I am delighted to be here this morning to open the 2004 Corporate Tax Association Convention.
The Convention provides an opportunity for tax experts from many of Australia's leading public companies to reflect on some important issues in tax reform.
So today I would like to share with you some thoughts on where we find ourselves in the realm of tax reform, how far we have come and the challenges that remain - as well as the significant contribution that the Corporate Tax Association and its members will inevitably play in future tax reform.
There are not a lot of opportunities to talk constructively about tax reform – it is an emotive subject for most of us - so I am eager to utilise this opportunity to the full!
An efficient and competitive tax system is part of the architecture of the modern economy.
And tax reform is about removing the barriers to productivity that will enable economic prosperity and keep Australia in the enviable economic position we currently find ourselves enjoying.
I welcome Frank Drenth's recent assessment that Australia has 'undoubtedly experienced a prolonged period of economic growth, that has significantly exceeded rates achieved by other developed countries, because of the Government's strong economic management'.
Obviously Frank was commenting in the context of improved company profits and the resulting increase in corporate tax collection.
Whatever the context, the strength in company tax contribution to revenue can be attributed to sustained economic expansion which has become a hallmark of the Howard Government.
In discussing tax reform I endorse the view of a US Treasury official who said almost 30 years ago that the blueprint for tax reform should be:
"That a tax system looks like someone designed it on purpose".
Certainly, from my perspective, I vouch that the Government has taken this sentiment on board.
Australia and tax reform
I am rightly proud of the Howard Government's achievements in tax reform, particularly in the area of business tax reform.
It is not an overstatement that these reforms represent the most far-reaching and dramatic tax reforms ever attempted in Australia's history.
During a lunch I attended recently I was told that extensive tax reform would not occur unless accompanied by 'real political will'.
As a Treasury Minister in the Australian Government that has been at the helm during the implementation of business tax reforms (just to mention one initiative), the Government has the right to feel incredulous at the suggestion that political will is lacking when it comes to tax reform.
But more of politics and 'political will' later.
The sweeping tax reforms undertaken over the past few years have underpinned Australia's sustained economic performance, a fact underscored by the OECD view that a key economic reform in Australia has been the reform of our tax system.
An internationally competitive and structurally sound business tax system, as envisioned in the Ralph Review of Business Taxation, is now a reality.
The Government has listened and been responsive to industry calls for specific tax initiatives to remove impediments to business investment.
Recent reforms are delivering significant economic benefits to Australia by contributing to a larger, faster-growing and more dynamic Australian economy.
The International Monetary Fund in its April 2004 World Economic Outlook expects that Australia's strong economic performance will continue.
We understand that creating an environment in which business can prosper is essential.
A strong corporate sector creates jobs, secures critical investment and trade for Australia, all of which are fundamental to our continuing economic prosperity.
Tax reform that benefits business by making it more competitive represents an investment by Government in securing a successful economy.
Investment in tax reform is therefore a critical element of nation-building.
Corporate Governance
The Government has also made the same commitment to a robust, modern and flexible regulatory framework for corporate governance.
The drive to improve corporate governance is another part of the Government's ongoing program to modernise business regulation in Australia.
The Government's Corporate Law Economic Reform Program (CLERP) is designed to ensure that we improve productivity, promote business activity and confidence in our corporate culture.
The object of recent reforms dealing with audit reform and corporate disclosure is to improve the operation of the market by promoting transparency, accountability and shareholders rights.
CLERP 9 takes a balanced approach to corporate regulation without over-burdening business with unnecessary regulation nor being overly prescriptive.
Governance and tax risks
It is self-evident that good corporate governance also includes managing risk in respect of taxation.
As someone once said: "A tax return is not an opening offer".
The Commissioner of Taxation recently wrote to the boards of large Australian companies highlighting the need for boards to be actively involved in assessing tax-related decisions.
I note there has been some concern about the Commissioner's approach and some concerns about the capacity of boards to get across the technical details that determine those risks.
However, despite these concerns I do not think anyone denies that tax decisions can pose a risk to the reputation of a company and the returns it can make to shareholders.
I share the Commissioner's view that company boards have a responsibility to ensure that tax laws are properly applied.
Recent surveys indicate a high percentage of company directors agree that tax is a real corporate governance risk area.
Judgements about tax compliance are, or should be, part of the corporate governance processes of every company and board.
At a practical level, I do note concerns remain about the Commissioner's access to this kind of risk management information in the event of an audit.
While the position here is a work in progress, I understand that there are ongoing discussions with the ATO that will ensure that an appropriate balance can be struck between the Commissioner and corporate Australia in managing this issue.
I will continue to carefully monitor an acceptable solution between governance and tax risk requirements.
Review of self assessment (ROSA)
While sweeping reforms have modernised our tax system and made it fairer and more sustainable, the Government is also determined to ensure the income tax self assessment system best serves the needs of the Australian community.
Obviously the tax system is about collecting revenue but this needs to be a fair system, applied impartially and one where the system can be administered without imposing unreasonable and unnecessary administrative and compliance costs.
There are always trade offs between these considerations.
As Einstein is reported to have said in relation to completing his tax return:
"This is too difficult for a mathematician – you need a philosopher"
It is therefore appropriate that during the 15th anniversary of the self assessment system, the Government announced a Review into how it is tracking and whether any rebalancing of the system is warranted.
The Review was sparked by taxpayer concerns, including corporates, that uncertainty and its consequences were becoming major issues in managing companies' tax risks.
Tax risk is also heightened when implementing major tax reforms.
Complex changes to tax laws can present practical difficulties of interpretation and administration for all stakeholders.
Uncertainty is one of the least desirable features of any tax system particularly where it may impact on the level of voluntary compliance.
In examining ways to reduce uncertainty, the discussion paper has canvassed a wide range of options under 5 or 6 main categories.
Issues canvassed in ROSA that are perhaps most relevant to the corporate sector include:
- The arguments for remission of the general interest charge below the statutory rate for tax shortfalls in the period between the original and amended assessments;
- The potential alignment of the Part IVA amendment period with the general amendment period of 4 years;
- Limiting the review period for loss companies to the period for taxable companies; and
- Extending the operation of pre-assessment agreements, that are currently restricted to transfer pricing and GST transactions, to a wider range of circumstances.
On the topic of ATO advice, the discussion paper examines a range of issues relating to accessibility, timeliness, accuracy and reliability.
Treasury will be taking submissions on its discussion paper until 21 May and will report to Government by the middle of the year.
Principle-based Approach to Tax Law Design
Another issue raised by business in managing tax risk is the extent to which the complexity of the tax laws can be addressed.
One avenue explored in the ROSA discussion paper is whether a principle-based approach to tax law design could result in a less complex, more coherent statement of the tax laws.
Over the past 20 years, tax law has set out in increasing detail how the law is to apply in a variety of fact situations.
This is often seen as desirable, as taxpayers naturally want a high degree of certainty as to whether and how the law will apply in their particular circumstances.
While this approach does provide certainty where a taxpayer's particular circumstances are specifically addressed, laws designed in this way can never anticipate all the relevant circumstances of each and every taxpayer.
I am being constantly approached for a carve-out or exception to prescriptive legislation that at times can work a manifest unfairness or have an unintended consequence.
This is particularly the case in the rapidly evolving financial markets.
There has also been increasing recognition of the benefits of using high level principles, rather than black letter approaches, to draft tax law.
Where necessary, additional detail can be provided in the law, the explanatory memorandum or subordinate legislation.
Elaboration of the practical effects can also occur through rulings.
In this regard the Commissioner discussed in a recent speech the extent to which his power of general administration of the law can be used to address issues of tax compliance.
I certainly encourage and ensure wherever possible that a pragmatic approach to tax law interpretation is followed.
It is an effective way of ensuring the policy intent of legislation is delivered and that administrative solutions are found wherever possible without the need for ongoing clarification by legislative amendment.
Our overarching objective in adopting a principles based approach is to ensure our regulatory framework remains robust, modern and flexible without over burdening businesses with unnecessary regulation.
The reform process
We are also changing the way we undertake the tax reform process.
Crucial to that change has been the integration of the tax policy and tax law design functions, and the new community consultation arrangements for the development of new tax law.
The resulting closer engagement between Government, the Board of Taxation and the business community has been evident in the valuable and constructive consultative role played by the Corporate Tax Association and its members.
It's gratifying to see business endorsement for the quality and effectiveness of the recent consultation process for the Review of International Tax Arrangements (RITA) legislation.
I welcome and endorse comments made by Frank Drenth in a recent BRW article where he said this new consultation environment also carries with it enhanced responsibilities for business participants.
These responsibilities extend to ensuring integrity issues are appropriately identified by participants in the consultation process up front, rather than taking a short sighted approach and cherry picking the benefits from consultation.
The Government must be able to trust that consultation is occurring in an honest and frank environment. If that trust is breached then the consultation process ultimately fails.
Review of International Taxation Arrangements (RITA)
The globalisation of economic activity and the need to keep Australia competitive have been important catalysts for tax reform.
The Government has delivered greatly improved treaty arrangements with the United States and United Kingdom. They form the basis of a competitive and modern tax treaty network for Australia.
Both treaties substantially reduce withholding taxes on certain dividend, interest and royalty payments.
Greater certainty is also provided for business on capital gains tax and new treaty issues like employee share options and dual listed companies.
As a result of the Board of Tax's review of the international tax system the Government has announced a number of measures relating to international tax arrangements.
The New International Tax Arrangements Bill 2003 targets the superannuation and funds management industries.
These measures reduce unnecessary tax compliance burdens for the superannuation and managed funds industries.
The reforms modify the foreign investment fund rules, which are currently imposing significant compliance costs—resulting in higher costs and lower returns for investors.
These compliance costs also disadvantage internationally focused Australian funds seeking foreign investment, compared to foreign funds.
These rules will be changed to provide a better balance between their integrity objectives and the compliance cost burden for taxpayers.
The third tranche of reforms, introduced into Parliament on April 1, aims to reduce the burden of Australian tax on the foreign business operations of Australian companies.
These reforms will make Australian companies more competitive in raising capital for those foreign business operations and so make Australian companies better able to compete for business offshore. This indirectly will improve their ability to compete in Australia.
Two measures in the Bill will largely remove Australian tax from the foreign active businesses of Australian companies.
The legislation allows business to get on with business offshore with less need to be concerned about an additional layer of Australian tax.
As well as reducing tax costs, it will make compliance with the Australian tax law a lot easier.
Australian companies have a large amount –more than $160 billion - invested in foreign businesses and providing them with more freedom in dealing with those businesses by removing more Australian tax considerations can only be of benefit to those companies and to their Australian shareholders and employees.
Consultations have begun, or will soon begin, on the next round of measures to be implemented and I look forward to your continued participation in those consultation arrangements.
Loss Recoupment Rules
I recently announced a package of measures designed to substantially simplify the company loss recoupment rules.
Widely held companies, such as listed companies, have experienced difficulties and high compliance costs in testing for continuity of ownership.
These companies often find it impractical to comply with the continuity of ownership test where there are a significant proportion of small portfolio shareholdings, including institutions such as managed funds and superannuation funds.
Where shares in a company are heavily traded, the company may fail the continuity of ownership merely because of "market churn" in shares and not because of any loss trafficking activity or a material change in ownership of the company.
This has resulted in widely held companies relying, to a large extent, on the same business test in order to claim past losses.
While the same business test works reasonably well in the context of small companies with a narrow field of operations, it is a difficult test to apply and has uncertain operation for large and diversified companies.
The Government's extensive review of the loss recoupment rules, again involving industry consultation, has enabled a policy response targeting the areas where uncertainty, compliance costs and revenue risks are highest.
The outcome is a package of reforms that represent a pragmatic response to the problems with the current loss recoupment rules, while maintaining the basic structure and integrity of these rules.
Taxation of financial arrangements (TOFA)
The second stage of the taxation of financial arrangements project was completed last year with the introduction of new provisions clarifying some fundamental issues relating to the taxation of foreign currency transactions.
Currently, Treasury officials are reviewing a number of issues raised by industry and professional bodies concerning the implementation of these new provisions.
The last two stages of the TOFA project, containing tax timing rules for gains and losses from financial arrangements, are currently under development.
An important issue impacting on the development of these rules has been the release in December 2003 of the Australian version of international accounting standard IAS 39 which for the first time provides guidance in the form of an accounting standard for the measurement of gains and losses from financial arrangements.
The implications of this standard for stages 3 and 4 of the TOFA project are being examined with a view to identifying potential compliance costs savings.
Conclusion
In an election year talk will inevitably turn to whether the business community thinks the grass might be greener on the side.
From my policy and portfolio perspective I find it difficult to make any meaningful comparison between the Government's approach to tax and the economy and the approach the Opposition has haphazardly outlined.
Labor business credentials are tenuous at best and short-sighted and alarming at their worst.
As the Minister who has to endure piles of legislation crawling through various senate committees only then to have unsubstantiated opposition on the other side of that process, you will forgive me if I sound a little world weary about the political process.
Opposition for opposition's sake often comes to mind in the Senate when you're dealing with the Treasury measures.
The Opposition leader has stated that "Labor is pro-market but not necessarily pro-business".
On occasions Labor has sought to explain its opposition not on policy grounds but on the grounds of relative priorities or populist posturing.
The rationale seems to be that business should take comfort that Labor supports it, but just doesn't support it enough to commit to the sort of investments the Government has committed to and that is necessary if we are to sustain the momentum in the economy.
Labor's refusal to support Australia entering into the new tax treaty with the UK and its opposition to expatriate tax reform are two cases in point that simply defy rational explanation.
Far from the grass being greener for business, under Labor there is likely to be some very dry patches in the paddock.
You will have noticed that consultation with the tax community has been a consistent theme across each of the tax reform issues I have canvassed today.
Through engagement with stakeholders, the Government has been able to draw on the experiences and knowledge of tax professionals, and others, to improve the tax system for the community more broadly.
A continuing challenge for the Government is to build on the collaborative working relationships established to date.
These relationships will form the foundation for sharing the Government's continuing vision for improving the tax system.
I will have an opportunity to elaborate on that vision, in more detail, later in the year.
To revert to my opening comments, the Government has conclusively proven, despite nay-sayers, that is has the political will – the sheer political guts – to take on the tough decisions required to reform the tax system.
We have come a very long way from the shambolic tax system we had to endure before the Coalition came to Government.
We are a Government that will not shirk the political risk of making tough decisions in the national interest.
Nowhere has this political will been more evident than in reform of the tax system.
I invite the CTA to continue this journey by working with the Government on tax design and developing a more principles based statement of the law.
This is not a short-term project, but one for the benefit of future generations of Australians.
Thank you.