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HON JOE HOCKEY MP SHADOW TREASURER INSTITUTE OF CHARTERED ACCOUNTANTS NATIONAL CONFERENCE HILTON HOTEL, GEORGE STREET SYDNEY 23 NOVEMBER 2012 “A COALITION GOVERNMENT’S APPROACH ON TAX”
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Ladies and gentlemen let me begin by thanking Paul Stacey for his kind introduction. I would also like to thank the Institute of Chartered Accountants for inviting me to give the keynote address today, in turn providing me with the opportunity to address Australia’s leading tax practitioners.
Taxation reform in Australia over the past 5 years Since my time in opposition over the past 5 years there has been a great deal of focus on ways to achieve taxation reform. One of the first acts of the Rudd Government, following their election in November of 2007 was the major so-called root and branch review of the Australian taxation system, the Henry Review. This was commissioned in 2008 - one of the only things to come out of the much heralded 2020 Summit. The review cost in excess of $10 million, received over 1,500 submissions, consisted of a panel of 5 experts and produced a report of more than 1,300 pages. It made 138 recommendations, of which the Government claims to have progressed less than a third - and even this would have to be a very loose interpretation of the word “progressed”.
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Clearly the broader community and business representative groups in particular, were disappointed with the Henry Review process. After birth the Review was abandoned by its parents as the Secretary of the Treasury rightly returned to his day job of implementing Government policy which, by the way, specifically ruled out 26 of his recommendations. In the fallout from the 2010 election the Government made a major tax reform promise to the independents. It promised to hold a tax summit. Of course by this stage the previously ruled out carbon tax and the fourth iteration of the mining tax were dominating the tax debate. This million dollar Tax Forum subsequently held in October last year, led to a major new tax initiative the Business Tax Working Group. This new group was charged with doing the government’s work to find savings to pay for a company tax cut. Reviews, forums, summits, working groups….its all talk. Of the 27 major new tax changes to come from the Labor Government only a handful most notably the mining tax, came from one of those consultation processes and even then it has had four further versions since the Henry Review. Additionally over the past 5 years this Government has been through 5 Assistant Treasurers. It is of little wonder that much of the legislation which has been pushed through Parliament has had amendments added at the eleventh hour. It has also been far too common for the Government to be amending its own amendments on the floor of the Parliament as its own drafting and policy errors have become apparent.
Government stuff ups In just the past 6 months alone we have seen countless examples of a Government without a stable and consistent approach on taxation. We have seen poor judgement, time and time again in the implementation of tax legislation. Look no further than the changes to the withholding tax rate on distributions by Managed Investment Trusts, and the eleventh hour deal that had to be struck with the Greens to secure passage of this legislation. This intervention led to the creation of a different withholding tax rate under the Clean Building Managed Investment Trust legislation. In this area alone in the last five years Labor has gone from a rate of 30%, to 15%, to 7.5% then back up to 15% unless you have a green building where it is now 10%. This illustrates the shambolic approach of Labor to taxation. They make it up as they go along. In other areas we have tried to save the day. For example on the changes to the Living-AwayFrom-Home-Allowance without the Coalition’s intervention, the Government would have split the taxation treatment of food and drink allowance between the fringe benefits tax legislation and the income tax legislation. This would have ultimately increased compliance costs for employers and employees, and created yet even more confusion and uncertainty!
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But the signature taxation failure of this Government remains the botched handling of the mining tax. After five failed attempts to get it together the Government now wants to return to scene of the crime and have another go. My advice to the Government would be to stop digging. And the pun is very much intended! The Prime Minister and the Treasurer personally got involved in secret negotiations to try and salvage something from the RSPT wreck. They failed completely and utterly. The Minerals Resource Rent Tax has hardly raised a dollar in its first quarter despite the Government forecasting $2 billion in revenue for its first year of operation. The Mining Tax package has been a fiscal disaster. After initially promising $12 billion in revenue in just its first two years, it now promises just $9 billion in four years. The problem is that it has $15 billion of expenditure against this revenue. Only Labor could introduce a new tax that leaves the Budget worse off. And structurally worse off at that! But these are not just fiscal embarrassments they are sovereign risk creators as well. The reputational damage associated with inconsistent and chaotic taxation policy is immense. Furthermore the costs of compliance and complexity become significant. Whilst some accountants may welcome taxation complexity, I think we were all startled when Ken Brinsden the Managing Director of Atlas Iron announced that his company has “spent the best part of $2million in compliance to find that we are not paying the tax.” This is a story repeated across the mining industry.
Blatant tax grabs Chaotic tax policy is usually associated with revenue shortfalls. The Government has no spending restraint and so it keeps running out of money. This Government describes higher taxes as savings. In the recent MYEFO the Government claims to have found over $16 billion worth of savings, whilst closer inspection of this figure shows that nearly 80% of these so called saves have actually been from revenue measures. Most revenue measures from this Government have come as a complete surprise to both business and the taxpaying public. In Labor’s first budget in 2008, they used a tax increase dressed up as a social policy initiative to reduce the consumption of alcopops, that was originally forecast to raise over $3 billion across the four year forward estimates. They also targeted the luxury car tax, increasing its rate from 25% to 33% raising over $500 million in revenue over the forward estimates.
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In Labor’s second budget it chose to target superannuation in what proved to be a continuing trend, and reduced concessional contribution caps reaping in just under $3 billion over the forward estimates. This was at a time when Australians approaching retirement were watching their savings disappear thanks to the turbulence of the GFC. There was also the removal of the income tax exemption for overseas employment income earned by Australians working overseas, netting the Government more than $600 million over the forward estimates. Then of course there was Labor’s third budget, Kevin Rudd’s final budget, which saw more tax grabs dressed up as social policy, with a significant increase in tobacco excise which netted the Government over $5 billion across the forward estimates. This budget also saw the medical expense tax offset targeted, increasing the threshold from $1,500 to $2,000, netting the Government $350 million over the forward estimates. And as we all know this was targeted again in this year’s budget with a means test introduced and a reduction in the rate of reimbursement. Labor’s fourth budget (which was Gillard’s first) oversaw further revisions to Mining Tax measures, as well as the introduction of a temporary flood and cyclone levy forecast to raise $1.7 billion. The Government argued that the levy was needed to preserve the budget’s position. However the actual budget deficit for that financial year blew out from $23 billion to $43 billion. That year also saw the introduction of measures proposed by the Greens with changes to the treatment of fringe benefits tax for cars netting $1 billion over the forward estimates. We also saw various other tax grabs such as the abolition of the Entrepreneur’s Tax Offset (a measure that actually helped the small business sector), the removal of minors’ eligibility for a low income tax offset on unearned income, and the phase out of the dependent spouse tax offset, with all of these measures netting the Government $2 billion over the forward estimates. Which brings us to this year’s budget, Labor’s fifth budget, that not only saw the final death of company tax cuts but a range of other tax promises as well. In MYEFO handed down just last month, the Government moved to monthly pay-as-you-go (PAYG) instalments for large companies (at least initially, and later to much smaller companies) netting a massive $8.3 billion over the forward estimates. No consultation with business and no regards to the pressure this may place on cash flow and investment. Without this measure the forecast surplus in 2013-14 would in fact be a deficit of $3.3 billion.
Addicted to taxes There is a misconception doing the rounds in Canberra on the level of taxation imposed by Labor since coming to Government. This Government wants people to think that its tax to GDP ratio is lower than previous Governments, but it is a claim that is both misleading and ignores reality.
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To portray itself as a low taxing regime the Government takes into account the immediate tax take. But that’s just one element of the call on the nations’ resources by which the government funds its extravagant promises. What Labor conveniently forgets to add are non-tax revenue and borrowings. Non-tax revenue includes dividends paid to the government by publicly owned institutions, the sale of non-financial assets, and interest received from the Future Fund. The third source of funds - borrowings - may seem to be politically painless because the private sector - read voters – do not have to sacrifice any income in the current year to fund the government’s spending. But Government debt is about borrowing taxes from future generations that have to pay the principal and interest on those borrowings. This government has relied heavily on borrowings during its time in office. Over the past four years the government has borrowed well in excess of $170 billion. And they are not done yet. This year the government will put another $7.3 billion on the credit card and they will not stop borrowing until at least 2017 - another five years away. By borrowing now they are leaving a massive burden of deferred taxation which will be borne by future generations. In total, the government’s call on present and future taxpayers in the year just finished was nearly 26% of GDP. That is higher than in any year of the previous Coalition government. The average for the Coalition was 23.4%. The average for the five years of this government will be 25.5%. The Coalition ran surpluses in ten of its twelve Budgets. Net debt fell in every year the Coalition was in office. So when you compare the actual burden on taxpayers by adding annual borrowings to revenue, this Labor Government is the highest taxing government in modern Australian history. Try as it might the Government cannot hide that it relies so heavily on borrowings. It doesn’t matter what mix of funding is used in a particular year – in the end the taxpayer always pays.
Retrospective taxes Aside from blatant revenue grabs, the Government has been fond of introducing retrospective taxes in recent times. They tax us in the present, they tax us well into the future through the debt burden they leave behind.
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But recent retrospective changes to tax consolidation cost setting rules, along with retrospective changes to transfer pricing measures shored up $8 billion of revenue for this Government. There is no policy principle here. Retrospective tax legislation is a draconian measure and the Coalition is strongly opposed to it on principle. Whilst unintentional errors may be fixed I have made a very clear point that quality control in relation to tax legislation is crucial, and that quality control involves appropriate supervision. In my speech before Parliament in relation to the changes to tax cost setting arrangements for consolidations, I made the very point that has now subsequently been picked up in the recent Treasury and ATO Protocol regarding formal quality assurance and accountability. I welcome the Government’s announcement that ‘sign offs’ are now required from a senior officer in both Treasury and the ATO on legislative intent. I welcome that these officers will be affirming to the Minister that, as far as practicable, the Bill and the extrinsic materials which include the summaries and the examples in the explanatory memorandum, clearly articulate the Government’s intended policy. This is a good move, albeit overdue.
Governance of the ATO I will turn now to the role of the ATO. Many of you are telling me that the Government’s ad hoc and inconsistent approach to policy implementation has seeped into the ATO’s dealings with business. For a while now, and I believe many within the Australian community share this concern, the ATO’s lack of understanding as to how the private sector ticks, especially small and micro businesses, has been an acute cause for frustration in recent years. In my speech to the National Press Club in May of this year, I said the ATO was lacking a broader business perspective in regards to its management. I announced that a Coalition Government would increase the number of Second Commissioners of Taxation, from three to seven. I would expect those executives would come from the private sector and be based outside of Canberra. The recent appointment of Mr Chris Jordan as the 12th Commissioner of Taxation is recognition of the need for change in the leadership of the Australian Taxation Office. For too long the key leadership roles in the ATO have been given to those whose careers did not include any private sector experience. Mr Jordan’s experience over many years as an executive at one of Australia’s largest professional services firms, and his senior role with the Board of Taxation for more than a decade make him a very suitable appointment.
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The Coalition looks forward to working with Mr Jordan in the years to come.
Coalition’s record in tax administration I will talk now about tax administration. I wish to acknowledge two very influential institutions that have contributed substantially in recent times to improvements in tax administration. These institutions have helped to build taxpayers’ confidence in a system of tax administration that at times can appear unresponsive and stuck in its ways. I am referring to the Board of Taxation and the Inspector-General of Taxation. Each institution commands wide respect for the work they perform and independent advice given to government. It gives me some pride to credit the previous Howard-Costello administration which so successfully reformed our taxation system, with establishing both these bodies. To gauge the standing of these institutions you need look no further than the statements in the Henry Review. In relation to the Board of Taxation it was said that “It has advised the government in the interests of all Australians - it has not acted as a lobby group for special interests, nor has it been a rubber stamp for government proposals.” The Henry Review also recorded the Inspector-General of Taxation’s great work despite limited resources of an annual budget of only $2.2 million a year and a staff of only seven. We should not let it slip from memory that at the 2007 election, the Labor Party refused to commit to continuing with the Inspector-General of Taxation as a separate statutory office. The professional bodies, including the Institute, voiced their concerns, arguing that the Inspector-General’s independence should not be compromised. These two institutions have proved to be a counter-weight to what can be an inwardly focused, Canberra centric view of the world.
Quality assurance and accountability The Government’s recent announcement in response to the Board of Taxation’s report into improving tax law design is seen by the Coalition as a move in the right direction. The Government acknowledged that improved tax law design requires good project management and quality assurance processes, as well as maintenance of an appropriate level of technical expertise within Treasury. To meet the challenge put by government, Treasury has established a Law Design Practice group to more effectively coordinate the process of moving tax policy into its legislative form.
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Treasury has brought the Office of Parliamentary Counsel into its legislation project management function so that OPC can assist in the early identification of potential complications. The Coalition supports a greater integration of OPC into the tax design processes of interaction between government and non-government parties. The Coalition’s approach would be to utilise experienced legislative drafters as a part of a team such as the Law Design Practice, even if they live in Melbourne, Sydney or elsewhere. I agree with the Board’s recent view that engagement should become part of a more systematic approach to the development of policy and legislation including at the preannouncement stage where appropriate. It’s the quality of consultation, as distinct from the quantity of consultation that needs to be improved. The point that particularly resonates with me is that the engagement should be open and seen as a joint commitment, including by the non government sector, to an outcome that will be in the national interest.
Resolution of taxation disputes I would also like to discuss with you the resolution of taxation disputes. In brief, I want to address how best to restructure the ATO so that there can be confidence that fair and impartial decisions will be made about risk reviews and audits. At this point I want to stress the Coalition’s view that compliance with the taxation law is crucial. The other important point about compliance is that the community has to have confidence that everyone is pulling their weight and the system isn’t being gamed. A typical dispute scenario starts after the taxpayer has received their tax assessment. The ATO’s review of the taxpayer’s business and its relationship to the content of its tax return may progress from a risk assessment to an audit. Audits are invariably slow. There may have been attempts to resolve matters, but if there is still a sticking point, the ATO team will issue an amended tax assessment. If the taxpayer decides to contest a matter, their objection to the amended assessment will have to be examined by the ATO. It’s that reconsideration of the issue at the objection stage that potentially puts the ATO into the situation of investigator and prosecutor. The team that has undertaken the audit and just issued the amended assessment is unlikely to come to a different conclusion when they look at the taxpayer’s objection. There should be a completely new team that considers the objection.
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The perception that there may not have been a fair consideration of the matter needs to be addressed. To do that, the function of the audit must be separated from the second stage review that happens when a decision is to be made about an objection. The Coalition’s intention is to make sure that this happens in the most administratively effective manner. One option put forward by the Inspector-General of Taxation in his submission to the 2011 Tax Forum: “... a separate appeals area would empower the ATO’s in-house legal section to independently assess the evidence and prospects of a case before progressing the matter to litigation. “The ATO’s litigation arm would, like the Director of Public Prosecutions in criminal matters, have ultimate discretion as to which matters the ATO would litigate, which would be conceded and which should otherwise be settled.” An alternative approach could be to move the appeals section out of the ATO into a different agency, recognising that the audit function is different from an independent review.
A Coalition Government So what more can you expect from us? I believe that it is important to be honest with you on exactly what type of taxation reform to expect from a Coalition Government, particularly given our current economic and fiscal outlook. Our country needs a Government that has a consistent, transparent, logical and predictable approach on taxation reform if it wishes to build business and investment confidence. My very firm view is that significant tax change must leave taxpayers better off. Substantial taxation change inevitably dislocates the community and the costs of that dislocation must be offset with some level of positive financial benefit. The fiscal position we are likely to inherit after the election limits the scope and scale of tax reform that we would be able to achieve in a first term of Government. That is not to say that there will never be the opportunity for system-wide tax reform in a further term of a Coalition Government. But the first priority for an incoming Coalition Government must be to get the Budget back under control. What I can promise is that a Coalition Government in its first term will abolish the carbon tax and the mining tax. The carbon tax was implemented after a breach of faith with the Australian people, and directly impacts the cost of living for everyday Australians. This tax will go.
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The removal of the Mining Tax is a responsible thing to do, as it structurally damages the budget, with expenditure linked to the tax escalating in value over time much more than the tax is expected to raise. This tax will also go under us. What I can also promise you from a Coalition Government in our first term are ways to improve the current system of tax administration. From what I have discussed with you today, there are clearly some parts of the administration of our taxation system that would benefit from a new approach. I will have more to say about that as we get closer to the next election. Thank you very much. [ENDS]
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