SUBJECTS: Australian Financial Centre Forum Report, investment managed regime, withholding tax, superannuation, Cooper Review, Sons of Gwalia case, corporate insolvency law reform package.
JAMES CARLETON:
Minister Chris Bowen is with us now. Good morning, Minister.
CHRIS BOWEN:
Morning, James. Nice to talk to you again.
CARLETON:
You too. So in 10 or 20 years from now, best case scenario, where would you like to see Australia's financial services industry?
BOWEN:
Look, I'd like to see us very much as one of the global centres. By that I don't mean New York or London, but one of the key places that people think of when they think of managing money in Asia. That means we need to be a hub for transactions of not only Australian dollars, but also non-Australian dollar transactions. And if people are thinking about, 'where would I like to work if I want to be a key player in the Asian financial markets?', Sydney and Melbourne are thought about in the same sense as a Shanghai and Singapore and Hong Kong.
CARLETON:
What are the barriers to achieving that goal?
BOWEN:
Look, I think there's several. [Child crying]
I think one of them is that Australia is simply just a long way from Europe, where a lot of the decisions are made and people in Europe say to me that, you know, they really like the Australian market, they really think that Australia's very sophisticated, but that it's a long way away. So we need to do extra to combat that. We need to ensure that our tax system is as transparent and open as possible.
Foreign investors say to me, 'we don't particularly mind how much tax we pay – we can build that into our calculations and work out where we're going to do business, as long as it's clear and transparent as to how much we'll pay and how the system will work.' And that's something the Johnson Report has some very strong recommendations for.
CARLETON:
It also has recommendations in terms of capital gains tax and perhaps your own child disagrees with them.
BOWEN:
[Laughs.] [Inaudible] such matters, James, yeah.
CARLETON:
[Laughs.] What currently happens when we have capital gains tax is – explain if I'm wrong – but we tax all the money that's in Australia, even if it's for projects overseas. And the idea is that if the money's invested in Australia, or managed in Australia, rather, by Australian experts, but for overseas projects, then we shouldn't be putting capital gains tax on that to make it more competitive, make it more attractive to foreign investors.
BOWEN:
Yeah. One of the recommendations – there are 19 recommendations in the Report – one of them is an investment manager regime or an investment managed regime. Basically, if you're an offshore investor, put your money into Australia, and Australians manage it, they manage it, you know, from sources around the world, then the tax regime would reflect that. And really what it's about is growing the pie saying, well, if we make our tax system more transparent, more people will come here to do business and get us to manage their funds, and the pie will grow and of course tax revenue will grow as a proportion. And so we're working those recommendations through.
CARLETON:
Tax revenue would grow in the long term; that would be the plan. But the certainty would be tax revenue would fall in the short term. How much revenue would Australia lose if we were to limit the application of capital gains tax in this way?
BOWEN:
Well look, we're going through each of the 19 recommendations and costing them as part of our consideration. We haven't endorsed any of the recommendations yet. As I made clear when I released the Report, we'll consider them in relation to the independent tax review which the Government has received, also in the budgetary context. We'll weigh up those short term costs with long term benefits and competing priorities. And that's a process that we're going through, but in the interests of openness and transparency we want to get the Report out there.
CARLETON:
The Report also recommends abolishing withholding tax on interest earned by foreign banks in Australia. From July, in any case, you'll be cutting that to 7.5 per cent, which you've said is one of the lowest rates in the world. If we're already competitive, wouldn't abolishing the tax just mean forgoing revenue?
BOWEN:
Slightly different things, James, different types of withholding tax. The tax that we've cut is the withholding tax on distribution from Australia's managed funds to offshore investors. So if you've got an offshore pension fund, a company or an individual that's put their money with Australians to manage, we've cut the withholding tax. It was 30 per cent, we're cutting it to 7.5 per cent. As you say, it was the highest rate in the world. It was a big disincentive to people putting their money with Australian funds managers. We're cutting it to 7.5 per cent and that will mean that we are much more competitive.
Now, the recommendation that you were referring to is about a different type of withholding tax. Where you have Australian subsidiaries of foreign banks, we're one of the few countries in the world that actually charges tax to those subsidiaries when they are funded by their parents. So if you've got a bank in Australia which gets an injection of funds from offshore, we charge withholding tax and we're one of the few countries in the world that does that. And the Report's made recommendations about that, what that means, not only for Australia as a financial services hub but for the choice, the range of choices available for Australian investors by not having as robust competition as we otherwise might.
CARLETON:
In making the financial services industry more attractive in this and other ways, obviously you're going to face the argument that courtesy of the compulsory nine per cent super, the sector already receives perhaps the most massive sustained windfall of Government assistance we can conceive, $1.2 trillion under management. They don't need tax breaks, they need to be taxed more would be the argument that some people make.
BOWEN:
Well, you're right to identify that perhaps our biggest advantage is our funds under management, the fourth largest pool of funds under management in the world, thanks entirely to our compulsory superannuation scheme. That has really given us the skills base and the sophistication that enables us to even have this conversation, and this is something that is driving this. The Prime Minister and I had discussed this even when we were in Opposition. This has been a key priority for us. How do we capitalise on that? We're only exporting – I actually think the figure is lower than the one you quoted, there are various estimates but the estimate I find most credible is lower than the one you quoted in your introduction – I think it's about 3.5 per cent of funds under management in Australia come from offshore [inaudible] comparable centres.
So we need to be using those skills. And Australia's superannuation system has been a great asset. It's provided for more comfortable retirement income, it has provided for the recapitalisation of Australia's companies. Over the last two years, we've recapitalised a higher proportion of our stockmarket than any other country in the world thanks to our superannuation system and it gives us those skills. So it's a great asset which we need to nurture rather than treat as a negative.
CARLETON:
And if we do nurture it and then lift that foreign component of investment in our wealth management industry, it'll be a goldmine for the big four banks and the two big accounting firms. That's just the bottom line because of the vertical integration of the sector. Will the Government, in providing this assistance, the carrot of assistance I suppose, be also linking it to the stick of superannuation reforms? Perhaps the Cooper Report recommendations.
BOWEN:
Well, we certainly are looking very seriously at a number of reforms to superannuation. You've identified the Cooper Report, and the Henry Review, the independent tax review also deals with superannuation and parts of the Cooper Review have already been completed and made public, there are more parts of this we're working on. The Henry Review will be released in the not too distant future and then we'll be having something to say about our thoughts on superannuation reform.
I don't see the two as being necessarily either mutually exclusive that you can make our superannuation system more transparent and open, and promote Australia as a financial services hub. On the contrary, I think they're quite complementary.
CARLETON:
Let me turn to another matter finally, Minister. In 2007, you remember the High Court ruled that shareholders would rank equally with unsecured creditors in the event of a corporate collapse, the Sons of Gwalia decision. What plans does the Government have in respect to this?
BOWEN:
Yes, James. I'll be announcing today that we'll be overturning that decision, and this is something that we've given a lot of thought to. The problem is that it has undermined the traditional distinction between debt and equity. And look, when you create winners in these situations, you are creating losers, and I was concerned that not only funders – banks – but also creditors, who are often small businesses, were being disadvantaged by that ruling.
It's part of a suite of insolvency reforms. We're also modernising the insolvency regime, bringing it up to date for the 21st century, allowing more electro-communications, just basically modernising the way it works. And also, I'm issuing a discussion paper about how we assist directors to keep companies afloat in difficult times. At the moment, the insolvency rules are very onerous and restrictive, and I think there could be ways we could do it better. Hence we're issuing a discussion paper on changes to the law which might assist directors to actually get their companies through more difficult times. That will all be out to the public today.
CARLETON:
Chris Bowen, thank you for being with us.
BOWEN:
Thanks for your time, James. Always lovely to talk to you.