27 March 2015
Speech - #2015004, 2015

In the role of: Assistant Treasurer [23 December 2014 - 21 September 2015]

Address to the Minerals Council of Australia Biennial Tax Conference

Check against delivery

Introductory remarks

Good morning and thank you, Brendan (Pearson, Session Chair), for the opportunity to speak at this event with so many other eminent players in the sector.

The Minerals Council of Australia, of course, is a significant voice in the public sphere and makes an important contribution to the development of policy.

The MCA’s Biennial Tax Conference is an important marker in expanding that knowledge, gathering, as it does, such a distinguished group of experts from across the policy and industry arenas.

It’s a terrific opportunity to discuss the issues of concern to us all.

As you know, the theme of the conference this year is “tax reform: the quest for competitiveness” – and it’s particularly timely.

Today, I’d like to spend my time with you discussing four main themes.

I’ll start with some context by considering the economic climate.

I’ll then examine the current tax system, before drilling down – no pun intended – into the Government’s approach to mining tax.

My fourth and final theme is tax reform and deregulation – priorities for this Government and all of you gathered here today, I’m sure.

1. The Economic Climate

We know, of course, that the global economy continues its struggle to bounce back from the global financial crisis.

The IMF has once again downgraded its outlook for global growth and now expects growth of 3.5 per cent in 2015, and 3.7 per cent in 2016.

The bright spot in the global outlook is the US, with its labour market in particular continuing to accelerate. Almost 300,000 jobs were added in February and the unemployment rate fell to 5.5 per cent, its lowest level since May 2008.

But, as the recovery in the US strengthens, Europe continues its battle with soft demand and the developments in Greece earlier this year are a sharp reminder of the structural shortcomings in the eurozone.

What’s perhaps more directly relevant to us in the Australian economy is slowing growth in China.

Although its reduction in the official growth target to 7 per cent in 2015 (from 7½ per cent in 2014) was hardly surprising, slower rates of aggregate growth are just one part of the story.

Perhaps of greater importance to Australia is China’s much talked-about transition away from investment-led growth, which is now really beginning to take effect.

And this shift is nowhere more apparent than in China’s housing market.

Property investment, a central driver of economic growth, has slowed markedly over the past year or so as authorities attempt to rein in excessive credit growth and opaque lending practices.

Not only has China’s housing market been an important driver of economic growth, it has also been the largest user of raw materials, including iron ore.

Mirroring events in China, the Australian economy has begun its own transition away from mining investment to broader-based drivers of growth.

But growth is expected to remain below its trend rate in the near term as the hole left by the fall in mining investment is significant and difficult to fill.

Again, that’s not surprising given that the run-up in mining investment over the past decade was unprecedented.

But the huge pipeline of resources investment is now well and truly past its peak. Resources investment has now fallen by 22.6 per cent since 2012-13, and is expected to fall even further this year and next.

Resource industry employment has also begun to fall, and could fall further as several large LNG projects end their more labour-intensive construction phase during 2015.

Already, mining employment has fallen by around 70,000 from 2013 to 2014.

As resource projects have moved into their production phase both here and overseas, global supply of iron ore, coal and other non-rural commodities has surged.

Australia has often been leading this charge.

For example, Australia’s iron ore export volumes have expanded by a huge 230 per cent over the past 10 years, while our LNG exports are expected to increase by a similar amount in the next five years. As is already the case for iron ore, Australia is expected to become the world’s largest exporter of LNG.

But falling commodity prices have been the inevitable consequence of this surge in global supply. Prices for iron ore, for instance, have roughly halved over the past year or so, with the oil price experiencing a similar plunge.

Commodity price falls were always expected – but we have all been surprised by the pace and timing of these falls.

These price falls are obviously weighing on revenues in the mining sector, leading to lower profits and a sharper focus on reducing costs.

They’re also having an impact on exploration activity. Indeed, the latest minerals and petroleum exploration survey from the ABS points to an expected fall of over 40 per cent in the six months to June 2015.

Lower profits and wages in the mining sector will, in turn, reduce government tax receipts both at the federal and state levels.

So falling mining investment will continue to weigh on growth for some time yet – but there are some encouraging signs that other drivers of growth are helping to fill the void.

As I’ve noted, mining exports keep growing strongly and the ramp-up in LNG exports in coming years will add to this.

Further, household consumption grew at its strongest rate in nearly three years towards the end of 2014, and there are good prospects that housing construction will remain strong for some time yet.

Historically low interest rates and cheaper fuel costs will encourage increased household spending, while the sustained fall in the dollar will provide an ongoing boost for all our exporters, from tourism operators to farmers.

We have the fundamentals in place to help ensure that the recovery can take hold.

2. The current tax system

It’s well-known that one of this Government’s priorities is budget repair. We also need to make sure that our expenditure is appropriate.

But that’s not the whole picture.

What about our revenue?

What do we think will be the position going forward? And what about our tax mix, now and in the future?

Following the global financial crisis, tax receipts have recovered and are projected to continue to grow until the tax-to-GDP ratio reaches 23.9 per cent of GDP in 2020-21.

Over the longer term, the Intergenerational Report or ‘IGR’, which we released earlier this month, assumes a long-run constant tax-to-GDP ratio of 23.9 per cent of GDP.

That’s based on the average tax-to-GDP ratio over the eight years from 2000‑01 (the year the GST was introduced) to 2006-07.

The increase occurs largely because individuals will pay increasing average tax rates on personal income over time owing to ‘bracket creep’ – which occurs when rises in nominal income from employment and investments gradually push people into higher income tax brackets.

But a tax rate of 23.9 per cent of GDP will not be enough to forestall further budget tightening.

The IGR warns that pressure on taxes and spending will surge over the next four decades unless it is checked, with Australian governments facing growing fiscal pressure as the population grows and ages.

This would require even higher taxes or severe future spending cuts, posing difficult decisions for subsequent governments.

And the Government relies heavily on income taxes, levied on both companies and individuals. These are the taxes Australia relied on in the 1950s.

Of course, over the past 15 years, there have been some modest changes in the composition of our tax revenue. These partly reflected changes in the economy, such as the growth in commodity prices and efforts to broaden the tax base, like the introduction of the GST.

But Australia relies more on income taxes and less on consumption taxes than other developed countries.

In fact, income tax makes up the majority – 58 per cent – of our tax revenue.

Among OECD nations, only Denmark raises a higher proportion of revenue from income taxes. The OECD average for revenue raised from income taxes is 33.6 per cent, so Australia is well above that.

This comparison does not include social security taxes, which Australia doesn’t levy.

Interestingly, Australia’s reliance on income tax is not that dissimilar to some of our regional competitors.

Malaysia, for example, raises 71.1 per cent of its revenue from income taxes, and Hong Kong raises 64.8 per cent of its revenue from income taxes. I should note, however, that their government sectors are far smaller than Australia’s.

Of that 58 per cent of Australia’s tax revenue raised by income tax, 39 per cent comes from taxes levied on individuals, and 19 per cent from taxes on corporate entities.

And of that 19 per cent, over the last few years, the resource sector has paid around one quarter of company tax, up from around 8 per cent in 2004-05.

For all Australian governments, corporate tax as a share of total tax has increased in recent decades. In 1983, corporate tax formed around 9 per cent of total tax while, by 2012, this increased to around 19 per cent. This was due to increased corporate profitability, and the efforts of governments to broaden the corporate tax base (while lowering the rate).

By contrast, the OECD average corporate tax revenue (as a percentage of total tax revenue) has remained relatively stable, at around 8.5 per cent over the same period.

Australia’s corporate tax rate at 30 per cent is high compared to many of the countries we compete with for investment, especially those in the Asia-Pacific region. This makes it harder for Australia to attract and retain investment.

Corporate income tax rates have fallen worldwide in recent years – but Australia has not kept pace.

For example, the United Kingdom’s main corporate tax rate will soon be 20 per cent, while Singapore’s is 17 per cent.

Of course, our economy is not the same as many other OECD members’, nor is it the same as many of our neighbours. For instance, unlike many of them, we have a strong resources sector.

But in an ever-more globalised world, it’s important that our tax settings are right.

Tax matters more as competition for foreign investment intensifies and businesses become more mobile.

3. The Government’s approach to mining taxes

Let’s use that as a segue to talk about our approach to mining taxes.

As you know, the Government has repealed the Minerals Resource Rent Tax (or MRRT) and discontinued or re‑phased measures that were introduced by the former Government on the expectation that their cost would be met by mining tax revenues.

The former Labor Government locked in around $17 billion of expenditure over the three years from 2014-15 to 2017-18 against the almost non-existent proceeds of this failed tax.

In the two and a quarter years from its introduction on 1 July 2012 to its termination on 30 September 2014, the MRRT raised just $340 million in net terms. Worse still, estimates of what the MRRT would have raised over the forward estimates to 2017-18 withered to just $669 million in net terms.

And what is even worse, the MRRT imposed large compliance costs on operators in the resources sector trying to comply with the complex tax. In the two years of its existence, less than 20 taxpayers contributed to paying the net $340 million raised by the MRRT, but over 135 miners were required to submit MRRT instalment notices while making no net payments.

That means over 115 taxpayers were complying with the MRRT legislation without paying any tax. The compliance cost to taxpayers for this unnecessary activity was estimated to be over $10 million a year.

And you can add to industry’s compliance costs the administration costs of the ATO, which were around $20 million a year.

If you compare the roughly $40 million administration costs over the two years of the MRRT from 2012-13 to 2013-14 with the net $340 million raised, this represents an average administration cost of approximately 12 per cent – compared with the average ATO cost of 0.91 per cent of revenue collected.

When this Government removed the MRRT to restore confidence in the mining sector, we helped free up the industry.

And there are several other areas that will help boost activity.

For example, the implementation of landmark free trade agreements with Japan and South Korea will provide further opportunities for Australian resource companies to boost exports, ensuring that tariffs on Australian coal and iron ore exports to Japan and Korea are locked in at zero.

Our free trade agreement with China – the ChAFTA – will come into force when China and Australia complete the necessary treaty-making processes, likely to occur this year.

Its core resources and energy outcome is the removal of tariffs on all resources and energy products, including the 3 per cent tariff on coking coal on the day the Agreement comes into effect, and the 6 per cent tariff on thermal coal within two years of commencement of the Agreement.

As you know, the MCA has itself estimated that the tariff reductions in the ChAFTA will result in around A$590 million savings per annum for the resources industry.

Once the Agreement enters into force, 92.9 per cent of China’s current imports of these products from Australia will enter duty free, with most remaining tariffs removed within four years. On full implementation of the Agreement, 99.9 per cent of Australia’s current resources, energy and manufacturing exports will enjoy duty free entry into China, which is great news for Australian exports.

This Government has always recognised coal mining as a key contributor to the Australian economy, one that is responsible for both direct and indirect job creation across the economy, particularly in regional areas.

Coal contributed $40 billion to total Australian exports in 2013-14: that’s some 17 per cent of all commodity exports and our single largest export contribution after iron ore.

As everyone in this room fully appreciates, coal represents an important part of Australia’s energy mix, currently providing almost 64 per cent of Australia’s electricity generation capacity.

The International Energy Agency’s 2014 projections indicate that coal will both remain a dominant global energy source for electricity generation and supply around 25 per cent of world primary energy out to 2040.

The IEA also notes that coal still accounts for around 41 per cent of global electricity generation.

2 billion people still live with either unreliable or no access to electricity. For many countries, coal-generated electricity is a vital component of their energy supply strategies and that’s likely to continue.

So our coal exports play a significant role in lifting living standards across the world.

As long as countries elect to include coal in their energy mix, Australia will continue to be a reliable and competitive supplier.

Our approach to the fuel tax credits scheme is similarly pragmatic.

The scheme generally operates to provide eligible businesses with credits for the fuel tax included in the price of fuel – like petrol and diesel – where it is used in business activities. It avoids distorting business investment decisions and behaviour.

The scheme means that fuels used off-road for business purposes are generally effectively free of fuel tax. This removes or reduces tax on crucial business costs, benefitting industries like manufacturing, construction, primary production, mining and commercial power generation.

It also means that excise and customs duty collected from manufacturers and importers of fuel is a tax on final private consumption.

The Government passed legislation to make sure that businesses would receive fuel tax credits equal to the increased rate of duty when fuel excise indexation was reintroduced.

We are also promoting open and accountable management of all our natural resources.

For example, as part of the global Extractive Industries Transparency Initiative, both the payments made to Government by oil, gas and mining companies and the amounts received by Government are published in an annual report. This not only improves accountability, it also makes it possible for citizens to see how much a government receives from its national natural resources.

In countries where the Initiative is being implemented, it is supported by a coalition of governments, companies and civil society working together.

Extracting oil, gas, metals and minerals can lead to national economic growth and social development. But poor management of natural resources can lead to corruption and conflict. More openness and transparency around how a country manages its natural resource wealth can help all citizens benefit from them.

Let me say that I welcome the MCA’s involvement in the EITI Pilot, particularly the Australian EITI Pilot Multi-Stakeholder Group. I understand the pilot successfully demonstrated the effectiveness and transparency of Australia’s governance systems and financial controls.

For its part, the Government is currently considering the Group’s Report to Government and whether Australia will seek candidacy to become a member of the EITI.

Before moving onto tax reform and deregulation, let me spend a few moments on mining exploration.

Exploration today determines the resources that can be mined or developed tomorrow. The future health of the resources sector depends on such exploration.

Without that assistance, there would not be enough investment and exploration.

This Government has passed legislation that will encourage investment in small exploration companies that explore Australia’s land for mineral wealth.

This also provides Australian resident shareholders of small mineral exploration companies with no taxable income with a refundable tax offset for their costs of exploration from 1 July 2014. To do so, companies must give up a portion of their losses.

Mineral exploration companies can provide exploration credits to their shareholders for the greenfields mineral exploration they conduct in Australia.

The cost of the incentive is capped at $100 million over three years with a review of the scheme taking place in 2016.

Only expenditure on exploration for minerals is eligible for the incentive, and the incentive will be restricted to greenfields exploration. Expenditure on studies to evaluate the economic feasibility of mining minerals once they are discovered is excluded.

As many of you will know, in 2014, the Government introduced an integrity measure to better target the immediate deduction for the cost of mining rights and information assets first used for exploration.

Limiting the immediate deductibility was necessary to remove the exploration tax concession for trading late-stage exploration rights and information, where the price reflects the value of resources discovered, rather than the right to explore.

It was not meant to remove the immediate deductibility of an exchange of an interest in a mining, quarrying or prospecting right in return for exploration services; what you will know as a farm-in, farm-out arrangement.

Nor was the integrity measure meant to affect parties to a joint venture, when they exchange interests in mining, quarrying or prospecting rights. This is so the owners of the project have a consistent ownership interest in all the reserves and resources of the project.

The Government has given the resources sector assurances that these arrangements would not be affected by better targeting the deduction for the cost of assets first used for exploration.

I know the MCA has worked closely with Treasury to develop legislation so that exploration activities and other legitimate restructuring arrangements can continue without any unintended tax consequence.

I’m pleased to say that this legislation will soon be introduced into Parliament with the implementation back-dated to 14 May 2013, which is when the integrity measure commenced.

On another exploration issue, many of you will know the ATO released a final ruling on 17 December 2014, applying a narrower definition to expenditure under the Petroleum Resource Rent Tax.

The ATO ruling was a concern to some in the oil and gas industry although I understand the prospective approach has allayed some of these concerns.

I also understand that the ATO is currently reviewing its ruling of the exploration definition under the Income Tax Assessment Act.

The draft ITAA ruling is expected to be released later this year. If it is causing concern, let me say I don’t think there is cause for worry. The ATO consulted at an early stage with industry, and has continued to consult openly and productively.

The Petroleum Resource Rent Tax Act and the Income Tax Assessment Act are two different pieces of legislation, with the ITAA specifically including economic feasibility studies in the exploration definition.

The new ITAA ruling is not intended to wind back the broad approach taken by the ITAA on feasibility study deductions. While there may not be a ‘bright line’ test based around ‘decision to mine’ as some in the industry may favour, the new ruling will look to provide clearer guidance about what is in and what is out, especially in the grey area of advanced design.

4. Tax reform and deregulation

Let me now talk a little bit about our priorities on tax reform and deregulation.

Taxation reform offers a significant opportunity to improve Australia’s prospects for economic growth and living standards.

Australia has a strong interest in ensuring the integrity of our tax system. Tax avoidance undermines community trust in the fairness and integrity of the tax system, which is critical to overall effectiveness and efficiency.

Many if not all of you will know that Base Erosion and Profit Shifting, or BEPS, refers to situations where the interaction of different tax rules leads to low taxation or even no taxation, and where profits are shifted away from the countries where the activities creating those profits take place.

Australia has a robust set of domestic laws in place to counter BEPS, including a comprehensive thin capitalisation regime, tough transfer pricing rules, and an extensive general anti-avoidance rule.

We are working closely with our international counterparts, including G20 and OECD countries, because multinational tax avoidance is a global problem.

Our leadership of the G20 was particularly effective in ensuring a coordinated global response to tackle this issue.

The OECD is progressing the G20/OECD BEPS Action Plan, which identifies a series of domestic and international actions designed to address deficiencies in the international tax system that create opportunities for tax avoidance.

The OECD is now more than half-way through its two-year plan, to be finalised in December 2015, after which the Government will consider its outcomes.

We are continuing to examine ways to strengthen Australia's tax laws and monitor overseas developments, and will not hesitate to take immediate action if required. Any action will be cognisant of the G20/OECD BEPS Project.

On Australia’s tax reform specifically, of course, the Government is undertaking a comprehensive review of the tax system, with the principal aim being a better tax system that delivers taxes that are lower, simpler and fairer.

This process will be open and constructive and we expect to release a discussion paper calling for submissions soon. I urge you to engage with the process by making a submission.

Once there has been an opportunity to closely examine all submissions, an options paper will be developed. This will be followed by the release of the Government’s tax plan before the next election.

We understand the importance of tax reform in lifting Australia’s productivity, competitiveness and economic potential.

On deregulation, the Government is committed to reducing regulatory burdens as a critical step towards improving Australia’s productivity.

The goal is to restore certainty, predictability and meaningful consultation so that policy serves to boost confidence, promote investment, and encourage employment.

As part of our deregulation agenda, we’ve overhauled the process for creating, implementing and reviewing new regulations. This includes a process within Government whereby the costs and benefits of additional regulation are carefully balanced.

As you know, when we came to office, we established a red tape reduction target of $1 billion each year in compliance costs.

By cutting compliance costs, we want to help businesses grow, invest and create more jobs.

I’m pleased to say that, since the 2013 election, the Government has announced more than $2.1 billion in red and green tape savings for businesses, individuals and community organisations. That’s more than double our annual target!

And, of course, we’ve already repealed unnecessary and damaging taxes, such as the mining tax and carbon taxes, to unleash Australia’s economic potential and help businesses to grow and employ people.

The Government also set aside at least two parliamentary sitting days each year to repeal unnecessary or redundant legislation, known as ‘Repeal Days’.

Last year, legislation was introduced to repeal more than 11,000 regulations or pieces of legislation that totalled more than 57,000 pages.

At the Autumn Repeal Day on 18 March, I released Treasury’s annual deregulation report detailing measures that resulted in $570 million in net red tape savings achieved across the Treasury portfolio to the end of last year.

This annual report also presents findings of the regulation stocktake conducted last year. It is estimated that the total annual compliance cost of Treasury regulation was approximately $47 billion as at late 2013 and, of this, the largest source of compliance costs is tax regulation, which accounts for $40 billion.

It’s simply mind-boggling – and that’s why we remain committed to removing redundant or unnecessary legislation.

Closing remarks

I think it’s pretty clear, despite challenges on the revenue side, that we’re in pretty good shape compared to many other nations.

Our challenge now, as we move into the production and export phase of the mining boom, is to make sure we can continue to make the most of our resources.

This Government supports a vibrant and competitive energy and resource sector that employs thousands of Australians and makes a vital contribution to our economy. Our achievements and our reform priorities bear testimony to that.

But we can’t rest on our laurels.

We are encouraging further exploration, and our approach to multinationals, tax reform and cutting regulation will help us increase productivity and realise our potential.

I am confident that, if we can continue to discuss these issues in forums like this, we can develop and implement the policies that are best for all Australians.

Thank you.