Good afternoon and thank you for inviting me to this, the inaugural IFSA/Deloitte Leadership Series Lunch.
I think this is also the first major IFSA event I've spoken at since John Brogden became IFSA CEO, so a public welcome to John in that role.
Just over six months ago, I stood here complimenting you on how you sought to achieve the highest standards for the financial services industry.
And here I am again and I'd like to offer another compliment, this time for introducing a new element in your leadership series through today's inaugural lunch and for the many more that I am sure will follow.
IFSA already runs a highly successful future leaders program. And this new lunchtime leadership series is an excellent addition to the program.
Deloitte is an important market player and I value their advocacy and views on important tax and accounting issues in my portfolio.
So, I congratulate IFSA and Deloitte for taking this initiative and for all those in attendance today for your own engagement.
I feel particularly privileged to be the first speaker at this forum and I intend to start the series by looking at some major issues that we both face today and that we'll face going forward, these are issues that will help shape Australia's future.
But I want to do so in way that rests very firmly in two key principles – these are guiding principles for me in my role as the Minister responsible for the administration of the taxation system, just as they were when I was Minister for Superannuation and Corporate Law.
I am referring to certainty and also to transparency.
Understanding exactly what your obligations are and understanding the process of how they are formulated and applied is paramount for business.
With more than a $1 trillion in your hands to manage and invest on behalf of over ten million Australians, these principles are paramount for each of your businesses.
So today I want to run through a few areas of policy development and in doing so, show how they are firmly anchored in these important principles.
Planning for the Long-Term: The Intergenerational Report
And there is no better place to start than with the Third Intergenerational Report - Australia to 2050.
The Australia to 2050 report is all about openly, transparently and clearly understanding the medium-term and long-term challenges our country faces, so we can plan how to meet them with certainty and good forward-looking policy.
It is about marshalling the evidence, understanding the numbers and projecting the future – all concepts with which you all would be very familiar as you plan in your own businesses.
So what does Australia to 2050 tell us?
Most prominently, the greatest pressures on Australia's living standards and government finances will come from an ageing population, with all its attendant calls on the health system and retirement income.
At the current rate of spending on ageing and health, total government spending will jump from around 22 per cent of GDP in 2015, to around 27 per cent by 2050.
Health costs alone will account for more than two-thirds of the projected increase in spending.
While these challenges are substantial, they are not beyond us – particularly if the Government continues to pursue a multi-faceted policy approach to confront them.
The sooner even modest reforms are put in place the better, because the cumulative savings over the next 40 years can be significant. In the same way, the compound interest has a profound impact over time.
Also, if we work to grow our economy, we can more easily meet the fiscal pressures.
We can do this by raising productivity growth over the next 40 years and removing barriers to workforce participation.
The Government is already laying the foundations for productivity growth. We are investing in skills and nation building infrastructure and implementing the Education Revolution.
The Government is also addressing some of the fiscal challenges presented by an ageing population and rising health costs.
Most recently, the Prime Minister announced the new National Health and Hospitals Network to deliver better hospitals and better health care for all Australians, wherever they live.
These are the biggest changes to Australia's health care system since Medicare was introduced.
We have also introduced changes to improve the sustainability of the age pension. We have raised the pension access age to an appropriately higher level of 67 – a tough but responsible decision – reformed a number of family payments and introduced legislation to means test the private health insurance rebate, although this last measure is stalled in the Senate.
Specifically, Australia to 2050 also sets out that:
- Australia's total population will be 36 million by 2050.
- by then, there will be only 2.7 people of working age to support each Australian aged 65 and over, compared to 5 people now;
- the number of people aged 65 and over will more than double within the same time period;
- spending on age-related pensions is projected to increase from 2.7 per cent of GDP today to 3.9 per cent of GDP in 2049-50; and
- spending on aged care is projected to increase from 0.8 per cent of GDP today to 1.8 per cent of GDP by 2049-50.
Now I strongly believe we should be happy we're all heading for longer and healthier lives.
On television the other night, the American surfing pioneer, Dick Brewer, said his doctor told him he'll live to 100 and: “I'll probably be surfing till the day I die.”
According to the experts, these are not unreasonable expectations and I too hope to live to be a hundred – and keep going to the gym till the end as well.
Australia's population has more than doubled since I was a teenager in the 70's and I believe we can accommodate the future growth predicted by the Australia to 2050 Report.
In fact, future population growth will help us increase our productivity. Other advanced countries will have to deal with an ageing population that is also declining in numbers and productivity.
Australia to 2050 points out all developed countries are experiencing population ageing and Japan, for example, will have only 1.4 people of working age for every person aged 65 years or older in 40 years. That's half Australia's ratio. The Japanese and many European countries will face extraordinary challenges in this regard.
Australia is also in a very strong comparative position because of our strong mixed retirement income system, including a large and growing pool of superannuation funds – overwhelmingly in a defined contribution system.
Managed Funds Sector
And this leads to the sector many of you come from – the managed funds sector.
Australia's fund asset pool is growing strongly – so strongly that, at the end of 2009, Australia's managed funds stood at around $1.7 trillion, equal to around 135 per cent of nominal GDP.
As you are all no doubt aware, Australia's managed funds assets offer a wide array of business development and export opportunities for both domestic and international market participants.
Growth of the managed funds industry is vital for Australia's economic well being.
It provides a massive pool of funds - funds Australian companies could call on for much-needed capital in the midst of the global financial crisis.
Further, the growth of funds under management drives development of a significant and sophisticated wealth management industry in Australia. This industry is a key part of Australia's financial sector, which contributes significantly to national output, employment, economic growth and development.
The sector directly accounts for about 10 per cent of GDP — more than our mining sector contributes.
However, the dynamic growth of Australia's managed funds also presents challenges for the industry. It is vital that managed funds are run efficiently and responsibly.
And the Rudd Government has also come to the table – again guided by a desire to deliver for you a higher degree of certainty – to significantly boost key aspects of the regulation of managed investment trusts for example.
Managed investment trusts
A key plank of certainty for your industry is the provision of a more certain and competitive Australian tax regime for attracting foreign funds under management.
The Government recognises that uncertainty and complexity surrounds the application of the current tax law to managed investment trusts.
Consequently, in 2008 we asked the Board of Taxation to review these tax arrangements, and now, we are considering the Board's final report. We will announce our response in due course.
The Government has already taken a major step to reform the tax arrangements applying to managed investment trusts.
Just last week, the Parliament passed the Government's legislation to allow eligible managed investment trusts to elect to apply capital gains tax (capital account) treatment to gains and losses made on disposals of certain assets, primarily shares, units and real property.
The deemed capital account treatment for eligible managed investment trusts reduces complexity and compliance costs, and boosts the local industry's global competitiveness.
The changes give managed investment trusts and investors certainty about when they can access CGT concessions on gains.
The measure will allow an eligible MIT to make an irrevocable election to treat gains and losses on disposal of certain investments, primarily shares, units and real property, on capital account with effect from the 2008-09 income year.
If an eligible MIT does not elect capital account treatment, then gains and losses on disposal of shares and units will be treated on revenue account.
There is an expanded concept of MIT for the purposes of the measure, which will facilitate the inclusion of certain state operated trusts and wholesale trusts that are owned by certain widely held entities, such as life insurance companies and complying superannuation funds.
The changes will provide certainty to MITs and investors for prior year assessments that may have been prepared on the basis of an incorrect assumption about the operation of the law, as the Commissioner will be unable to amend assessments in respect of the re‑characterisation of gains and losses from eligible assets, unless the taxpayer consents.
The changes will also clarify that distributions on 'carried interest' units in a MIT, and disposals of such units, are treated on revenue account.
Financial Services Hub
I'd now like to say a few words about the development of the financial services sector's international profile.
The Government established the Australian Financial Centre Forum in September 2008 and as you know, Chris Bowen and I recently released the Forum's report – Australia as a Financial Centre: Building on our Strengths, or the Johnson Report.
Our financial system fared well in the global financial crisis, and now we need to capitalise on the strengths of our regulatory system, our sophisticated financial sector, and our proximity to the fastest growing region in the world.
As the Johnson report noted, many countries in the region will need to develop a wider range of financial services over coming years. This includes capital markets, retirement income schemes, and asset management and insurance products.
While private sector savings ratios are typically high in the region, the range of financial assets for investors is limited. As incomes and wealth rise, demand for more sophisticated financial services will also rise.
Australia's opportunities for leveraging off our financial services skills and expertise, in the region and beyond, are potentially enormous.
We have the fourth largest financial services sector in the world, yet we export very little.
The Johnson report, with significant contributions from IFSA as an organisation and from individual members, seeks to build on these developments.
The Johnson Report makes a number of tax related recommendations, including:
- abolishing interest withholding tax on offshore borrowings;
- removing state based taxes on insurance;
- commissioning a Board of Taxation review to ensure a level playing field for Islamic finance products in Australia; and
- introducing an Investment Manager Regime, to provide tax certainty on offshore funds under management in Australia.
The Government is carefully considering each recommendation. Of course, some of these overlap with issues considered in the independent tax review and will need to be considered in that context.
But I would like to say a few words about just how seriously we are taking this work, by mentioning my own plans in relation to Islamic finance.
To assist in the Government's next steps on this matter, at the end of April I will be travelling to the United Arab Emirates, Qatar and Bahrain.
On that trip, I will be focused very heavily on high-level talks on the regulation, promotion and export of Islamic finance, banking and insurance, or takaful services.
I will be holding talks with the Secretary General of the General Council for Islamic Banks and Financial Institutions and the Secretary General of the Accounting and Auditing Organisation for Islamic Financial Institutions – two global peak bodies on Islamic finance.
I will also visit Deloitte's own Islamic Finance Knowledge Centre in Bahrain and host a roundtable with regional policy and industry figures.
Australia sits as one of the closest neighbours to Indonesia – a rapidly growing developing economy and the largest Muslim nation in the world. We have close and growing business ties to the Gulf region and beyond.
We must do more in the space and I sincerely hope all in this room can see the potential and the challenge at hand.
At the same time, as part of the consideration on a tax treatment of sovereign wealth funds, I will be consulting with major Middle East sovereign wealth funds and investment councils. It is vital that any new regime, in a much more capital competitive world, would be appropriate to attract the inward investment we need to develop business and to jobs.
Australia's tax system
Independent tax review
As you are aware, Australia's status as a leading financial centre needs to be supported by an internationally competitive tax system.
And as investors, you understand that tax policy plays an important part in our economic life.
Tax policy will play an important role in shaping Australia's economic future.
That is why this Treasurer commissioned the independent tax review to identify the long‑term reform directions needed to help us deal with the demographic, social, economic and environmental challenges we are facing.
The tax system is fundamental to Australia's productivity and competitiveness, and how we will meet those challenges and sustain the standard of living and social cohesion we expect.
The review consulted widely and received around 1,500 formal submissions.
The Treasurer has confirmed that we will release the review be by the time of Budget. When we do release it, we will be encouraging a genuine national debate by approaching tax reform with an eye to the next decade and beyond.
This is part of the Government's commitment to building a more productive and competitive economy.
Earlier this month I announced the Government would tax investors in traditional instalment warrants as the owner of the asset held in the trust.
On the same day, the Minister for Financial Services, Superannuation and Corporate Law, the Hon Chris Bowen MP, announced that the Government would tax a superannuation trustee who enters into a permitted limited recourse borrowing arrangement to purchase an asset as the owner of the asset.
Both changes will apply for assessments from 2007-08 and later.
These changes will benefit investors by ensuring there is no CGT event at the time of the last instalment.
The Government is consulting on these changes and I welcome industry's participation. Consultation closes on Friday, 9th of April 2010.
The Government will also consult on the draft legislation.
Further tax certainty boosts – the Inspector-General's “U-turns” report and repeals of unlimited reassessments
The Government has further added to certainty through the repeal of over 100 provisions in the income tax laws that provide the Commissioner of Taxation with an unlimited period to make an amendment to a taxpayer's assessment.
The removal of these powers will ensure taxpayer affairs for a particular year become final at the conclusion of the standard amendment period of two to four years – and this finite amendment period will apply unless there has been fraud or evasion.
This reform coincided with my release last week of the Inspector-General of Taxation's U-turns report. The IGT found that while the ATO may have acted within the law, in some circumstances, taxpayer perceptions of ATO changes in views or practices and related delays, may be justified. A number of recommendations were directed to the ATO and Government.
The first recommendation is that the Government consider whether the current legislative framework provides effective transparency and certainty for taxpayers when the Tax Office retrospectively applies new, changed or clarified views.
The Government agrees that transparency, clarity and certainty are critical principles with the administration of tax matters and we will consider this recommendation in the context of the overall response to the independent tax review.
The ATO broadly agrees with the report's administrative recommendations and has informed me that it will be developing its administrative practice in this area in close collaboration with the taxpayer community.
The Rudd Government has now been in power for more than two years – yes time does fly.
In that time, we've had to chart our way through the worst global recession in 75 years.
The financial world is vastly different to the one we were all used to before the collapse of Lehman Brothers on 15 September 2008.
One thing hasn't changed, however, and that has been our commitment to boosting certainty and transparency for taxpayers.
It remains a core policy of the Rudd Government and it will help us achieve our aims of positioning Australia as a financial services hub, expanding the sector and building its contribution to domestic economic growth.
I should point out that Australia is moving to seize the opportunities of the short, medium and long-term future from a position of strength compared to other advanced economies.
Australia's economic performance in 2009 in the wake of the devastation of the global financial crisis was remarkable.
While the global conditions remain challenging, the Australian economy continues to grow - by 0.9 per cent in the December quarter and 2.7 per cent through the year.
This solid performance reflects the success of the Government's stimulus package. It significantly boosted confidence. Not just of households, but of businesses too, at a time when the outlook was bleak.
The global economy is picking up. Concerted global action has boosted growth and this has fed through to Australia's financial sector.
Australia's financial sector is performing strongly.
As the outlook for the global economy improves, demand for Australian exports will increase.
Australia's labour market has been remarkably resilient, with the latest ABS statistics showing a 5.3 per cent unemployment rate, lower than expected at MYEFO and about half that of the USA and Euro zone countries.
The IMF forecasts for Australia are also strong. In its latest World Economic Outlook released in January, the IMF forecast that Australia's real GDP would grow to 2½ per cent in 2010 and 3 per cent in 2011.
We have abundant natural resources, a highly educated workforce and burgeoning technology. Our national wealth is growing and set to grow more strongly.
The Government is already setting the agenda to shape the future we want.
And we know your industry will be crucial in keeping our national wealth flourishing.