and could pull—at both a state level and a federal level. So let's do what we all know will in fact increase housing affordability and pull those levers and pull those new ones too. Senator DAVID POCOCK: Is the BCA concerned that on the one hand you're saying we need more supply of housing and, on the other hand, you're talking about the $45 billion of AirTrunk investment—I think AirTrunk is now owned by BlackRock—that has gone to India? Do you not see that investment in building data centres is actually taking away from building housing? Mr Black : It depends how you look at it in terms of skills. We agree entirely that we need to invest more in skills, and that's one of the key levers that government can pull. We know, for instance, that employer incentives for bringing on apprentices have dropped over the course of the last few years. What's interesting is, when you consider the analysis from 2008 onwards, whenever we've seen an increase in employer incentives, we've seen a corresponding increase in commencements in and completions of apprenticeships. Equally, whenever we've seen a reduction in government supports, we've seen a corresponding reduction in commencements and completions. That's one lever that can be pulled on skills. There are other levers that we can pull with respect to our migration system, from a skill set perspective, and there are still further levers that we've spoken to in numerous reports, including with respect to simple things like career advice at schools. But the short point is, Senator, I would entirely agree with you that we do need to up our skilled workforce. It's not just for housing. It's not just for infrastructure and business development opportunities. It's for renewable energy projects. It's for state infrastructure as well. We're going to need more skills. Senator DAVID POCOCK: Thank you. CHAIR: Senator Chandler. Senator CHANDLER: I've got a couple more questions for both the BCA and ACCI. Obviously, the CGT changes that we're discussing go beyond just the housing market. One of the justifications is that it will remove a loophole whereby an investor could still effectively access the CGT discount for an investment property, for example, by purchasing it through a company and later realise the capital gain through the sale of the company. Do you believe that this would ever actually happen in practice or that it adequately justifies the expansion of these CGT changes to all assets? Mr Alexander : We've found it rather extraordinary. The government had clearly been looking at housing investment as an issue. When, on budget night, it appeared that business investment was going to be hit as well, we were very surprised given the government's declared intention to foster investment in business in Australia. We did feel that we were somehow collateral damage in an exercise aimed at investment in established property. It is interesting that, whenever the government is asked about the impacts on business, it answers in reference to property, which is a different story. We just don't think there's any prior reason why Australia needs higher taxes on investment in business. That's a choice that the government has made out of a myriad of different options for tax reform. You don't need to choose an option that says, 'This is going to require higher taxes on investment in business.' Senator CHANDLER: Mr Black, do you have anything to add to that? Mr Black : I think my colleague put the point well. The only point that I'd add to that is that I think, with any type of reform, you need to consider the costs and the benefits associated with that reform. We've seen, for instance, the argument put that there will be 75,000 more homeowners created as a consequence of these changes. That is a social good, and that is a good thing. I don't think anybody would argue against that. But the question is always then, 'At what cost does that come?' We see the cost will be three million Australians paying more rent. We see 35,000 fewer homes in circumstances where we say that the real answer with respect to housing affordability is more supply. We see 10 million Australians affected by these reforms, and that means 10 million Australians—half of Australia's adult population—will be subject to higher compliance costs. And we see that there will be no productivity uplift and no economic growth dividend that comes about as a consequence of the changes either. So, in those circumstances, we say, 'Is that benefit worth the cost?' and we would argue no. Senator CHANDLER: There has also been a number of references by Treasury to this OECD work around the impact of investment decisions as a result of these changes. Do you agree with that work and their assessment of that work? Mr Black : It's an interesting report. As I see it, the report does two key things. The first is that it speaks to the idea that it is not necessarily the case that CGT discounts will always be the best way of promoting investment. The second thing it does is say that, if you are intent on promoting investment, there may be other opportunities to do it. It does note that there is mixed evidence as to what the outcomes of CGT discounts are. But, I think, for our purposes here, with what we are arguing at the moment, if the proposition is that this report leaves the door open as to the impact of CGT discounts, that doesn't mean dispense with them and don't replace them with something better. It means to perhaps look at it but do it in the context of thinking, 'How we go about better driving the type of investment outcomes that we're looking for?' That's why, from our perspective, we have consistently argued that the best way of looking at the particular problems that we've got—nobody here, I think, would accept the idea that our tax system is perfect; it's not. We have intergenerational problems. They need to be addressed. The tax system is part of that. We have business investment problems. They need to be addressed. The tax system is part of that. We need to reform our tax system. However, is this the right way? We would say no. Let's go about doing this holistically. Let's take the time needed. Let's look at company tax, personal taxes, consumption taxes, state taxes and transfers from government to individuals. That's the appropriate way of proceeding, and we'd love to be part of that process. Senator CHANDLER: But Treasury continually uses this report to justify their policy decisions. Isn't that right? Mr Black : I can't speak to whether or not they are relying on this report for the purposes of advancing their particular arguments, but my point would be with respect to this report—if it highlights anything—it's that, if you are to dispense with a CGT discount, you really should be looking at something else. Senator CHANDLER: Mr Black, that segues nicely into my next question. I'm guessing the impact of these changes on business dynamism and productivity is not going to be a good picture, is it? Mr Black : We know, as I mentioned before, that we see reduced investment—and that's in the budget papers alone. But we haven't seen a full and rigorous assessment of these changes. As I've mentioned, that is to a large degree a consequence of the limited that we've all had. We need more time. We need to have these types of rigorous assessments carried out so there can be that genuine argument. What is right? What is wrong? Who's right and who's wrong. What's genuinely in the country's interests? Senator CHANDLER: We heard from witnesses earlier that introducing income averaging and removing the 30 per cent minimum tax would be an improvement on what has been proposed. Do you consider that those changes would be anywhere near sufficient to justify proceeding with this package, or would you say, 'No. Let's go back to the drawing board.'? Mr Black : We would say they're not sufficient to justify proceeding with the package. Senator CHANDLER: Mr Alexander? Mr Alexander : We would say that as well. They could ameliorate some of the worst impacts, but the overall damage is still there. Senator CHANDLER: COSBOA? Nods aren't on the Hansard. Mr Addison : A hundred per cent agree. Senator CHANDLER: Thank you. What is the impact of the rushed timeframe and the uncertainty created by having so much delegated legislation that we don't really know about yet that is going to sit underneath this bill? I think COSBOA might have touched on this in their initial response, but I'm interested in hearing from the other witnesses as well. Mr Alexander : I think it heightens the risk of bad legislation coming in with all sorts of unanticipated consequences. We've seen a glimpse of this. Almost every day there's a news story about impacts, whether it's charities or different sectors being impacted. The sheer size of the package really warrants a serious examination, not a quick-hit job to run it through the parliament. We haven't really even heard from mid-sized businesses, for example. There's a focus on startups, but there's a whole tier of business there that is going to be hit by these changes. Senator CHANDLER: That goes to the question, 'What is the problem in having an unknown here?' In terms of the business sector more broadly, what is their likely reaction or response to that level of uncertainty? Mr Alexander : Well, the uncertainty is very worrying, and that's impacting on business decision-making that's going on right now. They're concerned that they're going to be held to higher liabilities down the track. It's very dispiriting for them to see this coming their way. You can see it immediately. I've spoken to many businesses directly who can't believe that, after so much encouraging talk, this is the real action that comes afterwards, which is going to force them to reconsider: do they want to invest, do they want to establish here, or do they need to think about overseas—those sorts of questions—so it's come as a real shock. Senator CHANDLER: Realistically, if we pass this legislation through the parliament, and then it comes down to what the regulations look like and all of the fancy Senate things around disallowances and those sorts of things come into play, do any of your businesses and your stakeholders have any confidence that we'll be able to fix this retroactively once the regulations come into play, or is this really our opportunity now, with this legislation, to say: 'This isn't designed for purpose. This shouldn't be passing. It will be too late if we just wave it on through now and hope that we can fix it up later on'? Mr Alexander : I think it's critical that it's dealt with now rather than putting the legislation in and then worrying about it later. What about if the worries go back to the legislation point? The horse has bolted. So the sequence of events is the wrong way around. It should have been flagged and should be a proper review, like most legislation of this sort of consequence is. Senator CHANDLER: Mr Black? Mr Black : We would reiterate the points my colleague just made in terms of businesses being less likely to make investment decisions in times of uncertainty. We know that business confidence is low at the moment. Indeed, it's very low, and that makes it less likely, once again, that we'll see investments made. But we also see that uncertainty in domestic policy settings is well and truly matched by uncertainty with respect to global events in the world around us. That in turn impacts upon decisions that businesses are taking. Many businesses now think about trying to accept uncertainty as the new normal on the basis that they need to keep making decisions in circumstances where uncertainty is present, but that doesn't mean that they are liking it or that it is a good thing. To the extent that we can, the more that we reduce uncertainty and the more that we put information in front of people upfront so that they have an informed basis on which to make decisions, the better. Mr Stojanovski : Just touching on the legislative instruments as well, I'm conscious the chair of said committee is here and knows this all very well, but I guess you do cover a lot of instruments as part of that. I think it was 1,500-odd in the past year. And, as part of the process too, there is a lot to cover. And, at the same time, when things are put forward, it's put forward to be either approved or rejected. Amendments can't be made. Senator CHANDLER: Just quickly to the BCA, apart from the CGT changes, you've raised in your submission and, I think, mentioned in your opening comments an anomaly with FBT and the standardised deduction. Can you please walk me through how more tax might end up being paid from a tax cut or something that appears to be a tax cut? Mr Stojanovski : It's a—I don't know if 'quirk' is the right word. The way it would work now is if you've got a salary-sacrificing arrangement—let's say I've got a $1,000 arrangement for some work related expenses between an employee and employer—basically, you wouldn't pay FBT on it now, but under the proposed changes you would end up being caught by it, because otherwise a taxpayer would potentially get the benefit of the deduction through their salary-sacrificing arrangement, and then they could claim the standard deduction at the end of the year. So effectively they would double dip, if you want to put it that way. The way it's addressed in the bill is that that whole feature is switched off. So, if I have a $2,000 salary-sacrificing arrangement, I'll lose all of it, which in turn would mean that the employer would end up paying FBT on the whole amount. So I think this would end up having quite a big disruption to a lot of these arrangements, one way or another. Senator CHANDLER: I think that's just about me done. CHAIR: I will go to Senator O'Neill. Senator O'NEILL: I'm sure that you've been following the evidence today, and I think, Mr Black, you indicated in your response the best way of looking at this at the beginning of a couple of your sentences, which belies a particular world view. We've heard very different views over the course of the day, including from our first witnesses, about competing strategy—strongly held views. And I think that's what we're getting on the record today. I want to also acknowledge that COSBOA indicated they have had many consultations with the government, and I understand that the other representative groups have had that too, so we're not coming from a standing start. There is an ongoing conversation happening with this government. That being said, could I go to a point that you made, Mr Black, about foreign investment. Just for the record, what is the status of corporations and foreign investors with regard to the capital gains discount, to your knowledge? Mr Black : I'm sorry—what is the status? Senator O'NEILL: Yes. If I were an international corporation or a foreign investor, do I get a capital gains discount? Mr Stojanovski : It'll all depend on the different types of investment, and I think there are other changes that are being considered right now around the withholding regime as well. Senator O'NEILL: Let me put you out of your misery and say that corporations and foreign investors don't get the capital gains discount. That being the case, how do the changes that you've put on the record in your evidence this afternoon, Mr Black, really impact global competitiveness as you say? Mr Black : What we were talking about was our competitiveness for the purposes of investment attraction across the board. My point earlier was that we have a challenge already with respect to our investment competitiveness globally, but we also have a challenge in terms of our capacity internally to attract investment, because our settings aren't competitive and that holds investment back. That was part of the point that was made in response to the previous questions that were put. Senator O'NEILL: The reality is there's a lot of complexity here, and there are differences across all sorts of businesses. They're all different shapes and forms. If I can go to COSBOA, though, you do genuinely represent small business, I would say. ACCI, you represent small and medium enterprises. What's the 25 per cent tax regime in terms of your members? Isn't that something that they use currently? Mr Alexander : There are two tiers in Australia. There's the 30 per cent and the 25 per cent, but even the 25 per cent— Senator O'NEILL: Is that changing? Mr Alexander : No. There are no plans to change that. Mr Addison : No, but that's only the company tax rate, which is only a portion of the small businesses in Australia. Senator O'NEILL: Nonetheless, that remains the same. I think there's a lot of confusion in this space, so I'm trying to get some facts on the record. Can I go to the four small-business capital gains tax concessions. COSBOA, are they staying or are they going? Mr Addison : Referring to your opening comment about there being many discussions, 'many' is a subjective word. We've had discussions, and we would hope they would be ongoing before this legislation is considered by the Senate. Again, that call for—far more discussions need to happen. Senator O'NEILL: That call for consultation—that is heard. Mr Addison : Thank you. Senator O'NEILL: Many other participants have indicated that as well, with a very different set of arguments. This is a government that is listening, but there are competing views. Can I go to some real clarity on this. If you're in a small business, you're up to your eyeballs in running the business, right? You're balancing everything. The misinformation and confusion out there is driving people nuts. They haven't got time at 9 o'clock at night to go through all the detail, so let's get some clarity for them. There are four small-business capital gains tax concessions that some businesses might activate, but many are just going to hold on for a very, very, very long time and not ever sell off their business; they're going to hand it on to their children et cetera. Capital gains tax concessions, four of them—are they staying or are they going? Mr Addison : We would not know. We have not had the feedback loop from Treasury that has confirmed they have a policy position. Senator O'NEILL: Can I take you to the information from the Australian government, in response to the budget, trying to get this information out to the public. The Small Business Explainer factsheet says: If you sell your active business to retire, start a new business, or relocate, you can still reduce or completely remove tax on any gains if you meet the eligibility criteria. The most recent data shows that over 90 per cent of active businesses are eligible. That's there in black and white, but it's not in the black and white that I'm reading on social media or in the traditional media. Why is that fact is not featuring so prominently in the evidence we're receiving this afternoon? Mr Addison : Because it's in a government statement; it is not in the legislation, so it's not with certainty that we have that proposed before us. Senator O'NEILL: I would put a different view to you. It's in black and white there. It's for the information usage of actual small businesses who are needing the facts on the record, and those facts are there for them from the ATO. Could I go to the tax reform package—I'm sure you're aware of that—with $3.5 billion in new measures that reduce taxes on businesses, particularly to help support investment and cashflows. Can you explain how those investments will support small businesses? Mr Addison : We welcome the instant asset write-off being made permanent. It's been a call of ours for a long time. That is a positive that comes out of this budget. Senator O'NEILL: Once upon a time there was not such a thing as the instant asset write-off. Can you recall which government introduced it, Mr Addison? Mr Addison : No, I can't. Senator O'NEILL: I can tell you: it was a Labor government. Mr Addison : Excellent. Senator O'NEILL: There was a period where it ceased to exist. Do you know when that was, Mr Addison? Mr Addison : I'm guessing the answer is not when Labor was in government. Senator O'NEILL: It was Mr Abbott who removed that. Very importantly, all those small businesses out there—I come from a small-business family. In Labor we have many people who come from those sorts of families. Mr Addison : We welcome the measure. Senator O'NEILL: Excellent. I'm glad to hear it. Not only has it been returned; it is now a permanent feature. We are making it permanent, so I'm glad that you've got support for us there. I'll go to the other measures. Permanently introducing the two-year loss carry back—are you happy about that? Ms Cappuccio : Yes. It's also a measure we really welcome. Senator O'NEILL: What does that do for a small business? Let's get the facts on the record. Mr Addison : What it says is, if a business is continuing to grow, continuing to take risk and has, maybe, their third year of operation where they do not have a profit—so they make a loss—but in their first two years they performed particularly well and they paid tax, in that third year, when they've made a loss, they can look backwards two years, see how much tax they paid and claim some of that back to assist their cashflow. Senator O'NEILL: That's obviously very advantageous to small business to even out the lumpiness that is part of what happens. Mr Addison : I think it is a measure that offers some support to a business that is continuing to grow but has had a tough, as I put it, third year. Senator O'NEILL: Yes—which is possible. Do you know the quantum of cashflow support that the instant asset write-off alone provides to small businesses over the five years? Ms Cappuccio : Not off the top of my head. Senator O'NEILL: It's an important number. It's not a small number. Over the next five years, $890 million in cashflow support is flowing through to small businesses. That makes me think that there's been considerable fruitfulness in your discussions with the government about support for small business, which is at odds with the fear and alarm that seem to dominate so much of the debate at the moment. Mr Addison : As we've stated, we are in full support of the instant asset write-off and its impact. The quantum of that—we've asked for some detail behind that so we understand exactly how that benefit is quantified. We're in support of the instant asset write-off being made permanent. Senator O'NEILL: Could you explain something. I don't think even businesses understand, for the reasons that I was talking about, like that they're so busy doing their business—and that's one of the critiques; you should spend some time working on your business, not in your business—but they're hearing all this noise and alarm. The capital gains tax is a regime that many businesses would hear about and perhaps be alarmed about but not actually engage with. How would a typical small business come into contact with the capital gains regime? What capital gains triggers would they typically come across, and how would this happen? Mr Addison : I spoke to two examples that came straight to me earlier, where the business owners themselves were making different decisions because—where do they get their budget commentary from?—they've read the papers; they've listened to the radio; they've seen it on TV. Senator O'NEILL: Yes. I was verballed the other day. Somebody said that you can't make an investment in property, negatively gear it and bank the capital gains discount. That's just not true. You invest in new properties and you get exactly that. Misinformation is out there, isn't it? Mr Addison : Absolutely. To your point, I'm very pleased to see you identifying with the complexity of running a small business. They are overwhelmed at this point in time, not just by the economic circumstances but by the level of complexity and the level of regulation, be that federal or state. They are swamped. Somebody quoted to me today, from their research, that a very small business spends 0.6 of their time just on compliance matters. Senator O'NEILL: If I can draw you back to the capital gains trigger. Mr Addison : A hundred per cent. What are they doing? They're hearing, they're seeing the headlines, and, right at the moment, they are confused by the complexity. To your point, the misinformation is not helping. But, right at the moment, we don't have certainty. We don't know what this CGT looks at. We have a lot of discussion about carve-outs or tweaks or changes, and we have legislative instruments and regulations that don't exist at this point in time. Senator O'NEILL: We do have some documents that actually tell things as they really are. I would encourage people to look to those, and perhaps, if we could get this legislation passed quickly, the certainty would return to the sector, and people could make sound investment decisions. Thank you. CHAIR: I'm going to conclude there so that we can get to our last witness of the day. Thank you very much, everyone, for attending today. We appreciate your time..