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Finance and Public Administration References Committee
27/04/2016
Outcomes of the 42nd meeting of the Council of Australian Governments

LARKINS, Ms Alison, Acting Deputy Secretary, Social Policy, Department of the Prime Minister and Cabinet

YEAMAN, Mr Luke Yeaman, First Assistant Secretary, Economic Division, Department of the Prime Minister and Cabinet

BRENNAN, Mr Michael, Deputy Secretary, Fiscal Group, Department of the Treasury

BRAKE, Mr Roger, Acting Deputy Secretary, Revenue Group, Department of the Treasury

ROLLINGS, Mr Jonathan, Division Head, Commonwealth-State Relations Division, Department of the Treasury

CHAIR: I welcome officers from the Department of the Prime Minister and Cabinet and Treasury. Information on parliamentary privilege and the protection of witnesses and giving evidence to Senate committees has been provided to you. I remind senators that the Senate has resolved that an officer of a department of the Commonwealth or of a state shall now be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. Officers of the department are also reminded that any claim it would be contrary to the public interest to answer a question must be made by a minister and should be accompanied by a statement setting out the basis for the claim. I now invite you to make a short opening statement, and at the conclusion of your remarks I will invite members of the committee to ask questions. As you do not wish to make an opening statement, we will start with questions from Senator Wong.

Senator WONG: I want to start with some process questions about COAG. Obviously there is a lot of officer-level work that goes into preparing the agenda for COAG. Which of the officers at the table were involved in preparing agenda papers for the COAG of 1 April?

Ms Larkins : That would be Mr Yeaman and I.

Senator WONG: Ms Larkin, you are acting—

Ms Larkins : I have been acting since February.

Mr Yeaman : I have been in the role since September last year.

Senator WONG: And you are a FAS?

Mr Yeaman : That is right.

Senator WONG: So COAG is set, agenda papers are prepared in consultation with the states and sometimes working papers for ministers to consider?

Ms Larkins : Yes.

Senator WONG: If necessary, there are also cabinet consultations on particular propositions and the negotiating position the Prime Minister will take—correct? Is that a reasonably fair summary of it?

Ms Larkins : Yes.

Senator WONG: I want to understand when the process commenced for the 1 April COAG and how that was undertaken. I want to start first with the December COAG. Can you confirm for me that the December COAG did not consider any proposition in relation to a state taxation option?

Ms Larkins : That is right.

Senator WONG: So at some point between December and 29 March—

Ms Larkins : Sorry, just to clarify: are you specifically talking about the income tax-sharing method?

Senator WONG: Yes.

Ms Larkins : There was discussion about state tax reform but there was not—

Senator WONG: How would you like me to refer to it? We should probably get the nomenclature. We have been calling it 'double tax', but I am happy to call it something else if you would prefer.

Mr Yeaman : I think 'state income tax levy proposal' is how we would refer to it.

Senator WONG: So state income tax levy proposal?

Mr Yeaman : I would add that there was a broad discussion at the December COAG meeting around revenue-sharing arrangements with the states. So there had been a long process through the COAG—

Senator WONG: That is a different proposition, Mr Yeaman. This is all on the public record, because obviously it got leaked. It was, I think, well reported that the government had modelled various taxation measures, including—I think the evidence was—six GST options and a couple of Medicare levy options.

Ms Larkins : That was modelling led by the states.

Senator WONG: I think the Commonwealth Treasury was modelling them.

Mr Yeaman : It was modelling done in response to proposals put forward by the states.

Senator WONG: The Commonwealth Treasury was reported as modelling a range of GST tax changes and Medicare levy changes for the 15 December parlay. Is that correct?

Mr Brennan : We provided information to the states and also to Prime Minister and Cabinet.

Senator WONG: That is non-responsive, Mr Brennan. I do not want to have to keep everybody here today. I put to you what is on the public record that the Commonwealth Treasury modelled GST changes and a Medicare levy change. I am not going to spend a lot of time on it, but that has already been publicly reported. That is correct, isn't it?

Mr Brake : We have done costings for both of those.

Senator WONG: For the 15 December COAG, that modelling work was done on GST changes and a Medicare levy change. Correct?

Mr Brake : Our costings were done for the CFFR meeting.

Senator WONG: Sure.

Mr Yeaman : Which fed into the—

Senator WONG: Correct. So you do it for CFFR—it is one of the less useful acronyms, I suspect—and aspects of that are then considered by COAG. Correct?

Mr Brake : Correct.

Senator WONG: Leaving aside what you did for whom, I just want to confirm that work was done in relation to GST changes, various options and a Medicare levy change. Correct?

Mr Brake : Correct.

Senator WONG: At that stage, with the December COAG, did you consider, provide or do work for CFFR on the state income tax levy? We are only in 15 December. Mr Brake, I am going to give you plenty of opportunity to tell me when you did start that work.

Mr Brake : We did not do specific modelling of those options for the CFFR meeting.

Senator WONG: When was that meeting? The day before?

Mr Brennan : My recollection is that it was 14 December.

Senator WONG: Then post the 15 December COAG, when was the date of the April COAG set? Does anyone remember that?

Ms Larkins : We would have been testing dates in January.

Senator WONG: Tell me about the process, Ms Larkins, of developing the agenda papers for the April COAG.

Ms Larkins : Can you be more specific?

Senator WONG: When did you start doing them? What work streams were there?

Ms Larkins : We were working on papers straight after the December COAG. We worked through January on various papers that were being prepared.

Senator WONG: Obviously health and hospitals was an issue under consideration.

Ms Larkins : Yes, that is right.

Senator WONG: And the process of doing that work was in partnership with the states. Would that be correct?

Ms Larkins : It was. Yes.

Senator WONG: Just tell me who does that. PM&C and Health engage with state premiers, chief ministers' departments and health departments?

Ms Larkins : Primarily PM&C do that engagement with the premiers' departments. At various points we might bring in the Department of Health and the premiers might bring in their health departments.

Senator WONG: The products out of that are, ultimately, agenda papers and supporting papers to the agenda. Correct?

Ms Larkins : Yes.

Senator WONG: Who was doing the work on the state income tax levy?

Ms Larkins : That work was being led by PM&C in consultation with other central agencies.

Senator WONG: Was that you, Mr Yeaman?

Mr Yeaman : Yes.

Senator WONG: You have been in there since September?

Mr Yeaman : That is correct.

Senator WONG: When did you first come across the composition of the state income tax?

Mr Yeaman : As you would be aware, there has been a long history around this issue. It had been raised in the Commission of Audit in May 2015 and a number of state premiers had raised variations on a theme around income tax-sharing proposals. So we had been—

Senator WONG: Hang on, let's be precise here. I think one state Premier had raised the states getting a fixed share of Commonwealth levied income tax. That is a different proposition to states levying their own income tax.

Mr Yeaman : That is correct.

Senator WONG: Did a state Premier raise a state income tax levy?

Mr Yeaman : My understanding is that Premier Baird had raised the idea earlier in the piece around the potential for states to vary rates at some stage in the future.

Ms Wong : So there would be potential for the states to—

Mr Yeaman : To set their own rates of income tax at some stage.

Senator WONG: When do you say he did that?

Mr Yeaman : 31 March 2015.

Senator WONG: Okay. Keep going; you were saying it has a long history—I am happy to go back there.

Mr Yeaman : We have been aware of the issue for some time and looking internally, obviously, at these broad issues in the context of the broader Federation and the tax white paper process. If you are asking at what stage did we first begin work on a specific proposal around state income tax sharing in the context of COAG—that is it?

Senator WONG: Yes.

Mr Yeaman : We provided briefing as early as January.

Senator WONG: To whom?

Mr Yeaman : To the Prime Minister.

Senator WONG: Was Treasury involved in the preparation of that briefing?

Mr Yeaman : We consulted closely with Treasury in preparing the briefing.

Senator WONG: You consulted Treasury in the preparation of briefing to the Prime Minister regarding state income tax levying?

Mr Yeaman : Yes.

Senator WONG: For a specific state income tax levy as opposed to the proposition of revenue sharing, which I described before?

Mr Yeaman : The briefing that we provided covered a range of options in the revenue-sharing space.

Senator WONG: Which included the state income tax levy—

Mr Yeaman : Including that.

Senator WONG: Do you remember when in January that that was provided?

Mr Yeaman : I will confirm it for you, Senator, but I believe it was around 20 January.

Senator WONG: Before or after Australia Day?

Mr Yeaman : Sorry, it was 22 January.

Senator WONG: Okay. So that was a briefing for the Prime Minister. You say you consulted with Treasury. Who did you consulted with?

Mr Yeaman : Various officials, including Mr Brennan.

Senator WONG: Mr Brake, you were consulted?

Mr Brake : A team which I lead at the time, which was the tax reform task force, has been working very closely with the PM&C since the two white papers were announced. So worked very closely in the lead-up to COAG—

Senator WONG: Mr Brake, that was not my question. Were you consulted specifically on the briefing provided to the Prime Minister that was given on 22 January?

Mr Brake : My team would have been consulted on that.

Senator WONG: You said 'would have been'. Was your team consulted or not and, if so, who was?

Mr Brennan : I think we would have to check that. I personally do not have a firsthand recollection of the consultations—

Senator WONG: So why are you here, Mr Brennan?

Mr Brennan : I have had an involvement throughout the process on these matters, but as to the nature of the consultations we had with PM&C—

Senator WONG: I made very clear, including before, that we would be going in detail through the process in the lead-up to the COAG. If you do not have the officers here, I suggest you perhaps ask them to come here.

Mr Brennan : I am confident we have the officers here to answer these questions.

Senator WONG: Then someone answer my question.

Mr Brennan : I am not sure that we can give a precise account at this point as to the precise nature, timing and identity of who discussed what.

Senator WONG: There is a briefing to the Prime Minister on the largest changes to the Federation in 40 years and I want to know when the Treasury was consulted and who was consulted, and I want to understand the nature of those consultations.

Mr Brennan : I think we will have to take that on notice.

Senator WONG: You are going to take it on notice?

Mr Brennan : Yes.

Mr Brake : I think we can be very confident in saying that there was ongoing consultation; about a particular date we would need to take that on notice.

Senator WONG: Okay. So you are going to say 'ongoing consultation' generally, but you cannot tell me about the first briefing to the Prime Minister, which is the first time we can identify the state income tax levy. Let us not obfuscate by talking about revenue sharing, different models of taxation et cetera. We are talking about a specific double taxation proposition—that is, the states being able to levy their own income tax. The evidence is that the first briefing to the Prime Minister about that is January 2016. You say that you have been consulted, but you cannot tell me who, when, what or how. Correct?

Mr Brake : We will have to take on notice the precise details.

Senator WONG: What did you think you were going to be asked before this hearing, Mr Brake? Is there someone behind you who actually did this work and who might be able to answer my questions?

Mr Brake : We will need to continue to take that on notice.

Senator WONG: Can you come back later today?

Mr Brake : We will do our best.

Senator WONG: Thank you. So a briefing goes to the Prime Minister. Was it agreed that more work would be undertaken on the state income tax levy as a result of that briefing?

Mr Yeaman : I think that goes to the content of our briefing and the advice for the Prime Minister.

Senator WONG: Well, there was a decision made. The Prime Minister stood up at Penrith oval and announced this. I am just trying to understand when that decision was made.

Mr Brennan : Work continued from that point through to the COAG meeting on 1 April.

Senator WONG: Who undertook that work?

Mr Brennan : PM&C.

Senator WONG: I am conscious of the boundaries, but was that the only tax option you were working on?

Mr Brennan : No, there were a variety of tax options.

Senator WONG: So it was one of a variety. In PM&C, did you have Treasury people seconded in, or did you just consult?

Mr Brennan : No, we consulted with them

Senator WONG: Who are the key people you consult on the state income tax levy?

Mr Brennan : Within Treasury?

Senator WONG: Within Treasury?

Mr Brennan : The Commonwealth State Relations Division and the taxation branch.

Senator WONG: So it is Mr Rollings. It was obviously not Mr Brake, because he cannot answer many of my questions, or was it? Who are the people that worked with you on developing this policy?

Mr Brennan : There were a number of people at different levels across both organisations discussing this issue at different times, so it was not one contact that we had.

Senator WONG: Mr Brake, when was the Treasurer briefed about the state income tax levy proposition?

Mr Brake : We provided a briefing around about the same time.

Senator WONG: So 21 January? Was any decision made by the Treasurer as a result of that briefing? Was a decision made about which options to pursue or which options not to pursue?

Mr Brake : I think that goes to a decision of government.

Senator WONG: I am just trying to understand the process here. Unless someone can explain this to me, you have briefings, you say, to both the Treasurer and the Prime Minister on the 22nd. You then have the Prime Minister standing up on 30 March announcing it. I just want to understand the decision points. So if you can just tell me those?

Mr Yeaman : As I said, a briefing was provided and work continued up to the COAG meeting, to the point where the announcement by the Prime Minister was made.

Senator WONG: That is not a decision point. Let us do it this way. Ms Larkins, I think you agreed with me that you have this process of preparing agenda papers, et cetera, and cabinet is consulted as required or cabinet decisions are made as required. Was there an agenda paper prepared for the purposes which included a proposition around a state income tax levy?

Ms Larkins : Not an agenda paper.

Senator WONG: What was prepared?

Mr Yeaman : There were papers prepared in the context of the discussion around state tax reform more generally for the COAG meeting and around other economic matters, but it did not encompass the state tax-sharing proposal.

Senator WONG: Can you say that again?

Mr Yeaman : For the COAG meeting, there were papers prepared that covered the broader discussion that had been ongoing in COAG around state tax reform.

Ms Larkins : Some items on the agenda—

Senator WONG: Say the second half of your previous answer.

Mr Yeaman : But the papers did not incorporate the state tax-sharing proposal—the formal papers.

Senator WONG: So the formal papers for the COAG did not incorporate the state income tax proposal?

Mr Yeaman : That is correct, Senator.

Senator WONG: Can you tell me why?

Ms Larkins : It is not unusual for either us or the states to raise issues in the COAG context without papers.

Senator WONG: It is not unusual to raise a reform of this size without any papers? Seriously?

Ms Larkins : It is not unusual for there to be substantive conversations—

Senator WONG: I am sure there is a substantive discussion. I am using the Prime Minister's own language. He said, 'This is the largest reform in 40 years.'

Mr Yeaman : I think that, drawing on the Prime Minister's comments, he indicated that he wanted to have a discussion with the state premiers on this issue, on the concept of this idea, and that, if they were agreeable, a series of further work would occur after that point on the details of the proposal.

Senator WONG: So: 'We'll have a chat and think about the detail after.' I am glad you have been clear about that. Papers were prepared for COAG, but did not incorporate a state income tax proposal. Other than the briefing on 22 January, was anything further prepared for the Prime Minister with respect to the state income tax levy proposal?

Mr Yeaman : Yes, Senator. Further briefing was provided in the lead-up to the COAG meeting.

Senator WONG: On which dates was that provided? Mr Brake, I will be asking when briefing to the Treasurer was provided, so maybe you could prepare work on that.

Mr Yeaman : There was a further briefing provided on 26 February to the Prime Minister and a briefing was provided in a minimal way ahead of the COAG meeting itself as part of the COAG briefing papers.

Senator WONG: That would be in late—

Mr Yeaman : A week or so before the meeting.

Senator WONG: Was that last set of briefing provided prior to his press conference on 30 March?

Mr Yeaman : Yes, Senator.

Senator WONG: I am trying to get a sense of the extent of the analytical work that underpinned the briefing on the particular proposition we are discussing.

Mr Yeaman : We provided analysis and data information around the proposal. Modelling is one of those terms that is difficult to define. There was not a large-scale modelling exercise attached to it, but we provided a series of analysis and data.

Senator WONG: Was that analysis undertaken in PM&C or externally?

Mr Yeaman : It was undertaken in PM&C but drew on information from Treasury and the finance department as well.

Senator WONG: So you undertook analysis, but Treasury provided some of the dataset, essentially?

Mr Yeaman : And general advice.

Senator WONG: Mr Brake, when did you brief the Treasurer on the state income tax levy proposal? You said that in January 2016 it was included. Tell me if this is incorrect. I want to be fair to you. It was included as part of a range of options on which the Treasurer was briefed at around the same time the Prime Minister was briefed?

Mr Brake : Correct.

Senator WONG: Was there a difference between the Prime Minister's and the Treasurer's briefing, in terms of the actual options?

Mr Yeaman : Treasury provided their own briefing and we provided our own briefing.

Senator WONG: No—I am asking a slightly different question. I think you, Mr Yeaman, said that the briefing provided to the Prime Minister went through a set of options around taxation—that is, state-federal financial relations reform—on which a state income tax levy was one option. I assume you said: 'Here is a set of options for your consideration.' I am asking if the set of options on the matters provided to the Prime Minister were the same as the set of options provided by Treasury to the Treasurer?

Mr Yeaman : I am not aware of the advice provided to the Treasurer, so cannot speak to that.

Mr Brake : Certainly, I did not see the PM&C advice. It would be normal for us to provide our advice independently, of course, but we also provided advice on a number of different proposals.

Senator WONG: Did the 16 January 2016 briefing to the Treasurer include a state income tax levy?

Mr Brake : Correct, Senator.

Senator WONG: It did. I asked you whether, as a result of that, the Treasurer made any decisions narrowing the set of options in which work was to be undertaken? As a result of the 16 January briefing, did the Treasurer make a decision to narrow the options on which further work was to be undertaken?

Mr Brake : The briefing was to inform ongoing discussions within the government.

Senator WONG: That is not really the question I asked.

Mr Brennan : I think it is fair to say, without going to the content of the advice, that I do not think it was an outcome of that advice that the field got particularly narrowed to a smaller range of options. As Mr Brake and Mr Yeaman said, we did not share the letter of our respective briefs. I know in our case, without going to the content of the advice that we provided, the brief that we provided would have gone to fairly general propositions rather than specific, concrete models, not least because the stream of briefing we were providing at that point was really coming out of some of the discussion from the December CFFR. You rightly made the distinction between the Weatherill proposal around income tax revenue sharing and something that would be a step further along—a state income tax levy—but, in essence, that was the context in which these things were raised. I think the raising of the issue of a state income tax levy would have been done in fairly broad terms.

Senator WONG: You are not resiling from the evidence that it was included in the—

Mr Brennan : Yes, that is right.

Senator WONG: What is the next briefing to the Treasurer which goes to the state income tax levy?

Mr Brennan : My recollection is that we would have briefed the Treasurer again in early February, and, again, that would have gone to the broad range of options around—

Senator WONG: When did the state income tax levy go to cabinet?

Mr Yeaman : I do not have a precise date in my head, but normal practice is that the negotiating position for the Commonwealth for the COAG meeting is taken to cabinet in the week prior to the meeting.

Senator WONG: You are PM&C. I am sure someone can find out.

Mr Yeaman : Yes, I can find the exact date.

Senator WONG: I will not go to what cabinet decided, though that would be quite nice, but I want to be clear whether or not that COAG negotiating mandate—how would you like me to describe that?

Mr Yeaman : That is fine.

Senator WONG: You are happy with that? Did that include the proposition of a state income tax levy?

Mr Yeaman : The Prime Minister has indicated publicly that he took that proposal to cabinet, and the COAG cabinet discussion took place on 22 March.

Senator WONG: As a result of that meeting, was a decision made to pursue a discussion with the states on a state income tax levy?

Mr Yeaman : I would not divulge the outcomes of cabinet consideration.

Senator WONG: We are entitled to determine decisions of government. Did the government make a decision, before the Prime Minister stood up and said so, that a state income tax levy was on the table?

Ms Larkins : I think Mr Yeaman said that the Prime Minister said that he took this to cabinet.

Senator WONG: Did the government make a decision prior to the Prime Minister standing up that it would take a state income tax levy proposal to COAG?

Ms Larkins : I think we have said as much as we can say, which is that the Prime Minister has already said he took it to cabinet.

Senator WONG: I assume the Prime Minister does not stand up and put something like that in the public arena without cabinet determining it.

Ms Larkins : And I think that he said it went to cabinet for consideration.

Senator WONG: Mr Brennan, what did you understand the position of the Commonwealth to be prior to the Prime Minister—I withdraw that. When was Treasury first aware the Prime Minister would be announcing this proposition?

Mr Brennan : As is normal with COAG, you become increasingly aware of the nature of the conversation that is likely to happen at COAG—

Senator WONG: It is not a conversation. The Prime Minister stood up and made an announcement. Was Treasury aware, before he stood up, that he was going to be doing that?

Mr Brennan : We were aware that an income tax levy proposition was likely to be a topic of conversation at COAG, yes.

Senator WONG: When was PM&C aware that the Prime Minister was going to be making a public announcement?

Ms Larkins : We were not aware before the announcement was made. But, as Mr Brennan said, we were aware that it was going to be a topic of conversation at COAG.

Senator WONG: Can I come back to consultation with states. That is led by PM&C?

Ms Larkins : Yes.

Senator WONG: Did the state income tax levy ever go to the CFFR?

Mr Brennan : No. The last CFFR meeting prior to COAG was on 14 December. There was a discussion there about the Weatherill proposal on tax revenue sharing. The next meeting of the CFFR following that was on 1 April, where the Treasurer was present with the first ministers for the COAG.

Senator WONG: Where you did the joint meeting?

Mr Brennan : Yes.

Senator WONG: Prior to the Prime Minister's announcements, did you or anyone from Treasury have any discussions with state treasury officials regarding the state income tax levy proposition?

Mr Brennan : I would have had some informal conversations with some of my counterparts in the days leading up to COAG.

Senator WONG: What does 'informal' mean? And can we not use 'would have'—because it sort of means, 'Maybe I did, maybe I didn't.' Did anyone from Treasury have discussions with state or territory treasury officials in the lead-up to the 1 April COAG in regard to the proposition of a state income tax levy?

Mr Brennan : What I am saying is that we did not have a formal heads of treasury meeting prior to the CFFR COAG meeting on 1 April. The most recent heads of treasury meeting—the discussions we have with states—was sometime before that. When I say 'informal', that is what I mean; we did not do a structured heads of treasury meeting. Prior to meetings of that nature, I often have conversations with some of my counterparts—and I did have some conversations with my counterparts in the lead-up to this COAG meeting.

Senator WONG: Which states or territories?

Mr Brake : I would prefer not to say.

Senator WONG: I do not think you have that right actually.

Mr Brennan : These are private conversations.

Senator WONG: They are not private conversations. Your deputy secretary in Treasury having a discussion about a tax proposal going to COAG is not a private chat.

Mr Brennan : These are topics that would have cropped up in the course of a broader conversation in the lead-up to COAG.

Senator WONG: I just want to know which states or territories were advised by Treasury—I will come to PM&C shortly—that the government would be putting to COAG a proposal on a state income tax levy.

Mr Brennan : That really was not the nature of the conversation. The conversation was more a general discussion with a few states about the coming COAG. I would not go into the detail of those conversations any further.

Senator WONG: You put them into the arena, Mr Brennan. I asked a simple—

Mr Brennan : You were asking whether we have had conversations—

Senator WONG: I have not finished my question. I asked a simple question: did Treasury officials have any discussions with state or territory treasury officers about the proposition of a state income tax levy ahead of the COAG? That is my question.

Mr Brennan : I am just saying I would have had some conversations with some of my counterparts and it would have included some discussion of income tax sharing.

Senator WONG: Income tax levy, not sharing—a state income tax levy. I am asking: what, if any, conversations occurred about that policy proposition?

Mr Brennan : To be honest, the conversation were probably a bit broader than that. They probably went more to tax revenue—

Senator WONG: Can I ask my question again, because I do not have an answer. Did Treasury officials consult with any state or territory officials ahead of the COAG in relation to the proposition of a state income tax levy?

Mr Brennan : We did not have a formal structured consultation process, no.

Senator WONG: And heads of treasury did not meet?

Mr Brennan : No. As I said, the most recent heads of treasury meeting was in March.

Senator WONG: Can you explain to me why you would provide a proposal for something as radical and not have heads of treasury consider it?

Mr Brennan : The broad issue of tax revenue sharing had been around and had been discussed. I take your point; you are making a distinction between those two.

Senator WONG: I want to go back. And I will ask PM&C about the federation white paper, that long awaited document, but that is another topic. It is a very large change that was floated—as the Prime Minister himself, in his public statements, has made clear—so why would there not have been a discussion between heads of treasury?

Mr Brennan : I think it is fair to say that, in the lead-up to the COAG, there was a lot of consultation between us and PM&C. So I think treasuries generally were in the loop and being consulted and making a contribution to the work that was underway. In the lead-up to COAG, as is typical, the negotiations with the states were mediated more through the first ministers' departments than through the treasuries. But that is normal for a COAG.

Senator WONG: No, that is not normal. That is not how the GST and the Medicare levy modelling in December 2015, which we discussed earlier, were done. Treasuries were intimately involved in that.

Mr Brennan : The treasuries were involved—it is just that—

Senator WONG: Did you at any point model the effect of a state income tax levy, what it would look like, the different rates?

Mr Brake : Like Mr Yeaman, I would come back to the—

Senator WONG: Did you do any modelling?

Mr Brennan : I would not describe it as modelling, no.

Senator WONG: You did analysis?

Mr Brennan : We have done quantitative analysis, yes.

Senator WONG: When did you start that quantitative analysis?

Mr Brennan : I would have to take that on notice, but we have certainly done quantitative analysis on the broader issue. I take the point you are making, but—

Senator WONG: Did you do quantitative analysis on the idea of a state income tax levy?

Mr Brennan : I think we did, but I would have to take on notice that specific question.

Senator WONG: Could you come back to me on that.

Mr Brennan : Yes.

Mr Rollings : Because the proposal was at its early stage and broad concept, the extent of the quantitative we were doing was around the dimensions and impact of the Commonwealth reducing its tax rates to make room for a state levy and broad observations on the quantum of state payments that are currently made.

Senator WONG: Thank you. I am glad you answered that, Mr Rollings, because I actually did want to ask you what work was done about how this would interact with the principles of HFE.

Mr Rollings : Broad commentary on the fact that HFE impacts would have to be a consideration that would be part of further work if this were to be progressed.

Senator WONG: Would it be fair to say that you commented: 'This proposition will impact upon the principles of horizontal fiscal equalisation but we would need to do more work on that'?

Mr Rollings : That is probably correct, yes.

Senator WONG: You would know much more about this than I do. But it would seem to me that, if you maintain the principles of HFE—or perhaps I should ask you about that. Was there ever a proposition that you would abrogate the principles of HFE in respect of this proposal?

Mr Rollings : Again, the proposal was a high-level proposal at the first stage to see if the states were interested and acknowledging that more detailed design would have to be undertaken if the states were interested.

Senator WONG: Yes, but were the principles of HFE regarded as immutable in that discussion, or not?

Mr Brennan : Neither way.

Senator WONG: So you could abrogate the principle of horizontal fiscal equalisation?

Mr Brennan : That is always an option for governments.

Senator WONG: Maybe this is a simplistic proposition—and tell me if I am wrong. If you did go down an income tax levy path—and certain states, by dint of their economic structure, population base et cetera could get a higher quantum of state income tax, including a higher per capita quantum—then if you were going to apply the principles of HFE unaltered, wouldn't that inevitably lead to a greater share of GST going to the smaller and poorer states?

Mr Rollings : I always hesitate to commentate on the fallout of the HFE system in specific terms but, again in broad terms, the choices for a government going down this path would be to either let the current system of HFE operate to equalise the treatment of the income tax or to choose not to exclude it from that system. But again, we never got to that stage of detail of consideration.

Senator WONG: Did that form part of any briefing to the Prime Minister or the Treasurer? Those two propositions form a fair enough kind of conceptual framework—you either change the principles of HFE or you accept that those principles will result in different levels of GST allocation if you put in place an income tax levy. That is a statement of fact. Correct? Did those propositions form part of any briefing to the Treasurer?

Mr Rollings : We would have touched on HFE as an issue—

Senator WONG: Could we stop saying 'would have', please? 'Would have' is a sort of hypothetical proposition. You either did or you did not.

Mr Rollings : If you are asking me to go into the specific nature about our advice to the Treasurer—

Senator WONG: Did I ask that?

Mr Rollings : I think you might have.

Senator WONG: No, I do not think so. I said, 'Did the effect of'—well, I cannot remember exactly what I said, but I will ask it again. Regarding the issues you raise today about the application of the HFE principles in light of a state income tax levy, was the Treasurer briefed on those issues prior to the COAG?

Mr Rollings : Again, without talking about the specific nature of what we advised the Treasurer, you could expect that in briefing the Treasurer on issues that go to state revenue sources that HFE would be an issue that would be included in that.

Senator WONG: Prior to COAG?

Mr Rollings : Prior to COAG.

Senator WONG: Thank you. Moving to PM&C, when were the agenda papers finalised?

Mr Yeaman : As you would be aware, it is a very iterative process leading up to the COAG meeting, so different papers were finalised at different stages in the weeks leading up to the COAG meeting.

Senator WONG: Some of my colleagues might want to know when the health and education papers were finalised. Actually, can we get what the agenda papers were by topics?

Mr Yeaman : We could do that on notice. I do not have the full details now of when each paper was settled and circulated to the states.

Ms Larkins : We could get that on notice. We send them out in tranches as they are ready.

Senator WONG: Can you tell me what the topics of the agenda papers were?

Ms Larkins : Not off the top of my head.

Senator WONG: You are very good, Ms Larkins. I am sure you could do a reasonable job.

Ms Larkins : I will check to see whether we have them here, but I do not think I can do them off the top of my head.

Senator WONG: Do we have them here? Are they public?

Ms Larkins : We do not have them with us, but—

Mr Yeaman : The papers are not public, but the communique obviously refers to each of the different items under the agenda.

Senator WONG: I have quite a lot more questions, Chair, so I do not know if someone else wants to jump in.

Senator McKIM: To further explore a couple of the matters that Senator Wong raised, there has been evidence given about the briefing papers that were sent to the PM and the Treasurer in January, and evidence that the state income tax levy proposal was part of a range of proposals in those briefing papers. Are you able to assist the committee in terms of how the state income tax levy proposal came to be in those papers? Was that at the request of the Prime Minister's office, was it at the request of the Treasurer's office, was it something that either of the departments decided proactively to include?

Mr Yeaman : As I mentioned, there were a number of proposals in this space that had been put forward by premiers at different times and in other public documents—as I said, these had all been canvassed in the Commission of Audit and also in the Federation discussion paper. Coming out of the December COAG meetings we provided a range of advice on a range of options in that space, including the income tax issue.

Senator McKIM: Including the income tax levy proposal? Was it PM&C's decision to include that as one of the range of reforms in that brief, or did the PM's office get in touch and ask for it to be included?

Ms Larkins : To the best of my memory, we provided a fairly comprehensive briefing on what had happened in the Reform of the Federation work, which included this proposal, and I think that might have then led into further discussions with the Prime Minister's office and the Prime Minister. So we initiated a briefing on all of the work and all of the options.

Senator McKIM: Just to be clear, to the best of your knowledge, it was not included in that briefing note at the request of the Prime Minister's office?

Ms Larkins : Yes. To answer that specifically, I want to take that on notice. My memory is we provided to the new Prime Minister and the new office comprehensive briefings on what had occurred under the Reform of the Federation process, including a whole lot of historical documents. That will have included briefing on this particular measure.

Senator McKIM: I would appreciate it if you could take that on notice, and if there is anything different perhaps you could inform the committee. Could I ask the same question to Treasury? Mr Brennan, would you like me to repeat it?

Mr Brennan : No, that is fine. Likewise, I think we would have to check. I am happy to check, but I do not recall a request being made that a brief deal with a particular issue. Whilst I acknowledge the point that is being made here about the distinction between revenue sharing and giving states the autonomy to set an income tax rate, the two have often been talked about together in the same context. I think the fact that our briefing was comprehensive and dealt with a range of potential options would have been just normal practice.

Senator McKIM: Thank you. After the briefing, was there a communication from the Treasurer or the Treasurer's office to the department to do more work on the state income tax levy proposal?

Mr Brennan : Again, I do not recall that. I am conscious that we provided ongoing briefing over that period on a range of matters involving revenue sharing as well. I would have to check the record as to whether they were explicitly requested or whether we provided that advice.

Senator McKIM: Could you take that on notice?

Mr Brennan : I am happy to do that.

Senator McKIM: Thanks. Ms Larkins, I have the same question to you. Are you able to assist the committee in real-time now or would you prefer to take that on notice?

Ms Larkins : Could you repeat the question?

Senator McKIM: Certainly. Post the briefing to the Prime Minister on the 22nd, was there any communication back to the department from the PM's office to ask that a greater body of work be done on the state income tax levy proposal?

Mr Yeaman : I think I need to take that on notice to check the details. As Mr Brennan said, briefing was provided and work continued across a range of options, so I would need to check that.

Senator McKIM: What I am trying to explore here is when and how the broad range of options were distilled down, if they were, and became advice or support materials for the PM to use in the announcement that he made. Just for clarity, that is the intent of that question. Ms Larkins, was there anything prepared by PM&C for the Prime Minister specifically to provide to state premiers and chief ministers around the state income tax levy proposal?

Ms Larkins : Do you mean written material that he could pass on?

Senator McKIM: Yes.

Ms Larkins : Not to my knowledge.

Senator McKIM: Mr Brennan, the same question for you. Was there anything specifically prepared for the Treasurer to provide to state and territory treasurers?

Mr Brennan : No, I do not believe so.

Senator McKIM: Could I ask you both to take that on notice to confirm those answers. Thank you.

Senator WONG: Was 22 March the relevant cabinet meeting?

Mr Yeaman : Yes.

Senator WONG: Subsequent to that cabinet meeting, was PM&C tasked with consulting with the states and territories?

Mr Yeaman : No.

Senator WONG: Was there any discussion within government about how to have a conversation with the states and territories ahead of this proposition going into the public arena?

Ms Larkins : Not that I was a party to.

Mr Yeaman : No. As was mentioned earlier, we were aware that the Prime Minister would likely raise this with the premiers in the context of COAG, but we were not asked to provide formal advice to the states or engage with them directly.

Senator WONG: Did you provide further advice between 22 March and COAG on this—only the COAG briefing papers?

Mr Yeaman : Yes, in the normal course of briefing for the COAG meeting.

Senator WONG: Which includes briefing about an income tax levy?

Mr Yeaman : Correct.

Senator WONG: As a result of that cabinet meeting, no-one at the Public Service level was told to go and talk to the states about this?

Mr Yeaman : My understanding is that the secretary of our department, Dr Parkinson, may have had some informal discussions with his counterparts in the lead-up to the COAG meeting. I think the Prime Minister referenced that in his public statements—

Senator WONG: Informal discussions or formal? I did not hear you.

Mr Yeaman : Informal discussions.

Senator WONG: What does 'informal' mean? You are talking about, 'Hey, we're going to drop a state income tax levy at the meeting of first ministers'—

Mr Yeaman : Not through a formal process meeting or set of papers, but he talked to his state counterparts.

Senator WONG: When were you aware that Dr Parkinson was having those discussions?

Mr Yeaman : I want to confirm this, but my understanding is that he spoke to them over the weekend prior to the COAG meeting.

Senator WONG: No, when did you become aware that he was having these discussions?

Mr Yeaman : I would need to take that on notice.

Senator WONG: Before or after they occurred?

Mr Yeaman : I would need to take that on notice.

Senator WONG: You do not remember whether you knew before or after the Prime Minister said that?

Mr Yeaman : I am not quite clear exactly when the secretary spoke to his counterparts, so I would need to take it on notice.

Senator WONG: When were you aware that Dr Parkinson was engaging with his counterparts on the state income tax levy?

Mr Yeaman : In the days preceding the COAG meeting.

Senator WONG: At the time you became aware, had those conversations occurred or not?

Mr Yeaman : I suspect some of them may have occurred, but I would need to take that on notice.

Senator WONG: Ms Larkins, you were not engaged in this?

Ms Larkins : No.

Senator WONG: Were you aware that Dr Parkinson was having these discussions?

Ms Larkins : I was aware that Dr Parkinson was having discussions in relation to the hospital agreement, but at that point my focus was on the hospital-funding agreement and I was not aware of the income tax—

Mr Yeaman : As you can imagine, in the lead-up to a COAG meeting the secretary engages closely with his counterparts in the states across the whole agenda.

Senator WONG: I understand that. Ms Larkins, you were not aware of the income tax levy proposal?

Ms Larkins : Yes, I was.

Senator WONG: When were you aware of it?

Ms Larkins : I do not remember.

Senator WONG: Post or pre the cabinet discussion?

Ms Larkins : Pre the cabinet discussion. But I am saying that I was not aware of the content of Dr Parkinson's discussions with—

Senator WONG: Mr Yeaman, you said you would take on notice the details of this, but you think these discussions between Dr Parkinson and his state and territory counterparts occurred on the weekend?

Mr Yeaman : I would need to confirm that—but around that time, yes.

Senator WONG: That is the long weekend prior to the COAG meeting?

Mr Yeaman : Correct.

Ms Larkins : We do have, as best we can recall them, the agenda items.

Senator WONG: That is very kind of you, thank you.

Ms Larkins : They were competition policy; state tax reform; federation reform, which specifically dealt with hospital funding; reducing violence against women; counter-terrorism; the standing item on Indigenous affairs; and NDIS.

Senator WONG: Does the state tax reform talk about reform of state taxes, not the state tax levy?

Mr Yeaman : That is correct.

Senator WONG: The state income tax levy was part of the federation discussion?

Mr Yeaman : As we have said, the state income tax proposal was not formally raised in the papers. The state tax reform paper that was provided to COAG canvassed broader state tax reform issues and to some extent Commonwealth tax reform processes that were underway. The federation reform was focused primarily on health.

Senator WONG: Dr Parkinson talked to his counterparts. Was there any advice to you, Mr Yeaman, about the content of that or any outcome of that?

Mr Yeaman : No. As I said, I think these were broad discussions covering the whole agenda that took place in the lead-up to the COAG meeting. I understand that he had some of those conversations, but they were not fed back to me.

Senator WONG: Did you get any calls from your state counterparts asking for more detail?

Mr Yeaman : No, just the normal engagement that we have with the states prior to any COAG.

Senator WONG: What about Treasury? Did the states or territories contact Treasury to gain more information about the state income tax proposal?

Mr Brennan : No, the only discussions were the ones that I mentioned as part of—

Senator WONG: Just on that: there is quite a bit of public commentary from premiers and others about the lack of consultation, including a public assertion by the Queensland Premier that 'we never got documentation about the proposal'. That is correct? No documentation was ever provided about the state income tax proposal. Is that right?

Mr Brennan : From our point of view that is correct. We did not provide any documentation to our counterparts.

Senator WONG: Can I go to 29 and 30 March. There is statement which is issued by the Prime Minister described as the Statement on Federation. Mr Yeaman, was PM&C engaged in preparing this statement?

Mr Yeaman : No, Senator.

Senator WONG: Do you know who prepared it?

Mr Yeaman : I presume it was in the Prime Minister's office.

Senator WONG: When did you become aware of the statement?

Mr Yeaman : When it was released.

Senator WONG: What about Treasury? Did they provide any advice or clear any aspect of this statement?

Mr Brennan : No, not that I am aware of.

Senator WONG: When did Treasury become aware of the statement?

Mr Brennan : When it was released.

Senator WONG: When it was released?

Mr Brennan : Yes.

Senator WONG: Is this the only thing in writing, other than a cabinet document, about this plan to give states the capacity to levy income tax that the government produced ahead of the COAG?

Mr Yeaman : To my knowledge, it entered as a public document, yes.

Senator WONG: Prepared in the Prime Minister's office?

Mr Yeaman : As a media statement, yes.

Senator WONG: It is a media statement that goes directly to a pretty big proposition.

Mr Yeaman : As I said, we had been providing briefings through January and February and in lead-up to the COAG meeting on the broad options, but that statement was not produced in the department.

Senator WONG: The Prime Minister in his subsequent media press conference described this as the most serious reform to the Federation for over 40 years. Yes?

Mr Yeaman : That was his statement, yes.

Senator WONG: But the states do not get anything in writing about it before it is discussed with them? It was raised with them over a long weekend. The only public statement is a media statement prepared by a political adviser. Treasury does not talk to any of their counterparts and nor does PM&C, other than the Dr Parkinson phone call, before it is dropped publicly.

Mr Yeaman : As I said earlier, firstly, we had been writing a regular briefing on this topic in the lead-up to the meeting; and, secondly, as I said, the Prime Minister had indicated that the intention was to raise this privately with the state premiers, have a discussion around the idea and the concept and then further work would continue after that point if there was an appetite from the state premiers to proceed, which obviously there was not in the circumstances.

Senator WONG: No. Is it really surprising? This is a proposition to fundamentally recast federal-state financial relations, not just a revenue sharing but an income tax levying proposition self-described by the Prime Minister as the largest changes in 40 years. It gets announced at a football oval, without any heads-up or discussion at officials' level. It is pretty unsurprising that the states and territories said no, isn't it?

I am trying to understand the parameters of what the Commonwealth's position actually was for COAG. As a result, Mr Brennan or Mr Brake, of the Prime Minister's announcements on 30 March, was the Treasurer briefed at all or did his office or he seek any briefing on this proposal?

Mr Brennan : The Treasurer was briefed around that time, in the lead-up to COAG, as per the normal process.

Senator WONG: But I am asking as a result of the Prime Minister saying what he said that day. Was any briefing sought from Treasury by the Treasurer or his office?

Mr Brennan : We briefed around the same time. I would not say that it was linked to the PM's release, but we certainly briefed in the days leading up to COAG.

Senator WONG: I want to understand what officials understood as at 30 March was the Commonwealth's position. Was it the Commonwealth's position that the Commonwealth would agree—this is the suggestion—to reduce its income tax by a certain proportion and the states would then levy an equivalent income tax? Was that your understanding of what the Commonwealth's position was?

Mr Brennan : That is what is spelled out in the PM's release and that was our understanding.

Senator WONG: And that was the Treasurer's understanding?

Mr Brennan : Yes.

Senator WONG: Was the Commonwealth contemplating a proposition for discussion at COAG that any arrangements would permit a state to lift taxes beyond an agreed amount?

Mr Yeaman : As I understand the comments, the proposal was that in the short term there would be no additional increase in taxation. So the Commonwealth would vacant a certain share, a space, and the states would be allowed to fill that. That would be a period of transition and then at some point in the future it was possible, subject to further discussions and negotiations with the states, that they may have the capacity to then vary income tax rates as they can with land tax, payroll tax, stamp duty et cetera.

Senator WONG: So they could raise it in the future?

Mr Yeaman : That was contemplated, and I do not think—

Senator WONG: Where was this contemplated, Mr Yeaman? I know you do not want to tell me what was decided at cabinet, but was there an agreed position as a result of a cabinet decision or other Prime Ministerial decision which contemplated different rates of income tax across the Federation and the possibility that a state or territory could raise it beyond the agreed amount?

Mr Yeaman : As I understand the government decision, it was an agreement to approach the states with a proposal to offer them the capacity to levy their own income tax under the parameters discussed. The details of that was a matter for discussion and subject to the states' interest. So I think those broader parameters were things that still needed to be settled, but the broad concept and the idea was what was going to be raised with the premiers at COAG.

Senator WONG: Sure. But you have just given evidence that the proposition was that you would have an agreed reduction in Commonwealth income tax and the states would make up the difference but only to the same amount—so double taxation but not a net increase in taxation. Okay? So two sets of tax on the day sparked not an additional quantum—

Mr Yeaman : Overall burden.

Senator WONG: Yes, and that, after the transition period, the states could then levy their own income tax.

Mr Yeaman : I am reflecting public statements made by the Treasurer and the Prime Minister on 30th and 31st where they, as I understand it, contemplated those possibilities, but it was—

Senator WONG: When did you first come to understand that to be a possibility—that is, to go beyond the agreed amount?

Mr Yeaman : As I said, we had been providing briefings on that option for some time prior to the COAG meeting.

Senator WONG: No, I did not ask that; when did you understand that that was the Commonwealth's position, to contemplate the states levying a differential rate of tax and increasing it beyond the amount that the Commonwealth had reduced its income tax?

Mr Yeaman : I would need to take that on notice.

Senator WONG: Was it before or after the Prime Minister said so?

Mr Yeaman : So, without going to the content of our briefing, our briefing had gone to this issue across a range of issues.

Senator WONG: So how long was the transition period being contemplated?

Mr Yeaman : I think those are matters that will need to still be settled in discussion with the states.

Senator WONG: But you would agree that what was contemplated by the Commonwealth was that period of time—one, two, three, four, whatever years—where the states and territories could levy an equivalent amount and the Commonwealth would reduce its tax rate by an equivalent amount, but that thereafter it was contemplated that the states and territories could levy their own income tax, including going above the amount by which the Commonwealth had reduced its income tax.

Mr Yeaman : That is my understanding of the Prime Minister's comments.

Senator WONG: So how many differential rates of tax would that mean?

Mr Yeaman : In theory, it could mean multiple rates across multiple jurisdictions.

Senator WONG: Nine.

Ms Larkins : As there currently—

Senator WONG: Eight plus one.

Ms Larkins : is in other forms of tax.

Senator WONG: This is income tax; we are not talking about stamp duty, land tax and so forth.

Ms Larkins : Yes.

Senator WONG: Was there a ceiling contemplated?

Mr Yeaman : I think those are matters that need to be settled in discussion.

Senator WONG: Presumably, this is what the Prime Minister meant when he said:

… if a state government, over time, wants to raise more money by lifting taxes well it will be answerable to the public just indeed as we are to the people of Australia.

Mr Yeaman : That is the quote I am referring to, Senator.

Senator WONG: Was this Treasury's understanding?

Mr Brennan : Yes, Senator. I think, as I say, the proposition that was put in the Prime Minister's press release on 31 March—

Senator WONG: Was it 30th or 31st? The 31st is the transcript with Fran Kelly; the 30th is the statement.

Mr Brennan : I apologise.

Senator WONG: And there is another health and Medicare one—there are various other ones in relation to other matters.

Mr Brennan : Our understanding was that a specific proposition was being put to the states that was reflected in the press release of the 30 March; however, as Mr Yeaman said, there was an expectation that the COAG discussion would be fairly broad ranging. It would be a kind of, if you like, an initial discussion on options in relation to revenue sharing and potential profits for state income tax levies, so there was a general openness about where that conversation could lead but that this was the proposition being put.

Senator WONG: When was Treasury first aware of this proposition around a transition period?

Mr Brennan : I am not really sure about—

Senator WONG: Were you aware of it before the Prime Minister essentially flagged that states could raise their income tax component in order to net an additional tax burden?

Mr Brennan : It is fair to say that in the course of this long history of briefing the Treasurer—

Senator WONG: It is not that long, is it? You started this in January.

Mr Brennan : Probably it goes back a bit beyond that but, certainly—

Senator WONG: I am happy to go back to the Federation white paper, which has been a bit of a shemozzle. Let's focus on this.

Mr Brennan : That period of briefing obviously traversed a range of options from the narrow revenue sharing through to models of levy of income tax. Yes, we were broadly aware that there were a range of potential options—

Senator WONG: Come on—you are broadly aware of a lot. The Prime Minister of the country comes out and says, 'I'm going to suggest that we consider a double tax regime, a state income tax levy' and he leaves on the table the proposition not only that the states could simply pick up an existing component of income tax but that they could actually raise it beyond the current level. I am asking you when you became aware of that proposition, the second part that what was contemplated was not just, let's say for argument's sake, five or 10 per cent or two per cent or one per cent; but that would only be a fixed issue for a period of time and that states could actually go beyond existing taxation levels after a transition period. When was Treasury first aware that that was the Commonwealth's proposition?

Mr Brennan : As unsatisfactory as this may be, the way I would characterise it is that we were aware of the proposition that was being put, as per the press release of 30 March. We were also aware that the Prime Minister and the Treasurer's view was likely to be that they wanted to initiate a discussion and there was a degree of openness about where that discussion might ago.

Senator WONG: Mr Brake, were you aware that there was a prospect on the table of states levying different levels of income tax before the Prime Minister said so?

Mr Brake : I have nothing further to add to what Mr Brennan said on this.

Senator WONG: I just asked you a direct question. Were you aware that the Commonwealth was contemplating a proposition where you could have states levying an additional income tax over and above the existing levels as part of the state income tax levy discussions?

Mr Brake : As Mr Brennan said, we were aware of a broad proposal and, as Mr Brennan and Mr Yeaman have indicated, we were aware that there would be a number of details that would need to be worked through if there was an outcome out of COAG to further pursue the proposal.

Senator LUDWIG: Did a brief come across and were you briefed by the department? If you were, was that a formal briefing or did you read it in the press?

Mr Brennan : I think it comes back to the fact that Mr Yeaman—

Senator LUDWIG: No, I asked Mr Brake a question. He said he became aware. I am curious as to how he became aware. I think that is a fair question. It should not be a hard question, surely.

Mr Brake : As we have discussed, we were providing briefing to the Treasurer on a range of issues relating to this over this period.

Senator LUDWIG: You provided a briefing in relation to a state income tax levy proposal?

Mr Brake : Yes. Along with other options, we were providing briefing on these issues.

Senator LUDWIG: That is not an answer to the question as to how you became aware. If you are providing the briefing, you are aware of it—in other words, you are providing the information. You said that you became aware of it, so you became aware of it from an external source. That is the imputation of the answer to the question that was put to you. How did you become aware of it?

Mr Brennan : All I can do is go back to my previous answer. We were aware that there was a range of options because we had provided briefing on a range of options in the lead-up to COAG. There was a proposition being put to the premiers and the treasurers in the COAG meeting, but there had been an openness to see where that conversation went.

Senator LUDWIG: Thank you.

Senator McKIM: When did Treasury become aware that the Prime Minister wished to place the issue of the state income tax levy proposal into the national conversation?

In other words, were you aware before the announcement was made that the announcement was going to be made? Or was it a bolt from the blue?

Mr Brennan : As PM&C has said, there was a cabinet process, as you would expect, prior to the COAG meeting. So in the lead-up to the cabinet process, we were aware that this was a topic likely to be discussed at COAG.

Senator McKIM: The question was specifically around the PM's statement on 30 March. Were you aware that that statement was going to be made, or might be made, prior to it being made?

Mr Brennan : I was not specifically aware of the fact that the PM would put out a press release, but it is, I guess, not unexpected that the PM would say something publicly about some of the positions that he was taking going into COAG.

Senator McKIM: Sure. Ms Larkins, perhaps the same question to you: was PM&C aware that the Prime Minister was going to make the statement that he made on 30 March?

Ms Larkins : I was not aware of the statement being released. I am pretty—

Senator McKIM: Sorry to interrupt. The question was: were you aware that he intended to make that statement prior to him making it?

Ms Larkins : Not at that point—at that particular time.

Senator McKIM: So that was a surprise to you?

Ms Larkins : No, it was not a surprise. We expected him to say something, but the actual timing of that statement—

Mr Yeaman : We were aware that the Prime Minister would raise this in the context of the COAG meeting with the premiers. For the form of the public statements and the media release, we were not aware of the exact timing or form of the release.

Senator McKIM: Sorry, Mr Yeaman, I think you have just said that you were aware that he intended to raise it publicly prior to the COAG meeting. Is that—

Mr Yeaman : In the context of the COAG meeting. We knew that he wished to raise this as an issue at the COAG meeting. As Mr Brennan said, it is not unusual for a prime minister to raise matters with the premiers in the lead-up to the meeting. But we were not aware of the precise form of the statement.

Senator McKIM: Sure. When did you become aware that he intended to raise this publicly?

Mr Yeaman : As a result of the cabinet discussion.

Senator McKIM: As a result of processes of cabinet. I know you cannot talk about the decisions cabinet has made, but it would not be an unreasonable assumption, given your answer, to suggest that the fact the PM was going to place this into the national conversation was part of the cabinet decision.

Mr Yeaman : The Prime Minister indicated that he took this matter to cabinet. We were aware before the COAG meeting that he would raise it at COAG.

Senator McKIM: I am ware that Senator Wong has some further questions in relation to the matters we have been discussing, but could I just ask a couple of questions about the outcomes from COAG on health. The communiqué says that there will be $2.9 billion to the states and territories, and the Heads of Agreement has now been signed. The Heads of Agreement does not itself contain a dollar figure. We have had two states, Queensland and Tasmania, publicly give an estimation as to the funds that would flow to them out of the $2.9 billion, which I cannot make add up. Are you able to inform the committee of how much each state and territory will get under the formula contained in the Heads of Agreement?

Ms Larkins : No, I am not able to. I can take that on notice, but it is really a matter for Health to provide that level of detail, and I do not have that detail with me. But we can refer that to Health and come back to you.

Senator McKIM: I would appreciate that, Ms Larkins, if you were able to do that. Would you agree that, normally, Commonwealth grants are distributed to states and territories on a population basis? Would that be an accurate general statement?

Ms Larkins : I do not feel well enough informed to say 'normally' because I am aware of number of exceptions to that rule.

Senator McKIM: No worries. For example, in Tasmania the Premier has said that that state's estimate was $54 million. But distributed on a population basis, Tasmania should receive $63.8 million. So there is quite a big discrepancy—about a $10 million discrepancy—in comparing what Tasmania would be due if those funds were to flow on a population basis to what the Tasmanian Premier has said publicly that he expected to get from this funding. In fact, Queensland's discrepancy is about $138 million—comparing what the Queensland Premier has said in a media release of her estimate of what Queensland will receive to what Queensland would receive on a population basis, which is $582.9 million. Are you aware of how the funds will be broken down on a state-by-state basis? I understand you cannot give a dollar figure, but are you aware of the model?

Ms Larkins : I am broadly aware of it. Again, it would be better for me to take it on notice. It is not entirely a population model. It is a model based on historic levels of hospital investment plus some consideration of particular disadvantage and costs of operating in various states. But, again, for me to give you a precise answer, it would be better if I took that on notice.

Senator McKIM: When you refer to 'historic levels of hospital investment', are you referring to historic state and territory—

Ms Larkins : Sorry, hospital activity, not investment. I have been well corrected.

Senator McKIM: 'Hospital activity' is historic levels of hospital activity at a state and territory level. In other words—as a follow up question to you, Ms Larkins, or anyone else who is able to assist the committee—if the historic levels of activity were lower, would that mean a lower amount of the two?

Ms Larkins : No, I think that is not what I am saying. I am saying that there is a complicated—in fact, Mr Brennan might be able to describe it.

Mr Brennan : I endorse Ms Larkins' view that we should refer this to Health, but I can give a couple of high-level comments. I guess the centrepiece, or a key aspect, of the COAG deal on hospitals is that we continue with some of the key parameters that have existed under the National Health Reform Agreement.

Senator McKIM: Like activity based funding.

Mr Brennan : Activity based funding—that is right—based on a National Efficient Price, and those two parameters really drive what the ultimate health spend will be. While there is a 6½ per cent indexation cap put in place in relation to this funding deal, because it is not a block funding deal it is not as simple as saying there is 6½ per cent indexation and we will just divide that up among the states. It will depend on the activity levels of the individual states going forward as to what share of the $2.9 billion they each receive. So that is why a state may or may not end up getting its population share, depending on the activity levels that—

Senator GALLAGHER: I will just follow up there. The 6½ per cent is a national cap, is that right?

Ms Larkins : We are still to work through the details of how the cap will work, but it is a cap on growth of Commonwealth expenditure, if that makes sense.

Senator GALLAGHER: It does. So that means that, based on the National Efficient Price activity based funding and some of the other factors that you have outlined, some jurisdictions would potentially get more than 6½ per cent from the Commonwealth and others would get less.

Mr Brennan : If the caps works as a national cap, that is possible.

Senator GALLAGHER: But you have not decided whether it is a national cap.

Ms Larkins : We are working with the states to determine how that cap will best work.

Senator McKIM: So it is accurate to say that as of today you do not know how much of that $2.9 billion will flow to each state and territory—is that an accurate comment?—because you are still working through it.

Mr Brennan : It depends on actual activity when the time comes. So we and Health can model potential outcomes based on what we currently know about the National Efficient Price and the current level of state and territory activity data, and they can model some activity levels going forward and generate estimates in that way. But, in principle, it is not actually possible to pinpoint with certainty how much an individual state will get because of—

Senator McKIM: Yes, I do accept that, Mr Brennan. Are you aware of whether Health is modelling that at the moment?

Mr Brennan : Health would be modelling that, yes.

Senator McKIM: I am actually not sure which agency would be the lead agency for doing this, so I will put it to both you. Can one of you take on notice to provide details of any modelling that Health has done to date on those matters and also perhaps to provide an overview for the committee on the details. You have given a high-level response, which I appreciate, but the details of the model that will be used to allocate the funding.

Mr Brennan : Yes, we can do that.

Senator LUDWIG: Just coming back to the cabinet submission, which department was the originator?

Mr Yeaman : Prime Minister and Cabinet.

Senator LUDWIG: Was it a joint submission, or was it just Prime Minister and Cabinet?

Mr Yeaman : No, normally the COAG submission would be a Prime Minister and Cabinet submission.

Senator LUDWIG: Was it circulated? I am not asking about the content. Was it circulated 10 days before, under the 10-day rule?

Mr Yeaman : I need to take that on notice.

Senator LUDWIG: Was it a COAG outcomes document, a COAG briefing document, or a document seeking permission to put proposals? I am really trying to understand how you would refer to it.

Mr Yeaman : I think the term 'negotiating mandate' was raised earlier. Normally, the COAG submission would be a submission that outlines what is on the agenda, the key outcomes the Commonwealth is seeking to achieve, likely sensitivities and so on.

Senator WONG: I think the evidence you gave before—you, collectively—was that a design feature of the Commonwealth's proposition was the transition period with the possibility of increased income tax rates after the transition period, all of which would be for discussion. Is that a fair enough proposition? Is that a fair enough summary of the evidence?

Mr Yeaman : As I said, I think the proposition was that the Prime Minister raised the concept of income tax sharing with the states, and then in other comments—the Prime Minister's and Treasurer's public comments—they floated that that could be considered. There were a number of elements of this proposal—we touched on HFE earlier—where, to proceed with that, it would need to have been worked through. One option would be the level of flexibility the states would have around the ability to change rates over time. I think the Prime Minister indicated that was something that was under contemplation for the future. I would not call it a design feature.

Senator GALLAGHER: Just following on from that, I note that, in the comments made by the Prime Minister and the Treasurer post the announcement on the 30th, there were comments about linking the state income tax proposal to the states meeting costs for health and education into the future. Both the Treasurer and the Prime Minister made comments around that. What work had been done on linking the state income tax levy proposal with health and education funding? It seems to me, from those comments, that there was a direct link between giving states the ability to raise revenue and meeting the future costs of both of those areas.

Ms Larkins : I think, throughout the Reform of the Federation work, there had been a discussion about pressure on all governments in relation to growth and expenditure for education and health. In that context, there was a broad discussion about various options, including GST, Medicare levy and other income tax options to raise revenue to meet those future needs. So I would see it within that context.

Senator WONG: On the same day, 30 March, on which the Prime Minister made the comments that Mr Yeoman has explained, Mr Morrison said this—there was a Sky interview, for which I notice no transcript has been issued, but it was recorded on the transcript of the 7.30 report, which ran a segment of the interview:

SCOTT MORRISON, TREASURER: The Prime Minister made it pretty clear today also that we have no appetite for states to be able to increase taxes.

SKY NEWS JOURNALIST: The Prime Minister did say today that in the future states would be free to increase their income tax rates, which would in fact increase the overall tax burden.

SCOTT MORRISON: Well, the Prime Minister has—I don't think has gone that far, ultimately.

Could someone at the table tell me which of those two positions was the Commonwealth position.

Ms Larkins : I do not think we would normally disclose the details of cabinet deliberations.

Senator WONG: No, I am not asking. It is very interesting that you are telling me that that was the argument in cabinet, but that is—

Ms Larkins : I am not telling you that that was the argument. I was not there.

Senator WONG: Fair enough, but this this a public statement. You have the Prime Minister saying, essentially—and I am happy to read the quote again; it is the one we discussed at some length earlier—that in the future the states could increase income taxes under these arrangements. I thought Mr Yeaman explained quite well what the proposition was. I had not heard the transitional period notion before. Mr Morrison said that the Commonwealth had 'no appetite for states to be able to increase taxes'. Which was the Commonwealth's position in the lead-up to COAG—the Prime Minister's position that the Commonwealth would contemplate the states increasing income taxes subsequently, or Mr Morrison's position that the Commonwealth had 'no appetite' for that?

Mr Brennan : I do not think there is much I can add. I am not aware of the quote that you have raised, but—

Senator WONG: I am happy to print it off for you. I have read it out.

Mr Brennan : I think that, as Mr Yeaman characterised, the Commonwealth proposition on this was that there was a proposal that involved no increase in the overall income tax burden. But there was a degree of openness about where the conversation at COAG could lead to on these matters.

Senator WONG: He went further than that, didn't he?

Mr Yeaman : Obviously, I cannot speak for the Treasurer's or the Prime Minister's comments but, to add a little context, there had been ongoing discussions through the COAG process with the states about the Commonwealth's desire for the states to look closely at their own tax bases and, in broad terms, to keep the overall impact of tax on the economy low. So it is not necessarily inconsistent to say that at some point in the future the states may be able to have some flexibility around the rates. I am not saying that was the government position, but that was something that was contemplated. Obviously the overall impact on the tax burden and the overall impact on the economy depends on the whole mix of taxes, including stamp duties and land taxes et cetera.

Senator WONG: The Prime Minister actually said:

Well you could, you could in the future—

I am quoting from the Fran Kelly interview—

you could have a different rate of income tax.

How is that consistent with Mr Morrison saying:

We have no appetite for states to be able to increase taxes.

Mr Yeaman : I cannot speak for the Treasurer.

Senator WONG: Can the Treasury tell me what the Treasurer meant?

Mr Brennan : I do not think I have anything further to add.

Senator WONG: What does the Treasurer mean? What do you understand the Treasurer's position to be?

We have no appetite for states to be able to increase taxes.

Can you tell me how that is consistent with a proposition which allows the states to increase income taxes?

Mr Brennan : I just do not think I can add further.

Senator WONG: Question to Mr Turnbull:

Journalist: … you did say quite clearly yesterday that in the future, after say a period of five years, the states would be free to lower that amount of income tax or raise it.

Prime Minister: Yes, of course.

Journalist: So we could see a higher burden of income taxation?

Prime Minister: Well, well, states could, just as federal governments can lower and raise income tax and do so all the time …

Journalist: So we could end up with double taxation? … Well if the states are ultimately free to do what they like with that, then ultimately we will have a separate income tax system.

Prime Minister: … You could have a, a different rate of income tax …

I do not understand. Is that the Commonwealth's position prior to the COAG?

Mr Yeaman : As I said, the position was to raise the proposal with the states. You would then have to work through the details of how the scheme would work.

Senator WONG: The Federation White Paper—I have had lots of discussions with—

Ms Larkins : It is not coming, Senator.

Senator WONG: No, I gathered that. So it is officially junked, is it?

Ms Larkins : Yes. There will not be a green or white paper, and the work on Federation will be taken forward in the context of the work that Treasury is doing arising out of the COAG meeting in April.

Senator WONG: Which is what? What is the work the Treasury is doing arising out of the COAG? The more efficient federation for all Australians—the federal communique?

Mr Brennan : There was a commitment out of COAG that the states and the Commonwealth—and that HOTs would be the kind of coordinating mechanism for this—would get together and explore revenue-sharing proposals. These would be proposals to look at the current stock of tied grants and identify opportunities effectively to replace some tied grants either with untied money or with an explicit sharing of income tax revenue, as distinct from flexibility around—

Senator WONG: Are you working on a levy proposal?

Mr Brennan : No.

Senator WONG: Just the revenue-sharing idea?

Mr Brennan : That is right.

Senator WONG: Ms Larkins, I think it was still kind of alive at the last estimates hearing, so when was the decision made that the Federation green and white papers would not be proceeded with?

Ms Larkins : Post COAG.

Senator WONG: Who made that decision?

Ms Larkins : The Prime Minister.

CHAIR: I have a number of questions, mostly related to the interaction between the state income tax levy and the education portfolio. Is there someone at the table who can assist with that?

Ms Larkins : I can. Sorry, just to correct what I just said, it was part of the discussion that went to cabinet as part of the COAG negotiating mandate—the future of the green and white papers for the reform of Federation.

Senator WONG: Would it be correct to say that cabinet had determined to not proceed down that path prior to COAG?

Ms Larkins : I am just stuck on whether I can talk about deliberations of cabinet.

Senator WONG: I am just trying to work out where the decision making is. Was the decision by government to not proceed with the previously announced green and white papers on Federation made prior to COAG?

Ms Larkins : Yes.

CHAIR: Ms Larkins, on 31 March the Prime Minister made a public statement about the possibility that the Commonwealth, as part of a state income tax levy arrangement, might withdraw from public school funding in exchange for this transfer of taxation power of some kind to state governments.

Ms Larkins : He used it as an example of an area that might—

CHAIR: When was the Prime Minister briefed on that proposition?

Ms Larkins : Briefings on education specifically would have been included in the briefs that Mr Yeaman talked us through earlier today.

CHAIR: Do we have a particular date? That was on the 23rd, I think?

Mr Yeaman : I think it was the 22nd. Sorry, I would need to confirm the exact date. But—just to add to Ms Larkins's comments—on the briefing that we provided on the proposal: one of the elements of an income-tax-sharing proposal was that the Commonwealth would look, as Mr Brennan just said, at moving out of some areas of joint funding to provide the states with an untied revenue source, so the briefing that we provided was not education specific. Education was encompassed within a broad range of existing national partnership or specific-purpose payments that the Commonwealth provides to the states. All of those would need to have been worked through if a decision to proceed had been taken, but it was not an education-specific briefing; it was briefing on the whole range of national partnerships and specific-purpose payments that are currently in play between the Commonwealth and the states.

CHAIR: You are saying it was not a detailed briefing about the implementation of a change to education in particular?

Mr Yeaman : In the context of income tax sharing?

CHAIR: Was any detailed briefing about education provided to the Prime Minister on 22 March in any other context?

Ms Larkins : No.

CHAIR: I am interested to understand what information the Prime Minister had at his disposal. Had you had any consultations with the department of education about the inclusion of education on that list of options where the Commonwealth might withdraw?

Mr Yeaman : There are two streams here essentially. One is that, as you would be aware, there have been ongoing discussions in the context of the Federation white paper around education funding more broadly and education arrangements. Separate to that, there were the proposals around revenue-sharing options including income tax sharing. The material that was in our briefing regarding income tax sharing covered the full sweep of national partnerships and specific-purpose payments in terms of what the Commonwealth currently provides to the states and what that funding is for. It did not go to the detail of specific education arrangements.

CHAIR: So you did not consult with the education department?

Mr Yeaman : Not on that particular proposal.

CHAIR: When was the last time Prime Minister and Cabinet was in consultation with the education department about significant changes to the allocation of state and territory responsibilities within the Federation?

Ms Larkins : We would have been talking to them right up to the COAG meeting, but, again, not in relation to this specific—

CHAIR: Were we, or would we have been?

Ms Larkins : Again, I will need to take it on notice, because I do not have dates in front of me, but we were certainly talking to them in the context of the lead-up to COAG preparations.

CHAIR: The education department, in answer to a question on notice, has said that the department informed the Reform of the Federation green paper process in 2015 and has not since provided further advice to that process.

Ms Larkins : We have ongoing conversations with the department of education about education policy and education reform.

CHAIR: But not in relation to the Reform of the Federation green paper process. Did you have conversations with them in the context of preparation for COAG?

Ms Larkins : It is my understanding that we did. Again, I will take it on notice so that I can give you more detail.

CHAIR: Were you talking to any state and territory departments about education?

Ms Larkins : We had been through the life of the Reform of the Federation process.

CHAIR: In the lead-up to COAG?

Ms Larkins : Not in the immediate lead-up to COAG. We did not talk to states and territories about any specific proposals.

CHAIR: Was there any consultation with some of the other agencies that might have been affected had the changes to education floated by the Prime Minister been pursued—for example, with the Australian Institute for Teaching and School Leadership?

Ms Larkins : Again—and I think the Treasury officials have outlined this, as I think Mr Yeaman has—what was proposed was for the Prime Minister to float this idea with his colleagues at COAG and to test their appetite for further development of this work. We were in the nature of, 'Would you agree to look at this with us?' It was not a firm proposal on the table for the Commonwealth to withdraw from funding state schools.

CHAIR: These issues had been canvassed in the Federation green paper.

Ms Larkins : There has not been a Federation green paper. It was canvassed in discussion paper and the issues papers.

CHAIR: There were a range of concerns raised—principally, that a withdrawal from the public education system on behalf of the Commonwealth could lead to different funding models being applied across states and territories, and between government and non-government sectors, leading to differences in the level of public funding for schools with similar population characteristics. It went on to say that it would be likely to give rise to concerns about fairness as well as introduce perverse incentives for governments to shift costs within the system. In canvassing this option, it considered the possibility that this would reduce the ability of states and territories to effectively regulate and assist the non-government sector to improve student performance and said that it may impede easy movement for students between schooling sectors. Was the Prime Minister alerted to any of those concerns in the briefing that you provided on 22 March?

Ms Larkins : There was no concrete proposal for the Commonwealth to withdraw from schools.

CHAIR: What advice was the Prime Minister relying on when he floated this proposition on 31 March?

Mr Yeaman : I think one way to put it is that, if you were to proceed with an income tax sharing proposal along the lines outlined by the Prime Minister, one of the things you would have to consider is which areas of joint Commonwealth-state responsibility you may wish to vacate. In every single one of those areas, whether it is skills or whether it is education, or any number of other areas, you would have to make a judgement call on a case-by-case basis whether the benefits of joint responsibility were outweighed by the benefits of clearer lines of roles and responsibilities.

CHAIR: I certainly agree with you.

Mr Yeaman : When the Prime Minister used education as an example in the media interview, we took that as him using that as an example of those kinds of choices that would need to be made across all of the areas. But, as Ms Larkins said, no decision had been taken for the government to proceed on that basis in the education space.

CHAIR: It is difficult for me to reconcile the public comments that were made with your suggestion that it was simply an example. So you are telling me that the department had not provided any detailed information to the Prime Minister about the implementation of that particular example, which was a withdrawal from public school funding on behalf of the Commonwealth? Is that correct?

Ms Larkins : Yes, and there had not been a decision to put that. A decision to withdraw funding from Commonwealth schools was not on the table.

CHAIR: Are you now working on such a proposition? Is that a proposal of continuing interest to the Commonwealth?

Ms Larkins : We are not doing any work on that at the minute.

Mr Yeaman : Treasury may like to comment, but the current agreement that was made at the last COAG meeting was to look at the broad area of tied grants versus untied grants and whether there are improvements that can be made in that area. That is what Treasury is discussing with the states—and they can speak in more detail about that process. So, to the extent, all Commonwealth and state funding agreements are being considered in that context. The scope of that, I think, it is still to be settled.

CHAIR: The communique has just guidelines about school funding as an outcome of the 1 April meeting. It says:

COAG recognised the positive contribution high quality schooling makes to both individuals and the economy. It noted that the Commonwealth’s contribution to school education is funded through to the end of 2017, and agreed that discussions on new funding arrangements should be concluded by early 2017.

Was that all that was able to be agreed about school funding at that meeting?

Ms Larkins : It was the outcome of the meeting.

CHAIR: What process is now being undertaken to formalise school funding arrangements after 2017?

Ms Larkins : That work is being taken forward by Minister Birmingham, and questions on that are best directed to the Department of Education.

CHAIR: Is it likely to come back to the next COAG meeting?

Ms Larkins : My understanding is that it is not scheduled to come back to the next COAG meeting. It is being taken forward by Minister Birmingham in negotiation with his state and territory colleagues and the non-government schools sector.

Senator WONG: There is a ministerial council.

Ms Larkins : Yes, there is.

CHAIR: The ministerial council was due to meet, I think, in March but that was cancelled. I think there is another meeting scheduled in June, but that seems unlikely to go ahead. When do you think the community will have their opportunity to have some input into arrangements for school funding?

Ms Larkins : Again, Senator, I think that is a question that needs to be directed to the Department of Education.

CHAIR: It is no longer in the remit of COAG at all, in any way?

Ms Larkins : I think it is a question for them.

Senator GALLAGHER: I have a few questions on the health discussions. On the $2.9 billion agreement, is that figure an estimate or is that the maximum cap on what the Commonwealth—

Ms Larkins : My understanding is that it is an estimate.

Senator GALLAGHER: So it could increase beyond $2.9 billion or does the national cap constrain it?

Mr Brennan : The cap constrains it. The $2.9 billion is basically premised on the application of 6½ per cent to the base in 2016-17.

Senator GALLAGHER: So that is the maximum exposure you would expect to the Commonwealth under this agreement?

Mr Brennan : Yes.

Senator GALLAGHER: But it could be less than that?

Mr Brennan : In principle, it could be less than that.

Senator GALLAGHER: How was the $2.9 billion figure reached?

Mr Brennan : In terms of?

Senator GALLAGHER: In terms of the rationale, in unpacking that $2.9 billion. When you look at the Parliamentary Budget Office analysis, for example, it says that $7.9 billion has been cut from expected health funding over the forward estimates period. This returns $2.9 billion to the states. Is there a policy rationale behind that?

Mr Brennan : In one sense, they are questions for Health, but my sense is that it is less about the $2.9 billion than it was about the indexation rate. So the states were particularly keen on achieving a higher level of indexation than was factored into the forward estimates, and the COAG agreement was really around the 6½ per cent cap.

Senator GALLAGHER: Which led to that figure—

Mr Brennan : That is right—the 2.9.

Senator GALLAGHER: on being determined.

Mr Brennan : Correct.

Senator GALLAGHER: But it is still less than what had been previously factored into the forward estimates for expected health funding?

Mr Brennan : I would have to take that on notice.

Senator GALLAGHER: Could you?

Mr Brennan : Yes.

Senator GALLAGHER: It would be good to know. I do not know whether the Treasury agrees with the PBO analysis, but comparing that figure with what has been replaced and what has been cut would be useful.

In terms of the heads of agreement that was signed: there was a draft heads of agreement that was leaked the day before—and, Ms Larkins, I think this is probably your area. That had a paragraph 9 which had 'tax reform' as one of the subheadings within that agreement. What can you tell me about that?

Ms Larkins : I think we would normally not go into the details of the negotiations between the Commonwealth and the states, so I would like to take that on notice. It is not something that we would normally divulge—

Senator WONG: Chair, I understand that is what officials say; that is not what the Senate says—not what the resolutions say about what you can—

Ms Larkins : I would appreciate, Chair, an opportunity to consult on that matter, because it does go to the negotiations that we have between the Commonwealth and the states.

CHAIR: Ms Larkins, it is reasonable for the parliament to make an inquiry about how the Commonwealth is conducting its business and on what basis, and we have had answered a range of questions around similar issues this morning. If you are able to undertake to get back to us very quickly—

Ms Larkins : I could talk in broad terms: that leaked agreement was an agreement that was circulated to states for comment. We always work with the states to come to an agreed position. That was the first document we shared with them that formed the basis of subsequent discussions. But I would like to take on notice the detail of those discussions.

Senator GALLAGHER: The reason it stands out to me is: I have never seen 'tax reform' as a subheading within a health agreement before. So it is unusual to see it there as part of the discussions. It also has a section that says 'language to be circulated separately'. Can you advise the committee of whether that actually occurred? Was language relating to that section circulated separately in the lead-up to COAG?

Ms Larkins : Not that I recall.

Mr Yeaman : It may be a question of form. We described the agenda for the COAG meeting earlier as having a 'federation' title for one topic. So there would be a broad discussion around the federation which was primarily focused on health, but, for example, issues around state tax reform and what the states might achieve in their own tax bases had been around. So I think there were a certain number of placeholders in various documents at different times for different items that may emerge in the negotiations. But that was quite a fluid process.

Senator GALLAGHER: Just going back: I have sat in part of COAG negotiating health reform, and I have never ever seen 'tax reform' as a subheading, conditional for health funding from the Commonwealth—that you would have to sign up to tax reform as your way of getting access to extra funding from the Commonwealth. I see what you are trying to do, and I note it, but I think it is more than just a marker there.

In terms of primary health care: again, in the draft agreement—and the Prime Minister and the Minister for Health, in the lead-up to COAG, mentioned this in their public statements: the retaining of $70 million a year over three years ongoing, it seemed, from public hospital services in order to pay for the Commonwealth's primary health-care reforms. That was covered off at paragraph 18 and in a schedule to the draft agreement. The final agreement that was released publicly is silent on that $70 million—or the $210 million. Can you inform the committee of where that is up to?

Ms Larkins : It is not in the final agreement. In the negotiations that we are currently having with states, we will want to talk to them about how we jointly ensure that we have the infrastructure we need to do some of the coordinated care work that we want to do across Commonwealth/state.

Senator GALLAGHER: So in terms of the $2.9 billion on offer to the states and territories, is the Commonwealth removing $210 million of that in order to pay for it?

Ms Larkins : It is no longer in the final heads of agreement.

Senator GALLAGHER: So it is not conditional?

Ms Larkins : No, it is no longer in the final heads of agreement.

Senator GALLAGHER: So the states won that at COAG to have that removed from the agreement, we can assume. If the Hansard does not pick that up, I will take that as a yes that that has gone.

Ms Larkins : I can be clear that it has gone; it is not in there.

Senator GALLAGHER: Understood: it has gone. Going back to the discussion we had briefly with Senator McKim, you were saying that you are not able at the moment to indicate the states' or territories' share of that $2.9 billion—is that correct at this point in time? Was there a base level that was able to be provided to the states and territories—a comfort level? The agreement says that 95 per cent of the money will be paid prospectively based on a number of different criteria. Surely, to get the premiers and chief ministers to sign up, they must have had some indication of what allocation of the $2.9 billion they would get.

Ms Larkins : Health did provide a modelled scenario of what states would provide that was indicative and had a number of parameters that were clear to the states and territories. So they did have a sense of what the money would be leading up to the discussion.

Senator GALLAGHER: Can that be provided?

Ms Larkins : Yes, I think we have already undertaken to ask Health.

Senator GALLAGHER: In terms of Senator McKim's question. National Efficient Price and the activity based funding—I think in the 2014-15 budget, both of those were scrapped as part of the changes to health funding. So they are now back as part of health funding between the Commonwealth and states. What about the National Health Funding Body, the administrator of the National Health Funding Pool and the IHPA, the Independent Hospital Pricing Authority? They had all been flagged, I think, at some point for abolition. Are they all back in now?

Ms Larkins : All the mechanisms that allow the funding to be paid—the exact sort of administrative mechanisms are still to be finally determined. But, yes, all of the funding mechanisms.

Senator GALLAGHER: So that is really putting back in place the National Health Reform Agreement that was negotiated under the previous government—the funding arrangements—

Ms Larkins : Those elements of it, yes.

Senator GALLAGHER: which essentially controlled how the funding flowed to the states and territories from the Commonwealth. The previous Labor government's agreements are back in place for Commonwealth funding of public hospitals.

Mr Brennan : Certainly those design elements are consistent with the current NHRA. There were some other elements of the NHRA when it was first struck, including some funding guarantees.

Senator GALLAGHER: The funding guarantees are gone and the 50 per cent rate has changed.

Mr Brennan : That is right—the move to a higher level of the National Efficient Price. So the proposed—

Senator GALLAGHER: The infrastructure is there but the funding is not.

Mr Brennan : Well, a large increase in funding is there and, as I said, I will take on notice if comparisons can be made between what was and what is now. The idea of a National Efficient Price with the Commonwealth funding proportion of it is consistent with the current arrangements as is the activity based element with states reporting activity data. The differences really are: the absence of the states' specific and the overarching guarantee—the $16.4 billion guarantee—and the fact that we have got a capped arrangement. That is a new element.

Senator GALLAGHER: In terms of the mechanisms and the infrastructure within the agreement, that has returned to the Labor government's National Health Reform Agreement, and the only changes really centre around the funding flow, the funding allocation.

Mr Brennan : That is probably a fair assessment.

Senator GALLAGHER: Just back on the Federation white paper process: could we get a figure of how much had been spent on that?

Ms Larkins : I will have to take it on notice. I do not have it off the top of my head; but, yes, we can do that.

Senator GALLAGHER: That would be good. I think it has been asked—

Ms Larkins : It has.

Senator WONG: I think you have been pretty good at providing that.

Ms Larkins : I will certainly have it for next week, but I have not got it with me today so I would like to take it on notice.

Senator WONG: Soon. It is just the update from the last estimates to date.

Ms Larkins : Yes. I do not think anyone will have it. We will have to go and work it out.

Senator WONG: What was the cost at the last estimates?

Ms Larkins : I do not remember it, Senator; I am sorry. And I do not think anyone here would have it.

Senator WONG: What was the original budget?

Ms Larkins : Again, Senator, I am sorry. I had not prepared for those questions so I do not have them off the top of my head.

Senator WONG: I am not having a go at you, but it is one of the last refuges of PM&C to tell me that this was not a thought-bubble, that this was all work done in terms of the Federation green and white papers.

Ms Larkins : I will take that on notice and get you the figure.

Senator WONG: What was the original budget and was it revised? What are the costs to date? What about the tax white paper? What is happening?

Mr Brake : The government has said that its tax policies will be released with next week's budget.

Senator WONG: So no tax white paper either. It is not a white paper. Let's not have the conversation where I think Senator Cormann said that the budget is printed on white paper. It is not a tax white paper in the sense that policy makers understand. Correct?

Mr Brake : The white paper sets out the government's proposals. As the government said, these proposals will be set out in next week's budget.

Senator WONG: Are you going to be releasing a tax white paper?

Mr Brake : The budget will encapsulate those proposals.

Senator WONG: What are the costs on the white paper to date?

Mr Brake : I will have to take that on notice.

Senator WONG: Ms Larkins, my office has just advised me that in fact PM&C took the costs of the Federation white paper on notice in February and I still have not received them. Can I indicate this and ask the secretariat to follow this up: can we please have those today. That is not an unreasonable request. The department has been on notice for a couple of months about that.

Ms Larkins : Yes.

Senator WONG: Thank you.

CHAIR: There being no further questions from senators, I would like to thank witnesses who have given evidence to the committee. I suggest that answers to questions on notice should be provided by close of business on Friday, 29 April. I understand that that is a short time frame but we are constrained by the government's decision to bring the budget forward. If you are able to accommodate that, we would appreciate it.

Committee adjourned at 12 : 28