Introduction
Good morning and thank you for inviting me to breakfast today.
While tax and economics is hardly the breakfast option of choice for most people, I hope that what I have to say this morning energises you for the rest of the day!
Australia's Economic Outlook
I'd like to start by giving you a brief snapshot of Australia's current economic situation.
We can be proud that Australia is such a resilient nation. Just look at how we've navigated our way through the global financial crisis and emerged in better shape than any other advanced economy. Early on, we hardly dared to hope for this outcome.
Of course, we felt the effects of the global recession. Economic growth slowed, the unemployment rate drifted higher, and tax revenues quickly dried up. But it could have been a lot worse.
Unlike other countries, we maintained a Triple-A credit rating and low unemployment levels. We grew while other economies contracted.
In recent months our economy has performed strongly, with growth higher and unemployment lower than anticipated.
However, challenges remain: current growth rates remain below the trend level we've become accustomed to – around 3 per cent.
However, it is good news that the economy is now expected to grow by 1½ per cent in 2009–10 and by 2¾ per cent in 2010–11, compared with forecasts of –½ per cent and 2¼ per cent at Budget.
Last week's labour force data, showing the unemployment rate falling back to 5.3 per cent, was another great achievement by hard working Australians and also employers.
This improved outlook reflects:
- the success of the Government's stimulus package, which has had a greater than expected impact on confidence;
- concerted global action, which has had a greater than expected impact on global growth; and
- the strength of our financial sector.
I want to make the point about how vital the timing of the stimulus was to the final outcome.
If the Government had waited a couple of more months for more signals of what was likely to happen, then the horse would have bolted, along with business and consumer confidence - creating the type of downward spiral we have seen in other countries.
While some economies are still stuck in that downward cycle, things are generally getting better.
The improving outlook for the global economy will increase demand for Australian exports so the outlook for domestic mining related investment looks healthy.
With a number of larger projects now looking more likely to proceed, new engineering and construction investment is expected to grow more strongly in 2010–11.
In addition, data outcomes since the publication of the 2009–10 MYEFO have been slightly stronger than expected.
- International data has provided further confirmation of the recovery in the global economy.
- Domestically, the September quarter 2009 National Accounts showed that the economy grew by 0.2 per cent, due in large part to the effects of the Government's stimulus measures.
- Other economic data, such as retail spending and building approvals, suggest that economic growth maintained momentum through the December quarter 2009.
These are all very encouraging signs.
Tax Reform and Emerging Tax Issues
Of course, of closer interest to many of you here today is the topic of taxation.
In particular, I suspect you would like to hear my views on the independent tax review.
Unfortunately, as you would understand, I can't say much right now about the report; its recommendations, or the Government's response. As the Treasurer and I have said – we simply won't speculate on the Review as this would be neither helpful nor productive.
The Government established Australia's Future Tax System Review Panel to identify the long-term directions needed to help us deal with the obvious demographic, social, economic and environmental challenges that lie ahead.
The Intergenerational Report the Treasurer released earlier this month details many of these challenges.
As the tax system is fundamental to Australia's productivity and competitiveness, tax reform will help us meet those challenges and sustain the standard of living and social cohesion we expect.
The Johnson Report
As well as the independent tax review, the Government is also currently considering the Johnson Report, which was released by my colleague Chris Bowen and I on 15 January.
This report is a key step in furthering our commitment to developing Australia as a leading financial services centre in the Asia‑Pacific region – many of which relate to my portfolio of tax reform and administration.
Australia already possesses many of the characteristics of a leading financial centre.
Australia offers investors a politically stable environment, a robust regulatory system with world's best corporate governance standards, and a highly skilled workforce. But if we are to be recognised as the leading financial centre in the region, we can't afford to take these advantages for granted.
This is why, in 2008, we established the Australian Financial Centre Forum. Chaired by Mark Johnson, the Forum was asked to examine Australia's current policy settings and identify what needed to be done to improve the performance of Australia's financial services sector within the region.
The Johnson report has been well‑received by the financial services sector. It contains 19 recommendations, many of which, as I've said, relate to taxation.
These include recommendations to remove interest withholding tax on borrowings by financial institutions, to abolish state insurance taxes and to introduce an investment manager regime.
Securing Australia's position as a regional financial services centre means ensuring we have an internationally competitive tax system.
But achieving international competitiveness is not about reducing our tax rates to the lowest in the world. Rather, as indicated by the report, the focus should be on identifying and removing barriers to the internationalisation of our financial services sectors. It should also be on striving towards a system that is open and transparent and provides clarity and certainty, while maintaining integrity.
The Government is looking closely at all of the report's recommendations, and a number of them will need to be considered in the context of the recommendations contained in the independent tax review.
And of course the third major review in this broad area is the Board of Taxation's (MITs) managed investment trusts review, which the Government is currently considering.
Of course just last week I moved towards completion the first instalment of the Rudd Government's major overhaul of MITs by finalising and overseeing the introduction into Parliament of the capital account election measure.
The final measure was much expanded and informed by important consultations and I believe illustrates just how focused this Government is on delivering a clear, simple and tax certain regime for our financial services industry.
Recent Key Tax Reforms
Sometimes, amid all the talk about future tax reform, we forget about the things the Government is already doing to improve the tax system.
As I have said previously – one of my top priorities as Assistant Treasurer has been to undertake a thorough audit of all the current and outstanding announced tax measures.
Some of these, as many in this room may know, date back well into the previous government's time in office.
We have done that and now my focus has shifted to seeing this raft of measures enacted into law – a "clearing of the decks" if you like.
You will certainly see that the Tax Laws Amendment Bills, the TLABs, will be longer and will move us solidly towards this outcome.
Proposed changes to capital gains tax scrip for scrip roll-over
Earlier this year I announced that the Government would make it easier for takeovers and mergers regulated by the Corporations Act 2001 to qualify for the capital gains tax scrip for scrip roll‑over.
This change allows the roll‑over to operate more effectively and applies from 6 January this year.
Just to explain, the scrip for scrip roll‑over ensures that capital gains tax is not an impediment to takeovers and mergers. It allows taxpayers who exchange shares in one company for shares in another to defer the realisation of any capital gains from this exchange.
One of the requirements of the roll‑over is that members in the target entity must be able to participate in the merger or takeover on substantially the same terms. This differs from the member participation requirements in the Corporations Act.
As a result, a merger that meets the requirements of the Corporations Act may not otherwise qualify for the scrip for scrip roll‑over.
Consequently, the Government will carve out takeovers and mergers from having to satisfy this requirement for the roll‑over when the arrangement has been approved under the Corporations Act, including via a scheme of arrangement.
The Government has already undertaken public consultation on the design of these changes and I also welcome feedback from industry on the draft legislation as this process comes to fruition within the next few months.
Reform of the foreign source income attribution rules
In the 2009 Budget, the Government announced significant reforms to Australia's foreign source income attribution rules.
These reforms involve the repeal of the Foreign Investment Fund (FIF) and Deemed Present Entitlement (DPE) provisions and the modernisation and re-write of the Controlled Foreign Company (CFC) rules.
I've released draft legislation to repeal the FIF and DPE rules for consultation and also released a consultation paper on the modernisation of the CFC rules. Consultation on the FIF proposals closed earlier this month. Consultation on the CFC measure will close on 1 March.
The operation of the attribution regimes has, over time, become inefficient and, in light of growing global interactions, poorly targeted. The compliance costs they impose are disproportionate to the risk to revenue. The reforms will ensure that the integrity objective of the regimes is better balanced with other objectives such as low compliance costs.
The reforms will deliver significant compliance cost savings by simplifying and modernising a complex set of rules. They will also advance the Government's commitments to secure Australia's place as a leading financial services centre in the region and, more generally, to improve the competitiveness of Australian businesses operating offshore. The prospect of consolidating the two income tax Acts will be brought a significant step closer.
Details surrounding the transferor trust changes and the anti-roll-up fund rules are still being developed. Legislation to give effect to these changes will be released for further comment before the legislation is finalised.
The repeal of the FIF and DPE rules will be effective from a date that balances an early commencement with broader Budget considerations.
Tax Practitioners Board – licensing requirements and in-house tax advisers
As many here would be aware, 2009 also saw the finalisation of legislation to introduce a new, and long awaited, tax agent services regime.
This legislation provides a robust framework for the regulation of tax agent services reflecting today's modern commercial environment.
To administer this new regime (due to commence on 1 March 2010), I appointed the inaugural Tax Practitioners Board in October of last year.
Led by Mr Dale Boucher, the former CEO of the Australian Government Solicitor, the Board includes current tax practitioners.
The tax agents' services regime is a major piece of red-tape reducing national reform, encompassing tens of thousands of professionals across the country.
It replaces six existing state-based Tax Agents' Boards - one, clear, straight-forward national regime put in place for the first time.
Over the past several months, I have been speaking with a number of associations and practitioners in the tax agents sphere and the new Tax Practitioners Board. They have all welcomed the introduction of a single national regime and have been very supportive of the new Tax Practitioners Board.
During my discussions with the industry and in consultation with the Board, I have formed the view that, in at least one area, the Government will pass regulations to exclude a group from being required to register.
I'm speaking specifically about 'in-house' advisors. These individuals often provide tax advice which would be relied upon within their corporate group for a single tax entity.
It was not the Government's intention in developing this national regime that these advisors would be required to register if they are only providing advice within their corporate group.
Now, I know there are one or two groups which have put a case to me to be similarly excluded. I am currently conducting discussions with the relevant parties and will make further decisions in the near future.
The Board has already demonstrated its commitment to working with industry and stakeholders to help groups understand the requirements of the new regime, and to work through any issues.
The Board has held a preliminary consultative forum with various organisations. In addition, it has also met with a number of different parties on a one-to-one basis.
I'm confident that the Board, with its mix of experience and skills, will ensure a smooth transition to the new regime.
Recent draft determinations affecting foreign investors – private equity
Finally, I know an issue of interest to many in the business and tax community is the tax treatment of private equity investments by foreign investors.
You are no doubt aware that the ATO recently released two draft tax determinations on this issue.
One deals with whether the gain from the disposal of the target assets is of a revenue or capital nature.
The other considers the question whether the general anti-avoidance provision of the income tax law can apply where the private equity investment is routed through a variety of tax jurisdictions which could include a tax haven.
It's the proper role of the ATO, which has sought comments on these draft determinations, to provide its view on how the current tax law operates. In this regard, the Commissioner of Taxation is an independent, statutory office holder.
At the same time, the Government is looking closely at the draft determinations is closely considering representations from industry and advice from the Treasury before determining what action, if any, may be needed.
I have already held a number of meetings on this issue and the consultative process is continuing to run its course.
The Government will also consider advice from the Treasury and the Tax Office before determining what action, if any, may be needed in the coming months.
The Government encourages foreign investment and it actively seeks to promote Australia as a financial services centre, as demonstrated by:
- a reduction – to 15 per cent – in the withholding tax rate on fund payments from Australian managed investment trusts to most foreign investors for the 2009–10 income year;
- a further reduction – to 7.5 per cent – for the 2010–11 and subsequent income years;
- modernising how we tax financial arrangements by enacting the stage 3 and 4 TOFA measures in March 2009;
- signing world-leading mutual recognitions agreements with the United States, New Zealand and Hong Kong;
- as already mentioned, the commitment to modernise the Controlled Foreign Company rules and repeal the Foreign Investment Fund and Deemed Present Entitlement rules;
- legislation introduced into Parliament on 10 February 2010 to implement last Budget's decision to allow, with effect from the 2008–09 income year, eligible managed investment trusts to make an irrevocable election to apply the capital gains tax regime to gains and losses on disposal of certain passive investments (in the main, shares, units and real property); and
- as announced on 10 February 2010, the expansion of the definition of a managed investment trust under the withholding tax rules, which will more closely align with the definition contained in the capital election rules. This expanded definition will enable wholesale managed investment schemes and government-owned managed investment schemes to qualify for the reduced withholding tax rates with effect from the period commencing 1 July 2010.
There is, nevertheless, a balance to be struck between the Government's encouragement of foreign investment and financial services, on the one hand, and protection of the integrity of the tax system, on the other.
The community expects the tax system to be fair and equitable, and that businesses, whether large or small, will meet their tax obligations.
It's important to be clear about the nature of a particular type of commercial activity, for example, whether it's of a passive nature that attracts special tax treatment or is more akin to the carrying out of a business operation or commercial transaction entered into with the intention of making a profit from that operation or transaction.
Likewise, the Government and our tax treaty partners are concerned to ensure that complex financial structuring involving tax havens is not used to skirt around our double tax treaties or our domestic tax laws.
Conclusion
We clearly have interesting, and very busy, times ahead!
A lot has been done, and is being done, to move the nation forward. But, we have a lot more to do.
The Government is closely considering the recommendations of the independent tax review and the Johnson reports and we will develop our response to both in a considered and measured way.
As I've said before, I won't be commenting just yet on the recommendations, or on any of the speculation that has been circulating in the media and elsewhere.
What I can say is that the independent tax review has been a comprehensive examination of our tax system and will provide the foundations for a plan for long-term reform, to make our tax and transfer systems fairer, simpler and more competitive.
I look forward to working with you on that important task.