21 June 2010

Address to the Property Council of Australia Capital Markets Leaders' Summit, Canberra

Good morning and thank you for that kind introduction.

First, congratulations to Daniel [Grollo, PCA National President] and the Property Council of Australia for again hosting the Capital Markets Leaders' Summit here in Canberra.

Bringing together so many business leaders in the national capital to discuss issues which affect us all is a great initiative.

The wider community views property as bricks and mortar investment, but in truth, before the bricks, before the mortar, comes the capital – and then the planning and development processes.

I know these issues are core concerns of your organisation Daniel, and for many in this room today, as they are for the Government.

We realise the contribution the property sector makes to our economy and in providing jobs for Australians – that's why in several regards our major stimulus package included measures directly in support of your industry.

I was in fact very interested to read this week the latest Australian Bureau of Statistics report on employed persons by industry.

Jobs in the construction industry – and I know property involves more than construction – increased by 40,000 in the six months to May.

For the first time, more than a million Australians are now directly employed in construction and it is the third largest employer by sector in the country.

When you add the jobs in other sectors directly associated with the property industry, you can see the massive contribution you make to the economic well-being of Australians.

Economic outlook

When I addressed the Capital Markets Leaders' Summit in June last year, I said that the National Accounts figures released earlier that month were a testimony to Australia's economic resilience during the global financial crisis.

This June, the figures — and our prospects — are even brighter.

According to the National Accounts data released earlier this month, Australia's GDP grew by 0.5 per cent in the March quarter to be 2.7 per cent higher through the year.

Australia's real GDP is forecast to grow by 3¼ per cent in 2010-11 and four per cent in 2011-12.

This will return the economy to full capacity in that year — three years earlier than previously projected.

In fact, this is forecast to be the fastest positive turnaround in the Government's budget position in modern times, delivering a tightening in the fiscal policy stance of around 1½ per cent of GDP a year over the next three years.

The Rudd Government has delivered this early return to surplus by maintaining a strong commitment to our deficit exit strategy. A key component of this strategy is to keep real spending growth below two per cent in the years of above-trend economic growth. This means that we will keep real spending growth below two per cent from 2010-11 to 2013-14.

Once the budget is back in surplus, the Government will retain a two per cent cap on real spending growth, on average, until the budget surplus is at least one per cent of GDP.

Australia's budget position continues to be among the strongest in the developed world. Our forecast deficit of 2.9 per cent of GDP in 2010-11 is well below the 9.5 per cent average for the major advanced economies in 2010.

A return to surplus in 2012-13 would put Australia at the forefront of global financial consolidation efforts, with the major advanced economies expected to remain in collective deficit by an average of six per cent of GDP in 2012.

Importance of deep and liquid capital markets

The Government believes, both during challenging and during good economic times, that deep and liquid capital markets are vital to our economic health, providing Australian companies with finance – particularly during periods of financial instability – and with options for accessing money, enabling them to mitigate funding liquidity risk.

Deep capital markets put competitive pressures on the cost of business credit throughout the financial sector and they also reduce the risks of having our credit system concentrated in a small number of financial corporations.

Our markets performed admirably during the global financial crisis, supported by several Rudd Government initiatives.

The Guarantee Scheme for Large Deposits and Wholesale Funding, together with the Financial Claims Scheme for deposits of less than $1 million, ensured the continued flow of credit to households and businesses.

The Government's investment in residential mortgage-backed securities supported smaller lenders in the Australian mortgage market, and ensured that thousands of home buyers and small business had access to finance.

While Australia has emerged from the crisis in far better shape than other countries, we are taking this opportunity to strengthen the resilience and dynamics of our financial system.

We are aware that the domestic corporate bond market is small compared with those of other countries. This reflects Australia's cost-effective banking sector and a lack of liquidity in the domestic debt securities market.

In May this year, we simplified prospectus requirements for issuing bonds. This initiative will reduce the cost and complexity of issuing bonds to retail investors. It provides relief for "long form prospectus requirements" to facilitate greater flexibility and speed-to-market in making bond offers.

And on Budget night this year, we announced that we will phase down the interest withholding tax paid by financial institutions operating in Australia.

This measure includes a phase down in the interest withholding tax incurred by local subsidiaries and branches of foreign financial institutions when they pay interest on borrowings from their overseas parents.

For local subsidiaries of foreign financial institutions, the interest withholding tax will be reduced on these borrowings from 10 per cent to 7.5 per cent in 2013-14, and to five per cent in 2014‑15. If possible, subject to medium‑term fiscal objectives, we will further reduce this rate to zero.

As well, the IWT rate applying to borrowings by an Australian bank branch from its overseas head office will be reduced from five per cent to 2.5 per cent in 2013-14 and to zero in 2014-15.

This will boost banking competition by allowing local subsidiaries and branches of foreign banks to access cheaper funding, supporting their lending to Australian households and businesses.

This was a key recommendation of both the Johnson Report and the independent Australia's Future Tax System review, otherwise known as the Henry Review.

So we continue to roll out important new measures that build on our record of sound management throughout the global financial crisis.

But of course capital markets, as a key part of a fluid international economy, also face downside risks.

As advanced and emerging economies are recovering from the crisis at different rates, the global outlook is uncertain.

The past two months have seen disturbing events in some European economies. As you would be aware, in early May European policymakers were forced to announce a broad package of stabilisation measures worth €750 billion, after the failure of previous attempts to reassure markets.

Despite this forceful response, the situation remains fragile. International financial markets remain volatile, reflecting ongoing uncertainty about the impact of the European sovereign debt crisis in the early days of the global economic recovery.

In this environment, the Government is fully aware of the primacy of reform in meeting economic challenges and planning for future growth - and we remain determined to maintain our momentum for reform.

Benefits to our capital markets of a modern financial centre

One of the ways we are maintaining that momentum is by positioning Australia as a leading financial services centre.

By any measure, Australia is already well on the way to meeting the essential criteria of being a true financial hub.

We have a high degree of political stability, a sound regulatory system and a high credit rating. Of the ten AA-rated banks in the world, four are Australian – that means 40 per cent of the world's top rated banks are right here, an amazing achievement.

We also have innate advantages, such as our geographic proximity to Asia and the fact that we are in a similar time zone, as well as a very well-educated and a mobile workforce.

The Government is committed to creating Australia as a financial services centre, not as some noble ideal, but because of the many benefits it would bring to our nation.

To ensure that Australia fully realises our potential in this area, in September 2008, the Government announced the establishment of the Australian Financial Centre Forum to recommend ways we can advance the international competitiveness of the sector.

The Government released the Forum's Report on 15 January this year and announced our response to the recommendations last month.

The Government's response to the Johnson Report provides in-principle or direct support for nearly all the 19 recommendations.

This work is also serving us well domestically by strengthening the depth and liquidity of our capital markets.

Managed investment trusts

One other area where we have been working hard on reform – real, tangible and delivered reform – is in relation to our managed investment trust (MIT) regime.

I know that the property industry are great users of MIT structures so you will have seen the scale of the modernisation we have been undertaking.

We are talking not about tinkering around the edges, but putting in place a $120 million completely new tax system for MITs.

We are talking about the passage of legislation to allow MITs to elect to have the capital gains tax regime as the primary code for taxing gains and losses on the disposal of key investments – a huge step up for the sector.

We are talking about a dramatic reduction in certain withholding tax rates from 30 per cent down to 7.5 per cent for payments in respect of the year beginning 1 July 2010 – a 75% reduction in tax rates.

As the next step in this reform task, last month we introduced legislation into Parliament which significantly changed the definition of a MIT for capital account and withholding tax purposes.

This reform was, and still is, aimed at more closely aligning the definition to be used for both the managed investment trust withholding tax rules and the capital account rules, and provide further certainty in relation to the operation of the MIT withholding tax rules.

Before I move on I would like to acknowledge the contribution of the Property Council and its members in assisting us in delivering this final plank in our MIT package.

The devil is always in the detail as they say, and what was introduced back in May, despite following on from a wide ranging sector consultation, didn't quite get it exactly right.

Nonetheless, the Property Council and others including IFSA worked in a very close and productive dialog with my office so that a way forward was found.

I can publicly confirm today, as many of you here already know, we will amend the relevant Bill to, among numerous other things:

  • extend the widely held rules for trusts that are unregistered wholesale funds to all wholesale funds, whether registered or not;
  • relax the widely held requirement for wholesale funds from a 30 member test to a 25 member test;
  • insert a new widely held rule for registered funds that allows a specified widely held entity to hold between 25 to 60 per cent of the qualifying MIT;
  • require that a fund need only manage a substantial proportion of its Australian assets in Australia to qualify for the lower withholding tax treatment; and
  • a significant expansion in the list of entities considered to be widely held to now include foreign government pension plans, sovereign wealth funds and certain government agencies and widely held foreign equivalents of a managed investment scheme, with this expansion supported by a new regulation‑making power to provide for further expansion of the list if warranted in the future.

This is a solution that now achieves both the Government and industry's joint objectives of promoting investment and productive economic activity in this country.

I would like to thank those in this room, and more broadly in the interested stakeholder community for your input in this process.

Economy-wide tax reform

I would like to end this morning by saying a few words on the task of major, economy-wide tax reform.

It isn't easy and it requires a focused commitment to achieve real outcomes.

It requires stakeholders who are able to move beyond only what appears to be in their immediate self-interest to see the bigger picture, to see how a more modern tax system overall stands to benefit everyone, including themselves.

The old adage of "a rising tide lifts all boats" comes to mind.

We have achieved this in the managed investment trust area with the property and financial services measures – major reform, issues along the way, level-headed interactions and good outcomes.

As you're all aware the Government is currently engaged in a debate with another sector of the economy, the resources sector, over the Resource Super Profits Tax.

I note that mining is 18th of the 19th largest employers by industry as measured by the ABS – at almost 180,000 direct jobs in May.

We want to capture the benefits of the resource boom for all Australians, address the challenges of an ageing population and ensure we have the skills and capacity to drive future growth.

This super profits tax applies only to very high profits derived from the resources that Australians own.

The RSPT will apply to non-renewable resource projects from 1 July 2012 at a rate of 40 per cent on a project's super profits, effectively replace multiple royalty regimes with one tax.

This will allow us to fund higher retirement savings, more roads, rail and ports, fewer and lower business taxes and less red tape, especially for small business, and a simpler tax time for millions of Australians.

The Australian people own 100 per cent of Australia's natural resources and deserve a fairer share of the super profits mining companies make during a boom.

As mining companies' profits have risen, the Australian people's share of those profits has fallen.

The Government simply wants to take the Australian people's share of mining profits closer to where it was in the early 2000's.

A special panel has been conducting consultations, genuine consultations, with the industry with, so far, more than 80 companies involved.

And the Prime Minister, the Treasurer and the Minister for Resources are all deeply engaged in this important process.

We will further consult with industry on the finalisation and implementation of the RSPT.

But all sectors of our economy, and all Australians, have a vital interest in this project of tax reform – it is about the national future, about productivity, about efficiency and about jobs.


Since coming to Government, we have made it our priority to attract foreign investment, make it easier for Australian companies to finance their operations and do business internationally.

We are committed to and our record shows we are achieving reform to see Australia as financial services and capital hub.

Despite the intervening global recession, I can assure you we have maintained our focus on financial and taxation reform.

The initiatives I have outlined today, together with the raft of other reforms we are introducing to improve the depth and liquidity of our markets, will help to secure Australia's future prosperity.

We value the input we receive from professional associations like the Property Council of Australia and I hope that we can continue working towards our common goals.

Once again, thank you for inviting me to address your summit this morning.