Ladies and Gentlemen.
The pathway to reform is littered with the remains of unimplemented ideas.
Some ideas are poorly considered and quite rightly cast aside. Others are casualties of vested interests or fearful inertia opposed to any form of change.
A pragmatist can accept these failures.
Sadly, however, beside these failures many lay positive reforms which never come to fruition. These are the ideas left to decay, not because they are defective, but because the momentum for their implementation has been lost. No one should forgive these missed opportunities.
Governments, in partnership with industry, have a responsibility to ensure that the benefits of reform flow to the Australian community. This is critical to ensuring broad acceptance for the continuing need for reform. Before lifting our gaze to the future, we must ensure that we crystallise the gains already made.
In this regard, I am reminded of a quote by the American essayist John Burroughs when he said:
The lure of the distant and the difficult is deceptive. The great opportunity is where you are.
Business tax reform
As we consider where we are today, it must be said that strong foundations have already been layed for the future success of our country.
This Government's strong record of tax reform has underpinned Australia's economic performance.
A stable economic environment, conducive to long-term productive investment, will provide enduring benefits to the Australian community.
Over the past three years, this Government has implemented the most comprehensive and successful agenda of tax reform in Australian history.
The trilogy of indirect, personal and business tax reforms will ensure that Australia has a more efficient, internationally competitive and robust system of taxation.
A simple statistic which demonstrates the breadth of the reform undertaken, is the number of Bills that I have personally steered through the Parliament in the little under two years during which I have had portfolio responsibility for tax design. During this time, I have had carriage of 26 bills specifically amending the tax law with a further 4 bills pending.
To put this in context, I will briefly provide you with a thumbnail sketch of business tax reform to show the enormity of the reforms undertaken to date.
The centrepiece of business tax reforms has been the significant reduction in company tax rates to an internationally competitive 30 per cent.
Capital gains tax changes have provided further efficiencies by replacing indexation with a halved rate of tax for individuals and trusts and exempting one third of the gain for superannuation funds.
Tax rate reductions have been funded by complementary measures that broadened the business income tax base.
Significantly, the Uniform Capital Allowance System removed accelerated depreciation and aligned depreciation rates with the income producing life of assets.
Exceptions to the effective life rules have also been tightly targeted. These exemptions are directed solely to industries of national significance able to demonstrate a competitive disadvantage.
Of particular note to this audience, the Government has introduced statutory caps on the effective life of certain assets used in the oil and gas supply industry. This shortens the depreciation write-off periods of these assets, when compared to the Commissioner of Taxation's revised "safe harbour" effective lives of these assets.
The new consolidation regime, de-merger tax relief and the simplified imputation system will reduce the tax compliance burden over time and facilitate commercial restructuring of businesses.
The Government has also listened and been responsive to industry calls for specific tax initiatives to remove impediments to business investment.
Recent venture capital reforms have been designed to provide an internationally competitive framework to encourage more foreign investment and expertise in Australian business.
This is critical to Australia's ability to realise our innovation potential and thereby deliver more productivity growth.
In addition, proposed changes to the tax exempt leasing arrangements will encourage continued financing of essential infrastructure by the private sector.
Further, this Government has developed an internationally competitive and structurally sound business tax system as envisioned in the Ralph Review of Business Taxation.
The Government remains committed to maintaining the momentum of business tax reform and building on the reforms already put in place.
Review of International Taxation Arrangements
Another important area of tax reform is the Review of International Taxation Arrangements, affectionately known as RITA.
In this year's Budget, the Government announced a package of reforms to improve the competitiveness of Australian companies with offshore operations.
Active business income earned by a foreign subsidiary and repatriated to an Australian parent will be tax-free.
For example, a subsidiary making profits from mining in a foreign country won't pay Australian tax where the profits are paid to its Australian parent.
Likewise, where an Australian group sells a foreign subsidiary that operates an active business, the profit on sale will not be subject to capital gains tax.
The Government will also reduce the costs of complying with the controlled foreign company rules.
The Government has announced a move towards a more residence based treaty policy, a key feature of which would involve reducing withholding tax rate limits consistent with the direction set in the US Protocol.
All of these initiatives reflect the commitment of this Government to business and industry as essential drivers of Australia's future economic success.
Petroleum Resources
Turning now specifically to the petroleum industry, there is clearly a growing interest in exploring Australia's potential for petroleum.
Recent discoveries in the Otway Basin as well as new developments in deep-water technology have added to this interest.
Nine new offshore exploration permits, expected to generate almost $193 million in exploration activities over the next six years, have been announced for Commonwealth waters off the coast of Australia.
The permits range from small tracts close to producing oil fields, where there is ready potential to capitalise on new discoveries, through to large, deepwater frontier areas.
The resulting exploration work will significantly advance understanding of the petroleum potential of Australia's vast offshore areas and hopefully lead to major new discoveries.
Petroleum exploration and development activity in these areas will benefit from the application of the profits-related petroleum resource rent tax. Royalty and crude oil excise will not apply.
The development of new basins is fundamental to addressing Australia's declining liquid fuel self-sufficiency.
The regular release of offshore acreage is a key part of the Australian Government's strategy to encourage investment in petroleum exploration.
In 2003, 35 offshore acreages have been released. The release areas cover the full range of exploration provinces from frontier to mature and offer exciting possibilities for exploration companies of all sizes.
The role of frontier exploration areas in meeting Australia's future energy needs is well recognised by the Howard Government.
In the recent budget we announced an injection of an additional $61 million to Geoscience Australia.
It is an amazing fact that 90% of all oil exploration success in Australia since World War II has been directly underpinned by geoscience advice provided by Geoscience Australia.
That information will continue to flow free-of-charge to promote investment in offshore exploration of untested, frontier areas.
The tax environment for exploration and development
In relation to the tax environment for exploration and development, a number of concessions are already available.
Companies receive an immediate deduction of petroleum exploration and prospecting expenditures. Immediate deductions are also available for environmental costs including certain mine-site rehabilitation costs, expenditure associated with the removal of offshore platforms and environmental protection expenditure on pollution control and waste management.
Investors in Pooled Development Funds receive a tax exemption on dividends paid by PDFs and an exemption from capital gains tax on the sale of their shares.
PDF companies also pay a concessional tax rate of 15 per cent on investments in investment businesses and a tax rate of 25 per cent on income earned through `unregulated' investments.
Unincorporated Joint Ventures provide flexibility to companies that wish to pool resources for the purposes of pursuing an exploration project, while preserving the ability to deduct expenses against income at the company level.
Venture Capital Limited Partnerships provide a limited liability partnerships that are taxed as if they were ordinary partnerships. This means that tax is payable by individual partners rather than the partnership, providing a flow-through tax mechanism.
Exploration
The Howard Government is committed to ensuring that investment, risk and success in exploration continue into the future.
With Australia's energy demand forecast to grow by between 35 and 50% over the next 20 years continued exploration is essential to Australia's ongoing economic viability.
Last year we announced the development of a Mineral Exploration Action Agenda.
This is an industry-driven response, which will map the mining sector's exploration future.
In addition to this, the Prosser Inquiry is concluding its investigation of possible exploration incentives and is expected to report to the Parliament later this year.
One of the most prominent issues being considered by the Prosser Inquiry is the introduction of a flow through shares scheme.
Flow through shares
Flow through shares is a topic that has attracted particular attention across the mining and exploration sectors. Proponents of such a scheme tout its ability to raise additional capital for exploration.
A system of flow through shares would allow shareholders to claim a deduction for expenditures undertaken at the company level.
This is not a standard feature of the company tax system.
Costings undertaken by the ATO suggest that such a scheme would cost around $1 billion over four years if applied to small and medium sized corporations.
Being the Minister for Revenue and Assistant Treasurer, my primary concern in considering any new concessional tax measure is that it is efficient and effective in achieving its goals.
Having said that, the Government is open to proposals that seek to boost resources exploration. A flow through shares scheme is one of those that deserves serious consideration.
The starting point for consideration of an incentive flow through shares scheme is that it must be founded on the economic merit of the underlying resource activity and not rest predominantly on tax considerations.
There is some evidence in a recent ABARE report commissioned by the Department of Industry, Tourism and Resources that such a scheme will assist junior exploration companies in their quest to raise capital.
However, Australia has tried flow-through schemes on two previous occasions. On both occasions the schemes were abandoned as having failed to meet their objectives.
An important consideration in the current debate will be the extent to which a flow through shares scheme would be any more effective in the current environment.
Canada has operated a flow through share scheme for mineral and petroleum exploration and development since 1954.
The Canadian model provides a useful, if not conclusive, set of comparisons.
It is interesting that Canada's exploration performance over the 1990's did not match Australia's.
A 1994 evaluation of the scheme by the Canadian Department of Finance gave a mixed report.
It identified some significant negatives including that activity generated by the scheme was not particularly high.
Perhaps more concerning, it found that the industry experienced inflated exploration drilling costs and declines in project quality.
I want to make it clear that the Canadian experience may not be definitive. However, the extent to which we can learn by these experiences is relevant in the Australian context.
The Prosser Inquiry has provided industry with a unique opportunity to make the case for a flow through incentive scheme.
In order to make the case to Government, industry will need to adequately address why the two previous incentive schemes in Australia have failed and why historically, exploration peaked in Australia outside the periods of the incentive schemes.
It will also be essential that you clearly identify how such an incentive scheme can be effectively managed or ring-fenced so that it is not a vehicle for tax abuse. You will need to show that such arrangements will produce a commitment to long term investment relying on the market price of resources, rather than merely generating investments which are tax motivated.
Obviously these are matters to be agitated with the Prosser committee. The analysis also needs to take account the taxation reforms and lower tax rates this Government has already delivered.
PRRT system - ABARE report
In considering the case for flow through shares, the Government is likely to rely to some extent on the assertions of industry as to the future effectiveness of such a scheme.
The credibility of industry in this area will be determined in part by the way in which the industry has responded to other reform initiatives in the recent past.
In this regard, I would note that ABARE was recently commissioned to examine the fiscal settings in Australia's PRRT arrangements.
This commission was in response to arguments that Australia's PRRT arrangements should take into account the changing nature of offshore petroleum exploration and production activity, particularly the shift toward exploration in deepwater and frontier areas.
ABARE found that Australia's PRRT is a competitive and efficient resource taxation system and has provided the community with a direct return on the extraction of petroleum resources.
ABARE also found that the PRRT represents a major advance over alternative production based royalties, including specific and ad valorem royalties.
The results of ABARE's report do not support claims that the PRRT is discouraging exploration and development in deepwater areas and gas projects. Industry continues to engage in significant frontier and deepwater exploration activities, and domestic and international gas markets are expected to further significantly development over time.
ABARE reported that Australia is ranked 6th in the global ranking of deepwater exploration wells. This is greater than what would be expected in view of Australia's low level of prospectivity.
At the end of 2001, Australia was estimated to have held around 0.3 per cent of the world's proved reserves of oil and 1.6 per cent of the gas reserves.
Government is continuing to work with APPEA to improve the administration and operation of the taxation regimes that impact the petroleum industry.
In this regard, legislation was introduced into the Parliament last December for partial use and infrastructure licence amendments to the PRRT.
These amendments, which will be debated in the current session of Parliament, face an uncertain passage.
The Labor Party has signalled that it will not support the infrastructure licence amendments. This should be seen as a blow, not just for this measure, but also for any wider reform agenda.
In addition, regulations to determine a gas transfer price for sales gas used in integrated gas to liquid operations are close to being finalised and should be gazetted shortly.
The former Assistant Treasurer provided an assurance to the Opposition that the Government would continue to consult with industry on the detail of the regulations, that industry's views would be reflected in the regulations, and that industry's agreement to the regulations would be sought before finalisation.
APPEA has acknowledged that this commitment had been fulfilled to date. It is now essential that industry supports the passage of these regulations.
While I know that the industry has some residual concerns, the time has come to put these differences aside and move forward with the significant achievements that are reflected in the draft regulations.
It goes without saying that an implemented measure which provides 90 per cent of what industry is seeking is infinitely more valuable than 100 per cent of nothing.
Consideration of APPEA's April 2002 Technical Enhancements to the PRRT is proceeding, though the Government's priority lies with the finalisation of the gas transfer pricing regulations.
It should be noted, however, that the ATO has indicated to APPEA that they are committed to seeking administrative solutions to a number of the issues canvassed.
In view of the time it takes to develop and secure passage of PRRT legislation I encourage APPEA to continue to seek administrative solutions as an alternative to legislative amendments where possible.
Energy Reform
While not within my portfolio responsibilities, in addressing a forum such as today, I would like to touch briefly on one of the greatest challenges which will face Australia over coming years.
Australia's energy demand is forecast to grow by between 35 and 50% over the next 20 years.
Meeting this demand will require an injection of about $20 billion into energy infrastructure over the next decade.
This obviously poses a significant challenge for Government and industry.
The Howard Government is committed to tackling Australia's energy concerns in a way that balances both environmental sustainability and economic growth.
The Prime Minister has announced the establishment of a Ministerial Oversight Committee on Energy, which he will chair.
The setting-up of such a high level Energy Task Force confirms energy market reform as one of the highest priorities for the Government's third term.
Corporate governance
Before closing, I would like to turn briefly to the other topic of your discussions, corporate governance.
It is undeniable that the issue of corporate governance and its regulation is one of the most important policy challenges facing governments, business, investors and regulators today.
The quality of corporate governance plays a key role in determining the competitiveness and dynamism of corporations and their markets which, in turn, impact on domestic and global economies.
Recent corporate failures such as Enron and Worldcom in the United States, and HIH and OneTel in Australia have severely tested investor trust in the conduct of company executives, auditors and directors. As a result, greater attention is being given to the importance of accountability and transparency in the management of corporations.
In developing a best practice corporate governance framework the ASX Corporate Governance Council has noted that good corporate governance must protect the rights of shareholders, recognise public interests and ensure timely and accurate disclosure of material matters concerning the corporations. However, good corporate governance practices may vary from corporation to corporation necessitating a significant degree of self-assessment.
The Government's challenge is to ensure that there is a proper framework to address systemic failures that are identified and to tackle impediments to good corporate governance.
This framework needs to be attuned to business practices and the needs of the Australian community. The regulatory response should encourage competition and growth, and protect investors and market participants without stifling innovation or wealth creation.
Clearly however, while governments play a central role in shaping the regulatory framework, the main responsibility for corporate governance lies with corporations themselves.
Shareholder activism, in particular, is a major force in improving corporate governance. A rapid expansion in the domestic and global share owning population has driven unprecedented power transition to shareholders, which will have far-reaching and ongoing consequences for governance.
Conclusion
At the outset of my address to you today I quoted from the American essayist John Burroughs. I think it is worthwhile to leave you with another of his quotes in which he reminds us that opportunities are often close and there are rewards for those who see and take them. He said:
The lesson which life repeats and constantly enforces is 'look under foot.' You are always nearer the divine and the true sources of your power than you think.
Government and industry have over recent years shared a valuable partnership. This partnership has allowed unprecedented reforms to flow.
It is essential that the benefits of these reforms are fully realised for the benefit of the Australian community.
Sometimes when looking to the future, it is easy to forget how far we have come and the opportunities which are already at our feet.
Thank you.