State chairman, Pat Cooper, congress delegates,
I am delighted to have been asked to give the opening address at your Congress today.
This government has worked very closely with your Institute.
At a Board meeting earlier this year, representatives of the Institute and I agreed to meet regularly to discuss issues of mutual concern.
Your tax director, Ian Langford-Brown, is well known as a very vigorous advocate of Institute views in his regular visits to the ATO, Treasury and the Executive Wing of Parliament House.
I note that many of you will be attending sessions on tax reform, and I look forward to hearing the outcome of your deliberations.
You have asked me to give the government perspective on business tax reform.
Let me start by making some comments on the general issue of reform.
This government has carried out a major reform agenda. The areas of reform include labour markets, corporate law, telecommunications, competition policy, as well as fiscal policy reform and monetary policy reform.
These reforms have meant that the Australian economy is indisputably in the top league of economic performers in today's world economy.
Recently, eminent US Economist Professor Krugman described Australia as the "miracle economy".
Australia's has strong growth, low inflation, low interest rates, falling unemployment and industrial disputation at levels not seen since around World War II.
Economy
There are three points I want to make about Australia's recent economic performance.
The first is simply to highlight the strength of the economy.
As the Treasurer recently said:
"Nearly all of Asia slid into recession in 1998-99. Yet in the June quarter 1999, Australia recorded its ninth consecutive quarter of real GDP growth above 4 per cent – our longest consecutive period of "4 plus per cent" real GDP growth since the early 1970s.
In fact, over the 1990s Australia's real GDP per capita has grown at an average annual rate of 2.1 per cent, almost double the OECD average. This is the only one in the last four decades where Australia's per capita growth has exceeded that of the OECD.
This brings me to my second point: Australia's improved productivity performance.
The productivity performance of the Australian economy is at an all time high. As the Productivity Commission points out, productivity growth is now faster than the so-called golden age of growth around the 1960s.
Because of this change in performance, we now estimate the Australian economy has the potential to sustain growth of around 3 to 4 per cent a year over the next decade, setting us up for strong growth in jobs and incomes.
My third point is this: the economic policy reforms that have been made are producing tangible and sizeable gains to ordinary Australians including better employment prospects and higher pay.
Real wages have grown strongly in recent years, averaging around 2 per cent per annum since the Coalition came to Office, compared to growth of around per cent per annum under Labor.
All of this brings me to tax reform, because tax reform should be seen in the context of a continuing reform effort to deliver higher living standards to Australians and to keep Australia in the top economic league.
Within two years Australia will have a completely new tax system. There will be fundamental changes to income tax, indirect tax and business tax.
General Comments on Tax Reform
The Government is delivering on its commitment to overhaul Australia's income tax system.
We all know that Australians pay too much in income tax and that marginal tax rates on average earnings are far too high.
Therefore, on 1 July 2000, the Government will deliver the largest income tax cuts in Australian history. Overall, these tax cuts total some $12 billion dollars each year. Many families will benefit in the order of $40 to $50 per week, or over $2,000 per year.
The Government is delivering a New Indirect Tax System.
It is probably true to say that there has never been a more debated reform in Australian history than the Government's election promise on the goods and services tax.
But tax reform doesn't just involve introducing a GST – in the process, we are abolishing Labor's unfair wholesale sales tax and a range of State taxes including bed taxes, upon introduction of the GST, and financial institutions duty and stamp duty on quoted marketable securities, as of 1 July 2001.
By the year 2005, a range of stamp duties will be reviewed with a view to their abolition – many of which fall on business and cascade through the system. We are also streamlining the way business interacts with the tax office through our PAYG arrangements.
The fundamental effect of this change will be to cut industry costs which will improve business efficiency and lead to greater levels of output and higher employment growth.
The Government has set aside $500 million to assist small and medium enterprises, the community sector and educational bodies to get their business operations GST-ready. The New Tax System Advisory Board, chaired by Chris Jordon of KPMG, is overseeing the role of the GST Start-Up Assistance Office whose role is to distribute the funding.
Another example of the assistance being provided to businesses preparing for GST is the basic GST training seminars being run by the ATO. There are to be well over 1,000 seminars, all over Australia.
To give you an example of the diversity of the audience attending these seminars, the largest to date was held in Adelaide, where 440 people attended to hear about GST and property development. This contrasts with one of our Kalgoorlie seminars, where there were less than 10 attendees including a shearer and a station owner.
The ATO is also about to start offering field visits to enterprises to assist them to prepare for the GST. I encourage you to use these resources in your businesses. A visit from the Tax Office is not something that people are accustomed to asking for, but the Commissioner has assured businesses that his GST field officers will be looking only at GST implementation.
Let me now turn to business tax reform.
Business Tax Reform
No process demonstrates the government's commitment to consultation better than the current process of business Tax Reform.
Just over 12 months ago, we asked John Ralph to undertake a unique process of consultation with industry and the private sector.
John Ralph expressed his objectives with singular clarity:
"The overarching objective of the Review has been to design a taxation system that will contribute best to economic growth – the source of common wealth from which comes the funding of the services desired by the community. Education, health, welfare and the security of the nation are functions that governments fund from revenue collections, mainly via the taxation system.
The vitality of the economy and its ability to grow must not be unnecessarily impaired by the inevitable strain these collections impose.
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All Australians have a stake in this, not just business, and reform needs to be developed within the context of enhancing economic performance and a well-functioning taxation system must be seen to be operating fairly, efficiently and transparently."
One of the messages that came out of the Ralph process was the benefit to be had from consultation at the ground level between the policy, legislative and systems designers on the one hand, and the users of the system (ie. the business community) on the other.
The Institute was a keen participant in the Ralph process, both in terms of making submissions to the Review as well as contributing to focus group and other discussions on issues of interest to your membership.
The Government has committed itself to a further process of consultation around the implementation of its business tax reforms and will welcome the input of the business community in establishing a better business tax system for Australia.
The Government gave the Ralph Review some broad guidelines – namely to reduce the complexity of the system, explore the scope to reduce company income tax and capital gains tax.
John Ralph has presented his report and the main features of the New Business Tax System as announced by the government are:
- A significant cut in the company tax rate. The tax rate will be cut from 36 to 30 per cent, making it very competitive globally and in our own region.
- Capital gains tax will be reformed. At present, individuals are taxed on real capital gains at their marginal income tax rates, currently ranging between 20% and 48.5%. The reforms will tax 50% of nominal gains and provide relief on scrip-for-scrip takeovers.
- To help fund the package, depreciaton for plant and equipment will be based on effective life rather than accelerated as at present.
- In addition, there will be substantial capital gains tax concessions for small businesses as well as a dramatic reduction in compliance for such businesses with the introduction of a simplified tax system.
The Simplified Tax System will dramatically reduce paperwork and compliance burdens for small businesses, and effectively maintain access to existing concessions. Amongst other things, it enables small businesses to determine their taxable income on a cash basis, means that over 75% of small business will no longer have to do an annual stocktake, and simplifies depreciation for small businesses. These measures will provide further impetus to the small business sector.
The Tax Reform currently being undertaken by the government is arguably the greatest reform of Australia's tax system since the introduction of the federal income tax in 1916.
And the signs so far are that the process has been highly successful.
The government has been delighted with the very positive response to the announcement of the first stage of business tax reform on 21 September.
The Australian Chamber of Commerce and Industry stated that:
"The Ralph Committee Report has provided this country with a blueprint for business tax reform which has the overwhelming support of the business community."
The Tax Institute of Australia stated that:
"Reductions in the corporate tax rate, concessions for small business, lower CGT and imputation refunds for small investors are all positives for the creation of a more competitive environment for business in Australia."
I particularly agree with the comment of this Institute's executive director, Stephen Harrison, in the November issue of Charter when he said that:
"The raft of business tax changes that have come out of the Ralph Review should prove an exciting proposition for business and individuals. It should enrich us as a nation by encouraging enterprise."
So where are we at now with business tax reform?
The first legislation implementing the New Business Tax System was introduced into the House of Representatives on 21 October. This legislation deals with a number of measures:
- it lowers the company tax rate to 30% in 2001-2002;
- it introduces an internationally competitive capital gains tax regime;
- it provides for a number of integrity measures to reduce tax avoidance opportunities; and
- it replaces accelerated depreciation with effective life depreciation (except for small business). Small business is not affected by these depreciation changes because, as I said, it is to benefit from the Simplified Tax System.
The Treasurer will be announcing the second stage of the Government's response to the Ralph Review very shortly.
The reforms under consideration as part of stage 2 include the so-called Option 2, which is the cash flow/tax value method of calculating taxable income, and integrity measures.
We're heading back to Canberra in just over a week, and business tax reform will be a major item on the agenda in the weeks following that. Firstly, of course, the legislation must be passed by the House of Representatives. But as I'm sure you're all aware, the excitement in the current political environment is in the Senate, rather than the House. The longest parliamentary debate in the history of the Australian Parliament was in the Senate. It was the GST debate in June of this year and it lasted 72 hours. As I'm sure you can imagine, I'm not hoping for a repeat performance on business tax reform!
But the government is hopeful that the Democrats, and maybe even the Opposition, will appreciate and embrace the benefits of the Ralph changes.
Senator Murray, the Democrats' spokesman on taxation matters, speaking to John Ralph on the first day of the Senate Committee inquiry into the business tax reforms, referred to the simplicity gains of the Ralph Report as a "river of gold running through this report". Indeed, he went on to say that he thinks the simplicity measures will result in considerable increased revenue.
The terms of reference of the Senate Committee are largely concerned with the revenue impact of the reforms. The Committee is due to report by 22 November 1999.
Together, the first and second stage measures are expected to be broadly revenue neutral over the period of the forward estimates.
Further legislation to implement the government's business tax reform will be introduced later this year and early next year
Let me assure you that the Government is extremely conscious of the need of business for certainty in the tax law, and is working hard to get the legislation through Parliament as soon as possible.
In summary, what is being done now has never before been done in Australia. It's a major reform of our taxation system. It has taken a lot of determination and courage by the government to pursue this level of change:
- first we had the election in August last year;
- then we had to get the GST through the parliament;
- we now have to get business tax reform through the parliament;
- and then we have the implementation phase.
I can't over-emphasise the importance of support from the business sector in this entire process. Both political support in making the reform law, and administrative support in making the reform work.
We're looking forward to continuing the closer consultation with business which has developed with the tax reform process. We certainly value the feedback we receive from business, and from the professions. As a group which spans both of these – chartered accountants in business, your views and experience are particularly important.
I wish you a successful Congress over the next 2 days, and look forward to continuing consultation with you in the future.