Interview with Lucie Bell, Perth Drive, ABC Radio

Subjects: tax reform, insurance price transparency Lucie Bell: Eight minutes past 3. Well, look, if you’ve opened an insurance renewal notice recently, it’s likely that you’ve had a little bit of a shock. Premiums right across the sector, whether it’s for your home and contents, your car insurance, your health insurance, they’ve been skyrocketing.

And to be frank it’s kind of not always really that clear why. And I know I’ve definitely heard from our talk‑back callers here at ABC Perth that people here in Western Australia can often feel like we’re being penalised with higher prices because of an increasing claims on the East Coast, for example, about whatever’s happening in a global context. And if so, is that just business, and is it fair?

Well, earlier this week, my next guest stood up in front of a room of insurance sector representatives, and he essentially put them on notice over their pricing transparency, their industry code and the way they handle your claims. Daniel Mulino is the Minister for Financial Services, he is also the Assistant Treasurer. Thank you so much for your time this afternoon.

Daniel Mulino: Thanks very much for having me on, Lucie. Look, before we talk about the insurance sector, some really big news today around which businesses are going to be carved out from your planned changes to capital gains tax. I was hoping that we could get you to just run through a few of the key changes there.

You’ve broadened the turnover threshold for small business. What’s that going to be now? Yeah.

So for the active assets concession, when it comes to the CGT taxation, that will be a turnover amount of $2 million lifted to $10 million. That means now that all 2.7 million active small businesses, basically 98 per cent of all businesses in Australia, will now have access to that 50 per cent reduction in CGT. That’s a really important shift in that, and that’s the most commonly used CGT concession of the 4 major CGT concessions that can be used by small businesses.

So that was in response to a lot of feedback from small business around – concerns raised around the way that the CGT might operate and the fact that the thresholds hadn’t been adjusted for quite some time, so that’s going to mean that now all small businesses can benefit from that particular concession. Is that a bit of an admission that you maybe got it wrong in the Budget initially then, Assistant Treasurer, isn’t it a bit backwards to kind of get everyone on notice, have them a bit worried and then kind of wind it back?

Did you get it wrong? Well, so in the Budget we included a lot of really important measures for small business, including making the instant asset write‑off permanent, including loss carry‑back measures, and a range of measures to make the tax system simpler. When we announced our major tax reform package – and this is very normal when it comes to complex tax reforms – we did say that we were willing to consult around a number of elements where there were details.

And so one of the items that the treasurer foreshadowed on Budget night that we were willing to consult on was start‑ups and the way the CGT acted in relation to start‑ups, but another was that we said we would have a conversation with small business. And I think this is very normal with taxation reform that there are adjustments made after the initial framework of the reforms is announced.

And I think it shows that the consultation has been genuine, that we’ve genuinely listened to representations made by small business peak bodies, and indeed small businesses. So your changes you’ve made today sort of now capture, I think I got this number right when you said it, about 97 per cent of all small businesses, is that right? Well, so it’s 98 per cent of all businesses, but it’s basically all active small businesses, so up to $10 million turnover.

And this is the most commonly used CGT concession, the active asset concession, and so that’s a really significant shift. Yes. You also touched there on start‑ups.

Now that industry has been very vocal and was very concerned about the changes you’d been proposing sort of stifling investment. What have you decided around start‑ups today and employees and founders in those kind of sectors? So the way that we’re changing the CGT indexation is to go back to the original CGT indexation that the Hawke–Keating government brought in, which is the index to inflation off the cost base of the assets purchase price.

And that really takes it back to taxing real gains rather than what we consider to be an arbitrary reduction on nominal gains. But we do concede that when it comes to start‑ups, they have a particular situation where they basically have near zero, or sometimes a zero cost base. They start with very few assets.

And so when the Treasurer announced these changes on Budget night, he said that we would consult with start‑ups. We recognise that start‑ups are incredibly important for innovation and productivity growth in our economy. And so today the Treasurer released the discussion paper which flagged some thresholds for innovative start‑ups with a turnover threshold of up to $50 million and less than 10 years since incorporation, that the 50 per cent discount might apply to CGT in those circumstances.

So we’ll consult on those thresholds further. The discussion paper itself is the result of a number of discussions with start‑ups, and again peak bodies. And then there’s also the potential for a 15‑year time limit for biotech, because there’s arguably special circumstances there and a longer lead time for bringing innovation and new processes to market.

It’s 14 past 3 on ABC Radio Perth 102.5, and right around Western Australia, you’re listening to Daniel Mulino. He’s Assistant Treasurer and Minister for Financial Services. We’ve been talking about the carve‑outs for the changes to capital gains tax which the Treasurer and the Prime Minister announced earlier today.

Daniel Mulino, the WA Treasurer here, Rita Saffioti, she would like you to consider what she calls the original start‑ups in this carve‑out. She would like the mining and exploration sector to be included. Are you open to that?

Well, I think what we’re focused on here are start‑ups with a very low or zero cost base, and this was the situation that the Treasurer focused on on Budget night, and indeed at the Press Club the day after the Budget there were a number of questions on this front, and it’s the interaction of that low or zero cost base with the end sale price of the asset. But look, if people want to bring ideas and feedback on the tax package to the Treasurer or to the government or myself, obviously happy to listen, but I think what we’ve demonstrated in the package that we’ve announced today is that we’ve listened on a range of fronts and made meaningful changes.

I want to get on to the insurance discussion in just a second, but I do want to touch as well on the changes around trusts, because that has also kind of raised a lot of concerns for people, particularly around testamentary trusts. Can you kind of explain for us in as simple terms as possible the changes that you’ve made there today, or what’s changed? Yeah.

So the main changes that we’re making in relation to discretionary trusts in general is to say that there’s been a significant growth in discretionary trusts over the last 20 years, a rough doubling in the number of discretionary trusts, and in a number of circumstances they’ve been used to split incomes. And so in order to not totally equalise necessarily, but to better even up the way that taxation of income from labour is treated as opposed to taxation of income from other sources such as capital or through trusts, we’re putting a 30 per cent minimum.

Now when it comes to discretionary trusts, there are a small number of discretionary testamentary trusts, so obviously for people wanting to have assets held after they pass away with discretion in the hands of the trustee. We originally said that we wanted to impose this 30 per cent minimum on all discretionary trusts to have consistency there. And that we made clear right from the start that deceased estates and fixed testamentary trusts wouldn’t be included in the new arrangements.

But again, we’ve heard concerns raised by people, and we’ve heard that some people have found the system that was originally proposed confusing. And so what we’ve done, just to make things absolutely clear is that the small number of testamentary discretionary trusts, around 10,000, a bit over 10,000, will not be included in the new scheme. So just to make it absolutely clear, deceased estates and both discretionary and fixed testamentary trusts will now not be included.

It’s a change that has been modelled as not materially changing the overall revenue from the trust changes. And so the core policy rationale remains, but we think that this change is going to provide a lot more certainty and clarity and alleviate some of the concerns that have been raised. You said a moment ago that you’re still happy for different sectors, different people with ideas, whether it’s our state Treasurer, or I guess any other sector to come forward and have a chat to you.

But it’s my understanding you still want to try and get this legislation through within the next 2 weeks. Is that still the timeframe? That doesn’t leave an awful lot of room to kind of discuss this much more, does it?

So the core framework legislation we are looking to get through in the next 2 weeks, and we’ll be engaging in good faith with all parties in the parliament on that front. And there are some really important measures that we think need to be put through the parliament, including the changes to negative gearing and CGT, but also the WATO, the Working Australian Tax Offset, and the deduction.

There are some measures that will need to be dealt with over a longer timeframe, so for example, the measures around innovative start‑ups, we’ve issued a discussion paper today. But they will – any changes that come in relation to start‑ups will be dealt with in the subsequent piece of legislation. And that’s very normal.

If you go back to, for example, the Howard government’s introduction of the GST, there was an initial framework piece of legislation. And then in the year between that legislation and the start of the GST, there was a further number of bills, I think in that case there were up to 8 bills that were passed over the following 12 months. So it’s very normal for tax legislation, because it is so complex – Complex, yeah. – often to involve more than one bit of legislation.

The important framework is going to be provided for in this bill. And then there will be some details which we will work through in a subsequent piece of legislation. And then later in the year there will be another piece of legislation that will deal with the trust issues.

Daniel Mulino is with you. He’s the assistant federal treasurer. He’s been talking you through some of today’s changes to capital gains tax reforms and some of the carve‑outs.

You also are the Minister for Financial Services, and that means that insurance comes under your portfolio. You attended an insurance summit a little earlier this week with the big players, who we know are raising premiums kind of right across the board. I wonder if you feel those price hikes in general tend to be fair and reasonable?

So I think there’s a broad agreement that we need to have more uniformity across insurers in relation to how they communicate premium levels to consumers. So price transparency I think is important on a couple of fronts. Firstly, there’s got to be a better way, I think, where consumers get a clear sense as to why the premium is at the level it is.

And that might be something like a traffic light indicator on each of the major hazards in relation to that property or that small business saying, you know, ‘We think in relation to storm and fire you’re a low risk, but in relation to flood you might be a medium or a high risk’, and that will give you a sense as to why the level of your premium is roughly where it is.

That will also make it easier for people to compare across policies. It’s also important, I think, that where policies change by more than a certain amount in a year, perhaps say 10 per cent, that insurers make it clear to the consumer why that’s the case. Now it may not be possible to break it down in absolutely minute percentages if there’s a few different causes.

But I think it’s important that we have a system where, for example, it might be that the company has reassessed your risk of flood, or it might be that construction costs have gone up, but I think there’s too many situations in which consumers get a 10 or a 15 per cent rise in their premium and there’s no clear explanation. And then the final point I’d say is that when it comes to dealing with some of the underlying risks, and this is really important with some hazards, like fire or flood.

I think it’s really important to have more price transparency, because that will be critical when it comes to linking premium reductions to where, for example, a household reduces its risk through better managing a fire risk around it, or if there’s a levee built around a town and that significantly reduces the flood risk in that town. I think price transparency will help to communicate to consumers that the flood risk has come down, and that should be reflected in premiums.

So you’d like to see some of those changes, and you’d like the code for insurers to be mandatory rather than voluntary. What sort of a timeline do you have to kind of have a bit of open discussion or public consultation on this? So price transparency I think might need to be dealt with separately than the code.

It might be that we need to deal with that through legislation. We’re starting the consultation process on price transparency, and so what we’re starting to think about is what kind of models are going to make sense, what kind of models are going to clearly communicate the premium drivers to a consumer, what’s going to be comprehensible, what’s going to be clear?

So we’re going to start by looking at models that are used in other countries. Some insurers are already trialling different things, some insurers are trying a traffic light approach, but there are other methodologies that might be used, so we’re just starting the process now. I want to try and push this along as quickly as possible, but it’s not a straightforward thing, and I want to make sure that we step through it carefully so that we can develop something that is genuinely useful to consumers.

Just before I let you go, Daniel Mulino, just one last question, particularly because we have so many pockets of WA, it’s a really big state, where people are kind of facing this really awful situation of being told that they’re now uninsurable. I mean that is a growing problem for pockets of our community. Do we need some kind of safety net?

What are you going to do about that? So this is a significant issue, and it’s actually an issue that is occurring right around the world. We see similar things in Europe, in North America, and in fact in countries all over the world, where insurers are actually now able to identify risk at a much more granular level.

And on the one hand that means that there’s often more accurate pricing of risk, but it does mean that it’s now possible in insurance markets to identify households with quite high risks. And it is meaning that growing numbers of households are finding it hard to get affordable insurance. In data that was released from a number of sources over the last couple of years, it appears that more than 200,000 properties around Australia, including in WA of course, may be at the point where it’s going to be very hard for them to afford flood insurance in particular, but there are, of course, also some households with very high fire risk.

And so we are at the moment looking at different models used around the world, in North America, in Europe, and seeing what kinds of approaches we might take. Daniel Mulino, thank you so much for your time today. A few really big policy areas to unpack, and some pretty complicated policy to look at there, so I appreciate you making time for us.

Thanks so much, I appreciate it.