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

CHAIR —Welcome. I will recap a couple of matters for the benefit of the officers. The Senate has resolved that an officer of a department of the Commonwealth or of a state should not be asked to give opinions on matters of policy and should 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. Do you wish to make an opening statement?

Mr Rawstron —No, we do not wish to make an opening statement.

CHAIR —Senators, questions?

Senator STEPHENS —Yes, I will start. You heard the previous witnesses, so I suppose the first question is: what do you see as the mischief that the bill is intended to address?

Mr Rawstron —The bill is directed at restating the original policy intent behind the 2005 amendment—that is, simply to reflect the changes that were occurring at the time with the TOFA legislation, which dealt with changes to the debt equity rules. Simply put, the bill is attempting to restate the policy, which is that the interest withholding tax measure was always aimed at providing relief for equity raising of debenture types and those which meet the public offer test. It was drawn to our attention that, potentially, the words in the 2005 amendment could be interpreted in a much broader way than was ever intended.

Senator STEPHENS —So you are saying that potentially it could be, but the EM actually mentions ‘interpretive pressure’. Has there been interpretive pressure?

Mr Rawstron —It is a question you would have to ask my colleagues at the ATO, but my understanding is that the answer is yes.

Senator BERNARDI —Pressure brought by whom?

Mr Rawstron —Well, people will apply to my colleagues at the ATO—they will be able to answer when they arrive!—for private rulings, and some of the applications that they were receiving were applying what you might call unique interpretations of what is a debt interest and how you might interpret what a debenture is.

Senator BERNARDI —How does that differ from the private rulings that people seek with regard to other tax treatments?

Mr Rawstron —It is no different. That is my understanding.

Senator BERNARDI —So it is the same process?

Mr Rawstron —There would be no difference. The only issue, I suppose, is from a policy point of view, and it is probably something the previous witnesses said: what do the words of the legislation mean as against what the policy intent is? There was some concern that maybe the words could be interpreted beyond what the drafters of the words thought they meant.

Senator BERNARDI —Which is the role of every lawyer in Australia, isn’t it?

Mr Rawstron —That is right.

Senator BERNARDI —With all due respect to lawyers! Thank you.

Senator WEBBER —Is it the view of Treasury that the legislation as it stands completely addresses the mischief, or is it anticipated that we will need regulation for that?

Mr Rawstron —You have to look at the bill as a whole. It is in a sense restating the original policy intent but recognising that the market has moved on. As a form of architecture, in terms of designing the bill, the view was taken that the easiest way to restate the policy and recognise that the market had moved on and deal with the future was to use the regulation-making mechanism. That was seen as the best way to achieve that. So, for a lot of the submissions you have received, it is a question of how you design the policy, how you actually implement it, and our best judgement was that using the regulation mechanism provided the government with the flexibility both to address the current changes in the marketplace and to make decisions about what it wanted to do for the future.

Senator WEBBER —But there is no capacity, therefore, to get the legislative framework right in the first place. Instead, we are going to have this legislation as it stands and then the capacity for a lot of disallowable instruments to come into the parliament every time there is movement in the market.

Mr Rawstron —Our intention was that the development of the regulations and the development of the legislation were contemporaneous, so a lot of the developments in the marketplace will be addressed through the regulations.

Senator WEBBER —So, if they are contemporaneous, are there draft regulations?

Mr Rawstron —We were in the process of doing them at the time the measure was being put before the parliament.

Senator WEBBER —Are they available to the committee?

Mr Rawstron —No.

Mrs Laduzko —They are not, predominantly because that process has not progressed while this process is being addressed.

Senator WEBBER —This committee is often faced with the problem of accepting legislation on face value, being told that the regulations are coming later and they are going to address any concerns that we may or may not have. But then we do not get to see the regulations for a long time. It is very difficult when you are dealing with market certainty to accept that something you do not see is going to address the problem. So is there a time line for when the regulations are going to be out?

Mrs Laduzko —Like I said, industry has stopped participating in the regulation consultation process while they have deliberated through this process. It had been our intention to have the regulations drafted as soon as possible with the commencement of the act. Before you were also alluding to the negative reg power, which some of the other witnesses spoke about. It was not our intention to be drafting regulations to use that power.

Senator WEBBER —The last time we dealt with—

CHAIR —Sorry to interrupt you, Senator Webber, but could you walk me through that again, Mrs Laduzko?

Mrs Laduzko —A number of the other witnesses, and also I think some of the submissions, alluded to the regulation power to carve things out of the exemption. The explanatory memorandum to the bill said we had not intended to use that power. We did not intend to unwind current practices, particularly interpretive practices around debentures, and that was still the case. We went into consultations with a view to finding out what instruments might need to be included in the exemption. We were not consulting on the basis of excluding things.

CHAIR —That is very important.

Senator BERNARDI —This is in regard to the ABA proposal about the negative list?

Mrs Laduzko —Yes.

Senator WEBBER —Is that actually written down somewhere? Is that part of the framework or do we just learn this through this process? It seems to me we need some kind of more rigorous commitment on that than just an exchange between us.

Mrs Laduzko —The explanatory memorandum to the bill indicates that it was not the government’s intention to use the negative reg power at this time.

CHAIR —That is a very important clarification, I have to say.

Mr Rawstron —If I may add to my colleague’s comments, we have been aware since mid last year of the concerns that industry had about the particular measure, so we are well alert to their issues around syndicated loans et cetera.

Senator WEBBER —And is it Treasury’s view that the legislation as it stands addresses industry concern?

Mr Rawstron —When taken with the regulation-making power.

Senator WEBBER —With the regulations that the committee will not see before it passes the legislation.

Mr Rawstron —I can understand your point.

Senator WEBBER —The committee has been down this road before. We take on face value that the concerns the committee may have with a piece of legislation are going to be fixed by regulation. We never see the draft regulation. The draft regulations come in 18 months later and they do not necessarily address the concerns we initially had, but we all go on memory and some kind of understanding. This is a big and dynamic market. I would have thought we needed a bit more than this to correct a bill. The last time we looked at it was in 2005. Two years later we are passing a new piece of legislation and then we are going to fix it all by regulation. It seems to me we are constantly tinkering at the edges rather than fixing the problem.

CHAIR —That is probably an opinion on the policy.

Senator WEBBER —Our previous witnesses said—and I am paraphrasing and probably taking them completely out of context—the draft legislation is a bit different from what they thought it would look like through the consultation process. Do you have any comment on that?

Mrs Laduzko —We initiated a consultation process when we first realised that we needed to amend the legislation to reflect the government’s original policy intent. A number of people made submissions, including the gentlemen here as witnesses this morning.

Senator STEPHENS —Just while Senator Webber is regrouping and the ATO grab their breath, can I go back to your asking us to place great faith in the explanatory memorandum. It actually says that the regulation-making power will only be used where specific abuses emerge. Can you elaborate for us on against which criteria that will be determined and what could constitute a trigger for prescribing an instrument? What monitoring do you intend to do?

Mrs Laduzko —Our ATO colleagues can flesh this out somewhat, but the particular reason we had the negative regulation put into the bill was to address various concerns that may have arisen from the ATO’s perspective in terms of interpretation of ‘debenture’; it was not actually a focus on the debt interest predominantly. We worked through those issues and we concluded that, rather than attempting to more circumscribe the concept of ‘debenture’ in the law at present, we would leave it to run the appropriate interpretive outcomes through the ATO but reserve this power in case there was evidence in the future about systemic deliberative issues of instruments just to achieve the debenture outcome. Part of our concern was also that the pressure on debenture would have worked to undermine the amendments we were making to circumscribe the debt interest eligibility back to what the government had originally intended.

The negative reg, as we call it, was actually intended as a middle ground, as opposed to attempting to actually prescribe more tightly what ‘debenture’ means—a term that I think other witnesses would agree has a very wide and broad meaning under the tax law at present. Our attempt was in fact to not upset current practices by putting in primary law certain attempts to circumscribe it which actually might have been more destabilising.

Senator JOYCE —Is there anything in this that would be captured under a capital gains tax net?

Mrs Laduzko —No, in the sense that we are only dealing with payments of interest on instruments.

Senator JOYCE —So there is no looking into it as tradeable instruments?

Mrs Laduzko —Obviously some instruments when they are traded would have capital gains implications, but that is not the focus of these provisions.

CHAIR —Senator Webber, are you collecting your thoughts?

Senator WEBBER —I’ll feel free to interrupt you!

CHAIR —I wasn’t too sure whether you had finished your questions.

Senator WEBBER —I will come back to it—I have some issues I want to come back to.

Senator JOYCE —Sorry about that, Senator Webber. I just wanted to get on the Hansard that I’m here!

CHAIR —I thought I’d made that very clear early on, Senator Joyce. Senator Bernardi, you have some questions.

Senator BERNARDI —How do you respond to claims that some deposit accounts like retail accounts and maybe credit cards will be caught under this schedule?

Mr Rawstron —When you say ‘caught’ you mean?

Senator BERNARDI —They could qualify for exemptions.

Mr Rawstron —Depending on how you define ‘debt interest’ and how you apply the public offer test you could argue that a freely available account which is a debt interest could meet the definition of the exemption under the legislation.

Senator BERNARDI —But Treasury does not have any particular problems with that?

Mr Rawstron —Yes.

Mrs Laduzko —Treasury does have problems with that. That is part of the issue that we are seeking to address with the amendments currently before the House.

Mr Rawstron —The concern was that you could interpret the current words well beyond their intended meaning, just on the face of it. What is a debt interest? Sure, it may be a bank account; a bank deposit might be a debt interest. And the only other proviso is that it needs to meet a public offer test. Well, is the mere fact that it is advertised in a newspaper enough to be a public offer? So the amendment is aimed at recasting or restating the policy: that it has never been intended that those types of transactions, those types of instruments be exempt from paying interest withholding.

Senator BERNARDI —I thought we heard earlier from another witness that this legislation does not address that. Have I misunderstood what the ABA said this morning?

Mrs Laduzko —The current bill as it stands is intended to exclude deposit type instruments. It is actually intended to restore the policy to where the government had intended it to be. As a corollary of that, it also safeguards against deposit instruments getting eligibility for interest withholding tax exemption. A lot of the pressure is around interpretations of the public offer test. However, industry has been very firm in its opinion that it would rather we did not revise our definition or interpretations of the public offer test because that may have consequential impacts on existing exemptions in place in the debenture market.

Senator WEBBER —Earlier we heard from the ABA and they said they had presented a proposed amendment. Do we have a timeline for when that is going to be considered and when advice is going to be given? I obviously do not want to know that. It is just that, again, the committee is in an awkward position in that they have flagged a potential amendment, which we have not seen, and we do not know whether it is going to be accepted or not, yet the government has us under pressure to deal with the legislation.

Mr Rawstron —Certainly the ABA has provided Treasury with some suggested drafting, but that suggested drafting has not really been tested at this stage. We are looking at it to see whether it delivers what the ABA says it delivers and then obviously it will be a matter for the government to decide whether it wishes to adopt that or not.

Senator WEBBER —Is it going to take you a while to look at it and see—

Mr Rawstron —I imagine that we would need to actually express a view sooner rather than later, given the timing of the matter before parliament. But, again, it is a matter for the government.

Senator WEBBER —I understand, but in terms of the timeline for when the Senate is going to consider the legislation—I would be reluctant to deal with it before you have been through that process.

Mr Rawstron —The key issue is: where does it draw the line as against the current proposed amendment? It may have implications for the way in which revenue is currently collected under the interest withholding tax. Obviously the government would need to balance that against other competing interests.

CHAIR —Can I direct a question to the ATO. There was a question raised before about interpretive pressure, which Treasury quite rightly indicated the ATO would be better able to answer. Has there been interpretive pressure in relation to this whole question?

Mr Latham —There has been some querying of what actually comes within this and it has been dealt with in a couple of ATO interpretive decisions.

CHAIR —Is there a concern within the ATO that there may be interpretive pressure in the future in relation to the rapid expansion and fluidity—if that is the right word—of this whole area, which was generally agreed in the evidence that was given before us?

Mr Latham —Yes.

CHAIR —Has that underpinned the decision and the recommendations made by the ATO?

Mr Latham —Treasury has been running the legislation and we have informed them of these potential pressures.

CHAIR —But the EM refers to interpretive pressure. Where did that advice come from—yourselves?

Mr Latham —Yes.

CHAIR —The EM states:

The continuing requirement that debentures and debt interests meet the public offer test limits the range of debentures and debt interests qualifying for interest withholding tax exemption.  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.  This represents a threat to the integrity of the tax system. 

Mr Latham —For example, one of the ATO IDs deals with certificates of deposit, which represented an extension from the wholesale market out into the retail market, and that was an example of that interpretive pressure.

CHAIR —I take it you are envisaging further changes with the expansion of this whole area. I am trying to find out what is underpinning all this.

Mr Latham —There could be those pressures. Currently it is in the early days.

Senator WEBBER —Can you expand on that? You are saying that there have been a couple of—

Mr Latham —There was a ruling request.

Senator WEBBER —A ruling request?

Mr Latham —Yes, that talked about certificates of deposit that were going to be made available to the retail market.

Senator WEBBER —I do not in any way want to diminish the work of the ATO or the market, but there has been a ruling request and there could be further interpretive pressure, and that is the basis for this section of the legislation?

Mr Latham —Treasury would need to answer that one.

Senator WEBBER —I am trying to work out what is driving this. We did not get it right in 2005 if you are having to restate a policy commitment.

Mr Rawstron —Basically, the issues which were behind the policy went to how you interpret the concept of a debenture and how the market is evolving. You could argue that it is a bit more inventive regarding what falls within the definition of ‘debenture’.

Senator WEBBER —I understand that, but I want to deal with certainties—not what I could argue in future may be interpretive pressure. Where is the evidence for it? Where is the evidence that it is happening now, that it is really a problem and we have to fix it? Because if there is a problem it means that we got it wrong in 2005.

Mr Rawstron —Sections of the market have been approaching the ATO asking for preliminary views about whether certain things fall within the current wording of the legislation. That raises concerns that perhaps in the marketplace there is a view forming that the meaning of the words of the provision are far broader than the policy ever intended. From my point of view, there are two ways of approaching this. You can decide to leave the legislation as it is and then deal with the outcome in the market. The market will move very quickly—as you are probably well aware—and then you will have to deal with the consequence. You could say, ‘If we did not expect to give up that tax revenue, do we go back and try to claw it back or do we let it go through to the keeper?’ Or, ‘Do we move now before the market has fully moved and restate the policy and then deal with what has happened in the market until now through regulation?’ You could argue the fact that this approach is actually clearer than leaving it uncertain and effectively placing the government in a very difficult position in deciding what it should do if the industry decides to test the existing law and we discover that you can interpret the existing law to mean everything is a dead interest and there is in fact no withholding.

Senator STEPHENS —So this is a pre-emptive strike?

Mr Rawstron —I would not regard it as a pre-emptive strike. It is simply restating the policy to provide clarity around the intention of the original 2005 measures.

Senator WEBBER —So there is significant evidence that the policy that was stated in 2005 is not being interpreted in the right way and that it needs to be fixed—or we think that might be the case?

Mr Rawstron —We have been advised that there is risk to those words.

Senator WEBBER —Can you quantify that for me? Again, this is a face value discussion.

Mr Rawstron —Quantify?

Senator WEBBER —So far I have one ruling and there may be interpretive pressure. I need some kind of quantification of the problem.

Mr Rawstron —I do not have the figures in front me but I know that interest withholding generates, in terms of revenue, hundreds of millions of dollars.

Senator WEBBER —But in terms of ‘if we don’t do this’, what is the problem going to be?

Mr Rawstron —If you do not do this then I suppose, as a matter of government, you can make a decision and run the risk of losing a particular revenue stream. The other thing that you have to bear in mind is that Australia has a tax treaty network. While we may be talking about the benefits to foreign lenders to Australian business, on the other side of the coin there are the benefits Australian financial institutions have when operating in overseas markets. My area is also responsible for negotiating tax treaties. One of the things that we use to get benefits for Australian financial institutions and other lenders is this: ‘If we don’t tax your interest withholding you won’t tax ours.’ If, by stealth, you unilaterally lose the ability because of interpretation pressure, that is not a bargaining chip I can actually use in negotiations because we do not have that. Over time you may end up with no interest withholding tax. That is an extreme view, but that is one argument that you can put.

CHAIR —I take it this has arisen because there was a very different and large expansion of the allowable instrument flying out of 2005 and expanded use of the term ‘debenture’.

Mrs Laduzko —It is partly that. We have been saying that we have been attempting to restate the government’s policy intent with these amendments. I think it was the way we constructed the 2005 provisions, with the use of the word ‘dead’ interest which, as a matter of law, is a very broad term. You cannot ascertain it as something else. Previous witnesses noticed that a very concessional and accommodating interpretation of the public offer test meant that the effect of the law was potentially considerably broader than the government had intended at the time it made the amendments in 2005. The amendments we have moved now are to restore the law back to what the policy intent was. However, there is regulation-making power included in that to address some of the issues that other witnesses have raised around the question: ‘Would we like to take the policy further in certain areas?’ That is what the consultation process we initiated was intended to look at.

Senator WEBBER —The EM says the financial impact of this will be nil.

Mrs Laduzko —I would really like to have our revenue forecasters here to explain that. It is a technicality about a correction restoring an original intent, which means because it has not yet happened. It is something I would rather get some advice on, clarifying why there is a genuine and substantial risk to revenue as opposed to something that says nil as a financial impact.

Senator STEPHENS —Is that some advice that you are able to provide?

Mrs Laduzko —Yes.

Senator WEBBER —I think that would be very helpful.

CHAIR —Do you want to take that on notice?

Mrs Laduzko —I would like to take that on notice, because it is not something I feel comfortable giving the correct explanation for.

Senator WEBBER —And how did we establish that the compliance cost impact will be negligible?

Mr Rawstron —I suppose you had industry witnesses who expressed their view, but our understanding is that the cost of converting an instrument into a debenture is quite low compared to the borrowings involved.

Senator STEPHENS —We heard evidence—

Mr Rawstron —It is the opposite, it is quite significant.

Senator STEPHENS —that absolutely that was not the case.

Mr Rawstron —As I understand it, if you are borrowing hundreds of millions of dollars, compliance costs may be less than $100,000. I am not quite certain.

Senator WEBBER —Can you take that on notice and find out for us? If we say the compliance costs are negligible but we do not really know, then it is a moot point.

Mrs Laduzko —It is also a relative assessment as to how many instruments had yet moved in the marketplace to take advantage of the broadening from 2005. It is probably not the case that the greater proportion had not yet adjusted their practices.

Mr Rawstron —One issue which does happen, and it is pretty easy to understand, is that converting an instrument into a debenture is not something well understood overseas. Certainly there is a cost in trying to convince your overseas banker that you need to do it this way, so time and effort has to be put into that. My understanding is that creating the instrument is not a significant dollar cost compared to what you are borrowing.

CHAIR —But it was the cumbersome use of that debenture that was causing problems internationally, and hence those 2005 amendments were to ‘deburden’ it to a certain extent. That is my understanding of the principles that underpinned that.

Mrs Laduzko —You have already heard evidence about the TOFA amendments with the debt equity rules. A couple of years after those amendments, there was an adjustment that said non-equity shares that would once have been equity with dividends would now be regarded as debt interest. Then there was a change to the law in 2003 that deemed that dividends paid on these types of debt shares would be interest, which meant it was an interest stream.

The 2005 amendments were targeted at those hybrid instruments that shifted from being equity to being debt. They had lost the benefits of dividend imputation and other things that go with the dividend stream, and we said: ‘They’re quite harmoniously capital raising. They would have been shares in another form or they would be a debenture issue, and now we’ve changed the law to say that those dividends under that type of share are now interest.’ Our view at the time was that they should be allowed to seek the IWT exemption on the basis that we had changed their character and probably carved them out of some other concessions.

CHAIR —The institute of accountants gave evidence that that opened up the market to a different range of people who previously were probably advised that, because of the costs associated, unless it was $50 million they were not in the hunt. My understanding of the evidence given was that it opened the market up further.

Mrs Laduzko —The legal effect of the amendments we made was that, but that was unintended.

Senator STEPHENS —Mr Rawstron, can I come back to the points you were making. First of all, Senator Webber asked you what would be the impact if we did not pass this. I am paraphrasing you, but you said you would make a decision that you are prepared to forgo that revenue. That is not really the impact of not accepting schedule 2, is it?

Mr Rawstron —We would not be moving the amendment unless we thought there was an integrity matter that we needed to address. The government decided that it wanted to do something else. Obviously, you would have to count the consequences of doing that. All I am saying is that I do not think you can draw the conclusion that there is not a consequence for deciding to remove schedule 2. There is a consequence—over time there will be.

Senator STEPHENS —Sure, although you cannot quantify the consequence in terms of revenue for us.

Mr Rawstron —The consequence would be at the extreme that you lose the ability to raise interest withholding tax on anything which is a debenture and broadly defined as debt interest. As I said, that would amount to hundreds of millions of dollars per annum.

Senator STEPHENS —Sure, but that would only be if there was a challenge. You suggest that some of the lawyers might actually challenge some of the interpretations that currently exist or currently are being applied in the legislation as it stands. There are some quite clear interpretations in rulings so far about what is applicable under the act. We are not looking at this being a massive loss of revenue to the government if this did not go ahead in its current form, are we?

Mr Rawstron —All I can do is say what I said before. We do not administer the legislation. The ATO administers the legislation. They are the ones who can see what happens in the marketplace. It is not for me to make that decision. It is for the government to make a call about that.

Senator STEPHENS —When we talked about what the mischief was that was intended to be addressed in this bill, you said that the ATO had been asked to rule on a unique case. Is that the certificate of deposits you were referring to before? Was that the unique interpretation?

Mrs Laduzko —We might have misparaphrased each other, but I did allude to the fact that the regulation power that is currently within the amendments to carve things out from eligibility was intended as a mid-ground outcome to concern there were pressures on the debenture side of things. Rather than putting into the primary law certain carve-outs or clarifications about what we meant ‘debenture’ to be, which might have created even more uncertainty in the marketplace than is currently alluded to, we chose this path in case the ATO gave us advice in the future that there was a systemic and deliberate program of deliberately trying to get the debenture exemption, and we would leave it at that point rather than trying to address what we thought were the pressure points at the time. The concern around debenture is quite closely aligned to what we were trying to do with the amendments on the debt interest side, which meant that, if we had not fixed the debt interest to restore the policy intent, pressures on debenture could have undermined the effect of that amendment and made the whole thing redundant.

Senator STEPHENS —Is that how the ATO interprets the situation?

Mr Latham —Yes.

Senator WEBBER —It still sounds very pre-emptive, though—this could happen if this may happen.

Senator STEPHENS —And reserving the powers for some future opportunity.

Senator WEBBER —I do not have any of the expertise that any of you do.

Mrs Laduzko —I can only note that industry itself did flag with us certain ways one could look at the public offer test, which drew attention to this issue.

Senator STEPHENS —There is one point I wanted to go back to. Mr Rawstron, you suggested that the idea of using IWT exemptions in treaty negotiations was something that you do. With what countries do we have that negotiation?

Mr Rawstron —Australia has over 40 tax treaties.

Senator STEPHENS —Could you take that on notice and provide the ones where you have used that negotiation?

Mr Rawstron —Certainly the United Kingdom and United States tax treaties provide reciprocal exemption from IWT. Most of the syndicated loans probably organised through those two countries—

Senator JOYCE —Does the United States have a reciprocal capital gains tax exemptions, where you just provide them with the real property asset capital gains tax exemption?

Mr Rawstron —Most of our treaties are moving towards residence based taxation, which effectively means that you would lose—

Senator JOYCE —Does the United States have that? If I am here and I buy and sell Continental Airlines in the United States, is that capital gains tax free in the United States and only taxed in Australia?

Mr Rawstron —I will have to take that on notice.

CHAIR —I want to take you back, Ms Laduzko, to some comments you made. Clearly what was put to us this morning by a number of witnesses was that there is a view that there are two proactive parts to the regulation: you have told the committee that one part will be proactive and one part effectively will be kept in reserve. Would you acknowledge that that might be leading to some uncertainty?

Mrs Laduzko —Obviously, it must be because that is what the witnesses have been saying to you. Unfortunately, that wasn’t our intent; it was as a better outcome to making prescriptive changes in the law to what might be meant by debenture. Admittedly, as one of the senators mentioned, you can only take our aim on faith. As I said, it was not our intention to use that regulation making power but I reiterate that the interest withholding tax provisions are about enforcing a taxing right we have, and there are some significant integrity aspects to those provisions which we would look to be able to safeguard.

Senator WEBBER —It is Treasury’s view that if we do not pass this, the entire regime is under threat—that is the message I am getting.

Mrs Laduzko —It is Treasury’s view that there are some risks to revenue beyond what the government intended associated with this—

Senator WEBBER —See: we are still grappling with the unknown.

Mrs Laduzko —It was never the intention that the concession be given to a range of standard depository products. The way the law works it possibly could be extended that far, and industry has raised those speculations with us. The fact that they have not yet acted upon them does not mean they cannot or will not.

CHAIR —I take it from what you are saying that you believe regulation is the best way to address a rapidly changing market situation to protect the integrity of the law as it stands. Is it Treasury’s view that you need that regulatory power to respond quickly rather than through a legislative process?

Mrs Laduzko —We had thought that the regulatory making power would be a positive in the sense that it allowed us to consider extensions to the policy if the government so wished and was prepared to trade off the gains to the marketplace versus the revenue cost to Australia, and that we would be able to do it through a reg faster than we can amend primary law. We also thought—the explanatory memorandum alluded to this—that the regulations could function to transition instruments that had inadvertently received eligibility since 2005. That was part of the consultation process we had initiated. But things can obviously be viewed differently by different parties.

CHAIR —You were coming from the point of view that positive discrimination was more likely to lead to additions to the withholding tax exemption. The witnesses have put to us the potential for reductions in that list and therefore the uncertainty. I take it that was not the intent.

Mrs Laduzko —That was never our intent. We can appreciate their concerns, but that was never our focus.

Senator WEBBER —So how are we going to fix it? To be fair, if they are interpreting this move, the consultation process, the draft legislation and the lack of regulations one way—that is, the industry versus the way you interpret it—we have a gulf of understanding and we have to fix it; otherwise it makes people like me very hesitant about accepting the legislation. If the people who are going to deal with the legislation and use it every day have a different view of the impact than you do, then we have a problem.

Mrs Laduzko —Treasury would support industry’s views around the transitional arrangements. We always intended appropriate transitioning, and they have quite rightly brought to our attention a technical matter which we would need to address and we are happy to move an amendment.

CHAIR —That is the staggered draws and—

Mrs Laduzko —Yes.

Senator WEBBER —What are your appropriate transitional arrangements?

Mrs Laduzko —We would accept eligibility along the lines proposed.

CHAIR —If this is a matter that is policy advice to the minister, you should not answer it if there has been a firm decision. If you are commenting on policy, then do so; if it is still the subject of policy advice, then you should not.

Senator WEBBER —I accept what you say, Chair, although surely the market has the right to know what the transitional arrangements will be.

CHAIR —I suspect what we have been told is that this is going to be addressed, but I do not think it is—

Senator WEBBER —So, again, it is going to be addressed perhaps some time in the future in some form of draft, but we have to accept all of that at face value and pass the legislation.

CHAIR —I acknowledge that. I think we would be entitled to indicate in our report that we believe this matter should be addressed, and I suspect from what we have heard that it is going to be taken on board. I just don’t want to compromise these officers by—

Senator WEBBER —Yes, I understand, but I would want to know how it is going to be done.

Senator STEPHENS —Has the issue of grandfathering been considered?

Mrs Laduzko —That is what we mean with the transitioning provisions, yes.

CHAIR —That is the staggered draw and the redraw aspects of it.

Mr Rawstron —We are well aware of those issues.

CHAIR —And they have been taken on board?

Mr Rawstron —Yes.

Mrs Laduzko —We have been having discussions with industry around that matter.

Senator STEPHENS —To raise an issue that was raised by the witnesses this morning, do you envisage that any forms of syndicated loans would be prescribed as ineligible?

Mrs Laduzko —It is not our intention to propose that outcome.

Senator STEPHENS —Thank you.

CHAIR —We have achieved a fair bit this morning. It is just a matter of putting it all together.

Senator WEBBER —Some of us have had a crash course in this!

CHAIR —All right. Thank you very much for your assistance. That now finishes this hearing. I thank everyone for their attendance.

Committee adjourned at 11.11 am