Richard Marles (Corio, Australian Labor Party) Share this | Hansard source

I rise to speak in support of the Income Tax (Managed Investment Trust Withholding Tax) Bill 2008, the Tax Laws Amendment (Election Commitments No. 1) Bill 2008 and the Income Tax (Managed Investment Trust Transitional) Bill 2008. Before I get into the substantive arguments in relation to those, I would like to welcome the students of the North Narrabeen Public School, who are present here today on my left, and the students of the Cambridge Park Primary School, who are on my right. I welcome them to Canberra, to this parliament and to this House, and I hope that they enjoy their time here.

I find this a very comforting debate. It is comforting because it is a debate about the engagement of this country with the rest of this world and a debate which completely characterises the positions on international engagement which have been taken by both the Liberal Party and the Labor Party since the Second World War.

This legislation is about trying to create a financial services hub based in Australia, levering off what is a very strong domestic industry and turning it into a financial services hub for the Asia-Pacific region. It looks at the suite of withholding tax rates which apply to the various earnings which can be achieved in this country, making them consistent with and competitive with the rest of the world. When you look at those tax rates, you see that most of the earnings which can be achieved by a foreign investor in this country are taxed at a rate largely consistent with and competitive with the rest of the world with the exception of one—that is, the rate of withholding tax which applies largely to property trusts, currently at 30 per cent and right out of kilter with the rest of the world. That means there is a significant hurdle in place to developing this country as a financial services hub for the Asia-Pacific region. Ultimately, this legislation is about reducing that tax rate to one much more consistent with and competitive with the rest of the world, so that we can build upon what is a very successful domestic industry and create this country as a financial services hub for the Asia-Pacific region.

The other side oppose this legislation. In doing so they use phrases like ‘tax breaks for foreigners’. When the Liberal Party have looked beyond our shores over the last half-century, essentially they have been scared. Instinctively their heads have turned 180 degrees and looked inwards. They have been incredibly insular; whereas, we see opportunities for our people which can be achieved when we go beyond our own shores. We see possibilities for our own people here by engaging in the rest of the world. When the Liberal Party look beyond our shores, they see threats. When we look beyond our own shores, we see opportunities. When they talk about tax breaks for foreigners, we see jobs for Australians. That is one of the fundamental differences which have characterised the Labor Party and the Liberal Party since the Second World War. This legislation is absolutely about Australia engaging with the rest of the world, levering off a very successful domestic industry to create a wonderful opportunity for our people and a very exciting opportunity for a new export industry in this country, which is why I am so excited in speaking today.

In a moment I will go to the funds management industry in Australia and what this opportunity represents for them, but before doing that I will go through the specifics so that it is clear what these bills are seeking to do. These bills apply to fund payments which, excluding dividends, interest and royalties, cover the distribution of Australian source net income of Australian managed investment trusts to foreign residents. The particular focus is on Australian source rental income and capital gains from Australian property trusts.

This legislation seeks to give rise to a change in the rate of tax incurred by managed investment trusts in accordance with section 55 of the Constitution. The bill which gives effect to this change is the Tax Laws Amendment (Election Commitments No. 1) Bill 2008. In this bill, the current non-final withholding tax rate for property trusts of 30 per cent will, in a staged way, ultimately be replaced by the final withholding tax rate of 7½ per cent. The difference between non-final and final is important because it goes to the issue of why the particular levels of tax have been chosen. It is important to understand that this is a staged transition. It will not happen overnight. In the first year after this bill gets royal assent, the reduction in the tax rate will be from 30 per cent to 22.5 per cent as a non-final withholding tax amount. In the second year, it will reduce further to 15 per cent as a final withholding tax and in the third year and thereafter it will come down to the ultimate goal of a 7½ per cent final withholding tax rate.

The difference between non-final and final under the current regime, which is a non-final regime, is that companies or investors are allowed to claim tax deductions against that 30 per cent, so ultimately they can bring that tax rate down. As a final tax regime, which is what we seek this to be, there will not be the ability to claim deductions. Technically, that means the reduction of the tax rate is not as large as it seems, which gives some explanation to the queries from the other side about why we have gone for a rate of 7½ per cent rather than 15 per cent. It is important to understand that the reason we have changed from a non-final to a final withholding tax regime is that many foreign investors found that engaging with our tax regime in a situation where they had to claim tax deductions was often complex and difficult from where they stood. In effect, we are reducing the tax rate to make it more competitive and more consistent with the rest of the world. By shifting from a non-final regime to a final regime, we are also making it a far simpler tax regime and one which is much easier to engage with for foreign investors. In that sense, it is a very important reform as well. That is why, ultimately, we will come to a rate of 7½ per cent.

There is another important point to be made in relation to this bill. That is, the reduction in the tax rate will apply only to entities who are residents of information exchange countries, as defined in the Income Tax Assessment Act 1997. Information exchange countries are countries with whom Australia has an information exchange agreement. Where those agreements exist and where we can verify absolutely the legitimacy of the foreign investors in our system, beneficial tax rates will apply, but where we do not have such an agreement in place, the current 30 per cent rate will be in place. Making that differentiation obviously is an important public policy stance because it encourages countries to engage in such an agreement with us. The one country talked about a lot in this debate is Singapore, with whom we do not have such an agreement. It is hoped we will reach an agreement with Singapore so that foreign investors from Singapore can enjoy the benefits of our new tax regime. It is an important point to make because it sends a strong signal that Australia is not tolerant of international tax evasion and avoidance. We send that the signal by making it clear that we will tax at a higher rate foreign investors from countries which do not have such an agreement with Australia.

Another technical point is that this new tax regime, of which these bills are a part, will apply to distributions received directly from managed investment trusts and indirectly from custodians and other entities. That is a point worth noting. The provisions in relation to indirect flows expand the current non-final withholding tax regime, which is currently limited in application to indirect flows through custodians only. So there is an increase in the breadth of this regime and, in increasing the breadth of the regime, we will make it consistent with the final withholding tax arrangements which currently apply to dividends, interest and royalties. If you like, there is some housekeeping to be done to the way this bill is constructed so that it is more consistent with the tax regimes which apply to other earnings that exist in this country for foreign investors.

These bills seek to facilitate the emergence of this country as a funds management hub for the Asia-Pacific region and in doing so we will turn our very strong, vibrant domestic industry into one which has an export capacity and which derives export earnings. It really is one of the most exciting opportunities that exist in this country today for the development of a new export based industry. The Prime Minister in August 2006, as the then shadow minister for foreign affairs and trade, addressing the Investment and Financial Services Association conference signalled the Labor Party’s intent to develop this area of Australia’s financial services industry. In a sense these bills represent the fruition of that vision.

Australia obviously has a number of really significant natural advantages and attributes in this area such that we can become a financial services hub for the Asia-Pacific area. Firstly, this country enjoys a very skilled workforce. Secondly, we have a strategic location in the Asia-Pacific time zone, and that is very important in being able to engage in real time with countries like Japan, China and Korea. Thirdly, Australia has a stable economic environment and a very well-respected regulatory regime. All those kinds of stable conditions will naturally attract foreign investors to this country. Fourthly, really significantly—and it is in a sense this fact that gives us the opportunity to develop this export industry from the existing domestic industry—right now Australia has the fourth largest onshore managed fund market in the world and currently the largest in Asia. We are clearly punching well above our weight. In December last year Australia had $1.36 trillion in consolidated funds under management—a very significant amount of money indeed. That total includes approximately $128 billion in Australian property trusts, which would be the subject of this change to the tax regime.

It is important to understand why we have such a large managed fund industry in this country already. It is basically as a result of the reforms brought in by the Hawke and Keating governments during the 1980s and 1990s that put in place comprehensive occupational superannuation in this country through the establishment of the superannuation guarantee legislation and the establishment of industry superannuation funds. It was a Labor reform in the 1980s and 1990s which gave the platform for this wonderful opportunity for our country in 2008.

As much as we will hear those on the other side of this House saying that when John Howard was in power they thought this was a great idea as well and they were doing all they could to bring it about, the fact of the matter is that they did very little to bring it about. Of that enormous managed fund money which currently exists in Australia, less than three per cent of the fees can be attributable to foreign investment. So, as large as a domestic industry as this is, what we are earning from that industry in an export sense from foreign investment in Australia is absolutely pitiful. That reflects the record of the Howard government over the last 12 years in relation to this opportunity. The fact of the matter was they were scared to look overseas and they did not see this opportunity. As a result, those 12 years are lost. That is why it is so important that this government act now to build upon this industry and to create a dynamic export based industry in Australia.

These bills will provide Australia with one of the lowest withholding tax rates in the world, in line with the withholding tax rates currently in operation in the United States, the Netherlands and Hong Kong. It is hoped that, as a result of that, we can attract a significant amount of foreign investment to this country. I think it bears to spend a moment thinking about how the international foreign investment market works. By definition, we are talking about funds which are very liquid and are able to be diverted to one country or another. When you are talking about earnings, you inevitably are talking about people making decisions on the basis of what is the best marginal rate of earnings. So getting the tax regime right, putting our country in a position where we have an attractive tax regime for international investors to invest in this country, is absolutely critical in attracting that investment to this country. Small changes can make very large differences. That is why this legislation is so important.

The 2007 estimates suggest that the global managed funds industry will top US$60 trillion before the end of this decade, increasing from the current US$50 trillion. Funds under management in Asia are expected to grow by 14 per cent over the next decade. The growth of China provides an incredible opportunity to develop Australia as a financial services hub and makes this such an important time to act upon this initiative.

Access Economics, using its in-house general equilibrium model, has suggested that the potential benefits that this type of reform could bring to the overall economy by 2010 include an additional 25,000 jobs. This is a huge industry development that we are talking about, including 3,500 jobs in the finance sector. Ultimately, they make the estimation that this could add as much as 0.3 per cent to overall GDP.

This is a very exciting opportunity. It is very important that we get our tax regime right. That we have not got it right over the last 12 years stands as a legacy which condemns the former Howard government for failing to see this opportunity and failing to build upon it. But, of course, it ought to be no surprise to anyone in this room or to the Australian people, because the Liberal Party are ultimately the party of economic laziness and it is Labor who have been the party of financial reform. This reform is ultimately not about radical thinking; it is actually about intent listening—listening to industry experts and taking their advice to develop good policy. The Howard government had over a decade to provide this type of reform but, as in so many other areas, they were far more concerned with the election cycle than they were about the long-term future of this country. This was a ball in the air that they simply dropped. This is just an issue that they completely missed.

This new regime is one of the many measures which are being put in place by the Rudd government to try to construct a future for our country which goes beyond the existing mining boom. There is enormous growth potential in the financial services industry in this country. This is a fantastic and exciting opportunity to make Australia a financial services hub in the Asia-Pacific region. Now is the time to entice those funds to this country and now is the time to develop this industry. For those reasons, I very much commend these bills to the House.

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