15 July 2015
Transcript - #2015156, 2015

PwC Tax Reform Forum – Q&A Panel, Melbourne

MODERATOR:

The Treasurer’s been very generous with his time. We’ve got about 20 minutes for questions. We might go straight to it, given the shortness of time. If you have a question, if you could raise your hand and let us know who you are and the organisation you’re from.

QUESTIONER:

[Inaudible] there’s so many concessions in the tax system, you talked about negative gearing and superannuation concessions [inaudible]. So when you’re looking at tax reform and what people have said, you’ve got to look at it holistically. Why won’t you look at the other side of it, why won’t you look at these concessions that are allowing people to do tax planning, and you know, only talk about one side of it rather than the whole thing?

TREASURER:

We are addressing the entire taxation system. The ones that you mentioned, negative gearing, we have some inbuilt structural challenges in the system that we inherited. For example, you’re allowed to negative gear a million-dollar, forty-year-old unit in the middle of Melbourne. But you, depending on your income, may not be able to negatively gear a business that is employing ten people that is exporting and engaged in productive activity. The question is, do you address the issue of negative gearing on that million dollar property, or do you address the negative gearing on the business? Our view is in relation to negative gearing, that individuals should be able to, and it’s common practice worldwide, individuals should be able to deduct the expenses of a business or an investment against their primary income. That is the principle. People think of negative gearing as only applying to real estate but it applies to shares, it applies to a whole range of things. So, in fact, by removing negative gearing on real estate as some are suggesting and the Labor Party have now said that they’re going to go down this path, they are creating an exception to a standing rule in taxation law, and that is that you can deduct the cost of, or the losses, against, another form of income. So that would be creating another exemption. In the case of superannuation, I cannot divorce the tax reform debate from the economy. And the fact is superannuation returns are at an extremely low level. From a historic perspective, more and more Australians rely on their retirement savings and if you were to impose new additional taxes as our political opponents want to do, on superannuation, you’re going to simply reduce the amount of money that retirees have in their pockets. Now, the biggest driver of economic growth is household consumption. And because we’ve got a bigger cohort of older Australians, the worst thing you can do is start penalising them and dissuading them from spending money.  So from our perspective, it is the wrong way about that debate. Secondly, the proposals so far have been about simply about adding taxes and or adding complexities in relation to superannuation, not reducing taxes or reducing complexity or making the tax system fairer. 

MODERATOR:

Thanks Treasurer. We might go down to the back corner, we got a question…

QUESTIONER:

[Inaudible] my question is really about the retirement income. I think you’re a bit complacent assuming that we don’t want changes. It’s such a screwed up system, it’s been changed over and over [inaudible] the general perception is that tax concessions are unfair [inaudible]

TREASURER:

Thank you John. I look forward to reading your submission. I don’t say that flippantly. It’s not unreasonable for anyone to put forward that view. You know when I announced in last year’s Budget that, from memory, from 2035 we were going to increase the pension age to 70. You know, there was immediate rejection by our political opponents. I hope you can speak common sense to them. Because when the retirement income system was built in 1992, life expectancy was around 72. Today it’s around 82. By the middle of the century, it will be close to 102. And yet, so much of what people are investing now has meant in some cases, to serve their needs in the middle of the century. So, there are many issues at play in the retirement income system and I don’t mind them being debated. The debate at the moment is about whether you add new taxes. And we do not believe it appropriate to add new taxes to that system. We think it’s just dead wrong. And it will just add to the complexity of the system, but the worst part of it is it will undermine confidence in the system. If you’re going to do this, you need to have a very proper and fulsome consideration of it. And as I’ve said on many occasions, at the moment we’ve got a Financial System Inquiry we’re responding to, we’ve got a competition policy inquiry, we’ve got a tax reform process, we’ve got federation reform, we’ve only just released the Northern Australia White Paper, the Agriculture White Paper. Let’s just do it incrementally and carefully, and importantly, reassure people that there aren’t going to be any kneejerk reactions either from a fiscal perspective by hitting super with new taxes, or from a regulatory perspective by adding to the complexity without properly thinking through the interaction with the Age Pension system, the age care system, the private health care system and a range of other parts.

MODERATOR:

Thanks Treasurer. We’ll go to a question here.

QUESTIONER:

Treasurer, Ben Potter from the Financial Review. You just read this morning that there was $35 billion [inaudible] waiting to be collected. I’ve been curious about your views on that. And also our hosts have indicated that [inaudible] against multinational tax avoidance [inaudible] on the things you talked about, to keep the tax system internationally competitive [inaudible]?

TREASURER:

Well, that’s a pretty comprehensive question. Firstly in relation to $35 billion, I saw that report from the Inspector General. I’m seeking some advice on it. I understand there are significant legacy issues in relation to that. Also, I think the Taxation Office is looking at a more cooperative approach to recovering money that is owed to the ATO rather than dragging more and more cases through the courts. There might be some factors at play in that. There’s quite a number of legacy issues in relation to that number. On the second thing, you know, the economy’s moving much faster than any government. When I first became the Treasurer and I raised in the G20 the fact that a number of multinationals were not paying their fair share of tax, a number of my finance minister colleagues, in fact maybe just one or two, said leave it alone, they’re our companies, they pay their fair share of tax in our jurisdiction. I must saw that view has changed over the past few months, and that country has decided to not only go after the tax that is owed in their jurisdiction, but they’re trying to go after tax that is owed in other jurisdictions as well. So there has been a quite dramatic sea change in the G20 and across the OECD in the last 18 months. I do put it down in many ways to the leadership of Australia in that regard. At the G20 in Brisbane the Prime Minister pushed it, I pushed it chairing the G20 in Sydney, in Washington, Cairns and in Brisbane as well. So we are moving quite rapidly. And I make no apologies for going after the approximately 30 multinationals that in particular are engaging in the double Irish Dutch sandwich, which I would hope you are not familiar with at PwC. Let’s pretend that you guys don’t know about it. No apologies there. Increasingly, now we’ve found we believe, as a result of the work we’ve been doing with the United Kingdom and a number of other jurisdictions, we believe that there’s a new way of collecting the GST in relation to parcels and goods that are imported into Australia, below the current low tax threshold. And we will be using the mechanisms of the OECD to ensure that that money’s recovered and I’ll be raising it with the Treasurers in August. 

MODERATOR:

I’ll just add, to make the point clear, the conversation around how much big business pay is an absolutely appropriately fair conversation, but, I think from a media perspective and in the debate, one can’t ignore the fact that international tax involves not just Australia but other countries competing for capital. And the reality of it is, what we would say we should be worried about is not just the tax being collected from international companies, today but some of those technology companies didn’t exist ten years ago. And the new ones that come into existence in years to come, where will they choose to set up for their Asian Pacific branches. And we want them to choose here. That’s our point. 

TREASURER:

I tell you, the Chinese Government, they tell me they’re not collecting any tax at all from Ali Baba, and it’s a massive Chinese company, it’s listed on the New York Stock Exchange. It started in China. And this is the sea change. More and more companies have no effective [inaudible]. They’re global citizens. Well, companies aren’t citizens, but they’re effectively global and therefore you traditionally say, for example PwC, I wouldn’t know, I think it started as a British company. But frankly it’s a global company. Google, it might have a head office in the United States, but it is global. And increasingly, you’re going to see global citizens as well. And this is going, particularly when you’ve got a massive reliance on a handful of companies as I said, 12 companies in Australia provide a third of all our company tax. Ten percent of Australian workers pay almost 50 per cent of our income tax. They’re the most mobile and agile of all in Australia. So you lose a few of them and all of a sudden it erodes your tax base. And this is a big challenge that we’re facing, a big challenge going forward.

MODERATOR:

We have time for one more question.

QUESTIONER:

Greg Wallace from The Australian. Just picking up on some of the specifics in your comments to the States. So you’re saying that they should generate more of their own revenue. What are some of the specifics [inaudible]?

TREASURER:

If we are going to engage in a proper discussion, the States obviously need to point out what they can do. There have been many suggestions over time, out of the Henry Tax Review and others. I’ll just make this point, I heard that the Premier of Victoria today ruled out any change to the GST. Just ruled it out. Flatly, no broadening of the GST, no increase in the GST. Let me be very frank, the Federal Government is not going to be arguing for a tax change that the beneficiary actually doesn’t want. You can waste a lot of capital in the debate on reform. But if the beneficiary of that reform actually says, no, we don’t want it, you’re on your own, it’s effectively game over. And I’ve said, and the Prime Minister has said on numerous occasions, the only way you’re going to get change to the GST is to have the unanimous agreement of the States, Territories, and bipartisan support in the Parliament, so it goes through the Senate. Well, the Premier of Victoria just ruled it all out. Unilaterally, under no political pressure, ruled it all out, said he doesn’t need the money. So this is the difficult environment in which we operate. Where we say okay, let’s have a long term considered approach to tax reform, certainly in the discussion of the federation reform as well. And you have for all time, unilateral rule outs, in relation to some of the structural change that may be necessary, and that’ quite frustrating. Having said all of that, maybe common sense will prevail, and when it comes to structural reform, there can be agreement between all States and the Commonwealth. I think it is too easy for people to keep saying, just broaden the base of the GST. It is a lazy approach to tax reform for a number of reasons. Firstly the GST is under increasing structural threats, through the mobility of commerce, particularly internet-based commerce, not just goods being purchased over the internet from overseas, but increasingly services. Secondly, as Tom pointed out earlier, GST applies to 46 per cent of the economy but it’s a narrowing base in the economy, because you’ve got health which is excluded from the GST, it it’s a growing part of the economy in aged services, so take that into account. I ask myself, will the GST be around in 30 years’ time? Will company tax be around in 30 years’ time? There are some arguments to say they will become redundant taxes in 30 years’ time. And the tax base would have narrowed so substantially, as it wouldn’t be able to address the funding needs of government going forward. That’s the debate we need to have. That’s why we need to talk about tax reform that goes beyond simply the lazy argument that we need to change the GST, or changing this or that. Having said all of that, if the beneficiaries of that reform argue against it, it makes it near impossible to have any change in that particular area.

MODERATOR:

Because the Treasurer is on a really tight schedule at this stage I’d like to invite Paul Abbey up to the stage.