Senator FIFIELD (Victoria) (10.13 a.m.)-The New International Tax Arrangements (Managed Funds and Other Measures) Bill 2004 is a further step in implementing the government’s package of international tax reforms designed to enhance the competitiveness of Australian managed funds, facilitate investment into Australia and assist Australia’s development as a global financial service centre. This bill is a reminder that this government is committed to working with business in the way that tax policy is decided and implemented. The measures contained in this bill reflect the expertise and hard work of a broad range of participants, from officials and business groups to individual businesses and the members of the Board of Taxation. In 2002 the Treasurer announced a review of international tax arrangements. Subsequently, a consultation paper was prepared and released by the Treasury, including a range of options for consultation. That consultation was undertaken by the Board of Taxation, and the government certainly appreciates the tireless efforts of those involved in that process. In 2003 the government received the board’s report and released its response.
A further round of consultation then commenced on the design of the legislation. The main components of the government package include the following. Firstly, it simplifies the application of the controlled foreign company rules for Australian companies operating in countries where tax arrangements are comparable to Australia’s and also eases these rules for certain services provided in international markets. Secondly, it moves towards a more residence based treaty policy, consistent with the directions set in the US protocol, where the overall treaty package is in Australia’s national interests. Thirdly, it exempts Australian companies and their controlled foreign companies from capital gains tax for the sale of certain non-portfolio interests in foreign companies and extends the existing tax exemption for foreign non-portfolio dividends and certain branch profits. This will assist Australian companies operating offshore as well as regional headquarters operations based in Australia.
Fourthly, it proceeds with the previously announced foreign income account measure. Fifthly, it better targets the foreign investment fund rules to reduce compliance costs for Australian managed funds and superannuation entities investing offshore by increasing the balanced portfolio exemption from five per cent to 10 per cent for all taxpayers and exempting compliance superannuation funds from the FIF rules. Sixthly, it seeks to revise certain aspects of the cross-border taxation of resident trusts to improve the international competitiveness of Australian managed funds. It also seeks to proceed with the simplified treatment of foreign trusts and the tightening of the transferor trust rules, both previously announced. It also extends aspects of the separate entity treatment given to foreign bank permanent establishments to branches of other financial entities. Further, unfranked dividends received by foreign owned branches generally will be taxed on assessment instead of being subject to non-resident withholding tax. Finally, it addresses the double taxation of employee share options. A previously announced measure requiring security from departing residents for deferred CGT liabilities will not proceed. The legislation is now being introduced in tranches. The bill which we are considering today relates mainly to managed funds. This bill was preceded by bills concerning foreign investment fund rules, interest withholding tax, controlled foreign companies and a range of other matters, which were all designed to improve Australia’s business and investment competitiveness.
I would like to take this opportunity to outline some broader perspectives on the tax reform process-in particular, the process by which this bill and other legislation is being implemented as part of the government’s international tax reform package. The process by which the government has developed these bills has been exhaustive in its preparation and has been characterised above all by consultation. There have been public discussion papers, advisory boards, consultative groups, roundtable discussions, reports, government responses and publicly released draft legislation. Consultation is continuing on outstanding aspects of the international tax reform package. It is further evidence of this government’s determination to work with business to maximise Australia’s economic potential. Consultation is ongoing with the Permanent Establishments Working Group, Conduit Working Group, Foreign Investment Funds Working Group, Controlled Foreign Companies Working Group, the Tax Treaties Advisory Panel and the Foreign Trusts Working Group. This work goes on behind the scenes and attracts little of the public attention that some of the trench warfare style debate about other tax issues does, but it is certainly necessary.
International tax, although it does not get the same publicity, is still very important. The work done as part of consultation process is a great credit to our business community and the officials involved. It also reflects the trust and cooperation which has developed between this government and the business community. This is a government which works with business and listens to business. It does not always do what business wants, but it always consults and listens to their perspective. Where business has a reasonable point of view, it will act. This is in contrast to the Labor Party. Labor, as I said in the Senate yesterday, has not had to control or run a tax system for about nine years now. But we can get an idea about how it will handle tax policy in future by taking a brief look back at the election. Firstly, Labor was evasive about when its tax policy would actually come out. On 5 September last year Mr McMullan was asked when Labor’s tax policy was going to come out. He replied, ‘Soon.’ Then, helpfully, he added, as though it was a great revelation, ‘It will be before the election.’ How thoroughly decent! Despite promising it months before, there was a concession that it would be released before the election.
Mr Crean was interviewed on Business Sunday on the same day last year. While talking about Labor’s economic management credentials, he said, in terms of Labor’s consultation with business: ‘We have been prepared to engage the business community. Myself, Bob McMullan and David Cox’-how lucky can business be!-‘have all had exhaustive meetings over long periods of time with the business community to explain them.’ Mr Crean was then told by the journalist, ‘But they still don’t know what your tax policy is.’ Mr Crean replied, ‘We’ll be announcing that very soon and I think people will be very impressed with it.’ They were not. Labor’s tax policy has since been withdrawn, as have other large elements of their policy. Labor yet again are without a tax policy at this point in time.
Following the election Mr Swan commented on how things needed to change in Labor’s approach. On 31 October he said: ‘It is a great challenge. I am going to be knocking on a lot of doors over the next 12 months as we flesh out Labor’s new economic growth agenda. In fact, I think I will probably need a new fitness regime to cope with all of those boardroom lunches and dinners. I think it is going to be a bit of a chicken salad offensive, actually. I have to learn out there and we are going to take our time to flesh out our new economic growth agenda for this country.’ So a chicken salad offensive is at the heart of Labor’s new process of consultation. He added, ‘I and other members of the shadow cabinet will be moving around the boardrooms, the lunch rooms and the community to get their feedback so that we can put forward a fresh agenda for the future.’ So there is lots of moving, talking and listening, but will it produce any policy? I would not expect it any time soon.
Only yesterday Mr Beazley said that his approach will be to ‘hold them to account’. He said: ‘ You subject them-the government-to questions and you put up, as the election approaches, a few decent alternatives. From the Labor Party’s point of view we are going to find much more focus on the sorts of questions that we ask.’ It sends a chill down my spine! That is much the same as what Mr Beazley said in July 2000. He said, ‘Well, accountability is critical for our parliamentary process, so you actually have a role to be carping. But, carping, yeah, there is a role for that, unfortunately.’ He then went on to say: ‘You have to present an alternative vision’-the same words as he used yesterday-‘but only as you get closer to an election.’ Again, policy? No. It is a case of waiting, waiting, waiting. At the death knock, just before the election, if we are lucky we will get something from those opposite. We have seen this play book before and we know what to expect.
International tax is not a topic which enlivens the hearts and imaginations of the average Australian, but it is a vital issue which requires very careful consideration and ongoing monitoring to ensure that arrangements continue to operate as intended. Taxation can affect decisions about the location of foreign investment, as Senator Murray indicated. Australia is a great location to invest. In large part that is due to the government’s strong economic management during the past nine years under the leadership of the Prime Minister and the Treasurer.
Senator Sherry-What has happened to economic growth in the last nine years?
Senator FIFIELD-This government has delivered strong growth. This government has delivered strong growth, budget surpluses, low interest rates and the lowest levels of unemployment in over 20 years. Those facts do not change despite the interjections opposite. Political and economic stability are important issues for determining investment, but we also need an international tax system which makes the most of Australia’s economic potential. Taxation can affect decisions about direct foreign investment, but it is a more significant factor for portfolio flows of capital. Taxation is likely to become increasingly important to decision making as world markets continue to integrate and liberalise.
The bill we are considering today relates particularly to managed funds. Managed funds are sensitive to tax on the income flowing to investors, and for this reason it is important to get Australia’s tax arrangements right. This bill focuses on making the Australian managed funds industry more attractive to foreign clients. Australia’s managed funds industry is robust, helped by a strong and stable economic performance, an educated work force, low-cost infrastructure, world-class regulatory systems and highly developed financial markets.
This bill makes changes in schedules 1 and 2 which are designed to reduce taxation impediments to the further growth of managed funds. These changes will allow Australian managed funds to become more internationally competitive, increasing their attractiveness to nonresidents. Under current capital gains tax arrangements, nonresidents investing in assets through an Australian managed fund may be taxed more heavily than if they invested directly in those assets or through a foreign fund. Measures in this bill will eliminate those distortions. Complementary measures will reduce the taxation on foreign-source conduit income earned by nonresidents by interposed Australian managed funds.
In schedule 3 the bill also amends interest withholding tax arrangements to bring them up to date with recent changes to the debt equity rules. These changes will ensure that the current IWT exemptions are consistent with the way that companies raise finance. The changes will also remove tax impediments to the restructuring of foreign bank operations in Australia from subsidiary to branch structure.
The CGT measures in schedule 1 of this bill apply to capital gains and losses made on or after the date on which the bill receives royal assent. The tax treaty measures in schedule 2 apply from the beginning of the year of income in which this bill receives royal assent. The IWT measures in schedule 3 apply to interest paid on debt interests issued on or after royal assent, to payments made on the relevant capital instruments issued on or after royal assent and to debentures or debt interests issued after 18 June 1993 which are transferred on or after royal assent.
As I noted previously, the business community has provided invaluable input to the preparation of this bill and we appreciate the contribution made by the business community in developing the international tax reform measures which are being progressively introduced. The bill again demonstrates that this government will listen to business and work with it to create a better environment for doing business. I commend the bill to the Senate.