9 June 2009 - 14 September 2010
Tax Reform - A Dynamic Process
Keynote Address to The Australian School Of Taxation
Post-Henry Review Tax Conference
The Museum of Sydney
21 June 2010
I'd like to start by thanking David Gonski, Chair of the Australian Stock Exchange, Coca-Cola Amatil and Investec, among many other things, and Professor Fred Hilmer, Vice Chancellor of the University of NSW, for inviting me here tonight.
I'd also like to specifically acknowledge the Australian School of Taxation, or A-Tax, at the UNSW, which has been the primary organiser of this important conference. Thanks particularly to Professor Margaret McKerchar, the Head of School at A-Tax.
A-Tax is certainly a globally leading taxation school and I note with interest that on your website you highlight that, and I quote:
"The rate and volume of tax reform in Australia in recent years has resulted in a sweep of legislative and policy changes. Accordingly, there is a need for tax administrators, lawyers, economists and accountants to ensure they have the skills to operate in this dynamic environment."
I will come back to this point later but I recite this extract to highlight that Australia's leading taxation school fully understands that tax reform is not a staged process, and it's certainly not static.
It is dynamic, it is about give and take, it is about balancing the immediate-term with the long-term. But more about that shortly.
I'd first also like to acknowledge the Taxation Law and Policy Research Institute at Monash University and the Institute of Chartered Accountants Australia for their respective roles in organising this conference.
And this is a very important conference and its agenda is ambitious.
I also understand we have here tonight economists, tax policy experts and academics from around the world, including from the United States, Canada, Germany, the UK and New Zealand.
A warm Australian welcome to you.
Australia's Future Tax System
Now to the reason we're all here - tax reform.
The Australia's Future Tax System review, known as the Henry Review after the chair of its oversight panel and your earlier speaker today Dr Ken Henry, the head of our Treasury, was established by the Rudd Government because we need a tax system for the future, not just a tax system inherited from the past.
We need a tax system that will meet the challenges we know are either upon us today, or that are fast coming around the corner.
These are the truly massive challenges that will form the major public policy concerns of our children's and their children's generations.
Population growth (or decline in many parts of the world), population ageing and the challenge of fiscal rectitude in the face of fewer people working, higher health costs and more people in retirement.
How to fund the infrastructure we need as a modern economy.
How to manage and fund the challenge of sustainability, whether that be environmental, economic or social sustainability.
How to channel transformational new technologies to deliver an ever more productive and efficient economy that sees less red-tape and that maximises people's personal time.
The common denominator in all these policy challenges is, of course, the tax system.
If the tax settings are outdated and don't reflect how best to confront these challenges, then we miss the chance to lock in growth, wealth and economic and social progress.
Essentially, if our tax system is aimed at the challenges of yesterday, then we start with a handicap in dealing with the challenges of tomorrow.
And this is a constant process and one that, like so much in our modern world, is getting more and more rapid. I like to recount one of my favourite statistics - of the top 10 jobs worldwide in 2009, only four of them existed in 2004. That is how rapidly and dynamically our world is changing, so just keeping up is half the task.
So that is why we established the "root and branch" review and that is why we have since announced a massive tax reform agenda - Stronger, Fairer, Simpler - A Tax Plan for our Future, about which I will say more shortly.
But first, as I have said, any debate on dynamic tax reform needs to be held in the context of both the current economic environment and the future challenges we'll face as a nation, and it's to these I will now turn.
Australia's Strong Economic Position
While the world economy is staging a slow recovery, with a sluggish recovery in advanced economies and a more robust one in emerging countries, 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.
The positive outcome for the quarter carries the prospect of a self‑sustaining private sector recovery. 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, currently among the lowest of the advanced economies at 5.2 per cent, is now forecast to fall to 4¾ per cent in late 2011-12.
The much improved outlook reflects a number of key factors. We didn't have a recession like most of the advanced economies, and avoided large-scale job losses and sharp declines in investment.
This had much to do with the early and decisive policy actions taken by the Rudd Government and the Reserve Bank.
And of course we are in an enviable position fiscally, with the Budget coming back to surplus in three years time in 2012-13, which is three years ahead of time.
The Challenges Ahead
But maintaining these excellent conditions into the future is not something that will just occur by chance.
We need to actively harness the forces of demography, geography and technology to ensure we meet the challenges of the 21st century.
And we know what those challenges are because we have undertaken the Third Intergenerational Report, or IGR.
The Third IGR, which was released by the Treasurer on February 1, and was appropriately titled Australia to 2050: future challenges, lays out a complex mix of challenges for living standards, well-being and government finances over the next 40 years.
As I have said, these include a growing and ageing population, escalating pressures in the health system and climate change.
For example, on an ageing population the IGR projects that by 2050, there will be only 2.7 people of working age to support each Australian aged 65 and over, compared to 5 people now, and that the number of people aged 65 and over will more than double within the same time period.
Over the next 40 years, real GDP per person is projected to grow at an average annual rate of 1.5 per cent, compared with 1.9 per cent over the past 40 years.
Productivity growth is assumed to be lower over the next 40 years than the past 40 years; however, it will still be the main driver of growth in real GDP per person.
Slower economic growth, combined with the challenges of an ageing population, is expected to place significant pressure on Australian Government spending.
If left unaddressed, the combination of future spending pressures and slower projected economic growth will lead to a reduced capacity to raise revenue to fund growing expenditure and the massive task of investing in the infrastructure of tomorrow.
So there we have it - the overwhelming and unavoidable case for tax reform.
We have to ensure that our tax system is aimed at meeting the challenges of tomorrow, not engineered for the issues of yesterday.
As A-Tax has itself confirmed, we have and we need a dynamic tax system and an equally dynamic approach to tax reform that matches our dynamic economy and dynamic nation.
Dynamic National Tax Reform
And so the Rudd Government has grasped the nettle of major tax reform.
It hasn't made us particularly popular with parts of the community, but frankly we are not doing it to get ahead in some political poll.
We are doing it to meet the long-term challenges of our nation and because it's the right thing to do.
I want to touch on each element of this package and then talk about the consultation process and community debate that is currently afoot.
Resource Super Profits Tax
You would of course be aware that a Resource Super Profits Tax is a core component of this tax reform agenda.
Australia is set to benefit greatly from the global economic recovery.
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.
With this reform, we will invest the proceeds from the resources boom in a stronger economy for all Australians.
The RSPT will apply to non-renewable resource projects from 1 July 2012 at a rate of 40 per cent.
Despite what may have been said by some mining companies, the Australian people do own 100 per cent of Australia's natural resources and they do 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.
But the RSPT is only part of the tax reform agenda - it is, of course, the part some in the resources industry would have you believe is the only part of tax reform, but they are simply wrong.
The Government is determined to use the RSPT to assist in meeting the long-term challenges faced by our nation - to capture the benefits of the resource boom for all Australians, to address the challenges of an ageing population and to ensure we have the skills and capacity to drive future growth.
Accordingly, the revenue from the RSPT will be used to:
- generate more superannuation savings for working families;
- reduce taxes on savings;
- boost bank competition through tax changes;
- lower tax for all companies, accelerated for small business;
- give higher and immediate additional concessions to small businesses;
- invest in our future infrastructure, particularly in mining states; and
- significantly simplify personal "tax time" for millions of Australians.
Superannuation Tax Reforms
Individuals will directly benefit from our tax reform agenda with roughly a third of the package being used to ensure that we save, rather than squander 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. We're also extending the $50,000 superannuation contributions cap for over 50s with balances below $500,000. This measure is expected to benefit 275,000 people.
For the first time, the Superannuation Guarantee will be extended to people aged between 70 & 75, if they choose to stay in work. Around 33,000 employees are expected to benefit from this measure.
These measures will increase Australia's pool of superannuation savings by $85 billion over 10 years.
Reform of Savings Taxation
We will also significantly reform the tax treatment of interest income.
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.
Boosting Bank Competition Through Tax Reform
And we are going to boost bank competition in Australia through the phase down in interest withholding tax for financial institutions.
This measure reflects recommendations in the Johnson Report on Australia as a financial services hub and also 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.
The phase down in interest withholding tax will encourage a healthy level of competition in the banking sector and demonstrates the Government's commitment to securing Australia's position as a regional financial centre.
Company and Small Business Tax Reform
Roughly a further third of the tax reform package to be funded by the RSPT will promote growth across the economy, addressing the risk of a ‘two-speed economy' by taking the brakes off the slower lane.
A cut in the company tax rate from 30 to 28 per cent will help make Australian industry more competitive across the board.
Small businesses will get a head start on the company tax cut, with the 28 per cent rate applying from 2012-13.
Importantly, small businesses will also 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.
You wouldn't know it from the tenor of some of the contributions to the debate on the RSPT, but the Government will use approximately another third of the revenue to directly assist the resources sector.
A new $6 billion regional infrastructure fund will make infrastructure spending a permanent feature of Commonwealth and state budgets.
The Fund comprises $5.6 billion of revenue from the RSPT commencing in 2012-13 and an additional $400 million for the fund between 2010-11 and 2013-14 which has already been provided for in the Budget.
Without infrastructure funding, capacity constraints will hold back resource sector expansion.
Simpler Tax Time for Millions of Australians
The first of the three Budget measures to be funded by the RSPT offers taxpayers a standard tax deduction for work related expenses and the costs of managing their tax affairs.
Taxpayers can choose a $500 standard deduction from 2012-13, rising to $1,000 from 2013-14.
Taxpayers with higher expenses can continue to claim their actual expenses as they do now.
This will simplify the tax system and make filing a tax return easier for millions of taxpayers.
It is a budgeted plan to give hard-working Australians the option of a tick-and-flick return and to throw away the shoe-box full of tax receipts.
It is a cut in tax time red tape.
As I announced today, 2.02 million people from this great state would be immediate net winners under this policy.
That is an investment of $520 million - over half a billion dollars - for people right across NSW.
Australia wide, 6.4 million people would be $1.63 billion better off over just the first two years of the scheme.
The Debate on Tax Reform
So that's the package - and as tax experts you will recognise that it is indeed a substantial package.
I reject any assertion that this is not a Government of major tax reform.
I challenge the commentariat to find me another developed country that is concurrently undertaking tax reform of the taxation of companies, small businesses, the resources sector, the treatment of savings, the retirement incomes system and bank financing while also putting in place the most sweeping simplification to personal tax time in generations.
Find me that jurisdiction.
Well its right here isn't it - it is Australia preparing for the future.
And we are not doing it from a position of weakness.
Now, as you all know - indeed this is why you're at this tax conference - dynamic tax reform comes hand in hand with stiff community debate.
This week I will have been in the Australian Senate for 20 years and I have seen my fair share of debates, both big and small, both real and manufactured.
But the scale of the scare campaign and the misinformation campaign that has been trotted out by the miners is truly worthy of comment.
So, I want to run through three of the main myths - and there are many more than these three of course - that are being peddled in the community and to give you some material to consider on each of them.
They are, one, there has been no or no substantive consultation on the tax; two, that investment in the resources sector will simply stop, especially international interest from key partners such as China; and three, that somehow our return to a Budget surplus is predicated on the RSPT.
The attacks on the consultation process have come from all over. Most recently we saw BHP Billiton Chairman Jacque Nasser send a message to all BHP Billiton shareholders containing a full frontal attack on this issue. In that email he said:
"We are very disappointed that consultation has not been possible."
The Chief Executive of South Australian Chamber of Mines and Energy, Jason Kuchel, in the Adelaide Advertiser last week, said he was: "Gobsmacked by the lack of consultation."
Well I'd like to run through some facts for you and ask you to judge whether we're committed to consultation or not.
Since the Treasurer's announcement of the tax review on 13 May 2008, over 1,800 pages of detailed material spanning discussion papers, consultation papers, reports and explanatory documents have been released for community consultation.
After calling for submissions in August 2008, 1,745 separate submissions were received by the Review panel.
Submissions were received from the two main resource industry bodies, the Minerals Council of Australia (MCA) and the Australian Petroleum Production and Exploration Association (APPEA), along with several from major companies in the resources sector.
Members of the Panel and its Secretariat delivered around 30 speeches and presentations to various audiences, two of which specifically dealt with resource taxation - a keynote speech at the APPEA Tax Conference in Perth in August 2009, and a keynote speech to the MCA's Biennial Tax Conference in Melbourne in September 2009.
The Secretariat met with the MCA's Tax Committee on four occasions during the course of 2008 and 2009, members of the Panel met with MCA representatives in November 2009, and the Secretariat met with the MCA's consultants in November 2009.
The Secretary to the Treasury and other members of Treasury's Executive Board attended the MCA's full council meeting in May 2009, and a member of the MCA Secretariat attended the AFTS Tax and Transfer Policy Conference as part of a select invitation list.
And since we announced our tax reform package on 2 May 2010, senior Ministers including the Prime Minister, Treasurer, Minister for Resources and myself, among others in the Government, have personally spoken to representatives from any number of mining companies.
Treasury estimates that departmental staff have participated in 265 hours of direct consultation on the RSPT.
In addition to the Resource Tax Consultation Panel's discussions with 26 companies, briefing sessions have also been held in capital cities around Australia. These included:
- 65 companies and 22 individual sessions in Sydney,
- 52 companies and 16 individual sessions in Brisbane,
- 72 companies and 27 individual sessions in Melbourne,
- seven companies and one individual session in Burnie,
- 109 companies and 47 individual sessions in Perth, and
- 36 companies and 11 individual sessions in Adelaide,
- with a session still to be held in Darwin.
So far, over 600 representatives from around 356 companies, industry and tax associations, financiers and states have participated in the consultation process.
Another thing I have done a lot of in that 20 years in the Senate is consultation and I can tell you, this rates right up there as deeply consultative when compared to what I have seen in the past.
So that's what we have on the one hand.
And I have to say there are many in the community - including many in the resources sector - who have responded well and become constructively involved.
But equally, on the other hand, there are some who have not only played almost no role in the consultations, but they have actively done all in their power to make sure the consultation process and the community debate is misinformed and even shut down completely.
You see, most companies want our economy to grow strongly, but some only want their own companies to grow strongly.
As the Treasurer said yesterday, it's widely known in the business community and the media that some companies are strong-arming other companies and organisations into silence or opposition to these reforms.
The Australian community deserves better and such behaviour has no place in a true, open and dynamic debate on tax reform.
Investment in Resources
Now the second big myth being propagated is that the RSPT will see the end of investment in our resources sector, particularly international investment.
This has been repeatedly raised in the context of our most important economic partner with regard to resources, China.
Again let me set the scene with a direct quote, this time from Clive Palmer when he appeared at the National Press Club:
"If you want to stop people smoking and drinking what do you do? Do you give them a nice lecture? Do you send them to the local pastor or do you tax cigarettes? Do you tax drinking? If you want to stop people from investing and creating jobs what do you do? You tax it. And that's what the government wants to do... If we look at the South China Post... you'll see the headline rate is 70 per cent tax to Australian mining industry.
So - according to Mr Palmer, across China a chilling effect is already at work, cutting back investments in our important resources sector.
Well, summer must certainly have arrived in the northern hemisphere because just today, upon the occasion of the visit to Australia of the Vice President of the People's Republic of China, His Excellency Xi Jinping, Mr Palmer's own company, Resourcehouse Ltd, has signed a major cooperation agreement with the Export-Import Bank of China, the Metallurgical Corporation of China and China Power Holdings.
And this is no small deal - it is to establish a US$8 billion China First Coal Project involving the construction of a mine, a 476km railway to the port of Abbott Point near Bowen and the construction of a coal loading terminal.
All in all, a deal worth over AUD$10 billion.
And the project is expected to result in approximately AU$4 billion in exports every year for the next 25 years.
Hardly the deal you'd expect in the alleged "Arctic freeze" Mr Palmer claims to have enveloped the sector.
And interestingly, I note another loud opponent of the RSPT has also had a very good day.
Fortescue Metals Group Ltd, headed of course by Mr Andrew Forrest, has signed an engineering and procurement Contract Cooperation Agreement with China Gezhouba Group Company Ltd.
This agreement will fast-track the expansion of Fortescue's iron ore project in the Pilbara to a production capability of 95 million tonnes of output a year.
At current estimates, the expansion will add more than AU$5 billion of annual export revenue to Australia.
So, on the issue of investment flows into our mining sector, I will stop at that and let the facts speak for themselves.
Federal Budget Surplus is not Dependent on The RSPT
One more of the myths being propagated out there is that the passage of the RSPT is somehow linked to our process of fiscal consolidation.
Let me be clear - it is not. The revenue from the RSPT is going to fund the significant tax reforms I've just discussed.
I said earlier, the Budget is returning to surplus in three years' time - three years early. This is the fastest fiscal consolidation since the 1960 and is not dependent on the RSPT.
This result is based on Budget management based on fiscal discipline and by helping to keep Australia out of recession - one of only three advanced economies to do so.
So what's driving this multi-layered, very well funded scare campaign?
To be sure there are those that simply don't want to pay a cent more in tax, regardless of the fact that, for example, iron ore prices have risen by 500 per cent since 2004, or coal up by between 300 and 400 per cent.
But increasingly I am convinced that the real driver is that the big global players are using Australia as the first front in what they fear will become a global war against an increasing shift towards super-profit based taxation of mining and extraction.
It hasn't gone unnoticed that India has confirmed it is examining a profits tax option and prominent economist Saul Eslake at the Grattan Institute has highlighted Brazil's keen interest in the RSPT model.
These are big emerging economies that will dominate global growth into the future.
As I noted earlier, we are joined here tonight by economists, tax policy experts and academics from around the world, so the interest in our reform package is indeed global.
All in all, I just can't help but wonder if the Australian people are simply providing the battlefield for the first skirmish in a much larger global puzzle.
I want to conclude tonight where I began - and that is on our commitment for truly widespread and dynamic tax reform.
The Henry Review did a forward-looking and thorough job.
Following that contribution, the Rudd Government has crafted an equally wide-ranging tax reform package that stands to broaden and strengthen our economy, ensuring all sectors grow in a sustainable way that benefits everyone.
With Australia averting a recession, we are now working hard to keep our economy strong and meet the intergenerational challenges of the coming decades.
But, as I know you in this room would all appreciate - tax reform is a process, not a one-off exercise.
As the Prime Minister has reminded us - tax reform is also tough, hard work, but this Government is about the business of reform.
It is, of course, also a dynamic process.
Debate - when fair and accurate - is certainly encouraged and indeed is a core part of this process.
I know that's the spirit with which you are all here tonight.
We in the Government remain fully committed to dynamic tax reform, fully committed to the RSPT and the rest of the tax reform package and fully committed to a frank, open and accurate debate.
Thank you again for having me here and I hope everyone enjoy's the dinner.