Nick Sherry (Tasmania, Australian Labor Party, Minister for Superannuation and Corporate Law) Share this | Hansard source

I do not know who is confused or in disarray but I would suggest it is the opposition, after the performance of the shadow Treasurer, Mr Turnbull—but I might come back to that a little later. The Tax Laws Amendment (Election Commitments No. 1) Bill 2008, the Income Tax (Managed Investment Trust Withholding Tax) Bill 2008 and the Income Tax (Managed Investment Trust Transitional) Bill 2008 deliver on a very important election commitment to slash the withholding tax rate that applies to non-resident investors. The legislation represents the final stage of the implementation of an election commitment that was first announced in last year’s budget reply by the now Prime Minister, Mr Rudd.

That was a specific commitment in the budget reply, which was given just over a year ago. It was reiterated on a number of occasions in the lead-up to the election, and it was a specific election promise. I am aware that, at the IFSA conference the year before, before Mr Rudd became leader of the then opposition and obviously before he became Prime Minister, he had a particular interest in this issue and he raised it on that occasion. I think that was approximately October 2006. So on this issue, from the original announcement by Labor of its interest in this area through to the specific announcement in the budget reply last year and then the election commitments, the Prime Minister has had a very long, clear, unequivocal commitment on behalf of the Australian Labor Party.

Schedule 1 of the bill replaces with a new withholding tax regime the existing 30 per cent non-final withholding tax regime applying to certain distributions from Australian managed investment trusts to foreign investors. The importance of this measure to Australia’s future prosperity should not be underestimated. The measure is a key plank of the government’s aim to make Australia a financial services hub, and this is of great importance to the financial services sector, particularly in the Asian region. It will ensure that Australia remains a world leader and at the cutting edge of funds management.

The financial services industry makes a large contribution to Australia’s wealth and has significant potential to contribute even more. The financial and insurance sector currently contributes more than seven per cent of gross domestic product, and this makes it the third-largest industry in the Australian economy. The sector employs around four per cent of Australia’s workforce, or around 400,000 people, and contributes about $30 billion in tax revenue through corporate and personal income taxes.

Some people would be surprised to learn that Australia in fact has the fourth-largest offshore managed fund market in the world, with assets worth approximately $1.4 trillion under management. This is primarily due to superannuation savings, in turn primarily due to the initiative of compulsory superannuation introduced by the Hawke and Keating governments and later built on by former Prime Minister Mr Keating. This puts Australia in a uniquely fortunate position to assist in the country becoming a financial hub and to underpin export financial services. Due to the huge size of funds under management, Australia has developed a number of natural advantages in funds management: a good reputation; a well-respected, experienced, regulatory regime; a skilled workforce; and being strategically placed in the Asian time zone.

However, despite all these advantages, incredibly, less than three per cent of fees derived by Australian funds management funds are attributable to foreign investment. Added to this is the fact that, of the small amount of foreign funds under management here, most of this is derived from investors in a narrow range of countries, in particular the US and the United Kingdom. So it is clear to the Labor government and to the industry that the financial services sector has an immense untapped potential for growth, particularly in the Asian region, and obviously the Asian region itself has very fast economic growth, driving significant funds under management in Asia.

The Access Economics report last year demonstrates the export potential of Australian funds management. The report found that, under a business-as-usual forecast, the financial services industry would by 2010 export just over $1.5 billion out of total sales for the sector of just under $50 billion. But, if the share of exports in the financial sector increased gradually from its current level of three per cent to 10 per cent by 2010, exports by the sector would be $3.3 billion higher by 2010.

Reducing the withholding tax will substantially improve the competitiveness of Australian managed funds and help Australia realise its potential and boost financial services exports. The measure will give Australia one of the lowest withholding tax rates in the world, which will significantly boost the attractiveness of Australian managed funds, particularly property trusts for foreign investors.

We do not suggest that Australia will become a London or a New York. They have historical, geographical, political and financial strengths that were laid down centuries ago, in both cases. But Australia as an Asian financial services hub, to compete effectively with centres like Singapore, Hong Kong and Dubai, is achievable. The Australian Labor Party and the government believe that we can grow an Australian industry to ensure our bright and skilled young people have first-class jobs in Australia and are not forced to go overseas to get valuable experience and that indeed, if they do—and many Australians do—they will return to a world-class financial services sector.

The rate of withholding tax will depend on the residency of the foreign investor. Residents of countries in which Australia has an effective exchange of information agreement on tax matters will be subject to a reduced final withholding tax rate of 7.5 per cent once the measure is fully implemented. The rate goes beyond the government’s election commitment and ensures that Australia’s funds management industry is well placed—and that is a contributor to the cost issue that Senator Coonan touched on in her contribution. In the first year, the rate of tax will be 22.5 per cent, dropping to 15 per cent in the second year. However, in that first year residents of effective exchange of information countries will be eligible to claim deductions for expenses relating to their distributions. This will assist in the transition to a flat and final withholding tax regime. Residents of countries with which Australia does not have an effective exchange of information agreement will be subject to a 30 per cent withholding tax.

Efforts to prevent international tax evasion are substantially enhanced by the ability of countries to exchange information relating to tax matters. Australia does not have this capacity with many countries, with some actively trading on their scope to offer individuals and businesses anonymity. The list of countries with which Australia has effective exchange of information will be prescribed by regulation.

Schedule 2 of the bill will exempt from income tax the Prime Minister’s Literary Awards, to the extent that the awards would otherwise be assessable income. The Minister for the Environment, Heritage and the Arts announced on 28 February that these awards would be tax exempt, and the bill delivers on that commitment.

As I touched on in the beginning, it is unfortunate that there was some uncertainty in the opposition’s position on this legislation—or at least until I spoke in question time today—and I understand that the Treasurer, Mr Swan, touched on the issue as well, but that has now been clarified, fortunately. With those comments, I commend the legislation to the Senate.

Question agreed to.

Bills read a second time.