9 June 2009 - 14 September 2010
Keynote Address to the
The Institute of Chartered Accountants' in Australia Business Forum
Hilton Hotel, Adelaide
9 June 2010
Thank you Yasser (El Ansary) for inviting me to this, the second business forum with Institute members.
This is a great event and as usual, the Institute is at the forefront of the tax reform debate.
And by all accounts the Institute is moving from strength to strength- I read just on Monday that you are in a very strong financial position, with solid membership growth leading to you breaking through the 50,000 member level.
Well congratulations to you on your strength, and indeed to the whole sector, you play a critical role, and as you know, my door is always open to you and your colleagues.
And when we look at what are the substantive fields in which you have and will need to continue playing that critical role, none rank higher than national tax reform.
The Government wants the best tax system for the 21st century and invites you to join with us to help achieve it.
And, forums like today show why the ICAA so successfully plays the role it does.
I would also add that if the last forum in Perth is any guide, you can all look forward to a stimulating and extremely practical program.
But you here today have one distinct advantage over your colleagues who I addressed in Perth.
On that occasion back in April, the report of the independent review of taxation hadn't yet been released- but now, well it's certainly out there for all in the community to see and debate.
And let's remember, that is exactly what we always said we wanted- a healthy debate on tax and tax reform directions.
I will come back to the Resources Super Profits Tax in more detail later, but I would ask that you recall our commitment to an informed and balanced debate.
We need to keep misinformation out and keep the facts in.
And the same holds true for all tax reform issues- there is no need and no value in crying that the sky is falling in every time a tax issue arises.
It helps not one little bit- intelligent, informed and civilised debate (and remember those facts!) is the way to go about it.
And it's in that spirit that I am here today and will head to Perth at lunch time to join the Prime Minister, the Treasurer and the whole Cabinet to engage in more tax reform discussions with the community there.
So, perhaps before we get right into the tax space, I think it worthwhile just to spend a little time to bring you up-to-date on the state of the economy and where this leaves us versus our peers as we come to the end of our financial year.
Australia's economic position
The world economy is staging a slow recovery, with a sluggish recovery in advanced economies and a more robust one in emerging countries.
Downside risks from global financial market turbulence and banking sector weaknesses have grown in the wake of concerns over some European economies.
The outlook for Australia's economy is considerably more upbeat.
The latest National Accounts data released this month showed GDP grew by 0.5 per cent in the March quarter to be 2.7 per cent higher through the year.
Much of that growth is down to the strong growth in public investment- 12.5 per cent- with the Government's stimulus programs, including the Building the Education Revolution, contributing around 0.4 of a percentage point to GDP growth for the quarter.
The positive outcome for the quarter signals a self-sustaining private sector recovery is in prospect.
The economy is expected to grow by 3¼ per cent in 2010-11 and 4 per cent in 2011-12 which will return the economy to full capacity in that year. The unemployment rate is forecast to fall to 4¾ per cent in late 2011-12.
The Budget is expected to be back in surplus by 2012-13- that is in three years and three years ahead of schedule.
Here in South Australia, the outlook for your economy has also strengthened since the last State Budget.
The latest data show growth in State Final Demand of 1.3 per cent in the March quarter and growth of 5.2 per cent over the year to the March quarter.
The most recent official forecasts have the South Australian economy growing by 2¼ per cent in 2009-10 and by 2½ per cent in 2010-11- not the recession forecast in the last State Budget.
Aggregate business investment proved to be remarkably resilient – although private non-residential building investment did fall significantly in South Australia, as it did across the nation.
And how does all this compare to our international competitor economies?
The Treasurer who will today arrive back into Australia from attendance at the G20 Finance Ministers meeting in South Korea certainly had a comparatively strong story to share with his global counterparts.
The debt difficulties in Greece, and Europe more broadly, continue to generate turbulence on global financial markets. Hungary is the latest country in Europe to cause concerns about its finances.
Here in Australia, however, we have one of the strongest budget positions in the developed world, with forecast deficits now lower across the forward estimates. For 2010-11, the forecast underlying cash deficit is $16.3 billion less than it was a year ago - at $40.8 billion, or 2.9 per cent of GDP.
Net debt is projected to peak at just 6.1 per cent of GDP in 2011-12 - half of the level projected a year ago and less than one tenth of the average across the major advanced economies. The average debt of these economies will peak at 93 per cent.
The recovery is the United States remains patchy with the latest unemployment figures proving disappointing.
The U.S. economy added 431,000 jobs last month- but 411,000 of those were temporary Government positions for the 2010 Census and there was a marked slow down in private sector employment growth.
The US unemployment rate fell by 0.2 per cent and still stands at 9.7%, while in some countries in the Euro zone it's well into double digits.
Our unemployment rate at 5.4 per cent, already the second-lowest among the major advanced economies, is set to fall further, to 4¾ per cent by mid-2012.
As the Treasurer has pointed out, there is currently a two-speed or even three-speed global economy, with the Asia-Pacific and Australia growing strongly and setting the pace of recovery.
But the growth in the global economy- whether today driven by China and India, or into tomorrow- stands to see Australia benefit markedly.
Australia is set to reap the benefits of ongoing strong demand for bulk commodities from emerging Asia and recovering demand from advanced economies should deliver higher export volumes and prices for Australia, contributing to growth and boosting the terms of trade.
Building a stronger, broader economy
The Resource Super Profits Tax
And this helps explain why a key element of the Government's long-term tax reform package — Stronger, Fairer, Simpler: a Tax Plan for our Future — is a Resource Super Profits Tax.
We want to capture the benefits of the resource boom for all Australians, address the challenges of ageing population and ensure we have the skills and capacity to drive future growth.
This super profits tax applies only to very high profits.
And on profits derived from the resources that Australians own.
The single super profits regime on non-renewable resource projects from 1 July 2012 at a rate of 40 per cent will effectively replace multiple royalty regimes with one tax.
This will allow us to fund higher retirement savings, more roads, rail and ports, fewer and lower business taxes and less red tape, especially for small business.
The Australian people own 100 per cent of Australia's natural resources and deserve a fairer share of the super profits mining companies make during a boom. As mining companies' profits have risen, the Australian people's share of those profits has fallen.
The Government simply wants to take the Australian people's share of mining profits closer to where it was in the early 2000s.
The super profits tax regime only taxes profits and fully recognises the large investments made in resource projects.
It is designed to share risks between miners and the government, with transfers of deductions and refunds for eligible unused deductions.
The Resource Tax Consultation Panel is holding targeted consultation with industry to resolve design issues in a way that will best deliver on the aims of the super profits tax.
And let's remember, the Government will use about a third of the revenue to directly assist the resources sector.
A new infrastructure fund will make infrastructure spending a permanent feature of Commonwealth and state budgets.
It will deliver $700 million in 2012-13 and more than $5.6 billion in the next decade. Without infrastructure funding, capacity constraints will hold back resource sector expansion.
The Government will also deliver on its commitment to promote new investment in the resource sector through a resource exploration rebate.
Exploration costs for geothermal energy will also be eligible for the rebate.
So this is a regime based on the super profits of a sector that we all own an interest in but that is based on a product that will never be renewed- yet the regime is one that is clearly targeted as supporting that same sector in many new and innovative ways.
The whole community will gain (or lose)
Now the other critical point to make is that there are several other very important ways we all either stands to win or, if the super profits tax is not put place, lose.
You must remember that the revenue from the super profits tax will be used to:
- lower tax for all companies, especially small businesses
- generate more superannuation savings for working families
- dramatically simplify tax time for millions of Australians, and
- encourage greater deposit savings and boost competition in banking services.
I want to quickly touch on each of these.
Company and small business tax arrangements
A phased cut in the company tax rate to 28 per cent, starting from 2013-14 will help make Australian industry more competitive across the board. And we will seek to cut the company tax rate further, as revenue allows.
Small businesses will get a head start on the company tax cut, with the 28 per cent rate applying from 2012-13.
Small businesses will benefit from a new instant write-off for assets costing up to $5,000. Depreciation for other assets will be simplified, reducing complexity, cutting red tape and providing upfront tax relief.
Individuals will also directly benefit as we save rather than squander another large slab of the benefits of the boom, and translate higher economic growth and wages into long term benefits and more secure retirements.
The superannuation guarantee will gradually rise to 12 per cent. Around 3.5 million lower paid Australians will receive a concession on their superannuation guarantee contributions, for the first time. People aged over 50 with lower super balances will be given more generous contributions caps to allow them to make catch-up contributions.
And I have heard some in this debate question how increasing employer contributions to people's super accounts costs the Government money- and therefore why do we need to the super profits tax to pay for this.
So I want to again explain why this is the case.
As we direct more income from employment into super accounts- that money is taxed at highly concessional rates when compared to it having been left as income in the worker's pay packet, which generally attracts a higher tax rate.
In the first year, the SG rises by 0.25 percentage points for example, with a cost to revenue of $240 million 2013-14.
This rises to $3.6 billion in 2019-20 when the SG reaches 12 per cent.
So this is a real and direct cost- but it's an investment we in the Rudd Government believe almost speaks for itself, it is so valuable to our community and our national future.
Tax time simplification
And this package includes another first for working Australians, and that is the first time our system will have a default offer of a standard tax deduction for work expenses.
Taxpayers can choose a $500 standard deduction to cover work-related expenses and the cost of managing their tax affairs. This standard deduction will rise to $1,000 from 2013-14- benefiting 6.4 million Australians.
In South Australia, this would benefit 460,000 people in the second year and they would be $120 million better off over the first two years of the policy.
Taxpayers with higher expenses can of course continue to claim their expenses as they do now and not be worse off.
This will simplify the tax system and make filing a tax return easier for millions of taxpayers.
Deposit savings and supporting better bank competition
And the tax treatment of interest income will be overhauled thanks to proceeds from the super profits tax.
From 1 July 2011, individuals will receive a 50 per cent discount on up to $1,000 of interest earned on deposits, bonds, debentures and annuity products.
This discount means interest income will receive a similar tax treatment to capital gains on assets held longer than a year.
It will help Australians save for their future and around 5.7 million Australians will reap the benefit next year.
And, in a move that will encourage a healthy level of competition in the banking sector and enacts key recommendations of both the Johnson report on Australia's position as a regional financial centre and the Henry tax review, starting in 2013-14, the Government will phase down the main 10 per cent interest withholding tax rate applying to offshore borrowings of financial institutions to 5 per cent in 2014-15.
We will try to reduce this rate to zero, subject to our medium-term fiscal objectives.
So, all in all, this is a major package and let me be clear, we simply cannot do any element of it without the super profits tax.
This is not an exercise in anything other than fiscal discipline- we cannot take these important economy-boosting actions without paying for the substantial bill they give rise to.
Our commitment to a balanced Budget is rock solid, so I just hope, as the community - both the broader community and the tax community I am addressing specifically today- formulate their views in this debate, they do two things.
First, we remember the facts and reject the misinformation.
Second, we think about the importance of what this Rudd Government wants to do with the proceeds of the boom- more super in every Australian's account, less complicated tax affairs for most, lower taxes and more growth for the whole economy.
These are big, long-term reforms designed to set Australia up for decades to come, not just a few years.
It's a package deal that is important both for the South Australian economy and the national economy at large.
Now, as you all know, I have a wide range of other work underway in any number of areas- a totally new tax system for managed investment trusts, an investment manager regime, Islamic finance, a comprehensive review of the tax treatment of collective investment vehicles, issue on private equity taxation treatment, foreign investment fund rules, an anti-roll up rule, the tax treatment and regulation of private and public ancillary funds- and I would be more than happy to take your questions on any of these issues.
But I wanted to end this morning by highlighting a fact I know you in this room all appreciate- tax reform is a process, not a one-off exercise.
The Treasurer has stressed this, the Prime Minister has too.
This was the prism through which the Henry Report was surely authored and this is the spirit in which we are currently seeking to work with the community on tax reform.
The Government has embarked on a program of significant tax reforms that will build sustainable growth with low inflation.
They will help to deliver a stronger economy which will benefit all Australians through more jobs and higher wages.
Global conditions remain challenging, yet our economy continues to grow. Structural reforms of the kind I have described are the kind of changes we must make if we are to successfully meet the challenges of the future.
These are not just reforms for now.
They are reforms that will help set Australia up for the next decades, not just the next few years.
And I thank you in the tax and accounting sector for the role you've played to date and I am sure will continue to play going forward.