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STANDING COMMITTEE ON ECONOMICS
26/02/2007
Tax Laws Amendment (2006 Measures No. 7) Bill 2007

CHAIR —I welcome Mr Tony Burke, from the Australian Bankers Association; Mr Wayne Green, Chairman of the Australian Branch of the Asia Pacific Loan Market Association; and Mr Greg Miller. Do any of you wish to make an opening statement?

Mr Burke —Yes, please. Thank you for the opportunity to appear before the committee inquiry this morning on this important tax issue for banks and many other institutions in Australia. Firstly, I would like to give some background to the issues that we have with the bill as it stands. Since about 1998 there has been a quite effective regime for interest withholding tax. There were some amendments in 2005 to broaden the exemption, which industry supported at that time. For example, prior to 2005 a debenture had been needed. There were some growing concerns about debentures in the marketplace. For example, international practice in relation to syndicated loans was not to have such an instrument.

The 2005 amendments facilitated more efficient access by the syndicated loans market, for example, to an exemption that was already available to them. However, we understand that Treasury and the ATO had some concerns. They believed that the amendment had gone too far, but we were firmly of the view that the only area of concern was retail products, for example, retail bank accounts and other retail banking products. We provided the paper on request, which suggested some options for resolution to meet express concerns of Treasury and the ATO. Later in the year an amendment was drafted and introduced and we made a further submission raising concerns about the amendment itself. My colleague Wayne Green will give some examples and explanations of the products at issue, particularly syndicated loans.

In relation to the bill, schedule 2 specifically, it is our view that it reverses ongoing development legislation over the last few years but, on the face of it, it has retrospective application to do with the start date. We do believe that, if enacted, it would significantly impede the debt markets. We have a further concern about the regulation-making powers, the existence of which would cause further uncertainty in the marketplace. We do not believe that using the regulation-making power within the schedule would remedy the flaws that we see.

We think that we have provided a better approach to Treasury. We have provided a draft amendment, which they are considering. We have settled on an exclusion approach, the effect of which would be to provide that all products would be within the exemption unless specifically excluded, and excluded would be all deposits issued by banks and like financial institutions providing the deposit is not otherwise a debenture, as a result transferable or negotiable certificates of deposit which should still be exempt whether they be retail or wholesale and (b) any other dead interest not being a deposit or debenture offered at the retail level. For example, this might include credit cards if these are not regarded as deposits. We believe our approach better implements the spirit of the 2005 amendments, that it directly targets the specific concerns raised by Treasury and the ATO. It would substantially reduce the need for later amendments to take account of market and product changes later on. It would give a speed to market and would move unnecessary regulatory risk. We are working with the minister and with the Treasury on our preferred approach and look forward to further consultation on our proposed solution.

Mr Green —The APLMA is an Asia in Australia based association focused on the growth and liquidity in the primary and secondary loan markets so we are concentrating on the aspect of syndicated loans. Syndicated loans are loans where one or more banks initially provide the loan transaction and underwrite the loan, and then it is actually sold down to a series of other banks both locally and offshore. The APLMA has 140 member institutions, including the top four major Australian banks and all the significant international banks based within the Australia and Asian region. We are very much in support of the ABA’s submission for the current change. We have also lodged submissions with regard to the bill and the potential impact that we see it may have on the global syndications market as it has evolved over the last 10 years. We certainly were very supportive of the amendments that went through in 2005. We recognise that loans were dead interest and that certainly brought the Australian loan market in line with the global loan markets with regard to the seamless ability to sell and have foreign banks come into the Australian loan market.

There is some uncertainty with regard to the current bill and the treatment, potentially, of syndicated loans. We are concerned that, without the clarity that we have currently, it will cause some negative impact with regard to our ability to sell loans down into the universe of banks.

The other issue—and I think Tony has already raised it—is that there are some questions with respect to the retrospective denial of the withholding tax exemptions on loans that were put in place prior to December 2006 but have yet to be drawn down. From our perspective, the Australian syndicated loan market has grown dramatically over the last five or six years to the extent that towards the end of 2006 the loan market exceeded $A80 billion—that is, in principle, syndicated loan transactions. The demand for loans in Australia has certainly grown through the investment in infrastructure and the growth of Australian and foreign companies. We want to see and encourage that growth in the loan market. We are very keen to see further investment in infrastructure, and the ability to syndicate loans offshore with the benefit of an exemption of withholding tax is critical to the growth of that market.

More recent transactions that have had the benefit of being able to be placed offshore with an exemption of withholding tax have included motorway developments in Brisbane such as RiverCity Motorway, which is the north-south tunnel bypass, which was a $1.9 billion transaction. That loan was sold down to 23 banks, and 11 of those banks were knocked on this side in Australia and therefore required the exemption for withholding tax. A point to make on the withholding tax exemption is that if withholding tax is applied to these loans, it is not the bank that has to reduce its revenue; it is actually a gross-up charge to the borrower, so the impact is more on the borrower and the feasibility of the transaction that it is on the financing. Further examples have been the Mitcham-Frankston Motorway in Victoria that runs east. That was also sold onto the offshore market, and more recently through refinancing.

Going forward, we have got some very large corporate deals coming into the market which will far outweigh the ability of the Australian market to absorb those loans. A classic example of that is the split-up of Toll. The Toll infrastructure deal will probably be in excess of $5 billion, and the Australian market could not possibly absorb all of that loan. So we need to access the offshore banks and we need a seamless approach to withholding tax to be able to achieve that. This would also bring Australia into line with the overseas market, where the approach is very similar to what we are proposing.

The important thing about the current process is that the banks, the underwriting banks and the borrowers do it here to meet the current regime: the public offer test. These loans are for all intents and purposes treated as debentures. They are offered to a wider group of banks, and those banks then make the decision whether or not to come into those transactions. We understand the reason for the changes to the bill and the avoidance of any leakage, particularly from the retail sector, but we believe it does have some critical issues with respect to the wholesale loan syndication market. We are certainly in favour of working with the ABA and with their suggestion that we come up with the excluded list of products, and we are keen to work with Treasury and the tax office in putting that in place.

CHAIR —For the record, the range of borrowings has been greatly extended by a number of historical amendments to the act—I am just looking here; one of your colleagues has set it out quite well—128F relief has been expanded on a number of occasions; the business end use requirement in 1997; making funds available to foreign branch banks in 2001; and of course extending the relief to debt interest in 2005. I presume this has had a considerable impact on the borrowing ability of Australian companies, and we have seen the sorts of outcomes that you were talking about before through that. Would you agree that these exemptions must be targeted to protect revenue?

Mr Burke —The primary purpose, as I understood it, was as an integrity measure; and, yes, the revenue must be protected. But it is our view that maintaining the exemptions and the structure that we are proposing will not have a significant impact.

CHAIR —Yes, but in a general sense you would acknowledge that these exemptions have got to be targeted so that there is no risk to revenue.

Mr Burke —Indeed, quite so.

CHAIR —Mr Burke, have you done any work on or had any discussions about what, potentially, the revenue implications might be if your proposals were adopted?

Mr Burke —We have attempted to do so. We have raised with Treasury the possibility of having access to their costings, but that has not been possible.

CHAIR —So I take it from that that there is some risk of revenue implications.

Mr Burke —There may be, but we have not sized them.

CHAIR —No. Okay.

Mr Miller —Just to clarify that point in relation to the syndicated loan market, we do not expect there to be any revenue impact on that market by reason of the fact that the syndicated loan market was using the debenture type structures when those provisions were put in place. When the debt interests were introduced in 2005, that actually brought our market into line with what was happening offshore. So we do not expect that there will be any revenue implications for the loan markets, because those markets have been making use of the public offer test and interest withholding tax exemptions for some time.

CHAIR —Would it be reasonable to say that you are assuming that syndicated loans will still have their exemption but you want some certainty of that? Is that what you are saying?

Mr Green —Yes. It is a clarification issue to fully cover off on syndicated loans so we can continue to go through the process of structuring loans et cetera and selling those loans to the offshore market. But the participation in loans by foreign banks is by professionals; it is not widely uncontrolled. These are all registered banks in overseas markets who are not domiciled or do not have lending offices in Australia. As I said before, the Australian market probably has 30 reasonable lenders who are active in the syndicated loan market, and syndicated loans cover the whole range from corporate financing to infrastructure and project financing—all sectors which are critical to the Australian economy. So the loan market itself has outgrown the capacity for Australian based entities to fund those loans and hence we need to go offshore. For that we need to be seamless, I suppose, in our approach to placing those loans, without having any potential issue for concern whether or not we gain the exemption for the loan.

CHAIR —Nothing that I have read from the Assistant Treasurer and Minister for Revenue would indicate to me that syndicated loans would not retain their exemption, but I presume you are concerned that there be some element of certainty around them. Is that right?

Mr Burke —There is a lack of certainty, yes. It has never been an understanding, from the start of consultations on this matter, that syndicated loans would miss out, but we believe that schedule 2 does create uncertainty.

CHAIR —Well, as I said, nothing I have read would indicate to me that they are going to lose their exemption, but you want some clarification of that.

Mr Green —No, we are not seeing loans being targeted by the changes, but we are just seeking that clarity.

CHAIR —Yes, I understand. Colleagues, who would like to kick off the questions—Deputy Chair?

Senator STEPHENS —Thank you, Chair. Thank you, gentlemen, for your submission. I want to go to a point that you made, Mr Burke, in your opening statement. You told us that you had provided your paper to the ATO and Treasury. In terms of Treasury’s response, you said you were working with the minister and were hopeful about it.

Mr Burke —Yes.

Senator STEPHENS —Given that we are here to examine the legislation as it stands and you have drafted an amendment—

Mr Burke —We proposed an amendment which we delivered to Treasury on Thursday. We have not had any response to date.

Senator STEPHENS —Okay. Chair, do we know when this bill is likely to be introduced into the parliament?

CHAIR —I think at the moment it is intended to be listed for debate this sitting week, but that is probably unlikely, I have to say, given the workload that is there.

Senator STEPHENS —Sure.

Mr Burke —May I continue with the answer to that question? We did not think it was appropriate to table it today unless and until Treasury had provided some response.

Senator STEPHENS —Okay. You have not got a response yet?

Mr Burke —No.

Senator STEPHENS —In terms of the issue of retrospectivity, which is always a concern to us, Mr Green, you made the point about loans that have not been drawn down but might be. Can you give us a quantum of what that represents?

Mr Green —Traditionally, loans, particularly in the project finance or infrastructure sector, are given up-front, as in the total amount of the loan. I do not have any dollar value details. But, for instance, we can look at ConnectEase. ConnectEase is a $2 billion transaction. It is only drawn at this stage to about $500 million because the way the process works is that the sponsor money goes in first then the project finance is drawn as it gets down to conclusion. It is not due to be completed for another 12 months. So at the moment almost three-quarters of that loan is yet to be drawn. There is a question therefore: when it is drawn, is that a new loan and therefore does it qualify for the exemption? That is one of our concerns going forward.

Senator STEPHENS —Is that an issue that you have raised with Treasury and the ATO?

Mr Green —Yes.

Senator STEPHENS —Did you get a response on that issue?

Mr Burke —Not specifically.

Mr Miller —Can I clarify that? There are two forms of loans which are put in place and then drawn at a later point in time. One is the progress draw loan that Wayne has just mentioned, but there is also what we call a revolving loan. A company requires funding over time and that funding will increase and decrease over time. That is more for a corporate structure rather than for a straight infrastructure type project or a construction facility. Nonetheless, it gives borrowers a lot of flexibility that they cannot get, for instance, from the capital markets, where the banks can allow loans to be drawn and then be repaid and drawn and repaid. That is the other way in which loans may be drawn under an existing facility some time in the future.

Senator STEPHENS —In that case, Mr Miller, you can see that in an infrastructure project you can almost map the process of drawing down, I suppose, as the project moved ahead. But, in the revolving loan, can you see that there are different issues in relation to the retrospectivity considerations in this bill?

Mr Miller —Certainly that concern would also apply to those loans. It is certainly something that the legal fraternity have had in the back of their minds and they have tried to come up with structures to try to deal with any risk. It is not to say that the risk is actually there; it is more dealing with the risk of that occurring. That is another way in which there can be a potential impact. The important thing there is that what borrowers look to from the bank market in relation to these revolving loans is flexibility and, certainly, to borrow interest in order to have those flexible types of loans.

Senator STEPHENS —Is there any evidence that the bill is causing disruption in the syndicated loan market now?

Mr Green —I think it has brought some caution to new loan transactions going forward, because we cannot give the same degree of confidence that we have prior to the bill going through in regard to the treatment of the loans going forward. This is particularly important for offshore entities and the borrower, of course, where they may be impacted by the gross-up clause. Also, when a bank is reviewing a loan opportunity or a credit opportunity, they will need to sign off in regard to the taxation position. If that is grey then they will not get that sign-off. It may stop them from coming into a new loan transactions that we are trying to sell out of Australia. So there is some caution at the moment—

Senator STEPHENS —Have you had those discussions with the ATO?

Mr Green —Yes, certainly, because I chair the association. At our meetings, it is a point of conjecture at the moment as to how this is going to go forward. As I said, the industry is not concerned so much about adhering to the guidelines and the rules. It is just having the clarity about what they are going to be and having no potential for interpretation going forward. Hence, with the 2005 adjustment, debt interest and qualifying for debt interest is clearly the process that we undertook.

Mr Burke —Can I add to that. I am not in the market as Mr Green is. I certainly speak to my colleagues in other industry associations and the sector. One of them will be here at the next hearing. The view that there is uncertainty is very widely held.

Mr Miller —There has been a very concrete impact. In 2005, when debt interests were introduced, the market did move to a more internationally recognised format—that is, it dropped the debenture concept and what we called a loan note concept. Once there were initial rumblings that there was a view from Treasury, or from the ATO, that the amendments went too far, the law firms reverted back to the debenture concept in relation to giving their advice. So most of the products that we saw moved back to the loan note type of structure. This structure is extremely cumbersome. It is necessary to create a concept of a registrar. It is also necessary to update the register every time there is a drawing or repayment, and it does create operational risk. Of course, at the end of the day, that is an operating risk that gets paid for by borrowers, through payments to registrars. So there has been that sort of impact as well.

My understanding of what these regulations do is that they require what falls within debt interest to be done by way of regulation, but also they allow for regulations to remove certain debentures from eligibility. Not only is there uncertainty created because the debt interest route is no longer used by the marketplace and the market has reverted to loan notes, but also the possibility is created of regulations removing syndicated loans from eligible debentures. As the chair quite rightly pointed out, there has been no suggestion of that, but that does create an element of uncertainty and risk.

Senator STEPHENS —You are proposing a negative list of debt interests that are not eligible for exemption that should be included in the act. Is that right?

Mr Burke —In there, unless specifically excluded.

Senator STEPHENS —Mr Burke, you said the regulation-making powers do not fix the financial—something or other. You are concerned about it being in regulation. Can you elaborate on that?

Mr Burke —Sure. Firstly, we think that the matters upon which this discussion turns are crucial and they need to be in the legislation, not in some regulation-making power. Secondly, there can often be substantial delays in producing regulations in relation to a particular case—for example, upper tier 2 subordinated debts. We have been at that for nearly four years now. To have that level of uncertainty in these very large markets is unsatisfactory. We also think that, even from the point of view of the law-makers, the approach will be difficult because it will mean considering the market at some level of frequency to determine where there have been changes which need new regulations or modifications to existing regulations. Our approach, we believe, provides a fairly simple structure which will not need to be revisited every period of time to change.

Senator BERNARDI —Mr Burke, you mentioned credit cards in your opening statement. Can you clarify for me whether credit card debt is then sold offshore? Is that what you were suggesting?

Mr Burke —No. I was suggesting that if a credit card product were to be regarded as a deposit, which in some cases it might be—

Senator BERNARDI —As a deposit rather than a credit facility?

Mr Burke —Yes, because it has a deposit balance. You can have a deposit balance on a credit card. So the treatment of that particular product might be that it is a deposit and therefore it should be excluded, we believe.

Senator BERNARDI —Thank you. I was just intrigued as to how it fitted into this process.

Mr Green —I think it was more an example of a retail product that in some form or another needs to be excluded.

Senator BERNARDI —It could cross both sides of the spectrum, according to how you want to define it.

Mr Green —Yes.

Senator BERNARDI —Senator Stephens had some questions about retrospectivity, the drawdown of loans in infrastructure projects and also the revolving line of credit. Do you believe that these things should be treated differently? They seem very different products to me. The $2 billion infrastructure loan, which has already been established, and which is going to be drawn down progressively seems to be a different product. It almost merits different treatment from a revolving line of corporate credit where people can repay it and redraw and things of that nature. Do you have a comment on that?

Mr Green —We do not see any differentiation between the products. It is about the client’s ability to borrow a certain loan amount, and that is the amount that we generally syndicate to a broader group of banks. I do not think a loan with a drawdown process should really have any different treatment to a loan fully drawn from day one. It is just the inference under legislation on the way it was treated—the revolving nature or the gradual drawdown process. Every drawdown could be seen as a new loan and therefore a new qualification.

Mr Miller —There are a couple of things there. One is that the actual body of the lending terms and conditions are exactly the same, irrespective of whether it is a term loan or a revolving facility. The actual provisions that deal with revolving facilities are quite a small part of the loan; it is only a couple of clauses. Also there are a number of loans which can be part revolving and part not revolving. A particular loan may have a term element and also a revolving element. We have also seen term loans with a particular tranche where, in particular circumstances, the borrower can repay it and then, for instance, after a two-month gap, redraw again. I do not think it is possible to say they are different products. They are just an elaboration on the same product.

Senator BERNARDI —I guess I am trying to deal with the retrospectivity issues. A loan that has already been partially drawn down under the old regime has a finite time—as with your $2 billion infrastructure loan. But there is no finite time with an ongoing line of credit. I just wonder whether they do warrant differentiation. You had said, no, that you regard them as the same.

Mr Green —I think under a finance project or infrastructure type transaction there is also flexibility because, as we know, not all projects go to the timetable. There can be a deferral of those drawdowns over time as well, subject to reaching certain benchmark hurdles in the progress of that project.

Senator BERNARDI —But, if part of it has been drawn down, you could mount the argument that the loan falls under this regime and any future loan facility established has not been previously approved, whereas the case is slightly different because that could go on forever.

Mr Green —Revolving, yes.

Mr Miller —The other element to that is that that is certainly the view the law firms have taken. For the purposes of doing a public offer test, the view that seems to be recognised within law firms is that that initial public offer test or exemption applies to the full life of the loan, whether it has been repaid or not. They have used a couple of techniques to do that. That does not remove the uncertainty, of course. But there were also some tax determinations last year which suggest that the ATO adopted a similar view, that loans which were repaid and redrawn had the same debt interest—they used debt interest in that context. Certainly the question of the uncertainty in relation to this change has been brought up by the firms. We are getting quite technical and probably out of the expertise of the three of us, but that is an uncertainty that has been brought up.

Senator BERNARDI —It is the masters of the universe who decide how this works. Is that right?

CHAIR —You are obviously not lawyers because you have only given one opinion.

Mr Burke —I would like to add a comment. The complexity of what has been a fairly brief discussion indicates why for us the approach of trying to define a whole set of products by regulation is fundamentally flawed. Our approach is a fairly simple approach. It excludes deposit products for which there are very widely accepted definitions in the corps act and FSR.

Mr Miller —That is a very valid point. The difficulty is that these products are evolving. They are market based. There is no definition around them; there is no need to define them. For instance, what is the definition of a syndicated loan? It is very difficult to put a definition around that. So to try to introduce the concept into legislation would be extremely difficult because of the fact that they are evolving. There are subtleties around those concepts, about which I will not bore you with the details. The question is: where do you draw the line?

Senator BERNARDI —But there is an industry accepted definition: if you referred to a syndicated loan, your industry would know what you were talking about, wouldn’t they?

Mr Miller —As a general concept, you would, but then it comes down to the devil in the detail. For instance, we are doing a transaction at the moment where an Australian borrower has found banks themselves and introduced banks. Certain terms are consistent across the banks, but certain terms are not consistent across the banks. That is not a traditional syndicated loan structure, but it is probably something that would appear in the league tables as being a syndicated loan. So the question is always how you actually define these things. As well as looking at some of the other products that are out there, again these things do evolve. New products develop over time, things such as I mentioned before with the revolvers: a term loan that you can actually repay but then redraw further down the track. Those things are evolving depending on the requirements of the borrower.

Senator BERNARDI —But as things do evolve, there is ministerial discretion in this bill, is there not, to provide other exemptions?

Mr Miller —And I think the issue then comes back to Mr Burke’s opening comments about the time to market. If there was a requirement, when you are structuring a product, to go and get ministerial approval, I would suggest that people would probably throw their hands up and go with what they have got. In a lot of situations, speed to market is extremely important, so there is not a lot of time to structure a transaction. It needs to be done in a very short period of time, particularly around some of the bid processes such as the bids for infrastructure finance and also the bids for some of the other event driven financings in the marketplace. Confidentiality is also crucial. So the degree of uncertainty that comes with having a new product and then having to go and get a regulation passed in order to include it would be fraught with a little bit of danger from the perspective of the industry.

Senator MURRAY —I wanted to deal with that point. I will start with that. To me, the danger that you have just outlined is that the government’s policy of reducing regulation is defied by this provision and you are going to get a degree of central planning injected into what is presently a highly dynamic real-time process. Is that right?

Mr Miller —Yes, that is correct.

Senator MURRAY —It seems odd to me. When a legislator sees that a provision has no financial impact and it is an existing provision, the automatic assumption before you look at it is that it is either an efficiency measure or a clarification measure. However, the wording of this measure is specifically directed at improving integrity. If you improve integrity, you should have a financial impact. So I cannot find the reasons that this should be brought forward. At 2.9 on page 46 of the explanatory memorandum this statement appears:

However, interpretative pressure on the relevant law has the potential to substantially widen the range of debentures and debt interests that could qualify for exemption from interest withholding tax, beyond the original policy intent.

CHAIR —I am glad you raised this, Senator, because that was going to be one of my next questions also.

Senator MURRAY —There is no financial impact from this measure, so they do not expect to close any integrity holes—no money coming forward. That means they are forecasting something which is indeterminate. Are there any market signals about ‘interpretive pressures’—whatever that means? Is that courts? Is that market practice? Is there somebody losing money somewhere? What is this leakage?

Mr Burke —We have not seen it. We also find the term ‘interpretive pressure’ curious as we are not observing it in the marketplace. We understand that, to the best of our knowledge, one party asked for an interpretation from the ATO in relation to a deposit product. I do not know whether that constitutes interpretive pressure. That is the only example that we have seen.

Mr Miller —I understand that the ATO is speaking later on this morning. We argue that the suggested amendments that were put forward by the ABA and supported by the APLMA get over those types of concerns. It identifies the type of product that we understand Treasury and the ATO are concerned with and deals with it with some definitions and some language that relate to retail in the FSRA space. This is looked at quite widely in the marketplace because of the importance of those provisions. So there is a lot of certainty and clarity around the type of products that would be excluded.

CHAIR —But today’s product is not necessarily tomorrow’s product, is it?

Mr Miller —That is correct.

Senator MURRAY —Which is why you want a dynamic market, which you don’t interfere with, with regulation. That is right, isn’t it? That is your point.

Mr Miller —Yes.

Senator MURRAY —Let me just understand this, because it is a very technical area. We have an existing market circumstance, which this law proposes to adjust, which will then require regulation, which we all know takes many months to clarify if a problem emerges. To your knowledge, there is no problem whatsoever identified in terms of market integrity or loss of revenue. Certainly the EM does not spell that out. Therefore, they are correcting something which is just expressed in highly generalised terms; it is not related back to a court case, a tribunal decision or an ATO ruling problem—nothing of that sort exists out there. Is that correct?

Mr Burke —Not that we have seen. Concern was raised about deposit products. As my colleague Mr Miller said, ‘If that is a concern, then here’s an approach which squarely addresses that.’ As opposed to that approach, a simile is to look at the galaxy and try to define every star, including those which won’t come into being for some time into the future.

Senator MURRAY —Before I get to the issue of promissory notes, how far back does the retrospectivity go in this provision? You say it is a retrospective application.

Mr Burke —My recollection is 7 December.

Senator MURRAY —I see. When I think of promissory notes, a little bell rings in my head because there was a court case concerning Westpoint which indicated that there were some difficulties with the fitting of promissory notes into this broad area of determination. That affected the way in which a prospectus could be offered. The obligations under the Corporations Law follow on with the whole Westpoint mess. I wondered if this was a mechanism by which that court case could be addressed, although you say it is only December.

Senator WEBBER —I initially want to return to the issue of your proposed amendment. Have Treasury or ATO or anyone given you any feedback on when they expect to be able to come back to you with a view?

Mr Burke —I spoke to Treasury on Friday, in the middle of the day, who indicated that they were considering it, who indicated that they were preparing a paper for the minister. I attempted to make contact with her again this morning, but failed.

Senator WEBBER —This is perhaps more a general discussion for the committee, but I personally would be reluctant to proceed with the legislation until we have had further discussion about an amendment that some of us, particularly those of us from the opposition, have not seen and don’t know whether that is the approach we want to take. This is something we can obviously talk to them about, but if we are not sure that they are going to come back this week, it would make it hard. I know that the minister is in a bit of a hurry for us to deal with this legislation, which is why we are here today rather than later in the week. What would your recommendation be if they come back to you and say: ‘We don’t need to amend the legislation; we’ll fix your concern by further regulation’? Would you recommend that we pass the legislation?

Mr Burke —No.

Senator WEBBER —What will the impact be on the market if we keep fixing these things by legislation? If we adopt your approach, which you say gives certainty and allows flexibility, will we keep facing bills like this if we go down the Treasurer’s line of amending the legislation every time there is something new that we have to consider?

Mr Burke —That would be our view: either amendments to the head legislation or amendments to regulations; or, that new regulations are put in place or a withdrawal of regulations. These markets do change in character rapidly for varying reasons. International legislation and practice is changing and Australia needs to keep pace with that. As I think we have discovered together in this fairly brief discussion, these are very technical matters.

Senator WEBBER —Yes. They are far too technical for me, that’s for sure.

Mr Burke —To revisit them every year, or whatever the time frame might be, seems an unwieldy approach.

Mr Miller —I would like to make another point on those types of issues: there are double-tax treaties with the US and the UK. It is certainly not my area of expertise but my understanding is that payments of interest going from Australia into those two countries are exempt from withholding tax. So effectively you will have two regimes: one in which you do have some certainty; another in which you could have an element of uncertainty, which will skew the involvement of banks lending in this market towards the UK and US banks.

Senator MURRAY —If you cannot determine the immediate effect of any uncertainty in a financial market you just add a premium to your risk, whatever that is, don’t you? It is just the cost of capital.

Mr Green —In this case that risk is passed on to the borrower in the form of withholding tax.

Senator MURRAY —That is right. So uncertainty translates into a defined economic cost to the user of capital.

Senator WEBBER —And it is an interesting dynamic in the marketplace when that uncertainty comes from legislation and bureaucratic regulation, and it is one that we should be able to fix.

CHAIR —I find this discussion fascinating. I take a slightly different view from Senator Murray. There is acknowledgement that the integrity of revenue has to be protected, and I think we have acknowledged that this is a very fluid area and that there are constant changes. There is still the opportunity for parliamentary debate on regulations and disallowable instruments, which can be dealt with very quickly by the parliament. I am a bit concerned; we are all acknowledging there can be rapid change. Earlier, Senator Murray quoted the EM, but if you look at clause 2.3, it states:

The Schedule does not seek to upset the long held and accepted market views as to what constitutes a debenture. It will, however, provide a safeguard against unintended broadening of the range of financial instruments eligible for exemption.

Isn’t regulation the very way that you deal with changing situations in order to protect the integrity of the system?

Senator MURRAY —There is no financial impact, and that is what worries me. If they had said, ‘We’re going save $10 million a year from this.’ I would say, ‘Okay, you’ve identified a leak and this is your method of solving it.’

CHAIR —I think there is more cost to revenue if there are unintended consequences. I think there has been an acknowledgement at the table that things are changing very rapidly, and there may well be unintended consequences from that. Do you acknowledge the interpretative range of exemptions and that changes in markets may well test the current exemption interpretation?

Mr Green —I think that will always be the case going forward. We are reasonably selfish in our representation and submissions. We are focused on one part of the market where, within the certain rules and regulations we have been operating under, everything had been fine. But this has brought up a lot more grey to the whole equation. That uncertainty will have an impact on our market going forward.

Senator WEBBER —To be fair, I think this is a more dynamic discussion. Numerous times before the committee has been faced with legislation from Treasury with regulation to follow, but the regulation is not drafted and often we do not see it for 18 months. So there have been some problems with marrying the two things up. That is my hesitancy in relation to the certainty in public policy. Your predecessor as chair had huge issues with Treasury.

CHAIR —If you take the syndicated loan aspect of it, on which I think we all agree there needs to be some clarification, just as a matter of principle: are you better able to react to these things by way of regulation or by way of a convoluted loose-leaf process? We all have obligations to protect the revenue base for expenditure in other areas, and I think we all acknowledge that; it is how you best respond to threats to that.

Mr Burke —Chair, I would like to respond. Firstly, there are grey areas in the EM. You drew our attention to 2.3, which states:

The Schedule does not seek to upset the long held and accepted market views as to what constitutes a debenture.

You can see a grey area if you compare that with 2.10, which in the middle of the paragraph states:

The scope of the term debenture is generally considered to be a matter of some uncertainty, with the terms debenture and security having broad common law meanings.

And it goes on.

Senator MURRAY —And so it should; isn’t that the basis of a market?

Mr Burke —Absolutely.

Senator MURRAY —The market must be uncertain because it is constantly changing.

CHAIR —But the question is whether you respond to that by way of regulation, which is far more easily implemented, or whether you go through a convoluted legislative process. And I suppose that is what the committee will discuss. So, gentlemen, thank you very much for your time; we have now run out of it.

[9.52 am]