House of Representatives

Second Reading Speech

Mr Bowen (Minister for Competition Policy and Consumer Affairs, and Assistant Treasurer)

I move:

That this bill be now read a second time.

I am very happy to introduce this bill today, a bill that 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 seven per cent of GDP. This makes it the third largest industry in the Australian economy. The sector employs around four 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 three per cent to 10 per cent by 2010:

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Exports by the sector would be $3.3 billion higher by 2010;

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Australia's GDP would be $1.9 billion above 'business as usual' levels by 2010;

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And there would be an extra 25,000 jobs in the economy, including 3,500 in the finance sector.

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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.

I commend the bill to the House.

Debate (on motion by Mr Pyne) adjourned.