27 August 2015
Speech - #2015013, 2015

‘The Government’s Tax Agenda’, Address to the Queensland Tax Forum

Check against delivery

Good morning everyone and thank you to The Tax Institute for inviting me to open your inaugural Queensland Tax Forum today.

As the leader in tax education, The Tax Institute is renowned for the practical focus of its programs which help professionals to immediately apply their learning in the workplace. So it's a great pleasure to talk tax with you, and be a part of this important forum.

Today I want to focus on Australia's tax system and how it compares internationally. I want to add to what the Treasurer said earlier in the week about why we must reform Australia's tax system. I will also explore the work we are doing through the tax reform process.

Finally, I want to share with you the areas where tax reform is well underway – by stimulating small business, ensuring Australia remains a competitive financial centre in the region and making sure multinationals meet their Australian tax obligations.

Our Tax system

To put our tax system into perspective, it is useful to start with a brief overview of the system and some key metrics.

In 2012-13, the Commonwealth raised around $326 billion in tax revenue. This revenue was equivalent to 21.5 per cent of gross domestic product. In the same year, there were around 9.5 million individual and around 350,000 corporate taxpayers.

Tax is important. It affects our standard of living and the ability of governments to deliver services. How the Government raises revenue affects economic growth by impacting on the returns on work, investment and innovation.

Notwithstanding the large number of individual and corporate taxpayers, we are overly reliant on a relatively small number for the bulk of our revenues.

In 2012-13, the top 10 per cent of taxpayers paid around 45 per cent of personal tax, while the bottom 50 per cent paid roughly 12 per cent.

On the corporate tax side, a dozen companies paid around one third of Australia's company tax.

Further, the tax law has become complex and burdensome. The compliance costs and administration costs associated with this complex system are too high.

Today, we have more than 14,000 pages of tax law with annual tax compliance costs estimated to be in the order of $40 billion.

This cost directly affects our international competitiveness and discourages individuals from starting or expanding their own business for fear of the complexity and compliance burden they will face. This is exactly why reform must include doing more to lower the compliance burden on all taxpayers.

How does our system compare

Currently, Australia's tax system has a relatively high reliance on income taxes. Personal income tax is our largest source of revenue raising about $170 billion each year.

When you combine it with corporate taxes, it makes up around 60 per cent of our tax revenue – compared with an average of 34 per cent across the world's top economies.

Among OECD nations, only Denmark raises more revenue from personal and company income taxes than Australia.

Australia's reliance on personal and company income tax has remained largely unchanged since the 1950s, despite significant changes in the economy.

The recent Intergenerational Report details the challenges ahead.

A greater proportion of the population will be aged over 65.

The number of Australians aged over 65 is projected to more than double by 2054-55 compared with today.

This ageing of the population will impact on revenue. It is the under-65s who traditionally pay the most personal income tax through salary income.

As the population ages, productivity growth will be crucial to improving our overall living standards.

Unfortunately, the economic costs of raising revenue are higher than they need to be. Given these challenges ahead, we need to reduce the economic cost of raising revenue and minimise the drag on our economy.

This is why we need to achieve a better tax system that is lower, simpler and fairer.

The burden of the tax system should not fall unduly on any individual or group.

We need to reduce the tax burden on working Australians as workers are becoming more mobile. We need to encourage innovation and reward for effort.

A starting point must be addressing bracket creep which the Treasurer spoke about earlier in the week. Bracket creep reduces the incentive to get ahead. Let me illustrate this point with a simple but all too common example.

Michael is a part time worker who earns $36,500 in 2014-15 with a marginal tax rate of 19 per cent. Michael's wage has been increasing by around 3 per cent per annum (slightly above CPI), which has been moving him closer to the $37,000 tax rate threshold. Over coming years, by merely keeping up with inflation, Michael's income will move above $37,000.  His additional income above $37,000 will now be taxed at a higher rate of 32.5 per cent. The tax rate on the additional income will have risen by more than 50 per cent, even though Michael's real wage has not changed.

This is not the only challenge facing our tax system.

As the Treasurer cited earlier in the week, our highest marginal tax rate is 47 cents for each extra dollar earned – significantly higher than New Zealand's top marginal rate at only 33 cents; Singapore's at 20 cents; and Hong Kong's at only 15 cents.

In addition, our top rate applies at $180,000 — only 2.3 times the average full-time wage. In the United Kingdom, their top rate kicks in at 4.2 times their average wage while in the United States it applies at 8.2 times their average wage. [1]

If we do nothing, Australians will increasingly look to take their ideas and skills offshore – where the reward for their efforts is higher.

Our tax system must also recognise the increasing global nature of companies.

Today, more and more business value comes from patents, trademarks, copyrights, brands and ideas which can be located anywhere in the world.

High company tax can stifle investment, drive it offshore and ultimately, cost Australian jobs.

Most taxation specialists will tell you that lower company tax rates have a more positive economic impact because companies deploy capital for productive activity, including job creation.

That's why many countries such as the United Kingdom, Canada and New Zealand have dropped their company tax rates in the last few years. All of these countries now have a company tax rate that is less than Australia's.

We have made a start by reducing the tax rate for small businesses. I will talk about this more later.

Our tax system will need to adapt to the challenges of the future. It will also need to help Australians better capitalise on our new economic opportunities.

Comprehensive tax reform could provide a substantial boost to living standards – potentially, a bigger boost than any other single area of government policy.

We cannot afford to put this debate off any longer. The global economy will continue to change even if we don't.

The Tax White Paper process

We have already made a start.

Tax reform, which many of you have already been involved in, is part of the Government's wider economic reform agenda. It is aimed at addressing the challenges of an ageing population, lifting productivity and making the most of the underlying potential of our economy.

The Government is exploring ways to make taxes lower, fairer and simpler. These are important but not new goals.

In March, the Government released the Re:think Discussion Paper. It started a national conversation about tax reform and sought the views of the public on potential reform ideas.

In response, we have received over 860 submissions.[2] Australians understand the need for change. These submissions help us understand what needs to be done and inform the development of options.

We will release an options paper later this year which will take into account the views raised in the submissions.

We will continue to engage openly and constructively on these issues culminating in the release of a white paper before the next election.

We need a tax system that better supports the needs of Australians so we can pay for the services the community expects while promoting economic growth, jobs and opportunity.

As a Government, we cannot deliver tax reform on our own. This is a key message I ask you all to take away.

As always, we need the community and all of you to continue engaging in this important debate. True tax reform will not occur without widespread community support and understanding. 

It is not sufficient for the Government alone to lead the reform debate.  Credible and considered stakeholders need to add their voices to the call for reform.

For obvious reasons, tax reform is perhaps the most difficult of all reforms. It affects the Government's bottom line; some win more than others; and inevitably requires co‑operation with the states.

That is why the Abbott Government has embarked on a reform process, informed by the views of a wide range of stakeholders, with the aim of arriving at a reform package that will deliver a lower, simpler and fairer tax system and one that is in the country's best long term interests.

The States are central to genuine, broad based tax reform. For this reason it has been especially pleasing to see the largest State, NSW, under Premier Baird, leading the debate on the need for State tax reform through a proposal to raise the GST rate to 15 per cent. 

We shouldn't forget that when the GST was introduced in 2000, more than 30 inefficient state taxes and duties were reduced or abolished by the states and territories.  This was real reform.  Introducing the GST wasn't about raising more revenue, it was about a more sustainable and efficient source of revenue and a simplification of State-based taxes.

Today, the GST represents about 23 per cent of total State revenues. It's a reform that has stood the test of time but one that we shouldn't be complacent about.  Australia's GST covers only 47 per cent of national consumption and at 10 per cent is roughly half the OECD average. 

While changing the GST requires the support of all the States, this shouldn't deter public debate and economic analysis about the merits of further reform.  This is why we have not ruled out consideration of the GST during the Tax White Paper process.

However, we aren't waiting for this tax reform process to finish before improving our tax system. 

Just last Friday the Treasurer met with state and territory treasurers to discuss the future of our tax system. Importantly, they have all agreed to work together to develop potential models for a future tax system that delivers the revenue we need without harming the economy we want.

It was especially encouraging to see the treasurers reach an in-principle agreement to apply GST to low‑value goods imported into Australia.

This shows us that the states and the federal government can come together to deliver important reform.  The challenge for all of us is to maintain this momentum.

Announced but un-enacted measures

As you know, improving the tax system is also about good housekeeping.

We continue to make good progress on determining the future of over 90 announced but not yet enacted tax measures we inherited when we came to office in 2013. Some of these measures dated back more than a decade.

20 measures have received Royal Assent; 5 measures are before Parliament; and 11 measures are still to be introduced. The remaining 56 measures will not proceed. 

Keeping with our goal of lower, simpler, and fairer taxation, we are resolving the uncertainty this backlog had created for many businesses and consumers.

Areas where tax reform is underway

I would now like to take some time to highlight the areas where tax reform is well underway – by stimulating small business, ensuring Australia remains a competitive financial centre in the region and making sure multinationals meet their tax obligations.

Stimulating small business

The progress the Government is making with international tax issues is being replicated with the taxation of small businesses. 

We know the hard working women and men of Australian small businesses are the engine room of the economy. And we want to ensure that Australia is the best place to start and grow a business.

The best way for us to create jobs is to build a strong, prosperous economy that encourages business confidence. Ninety-six per cent of all Australia's businesses are small businesses, employing over 4.5 million people and producing over $340 billion of our nation's economic output per year.

The $5.5 billion Small Business Package from this year's Budget is the biggest in our nation's history and builds on what we have already achieved.

The package is designed to help small business to grow and create jobs. Helping more small businesses become profitable, sustainable and competitive will ensure they are in the best position to hire new employees, providing more jobs for Australians including for our younger and older workers.

As part of this package, and our promise to help small business, the Government has passed legislation to reduce the company tax rate from 30 per cent to 28.5 per cent for companies that are small business entities. That is those businesses with an aggregated turnover of less than $2 million.  We know this will encourage investment and growth in our economy.

We have also passed legislation which provides owners of unincorporated small businesses a 5 per cent tax discount on their business income, capped at $1,000 per taxpayer per year.

These businesses are our sole traders, our partnerships, our trusts. This tax cut will put money back in their hands, so they can reinvest to grow their business and employ new staff.

Another way the Government is helping small businesses is by providing them with access to accelerated depreciation. From Budget night up until the end of June 2017, all small business will receive an immediate tax deduction for every eligible asset they buy costing less than $20,000. Previously, the threshold was $1,000. 

Increasing the depreciation threshold will mean improved cash flow for small businesses. It will encourage them to bring forward investment in the assets they need to grow their business and service their customers.

Now if a small business needs to purchase new assets for their business, they can with the knowledge that its cost will be immediately deductable. It will mean less red tape and more time to focus on running and growing their business.

Over 280,000 small businesses have been established since 2013. As many of you would know, establishing a small business can be a costly and time consuming process.

To help alleviate some of this burden, we have provided small business with access to an immediate deduction of certain professional expenses and government payments that maybe incurred when starting the business. We think this will help reduce red tape and encourage more entrepreneurial activity.

The changes to the taxation of employee share schemes build on our Growing Jobs and Small Business package to support innovation and to create the right conditions for Australian entrepreneurs.

The changes will make the tax and administrative arrangements more competitive by international standards. They will help innovative Australian firms attract and retain high-quality employees in the international labour market. The changes came into effect on 1 July.

Johnson Report measures

The Government is also creating opportunity for those in the financial services industry, by committing to Australia's future as a leading financial centre in our region. 

In 2009, the Australian Financial Centre Forum published a report known as the Johnson Report.

The report found that Australia has a strong financial services industry and recommended policy changes in a number of areas, including tax, to better position Australia as a leading financial centre.

Australia's funds management sector is one of the largest and most sophisticated in the world with $2.6 trillion of total funds under management.

However, as you may or may not know, only 3.5 per cent of these funds are managed on behalf of non-resident investors. This is considerably low compared to the likes of Singapore, Hong Kong and the United Kingdom, whose funds managed on behalf of foreigners are 80 per cent, 70 per cent and 40 per cent.

To promote Australia's financial services strengths and capabilities, I recently travelled to Japan and Korea with representatives from the financial services industry. The trip reinforced my optimism for the enormous opportunities that lie in our region.

The burgeoning Asian middle class is set to reach more than three billion people by 2030. The region is already home to 60 per cent of the world's population; by 2019 it's expected to account for 42 per cent of global economic output.

We must ensure Australia's financial services sector is in the best possible position to benefit from this extraordinary growth. 

For this reason, we are committed to advancing the remaining key recommendations in the Johnson report.

The Government is set to introduce a dedicated new tax system for managed investment trusts (MITs). This new tax system will modernise the tax rules applying to MITs, making Australian managed funds more competitive and Australia's funds management expertise more exportable.

As announced in the Budget, the new rules will apply from 1 July 2016 with some eligible MITs being able to apply the rules from 1 July this year.

On collective investment vehicles, or CIVs, the Government is considering the design features of a new regime that will extend the range of tax flow-through CIVs that can be offered by Australian fund managers.

This is great news for Australian fund managers, as a wider range of CIVs will make Australian products more attractive to non-resident investors, particularly those in the Asia-Pacific region who are less familiar with trust structures.

I am pleased to note that the Investment Manager Regime or IMR reforms passed through Parliament in June this year. The IMR clarifies the tax treatment of foreign investment into Australian assets and through Australian fund managers.

The IMR was a key recommendation of the Johnson Report, which has received overwhelmingly positive feedback from Industry.

My recent trip to Japan and Korea also allowed me to further progress the Asia Region Funds Passport.

The Passport will assist Australian fund managers to offer their world-class services across the region. Australia has led the development of the ground-breaking initiative.

The Government has been working behind the scenes to ensure the Passport is supported by the widest possible group of APEC economies. To this end, later this month, APEC Finance Ministers will be meeting in the Philippines where interested finance ministers will sign the Asia Region Funds Passport Statement of Understanding. This statement is a high level document indicating our political commitment to join the Asia Region Funds Passport.

The statement invites all eligible APEC economies to consider participating in the Passport when it commences towards the end of 2016. We have been very pleased with the progress of discussions across the region and will have more to say following the APEC Finance Ministers meeting.

Taxation of multinationals

A fairer tax system is one in which all taxpayers meet their tax obligations. This is why we are committed to addressing tax avoidance by multinationals.  If a company makes a profit in Australia, then they should pay tax in Australia. We do not want individuals and small businesses unfairly carrying the tax burden.

As the G20 president in 2014, the Government led the development of the G20/OECD Base Erosion and Profit Shifting (BEPS) Action Items.

Australia already has robust and sophisticated laws that deal with tax avoidance by multinationals. This includes a comprehensive thin capitalisation regime, tough transfer pricing and controlled foreign company laws, and extensive general anti-avoidance rules.

And last year, we tightened Australia's thin capitalisation rules to limit the scope for multinationals to claim excessive debt deductions.

In the 2015 Budget, the Government announced a package of actions to further enhance Australia's tax laws and level the playing field for domestic business.

First, we are introducing a new multinational anti-avoidance law to stop multinationals using complex schemes to avoid paying tax in Australia by booking revenue overseas. It will apply from 1 January 2016 and target multinationals that artificially structure their operations to avoid a taxable presence in Australia.

Second, as I mentioned earlier, we are closing the digital tax loophole to ensure the GST applies to digital products and services which are downloaded in Australia.

Third, we are introducing new OECD country-by-country reporting requirements from 1 January 2016 to strengthen the ATO's ability to identify profit shifting. Country-by-country reporting will require multinational companies with worldwide revenue greater than $1 billion to report to tax authorities annually for each jurisdiction in which they do business, the amount of revenue, profit, income tax and economic activity.

And finally, we are doubling penalties for large companies engaging in tax avoidance and profit shifting.

The Treasurer also asked the Board of Taxation to take the lead on developing a new code for greater public disclosure of tax information by large business. The Board will be holding initial consultations through August and September with interested parties.

The Board is keen to hear from the business and broader community on this issue. It has already held preliminary consultations in Sydney, Melbourne and Perth and is planning further meetings here in Brisbane in coming days.

In addition, the Government will continue working with other countries to implement the two-year BEPS Action Plan to address profit shifting by multinationals and ensure companies pay tax in the jurisdictions where they earn their profit.

The further recommendations of the OECD that will be delivered in October this year will provide a strong platform for further action to address tax avoidance by multinationals.

The Government has asked the Commissioner of Taxation to double his efforts in combatting multinational tax avoidance. This means undertaking more extensive enquiries and audits of multinational companies that are considered a risk to Australian tax collections.

The Government is providing the ATO with $242.7 million in additional funding over four years to achieve this. The will assist the ATO in undertaking more than 200 risk reviews and 20 intensive audits. The ATO has already raised $400 million from this program, and expects to raise a total of $1.1 billion from its audit activities in this area.

Before closing, allow me to briefly compare our approach to that put forward by the Opposition.

The Opposition has proposed a number of measures which they claim will deal with multinational tax avoidance – principally, limiting interest deductions based solely on a worldwide gearing test.

They claim that their policies will raise $1.9 billion over the next four years.  Not surprisingly, given their track record on tax policy, the Government has repeatedly called on the Opposition to release the Parliamentary Budget Office costing of their policies so that the underlying assumptions can be properly examined – they have consistently refused.

In the absence of their Parliamentary Budget Office costing, what we do know is that the Treasury has assessed their policies and determined that the proposed changes to thin-capitalisation rules in particular would deter investment and cost jobs. The Treasury has also confirmed that they would also adversely impact the legitimate activities of Australian headquartered multinational companies.

In the words of Rob Heferen, Deputy Secretary to the Treasury: "[the] proposed change to the current thin capitalisation rules would inevitably compromise economic activity."[3]

This assessment is backed up by the Business Council of Australia who claimed the proposals would have the effect of "undermining major capital and infrastructure projects and deterring investment"[4]; and the Minerals Council of Australia who stated that "Australia's tough thin capitalisation rules were strengthened from 1 July 2014 and any further changes would add to perceptions of sovereign risk of investing in Australia."[5]

Even more concerning, the Opposition's policies on multinational tax avoidance do not go to the heart of the issue. Their policy, which primarily targets debt deductions, does not focus on areas where there is the greatest potential to address profit shifting by multinational companies.  

As a result, their policies will be both ineffective in targeting the real problem and damaging to the economy. 

 Concluding remarks

Reform of the tax system is not new or easy. As the world continues to change, we must ensure our structures and systems keep pace.

While I am proud of what the Coalition Government has been able to achieve to date, much work remains. 

Tax reform is a key part of the Government's policy agenda to build jobs, growth and opportunity. The Government wants to deliver a better tax system that is lower, simpler and fairer which is good for the economy and where everyone meets their tax obligations.

The Government looks forward to continuing to work closely with the community, industry and bodies like The Tax Institute to achieve meaningful reform. For reform to succeed, we all need to act.

It has been a pleasure to be with tax leaders and to update you on the Government's priorities at the beginning of your forum.

Let me wish you two days of rich discussion and learning, and let me encourage you to continue making contributions to our national discussion over the days and months ahead.

Thank you.


[1] This is based on OECD data of average wages in the US, does not include state income and other taxes or social levies.

[2] Many of the non-confidential submissions can be found on the BetterTax website.

[3] Rob Heferen, Deputy Secretary, Revenue Group, Senate Estimates, 2 June 2015.

[4] Statement on Suggested Changes to Tax Arrangements, Business Council of Australia press release, 2 March 2015.

[5] Minerals Council of Australia Media Release, 2 March 2015.