Annette Hurley (SA, Australian Labor Party) Share this | Hansard source

As outlined by Senator Sherry, the Labor Party supports most of the measures in the Tax Laws Amendment (2007 Measures No. 3) Bill 2007. Schedule 10 deals with taxation of managed investment trusts, and most public comment has been received in that area. For my part, I want to deal exclusively with this area of the bill.

Managed investment trusts as discussed in this bill are funds that are held by an Australian entity and managed by trustees. Most are unit trusts that distribute their income fully and have investments across a wide range of assets such as property, shares and bonds. The funds affected by schedule 10 of this bill are largely listed property funds or real estate investment trusts. The Australian funds are now generally sophisticated and competitive and have attracted offshore investors. These investors are varied but include institutions such as large pension funds and other funds managers.

Until recently, these trusts have largely grown by investing in Australian assets and harnessing Australian funds. Their success attracted overseas investors, but now there is competition from other managed investment trusts in other parts of the world such as Hong Kong and Japan. This is where I would differ from Senator Watson, who says that the market has been very successful in Australia and therefore investors will not be deterred from investing in Australian funds. Other countries have now seen the value and importance of these funds and are doing their best to take over Australia’s share in these kinds of managed investment trusts.

Labor’s view is that the Australian financial sector should be encouraged and that Australia could and should be a financial hub in the Asia-Pacific area. We have the talent, innovation and expertise to make that happen. This is a view shared by the industry, and there is ample room for improvement in the services sector. Australia’s services contribute over 70 per cent of GDP. The contribution to export, on the other hand, is difficult to determine but is around 20 per cent. So there is a great disparity here. With the fast-growing Asian economies, demand over the next decade or so should be strong, and Australia is well placed to provide the high-quality service that these countries require. The growth of the financial services sector in Australia has been exponential in the last 20 years or so. This, of course, was largely to do with the opening up of the financial sector and the financial markets in the 1980s by Treasurer and then Prime Minister Paul Keating. The financial sector now contributes 7.2 per cent, or $68 billion, of GDP.

Initiatives in superannuation—the super guarantee put in place by Mr Keating—have also ensured a strong flow of capital into funds in Australia. This is one policy that Mr Keating—unfortunately, in my view—did not address in his Lateline interview last Friday night when discussing his time as Treasurer and Prime Minister. I believe that this policy and its flow-on effects resulted in a major benefit to Australia’s economic future and to the wellbeing of its citizens, and this will continue for many decades to come. Australia is, therefore, very well poised to be a major financial services provider.

We are now riding well in current economic terms but there will come a time when the terms of trade will decline and we will look to other sectors to cover the reduction in export income from the mining sector. How long have we in this country talked about the need to get away from exporting primary industries? The progress has been slow but we certainly need to put in place now, when the economy is booming from the benefits of the resources industry, the building blocks that will take us through to an equally prosperous future. Continued growth in the financial services sector presents an opportunity for Australia—like the UK, the US, Singapore and Ireland—to deliver substantial gains in economic activity from this area. It will not be easy, of course, because Australia, as I have said, faces strong competition from other aspirants in the region—Japan, Singapore and Hong Kong.

Having expressed its strong support for the financial services sector, the Labor Party announced its policy on taxation of managed investment trusts. Labor’s taxation policy is framed to ensure that Australia will not be competitively disadvantaged compared with other countries that are becoming active in this market. Schedule 10 of the bill represents a measure that will have an important effect on the financial services sector and managed investment trusts in particular. Labor supports the broad change proposed—that is, the introduction of a withholding tax. Previous arrangements meant that foreign investors had to lodge Australian tax returns and pay tax at a variable rate, depending on their investments, of between 29 and 45 per cent. This made the taxation regime difficult and complex. The fact that the investors were based in foreign jurisdictions and sometimes acted through intermediaries meant that compliance was also very difficult.

Payment of a flat withholding tax by the managed trust will simplify and streamline taxation arrangements. Where Labor differs is in the rate at which the withholding tax is set. The Tax Laws Amendment (2007 Measures No. 3) Bill 2007 proposes a 30 per cent tax rate. From evidence given to the Senate Standing Committee on Economics inquiry into this bill, it was clear that the government expects that this is not going to be the effective rate in the end, for two reasons: firstly, that as time goes on reciprocal tax treaties will ensure that this rate is reduced; and, secondly, foreign investors will be able to gear their investments so as to claim deductions and reduce their tax rate.

Most Australians are familiar with the negative gearing allowed for housing where an investor buys a house other than his own home, rents it out and is then allowed to claim the interest as a tax deduction. The same principle applies to foreign investors in Australian real estate trusts. They often deal in large sums like $100 million rather than the couple of hundred thousand dollars that individual investors deal in, but the principle is the same. Those involved in managed trusts indicate that most foreign investors in trusts use this method of getting their effective taxation rate down to 15 per cent or less. Labor says that, if this is the effective rate, why not acknowledge this fact and make the withholding tax a flat and final 15 per cent without any deductions? This would further clarify, simplify and streamline investments in these trusts. Furthermore, it would put Australia in line with its major competitors in this market.

The 30 per cent headline rate of taxation is a disincentive for foreign investors, and it is recommended that the flat and final rate be 15 per cent or less. This is consistent with areas such as Hong Kong, Singapore and Japan, which, at this time, have much lower rates than that. In practice, the need to gear, which I have described, is a disincentive for foreign investors to invest in the Australian market. Mr Robin Speed, a lawyer, explained this to the economics committee. He said:

So, as soon as you say, ‘You’re going to be hit with a 30 per cent withholding tax,’ they say, ‘Gee, that’s a major problem for us. If it was 10 per cent, like Singapore, we can live with it, but we can’t live with 30 per cent.’

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As soon as they are faced with a 30 per cent withholding tax, they will not lodge an Australian tax return. You just do not do that ... The great bulk of people out there simply do not do that and simply tune out.

Investors prefer to pay a final tax rate, as they do in other countries. They invest much larger sums in other countries where they do not have to structure their affairs; therefore, they are reluctant to gear the relatively small sums they might invest in the Australian real estate market because it costs money to set up the structure and to claim the gearing that is required. Industry representatives at the committee all argued that the combination of the high headline rate, the absence of a final rate and the perceived administrative difficulties with gearing were enough to cause potential foreign investors in Australia to look elsewhere.

I want to talk briefly about the government’s costing of Labor’s proposal to reduce the rate to 15 per cent. That costing has no credibility attached to it as the Treasury rate for overseas investment in trust does not assume any gearing. We know, from evidence to the committee, that most foreign investors do gear. If they want to claim the interest deduction and get their tax rate down to the return that the government is talking about through gearing, they have to gear. Yet Treasury does not allow any costing for that in its estimates.