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Foreign Affairs, Defence and Trade Legislation Committee
24/10/2018
Estimates
DEFENCE PORTFOLIO
Defence Housing Australia

Defence Housing Australia

[20:00]

CHAIR: Welcome. Ms Mason, do you wish to make an opening statement?

Ms Mason : No, thank you.

CHAIR: All right, we'll move straight to questions.

Senator GALLACHER: I'm reading from a Defence portfolio overview produced by the Australian National Audit Office on 5 July 2018. There's a very intriguing comment too. Under 'Defence Housing Australia', it says:

assessment of the tax and accounting implications of the return of the site at Badgerys Creek Road, Bringelly, given the complexity of the transaction …

That piqued my interest and attention, so I then went to your 2017-18 annual report, and I have a number of questions about that particular transaction. Ms Mason, how much was the land at Bringelly originally purchased for?

Ms Mason : The site was originally acquired for $10.35 million.

Senator GALLACHER: What date was it purchased? Was it in the last week of Minister Andrews's tenure?

Ms Mason : It was in 2015. I don't think I have the date in front of me, but it may be that one of my colleagues can assist with that.

Senator GALLACHER: But it was bought under Minister Andrews's tenure as Minister for Defence?

Ms Mason : No, I think in 2015 it would have been Minister Payne. We can check that for you. I'm just going on memory.

Senator GALLACHER: So we'll check when it was bought and who the minister was. Is there anybody here who can answer that while we speak? That might be something you could consider. Has the land been revalued since it was purchased?

Ms Mason : Yes.

Senator GALLACHER: What was it revalued to?

Ms Mason : I think there's been a series of valuations. We'd probably need to take that on notice. There's been, to my recollection, a number of different valuations.

Senator GALLACHER: Okay, let's cut to the chase. It was bought in 2015, and two years later the airport was announced. It was 119 hectares. It would have been a significant revaluation.

Ms Mason : It's 115 hectares.

Senator GALLACHER: And it was worth $10.3 million. What did it go up to?

Ms Mason : It depends on the basis of the valuation. There are different methodologies that can be used.

Senator GALLACHER: If I was to say it was revalued to $200 million, would that be out of the ballpark?

Ms Mason : Yes, I think it would be.

Senator GALLACHER: What about $150 million?

Ms Mason : I think, on one methodology, it may have been in the order of $125 million.

Senator GALLACHER: So, from $10.3 million, it was many multiples of $10.3 million in increase in value?

Ms Mason : On certain methodologies on valuations. You can use different methodologies. There can be an 'as if' or 'as is' valuation.

Senator GALLACHER: But you would have had it revalued, so you would have a factual figure of revaluation. I don't know what the methodology is. I can tell you what a speculator might use, but that would be a guess, wouldn't it?

Ms Mason : I just said that an 'as if valuation' that I can recall was in the order of $125 million.

Senator GALLACHER: I specifically asked, prior to this hearing, for people in land acquisition and disposable to be available. Is there no-one here that can give us the correct figure?

Ms Mason : We did get advance notice of that, but we didn't receive advice that you wanted to ask specifically about the Bringelly site. I've informed you that, on one methodology—an 'as if valuation' methodology—the figure was $125 million.

Senator GALLACHER: Thank you. Was there a date attributed to that revaluation at that methodology?

Ms Mason : Yes, there would be, but I would need to take that on notice.

Senator GALLACHER: Okay. I go to your I go to your annual report and I go through a few of your targets. You didn't meet the revenue back to government on page 55. I understand that that's not necessarily connected with this transaction—that little box you've got there. Basically, in 2017-18 you sold some properties. The result was $25.1 million below the corporate planned target. I refer to those because you had a shortfall in your operating activity and didn't hit your target. At the same time that that was happening, you had a potential windfall gain due to some smart buying in 2015. Then we go on to see that your financial performance in 2017 was lower than the targets that you had in your corporate plan. So a couple of areas had nothing untoward, but in your corporate plan you were lower in your targets. That's what your annual general report says. You had a purchase in 2015, you had a $125 million valuation and then you got a directive—this is correct, isn't it—from a minister to transfer Bringelly back to Defence for $11,591,252? Is that a factual series of events?

Ms Mason : It is, but they're not necessarily connected to another.

Senator GALLACHER: I'm just constructing my case that you were a bit under on your targets, you had an opportunity to meet them easily if you were able to sell that for $125 million but there was a direction to return it for $11 million? How does that work?

Ms Mason : It's correct that there was a direction to transfer ownership of that parcel of land to the Department of Defence. However, the reason that we undershot our targets is not related to that issue.

Senator GALLACHER: We're in vehement agreement about that. I just pointed to a couple of areas where, for whatever reason, you were slightly under your targets.

Ms Mason : That's correct.

Senator GALLACHER: I'm pointing to a windfall opportunity, if you like, that might have absolved that shortfall in your targets. Not in the areas that it's concerning, not in those two boxes but in the global scheme of things, you could have been a bit better off.

Ms Mason : Implicit in your account is an assumption that that we may have wished to dispose of that parcel of land and sell it.

Senator GALLACHER: I'm going to get to that.

Ms Mason : And we didn't.

Senator GALLACHER: Okay. So you are a for-profit. Defence is a not-for-profit. How did you satisfy yourself that the direction to send the land back didn't incur any taxation liability or accounting liability to DHA?

Ms Mason : We satisfied ourselves by seeking professional advice from an accounting firm.

Senator GALLACHER: Did that advice say that you needed a private taxation rule?

Ms Mason : We sought a private taxation ruling.

Senator GALLACHER: But why are you so careful about that? Why wouldn't you tell me that straight up?

Ms Mason : I have told you that. We satisfied ourselves by getting accounting advice. We wanted to put it beyond doubt because we take a cautious approach to our compliance with taxation requirements, so we sought a private binding ruling to make sure we were operating correctly in respect of our taxation obligations.

Senator GALLACHER: And was it not thought when the ministerial directive was issued that potentially there would have been a taxation implication to DHA with this directive? If you minister is Defence and they decide to do something, you get a taxation ruling on it? Is there a contest here somewhere?

Ms Mason : No. The minister made a legitimate decision, which is provided for in the DHA Act. Section 31 of our act allows the relevant minister, which in this case is the Minister for Defence, to give directions to DHA. DHA then carries out those directions and, in doing so, we needed to satisfy ourselves that we were correctly discharging our taxation obligations. In order to do that, we sought professional advice and a ruling from the Taxation Office.

Senator GALLACHER: And that attracted a comment in the Australian National Audit Office Defence Port polio Overview assessment of the tax and accounting implications of the return of the site of Badgerys Creek-Bringelly given the complexity of the transaction. There wasn't any complexity about the transaction from your perspective?

Ms Mason : I would say it's complex in that it's unusual. We hadn't had a direction of that nature previously—to return a parcel of land at a particular value. In that sense there wasn't a tried and true path for us to work out the correct taxation treatment.

Senator GALLACHER: My understanding is the land was purchased to do what you normally do: 30 per cent houses for defence and 70 per cent for the private market. Is that correct?

Ms Mason : That's the way we normally approach things if we acquire land. Sometimes things do change and that rule of thumb 30 per cent can vary up or down. Generally speaking, we look to retain about 30 per cent.

Senator GALLACHER: The Minister for Defence is not here to answer it, but the obvious question is: why was the decision made to move a very valuable piece of land out of your remit and back into defence? Is that directive public knowledge or open to the public? Can anybody look at it and say this is why we did it?

Ms Mason : My understanding is that the government took a decision that that land would be better used for purposes related to the second Sydney airport.

Senator GALLACHER: Okay. Now we're not talking about defence, are we? We're talking about the minister for the western Sydney airport? Who are we talking about? Which government? How does that process work? Is it a cabinet decision? Is it a defence minister decision?

Ms Mason : The direction to DHA was a decision for the Minister for Defence. In terms of broader considerations within the government, those are not matters that we're necessarily privy to.

Senator GALLACHER: So the ministerial directive wouldn't necessarily disclose a reason; it would just be a directive based on their decision-making process?

Ms Mason : I would need to check that.

Senator GALLACHER: You clearly had a plan to use the land?

Ms Mason : Yes.

Senator GALLACHER: If we look at the 2014-15 annual report, that stated there were 1,337 allotments, which were expected to serve Holsworthy Barracks? Is that correct?

Ms Mason : Possibly. I don't have that document in front of me, but certainly the intention was to provide housing for ADF members posted to Holsworthy Barracks. The numbers I'm not sure about.

Senator GALLACHER: Where are you going to get 115 or 113 hectares to fulfil that need that you identified in 2014-15 and for the purchase in 2015? Have you got another 120 hectares ready to go to meet the need of Defence?

Ms Mason : We don't have 115 hectares of land elsewhere, but, given that our normal rule of thumb would be 30 per cent for ADF members, we don't necessarily need to replicate 115 hectares; we simply need to make sure that, through one provisioning method or another, we have sufficient dwellings available to meet the Defence housing forecast for the Holsworthy posting location.

Senator GALLACHER: Okay. But, with the way you operate, the other 70 is the funding model for the 30, isn't it? So the opportunity is lost on the profit of the 70 per cent, if you know what I mean? With 1,300-odd allotments, you might only use 30 of those for Defence, but there's a profit mechanism on the others, isn't there? You may meet the 30 per cent for Holsworthy, but you've lost an opportunity.

Ms Mason : I think the government took a decision to use that land for other purposes.

Senator GALLACHER: But, clearly, DHA lost an opportunity? Is that too strong a point?

Ms Mason : We're not going to make a profit from that parcel of land, that's true.

Senator GALLACHER: Does the directive disclose any reasons for disposing of it to you? Or is it just—

Ms Mason : I would need to check that. I don't have the directive in front of me, so I really would need to take that on notice and check the wording of the directive.

Senator GALLACHER: How does it come about? Do you get a directive on Monday morning and comply with it, or are there discussions about it prior to it? Is it a board decision? Are there board discussions?

Ms Mason : I think it would be fair to say that it wasn't unexpected; there had been discussions beforehand.

Senator GALLACHER: All right. I want to go to a related area, but would it be fair to say that the decision, in the global financial terms of DHA's operating year, wasn't helpful for meeting your targets in respect of a return to government?

Ms Mason : I wouldn't put it like that, no.

Senator GALLACHER: Well, you have said there was $125 million of valuation reduced to $11 million. What did you get back for that property when it was transferred—$11,591,252?

Ms Mason : What I actually said, Senator, was that on one valuation methodology—which is the 'as if' valuation—it was $125 million. I also said there were different valuation methodologies that could be used. If one were to use an 'as is' methodology it would produce a much smaller number—more in the order of $22 million, my recollection is.

Senator GALLACHER: Okay.

Senator MOORE: Has any valuation been over a million dollars?

Ms Mason : At some point, though none that I'm aware of.

Senator MOORE: I wanted to check. You made the point very well that there was a range of valuations. I wanted to know what the upper and lower areas were.

Ms Mason : Obviously, at one point it was $10.35 million, which was the price that we paid for it. And at some point between when we applied it and when subsequent valuations were done, the value changed.

Senator MOORE: Changed—yes.

Senator GALLACHER: Can you inform me about the advisory committee of Defence and DHA? Is that the correct description/

Ms Mason : Yes, there was an advisory committee established under the DHA Act. I'll ask Mr Jordan to assist us with that. The composition of that advisory committee does include representatives from the Department of Defence and a nominee from DHA, which is myself, as managing director. It's chaired by one of the other board members of DHA, Vicki McConachie, who is the CDF representative on the DHA board.

Senator GALLACHER: Perhaps on notice, could we have the membership of that advisory committee?

Ms Mason : Yes. It's chaired by Vicki McConachie and I am a member, as the DHA nominee. There's also a representative from Defence Families Australia. Mr Jordan can possibly help you further.

Mr Jordan : The other representatives are nominated by each of the service chiefs. From memory, if memory serves, usually they're deputy chiefs.

Senator GALLACHER: The deputy chiefs of Army, Navy?

Mr Jordan : Yes, of each of the services.

Senator GALLACHER: So it's a high-level commitment?

Mr Jordan : Yes.

Senator GALLACHER: You mentioned your title is governance?

Mr Jordan : Yes: General Manager Governance.

Senator GALLACHER: Did this transaction and directive go past your governance committee or your governance policy? Did you look at this directive and the implications?

Mr Jordan : I was certainly aware of the direction.

Senator GALLACHER: Did you seek the appropriate taxation advice and taxation ruling? Or is that—

Mr Jordan : Taxation is not really in my purview. That wasn't up to me to do.

Senator GALLACHER: If you weren't paying a taxation liability, it would certainly come into your purview?

Mr Jordan : Absolutely, but I'd be straight down to the office of the CFO!

Senator GALLACHER: Okay.

Ms Mason : Senator, I have a couple of additional pieces of information. You asked me whether the direction we received included reasons for the transfer: it did not. And you asked me earlier about the date of acquisition of the Bringelly land and who the Minister for Defence was at the time. You were, in fact, correct, it was Minister Andrews in 2015.

Senator GALLACHER: In his last week, I think, or thereabouts. Very good decision.

Ms Mason : I'm not sure; I don't have the exact dates.

Senator FAWCETT: It was 21 September 2015 when he stopped being minister.

Senator GALLACHER: Okay. So I'm on the advisory committee: it's a high-level committee, it includes deputy chiefs of all the services. Do they meet three-monthly? Is that correct?

Mr Jordan : Approximately quarterly, yes.

Senator GALLACHER: Approximately quarterly. And the discussion in there is on future housing needs? Future housing stock?

Mr Jordan : Just to paraphrase the act, the committee was established in the changes to the DHA Act around 2006. It was formed for Defence to provide advice to DHA on housing matters and vice versa.

Senator GALLACHER: Okay. What's Project Symphony? Is that's its name?

Mr Jordan : Project Symphony, yes.

Senator GALLACHER: Who knows anything about that? What's that?

Ms Mason : That's a project being undertaken internally within DHA. It's seeking to do a couple of things. It's looking at the implementation of new accounting standards, which will affect DHA and other Commonwealth and private sector entities. These are international accounting standards that have been adopted as Australian Accounting Standards by the Australian Accounting Standards Board. They are not optional; they are accounting standards that we need to follow. We've been conscious that these accounting standards will impact on DHA and we've been working on issues associated with their implementation since last calendar year.

In addition to that, we're making sure that the various elements of our business improvement activities are dovetailed with that work on the accounting standards. The project name 'Symphony' is intended to portray the fact that all those things need to work together to make sure the business can operate effectively.

Senator GALLACHER: And that's also mentioned in the portfolio overview by the audit office. Does the project deal with your projections about the housing stock and increases and the like?

Ms Mason : Not to any particular extent. It might have that as part of it, but can I just explain how our forecasts on housing stock work? Each year we receive from the Department of Defence a Defence housing forecast, which tells us what Defence think they need in various locations across Australia, by rent band—there are different entitlements for different ranks. They tell us how many properties they require for staff at different levels within Defence and we then examine their expected requirements and develop a draft provisioning schedule which we provide to the Department of Defence, usually in about mid-December.

I think we get the Defence housing forecast from them in about August—I'm just looking at my colleagues—normally in August, but the dates can vary a little. We respond by about the middle of December, and then normally Defence come back to us by February or March and they tell us if they find our proposed provisioning schedule acceptable. If they do then we agree it and that becomes the forecast that we work to for the forthcoming financial year.

Senator GALLACHER: So that activity—

Ms Mason : They give us the next financial year plus three beyond that, which enables us to do our capital planning for the out years. As best we can, we try to make sure that we seek to match the Defence housing forecast. I think I've given evidence at a previous estimates hearing that we don't aim to meet 100 per cent of the forecast, because if we did we'd probably have vacant homes—more so than we need. So there is a balancing item, which is rental allowance in the private rental market. Normally, we aim to meet between 85 and 95 per cent of the Defence housing forecast. The other five to 15 per cent will be met through the private rental market.

Senator GALLACHER: That's fairly straightforward. For 2017-18 there was a process followed—an agreement on the housing stock?

Ms Mason : Yes.

Senator GALLACHER: So 2018-19 has followed the same fundamental concept: sit down, have meetings and then you put some figures to them and they come back and agree?

Ms Mason : Yes. We're on that journey at the moment. Obviously, we've received the Defence housing forecast for 2019 and beyond. We're working our way through what our response is going to be in terms of a draft provisioning schedule, which we will provide to the Department of Defence by mid-December. Then there'll be some toing and froing and we will agree it.

Senator GALLACHER: With that schedule, you put it forward and then, as you said, there is toing and froing. What actually happens at the end? Do you both sign off on the deal?

Ms Mason : There's an exchange of letters. Probably, for the sake of completeness, I should mention that there's a quarterly review of how we're actually tracking against the forecast, and that's for a couple of reasons. Sometimes we might have difficulty provisioning in a particular location or sometimes Defence may change their requirements within the financial year, and obviously we seek to respond as best we can to their changing requirements, whether that's up or down in particular locations.

Senator GALLACHER: So, if I'm trying to tie too many things together, let me know, but if Project Symphony, the new accounting standards and your forward forecasting mean there's a reduction in the availability of houses for Defence, what is their remedy? Do they just say, Fair enough, we'll just have to put more people in the private market or transfer fewer people,' or what? What do they do?

Ms Mason : It wouldn't necessarily be a reduction in the amount of housing available for Defence. The way we seek to meet defence housing needs has private rental as part of the mix which we administer on behalf of the Department of Defence. There's also direct leasing, there are properties that we own, there are properties that Defence own and there are properties that we may construct or acquire and sell to private investors and then lease back. There are a range of provisions—

Senator GALLACHER: I accept you can accommodate people.

Ms Mason : It's how you cut the cake, basically.

Senator GALLACHER: It's a very well-known project. At any hotel in the country you will see a DHA ad for 'Buy this,' 'Invest in this, and you'll never have to worry again.' However, what I'm asking is: is the housing stock of Defence going to increase under this new arrangement or decrease? I accept you've got mechanisms for dealing with that.

Ms Mason : I'd like to think that we're still going to be meeting the housing needs of Defence through one mechanism or another. The mix of the mechanisms may alter such that there may be more rental allowance accommodation and perhaps less sale and lease-back product, but I don't think there are going to be members without housing because of that project.

Senator GALLACHER: I totally accept that; I fully understand that. My direct question is: will there be less defence housing built and owned rather than meeting it with leasing or private sector involvement?

Ms Mason : Okay: less built and owned. I will ask my colleagues whether they feel equipped to offer a view on that.

Mr Jorgensen : I think under the Symphony project we'll be looking at various ways to improve the DHA model. This could include potentially increases in ownership of housing. So, generally speaking, I wouldn't see that the volumes of housing that Defence Housing Australia own, construct or acquire necessarily will be materially different to what we've seen in the recent past.

Senator GALLACHER: So, you would say: it's business as usual? I think business-as usual-housing is a model that you use. You wouldn't see any change under Symphony if I was to go back over four financial years that way and then you're going out three—you're saying it's business as usual?

Ms Mason : I think there will be some changes. It's a bit speculative as to exactly what that might look like. If I could make further comments to perhaps assist you: the effect of the new accounting standards is going to make our sale and lease-back approach to provisioning probably one that's going to service less well into the future. What I mean is: at the moment, if we sell a property we can recognise the revenue from the sale of that property at the time we sell it. Under the new accounting standards, we will need to recognise the right-of-use asset that attaches to the long-term lease that we have over that property. So, effectively, we will have about $2 billion worth of leases come on to our balance sheet that were not there before. What we'll need to do is recognise the right-of-use asset and also recognise the liabilities that go with our leasing obligations over the same period. So, it's going to make our performance as an organisation look quite different, even if we're doing exactly what we were doing before.

Senator GALLACHER: I only have a minute to go, so a couple of things, if you could take on notice—the last three meetings of the advisory committee and who attended; has Project Symphony been discussed at the advisory committee level; and, substantially, is there agreement? Are you going to be in a contest here in three months time with Defence; or is this all going swimmingly well?

Ms Mason : There's been mention of components of Project Symphony at various advisory committee meetings, and in addition to that there's a steering group overseeing the work, chaired by myself as managing director of DHA. It also has senior-level representatives from the Department of Defence and the Department of Finance, who are involved and able to recognise the work as it tracks through.

Senator GALLACHER: Finally, you were going to check whether you can release the directive to the committee.

Ms Mason : No, I don't think you asked me that.

Senator GALLACHER: Well then the question I'm asking is: what's in the directive? Does it say why they are doing it, what the land is going to be used for when it's returned to Defence and whether or not taxation advice was taken by the minister? Clearly, it was a problem for DHA. You needed to get taxation advice and a private taxation ruling. That's what the Audit Office told me—that you had to seek a private taxation ruling to make sure there were no unintended costs or accounting problems on your side of the fence, because they're not-for-profit and you are for-profit.

Ms Mason : That's a lengthy question, so I'll try and address its parts.

Senator GALLACHER: I'd like you to take it on notice, because we're out of time.

Ms Mason : Okay.

CHAIR: What a good idea. It will allow you to give a full answer. To Defence Housing Australia, thank you very much for your evidence this evening.