Good afternoon and thank you to Noel [Rowland, CEO of the Taxation Institute of Australia] for inviting me to speak today.
I'd like to take this opportunity to acknowledge the important role the Institute plays in the tax arena. Judging not only by the number of people here today, but more importantly, by your strong record of achievement, you are the heart of the tax profession and tax education in Australia.
Tax policy is a community concern and the Institute plays an important role in educating the community and the professional sector about tax.
As the title of your 25th convention proclaims, you speak from experience – a quarter of a century of conventions worth of experience! And that's not to mention your 67 years as an organisation in the tax field.
And you combine this experience with a desire to keep learning and sharing.
The reputation of your education programs is enviable. They deliver both technical advice and work skills education, and they do this extensively and comprehensively.
Your contribution to the tax policy debate is also highly regarded. The Institute always provides thoughtful and substantial input on a broad range of tax policy issues, from climate change and the independent tax review, to more specialised issues − such as family trust election provisions and penalty remissions.
And, as you know, the Government has been particularly active over the last two-years in addressing a large number of unfinished and also new tax measures. The work of the Institute in the form of advice and submissions on this body of work has been greatly valued.
As tax professionals and educators, you understand that tax policy plays an important part in our economic life. And now, more than ever before, the Government is articulating just how tax policy is integral to our economic life.
Tax policy will shape Australia's economic future. It can improve productivity. It can lift GDP so that Australians are better off and it can deal with intergenerational issues in a way that ensures a sustainable future. These are big asks, and our performance must be up to the scratch.
Australia's strong economic performance
Before I delve into some specific tax areas, I thought it would be useful to run through quick overviews of Australia's strong economic performance in 2009, as we all know, in the wake of the global financial crisis.
In addition, I think it useful, as the tax community, for me to make some comments on the broader longer term challenges we face as recently highlighted in the third Intergenerational Report.
Responding the crisis
It is interesting to reflect just how much has changed over the past 12 months for the global and Australian economies.
Around this time last year, the Government had just announced its $42 billion Nation Building Economic Stimulus Plan, providing further critical public support to both households and businesses at a time when the outlook for the international economy was at its lowest.
Both arms of macroeconomic policy were in full swing, with the Reserve Bank cutting the cash rate by a total of 425 basis points from September 2008 to April 2009, providing immediate financial relief to households and businesses.
Many of you are aware how the Australian economy has responded over the last 12 months – despite the worst global recession since the Second World War, the Australian economy continued to grow during 2009.
This week's national accounts has entrenched Australia at the very top of the world's leading advanced economies. We are one of only three of the 33 advanced economies that avoided recession during the global financial crisis.
In year average terms, advanced economies as a group contracted by a record 3.2 per cent in 2009.
Alternatively, in the Australian economy GDP grew by 0.9 per cent in the December 2009 quarter to be 2.7 per cent higher through the year.
This is a remarkable achievement in a devastating year for the global economy.
But we must not forget that without the fiscal stimulus, Treasury estimates that the Australian economy would have contracted by 0.7 per cent.
And, as a further pillar of our strength, we can see that our fiscal position also sits in stark contrast to other countries.
The Government remains committed to ensure fiscal sustainability and responsible economic management through adhering to our medium-term fiscal strategy, which includes:
- achieving budget surpluses, on average, over the medium term;
- the Government remaining committed to keeping taxation as a share of GDP below the level it inherited, on average. That is 23.6% of GDP in 2007-08; and
- improving the Government's net financial worth over the medium term.
As a result of our fiscal discipline, the latest MYEFO projects the Budget to return to surplus by 2015-16, with net debt to peak at 9.6 per cent of GDP in 2013-14 – a tenth of that of the major advanced economies. The IMF forecasts net debt of these countries will be an average of 93 per cent of GDP in 2014.
As a result, Australia will continue to have lower deficits and lower debt than the major advanced economies.
Without a decisive policy response, Australia's experience during the crisis would have been very different and very much worse.
But the Government is interested in more than just navigating Australia through immediate-term problems.
That's why in responding to the global financial crisis we introduced measures to support Australia's long-term social and economic needs through infrastructure and nation‑building projects.
To frame this long-term agenda with facts, we commissioned and released early last month, the third Intergenerational Report, Australia to 2050: future challenges.
The IGR sets out with great clarity the challenges we face, including an ageing population, a growing population, escalating pressures on our health system and the impacts of climate change.
As you may recall, the report reveals that the number of people aged 65 and over is projected to more than double over the next 40 years, and the workforce participation rate is projected to fall from around 65 per cent today to an estimated 61 per cent in 2050.
While the population is projected to age over the next 40 years, it will continue to grow, but at a slower rate than the previous 40 years.
Even with slower population growth, we can expect our population to reach around 36 million people in 2050.
The Intergenerational Report concludes that an ageing population continues to pose a challenge to future living standards and the sustainability of government finances.
That is, without action to address current fiscal policy settings, ageing pressures could damage our fiscal sustainability in the long-term – and so the maintenance, clarity and effectiveness of our tax system and tax settings are again brought into the lime light.
Australia's tax system
Australia has a diverse and complex taxation system. Some degree of its complexity is unavoidable in an equally complex world, but a fair amount is truly unnecessary – I know that most in this room regret just how complex and distant the system can be.
But that said, we do also have many features of our system that work well and its overall administration – while throwing up some surprises from time to time – is by, international standards, broadly a leader.
But as the Treasurer and I have said on many previous occasions – we can do much more to ensure that the tax system is better able to assist in meeting the long-term challenges I have touched on today.
That is why this Government commissioned the independent tax review.
Independent tax review
Of course, many here today, as with pretty much everyone at most of my public engagements of late, are very keen to discuss the topic of taxation, tax reform and the independent tax review.
The Treasurer established the independent tax review to identify the long-term directions needed to help us deal with the great demographic, social, economic and environmental challenges we are facing.
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.
As you know, the review consulted widely and received around 1,500 formal submissions – of course including from the Institute and a range of your members. It canvassed a wide-range of issues of concern to the community resulting in an extremely rich source of information which helped it shape its recommendations.
We don't have a specific timetable for releasing the tax review.
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.
I very much look forward to coming back here or engaging with you all in many other ways on what's in the review and what's in our initial response.
The Johnson Report
The second area I wanted to touch on was the Johnson Report, and I want to focus particularly on the aspects of the report that fall within my tax portfolio responsibilities.
This report, which was released by my colleague Chris Bowen and I on 15 January, is a key step in furthering our commitment to developing Australia as a leading financial services centre in the Asia‑Pacific region.
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.
The Johnson report has been well‑received by the financial services sector. It contains 19 recommendations, many of which, as I've said, relate centrally 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.
Tax Practitioners Board
Now I know the Tax Commissioner was here yesterday and he gave you a fairly detailed run through of the new regulatory framework for the tax profession.
I don't intend to add very much to his comments other than in two discrete areas – first, I want to take this chance to reiterate why it is so many in the profession has fought so hard for a national regime for so many years; and second, I want to touch on the issue of the scope of the regime's coverage.
Less than a week ago, the new tax agent services regime formally commenced – on March 1.
Unlike the previous regime, this provides one single, standard, national regime administered by one national body, the Tax Practitioners' Board.
Dale Boucher, as the Chair of the Board is engaging with you, the profession, and of course, considering the sheer scale of the exercise, there is a great deal more to do.
I think the calm and professional manner in which almost everyone in the tax agent and BAS agent fields has approached this exercise is a testament to you as a collective profession. And for that I thank you.
But as the regime rolls out I think it useful to reiterate the core principle behind it, and that is that the new regime is built on a principle that where one entity provides tax agent services to another entity or individual and receives a fee for that service they should be required to register and be subject to the regulatory regime.
This is clearly designed to protect consumers of tax agent services – whether they be direct consumers such as people filing tax returns or companies procuring tax advice, or if they are indirect consumers such as the shareholders of entities procuring that tax advice.
It is about lifting all professional standards and in doing so, ensuring the tax profession remains exactly where a body such as the Taxation Institute has worked so hard to put it.
Now on the issue of the scope of the coverage of the regime, as you know, over recent months, I have spoken to a number of associations and practitioners as well as with Treasury and the Board.
As a result of these discussions I have decided to exclude services provided within a tax consolidated group from the regime.
Similarly, a number of groups have put a case to me to be excluded. I can confirm that these discussions are close to completion and that I am considering the Board and Treasury's advice on these matters.
Again, I would refer you to the principles I have just run through, as these will guide me over coming weeks as I determine if any further action is needed.
Taxation of foreign employment income
This was a 2009 decision in relation to Australians in employment overseas and the fact that most such people will no longer be exempt from Australian tax. These are of course the reforms to section 23AG.
This is an important equity measure and we stand firmly by it.
There are two specific aspects of this measure and its rollout that I would like to draw to your attention today.
The first has to do with the ATO administration of the new measure.
There has been recent media speculation to the effect that this will be complex and difficult.
Let me assure you that this is not the case and these views are misinformed.
For example, Australians working overseas will not be required to lodge a foreign tax return to demonstrate and claim amounts of foreign tax paid, as has been claimed.
All they will be required to do is to keep their normal pay slips and under our self-assessment regime these pay slips will only need to be provided if the ATO undertakes an audit.
This process will ensure that there will be no double taxation and that these Australian employees will receive a credit for any foreign tax paid.
Issue has been raised with how lower income earning Australian – like the perennial Aussie working in a pub in London – might be impacted.
But it seems to have been forgotten that we have tax free threshold in Australia and the low income offset which raises the effective tax free threshold to $15,000 and these do continue to apply. That is, the foreign employment income remains subject to the tax free threshold and the low income tax offset. This means that Australian backpackers who work overseas are very unlikely to pay tax in Australia unless they had other income.
And yes, many foreign jurisdictions use different tax years from our July-June financial year. We understood this when developing the measure.
Where the foreign country has a different financial year to Australia, the foreign income should be reported against the Australian financial year.
The taxpayer already has considerable time after the end of a financial year to lodge their return, especially if a tax agent is used, and this should be sufficient to cope with any timing differences internationally.
In addition, I would highlight that the Tax Office registered a withholding tax variation on 14 July 2009 to allow employers to reduce Australian PAYG withholding by the amount of the foreign withholding payable in respect of that same payment to the employee – a further important measure.
And the Tax Office is currently working with a number of large employers, with Australian employees in many countries, to develop specific withholding rules to reduce the compliance burden.
So, all in all, I just wanted to reinforce today that this important equity measure will be implemented with the greatest of care and support and will deliver a further important element in a fair and sustainable Australian tax system.
Let me turn now to the second issue I wanted to raise on the section 23AG reforms and that's the issue of the application of fringe benefits tax to these workers.
Given the foreign income of the Australian residents is no longer exempt, then the Australian FBT rules come into play.
A problem in this space is that, in Australia, FBT is levied on the employer while in foreign jurisdictions the FBT is regularly imposed on the employee, so a situation arises where a double FBT payment becomes a possibility.
I am advised that the Tax Office, based on explicit direct advice, was expecting a private sector request for a ruling so that it could make its position on this clear. That request was not made.
Therefore, at my instruction, the Treasury has provided the Tax Office with a series of scenarios and how the FBT arrangements apply in practice, and they are working together on a solution. This work is proceeding with the highest of priority and is almost complete.
On my current advice, I understand that it is likely that an administrative solution can be found that will prevent the payment of Australian FBT on the basis that the relevant costs would be "otherwise deductable" in Australia.
Of course this will depend on the circumstances and facts of individual cases – so I would encourage employers to seek a ruling from the Tax Office if they have any concerns.
But to conclude my comments on section 23AG, our position on this FBT issue is clear – where there is FBT double taxation, as far as possible we will put the Australian working overseas in a remote locality in a similar position to a worker based in one of our capital cities who flies in and out of a remote mining site in Australia.
As all of you know, there are so many other major tax reform measures currently either before the Parliament, having recently passed the Parliament or having been opened to consultation.
Major reforms to the administration of the GST fit, from my last recollection, in all three of those categories!
And further to that we have:
- important changes to the tax treatment for investors in failed managed investment schemes
- extensive further work on the consolidation regime
- the introduction of the final legislation on the capital account treatment following election of managed investment trusts
And these are among many others.
I know in your many and varied technical sessions here at the National Convention you would have touched on many of these in much more detail than I can today, unless you want to book dinner and stay right through!
So, if I had a single word to describe the year ahead, as I have said before, it will be "busy".
But it will be a very good kind of busy.
It will not be busy with a focus on how to dig our economy out of recession.
It will not be busy with seeking urgent solutions to end double-digit national unemployment.
It will not be busy with depressing naval gazing as to what might have been had we not acted earlier to support the economy and jobs.
No, 2010 will be busy for the Government and for all those in this room with a positive, future-looking agenda that wont be distracted by the serious woes that plague so many of our peers internationally.
This will be a year of agenda-setting and action that is firmly targeted at the long-term future prosperity and sustainability of our great country.
And that of course includes tax reform and tax policy.
Good tax policy is a vital part of strong economic management and we look forward to continuing exactly that throughout the year ahead.
Thank you again for having me here today.