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Banking (State Bank of South Australia and Other Matters) Bill 1994



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House: Senate

Portfolio: Treasury

Commencement: Parts of the Bill will commence as follows:

Part 2.1, excepting sub- sections 5(2) and 6(2), will commence on a day fixed by Proclamation which is not earlier than the commencement of the State Bank (Corporatisation) Act 1994 (SA). If these sections do not commence within 6 months of the day on which State Bank (Corporatisation) Act 1994 (SA) commences, they commence on the first day after the end of that period;

Sub- sections 5(2) and 6(2), will commence on a day fixed by Proclamation.

The remainder of the Bill will commence on Royal Assent.

Purpose

To facilitate the restructuring of the State Bank of South Australia (SBSA), in accordance with an assistance package which is being provided to South Australia by the Commonwealth, and in conjunction with the State Bank (Corporatisation) Act 1994 (SA). To this end, the Bill will amend a number of different Acts:

The Banking Act 1959 to facilitate the referral of banking powers over the State Bank to the Commonwealth;

The Corporations Law to oblige the ASC to deregister dissolved subsidiaries of the SBSA;

The Fringe Benefits Tax Assessment Act 1986 (FBTAA) to modify the effect of that Act on car benefits provided by the new corporatised entity, the Bank of South Australia Ltd. (BSAL);

The Income Tax Assessment Act 1936 to modify the availability of certain deductions to BSAL;

The Privacy Act 1988 to allow information about customers to be passed from SBSA to BSAL;

The Taxation Laws Amendment Act (No.2) 1992 to facilitate certain transitional arrangements; and

The Reserve Bank Act 1959 to allow the Reserve Bank Board to grant leave of absence to a Board member rather than the Treasurer.

Background

The SBSA was established in 1984, through the merger of a large savings bank, the Savings Bank of South Australia, and a relatively small trading bank, which was also known as the State Bank of South Australia. The new entity, the SBSA, was created and controlled by the State Bank of South Australia Act 1983 (SA) and commenced operations in July 1984. The new bank also had a small corporate arm, the Beneficial Finance Corporation Ltd 1 .

Following industry deregulation, the assets of SBSA grew at a rapid rate over the period 1984 to 1991, fuelled by the unsustainable property boom which was responsible for the collapse of a number of other financial institutions elsewhere, most notably the Pyramid Group in Victoria.

Although estimates of SBSA's value and growth rates over this period vary, its average annual growth rate over the period can be stated to be of the order of 40%, significantly higher than other major State and private banks 2 . Its assets grew from around $ 3 billion in 1984 to $ 21 billion in 1990, before the extent of its problems became known. The Bank had been moving away from its traditional basis, housing loans, and into riskier "banking related" activities which included the acquisition of subsidiaries, and speculative loans in the finance, investment and insurance industries 3 . Loans in these industries at a time of high interest rates entailed higher risk and exposed SBSA to the possibility of a large portfolio of non- performing loans and potentially disastrous losses.

In January 1991, an assessment of SBSA's financial position by analysts J.P.Morgan reported a portfolio of non- performing loans of around $2 billion. The major proportion of these loans were in the property and finance area 4 . The then Premier, John Bannon, disclosed to the public that the affairs of SBSA were in disarray, and it became increasingly likely that a Government bail- out would be necessary. A support package was announced which consisted of a sum of $970 million being paid to a government account to shore up SBSA, $500 million of which was paid immediately to SBSA. As at 30 June 1991, the SA State Budget Papers estimated the loss of SBSA to be conservatively around $ 1.6 billion 5 . The actual extent of the losses appeared to be much worse, possibly of the order of $ 2.2 billion 6 .

The Government commissioned the State Auditor- General to investigate and also appointed a Royal Commission to investigate aspects of SBSA's operations including the degree of prudential control over SBSA, and the activities of its Board. In May 1992, as evidence of the potentially enormous losses came to light, the Government transferred around $ 3.2 billion 7 of non- performing loans to Treasury, as part of the restructuring package. This was described in the 1992- 93 Budget Papers as being to achieve a

"...'good bank/bad bank' split by way of what is effectively sub- participation to the Treasurer." 8

In September 1992, the Premier resigned and by January 1993 the Treasurer, Frank Blevins, had admitted that a $ 3.15 billion package would be necessary to rescue SBSA. In a similar fashion to events in Victoria, the Federal Government announced on 17 February 1993, in the run up to the 1993 Federal election, that it would provide special assistance to South Australia to deal with the debts, as it felt that

"... the debt burden imposed on South Australia as a consequence of the actions of the State Bank of South Australia has placed an extraordinary and unfair burden on the people of South Australia and constrained the State in its ability to participate in the economic recovery now under way." 9

This assistance was to be granted on a number of conditions, namely that:

SBSA be sold as soon as practicable;

SBSA be brought into the Commonwealth's tax net free of losses from 1 July 1994;

all existing tax losses be extinguished; and

the SBSA be brought under Reserve Bank prudential supervision. 10

In return, the Commonwealth was to provide $ 647 million in assistance over 3 years, the first $ 263 million having been paid in June 1993. The 1993- 94 SA Budget proposed that, subject to market conditions, SBSA be sold within 2 years time. A steering committee had already been established to oversee the corporatisation and sale of SBSA. The Budget also accepted the conditions upon which Commonwealth assistance would be received 11 .

In September 1993, the Royal Commission produced its Final Report which followed an interim First Report presented in November 1992, and Second Report presented in March 1993. The Final report recommended further investigations into the activities of SBSA's Board with a view to the commencement of civil proceedings against certain individual Board members to recover Bank losses 12 .

In early 1994, the South Australian Government introduced the State Bank (Corporatisation) Bill 1994 setting out its preferred method for restructuring SBSA. The Bill would establish BSAL, a private body 13 which would have assets of SBSA transferred to it 14 . Part 7 of the State Bill also refers banking power over BSAL to the Commonwealth.

Main Provisions

Amendments to the Banking Act 1959.

The Banking Act 1959 deals with the supervision of the Australian banking system. The Act contains provisions to protect depositors, provides for minimum liquidity levels by regulation, and deals with aspects of foreign exchange and investment.

Clause 5 amends section 5 of the Act to include BSAL in the definition of "bank", thereby bringing it within the Act.

Amendments to the Corporations Law.

The Corporations Law regulates the activities and a wide variety of transactions carried out by companies. As part of its assets, SBSA holds a significant number of charges over property. Sub- section 268(1) of the Corporations Law requires that when a charge is transferred, a notice must be provided to the ASC. The Bill introduces a provision to enable "bulk" notification for SBSA transfer of charges necessary in the restructuring and corporatisation of SBSA.

Clause 9 inserts a new section 268A into the Corporations Law to allow SBSA or BSAL to notify the ASC of a transfer through a single notice for a number of charges, rather than by way of a separate notice for each charge.

Similarly, where a company is to be deregistered, sub- section 574(1) of the Corporations Law allows the ASC to publish a notice in the Gazette deregistering the defunct company, once other procedures in sections 572 or 573 have been complied with. The South Australian Bill will provide for assets of subsidiaries of the SBSA to be transferred to the SBSA or BSAL, and for those subsidiaries to be dissolved. This Bill amends the Corporations Law to ensure that those dissolved companies are removed from the ASC register.

Clause 11 inserts a new section 574A which obliges the ASC to remove any companies dissolved under the South Australian Bill from its register.

Amendments to the Privacy Act 1988 .

The Privacy Act 1988 applies certain privacy principles to the handling and transfer of personal information. The Act limits the use of personal information by certain agencies, grants access to personal records in specified circumstances and establishes the office of Privacy Commissioner to deal with complaints. Section 18N is a provision of the Act covering the disclosure of personal information by credit providers, including information as to credit worthiness.

Clauses 18 to 20 of the Bill give specific exemption from the Privacy Act 1988 for transfers of loans from SBSA to BSAL, disclosure of customer information between SBSA and BSAL and disclosure of information for the purposes of the management of customer accounts transferred from SBSA to BSAL.

Amendments to the Income Tax Assessment Act 1936.

The Bill contains provisions which extend certain concessions available under the Income Tax Assessment Act 1936 to BSAL, and allow tax file numbers of customers to be provided to BSAL.

Clause 38 provides that the development allowance and general investment allowance which are available as tax deductions in relation to certain capital expenditure, can be claimed by BSAL 15 .

Clauses 39 to 51 allow tax file number information to be transferred from SBSA to BSAL, without the need for customers to re- quote their tax file numbers to BSAL. Customers will be given an opportunity to object to any such transfer by clause 42.

Amendments to the Fringe Benefits Tax Assessment Act 1986.

Normally, an employer who provides a car for employee use will be liable for fringe benefits tax based on the amount the employer paid for the car. Section 9 of the Act prevents artificial sale or sale and lease arrangements between parties to reduce the value of the benefit, and hence any FBT liability. An unintended effect of the privatisation of BSAL will be to trigger this section, thereby otherwise increasing the value of the benefit, even though the transactions between SBSA and BSAL will be conducted on an arm's length basis. The Bill modifies the effect of the FBTAA to avoid this outcome.

Clauses 53 and 54 provide that for the purposes of section 9 of the FBTAA, BSAL is not, and never has been an associate of SBSA.

Endnotes

1 Mansfield, J, Royal Commission into the State Bank of South Australia, Final Report, September 1993, p 1.

2 Scott, G, "Economic Policy" in Parkin, A and Patience, A (eds), " The Bannon Decade", Allen and Unwin, 1992, p 91.

3 Ibid.

4 Ibid.

5 Budget Papers (SA), 1991- 92, Financial Statement, p 70.

6 Scott, ibid p 88.

7 Budget Papers (SA), 1992- 93, Financial Statement p 80.

8 Budget Papers (SA), 1992- 93, Financial Statement p 81.

9 Press Release, Prime Minister, 17 February 1993.

10 Press Release, ibid.

11 Budget Papers (SA), 1993- 94, Financial Statement p 3.1.

12 Mansfield, ibid, p 11.

13 Clause 3

14 Part 4.

15 Further information regarding the investment and development allowances can be obtained form Bills Digest No. 64, Taxation Laws Amendment Bill (No.2) 1994.

Marco Bini Ph. 06 277 2476

Bills Digest Service 4 May 1994

Parliamentary Research Service

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1994.