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ECONOMICS LEGISLATION COMMITTEE
Australian Taxation Office
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ECONOMICS LEGISLATION COMMITTEE
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Australian Taxation Office
Senator BOB BROWN
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ECONOMICS LEGISLATION COMMITTEE
(Senate-Thursday, 24 February 2011)
Australian Securities and Investment Commission
Department of the Treasury
Australian Taxation Office
Senator BOB BROWN
Australian Bureau of Statistics
Australian Competition and Consumer Commission
Australian Prudential Regulation Authority
Department of the Treasury
Australian Office of Financial Management
Commonwealth Grants Commission
- Australian Securities and Investment Commission
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Content WindowECONOMICS LEGISLATION COMMITTEE - 24/02/2011 - TREASURY PORTFOLIO - Australian Taxation Office
CHAIR —The committee will recommence its consideration of the Treasury portfolio with the Revenue Group of the department and the Australian Taxation Office. I note that it has set Friday, 8 April as the date for the return of answers to questions on notice. At this time, the committee would like to note the exceptional public service of Dr Ken Henry throughout his tenure as Treasury secretary. We think this is his 22nd appearance at estimates as secretary, and we thank Dr Henry for his assistance at estimates and at other inquiries over the past decade. We wish you all the best for the future and whatever undertaking you go on to after this phase of your life.
Dr Henry —Thank you.
CHAIR —The deputy chair might wish to say a few words as well.
Senator EGGLESTON —Yes, thank you, Chair. Dr Henry, on behalf of the coalition, we thank you for your long and distinguished service to the federal government under both jurisdictions. I believe that you are the architect of the GST, which was certainly a very significant tax reform for this country, and you have made many major contributions over the years. So we thank you for that and wish you all the best in the future.
Dr Henry —Thank you. I appreciate those words greatly.
CHAIR —Minister, do you have an opening statement?
Senator Sherry —Only to endorse the remarks made by the chair and the deputy chair about Dr Henry’s great public policy contribution. I would also note, of course, the stimulus package, which was a major contributor in itself in ensuring that Australia did not have a recession, unlike most other advanced economies. I will just put that on the public record as well. It has been a pleasure to have worked with Dr Henry.
Dr Henry —Thank you.
CHAIR —Dr Henry, do you have an opening statement?
Dr Henry —What can I say after what has been said thus far, other than to welcome very much those very generous remarks. I was not aware that I had appeared 22 times before this committee as secretary. I guess, given that degree of familiarity, there is a chance that I might miss some of this—there is a chance. Thank you very much.
CHAIR —Thank you. Mr D’Ascenzo, do you have any opening remarks?
Mr D’Ascenzo —I have had the pleasure of working with Dr Henry in his capacity over many years, both in the Public Service and when he was adviser to the former Treasurer. During all of that time, I found him to be a person of high integrity who thought deeply about policy, and policy that would be beneficial to the future wellbeing of Australia. It has been a pleasure and an honour to work with him.
CHAIR —Thank you. Senator Cormann.
Senator CORMANN —Thank you, Madam Chair. With your indulgence, may I also associate myself with the comments made by you and the deputy chair. I am sure, Dr Henry, that you will miss us in the months ahead. Just to make sure that your experience is as enjoyable as possible today, we will give it our best! Perhaps I could start by asking you where we are at with the government’s promise to the Independents to hold a tax summit by 30 June 2011.
Dr Henry —It is my understanding that details of the tax summit have yet to be finalised. I think the Prime Minister has indicated that the summit is likely to be in the second half of this year. But, beyond that, I am not aware of details having been provided publicly of the summit and, as I say, it is my understanding that those details are still under consideration.
Senator CORMANN —You can confirm that it will not be happening by 30 June, by the sound of it.
Dr Henry —I cannot confirm it, because I have been told that the Prime Minister made a remark to the effect that it would be in the second half of this year. I did not myself see the Prime Minister make that remark but it has been reported to me. I would not want to confirm for the committee that the summit will not occur before 30 June because, until details are finalised, there is obviously some uncertainty about the precise date.
Senator CORMANN —It has been reported to me that the Treasurer, in fact, made some comments to some business people in Melbourne to the effect that it was most definitely not going to happen by 30 June, although I have not seen that reported, that it may happen by the end of this year but it could well be as late as next year. Is that a line of discussion that you are aware of?
Dr Henry —I was not aware of that.
Senator Sherry —That is hearsay. I will take on notice, though, the question about the dates or date.
Senator CORMANN —But is it fair to say that Treasury will be the lead agency in organising the logistics for the tax summit?
Dr Henry —I would expect that Treasury would be expected to take leadership of logistical matters.
Senator CORMANN —That has not been decided yet?
Dr Henry —As I said, the details are yet to be finalised.
Senator CORMANN —Including which agency is the lead agency?
Dr Henry —Yes. The decisions have not been taken. As I say, it would be my expectation that Treasury would take charge of logistical arrangements. Indeed, it is the Treasury that is providing advice to government on those logistical arrangements, so that would seem to make sense. But those matters have yet to be finalised by government.
Senator CORMANN —Has somebody within Treasury been given specific responsibility for tax summit preparations?
Dr Henry —Indeed. We have somebody in the department who has been thinking about these matters. He has devoted quite a lot of his time to thinking about these matters.
Senator CORMANN —Is that their sole focus or do they have other responsibilities as well?
Dr Henry —I am not aware myself. I am not that close to it myself to be able to tell you whether that particular officer has other responsibilities.
Senator CORMANN —Is there a tax summit team or is it just one person at the moment?
Dr Henry —I would have to take that question on notice.
Senator CORMANN —Is it fair to say that so far we do not have a date, a venue, an agenda or terms of reference? We have to wait and see?
Dr Henry —That is my understanding, yes.
Senator CORMANN —In relation to the mining tax, I have an initial question in the context of the FOI release which was reported on two occasions now in the Financial Review. You would be aware, of course, that through two Senate committees and various questions and orders of the Senate, the Senate has sought access to specific information in relation to the mining tax. I refer specifically to the breakdown in revenue estimates under the MRRT model between coal and iron ore. Over seven or eight months Treasury and the government have refused to provide that information to the Senate without giving us much of an explanation as to why it would not be in the public interest to do so and without providing a statement of reasons. Yet, under FOI, the information has been released. Obviously, from the Senate’s point of view, that is a little bit confronting. Given our role in scrutinising the activities of government and our reliance on obtaining information from government, to essentially not be provided with any of this information for seven months only to see it released to the media through an FOI request seems a bit inappropriate. I invite you to comment on that.
Dr Henry —What can I say? This is the way that our parliamentary procedures operate. You may consider it—and I understand why you consider it—an unfortunate outcome of the way that our parliamentary processes operate, but there we are.
Senator CORMANN —Information was sought, questions were asked, answers were not being provided. The chair just read out in her opening statement a reference to an order of the Senate in relation to one of our standing orders in relation to public interest immunity claims. The question was ignored. No statement was made as to why it was not in the public interest to provide us with the information. The information was subsequently released by other means.
Dr Henry —Sure. We have traversed these issues on other occasions and, on one of those occasions—in fact, in one of the hearings that you referred to—I indicated that I was not claiming public interest immunity in not providing information to the committee. I think I also said that, as far as I was aware, I had never made a claim of public interest immunity in any Senate committee hearing. I also said that I doubted that I ever would. I think it is pretty safe now to say that I never will. Instead, what I was doing on those occasions was taking the opportunity afforded to me by resolutions of the Senate to refer the question to the Treasurer for the Treasurer’s consideration—nothing more or less than that.
Senator CORMANN —Thank you, Dr Henry. I, of course, understand that the person to blame in all of this is not you; it is the Treasurer. It is the Treasurer who has been absolutely desperate to keep information secret, quite frankly, that should have been released in the public interest. But I ask the question again: the MRRT model has now been released—the MRRT model that was put together presumably by Treasury which is based on the initial $10½ billion revenue estimate over the forward estimates. That figure has since been adjusted to $7.4 billion over the forward estimates in MYEFO. Have you got an equivalent model over 10 years on the revised MYEFO estimates—similar to the MRRT model for the $10½ billion version?
Dr Henry —Yes, I understand the question. We have done a lot of numbers inside the department on various scenarios, as you would not be surprised to hear. I have previously said to this committee—and I think it was understood very well by the committee—that those numbers are of such poor reliability that I was very reluctant to see those numbers in the public domain. So, if I were to be asked to construct a public interest immunity argument, I would not find it very difficult to do so; but I am not doing that.
Of course, when a request is made under freedom of information laws for access to numbers, whatever view I may take, the burden on the decision maker in the department is that the information is to be released unless, in the decision maker’s mind, there is a clear public interest against release. That is becoming, and has become, over the years an increasingly difficult hurdle for decision makers in departments to jump and that is one of the reasons why I think you are seeing more information released under freedom of information.
As to my own view on the provision of such information publicly, including in forums like this, my view remains as it was the last time we met, that the figures are of such poor quality, there is so much uncertainty attaching to them, particularly the figures in the out years—that is, beyond the forward estimates period—that they are not figures that should be accorded the significance that they have been accorded in public debate.
Senator CORMANN —It is obvious that there is poor reliability because the figures keep bouncing around and secret underlying assumptions change. There may well be poor reliability around the revenue estimates, but the spending commitments that are connected to it are pretty certain to continue to grow moving forward while the revenue continues to bounce around. Isn’t that the case?
Dr Henry —It is the case. As we all know, these particular revenue estimates, and, indeed, of course, the actual revenue eventually collected, is highly dependent upon the exchange rate and commodity prices for individual commodities—iron ore and coal. It is a matter of fact on the historical record that the exchange rate, particularly the Australian dollar-US dollar exchange rate—and that is the one that matters most with these revenue estimates, as you know—and also the world prices of iron ore and coal have been amongst the most volatile parameters that economic forecasters or revenue forecasters would confront. That is something that is very well understood. We have discussed it many times in the Senate Select Committee on Fuel and Energy.
Senator CORMANN —We have indeed, and what a great committee that was. But the issue that you raise here—and I see you smile; I know that you enjoyed your time there—is a very important policy issue in terms of the way this mining tax is proposed to be introduced by the government. One of the board members of the Reserve Bank recently made the point that the revenue from such a tax, if we have such a tax, should be invested into the Future Fund or a fund of that nature; whereas what the government is doing is actually using the revenue estimates and committing them to spending. Even the $6 billion out of the original $100 billion over 10 years that was committed to the so-called Regional Infrastructure Fund was structured as a spending program and not as a fund as such.
Senator Sherry —That is not right. If you look at the use of the funds, there are tax cuts. I will not go into them in detail but, for example, there is an effective tax cut on low income earners’ superannuation contributions, there is a cut to company tax and, in addition to that, there is the increase in the superannuation guarantee, which is going into savings. So it is not correct to say that it is for expenditure.
Senator CORMANN —Let me rephrase my question, Minister. I hear what you are saying. Over the 10 years, the related fiscal impact on the budget from the measures that you have just outlined and others is essentially going to continue to grow moving forward, pretty well like this, whereas the revenue from the mining tax, with the way it is structured, is going to bounce around. If you were to put that money into savings in a Future Fund, it does not really matter whether one year you get $10 billion or the next year you get $20 billion, $3 billion or $5billion because you have not got an ongoing fiscal impact. It is not going to hit your budget bottom line to the same extent. But the way the government has structured it—and I would like to get Dr Henry’s perspective on it—is such that your revenue is going to fluctuate dramatically as exchange rates, commodity prices, production volumes and a whole plethora of other assumptions change, whereas your related fiscal impact on the budget in terms of these other commitments the government has made is going to continue to grow. What is the implication of that in terms of the fiscal sustainability of the way the budget is currently structured?
Dr Henry —On the matter of fiscal sustainability, what obviously matters is the average level of commodity prices and the exchange rate and so on through time. That is what matters—its average level—if you are talking about fiscal sustainability. Volatility is a separate issue. It is not an irrelevant issue. It is not even a small issue. It is quite a significant issue. But it is a separate issue; it is quite separate from sustainability. As far as the various proposals that I have seen concerning fiscal stability funds go, there are really two strands of thinking. The first is that, recognising volatility in commodity prices and exchange rates, it might be sensible to accumulate a fund in the good years in order to finance government spending—if you like, a budget deficit—in the bad years. So that is one argument.
Another strand of the argument is that the years that we presently find ourselves in are highly unusual and they will not last—that is, the terms of trade boom that we are experiencing at the moment is a transitory phenomenon and we will at some point, nobody knows when, go back to a lower level of commodity prices and at that lower level of commodity prices there will not be as much revenue. The argument there is not a financing one at all; it is not to do with financing the budget. It is that, if this really is just a one-off boom in commodity prices, in forming judgments about the average level or the trend level of revenue to support trend government spending and, therefore, in thinking about the question of fiscal sustainability, one would want to look through this period—essentially ignore this period—for fiscal sustainability purposes.
So those are the two strands of the argument that I am aware of that people have used in supporting the case for some sort of fiscal stability fund. As to the first of those, dealing with volatility, of course, the first question that has to be confronted by those who put the argument is: in the bad years, why wouldn’t the government borrow? Why wouldn’t the government issue Commonwealth government securities and then in the good years repay those Commonwealth government securities? That is, in order to finance the budget, one does not have to sell, let us say, US treasuries that one had accumulated in some fiscal stabilisation fund. Instead, one could sell Australian government securities to finance the budget in the bad years. So I must say that I find the fiscal stability fund to manage volatility in the budget a little peculiar, but that is just me. There are a lot of people who do not find it peculiar.
As to the second strand of the argument—that this is just a one-off boom and it is transitory and will go away and we should be careful not to lock in government spending programs thinking that this boom will go on forever—that, it seems to me, is a very serious matter and we should be thinking very deeply about that. Nobody really knows. Even those who believe that this is a transitory phenomenon are unable to say when it is going to end. As you know—and I am not being critical—we have projected the end of this commodity price boom on numerous occasions, only to be caught short confronting higher commodity prices the next year than what we are presently experiencing. For that reason, in the budget, our commodity price projections are downward sloping—that is, for prudent budgetary reasons, we factor in a very substantial fall in commodity prices over a 10-year period. But that is not to say that that will happen. And, by the way, it is those projections that form the basis for the revenue projections for the MRRT. That is not to say that that will actually be the outcome. We do not know that commodity prices really are going to trend down in the way that we have set out in the budget over a 10-year period. We just put that there as a possible scenario, a prudent scenario, to support the sort of fiscal sustainability discussion that you are referring to.
Senator CORMANN —But you never even know whether the budget cycle is going to eventuate. So that is nothing unusual. That is why you assess performance against what you plan for. Have you revised your MRRT revenue estimates further since MYEFO?
Dr Henry —I am not aware of revisions since MYEFO. Certainly there would have been scenario work done, people asking, for example, the questions, ‘What if commodity prices were to stay at present levels?’ and ‘What if commodity prices were to follow a different trajectory?’ I am sure that there is that kind of work being done.
Senator CORMANN —But between the RSPT and the 2 July deal, obviously there was a formalised revision of various assumptions.
Dr Henry —Yes.
Senator CORMANN —There was another formalised revision of various assumptions for MYEFO.
Dr Henry —Yes.
Senator CORMANN —There has not been any further formalised revision of assumptions by Treasury since—
Dr Henry —No, not that I am aware of.
Senator CORMANN —You would be aware of it, I would have thought.
Dr Henry —I would hope so.
Senator CORMANN —So this article in the Fin Review of a little while ago that senior Treasury sources claimed that the MRRT would raise less than $5 billion over the forward estimates is not an accurate statement, as far as you are aware?
Dr Henry —As far as I am aware, it is not.
Senator CORMANN —The argument in the Fin Review today, which I think is a legitimate argument, is that, if you want to compare the impact of the mining tax deal of 2 July to what former Prime Minister Kevin Rudd put forward, you really have to compare the RSPT and the MRRT based on the same assumptions. Given that you revised your assumptions for the MRRT, to really test the fiscal impact you have to apply the same commodity price and other assumptions to the RSPT model. Have you gone through that exercise in Treasury?
Dr Henry —I am not aware of it myself. I would have to take it on notice.
Senator CORMANN —If you have done it, now that you have taken it on notice, could you provide us with information about the outcomes of that—
Dr Henry —As with all of these matters, I will of course be referring the question to the Treasurer.
Senator CORMANN —Of course. But just to put on record that, if the Treasurer was inclined not to respond to these things, given that the information has otherwise been provided under FOI requests to media outlets—
Dr Henry —No. Actually, I do not think information on this matter that we have just been discussing has been provided under FOI to anybody.
Senator CORMANN —If I also can then put on notice the $7.4 billion estimate, the modelling that was done for that. Could I obtain on notice the equivalent information to the one that was released under FOI for the MRRT model but under revised estimates that happened for the purposes of MYEFO? Just looking at the MRRT model, over the 10 years there has been $38.5 billion worth of MRRT revenue, with $25 billion of it coming from iron ore. That is about 65 per cent. It is fair to say that the iron ore share of the MRRT revenue is a proxy for the Western Australian share of the MRRT revenue, is it not?
Dr Henry —That is probably a reasonable proxy, I would think.
Senator CORMANN —I see people behind you sort of nodding.
Dr Henry —That is encouraging.
Senator CORMANN —It is encouraging for you and it might be encouraging for the federal Labor government but it is not encouraging for those of us from the great state of Western Australia, because it means that over the forward estimates 80 per cent of the MRRT revenue would come from Western Australia: 87.5 per cent in the first year, 76.9 per cent in the second year and, of course, 64.93 per cent over 10 years. It sort of makes it a tax on Western Australia, does it not?
Senator CAMERON —So it should.
Senator CORMANN —I am pleased to hear you say that.
Senator Sherry —And your point is?
Senator CORMANN —The question is: is it fair and reasonable to have one single new national tax targeted at one specific state economy to the extent that this tax is, with the way it is structured, with all of the other resources excluded and the main chunk of it coming from iron ore? Is it a fair proposition for a national tax to target one specific state economy like this MRRT does?
Dr Henry —I will say two things about it. The first is that Australia has a comprehensive system of horizontal fiscal equalisation. That is concerned precisely with those questions: what is a fair distribution amongst the states and territories of the national tax revenue? So that is a matter for the Commonwealth Grants Commission to reflect on in its advice to the Commonwealth Treasurer. It is a horizontal fiscal equalisation matter. The second thing I would say about it, which I think is relevant—and it is certainly relevant to horizontal fiscal equalisation—is that we are seeing the consequences playing out in Europe right now of countries having a common currency and lacking a comprehensive system of horizontal fiscal equalisation.
Senator CORMANN —Just talking about horizontal fiscal equalisation, I was thinking really of a fiscal imbalance, which of course is a different issue altogether. But on horizontal fiscal equalisation, has the Treasurer made the determination for 2011-12 in terms of the share of revenue—
Dr Henry —No.
Senator CORMANN —Is it unusual not to have made that determination?
Dr Henry —No. That determination is usually made, I think, in March. It is a question that would better be put to the fiscal group people when they are here. But my understanding is that the determination is typically made in March.
Senator CORMANN —We will. In terms of the flood tax, what options has Treasury provided to the government to fund the reconstruction package?
Senator Sherry —That is a policy option to government, so we cannot go there.
Senator CORMANN —Why can’t we go there?
Senator Sherry —It is policy advice to government.
Senator CORMANN —Are you claiming public interest immunity?
Senator Sherry —No. I will take it on notice. But you are well aware of it. You can chuckle and laugh, but I have sat where you have, Senator, and posed similar questions and made similar vain attempts. We are very consistent in our approach, as you were when you were in government.
CHAIR —There are a couple of things that I want to check. The committee, in our break, agreed to go to 1.30 with this session. So I am just letting people know that in advance.
Senator Sherry —Can I just ask: are there any consequential changes to the program this afternoon?
CHAIR —We will be back from lunch at 2.30.
Senator Sherry —What happens then? There are some logistical issues here. What about afternoon tea and macro, because it involves different ministers?
CHAIR —We will finish with revenue at 1.30 and we will be back at 2.30. We will just shorten the time for those three agencies and we will be back on track.
Senator Sherry —And then macro—
CHAIR —Will start as planned, at five o’clock.
Senator Sherry —I am not sure whether Dr Henry is coming to macro, but I do not expect that he will be coming to the other three.
CHAIR —Senator Cormann, perhaps I could have your indulgence. I am sorry to interrupt your questioning, but Senator Brown needs to go. So I will hand over to him and get back to you.
Senator BOB BROWN —Thank you very much. I will not take too long. On the same matter of the minerals tax, the Financial Review story this morning, front page, refers to $100 million forgone over the coming decade, under the price and volume assumptions that have not been released. Are those price and volume assumptions held by Treasury and, if so, can the committee have them?
Dr Henry —Obviously we have within the department the price and volume assumptions on which the MRRT revenue estimates in MYEFO were constructed. In previous committee hearings, I have indicated that the price and volume assumptions rely very heavily on information provided by the companies to the department. The companies tell us that they regard that information as being commercial-in-confidence. In fact, so far as we know, they have not shared the information among themselves. They have independently, that is, one by one, shared the information with us, on condition that it remain commercial-in-confidence, that it be protected. We have been through this before. Of course, the assumptions on which the revenue estimates are based can be aggregated in ways, I suppose, but we have not provided that information publicly. It would be a matter for the Treasurer, in my view, whether that information were to be provided to this committee or indeed provided publicly.
Senator BOB BROWN —I make that request.
Senator Sherry —We will take it on notice.
Senator BOB BROWN —Thank you. The headline story that $100 billion would be forgone, if those assumptions are correct, is right?
Dr Henry —I cannot confirm that. I can simply say what I was saying earlier, that the revenue estimates are very sensitive to the exchange rate and to assumptions made about commodity prices. You can get very large changes depending upon what assumptions you make. For example, as I was explaining to Senator Cormann earlier, in the methodology that we use that underpins the MYEFO estimates we have commodity prices falling by a substantial amount over a 10-year period. Without having looked too closely at the numbers, I feel confident enough to say were we, instead, to maintain commodity prices at their present level our revenue estimates for the MRRT would be some multiples of the revenue estimates contained in MYEFO. That is just to illustrate that the estimates, the projections, are extremely sensitive to the commodity price assumptions that you use.
Senator BOB BROWN —So the assumption is that $100 billion forgone under the prescription adopted by the government cannot be discounted?
Dr Henry —Let me put it this way: it would be possible, I am sure, to construct, without having done it myself, a scenario for commodity prices and for the exchange rate that would generate such a gap in revenue projections over a 10-year period. I am sure it would. Whether that scenario for commodity prices and exchange rates would be considered a reasonable one, a realistic one, is really a matter of individual taste, I think.
Senator CORMANN —Can I just quickly jump in for a second because—
Senator BOB BROWN —I just want to ask on that: is there a more reasonable assumption to be made?
Dr Henry —The assumption that we consider most reasonable for commodity prices and the exchange rate is the one that we have used, or the set of assumptions we have used, to construct the MYEFO numbers.
Senator CORMANN —The thing is, you talked about a scenario. You can construct a scenario but it is not really so much about constructing a scenario, it is about comparing apples with apples.
Dr Henry —Yes.
Senator CORMANN —If you change your commodity price assumptions and your volume assumptions for the MRRT model when you do the deal on 2 July, in order to compare the impact of what the RSPT would have collected with what the MRRT is likely to collect, then you should really be using the same assumptions to assess the impact. That was not done at the time. I understand your reasons why. It is not picking one scenario. In order to achieve what Senator Brown is after, what I have been after for the last seven months, you need to apply the same commodity price, volume and other assumptions to the RSPT construct as you have applied to the MRRT construct on 2 July. That is where the $100 billion in lost revenue over 10 years comes from, or perhaps even more, quite frankly.
Dr Henry —I do not discount the logic of what you have put to me at all. I understand perfectly well what you are saying. I am not taking issue with that at all. Senator Brown asked me whether a particular number, which has appeared in the public domain this morning on the front page of the Financial Review, is or is not correct. I was just saying that—
Senator BOB BROWN —Really whether it is reasonable or not.
Dr Henry —Well—
Senator Sherry —Senator Brown, I just make the point that, when I was sitting there in opposition, I would be asking Treasury in macro, not here, and testing the underlying assumptions about revenue from mining. They outlined the approach that Dr Henry has outlined today. It turned out that that very conservative and correct approach did not happen. The mining price did not come down.
Senator BOB BROWN —Dr Henry is telling us that the basis of the $100 billion figure is reworked figures on data coming from the mining corporations themselves. I again say: it is not an unreasonable assumption that that headline entails.
Dr Henry —In constructing a scenario to provide advice to government in the formulation of policy we have relied quite a lot on information provided by the companies, and we then have made judgments about what might be a prudent future trajectory for commodity prices over a long period of time, not because we think it is a plausible scenario or not because we think it is the most reasonable scenario but rather that we consider it a prudent basis on which to formulate it. If you like, it is a conservative approach that provides a degree of prudence for decision making over an extended period of time.
If you are asking me whether I consider a particular number to be reasonable or not, I am in a bit of difficulty. Frankly, there is something actually quite unreasonable about producing 10-year revenue estimates for a tax like this.
Senator BOB BROWN —But those figures—
Dr Henry —That is actually something which is quite unreasonable.
Senator BOB BROWN —But we are dealing with that, Dr Henry. That is how the proposed mining tax is constructed, on a basis that comes out of forward projections.
Dr Henry —It is true that the structure of the tax will have an impact on the revenue collected in every year, and obviously over 10 years. I guess what I am suggesting is that there are some risks in basing your tax design on a 10-year comparison of revenue collections between two different approaches when the revenue projections are so sensitive to economic parameters which are, as I said earlier, amongst the most volatile economic parameters that revenue forecasters have to confront.
Senator BOB BROWN —Can you see why, as legislators, I and other committee members might be concerned about forgoing $10 billion per annum—
Dr Henry —Yes, of course.
Senator BOB BROWN —if we ignore the figures that we see coming out, or predictions which are based on those coming from the corporations themselves?
Dr Henry —I guess what I am saying is yes. You say ‘forgoing $10 billion a year’ Maybe, yes. Alternatively you might be forgoing $5 billion a year or $1 billion a year or perhaps even nothing. It just depends on what happens to commodity prices and the exchange rate.
On the other side, it would be possible to construct scenarios which had you believing you were forgoing $20 billion a year. This is very uncertain. These are very uncertain bases on which to be taking decisions about policy design.
Senator BOB BROWN —But, in a world in which $2 billion to Australia may mean a universal dental healthcare system, it matters. You have just acknowledged that.
Dr Henry —Yes, I understand that.
Senator BOB BROWN —Is Treasury able to provide the committee with the figures for other minerals being included in the proposed tax—uranium, gold, nickel and so on?
Dr Henry —I do not believe we have done that work. I could be wrong. Again, I will take the question on notice and refer the question to the Treasurer.
Senator BOB BROWN —Thank you.
Senator CORMANN —Following on from Senator Brown, I hope that the Greens will support future motions in the Senate to order the production of that information—all these volume and quality price assumptions. I am very interested in your line of questioning, Senator Brown. I will work very happily with you to force this government to be accountable.
Senator Sherry —I suspect they probably will, but for totally different reasons.
Senator CORMANN —That is okay. That suits me fine. Dr Henry, you made the point that these revenue estimates are extremely sensitive to assumptions. Of course that has been a matter of discussion for some time. Given the revenue estimates are so sensitive, surely that makes the transparency of the assumptions used even more important. Why can the state government in Western Australia, which also collects revenue that is sensitive to changes and those assumptions, publish those assumptions openly and transparently in their budget papers while the Commonwealth government is not in a position to be equally open and transparent?
Dr Henry —That is properly a question to the Treasurer rather than me, I think.
Senator CORMANN —I take it that you would rather not answer.
Senator Sherry —I will take it on notice.
Senator CORMANN —That is excellent. ABARE is about to release its new forecast next week. Have you seen those ABARE forecasts around commodity price production volume assumptions?
Dr Henry —I have not. It is possible that—
Senator CORMANN —Has somebody in Treasury seen them? Would you see them in advance before they get published in the normal course of events?
Dr Henry —No. You may have observed that gentleman shaking his head.
Senator CORMANN —I have seen the shake of the head from the second row. Hansard finds it very difficult to pick that up.
Dr Henry —Yes. Apparently the answer is no.
Senator CORMANN —Would you be expected to revise your mining tax revenue estimates after ABARE releases its commodity price and—
Dr Henry —Not for that reason. We are, of course, thinking about revenue projections for budget purposes. We are continuously revising various heads of revenue as we get more information but really only to support the preparation of the budget.
Senator CORMANN —Last time that ABARE came out with more short-term forecasts you were very quick to seize on them to, of course, revise your assumptions to facilitate the MRRT deal, I guess.
Dr Henry —If the government was asking us for advice—policy advice—on a major redesign of a tax, of course we would always use the most recent information.
Senator CORMANN —Just going back to the flood tax, were you instructed by government to provide advice on a flood levy or was that something that was put forward by Treasury?
Dr Henry —I do not know the answer to that question.
Senator CORMANN —Is there somebody coming forward? Perhaps they can assist us?
Mr Wilcock —I have to confess that I was not in the country at the time that the Queensland floods took place and therefore I do not have any personal knowledge of the exact sequence of events. We would have to take that on notice.
Senator CORMANN —Is there somebody in Treasury who knows when the proposition to increase the income tax for the purpose of the flood levy was first raised?
Dr Henry —I doubt that there is in this room.
Mr Wilcock —We would need to take that on notice.
Senator CORMANN —I just assumed that Treasury would have been quite central to that discussion—or is that a wrong assumption?
Mr Wilcock —As I said, I think we would need to take on notice the issue specifically. It is generally the case that the government recognised that it would have some funding requirements arising from the floods in Queensland.
Senator CORMANN —Mr Wilcock, you were out of the country. Dr Henry is not really clear about it. Was Treasury involved at all in the decision to fund part of the reconstruction package through a flood tax?
Dr Henry —I think I can answer that question. I know we were involved, of course, because we were certainly advising government on it. So I can confirm that we were involved.
Senator CORMANN —When did you first provide advice?
Dr Henry —That I do not know.
Senator CORMANN —You do not know whether it was initiated by Treasury or whether it was initiated by the government?
Dr Henry —No. Of course that is sometimes a rather difficult thing to find out after the event.
Senator CORMANN —It gets lost in the backwards and forwards of—
Dr Henry —No, it is not really that. It is that, in my experience over a long period of time now, in advising governments quite often various options are kicked around, perhaps, in discussion and it is often very difficult to recall after the event whether the first person to raise a particular option was sitting on one side of the table or on the other side of the table. That is all. That is all I am saying.
Senator CORMANN —Has Treasury conducted any modelling of the impact of the flood tax on the economy?
Dr Henry —The impact of the flood tax, the flood levy, on the economy? I am not aware of any such work having been undertaken. I will take that on notice too. I do not want to mislead you, but I doubt it.
Senator Sherry —It is a levy; it is not a tax.
Senator CORMANN —It is an increase in the income tax, so it is a tax.
Senator Sherry —No, it is a levy.
Senator CORMANN —Is it an increase in the income tax?
Senator Sherry —It is a levy in a similar way to when you were in government. You may not have been party to the decision. I can recall a milk levy, a sugar levy, an Ansett levy, an East Timor levy and a gun levy. I can recall a few levies in my time. I can recall a surcharge too, if we want to go to the difference between a surcharge, a tax and a levy. I can recall plenty of levies when—
Senator CORMANN —Yes, I am sure you can recall plenty of levies in Australia’s—
Senator Sherry —you, the Liberal-National Party were in government.
Senator CORMANN —Australians can recall plenty of tax increases over the last three years too.
Senator Sherry —I can recall quite a lot.
Senator CAMERON —Senator Sherry, that does not affect the three lines—
Senator CORMANN —Describe for me how the flood levy is constructed. What is it? How do you raise the money through the flood levy? What is the construct of it?
Dr Henry —It is a levy that sits on top of personal income tax payable according to a person’s taxable income.
Senator CORMANN —For all intents and purposes, it is an increase in the income tax paid by individuals paying income tax, isn’t it?
Dr Henry —Certainly it has the effect of changing the amount of a payment that a taxpayer would have to make to the Australian Taxation Office.
Senator CORMANN —For all intents and purposes, it is an increase in income tax?
Dr Henry —My colleague is reminding me that it is certainly not for all taxpayers.
Senator CORMANN —You are talking there about people who are excluded from it and who get exemptions and so on. But that applies to the income tax arrangements generally: some people qualify for exemptions and some people do not.
Dr Henry —Yes.
Senator CORMANN —But it is for all intents and purposes an increase in income tax unless you qualify for one of the exemptions.
Dr Henry —Like the Medicare levy.
Senator CORMANN —Which is also increasing the income tax burden.
Dr Henry —And it is a levy.
Senator Sherry —In this case it applies for one year.
Senator CORMANN —We will see.
Senator Sherry —Have a look back over the transcripts and the debate we had on surcharge levies and taxes over the last 20 years or so. It has been thrown around. The issue of levies, taxes and surcharges has been extensively debated.
Senator CORMANN —When looking at the funding obligations of the Commonwealth or their share of the recent flood damage bill in Queensland and through, mostly, eastern Australia, there are three options, as I understand it: defer the surplus and add to the government’s current expenditure, hence the deficit; cut existing programs and reallocate that funding towards the damage bill; or impose a new tax to raise revenue to cover the damage bill. What is the impact of each of those three main options, according to Treasury?
Dr Henry —The principal impact is, of course, distribution. All of these are simply answering the question, ‘Who is going to pay?’ With respect to adding to the deficit and adding to borrowings, if that were the preferred approach, what that is saying is that, rather than today’s taxpayers paying, future taxpayers will pay. It is a distributional issue.
With respect to financing the flood-related expenditures through cutting other government spending, then the view is being taken that, rather than taxpayers per se paying, it is recipients of various forms of government expenditure who will be denied benefits—yes, largely denied benefits—who will pay. With respect to a flood levy, the decision is, of course, that current taxpayers pay. It is essentially a distributional question.
Senator CORMANN —Given the current state of the economy, why was the mix of a levy and some spending cuts chosen?
Dr Henry —That is a policy question. It is properly one for the Treasurer to answer.
Senator CORMANN —Maybe you could take it on notice.
Senator Sherry —I will take it on notice.
Senator CORMANN —Thank you. The government has now reversed, of course, some of its proposed cuts in order to get support from either key House of Representative members or key senators in these sorts of negotiations. There is a hundred million dollars from the Solar Flagship program in the forward estimates and $264 million for the National Rental Affordability Scheme. Have you identified alternative savings to replace these spending cuts or these spending cuts that have been reversed?
Dr Henry —Not to my knowledge. These would be matters for Fiscal Group, who will be appearing before you later, or alternatively, of course, the department of finance.
Senator CORMANN —Fair enough. The advice we have had from the finance department is that there is still uncertainty as to what the actual exposure of the Commonwealth is going to be. If the bill ends up being more than the $5.6 billion or whatever that has been talked about, would any further increase in that bill be funded through the levy/increase in income tax or through spending cuts?
Dr Henry —That is a question for the Treasurer.
Senator Sherry —It is a hypothetical, but I will take the hypothetical on notice and see whether the Treasurer wants to respond.
Senator CORMANN —I have some other questions, but I am happy to let somebody else go.
CHAIR —All right. We have a number of other people. I can come back to you.
Senator CORMANN —Particularly on ATO because I do not want Mr D’Ascenzo to feel ignored. As much as all of our love is going to Dr Henry today—
Senator Sherry —I was just thinking, ‘The ATO’s not getting much attention.’
Senator CORMANN —we have some stuff for you.
Dr Henry —I would prefer that the commissioner not be ignored.
Senator CAMERON —As long as, Dr Henry, there is not a group hug when we finish.
Dr Henry —Indeed.
Senator Sherry —So far I am feeling like that. Maybe we should have the photo opportunity—get them back in.
Senator CAMERON —Dr Henry, you talked about how sensitive the medium-term forecasts are to different assumptions. What kinds of fluctuations have you looked at in your assessments?
Dr Henry —I was reporting earlier that, without doing too much work on this, I am sure that, were commodity prices to remain at about their present levels rather than fall in the way that we have outlined in the budget, the MRRT revenue would be several multiples of what we have in MYEFO—that is, the 10-year revenue would be several multiples, if you held commodity prices constant at present level, which is not what we do. We take a much more prudent approach.
Senator CAMERON —Sorry, Dr Henry, can you just remind me: what is the figure that we are talking several multiples of? Do you have that?
Dr Henry —The MYEFO figure? I do not have the 10-year MYEFO figure here.
Senator CAMERON —Does anyone have it?
Dr Henry —I do not think it has been made public. I do not think it is a matter of public information, the 10-year figure for the MYEFO. For the reasons I mentioned earlier, I am a bit hesitant—well, more than a bit hesitant. There is so much uncertainty surrounding these numbers that I would prefer the 10-year estimates were not in the public domain. For various reasons they are, but I do not think this 10-year estimate or 10-year projection for the MYEFO is in the public domain. I do not think so.
Senator CAMERON —If prices stay high, even within a shorter time span, it is still substantial amounts of income with this tax, is it not?
Dr Henry —That is right. The MYEFO reports $7.4 billion over the forward estimates. That is not an insignificant amount of revenue.
Senator CAMERON —Can I come back to another issue, and that is the horizontal fiscal equalisation.
Dr Henry —Yes.
Senator CAMERON —I have asked in the past, I am sure, in committees about the benefits that Western Australia have received from horizontal fiscal equalisation over many years. I think I have continually been told that there are no statistics available. I think I have even asked the ABS whether they have the statistics. Given that there are no statistics available, is it a fair and reasonable proposition to say that Western Australia have been a beneficiary of horizontal fiscal equalisation over a lengthy period of time?
Dr Henry —Yes, I think that is a fair proposition. I do not think anybody would argue the contrary. Indeed, for most years that I have been in the federal Treasury Western Australia has been the strongest supporter of horizontal fiscal equalisation.
Senator CAMERON —Is that still the case?
Dr Henry —It does not seem to be, no.
Senator CAMERON —So it is an argument that changes—whether you are a beneficiary or whether you are putting the money in to help other states. Is that what is happening?
Dr Henry —I cannot say for sure, but that conclusion would certainly be consistent with the observed behaviour.
Senator CAMERON —What would you—
Senator Sherry —Tasmania is still in favour, I can assure you of that! We are very consistent in Tassie. We have a hundred years of consistency on this matter. We are very pleased to have it.
Dr Henry —Are you talking about the past or the future?
Senator Sherry —And, I suspect, a hundred years into the future.
Senator CAMERON —So it is not going to be the republic of Tasmania very quickly, is it? Dr Henry, what would be the implications if horizontal fiscal equalisation was not there?
Dr Henry —Maybe it was a bit obtuse but I was referring earlier to one set of possible implications that is being revealed right now in Europe, or at least in parts of Europe, where there is a federation of sorts. But it is not a very well-developed federation. It is certainly not a federation as developed as the Australian federation—nothing like it. A group of countries have decided to share a common currency without a system of horizontal fiscal equalisation. I think it fair to say—well, it is obviously more than fair to say; it is patently obvious—that that is causing a few problems. In a federation where various parts of the federation are likely to experience quite different economic performance, depending upon various external shocks, whether it is an increase in the terms of trade or some other external shock—and of course for much of our post-war history we thought we were dealing with a decline in the terms of trade, a long-term decline in commodity prices.
Whatever the source of the shock, if the various parts of the economy share a common currency, those shocks will be better dealt with if there is a system of horizontal fiscal equalisation to redistribute essentially windfall gains—perhaps not all windfall gains—to other parts of the economy that are not experiencing the same benefit. That is particularly important where the external shock produces a change in the exchange rate—particularly where the external shock is, if you like, a positive external shock, so it causes an increase in the exchange rate. Horizontal fiscal equalisation is then not just a matter of distributing a windfall gain more broadly; it could also be seen as a form of compensation to people who, beyond being denied access to a windfall gain, in fact suffer a windfall loss.
Senator CAMERON —Kenneth Rogoff, Professor of Economics and Public Policy at Harvard, and formerly the Chief Economist of the IMF, made a speech last week about the growing problem in Africa, Europe and worldwide of inequality of income, wealth and opportunity, which he argues is greater than at any time since the last century. You have spoken about how horizontal fiscal equalisation can improve these things. Given that there is still a lot of instability worldwide, what are the implications for us? Reading the financial press here you would think there never had been a financial crisis and there never had been a problem, and you would not know that all these problems still exist everywhere else. If people like Professor Rogoff are pointing to these huge issues, are there implications for us in what is still happening worldwide?
Dr Henry —Yes, there are. You are referring to what is sometimes characterised as a two-speed world economy. We talk domestically about a two-speed Australian economy, and the two are certainly not unrelated. Indeed, they are very closely related. The two-speed or three-speed Australian economy—anyway, it is multiple speeds—owes a lot to the extraordinary growth presently being experienced in China, to a somewhat lesser but nevertheless important extent in India and, excluding Japan, pretty much in East Asia as a whole. That presents the Australian economy with very high prices for iron ore, coal and other commodities that we have in abundance and which feature significantly in our exports. The consequence of those strong increases in commodity prices, and particularly of the investment that is made off the back of them, is an appreciating Australian dollar. If the Australian dollar does not appreciate then the alternative consequence—and it is unavoidable—would be rapidly accelerating inflation and wages, which would achieve a real appreciation and a loss of competitiveness in the Australian economy by a different route. But whether it is an appreciation of the nominal exchange rate or inflation rates well in excess of inflation rates of our trading partners, one way or another we would suffer a loss of competitiveness. It does not matter too much to those sectors of the Australian economy that are benefiting from the higher commodity prices—a loss of competitiveness for them would barely be felt, given where the commodity prices are. But obviously it is a loss of competitiveness that is being felt by a lot of industries and businesses in Australia. This is going to be a fact of life for some time to come.
That is one way global developments are impacting on domestic economic developments. In that, there is a challenge for macroeconomic policy and microeconomic policy in Australia. There are other parts of the world economy which, largely as a consequence of the global financial crisis, are not growing in the way China and India are growing. In North America—particularly the United States—and in both the United Kingdom and continental Europe, the prospects are for subdued rates of economic growth; in my view for a considerable number of years. Some are more optimistic about the United States economy than I am, and with good reason. I do not discount the arguments, but I think the US economy is going to experience subtrend rates of growth for some time. I think the same is true for most of continental Europe and the UK.
On top of that, there is a risk that we have been talking about for some time associated with sovereign debt, in Europe in particular—although the Europeans, with the assistance of the International Monetary Fund, have managed these risks quite well to date. The risks are nevertheless there. Greece, Ireland and Portugal, in particular, stand out as countries that present some risk of volatility in sovereign debt markets. That volatility would not be helpful to the international economy, and it probably would not be helpful in Australia’s case as well. Some are more sanguine about this and take the view that global finance has to go somewhere and, if there were to be a sovereign debt crisis, Australia might look like a very attractive place for savers globally to want to put their money. That is probably true; I understand that argument. But, going back to my earlier point, that would mean an even higher exchange rate and an even greater loss of competitiveness for those trade-exposed sectors of the Australian economy that are not benefiting from the high commodity prices. Australia’s economic performance has been outstanding in global terms, but one should not get complacent about the risks that are out there in the international economy.
Senator CAMERON —For many years when I was the Secretary of the Manufacturing Workers Union I argued for a broad based economy—that we did not become a quarry, a farm and a tourist destination. It seems to me now there is an argument for taking off the tourist destination; we should simply be a quarry and a farm. Tourism and manufacturing must make room for the investment boom in the mining sector. I know the red book advice to government was along those lines. I am just wondering how we can maintain a balanced economy and how can we ensure that we do not end up with the problems Professor Rogoff is arguing. If we have made a miscalculation and the commodity prices come off quicker than we think, or interest rates in China rise, or there are domestic problems in China of the scale in other countries, it is a big problem for us and we need to have a broader base. What is the thinking on that?
Dr Henry —There is quite a lot of thinking on that. One of the issues you are raising is: when the commodity price boom is over, what sort of industrial structure is the Australian economy left with? As we have already discussed, we do not know how long this commodity price boom is going to last. It could last for a very long period—that is, it could last for decades. It is not difficult to construct a plausible scenario that has this commodity price boom lasting for several decades. It could. On the other hand, either because of a sharp retraction in demand for commodities from the Chinese economy or the Indian economy or because we get an unusually strong increase in supply of commodities, the commodity price boom could come off sooner than anybody is presently anticipating. Again, the question would be asked: what sort of industrial structure are we confronting in the Australian economy? Let us suppose that in 20 years time commodity prices have come off quite significantly. The structure of the Australian economy then that would be consistent with Australia maximising at least its gross domestic product would be an industrial structure quite different from the one we have had. That is, I do not think we would want to go back to an industrial structure of 20 years ago. That is what I think. It seems highly unlikely to me that, even in the absence of strong international prices for coal and iron ore, 20 years from now the optimal industrial structure for Australia would be the industrial structure we had 20 or 30 years ago. We need to keep that in mind.
However, even having said that, things can be done to take out some insurance against an outcome that has us locked into particular industries that are presently benefiting from high commodity prices. The team who put together the tax review focused on this issue in some detail. One of the questions the tax review group asked ourselves in preparing Australia’s future tax system was: what can be done to reform the Australian taxation system that would take out some insurance against the Australian economy ending up too heavily specialised in a world in which commodity prices then fall? There is quite a lot in the report on that topic.
CHAIR —Thank you.
Senator CAMERON —Dr Henry, I thank you for the contribution you have made during the time I have been here, and for your long-term contribution to the Public Service.
Dr Henry —Thank you, sir.
Senator BOSWELL —I have questions about the minerals resource rent tax as it relates to the smaller and mid-sized companies. The smaller mid-cap companies will have to implement compliance measures to approved relevant agencies such as the ATO. They have not hit the $50 million threshold. The burden of proof falls to these small- to mid-cap mining companies. This all costs money and is a further disincentive to invest in our resource sector. What arrangements will be put in place to manage the compliance and administrative burden that the MRRT is likely to place on growing exploration of small mining companies?
Dr Henry —My colleague Paul McCullough will take that question.
Mr McCullough —I missed a little bit of the question. To the extent that it goes towards details of compliance activities and those sorts of things, those details have not been sorted out yet, for the simple reason that the legislation, for example, has not been completed and there has been no opportunity to consult on that. A couple of processes have been running that you would be aware of. The policy transition group was meeting for the last half of 2010 and published a report in December of 2010 that goes to some of those issues and recommends a further process for consultation with industry over the next period of implementation that should address those sorts of things. Treasury, the department of resources and the Australian tax office would be involved in that implementation process, and those issues would be worked through collectively.
Senator BOSWELL —Can you explain the operation of the MRRT threshold—specifically how the mechanism will work with those companies which are operating between the $50 million and the $100 million bracket?
Mr McCullough —No final decision has been taken by government about exactly how the threshold would work. Again, the policy transition group has made some recommendations. I can refer you to a particular page; I might even be able to give you a copy of the report. The government has not had an opportunity to consider that yet or announce precisely how that is going to work.
Senator BOSWELL —In relation to the method of managing deductions for mining companies’ MRRT liability, can you explain the operation of the safe harbour? What are the methods available to go there?
Mr McCullough —Again, it is just a little bit early for some of those details to be fleshed out. We are still well before a process of any legislation having been finalised.
Senator BOSWELL —When is this legislation due to be put in place?
Mr McCullough —I think the Treasurer has made a commitment to an exposure draft around May. I think the plan then is to have further consultation on the exposure draft with a view towards introduction before the end of this year—so the end of 2011.
Senator BOSWELL —If the exposure draft is due in May, surely there must be some answers to the questions that I have proposed. You cannot just put out an exposure draft missing all those inquiries.
Mr McCullough —I am not suggesting that it will necessarily be missing all of that detail. Obviously, there is an iterative process. The high-level policy issues were settled with the heads of agreement in the middle of last year. Then the policy transition group made 90-odd recommendations on matters of what I would call lower level policy detail. The government is yet to announce its position on those. Once that happens, then, the way these things develop, a range of technical, compliance and administrative issues need to be worked through in the finalisation of the legislation. Then there is usually a process where the tax office makes known its position on things to do with compliance, administration and interpretation.
Senator BOSWELL —You said earlier that you would give me some information. What information can you give me?
Mr McCullough —It is not in a very digestible form. There is, for example, the policy transition group’s report, which covers those 94 recommendations. I do not think we have time to go through each one of those in detail.
Senator BOSWELL —No, I do not expect you to.
Mr McCullough —I think we have a spare copy of the report we can give you. It is publicly available. It is on the website, if we do not have a hard copy.
Senator BOSWELL —Thank you. Dr Henry, for the first time in my political career I find myself agreeing with the former Secretary of the AMWU. What the good senator says is accurate. You may be well above it, but because of the increasing dollar and the two-speed economy you refer to there is a great deal of hurt out there in the manufacturing industry right across the board. People are telling me that the order books are empty and that in another month they will have to make some serious decisions on where they go. I take this opportunity to pass that on to you. We have crossed swords a few times, but I wish you the best and success in your new venture.
Dr Henry —Thank you very much, Senator.
Senator XENOPHON —Dr Henry, I asked you some questions on 27 May about the KPMG Econtech modelling of the RSPT, particularly in relation to whether there was any modelling of the regional and sectoral effects, and also what the definition of ‘long run’ was. Thank you for the response on notice saying that the KPMG Econtech model was the MM900 model, it is not a regional model and no modelling was undertaken of regional effects. Do you think modelling ought to be done of regional effects, given that there could be marked differences in the impact in a regional area with such a tax? To put it another way, there would be a degree of finessing, or a greater degree of information, if regional effects were considered.
Dr Henry —That is clearly true. But, firstly, we do not have the modelling capability and, secondly—
Senator XENOPHON —Also there are no regional models available?
Dr Henry —No, I am not saying that. We do not have the modelling capability in house that would allow that sort of modelling to be undertaken. With the models that do exist that allow for regional differentiation, there is a lot of judgment involved in putting the models together. For example, most of the models that support the kind of impact analysis that you are talking about—computable general equilibrium models—have at their core a detailed input-output system that records the interindustry linkages with respect to usages of intermediate inputs. That is not the primary factors of production—labour, capital, land and so on—but the intermediate inputs: materials principally, fuel and so on.
In Australia at the national level, the Australian Bureau of Statistics publishes an input-output table roughly once every five or six years. Obviously, if you are going to construct a computable general equilibrium model for the Australian economy you want to have that most up-to-date input-output system sitting at the core of it, and you will have to put up with out-of-date data from the Australian Bureau of Statistics. It is unavoidable. It is not a criticism. This is difficult stuff to do. If you then want to construct a model which has, let us say, eight regions in it—six states and two territories—you have to construct eight input-output systems out of that one national system. You do that yourself. The ABS does not do it. Doing that, an enormous amount of judgment has to be applied. If you then want to go down to substate level or subterritory level, into regions, you have to construct even more input-output tables. Again, the ABS does not do it; you have to do it yourself. In doing that, you will have to exercise a large amount of judgment.
There comes a point where one has to wonder about the quality of the information that is coming out of the models. Firstly, we do not have the models in house. Secondly, the construction of models to allow the sort of analysis you are talking about involves so much judgment on such little information that one would have to question the quality of the output.
The second thing I would say in response to the question is that we have just had a discussion about some of the macro-economic and industry—and by implication regional—consequences of commodity prices being where they are. Whatever one thinks about the size of the MRRT as against alternatives, frankly, the regional impact of the MRRT is likely to be tiny relative to the regional impact of the large increase in commodity prices we have had on the other side. I am not saying it is an unimportant issue, but it is very much a second, third or fourth order issue relative to the regional impact of commodity prices.
Senator XENOPHON —There was also discussion as to what the ‘long run’ meant. I think your answer on notice was that KPMG Econtech suggested it was a five- to 10-year range.
Dr Henry —Yes.
Senator XENOPHON —Do you acknowledge that if you are looking at that long-run effect there could be some transitional effects in the first one, two or three years before things smooth out that could cause dislocation in regions?
Dr Henry —Absolutely. Senator Cameron was referring to some of these earlier, and so was Senator Boswell. With commodity prices being where they are and the exchange rate being where it is, some businesses feel dislocated. This stuff does not tend to happen seamlessly and incrementally. Rather, a business may confront the very real question of whether, with the exchange rate being where it is, it is able to remain in business.
Senator XENOPHON —Is it worth doing the modelling in the first place if there are so many variables?
Dr Henry —The increase in the exchange rate that we have experienced is not largely an artefact of government policy. It is largely an artefact of the external shock that the Australian economy has experienced, and is experiencing, because of very strong commodity prices. I do not want to be misinterpreted on this. I am not saying that this is an uninteresting question; it is a very interesting question that you raise. What I am saying is that we do not have the technology in house to do the work. If we did have the technology, I would have serious concerns about the quality of the output that comes out of it. The other thing I am saying is that, frankly, with the MRRT on one side stacked up against the very large increase in commodity prices that we have had on the other side, worrying about the regional impact of the MRRT but not worrying about the regional impact of the very strong increase in commodity prices to me seems a little peculiar.
Senator XENOPHON —Minister, the Inspector-General of Taxation was referred by you on 19 April for a comprehensive review of the implementation of the ATO’s Change Program. I understand that report was delivered to government on 3 December and handed to the Assistant Treasurer on 5 December. The government has 25 sitting days to table that report. How close are the parliament and the Australian public to seeing that report of the inspector-general?
Senator Sherry —Firstly, it was referred by me when I was Assistant Treasurer. Obviously, I have had a change of portfolio responsibilities, so my successor, Minister Shorten, now has responsibility. I will have to take it on notice. I will make best endeavours over the next couple of hours to see whether I can be more precise than that.
Senator XENOPHON —I would appreciate that. In terms of natural justice, as I understand it the ATO would normally have a chance to respond to that report—or has that process already occurred? Perhaps Mr D’Ascenzo can answer.
Mr D’Ascenzo —Yes, we have already responded and included that in the report.
Senator XENOPHON —Mr D’Ascenzo, your understanding is that the natural justice process that the inspector-general undertakes has already been done? Mr Butler is indicating yes. So the ball is in the government’s court?
Senator Sherry —I think the ball is always in the government’s court.
Senator XENOPHON —Not necessarily, if there is an opportunity for the tax office to respond.
Senator Sherry —I accept your point. I cannot give you an indicative date. Under the 25-sitting-day rule, it is 6 July, which is obviously some months way.
Senator XENOPHON —It is a new tax year.
Senator Sherry —Yes, it is. The operational rules are that we have 25 sitting days. I understand your interest because I took many of those inquiries that were generated as a consequence of your being interviewed around the country. I well recall your interest in this.
Senator XENOPHON —Always happy to help, Minister.
Senator Sherry —You certainly did, given the number of shock jocks I had to be interviewed by!
Senator XENOPHON —I was very kind to you, Minister, in the media.
Senator Sherry —Yes, I know you were. I think you were very considered. I accept that you have an interest in this. I will make some inquiries. I will get one of my staff to speak to the Assistant Treasurer’s office and see if we can get you a more accurate date.
Senator XENOPHON —If the response could be given today that would be useful. Mr D’Ascenzo, these are things you may wish to take on notice: how many staff, including SES staff, both ongoing and non-ongoing, currently work at the ATO, including the classifications by number and percentage? How would that compare to the 2009 year and the 2010 year? I appreciate that you might want to take that on notice.
Mr D’Ascenzo —That information would be in our annual report, but we can make it available.
Senator XENOPHON —Yes, but specifics in terms of the classifications and percentages. Also, what are the projections in terms of staff levels and classifications for ongoing and non-ongoing staff and SES for the current tax year? In terms of the amount that was paid by the ATO to taxpayers in interest for delayed returns, that is higher this year, isn’t it, than it was in previous years? Is that the case?
Mr D’Ascenzo —I think that is the case. I think there are two large payments for two large companies in relation to the outcome of court decisions. You have to see interest in the light of adjustments to previous assessments through court processes.
Senator XENOPHON —Is it just that, or are more taxpayers being paid for delays?
Mr D’Ascenzo —We have further details there. Mr Butler might be able to give you more details. That has influenced the greater number. That is the significant material change.
Senator XENOPHON —Again, Mr Butler, I am happy for that to be taken on notice, unless you want to elaborate on it now.
Mr Butler —I will take it on notice, but generally speaking there were certainly more cases where taxpayers received interest because of the delays this time last year in processing returns.
Senator XENOPHON —As I understand it, Mr D’Ascenzo, the whole idea of the Change Program was to go to the new Siebel system. I think Mr Butler has had a key role in that system.
Mr D’Ascenzo —It is not quite as simple as that. The Change Program has a number of components. We started off with new portals for tax agents, taxpayers and businesses. That was a precursor. Release 1 was the new client relationship management system. Release 2 was a new work plan and case management system. Release 3 is about an integrated system. The whole range of processing and accounting systems, many of which were brought from the 30-year-old National Taxpayer System, is in the new integrated platform. There are a lot of different components to it.
Senator XENOPHON —I understand that. Is there is a distinction between the legacy system and the Siebel system?
Mr D’Ascenzo —Release 3 is an integrated core processing system, which is not the Siebel system. The Siebel system is our case management and workflow program.
Senator XENOPHON —In terms of the contract with Accenture, the idea is to streamline the processing of tax returns?
Mr D’Ascenzo —That is right.
Senator XENOPHON —And the initial contract with Accenture would have included BASs as well?
Mr D’Ascenzo —Yes.
Senator XENOPHON —Are BASs now being processed under the new system?
Mr D’Ascenzo —No.
Senator XENOPHON —Will they be processed under the new system?
Mr D’Ascenzo —We have to work through when in our scheduling we want to do that. We had contractual arrangements with Accenture that compensated for that extra work.
Senator XENOPHON —Was the BAS system due to go to the new system but did not do so because of some technical difficulties?
Mr D’Ascenzo —Not so much technical difficulties, just program scope issues. We wanted to make sure that information was integrated. Part of the overall process was to make sure that our AIS system interfaces with our warehouse and that our warehouse then interfaces with the information from our new integrated core processing system so that we have the information that we get from both of those systems. So, from an information-gathering perspective, we have that integration in the back end. As to whether we move the BAS system onto our new system, I think that is still within our long-term projections.
Senator XENOPHON —Is there any time frame at this stage for BAS coming onto it?
Mr Butler —We have discussed this in a previous hearing. The business activity statement work was delayed. We decided to defer that work. Right now we are working on part of it, which is called pay-as-you-go instalments, with a view to that being finished at the end of this calendar year and further testing early next calendar year. We are doing it by components. Right now we are working through a more comprehensive program of work around information technology; we plan to have that plan finished by 30 June. Then we will clearly set out when we will be able to pick up the rest of the accounting system. We need to factor into that recently announced government changes, such as the review of superannuation.
Senator XENOPHON —Was it intended for the new system to include GST or is that still being done under the legacy system?
Mr Butler —The AIS system is not nearly as old as the National Taxpayer System, which we replaced with the Income Tax System. AIS was built as part of tax reform, so it is a much newer system. It was intended that it would all be together. For a range of reasons, which we discussed in other hearings, that did not happen. We took it out of the scope of the contract—
Senator XENOPHON —GST was initially in the scope of the contract, wasn’t it?
Mr Butler —That is correct. The business activity statement system includes GST. The remittances are paid by business through business activity statements, so it is GST, income tax and those sorts of things.
Senator XENOPHON —Can we go to the issue of service standards? I understand that it is to process 94 percent of returns within 14 days. Is that right?
Mr Butler —Ninety-four percent of individual returns lodged electronically within 14 days.
Senator XENOPHON —Thank you for clarifying that. Are you confident of meeting that service standard for this current year and for the previous year?
Mr Butler —In July we did not meet that service standard. The volume of returns we typically receive in July means we now cannot recover that service standard for the whole year. But August was 90.9 per cent and September was 93.8 per cent—so it went over 90 per cent. It was 95.7 percent in October. All this information is on our website. So we exceeded the service standard in many months, but because of the volume of returns in July—
Senator XENOPHON —Because time is limited, I do not want to go to things that are available on the website. The website indicates that you have details of finalised days—70. With respect to returns sent electronically, you have details finalised at 29-plus days. Could you indicate on notice how many delayed returns there were from 30 to 60 days, 61 to 90 days and in 30-day increments up until six months? Because that would be an issue. Hopefully there are not very many after 90 days. Those figures only go to 29-plus days, don’t they?
Mr Butler —That is correct.
Senator XENOPHON —They do not tell us about longer delays.
Mr Butler —With the longer delays, there would be particular reasons why returns were delayed. In those returns would be returns we have stopped because we think there are fraudulent claims. Identity theft cases would be in those ones which are more than 30 days old. We can give that break up.
Senator XENOPHON —To be fair to the ATO, you would be able to do a comparison of before the Siebel system came on line?
Mr Butler —Siebel was the case management system before the new system was put in place.
Senator XENOPHON —Okay, let us say the new system.
Mr Butler —That certainly is the case. With this new system we report it differently. In the past, of those returns that finished in December, we used to report how many were completed within 14 days. Now we say, ‘Of those returns received in December, here is what has happened to all of them.’ It is more complete reporting.
Senator XENOPHON —It would be good if you could provide those details on notice, particularly for those that blow out. There are some returns that you key manually; is that right?
Mr Butler —Very few, but there are some.
Senator XENOPHON —On notice, could you provide me with details of what percentage and number of tax returns were keyed manually for the 2009 and 2010 years and what do you envisage the level of any manual keying to be for this year?
Mr Butler —I will take it on notice. I am not sure how far we can go back accurately for manual keying.
Senator XENOPHON —I am just trying to get a sense of whether there is any difference in manual keying before the new system and post the new system. Presumably there would be less manual keying.
Mr Butler —Manual keying is a very small part of the work. Returns go through a system. They come out for exceptional review items. We know there are fewer exceptional review items in the new system than in the old system. In the old system our staff could only action one at a time; now they can do three or four at a time. We can give you the information about that, if that is of interest to you.
Senator XENOPHON —I want to go to the issue of error codes. We had a long discussion a couple estimates hearings ago about error codes. You indicated there were a number of error codes, or systems errors. For this year are there any error codes or system errors that are stopping or delaying the electronic processing of tax returns?
Mr Butler —There are always error codes in the system. Even the national taxpayer system was 30 years old. There were error codes. So there are, yes.
Senator XENOPHON —Could you supply some more details about the extent of that? How many hardship cases have there been in the 2009 year compared to the 2010 year, and how many are you expecting this year?
Mr Butler —I will take that on notice.
Mr D’Ascenzo —That is hardship cases in relation to people—
Senator XENOPHON —I think there is a definition of hardship cases in there.
Mr D’Ascenzo —Yes, there is, but that is not related to the system. If individuals cannot pay tax because of desperate circumstances they seek hardship provisions to waive the liability. So I am not sure how that relates to your line of questioning.
Senator XENOPHON —It is fair enough to clarify that. My understanding is that there have been applications in respect of hardship cases because of delays in the processing of returns, insofar as people have raised issues about the delays of processing returns.
Mr Butler —I think we have answered questions in previous estimates hearings about cases where people were anxious for their refund. We opened our criteria for ‘hardship’, treated them as ‘hardship’ and pushed them through the system.
Senator XENOPHON —That is right; Mr D’Ascenzo has clarified that. I am grateful for that. Have any legal actions been lodged in respect of delays, including any class actions? I have not heard of any.
Ms Granger —No.
Senator XENOPHON —In terms of the ATO’s relationship with Accenture, I note there have been some significant problems with the UK inland revenue office and Accenture. I am not sure whether that relationship has been terminated. Are there any ongoing discussions about renegotiating or terminating the contract with Accenture as a result of any problems with the implementation of the Change Program, for which Accenture is responsible?
Mr Butler —We still have Accenture doing work with us. We have a very positive relationship with them. The Change Program contract finished in June last year. We negotiated compensation for not doing business activity statements. As the commissioner said, that was a very positive, constructive environment. So we have a good, a positive and a professional relationship with Accenture.
Senator XENOPHON —I will put my question about compensation claims lodged for delays on notice. I do not know whether that is a different category. Perhaps Ms Granger can assist on that. Is there is a distinct category of compensation claims being lodged with regard to delays in returns being processed? I mean in terms of consequential loss. There is the interest payment. That is one aspect, and that is a straightforward interest payment. But there is another category, isn’t there, for compensation for any consequential or other losses?
Ms Granger —Certainly, as some of the claims included that ground, you have to specifically have a different process for that.
Senator XENOPHON —Sure.
Ms Granger —We had 104 claims for compensation.
Senator XENOPHON —Was that for 2010?
Ms Granger —Those statistics are as at 17 January this year.
Senator XENOPHON —For the current year?
Ms Granger —Yes.
Mr D’Ascenzo —Those are the total number of complaints we have had.
Senator XENOPHON —I am sorry, compensation claims.
Mr D’Ascenzo —Compensation claims.
Senator XENOPHON —Can you provide details of how that compares with the 2009 and 2010 years, given there is that specific category of compensation as distinct from the interest payments.
Mr Butler —We may not be able to make that comparison. These were compensation claims in respect of a new system. Of course, we did not have new systems in the earlier years. We can certainly give you the detail about the number of claims made for compensation from taxpayers and tax agents.
Mr D’Ascenzo —We could probably give you the details of any that we have actioned as well. I do not think we have actioned any in a way that the claim has been substantiated.
Ms Granger —In fact, 85 claims have been declined.
Senator XENOPHON —Obviously, just because you make a claim it does not mean it is a valid claim, I understand that. I have a general question about the issue of staff, Mr D’Ascenzo. I know there will be some answers on notice. Is it fair to say that you have to take on more staff to cope with the change program or the new system because of a number of technical glitches or issues with the implementation of the system?
Mr D’Ascenzo —Maybe Mr Butler can answer that more specifically. The system is working very well from our perspective. In fact, we think it has been a great achievement for this country to be able to have a new system that manages flows of processes that go to the order of three to four million a month at its peak times. Most countries in the world aspire to that. We have had a number of independent reports that have indicated how well the implementation has gone, given the complexity and size.
Mr Butler —We do not have additional staff. We have additional staff during tax time, as we always do, because it is our busiest time of the year. We can take it on notice and give you comparisons over the past three years, for example, of tax time staffing full-time equivalent numbers, if that is of interest to you.
Ms Granger —Perhaps I can give a couple of statistics. Our staffing level at 30 June last year was 24,277. At 31 December, the end of this calendar year, it was 23,902, so it was slightly less. About nine per cent of those were non-ongoing staff. That was coming out of our peak processing season. So it is slightly less, but there are a lot of ons and offs in tax office staffing, as you know.
Senator XENOPHON —And you have your peak periods. Without going to the content of the Inspector-General’s report, Mr D’Ascenzo, are you satisfied with the process that was undertaken and that the tax office was treated fairly in that report?
Mr D’Ascenzo —It is a question of the capabilities of people. We have had a number of reports from specialists in the implementation of major IT systems, both here and internationally. That has been made public. Everything has to be weighed up in light of those different perspectives.
Senator XENOPHON —You are satisfied that the process undertaken by the Inspector-General was a fair one from the tax office’s point of view?
Mr D’Ascenzo —We had an opportunity to respond to the recommendations or the findings, and we did that. The extent to which they were taken into account is a matter for the Inspector-General.
Senator XENOPHON —But on the question of fairness, you do not want to comment on that?
Mr D’Ascenzo —It is a question of whether or not the processes have gone through. The other question is whether or not people’s different perspectives were balanced in an appropriate way. That is for others to judge.
Senator BUSHBY —I have a question for the revenue group. Has Treasury updated its economic modelling on a carbon price since 2008?
Dr Henry —That is a question for the macroeconomic group.
Senator BUSHBY —The macroeconomic group?
Dr Henry —I can understand why you think it would be a question for the revenue group, but it is not.
Senator BUSHBY —Has there been an internal change in how that has—
Dr Henry —No, I do not think so.
Senator BUSHBY —We have asked many, many questions on economic modelling—
Dr Henry —Of revenue?
Senator BUSHBY —on the ETS and carbon price of this group in the past.
Senator CORMANN —The Prime Minister has just announced that we will have a carbon tax by 1 July 2012, so it is clearly a revenue measure.
CHAIR —The macro group are on later.
Senator BUSHBY —We can follow up aspects of this that are relevant for macro later. This is in the context, exactly as Senator Cormann says, that the Prime Minister has announced that we will have a carbon tax.
CHAIR —Yes, but the Secretary of the Treasury has said that this is a question for the macro group.
Senator BUSHBY —I will try to focus the questions on the tax side of it.
Senator CORMANN —The carbon tax—it was not to be before the election and it is now looking like—
Senator Sherry —We know your political rhetoric.
Senator CORMANN —We like this broken promise of this government.
Senator Sherry —Perhaps we should focus on the question. You are wasting your own time—
Senator BUSHBY —I think he was just outlining—
Senator Sherry —and the very valuable time of the officials.
Senator BUSHBY —I think Ms Quinn used to answer questions, and I am quite sure it was in this section.
Dr Henry —No, I do not think so.
Senator BUSHBY —It certainly was not macro.
Mr McCullough —She might have been part of the fiscal group. She probably has the policy carriage of that sort of issue.
Senator BUSHBY —In terms of modelling, is that still within the fiscal group?
Mr McCullough —There is a special modelling unit that straddles both macro and fiscal. Meghan Quinn heads that unit.
Ms Mrakovcic —Meghan Quinn is the general manager of the macroeconomic modelling division.
Senator BUSHBY —So we will be able to ask questions about the modelling of the carbon tax of macro and Ms Quinn will be present to do it.
Ms Mrakovcic —This is the economic impact of carbon prices? This is the CGE modelling around the carbon price?
Senator BUSHBY —For instance, the 2008 modelling estimated the carbon price at $26 was necessary in 2012-13 to achieve the government’s five per cent carbon reduction by 2020—that type of thing.
Ms Mrakovcic —Those types of questions should be referred to macroeconomic modelling.
Senator BUSHBY —I might hand those over to them and focus on a few questions for the tax office. Firstly, in today’s Australian Financial Review Mr D’Ascenzo was quoted as expressing his frustration at his lack of power to modify tax rules on excess superannuation contributions. I have asked you questions before about how many people have applied for the application of your discretion. First of all, is that report an accurate description of your feeling in respect of that particular issue? If it is, and even if it is not, to what extent do you have the discretion to recognise that some people are getting into a situation, through mistake or the mistake of advisers, that has serious consequences for them and their superannuation?
Mr D’Ascenzo —Unfortunately, the reporting has mixed a few terms. My key point at the SPAA conference was to highlight the policy rationale of superannuation. It comes from two perspectives. One perspective was: how do we safeguard retirement incomes for Australians? Parliament, in trying to encourage that, has provided a number of concessions, tax expenditures, that allow superannuation to thrive in this country. That means that the parameters of those concessions are outlined by the rules. So when people disregard the rules, whether it be the rules for self-managed super funds or super guarantee, what you have are two things: (1), you do not have an adequate safeguard in the retirement outcomes or, (2), concessions being provided to others that were not intended under the original design to access that. That was my key point.
Then we started to talk about the super review recommendations. In the super review recommendations—this was the Cooper review—the proposition was mooted, which I think the government has agreed to subject to further consultation, that there should be a review of the penalty structure for self-managed superannuation funds. At the moment, even for trivial breaches, the commissioner’s sanction is to make funds non-qualifying. That has a very significant impact on the viability of those funds. That is the area that we were referring to. If you were to take out of that first line in the report ‘excess contributions tax’ and throw in ‘self-managed super funds’ then that would be what I was talking about.
Senator BUSHBY —The report mentions the self-managed super funds as well—it goes on in the next paragraph.
Mr D’Ascenzo —That was the penalty regime. The sliding scale of penalty applies to self-managed super funds, not to the question of excess contributions tax. In a sense, not maliciously as it turned out, people got the two references wrong.
Senator BUSHBY —You think that there needs to be some tweaking of the self-managed super funds rules, maybe a sliding scale of penalty—
Mr D’Ascenzo —The point is that the sanction that currently exists is to make a fund not qualify.
Senator BUSHBY —It is ‘draconian’, to quote you?
Mr D’Ascenzo —It is for trivial offences, which is the context of my statement.
Senator BUSHBY —Ultimately, government should seek to achieve a balance between protecting the revenue but enabling people to get on and make appropriate arrangements to look after themselves post-retirement. Protecting the revenue in an overly ‘draconian’ way, to quote you, eats into their ability to do that because it makes them non-compliant.
Mr D’Ascenzo —Basically, you stop them from conducting that process of building their nest egg for retirement through these self-managed super funds.
Senator BUSHBY —Hopefully, having raised it and put it squarely before the government, as you have publicly, and also I believe more directly—
Senator Sherry —There was the same issue with the APRA-regulated funds. I think the SI(S) Act changed the penalty regime from an absolute black-white remove tax concessionality to a more appropriate graduated regime. I am not aware of the history of why that does not apply to the self-managed super fund sector. I do not think there is any dispute of this issue, but it is a separate issue from the—
Senator BUSHBY —I was going to get to that.
Senator Sherry —tax treatment of excess contributions.
Senator BUSHBY —Hopefully the government will take this issue on board and we will see some action down the track.
Senator Sherry —As to the issue of the graduated penalty regime, yes, I would have to double-check our policy announcement on Cooper, but I—
Mr D’Ascenzo —No, the government has agreed to that recommendation, subject to consultation.
Senator BUSHBY —In terms of the excess superannuation contributions, the article says that about 90,000 people have been caught since 2007. I was intending to ask you anyway for an update on how many people have been caught. Is that an accurate figure?
Mr D’Ascenzo —As to the situation of excess contributions, the points I made—and I think it was just good context—were that people sometimes confuse what the different impacts of the rules are. Impacts do change, depending on whether or not you are breaching the concessional amounts and the non-concessional amounts and all by the same amount. Normally, if you have just breached, say, the concessional amount, the tax payable there is 31.5 per cent, which is equivalent to the marginal rate. What it says, in effect, is that you have had this tax concession, you are not really entitled to it and so it brings it back into the revenue pot. I wanted to make the point that the people who are subject to a potential 93 per cent rate is a very small proportion of the total population. Sometimes in the media it gets confused. All of this is subject to 93 per cent, whereas it is the very small tip of the—
Senator BUSHBY —It probably makes better press.
Mr D’Ascenzo —It does. That was the point I wanted to make in that context. The other one was that we have done something like 15,000 assessments. Of those 15,000 assessments we have had eight per cent of people coming back to the ATO and saying: ‘Commissioner, you have discretion. Can you exercise it in my favour?’ So that is eight per cent of the assessments raised. We have always taken the view, in fact in a recent AAT decision supports the approach we take, is that that is a very narrow concession. We have exercised that discretion favourably in about 20 to 25 per cent of the cases we have. Of that eight per cent—
Senator BUSHBY —That eight per cent—
Mr D’Ascenzo —We allow two, which means that 98 per cent are still there, subject to the liabilities that we have imposed under the law.
CHAIR —We will leave it there. We have run out of time.
Senator BUSHBY —I had not finished on that particular topic.
CHAIR —There are other senators wanting to ask questions.
Senator BUSHBY —I have had, what, about five minutes—
CHAIR —I am sorry. Senator Pratt.
Senator PRATT —Thank you very much, Chair.
Senator BUSHBY —out of 2½ hours—10 minutes. I am a permanent member of the committee. Bob Brown got more time and he is not even a permanent member.
Senator PRATT —I wish to go to the R&D tax bill in the Senate. Does anyone have information on the implications of those amendments?
Mr Antioch —Senator, the bill that has come to the Senate from the House last year does not contain any further amendments. I am not entirely sure—
Senator PRATT —As I understand it, there have been some amendments moved in the Senate by opposition parties. I am looking for an analysis of those. You may not have that information. If I am correct in my question then perhaps you could take that analysis on notice.
Mr Antioch —We could. There were some amendments mooted by the opposition the last time the bill came to the Senate. It is not clear whether those are still the amendments that the opposition intends to move.
Senator PRATT —As to the R&D, perhaps my colleagues can enlighten me as to whether we will be subjected to those again and whether there is an analysis of that approach. Anyway, I have plenty of other questions. I do not want to waste the committee’s time. In the interests of brevity, I might just move on from that topic.
Mr Antioch —Sure.
Senator PRATT —There have been a number of comments about flood levies, exemptions. There has been a lot of debate in Western Australia about calling for people who have been victims of bushfires and floods there to be exempt. There seems to be some misunderstanding about that. I am seeking confirmation in a public forum that people who received the Australian government disaster recovery payments for both the recent WA bushfires and the Carnarvon floods are exempt from the flood levy.
Senator CORMANN —It is a decision—
Senator Sherry —You are not answering the questions.
Mr McCullough —I think Mr Wilcock can clarify—
Senator PRATT —Any misinformation—
Mr Wilcock —There will be exemptions from the flood levy in respect of people who receive an Australian government disaster relief payment. That payment is available in relation to people who suffered certain specified types of damage from floods in Queensland, Cyclone Yasi and the WA bushfires.
Senator CORMANN —Was that policy decision made to include—
Senator Sherry —Chair, firstly, he is cutting in on the officer as he is—
Senator CORMANN —No, it is a follow-up question.
Senator Sherry —He should be courteous enough—he is not yet a minister—just be patient.
Senator CORMANN —It is normal practice to have follow-up questions.
Senator Sherry —Just be patient. The government will not tolerate, and you did not either, when you were in government, witnesses being interrupted, Chair. Secondly, someone else was asking a question, Chair.
Senator CORMANN —It is normal practice in committees like this to have follow-up questions and you know that.
CHAIR —Just ignore the interjection. If you could finish your answer.
Mr Wilcock —So the WA bushfires, the Carnarvon floods and the floods in Victoria.
Senator PRATT —Thank you. I would like some advice on the significance of the flood levy legislation being passed in a timely manner. I suppose you would need to deal with things like finalising your withholding schedules as well as enabling other people to be ready with software et cetera.
Mr D’Ascenzo —Yes, that is correct. The earlier the better, in terms of the administrative arrangements that need to be made. As you pointed out, trying to get out the withholding schedules is quite an important matter for employers. Software developers need some time to prepare their packages, and also to try to explain to the community where ultimately people are exempted, who is and who is not eligible. It is going to be quite a task.
Senator PRATT —To get that ready for the next financial year we have to start now and have some certainty about what that legislation is like.
Mr D’Ascenzo —From an administrative perspective, the earlier the better.
Ms Granger —If I could just add to that. In relation to the commissioner being able to do new withholding schedules, he actually does need legislation in place in relation to that. He would not be able to do those schedules without that. It is also important for lead times as well.
Senator PRATT —Thank you very much. Dr Henry, I would like to ask you a question. Senator Cormann has been speaking about the fact that a large proportion of the MRRT will be raised in WA. I would like to ask what the ramifications are of a state government that does not have high enough royalties. It helps drive up the value of the dollar et cetera. It puts its hand out to the Commonwealth for health, education and infrastructure funding. You talked about the regional impacts of the commodity boom. Might these be things like the fabrication shops on the Kwinana strip? They were expecting a lot of work from the commodities boom but they are finding that a lot of that work is going offshore. That is characterised by, I suppose, high rents in towns like Port Hedland where families are paying $1,500 a week but cannot get their kids into child care because childcare workers cannot afford housing. Can you talk through some of those issues that I have raised?
Dr Henry —It is certainly the case that the regional impact is not as straightforward as saying that a state that has a lot of iron ore and coal is a state in which everybody benefits from high iron ore and coal prices. That is certainly the case. The state of Queensland probably provides a very stark illustration of the dangers in coming to such a conclusion.
Senator Cameron referred earlier to the impact on tourism of the high currency and that seems to have impacted Queensland more than any other state. It is certainly the case that even within a state, even within a region, different businesses are being impacted differentially, largely because of the impact of high commodity prices on the Australian dollar.
It is quite complex, and I think it is very difficult to generalise with any confidence. For example, some businesses that are being impacted severely—I am thinking of some manufacturing entities even that have been impacted negatively by the high dollar—and some have found opportunities to supply product to mining and engineering construction associated with mining. It is quite a complex story.
CHAIR —We will move on to Senator Eggleston.
Senator EGGLESTON —Thank you, Chair. I had some questions on a carbon tax yesterday which I sought to ask in the minerals and energy section. I was asked to ask them in this section of Treasury. I am not sure whether or not it is appropriate.
Dr Henry —Perhaps I can assist the committee, Chair. The appropriate group would be fiscal group—anything to do with climate change, whether it is an emissions trading scheme or whatever. That includes, Senator Bushby, questions on the modelling. We will ensure that Ms Quinn is here with the fiscal group colleagues to take those questions.
Senator LUDLAM —I would like to change the subject and put some questions to whoever feels best qualified to deal with housing. Some of the issues that were raised in your tax review, Dr Henry, that do not seem to have received a great deal of play since you wrote about housing. Specifically, we have a range of tax incentives that encourage investment in property. Do you consider that we have effectively got a tension in Australia between tax policies designed to encourage appreciation in real estate markets for the benefit of investors at the same time as we are ploughing money into housing affordability initiatives to try and keep housing within range of the rest of us? Is there a tension inherent in the way that we are taxing the housing sector?
Dr Henry —This is a policy question, but it does relate to material in the tax review that I chaired, so I am happy to respond to the question, at least in a general policy way. I think the features of the tax system that you would be referring to in particular probably—I am guessing—relate to the way that the capital gains tax interacts with deductions permitted for income tax purposes, something that in this country we colloquially refer to as ‘negative gearing’. It is likely that the combination of our fairly concessional capital gains tax treatment of rental housing—a combination of that with negative gearing—does provide an incentive. There is no doubt that it provides a strong incentive for investors to invest in rental property, when there is an expectation of significant capital gain.
We saw precisely this behaviour in the early part of the last decade, particularly running up to the end of 2003, where a lot of the finance that was approved for housing—a very large proportion; I cannot remember the precise proportion, but it was a very large proportion of the finance approvals—was for investor housing. I do not think there can be any doubt that at least when there is an expectation of strong price increase in housing generally there is then a shift in the pattern of housing investment from owner-occupier housing, which itself is generously treated, of course, under capital gains tax, to investor housing, to rental housing.
It has been argued by many, including a number of academics who undertake research in this field, that the tax incentive itself contributes to house price increases and underpins expectations of further house price increases and that, therefore, there is some feedback into market behaviour. To the extent that that is true, obviously there is a distortion in the pattern of investment in the housing sector, which affects not only owner-occupier housing but also the supply of more affordable housing for lower income people because you have a distortion affecting the housing construction sector; and all housing, for whatever purpose, in the scenario that I have outlined—whether it is for public housing even—has to compete for skilled labour with those sectors that are building housing for other sectors, including the investor housing sector.
Senator LUDLAM —The long-run increase in house prices is appreciating at about nine per cent a year. The last time a body—I think, apart from the review that you undertook—looked at the combined total of capital gains tax exemptions, land tax exemptions and negative gearing, it was about $50 billion a year. The Commonwealth spends about $1 billion a year on housing affordability initiatives, which virtually did not exist under the previous government. I feel as though there is something very difficult to reconcile. As far as your review is concerned, what is the state of your thinking about how to untangle these split incentives?
Dr Henry —There is quite a lot of material in the review on this topic. Broadly, that is on land tax and the way that land tax operates. There are two principal issues associated with land tax that are relevant to the question that you have raised. The first is that land tax obviously has numerous exemptions. So the own home is exempt from land tax, primary production land is exempt from land tax and so on. But the land that is subject to land tax, putting aside commercial real estate, is rental property. But in respect of rental property, there is a substantial threshold that is available on an individual basis in most jurisdictions—in all jurisdictions, I think—but any owner of rental property has to aggregate all of their land and just has access to one threshold.
An interesting consequence of that is that, internationally, the proportion of rental housing owned by individuals is higher in Australia than anywhere else in the world. It is an obvious consequence of the aggregation of land holdings and the application of a single threshold per individual or per taxable entity. The states are pretty well aware of this, but there is an obvious case there for considering a reform of land tax for that reason.
As far as the other aspects are concerned, in the review we presented a case for having a more equal taxation of various forms of saving. An individual can save, obviously, by putting their money in a bank account. They can save in superannuation, as we discussed earlier. They can also save by buying shares or by investing in rental property, as we have discussed. We argue that there was a case for providing preferential tax treatment for saving, and that case is probably nowhere stronger than in long-term saving, post-retirement saving—that is, superannuation. So that is a clear case, we thought, for having concessional taxation for saving.
With respect to the other categories of saving, the various categories, we thought there was also a case for having preferential tax treatment of saving as against, say, labour income; but there was an equally strong case for flattening out the taxation treatment as between those various forms of saving. So we propose in the review a rule which says that a percentage—less than 100 per cent—of income from saving, whatever the form of saving is, be included in taxable income; that is, there be, essentially, a uniform discount across the various forms.
In respect of income from rental housing, what this would mean, for example—and I think from memory it was a 60 per cent inclusion rule—is that 60 per cent of rental income would be included as taxable income, but on the other hand you would only be allowed 60 per cent of your deductions, and that includes interest deductions. So for those who are engaged in negative gearing—that is where, by definition, the interest deduction exceeds the rental income—instead of getting deduction for the full amount of the excess, they would get a deduction for 60 per cent of the amount of the excess. That would go some way to addressing the tax distortion that you have referred to.
There are ways of flattening out the tax treatment of saving to address the distortions that you are referring to, or at least partially address the distortions you are referring to but which overall do not reduce the concessionality of the tax treatment of saving. Indeed, it would be possible to construct these things in a way where it was actually revenue negative—that there was an enhanced incentive for saving overall but a more—I hesitate to use the word ‘neutral’ but this is how we talk about it internally—neutral taxation regime for saving.
Senator LUDLAM —What about tax incentives available for properties that are kept vacant—speculative vacancies?
Dr Henry —I think the two instruments that are available there for governments are capital gains tax and land tax, really. Capital gains tax and land tax are the two obvious instruments that are available.
Senator LUDLAM —I will place my last question on notice. Could you just tell us what specific resources, either FT or work units, within Treasury or the tax office are currently working on housing affordability and where those folk are located?
Dr Henry —Sure. I will take that question on notice.
Senator LUDLAM —Thank you. Thank you, Chair.
Senator BUSHBY —I have just one final question on the excess superannuation contributions. How much money has been raised from that change? It may be Revenue that can give me that answer or the ATO.
Mr D’Ascenzo —Mr Olesen might address that question.
Mr Olesen —As the commissioner mentioned in an earlier answer, we have raised about 15,000 assessments for excess contributions tax. I think collections are in the order of $100 million to date. I do not have the precise figure here.
Senator BUSHBY —Is that consistent with the projections of the amount that was going to be raised by this change of revenue?
Mr Olesen —I would have to take that on notice.
Senator BUSHBY —Is anybody in Revenue able to answer that? I recall that we had a hearing into the changes through this committee some years ago and there were objections at that time.
Senator Sherry —I think it was under the former government when this provision was introduced. But I do not recall us—
Senator BUSHBY —The former Labor government?
Senator Sherry —No, the former Liberal government—the penalties for the excess.
Senator BUSHBY —I am sorry, when you changed the cap.
Senator Sherry —I am sorry, I thought you were referring to—
Senator BUSHBY —That is what has led to a lot of the errors in terms of advice and people’s decision making, the lack of it—
Senator Sherry —Well, let’s not—
Senator BUSHBY —and that was actually canvassed in the hearing that we held into that change.
Senator Sherry —That is not true, Senator. If you look at the—
Senator BUSHBY —The commissioner nodded when I said that.
Senator Sherry —If you look at the number of people. First, this penalty was introduced by the previous government. Second, if you look at the 2007-08 financial year, when the previous Liberal government was in power for at least a part, there were a significant number of individuals who were affected by this tax. They are the facts.
Senator BUSHBY —Absolutely. But the cap was lifted, I think, in the last year of the coalition government. The amount that you could actually put in the concession was lifted, and then 12 months later it was reduced by the Labor government. What I am concerned about, and what I have always been concerned about during the process when we looked at the change, is the potential for people to get caught between the cracks. The decision on where you set the concession is a matter of policy for government, and we may like it or we may not. But what I was concerned about was people suffering consequences for not getting it right, because things change. It goes up, it goes down. It is about making sure that people have the opportunity to do the right thing and not suffer consequences unreasonably. My questions to the ATO today and in previous estimates have been designed to get to that point and to understand how we can deal with that to make sure that people are not losing out on retirement savings that they should and would otherwise have had because they made an inadvertent error or their adviser made an inadvertent error.
Mr Olesen —Senator, it might help if I explain a lot of the work that we have done around excess contributions. Tax to date has been in relation to the 2007-08 year. We are finalising those cases in the current period and moving on to the 2008-09 year cases. It will not be until the next financial year that we get onto the 2009-10 cases. So in terms of that three-year picture that you are seeking, it will just take a little while before we get through that body of work. We will have a rough sense now of the overall likely numbers that may be impacted, but in terms of actual assessments that we raise, that work will take place over the next six to 12 months.
Senator BUSHBY —I might leave this topic and move on to something else, and we will have a look at that picture as we go. The reason I ask about the commissioner’s discretion is that no doubt there are people who are flagrantly making decisions without checking the law. There are others, I think, who fall through the cracks and, through no fault of their own, find themselves in a position where they might be paying up to 93c in the dollar.
Turning to adverse decisions, I note that in the Australian Financial Review on 16 February this year there was a report that the Inspector-General of Taxation will be investigating your order to small businesses and high-wealth taxpayers in addition to a review of larger business entities. I also note that the ATO has received criticism for being too aggressive in its approach and/or failing to take into account key documents and arguments. For example, there is the Denlay case in the 2010 Queensland Appeal Court and the more recent AATA case Re James and Anor v FCT. I also see there was a new case that you lost yesterday with Luxottica. I have not had a chance to read that to see if there were any adverse comments in it, but presumably there might be. What were the costs to the ATO of the Re James and another case and the Denlay case?
Mr D’Ascenzo —We have actually won the Denlay case.
Senator BUSHBY —Did you have any costs?
Mr D’Ascenzo —We would have had costs.
Senator BUSHBY —If you won did you receive a costs order? There are adverse comments in there about some of your approaches. That is really what I am going to.
Mr D’Ascenzo —Well, we ended up winning the case.
Senator BUSHBY —The court was critical in that case of the ATO for taking steps in bankruptcy against a taxpayer who was in the process of lodging an objection to an assessment. That is a correct statement?
Mr D’Ascenzo —I think the general question was whether or not we should be seeking recovery of debt in relation to an arrangement which we think might be fraudulent. The court said they needed to expend their money on legal defences first.
Senator BUSHBY —My primary focus of these questions is not so much the cost. I did ask that, but it was more of an aside. I am mostly interested in how you are using the powers of investigation when you undertake investigations when you actually take matters to court. In terms of the comments in the Denlay court case and also the comments in Re James and another—
Mr D’Ascenzo —Which one is the other case, Senator?
Senator BUSHBY —It is the AATA 26 Re James and another v FCT.
Mr D’Ascenzo —I am not sure of that one.
Senator BUSHBY —In that one, the tribunal was critical of the ATO’s stance on a number of issues. I can read those out to you. As to purchases and admissions, the AAT noted on several occasions that the purchasers of the business had admitted at various times and in various documents that they remained indebted to the taxpayer. Contrary to the commissioner’s argument that the taxpayer had failed to produce evidence of existence of the amount owing to them, and given that you are not familiar with this case, I might put some of these questions on notice for you. We will probably get a better response.
Mr D’Ascenzo —I am happy to do that.
Senator BUSHBY —Basically, I am interested in the decision-making process that leads to some of the processes that you take that have attracted adverse comment.
Mr D’Ascenzo —We have a public process which is contained in a range of our public documents as to how we go about the process of litigation. Litigation is a process that involves not only ourselves but usually external solicitors, depending on the case that we have. Sometimes we do it in-house if it is a routine matter in terms of solicitorial role. We have a range of call-over processes within the organisation to make sure that the evidence is sound. We have a host of checks and balances in those processes to make it such that we meet the model litigant requirements. Indeed, if you look at the Attorney-General’s reports on our performance, given that we have probably one of the highest levels of litigation in the Commonwealth, we do very well given the number of cases we deal with.
Senator BUSHBY —As I say, I will put some of these questions on notice. One of the questions that follows on from that, in my mind, is: what are the criteria that the ATO uses to rank, from high to low, the tax risk assessment into which certain business taxpayers should fall?
Mr D’Ascenzo —Again, it depends on what area of mischief might well be at the heart of risk assessment. Certainly, the size of the issue is an area. What you look at in a risk matrix are the consequences and the likelihood, and you graph that. If you have very high consequences, that puts you at one level of that risk matrix. If the likelihood of that occurring is high, that is our high risk, and then you work your way in accordingly.
Senator BUSHBY —But presumably it is more complex than that. Does it take into account things like the cooperation of taxpayers in willingly providing information or volunteering to extend statutory periods beyond which the ATO cannot act against them, or is it impacted by whether the taxpayers initiated litigation against a tax assessment? Do those sorts of things feed into individual risk assessments?
Mr D’Ascenzo —That goes to the process of examination audit or litigation. In terms of our original risk framework, it is more a question of consequences and likelihood. The consequences do not have to be just to the individual taxpayer; there could be consequences to the integrity of the tax system, the integrity of the super system. Where there is a principle that may have a wide application, that is a risk. A risk is that perhaps the law is not operating as it should. So it is more complicated, as you mentioned. But that is how we first start off working out what areas we put the focus, because all administrations have a scarcity of resources and have to make choices about where you best put your resources to get the best environmental outcome. The best environmental outcome for us is an environment where we have made it as easy as possible for people to voluntarily comply and that there are actually high levels of willing participation in both the tax and superannuation systems.
Senator BUSHBY —Which branch in the ATO is responsible for ensuring that you act as a model litigant?
Mr D’Ascenzo —We have a litigation area in the ATO.
Senator BUSHBY —What procedures are in place to ensure that model litigant rules are followed?
Mr D’Ascenzo —As I explained, we have a range of checks and balances. Ms Granger could give you some more details. We have to report to the Attorney-General on the model litigant claims. They are actually included in the report I send and sign off to the Attorney-General in terms of our performance in that area. We make sure that is reported in our annual report. Over time, I am not seeing any systemic concern over and above the odd case that, for different reasons, can attract criticism, sometimes against us and many times against the taxpayers.
Senator BUSHBY —To change the subject slightly, I note in an appeal court decision in the Supreme Court of Tasmania, Saxby against the Crown, a conviction was confirmed against a taxpayer who made a false representation in an objection to a tax assessment. Without going into the merits or otherwise of the case, which has been decided by due process, I was wondering how often the ATO has prosecuted taxpayers for making false statements in an objection to a tax assessment.
Mr D’Ascenzo —I can take that on notice. We are working with the Commonwealth Director of Public Prosecutions with a view to working with his officers to facilitate the ATO through the auspices of the DPP in prosecuting more cases civilly through the powers that are in our Taxation Administration Act, in order to lessen the burden on the DPP, who we reserve for the more serious, complex cases.
Mr Quigley —I can respond with those figures, if you like, or else we can provide them to you separately.
Senator BUSHBY —Okay. I will put some questions on notice about this because I need to wind up and give some time to Senator Cormann. Thank you.
Senator CORMANN —I have a few quick questions for the ATO. How is your performance going in terms of turnaround for tax refunds for business entities and wage and salary earners? There were some problems there in recent times. How is that tracking?
Mr Butler —As I mentioned earlier in the hearing when I answered a question from Senator Xenophon, in July we had some delays in processing returns, but since then returns have gone through very smoothly.
Senator CORMANN —Can you put some figures around that, on notice, perhaps?
Mr Butler —We have recently completed our 10-millionth individual tax return in the new system since 1 July this year. The actual number is on the website.
Senator CORMANN —I will not dwell too much on this because we only have a little bit of time left. Today, the minister, Senator Nick Sherry, and I have had a bit of a debate about people inadvertently breaching their concession and non-concession contribution caps. I know that Senator Bushby has asked some questions about this. Indeed, Senator Bushby put a question on notice on this issue last year and I put a related question on notice this year, but you have different answers in relation to your capacity to provide statistics on how often you use your section 264 powers. In response to Senator Bushby you essentially said it could not be done and in response to me you said you would be able to do it by around March 2011. What drove the change? What happened?
Mr D’Ascenzo —I am not aware of those differences.
Senator CORMANN —And there was sort of a blank refusal initially.
Mr D’Ascenzo —I think there was a request for the use of access without notice, and that came out of an Ombudsman report. The Ombudsman asked us to make that more public, and we have done that through our annual report.
Mr Quigley —Senator, if I might clarify: the reason we do not keep and we cannot provide figures on every time that we use our access and information powers is because they are used on an everyday basis. The auditors are out there every day. They have their authorities which they provide and they get informal access. I can give you figures on the number of times that we have—
Senator CORMANN —Can we do that on notice, because I do want to spend the last two minutes with Dr Henry. The chair has advised us that this is the area for corporate matters in the Revenue Group. Dr Henry, given that this is your last attendance at Senate estimates, can you share with us whether you are leaving on a high or whether you are leaving on a low?
Dr Henry —After this morning’s questions, I would have to say that I am leaving on a high, Senator.
Senator CORMANN —So we can take credit for that?
Senator Sherry —We can all take credit for that.
Senator CORMANN —I will not let you off the hook that easily, Dr Henry. Given that you have put a lot of work into a very comprehensive tax review, out of which the government only picked the proposal for a multibillion dollar new tax and then botched your proposal and introduced something completely different, more complex, less fair, not replacing state and territory royalties but creating a top-up tax, not talking it through with state and territory governments and of course now not having a tax summit to consider your recommendations, at least not in the time frame that was promised, is that a disappointment to you?
Dr Henry —I remain very optimistic with respect to the implementation of many recommendations of the report—very optimistic.
Senator CORMANN —Over the long term it might take a different government to achieve some of them.
Dr Henry —That will obviously be out of my hands.
Senator CORMANN —Thank you, Dr Henry.
CHAIR —Thank you, Dr Henry, and thank you to the revenue section of Treasury. We will resume after the break with the Australian Bureau of Statistics.
Proceedings suspended from 1.29 pm to 2.33 pm