Chris Bowen (Prospect, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

by leave—I take this opportunity to update the House on the government’s policy objective of promoting Australia as a financial services hub. The government has long had the policy of identifying artificial barriers to the competitiveness of the Australian financial services sector and eliminating these barriers. The Australian financial services sector is well developed and competitive but, as I have said in the past, the robustness of the Australian financial services sector has not translated into exports. While we have the fourth largest pool of funds under management in the world and a very good funds management capacity, we have not attracted significant amounts of overseas money to be invested or managed in Australia. Accordingly, the government made a commitment when in opposition to reduce the withholding tax on the distribution to nonresidents by Australian and managed funds. This was quite a controversial announcement at the time. It was fervently resisted by the previous government. However, on 1 July 2009 the relevant withholding tax rate will go to 15 per cent and on 1 July 2010 it will go to 7.5 per cent, one of the lowest rates in the world. This is an example of the government identifying artificial barriers to the competitiveness of our funds management industry and financial services sector more generally and eliminating them.

We very much recognise that there is more to be done. Last July the government convened a financial services hub summit in Sydney with industry regulators and state governments to assist in further identifying competitive barriers and outline a path for going forward. The summit was clear in its recommendation that we need a permanent body to close the ring between the government and the sector and to promote Australia as a financial services hub. Accordingly, on 26 September last year I announced the establishment of the Australian Financial Centre Forum to develop a coherent framework to advance the Australian financial services sector’s international competitiveness and position Australia as a leading financial services centre. I announced the appointment of Mr Mark Johnson, a retired deputy chairman of Macquarie Bank, as chairman of the forum and also the establishment of a panel of experts and an industry reference group, all supported by the Treasury secretariat. The structure of the forum reflects the fact that it is a joint government-industry initiative aimed at ensuring that the comparative strengths of the Australian financial services sector are recognised and utilised and that the sector is in a position to take full advantage of the opportunities available to it.

Today I report to parliament progress made by this forum since its establishment. The first point to make is that the forum was born in the midst of a global crisis which deteriorated markedly shortly after the announcement of the initiative. The Australian financial services sector has certainly not been immune from this crisis but the sector has, comparatively, fared better than most. This is due in no short measure to the quality of our regulatory system and of the people who administer it. It also reflects well on the quality and risk management skills of corporate Australia.

Nevertheless, this is a tough time for the Australian economy. Out of this adversity will arise opportunities. It is in anticipation of those opportunities that the government remains committed to the Australian Financial Centre Forum initiative. The development of a blueprint for positioning Australia as a leading financial centre as the world emerges from the current crisis is regarded as a priority by the government. Since its establishment the forum’s panel of experts and reference group have met regularly and have called for and received two rounds of submissions from industry. Forum representatives have also met personally with many stakeholders in the sector. I have been kept up to date with the feedback from industry and already this feedback, along with the input from other government initiatives, has led to government actions.

On 12 May, after receiving the recommendations of the Board of Tax and the Australian Financial Centre Forum, I announced a major modernisation of the attribution rules and the deemed capital account treatment for capital gains and losses made on disposal of investment assets by managed investment trusts subject to appropriate integrity rules. Australia’s attribution rules, the controlled foreign company, or CFC, rules and the foreign investment fund, or FIF, rules, the transfer of trust rules and the deemed present entitlement rules, are notoriously complex. Under the government’s announced changes to the attribution rules, the CFC provisions will be retained as the primary set of rules designed to counter tax deferral arrangements. The CFC provisions will be rewritten in the Income Tax Assessment Act 1997. The FIF provisions will be repealed and replaced by a specific, narrowly defined anti-avoidance rule that applies to offshore accumulation or rollup funds. The deemed present entitlement rules will be repealed. The transfer of trust rules will be retained with amendments to enhance their effectiveness and improve their integrity.

These reforms will dramatically reduce compliance costs for managed funds and other businesses, saving business up to $80 million each year. The reforms are fiscally responsible and will help Australian companies compete in global markets at minimal revenue cost while delivering major compliance cost benefits. Allowing for deemed capital account treatment for managed investment trusts will provide more certainty, dramatically reduce complexity and compliance costs for effective businesses and ensure Australia’s tax regime is competitive in attracting foreign funds. There remain a number of implementation details that need to be considered with this measure and which will be canvassed in a Treasury consultation paper to be released shortly.

As I said in announcing them, these measures form a key part of the Rudd government’s election commitment to make Australia a funds management hub in the Asia-Pacific region and will help boost financial services exports. The changes have been welcomed by industry. The Deputy Chief Executive of the Investment and Financial Services Association, Mr John O’Shaughnessy, for example, commented:

These budget measures will provide a strong platform for the Australian managed funds industry to continue to grow domestically and increase its share of its exports to the region.

The government continues to examine other possible areas for reform identified by the Australian Financial Centre Forum and looks forward to receiving its further reports later in the year.

Many of the issues raised by the industry through the forum are tax related. In particular, representations have been made on the subject of interest withholding tax. These submissions go to tax on interest paid on borrowings by Australian branches and subsidiaries of foreign financial institutions to their parent companies and on interest paid by Australian banks in respect of foreign sourced deposits. Another interbank funding issue that has been raised is that of the limit of deductibility of interest paid to foreign bank branch parents with reference to the London interbank offer rate.

Industries place considerable importance on the issue of clarity in the tax system. The forum has received many representations suggesting that the lack of tax clarity and consistency in a number of areas is inhibiting the growth and development of the financial services sector. The forum has written to the Henry review outlining the nature of these concerns and they will be considered in the context of that review. A particular issue that industry has raised is the tax treatment of income derived by foreign funds when they utilise the services of Australian fund managers. I have asked the Treasury to examine and provide advice on industry’s proposal to introduce an investment manager exemption.

Another taxation matter that has been raised in the context of the forum is the question of the GST on financial supplies. As I announced on 12 May, I have agreed to Treasury undertaking reviews of the GST margin scheme and the application of the GST to financial supplies. I have asked the Treasury to consult widely. These reviews are designed to simplify the operation of the legislation and reduce both compliance and administrative costs while retaining existing policy intent. To facilitate reviews, Treasury has prepared discussion papers and welcomes submissions. The discussion papers can be obtained from the Treasury website.

Ease of market access within the Asia-Pacific region and beyond for Australian financial services companies is a key dimension of the work of the forum. Within that context the potential development of a network of appropriate mutual recognition arrangements for the financial sector regulation area has been raised by the forum as a recommendation for priority treatment. As a result, I have raised this matter with the Minister for Superannuation and Corporate Law and I know that he is actively pursuing the matter and, indeed, recently raised this issue on his visit to Singapore with the relevant officials there.

A specific suggestion that has come out of these submissions to the forum is that of establishing a regulatory one-stop online gateway which streamlines and facilitates foreign entrants into the Australian market. This proposal, which would appear to have some merit, is being examined in more detail in the context of the forum’s ongoing work.

An interesting matter that has been raised through the forum and elsewhere, notably through Austrade, DFAT and by my colleague the Minister for Trade, is that of Islamic finance. This has been highlighted as an area of emergent opportunity. Despite the global financial crisis in the Middle East and other Islamic centres, there are funds to invest and a demand for Islamic finance products. Regulation in some jurisdictions can create an uneven playing field for these products due to their form. Those countries where Islamic finance products are easily facilitated will have a competitive advantage in attracting these funds. Many countries around the world including the United Kingdom and France are taking measures aimed at facilitating Islamic finance products.

The Australian government is concerned to ensure that the Australian financial sector is not being left behind in this emerging field, and I am pleased to note that the Australian Financial Centre Forum held a roundtable on Islamic finance and taxation issues at the Treasury offices in Canberra in March. This roundtable was a start in identifying whether there are any regulatory impediments in relation to promoting Islamic finance products in Australia.

I am pleased to announce that the Australian Financial Centre Forum website is online and I encourage members of the public to view the site where they can find details of submissions made to the forum and other information. The site can be accessed at www.treasury.gov.au/afcf. The government looks forward to receiving the forum’s recommendation on a policy blueprint for promoting Australia as the leading financial services hub later this year. I will report back to parliament as appropriate on further progress made by the forum.

On behalf of the government, I would like to thank the forum chair, Mark Johnson, and all members of the panel of experts and the reference group for their hard work and intellectual input to this very important initiative. The government is confident that, as a result of the ongoing work and recommendations of the forum, what will emerge will be an even more open, well-regulated, competitive and innovative financial services sector that is able to take full advantage of the regional and global opportunities which are likely to come its way in the future.

In the current environment, in which the financial services industry around the world has been battered from crisis to crisis, it would be easy to walk away from the promotion of Australia as a financial services hub—that would be the worst outcome. For several years to come, I suspect that the world’s investors will be looking for a safe, stable home for investments. With the help of the Australian Financial Centre Forum, we will be well placed to make the most of this opportunity.

Madam Deputy Speaker, I ask leave of the House to move a motion to enable the member for Aston to speak for 11 minutes.

Leave granted.

I move:

That so much of the standing orders be suspended as would prevent the member for Aston speaking for a period not exceeding 11 minutes.

Question agreed to.

Chris Pearce (Aston, Liberal Party, Shadow Minister for Financial Services, Superannuation and Corporate Law) Share this | Link to this | Hansard source

The opposition welcomes this opportunity to reply to the minister’s update on the government’s policy objective of promoting Australia as a financial services hub. At this stage, I do not intend to respond in detail to the particular measures that the minister has touched on today—suffice it to say that these are matters the industry has also raised with me. I recognise that these are important objectives in ensuring that the domestic industry is in a strong and competitive position to export its capability and to continue to grow and generate high-skilled jobs in our country at a time when they are most needed.

My concern today is not with what the Assistant Treasurer has spoken about but, rather, what he has not said. The Assistant Treasurer has today failed to say how, for example, attacking confidence in Australia’s superannuation system is a good thing for Australia’s ambition in the region, or how removing incentives for employees to access share schemes is going to attract and help retain talented individuals in the Australian financial services sector. The coalition’s view is that we can no longer look at policy responses like these in isolation. These things are all interconnected—as the government discovered when it introduced an unlimited bank guarantee which overnight resulted in the freezing of $20 billion worth of mortgage funds. These are all policy decisions which impact upon Australia’s attractiveness as a financial services hub in our region.

The briskly constructed and poorly executed bank deposit guarantee continues to significantly distort the Australian financial system. The key questions surrounding the distortion caused by the guarantee remain unanswered and, indeed, unresolved. The originally unlimited guarantee cover, which is now capped at $1 million, has not been wound back despite calls from many key stakeholders that it be wound back to $100,000. Further, there remains no plan for the phasing out of the guarantee in three years time. This alone has caused more instability within the market and the region than would have otherwise occurred because of the financial crisis.

The removal of the risk and return differential undermined formerly stable and reliable investments such as mortgage trusts and cash management trusts, resulting in the freezing of the funds of 300,000 Australians. These were cash management trusts and funds that people from the Asia-Pacific region were attracted to because they were offered here in Australia. Those 300,000 Australians were told by the Treasurer to ‘go to Centrelink’. Does the government intend to leave these distortions unresolved for the next three years? When does the government plan to restore confidence and stability to the marketplace?

Another troubling aspect of the government’s mismanagement of the financial services sector is their approach to short selling. Short selling is an important mechanism in the Australian Securities Exchange and exchanges across the Asia-Pacific region. Labor has dithered over the short selling regulations and, to this day, the so-called urgent short selling bill remains impotent and vacuous. If ASIC had been provided with an appropriate disclosure regime which appropriately regulated short selling, the ban may have been lifted earlier and players not only in Australia but across the region could again have looked to Australia as an attractive financial services market.

The government’s indecisiveness has resulted in a proliferation of instability in the financial markets, and this has impacted on our attractiveness across the Asia-Pacific region. There is no disclosure regime because the government have not tabled the regulations. On this, however, the government would not agree—because they think that they have—but clearly such claims are contrary to the statements made by ASIC. Last week ASIC said that they looked forward—in other words, in the future—to the commencement of the government’s permanent disclosure regime. On the same day, the SDIA said that what they would really like to see now the detailed obligations in relation to short selling regulations, which are yet to be released by the government. So it seems that there is no consensus that there is a comprehensive disclosure regime. Again, this is having an impact upon Australia’s attractiveness as a financial services hub in our region.

What is lacking, of course, is certainty and stability. If this government is serious, it needs to consider all financial services policy actions in the context of its overall vision for the sector and for the region. This is the only way to capture and foster long-term investment in our financial services sector. In this regard, we are supportive of the establishment of the Australian Financial Centre Forum and, of course, its objectives. But clearly it does not go far enough, as the above policy bungles highlight.

I want to remind the House that it was the former coalition government that established Axis Australia in 1999 to position Australia as a global financial centre in the Asian time zone. Australia’s role as a global financial services centre in the Asia-Pacific region is one that successive Australian governments have supported through various policy and promotional initiatives. Indeed, the financial services sector today generates some $81 billion in value, or 8.7 per cent of real growth, with an annual average growth rate of 4.3 per cent since 1991. This contribution to GDP is up from 6.5 per cent two decades ago, and its expansion has also aided growth in related sectors such as communications, property and business services, providing hundreds of thousands of jobs for Australian workers.

Let us not forget that superannuation is a vital component of the Australian financial services industry—and confidence in that system is being eroded by this government. In the interests of short-term political expediency, the government has undermined efforts to provide self-sufficient retirement benefits for all Australians and to provide a stable and sustainable budget. This is an important point that again impacts on our attractiveness as a financial services sector. For more than 20 years successive governments have succeeded in encouraging Australians to take control over the planning of their future yet, over the course of one evening, Labor has systematically swept aside any sense Australians may have had of a secure future and instead left working families with uncertainty and a loss of confidence in the superannuation system.

I believe that governments have an obligation to provide a stable and certain environment via which people can plan their future. Labor has instead brought on a crisis of confidence over compulsory super and is shaking the public belief that we should take responsibility as best we can to secure arrangements for our own future retirement needs. As a matter of fact the Prime Minister said, just 12 days before the last election, that there would be no change to the superannuation laws, not ‘one jot or one tittle’. And Senator Sherry, the Minister for Superannuation and Corporate Law, said in April that Labor would maintain the co-contribution scheme. At this difficult time for savings and superannuation and for the whole of the Australian financial services sector, confidence in our laws is paramount for encouraging much needed stability. Uncertainty in superannuation and in other areas of financial services undermines this system’s credibility and undermines the perceived safety of the Australian system. The government seems incapable of realising that continually changing the rules is not the best way to promote certainty and to attract inbound investment. This government would do well to remember that superannuation is the bedrock upon which the funds management industry and many others have developed and matured. It is time to restore confidence in the system and ensure that Australia continues to be seen as having world’s best practice.

In this regard, the coalition also has serious concerns with the government’s approach to competition in the sector. Default fund monopolies are inconsistent with a vibrant and open financial services sector, yet the government tacitly approves the work of the AIRC with respect to the so-called modernising of awards. The more we restrict competition the less our market will be seen as an attractive one in which to do business and the less likely it is that offshore markets will open their doors to our Australian firms. At this time, with record debt and record budget deficits, we need government measures that will attract capital, not measures that will impede its flow. This is a very important consideration for us here in Australia, given our geographic location within the world. We have to make Australia an attractive destination for the flow of capital; otherwise people can send their money elsewhere. We are a long way from the rest of the world and unless we are an attractive destination for capital it will not flow to us. I believe it is time the government took a comprehensive approach to growing Australia’s financial services sector and stopped giving with the one hand and taking away with the other.

Allowing huge structural problems that impact on our financial services sector—such as the bungled bank deposit guarantee—to fester alongside inaction on short selling and the winding back on superannuation is, I believe, a sure-fire way to actually destroy and take away from Australia’s reputation as a financial services centre. Creating a global financial services centre is all about providing certainty and stability. You have to ask the question: how can we attract foreign investment and position Australia as a leading financial market if the government continually undermines, in all of its policy initiatives, certainty and stability? How can you possibly achieve that when certainty and stability are constantly being undermined?

That Australia should be a financial services centre is an important objective for the future of our country. We must consider this goal as a holistic concept. Political expediency by this government should not get in the way of us as a country achieving this goal, of us working towards truly making Australia the most attractive centre for financial services across the Asia-Pacific region. I urge the government to set aside its political strategy and to actually adopt an economic strategy so that Australia can achieve the position of being a leader in global financial services and, most importantly, be a leader in financial services in the Asia-Pacific region.