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Economics References Committee
26/04/2018
Commitment to the Senate issued by the Business Council of Australia

BEAVEN, Mr Peter, Chief Financial Officer, BHP

KING, Mr Grant, President, Business Council of Australia

McKEOWN, Mr Alastair, Chief Financial Officer, EnergyAustralia

MOORE, Mr Richard, Chief Financial Officer, MYOB

WELLS, Mr Ian, Chief Financial Officer, Fortescue Metals Group Limited

WESTACOTT, Ms Jennifer, Chief Executive, Business Council of Australia

[14:31]

CHAIR: I welcome our other representatives, who are members of the Business Council of Australia: BHP, EnergyAustralia, MYOB and Fortescue Metals Group Limited. I understand that a representative from BHP would like to make an opening statement. If that's the case, I ask you to keep it as brief as possible, please.

Mr Beaven : Sure. We appreciate the opportunity to appear before the committee here today. As the committee is aware, we are Australia's largest mining company and one of the largest companies on the ASX. For all of the 130 years, our global headquarters have been here in Melbourne. Across Australia, we have substantial positions in iron ore, metallurgical and thermal coal, copper, oil and gas, and our operations employ around 35,000 people across the country. We're proud of the value we generate for Australia. Last year we made $5 billion in payments to the Australian government and over the last 10 years we paid $66 billion in taxes and royalties in Australia. Our effective tax rate in the financial year 2017 was 34½ per cent. When you include royalties, that figure increases to 46.1 per cent. Our total direct economic contribution in Australia, including our payments to suppliers, wages and employee benefits, dividends, taxes and royalties for the financial year 2017 was $20 billion. That's our total economic contribution to the country. All Australians have benefited: regional communities, capital cities, employees, suppliers, governments and shareholders, including the more than 500,000 Australians who directly own shares in our company and the more than one in three people who own shares through their superannuation. Last year we paid $9 billion to suppliers and over $3 billion in wages. I think it's very important to see how much of a contribution we make and where it gets distributed across the community.

Like everyone in this room, BHP want Australia to remain internationally competitive, and we want Australians to enjoy sustainable, high-quality jobs for the long term. Australia has been the economic envy of the world. We have enjoyed an unrivalled period of economic growth and have attracted significant international investment in the process, but the world is changing and we risk being left behind. For example, as others have already said, our company tax rate is higher than the OECD average, and that makes it harder to win investment dollars, because the competition for that capital is global. At BHP, every project in our global pipeline of options competes for capital through our capital allocation framework. This framework sets clear criteria for investment and reflects the reality of all global businesses. Capital will flow to where the investment climate is most attractive. It is as true for our projects in Australia as it is for our projects in any other country. If the Australian corporate tax rate were reduced, it is inevitable that more of our Australian assets would win investment through our capital allocation framework. The link is plain and simple, as is our commitment. We have a diverse set of Australian growth options across every commodity in almost every part of this country. They could support a further $32 billion of potential investment in major projects alone in Australia over the next 10 years. Over and above our already substantial tax payments, these major projects could also generate up to $54 billion in additional taxes and royalties for Australia over a 20 year period, and billions more in wages, payments to suppliers and returns for BHP shareholders.

Members of the audience interjecting—

CHAIR: Order!

Members of the audience interjecting—

CHAIR: Sorry, we can't have that. We will suspend the proceedings at this point.

Proceedings suspended from 14 : 36 to 14 : 40

CHAIR: We will now resume.

Senator PATERSON: Given that the committee has resumed, Chair, it might be an opportunity for you to say something on the record about that disruption.

CHAIR: I note that a protest just occurred. The comment I would make is that it makes the job of this inquiry more difficult, as it has prevented us from proceeding with what we want to do. I acknowledge the strongly held feelings of some people in the community—and some of us may well agree with some of the things that they've said—but it's not helpful for these proceedings.

Mr King : I'm seeking assurance that this does not play in the media. It has nothing to do with the inquiry. Frankly, we have a right to be disappointed that people were allowed to come in who had no purpose other than to—

CHAIR: This is a free country, Mr King. I can't stop individuals from doing what they've done. We've tried to stop the recording. I don't believe it was recorded by Hansard.

Senator KENEALLY: Mr King, can I clarify: are you asking this committee to ask the media not to run footage of that protest?

Mr King : I don't believe that that protest has anything to do with the inquiry.

Senator KENEALLY: Are you asking this committee to ask the media present not to run footage of that protest?

Mr King : I think that to do so would be inconsistent with what you're trying to achieve in the committee.

Senator HUME: Chair, could we have a couple of minutes break to discuss this? I personally found that quite intimidating, having that number of big, burly men in here threatening both witnesses and senators. I think that that was extraordinarily unreasonable, and I would like to request that we have a five-minute break so that we can put ourselves back together.

Senator KENEALLY: I'm happy to proceed. These people have come to give their evidence, and we have already delayed—

Senator HUME: I'm feeling quite intimidated.

Senator Paterson interjecting

Senator KENEALLY: Senator, you can excuse yourself for a moment if you need to go gather yourself, but these people have come—we've already had a delay because of Mr Bragg's phone issues.

Senator Hume interjecting

Senator KENEALLY: I am keen to hear what these people have to say. I don't think we need to have a five-minute break.

Senator WHISH-WILSON: A point of order, Chair: perhaps we need to meet and vote on this. Are you formally moving that we have a five-minute break?

Senator HUME: I'm formally moving that we have a five-minute break so that we can then resume. I think that people probably need to gather their thoughts, gather themselves and maybe take themselves to the bathroom—whatever they choose to do.

CHAIR: I'm happy to proceed, but are you—

Senator HUME: I personally think that we deserve a bit of a break after that. I found that to be a very intimidating event.

Senator KENEALLY: Go take a minute to yourself.

Senator HUME: I think that maybe we need to give the witnesses an option to get themselves together, too. That was extraordinary.

Senator WHISH-WILSON: The more we argue the less chance we have to ask questions. Let's have a break and have a vote on it. If you don't win the vote, then we—

Senator HUME: Do you think we could canvass the opinion of the witnesses, whether they feel like they need a break after that?

Senator KENEALLY: They don't have a vote.

Senator HUME: Certainly their testimony is quite important.

Senator WHISH-WILSON: We will have a vote. We could be back in 10 seconds if we have a vote.

CHAIR: If you insist on that, Senator Hume, we will take a short break to consider what you've put. I encourage everybody to remain where they are whilst we're doing that. The committee is suspended for the moment.

Proceedings suspended from 14 : 43 to 14 : 47

CHAIR: Thank you for indicating your preparedness to proceed at this point.

Senator HUME: Before we proceed, can I please let the witnesses know that, while their request was to ensure that that performance didn't appear on tonight's media, I'm afraid that Senator Keneally has already tweeted it out, so I think that it probably will. I'm very sorry to all the witnesses involved.

Ms Westacott : As one of the people whose personal security and personal names are at risk here, I think that's extremely frustrating.

Mr King : Could I just add—and Ms Westacott shouldn't have to advocate on her own behalf—that to target an individual by name in these proceedings is both, as I understand it, contrary to the rules and, frankly, appalling. And to take advantage of that, I think, is also appalling. I can't say anything other than that. We don't control the media. But I have to say that we are extremely disappointed.

Senator KENEALLY: You understand we live in a free country. People are allowed to protest. And we have a free press.

Mr King : People are allowed to protest and we have a free press, but setting things up—and it is very difficult to conclude anything other than that—is clearly not appropriate. We're far better to spend our time on the inquiry, so we're happy to get back to it.

Senator KENEALLY: I agree.

Mr King : Let's get back to it.

CHAIR: Yes, let's get to the substance of the matter at hand. That's a very good suggestion, Mr King. I'm not quite sure—

Senator HUME: Mr Beaven.

Mr King : Mr Beaven is—

CHAIR: Mr Beaven, have you finished your opening statement? I encourage you to keep it as brief as possible.

Mr Beaven : If the Australian corporate tax rate was reduced, it's inevitable that more of our Australian assets would win investment through our capital allocation framework. The link is plain and simple, as is our commitment. We have a diverse set of Australian growth options, across every commodity in almost every part of this country, that could support a further $32 billion of potential investment in major projects alone in Australia over the next 10 years. Over and above our already substantial tax payments, these major projects could also generate up to $54 billion in additional wages and royalties for Australia over a 20-year period, and billions more in wages payments to suppliers and returns for BHP's shareholders. They could create around 15,000 additional high-paying jobs centred in regional and remote communities. But they compete for investment against every potential project in our entire global growth portfolio and returns to shareholders, and not one single dollar of that $32 billion is currently allocated.

The competition for a project to be allocated capital is intense and it is global. At BHP, we believe that aligning Australia's company tax rate with that of other developed economies would help this nation create and maintain nation-building jobs. It would make it harder for global capital to say no to Australian investments and Australian jobs. This was the basis for our support for the BCA's commitment to the Senate. We believe that the enterprise tax plan sends a powerful signal that Australia is working hard to secure international investment. This is vital for Australia's continued economic growth and our ability to provide every Australian with access to long-term, rewarding employment opportunities. Thank you again for the opportunity.

CHAIR: Thank you, Mr Beaven. If I could just start the questioning here. You have indicated that there are myriad projects that you would consider, big and small. I think it was Mr Mackenzie who indicated that tax cuts would make marginal projects more appealing and that, while much of BHP's $25 billion worth of projects would not be dependent on a tax cut, some would. I am interested in some elaboration on that and in as much detail as you are able to provide.

Mr Beaven : Maybe I can explain how we allocate capital. One of my most important accountabilities is to run the capital allocation framework for BHP. Basically, we allocate capital in a particular order. First of all, we have to look after our business, then we have to look after our existing business, maintenance capital and so on and then we have to look after our balance sheet. We then make a commitment to our shareholders, who are, of course, the providers of capital, to pay out at least 50 per cent of our earnings as a cash dividend. The rest of the capital that is then available goes to compete, and it goes to compete essentially between further investment for growth—projects, if you like—and, of course, additional returns to shareholders or to the balance sheet.

What we do is we gather all of the opportunities across the world—they come from the assets and they come into finance, where I and my team are—and we evaluate those on a like-for-like basis. We run various metrics of return and risk on a like-for-like basis. From that hopper we are able to then pick a batting order; it's a competition. The projects that have the best risk-return profile are the ones that get allocated capital. There is a long list, as you say, across the world and there is a cut-off. The cut-off is those projects below that line or those projects that, on a risk adjusted basis, are worse than additional returns to shareholders.

CHAIR: How many projects on that batting order in Australia become profitable or viable with the 25 per cent?

Mr Beaven : We have over 20 projects in the major category, which is what we talked about here—the $32 billion.

Senator KENEALLY: Could you repeat that? How many?

Mr Beaven : Over 20 individual projects. They are in the submission that we provided you. Then there are myriad other smaller projects, which are in fact over and above that 32, but they go through the same basic process in a slightly different framework. There are some which are stronger, of course, and they will more than likely get capital. They tend to be the smaller projects—what we call, if you recall, brownfields or latent capacity. In other words, you have an existing asset and you are simply adding a small piece of investment and then you can in fact open up the capacity of that entire asset. Those are very capital efficient projects at very high returns. If you cut the tax rate for those smaller projects—they tend to be, unfortunately, smaller projects—it is a marginal benefit. It is a benefit, no doubt. The big issue—

Senator WHISH-WILSON: Mr Beaven—

Mr Beaven : If I may just finish.

Senator WHISH-WILSON: Can I just clarify one thing. Are you just talking about Australian projects here, or are you talking about across all sectors?

Mr Beaven : I am saying we have a global process. It is exactly the same across every asset and it all comes into a central team, which is under my accountability. Then there are other projects, and what you see on that list is the longer dated projects, and they are more marginal. They tend to be, as it turns out, the bigger projects. These are greenfield projects. There is nothing there at the moment. There is a resource and we need to allocate investment to that. So those are projects, understandably, that have been around for a long time, because in the past they haven't had the economics to rise to the top of this list and therefore get capital allocated.

That is the opportunity that we have collectively—and I say 'collectively' in front of us today. There are big projects such as the big versions. We have a smaller debottle-necking version of Olympic Dam, but there is a very large project that can come beyond that, that can double the size, using a different leaching technology, which has been developed by BHP. That could then add a huge amount of investment to Olympic Dam, to South Australia, to Australia. But that project is tough and it is going to need a lot of help from everybody, and we are the primary accountable people to make sure that we do everything we can. Our suppliers are going to have to be part of this. Maybe even our customers have to be part of this. But here is the opportunity for us, for you, to make a difference to that project as well, through this, because it could materially change the economics of that project.

CHAIR: Mr Beaven, I want to again give you the opportunity to tell us, to quantify for us, in as much detail as you can, what sorts of projects become viable under a 25 per cent company tax rate that aren't currently viable.

Mr Beaven : I would say, as I said before, those bigger, longer dated projects, the ones that have bigger capital in front of them. There isn't very much there at the moment, so there is nothing that you can borrow from that has been pre-invested. Those projects are the ones that are on the margin and they are the ones that will benefit the most. This was interesting. I hadn't heard the BCA's comment about the 10 to 15 per cent improvement, but actually that is more or less in the range of where our modelling comes out for the improvement of the economics of our projects. To put it another way, on a US dollar basis, because we have US dollar functional currency, there is a $3 billion to $4 billion reduction in capex. It would be another way of trying to demonstrate the impact of this.

Senator WHISH-WILSON: Can I ask for a point of clarification on that. Perhaps Ms Westacott, you could answer this as well, which is around that 15 to 20 per cent. Sorry, Mr King. Are you talking about a gross 15 to 20 per cent improvement in return on capital or are you talking about improvement to the existing returns? So, if you have got a one per cent marginal return at the moment, are you talking about a 0.15 per cent increase on that? I am just a bit confused.

Mr King : I'll take your question. We give three examples on page 7 of our submission, and I won't go through them because they are all there in writing, but each deals with an agribusiness, a mining and a manufacturing example. In fact, in the mining example, it's not a BHP example; it's not specific. It is just going through the maths. A rate of return that would be 14 per cent would become 16 per cent. So that would be a two per cent increase on 14 or a seventh, or roughly a 15 per cent improvement in the rate of return.

Senator WHISH-WILSON: This is an average across all sorts of different sectors and different companies?

Mr King : We've done analyses in different types of industries, because not all industries are the same. There are other deductions, allowances and expenses and things, but time frame is very important. With long-dated projects, that capital sits there for a long time earning no return, and improvement in the after tax return when they are finally earning, which can be five to 10 years away, is very significant. But the details and the examples are set out in the submission by the BCA.

CHAIR: So, Mr Beaven, you're not able to quantify anything further than what you have already said in terms of your pipeline of projects that become more viable under a 25 per cent tax?

Mr Beaven : We have provided a lot of information on that, certainly in our written submission and as I've discussed here today, you would understand there are a large range of projects and the economics of each of those projects is somewhat unique to that. What I would say is that the majority of that $32 billion—I'm sorry to say this again—but the majority of those projects are those longer dated greenfield-style projects that need the most help. In some cases, a tax cut by and of itself is not necessarily going to be enough but it will make a big difference to those. So we have got accountability to do our part, but what we are offering, I guess, is a fantastic opportunity for us to partner on making this sort of investment to get those sorts of returns, and not just for shareholders. They have to be good enough for shareholders, otherwise the shareholders will not allocate capital. That's a given, and it's a global standard. In the event that we make that investment, you will see the huge benefit that spreads through the entire community, in wages, in suppliers and in taxes, and of course there are the flow-on effects of what happens with those—the wages and all the suppliers and so on. It's a real thing.

Senator KENEALLY: Can I pick up on that: 'It's a real thing.' We've heard a lot of media commentary since Tuesday about how there was a lot of waffle and a lot of jargon and a lot of business terms were thrown around, but not many specifics were offered. We didn't ask for this commitment from the BCA and the signatories. It was given voluntarily. You say, 'It's a real thing.' I suppose what we're trying to nail down is: what can you, BHP, tell us will go ahead if this corporate tax cut comes to pass? Can you look the people of Australia in the eye and say, 'If this corporate tax cut goes ahead, we will do this project. We will employ this many more people' or 'We will raise wages by this much'? What can you give us that is a 'real thing'?

Mr Beaven : Senator, what I can tell you is that these projects have a lot of inputs. One of the largest inputs in terms of the economics of them is whether they win the capital. One of the most important inputs, of course, is tax, and royalties, because we pay 46 per cent of all pre-tax dollars in taxes and royalties. You would understand that is a very material difference to the bottom line. If there is a five per cent cut, clearly that's going to make a big difference, but there are a lot of other things that we—communities, ourselves and yourselves—can do to improve the probabilities and get these things up. It's inevitable. It's mathematical.

Senator KENEALLY: If it's inevitable, surely you can tell us one thing.

Mr Beaven : I have.

Senator WHISH-WILSON: Olympic Dam.

Mr Beaven : Olympic Dam will be improved, as will—

Senator KENEALLY: Improved.

Mr Beaven : Wards Well—all these types of projects, which are greenfields, all need help.

Senator KENEALLY: They need help, but you can't tell us they would necessarily go ahead.

Mr Beaven : It's mathematical. If you improve 46 per cent—

Senator KENEALLY: It's not mathematical—forgive me, it's not—because you've already acknowledged that you have other constraints: you have to return money to shareholders and there are lots of other factors, et cetera.

Mr Beaven : But, Senator, you would understand that, in the event that you improve one of those critical areas, almost half of the pre-tax dollars go in royalties and taxes from our business. When you improve that, you understand perfectly that it's going to make a material difference to that project going forward. I don't think that's hugely controversial.

Senator WHISH-WILSON: I understand it will make a difference, and potentially a material difference, but you use the word 'partner'. Are you asking the Australian taxpayer to subsidise your marginal projects? What we're dealing with here is money that, at the moment, is paid into revenue, which we use to run this country. You're now asking for some of that money to go to your company. I think it's a fair—

Senator KENEALLY: And, by the way, if you forego it, it will be paid for by bracket creep, so it is actually—

Senator WHISH-WILSON: That's a different issue. These aren't standout projects. By your own admission, they're marginal and they need a leg-up. What you are actually asking is for the Australian taxpayer to give your projects a leg-up.

Mr Beaven : No. What we're suggesting is that, if $32 billion were invested, it can create $54 billion. It can create 15,000 jobs. Our jobs in Australia pay, on average, $160,000 a year. They are located in regional areas, mostly—almost all of them. What I'm suggesting, Senator, is that is something that I think is of vital interest to all Australians. Ultimately, these are resources in the ground and we are the custodians of those. Australians own those things. So it's very important that we submit this to you and that we have a discussion around it. It is a collective and we need to get the most out of our resources so that we can create more than 15,000 jobs at $160,000 a year over the construction and the operation, and we can provide $54 billion in taxes and royalties, which in turn can be reinvested, very sensibly, no doubt, by the government in various things that are vital to this country. That's all.

CHAIR: I'd like to very quickly give other representatives here today the opportunity to give us more detail about the impact the 25 per cent corporate tax rate would have on investment and projects becoming viable that wouldn't otherwise be viable. I want people to have that opportunity to provide specifics and detail. So I'll ask EnergyAustralia: are you able to provide some further detail for us?

Mr McKeown : Thanks, Senator, for the question and to the committee for the opportunity to be here today. Before I answer your question I would like to reconfirm our support for the enterprise tax plan, as we consider Australia having a more competitive tax rate as something that's pretty critical for us to generate the investment needed to move to a more clean and modern energy structure. It's very similar to what Mr Beaven said in terms of BHP. EnergyAustralia is owned by China Light and Power, which is a company out of Hong Kong, so we're part of a wider global group, and so, I guess, similar, in the sense that any of our capital proposals have to ultimately get approved by China Light and Power, so we are competing with proposals and other capital projects whether they be in mainland China or Hong Kong or India, some of which have more preferential tax rates than Australia. So that's the challenge for us—to try to make our projects more competitive. We have a number of projects that we're looking at here in Australia, from pumped hydro in South Australia to new gas investment in New South Wales as well as battery and demand response. We're trying to look at a range of projects that really help towards integrating more renewables into the energy system in the future.

Again, these projects are not as clear-cut as you might like them to be; hence, when we look at investment and returns on capital, tax is a major part. So when we do look at how the economics play out, a lower tax rate would obviously feed through into better economics, which give us a greater chance of getting those projects approved, ultimately, and sanctioned.

Again, reiterating some of the comments that have been made before, if the projects all were to go ahead, it's probably a bit over a thousand jobs in Australia that would be created. Many of those are long-term, permanent jobs. We see that as a great opportunity, not only for our own people but obviously for new investment in regional Australia, largely. Hence, I come back to the point that, really, tax is one of those factors that has quite a big impact on the returns from the project.

CHAIR: So are those thousand jobs dependent on a cut to the corporate tax rate to 25 per cent?

Mr McKeown : A thousand jobs relates to: if we were to progress with all those projects.

CHAIR: Which may or may not progress, in any case. So what I'm asking is: which are the ones that are contingent?

Mr McKeown : At this stage, we're looking at a lot of the projects. As I say, tax is one of those factors; it's not the only factor that would go into looking at the overall economics. But, clearly, the lower tax rate does improve the overall economics of these projects.

CHAIR: I'm going to ask a representative from Fortescue, Mr Wells.

Mr Wells : Good afternoon, everyone, and thanks very much—

CHAIR: Very quickly: have you got any specifics? What are the jobs or projects that are contingent upon the 25 per cent?

Mr Wells : We've got a mine extension project which is currently in feasibility, which is a $1 billion to $1.5 billion project which will add about 1,900 jobs through construction, and 800. It's important to note that it's not about what's happening now. We take 20-year decisions. That feasibility study will be considered by the board, and the extent to which after-tax cash flows are better than they would otherwise be—that goes to that investment decision. So it makes it easier to say yes. That is not a marginal project. It will more than likely go ahead. But it's really important that we have the investment underlying business where we know what's happening in tax and we've got the consistency of the application as well, to have the confidence to make a decision about a 20-year investment and 600 people being employed over a seriously long period of time.

CHAIR: Mr Wells, your company's gone a step further than other companies, and, on your behalf, Mr Forrest has, according to the media, given commitments that the company will reinvest every dollar saved from the Turnbull government's full company tax cuts back into job creation and expanding its operations. Are these reports accurate?

Mr Wells : There are two points in that. One is that Fortescue have been consistently wanting to support tax transparency and also an efficient tax regime. So this is a perfect extension of that, and, quite publicly, we're about delivering value to our shareholders and stakeholders through reinvesting back into our existing business—investing in growth; investing in communities; investing in all of our stakeholders. So this investment is important not just for Fortescue as the company but also the communities we work in and the multiplier effect. Whilst we can focus on a year or a particular dollar, the multiplier effect is massive.

CHAIR: I'm asking: do you stand by those media reports? I'll repeat it. The commitment is to reinvest every dollar saved from the Turnbull government's full company tax cuts into job creation and expanding operations.

Mr Wells : We are very public in terms of our capital allocation, and that capital allocation is to reinvest in the business. So if that reinvestment delivers growth and wages, which clearly it will, that is correct.

CHAIR: Every dollar?

Mr Wells : Every dollar.

CHAIR: That's interesting. Was this decision disclosed to the ASX before Mr Forrest gave that commitment?

Mr Wells : Clearly not. In terms of disclosure to the ASX, as I said, our publicly disclosed approach to capital allocation is to reinvest in the business.

CHAIR: But not every dollar? I'm presuming—

Mr Wells : That's a media comment.

CHAIR: I think it's a quote from Mr Forrest directly. That's what I was asking: is that quote correct?

Mr Wells : That's consistent with our approach to capital allocation, which is to reinvest in the business.

CHAIR: My question is: was that commitment to reinvest every dollar disclosed to the ASX prior to the commitment?

Mr Wells : No, I don't believe it was.

CHAIR: Is there any barrier preventing other companies from making a similar commitment?

Mr Wells : I can't really commit to other companies other than to be consistent with the way Fortescue approaches it, in that we're a values based company and we do what we say we're going to do. We've consistently done that.

CHAIR: Can you tell me why, in giving that commitment to certain crossbenchers, you didn't include issues like wages or levels of employment?

Mr Wells : As the other people have said, ultimately it boils down to the earnings a company is going to make over a period of time. If you can tell me what the iron ore price is going to be, there are any number of sensitivities in relation to what's going to happen in the future. We give guidance to the market, if you like. We've given guidance for this financial year. Generally anywhere from nine months out we give guidance to the market on those expectations. That's the best we can do. We keep the market updated on the things we know about. If we don't know something we obviously can't give guidance because it wouldn't be correct.

CHAIR: The decision to reinvest every dollar—is that a decision taken at the board level?

Mr Wells : Yes. Mr Forrest is our chairman. Again, getting back to our stated policy of reinvesting in the business, that's clearly a board mandated strategy, and that's what we say to the market. As I said, we're a values based company and we do what we say we're going to do.

Senator WHISH-WILSON: Do you not pay any dividends at all at the moment?

Mr Wells : Our policy is that 50 per cent of after-tax cash flows pay dividends. The rest is reinvested in the business.

Senator WHISH-WILSON: Just as a follow-up question on that, it's been put to me that all Australian shareholders will have their franking credits changed if this tax cut from 30 to 25 per cent goes through. There might be an expectation that some of that money be used to pay higher dividends to compensate Australian shareholders. You don't believe your shareholders would have an issue with that?

Mr Wells : Ultimately our job as custodians of shareholders' funds is to get the best return on capital that we can. There will be any number of things that go into that, whether that's the underlying business environment or reinvestment—at the end of the day, the after-tax cash flows that we earn and reinvest or provide to shareholders. Shareholders can only make money one of two ways.

Senator WHISH-WILSON: According to share price or through dividends.

Mr Wells : They either get a dividend or the share price goes up.

Senator WHISH-WILSON: For all growth investors they're not going to care about the dividend, I suppose, and it won't affect your share price. But if you lose your shareholder mix because you're going to have a lower income payout in the future, that's going to affect your share price as well.

Mr Wells : That does change. Again, we all have challenges in dealing with the market because an investor is buying your stock for a particular reason, and generally it's either, as you would know, growth or yield. No matter which side of the fence you sit on, shareholder want more of either, both or all, and they want it now. Share prices move according to what's happening on a daily basis. So our constant challenge is to take long-term decisions and deliver value to shareholders sustainably and consistently over time.

CHAIR: How does that fifty-fifty decision stand if you're committing to reinvest every dollar back into job creation and expanding operations?

Mr Wells : It's a good question. With any investment decision or dividend decision—our stated policy is 50 per cent to 80 per cent, in actual fact. Part of that is there are different cycles you go through. We're a very young company. We're celebrating our 15th year this year. We've been in production for 10 years, and tomorrow we'll celebrate one billion tons. We've just come out of an investment cycle. We've spent US$22 billion, so that's obviously incrementally more Australian dollars. We've been paying significant tax and contributing to our communities for all of that period of time. Decisions on capital allocation are specific to that point in time, but, given the statements that our chairman has made, clearly that will go into that decision on the balance of reinvestment back into the business versus dividends.

CHAIR: So did Mr Forrest break ASX rules by making that pronouncement about reinvesting every dollar?

Mr Wells : No, I don't think so. I think it's consistent with our capital allocation. As I said, going back to our commitment to reinvesting back in the business and shareholder returns and getting that balance right, at the end of the day, cash is fungible in how it balances up.

CHAIR: So if you're saying it's consistent with what your previous policy was, how are you making any commitment to the crossbenches that it's different? You can't have it both ways, Mr Wells.

Mr Wells : I'm not sure—

CHAIR: If you're saying—

Senator PATERSON: They'll have more to reinvest if the company tax rate is lower.

CHAIR: If you're saying that Mr Forrest didn't break the rules and that his announcement is consistent with your previously stated position, then what is the extent of the commitment that you have given about reinvesting every dollar? What does that mean?

Senator KENEALLY: Is it every dollar? Or is it every dollar that you don't pay out in dividends?

Mr Wells : As you've articulated, the quote is 'every dollar of the tax cut'. So if the tax cut is $50 million to Fortescue, that gets reinvested back into the business.

Senator PATERSON: Chair, I just note that we're an hour and 20 minutes into this session, and I don't think any coalition or crossbench senators have asked any questions yet, only Labor and Greens senators. I wonder if we could share the call around?

CHAIR: Yes, I will do that. I will just finish off with MYOB, just for the sake of being even-handed, and give Mr Moore an opportunity to provide us with more detail—in as great a detail as you can—of what projects in Australia become viable under a 25 per cent corporate tax rate that wouldn't otherwise be viable under 30 per cent.

Mr Moore : Thank you, Chair, and thank you, Senate committee, for the opportunity to come today. We are an intellectual property business, so when we invest, we invest in people. The nature of software development is that most of it is in people's heads before it gets written into code. We put an example in our response to the written questions on notice that said if we were subject to a 25 per cent tax rate on our 2017 results, we would be able to give the same return to our shareholders after tax with a $5 million lower pre-tax profit. Effectively what that means is we would reinvest that $5 million into hiring more team members, whether they be software developers, partner managers or whatever that work with all of our SME and accountant clients across Australia and New Zealand. Effectively, that would grow our business and our shareholders would get the same returns as they would have done through their dividends and our after-tax returns.

CHAIR: Your submission says that you would hire 50 more software developers in Australia. Is that your commitment?

Mr Moore : If we were to be in the same position as we were at the end of 2017, and the tax savings had saved the business $5 million, then that would allow us to hire roughly 50 software developers. They earn about $100,000 each. That's how we would see this playing out for our business.

CHAIR: All right.

Senator HUME: I asked three questions of each of our witnesses—Qantas, Woolworths, JBS and Origin—on Tuesday, so I'm going to ask each company today the same three questions. Some of the answers you probably have already touched on. If you could just keep them quite high level for the sake of pace, that's appropriate. I will start with MYOB: how do you think your company is going to benefit from the full implementation of the enterprise tax plan? How will your employees benefit from a lower corporate tax rate? How might you pass on those benefits, or will you pass on those benefits, to other businesses in your networks, such as contractors and suppliers?

Mr Moore : Our business would benefit similarly to what you've already heard from the other businesses today. Individual projects that have to hit a specific return on capital, some of those that aren't making those returns today would make those returns and would get signed off within our business for investment. The second part is you need cash to fund those investments. Our cash opportunity would increase because we're paying less cash tax, so, similar to the example I gave, we would have $5 million more based on our 2017 results in order to reinvest that back into the business, which would fund those incremental projects. The third thing that MYOB would benefit from is just the broader boost to the Australian economy. We provide solutions to more than one million SMEs and accountants in Australia and New Zealand, and they are, like us, very dependent on the economic conditions that are prevalent at the time. If those economic conditions improve, as we expect they would with a company tax cut, that will benefit us because we'll have more SMEs; they will be more productive and more profitable and need more of our services.

In terms of how our existing employees benefit, there are two sides to that. So (1) is if we're hiring more software developers, as an example. That's quite a small market in Australia. There are not a lot of available software developers, and we have a very strong tech sector here, especially in Melbourne. We have around 250 software developers in Melbourne. We're adding to that regularly, and we're have stiff competition from our local tech competitors for those software developers. If we went to the market to try to find another 50, I have no doubt that would drive wage inflation across the software development groups. And (2) is that part of our annual process in our business, when we look at wages, is that we benchmark every role in the organisation against what the market is paying for that role. So in that case, clearly those software development roles from a market standpoint would be more expensive, so our internal team members would automatically get an increase in their salary to bring them into a reasonable range compared to the market. So from a purely procedural standpoint, our team members would benefit, and, more broadly, like I answered the first question, if we see the upside in the economy, I would imagine all of our team members will benefit from that.

Senator HUME: And, finally, what about contractors and suppliers?

Mr Moore : It's a similar answer, really. In dealing with a million SMEs across Australia and New Zealand we are very closely linked to lots of small business. A lot of our contracts are with those small businesses. If we're more successful, we will be investing more, we will be requesting more from them. We do a twice-yearly survey of small business in Australia, and last year we asked the small businesses whether they felt they would benefit from the corporate tax reductions being more broadly applied across all business. More than 60 per cent came back and said, 'Yes, we believe our business will be better off if those corporate tax reductions are applied across the entire business community.' That's because they see themselves as part of an ecosystem, as part of a much broader economy, and that for them to succeed in the long run then, ultimately, big business needs to be investing to improve their potential outcomes.

Senator HUME: So it's less trickle-down economics, and more a flow-through effect?

Mr Moore : Exactly.

Senator HUME: Mr Beavan?

Mr Beaven : I think we've covered a lot, but just to quickly recap: in terms of the company benefit, obviously we would have more capital to invest. Alongside that, and in addition to that, obviously the economics of the opportunities would improve and, therefore, we have, for shareholders, an opportunity to invest inevitably a lot more than that $32 billion.

For the employees, as we said, there will be new roles for people outside the industry. For existing employees, of course there will be a tightening labour market, as we saw a couple of years ago, when there was a lot more investment. We know exactly what happened to the labour market, and there is no reason why that wouldn't happen again, because it's how the market works. Everybody would benefit from that, whether they are existing employees or new employees. Then there are always career opportunities.

I think it relates to the third point, which is about suppliers. We've spoken about the huge impact—for every dollar that we create, one goes to shareholders, almost 2½ go to government, and then more or less three go to suppliers. The interesting thing for me is that suppliers are the folks who are directly part of the projects and operations, but there is another thing which I think is very important in this country, insofar as we are going to have to invest not just in projects but in technology, because the world is changing. In our area, our technology is leaching, automation and so on. We have created an excellent mining services industry here which has exported very efficiently and effectively elsewhere in the world. We need to keep investing in that, but there is a basis of that—that is, the big companies with the sites and the problems, if you like, they are solving. Once they solve those problems, they can then take those for export. I was living and working in Chile, where we did exactly the same thing. It worked very well, but it needs the platform of original investment for this to work.

Mr McKeown : As I said before briefly, from a project point of view lower tax would definitely drive the economics of the project, so the improving economics would give us a greater opportunity to get some of the new energy projects up and running, which the country badly needs. On high outflows through to employees, there are a number of points which, in fairness, have been discussed before—that is, creation of jobs through new projects. We've said there are approximately a thousand jobs if we did all of the projects, many of those in regional parts of Australia. As well as that, within our existing employee base with new projects and growth in the business come new opportunities for existing employees—upskilling, improving productivity, which, as we've said, would lead to wage inflation. The most obvious point is affordability. A lower tax rate gives us more ability to pay higher wages. The wage bill for EnergyAustralia is quite a significant proportion of our operating expenses, hence any sort of increase in affordability can flow through to higher wages. We have a track record over the last number of years of above average or above inflation pay increases. We've also closed the gender pay gap earlier on this year. That's a track record we're very proud of, and we'd like to continue that. A higher level of affordability via lower tax would allow us to continue that trend into the future. Your last point was around suppliers. Over 95 per cent of the expenditure we incur stays within Australia, therefore the additional investment would stay within Australia and support those contractors and suppliers.

Mr Wells : I think the whole after-tax cash flow thing has been done to death, but we make the point that the global or international competitiveness of the Australian tax regime in general is critically important. Fortescue's expansion was funded almost entirely from offshore capital markets. There isn't enough money with Australian banks to fund the $22 billion or the most recent $10 billion expansion Fortescue has done. If investment is about growth, access to capital is critically important as well. It's an important point. ANZ bank, for example, could lend us maybe $200 million. Putting that into the context of the major expansions companies have to do, you have to access offshore markets. Global investors want to invest in competitive countries.

Senator HUME: That contradicts entirely the testimony we heard today from a think tank, Per Capita, which is extraordinary, but I think you know; you're in the business.

Mr Wells : I'm just telling you how it is in the real world. On employees, training, development and jobs, if you think about the investment cycle we've been through in the Pilbara, there was complete resetting of wage levels. Those wage levels have not gone down; they were reset. There's no reason why that next investment cycle is not driven by a change in tax regime. We know the Pilbara is an interesting microcosm of the investment cycle, and that has the potential to occur all across Australia rather than just in Western Australia. Fortescue is another great example of the impact upon local communities. This is more than a trickle effect; this is a multiplier, where you have employees, contractors, suppliers, communities, Indigenous Australians—the things Fortescue does will continue to occur. That's how we see this playing out for us as an organisation and the broader Australian economy. With respect to continuous disclosure, we're talking about, first of all, a future event. Fortescue takes its continuous disclosure obligations very seriously, as do all companies. I state for the record that if there were a change and a requirement to disclose that to the market, we would do it at that point in time.

Senator HUME: Thank you, Mr Wells. I think we've had very consistent answers from all witnesses.

CHAIR: I understand from the secretariat that Mr Bragg is now available.

Senator HUME: Are you letting these witnesses go?

CHAIR: No, I think it's important for us to speak to Mr Bragg at this point, then unfortunately there will probably be other questions of the companies.

Senator PATERSON: I certainly have questions.

CHAIR: At some point we were planning to have a break in any case, so I suggest we now break for 10 minutes to allow Mr Bragg to come online.

Proceedings sus pended from 15:31 to 15:42