Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
 Download Current HansardDownload Current Hansard    View Or Save XMLView/Save XML

Previous Fragment    Next Fragment
Wednesday, 16 June 2004
Page: 23852

Senator COONAN (Minister for Revenue and Assistant Treasurer) (9:59 AM) —I formally record my thanks to both Senator Sherry and Senator Murray for their efforts in respect of the first of three tranches in the government's push to review and reform international tax arrangements. I now sum up the New International Tax Arrangements Bill 2003, which is the first tranche. In the 2003 budget, the government announced the outcome of a review of international tax arrangements and foreshadowed over 30 initiatives designed to modernise and improve the international competitiveness of our tax system. The bill, which is the second instalment of international tax review legislation, addresses issues facing the superannuation and managed fund industries. With over $500 billion invested in superannuation, which for most Australians represents their second largest asset after the family home, the government wishes to ensure that fund members get the best possible returns.

A substantial part of superannuation fund assets is in foreign investments. Superannuation funds invest around $90 billion offshore, most of which is in foreign shares. Much of this investment is conducted through Australian managed funds, which operate through trust structures. The reforms in this bill will improve the international competitiveness of Australian superannuation funds and managed funds and will improve returns to their investors. Increasing to 10 per cent the threshold for the balanced portfolio exemption under the foreign investment fund rules will reduce the compliance costs of Australian managed funds.

Due to increased globalisation and the growth of the financial services sector, the five per cent threshold is simply no longer sufficient to allow Australian investors to achieve offshore portfolio diversification. Currently, fund managers may sell down interests in non-exempt FIFs to five per cent at year end and reacquire them at the beginning of the new income year, involving, as you would appreciate, significant transaction costs. Investors will now be better able to diversify their offshore investment portfolios. The measures in this bill will give Australian investors increased opportunities from international investment.

The bill also removes unnecessary tax costs on our superannuation funds in relation to their offshore investments. Because superannuation funds currently have a low tax rate, their investment decisions are unlikely to be biased towards the kinds of offshore investment vehicles that the foreign investment fund rules are designed to target. Fund management services and expertise is an active business. It is not the kind of passive asset holding that the foreign investment fund rules are designed to address. The bill will therefore sensibly remove management of funds from the list of non-eligible activities so that investment in a company principally engaged in funds management should no longer be taxed under the foreign investment fund rules. The bill also removes an anomaly and reduces compliance costs for managed funds by extending to widely held unit trusts the interest-withholding tax exemptions currently available to companies.

Finally, the bill also modifies the controlled foreign company rules and implements a measure to prevent the double taxation of royalties in transfer-pricing situations. By sharpening the focus of the foreign investment fund regime, the government's intention is to strip away unnecessary compliance costs currently imposed on managed funds and superannuation funds. These unnecessary costs result in lower returns to Australian investors and make Australian managed funds less competitive with foreign competitors. The government is satisfied that these costs can be reduced without compromising the integrity of the regime as a whole.

During this discussion, the activities of the Senate Economics Legislation Committee were mentioned. I also wish to place on record that I welcome the findings of the Senate Economics Legislation Committee report on the bill, which recommends that the Senate ultimately pass the bill. I thank the committee for its report and for the efforts of its members. I understand from Senator Sherry's remarks that, through the Senate committee process and with the cooperation of Treasury officials, the costing has been unpacked and has now satisfied concerns.

I place on record that the 2003-04 Budget Paper No. 2 showed a net aggregate costing for all the FIF measures of $270 million over the forward estimates and stated that the costing included the new tax treaty with the UK and savings from not proceeding with a measure, which was announced following the Ralph review, to provide franking credits for foreign dividend withholding tax. I understand that the questioning process has enabled some unpacking of the costing. The costs of the measures contained in this bill are not substantial, but costings have been provided for each component part of the review of international tax arrangements when each part is finalised. The committee has certainly played a role in that.

Senator Murray alluded to the work of Treasury officials. I should also record this, because it does not often happen that the consultation process works so extremely well. Treasury's interface with business and their provision of very significant feedback to the government has worked extremely well in the development of these policy responses and legislation. Obviously, it works much better if you can have a policy direction from the government and then have the detail and finetuning built from the ground up. You always end up, in very complex situations, involving in some respects for people who are not close to it mind-bogglingly complex matters where some of the difficulties are identified before the legislation gets to a stage where it is being debated. Involving industry at a much earlier stage in the policy development process I think has really paid dividends.

Certainly it is difficult to think of a better way to develop complex tax legislation. I formally thank Treasury for their sustained efforts and I also note the strong business support for the bill. It again demonstrates that the government has listened and has been responsive to legitimate calls from industry for specific tax reforms to remove unnecessary impediments to business. This cannot be described as some concession to the big end of town. It is absolutely critical when you operate in a global environment that you have a competitive tax system able to be responsive to the needs as identified by business and that the measures in this bill ultimately flow through as assistance for those who have investments in superannuation funds.

I thank the business community, which has played a valuable and constructive role in helping to develop the law through the consultation arrangements. I am very gratified that the Senate, through my colleagues Senators Sherry and Murray, can see the big picture as well as the detail in respect of these bills. I do thank them for their support, and I commend the bill to the Senate.

Question agreed to.

Bill read a second time.