Introduction
Thank you for the opportunity to address the Retail Leaders Forum here today.
At the outset, can I recognise the impressive group of individuals that have been brought together to participate in this important two day event to focus on the future of retail in Australia.
I'm sure that you've had a very interesting discussion and learned from each other's experiences and perspectives.
There is perhaps no better time to be having such a discussion than 2013.
That's because the retail sector, much like the broader Australian economy, is experiencing a process of transition and structural change.
And this change presents both opportunities and challenges. And these are the things I would like to speak about today.
Australia's Retail Sector
But first I'd like to talk about the retail sector in Australia and its vital significance to the Australian economy.
Australia's retail sector employs around 1.2 million people, and, according to 2011-12 figures, it accounts for around 5 per cent of Australia's economy.
It is also a growing sector.
The most recent Australian Bureau of Statistics figures on retail trade released yesterday indicate that in trend terms Australian retail turnover rose by 2.5 per cent in January 2013 compared with January 2012.
These figures show that the sector as a whole is growing, but of course there are parts of the sector growing faster, some growing slower and some that are experiencing a more difficult time.
I think it is also important that, despite the challenges that I will discuss shortly, the retail sector continues to hold its head high and look to the future with confidence.
The Global Financial Crisis and the Arrival of the "Cautious Consumer"
One of the challenges that confronts the retail sector is the structural change that has taken place as a consequence of the Global Financial Crisis (GFC).
Prior to the GFC, consistently strong retail trade figures corresponded with a period of growth in household wealth and incomes, and a growth in credit.
With the onset of the GFC, Australia faced the real prospect of going into recession.
However, the Australian Government acted quickly and decisively to stimulate the economy, making cash payments to households which helped boost the retail sector.
There is a clear consensus among global policy makers that the Australian stimulus package worked, and worked effectively.
And in the case of the retail sector, you only need to look at the figures to see more evidence of that.
By the March quarter of 2009 Australia's retail trade volumes were around 2.3 per cent higher than its pre-crisis level, while for the OECD as a whole retail volumes were around 6 per cent lower than pre-crisis levels.
By May 2009, the Australian retail sector saw an additional 17,706 jobs created compared to the escalation of the GFC in November 2008, while 451,000 retail jobs were lost in the US.
The stimulus package was the bullet proof vest that shielded the Australian economy from the full force of the GFC.
It was a key reason why our economy is now more than 13 per cent bigger than it was five years ago despite around half of the 35 advanced economies having yet to return to their pre-GFC output levels.
However, since the GFC, we have also seen the rise of the so called "cautious consumer".
Consumers are increasingly aware of global economic difficulties and concerned about global economic uncertainty.
These cautious consumers have been saving more and spending less than they may have before the GFC.
And when making their spending decisions, these cautious consumers are also more aggressively seeking out value for money.
If you combine this lower propensity to spend with the fact that consumers now expect more for their money, this does present a challenge for the retail sector.
The good news is however, the Australian economy continues to grow with today's national accounts showing that our economy expanded by 0.6 per cent in the December quarter and 3.1 per cent over the past year, far outstripping every major advanced economy and the vast bulk of the developed world.
Indeed, Australia achieved this growth at a time when around half of all advanced economies contracted, including five major advanced economies. Australia's around-trend growth rate over the year is more than four times the OECD average.
It is also true that, notwithstanding the current uncertain international economic environment, many consumers have taken the opportunity over the last few years, especially while interest rates are at record lows, to reduce debt and repair their household balance sheets.
As confidence in the international economic environment improves, these consumers will have the capacity to spend more again. This will provide new opportunities for retailers.
I am not being particularly bold when I say that Australian retailers understand Australian consumers and their preferences better than the Australian Government does. I am a strong believer in the positive impact of Government, but I am also aware of its limitations!
In our dynamic and modern economy, one thing is clear – those businesses who meet their consumers' needs will grow and thrive. Those that don't will have a more difficult time.
In my time as Assistant Treasurer, I have engaged with the retail sector both as chair of the Retail Council of Australia and through the many meetings and events I have attended with retailers and their representatives.
The discussions I have had with Australian retailers have confirmed to me how determined they are to succeed, to grow and thrive.
The Rise of Online Retail
In recent years the pace of technological change has been increasing, and the impact of this is clearly evident in the rise of online retail. The iPhone was launched in 2007, and the iPad in 2010.
That is amazing when you think about it, given how common smartphones and tablets are nowadays.
According to the latest NAB Online Retail Sales Index, in the year to January 2013, Australia's online retail spending rose to $13 Billion, representing just under six per cent of the size of Australia's traditional "bricks and mortar" retail sector, and it is growing.
There are many reasons why consumers are choosing to shop online. Shopping online can offer consumers greater product choice, more price transparency and competition.
This is combined with the convenience of being able to shop anywhere using your smartphone or tablet, at any time of the day.
The rise of online retail is often viewed as a challenge for the Australian retail sector. And indeed, for some retailers, making the transition to multi-channel retailing may be less easy for some than for others.
However, it should be seen as an opportunity for the sector, and an opportunity that the sector is seizing.
And although there is a perception that Australian retailers are lagging behind overseas competitors when it comes to changes in market share, it is not so clear cut.
In fact, the most recent figures show that it is domestic retailers, rather than international retailers, that are taking the lion's share of online sales. The latest year on year comparisons in the NAB Index also showed that domestic online sales grew faster than international sales.
In terms of online retail and multichannel success stories, you only have to look at your conference program to see examples of Australian businesses that have seized the online opportunity.
Shoes of Prey is one example, and co-founder Michael Fox participated in a roundtable focusing on online retail yesterday.
Shoes of Prey is an Australian online retail business giving customers the opportunity to custom design their own shoes, which are then shipped to their door.
It's little wonder that this innovative Australian retailer has won numerous Online Retail Industry Awards, with Michael Fox receiving the 2012 Industry Recognition Award.
That's one example, but I know there are many more.
Growing Australia's Retail Sector – Policy Responses from Government
As I mentioned earlier – in our dynamic and modern economy those businesses who meet their consumers' needs will grow and thrive. Those that don't will have a much more difficult time.
But there is of course a role for Government to get the policy settings right.
In 2011, the Productivity Commission's inquiry Economic Structure and Performance of the Australian Retail Industry showed that there are a variety of policies that have an impact on the retail sector.
Adding to the complexity of ensuring that the policy settings are right is the fact that different levels of government have responsibility for different policy areas.
These include consumer protection laws, planning and zoning regulations and taxation arrangements, just to name a few.
The Australian Consumer Law
Reducing burdensome and unnecessary red tape frees up industries to innovate and compete, which will deliver better outcomes for businesses and consumers.
We've already made good progress here in the case of reforming Australia's consumer protection law.
The Australian Consumer Law, which I was proud to have implemented in 2011, replaced 20 Commonwealth, State and Territory laws with one national law that improved consumer protection, reduced compliance costs and increased productivity.
The Productivity Commission recently estimated the benefits of this reform to be almost $1 billion a year.
Planning and Zoning
Another area of great concern to many retailers relates to planning and zoning regulations.
The 2011 Productivity Commission report Performance Benchmarking of Australian Business Regulation: Planning, Zoning and Development Assessments identified a number of constraints imposed by planning and zoning systems that unjustifiably restrict entry into markets, and reduce the flexibility of businesses operating in a particular zone or centre.
The Australian Government recognises that planning and zoning is a State and Territory responsibility and has no plans to involve itself in the details of planning and zoning regulation.
However, whilst being a State and Territory responsibility, planning and zoning regulation impacts on national productivity and competitiveness.
State and Territory Governments need to show leadership through reform of their planning and zoning regulations.
Some jurisdictions have taken positive steps recently, but a few positive steps in one or two States is not enough.
Taxation
Goods and Services Tax
I know indirect taxation arrangements, specifically the "Low Value Import Threshold" (LVIT) for the Goods and Services Tax (GST) and duty is an area of particular interest to many Australian retailers.
As online shopping has grown, and the Australian dollar has remained high, this issue has understandably received more attention.
The LVIT allows Australians to purchase goods from overseas and import them into Australia valued under $1000 without the requirement to pay GST or duty on purchases of those goods.
In 2012, the Australian Government commissioned the "Low Value Parcel Processing Taskforce" (the Taskforce) to investigate options to improve the efficiency of processing low value imported parcels.
The work of the Taskforce followed the 2011 Productivity Commission report on the Economic Structure and Performance of the Australian Retail Industry.
The Productivity Commission found that the low value threshold for GST and duty on imported goods was not the main factor affecting the international competitiveness of Australian retailers.
While the Commission did find that there are in-principle grounds to reduce the low value threshold, it also concluded that it would not currently be cost-effective to do so without significant improvements in the efficiency of processing low value parcels.
The Taskforce did not actually make any recommendations regarding the level of the LVIT, but proposed a set of reforms which would need to be implemented effectively before the LVIT could be lowered.
In its Interim Response to the Taskforce's Report, the Government announced that consistent with the recommendations of the Taskforce, it will begin preparing business cases and possible implementation plans for reforms to low value parcel processing.
The Government does recognise that on the basis of fairness and tax neutrality, Australian retailers should not be disadvantaged by taxation arrangements which favour overseas retailers.
The Government also acknowledges that the current threshold of $1,000 at which GST is collected on low value parcels is very high by international standards.
However, until these business cases and possible implementation plans for reforms to low value parcel processing have been prepared, and the costs associated with any possible changes have been determined, no decision can be made regarding the lowering of the LVIT.
Nor should any such a decision be made – as the Taskforce's detailed report made clear, there are no simple or quick solutions to this issue.
It is important that the Government makes any decision based on rigorous and detailed analysis of the costs and benefits of change.
With around 48 million parcels entering Australia through the international mail stream under the LVIT each year compared with around 20,000 entering Australia above the LVIT at the moment, lowering the LVIT before putting in place significant reforms to processing capabilities would cause major disruptions to the international mail service and result in major inconvenience to the businesses and consumers that rely upon it. It could also disrupt the operations of air and sea cargo carriers who deliver 10 million low value parcels to their customers each year.
There is no point having a system where the cost to taxpayers of collecting the GST on low value parcels would outstrip the revenue that is collected.
I would point out that it was the previous Coalition Government which increased the threshold for goods imported through the non-postal system from $250 to $1000 in 2005, aligning it with the threshold for the postal system. One of the consequences of this short-sighted decision was to reduce the incentive for investment in parcel processing systems and their ability to assess GST on low value parcels.
In it also worth noting that the then Minister for Justice and Customs, Senator Chris Ellison, was promoting the benefits of a higher threshold, stating in 2006 that:
I understand that the increased threshold level is reducing costs and streamlining processing for 135,000 importers, small businesses and individuals1
There is no doubt that we would be having a very different conversation about the LVIT today if the former Government had aligned the cargo and postal thresholds at $250 instead of $1000 in 2005.
The business cases and possible implementation plans for reforms to low value parcel processing which I referred to above are currently being worked on, and I am advised that they will be completed in the second half of this year.
Multinational Taxation
When it comes to the Australian retail sector and taxation, the focus of the discussion does tend to be on the GST.
However, over recent months it has become clear that the focus also needs to be on corporate tax.
In November last year, I gave a speech to the ICAA National Tax Conference in Sydney, titled Towards a Fair, Competitive and Sustainable Corporate Tax Base.
One of the main concerns I raised in my speech was that the recent tax planning practices of many multinational corporations have emerged as a threat to the corporate tax base.
In my speech, I set out how some multinational firms structure themselves in a way that minimises their corporate tax liabilities in countries where they do business.
The point was to highlight the tax consequences of technological changes and how these changes have transformed the way economic activity is occurring. These transformations have included the rise of online retail.
Whilst these changes put pressure on the corporate tax base in Australia, I don't want to focus on the corporate tax base itself today, but on the fairness and competitive impacts of such practices on Australian retailers.
The point I want to make is that addressing the GST and the level of the LVIT will not by itself deliver the level tax playing field that Australian retailers are seeking.
There are major multinational enterprises with operations in Australia, and some of these compete with Australian retailers.
However, because of particular tax planning practices, some of these multinationals are not paying their fair share of corporate tax on economic activity in Australia, obtaining a competitive advantage over domestic retailers that pay tax on profits that are attributable to their Australian sales.
Recent articles in Australian newspapers have made such comparisons.
Whilst this is a problem, a valid question to ask is what solutions are being considered.
Some might argue that the solution is to cut the corporate tax rate and reduce the incentive to shift profits.
But when multinational companies can achieve effective tax rates of a few per cent - or even zero - trying to compete with these rates is no different to abandoning our corporate tax base.
This kind of international "race to the bottom" is not the answer.
The Gillard Government is taking action to ensure the integrity and sustainability of the tax system.
Firstly, we are doing this by reforms to two of the key integrity regimes in our tax laws – our transfer pricing rules and the general anti-avoidance rule known as Part IVA.
We need to make sure that we are doing everything possible through our domestic laws to keep up with the changing nature of global commerce in the information age.
Secondly, Governments all around the world need to rethink many of the key rules of international taxation, which are not keeping up with the changing business models and tax planning arrangements of many multinational companies.
Rethinking key aspects of the international tax architecture, by definition, requires international cooperation, as difficult as that may seem.
Jurisdictions around the world are looking at ways to stop multinational enterprises from shifting their profits offshore to avoid paying their fair share of tax.
Last month, the OECD released a report on base erosion that describes the structural nature of the problem and calls for a detailed global action plan.
And this important issue is also on the G20 agenda.
Here in Australia, I have established a Specialist Reference Group to look at these challenges and help Treasury develop a scoping paper to build community understanding of the nature of the challenges we face.
I have also asked the Treasury to brief the Retail Council of Australia at its next meeting on these issues.
Finally, the Government will shine a light on these issues by improving the transparency of taxes paid by large and multinational businesses.
This was high on the agenda at the first meeting of the Specialist Reference Group last week.
Transparency in taxation would go a long way to improving not only government's understanding of which taxpayers are pulling their weight, but it would give the community, including the broader business community and Australian retailers, the capacity to engage in an informed debate.
The Government will announce the details of changes to the transparency of the business tax system after considering advice from Treasury and the views of the community.
Conclusion
I would like to thank you for the opportunity to speak about the future of retail in Australia with you today.
As I mentioned at the start of my address today, there are both opportunities and challenges for retail in Australia.
Ultimately, it is people that are at the centre of retail in Australia, and those who have attended this important two day event will play an important role in shaping the direction of the sector.
I know that you have had the chance to discuss and share experiences about how to "seize hold of the future" of Australian retail.
I wish you all the best, and the Australian Government looks forward to continuing to work together with you.
1 Changes to import processing charges, Minister for Justice and Customs, Senator Chris Ellison, Media Release, 27/04/06