12 July 2004

'Holding Our Head Up High: Achievements and Challenges for the Australian Economy' - Address to the Australian Institute of Company Directors, Perth


It is a pleasure to be here today to address the West Australian arm of the Australian Institute of Company Directors.

Regrettably I don't often get the chance to venture to the West - so I relish opportunities like this to not only speak to you about the Government's agenda and plans for the future but also to hear from you about how some of our initiatives are working on the ground.

Today I would talk a little bit about how far we have come since the Howard Government was elected in 1996 and, importantly, where we are heading and how business can contribute to that process.

Undeniably, the Howard Government has played a key role in building and maintaining Australia's enviable economic prosperity. As the Prime Minister said in a speech last week – Australia is now holding its head up high.

We have presided over a regulatory revolution since we took office in super, tax and insurance that has really changed the landscape and I make no apologies for that.

The corporate and financial services sector has risen to the challenge of a raised standards bar – not without some difficulty – but as we reach the crest and turn the corner I believe we are finding ourselves in a better place.

Key elements of this reform have included the trilogy of indirect, personal and business tax reforms and the complete restructure of the Corporations Law through the CLERP process.

As Minister for Revenue and Assistant Treasurer, I am in the policy "engine room" driving solutions to many of the regulatory challenges within the Treasury portfolio.

Although I have often been referred to as a pair of webbed feet – the feet paddling madly away underneath the swan.

While furiously paddling, I am aware of the need to balance the desire for simpler regulation that is principles based, against black letter law solutions.

I have described this in the past as "the regulatory balancing act".


Regulatory decisions are not taken in a vacuum and are underpinned by broader economic objectives.

The Australian economy is set to record an impressive 14th consecutive year of economic growth in 2004-05. At the same time we have achieved 25 year record low unemployment and low inflation.

The Government's stable macroeconomic policies have created the right conditions for the Australian business sector to flourish.

Real business investment over the past 8 years in Australia has grown by an average of 8percent each year, compared to almost no growth at all, on average, in the first half of the 1990s.

Over the same period, the National Accounts show that profits of private non-financial corporations have increased by an average of 7percent in nominal terms each year.

The good news for business is that the Government's sound economic management and commitment to wide ranging taxation and other structural reforms means that Australia's economic success story is set to continue.

It is no wonder that international organisations such as the IMF and OECD continue to praise the robustness of the Australian economy, and expect Australia to continue to be one of the fastest growing advanced economies in the world.

CLERP in Australia

Since taking office, the Howard Government has progressively undertaken the modernisation and improvement to Australia's corporate governance framework.

The latest instalment of this reform project, CLERP 9 which came into effect on 1 July 2004, will enhance auditor independence, achieve better disclosure and increase corporate accountability through improved enforcement measures.

The Bill was passed with a few minor Democrat amendments moved in the Senate. While the Government did not consider the Democrat amendments were essential, they are broadly consistent with Government policy of open communication between boards and its shareholders.

It was important to secure passage of the CLERP 9 legislation and this example of legislative "renovation" by the Senate provides a salutary reminder of the vagaries of the political process despite the Government's best intentions for legislative simplicity.

The CLERP reforms also provide a clear illustration of the Government's aim to strike the right regulatory balance weighing up the need for improved corporate accountability without being overly prescriptive.

Unlike the Labor Party, the Government does not believe it should be sitting in boardrooms and fixing remuneration for executives.

We consider that corporate disclosure, transparency and accountability are much more effective tools to ensure shareholder protection and confidence in the market.

Accordingly, CLERP requires the basis of remuneration packages for senior company executives be clearly disclosed to shareholders.

Accounting standards

The CLERP program has also seen significant reform in the accounting standards setting processes including the new arrangements for the Australian Accounting Standards Board and the Financial Reporting Council.

While Australia already has its own high quality accounting standards, it is important to remember that we represent less than two per cent of the world's capital markets.

Global standards will reduce the risk premium foreign investors apply to overseas companies with unfamiliar accounting standards. This will benefit Australian companies by reducing their cost of capital.

While there are tricky issues to resolve in the transition to the new world of international accounting standards playing havoc with TOFA (Taxation of Financial Arrangements), the FRC's commitment to a 1 January 2005 transition date has provided certainty of direction for Australian companies.

Prudential regulation

One of the key areas ofregulation in my portfolio is prudential regulation. This has seen major reforms of the safety of super and the insurance industry following the collapse of HIH.

The government places great importance on ensuring the prudential regulation framework is robust and adjusts to market developments.

APRA released a discussion paper on issues for further reform of general insurance regulation on 20 November 2003, which included a number of proposals relating corporate governance and board composition for prudentially regulated entities.

A number of the issues raised in the paper flow from the findings of Mr Justice Owen in the HIH Royal Commission and were referred to APRA as part of the Government's response to the Royal Commission.

The discussion paper is intended to provide a basis for consultation with industry for developing further reform options. APRA is currently considering the submissions provided during the consultation process.

You would be aware that Dr Laker gave a speech on the issue to the Australian Institute of Company Directors in May which detailed the willingness of APRA to look to a principles-based rather than a prescriptive approach.

He did continue to stress APRA's view that given the crucial responsibilities of the board, APRA needed to be confident that they perform in a sound and effective manner.

Dr Laker laid out in that speech that, at the heart of their proposals, APRA is looking for ways to ensure five important attributes in a board:

  • Independence;
  • Expertise;
  • Diligence;
  • Prudence; and
  • Transparency.

I don't think there is any argument about the importance of these attributes. The relevant question is how APRA can arrive at a practical means of ensuring these attributes that is consistent with the body of expertise available to Australian boards.

APRA is willing to consider a principles-based approach. They are still likely to insist on measures which identify APRA's expectations of boards of prudentially regulated institutions and would put the onus more, if not fully, on boards to demonstrate that they can meet these expectations.

I am watching these developments with interest, particularly with an eye to balancing the burden of regulation against the protection of the community and the financial system.

Business Tax Reform

Australia's positive economic outlook is also due to the more efficient, internationally competitive and robust tax system Australia now has.

Tax reform has not been restricted to the domestic tax system and extensive roll-out of business tax reform.

An integral part of getting it right for Australian business has been the broad range of international tax reforms the Government has recently delivered.

Two of our more significant tax treaties, those with the United States and the United Kingdom, have been modernised and the withholding tax rates on dividend, interest and royalty payments have been substantially reduced.

This will provide long-term benefits to the economy by making it cheaper for Australian based business to obtain intellectual property, equity and finance for expansion. It will also remove obstacles currently inhibiting Australian corporate expansion offshore.

The Review of International Tax Arrangements, (known colloquially as "RITA"), has also delivered significant outcomes for business, not the least being long awaited reductions in compliance costs and complexity of the law.

The general thrust of the RITA reforms has been to remove Australian tax impediments for Australian companies expanding their businesses offshore.

Greater flexibility in the use of capital and profits internationally was another key objective, as was the encouragement of foreign investment in Australian multinationals.

Involving industry at an early stage in designing these international tax policies has paid dividends. A key to the success of that process was the business community's willingness to contribute, and the Government's preparedness to listen, and respond to calls to remove unnecessary impediments to business expansion.

It illustrates the benefits that can flow from a partnership between government and business in approaching tax reform – a partnership in which the Board of Taxation also plays a crucial role.

These changes have been welcomed by business as the most important changes to Australia's international tax laws in more than a decade – and rightly so!

However the process by which the international tax changes were developed also signals a better approach to how other tax policy design and implementation can be continuously improved.

How can the tax system be improved?

There is more that can be done to address the inherent complexity of our tax system.

Our tax law is long, comprising approximately 6,000 operative pages. It is also increasingly complex.

That complexity has demanded ever growing bureaucratic and parliamentary resources to implement and administer our tax laws, as well as burgeoning costs for business to comply with them. Increasingly we have a tax system that many find difficult to comprehend.

There are many reasons why tax law is so long and complex. The first is that our tax system serves two purposes. On the one hand it raises revenue for the essential services of government.

To quote Justice Oliver Wendall Homes: "Taxes are the price that we pay for a civilised society".

On the other hand, our tax system is a key part of the economic infrastructure which Government uses to pursue social and economic objectives.

Much of the debate around tax is a debate about these dual objectives.

But another reason for the complexity of our tax law is the way it is designed and written, with growing pressure in the past few decades for more and more detail in the interests of so-called "certainty".

Coherent Principles Approach to tax design

We are tackling this issue by examining how we can best deliver our commitment to design the tax code using general principles in preference to long and detailed provisions.

The approach being developed is described as "coherent principles" – and we have made a start.

The coherent principles approach aims to write the law in a series of operative rules - that are principled statements about what the law is intended to do - rather than details about the mechanism that gets it there.

But, unlike some general principles approaches, the coherent principles approach can accommodate detailed or specific rules - but only when needed, and not as a matter of course.

If experience with the law once it is enacted suggests that an ATO Ruling may be needed, the principled framework in the law will provide a sounder basis for the ruling than does the present black letter detail approach.

But that does not mean that it will be left to the ATO to invent the law. Law that is expressed as a framework of clear operative principles will set clear parameters for the ATO's interpretation.

Advantages of the coherent principles approach

Principled law will be conceptually simpler and it is not only business and the tax community that will welcome this.

Currently, consideration of tax law takes up a very large proportion of Parliament's resources. It is in the interests of democracy to provide the Parliament with law that can be readily understood.

Principled law will also be shorter – itself an important saving of Parliamentary time and resources.

Importantly, principled law will actually be more "certain".

There is an argument that the black letter approach provides "certainty" for taxpayers – because it sets out how the law will apply in their particular circumstances.

I agree - the black letter approach does provide certainty where the law specifically addresses a taxpayer's particular circumstances.

But experience has taught us that it takes an inordinate amount of time to do so, and the end product is often long and complex.

Not only that, no matter how careful we may be in addressing as many circumstances as we are aware of, something no one could have anticipated will often arise after a measure has been put into practice, or will emerge as business practices change over time.

In those circumstances, the black letter approach is actually less certain, because it is hard to discern the broad intention of the law – that is, you usually can't work out how, in principle, the law should apply to those new and emerging circumstances.

Principled law, on the other hand, while not usually providing fine details about the cases it covers, will provide a framework for working out how it applies to each of them.

Principled law will therefore provide more certainty, as fewer amendments will be needed to address particular circumstances that were not contemplated at the time the law was drafted.

What is the role for business?

However, the Government cannot achieve significant improvements in the tax system on its own. The effective functioning of the tax system ultimately requires a partnership between government and business. We are trying to make that partnership a more effective and productive one.

Just over two years ago the Government committed to enhanced community consultation on taxation measures, with participants invited to contribute information about the practical operation of the taxation system, and ways to improve the quality and effectiveness of proposed changes.

Those arrangements are beginning to bear fruit.

Recent consultations on the RITA reforms, as well as consultations on the recent measures adopting the coherent principles approach have worked particularly well.

Effectively engaging in community consultation requires a strong commitment from external participants. We need you to do more than just tell us what you want.

As we implement the coherent principles approach, it will be particularly valuable for you to test the principled framework in the particular circumstances of your business or industry, to ensure that the framework is comprehensive.

We will also be asking you to tell us the extent to which the principled framework is consistent with business practice. An important aim of the coherent principles approach will be that it results in less disruption to current business practices than may be the case with the present black letter approach. This asks for greater involvement on the part of business in the tax reform process, but is an investment that will pay dividends.

I appreciate that this call on your time also comes on top of the Commissioner's call for greater involvement by our business leaders with the tax system.

Last year, the Commissioner's "Large business and tax compliance" booklet acknowledged the role of business leaders in making judgments about the need for tax compliance to be part of the corporate governance processes of every company and board. More recently, the Commissioner wrote to about 1500 corporate boards sharing his views on management of tax risks and providing some practical guidance for boards.

While nobody expects Boards to become tax experts, I agree with the Commissioner's assumption that the proper identification of major tax risks - which risks are acceptable and appropriate, and which are not - and the processes that need to be put in place for the management of those risks, are matters that Boards should oversee within their company's risk management framework.

Corporate governance

Regulatory and business tax reforms need to be underpinned by a strong set of corporate ethics that encourages directors and employees to operate in an open and honest manner.

The Government's attitude to corporate governance can be summed up as "sunlight is the best disinfectant" and that transparency and disclosure represent governance best practice.

However, while governments play a central role in shaping the regulatory framework, the main responsibility for corporate governance lies with corporations themselves

Ultimately I believe we really have no choice but to do things differently and better. I welcome your participation in that task to ensure that the right regulatory balance is achieved.

Political Realities

I know I don't need to remind you that we are in an election year but please don't ask me when!

All elections are important ones for an incumbent Government – with each term we battle against our opponent's cries of 'It's time' and 'Give the other guy a go'.

Inevitably in an election year people's thoughts turn to whether the grass might be greener on the other side. This is to be expected and encouraged.

I think this election is an important one for the business community – your choice this year is a stark one.

It is a choice between maintaining a strong, dynamic and growing economy and a Government that believes in providing an environment where business can grow and be more competitive and an alternative party that is prepared to alienate the business sector and impose more red tape and paperwork and add its own new taxes without any consultation with industry.

After eight years in the job the Howard Government has achieved an extraordinary amount, particularly in areas that affect you – the economy, the regulatory framework and in the tax arena.

After I recovered from the mammoth two weeks of Parliamentary sittings before the end of the financial year I did a little stocktaking of my own.

I had a look at how many Bills and regulations I have passed or gazetted since I became Minister in late 2001.

Since becoming Minister for Revenue I have passed a total of 80 Bills plus another two that are awaiting Royal Assent. I have also gazetted 95 regulations.

One thing you can be sure of, if my political opponents get into Government, is that the regulatory and tax burden on business – small or large – will markedly increase.

The Business Council of Australia's recent report into Labor's industrial relations agenda is evidence of the risk Labor poses to Australia's economic prosperity.

This is an example of the leadership role that business must take if we are not to squander and jeopardise the reforms we all worked so hard to achieve.

The last thing that business needs is to have the clock wound back. As a nation we can't afford to let that happen.

Thank you.