Greg Combet (Charlton, Australian Labor Party, Parliamentary Secretary for Defence Procurement) Share this | Hansard source

I would also like to speak on the Tax Laws Amendment (Election Commitments No. 1) Bill 2008 and related bills. I will focus specifically on the reduction in the rate of withholding tax contained within the relevant bill. It is intended of course, as was outlined in the introduction of the bill, that this will contribute to the growth in what is already Australia’s third largest sector—that is, the finance and insurance sector. The legislation also represents another election promise fulfilled by the government—a promise that was first announced by the now Prime Minister when Leader of the Opposition in his budget reply last year. I think, to put it in some historical context, the bill represents the latest contribution by Labor to the growth of the funds management industry. This is a contribution that Labor has made to the economy stretching back to the 1980s, and I will go over a bit of the history later.

The bill, as we have heard, replaces the 30 per cent withholding tax regime that predominately applies to distributions of Australian source rental income and capital gains from Australian property trusts. Once fully implemented, foreign investors in countries from which Australia has an effective exchange of information on tax matters will be subject to a new final withholding tax of 7½ per cent on their distributions. It is the effective exchange of information on tax matters that I think the member opposite who spoke previously was referring to in relation to various countries that may effectively be excluded from the final withholding tax rate of 7½ per cent—and there are good reasons for that that have already been addressed.

Importantly, restricting the reduced withholding tax rate to countries with which Australia has an exchange of information agreement will ensure that the reduced rate is not abused and will encourage foreign jurisdictions to enter into exchange of information agreements with Australia. That is the purpose: to try to engage countries in that discussion and negotiation and to have reciprocal taxation understandings through exchange of information agreements. The reduction in the taxation revenue that is involved in this change should, at the end of the day, be thought of and seen as it is: an investment in the future of the financial services industry in this country. I think that is an extremely important objective. The purpose of the bill is to encourage growth in the funds management industry in Australia. Taxation revenue will grow at the lesser rate of the withholding tax as the industry and the financial services sector itself expands.

To put some of this in an economic context domestically and internationally, it is important to note that Australia now has the fourth largest onshore managed fund market in the world. In 2007 Australia had $1.36 trillion in consolidated funds under management, including $128 billion in Australian property trusts. The finance and insurance sector contributes more than seven per cent of GDP. It is an extremely important part of the Australian economy now. This makes it the third largest industry in the Australian economy, behind manufacturing and property and business services. It employs approximately 400,000 people and contributes $30 billion in taxation revenue. Lateral Economics estimates that the funds management industry may account for 40 per cent of the economic contribution of the finance and insurance sector. This puts the contribution of funds management to the economy at over three per cent of GDP. To put that in a bit of context as well, the funds management industry is therefore bigger than the agricultural, hospitality, utilities and communications industries. Any measure by government, such as those contained in these bills, to support the growth in that sector is extremely important economically and will have a significant impact over time.

As a result of the growth of the industry, we have in Australia a very skilled financial services workforce strategically placed in the Asian time zone. We have a very stable economic environment and a regulatory regime that is well respected internationally. Corporate governance in this country, albeit that there are always continuing opportunities for improvement in this area, is well regarded in general internationally. However, when you look at some of the economics of the industry, and in particular the international engagement and investment in Australian managed funds, you see that less than three per cent of the fees derived by Australian managed funds are attributable to foreign investment. According to the ABS, this ranks the financial sector as 27th out of 35 industries in terms of export performance. The current 30 per cent withholding tax rate—and this is the point that the member for Stirling, who spoke prior to me, needs to consider—is one of the reasons why Australian managed funds struggle to attract foreign investment. This is not mere conjecture; anyone in the funds management industry in Australia could attest to that fact. With the reduction in the withholding tax, one would expect an increase in foreign investment in Australian managed funds thereby increasing fund size and export in services.

Put in a historical context, this reform is another that will build upon the contribution that the labour movement has proudly made to the development of the funds management industry in this country. The introduction of compulsory superannuation provided the domestic base for the industry, and the measures contained in this bill will help boost the industry’s export potential. Compulsory superannuation, it needs to be recalled—because this history is sometimes lost—was the result of a concerted campaign by the labour movement. You have to remember that, back in the early 1980s, most working people did not have a superannuation account. Superannuation was largely restricted to people at an executive level in the private sector and to some limited areas of the private sector for workers generally, such as in the industry in which I worked for some time, the coal industry, and also in the stevedore and maritime sectors. Of course, many in the public sector at a state and federal level also had a superannuation benefit. But the fact of the matter was that millions of working Australians had no access to retirement savings through a superannuation system.

The growth of the compulsory superannuation system since the 1980s has resulted in millions of Australians amassing retirement savings, increasing their quality of life in retirement and relieving financial pressure on the Commonwealth pension system. In fact, over the last 20 years, the universal superannuation system has been the single most important mitigating factor in preventing widening wealth inequality. It has been an extremely important social and economic reform and it has built a large amount of national savings—the savings within the Australian funds management industry.

Part of the changes that were made as a result of the campaigns by the union movement in particular in the 1980s to achieve universal superannuation were the establishment of an accumulation fund and a move away from defined benefits. These are extremely important achievements. It is relevant to note that it was very effective too: at a time when there were higher inflationary pressures, in the second half of the 1980s, the achievement of the superannuation contributions at an industrial level contributed to the alleviation of some of those inflationary pressures through the trade-off between wages and super contributions by employers.

In fact, Accord Mark II, as it was then identified in 1986, began the process of really building the universal superannuation system. A three per cent superannuation contribution was ultimately agreed to in 1991 after a subsequent accord between the ACTU and the Keating government. As a consequence of that agreement, the universal superannuation system, through the super guarantee, was introduced by the Keating government in 1992, and that laid the basis for the contribution level that now applies across the workforce at the rate of nine per cent of people’s earnings.

Until the labour movement undertook these reforms, superannuation was beyond the wildest expectations of most working people. Not only do most working people now have a superannuation account that is building towards supporting their standard of living in retirement but the other result, to come back to the focus of this bill, is that these reforms led to the growth in the financial services industry that we have today. The domestic financial services market has grown by more than 460 per cent since 1992, and the pool of funds is forecast to grow to $2.5 trillion by 2015.

I saw and participated in this growth in the work that I did over the years representing working people as a union official and particularly as the leader of the ACTU. I also sat for many years as a trustee of one of Australia’s largest superannuation funds, Australian Super. It has in excess of $30 billion in funds under management and 1.3 million members and account holders.

The industry superannuation movement collectively has built very large wholesale funds management businesses, an industry superannuation property trust, a funds management business that invests strongly in infrastructure within the country and also a bank known as Members Equity Bank that I was privileged to serve as a director. In fact, part of Members Equity’s business is one of the largest infrastructure wholesale funds management businesses in the country behind Macquarie Bank.

All of these are extremely important reforms that have been achieved, and we need to continue to build and support the growth in the funds management industry. The measures contained in this bill will build upon the legacy of the establishment of the industry and assist in making Australia a funds management hub in the Asia-Pacific region.

Access Economics in fact released a report last year highlighting the export potential of Australian funds management. The report found that, if there were no policy changes, by 2010 the financial services industry would export $1.5 billion out of total sales for the industry of $50 billion—and that is not a significant proportion, of course. However, if the share of exports in the sector were lifted from the current three per cent to 10 per cent, Access Economics found that exports would actually reach $4.8 billion, GDP would be $1.9 billion higher and an extra 25,000 jobs would have been created—all by lifting exports, in effect, in this part of the services sector. This is what the bill is designed to do.

This country has a great opportunity to be the Asia-Pacific financial services hub. Australian funds under management are roughly the same as funds under management for the rest of Asia combined, minus Japan. It is an extremely important industry and we have the skills within Australia now to continue to expand it and have a greater export focus. This is vital to diversifying the economy. While we are enjoying the best export prices for our resources sector in many years, it is unlikely that that will last forever. Unlike the previous government, the Rudd Labor government is not content to leave Australia in a position of such heavy reliance on commodity prices. Just as we are investing in the future of Australian manufacturing, we are investing in the future of the services sector and, in particular, through this legislation, the export potential of the financial services sector. The boost in this area will be very timely.

In the last six years of the Howard government, despite the resources boom and record improvements in terms of trade, total export revenues grew at an average annual rate of only 5.8 per cent, compared to 10.7 per cent in the previous 18 years following the floating of the dollar in 1983—a poor performance on this front by the Howard government. As a result, the Howard government’s legacy is 70 consecutive months of goods and services trade deficits. No government in history has presided over such a run. In fact, the trade deficit for the December quarter of 2007, the last quarter of the Howard government, was $6.9 billion, the worst on record. Again I emphasise that this is in the context of high commodity prices, where we have had a tremendous lift in the terms of trade. We in Australia, though, also have a record current account deficit, at over 6.9 per cent of GDP, and soaring foreign debt of $616 billion at the end of the Howard government’s period. It is worth considering that, if commodity prices returned to their long-term average, we would see a current account deficit closer to 10 per cent of GDP. This is clearly unacceptable. The agenda of the Rudd Labor government, including the measure contained in this bill to reduce withholding tax, is aimed at strengthening our trading performance by supporting the diversification of our economic performance, particularly in the export of services.

You really have to ask why more emphasis was not placed on this issue by the Howard government. In fact, it was always a curiosity to me in my former roles outside parliament, and with my involvement in the funds management area, that so little was done during the Howard and Costello period to boost retirement savings, build national savings even further and address the intergenerational issues that former Treasurer Costello used to speak about but not do a great deal about. The only measure that I can recall of any credit in an attempt to address the retirement savings issue was the superannuation co-contribution, but in general this was an area of significant policy failure under the Howard-Costello government. They did not, I believe, make enough public policy effort to build the funds management sector and, in particular, provide a greater incentive for foreign investors to invest more in the Australian funds management industry. Continuing policy reform is therefore important if we want to see the Australian funds management industry grow, increase its international competitiveness and become more export oriented. For that reason, I commend the bill to the House.

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