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Economics Legislation Committee

DAVIS, Ms Shellie, Senior Adviser, Financial System Division, Markets Group, Department of the Treasury

DERLACZ, Mr Gregory (Greg), Senior Adviser, Individuals and Indirect Tax Division, Revenue Group, Department of the Treasury

GREENALL-OTA, Ms Julie, Principal Adviser, Financial System Division, Markets Group, Department of the Treasury

Evidence was taken via teleconference—


CHAIR: I remind all officials that the Senate has resolved that an officer of a department of the Commonwealth or of a state or territory shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. Thank you to all three of you for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so.

Ms Greenall-Ota : We do not have an opening statement and are happy to move forward to questions.

CHAIR: Have the three of you been listening to the previous witnesses to this inquiry?

Ms Davis : We heard some of the testimony to the inquiry but unfortunately weren't here for all of their testimony.

CHAIR: Can you give us a brief outline as to how this legislation will further encourage innovation in fin-tech industries?

Ms Greenall-Ota : The government sandbox that was formally announced in the budget for 2017-18 is designed to facilitate innovation and customer choice at the same time as maintaining consumer protections and the integrity of the financial system.

CHAIR: Are there specific ways that you believe this legislation will benefit consumers and not just industry participants?

Ms Davis : By removing some of the initial barriers to entry for firms offering new opportunities, new and innovative business models, we expect that consumers will be given greater choice and the ability to choose offerings that better suit their needs so that they can manage their financial affairs.

CHAIR: If you wouldn't mind would you repeat your names before answering the questions, just so we know exactly who we are speaking to. Can I ask you about the potential effect on prices. Do you think this legislation will potentially put downward pressure on prices of traditional financial services by creating that increased competition?

Ms Davis : We would expect that having new entrants in the market will create some greater competition. In terms of immediate impacts on prices, particularly given that this bill establishes an arrangement for a limited period of testing, we would think that the firms operating and taking advantage of the government's enhanced regulatory sandbox will probably be at the edges, offering the specific services to meet consumers' needs. We don't expect that that will have an immediate impact on prices, but over time, as these businesses graduate and progress to full licensing after making use of the sandbox, we would hope that that competition should drive some greater price choice for consumers.

CHAIR: In the testimony today and also in their submission CHOICE claimed that unlicensed financial advice on superannuation products, insurance and long-term investments is too complex and too important to be offered without the adequate protections that the sandbox removes. Do you agree with that proposition?

Ms Greenall-Ota : The protections may have already been mentioned earlier today. We are satisfied the protections in place that are required to be maintained—the internal dispute resolution procedures, membership with external dispute resolution and adequate compensation arrangements, which include professional indemnity insurance with a run-off period of additional months—in addition to the ongoing protections that are also included to be within the sandbox, including best-interest duties, client money obligations and responsible lending obligations, are adequate protections to address the products that have been considered to be within the scope of the sandbox.

CHAIR: CHOICE suggested that an innovation benchmark and a consumer benefit benchmark have to be reached before a fin-tech should be allowed to participate in the sandbox regime. Do you have any particular comments on that suggestion?

Ms Greenall-Ota : We are aware there is that criteria that is applied in sandboxes in other jurisdictions—for example, the United Kingdom. There are challenges, I think it is fair to say, with trying to come up with an appropriate definition of 'innovation'. I think that's my first comment to make.

Ms Davis : I think, as I heard some others raise during testimony, there is challenge. During consultation on the arrangements around the sandbox, in particular the specific design parameters of the regulation, we had a number of discussions with stakeholders around the idea of an innovation threshold or a consumer benefit or detriment threshold around the sandbox. There were a number of times when stakeholders put forward the view that it would be very difficult to have an objective test around those measures. For example, it was raised about a product or an offering that was not yet widely adopted in the market but did exist in the market place, would that be considered innovative and for how long would something that is still new to the market be considered innovative? That would be a quite difficult threshold to determine. Those issues are being very actively considered in terms of providing advice to the government on the final design arrangements.

CHAIR: Do you think that the legislation that's before the committee today is comparative internationally, if not best practice, after your industry and stakeholder consultations?

Ms Greenall-Ota : The sandbox, and I know there has been discussion on the UK sandbox, is as has been mentioned earlier more parallel with the existing flexible licence-waiver arrangements already in place, as ASIC has indicated. The proposed sandbox—the enhanced sandbox which is before the committee today is a separate, different, approach. We have given consideration to the design such that it is a different and expanded version on the ASIC sandbox that sets it apart and promotes Australia's fin-tech capability by supporting start ups and innovative businesses to be able to develop, test and launch their financial and credit services and products under certain restrictions.

Senator KETTER: My questions relate to schedule 2 of the bill, in relation to the taxation arrangements. Can you explain why these changes are necessary for both the venture capital arrangements.

Mr Derlacz : In terms of why the technical amendments are necessary, on an ongoing basis we engage in dialogue with a range of stakeholders, including the Australian venture capital association and the Australian Taxation Office, in the course of administering any part of the tax law. We find that there are certain arrangements which come to our attention, often due to interpretations they've evolved in respect of the law. In this case we're making minor technical amendments to rectify some anomalies where taxpayers are applying the law in a way that's slightly inconsistent to what was originally intended under the law.

Senator KETTER: You're talking about legislation from 2016 that seems to be misapplied by some taxpayers. Is that correct?

Mr Derlacz : Yes—or rather, there are parts of the legislation which existed before 2016 and parts of the legislation which were amended in 2016.

Senator KETTER: It says in the explanatory memorandum:

Schedule 2 makes changes to these provisions to ensure that they operate as intended.

Can you tell me with as little jargon as possible how they were intended to operate.

Mr Derlacz : It might be easier for me to talk for each of the elements in turn. In respect of the early-stage venture capital limited partnerships, we provide a tax incentive of 10 per cent on eligible investments in those vehicles. We intended for that offset to be 10 per cent. Stakeholders raised that there may be certain situations where that offset was being accessed in addition to the offset for early-stage innovation companies. That was not intended under the law. However, it was self-reported by stakeholders, and the ATO mentioned that to us once we raised the issue.

Senator KETTER: What about in respect of angel investors? Are the angel investor arrangements in the same category?

Mr Derlacz : They are minor technical amendments.

Senator KETTER: What do they achieve? Do they basically close off an extra concession or beneficial arrangement that wasn't originally intended? Is that what you're saying?

Mr Derlacz : In some cases, yes. In other cases they clarify the law to help taxpayers comply with their tax obligations. There are a range of technical amendments in the bill.

Senator KETTER: In relation to the angel investors, my understanding is that you're experiencing a double-dipping effect where individuals were claiming an offset and then claiming another offset through their trust. Is that essentially what you were saying just before?

Mr Derlacz : No, that is not what I was saying. There was a situation where, if an investor was investing in an early-stage venture capital limited partnership, there was an interpretation that could be taken under the law, potentially, where they may have thought they could access in addition the 20 per cent early-stage innovation company offset. That was not intended by the legislation. We've since tightened the law as part of these amendments.

Senator KETTER: How did this double dipping—I'm going to call it a double-dipping effect—come about?

Mr Derlacz : Would you be able to clarify that question?

Senator KETTER: Was this a failure, I suppose, of the drafting of the 2016 legislation?

Mr Derlacz : I may need to take that on notice. I'm not intimately familiar with the details of that particular arrangement.

Senator KETTER: Does it reflect the operation of a specific policy objective from the original bill? Anyway, if you could take that on notice that would be good. Were the original arrangements for angel tax incentives based on the UK Seed Enterprise Investment Scheme?

Mr Derlacz : Yes, I understand that they were based on the Seed Enterprise Investment Scheme.

Senator KETTER: Is it true that that scheme doesn't provide for trusts and companies to obtain a benefit?

Mr Derlacz : I'm not intimately familiar with the operation of the UK scheme. I can take that notice and provide a response to you.

Senator KETTER: Thank you.

CHAIR: I think that we're done. Thank you very much to officials from Treasury for appearing before the committee today. On behalf of the committee I would like to thank all of those who have made submissions and sent representatives here today for their cooperation with this inquiry.

Committee adjourned at 16:59