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Finance and Public Administration References Committee
27/04/2016
Outcomes of the 42nd meeting of the Council of Australian Governments

DRUM, Mr Paul Joseph, Head of Policy, CPA Australia Ltd

Committee met at 09:15

CHAIR ( Senator McAllister ): Good morning, everyone. I declare open this public hearing of the Finance and Public Administration References Committee's inquiry into outcomes of the 42nd meeting of the Council of Australian Governments held on 1 April 2016. I welcome you all here today. This is a public hearing, and a Hansard transcript of the proceedings is being made. We are also streaming live via the web, which can be found at www.aph.gov.au.

Before the committee starts taking evidence, I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. The committee prefers all evidence to be given in public, but under the Senate's resolutions witnesses have the right to request to be heard in private session. It is important that witnesses give the committee notice if they intend to ask to give evidence in camera.

On behalf of the committee, I would like to thank all the witnesses appearing today for their cooperation with this inquiry. Information on parliamentary privilege and the protection of witnesses and giving evidence to Senate committees has been provided to you. Mr Drum, CPA Australia have made a submission—submission No. 4. Did you wish to alter or make any amendments to that submission?

Mr Drum : No, thank you. We are happy with what we have provided.

CHAIR: Can I invite you to make a short opening statement, if you wish to do so, and, at the conclusion of your remarks, I will invite members of the committee to ask questions.

Mr Drum : Yes, certainly. Thank you very much. I would like to propose that we take our submission as read, so I do not intend to go over that. But just by way of setting the scene a little, CPA Australia is a member organisation that is over 130 years old. We have over 155,000 members around the world. We have been in Asia for over 60 years in Hong Kong, Singapore and Malaysia. We are an international organisation; we are a member organisation. Our policy development, position taking and presentation is based on the public interest. That is where we have come from with this submission to this very short inquiry.

To the matter of the terms of reference of the inquiry, our comments are limited, as you will see from the submission, to the taxation element. It is fair to say that CPA Australia—our organisation—and I think the community, by and large, would be particularly disappointed with where the tax reform debate has gone. I note that the terms of reference of this particular inquiry are about a specific COAG meeting, and so to expect that this single COAG meeting would be the catalyst or the turning point to bring about a whole lot of holistic change, I think, is expecting too much. Notwithstanding that, it is quite an important meeting in the time life cycle of the events that have been transpiring and rolling out ever since March last year when the Australian government released its Re:think paper.

Out of that process, there was a community expectation that the Commonwealth and the states would work together to look for an outcome that would help frame a better tax system for Australia and that would help address the challenges of the future. We have articulated them. They are well-known from the Intergenerational report: the ageing population, our over-reliance on income taxes at personal and company level, the fact that we are going to have less workers in the future and our under-reliance on taxes on consumption and the inefficient taxes at the state level that should be retired and replaced with more efficient taxes—so our whole tax mix.

This review promised to perhaps address the things that the Henry review into Australia's future tax system did not address. The terms of reference of the AFTS inquiry was limited because it specifically excluded taxes on consumption, or the GST, and taxes on superannuation. So we were presented with this all-embracing review and, optimistically, we have invested—along with many other organisations and businesses—to encourage governments at all levels to take this opportunity and do something that would be very progressive and that would encourage business, be good for jobs in Australia and encourage investment in Australia.

Certainly CPA Australia and I think the community at large would say there has been a bit of a squib on tax reform, and it is at every level. We really need to wait to see the outcome in the federal budget next week, but we were promised a white paper and we were promised packages, and now it seems as though, in a decreasing spiral, we have gone from a root and branch review to items being slowly taken off the table one by one and the states walking away, in absolute terms, from looking at embracing greater taxes on consumption. There are only two states, South Australia and New South Wales, that, to their credit, said, 'Look, we need to look at this more broadly.' Others, we think for ostensibly political reasons, stepped away and said that they did not want to embrace a broader reform agenda of the type that we think everyone basically agrees to in principle; they just do not want to do it.

Those are some of our initial thoughts. I also think a curve ball was chucked into the public arena a couple of days before the COAG, when the Prime Minister mentioned the proposal of discussing the introduction of income taxes at the state level again. I think that might have been news to cabinet; it certainly was news to some of the states. That skewed the whole debate before the meeting happened two days later. Again, from the outside, it did not do much to imbue community confidence in where our governments—our leaders—are taking that particular discussion. I will leave it there and leave some time for questions.

CHAIR: I have a couple of questions to kick off. In your closing remarks you talked us through the process of tax reform and you indicated that the way this last COAG meeting was handled may not have given the community confidence that this debate was being handled well. As Australian parliamentarians, it is hard not to observe that this is a process that is being led by the national government. In your submission to the Re:think tax process you talked about some of the things you would have liked to have seen had there been a thorough national conversation. Your submission speaks, in particular, to issues of modelling and consultation. Can I ask you to tell us about what kinds of consultation you have had, as a key stakeholder, around tax and, in particular, around this proposal for changes to the state income tax role.

Mr Drum : The consultation in general, and then the consultation in particular to state income taxes?

CHAIR: Yes.

Mr Drum : I will answer the questions in reverse. We were not engaged in any discussion on the reintroduction of income taxes at the state level, so that is not something that we have been privy to any discussion on. That is why I think, to us, this was like curve ball—something out of the blue—because it was not something that had been part of the narrative. It had not been something that had been promulgated around to capture people's ideas. Certainly it is not a new idea, and certainly if we look back to Henry, you will see that it is talked about in there. To us it was—if you remember the cartoon strip Larson's The Far Side, it was a Larson's The Far Side moment. It is one thing about income tax sharing, but another to go back to what we have described in our submission—early post Federation or even colonial days—where it is a defragmentation of a model that is working ostensibly well. A lot of people lose sleep over horizontal and vertical imbalance, but we lose less sleep over that. As long as the revenue comes in and pays for the services that Australians expect and need, then that is a pretty fair outcome.

There are arguments about how we cut up the pie and the sharing. We accept all that, and we appreciate that that is worked on year in year out. But certainly to start to defragment the system the way that it was proposed was, I think, a bit of a thought bubble. As our chief executive, Alex Malley, described at the time, it might be a half hour at Penrith that our Prime Minister would like to have had again.

CHAIR: Do you have any direct evidence that the Prime Minister might want to have that half hour back?

Mr Drum : No, I do not. To look at it another way, you might say: is it really too clever by half that it was actually amplifying the fact that the states always have their cap out, that they do not collect enough revenue to pay for the services that they deliver? Also to impress upon the states again, and maybe the broader public, that at least the states are empowered—they have their own taxing powers and so they are first and foremost empowered to structure themselves to collect the revenue that they need to pay for the services that they provide.

That is good on paper, but I do not think that in a competitive situation that is the reality. They have other taxes—stamp duties, payroll taxes, land taxes—all of these taxes. This is a competitive federation. They are all in competition for business, and the fact of the matter is that it is not quite a race to the bottom, but there are limits to what they can do with those taxes. To give them new income taxing powers as well just blurs and muddies the water, and not only for Australians and Australian business. Is a business going to move from one state to another because their income taxes are lower in that state? That could be plausible. What does it mean to offshore investors—how do they interpret all this? There are other countries that have dual income tax systems, and I do not think they are held out as exemplars of good business or good tax policy practice. In fact, it is an anachronism of the Federation.

I think he was trying to impress that point, and that was also a point that a former treasurer, Wayne Swan, made in the Great Hall of this parliament back at the national summit in 2011. He said that the states have their own taxing powers; it is up to them first and foremost to see what they can do with them, and then if we can assist, we can assist. I think it was a reimpression of that point, but I think that was totally lost on most.

CHAIR: You were not consulted, and indeed it is your view that income tax reform of this kind was not part of the national debate prior to the announcement. Since 31 March, when these ideas were first floated, have you been consulted around this proposal or any other tax reform proposal?

Mr Drum : No.

CHAIR: Have you become aware of any modelling or any detailed analysis that underwrote this particular proposal around income taxes?

Mr Drum : No, we are not aware of any modelling.

CHAIR: You have touched on it already, and I think we gather that you think that an income tax role for state governments is certainly not a priority, and may not be a good idea at all. Could you summarise for us the CPA's view about an income tax role for state governments?

Mr Drum : Our view is that income taxes should be collected by the federal government. Then we get to a sharing situation between the states and territories. I think that there is scope to have a broader discussion about the sharing of the income taxes with the states, but for them to create their own income tax rates and perhaps administration in collections—duplications that might go with that—seems totally inappropriate in the 21st century, in what some are calling the Asian century, though it seems to have fallen out of popular use now. We are looking at Australia's international competitiveness in the global economy to defragment and give states their own income-taxing powers. I am not sure whether they have those powers and just choose not to use them. The discussion with the Prime Minister the other day was that he would make space to enable them to do that, so they might even have those powers. I do not know if they totally gave them away back in 1942. I guess that is a technical point. In summary, we do not see it as part of the repertoire of taxes that states should raise.

CHAIR: What impact do you think that proposal would have on international competitiveness?

Mr Drum : Again, to my point before: I think it is confusing nationally and even more confusing internationally. If you are looking to invest in Australia on a more micro level, we have situations where transport companies will register all their vehicles in a particular state or territory because the registrations are lower. We just see it as an amplification of that competitiveness element. Is there an artificiality about it? Potentially. Back when the Rudd government was in power we had the discussion about a lower corporate tax rate for the Northern Territory, and then discussions immediately jumped to setting up a shell company in Darwin ostensibly to operate our business through there and have taxes there. It is like the multinational tax avoidance discussion in a domestic context.

CHAIR: Do you think that it would create a more or less efficient economy?

Mr Drum : We think it would be less efficient. I touched before on the duplication—who is going to collect these taxes? We have been looking to eliminate duplication. We talked about the elimination of inefficient state taxes by replacing with broader taxes collected at the national level. Again, this was swimming right against the stream of our thoughts on what a sensible, appropriate tax reform package for the 21st century would entail.

CHAIR: Finally, I think it is implicit in your answers, but it is a less efficient approach to raising tax. What do you think the impact on growth would be? Do you think it would help fuel growth?

Mr Drum : It really depends on how it was done, what was done and the rates. For a general question with a general answer based on those qualifiers, we think it is antigrowth. We think it would be negative. It would not be positive for growth. The Ken Henry report talked about Australia having 125 taxes, of which 10 taxes collect 90 per cent of the revenue. Are we now going to have another seven or eight taxes, of which 10 per cent are still only collecting 90 per cent of the revenue? It seems to us quite plain that the discussion should be about how we eliminate the 115 inefficient ones to rely more on the 10, eliminate the duplication of collection processes within the states, free up capacity for people to do other, more productive things and simplify the rules to encourage investment into Australia and to encourage businesses to grow. As I said, it seems to be going right against the tenor or the trend of some very clear messaging about what Australia needs if we are going to compete.

CHAIR: Thank you.

Senator McKIM: I have been through the CPA's package and wanted to ask, firstly, what goals the CPA is trying to achieve through that package. Is it simply to stimulate economic growth in Australia, or are there other goals that the CPA may have in mind that are in what some might consider to be in the public interest—for example, reducing greenhouse gas emissions or reducing inequality in our country? Could you talk the committee through that please?

Mr Drum : Sure. Ostensibly, our submission is based on jobs and growth, and, in that, that entails investment both domestic and international investment to make Australia a good place to do business, to set-up head offices, to employ people, to give jobs to our kids. I have two daughters at university and we want to ensure that they have jobs when they come out, good jobs, high-paying jobs, and that their kids do too. The whole tax reform debate is really about setting a framework for generations. There was some heavy lifting done in the Howard-Costello years, but you can see that the impact of that has petered out, if you look at the numbers and the changing consumption patterns and the ageing population. The Intergenerational report problems are quite evident; that that it is running out of steam as a model to raise the revenue that we need. To your question about jobs and growth, if we keep relying on income taxes on a lower base, they obviously have to go up and that is certainly going to have a negative impact on jobs, investment and growth.

Senator McKIM: Did the CPA consider things like levels of inequality in Australia and the capacity of the tax system, potentially, to attach a price to carbon and therefore drive down emissions as it worked through the process of developing its package?

Mr Drum : It is not something that we commented on as part of the rethink paper, no.

Senator McKIM: Is there any process underway within the CPA to consider those broad issues as part of a tax response?

Mr Drum : It is always on the table. At the moment, we seem to be caught in a bit of a whirlpool or a vortex of inertia and we are not expecting that there is going to be an outcome. Our pens are down at the moment and we are waiting to see what happens next week. But, certainly, it is a fertile area for discussion and review, and it is something that needs to be looked at.

Senator McKIM: Thank you.

Senator LUDWIG: I was looking at a doorstop interview by the Prime Minister in respect of this matter. It was on 31 March with Fran Kelly. I want to get your view on this in terms of your experience with the federal government on tax reform. Mr Turnbull said:

… can I tell you there is no increase in tax contemplated here. What we are saying is that we would, this is clearly a constructive offer, this is the biggest single proposal to make, get the Federation right in generations and what we're saying is we would retreat from levy less federal income tax, so we'd retreat several percent perhaps and then the states could levy that tax. Obviously there'd be no additional administration or compliance issues because it would all be managed by the ATO and then they would be responsible for that and given that that would then concentrate their mind …

I will stop there. It embodies a couple of bold ideas but it seems to say you would have the ATO not the state collecting the tax. The states would agree on how much less income tax the federal would collect and how much they would collect through the ATO on a state-by-state basis. You would imagine that that would actually create a burden on the ATO itself to manage that new regime. Notwithstanding the statement that it wouldn't, the real point of all this is that we are in no better position than we would have otherwise been in depending on what the states do—if they continue to do the same. It does not contemplate how that gets distributed back to them either. The real point I am trying to hone in on is: 'the biggest single proposal to make, get the Federation right in generations'. Has this been in the white paper, the previous tax reform, the Sir Ken Henry review? When was this last explored in detail, in your view? I cannot recall it in any great sense.

Mr Drum : You are really answering your own question, as far as I am concerned. I have been a member of CPA Australia for over 37 years. I have been involved in every tax review—not the draft white paper in 1985, but every reviews since then. There is often discussion about the states sharing, but to me it is an academic discussion that is included for completeness to show that we are thinking of all the options rather than something that is being put forward as a silver bullet idea, as a great moment in tax reform. This is not something that had been put out there as something that anyone was seriously contemplating as a silver bullet moment or a eureka moment for tax reform, in my opinion.

Senator LUDWIG: But it could be described as the biggest single proposal to make—

Mr Drum : It could be, but it could also be the biggest single negative proposal that comes out of this review, because we are not in favour of it. Even if the tax office is the collector, as you say, there are still other permutations. We could focus less on the administration. You could say that, at the state and territory levels, there is somebody checking to make sure that they are getting their fair share of the money. There could be some duplication there. You might say, 'The people who are currently administering the grants at the state levels all have a job change, a career opportunity for them.' It just seems to be duplication to us. Our income tax system has one of the 10 taxes that works pretty well. It is part of the 10 that I mentioned before that are collecting 90 per cent of the revenue. Personal income taxes and company income taxes are part of that. To disturb them is not a sensible proposal.

Senator LUDWIG: Do you think that it would get the Federation right in generations to come?

Mr Drum : No, I do not think so. I think we need more national taxes and fewer state taxes, and we need to worry less about horizontal and vertical fiscal imbalance.

Senator LUDWIG: The Prime Minister said:

We have raised it because I don't believe in dealing with the states via a megaphone—

Mind you, this was at a football oval, I think, or at least on the radio. He went on to say:

It has been raised privately and discussed between me and other chief ministers and between the Treasurer, Scott Morrison, and his counterparts and of course between Martin Parkinson the head of Premier and Cabinet and his bureaucratic counterparts.

Have you participated in any discussions with Prime Minister and Cabinet or have they contacted you about proposals such as this in recent history?

Mr Drum : No.

Senator LUDWIG: I would not have expected them to contact me either, but you would have expected at least some dialogue getting out into the broader media. I had not heard of this proposal other than, as you say, in academic discussions for completeness in various iterations of papers in the past. I am now answering my own question, but I was hoping that someone would shed some light on this. It is not something that an outer cabinet minister or an outer minister comes up with and floats as an idea. This is the Prime Minister saying, 'This will solve the Federation issues now and into the future.' You would expect a Prime Minister to have had detailed discussions with state and territory ministers, stakeholders and his cabinet ministers before announcing such a radical proposal.

Mr Drum : I agree. Again, it is an example of a single issue being rolled out. In this case it is one being, not put on the table, but kind of put as an absolute that 'this is what is really going to happen', while other things are being drawn off the table. If there was a broader embracing discussion and a package, and this was an element of that package, then that is quite a different kind of scenario to, as I said, looking at things as single issues one by one. That is where the public has become quite jaundiced about it, and it has become confusing. This whole process from the beginning of Re:think is not delivering on its promise to the people.

Senator LUDWIG: From the concept, which is the press release that the Prime Minister put out—Statement on Federation—on 30 March, the day before the Fran Kelly interview, I quote:

A way to solve this problem would be to give the states and territories a proportion of personal income tax—rather than demanding money from Canberra they would be raising money themselves and be accountable to their own voters.

Then we get a more detailed picture, if I could describe it as that, with Fran Kelly.

Correct me if I am wrong, but the federal government collects the income tax on behalf of the states, effectively, because we are a federation. It is still the money of the individuals who then get taxed, the taxes go to the Commonwealth and the Commonwealth agrees to then share it through a sharing arrangement.

Mr Drum : That may well be true. I cannot comment on that, I am not an expert on the constitutional arrangements about income taxes.

Senator LUDWIG: In any event, it would overturn 50 years of the way we have been doing it overnight.

Mr Drum : Correct.

Senator LUDWIG: Rather than demanding money from Canberra, they would be raising money themselves. But if there is no net gain in tax, as we hear from Fran, how is that going to solve the states' problems? Unless, of course, Hobart or Tasmania gets less.

Mr Drum : I think the no net gain in tax is the interim statement, so at the time of the pressing of the button to start this new system there is no increase in tax. What happens next is the real question, and that is what we are all interested in, because, if the states are truly going to compete and be able to set their own rates, then obviously that could mean more tax. If it is going to solve the problem it is unlikely the space is going to be created—they are given their own income taxes and then they reduce them, because that is not going to solve the problem.

Senator LUDWIG: Thank you very much—I just remain perplexed.

CHAIR: Thank you very much for your time, Mr Drum. As you can see, we could have had a much longer discussion with you, but we are very grateful you took the time that you did and we are grateful to the CPA for their submission.

Mr Drum : Thank you very much. We appreciate the opportunity. Even though it was only a short window, we are very grateful to be here today.

CHAIR: Thank you.