The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Nick Sherry

Nick Sherry

Assistant Treasurer

9 June 2009 - 14 September 2010

Speech of 26/04/2010

NO.010

Address to the Joint Business Luncheon of the
Australian Business Group of Abu Dhabi and the
Australian Business Council of Dubai

Abu Dhabi, United Arab Emirates

26 April 2010

Introduction

First, good afternoon and thank you all for coming today.

Salam alay kum (Peace be upon you)

I am truly honoured and delighted to be here today and to accept your gracious hospitality.

I would like to recognise the presence of Australia's Ambassador to the United Arab Emirate (UAE), His Excellency Mr Doug Trappatt.

I would also particularly like to thank the Chairman of the Australian Business Group in Abu Dhabi, Mr Kelvin Templeman, and the Chairman of the Australian Business Council in Dubai, Mr Derick Garlick, for hosting today's event.

I would take this opportunity to say a few words about both organisations.

The Australian Business Group in Abu Dhabi was established four years ago and already boasts over 250 members. The Group works closely with businesses here in Abu Dhabi and works hard to promote bilateral ties and bilateral growth.

The Australian Business Council in Dubai is another great organisation, working hard in the interests of a strong bilateral relationship. You and your predecessor organisations date back to 1993 and you've grown from an informal networking body to a 500-member strong body that focuses on promoting trade and other beneficial relationships between Australia and the Gulf region, with Dubai as your main focus.

I think it's excellent to see business groups like both of yours working together to promote trade links between Australia and the UAE.

You're both top flight examples of Australians working hard internationally to promote the strengths of our vibrant economy.

Congratulations to both of you on your work.

I'd also like to thank the Abu Dhabi Chamber of Commerce and Industry and it's Director-General His Excellency Mohamed Rashed Al Hameli, for their support of today's event.

I would like to point out that accompanying me here today is an Australian trade delegation.

Organised by Austrade, our national trade promotion agency, the delegation comprises representatives from Australian and international financial institutions, major Australian law firms, Australian funds management companies and investment houses and a representative from our peak superannuation (private pension) sector.

The focus of the delegation is Islamic finance, about which I will say more shortly, and I also welcome them and I encourage everyone here today to take the opportunity to engage with such a high level group of business leaders from Australia.

United Arab Emirates

Now, I have to say, it's wonderful to be back here in the UAE.

As I mentioned to a dinner group last night, I actually have a long family history here.

And it goes back to my father.

My father, who was also, among other things, a Member of Parliament, also had a career as an Australian expatriate working right here in Abu Dhabi, where he ran public relations for one of the first international hotels here in the Emirate.

In taking that role he was one of the early Australian professionals to work here, and when I got my itinerary for this trip I was extremely pleased to see that I was actually staying at the very hotel he once managed!

Just last week, in preparation for this trip, I found some old photos actually taken by my father, of Sheik al-Zayed himself – they're great pictures, of a great time.

I was also told the hotel has added significance in that it also hosted the first ever meeting of the Gulf Cooperation Council, or GCC.

I am not quite sure if my father was around for that, but he told me many great stories of this wonderful city that have stayed with me forever.

And, I do recall my first visit here in the early 1980s.

You have certainly made some changes since then!

But one thing that seems the same is the vibrancy, the energy and the focus.

And therein lays the basis of the strong Australian-United Arab Emirate bilateral relationship.

We share these important common features.

And these commonalities manifest in the bilateral data.

The warm relationship Australia enjoys with the UAE is based on extensive trade and investment relations, expanding high-level contacts and deep people-to-people links.

About 15,000 Australians, many of them talented professionals, are contributing to the Emirates' ambitious development agenda through their expertise in the health, education, financial, legal, design and construction sectors.

As well, about 300 Australian companies have operations in the UAE, while the number of UAE nationals studying in Australia continues to grow.

Over 1,700 UAE students are studying in Australian universities.

Our bilateral trade now amounts to a two-way merchandise trade figure of over A$5.5 billion in 2008-09 – the largest bilateral trade relationship between Australia and the region.

Our highly complementary economies create a good fit.

Australia's advanced engineering capability is ideal for the UAE's huge infrastructure programs, while Australian small-to-medium-sized enterprises offer world-class services that can be readily adopted by the UAE Government and private sector.

But our relationship goes beyond economics and trade.

Our two nations also share a strong interest in a stable and secure Middle East and Gulf region, and a strategic view on the security and development of the region.

As such, the Australian Government strongly values its dialogue with UAE leaders.

The Emirates have hosted a number of high-level Australian visitors in recent years, including the Prime Minister Kevin Rudd, the Governor-General Her Excellency Quentin Bryce just last week, and several senior Government Ministers from both the Federal and State levels.

And the UAE has reciprocated.

In January and February this year, Australia welcomed the UAE Foreign Minister, His Highness Sheikh Abdullah bin Zayed Al-Nahyan on his first official visit to Australia for the Australia-UAE Ministerial Forum.

On that occasion, Sheikh Abdullah and Australia's Minister for Foreign Affairs, the Hon Stephen Smith, issued a joint statement and signed a Memorandum of Understanding on the establishment of a Joint Committee on Consular Affairs.

Other high-level Emirates visitors to Australia over the past few years have included Her Exellency Sheikha Lubna Al-Qasimi, your Minister of Foreign Trade.

I should add that Australia is keen to further broaden and strengthen our relations with the Gulf Cooperation Council to cover foreign, trade, strategic and security cooperation.

Foreign Minister Smith sees the GCC-Australia Foreign Ministers Strategic Dialogue as an essential platform for promoting and facilitating closer engagement.

The inaugural Dialogue is scheduled for 2010 and it will be an important further step in the deepening of our relationship.

So, all in all, a big relationship and a big future.

Now I want to turn back to the core of my visit here – an Australian perspective on the global economy, the international financial environment and the role of Islamic finance.

But first I wanted to say a few words about the Australian economy and how we've weathered the storm.

The Australian economy

Just last week Dun and Bradstreet declared Australia the world's best economy in which to invest.

That declaration didn't just happen by chance, I can assure you.

It came from Australia having the right fundamentals and the right policy settings.

Australia's economy grew by 0.9 per cent in the December quarter 2009, and 2.7 per cent through the year to the December quarter.

Last week's World Economic Outlook from the IMF noted Australia and the newly industrialised Asian economies will likely stay in the lead in the recovery.

The IMF forecasts that Australia will grow by 3.0 per cent in 2010 and 3.5 per cent in 2011. According to the IMF, our growth outlook is stronger than that for other advanced economies as a whole, which are forecast to grow collectively by 2.3 per cent in 2010 and 2.4 per cent in 2011, after contracting by a record 3.2 per cent in 2009.

The latest forecasts (MYEFO) project the Budget to return to surplus by 2015-16, with net debt to peak at 9.6 per cent of GDP in 2013-14.

Australia will continue to have lower deficits and lower debt than the major advanced economies. The net debt of these countries will be an average 93 per cent of GDP in 2014 – in other words, Australia has one-tenth the average net debt of the major advanced economies.

The global economy – cooperation is key

Economically, we are truly living in a global age.

Here today we may be physically in the Gulf, and yesterday I may have physically been in the Asia-Pacific, but to the global economic market, we are one, complex interrelated international economy.

As part of this, the world has seen a rapid expansion in cross-border economic and financial activity.

This has been spurred by expanding trade and investment, the liberalisation and deregulation of domestic markets, the growth of multinational enterprises and the increasing mobility of people.

Despite the damage caused during the recent financial crisis, we can only expect cross-border trade and investment to continue growing.

And that's ultimately a good thing.

But as the global crisis clearly showed us, globalisation not only creates opportunities for the international economy, but also provides it with major challenges.

That's why it's critical that all economies cooperate to secure future growth.

If Australia's strengths and the UAE'S strengths are to be maintained – we need to continue working together to deliver an improved global financial system.

International dialogue and cooperation are essential for effective policy making, and engagement with the international community is vital for ensuring a strong, sustained and balanced global recovery.

For an example, we need look no further than the G20.

The concerted and decisive actions of that forum helped the world to deal effectively with the global financial crisis.

Australia has a seat at that table, as does your direct neighbour Saudi Arabia.

This is the key global forum that will help steer balanced global growth going forward, and the key forum in which we can all work for the most productive economic outcomes.

And, despite it having taken an international battering, Australia still believes the financial sector is a critical component of that global story.

Australia as a financial services centre

Australia's financial services industry is one of the world's most sophisticated, competitive and innovative.

It is also one of the safest.

The finance and insurance sector is now the largest contributor to the Australian economy.

In 2008-09, the sector generated about 10.8 per cent of GDP.

Over the past decade, the sector has grown by an average of 4.3 per cent a year — significantly above the average for all sectors.

Our banking system is extremely strong.

All four of the major Australian banks are AA-rated — out of a total of just nine rated AA worldwide, yes almost 50% of the AA-rated banks are from Australia, and this is just one indicator of the soundness of our financial and regulatory system.

In fact, the World Economic Forum's Financial Development Report 2009 ranked Australia as the second most developed financial centre in the world, behind the United Kingdom, but ahead of the United States.

We earned this ranking primarily due to the stability of our financial institutions over the last 12 months.

Another reason for our sound performance is the size and sophistication of our pool of managed funds, a direct result of Australia's compulsory superannuation system which has been in place since 1992.

At over $1 trillion and forecast to grow to four trillion within 20 years, Australia's pool of investment funds under management is the fourth largest in the world, and the largest in Asia.

These funds have been at the disposal of the Australian economy.

The skills that we have developed in managing this massive pool of funds have been a vital factor in the growth of our financial services industry.

Our funds management industry has capability across liquid asset classes such as equities and fixed interest, as well as illiquid assets such as infrastructure and property.

As well as funds management, the sector has considerable expertise in developing innovative financial products in infrastructure, securitisation, property and trade finance.

Islamic finance

So, while our finance and insurance sector already generates significant jobs and wealth, we recognise that it still has a great untapped potential.

That's why the Government of Prime Minister Kevin Rudd, through our Minister for Financial Services and myself, are working to build on this record and, in doing so, position Australia as a leading financial services centre.

In this regard, in September 2008, we commissioned a report into how we could better achieve that goal.

On 15 January this year, the Government released the final report of this process, known as the Australia as a Financial Centre (or the Johnson Report).

The report concluded that Australia has arguably the most efficient and competitive financial sector in the Asia-Pacific region, but there are further opportunities to expand our exports and imports of financial services.

And it made a range of important recommendations, including specific steps to ensure Islamic finance is enabled in Australia.

And that's exactly what I know want to address.

The competitiveness of Australia's financial services sector offers great opportunities for Islamic banks and financial institutions to do business in our country, or to export their products to Asia from a strong, stable and extremely well regulated regional base.

It of course also presents opportunities for Australian-based banks and financial institutions to develop Islamic or Shariah-compliant finance products for domestic and international markets.

Australia is well aware of the potential for Islamic finance in developing our nation as a financial services centre.

The Financial Centre Report I just mentioned includes two specific recommendations on Islamic finance.

First, the Report recommends the removal of regulatory barriers to the development of Islamic finance products in Australia.

Secondly, the Report calls for an inquiry by the Board of Taxation into whether Australian tax law needs to be amended to ensure that Islamic financial products have parity of treatment with conventional products.

It is with great pleasure I can announce here today that as the first major instalment in the Government's response to this landmark Report, I have just directed the Board of Taxation to undertake a comprehensive review of Australia's tax laws to ensure that, wherever possible, they do not inhibit the expansion of Islamic finance, banking and insurance products.

Islamic finance is a rapidly growing part of the global financial system and Australia is in an excellent position to capitalise on that growth, but we have to ensure our tax system doesn't unnecessarily prevent that from happening.

Today's announcement is major step in ensuring that we get the settings right.

The Johnson Report stated:

"…another major source of offshore capital is the Middle East, reflecting the sharp rise in the world price of oil. The greatest opportunity for Australia in terms of accessing offshore capital pools at competitive rates would appear to be in the area of developing Sharia compliant wholesale investment products."

As many of you would know, the main tax issue faced in relation to accommodating Shariah-compliant financial products in most Western tax systems is the form-based nature of such instruments.

That is, whereas Western tax codes normally focus on the details of the transaction in question and levy tax accordingly, this approach may give rise to anomalous tax treatments for Islamic instruments.

In a strict "form" approach, a transaction may, on its face, indicate one tax outcome, whilst the economic substance of the transaction may indicate another.

I am very pleased to say that Australia has made major inroads into integrating an economic substance approach into our tax laws, particularly with the latest of what is known as the Taxation of Financial Arrangements (TOFA) legislative reforms that I have into our Parliament.

The reforms are squarely based on assessing the economic substance of a transaction rather than its legal form.

The Board of Taxation review I am announcing today will take this work to the next level by examining the Australian tax laws to make sure the wholesale market for Islamic instruments is not being hampered.

I would like to be clear, this is not about special treatment or concessions for Islamic finance or its providers – and no-one interested in this market back in Australia has ever come to me seeking special tax beneficial arrangements.

Our decision to review our entire tax code through the perspective of the treatment of Islamic financial instruments is about ensuring that our system doesn't unfairly disadvantage or preclude such instruments.

This will have a dual advantage – of course, if Australia's tax system continues down the path of accommodating this type of finance it will serve Australia in terms of capital attraction, jobs and growth.

Fostering Islamic finance in our country will also open up new education and training opportunities for our universities and tertiary institutions.

For example, just last year, La Trobe University launched Australia's first Masters Degree in Islamic Banking and Finance. And many universities now offer subjects on Islamic banking and finance as part of a commerce/accounting/finance degree.

Australia's major financial institutions are already moving into this area.

In February 2010, one of our top four banks, Westpac, was the first Australian bank to offer a short-term wholesale investment product structured specifically developed for Islamic financial institutions.

As well, Australia's largest investment bank, Macquarie Group, recently revealed it planned to set up an Islamic finance joint venture with the Bahrain-based Gulf Finance House to target markets in the Middle East and North Africa.

But in addition to all of this, it will serve the Islamic world both as another option to deliver a strong and diversified investment portfolio and as a critical stepping stone into the broader Asia-Pacific.

Apart from all of this, there are almost 400,000 Muslims in Australia who may use Islamic financial services if they are more accessible and we feel that is an important element in why we are taking these actions.

As well, this would widen the choice of products for non-Muslims.

The detailed Terms of Reference of the important tax review, including the dates for reporting to Government, will be released in the near future and I look forward to further engaging with you all as we move forward on this issue.

Conclusion

The rapidly growing Islamic finance, banking and insurance market is worth almost $1 trillion and could reach as much as $5 trillion, according to Moody's Investor Services.

The UAE sits right in the centre of that.

As I said earlier, the UAE is a virbrant, energetic economy and a critical partner for Australia in the region.

Australia's our open and stable economy, the sophistication and competitiveness of our financial services industry, the strength of our regulatory system, and our unparalleled performance during and after the turmoil of the global financial crisis mean that we have a great deal to offer as a partner to this region.

Strengthening and deepening our economic ties can only benefit both our nations.

I hope my announcement today of the next step in Australia's role in the international Islamic finance market shows just how genuine we are.

It's been an absolute pleasure being here today, somewhat in the footsteps of my father.

Once again, I would like to thank you for inviting me to be here, for organising such a great event and for all coming along.

SHOOKRAN (Thank you)