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Wednesday, 18 June 2008
Page: 2737


Senator CHRIS EVANS (Minister for Immigration and Citizenship) (4:22 PM) —I move:

That these bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows—

TAX LAWS AMENDMENT (ELECTION COMMITMENTS NO. 1) BILL 2008

This bill delivers on a very important election commitment to slash the withholding tax rate that applies to non-resident investors.

This bill represents the final stage of the implementation of this election commitment which was first announced in last year’s budget reply by the now Prime Minister.

Schedule 1 to this bill replaces the existing 30 per cent non-final withholding tax regime applying to certain distributions from Australian managed investment trusts to foreign investors with a new withholding tax regime.

The importance of this measure to Australia’s future prosperity should not be underestimated. This measure is a key plank of the government’s aim to make Australia a financial services hub. 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 huge potential to contribute even more to the Australian economy. The finance and insurance sectors currently contribute more than 7 per cent of GDP. This makes it the third largest industry in the Australian economy. The sector employs around 4 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 onshore managed fund market in the world with assets worth approximately $1.4 trillion under management, primarily due to the compulsory superannuation introduced by the Keating government.

This puts Australia in a uniquely fortunate position to become a financial hub and export financial services to the world.

Due to the huge size of funds under management, Australia has developed a number of natural advantages in funds management.

Australia has built up a good reputation in funds management with a well respected and experienced regulatory regime, a skilled workforce, and being strategically placed in the Asian time zone.

However, despite all these advantages, incredibly less than 3 per cent of the fees derived by Australian managed 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 United States and the United Kingdom.

It is clear to this government and to the industry that the financial services sector has an immense untapped potential for growth particularly within the Asian region.

The domestic market has grown by more than 460 per cent since 1992 and the pool of funds is forecast to grow to $2.5 trillion by 2015, and the growth of funds under management in Asia is expected to grow significantly.

With Asian economies booming and the growing middle classes in China and India looking for investment opportunities Australian funds are well placed to manage their money.

An 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 finance sector increased gradually from its current level of 3 per cent to 10 per cent by 2010, exports by the sector would be $3.3 billion higher by 2010, Australia’s GDP would be $1.9 billion above ‘business as usual’ levels by 2010, and there would be an extra 25,000 jobs in the economy, including 3,500 in the finance sector.

However, the current high 30 per cent withholding tax rate, which was imposed by the former government, prevents Australian managed funds from attracting foreign investment.

Reducing the withholding tax rate will substantially improve the competitiveness of Australian managed funds and help Australia realise its potential and boost financial services exports.

This 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.

I do not pretend that Australia will become a London or New York, but we can build on our solid foundations in the industry and become an Asian financial services hub and compete effectively with the likes of Singapore, Hong Kong and Dubai. And we can grow an Australian industry to ensure that our bright and skilled young people can have world class jobs in Australia and are not forced to go overseas to gain valuable experience.

The new withholding tax regime will apply predominantly to distributions by Australian funds of Australian source rental income and capital gains but also to income not associated with land such as some foreign exchange gains or gains from traditional securities. The current flow through treatment for foreign source income will continue.

The rate of withholding tax will depend on the residency of the foreign investor. Residents of countries with 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. This rate goes beyond the government’s election commitment and ensures that Australia’s funds management industry is well placed to attract and retain future foreign investment, assisting it to reach its full potential in a growth sector.

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 final withholding tax. This enhances the integrity of the measure and sends a clear signal of the government’s non-tolerance of international tax evasion and avoidance.

Efforts to prevent international tax evasion are substantially enhanced by the ability of countries to exchange information relevant 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 to this 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 this year that these awards would be tax exempt and this bill delivers on that commitment.

The Prime Minister’s Literary Awards provide an annual cash prize of $100,000 in each of two literary award categories, for a published fiction book and a published non-fiction book.

Whether the award is assessable depends on the recipient’s circumstances and, in particular, the recipient’s assessable income.

To ensure that award winners receive the full benefit of this award, this measure will ensure that the award is tax exempt.

Full details of the measures in this bill are contained in the explanatory memorandum.


INCOME TAX (MANAGED INVESTMENT TRUST WITHHOLDING TAX) BILL 2008

This bill sets out the other rates of tax that apply to residents of information exchange countries for the second and later income years. Such foreign investors will be subject to tax at the rate of 15 per cent for the second income year of the measure following royal assent and 7.5 per cent for later income years.

This is a final rate of tax, with no provision to claim deductions for expenses.

This bill also imposes a 30 per cent final withholding tax on residents of countries with which Australia does not have effective exchange of information, with application from the first income year of the new regime.

Full details of this bill are contained in the explanatory memorandum already presented.


INCOME TAX (MANAGED INVESTMENT TRUST TRANSITIONAL) BILL 2008

This bill sets out the transitional rate of tax that applies to residents of countries with which Australia has effective exchange of information on tax matters for the first income year of the new withholding tax regime. Such foreign investors will be subject to tax at 22.5 per cent on their distributions from Australian managed funds but will be eligible to claim deductions for expenses associated with their investment.

This is an important step in assisting investors to transition from the current non-final withholding tax regime to the new final withholding tax regime.

Full details of this bill are contained in the explanatory memorandum already presented.


COMMONWEALTH SECURITIES AND INVESTMENT LEGISLATION AMENDMENT BILL 2008

The bill will strengthen the efficient operation of the Treasury Bond market by increasing Treasury Bond issuance and extending the collateral accepted for securities lending of these bonds.

It also provides for the safe investment of the proceeds of increased issuance in conjunction with management of the Government’s cash balances, using a wider range of high quality investment instruments than at present.

These measures will help maintain the role played by Treasury Bonds in the smooth functioning of Australia’s financial markets.

Issuance of Treasury Bonds

The Government’s commitment to strong fiscal discipline means that there is no need to issue debt securities to finance spending.

However, a liquid Treasury Bond market plays an important role in the Australian financial market.

The Treasury Bond and Treasury Bond futures markets are used in the pricing and hedging of a wide range of financial instruments and in the management of interest rate risks by market participants.

They thereby contribute to a lower cost of capital in Australia.

Without these markets, the financial system would also be less diverse and less resilient to the shocks that can emerge from time to time.

This has been demonstrated over recent months, when these markets provided important anchors for Australia’s financial system as it responded to the impact of credit and liquidity concerns sparked off by the sub-prime housing crisis in the United States.

The Government is committed to ensuring that the Treasury Bond market continues to operate effectively and therefore play this important role in the Australian financial market.

Following consultations with market participants about the adequacy of the volume of Treasury Bonds on issue, the Government has decided to increase Treasury Bond issuance.

The volume of fixed coupon Treasury Bonds on issue is currently around $50 billion.

It has been around this level for the past five years.

Other Australian financial markets have grown substantially over this period, as has the size of the Australian economy.

Reflecting these trends, the demand for Treasury Bonds has also grown.

Over recent months, demand for the bonds has intensified due to the strength of the Australian economy and exchange rate, together with global credit concerns that have increased the demand for high quality securities.

As a result, the Treasury Bonds available on issue have become more tightly held and it has become more difficult for dealers to obtain some lines of stock and maintain an active market in them.

Some increase in their issuance is needed for the market to continue to operate effectively.

This bill provides a new standing authority for borrowing by the issue of Commonwealth Government securities, subject to a limit on the total volume of securities on issue at any time not exceeding $75 billion.

This will allow an increase in the volume of fixed coupon Treasury Bonds on issue by around $25 billion over their current level.

The amount and timing of future issuance will depend on market needs.

In 2008-09 the Government will add around $5 billion to the Treasury Bond issuance of $5.3 billion that was already planned and detailed in the 2008-09 Budget.

The additional issuance will be targeted at bond lines that are in the shortest supply in the market.

The Government will continue to monitor market conditions to determine whether further issuance is required.

Any future increases within the overall $75 billion ceiling will be announced by the Government and implemented by a direction tabled in both Houses of Parliament.

The Government’s decision to increase Treasury Bond issuance at this time is consistent with the decision of the previous government, announced in the 2003-04 Budget, to maintain the market for Commonwealth Government securities.

In announcing that decision, the previous government noted that this would entail ensuring sufficient securities remain on issue to support the Treasury bond futures market.

The increased issuance of Treasury Bonds will not adversely affect the Government’s overall financial position since the increase in bonds on issue will be offset by an increase in financial assets on the Government’s balance sheet from the proceeds of the additional issuance.

The returns on these assets will also offset the interest costs from the increased issuance.

Investment

The proceeds from the increased issuance will be managed and invested by the Australian Office of Financial Management in conjunction with its present cash management activities.

The Office has experience and expertise in managing fixed interest financial assets.

At present the Office invests surplus Commonwealth cash in term deposits with the Reserve Bank of Australia.

The bill will extend the range of eligible investments that the Treasurer can make under the Financial Management and Accountability Act to include investment grade debt securities, and provide for the Treasurer to give directions to delegates on classes of authorised investments and matters of risk and return.

However, the bill provides that the Treasurer must not give a direction that has the purpose, or is likely to have the effect, of requiring delegates to invest in a particular company, business or entity.

This is to ensure that investment decisions are based on sound financial criteria.

Securities lending

The Australian Office of Financial Management operates a securities lending facility to facilitate the efficient operation of the Treasury Bond market.

This facility allows financial market participants to borrow particular Treasury Bonds for short periods when they are not readily available from other sources.

It thereby helps bond market intermediaries to trade and make two-way prices for all Treasury Bonds. Collateral is required, and a fee is charged.

Currently, when seeking to borrow, other CGS is required as collateral.

This has constrained access to the facility when such securities have been in short supply.

Following consultations with financial market participants the Government has decided to allow a wider range of collateral to be accepted by the facility.

At present, the securities lending facility operates using the Treasurer’s investment powers under the Financial Management and Accountability Act.

The bill provides a separate authority for the Treasurer to enter into securities lending arrangements for the loan of CGS.

The bill requires that collateral must be received for any securities lending and lists collateral that may be accepted, including cash and investment grade securities.

The bill requires the Treasurer to give a direction on the kinds of collateral that may be taken from within the categories listed in the bill.

The list is sufficiently wide to cover the same assets as the Reserve Bank of Australia currently accepts as collateral in its market operations.

Conclusion

These various measures will strengthen the markets for Treasury Bonds and the futures contracts that depend on them.

They will thereby contribute to the effectiveness and efficiency of Australia’s financial markets more broadly and to the resilience and robustness of our financial system.

These measures demonstrate the Government’s determination to ensure the efficient operation of Australia’s financial markets.

Further details on the changes outlined in the bill are contained in the explanatory memorandum.

Debate (on motion by Senator Chris Evans) adjourned.

Ordered that the Commonwealth Securities and Investment Legislation Amendment Bill 2008 be listed on the Notice Paper as a separate order of the day.