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Department of the Treasury

In Attendance

Senator Stephen Conroy, Minister Representing the Treasurer

Senator Nick Sherry, Minister for Superannuation and Corporate Law

Department of the Treasury

Dr Ken Henry, Secretary

Mr Richard Murray, Executive Director, Policy Coordination and Governance

Outcome 1—Sound macroeconomic environment

Output Group 1.1 Macroeconomic group

Dr David Gruen, Executive Director

Mr Mike Callaghan, Prime Minister’s Special Envoy

Mr Tony McDonald, General Manager, Macroeconomic Policy Division

Dr Steven Morling, General Manager, Domestic Economy Division

Mr Adam McKissack, Principal Adviser, Forecasting, Domestic Economy Division

Mr Kevin Playford, Manager, International Finance Division

Mr Mike Kooymans, Manager, International Finance Division

Mr Bill Brummitt, General Manager, International Economy Division

Outcome 2—Effective government spending arrangements

Output group 2.1 Fiscal group

Mr Nigel Ray, Executive Director

Ms Peta Furnell, General Manager, Social Policy Division

Mr Paul McBride, Manager, Social Policy Division

Mr Peter Robinson, Principal Adviser, Social Policy Division

Mr Steve French, General Manager, Industry, Environment and Defence Division

Mr Geoff Francis, Principal Adviser, Industry, Environment and Defence Division

Ms Meghan Quinn, Manager, Industry, Environment and Defence Division

Mr Kurt Hockey, Manager, Industry, Environment and Defence Division

Ms Natalie Horvat, Manager, Industry, Environment and Defence Division

Ms Penny Sirault, Manager, Industry, Environment and Defence Division

Ms Jan Harris, General Manager, Budget Policy Division

Ms Luise McCullough, Principal Adviser, Budget Policy Division

Mr Jason Allford, Principal Adviser, Budget Policy Division

Ms Michelle Stone, Manager, Budget Policy Division

Ms Sue Vroombout, General Manager, Commonwealth-State Relations Division

Mr Tony Webster, Manager, Commonwealth-State Relations Division

Ms Deidre Gerathy, General Manager, Corporate Services Group

Mr Rob Donelly, General Manager, Financial and Facilities Management Division

Outcome 3—Effective taxation and retirement income arrangements

Output group 3.1 Revenue group

Mr David Parker, Executive Director

Ms Christine Barron, General Manager, Indirect Tax Division

Mr Michael Willcock, General Manager, Personal and Retirement Income Division

Mr Mark O’Connor, Principal Adviser, Personal and Retirement Income Division

Mr Tony Coles, Manager, Personal and Retirement Income Division

Mr Chris Leggett, Senior Adviser, Personal and Retirement Income Division

Mr Nigel Murray, Manager, Personal and Retirement Income Division

Mr Paul McCullough, General Manager, Business Tax Division

Mr Rob Heferen, General Manager, Australia’s Future Tax System

Mr John Lonsdale, Adviser, Australia’s Future Tax System

Mr Jonathan Rollings, Acting General Manager, Tax Design Division

Mr Haydn Daw, Acting General Manager, Indirect Tax and Treaties Division

Mr Greg Wood, Indirect Tax and Treaties Division

Maryanne Mrakovcic, General Manager, Tax Analysis Division

Phil Gallagher, Manager, Tax Analysis Division

Colin Brown, Manager, Tax Analysis Division

Damien White, Manager, Tax Analysis Division

Mr Marty Robinson, Tax Analysis Division

Outcome 4—Well-functioning markets

Output group 4.1 Markets group

Mr Jim Murphy, Executive Director

Mr Geoff Miller, General Manager, Corporations and Financial Services Division

Ms Marian Kljakovic, Manager, Corporations and Financial Services Division

Mr Mark Sewell, Manager, Corporations and Financial Services Division

Ms Alix Gallo, Manager, Corporations and Financial Services Division

Mr Bede Fraser, Manager, Corporations and Financial Services Division

Ms Kate Preston, Manager, Corporations and Financial Services Division

Mr Patrick Colmer, General Manager, Foreign Investment and Trade Policy Division

Mr Godwin Grech, Principal Adviser, Financial Systems Division

Mr David Martine, General Manager, Financial Systems Division

Ms Kerstin Wijeyewardene, Manager, Financial Systems Division

Ms Vicki Wilkinson, Manager, Financial Systems Division

Mr Roger Brake, Manager, Financial Systems Division

Mr Trevor King, Manager, Financial Systems Division

Ms Jacky Rowbotham, Senior Adviser, Financial Systems Division

Ms HK Holdaway, General Manager, Competition and Consumer Policy Division

Mr Brad Archer, Manager, Competition and Consumer Policy Division

Mr James Chisholm, Manager, Competition and Consumer Policy Division

Mr Paul Madden, Executive Director, Standard Business Reporting Management Group

Mr Peter Martin, Australian Government Actuary

Australian Bureau of Statistics

Mr Peter Harper, Acting Australian Statistician

Mr Ian Ewing, Deputy Australian Statistician, Macroeconomics and Integration Division

Mr Garth Bode, First Assistant Statistician, Social Statistics Group

Mr Paul Lowe, Assistant Statistician, Population Census Branch

Ms Heather Jones, Acting Assistant Statistician, Human Resources Branch

Mr Debra Foggin, Chief Financial Officer

Australian Office of Financial Management

Mr Neil Hyden, Chief Executive Officer

Mr Michael Bath, Director, Financial Risk

Mr Pat Raccosta, Chief Financial Officer

Mr Gerald Dodgson, Head of Treasury Services

Australian Prudential Regulation Authority

Dr John Laker, Chairman

Mr John Trowbridge, APRA Member

Mr Brandon Khoo, Executive General Manager, Specialised Institutions

Mr Charles Littrell, Executive General Manager, Policy, Research and Statistics

Mr Senthamangalam Venkatramani, General Manager, Central Region

Australian Taxation Office

Mr Michael D’Ascenzo, Commissioner of Taxation

Mr David Butler, Second Commissioner

Ms Jennie Granger, Second Commissioner

Mr Mark Konza, Deputy Commissioner, Small and Medium Enterprises

Ms Raelene Vivian, Chief Operating Officer

Mr Neil Olesen, Deputy Commissioner, Superannuation

Mr Greg Burgoyne, Chief Finance Officer

Sally Druhan, Assistant Commissioner, ATO Finance

Productivity Commission

Mr Gary Banks AO, Chairman

Mr Bernie Wonder, Head of Office

Dr Michael Kirby, First Assistant Commissioner

Mr Terry O’Brien, First Assistant Commissioner

Dr Ralph Lattimore, Assistant Commissioner

Mr Paul Gretton, Assistant Commissioner

Australian Securities and Investment Commission

Mr Tony D’Aloisio, Chairman

Ms Belinda Gibson, Commissioner

Mr Michael Dwyer, Commissioner

CHAIR —I call to order this public hearing of the Senate Economics Legislation Committee. The Senate has referred to the committee the particulars of proposed expenditure for 2009-10 and related documents for the Innovation, Industry, Science and Research, Resources, Energy and Tourism, and Treasury portfolios. The committee must report to the Senate by 25 June 2009 and it has set 31 July 2009 as the date by which answers to questions on notice are to be returned. Under standing order 26 the committee must take all evidence in public session. This includes answers to questions on notice. Officers and senators are familiar with the rules of the Senate governing estimates hearings. If you need assistance the secretariat has copies of the rules.

I particularly draw the attention of witnesses to an order of the Senate of 13 May 2009 specifying the process by which a claim of public interest immunity should be raised and which I now incorporate in Hansard.

The document read as follows—

Order of the Senate—Public interest immunity claims

That the Senate—

(a) notes that ministers and officers have continued to refuse to provide information to Senate committees without properly raising claims of public interest immunity as required by past resolutions of the Senate;

(b)   reaffirms the principles of past resolutions of the Senate by this order, to provide ministers and officers with guidance as to the proper process for raising public interest immunity claims and to consolidate those past resolutions of the Senate;

(c)   orders that the following operate as an order of continuing effect:

(1)   If:

(a)     a Senate committee, or a senator in the course of proceedings of a committee, requests information or a document from a Commonwealth department or agency; and

(b)    an officer of the department or agency to whom the request is directed believes that it may not be in the public interest to disclose the information or document to the committee, the officer shall state to the committee the ground on which the officer believes that it may not be in the public interest to disclose the information or document to the committee, and specify the harm to the public interest that could result from the disclosure of the information or document.

(2)   If, after receiving the officer’s statement under paragraph (1), the committee or the senator requests the officer to refer the question of the disclosure of the information or document to a responsible minister, the officer shall refer that question to the minister.

(3)   If a minister, on a reference by an officer under paragraph (2), concludes that it would not be in the public interest to disclose the information or document to the committee, the minister shall provide to the committee a statement of the ground for that conclusion, specifying the harm to the public interest that could result from the disclosure of the information or document.

(4)   A minister, in a statement under paragraph (3), shall indicate whether the harm to the public interest that could result from the disclosure of the information or document to the committee could result only from the publication of the information or document by the committee, or could result, equally or in part, from the disclosure of the information or document to the committee as in camera evidence.

(5)   If, after considering a statement by a minister provided under paragraph (3), the committee concludes that the statement does not sufficiently justify the withholding of the information or document from the committee, the committee shall report the matter to the Senate.

(6)   A decision by a committee not to report a matter to the Senate under paragraph (5) does not prevent a senator from raising the matter in the Senate in accordance with other procedures of the Senate.

(7)   A statement that information or a document is not published, or is confidential, or consists of advice to, or internal deliberations of, government, in the absence of specification of the harm to the public interest that could result from the disclosure of the information or document, is not a statement that meets the requirements of paragraph (1) or (4).

(8)   If a minister concludes that a statement under paragraph (3) should more appropriately be made by the head of an agency, by reason of the independence of that agency from ministerial direction or control, the minister shall inform the committee of that conclusion and the reason for that conclusion, and shall refer the matter to the head of the agency, who shall then be required to provide a statement in accordance with paragraph (3).

(d)   requires the Procedure Committee to review the operation of this order and report to the Senate by 20 August 2009.

(Agreed to 13 May 2009.)

(Extract, Journals of the Senate, 13 May 2009, p.1941-42)

CHAIR —Officers called upon for the first time to answer a question should state their name and position for the Hansard record and witnesses should speak clearly and into the microphone. Please make sure all mobile phones are turned off. The committee will begin consideration of the Treasury portfolio with retirement income and superannuation questions for the Australian Taxation Office and Treasury revenue group. We will then follow the order as set out in the circulated program.

I welcome back Senator Sherry representing the Treasurer and officers of the ATO and Treasury. Would you like to make an opening statement?

Senator Sherry —I do not.

CHAIR —We will begin immediately with questions.

Senator BUSHBY —What modelling did Treasury undertake on the effects of reducing the super co-contribution?

Mr Gallagher —There were two forms of estimates produced for the superannuation co-contribution. The first set of estimates was merely on the basis of the forward estimates and what a different gearing for the co-contribution year by year would produce in cash and accrual terms. That is because the de minimis payment amount does not really deviate much from making the co-contribution linear. The other analysis that we did was take sample data from member contribution statements from 2005-06 suitably adjusted to the budget years. We had a look at the distributional impact of the co-contribution changes.

Senator BUSHBY —What results did you find?

Mr Gallagher —As you would expect, the co-contributions and income tested payments recipients generally have incomes as assessed below $62,000 or $63,000 and, if the gearing was taken from 150 per cent down to 100 per cent, they would lose a third of what entitlement they might have.

Senator BUSHBY —In your analysis did you look at any changes in behaviour that would flow in terms of people making contributions?

Mr Gallagher —One of the things that we did have a look at was the change in behaviour when the gearing was raised from 100 per cent to 150 per cent. There was also a threshold change in terms of the income test threshold at that time. What we found was that, of the clients who newly claimed the co-contribution under the new policy, 93 per cent came from the threshold change. In actual fact, only a very small number, seven per cent of the total change in take-up, had come from the co-contribution gearing. That led us to take the view that in actual fact 100 per cent is a very good return on your money—100 per cent government guaranteed in a single year—and that with the same income limits people seemed to make about the same contributions, or the bulk of the population would.

Senator BUSHBY —On the basis of that methodology did you form any opinion on the likely reduction in contributions by individuals as a result of these changes?

Mr Gallagher —We formed the view that it was unlikely that going from 150 per cent to 100 per cent would reduce contributions. The maximum contribution is $1,000. Many people seem to be contributing at that maximum level. For many of them who are in income test take-up, they are not actually entitled to that level but they all seem to put in the $1,000 to guarantee that they will get the best that they can. We thought that would continue.

The other issue, however, is the general returns environment for superannuation funds. The forward estimates have been adjusted in consultation with Treasury but particularly between the Australian Taxation Office and the department of finance because it is an expense, and the co-contribution expense forward estimates were slightly adjusted downwards given lower returns in superannuation funds in the current environment.

Senator BUSHBY —What proportion of government super co-contribution payments were paid to each superannuation industry segment as defined by APRA, the corporate industry public sector and retail? Are you able to answer for each of those?

Mr Gallagher —My data comes from member contribution statements going to the tax office. In actual fact I do not get to see them; I get to see totally anonymous records once they have been grouped together—

Senator BUSHBY —Is the tax office able to assist then?

Mr Gallagher —We do not have a fund classification on the data that we get.

Senator Sherry —There may be someone who can help you. But also some would be paid to the SMSF sector as well. The ATO makes the payment. I am not sure whether they would have that data.

Mr Olesen —I do not have the data with me.

Senator BUSHBY —Do you have access to that data?

Mr Olesen —We have the member contribution statements which are provided by superannuation funds to us, so that would give us a picture of the kinds of funds to which personal contributions are made.

Senator BUSHBY —On notice, I would like to see what proportion of the government super co-contribution payments are paid to each of those, to the best that you can identify, for each of the 2005-06, 2006-07 and 2007-08 years.

Mr Olesen —I am happy to take that on notice.

Senator BUSHBY —Is anybody able to help me with the next question, which is: what were the top 10 occupations receiving super co-contribution payments from the government where occupation is determined via the declaration in individual income tax returns or another appropriate method for the same years?

Mr Olesen —I could take that on notice. I do not have that information here.

Senator BUSHBY —As to the concessional contribution caps, is it correct that some individuals are more sensitive to marginal tax rates when choosing whether to participate in the workforce?

Mr Gallagher —Yes. The work that has been done on behavioural response to marginal tax rates and effective marginal tax rates tends to show that secondary income earners in couples and sole parents are more sensitive to their marginal tax rates than male bread winners.

Senator BUSHBY —Does Treasury expect any of the tax measures announced in the budget to have a negative impact on workforce participation?

Mr Parker —There was a range of tax measures announced in the budget, including in respect of the superannuation arrangements as we have just discussed. Are you asking specifically in respect of the superannuation measures or do you mean—

Senator BUSHBY —If you are able to answer more broadly than that I would welcome that, but I am specifically asking about the super measures.

Mr Parker —In respect of the superannuation arrangements I am not aware that we have done any analysis of participation effects as a result of the superannuation changes.

Senator BUSHBY —In view of Mr Gallagher’s comments just previously about people’s sensitivity to marginal tax rates, do you think that some of those superannuation changes may have some impact on individuals who are sensitive?

Mr Gallagher —The average remuneration for people who are contributing in excess of the caps is $221,000. This was in 2005-06, if the caps policy had applied then. For people over the age of 50 the average remuneration was $228,000. The bulk of the people affected by the contribution caps measure have remuneration in excess of $100,000. At that level of remuneration I think it is unlikely that their participation is marginal. What it is about as an issue is how they arrange their affairs in terms of this—

Senator BUSHBY —That is the average level of income; it is not necessarily the full range of the income, but at the lower end of the range there may be people who may well be marginal. Do you concede that?

Mr Gallagher —That is correct. I think in the Australia’s future tax system report there is a table which shows the distribution of remuneration for people contributing in excess of $25,000, so that information has been published.

Senator BUSHBY —I understand the minister gave a speech on 18 May 2009 where he indicated that the average account balance for individuals affected by the reduction in the contributions cap is $890,000?

Mr Gallagher —That is correct.

Senator BUSHBY —Is that a Treasury estimate?

Mr Gallagher —Yes, that is a Treasury estimate. That estimate is based on the ABS survey of employment arrangements, retirement and superannuation. That was a survey conducted in 2007. The balance information in that survey relates to the year ending 30 June 2006. The ABS have only made the unit record data available through their Remote Access Data Laboratory and the number corresponds to people who are over the age of 50 and who were contributing in excess of $50,000 in 2007. The average balance was $890.000. There were 28 per cent of the group who on the ABS numbers, as adjusted to fit the APRA average balance amounts, had balances in excess of $1 million.

Senator BUSHBY —You mentioned that that was as a result of a survey. Did you say who was surveyed?

Mr Gallagher —I am sorry, it is an Australian Bureau of Statistics survey.

Senator BUSHBY —They conducted it, but who did they survey?

Mr Gallagher —It is a survey of people contributing to superannuation. It is actually a survey of all people who are employed and people who have retired but are people who are employed.

Senator BUSHBY —Who are contributors?

Mr Gallagher —The population we have isolated in the analysis is people with deductible contributions.

Senator BUSHBY —Was the survey conducted of the contributors themselves, not of the funds?

Mr Gallagher —That is correct. That is not a funds statistic; it was what the people said about their own balance information.

Senator BUSHBY —Do you know how they were identified?

Mr Gallagher —It is a special supplementary survey, so it is a multistage sample of households leading to the interviewing of respondents in a household. Generally remote areas are excluded from special supplementary ABS surveys.

Senator BUSHBY —Do the limits in the co-contribution scheme include the employer’s nine per cent superannuation guarantee contribution?

Mr N Murray —The co-contribution scheme is paid on personal after tax contributions rather than employer contributions.

Senator COONAN —From 1 July 2009 are reportable employer superannuation contributions, adjusted fringe benefits and total net investment losses taken into account when determining eligibility?

Mr N Murray —Yes, from 1 July 2009.

Senator BUSHBY —Where are we currently at with lost superannuation?

Senator Sherry —There are three initiatives. We have talked about the temporary entrance and officers can explain what that adds up to—

Senator BUSHBY —I will ask them a question about that in a minute.

Senator Sherry —That is a removal from lost super. There was an announcement in the budget about very small accounts of under $200; the officers can outline what the impact of that will be. In terms of the specific auto-rolling together of lost accounts and the clearing house, consultations have concluded and an ‘options, issues and implementation’ paper will be released shortly.

Senator BUSHBY —So the consultation was completed at the end of last year; is that correct?

Senator Sherry —Yes, it has finished.

Senator BUSHBY —So it has taken until now to get to the next point. There will be a paper coming out; how soon will that be?

Senator Sherry —I anticipate that will be in July.

Senator BUSHBY —I turn to default funds. Minister, in February, you indicated that you had sought a map or a schematic of where default funds are and what was covered by default and a corporate fund. Have you received such a map; and, if so, will you make it available for the use of the committee?

Senator Sherry —As a matter of fact, I have not. Thank you for prompting me about that. A schematic was given to me yesterday of the outcomes before the current commission. That is the limit of the material that I have. But I will follow that issue up, because I do not have it yet.

Senator BUSHBY —Also, in February, you stated that you were not aware of it being a common practice for employers to select the default fund that would apply to their employees by opening up a competitive tendering process, with the aim to provide the lowest cost, high-return default option. Given that you stated at the time that you would like to see a full breakdown of the data from people who have engaged in that, have you effectively overcome your ignorance of the practice that you had then and have you had a look at it?

Senator Sherry —It is not an ignorance of the practice; that description is wrong. There is simply no published data on that practice that I can find. I have requested that APRA provide me with data about practices in respect of contract arrangements. I have just been informed that the data from APRA will be provided to me in a few days. So, if I do get it, I will provide it to you on notice.

Senator BUSHBY —So you anticipate receiving data which should indicate—

Senator Sherry —I have requested the data; I have not received it yet. I am told by one of my staff that it is a couple of days away. Do you want me to take on notice to provide it?

Senator BUSHBY —If you could, that would be much appreciated.

Senator Sherry —Yes.

Senator BUSHBY —Thank you. Still on default funds and modernised awards, can Treasury advise what legislation precludes default superannuation funds being named in industrial awards from price fixing, geographic exclusivity arrangements or other forms of anticompetitive behaviour?

Mr Parker —I think that goes more to the regulation of funds as opposed to their taxation treatment. It would be better to address that question to our Markets Group colleagues.

Senator Sherry —Also, it probably would be covered by employment and industrial relations because of the industrial provisions. It would be APRA and/or employment and industrial relations.

Senator BUSHBY —I would have thought that this particular section of Treasury would have an interest in ensuring that default superannuation funds, which represent a significant proportion of superannuation that is paid under SGC, are regulated in a way that avoids such anticompetitive practices.

Senator Sherry —The funds are regulated by APRA. As to the criteria for determining what an appropriate default fund is for the purposes of an Industrial Commission decision, we discussed this on the last occasion. I wrote to the commission, indicating that I believed that criteria should be developed when carrying out that process. They wrote back saying that, no, they did not believe it was appropriate; I think—this is not a quote—they did not have the expertise. They have proceeded in modernising awards. I am not satisfied with that outcome. The issue of default funds will be one of those matters that will be covered by the operational, governance, efficiency structure of Australia’s superannuation system that I announced last Friday.

Senator BUSHBY —Will that governance look into ensuring that a default award does not operate with any anticompetitive practices?

Senator Sherry —It will examine the issue of criteria for default funds. One of my frustrations in this area is that neither I nor the public can get hold yet of the long-term performance of each fund.

Senator BUSHBY —Are you talking about the long-term performance of each fund or each investment option within the funds?

Senator Sherry —Each fund; obviously these are default funds. I have asked APRA to produce that data in due course because I think it is important that the long-term investment performance of each of the approximate 600 funds, whether they are default or not, whether they are public sector, retail, corporate or industry funds in this sector that are APRA regulated, should be made public. But I do not have access to that.

Senator BUSHBY —We will have a discussion with APRA about that when they appear before us. But I understand that they are interested in delving a little deeper into the performance of investment options within funds to ensure that there is a better comparison between the performance of the—

Senator Sherry —They made a statement last week and we will deal with that.

Senator BUSHBY —It may take some time to develop a depth of comparison.

Senator Sherry —Yes.

Senator BUSHBY —Are you aware of any allegations that collusion has taken place according to the Australian Industrial Relations Commission award or as part of the Australian Industrial Relations Commission award modernisation process?

Senator Sherry —No. I have had no contact whatsoever with the Industrial Relations Commission since my initial request to them to develop criteria.

Senator BUSHBY —I am not asking whether you are colluding.

Senator Sherry —I have not.

Senator BUSHBY —I am just asking whether you or any of the officers at the table are aware of any allegations of collusion.

Mr Parker —No, we are not. Again, the people from Markets Group may have a window on this, but not the tax side.

Senator BUSHBY —Under the new arrangements, which departments, agencies and/or regulators will be responsible for ensuring that anticompetitive behaviour by superannuation funds nominated in modern awards does not occur?

Senator Sherry —You have referred a couple of times to anticompetitive behaviour. What specifically are you referring to?

Senator BUSHBY —I have mentioned before issues like price fixing, geographic exclusivity and other similar arrangements, where they may construct their approach to things in a way that does not deliver the best results for superannuants.

Senator Sherry —But, in the default fund context, where is the competition? The member is not selecting.

Senator BUSHBY —If people do not select, there is no competition.

Senator Sherry —Yes, that is right.

Senator BUSHBY —They basically fall into it. The concern that I have is that people who end up in default funds tend to be those who take the least interest—‘least’ is probably not the right word—or those who least examine the benefits that they are getting from their super funds. I am just concerned to ensure that they end up with a decent deal out of where they do.

Senator Sherry —Broadly, you are right. We do know that the majority of people do not actively select a fund, which is true of any compulsory system; therefore, you have a default solution. Whilst you and I might disagree on the mechanism, I share the same concern. That is why I have consistently argued publicly that, as part of examining the long-term rate of return of all funds—including fees, obviously—we need to know the long-term performance of all funds, including default funds. That includes corporate funds where they are a default fund and public sector funds where they are statutorily a default fund. I am not impressed by the data that I have seen in every sector—without knowing the individual funds, because that information is not available to me; but I have seen disaggregated data—that show that a number of funds in every sector that we are talking about are long-term poor performers. I do not believe that is in the members’ interests.

Senator BUSHBY —You are looking at the long-term data that goes back.

Senator Sherry —Correct.

Senator BUSHBY —Here, in addition to that, we need to be looking at the data for the long-term performance going forward.

Senator Sherry —That would be a bit difficult. Looking at data now going forward would be somewhat difficult.

Senator BUSHBY —Looking forward at how we maximise the likelihood that the performance of funds, particularly default funds that people end up in, gives them the best possible return. Looking back in five or six years time at the performance of default funds under modern awards will inform us very well. But, in the meantime, there may be things that the government can do, for example, to ensure that anticompetitive practices do not exist in these default funds which in five or six years time will result in finding that they have performed poorly.

Senator Sherry —As I have said time and time again—in fact, I have lost count of the number of times that I have said it—firstly, I am interested in the long-term performance of all superannuation funds and making sure that it is in the best interests of the member and no-one else. I think it is particularly important that default arrangements, wherever they exist, where an employee defaults into an arrangement—whether it be corporate, public sector or a retail master trust through a corporate or industry fund—are all good long-term performing funds that are in the members’ best interests.

Senator BUSHBY —And will remain so; that is the key.

Senator Sherry —Where they are good long-term returns, yes; where they are not good long-term returns, no.

Senator BUSHBY —I do not disagree in principle with what you are saying. However, the reality is that what we can do now is regulate to make sure that the funds that people go into without having chosen to go into them—where they have not gone out and made their own assessment of where the best return can be had—provide the best return or the best likelihood of the best return possible. As you have said, the majority of people do not select their own funds. That means that an awful lot of money is going into default funds, and it is very easy for a fund to become lazy when it is getting all of this money without having to go out and advertise its wares to attract it in the first place. I am very keen to see that those funds are kept on their toes and that there is no scope for anti-competitive or other practices to develop that would lead to, as you say, looking back in five or six years time and finding that they have performed poorly. Whether they were good long-term ones beforehand or not, once they become the default fund there is an incentive to be lazy.

Senator Sherry —I am very keen about that also and have already indicated my concern. I am also concerned about anti-competitive conflicts of interest in other areas of superannuation. All those issues are going to the panel that I announced last Friday.

Senator BUSHBY —In relation to the first tranche of modern awards, what is the anticipated annual flow of contributions into the nominated default funds?

Senator Sherry —I doubt whether anyone from Treasury would have that. We could take it on notice and hopefully try to get a figure for you.

Senator BUSHBY —In taking that on notice, would you mind also providing the percentage of total superannuation guarantee flows that that constitutes?

Senator Sherry —We will take that on notice as well.

Senator BUSHBY —A lot of these questions are now for APRA. Intraproduct advice simplification: in February you indicated that the financial services working group had concluded their work and that an announcement about the format and the simplification of intraproduct advice was likely to be made in March.

Senator Sherry —Yes.

Senator BUSHBY —In a speech about two weeks ago, you referred to this group’s work in this area and that you expect to announce a policy decision once the consultation period has expired. What changed between February and May that led to a delay in announcing the government’s policy decision on this by at least three months?

Senator Sherry —The consultation closes on 5 June. There was significant disagreement within industry about how this approach would be introduced. There was no consensus, if I could use that expression, so there was further consultation. The consultation has finished. As for the time frame, ASIC as well as the working group are involved in this consultation, so there are questions beyond that in terms of detail. ASIC may be able to add to my comments, but they are the reasons.

Senator BUSHBY —‘Renovating the house’ superannuation inquiry: what consultation with the superannuation industry has occurred in the development of the terms of reference for the review into the governance, efficiency and ‘renovating the house’ inquiry announced by you on 29 May 2009?

Senator Sherry —Massive consultation. Every person and their dog in the industry has been talking to me about it over the last seven or eight months. Not a day goes by without some individual or organisation raising the issue with me—what is intended, suggested terms of reference. Not a day has gone by, at least Monday to Friday. Some people have called me even on weekends, at home, about it. It has been massive.

Senator BUSHBY —Massive informal consultations.

Senator Sherry —Yes. Some people have written formally as well.

Senator BUSHBY —But you have not sought feedback formally from the industry, seeking their input on the terms of reference, to ensure that the review reflects what is needed?

Senator Sherry —I can indicate that at least eight organisations and individuals from the industry signed a communiqué. That would be an example of formal consultation. That is on the public record; it was released.

Senator BUSHBY —That was sent to you at their own behest; you did not actually seek—

Senator Sherry —No. I think it was an iterative process. We spoke to them and at various times they spoke to me and certainly to some of my staff. I had a number of meetings. There were quite a number of discussions. This was quite an extensive consultation. Various people and organisations signed the communiqué—and I must say that I am very pleased to have had at least broad acceptance of the process and issues that would need to be addressed, in a general sense, by such a wide-ranging number of organisations in the industry.

Senator BUSHBY —Will the inquiry look at any of the recommendations that came out of the 2007 Parliamentary Joint Committee on Corporations and Financial Services inquiry into superannuation?

Senator Sherry —That is really a matter for the chair and the panel itself.

Senator BUSHBY —Would you, as minister, consider that it would be advisable or beneficial for them to look at that?

Senator Sherry —I have not met with the panel as a whole yet. It is not for me at the moment to be indicating that. I think, within the broad parameters announced, two areas are not included. Obviously, one is the issues that are before the Henry review, which I have said broadly represent input and tax issues, and the other matters that were identified in the paper that they released. Secondly, there is the auto-rolling together lost accounts issue, which is an election commitment. They are the two areas that are not within the parameters of the terms of reference. If you look through the terms of reference, certainly at least some of the issues identified by the 2007 joint committee inquiry would fall within the terms of reference of the panel’s work.

Senator BUSHBY —If they are the only two areas that are specifically excluded, except to the extent that that inquiry dealt with those, it sounds as though all recommendations would fall within the terms of reference.

Senator Sherry —Yes. I was just looking for the summary of the recommendations of the PJC review. However, it was interesting that one of the recommendations of the PJC review was that there be a review, so that is what we are doing. It did touch on some other issues but certainly nowhere near to the extent that the panel that I have announced will be dealing with.

Senator BUSHBY —So, given the breadth of the terms of reference that you have just referred to, will the review consider directors’ disclosure, conflicts of interest disclosure, related party transaction disclosure, election of trustees, valuation of assets, nomination of default funds by the AIRC and the role of insurance within superannuation?

Senator Sherry —Yes. I would certainly be presenting to the panel that they should deal with those issues and a lot more.

Senator BUSHBY —I presume that there would be a lot more that it would also look at.

Senator Sherry —Yes, but certainly those issues.

Senator BUSHBY —What emoluments will the chair and the expert panel members receive as part of the review?

Senator Sherry —That is to be determined. I can take it on notice.

Senator BUSHBY —If you could.

Senator Sherry —It is too early in the process to provide you with the detail.

Senator BUSHBY —Once that has been determined, I would appreciate it if you would let the committee know.

Senator Sherry —Yes.

Senator BUSHBY —Given that that has not been determined, I guess you are not able yet to let us know what the cost to government of conducting the review will be? Has a budget been set aside for it?

Senator Sherry —We may be able to give you a figure on that.

Mr N Murray —No. That is Markets Group.

Senator Sherry —Markets Group are coming tomorrow and they can give us the details then.

Senator BUSHBY —Were the members of the expert panel appointed based on Treasury recommendations? How were they appointed?

Senator Sherry —I got recommendations from Treasury but, at the end of the day, it was my decision in consultation with a number of other ministers and the PM’s office.

Senator BUSHBY —So there was no consultation with the industry as to the composition of the panel?

Senator Sherry —There was massive consultation with the industry. I had all sorts of people suggesting all sorts of names.

Senator BUSHBY —But, ultimately, you have just indicated that the decision was made on the basis of recommendations from Treasury and your discussions with the Prime Minister’s office.

Senator Sherry —No, that is not what I said. Treasury provided an input; that is correct. I had significant consultation. I had all sorts of people suggesting names to me from all sectors of the industry certainly over the last six months but particularly over the last two months.

Senator BUSHBY —I note that you have acknowledged that the inquiry will examine conflicts of interest.

Senator Sherry —Correct.

Senator BUSHBY —Does the inquiry have a policy for handling conflicts of interest that arise with regard to the panel of experts?

Senator Sherry —All of the backgrounds and circumstances of the panel of experts were considered in the context of their appointment.

Senator BUSHBY —Does that mean no?

Senator Sherry —I am sorry?

Senator BUSHBY —You are saying that you looked at all the issues prior to appointing. What about conflicts of interest that arise in the course of the inquiry?

Senator Sherry —It was very hard to find anyone with any knowledge of superannuation—it depends on how you define ‘conflict of interest’—that in the past had not had some interest in superannuation.

Senator BUSHBY —I am not suggesting that you would exclusively appoint people to the panel who would not have conflicts of interest; I am interested in how you would deal with the situation when conflicts of interest arose as part of the process of the inquiry.

Senator Sherry —If such an issue arises, the chair can consider it when the panel meets—and it has not met yet.

Senator BUSHBY —I would appreciate it if the chair would consider that up front. I think that would be very worthwhile, given that it is very hard, as you say, when dealing with something like this, to find people who have not had conflicts.

Senator Sherry —Yes. Treasury have a policy in respect of conflicts of interest and I understand that that will be applied.

Senator BUSHBY —That is good to hear. Could we have a copy of that policy?

Senator Sherry —Sure.

Senator BUSHBY —Will that policy also cover the requirement of all members of the expert panel to declare their personal financial interests as they relate to the work of the review?

Senator Sherry —I am not sure about that, but we will check in terms of the Treasury guidelines.

Senator BUSHBY —Will equivalent standards to those for public company directors be applied to the expert panel?

Senator Sherry —Public company directors?

Senator BUSHBY —I refer specifically to the requirement set out in section 195 of the Corporations Act, under which public company directors must not be present for discussion or vote on matters where they have a material interest in the matter.

Senator Sherry —We will consider that in the light of the Treasury’s conflicts of interest guidelines. Certainly I will ask the chair to deal with that issue.

Senator BUSHBY —Earlier you raised temporary resident superannuation and I said that I would have some questions about it later on. In February, the department indicated that it would be writing to the industry in February about temporary residents’ super obligations and that the funds were due to respond by May. We are now in June; how have the funds gone?

Mr Olesen —Earlier this year, we granted an extension to funds until 15 June for making the initial payments. We wrote those letters later than we originally indicated because the funds indicated to us that they needed some additional time.

Senator BUSHBY —They indicated that last year before the bill was passed.

Mr Olesen —And they indicated it again in the ongoing consultations we had with them. So, following those consultations, we agreed to an extension to 15 June. Letters went out in April, from memory.

Senator BUSHBY —June 15 is less than two weeks away.

Mr Olesen —Correct.

Senator BUSHBY —How is compliance looking at this point?

Mr Olesen —Payments are not due until that date. We have received some early payments, but—

Senator BUSHBY —Have you received any further submissions from the industry, looking for further extensions or indicating that they will be unable to comply?

Mr Olesen —A very small number of funds sought extensions. We granted some extensions to something like five funds to pay a bit later. The rest of the industry have indicated that they will be able to make the payments in the current financial year.

Senator BUSHBY —Has Treasury revised its expectation of how much will be received on the basis of actual returns from funds or what they anticipate receiving?

Mr Olesen —The estimates, I think, were published and have not been varied. The Treasury might be able to answer, but—

Senator BUSHBY —Because there is an extension and they have not sent it all into you yet, you do not know what the actual receipts are.

Senator Sherry —I am not aware of any change to the estimates, unless any of the officers—

Mr N Murray —No. Again, as we have not seen the data yet, there has been no—

Senator BUSHBY —There is no hidden intent with this question; I was just curious to see where it had ended up.

Mr Olesen —Most of the funds have indicated that they will be paying inside the current financial year, so there would be no reason on those grounds to change the estimates in terms of expected—

Senator BUSHBY —How soon after 15 June will you know how much has been received as a result of this measure?

Mr Olesen —It is due on 15 June, so my expectation would be that we would receive significant amounts on or around that date.

Senator BUSHBY —Are you able to take on notice how much was raised by the measure?

Mr Olesen —Certainly.

Senator Sherry —We will take that on notice, if only because we both need to verify it, given that it was a coalition policy and we are interested to see that our implementation of coalition policy on this bipartisan measure delivers the revenue we both expect.

Senator BUSHBY —It certainly was coalition policy, but there are ways and ways of implementation.

Senator Sherry —As I have said before, I think, the method of implementation was varied by the government in order to simplify what was a somewhat more difficult implementation. However, we have had that discussion before.

Senator BUSHBY —We have. How does Treasury measure adequacy in terms of what percentage of Australians will have an adequate superannuation balance? Maybe this could go to Mr Gallagher again.

Mr Gallagher —Treasury generally measures adequacy in terms of replacement rates and it normally uses a replacement rate of spending, so we looked at how much could be spent in retirement as a ratio of how much could be spent during working life. There are two sorts of measures we do for this. One is reflected in the Australia’s future tax system report, which looks at hypothetical individuals accumulating from a given start date, earning a particular amount, retiring in a particular year and then living to life expectancy or beyond. We also have used population replacement rates to look at it. We also keep an eye on the absolute value of the dollars concerned. But, in terms of a standard that can be used in different years, we prefer to use replacement rates.

Senator BUSHBY —What percentage of Australians who are currently working, do you think, will have adequate superannuation upon their retirement, given current projections?

Mr Gallagher —Having said that we use replacement rates, I have not said that we have a standard for what is an adequate replacement rate. A number of numbers have been discussed around it. The minister himself has promoted 65 as being an example of what might be considered to be an adequate replacement rate, but Treasury has not adopted a standard. In terms of saying what proportion of Australians will have an adequate replacement rate, one of our problems is that we do not have comprehensive information on superannuation balances—there is only some selective information in the ABS surveys on superannuation balances—and it is hard to know what the career path of the individuals concerned will be; therefore, it is very difficult to give definitive figures. Essentially, we have come to the view that, for people who are working, although replacement rates will be lower over the next 10 or 20 years, once the superannuation system is fully matured, replacement rates will be in the range that we would expect. In the tax review document, there is a table that compares replacement rates for people at different ages and income levels now, to give you an example of what the system could be expected to produce. That represents, I think, indicative numbers of the way that we would expect the system to mature and replacement rates to become more adequate.

Senator Sherry —There are two brief matters. The complexity in this area is significant. For example, for the majority of people, it is age pension plus super. The government rightly announced an increase in the age pension; therefore, whatever people’s views about what should or should not be replacement rates, you would now have to recalculate the super contribution and what the outcome is there together with the increase in the age pension. Another complexity is the issue of super being ‘defined contribution’. Your outcome is heavily dependent on time in the system—that is, the amount that flows into the fund account as a consequence of compulsion and voluntary contributions. A third factor is the fees that are paid over time, and there has obviously been a debate about that. So it is a complex equation and has different outcomes for different individuals.

Senator BUSHBY —I will leave that there. I have a question to the ATO. What actions is the ATO taking to investigate and reverse the failure of some employers to remit superannuation guarantee payments to the ATO?

Mr Olesen —We have an extensive program of activities that looks at the compliance of employers in relation to their superannuation obligations. Primarily it is posited on dealing with all of the complaints that we get from employees about superannuation that is not paid on their behalf. We look at all of those complaints that we get annually and we seek to get through them as quickly as we possibly can.

Senator BUSHBY —Do you have any estimates for the value of the superannuation that, on average, remains unpaid at any one time?

Mr Olesen —No, we do not have estimates of that, but we can provide you with information about how much we collect annually.

Senator BUSHBY —There have been media reports suggesting that it is in the hundreds of millions.

Mr Olesen —The media reports are based on the figures that were in our annual report last year of the amounts that we raised as additional super guarantee payable from our compliance work and through voluntary compliance by employees. So the figure of $380-odd million, which has been kicked around in the press, is drawn from last year’s annual report. That is the amount that we raised in super guarantee—

Senator BUSHBY —That does not reflect how much is out there unpaid; it reflects how much was out there unpaid that you managed to recover.

Mr Olesen —It reflects a combination of things. It reflects the work that we did in auditing employers. It also reflects those employers who voluntarily came forward and paid up on their superannuation.

Senator BUSHBY —Do you think there is a lot out there that is unpaid? Given your comprehensive way of chasing it, you would hope not; but do you think there is?

Mr Olesen —When you look at the system as a whole, some indicators indicate that generally compliance with the super guarantee system is pretty good. If you look at aggregate flows of superannuation moneys into superannuation funds by employers and you compare that with aggregate levels of salary and remuneration in the community, it is well above nine per cent at an aggregate level. So, at an aggregate level, there are some indicators there that things are pretty healthy. If you look at the number of complaints that we get from employees, as a percentage of all employees, it is very small; the number of employers that are complained about, relative to all employers, is a very small number. When you look at some of those macro indicators, you find that they tend to support the view that levels of compliance with the super guarantee are pretty high across the board. Of course, not everybody complies; however, at a general level, it looks as though compliance is pretty good.

Mr D’Ascenzo —I fully agree with what my colleague has said. Having said that, our last three corporate plans have had a special focus on the follow-up of super guarantee. We will continue to have a focus on the follow-up of super guarantee because it affects ordinary salary and wage earners. As Mr Olesen said, last year we raised $385 million of liabilities that really are owed to employees. This year we have $291 million raised in liabilities that are owing to salary and wage earners. From a macro position, the amount of contribution paid to super funds by employers in 2007-08 was something like $69 billion. The amount that we are collecting is only a small proportion of that, but it is still an important proportion and one where we have a high focus.

Senator COONAN —I have a few questions on retirement income before we go to tax. Can an employee of a company or a business that has gone into liquidation or where a receiver has been appointed or, indeed, where there are some concerns that it might be going belly up ring the tax office and find out whether contributions are up-to-date, or would you say that information is confidential to the employer?

Mr Olesen —Certainly they can ring up the tax office and express a concern about whether their superannuation is being paid. That would be a complaint that we would follow up on and we would do so quickly, particularly if there were indications of insolvency or liquidation in relation to that company. Certainly they could complain to us and we would follow it up.

Senator COONAN —But would you give them any information? Would you be able to tell them whether super had been contributed on their behalf and was up to date?

Mr Olesen —You might recall that the superannuation guarantee law was amended a couple of years ago—

Senator COONAN —Yes, I do.

Mr Olesen —to allow us to keep employees informed of progress.

Senator COONAN —So you can keep them informed; you can get back to them.

Mr Olesen —We get back to them regularly on the progress of the complaint that they have made to us and whether or not we have been successful in both raising the liability and subsequently collecting it and transferring it to their super fund.

Senator Sherry —The secrecy provision that existed was removed by your government.

Senator COONAN —I know that. That is why I am interested in knowing how it is working.

Senator JOYCE —At this point in time, if your budget estimates are right, the liability of the federal government is $122 billion and next year it will be $126 billion—or $126,540,000,000. How much of that do you have put away?

Senator Sherry —I am sorry; how much does who have put away?

Senator JOYCE —That is the federal government’s liability for superannuation.

Senator Sherry —That is a matter for finance and public sector and Future Fund and public sector.

Senator JOYCE —Do you have any idea of how much we have put away for that?

Senator Sherry —The Future Fund is funded and there was a reasonable discussion about this in discussing its valuation at finance estimates; I think Senator Coonan was there. I cannot give you figures here and now, because I simply do not have them with me, but there was discussion about this matter at finance.

Senator COONAN —I just want to finish a few things with Mr Gallagher on retirement incomes. I know that he has a great tendency to go back and keep working until the wee small hours; he may be needed for this. Minister, when can we expect legislation to be introduced to amend the Social Security Act to increase the age pension, as announced in the budget?

Senator Sherry —An officer here may have some information about that, but that is a pension issue and not a superannuation issue. That would be FaHCSIA and it would be dealt with by another estimates.

Senator COONAN —I have a forecasting issue, which perhaps is more an issue for tomorrow. Budget Paper No. 2 states that the proposal will reduce the long-term cost to the budget of a substantial and growing expenditure. Is Treasury able to put that into some context? How much has expenditure on pensions been growing over the past 10 years and what financial impact does Treasury forecast the raising of the age pension age will have?

Mr Parker —That would be a question for tomorrow.

Senator COONAN —Thank you. I also have a couple of other macro issues.

Mr Gallagher —I can answer the last part of that question, which was about the financial impact that we expect raising the age pension age to have. You may have noticed in the budget papers the ‘pension sustainability chart’—at other times it has been called the worm chart—where there is a pension spend below the line and then a number of matching saves.

Senator COONAN —I remember you explaining it to me on previous occasions.

Mr Gallagher —In those matching saves, we show the save that would come from increasing the age pension age to 67. The numbers underlying the chart indicate that initially the save from increasing the age pension age will be 0.07 of a per cent of GDP in the longer run, starting off from around 2017 at about 0.02 of a per cent of GDP and increasing. The modelling underlying that is based on a ring group model of whole-of-population retirement incomes. In doing the analysis, we have made an adjustment; we have said that the labour force participation of pensioners will change as the age pension age goes up. I know that this has been asked in other estimates, but I would prefer to answer it while I am here. The underlying assumption is that, as the age pension age rises, people affected will move to the labour force participation of the group that is two years younger. That is because, on the existing modelling, the age pension age is a major determinant of withdrawal from the labour force.

Senator COONAN —Are you able to tell the committee of the relevance of the change to 27D? Why was that changed?

Mr Gallagher —It is because the existing schedule of women’s age pension age rising to 65 stops at about 2015. The general nature of the schedule is that every 18 months it moves six months so that there is a two-year period.

Senator COONAN —Thank you.

Senator PRATT —I have some questions on concessional contributions, and I think this was covered in part before. How many people exactly do you expect to be affected by the reduction in concessional superannuation caps? In addition, how does that relate to equity in the retirement income system?

Senator Sherry —Information has been given by Mr Gallagher and I think he may have some additional information to give.

Senator PRATT —I am interested particularly in the equity issues.

Mr Gallagher —In terms of numbers, we would expect that in 2009-10 about 170,000 people would be affected by the contribution caps; these people would have contributed amounts in excess of the new cap. We expect those numbers to rise across the forward estimates. In particular, in 2012-13 we would expect about 280,000 people to be affected by the—

Senator PRATT —What proportion is that of people making contributions?

Mr Gallagher —For people over the age of 50 it is about four per cent of those making contributions. For people under the age of 50 it is 1.1 per cent of those making contributions.

Senator PRATT —So on average it might be somewhere around two per cent.

Mr Gallagher —Yes.

Senator PRATT —I want to know about the equity components of that. Clearly, only a small proportion of co-concessional contributors believe that they can afford to make such payments so we are really only hitting the higher threshold of income earners by such a measure.

Mr Gallagher —Not only but mostly.

Senator PRATT —Mostly.

Mr Gallagher —Clearly, to be over 50 and making a superannuation contribution of $50,000, the remuneration is probably fairly healthy.

Senator PRATT —That is right.

Mr Gallagher —As I said, as printed in the Australia’s future tax system report, 93 per cent of those affected I think have remuneration in excess of $100,000. The average remuneration, if we just look at it in 2005-06, is $221,000. They tend to be but are not necessarily on a higher income, because there can be a strategy whereby someone receiving an inheritance can use that. They can live off an inheritance and then salary sacrifice in order to lower their tax. So it is not necessarily about executives.

Senator PRATT —But still, under those circumstances they might be reasonably well off in that they have that disposable income—

Mr Gallagher —Yes. The average balance for people over 50 is $895,000—

Senator PRATT —That is right. Not everyone—

Mr Gallagher —and 28 per cent have balances that are in excess of $1 million.

Senator PRATT —Could you say that again?

Mr Parker —I can provide you with additional information here. As Mr Gallagher indicated, it is estimated that that 170,000 people will be impacted in 2009-10 by this measure. If you look at the split of those people under and over 50, you will see that the number is 77,000 people under the age of 50. Of people making concessional contributions under the age of 50, the 77,000 is only 1.1 per cent of all people under 50 making contributions. Of those who are impacted, around 73 per cent are estimated to have remuneration in excess of $100,000.

Senator PRATT —So the vast number of people making use of this will not be affected by reductions.

Mr Parker —The vast numbers of people who are making concessional contributions are not affected—that is right.

Senator PRATT —What kind of budgetary savings are we looking at over the next four years?

Mr Gallagher —In 2009-10, the estimate is $625 million; then, going out, it is $640 million, $720 million and $825 million, giving a sum of $2.81 billion over the forwards.

Senator PRATT —I want to know about changes in behaviour by low- and middle-income earners in response to the increase in superannuation co-contributions. That is about the matching rate of 100 per cent to 150 per cent and I think it was in 2004 and 2005. Was there any behavioural change in low- and middle-income workers in response to the increase that was made in the superannuation co-contribution matching rate?

Mr Gallagher —When the gearing was raised from 100 per cent to 150 per cent we found that for people underneath the income test threshold there was not a significant amount of behaviour. That rise was associated also with a rise in the income test threshold. Ninety-three per cent of the new co-contributions were from people who benefited from the income threshold increase as opposed to people under the threshold, and the increase from the gearing itself was quite small. As I explained earlier, we do not expect large effects, because a 100 per cent return in a given year government guaranteed is still a very good rate of return.

Senator PRATT —On that basis, you would not expect there to be any disincentive for additional voluntary co-contributions from low-income earners impacting on their overall superannuation savings, would you?

Mr Gallagher —We have taken the view in our modelling that it will not act as a disincentive to contribute post-tax contributions at the current rate.

Senator Sherry —If you look at the level of incentive, it is still one of the most generous in the world in the sense of being up to a dollar for a dollar. It is effectively 100 per cent with up to 100 per cent interest guaranteed. In the current climate I certainly cannot think of any better rate of return.

Senator PRATT —I have not seen one either, Minister.

Senator JOYCE —Are you aware of supported accommodation where residents pay 85 per cent of their pension?

Mr Gallagher —Are you referring to nursing homes?

Senator JOYCE —Yes.

Senator Sherry —That is really an issue for FaHCSIA, Senator Joyce.

Senator JOYCE —Why is that an issue for FaHCSIA?

Senator Sherry —It is not a retirement income superannuation issue. If Mr Gallagher can answer you, I am more than happy.

Senator JOYCE —It is a pretty straightforward question. How many single pensioners live in supported accommodation where they pay 85 per cent of their pension?

Mr Gallagher —I will take that question on notice and seek to get some numbers. They will probably need to come from FaHCSIA or the Department of Health and Ageing.

Senator JOYCE —I will give you the questions that I would like taken on notice. How many single pensioners and couple pensioners paid a straight 85 per cent? The increase obviously will go straight to the providers. The question is: this pension increase is not really for the pensioner but for the pension accommodation provider, so what did we do for the pensioners?

Mr Gallagher —My recollection of the policy announcement is that there are special provisions to prevent the benefits going to the provider rather than the pensioner. But, as I said, they are more properly questions for Families, Community Services and Indigenous Affairs.

Senator JOYCE —Thank you.

CHAIR —I was out of the room for a little while and I wonder whether you have covered allocated pensions and associated changes.

Senator Sherry —No.

CHAIR —I want to ask about this issue because allocated pensions, I think, most clearly reflect the way that superannuation is designed to cover retirement. I am concerned that there seems to be a limited take-up of that vehicle. Could you go through the changes in the budget to make allocated pensions a bit more attractive?

Senator Sherry —One measure would be the minimum drawdown, which one of the officers could outline in detail.

Mr N Murray —The change announced in the budget was to reduce the minimum drawdown rate—the amount that you have to take from your allocated pension each year. Currently there is a requirement that you must draw down a minimum percentage each year. The government decided that, in light of the global financial crisis and the impact that it had on superannuation account balances, with some balances having fallen, rather than requiring the maximum amount to still be taken out, they would halve the amount that had to be taken out each year. The aim of that was to provide some relief so that people in certain circumstances would not have to liquidate assets at poor prices, for example, to pay for their ongoing pension. That move was designed to encourage continued take-up of these allocated pensions, taking account of the impact of the financial crisis.

CHAIR —I suppose it has been a relatively short period but, in view of the share market downturn, what has been the trend with allocated pensions? Have they been increasing as a vehicle for retirement?

Mr Gallagher —It is very difficult to get any market estimate of the extent of allocated pensions. The Australian Retirement Income Streams Association attempted to pull numbers together, but it has ceased to exist or certainly it has ceased to pull those numbers together and we do not have good series on the numbers who have allocated pensions. From current taxation data, we can see the number of people below the age of 60 who have a pension with a rebate; previously, because of tax-free super, we could see it for other ages. But in actual fact we do not have good time series data on allocated pensions.

CHAIR —So there is no way to estimate whether there is an increasing trend to take up allocated pensions.

Mr Gallagher —In order to get a better handle on the market, we will probably need to go to a private data provider but, at the moment, I cannot provide you with any estimates.

CHAIR —Minister, is there any intention to move in that direction and any way to encourage funds to make these kinds of allocated pensions more attractive?

Senator Sherry —Currently there is a range of incentives which, frankly, I find pretty complex. I would hesitate to run through them in any detail now; an officer may be able to help us. However, work is being done by the Henry tax review on annuitisation pension issues, so there is more work to be done in this area.

Mr Gallagher —There are a number of significant incentives to take a benefit in the form of a pension. One is that pensions in the retirement phase do not attract tax. It is also the case that pension amounts paid out from that fund, if it is an accumulation fund and is being funded, will be paid out tax free. The means testing treatment of social security allows for full return of capital rather than having a deemed treatment. For many people, because they do not take a high drawdown but, in terms of drawdown factors, tend to be at the lower end, the return of capital in many cases covers the actual payout that they get from their allocated pension products. So there are significant incentives in superannuation fund taxation, personal taxation and the income test treatment for people to take income streams.

CHAIR —I suppose that begs the question: is it therefore more attractive for people with a part pension or do we see—I suppose it is difficult for you to know, as you have explained—people with higher incomes who have a greater superannuation pool going into allocated pensions?

Mr Gallagher —It is very hard to capture exactly what happens during the retirement phases when people take their money out. But it appears to be the case that many people take some of their benefit as a lump sum and invest some of it in places where perhaps it is easier to get at, and the top tranche will be given to allocated pensions. Many people retiring with superannuation guarantee benefits currently would not have a sufficient benefit to justify the creation of an income stream. So for many people it will still be the case that a lump sum without a large accumulation will be the preferred benefit, particularly if taking it after the age of 60, when it will be tax free.

Mr Lonsdale —Perhaps I could add to what the senator and Mr Gallagher have said. The tax treatment of pensions is within the Henry terms of reference, so that is something at which the review will be looking at the end of the year. With their strategic report that they released as part of the budget, they drew attention to life annuities as something that they wanted consider further. So this is another form of pension product to better enable people with balances to purchase a life pension or a life annuity. Those products are very limited in the market at the moment. The issue was put to the panel that it would be desirable, as some people argued, for more of these products to be on the market to purchase at the point of retirement or in terms of a deferred benefit later on. The panel was very interested in that and it will be in its final report.

CHAIR —What is the distinction between a life annuity and an allocated pension?

Mr Lonsdale —An allocated pension is something that you would purchase. It is a predominant form of income stream that most people purchase and it gives you flexibility on the drawdown. A life annuity is something that you purchase and by which you get an income stream for life; that is set through your life.

CHAIR —Is that the one where, if you purchase it, and die before you expect to, you cannot recover the balance?

Mr Lonsdale —Correct.

Mr Gallagher —Whereas an allocated pension tends to be commutable; you can convert it back to a lump sum benefit, if you pay the appropriate fees.

CHAIR —Is that the end of retirement income questions? We will take a short five-minute break to hold a private meeting.

Proceedings suspended from 4.35 pm to 4.21 pm

Senator ABETZ —I had occasion the other day to have a look at the ATO website and I noticed a link on it to the Nation Building Economic Stimulus Plan. Who can tell me whose idea it was to put that onto the ATO’s website?

Mr D’Ascenzo —I do not know who put it on. It sounds like a good idea.

Senator ABETZ —If you are so convinced it is a good idea, can you tell us what is on that website that would provide extra and further information above and beyond that which is on the ATO website?

Mr D’Ascenzo —There is a lot of information of proposed laws that are not yet laws; therefore, we cannot provide advice on those laws. We have to refer the taxpayers who are interested in what those laws might be to the appropriate site.

Senator ABETZ —If it were such a good idea, was it your idea?

Mr D’Ascenzo —No, it was not my idea.

Senator ABETZ —Whose idea was it?

Mr D’Ascenzo —The person perhaps working on our website.

Senator ABETZ —Perhaps? Would you take it on notice because I have been lead to believe that, when the suggestion was first made to the ATO, the ATO declined to have this link put on. Can you comment on that?

Mr D’Ascenzo —I do not know of anything of that nature.

Senator ABETZ —Does anybody else of your staff have information in relation to this?

Ms Granger —I think we will have to take that one on notice and check for you.

Senator ABETZ —Nobody can tell us why this, in effect, propaganda website has been published? Senator Ronaldson went through this with the Department of Finance and Deregulation as to the Nation Building Economic Stimulus Plan website. Have you actually looked at it yourself?

Mr D’Ascenzo —Not that website, not through that link.

Senator ABETZ —How are you able to tell us then that it would be a good idea to have that link if you do not even know what is on it?

Mr D’Ascenzo —This is not the first time this has happened. Any time the government of the day changes laws that affect tax, people ask us, ‘What’s this all about?’ Until royal assent we really cannot provide more than is on the public record, so we refer people to the public record. Having a way for people to work through our system to that public record seems like a good idea.

Senator ABETZ —How do you know that it is the public record if you do not know what is on the website? It is just an assumption on your part.

Mr D’Ascenzo —Certainly as to these questions it is my assumption.

Senator ABETZ —Do you think it is a good idea to have this website link, not knowing what is on the website link? I trust the administration of taxation matters is somewhat more robust than that.

Mr D’Ascenzo —It sounds like a good idea for people to have a link to what is on the public record.

Senator ABETZ —How do you know that this talks about the public record and not just the propaganda of the government?

Mr D’Ascenzo —I am answering in the generic sense that it sounds like a good idea to have a link to information that is on the public record that allows people to understand what their possible rights are under a proposed—

Senator ABETZ —That reminds me of an answer that former Senator Gareth Evans once gave—that it seemed like a good idea at the time. But can I ask you then to take on notice whose idea was it? Did the Australia Taxation Office or any officer within it originally reject or disagree with the suggestion? Were further representations made to the ATO for the link to be put on your website?

Mr D’Ascenzo —I am happy to take that on notice but in the generic area it is quite common for us to refer to other—

Senator ABETZ —I am not talking about generic and other links, I am talking specifically about this one and at all times I thought I made it perfectly clear as to the particular website I was referring to.

Mr D’Ascenzo —Yes, you did.

Senator CAMERON —You did say it was not uncommon for this to happen. How long have you been doing these links?

Mr D’Ascenzo —I am not sure when we first started. I think the use of technology to provide links to other websites that contain information that is relevant to people is quite a common thing. We did it in relation to superannuation.

Senator COONAN —I want to go to a matter of tax administration relating to the posting out of the stimulus payments. How much stimulus money has been paid to deceased people or estates of deceased people? Can I please have a breakdown of the figure as to how much money, which cash bonus amount, whether it relates to either the first stimulus package or the second and how many recipients?

Ms Granger —I do not have the amount in payments but I can tell you the number of payments that have been made to deceased estates to date, and that is 16,000 payments. I am not sure if we can extract the figures because, as you know, the bonus payments can be made at three levels depending on your taxable income, so it is not just a matter of multiplying that by 900. I will see if we can provide you with the actual amounts paid.

Senator COONAN —Is that total over the two stimulus packages or the second stimulus package?

Ms Granger —This is in relation to the tax bonus, which is the one we were asked to deliver. It is figures to date because, as you know, there are still more returns to be filed up to 30 June. There may also be some circumstances where, because we made extensions to the time for filing for those affected by bushfires and floods, were there are some after that date.

Senator COONAN —Can the ATO identify taxpayers who are deceased by reference to a postcode, postbox or any other method? I could be wrong but my recollection is that there is a postcode reference in the database.

Ms Granger —We can identify by postcode. We have to run special program queries to get that kind of information. But, as you would remember, we normally try to do that kind of analysis in time for tax stats.

Senator COONAN —Was that program run prior to the stimulus payments being sent out?

Ms Granger —No.

Senator COONAN —Was there any reason why it was not run?

Ms Granger —Are you asking in relation to deceased estates?

Senator COONAN —Yes.

Ms Granger —No, because that was within the eligibility context.

Senator COONAN —What was in the eligibility—

Ms Granger —People who died during the year were not excluded from eligibility for the tax bonus. Prior to payment we had to create a complete mirror image of our database and what we then did was run eligibility criteria against that. This is for people who had already lodged for the 2008 year. Subsequently more taxpayers have been added to that as more returns are filed because, as you know, there were significant filings of tax returns during that time. That picture has been dynamic throughout the process of payments because we knew there were more files to come in. We did not do, if you like, segmentation of various groups within that. We were very busy just running the eligibility criteria so we could make the payments in time.

Senator COONAN —But it would have been physically possible, would it not, to be able to identify deceased taxpayers?

Ms Granger —To the extent that that has been notified on tax returns, yes.

Senator CORMANN —Was there a policy decision to leave them in?

Ms Granger —That is a question for Treasury.

Mr Parker —I will talk about the policy decision. As you would be aware, the tax bonus was designed essentially as a macroeconomic measure to stimulate the economy, to deliver that stimulus as soon as possible and consequentially in the design of the measure it was important to keep the design of it as simple as possible. The advice was that additional layers of detail would substantially delay the delivery of that measure and consequently would reduce the macroeconomic effectiveness of it. You might recall as this was announced it was intended to begin from early April—I think 6 April was the date at which payments were intended to be delivered. It was a massive effort on the part of the tax office to build the system anew to do this because there was no existing system in place which could make that payment. They did it.

Policy decisions were taken to keep the design simple in order that the system could be built in time. It is a very complex system. I am sure Ms Granger could tell you the story of how that system was built. From the policy side, along the way we had a very significant case in constitutional law as to the validity of those payments. The High Court heard that case in an expedited manner and delivered a judgement that it was constitutional. Given the macroeconomic implications, I think judgements need to be made to balance the macro objective vis-a-vis the amounts that have been paid to the deceased estates and so forth which are a very small proportion of the aggregate amount.

Senator COONAN —If I can paraphrase what you have said: the decision was to maximise the speed of the payments rather than worry about all the particular groups or any differentiated eligibility such as if you were a deceased estate?

Senator Conroy —Yes, that was certainly the policy objective. Unlike the opposition whose attitude was: let us sit on our hands and wait to see what happens; we were committed to trying to cushion Australian families from the worst of the global recession, so we quite deliberately took the decision that we believed there was a need to progress the protection of Australian families as fast as we could.

Senator COONAN —How did you know with deceased estates whether a payment would be going to a family, a charity, a trust, multiple beneficiaries or, indeed, that it would meet the objectives you have just mentioned?

Senator Conroy —I am not sure what your question is trying to get at. We took a decision to cushion Australian families—

Senator COONAN —Let me rephrase it.

Senator Conroy —from the impact of the global recession—

Senator COONAN —But you do not even know if it goes to a trust or a charity. You just do not know what a distributed payment would go to as a beneficiary of an estate. There is a huge assumption that it is only a family.

Senator Conroy —We made the decision to proceed as fast as was practicable to ensure the maximum benefit to Australian families, the Australian community, from being dragged deeper into the global recession, unlike those opposite whose official position was to sit on their hands and wait to see what would happen. We took the decision that we needed to urgently process and move forward with this stimulus package and we proceeded down that path.

Senator COONAN —Without arguing the toss about that—because it was never our position that one should sit on one’s hands and do nothing—

Senator Conroy —It was certainly the then shadow Treasurer’s position.

Senator COONAN —from the point of view of the current opposition. Without arguing the toss, what you obviously want to do is to make sure that it is effective. It is not much good doing something urgently if you absolutely misfire when the tax office quite clearly can identify 16,000 deceased estates and could have done so prior to these cheques being sent out. Isn’t that the case?

Senator Conroy —The position you are essentially putting is in actual fact the same position as you had back in December which was: wait and see. We are talking about less than—

Senator COONAN —We did not say that at all.

Senator Conroy —zero point two—

Senator COONAN —We did not say that at all.

Senator Conroy —This is the position that you are advancing. What you are talking about is that these payments should not have been issued because 0.2 per cent of the payments could possibly fall into this category and that we should hold up for weeks if not months the entire attempt to protect families across the board in Australia because you believe that 0.2 per cent may go to the categories you have nominated. That is the choice we faced and that is the policy decision we took, and we are happy to stand by it.

Senator COONAN —It has obviously been a monumental blunder because you have also, have you not, got money paid to Australian expats living overseas? How many are there?

Senator Conroy —This now reaches I think a total of around 0.6 per cent of the total number of payouts. Again, you are focused on barely half a per cent of the total recipients.

Senator COONAN —How many people?

Senator BUSHBY —It is still a quarter of a million dollars. A quarter of a million dollars is a lot of money.

Senator Conroy —We are not disagreeing. The billions of dollars that we are talking about here would have been held up.

Senator COONAN —That does not justify it? It is sloppy work.

Senator Conroy —More Australian families would be unemployed today.

Senator CAMERON —If you want a debate, then we will have a debate.

CHAIR —Senators!

Senator CAMERON —You would do nothing. You would just destroy jobs.

Senator BIRMINGHAM —I think there was a question to Ms Granger.

Senator CAMERON —Economic incompetence over there.

Senator Conroy —Let us be clear. You are prepared for Australian retail workers to be put out on the street with all of the other Australian families who would have suffered with higher unemployment because of the sit-on-your-hands, do-nothing, wait-and-see approach.

Senator BIRMINGHAM —We would not have been talking down—

Senator Conroy —That is exactly the position that you advocated. You can try to airbrush Ms Bishop out of your records, but you cannot airbrush what she said on the public record.

Senator BIRMINGHAM —Just tell us how many.

Mr D’Ascenzo —Twenty-seven thousand payments were made to people who were eligible and reported an overseas postal residential address.

Senator BIRMINGHAM —How did you calculate those?

Mr D’Ascenzo —From the reported overseas postal and residential address.

Senator BIRMINGHAM —How hard was that to calculate?

Mr D’Ascenzo —It means we have to run the system.

Senator BIRMINGHAM —How long did that take?

Mr D’Ascenzo —It is more than a press the button type issue, but I am not sure how long it takes.

Ms Granger —Having an overseas address does not mean that you are a non-resident for tax purposes. It simply means, for example, that you may have left Australia to work for a few months or to visit and you put down the address. What we are giving you is the overseas residential addresses that we have on those tax returns for that year. If they were non-resident during that year they were excluded from this payment. It is only what has happened subsequently.

Senator BIRMINGHAM —I understand that. How long did it take you or your office to ascertain the 27,000 figure?

Ms Granger —I do not know how long the analysis took. I can check for you. Again, it is a matter of doing another query of the database.

Senator BIRMINGHAM —When did you calculate that figure?

Ms Granger —I think it was in relation to questions that we were asked at the JCPAA, but I need to check that for you.

Senator BIRMINGHAM —In terms of the 16,000 figure and the 27,000 figure, are we talking about hours, days or weeks for the ATO to work out those figures?

Ms Granger —It would have been days, maybe a day. I do not know, but I could check.

Senator BIRMINGHAM —‘Days, maybe a day’. This is the significant level of detail that would have delayed the stimulus package by weeks or months if the government got its policy right. ‘Days, maybe a day’. That does not sound like a significant delay.

Ms Granger —I could give a little insight into the process of setting up the database with the eligibility criteria. To create the entire database it took the tax office computers an entire weekend where we were not able to do any other processing over that weekend. We had to stop it. There were three separate ones over three separate weeks; just to do a mirror image, then to apply eligibility criteria and then to apply payments. That is after we did the design process. It was quite important that we had all of that settled very early and were able to quickly work on doing the actual design and set-up of that system.

Mr D’Ascenzo —As Dr Parker mentioned from a Treasury perspective, the logistics of doing this was extremely hard. It has been a good achievement by the organisation to have done this. Could we have made those cuts in terms of policy before we rolled out? We are not sure. I think the decision was made to go for the more simple system, as Dr Parker pointed out.

Senator JOYCE —How did you make the qualitative statement—

CHAIR —Senator Joyce! If Senator Birmingham is finished then Senator Heffernan has the call next.

Senator JOYCE —I just wonder how you could make a qualitative statement of how long someone had to be passed away for before they deserved a payment and when they did not deserve a payment? For how long did they have to be deceased before they had been deceased for too long?

Mr D’Ascenzo —I think the criteria in the law was that they had to be deceased in the 2007-08 year.

Senator JOYCE —What is the emotional difference for people?

Mr D’Ascenzo —I am saying that is the criteria.

Senator JOYCE —It is crazy.

Senator COONAN —I just wanted to get a few answers.

CHAIR —Senator Birmingham has finished.

Senator BIRMINGHAM —I jumped in on Senator Coonan.

CHAIR —If this is going to happen then please let me know, because I got a complaint about Senator Cameron jumping in.

Senator CAMERON —Did you?

CHAIR —That is all okay now. Otherwise, we will just continue on according to the list. Senator Coonan.

Senator COONAN —I just want to spend a bit longer on this topic. Do you have a breakdown of any amount paid to people who were incarcerated in prisons?

Ms Granger —No, we do not. We do not have the means of being able to analyse that information.

Senator COONAN —Do you have any information about non-Australian residents—the colloquial term ‘backpackers’—who spent time working in Australia in 2007-08?

Ms Granger —No. As I mentioned before, if you were a non-resident on your 2007-08 tax return then you were automatically excluded from this database. The only information we have is about people who were resident for that year but gave an overseas address. We will not know how many of those are non-resident until they file their next year’s tax return.

Senator COONAN —There have been some reports that some people have received stimulus package payments twice or indeed more than twice. Does the tax office have any information about that?

Ms Granger —We had a small number of cases where there had been a doubling of payment. It involved one tax agent and there was confusion about whether to redirect the payments. At the time there was a double up of that. I think it involved about 400 payments. Three hundred of those were stopped and we are negotiating a repayment with the rest in relation to the second payment.

There was a newspaper report today or yesterday that suggested up to nine payments. I have not seen that personally. We followed that up. That was a number of beneficiaries. There was confusion about the actual case, so there was not any doubling up of payments.

Senator COONAN —Has there been any confusion with respect to people who have, for example, family trusts with multiple income streams? Were they eligible?

Ms Granger —The only case that I am aware of is the one that I just referred to, where there were a number of beneficiaries that were eligible. There was confusion that was a doubling up of payment. In fact, they were for separate beneficiaries.

Senator COONAN —How many people earning over $100,000 received the tax bonus by, for example, salary sacrificing? Does tax know?

Ms Granger —The only information we have is that if they met the eligibility criterion in terms of their taxable income they were eligible. We do not have a breakdown of those who may be below that level because of salary sacrifice.

Senator COONAN —You have obviously seen reports of people who are relodging tax returns in order to qualify for eligibility. Do you have any knowledge of that?

Ms Granger —No, I do not. I do know that we have had a particularly close look at where we see amendment requests, obviously for a whole range of reasons. We are looking closely at those.

Senator COONAN —How much money has been spent on advertising the cash splashes or bonus payments?

Senator CAMERON —Advertising what?

Senator COONAN —Would you rather ‘sugar hit’?

CHAIR —It is nice to have this pleasant discussion on semantics with the people up here, but do we have a question?

Senator COONAN —That is the question.

Senator BIRMINGHAM —We are waiting for an answer.

Senator RONALDSON —Can I ask a question while they are considering the question?

CHAIR —No. We are sticking with Senator Coonan’s question.

Senator RONALDSON —It is along the same line.

CHAIR —Is that question answered?

Ms Granger —The plan is to spend $11.5 million. I do not have the to-date figures on that, but we do expect to fully expend it.

Senator COONAN —Is that largely on print media?

Ms Granger —Print and radio. Most of it has been aimed at reminding people to get their returns in, what the basic eligibility criteria are and where to call if they need more information or what to look up on the website.

Senator HEFFERNAN —I am not an accountant; I am a wool classer and welder. If you are a farmer, you have a failure, you are a sole trader and you run at a loss, do you get the $900?

Mr D’Ascenzo —No, because you would not fall within the eligibility?

Senator HEFFERNAN —This is a stimulus payment to stimulate the economy, but if you are a farmer that happened to have a crop failure and ran at a loss you do not get any stimulation and they tell you to go to hell. Why is that?

Mr D’Ascenzo —That is the criteria for the payment.

Senator HEFFERNAN —Isn’t that stupid? You are prepared to send it overseas and send it to the estates of dead people, but hardworking farmers who happen to run at a loss are told to go to hell.

Mr D’Ascenzo —Basically, the eligibility requirements were taxable income.

Senator HEFFERNAN —Anyhow, that is not what I wanted to talk about. We are on division 7A. Could you explain to me what the principle behind division 7A is?

Mr Konza —The principle behind division 7A is to ensure that income is not taken from private companies without taxation being paid on it.

Senator HEFFERNAN —Would it be fair to say that the following interpretation is new to it: ‘Division 7A aims to tax transfers of wealth and value from private companies to their shareholders and their associates when these transfers are not made in the form of taxable dividend’?

Mr Konza —Yes, I guess so. The income tax act taxes the payment of dividends, for example. Division 7A is an integrity measure that makes sure that if people transfer the wealth of a company out to the shareholders, other than through dividends, then tax is paid.

Senator HEFFERNAN —Just to go back, it would be fair to say the current perceived anomaly of division 7A is that it does not bring to tax a distribution of private company profits in the form of a prelicence to use company assets such as holiday homes, boats and so on.

Mr Konza —Are you talking about the concept of a licence to use a company asset?

Senator HEFFERNAN —Yes, as opposed to a lease.

Mr Konza —Yes, that is right. What we are talking about there are cases that we have actually struck where the company will own a major asset and, without entering any legal contract, will simply allow a prominent person associated with the company to use that asset. In legal terms, it is called a licence to use.

Senator HEFFERNAN —That is correct.

Mr Konza —That is the anomaly.

Senator HEFFERNAN —With your indulgence, Madam Chair, I will just say that one of the great institutions of Australia, besides the tax office, is the institution of family farming. Would you agree with that?

Mr Konza —Yes.

Senator HEFFERNAN —Do you take it for granted when you go to the supermarket for your tucker, when the vegies are there, the meat is there and the milk is over there? You get used to that idea. You will be pleased to know that every day 40 per cent of the world’s tucker is actually chucked out. It is wasted. In the 2009-10 federal budget the Australian government announced its intension to introduce new legislation to prevent shareholders and their associates avoiding tax on the use of company assets, such as land, cars, boats and houses. How much is in the forward estimates that will be recovered from that?

Mr Konza —The forward estimates are a matter for Treasury.

Senator HEFFERNAN —How much are you after?

Mr Parker —I will ask Mr Brown to address the question.

Senator HEFFERNAN —Is this a considered guess you are about to give us or have you made some calculation of what is out there?

Mr Brown —The estimates for that do not include a specific allowance for any amount.

Senator HEFFERNAN —So you have got no idea of how much you are going to recover.

Mr Brown —Not how much is attributable to farmers specifically, no.

Senator HEFFERNAN —You just chuck the hook out there and see what you can drag in.

Mr Brown —The estimates are based on aggregate data. The aggregates do not necessarily break down.

Senator HEFFERNAN —I will put it in a better form of words. You are the bureaucrat and I am a worn-out farmer. How much does the government think it is going to recover from people who have been lurking the system, as you see it as a lurk?

Mr Brown —The forward estimates indicate that there is an estimate of around $10 million a year over the forward estimates period.

Senator HEFFERNAN —My question earlier that I did not get to ask is: in that scheme of the money going overseas to whoever they are—backpackers—how much money that we just threw away was involved in that compared with the money that we cannot give to farmers who have had a crop failure? How much money have we sent to people who have gone overseas? How much was in the cash splash on that, or whatever you would like to call it?

Senator CAMERON —I thought this question had been answered.

Senator COONAN —No, it was the number.

Senator HEFFERNAN —There is no need for points of order. We are under control. How much was in it? Was it $20 million or $30 million?

Ms Granger —Are you asking for the value of the payments?

Senator HEFFERNAN —How much money went overseas in the $900 giveaway?

Ms Granger —I do not have that figure with me.

Senator HEFFERNAN —But you do have it.

Ms Granger —We would have to do the analysis.

Senator HEFFERNAN —Have a rough guess?

Ms Granger —No. I am sorry. I do not have that.

Senator HEFFERNAN —Can you come back tonight with the answer? It has been in the press. I think it was $20 million.

Mr D’Ascenzo —The maximum amount would be $24,300,000, if it is $900 for each person, but some people have less than $900.

Senator HEFFERNAN —I am just trying to get this into perspective. We are talking about the $10 million forward estimate revenue and we have a $24 million giveaway to people who have gone to Timbuktu.

Mr D’Ascenzo —No. That is the maximum.

Senator HEFFERNAN —The maximum perhaps of the pulling apart of the institution of family farming, as well as a few other people, is going to be $10 million in. I would just like to say that I declare an interest. I am a farmer.

CHAIR —We do know that.

Senator HEFFERNAN —Even though I am worn out and cranky. My father’s generation of farmers, who were decent, honest, hard-working Australians—I have got a buggered neck from looking back like this when I have driven the tractor to see that the wheel was in the furrow all the time—

Senator CAMERON —I thought it was a problem you had in the party room.

Senator HEFFERNAN —All we do is drink together.

Senator Conroy —You are entitled to write a reply for defamation.

Senator HEFFERNAN —This is quite a serious issue. My father’s generation of farmers were simple bookkeepers and worked bloody hard without the gear that they have got today and they were originally four bushel bags a week. When that generation of farmers died they were more concerned not with the fact that they were dying but the fact that, if they did not have a flash accountant, when they died half of the family farm went on state and federal death duties in certain proportions. As you know, to guard against some of those things, and also to preserve the farm for the family in circumstances where there might have been nine or 10 kids, thousands of these farms were put into company structures, a thing called the Gorton scheme back in those days and all sorts of things such as family trusts, to protect the integrity of the family farm. It was not for some flash reason; they just wanted to continue farming and they did not want to lose half the farm. You would agree, Mr D’Ascenzo, that death duties were high-impact, low-revenue taxes.

This is going to be what is proposed. The government has known for weeks that I have been going to raise this. I have had the courtesy of going to the Prime Minister’s office and to Mr Swan. They are saying this may well be an unintended consequence and all we want to do is fix it. This will be a horrendous tax impacting on people who, for whatever reason, run at a loss—we are shaping up to another crop failure in the south again this year and we have had three already—and who were involved in all that stuff earlier to protect the institution of the family farm and have a farm, and there are thousands of them. There are representatives sitting right behind you there from the farming organisations who are terrified of the consequences of what this will do, whether it is unintended or not. You are saying that because of what is considered to be a licence now that the ATO states: ‘Granting a lease to a shareholder to use company property has always been caught by 7A Part III of the Income Tax Act 1936 while licences have not. The proposed legislation will extend the 7A provision to cover licences. As such, licences to use company assets will be considered leases and charged at a deemed market rate. Licences in the hands of the company will therefore be treated as taxable income.’

What if you are a farmer at Moree or wherever and dad had seven kids. Two of the boys stayed home, one went off to become a tax lawyer, three kids got married and left the farm, and two blokes were left to run a family partnership on a farm that was owned by the family in a company structure or a trust. Most farms in a lot of years have no chance at all of returning a real rate of income on the value of the farm. Say five per cent, which would be a leased value. If you have a drought, you have no chance of being able to pay any sort of fair dinkum rent even if it was imposed upon you. What you are saying under these changes in the 2009 federal budget is that the family farming partnership has to pay to the proprietor—usually the same people in a different form—a real rate of return in terms of lease, or if they do not pay that you will charge the trading partnership the equivalent of an unfranked dividend, which will be taxable, in a lot of circumstances where there will be a real loss because they have had a crop failure or whatever.

Mr Konza —Could I clarify one thing. Division 7A applies only when the private company has a distributable profit and distributable income. In that situation in which a company is not paying tax then division 7A does not apply.

Senator HEFFERNAN —Which company?

Mr Konza —The company that owns the farm property.

Senator HEFFERNAN —This stuff goes back to the 1960s. These structures go back where decent, honest, hardworking farmers had to change the structure of the farm or they simply lost it. In some of those companies there are unrealised profits. They do not actually make anything. Are they trapped?

Mr Konza —If it has distributable profits it may be caught by division 7A depending upon—

Senator HEFFERNAN —Some of these profits have accumulated back in the 1960s in these companies. This is a dead set attack on the people who supply your tucker.

Mr Konza —We would need to know whether those distributable profits have accumulated that way.

Senator HEFFERNAN —With great goodwill and with the indulgence of the minister, I am instructed that this may well be an unintended consequence. I am instructed that perhaps what you are after are the people who have got yachts, Lear jets, mansions and so on, and there is a proposal which is being put to the Treasurer’s office and the Prime Minister’s office to carve out the farming institution. Can you give me some advice on that?

Mr Konza —The only advice I can give you is to confirm the cases that we have identified have been in the high-wealth and high-income segments.

Senator HEFFERNAN —Say Joe Bloggs Pty Ltd owns a farm at Gunnedah and dad put it in the company name back in 1960-something. The boys have left. We will use plain language here. The institution of family farming is the one that guarantees the farm’s survival. Corporate farmers come and go. They are not used to the vagaries of the weather, working when it does not make any sense to work and so on. You try to protect the institution of the family farm. One of the reasons you do it is that you might have three sons. One might marry a dropkick. One might marry a bloody rocket scientist. You can have all sorts of challenges brought back on the farm by the next generation. This sort of arrangement protects the integrity of the farm. I have to say that this is seen to be an attack on arrangements that were made 30 years ago. Could we be given some advice? You might be able to come back with the advice. I am sure they are listening down in someone’s office. Was it the intention to capture farmers in this?

Mr Konza —These are matters for government rather than us. We apply the law.

Senator HEFFERNAN —My understanding from Treasury is that it was unintended. My understanding from the tax office, which is the world’s worst job, because everyone that comes through your door wants to pay less tax—

Senator Conroy —You are not asking the officer an opinion?

Senator HEFFERNAN —No. My understanding is that it is unintended, but the tax office will prosecute the law as it stands whether it is unintended or not. What I am appealing to is for decency of government. Australia’s farmers are already in suicidal land, a lot of them.

Senator CAMERON —You were in for 11½ years. And now you are appealing for decency? Come on!

Senator HEFFERNAN —No, this is now. With great respect, we do not have the decency to tell Australia’s farmers whether they are in or out of emissions trading. If we go into emissions trading, the profitability of cattle production is going to go down 200 per cent.

CHAIR —Senator Heffernan, can you not respond to interjections. Please continue.

Senator HEFFERNAN —We would seek clarification and obviously some consultation with the government, because Australia’s farmers are not up for this. We are under attack from everything from global cartels in fertiliser to the unknown of climate change, whether America is going to have their farmers in on the credit side and out on the debit side, another bad season forecast. These are decent, honest people and we just seek clarification. Is that fair enough?

Mr McCullough —If it is any comfort, I understand that the government’s intent is to consult fully on this process. There is a detailed paper that is about to be released.

Senator HEFFERNAN —I understand that.

Mr McCullough —Without getting into the technical nuances here, because it is a bit difficult, a number of the scenarios you have raised seem to me for reasons given by Mr Konza and others unlikely to result in the consequences that you fear will necessarily flow from some of those circumstances.

Senator HEFFERNAN —I just wanted to flag it in a nice way tonight, because we have had decency and the cooperation. It was not designed to be a political ambush. This is a consequence of what happened back in the 1960s and the 1970s in the Gorton scheme era. These things did accumulate all sorts of unrealised profits and so on. This is very complex. I can tell you that, if it goes ahead as is described in the budget papers, you will destroy both the mind and the body of a lot of farmers.

Mr McCullough —I understand that. I will just clarify a point, though. In your description you have talked about the family farm. The asset of the business is a different thing from what this is designed to catch. I think it would be wise to wait for the discussion paper, see the detail, and then perhaps some of the things you are concerned about will not come to a head.

Senator HEFFERNAN —We are all alarmed, and we seek to turn the alarm off. Thank you.

Senator CORMANN —I have a series of questions in relation to the proposal to means test the private health insurance rebate. Can you describe the process of Treasury advising the government regarding the proposal to means test the private health insurance rebate?

Mr Parker —There was a process of advice in the context of the budget being put together. It involved a cross-portfolio exercise—Treasury, Health and the Department of Finance.

Senator CORMANN —When did you first provide advice on the proposal?

Senator Conroy —I appreciate you will argue that a date goes simply to a process. The budgetary process is—

Senator CORMANN —The Prime Minister’s department and the finance department have answered exactly that question. I can tell you that the finance department provided advice on 22 February. The Prime Minister’s Department provided advice first on 23 February. I am sure that Treasury—

Senator Conroy —We will take it on notice. If Treasury has anything it would like to add then we will come back to you.

Senator CORMANN —How long is it going to take to provide that answer?

Mr Parker —In terms of the policy here—

Senator CORMANN —No. I am asking a very specific question.

Mr Parker —The relevant part of the Treasury that deals with the policy here is Fiscal Group, not Revenue Group. Our role in the private health insurance rebate area was limited to two specific areas, that is, the precise mechanism around the Medicare Levy surcharge arrangements and, secondly, a role in some of the costings.

Senator CORMANN —Presumably you would have coordinated the consideration of this measure across relevant departments? You described that as part of your introduction.

Mr Parker —No, we did not coordinate it.

Senator CORMANN —I am asking Treasury. I have been told that this is the section to ask Treasury about the private health insurance rebate.

Senator Conroy —You have just been told that it is not the section, it is Fiscal Group.

Senator CORMANN —This is where I was told to ask questions about this.

Senator Conroy —Has Fiscal Group come on yet?

Mr Parker —No.

Senator Conroy —You have not missed the opportunity. You will get to ask the Fiscal Group this question.

Senator CORMANN —When is the Fiscal Group?

Mr Parker —In terms of issues around costing or the mechanism relating to the Medicare levy surcharge and so forth, we are the right people to ask about those issues.

Senator CORMANN —Can you tell me when you first provided advice to government on this particular budget measure and who initiated the work?

Senator Conroy —We said that we would take that on notice and make sure we get the accurate answer. You asked the wrong group the question.

Senator CORMANN —I am asking you: when did your group first provide advice on it? Can you give me a date?

Mr Parker —We will take that specifically on notice.

Senator CORMANN —How long is it going to take you to get back to us? Can you get back to us by the end of tomorrow?

Senator Conroy —We will endeavour to do that.

Senator CORMANN —Can you also tell us when you first consulted with the Department of Health and Ageing? Did you consult with anyone outside the federal government in relation to this measure?

Senator Conroy —Again, you are asking questions that should be directed to Fiscal Group. They are more likely to know the answers.

Senator CORMANN —Do they take all of the responsibility for this? I will go to Fiscal Group and leave it there.

Senator COONAN —I would like to follow on from a question from Senator Heffernan. Will farmers have to pay rent to a family trust or company entity for living in the farm residence?

Mr D’Ascenzo —I do not think it is law yet, is it?

Mr Konza —As there is no legislation it is not a matter that we can comment on.

Mr Parker —As Mr McCullough commented, there will be a discussion paper on this released shortly. The legislation has not been legislated or put into parliament yet. The consultation process is intended to ensure that the law works as best as it possibly can.

Senator COONAN —At the moment you do not know whether farmers will have to pay rent to the family trust or company entity for living in their farm residence?

Mr Parker —That is a matter that may be considered by the government in the context of the consultation process. I could not give you a definitive answer.

Senator COONAN —If you do not know then you do not know. I wanted to move on to some issues to do with changes to the employee share scheme relating to the existing election of discounts for shares or options that applied from budget night, which was a major integrity measure. There is currently a rethink going on? Is that right, Minister?

Senator Conroy —I think we are reviewing aspects of this.

Senator COONAN —What is the timeframe for the review?

Mr Parker —The government intends to issue a paper on options in this area during the course of this week.

Senator COONAN —Is it within the contemplation of Treasury that this will be resolved by 30 June? What happens in the meantime?

Mr Parker —I think that is certainly an objective, yes.

Senator COONAN —That you are trying to resolve it by 30 June. What is the position in the meantime? The measure took effect from budget night, as I understood it.

Mr Parker —That is right. The measure did take effect from budget night. The position in the meantime will ultimately depend on what the government decides to do in response to the consultation process. The paper to be released later this week will address commencement issues and it is intended, in conjunction with that paper, that there will be draft legislation for the purposes of consultation. Hopefully when this paper is released the matter will become clearer.

Senator COONAN —Just sticking with what has been announced and what currently applies from budget night, it being an integrity measure, was there any consultation prior to the measure being announced?

Mr Parker —There was no consultation process prior to the measure being announced. There were processes both internal to government in terms of forming up the measure, and with people from the private sector putting to government that there were substantial compliance issues in this area that needed to be addressed.

Senator COONAN —The main reaction or objection, if I can put it that way, springs from the fact that the budget announcement will require some employees to pay tax up front on the difference between the cost value of shares or options that may never vest. Is that right?

Mr Parker —That is one dimension of the reaction to it, yes.

Senator COONAN —You mentioned some potential revenue leakage. Can you take us to that? My understanding from this side of the table is that deferral of tax can maximise revenue if paid at the marginal rate on a depreciated value.

Mr Parker —Yes. I think you are referring to the interplay between the income tax system and the capital gains tax system. In a perfect world where everybody complied with taxation arrangements to the extent that more of these schemes were taxed under the capital gains tax, and hence subject to the discount, then that would involve a smaller amount of revenue. That is why you will see in the costing that appears in the budget documentation the bring forward results in a large amount of revenue up front and then over time the amount of revenue declines.

Senator COONAN —It declines over the forward estimates?

Mr Parker —That is right.

Senator COONAN —Given industry’s response to the announcement, has Treasury done any calculations as to whether the revenue figures will stay the same, especially for the 2008-09 and 2009-10 years?

Mr Parker —We are in the process of looking at that issue. That would ultimately depend on whatever decisions the government takes through the consultation process and the regime adopted. It is fair to say that the response, particularly from the business community, to this measure has been, firstly, to acknowledge that there are substantial tax integrity problems in this area. They have been very forthcoming with that information in support of an argument that it should be possible to tax on deferral where there is a risk of forfeiture, for example. In the process of that consultation which has been taking place they have been providing substantial information on the degree of tax integrity problems, and the types of schemes that have been problematic, as a basis for making an argument that there would be an alternative way to close down that scheme. It is a matter of judgement, but based on the information which has been made available by the business community it appears that there is a larger revenue integrity problem here than the government was previously aware of.

Senator COONAN —I do not mean to interrupt you, but on those continually deferring?

Mr Parker —Yes, and disappearing from the tax system and setting up schemes where the deferral is not just limited to the 10-year period which is currently in the law but gets rolled over ultimately into further and further—

Senator COONAN —Do you have some numbers on that now?

Mr Parker —We do not have specific numbers on that. In effect, if the government were to look at changing the arrangements—as has been flagged as a possibility in the minister’s press release on this area—to permit deferral in more limited circumstances, what you would tend to get is less revenue upfront and then a growing amount of revenue over time.

Senator COONAN —It would change the projections?

Mr Parker —It would change the profile.

Senator COONAN —Did Treasury consider any alternative options to try to fix this problem that did not focus, for example, on taxing at the grant?

Senator Conroy —That would go to advice to government. Maybe you can rephrase the question and ask a similar type of question, but you are essentially asking to reveal what options Treasury considered, which I think goes to the heart of advice.

Senator COONAN —Are there any countries in the world that tax a grant?

Mr Willcox —I understand that a number of countries have schemes akin to the Australian one where it is possible to have an upfront tax as well as a deferred tax arrangement, although I think that the common feature would be deferred tax arrangements or taxing at the stage where a person is actually able to access the value conveyed by the scheme.

Senator COONAN —In your assessment and in your workings in relation to this matter did Treasury come to a view that taxing a grant was better than taxing investment?

Senator Conroy —I think unfortunately you are probably just across that line. Would you like to rephrase the question and try it slightly differently?

Senator COONAN —We are looking here at the workings—I am not talking about advice. I am talking about—

Senator Conroy —The workings in preparation of advice are still the workings in preparation of advice.

Senator COONAN —It may not be, because that might not have been the advice.

Senator CORMANN —Are you claiming public interest immunity?

Senator COONAN —Can I put this to you?

Senator Conroy —Any time you want to try, go for it. Any time you want to try it on, Senator Cormann, feel free.

Senator CORMANN —You know what the proper process is.

Senator Conroy —Any time you want.

Senator CORMANN —I can see that you have got an attitude of wanting to reveal information.

Senator Conroy —Any time you would like to start that debate, I am here. I sat there for 11 and a half years. I am fully aware of the rules of the Senate.

Senator CORMANN —Maybe we can ask the senior official at the table whether he is aware of the new order of the Senate.

Senator Conroy —It is of no relevance to the official. It is only of relevance to a senator.

Senator COONAN —Will the announced policy result in fewer people participating in employee share schemes?

Mr Parker —That has certainly been put to the government by the business community, yes.

Senator COONAN —Is that ‘yes’, is it?

Mr Parker —To the extent that the use of employee share schemes involves a tax break and that tax break has been reduced then, yes, you would expect participation in that scheme to be reduced.

Senator COONAN —You would expect that some employers would stop offering employee share schemes on the announced policy?

Mr Parker —As I said, that has been put to the government, yes.

Senator COONAN —Did you have any idea of the magnitude of this withdrawal from employee share schemes that has been foreshadowed?

Mr Parker —It is probably fair to say that we were surprised by the degree of the response, particularly in relation to the $60,000 cap. Obviously the level of the cap was a government decision. But, based on information that we have on the take-up of these share schemes—and I will ask some of my colleagues if they have any further detail on this—going back to some data the ABS collected in 2004, there is a very substantial proportion of employees in receipt of benefits under an employee share scheme that have an income below the $60,000 level.

Senator COONAN —Is the threshold something that the government has under consideration to change?

Mr Parker —I think that has been flagged.

Senator COONAN —It has been flagged, though, has it not? I think that is what the minister’s press release indicates.

Mr Parker —Yes.

Senator COONAN —Has Treasury modelled the impact on revenue if employers substitute employee share schemes with cash components?

Mr Parker —If employers substituted share schemes that were subject to the $1,000 upfront exception, and to the extent that that substituted into other forms of remuneration, that would tend to increase tax revenue, yes.

Senator COONAN —The minister referred to these matters in his press release of 24 May. Could you give me some details? He referred to some confusion as to taxpayers’ obligations. What are they?

Mr Parker —I might pass that question to colleagues from the tax office to give you details about the tax avoidance issues that have arisen here. One particular thing which the word ‘confusing’ was referring to is where taxpayers have taken their tax deferral option but at the later taxing point have nevertheless reported and claimed an amount of income under capital gains tax rather than income tax. It has been argued by those taxpayers that this was not a deliberate matter but a matter of confusion on their part. Nevertheless, it led to a substantial reduction in tax on their part. But perhaps my ATO colleagues could give you some further information about that.

Mr Konza —What my colleague from the Treasury was talking about was a situation that I think was partially addressed last year, which was where taxpayers were neither putting in an election nor declaring income and then saying that they had made an election but had not told us and had just forgotten to put the income in. The law was changed to make it mandatory that the income had to be returned as part of that election process so then there would be an outward sign that they had made that election and we could better ensure compliance. Nevertheless, our observation of the minority of high-income individuals who are not following the law is that many of those people simply find the temptation of taking the capital gains tax discount too great to resist and they will simply misdescribe their affairs in an attempt to take it. That is a fairly consistent observation. Some of those taxpayers also figure that it has been a long time since the grant of the shares, that everyone must have forgotten by now, and they simply do nothing with them. Some of them retire and stop lodging returns and obviously do not declare the shares. Because of the deferral period and the availability of the capital gains discount in other circumstances, a lot of taxpayers have found it too difficult to comply.

Senator COONAN —Mr Parker, you were going to refer someone who could help me with some ABS data.

Mr Robinson —The most recent data we were able to find in relation to the number of employees engaging in employee share schemes was from a 2004 ABS survey, the employee earnings benefits and trade union membership survey, which estimated around 481,000 people were engaging in employee share schemes at that time, which was equivalent to around 5.9 per cent of wage and salary employees in 2004. We noted that had grown over time since some of the earlier data that was available in relation to that, from about 2.4 per cent in 1989 to about 5.5 per cent in 1999 and up to the 5.9 per cent in 2004.

Senator COONAN —Does any data available to you indicate the companies that offer these share schemes in terms of size—say, large corporations down to SMEs or IT companies?

Mr Robinson —No. The information we had available to us was only really in terms of take-up by employees. There was really no information on the size of the business or industries offering employee shares. However, the other source of information that we have referred to in undertaking the costing is from Australian Taxation Office taxation statistics, where we looked at a category of income called Other Income Category 1, which actually includes a larger subset of income reported in people’s tax returns. For example, it includes lump sum payments and arrears, foreign exchange gains, benefits or prizes from investment related properties. Nevertheless, we took into account some information from there.

Senator COONAN —What did that tell you?

Mr Robinson —That was just trying to get a sense of, again—

Senator COONAN —How big or small—

Mr Robinson —I am sorry?

Senator COONAN —Go ahead.

Mr Robinson —We were just trying to get a sense of the amount of income associated with employee shares that people were claiming in their tax returns.

Senator COONAN —Are you able to give the committee any information extrapolated from those inquiries?

Mr Robinson —On the basis of some of our estimates, we estimate that the total pool of income that related to employee shares was a bit over half a billion dollars. But that was relating to mainly the taxation on the upfront and deferral, apart from the taxation which would have been received from people with employee share values up to $1,000, which of course are exempt.

Mr Parker —Part of the difficulty here in terms of the information is that there has been a large part of employee share schemes that have been in effect invisible to the tax system because they have been schemes where people have gone through the deferral route. They do not have to report anything to the tax office upfront; they do not have to do any election at that point. Then it is just a question of the basic honesty of the taxpayers in reporting that income. Regrettably—and this is evident in some of the tax office auditing information—they have increasingly picked up, as my colleague Mr Konza said, a minority, but a significant minority, of high-wealth individuals who have had employee share schemes who, on audit, have been found not to have complied with the law.

Senator COONAN —I appreciate the difficulty. Lest there be any misunderstanding about this, I do not think that you would find really from any elected representative any criticism of serious revenue leakage, if that is in fact what this represents. What I think the concern has been is that, firstly, it is very difficult to get these estimates anything like right. It appeared to have been a bit overestimated, if I can put it in a fairly neutral way.

Mr Parker —You are going to a question of judgment. Ultimately, history will tell, because we do not know how much of this stuff is out there. As I mentioned before, it certainly appears on the basis of information that has been made available that there may have been some more aggressive use of this than we had thought at the time. But, as I said, history will tell. If that is the case, there may well be more revenue to be gained from tightening up in this area.

Senator COONAN —Is the government committed to maintaining the employee share schemes?

Senator Conroy —Absolutely. One of the reasons we are going through the review process is to ensure that the share schemes can continue to function.

Senator COONAN —It was not the intention that you had effectively shut down employee share schemes and the very good benefits that flow for a lot of these shareholder interests—

Senator Conroy —We have a long history of promoting employee share ownership. We just want to ensure that it is not being taken advantage of by any individual.

Senator COONAN —Nevertheless, it is the intention of the government to try to redesign this scheme in such a way that it allows employees to participate in schemes in a way that allows the intention of such schemes to operate?

Senator Conroy —I do not think I can add much more than the press release that Mr Bowen put out at the time, where he outlined the key principles that would underpin the consultation process. There is no suggestion that we are attempting to close them down. In fact, it is the exact opposite.

Senator COONAN —He is talking about alternative solutions anyway, which made me anxious that we would get an assurance from you that the government is absolutely committed to employee share schemes.

Senator Conroy —Yes, we continue to be committed to them and we have a long history of promoting them.

Senator BUSHBY —To what extent has the ATO or Treasury considered the current tax arrangements of online companies based offshore but trading within Australia?

Ms Granger —I am just trying to think what the answer to that might be. At the moment I do not think we have a specific project around online companies. We have certainly done some work in the past in relation to what the taxing provisions are in relation to that. I am not aware what the particular projects are at the moment.

Mr D’Ascenzo —Just by way of background, a number of years back when the concept of e-commerce was coming to the fore we led some OECD work in preparing a number of OECD booklets on taxing responses to e-commerce activities. That involves trying to work through some difficult areas of what is a permanent establishment under our treaties, for instance. We have been doing that progressively for a number of years and more recently we had reviews of some online arrangements to ensure that tax was paid in relation to activities here. At this point of time it is not as high on our list as we expected in the past. That is why Ms Granger indicated it is not part of our main plan. That is basically where we stand.

Senator BUSHBY —Companies like Google, Yahoo, EBay, Facebook, Microsoft Fish Pond are all to some extent billed outside of Australia for services provided within. A recent estimate suggests Australia may be missing out on up to $160 million in tax just from Google because it does not have in place tax arrangements that capture this sort of activity. If you look at potentially $160 million from Google, we could be looking at tax revenue possibly in the billions if there were arrangements—

Mr D’Ascenzo —This is the point that I made about what is a permanent establishment or not comes into play. It is only taxable in Australia in relation to those activities if they do have a permanent establishment here and the international OECD benchmark for that means that they need to have a place or business here, and the general proposition in relation to electronic transfers is to not put in too much of a barrier for the free-flow of electronic commerce.

Senator BUSHBY —As I understand it President Obama is looking at taking some action with respect to online activities in the United States which occur in the United States but are billed from outside the United States.

Mr D’Ascenzo —I think it is always important to keep alert to this area because it was foreshadowed as a significant potential risk. We have not seen it in those terms. The risk that you referred to us is more in relation to the legal framework under which these apply. For instance, there have often been questions here of why suppliers of, say, books are not taxed whereas book stores here are. That is a question of policy and law.

Senator BUSHBY —It is a question of policy. I would have thought that a government facing significant debt would be looking at ways that would assist recover revenue to actually cover that. I will move on from there. Treasury has provided forecasts to 2016-17 showing above-trend growth. Given that Treasury failed to predict the unexpected events that led to the global financial crisis, how can we be sure that there will not be other unexpected events that will affect growth in revenue over the forecast periods?

Senator Conroy —What can I say? Dick Cheney comes to mind: how can we know what we do not know? Actually, it was Rumsfeld who said that.

Senator BUSHBY —We have the Treasurer saying that it would be silly to question these forecasts, to suggest that these forecasts of future revenue growth might not actually be realised. If you have the Treasurer saying you would be silly to question it, surely my question makes a lot of sense: how can we be sure?

Senator Conroy —I think Dr Henry has spoken at length on this issue in a speech—

Senator BUSHBY —I have read that speech and I do not think it really fully explains—

Senator Conroy —I am sure Dr Henry will be joining us—

Senator BUSHBY —I will be asking similar questions tomorrow as well. But in terms of revenue I was interested tonight.

Mr Parker —As a matter of logic, how can one be sure there will not be unexpected events? One cannot be sure there will not be an unexpected event, by definition. In terms of what these numbers are, I am sure Dr Henry and Dr Gruen, when you talk to them tomorrow, will speak at length about the trend estimates. The revenue numbers essentially drive off those numbers.

Senator BUSHBY —Essentially you acknowledge that there is a potential for unforeseen events, which means that you cannot say with absolute certainty that the revenue forecast contained in the budget—

Senator Conroy —To be fair, over the last 12 months Treasury have consistently indicated that the risks are on the downside—

Senator BUSHBY —I am not asking about whether the risks are on the downside or the upside. What I am asking is: will those forecasts be achieved?

Senator Conroy —If I can finish? Treasury have been quite clear that the risks were on the downside. I think the position now would be marginally different, but how can you guarantee that you will achieve a forecast when by definition a forecast is a forecast. It is not an actual; it is a forecast.

Senator BUSHBY —You cannot guarantee that you will achieve the forecast?

Senator Conroy —It is not an actual.

Senator BUSHBY —That is fine. We will move on from there. We will continue that tomorrow, no doubt. In your assumptions behind the forecast of future government revenues has Treasury assumed there will be no further tax cuts and no indexation of tax brackets between now and 2015-16?

Mr Parker —There are no further tax cuts in the forward estimates.

Senator BUSHBY —Is there any indexation of tax brackets?

Mr Parker —Not as far as I am aware. When the projections are done, they are always done on a no-policy-change basis.

Senator COONAN —What happened to the aspirational tax cuts?

Senator ABETZ —They went out the door with economic conservatism.

Senator COONAN —Have they gone out the window?

Senator Conroy —They were described dependent on future economic circumstances, and I would think that most would agree that the sort of circumstances we are facing at the moment mean that those are not part of the ongoing discussions.

Senator COONAN —Has that been announced anywhere?

Senator Conroy —I am happy to take that on notice if you like and get further information from Mr Swan.

Senator BUSHBY —It reminds me of an answer that you gave in the chamber about aspirational promises and non-aspirational promises.

Senator COONAN —The question I would like you to take on notice is: are the government’s aspirational tax rates goals a casualty now of everything else that the government—

Senator Conroy —I will happily take that on notice for Mr Swan to see if he has anything he can add.

Senator BUSHBY —Following on from my question about whether there were any further tax cuts or indexation of tax brackets in the forecast to which we have heard the answer is no, how much has been calculated to be added to government revenues from fiscal drag or bracket creep for each of the years up to and including 2015-16?

Mr Parker —I would have to take that question on notice.

Ms Mrakovcic —I just wanted to refer senators to the top paragraph on page 52 of the Mid-Year Economic and Fiscal Outlook publication. It says:

In the 2008-09 Budget, the Government made a provision for its aspirational tax goals in 2011-12. The Government said that achieving its aspirational tax goals ‘will depend on economic conditions and the need to maintain fiscal responsibility’. Given the dramatic deterioration in the global economic outlook and associated increased uncertainty, the provision will no longer be maintained. The Government will reconsider the policy parameters following an improvement in overall economic conditions.

Senator BUSHBY —Thank you. That answers Senator Coonan’s question. In terms of my question about how much has been forecast to be added to the revenue as a result of bracket creep or fiscal drag; you will take that on notice?

Ms Mrakovcic —Yes, we will.

Senator BUSHBY —Budget Paper No. 3 has GST projections out to 2012-13. Has Treasury done any modelling on years beyond that, to 2013-14, 2014-15, 2015-16 for GST? I could not find anything in the budget papers, but they may well be there.

Mr White —We actually say in statement three of Budget Paper No. 1 that we have modelled the receipts past the forward estimates out to 2020 in a similar way to the forward estimates period but with some simplifying assumptions. Yes, we do have GST numbers out to 2020.

Senator BUSHBY —Are you able to make those numbers available?

Mr White —Yes. We would have to take it on notice.

Senator BUSHBY —During estimates in February of this year it was noted that page 44 of the most recent UEFO showed the forecast for GST falling by $1 billion in 2008-09 and $2 billion in 2009-10. What do the budget papers show for GST for these two years now and subsequently, to the extent that they are forecast with reference to the level that was predicted by UEFO?

Mr White —Pages 5-41 and 5-42 of Budget Paper No. 1 have changes in revenue heads since UEFO.

Senator BUSHBY —Since UEFO?

Mr White —Yes. GST is on 5-41 and 5-42. GST receipts are down by $1 billion in 2008-09.

Senator BUSHBY —That is $1 billion since UEFO?

Mr White —Yes.

Senator BUSHBY —And UEFO was already down $1 billion?

Mr White —Yes.

Senator BUSHBY —So it is down $2 billion from the forecast prior to UEFO for this financial year?

Mr White —I think that is about right. I would have to go back and look at your first number, but it is about right. The 2009-10 year is down $2 billion since UEFO.

Senator BUSHBY —That is down $4 billion according to the answer that you provided in February?

Ms Mrakovcic —We would have to check.

Senator BUSHBY —Given that you told us that we were down around $2 billion in UEFO for the 2009-10 year, are you saying we are down a further $2 billion from that point?

Mr White —Yes.

Senator WILLIAMS —There is a serious problem with cash flow of the GST in the meat-processing industry. The problem is this: in the meat industry, if an abattoir—I will give you an example, Bindaree Beef at Inverell—go and buy livestock, they have to pay for livestock in seven days. If they buy on 25 May they have to pay on 1 June. They might buy half a million dollars a day of cattle so they pay $50,000 GST. Then on 2 June they pay another $50,000. As the month goes on by the end of the month they have got about $1.2 million out in GST. The problem is when they sell their meat, whether it be fresh or export, they do not collect any GST. On 1 July they put a claim in to get their $1.5 million of GST back; they will wait another two weeks and their GST will go up to probably $2.2 million. It will peak at $2.2 million, and then they will get their GST back—it might be $1.5 million, so their GST outgoing will go back to $700,000. It is a constant cash flow for them because that industry does not collect GST when it sells its product.

Would you see anything wrong with having a situation where these abattoirs could have a seven day BAS period where perhaps each Monday they could lodge their GST with a couple of people in the ATO, electronically pay them two days later and then that peak instead of being $2.2 million might be something like $700,000 or $800,000, which would free up $1.5 million of cash flow at no cost to anyone? It would just be processing each week. I see that as a solution. How do you feel about that idea because it is a serious cash flow problem in our abattoir processing industry?

Senator Conroy —I think the cash flow issue is argued at length in the GST debate and your party voted for it—

Senator WILLIAMS —I know. That was promised today—

Senator Conroy —I am happy to take that on notice to see what the Treasurer or Mr Bowen would like to respond with.

Senator WILLIAMS —It would solve a serious problem in a very competitive industry. They do it tough. I can name the abattoirs that have been closed over the years and we do need to keep these viable processing industries going.

Senator EGGLESTON —I have a lot to do with small business in the chambers of commerce. Again on the GST, some of them have difficulty meeting their BAS and GST payments. Do you have any data on that sort of thing—how many small businesses do have difficulty in meeting their BAS statements and GST payments?

Mr D’Ascenzo —We have some information on debt. There is some difficulty in differentiation but I can give you some generic information that can probably cover some of the order of magnitude of what you are interested in.

Senator EGGLESTON —Are you able to do that now?

Mr D’Ascenzo —Yes, I can do it now. I just want to see if I can find it.

Ms Mrakovcic —I just wanted to add to the numbers I mentioned before. The numbers that we quoted from statement 5 of Budget Paper No. 1 were in cash terms, and the numbers that you used of $1 billion and $2 billion in the UEFO document were on an accrual basis. There is a not insignificant difference between the two that one simply has to be aware of.

Senator BUSHBY —On that basis, are you able to tell me now what the drop in GST is for those two years and subsequent forecast years from the prediction in last year’s budget to now? That is what I was after. I wanted the prediction from the high before UEFO to now, so the accumulation of the four from last year’s budget to UEFO and then from UEFO to now for both those years and subsequent forecast years?

Ms Mrakovcic —We would have to take that on notice. Do you want it on a cash or accrual basis?

Senator BUSHBY —Both would be very useful.

Mr Parker —We will get those numbers to you quickly. It is a simple matter.

Senator BUSHBY —That would be good because Treasury’s record on answering questions on notice is not good. I am going to raise it with Ken Henry tomorrow. I raised it with him in February and it has not improved.

Ms Mrakovcic —In terms of small business we are seeing an activity statement debt. We have seen a growth to date of about 7.9 per cent.

Senator EGGLESTON —You are seeing a growth of debt level of non-payment of 7.9 per cent.

Ms Mrakovcic —They are the latest stats from about yesterday, actually.

Senator EGGLESTON —Has that been a trend over the last year with this financial crisis?

Ms Mrakovcic —Yes, it has been a gradual trend over the year.

Senator EGGLESTON —What was your previous debt level, say, two or three years ago?

Ms Mrakovcic —I would have to take it on notice for two years ago. I can give you the debt as of 30 June last year if that would help.

Senator EGGLESTON —I am just interested in knowing whether it has increased. Has there been a noticeable increase? Has it gone up by 50 per cent or 100 per cent?

Ms Mrakovcic —No. We are seeing a slight increase. We are seeing a larger increase in our small-to-medium enterprise market more than the micro market at the moment.

Senator EGGLESTON —I am interested in small-to-medium business. How many of these small to medium sized businesses have been penalised by the ATO for late payment or non-payment?

Ms Mrakovcic —We would have to take that on notice.

Senator EGGLESTON —Has the ATO provided any tax exemptions to small-to-medium businesses? If so, how many have there been in recent times because of these issues?

Mr D’Ascenzo —Tax exemption is a matter for government legislation. What we have done in terms of small business is actually try to make early contact with small businesses. By making early contact with them we have been trying to enter into payment arrangements. We have been remitting appropriate interest and penalties in some cases. We have been taking circumstances into account. We have also announced that we will be reducing the pay-as-you-go instalment rate for GST to two per cent from its current nine per cent rate starting from next year. There is a whole package of activities designed to assist small business.

Senator EGGLESTON —I want to ask about the hobby farm $250,000 tax loss cut-off. Would you describe the process behind Treasury recommending this measure to government or government recommending Treasury to investigate this measure?

Mr D’Ascenzo —That is a matter for Treasury.

Senator EGGLESTON —What does that mean?

Mr D’Ascenzo —I am not aware of the processes.

Senator EGGLESTON —Has Treasury any answer to that?

Mr Parker —I am sorry; could you repeat the question?

Senator EGGLESTON —It was about the $250,000 tax loss cut-off and what the process was behind Treasury recommending this measure to government or government recommending Treasury to investigate this measure.

Mr Parker —A range of advice was provided by Treasury to government on this matter in the process of budget formulation.

Senator EGGLESTON —Did Treasury consult with rural or regional communities regarding the impact on those communities of this measure? Was that part of your process or did it not do that?

Mr Parker —There was not consultation specifically about the integrity measure in the budget, no. I am happy to talk about the overall framework for consultation for tax measures and budget measures in particular if you would like, but I think that is on public record.

Senator EGGLESTON —I presume that it involves stakeholders though, doesn’t it?

Mr Parker —Any consultation process involves stakeholders.

Senator EGGLESTON —In this case ‘stakeholders’ would mean people who held these hobby farms, I would have thought.

Mr Parker —I am using a slightly pejorative label there. The government has a broad commitment to consult over the design and implementation of tax measures. That has been lifted as a result of the government’s commissioning and acceptance of the recommendations of the tax design review panel. That is in the public arena. In the formulation of that policy it was noted that in the case of budget measures, particularly when it comes to issues of integrity measures, there is not a commitment to a prior consultation but there is a commitment to subsequent consultation. As has been mentioned in other cases that we have discussed tonight, that consultation process is to take place.

Senator EGGLESTON —Did Treasury give any consideration to the fact that this measure might cause a flood of rural and regional land sales, resulting in a drop of property prices in the affected areas? Was that a consideration you took into account in your thinking?

Mr Parker —Again, you are going to an issue of advice to the government on that matter.

Senator Conroy —If you were to rephrase your question you may be able to find a different way to try to draw some information.

Senator EGGLESTON —It is about consideration of local impact which I suppose is stakeholder consultation, the stakeholder consideration—

Senator Conroy —You have probably crossed the line there. But if you would like to rephrase your question, perhaps you might be able to try a different way.

Senator EGGLESTON —It is difficult to rephrase it beyond the concept of consideration of local impact. I have been told that consultation in this issue was post the event rather than prior. I think I will assume that there probably was not a great deal of thought given to this particular dimension of this decision and I will leave it at that.

Senator JOYCE —If I earn over $250,000 and own a house which I rent out, can I negatively gear that?

Mr D’Ascenzo —Is this—

Senator Conroy —It sounds like tax advice. I thought you were a tax accountant.

Mr D’Ascenzo —Basically you get a deduction for expenses incurred in deriving assessable income. In this case, in relation to a rental property, the general proposition is that that is deductible.

Senator JOYCE —If I can earn over $250,000 and negatively gear a house, why can’t I negatively gear a hobby farm?

Mr D’Ascenzo —Again, that is not a question for me.

Senator JOYCE —There is an anomaly there; isn’t there?

Mr D’Ascenzo —It is not a question for me.

Senator JOYCE —It is kind of peculiar really; isn’t it?

Senator CAMERON —A house is the same as a hobby farm?

Senator Conroy —Yes, they are.

Senator CAMERON —If you have a house like a mansion, what do you do with that—

CHAIR —There is a very long—

Senator CAMERON —and a hobby farm. It is the same thing.

CHAIR —Please continue, Senator Joyce. We have a long list of people who want to ask questions, so let us come to order.

Senator JOYCE —I want to refer to 5-37 on the revenue statement. How do we manage to keep on getting more personal income in a recession?

Mr Parker —I am sorry?

Senator JOYCE —How do we manage to keep budgeting for more personal income tax returns in a recession?

Mr Parker —Could you point us to specific numbers?

Senator JOYCE —Page 5-37 of the budget estimates of Budget Paper No. 1—

Mr Parker —I have that in front of me.

Senator JOYCE —If, as you point out, this is the worst global financial crisis of all time, how do you manage to keep getting more gross income taxes from personal income taxes? It presumes that if the tax rates are reducing, which they are, that you have more people employed earning more money?

Ms Mrakovcic —There are two factors operating here. The first one is to note that the estimates have been revised down relative to the last budget. The second is to point you in the direction of a table on page 5-18 about key revenue parameters. You will notice that there is an item there called ‘compensation of employees’ and you will see that—certainly in 2008-09—there has been some sort of continued increase in that compensation of employees, which includes both a wage effect and an employment effect—that category of compensation. In the out years there has been a revision downwards and that has been reflected in lower estimates of what we expect to receive.

Senator JOYCE —We have reduced tax rates, but we are still collecting more money?

Mr White —Wages growth in 2009-10 basically offsets a slight fall in employment and personal tax cuts.

Senator JOYCE —So fewer people are getting paid more?

Mr White —Yes, it is just general wages growth as happens in most years.

Ms Mrakovcic —It would not be fewer people. Essentially you have wage increase occurring and you have slower growth in employment.

Mr White —No, you have a contraction in employment.

Senator JOYCE —Which one is right?

Mr White —There is a small contraction in employment and there are personal tax cuts. Wages growth in that year more than offsets both of those impacts.

Senator JOYCE —You have fewer people being paid more?

Ms Mrakovcic —Yes.

Senator JOYCE —That is interesting. I noticed your interest costs at 9-4. You have $300.8 billion and about $11 billion in interest. That calculates at less than four per cent. How do you manage to get a cost of funds out of 2013-14 at less than four per cent if you are anticipating 4.5 per cent growth in GDP?

Ms Mrakovcic —Can you confirm that you are referring to page 9-4?

Senator JOYCE —Yes, page 9-4.

Ms Mrakovcic —Is this the Australian government general government sector balance sheet? What item are you referring to?

Senator JOYCE —I am referring to your total liabilities stated at $300.8 billion, and the total interest was $11.975 billion.

Mr Parker —Is this a question about the interest cost on the government liabilities?

Senator JOYCE —Yes. How did you calculate the cost of funds?

Mr Parker —That is an issue that you should direct to Fiscal Group rather than to Revenue Group.

Senator JOYCE —Back in 2006 you calculated the exemption for non-real property for foreign entities at $50 million, $65 million and $65 million. Do you still hold to that costing?

Mr Parker —Can you give us some specific information? Then we will take the question on notice.

Senator JOYCE —With the exemption for non-real property assets for foreign entities that was passed in 2006, the calculation by the Revenue Group in Treasury was a costing, if I remember rightly, of $50 million and then $65 million in the preceding three years. Do you still hold to that costing, which at the time seemed absolutely remarkably low? If you do, what do you intend to save from taxing individuals who are deemed to be working overseas?

Mr Parker —In respect of your specific question about the earlier measure, I will take that on notice and go and have a look at the numbers.

Senator JOYCE —As you know, you have changed your laws in regard to when a person is deemed to be working overseas and when they are deemed to be working in Australia. Is that correct?

Mr Parker —That is right.

Senator JOYCE —I remember flicking through the budget—I cannot find it here—and seeing savings in there of about $250 million.

Mr Parker —It is about $200 million a year, and over the forward estimates it is $675 million.

Senator JOYCE —Can you refer me to where that is in the budget papers?

Mr Parker —Yes. If you look at Budget Paper No. 2, this is the measures document. It is on page 19.

Senator JOYCE —I have it here. It is $215 million, $225 million and $235 million?

Mr Parker —That is right.

Senator JOYCE —That is an exceptional windfall. Do you find that disproportionate compared with what you expect to have conceded on capital gains tax exemption for foreign entities?

Mr Parker —You put me in a difficult position, because I have taken that former question on notice.

Senator JOYCE —You can take it from me that it is $50 million and then $65 million in the preceding years.

Mr Parker —You also asked me whether I stood by those numbers.

Senator JOYCE —Yes.

Senator Conroy —We have indicated that we would take it on notice.

Senator JOYCE —I can table it for you if you like.

Senator Conroy —The question is: do you stand by those? That is a question that would require some detailed response.

Senator JOYCE —Do you acknowledge that still remains a big loophole in the Taxation Act?

Senator Conroy —You are asking an opinion.

Senator JOYCE —I will change it around.

Senator Conroy —Rephrase your question.

Senator JOYCE —Do I have the capacity, if I am overseas, to not pay tax in Australia for a capital gain that I make on the purchase and sale of a non-real property asset?

Mr Daw —There is an issue about where the taxing rights lie in respect of the sale of Australian assets. In terms of real property, Australia—

Senator JOYCE —I am talking about non-real property.

Mr Daw —The taxing right in respect of the treaties that we strike with our parties would rest with the residence of the non-resident.

Senator JOYCE —If I set up a trust in New Zealand, where there is no capital gains tax, then am I tax free? They do not have capital gains tax.

Mr Daw —I am not sure that would be a permanent feature.

Senator JOYCE —Would that be in breach of section 4A?

Mr Daw —I do not know.

Senator JOYCE —I notice the borrowings in the revenue statement and how they keep going up. Can you refer me to anywhere where you actually pay me the money back?

Mr Parker —I am sorry. You would need to be more specific about the question.

Senator JOYCE —I notice in the revenue statement that you take the increase in external borrowings. Can you direct me to where we are paying the money back?

Mr Parker —Can you direct us to a specific page?

Senator JOYCE —We can look at the increase in liabilities, which go out to $111 million, $169 million, $222 million, $273 million—

Mr Parker —Which page are you referring to?

Senator JOYCE —I am referring to page 9-4. You also have another subtable that talks about the incremental increase in borrowings, which quite obviously is this differentiation between those numbers. I was poring through your budget papers and I was trying to find somewhere where we actually pay money back. I cannot find it.

Mr Parker —Again, in respect of issues that go to balance sheet and flows on that, the appropriate people, who will be better informed to answer your question, are Fiscal Group.

Senator JOYCE —To the best of your knowledge, you do not know anywhere—

Senator Conroy —No. I think he indicated that the best section and the relevant section to ask this question of is the Fiscal Group.

Senator JOYCE —Going back to book 2, page 19, which is overseas workers, the change in this now obviously reflects that for someone working overseas—say, on a drilling rig off the Congo or working in Russia, as they do—instead of bringing that money back now into Australia and investing it in a local town such as Roma the smart thing for them to do right now would be to stay in Phuket or somewhere rather than coming home, wouldn’t it? If they stay over they do not have to pay any tax and we do not get the advantage of the GST revenue?

Mr Parker —Under the present law, if people are working overseas in a tax-exempt jurisdiction they do not get the exemption under section 23AG. If you are working in a tax haven or arrange your affairs so that you are paid in a tax haven, the present law does not exempt that kind of income.

Senator JOYCE —What is the exemption that we are closing up?

Mr Parker —The exemption as it applies now—and Mr Daw can provide further details if necessary—is that people who are working overseas for a continuous period of 91 days in a non-tax-exempt area will be required to report that income for Australian tax purposes if they remain a resident, and then they will get a tax credit for any tax paid in the foreign jurisdiction.

Senator JOYCE —A resident for tax purposes?

Mr Parker —A resident for tax purposes.

Senator JOYCE —If I want to remain exempt, the best thing for me to do is to stay overseas?

Mr Parker —If you want to remain exempt, the best thing for you to do is to clarify your residency status, yes.

Senator JOYCE —So, instead of coming back to Australia, spending my money here and getting caught for tax, now I am just going to go and spend it in Thailand or somewhere else. What were the numbers that you utilised in determining the figures that you came up with on the $215 million, $225 million and $235 million savings that you made? How many people do you deem to be overseas for that?

Mr Robinson —We referred to Australian Taxation Office data, which provides information on the number of employees claiming income which is exempt under section 23AG. That allowed us to provide some estimates of the number of people who are currently claiming the exemption. We had to make an allowance for people who will continue to be exempt under the proposed budget measure, which include foreign aid workers, charitable workers and certain types of government employees.

Senator JOYCE —In your consideration of actions and your determination of 23AG, did you model it that their actions would be consistent—that is, that they have the nous to go overseas and work, for instance, on drilling rigs? If they have the capacity to get their mind around that problem, do you not think they will have the capacity not to come back? They will just stay away for tax purposes. If your modelling is consistent, would that not be implausible, as people would just determine to stay away?

Mr Robinson —As I mentioned, the—

Senator CAMERON —The end of that song I Still Call Australia Home!

Mr Robinson —The costing was done on the basis of past patterns of claiming of foreign income under the exemption. We used that to inform our assumptions.

Senator JOYCE —In your modelling, did you create any mechanism of adjustment to take into account the motivation of the individual in this instance to stay away, not go home? Therefore, we have a problem because the numbers lack veracity. What I believe you have done is consistently model out the actions on 23AG on exactly who is there now and made the assumption that all of these people will act exactly as they did before even though the tax regime has changed?

Mr Robinson —Yes, we modelled the costing on the basis of the historical information.

Senator JOYCE —So it was on a consistent parabola. Do you believe in light of what we are talking about now that that may be implausible?

Mr Robinson —I do not know that that is an implausible assumption to start with.

Senator JOYCE —Are you affected by costs? Do you believe that the market works on such a mechanism that people predominantly try to save or minimise tax as best they can?

Senator Conroy —I think you are moving into quite a theoretical—

Senator JOYCE —There is nothing theoretical about it at all.

Senator Conroy —It is somewhat hypothetical.

Senator JOYCE —I was an accountant for 18 years. Believe me, there is nothing theoretical about this at all. It is quite simple.

Senator Conroy —Perhaps you may want to rephrase your question a little bit.

Senator CAMERON —You never made it to Treasury, did you?

Senator JOYCE —I will go to the CPRS. I notice in the CPRS on page 537 that your allocated revenue streams in CPRS start to flow in. I cannot quite pick it now, but I think it was four and 12, to the best of my knowledge. Where have you noted where the money is going out, where we are actually paying for things?

Mr Parker —That would be an expense measure.

Senator JOYCE —Can you just direct me to it?

Ms Mrakovcic —In the budget measures Budget Paper No. 2 document there is a Carbon Pollution Reduction Scheme revised implementation.

Senator JOYCE —What page is that?

Ms Mrakovcic —That is page 7 of Budget Paper No. 2. In addition there is a range of other CPRS measures in Budget Paper No. 2. That is a key one.

Senator JOYCE —There seems to be quite a differential between what we are collecting and what we are paying out—in fact, a remarkable differential. I also want you to show me where these are shown in the holistic figures.

Mr Parker —In which one?

Senator JOYCE —This is becoming a major revenue item for government. They are collecting vastly more money than they are paying out.

Senator Conroy —Could you repeat the question?

Senator JOYCE —I am saying that what you are doing is collecting $4 billion and then you are collecting $12 billion. I cannot see where you are paying the money out, so it has become a revenue raising mechanism for the government. Even on cross-portfolio page 7, the differential between what the expenditure item is is heading towards $10 billion.

Mr Parker —I do not think that you have the full picture.

Senator JOYCE —Maybe you can direct me to the full picture.

Mr Parker —I would ask you to direct that to the Fiscal Group, who have overall responsibility in Treasury for the CPRS arrangements. I am sure that when you ask them they will be able to provide you with a full description of the inflows and outflows.

Senator JOYCE —We are collecting money at the moment, but we are not paying it out. I want to refer you to social security and welfare, 6-7. I note in social security welfare—once more heading to a recession—that in 2009-10, on the estimate, we are actually going down. I thought that with unemployment that would be going up.

Ms Mrakovcic —Page 6-7 is the expenses statement. That is a question more appropriately put to our colleagues in the finance department.

Senator JOYCE —Do you think it would be peculiar that in the middle of a recession we are actually paying out less social security rather than more?

Senator Conroy —That is a finance question.

Mr Parker —Our Fiscal Group colleagues may be able to assist. If you turn over to page 6-8—I am just trying to be of assistance here, although it is not directly within our responsibilities—one of the reasons that it is mentioned there is that a decrease of $13.9 billion in 2009-10 results effectively from the fact that there were:

… one-off lump sum payments to pensioners, families and other Australians in 2008-09 as part of the Economic Security Strategy and the Nation Building and Jobs plan stimulus packages.

There is a large amount paid out as lump sum arrangements as part of the macroeconomic response of the government and then they are not there in the numbers for 2009-10.

Senator JOYCE —How do we deem when it was reasonable to pay a deceased person or their estate $900 and when it is deemed to be unreasonable? What was the cut-off process—whether they lodged a tax return in the last 12 months or something? Is that it?

Mr Parker —That is right.

Senator JOYCE —Why was that deemed to be the reasonable process?

Mr Parker —We have already discussed that at some length. This was a macroeconomic policy response. Time was of the essence, as has been explained. Building a new system was a large and complicated exercise. Making the measure simple so that it could be implemented, insofar as possible, on the basis of information that the ATO already had was critical to its design.

Senator JOYCE —How much of the $900 payments as a percentage have not actually been collected at this point in time?

Mr Parker —Not been paid?

Senator JOYCE —Not been paid or not cleared?

Ms Granger —We have done modelling based on the year before filing of tax returns. We think there could be up to 500,000 more.

Senator JOYCE —About half a million?

Ms Granger —Five hundred thousand.

Senator JOYCE —Five hundred thousand people still have not cleared their cheque?

Ms Granger —No, that is dependent on them filing. All of the returns that have been filed to date with the tax office have been evaluated and eligible payments made. All that remains is any more tax returns that are filed between now and 30 June, unless people have an extension of time in place.

Senator JOYCE —So if they are still putting in an extended return they are still going to get their $900?

Ms Granger —Up to 30 June: the legislative requirement is that it must be filed by then.

Senator JOYCE —After that time, if they have a valid case—sick, incapacitated?

Ms Granger —The requirements were that they had to have an extension of time granted by the commissioner in place at the time this became law. There are a number of tax agents who would have that, but the commissioner also made a special general exemption for those who were affected by natural disasters that they could have until the end of the following year. For example, if you have been affected by the recent floods or bushfires you have beyond 30 June.

Senator JOYCE —I want to go back to division 7A. Has it not always been the case that there has to be an arms-length transaction between a corporate entity and an entity; otherwise it was deemed to be an imputed dividend? It is deemed to be dividend and you have to pay the imputation credit?

Mr Konza —Technically it has to be a market rate of consideration. The transactions themselves cannot be arm’s length at all times, but as long as the rate is market, yes.

Senator JOYCE —Is there any capacity in the tax act to roll people from a corporate entity into, for instance, a trust such that it would not strike a capital gains tax event? For example, for people with family farms, could this be rolled out of a corporate entity into a trust entity in such a manner that it did not strike a capital gains tax event yet basically gave the capacity for the same protections that they would be looking for, that is, against divorce and disassociation of the asset by entry of new parties?

Mr Konza —A trust does not give all the same legal protections as a company. In answer to your question, I would need to take that on notice because there are rollover provisions that apply to the rollover of assets between different entities where exactly the same people are in control. These are very technical areas and it would be dangerous for me to give you an assurance without getting that checked.

Senator CORMANN —I have a series of questions in relation to the Treasury analysis of the coalition savings alternative to the means testing of the private health insurance rebate. I am advised that this is the right area to ask questions about that.

Mr Parker —Yes.

Senator CORMANN —Are we able to get a copy of the Treasury analysis that was released to the media on 17 May?

Mr Parker —The numbers were released by government. Mr Brown, are you aware of what form that was released in?

Mr Brown —No.

Mr Parker —In that case we will take the question on notice.

Senator CORMANN —Sorry, you will take on notice whether what has been provided to the media can be provided to a Senate committee that is assessing this?

Mr Parker —As I understood it, you asked whether we could get a copy of it. I will take on notice the provision of a copy of—

Senator CORMANN —Can you then also take on notice that, should you refuse to provide the information, we will require a proper statement of the public interest ground and the reasons as to why it is not in the public interest to provide that information, given it has been released to the media.

Senator Conroy —We have taken it on notice and the Treasurer will provide you with an answer.

Senator CORMANN —Who requested you to do the exercise of assessing the coalition’s alternative savings measure? Was that request from the Treasurer’s office?

Mr Parker —I am not personally aware. It was requested by the government in accordance with longstanding practice of—

Senator CORMANN —Can you also take that on notice?

Mr Parker —Successive governments are able and have asked the Treasury to cost a range of policy.

Senator CORMANN —This is a question that goes to process.

Senator Conroy —He is answering your question, if you would listen.

Senator ABETZ —No, he is not.

Senator CORMANN —He was not, actually.

CHAIR —Mr Parker, would you like to continue.

Senator CORMANN —It is a very simple question. Who submitted the request to Treasury to do the analysis? Can you give us a name or a position?

Senator Conroy —You are getting an answer, if you would let the officer finish.

Senator ABETZ —No. We were told what the general position was, which is all very interesting. We want the specific in this case.

Senator Conroy —If you will stop being rude and interrupting the official, he will give you an answer. He has indicated that we will take some parts of it on notice.

Mr Parker —And no doubt whichever individual it was was doing so effectively in the role of the government. Put it this way, if a person in the Treasurer’s office asked us to do that, then that would be in place of the Treasurer.

Senator CORMANN —Can you just talk us through the modelling you did to come to your conclusion that the alternative savings measure would mean that we would fall short by $3.2 billion over a decade?

Mr Parker —We can discuss that.

Mr Brown —The analysis basically projected out the tobacco revenues using the medium-term growth assumptions that apply to tobacco in the broader medium-term projections that were included in the budget. The growth rate that applies to tobacco is essentially zero over that period, which reflects the trend growth rate that we have seen in tobacco revenue over recent years. The growth rate in the other elements of the costing that was released were reflecting the growth rates that were applicable to the private health insurance measure, which is somewhat higher. The gap between the two measures reflects the different growth rates.

Senator CORMANN —Can you confirm the information that was reported in four major newspapers, which is that the measure would raise between $550 million and $570 million per year? Is that what you assessed?

Mr Brown —That is correct.

Senator CORMANN —These estimates are not a simple 12.5 per cent gain in revenue. There must be an assumption included somewhere along the way that there is a reduction in consumption moving forward?

Mr Brown —Going forward, the numbers take account of the growth in tobacco excise revenue. Tobacco excise revenue is essentially flat over that period. That reflects a decline in consumption as well as CPI indexation of excise going forward, and those two roughly cancel out.

Senator CORMANN —Is that a decline in consumption as a result of the increased excise?

Mr Brown —No. That is the trend decline in consumption overall. The costing itself includes a decline in consumption, which is related to the one-off price increase.

Senator CORMANN —There is an assumption of a decline in consumption as a result of the 12.5 per cent increase in tobacco excise under our measure; is that what you assess?

Mr Brown —There is a decline in consumption included for that, yes.

Senator CORMANN —Essentially, our proposal would reduce the number of people smoking or the amount of tobacco smoked or a combination of the two?

Mr Brown —A combination of the two. The elasticity used does have two components in the academic studies that we were using.

Senator CORMANN —Essentially, there would be a net health benefit to the nation?

Mr Brown —There would be a decline in tobacco consumption, yes.

Senator Conroy —That will be when you vote for the alcopops tax. When you vote for the alcopops tax you will be achieving a good health outcome.

Senator CORMANN —By applying a tax on one product? We are not going to go down that path. Is there any empirical evidence that you relied on to make the assessment?

Senator Conroy —Voting with us on our side of the chamber; we know which path you will be on.

Senator CORMANN —I am asking some questions here, Minister. Have you relied on any empirical evidence that higher tobacco taxes lead to less smoking and therefore make a positive contribution to public health?

Mr Brown —We were relying on academic studies that show there is a price elasticity associated with tobacco prices and that an increase in tobacco price leads to a reduction in consumption.

Senator CORMANN —How do our tobacco taxes compare with those in other OECD countries?

Mr Brown —I would have to take the specifics of that on notice. Most countries have relatively high levels of excise on tobacco, as we do in Australia.

Senator CORMANN —Has your department recently proposed an increase in the tobacco excise?

Senator Conroy —That goes to advice to government.

Senator CORMANN —Are you claiming public interest immunity?

Senator Conroy —No, I am just saying that it goes to advice to government.

Senator CORMANN —Why is it not in the public interest for you to answer that question?

Senator Conroy —As I said, that goes to advice to government.

Senator CORMANN —That is not a sufficient answer.

Senator Conroy —I have answered the question.

Senator CORMANN —I will just place on record that you have not answered the question. You have refused to answer the question. Madam Chair, I ask you to make a ruling as to whether I can insist, on specific reference to a public interest ground, on a statement of reasons as to why the minister does not think it is in the public interest to answer that very important question.

Senator Conroy —I will take that on notice.

Senator CORMANN —On a point of order—I have asked the chair to make a ruling.

CHAIR —The minister has just indicated that he was taking that on notice for referral to the minister. We will await the outcome of that before we go to that next step.

Senator CORMANN —If we accept the Treasury modelling of the tax take from the coalition’s proposed increase in the tobacco excise over the period of the forward estimates and we assume a 1 July 2008 start date, how much would be raised over the forward estimates? Presumably that would be four times $550 million, which equals $2.2 billion. Is that right? I can assist you. At present, the annual tobacco excise collections are $5.5 billion.

Mr Brown —It would be in the order of $2.2 billion, yes.

Senator CORMANN —It would be in the order of $2.2 billion. Over the period of the budget forward estimates, how much would be saved by the government’s proposed changes to the private health insurance rebate?

Ms Mrakovcic —$1.9 billion.

Senator CORMANN —Is it fair to say that according to the Treasury’s own reckoning the coalition’s proposed tobacco excise increase would more than offset the cost of retaining the current private health insurance arrangements over the period of the forward estimates?

Mr Brown —Over the forward estimates, that is right, yes.

Senator Conroy —Over a 10-year period that is not correct.

Senator CORMANN —Just going back to the 10-year period, and bearing in mind the significant public health benefits from fewer people smoking and the significant—

Senator CORMANN —I assume that the department has costed the savings to the public health system as a result of the reduced tobacco consumption over the 10-year period?

Mr Parker —No, we have not. Nor have we costed any of the second round effects.

Senator CORMANN —You call benefits to the public health system from fewer people smoking a second round effect, but you will put your name and the Treasury’s name to a 10-year forecast essentially as part of a political exercise of the government, will you?

Senator Conroy —I refute utterly suggestions that Treasury has been involved in a political activity, but you are welcome to the rest of your question.

Senator CORMANN —Why was the modelling done in such a hurry?

Senator Conroy —I just need to clarify your question: ‘Why was it done in such a hurry?’ It was provided when asked for. You might need to expand your question.

Senator CORMANN —On the spot. You do modelling, including assessing the impacts of—

Senator Conroy —You know the difference between first round effects and second round effects?

Senator CORMANN —I know the difference very well.

Senator Conroy —I just wanted to make sure I understood, because the implication from your question—

Senator CORMANN —Minister, do you think over a 10-year period there will be second, third, fourth and fifth round effects of a measure like this? Do you think there are going to be some benefits to the public health system of fewer people smoking?

Senator Conroy —The implication of your question was that there was a deliberate attempt not to include what you are now demanding be included.

Senator CORMANN —How meaningful is it to estimate over a 10-year period the first round of—

Senator Conroy —Normal modelling routines were followed.

Senator CORMANN —Normal modelling goes over a four-year period of budget forward estimates. Normal modelling does not go over a 10-year period. We have just found out that over the forward estimates we will actually be in front as a result of the coalition measure of an increased tobacco excise.

Senator Conroy —I see you are trying to hide your embarrassment at your inability to count.

Senator CORMANN —$2.2 billion revenue versus $1.9 billion savings. That is $300 million ahead.

Senator Conroy —It is quite clear that you are trying to perpetrate, firstly, a serious allegation against Treasury, which is refuted utterly. Secondly, and more importantly, you are trying to hide the embarrassment over the debacle that was your policy.

Senator CORMANN —We have just established—

Senator Conroy —A complete embarrassment.

CHAIR —Order! As it is now 7 o’clock we will continue this discussion after the dinner break.

Proceedings suspended from 7.00 pm to 8.03 pm

Senator CORMANN —I would like to go back to the Treasury analysis of the coalition proposal to increase the excise on tobacco by 12.5 per cent. The Treasurer’s office or somebody unnamed within the government asked you to provide the advice. That is what you indicated before.

Mr Parker —I said we would take that on notice.

Senator CORMANN —How was the request for advice made? Was it made by email, phone or in person?

Mr Parker —It is not in my personal knowledge.

Senator CORMANN —Is there somebody here who can assist me?

Senator Conroy —I said we would take it on notice for you.

Senator CORMANN —Is there anybody here who knows the answer to the question?

Senator Conroy —I said we would take that on notice for you.

Senator CORMANN —You are not prepared to provide the answer?

Senator Conroy —The officer has said he does not know. We will take it on notice and get you the information.

Senator CORMANN —There is more than one officer here who might be able to assist the committee.

Senator Conroy —As I said, we will take it on notice.

Senator CORMANN —When were you asked to provide the advice? Can you give me the date on which the request for advice was made?

Mr Brown —The request was received the morning after the policy announcement.

Senator CORMANN —That would have been Friday, 15 May. Do you know when you provided the advice? Were you given a deadline?

Senator Conroy —You are straying beyond the purposes of Senate estimates.

Senator CORMANN —I am asking about the process, the time.

Senator Conroy —No, you are straying beyond.

Senator CORMANN —It is a question that goes to process.

Senator Conroy —I will take that on notice and we will get back to you.

Senator CORMANN —I have a question directly to Treasury. When did you provide the advice to the government about the particular measure that we are discussing?

Senator Conroy —We will happily take that on notice and see if the Treasurer—

Senator CORMANN —Minister, you are not prepared to answer these questions? These are pretty straightforward questions.

Senator Conroy —Perhaps you have misunderstood the purpose and processes of Senate estimates. Taking a question on notice is not refusing to answer the question.

Senator CORMANN —I relate you back to answers that you have provided to questions on notice in the past, but anyway. If you are taking all of these things on notice, can we have a copy of the request or can you read it into the record so we know exactly what you were asked to provide advice on?

Senator Conroy —I will take that on notice and see what information the Treasurer’s office has to provide to you.

Senator CORMANN —You might be able to answer this, because it is either a yes or no. Was there one simple request or were there a number of successive requests?

Senator Conroy —I am happy also to take that on notice.

Senator CORMANN —You are not prepared to provide any answers?

Senator Conroy —No, we said we will take it on notice. You continue to labour under a misapprehension that taking it on notice is refusing to give you an answer.

Senator CORMANN —We know exactly what it means. It is a stalling tactic. It is an absolute refusal to provide the answer now. Were any phone calls or emails—

Senator Conroy —I am going to be sitting next to you when you vote for alcopops.

Senator CORMANN —Were any phone calls or emails exchanged between the department and either the Treasurer’s office or any other minister’s office while the modelling or calculations were being done?

Senator Conroy —I am happy to take that on notice for you also.

Senator CORMANN —As you are taking it on notice you might be able to tell us what the nature of the exchanges was?

Senator Conroy —Thank you.

Senator CORMANN —Who suggested that the figures be extrapolated out over 10 years rather than over the forward estimates? Was that the decision of Treasury or was that part of the request?

Senator Conroy —That will be revealed in the answer to the previous question most likely, but if there is any further information that we can provide for you we will take it on notice.

Senator CORMANN —You are not prepared to answer here and now who made the decision to extrapolate the costings over a 10-year period instead of over a four-year period? I suggest to you that you used Treasury for political purposes as part of your propaganda exercise on a particular measure.

Senator CAMERON —You asked—

Senator CORMANN —He is refusing to answer questions.

Senator Conroy —Thank you for your opinion. I will treat it with all the diligence you would anticipate.

Senator CORMANN —Perhaps the officer could answer the question whether the original calculation looked at a period over four years or whether the original calculation looked at a period over 10 years?

Senator Conroy —As I said, I am sure that information will be forthcoming in the questions that we have already taken on notice. If there is any further information on this, we will get back to you.

Senator CORMANN —You are being extremely helpful and extremely accountable at this Senate estimates committee tonight. This is a question to Treasury officials. Were you asked to assess the health effects of the increased excise on tobacco?

Mr Brown —No.

Senator CORMANN —The answer that I have just received was no. Thank you very much for that, Mr Brown. Did you consult the health department on your modelling?

Mr Brown —No.

Senator CORMANN —Just confirming my understanding—and correct me if I am wrong—over four years your assessment is that the increase in the excise on tobacco would raise about $2.2 billion over the forward estimates? That is what you said before.

Mr Brown —I have previously answered that question—yes.

Senator Conroy —Is it true that the PHI measure in the budget was costed over 10 years?

Senator CORMANN —The PHI measure was over the forward estimates. It was costed as saving $1.9 billion. I refer you to your budget papers where you will be able to assess that for yourself. The person who is writing your emails is obviously trying to get you out of a sticky corner, because your stalling is obviously—

Senator Conroy —Oh, yes, it’s really sticky!

Senator CAMERON —You must be under pressure!

Senator Conroy —I am under pressure here.

Senator CORMANN —I think we have the answers we need. We know that this would more than offset not proceeding with the means testing of the private health insurance rebate.

Senator ABETZ —Mr Brown, was population growth taken into account in your assessments over the 10-year period?

Mr Brown —It was based on the long-term or the trend growth rate in tobacco, which would implicitly take that into account but not explicitly.

Senator ABETZ —Was it taken into account or not?

Mr Brown —As I said, what was taken into account was the trend growth in tobacco excise revenue, which includes a number of factors, including changes in the volume of demand. That is partly determined by population.

Senator ABETZ —What population growth was factored into your assessment? You can take that on notice.

Mr Brown —It was not an explicit factor.

Senator ABETZ —That was not an explicit factor.

Mr Brown —But it is implicit in the growth rates that we used.

Senator ABETZ —Tell us, on notice, what the explicit growth rate is or the implicit growth rate in the population because that may tell us something as well. I turn to the luxury car tax. How are we going with those regulations for four-wheel drives and the tourism sector?

Ms Barron —Those regulations have been made.

Senator ABETZ —They have been made?

Ms Barron —Yes.

Senator ABETZ —When were they promulgated?

Ms Barron —I would have to take that on notice.

Senator ABETZ —All right.

Ms Barron —My understanding is that it was sometime last year, but I will check on that.

Senator ABETZ —How many claims have been made against them as yet? Do we know? Has that come out in any material as yet?

Ms Barron —I am not aware of any. I am not sure whether the tax office has any data on that that they have collected yet.

Senator ABETZ —Does it work when they put in their tax returns or do they get the benefit immediately upon purchase?

Ms Barron —Immediately upon purchase. That is when the luxury car tax becomes payable.

Senator ABETZ —That is right. That is what I thought. Given it is three, four or five months now I was wondering whether you might have some figures on that?

Ms Barron —I am not aware of any, but I can look it up to see if anybody does.

Senator ABETZ —So, could you take on notice how many have accessed it via the definition of being a tourism operator and also, I think, farmers’ four-wheel drives?

Ms Barron —That is correct.

Senator ABETZ —Our forecasts in relation to the luxury car tax have taken a fair pummelling. I must say that I was shown not to be a doubting Thomas in relation to your estimates; the predicted revenue was way off the mark. Can you tell us, over the forward estimates, how much less is now being anticipated to be brought in from the luxury car tax than when this measure was before the parliament and we were told we were being economic vandals by seeking to oppose it? I suppose I will be told now that it is just a forecast. It is in the hundreds of millions of dollars, is it not?

Ms Mrakovcic —The only information that we have, which is available in statement 5, on pages 41 and 42, basically related back to the change on UEFO. That is the only information that we have with us at this point in time.

Senator ABETZ —The budget papers tell us that, for the 2008-09 budget figures, increasing the luxury car tax would provide additional revenue of $555 million over the forward estimates. That is no longer right, is it? It is badly wrong and badly miscalculated, undoubtedly for a whole host of reasons. That was the best estimate at the time, but experience has shown that estimate to be out; is that right?

Mr White —Luxury car tax has been revised down.

Senator ABETZ —Yes. By how much?

Mr White —As we said, we have only got since UEFO in this document. As we have said in the document, it is basically because of the deterioration in economic circumstances. That is the main factor behind it.

Senator ABETZ —Can you tell us what the estimates are now for the luxury car tax revenues?

Mr White —We can tell you what they are now.

Senator ABETZ —How do they vary to previous years estimates?

Mr White —As we said, we have estimates here comparing to UEFO but we do not have estimates comparing back to previous estimates updates. We can take that on notice.

Senator ABETZ —That would be a very interesting exercise for us. If an explanation can be provided as to why those revenue forecasts, even as late as the last budget, then the mid-year economic financial outlook forecasts—

Senator CAMERON —Haven’t you heard of the global economic crisis? He is an absolute disbeliever.

CHAIR —Thank you, Senator Cameron. Have you finished your questions, Senator Abetz?

Senator ABETZ —No, I have not.

CHAIR —Please go ahead. Ignore—

Senator ABETZ —I would have thought, Chair, you might have asked whether Senator Cameron had finished his interjections; that would have allowed me to proceed. Can you provide us with the basis of the continual changes and downward changes in your forecasts? I must say that if we cannot get the luxury car tax forecasts right from six months to six months then it does raise some—

Senator Conroy —Please, Senator Abetz! The largest economic recession in 70 years. You guys are still waiting to see what happens. You guys are still saying, ‘Let’s wait and see what happens.’

Senator ABETZ —I turn to the CPRS. Who can tell me whether the CPRS is a tax or not a tax?

Ms Mrakovcic —For the purposes of preparing the budget statements it was treated as a tax. However, I would note that the precise classification arrangements around the CPRS are still under discussion in international forums. There has been a preliminary view reached that it is likely to be a tax revenue, but as I understand it that matter is still being actively discussed internationally.

Senator ABETZ —As I understand it, the international discussion on this is quite settled, under the 2008 SNA, the UN’s system of national accounts, the international statistical standard on which the Australian Bureau of Statistics GFS framework is based. ‘Under the 2008 SNA, payments for permits under cap-and-trade schemes are recorded as taxes and permits constitute assets that are valued at their market price.’ So that is settled, isn’t it, in the international fora?

Mr Parker —That is settled in the national accounts, the UN SNA.

Senator ABETZ —But I heard Ms Mrakovcic say that in the international forums there was still discussion. I thought internationally, courtesy of the UN system of national accounts, that had in fact been settled.

Ms Mrakovcic —The best thing for me to do is to take that on notice. I certainly know there was advice under the 2008 SNA. I am not certain of the status of that advice, whether it is in fact a final determination.

Senator ABETZ —In your very own budget document, paper No. 1, on page 534, at the very bottom of the page we are told ‘under the 2008 SNA payments for permits’—exactly what I read out is a direct lift out of the budget document. Now I am being told that that is not settled. When are we going to settle this within Australia for domestic purposes?

Ms Mrakovcic —I will take the question on notice. I do not mean in any way to mislead you. I simply note that the wording is:

However, some guidance has been issued under the UN System of National Accounts ...

The best thing that I can do is actually clarify the nature of that guidance and then follow through in terms of the best advice we can give you in relation to the Australian treatment.

Senator ABETZ —Thank you for that. You do not dispute that under the 2008 SNA, payments for permits under cap-and-trade schemes are recorded as taxes?

Ms Mrakovcic —No. I think that is what I tried to indicate at the beginning by saying that we in fact treated them as taxes in this budget, consistent with the 2008 SNA guidance.

Senator ABETZ —I go to the Department of Climate Change, discussing CPRS with them, and I ask in relation to the statement on page 12 of the Carbon Pollution Reduction Scheme Bill 2009: in case the charge for Australian emissions units issued as a result of an auction or for a fixed charge is at some time in the future considered to be taxation, how does the department envisage this potential change in definition taking place? I am told in a written answer:

The Commonwealth does not consider that the charges for the auction of Australian emission units or for the issue of units at a fixed charge under the price cap are taxes for constitutional purposes.

It seems as though, in the rush to get in the CPRS, one department does not seem to know what the other is doing. I welcome the acknowledgement in the Treasury portfolio that this is in fact a tax. It now, I think, has exploded that issue. It would be interesting to know whether Treasury has had discussions with the Department of Climate Change as to how they should answer questions of this nature.

Mr White —It is not unusual for classifications of transactions to be different under the GFS framework and for legislative or constitutional purposes. The CPRS would not be unique in that instance.

Senator ABETZ —If it is not unique, why are we then saying in the document the chances are that is what is going to happen?

Mr White —The document is saying this is how it is treated under GFS and for budget accounting purposes. It is not saying how it is treated by the constitution or necessarily in legislation.

Senator ABETZ —In other words, we still cannot be told whether it is a tax?

Mr White —For the purposes of the budget we are saying that we have put it in as a tax because that is what the budget accounting framework looks like.

Senator ABETZ —We are going to put it in as a tax, but we do not know whether it is a tax. That seems very clear to me. I am sure that will be of great assistance to businesses as they try to adjust to this scheme.

Mr White —There are different rules for classifying things under the constitution and in GFS.

Senator ABETZ —Thank you.

CHAIR —Senator Birmingham is not here. Senator Pratt.

Senator ABETZ —Senator Coonan, did you have questions?

Senator COONAN —Yes.

CHAIR —All right. Senator Coonan.

Senator COONAN —Thank you. I want to ask a couple of questions about the changes to youth allowance, the changes to the workforce participation criterion. As far as I can understand from the website, about 30,700 prospective claimants would not qualify in 2010, and 3,600 existing recipients would not qualify for a higher payment as independent recipients. Do you know how those figures were arrived at?

Mr Parker —It is not in our bailiwick.

Senator COONAN —Is that DEWHA?

Mr Parker —Yes, and Fiscal Group may be able to assist you in that as well.

Senator COONAN —I think this is probably in your bailiwick. Many potential students have delayed study and are currently undertaking a gap year based on the old rules. Can Treasury tell me how many young Australians currently in their gap year will be disqualified by the changes to the eligibility criterion for the allowance?

Mr Parker —It is the same response.

Senator COONAN —Thank you. That is all I needed to ask.

CHAIR —Senator Eggleston.

Senator EGGLESTON —I just have one question. As part of the 2009-10 federal budget the government has proposed a 50 per cent investment allowance for small business. I understand this allowance is an extension of the 30 per cent allowance proposed in the second stimulus package. The question is: has the Taxation Office monitored any level of interest in terms of inquiries on the investment allowance? Are people ringing up or writing in about it?

Ms Granger —Yes. There has been some level of interest, obviously, since there has now been royal assent on the act. It is particularly from large and medium businesses.

Senator EGGLESTON —Large business?

Ms Granger —Yes. We are doing a range of things to bring it to people’s attention, including through our normal tax agent mail-outs and activity statement mail-outs to alert business to the measure.

Senator EGGLESTON —What funding has the Taxation Office allocated to advertising this allowance?

Ms Granger —We received $14.8 million in funding to do marketing and education. As it has only recently received royal assent we are putting together the marketing and education campaign now. We expect to have that go to the IDCC in the middle of June, because obviously this will go into next year. We have permission to roll that funding over into next year.

Senator EGGLESTON —$14.8 million seems to be quite a lot of money for an advertising campaign. That may be what is required. Thank you.

Senator CORMANN —I have some quick questions in relation to the implementation and administration of the proposal to means test the private health insurance rebate. Will this be managed by the ATO?

Mr D’Ascenzo —I have not seen the legislation yet, so I do not know what the processes are.

Senator CORMANN —You do not know yet who has—

Mr D’Ascenzo —It is likely to be administered by us. What I am saying is that I do not know what the details are, but we did have some funding for implementation once that becomes law.

Senator CORMANN —Can you talk us through how this will work in practice? How will you know or how will people with private health insurance know whether they are in one of the income brackets where they are eligible for a reduced private health insurance rebate?

Mr D’Ascenzo —We are working with Treasury and others. At the moment, until the law is a bit clearer I have no precise details about how that is going to occur.

Senator CORMANN —It has not been finalised whether people have to self-assess, whether health funds have to provide you with the information or whether you are going to administer it? You do not have any information?

Mr D’Ascenzo —I think our people have certain proposals based on the current state, but that state is still moveable at the moment. Therefore, I might be misleading you.

CHAIR —Pass the bill and they will be able to tell you.

Senator CORMANN —In passing the bill we would want to know how it would be administered. The administration in itself can have an impact on the cost of premiums.

Mr D’Ascenzo —Yes. I agree that administration is quite relevant to the overall costing. All I am saying is that it is at a preliminary stage in terms of our design.

Senator CORMANN —We are asked to endorse a piece of legislation where you are not able to tell us how it will be administered in practice. Who is going to be responsible to make the assessment of which income bracket somebody is going to be in so that they can make a judgement as to which rebate they are going to be eligible for? How will that work?

Mr D’Ascenzo —Treasury might be able to provide more details about how the law is going to—

Senator Conroy —Mr D’Ascenzo has made the point a couple of times. It has not been finalised.

Senator CORMANN —You have to be able to tell us how—

Senator Conroy —I am sure there will be a Senate inquiry into this—as sure as night follows day.

CHAIR —We are doing it, I think.

Senator Conroy —I am sure that, if you wish, you will have the opportunity, when the legislation is presented to the parliament, to call Mr D’Ascenzo to answer these questions.

Senator CORMANN —There is a very simple question.

Senator Conroy —It is not finalised.

Senator CORMANN —How can we deal with a Senate inquiry into this over the next week? By 16 June we are asked to do that. Will you finalise by 16 June 2009?

Mr D’Ascenzo —Basically, I have to apply whatever the law says is the procedure to be followed.

Senator CORMANN —Let us just assume that the law says that, if you earn more than $75,000 per annum, you will no longer be eligible for the 30 per cent rebate but you will be eligible for the 20 per cent rebate. That is the legislation that is in front of us. That is in the budget and we are asked to assess the budget and whether what is in it will work. How will you know whether somebody will be eligible for the 20 per cent rebate, the 10 per cent rebate or no rebate at all?

Mr D’Ascenzo —Again, I could take that on notice and come back and provide you with what we have available at this point in time.

Senator CORMANN —That would be very much appreciated. In your information on notice could you also tell me how you will be dealing with one-off income events, such as capital gains, eligible termination payments on loss of jobs, and final entitlements on retirements? These are all things that could take you over and above a particular income bracket.

Mr D’Ascenzo —I understand.

Senator CORMANN —Do you understand the problem?

Mr D’Ascenzo —I understand the issues.

Senator CORMANN —How is that going to be assessed?

Mr D’Ascenzo —These are the sorts of issues that we have to work out ultimately to make the legislation work.

Senator CORMANN —At this point in time these are not things that you have sorted out yet?

Mr D’Ascenzo —We have preliminary designs. This is why I am saying that perhaps there is some material that I can provide you of what we have in mind. But that is going to be based, at the end of the day, on what the legislation says.

Senator CORMANN —Thank you very much.

Senator Conroy —I would like to correct the record on something that Senator Cormann said a little earlier. I am looking at the budget overview, which quite clearly has a chart, which I have in front of me, that shows the PHI calculated out to 2019-20 in the budget papers. I am sure that you were just not aware—

Senator CORMANN —What does it say over the forward estimates?

Senator Conroy —I asked specifically in the budget if it was costed over the 10-year period and you specifically said no. I just wanted to correct the record for the committee, because it is quite clear in the budget overview that it is costed out over 10 years.

Senator CORMANN —We could get into a whole debate now about how credible those costings are.

Senator PRATT —I would like to take our discussion back some hours and return to the question of the employee share schemes. We did have some evidence outlined in relation to the sorts of compliance problems that the ATO has been experiencing. I wanted a proper outline of those issues, because we only touched on them earlier.

Mr Konza —We have been saying publicly for some time that we commenced a project to check the taxation compliance of high-income individuals. In doing that, we examined the affairs of 1,300 high-income individuals. They are people who have earned more than $1 million per annum. In doing that, we found approximately eight per cent of them had substantial compliance issues. The majority of those compliance issues related to employee share schemes. Other compliance issues that we identified were not systemic in the way that the employee share schemes issues were. We went back to those eight per cent and we had voluntary disclosures in 48 per cent of those cases. When we went back to them on review, the high-income individuals and their advisers realised that clearly a breach of the taxation laws had occurred.

In examining those eight per cent, $27 million in liabilities were established. As my Treasury colleague said earlier tonight, I have said that it is a minority of taxpayers involved. I said that deliberately to recognise that. Having raised $27 million in liabilities on those eight per cent, that raised grave concerns in our mind. We have been raising this as a compliance issue, to my knowledge, for the last 18 months publicly and before parliamentary committees. I might just add that we estimate that we have only examined between five and 10 per cent of the high-income individual market. If you look at that $27 million there is still a considerable amount of income potentially at risk.

Senator PRATT —I am interested in exactly what people are doing. What sort of tax minimisation activities are we concerned about?

Mr Konza —As I outlined before, the main issue has been either the non-return of income that has been received under an employee share scheme; that is perhaps either a matter of deliberate evasion or due to the fact that these employee share schemes do go over a very long period of time.

Senator PRATT —Can you give me an example of a couple of case studies?

Mr Konza —Yes, if you can bear with me for a moment.

Ms Granger —While Mr Konza is finding those, in the most straightforward of cases it has simply been not including at all in returns. You have an option to include in the year in which they are granted or when it is crystallised. In some cases when the options are exercised it has been incorrectly calculated as a capital gain. That gives you an advantage because you can claim the 50 per cent discount. Those are straightforward cases.

Senator PRATT —Are these high-wealth individuals avoiding paying their tax?

Ms Granger —We think there are a number of different scenarios. We think part of the problem is exactly what Mr Konza said, that these happen over a long time and people may have misconstrued it, but we also think there were some deliberate cases. We have certainly found that since we have focused on it, once we prompt people, they very quickly agree that that is incorrect and adjust. There have been a number of voluntary disclosures. We have also noticed some pattern of improvement in the second year of this project in relation to the group that we first looked at, which was senior executives and directors of public companies. But we have now extended that project to include a broader range, private companies as well as—

Senator PRATT —So a director of a public company does not know their own personal tax rules and is not playing by the rules; is that what you are telling me?

Mr Konza —That could be the case. I think in other cases I regret to advise that the employee share schemes give quite comprehensive advice to their participants on what it means to be involved in their employee share scheme and that advice appears to have been ignored. The type of cases that we are looking at are where people have participated in a scheme over a number of years and have purported to exercise discretion to elections to defer the taxation on the value of the discount. As I alluded to before, in one particular case the taxpayer ceased employment and exercised all their remaining options—essentially retired—but then failed to include any of the discounted amount. I am not quite sure what the person’s motivation was but the additional tax in that case was $439,000, so over a four-year period they had received a great deal of their income in the form of employee shares and had not dealt properly with them.

In other cases we have seen where we had the CEO of a publicly listed company who acquired options in the 2004 year. They did not elect to pay tax immediately, instead deferring to a future time. When they exercised their options and sold their shares they then decided to apply the capital gains tax discount to the profits that they had made, and they were not entitled to do so having not paid the tax up front on the discount that they had received in 2004. As a result of that, additional tax of $580,000 was payable. Those couple of case studies underline the fact that, while we are talking about a minority of the total population, the tax value is very high.

Senator PRATT —I can understand people making simple mistakes if they are on a low to medium income but I find it pretty incredible that you have people with those kinds of assets mismanaging their tax affairs so blatantly. Can you take me through the compliance measures that the ATO has been going through again?

Mr Konza —Under the high income individuals project we have been identifying those whom we believe are earning more than $1 million in salaries or other professional earnings and then examining those taxpayers individually. But we have also been examining the annual reports of public companies. Public companies are required to make some statements about the share schemes that they operate for executives, so we have been able to use that to identify cases where we want to make sure that the income has been returned. But I might just add that part of the problem is of course that we are operating off the tax returns and so we have found that you do not always identify the total population off the tax returns because they have engaged in some form of income minimisation with the result that the income in their return is less than $1 million.

Ms Granger —As Mr Konza mentioned, this project started with publicly listed companies simply because we had more information on them. We have now extended it to private corporations and also to executives and directors who work for foreign multinationals as well. There are more challenges in terms of compiling the information but the other opportunity we have these days with improved data matching is that we can of course match back from share sales as well on that particular issue. But there is a broader range of issues we are looking at around the compliance of highly paid individuals as well.

Senator PRATT —I think you said there was $27 million in liabilities identified in that eight per cent. I am not sure if it was you, Mr Konza, who said that. Is that an illustration of the kind of revenue that is at risk here, or how do you assess what kind of revenue the government is forgoing?

Ms Granger —That was the 2008 audit results. We have also got figures to date for this year, 2008-09, and the adjustments there on the liability level. That is $34 million. However, as I indicated, we are broadening the range of issues we are looking at, including offshore transactions as another part of that.

Senator PRATT —Are you just uncovering more issues as you go along?

Ms Granger —We do expect that there will be some issues around offshore transactions, yes.

Mr Konza —There is also some temptation amongst some high-income individuals to divert their income to trust structures if they can—for example, to enable them to divert their income to lower taxed people associated with them. We believe that those arrangements are largely ineffective and we have been communicating to taxpayers and professional groups to make sure they understand that that is our view.

Senator PRATT —I do not think it is normal to undertake consultation before the release of a budget measure. I know it was widely criticised that there were no announcements made before the budget in relation to restricting access to tax concessions. What would the effect of a prior announcement or consultation on a measure like this have been?

Senator COONAN —Many, many times you can have very targeted and confidential consultations—

CHAIR —Thank you for that answer.

Senator COONAN —It is not a proper premise.

Mr Parker —It is not formally part of the budget process, particularly where you have large integrity measures, to consult. It is not part of the government’s framework in response to the tax design review panel, whereas—

Senator PRATT —To consult with people about their tax evasion?

Mr Parker —Yes.

Senator PRATT —That does not make much sense to me.

Senator COONAN —But you did it informally—

Senator PRATT —There is a policy options paper currently being developed, as I understand it. When is that due for release? I am sorry; I missed that part of the questioning.

Mr Parker —It is later this week.

Senator PRATT —I assume on that basis that you have been meeting with industry to discuss their concerns?

Mr Parker —Yes. There have been extensive discussions with industry. As I think I laid out before, industry have provided extensive information on the operation of their schemes, supportive of an argument that they have put to the government that there would be an alternative way to deal with these issues, and the government is considering those and will be putting out a paper.

To link back to the earlier discussion on the audit approach, one of the underlying policy rationales of a changed measure in this area is to take employee share schemes out of the audit space—that is, out of the space where the ATO has to go and find these areas of avoidance, evasion or confusion, or whatever, and into the normal day-to-day operation of the tax system so that the information is there so that people can comply with this automatically.

Senator JOYCE —We are talking about $26 million or something that you are trying to track down—is that it? How much is it?

Ms Granger —How much is it that we received in audit judgements?

Senator JOYCE —Yes.

Ms Granger —It was $27 million in the 2008 year and $34 million to the end of March for this year.

Senator JOYCE —Over $119,000 million in total—

Senator PRATT —Senator Cameron has been waiting very patiently.

CHAIR —Yes, indeed.

Senator CAMERON —Did you get the impression from some of the questioning from the opposition that farmers were being unfairly treated in the tax system? As I understand it, there are a number of concessions made to farmers in terms of tax. If they are having difficulties, they are allowed more time to lodge; they will get time to pay off any debt; they can pay off in instalments; they can remit penalties; and you can fast track the refunds. Is that still the situation?

Mr D’Ascenzo —That is the situation for all businesses and individuals where the circumstances warrant that sort of treatment.

Senator CAMERON —It seems to me, Mr Parker, that some of the questions you have had from the opposition would really indicate that they do not understand what is happening in terms of the tax receipts. The downward revision in the budget is $210 billion. Could you just walk us through why that $210 billion would be lost from tax receipts?

Mr Parker —There is a short answer to that and a long answer. The short answer is—

Senator CAMERON —I will have the middle answer.

Mr Parker —The short answer to it is the very substantial effects from the global financial crisis, the global recession and the slow-down of the domestic economy plus the falling commodity prices which have led to a reduction in nominal income growth in the economy. The details of that are spelt out in the budget. Broadly speaking, the difference in the economy from year to year, if you look at last year’s budget to this year’s budget—I think I would have to go back and look at the precise numbers again—is that in 2010-11 I think it is a nine percentage point difference, both real and nominal, because of the fall in the terms of trade. That then flows through to a very substantial reduction in tax revenue. As the year progressed, going through 2008-09. we have seen the effects of that progressively flow through the different tax spaces. Early on in the year we first saw those effects come through in the company tax base and the capital gains tax area. As the economic slow-down has broadened, we have seen GST receipts flatten off; we have seen wage and salary payments that have been withheld slow down as well, so there has been a bit of a flow-through starting in the corporate sector and progressing to wages and salaries.

There is a substantial discussion of this in statement 5 this year, a much more substantial discussion of the tax story than we have usually done. There are a couple of quite interesting dimensions in that in terms of how the numbers have evolved through the year. In the first quarter of the year—that is, the September quarter—tax receipts were tracking broadly as expected in the budget. You then come to October and the receipt numbers then fall very sharply. That was at about the time, obviously, that we had the first stimulus package come through. Then again, the tax revenue numbers fell very sharply below expectations in the early part of the year.

One other important feature which is drawn out in statement No. 5 is that for several reasons we have seen tax revenue decline earlier in this downturn than in previous downturns. To quickly pick up a couple of those—

Senator JOYCE —Where are they in the report?

Mr Parker —In statement 5. If you have a look at the beginning of that statement, I will take you to particular pages. There is a box on page 5-13 which tells the story. There are three factors which we have flagged there. One is that the capital gains tax has before the downturn lifted to a fairly significant part of the tax base. That then fell very early in the downturn because financial markets turned down before we had an effect on the real economy.

Secondly, we have seen the corporate tax share rise over the historical period and that has fallen quite significantly and early in the downturn because you tend to see the income effects of recessions flowing to the corporate sector before they flow into employment. Then the third thing which is substantially different this time compared with earlier recessions is that the tax system is now more closely linked in time with the real economy, particularly in the corporate area. It used to be the case that companies paid tax effectively in the year after the income was earned, and that is now more contemporaneous.

If you have a look at the two charts at the bottom of that box on page 5-13, they tell the story, first as to the CGT fall and then over on the right-hand side you can see that in the previous two downturns, that is the top lines in that chart, in the first year of the downturns previously the tax to GDP ratio rose because of the lag in the tax system, whereas this time around we have seen it fall so that the big falls in revenue have come earlier in this cycle than in previous ones.

Senator CAMERON —The short answer is: the global financial crisis?

Mr Parker —The short answer is the global financial crisis.

Senator CAMERON —In terms of other economies and other countries facing these issues, they are outlined in box one on 5.8, the decline in receipts in other economies. Other economies have to deal with the same issue that we are facing here, a decline in tax receipts. How are they handling this decline in tax receipts? Are there any lessons for us in terms of what is happening overseas?

Mr Parker —Those countries have somewhat different tax systems to us. The United Kingdom and the United States, for example, have some different arrangements in the loss carryback area, and that has led to a more significant fall in revenue in those countries. They have also obviously been more directly impacted by the global financial crisis than we have because that is the epicentre of the problems in financial markets, and that has led to very significant falls.

All of these countries have seen their tax base fall by more than the fall in the nominal economy. That is because all of those countries, including our own, have progressive tax systems. The tax system in all of those cases acts as what we technically call an automatic stabiliser; that is, it provides a buffer to cushion the real effect on the economy because tax revenue falls by more than the fall in the economy. The essential story in that box and that chart is that Australia compares relatively well to these other countries, but that in the broad all countries are experiencing very much the same.

Senator JOYCE —I think they work unbelievably well compared to your overall position on page 5.37.

Senator CAMERON —On page 1-13 of Budget Paper No. 1, when it talks about the fiscal stimulus to the economy, about half-way down it says, ‘The measures taken prior to this budget include the $10.4 billion economic security strategy, the $15.2 billion Council of Australian Government reform package, the Nation Building Package, and the $0.2 billion Nation Building and Jobs Plan. The stimulus packages are expected to raise the level of GDP by 2.75 per cent in 2009-10 and 1.5 per cent in 2010-11, supporting up to 210,000 jobs.’ Is there a rule of thumb in terms of tax receipts compared to a decline in GDP or is that just a theoretical thing? Can that be calculated?

Mr Parker —There is a rule of thumb and we can provide that to you. In so far as the stimulus packages have led to those results there which have been built into the forecasts, those forecasts then feed into the tax estimation. As a result of those stimulus packages there is a benefit in terms of heightened revenue.

Senator CAMERON —If we had done nothing, as some were advocating, then we could have been 2.75 per cent of GDP down to 2009-10 and 1.5 per cent of GDP down in 2010-11; 210,000 jobs less in the economy and a diminishing of tax receipts in the forward estimates? Is that correct?

Mr Parker —Yes, that is correct.

Ms Granger —I would also refer you to appendix A in statement 3, which gives you some information on the sensitivity of the budget estimates. In particular, it takes you through the impacts you might have from changes in GDP, so it might provide you with some guidance on that relationship.

Senator CAMERON —In relation to some of the questions on the income tax exemption for overseas workers, Senator Joyce spoke about people becoming tax exiles. As I understand it, the average tax saved by a worker overseas is about $9,000. Has Treasury done any analysis on whether we have $9,000 tax exiles? Is that a practical proposition that has been put to us?

Senator JOYCE ——If you could interpret that for us, that would be great.

Senator CAMERON —If you are unsure, I will try again.

Senator JOYCE —We are all unsure. We have not got a clue what you are talking about.

Senator CAMERON —Senator Joyce said that people would make themselves tax exiles basically because of the government initiative in terms of bringing some fairness into the tax system on overseas tax. I understand the average tax that workers are getting a benefit from by being overseas is $9,000. Are there any estimates as to how many workers are making themselves tax exiles for a $9,000 gain? It just seems a nonsense to me?

Mr Parker —In terms of your figuring, I do not have those numbers in front of me. It may well be that you could get a number of around about $9,000 by taking the costing and dividing that by the number of people affected. That would be a simple arithmetical exercise. As to whether that $9,000 leads to tax exiles, I could only speculate.

Senator CAMERON —As to managed investment schemes, the government released its review on non-forestry MIS in May 2009. Are you aware of the key findings of the non-forestry MIS report?

Mr Parker —The key findings were that in terms of the tax space it found that if you look at the economic substance of the transactions involved and compare that with a relevant benchmark, which is effectively whether someone has done the investment themselves directly, it can be seen that the way non-forestry MISs have been arranged in many cases look to have been structured so that there is an additional up-front deduction compared with other arrangements. On the other hand, of course, in this area there are a range of other tax benefits which can accrue to people doing this directly in terms of deductions for capital expenditure and so forth. The bottom line that was found in that report is that for non-forestry schemes—that is, where it is taxed under general law as opposed to the forestry regime where there is a specific one—the tax arrangements could be viewed as suboptimal. The government has, as you mentioned, put that report out. From here there are effectively two streams. The government has said that it will consider whether to make any movement in this area in the context of broader recommendations coming out of the Henry review. We are also aware, of course, that there is a joint committee process, which has been started in parliament. Naturally, we will make ourselves available to that process and no doubt the government will take account of the findings of that report.

Senator CAMERON —Was the collapse of Timbercorp and Great Southern related to more than simply the tax treatment of the MISs?

Mr Parker —I think the fundamental point about Great Southern and Timbercorp was that the structure of those schemes was essentially an underlying economic issue. It is not at all clear that tax was a significant issue.

Senator CAMERON —Has the tax treatment of managed investment schemes changed significantly over the last few years?

Mr Parker —No.

Senator CAMERON —Does the collapse of these schemes impact upon investors’ ability to claim deductions relating to their investments?

Mr Parker —No, it does not.

Senator CAMERON —Thank you, that is it.

CHAIR —Thank you. We are close to a scheduled break so we might take the 15-minute break.

Senator BUSHBY —We could break shortly.

Senator CAMERON —No, we are happy to have the break.

CHAIR —No, I think we have all been sitting around for a long time and Hansard and Broadcasting are stuck in the chair even more than I am, so I think we need a break.

Mr Parker —Madam Chair, Just before we break, Senator Bushby asked us before a particular question on GST revenue and we undertook to provide those numbers. We can do so now.

Senator BUSHBY —Excellent, thank you.

Ms Mrakovcic —Senator, for the four years commencing in 2008-09 on a cash basis, the difference between the 2008-09 and 2009-10 budgets is $4.1 billion in 2008-09, $6.9 billion in 2009-10, $7.3 billion in 2010-11 and $7.2 billion in 2011-12. On an accrual basis, it is, respectively, $3.8 billion, $6.3 billion, $6.7 billion and $6.9 billion.

Senator BUSHBY —I thought it might have been in answer to earlier, the drop. Thank you very much for the timely response as well, it is much appreciated.

CHAIR —The ATO and Treasury will leave us now. Thank you very much for your cooperation today.

Proceedings suspended from 9.07 pm to 9.20 pm