Senator JOYCE—I have a question with regard to the Tax Laws Amendment (Measures No. 4) Act 2006, which for the record covers capital gains tax exemptions for foreign companies for shares inaction. For the record, the passage of this legislation was supported by Labor. Did you give any advice on what would be compromised with regard to tax revenue on the passage of this legislation and the effect of foreign companies becoming capital gains tax free for majority non-real property assets which they show as inaction shares? Did you give any advice to Treasury on what that cost would be?

Senator JOYCE—It was $245 million over four years?

Senator JOYCE—That is $65 million in the first year and $50 million in the proceeding years after that. Would you feel that those figures are still relevant?

Senator JOYCE—Bearing in mind the event of private equity firms and the $11 billion possible takeover of Qantas, which is still on the table, do you think that those figures are grossly underestimated?

Senator JOYCE—Can we just look at the $11 billion in isolation. Of that $11 billion, 49 per cent is domestic, so let us talk about the 51 per cent foreign. That is roughly $5 billion. Let us say they get a 20 per cent increase, which would be stock standard for capital gains tax sales. That is a $1 billion capital profit for which in the past there would have been a 30 per cent tax. So we would have been looking at $300 million into the Australian coffers. After this, the passage would be zero. How do we comprehend $65 million, $50 million and $50 million when one event in isolation—

Senator JOYCE—At the time it was stated that there was a trade-off. There were other countries that have a like—

Senator JOYCE—Obviously you cannot take into account the countries that already have that process in place because they would be part of your figures. You cannot gain a saving from a position that already exists. You can only gain a saving from a position that is intended—that is, an intended change in the tax rules in another country which is a predominant Australian investment target. For instance, if you are talking about your costings, you cannot take into account the position of England because they should already be in your costings. You cannot take a saving. Is there another country that is a predominant Australian target that intends to change its capital gains tax rules to effect a saving for Australian investors?

Senator JOYCE—Which countries are they?

Senator JOYCE—So the belief was that there would be changes overseas and they will be sending their tax home and we would be taxing here. Just like they would be taxing it in their place of residence, we would be taxing our investment gains overseas in Australia. Is that correct?

Senator JOYCE—That would presuppose that if the costings of $65 million, $50 million and $50 million were correct, the intended changes overseas would bring about that savings, because otherwise they would be part of your costings already. What I am saying is you cannot—

Senator JOYCE—It could be avoided now. All I have to do is set up in New Zealand, where they do not have capital gains tax, siphon any capital gains I made in Australia into New Zealand and not pay tax at all.

Senator JOYCE—But if I were to wave my magic wand, buy Qantas and in a few years time sell it—and if my entity was based in New Zealand—I would not pay capital gains tax, would I?

Senator JOYCE—So I would be tax free.

Senator JOYCE—I am not very clever, but I am sure there are other people out there who are. Surely they would have thought of that.

Senator JOYCE—To base themselves anywhere—the Bahamas, New Zealand or any one of those other small islands.

Senator JOYCE—Part 4A.

Senator JOYCE—This is not a trick question. What are the arrangements of the United States on capital gains tax on shares? If I invest in the United States, are their arrangements an exact reflection of our arrangements?

Senator JOYCE—Can you take that on notice?

Senator JOYCE—I turn now to negative gearing through private equity buyouts and the position there. Referring back to that $65 million, $50 million, $50 million and $50 million, do you still stand by those numbers or do you think they need updating now?

Senator JOYCE—Are you still looking at that?

Senator JOYCE—Are you reinvestigating that amount?

Senator JOYCE—So the answer is yes. With the negative gearing of these entities and thin capitalisation rules, what is the position of the Taxation Office with regard to possible revenue compromise by private equity firms’ investments in such things as Qantas, Coles, PBL and other potential targets? What is the tax compromise by the higher gearing of these entities and the effect on the Australian tax take?

Senator JOYCE—Hang on. We have just exempted them.

Senator JOYCE—That is a one-off event. Once the foreigner buys it, then that capital gains tax remains overseas. Unless they sell it back to Australians, it is not going to come back into the loop. There is an inherent disadvantage in being Australian and investing in an Australian company. I would rather live in New Zealand and do it, because there is a cost advantage in doing it from there.

Going back to the tax effect of the negative gearing: with your income stream you have a tax deduction that is going to an overseas entity so you cannot tax it in Australia, and when that same overseas entity sells its investment it is capital gains tax free. So it is out of the loop in two sections. Have we done any investigations? I am not blaming you, because this is a new advent. Private equity firms have only arrived in recent times, but are we doing a strong analysis on what the effects will be because, if we need to change laws, we need to change them on what the effect will be on the Australian tax take. About 40 per cent of our tax revenue is corporate, is it not?

Senator JOYCE—The instrument of debt becomes an instrument of control when it is so prescriptive that it actually tells the organisation how it is going to work. Therefore, it may be nominally in debt but it is implicitly in an equity position. It has more fundamental items of control than the nominal shareholding position. Coming from my five years in banking, all I have to do is to say: ‘I will lend you the money. These are the key performance indicators and this is what I expect of you. These are your cost structures and this is how you will operate.’ Inherently I now have, by ipso facto, an equity position. Do we need to concentrate on that and look at potential amendments in the future to take that on board?

Senator JOYCE—Do you, under your taxation department powers, get to examine of those debt documents to determine if they are, by default, really not so much a debt instrument but an equity instrument?

Senator JOYCE—I refer my question to Mr Michael D’Ascenzo.

Senator JOYCE—When you see these private equity players in the market, do you actively investigate their debt instruments so as to ascertain whether they are ipso facto controlled instruments?

Senator JOYCE—How do you determine that without investigation of them?

Senator JOYCE—Are you doing that?

Senator JOYCE—Let us say it is sourced overseas. I am talking about it being sourced overseas.

Senator JOY