The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Chris Bowen

Chris Bowen

Minister for Financial Services, Superannuation and Corporate Law

9 June 2009 - 14 September 2010

Transcript of 03/05/2010

Interview with Richard Glover

ABC 702, Sydney

Monday, 3 May 2010

SUBJECTS: Tax reforms

RICHARD GLOVER:

Chris, good afternoon.

CHRIS BOWEN:

Good afternoon, Richard.

GLOVER:

138 recommendations from the Henry Tax Review; you've implemented just four of them. Mr Abbott says, he had quite a good phrase, he says, 'This is a Government which is absolutely allergic to anything which requires courage'.

BOWEN:

A couple of points in response. Firstly, these are big reforms that we've announced. Any reform which deals with the long term issue that people have been worried about for a long time, at the lack of adequacy of our superannuation savings, dealing with that, adding in $108,000 to the retirement of somebody who's 30 in the workforce now, adding half a trillion dollars to our pool of superannuation funds – that's a big reform. It's a reform which is not uncontroversial. Some people have criticised it; we knew they would.

Dealing with the mining tax, the resource super profit tax, are a controversial reform, as you have seen, as you referred to, one that we did expect and has occurred that has been very roundly criticised.

GLOVER:

For a policy which is supposed to build up our superannuation, it's worked well today, hasn't it? Most people's super is heavy in BHP and Rio, which have gone for a tumble.

BOWEN:

Well, you're always going to get some reaction on the share market, but these are reforms in the resources field which make the tax a lot more efficient and introduce some reforms that the mining industry's been calling for for a long time, recognising that some mining ventures take a lot more investment, recognising all that.

But can I deal with the issue about Tony Abbott that you raised in which he says that this response isn't robust enough. I think he used the word 'gutless'. Well, fine. Well, tell us which of the recommendations he would have adopted. Would he have adopted the recommendation to tax the family home? Would he have adopted the recommendation to include the family home in the pension asset test? Would he have adopted the recommendation to cut the pay of Defence Force personnel? Would he have adopted the recommendation to reduce the Baby Bonus? I mean, which one of the recommendations which we have rejected and which he says leads us to be – quote – 'gutless' would he actually adopt, and I think that shows the paucity of his argument.

GLOVER:

One of the arguments he did make, though, about the superannuation which I know is your special field is that it amounts to a tax on small business in that even though you're cutting the corporate tax rate, only about a third of small businesses are corporations, so for most of it it's absolutely equivalent, as he says, to a three per cent hike in payroll tax.

BOWEN:

Well, the first point is that every small business benefits from the simplification that we've made to the depreciation arrangements, the $5,000 upfront depreciation. That makes a huge difference to small business cash flow and a huge reduction in the paperwork burden that goes with tax. That applies across the board. Yes, incorporated small businesses get the corporate tax cut which we've brought forward ahead of the big businesses, but there's still a very substantial number of small businesses.

But on super, these are the same arguments, Richard, we've heard when the superannuation system was introduced. When Paul Keating introduced compulsory superannuation back in 1991, 1992, these are the arguments we heard: that it would drive small business out, that labour costs would go up, that unemployment would go up. What happened? None of those things. It gets built into wage negotiations.

GLOVER:

Well, you had a wage freeze in order to produce it.

BOWEN:

Well, it was built into wage negotiations and introduced gradually as we are doing and in fact, we are doing it more gradually than when the superannuation guarantee was introduced.

GLOVER:

When you're saying it's built into wage negotiations, are you saying to Australia's working people, 'You should expect to have your wage rates knocked down to the equivalent of this 12 per cent'?

BOWEN:

Well, no. We're still expecting wages to rise, that's what all the modelling shows, but what we're saying is that we've given plenty of lead time so that when enterprise bargaining occurs, employers, employees and unions can build it in to their negotiations and deal with it however they see fit.

GLOVER:

But you're saying workers should expect to pay for this.

BOWEN:

I think the ACTU, unions, everybody recognises that's a legitimate area for wage negotiation and needs to be taken into account when setting wage increases. We've said that, we've been very clear about that, the union movement has said that, and for employers, simply saying, 'Well this is just going to be paid by us', isn't what happens in history. It's not what happened when the SG was introduced and it needs to be taken into account that we are doing this very gradually to allow a) the reductions in corporate tax to apply and b) to give plenty of lead time for it to be factored into wage negotiations.

GLOVER:

Chris, we seem to change the superannuation rules every five seconds. It was only a minute ago that you said that people above 50 could only contribute $25,000 a year instead of $50,000. Now we're turning around and putting it back up to $50,000.

BOWEN:

Well, I agree with you. There's been too many changes in superannuation for a long time. It's been an annual event almost, Richard, under governments of both persuasions. And what I've said is that we need to have a good and proper process to settle superannuation policy and then stick to it, and that's exactly what we've done.

We've gone through some very significant changes in superannuation. Last weekend, I announced the changes to financial advice: getting rid of commissions, introducing the fiduciary duty for financial advisers; big changes for superannuation.

Yesterday, we announced the SG, the bonus for low income earners paying back their contributions tax and the catch up – you're quite right – the catch up for over 50s which is very important for people who haven't necessarily had superannuation all their working life, especially women who've had to leave the work force when they've been on parental leave and perhaps have come back part time. When they get to 50 and they start to think about their superannuation and look at their balance, they get quite worried that they don't have enough, and it's appropriate that with the revenue created by the resource super profits tax, that we use some of that to provide for a more concessional catch up for people over 50.

GLOVER:

Yeah, again, it's only relatively well-heeled people who can afford to put 50, you've got to have a heck of a lot of money before you can put $50,000 in.

BOWEN:

Well, yes, but what the superannuation industry have put to us very strongly is that when you get to 50 and you start to look at your balance, often that's the point where hopefully you've either paid off your mortgage or made a real dent in your mortgage; the kids have either left home or are paying their way at home; and you may just have a little bit of spare cash. If you want to put that into superannuation, you shouldn't be penalised for doing so.

GLOVER:

And you've got to have a lot of money to put $50,000 in, though.

BOWEN:

The $50,000 includes your superannuation guarantee, so it includes whatever your employer is already putting in. And the other point to make is that we've limited it to people with balances under half a million so it's a genuine catch up. If you genuinely need to put more in to make sure your retirement income is adequate, then we've allowed that catch up. If you've already got a very substantial superannuation balance and you're just using it to try and get tax preferred treatment for your savings, well, we don't allow that.

GLOVER:

Chris Bowen, the Minister for Financial Services, is with us after the release and reaction to the Henry tax reform paper.

Now, one of the most significant criticisms that I think has come from a lot of the economics editors is to say, 'Okay, maybe it is fair enough to have a resources rent of some sort on these mining companies' but in countries like Norway, for instance, they bundle that money up and they effectively put it into a future fund instead of spending it on superannuation, spending it on handouts and keeping some of it for an election locker. That's essentially what you're doing when it comes to criticism.

BOWEN:

Well, I would argue that superannuation is very much putting it away for the future. I mean, you can't get something that's more future focused. In fact, we've been criticised a little bit for being too future focused.

GLOVER:

It's not like paying off your national debt, though.

BOWEN:

Well, we've got a future fund. Why was the future fund created in the first place? It was created to deal with the superannuation liabilities of the Commonwealth. And I think that enhancing the adequacy of our retirement incomes is very much a future focused policy initiative.

Now, there's a very big gap between what we save through superannuation and what we should have been saving through superannuation. That has an impact on the long term sustainability of the Budget. That has an impact on the degree of comfort people can have when they retire, in an ageing population.

So I think putting roughly a third of the money into superannuation is a really long term, visionary action by the Government.

GLOVER:

People say that it still keeps the money here and ticking around the economy, which is precisely what we don't want. We don't want this two-speed economy in which, during times of great production for the mining industry, they end up doing so well that they send our dollar up and create a whole problem for other people. The aim is to sop up some of that money and store it away. You're not doing that by using it for things like tax cuts for business.

BOWEN:

Well, no, I'd make two points. Firstly, putting money into superannuation is actually at the beck and call of the economy when necessary. The superannuation funds we had were very useful in getting through the global financial crisis. We actually used a lot of that superannuation money to recapitalise businesses which a number of other countries didn't have the access to.

But your point about the two-speed economy is a fair one, and that's why we reduced the corporate tax rate generally, because not every business benefits out of the mining and commodity boom. Some are disadvantaged by the appreciation of the dollar and that's one of the reasons why we reduced the corporate tax rate.

GLOVER:

If the result of all this is to create an overheated economy, then the Reserve Bank simply puts up interest rates to cool it down again and net effect is to help nobody.

BOWEN:

Well, I don't think that putting money into superannuation in any way overheats the economy. In fact, it's often been suggested that it's a very good mechanism for dealing with the overheating economy to put more money into superannuation. The corporate tax cuts provide benefit to businesses who aren't benefiting from the commodity boom and that is something which is very useful in terms of the two-speed economy.

GLOVER:

I suppose, finally, we should come back to the mining industry because it has had a dramatic impact on the stock market today and certainly the mining companies themselves are screaming bloody murder over it. The argument is put, why select out one industry and make them subject to the punitive tax? You've got the industry that's going well, it's doing enormous things for this Government, for this country, it's internationally extremely competitive. When you've got a world leader like that, why try and knock it for six? You wouldn't do it to the forestry industry, you wouldn't do it to agriculture, why pick out one industry?

BOWEN:

Because we're not knocking it for six, and the current tax treatment of mining in Australia is very inefficient. It's a royalties-based system; it's based on the volume that they take out of the ground. It has no bearing on the profits they're making or the price they're getting, so they pay the same tax to state governments in really bad times as they do in really good times. And that means two things. Firstly, it means in the really bad times that there are viable mining operations which have to close because of the tax treatment, because they're paying the same flat rate of tax but making a lot less money. Under our system, they wouldn't pay tax in those circumstances. We'd refund them the royalties, and in the bad times their mines would be able to remain viable. But in the good times, when you're making, frankly, massive profits, it's appropriate – bearing in mind, you asked what the difference – well, the difference is that what's in the ground in Australia, we think, actually belongs to all Australians.

GLOVER:

But that's no good if you create a situation where it forces exploration, it forces mine development offshore.

BOWEN:

Well, it won't do that for two reasons. Firstly, we've actually improved the tax treatment of exploration. We've actually made it a lot more viable for companies who aren't sure how profitable a venture will be to go out and explore through the rebate, and that's something that the mining industry's been calling for for as long as I can remember, and we've done that. And secondly, this isn't new, Richard. We already have a super profits based tax in exploration in Australia, but that only applies to the offshore exploration, so we've had this for 20 years, in the Petroleum Rent Tax, and it hasn't killed investment. In fact, quite the opposite: investment has come along very strongly, so it's not as if we're just dealing with a theoretical construct here. We're dealing with something we have experience in, in the offshore mining exploration, and it works.

And you made the point earlier, about Norway. Well, Norway continues to have a very successful mining industry, particularly in relation to oil. Their effective tax rate is 78 per cent. We've got a resource profits tax of 40 per cent which can be used as a deduction when you're going to go and pay your corporate tax.

GLOVER:

Okay, but do you accept that on day one, this great scheme to build up our superannuation has probably reduced – all the people who are listening who've got superannuation, at least some of it will be invested in BHP and Rio if they're with a normal fund – you've essentially lost three or four per cent of their super today.

BOWEN:

Well, share prices go up and down all the time, Richard, but people don't take their money out of superannuation all the time. So share prices, yes, go up and down all the time in relation to Government announcements and other announcements, but once this package has been through and the mining industry's been consulted upon, I think you'll see very real benefits for the mining industry. We expect mining to continue to grow. Our estimate is that mining activity will increase by seven per cent over the next five to ten years, and that will be reflected in share prices and superannuation returns as well.

GLOVER:

Chris Bowen, thank you very much for your time this afternoon.

BOWEN:

Always nice to talk to you, Richard.