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Senate Legislative and General Purpose Standing Committees Consolidated reports on the consideration of bills July - December 2012 Volume 1-Community Affairs; Economics


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Australian Senate

Senate Legislation Committees

Reports on the consideration of bills July-December 2012

Volume 1

Australian Senate

Senate Legislation Committees

Reports on the consideration of bills July-December 2012

Volume 1

Community Affairs Committee

Economics Committee

© Parliament of the Commonwealth of Australia 2012

ISSN 1834-4062

This document was printed by the Printing Unit, Department of the Senate, Parliament House, Canberra.

TABLE OF CONTENTS

Community Affairs Committee " Australian Charities and Not-for-profits Commission Bill 2012*, Australian Charities and Not-for-profits Commission (Consequential and Transitional) Bill 2012* and Tax Laws

Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012*, dated September 2012...........................................................................1

" Dental Benefits Amendment Bill 2012*, dated October 2012............................ 79

" Low Aromatic Fuel Bill 2012, dated September 2012........................................113

" National Gambling Reform Bill 2012*, National Gambling Reform (Related Matters) Bill (No. 1) 2012* and National Gambling Reform (Related Matters) Bill (No. 2) 2012*, dated November 2012...........................................................................................193

Economics Committee " Clean Energy Amendment (International Emissions Trading and Other Measures) Bill 2012* and related bills, dated October 2012........................ 229

" Renewable Energy (Electricity) Amendment (Excessive Noise from Wind Farms) Bill 2012, dated September 2012......................................... 289

" Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012*, dated August 2012 ................................................................307

" Treasury Legislation Amendment (Unclaimed Money and Other Measures) Bill 2012*, dated November 2012..................................................... 423

"Pro∑visions of bill referred to committee.

The Senate

Community Affairs

Legislation Committee

Australian Charities and Not-for-profits Commission Bill 2012 [Provisions]

Australian Charities and Not-for-profits Commission (Consequential and Transitional) Bill 2012 [Provisions]

Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012 [Provisions]

September 2012

1

© Commonwealth of Australia 2012

ISBN 978-1-74229-693-7

Printed by the Senate Printing Unit, Parliament House, Canberra.

MEMBERSHIP OF THE COMMITTEE 43rd Parliament

Members

Senator Claire Moore, Chair

Senator Rachel Siewert, Deputy Chair

Senator Carol Brown

Senator Mark Fumer

Senator Bridget McKenzie

Senator Dean Smith

Substitute member for this inquiry

Senator Helen Polley for Senator Mark Fumer (on 4 September 2012)

Participating members

Senator Sue Boyce

Senator Trish Crossin

Senator Nick Xenophon

Queensland, ALP

Western Australia, AG

Tasmania, ALP

Queensland, ALP

Victoria, NATS

Western Australia, LP

Tasmania, ALP

Queensland, LP

Northern Territory, ALP

South Australia, IND

Secretariat

Dr Ian Holland, Committee Secretary Ms Sandra Kennedy, Principal Research Officer Mr Gerry Mclnally, Principal Research Officer Mr Patrick Hodder, Research Officer Ms Lauren Camevale, Administrative Officer

PO Box 6100 Parliament House Canberra ACT 2600 Ph: 02 6277 3515

Fax: 02 6277 5829 E-mail: community.affairs.sen@aph.gov.au Internet: http://www.aph.gov.au/Parliamentarv Business/Committees/Senate Committees?url=

clac ctte/index.htm

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TABLE OF CONTENTS

MEMBERSHIP OF THE COM M ITTEE............................................................iii

Chapter 1........... 1

Referral......................................................................................................................1

Conduct of the inquiry ............................................... ............................................. 1

Background............................................................................................................... 2

Purpose of the Bills..................................................................................................5

Chapter 2.......................................................................................................................13

The structure and role of the Australian Charities and Not-for-profits Commission.............................................................................................................14

The powers of the Australian Charities and Not-for-profits Commission ........... 18

The obligations and duties of registered entities...................................................22

Implementation timeline.........................................................................................28

Thresholds.............................................................................................................. 32

Independence..........................................................................................................34

Coalition Members and Senators Dissenting Report ....................................... 39

Rationale for the Legislation..................................................................................39

The Coalition *s Position.........................................................................................40

Issues.......................................................................................................................40

Conclusion.............................................................................................................. 45

Additional Comments by Nick Xenophon, Independent Senator for South Australia........................................................................................................................47

Introduction............................................................................................................ 47

Registration............................................................................................................. 48

A public benefit test................................................................................................49

The Register............................................................................................................ 50

Enforcement Powers...............................................................................................50

The Structure and role of the ACNC Commissioner............................................51

Thresholds.............................................................................................................. 51

Australian Greens Dissenting Report...................................................................53

Introduction.............................................................................................................. 53

ACNC BILL............................................................................................................. 53

Conclusion................................................................................................................ 62

Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill ...................................................................................................................................63

APPENDIX 1.................................................................................................................67

Submissions and Additional Information received by the Committee .............. 67

APPENDIX 2 .................................................................................................................71

Public Hearing............................................................................................................ 71

Chapter 1

Referral

1.1 This inquiry examined the Australian Charities and Not-for-profits Commission Bill 2012, the Australian Charities and Not-for-profits Commission (Consequential and Transitional) Bill 2012, and the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions Bill 2012. The suite of three Bills was referred to the Community Affairs Committee on 23 August 2012 with a reporting

date of 12 September 2012. The Bills were also referred to the Parliamentary Joint Committee on Corporations and Financial Services Committee.

1.2 Due to time constraints this committee has concentrated to a large extent on the Australian Charities and Not-for-profits Commission Bill 2012. The committee notes that the Parliamentary Joint Committee on Corporations and Financial Services examined the Australian Charities and Not-for-profits Commission (Consequential

and Transitional) Bill 2012 and the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions Bill 2012 in greater detail in their report. The two committees cooperated in the preparation of background material on the legislation and in some administrative areas such as writing to potential submitters. The report of the Parliamentary Joint Committee on Corporations and Financial Services is available at:

http://www.aph.gov.au/Parliamentary__Business/Committees/Senate Committees?url= corporationsctte/charities/report/index.htm

1.3 The Community Affairs committee received submissions from 48 individuals and organisations. It held a public hearing on the bills in Canberra on 4 September 2012. The committee thanks the many individuals and organisations who assisted it, particularly in light of the tight time frames for the inquiry.

Conduct of the inquiry

1.4 The inquiry was advertised in The Australian, and through the internet. The committee invited submissions from the Commonwealth Government and interested organisations. The committee received submissions from 49 organisations (listed at Appendix 1).

1.5 The committee held one public hearing as part of the inquiry. The hearing was held in Canberra on 4 September 2012. A list of witnesses who appeared before the committee is set out in Appendix 2.

1.6 Submissions, additional information, the Hansard transcript of evidence and responses to questions on notice can be accessed through the committee's website at: http://www.aph.gov.au/Parliamentary Business/Committees/Senate Committees? url=clac ctte/charities commission/index.htm

1.7 References in this report are to individual submissions as received by the committee, not to a bound volume.

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1.8 The committee sincerely thanks all submitters and witnesses for their contribution and participation in the inquiry process.

Background

1.9 There have been at least seven reviews of the regulation and taxation of the not-for-profit (NFP) sector in Australia over the last 17 years. These include:

" 1995 Industry Commission inquiry report Charitable organisations in Australia;

" 2001 Committee for the Inquiry into the Definition of Charities and Related Organisations inquiry report Reported of the inquiry into the definition of charities are related organisations;

" 2008 Senate Economics References Committee's Inquiry into the disclosure regimes for charities and not-for-profit organisations;

" 2010 Review into Australia's future tax system;

" 2010 Productivity Commission's inquiry report Contribution of the not-for- profit sector;

" 2010 Senate Economics Legislation Committee's Inquiry into the Tax Laws Amendment (Public Benefit Test) Bill 2010 and

" 2011 Senate Economics References Committee inquiry report Investing for good; the development of a capital market for the not-for-profit sector in Australia.

1.10 According to Treasury a consistent theme that has emerged from these reviews is that the regulation of the NFP sector would be significantly improved by establishing a national regulator and harmonising and simplifying regulatory and taxation arrangements.1

House of Representatives Economics Committee inquiry into Exposure Draft

1.11 In July 2012, the House of Representatives Standing Committee on Economics was referred exposure drafts of the Australian Charities and Not-for-profit Commission Bill 2012 and the Australian Charities Not-for-profit Commission (Consequential and Transitional) Bill 2012 for inquiry and report by 14 August 2012. In reviewing the bills, the committee sought to 'investigate the adequacy of the bills in achieving policy objectives and, where possible, identify any unintended

consequences'. The inquiry focused on three broad policy areas, namely, the capacity

1 Australian Charities and Not for-Profits C ommission Implementation Taskforce, Background to the Australian Charities and Not-for-profits Commission, bttp://acnctaskforce.treasury.gov.au/content/Content-aspx?doc=about/background.htm (accessed 30 August 2012); Department of the Treasury, Not-for-profit reform factsheet. Summary of the ACNC Bills, July 2012, p. 1. available at: http://www,treasury,gov.au/Policy- Topics/PeopleAndSociety/NFP-reform/~/media/Treasurv/Policv%20Topics/People%20and%20Society/Not-for- profit%20reform/2012/Factsheets/Summarv%20of%20the%20ACNC%20Bills/Downloads/PD F/Factsheet ACNC Bills summary.ashx (accessed on 30 August 2012).

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of the Australian Charities and Not-for-profits Commission to reduce red tape; the liability of directors, trustees and management committees for the conduct of not-for- profit entities; and procedural fairness.

1.12 The committee was largely supportive of the bills, concluding that '[t]he Bills should pass'. However, the committee determined that there was scope to refine the technical details of the Bills and the accompanying the Explanatory Memorandum.2

1.13 Treasury has advised that the government has adopted the recommendations of the House of Representatives Economics Committee. Table 1.1 is taken from Treasury's submission. It presents an overview the government's response to the recommendations in the House Economics report.

Table 1.1 * changes to theACNC Bills following House of Representatives Standing Committee on Economics inquiiy

Section o f the Bill

or Explanatory

Mem orandum

R eferenceC om m ittee

recom ≠

m endation

C hange

Objects ACNC Bill *

Paragraph 15-5(l)(c)

1 A new object of the Act has been added to

make clear the important role the ACNC will have in promoting the reduction of unnecessary regulatory obligations on the Australian not-for-profit sector.

Objects and Guide ACNC Bill * Section 10-5

Explanatory Memorandum * Paragraphs: 1.85 to 1.99

2 The guide material has been altered so that it

reflects that the Commissioner will support the transparency and accountability of the sector.

The explanatory materials have been added to, in order to better explain the operation of elements of the objects clause.

Registration provisions and Chapter four - enforcement powers

ACNC Bill *

Sections 35≠ 15, 100-10 and 100-15

7 Improvements have been made to ensure that

registered entities have the opportunity to respond to compliance concerns, including extending the requirements to issue *show cause * notices unless the ACNC

Commissioner, considering a number of factors, believes that immediate enforcement action is necessary.

These changes ensure greater procedural fairness for registered entities, while also providing the Commissioner with the discretion to

revoke registration or suspend or remove a responsible entity without giving the entity a show cause notice in appropriate circumstances

2 House of Representatives Economics Committee Report.

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Section o f th e Bill

or Explan atory

Mem orandum

R eferenceC om m ittee

recom ≠

m endation

C hange

Governance standards

Explanatory Memorandum * Paragraphs: 5.37 to 5.42

4 Material has been added to the explanatory

materials to explain that sector-developed codes of conduct for certain entities can be endorsed as part of the governance standards.

The Register ACNC Bill *

Subsection 40-5(2)

8 A requirement has been introduced to provide

that the ACNC Commissioner must not publish details of enforcement action on the Register for a period of at least 14 days, unless it is in the public interest to do so

earlier. This provides time for a registered entity to respond before such information is made publicly available. Such information entered on the Register will be removed after five years, unless the public interest requires that it be retained.

The Register ACNC Bill *

section 40-10(1)

5 A new regulatory power has been included in

the Bill, to provide that the ACNC Commissioner must not include certain information on the Register in prescribed circumstances. This would allow regulations

to be made to protect the privacy of private donors, such as those who maintain a private ancillary fund.

Obligations, liabilities and offences

ACNC Bill *

Division 180 6 The provisions of the Bill governing

obligations, liabilities and offences of incorporated and unincorporated entities have been redrafted to give effect to the Committee *s recommendations.

These have been revised to remove any criminal liability for directors of incorporated charities. They now also make clear that where there is a non-criminal contravention of the Bill, a director of an incorporated charity is only liable for any amount payable by the body corporate where this arises from a deliberate act or omission of the director involving dishonesty, gross negligence or recklessness.

Administrative penalties Explanatory Memorandum

* Paragraphs 13.137 to 13.162

9 Additional detail has also been added to the

explanatory memorandum to clarify the Commissioner's discretion regarding the issuing of administrative penalty notices.

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Section o f the Bill

or Explanatory Mem orandum

R eferenceC om m ittee

recom ≠ m endation

C hange

Transitional reporting arrangements

Schedule 1, subitem 10 of the ACNC Consequential and Transitional Bill

3 Transitional reporting arrangements have

been included to allow the Commissioner to treat a statement, report or other document provided to another Australian Government agency as meeting the financial reporting obligations of a particular registered entity under the ACNC Act. This arrangement will apply until the 2014-15 financial year and can be extended by regulation.

Statutory review Schedule 1, subitem 16 of the Consequential and Transitional Bill

10 Consistent with the Committee *s

recommendation the legislation will be reviewed after five years.

Source: Department of the Treasury, Submission 30, Appendix A, Summary Table - Changes to the ACNCLegislation, pp. 21-22.

Purpose of the Bills

1.14 The main ACNC Bill establishes a national regulator, and a national regulatory framework for the NFP sector. The ACNC Consequential and Transitional Bill contains consequential amendments to 34 Commonwealth Acts to support the operation of the ACNC. The Tax Laws Amendment (Special Conditions for Not-for- profit Concessions) Bill 2012 introduces a consistent definition of not-for-profit

entities across Commonwealth legislation and reverses an effect of the High Court's decision in the Word Investments case by restating and standardising the special conditions for tax concession entities and for deductible gift recipients.

1.15 Specifically the ACNC Bill:

" establishes the ACNC;

" charges the ACNC with registering NFP entities and maintaining a register;

" provides for the powers of the Commissioner in relation to the regulation of registered entities; and

" sets out the obligations and duties of registered entities.3

1.16 The ACNC Bill has three objects. Its first is to maintain, protect and enhance public trust and confidence in the NFP sector. Its second object is to support and sustain a robust, vibrant, independent and innovative NFP sector. The third object

3 Department of the Treasury, Not-for-profit reform factsheet, Summary of the ACNC Bills, July 2012, p .1.

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specifies that the ACNC will promote the reduction of unnecessary regulatory obligations on the NFP sector.4

1.17 Initially, only tax endorsed charities would be regulated by the ACNC. However, the Bill would establish a regulatory framework that can be extended to all NFP entities in the future.5

1.18 It is proposed that the ACNC will commence operations on 1 October 2012, and be responsible for determining charity status for all Australian Government purposes. The ACNC will maintain a charity register. As part of its status determinations, the ACNC will also determine whether a charity is a public benevolent institution or health promotion charity. All responsibility for the

determination of charitable status, including reporting requirements, will be handed over to the ACNC from 1 October 2012.6

1.19 Registration with the ACNC will be a necessary precondition for access to Commonwealth tax concessions. The ATO will accept the ACNC's decision on whether an organisation is a charity. Existing charities endorsed by the ATO as income tax exempt will be automatically registered with the ACNC.7

The Australian Charities and Not-for-profits Commission

1.20 The Bill would establish the statutory office of the Commissioner of the ACNC. A Commissioner of the ACNC will be appointed to oversee the functions of the ACNC. The Commissioner will be a fully independent statutory office holder, and will provide reports directly to Parliament via the Assistant Treasurer.8

1.21 An ACNC Advisory Board of legal, accounting and NFP experts will be established which will advise the Commissioner in carrying out the functions of the ACNC. The Advisory Board will consist of between two and eight members, with one of these members being the Chair of the Advisory Board.9

4 The Hon David Bradbury MP, Assistant Treasurer and Minister Assisting for Deregulation, House of Representatives Hansard, 23 August 2012, p. 5.

5 Department of the Treasury, Not-for-profit reform factsheet, Summary of the ACNC Bills, July 2012, p. 1.

6 Australian Tax Office, Not-for-profit refonns, 16 August 2012, available at: http://www.ato.gov.au/content/00283655.htm, accessed on 30 August 2012.

7 Australian Tax Office, Not-for-profit refonns, 16 August 2012, available at: http://www.ato.gov.au/content/00283655.htm. accessed on 30 August 2012.

8 Department of the Treasury, Not-for-profit reform factsheet, The ANCN and Advisoiy Board, available at: http://www.treasurv.gov.au/Policv-ToDics/PeopleAndSociety/NFP- reform/~/media/Treasurv/Consultations%20and%20Reviews/2011/Australian%20charities%20 and%20not%20for%20piOfits%20commission%20bill/Key%20Documents/PDF/ACNC Advis orv Board.ashx , accessed on 31 August 2012.

9 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, p. 165.

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1.22 The members are expected to have a detailed knowledge of the NFP sector and how it operates and are there to provide the ACNC Commissioner with a pool of broad knowledge and experience in the NFP sector, law, accounting and taxation which the ACNC Commissioner can draw on to assist him or her to effectively fulfil the role of ACNC Commissioner. However the board would not be a decision-making body and as such the ACNC Commissioner may have regard to the advice and recommendations of the board but will not be obliged to follow them.10 11

1.23 As well as being responsible for the regulation of the Not-for-profit sector the ACNC will also have a duty to provide assistance and support to the sector through the provision of educational material and other guidance. This includes assisting registered entities in complying with and understanding the legislation.11

The functions of the ACNC - registering NFP entities and maintaining a register

1.24 The Bills would provide the ACNC with the power to register NFP entities and to maintain the register. Registration will be voluntary but an organisation will have to be registered in order to access certain tax concessions.12

1.25 Chapter 2 of the bill establishes the parameters under which an entity may be registered with the ACNC. An entity may be registered if it:

" is a not-for-profit entity;

" is compliant with governance standards and external conduct standards;

" has an Australian Business Number; and

" has not been determined by Australian government agency that the entity has engaged in or supports terrorists or other criminal activities under Australian law.13 14

1.26 The Explanatory Memorandum (EM) provides the following explanation of not-for-profit entity:

A NFP entity is generally an entity that is not operating for the profit or gain of its individual members, whether these gains are direct or indirect. This applies both while by the entity is operating and when the entity winds 14 up.

1.27 In addition, the entity must satisfy the definition of 'charity', which will be defined to include seven subtypes:

10 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, pp 165, 171.

11 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, pp 163, 164.

12 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, pp 29-31.

13 Subsection 25-5(3), Australian Charities and Not-for-Profits Commission Bill 2012.

14 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, paragraphs 3.33 - 3.35.

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" an entity with a purpose that is the relief of poverty, sickness or the needs of the aged;

" an entity with a purpose that is the advancement of education;

" an entity with a purpose that is the advancement of religion;

" an entity with another purpose that is beneficial to the community;

" an institution whose principal activity is to promote the prevention or the control of diseases in human beings;

" a public benevolent institution;

" an entity with a charitable purpose described in section 4 of the Extension of Charitable Purpose Act 2004 (provision of childcare services).15

1.28 The EM to the bill notes that initially only charities may be registered, however, 'the bill establishes a regulatory framework that can be extended to all NFP entities in the future'.16

1.29 Decisions of a CMC Commissioner regarding registration and revocation of registration may be appealed to the Commissioner and, subsequently, to the Administrative Appeals Tribunal.17

The Australian Charities and Not-for-profits Register

1.30 The bill would authorise the creation of an Australian Charities and Not-for- profits Register maintained by the ACNC.18 The register would be available for public access and would disclose details of the names, contact details, Australian Business Numbers, charity type, date of registration, and the governing rules of each registered

entity. The register would also disclose the information statements provided by registered entities, with the exception of any information classified as not-for- publication, and financial reports and audit reviews provided to the ACNC. The register would also contain information potentially adverse to an entity, including warnings and directions issued by the Commissioner, enforceable undertakings,

injunctions, and suspensions and removals from the register.19 The bill would authorise subordinate legislation to restrict the kinds of information that may be included on the register.20

15 Subsections 25-5(1) and 25-5(5), Australian Charities and Not-for-profits Commission Bill 2012.

16 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, p. 7.

17 Section 30-35; section 35-20, Australian Charities and Not-for-Profits Commission Bill 2012.

18 Division 40, Part 2, Australian Charities and Not-for-Profits Commission Bill 2012.

19 Section 40-5, Australian Charities and Not-for-Profits Commission Bill 2012.

20 Section 40-10, Australian Charities and Not-for-Profits Commission Bill 2012.

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The powers of the Commissioner in relation to the regulation of registered entities

1.31 The Bill would provide the ACNC Commissioner with powers similar to other regulatory bodies such as the ATO and the Australian Securities and Investment Commission (ASIC). However the EM for the Bill emphasises that the ACNC Commissioner's primary function in terms of compliance with regulatory requirements in the Bill will be focussed on education and guidance to assist entities in meeting their obligations, rather than resorting to the enforcement powers outlined in the Bill.21 22

1.32 The specific education and advisory functions that the ACNC Commissioner will utilise are not set out in the Bill or the EM.

1.33 The EM lists the enforcement actions available to the ACNC Commissioner:

" issue warning notices;

" issue directions;

" enter into enforceable undertakings;

" apply to the courts for injunctions;

" suspend or remove responsible entities; and

" appoint acting responsible entities/2

1.34 The submission from the Treasury explained in further detail the powers available to the ACNC Commissioner:

" gathering information, monitoring activities and inquiring about matters relating to general compliance with, or potential breaches, of the provisions of the new laws. An ACNC officer may enter

premises for the purpose of monitoring, with the occupier *s consent or under a monitoring warrant;

" giving a registered entity a warning notice or a direction if the

Commissioner reasonably believes the entity has, or is more likely than not to, contravene the Act, governance standards, or external conduct standards;

" accepting enforceable undertakings from registered entities to comply with the Act, governance standards or external conduct standards;

" applying for injunctions to restrain registered entities from

contravening the Act, or to compel compliance with the Act; and

" suspending or removing a responsible entity of a registered entity (following a show cause notice), if the Commissioner reasonably

21 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, p. 117.

22 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, p. 117.

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believes that the registered entity has, or is more likely than not to, contravene the Act, governance or external conduct standards. The Commissioner may appoint acting responsible entities, subject to certain limitations, to enable the registered entity to continue to function.23

1.35 The Treasury submission also noted that the Bill provides an administrative penalty system in cases where misleading information has been provided or there has been a failure to provide information.24 25

The obligations and duties of registered entities

1.36 The duties of a registered entity are largely not set out in the primary ACNC legislation. The government announced in May 2012 that the governance standards and the detailed content requirements of financial reports would be set out in regulations, and that there would be a separate consultation process conducting for those regulations.

1.37 However the ACNC Bill does establish a reporting framework that

distinguishes organisations on the basis of their annual revenue. The reporting requirements will correlate with the size of the organisation and be divided into three categories:

" small entities - revenue of less than $250 000;

" medium entities - revenue of between $250 000 and $1 000 000; and

" large entities - revenue of over $ 1 000 000.23

1.38 While the detail of what each entity will have to provide is not yet established the Treasury submission stated that:

Small entities will not have to provide financial reports. Medium entities will have to provide financial reports which can be reviewed rather than subject to a full audit. Large entities will have to provide audited financial reports.26

1.39 Unincorporated and incorporated organisations would also be treated differently under the Bill. The obligations of unincorporated organisations would be based on the existing Tax Administration Act 1953, due to them not having a 'legal personality' and therefore unable to be sued or penalised.27

1.40 A body corporate does have a legal personality so would be treated

differently. According to the Treasury:

23 Department of the Treasury, Submission 30, pp. 11-12.

24 Department of the Treasury, Submission 30, p. 12.

25 Department of the Treasury, Submission 30, p. 9.

26 Department of the Treasury, Submission 30, p. 9.

27 Department of the Treasury, Submission 30, p. 13.

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.. .the Bill sets out a more streamlined and targeted framework for attaching personal liability to directors of a body coiporate. The directors of the body coiporate are not personally liable for any offences contained in the Bill. In the case of a non-criminal contravention of the Bill, directors will only be personally liable for the liabilities of the body coiporate in certain limited cases, for example, if there is a deliberate act involving dishonesty on their

28 Department of the Treasury, Submission 30, p. 13.

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Chapter 2

2.1 Every major participant in the inquiry supported the introduction of policy reforms for the charities sector, and there was widespread and general support for the bills and the government's intentions for the sector. The Community Council for Australia stated:

CCA strongly supports the ACNC Bills on the basis that they provide for the establishment of an independent and responsive regulator for the charities and not-for-profit sector. CCA believes that over time the proposed ACNC will significantly reduce red tape, duplication and compliance costs. The ACNC is not an instant quick fix, but a long term structural change that will become increasingly important over time. It will deliver real benefits to not-for-profit organisations, governments, regulators and the broader community.1

2.2 Other groups also supported the package. Philanthropy Australia indicated that it:

supports the passing of the ACNC legislation... The millions of Australians who give their money, time and effort to supporting volunteer organisations in this country deserve a full-time, independent, solely focused organisation

as regulator to foster best practice and growth in the sector. They also deserve a combined effort by all levels of government to reduce the burdens placed upon their good work.

Philanthropy Australia looks forward to working together with the ACNC into the future, for the benefit of the not-for-profit sector and the entire Australian community.1 2

2.3 The comments from The Smith Family were typical of those of many

stakeholders:

Given the numerous inquiries into the not-for-profit sector over the last decade, the number of review processes regarding the establishment of the ACNC which have occurred over the last 12 months or more and the clear refinement of the legislation which has occurred as a result of those processes, The Smith Family believes it is now appropriate that the legislation to establish the ACNC proceed. The Smith Family would welcome the passing of this legislation and the establishment of the Commission.

In conclusion, following years of reviews and multiple recommendations, and in light of the less than ideal circumstances governing the sector, The Smith Family believes it is now time to move forward with the

establishment of the ACNC. While the Bill is not perfect, it will enable the ACNC to begin to achieve what is now a long overdue reform. The

approach and the work to date of the Implementation Taskforce provide

1 Community Council for Australia, Submission 8, p. 1.

2 Philanthropy Australia, Submission 5, pp. 1-2.

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some level of confidence in how the important early phases of the Commission will proceed. Ongoing engagement of the sector will be important to the evolution of the Commission and its long term success.3

2.4 There was also acknowledgement of an extensive process of discussion, debate and consultation associated with the reforms.

The ACNC Bills have been through an extensive and comprehensive process of consultation and review. They should now be passed so that we can begin to implement a long overdue reform - establishing an

independent regulator for the Australian not-for-profit sector.4

2.5 The participation of Philanthropy Australia highlighted the exhaustive process of discussion:

Philanthropy Australia has been actively involved in the consultation and submission process to create the ACNC framework, including:

" Submission on the Original Discussion paper

" Participation in workshops

" Submission on the first draft ACNC Legislation issued in December 2011

" Submission on second Draft of legislation issued in June 2012

" Submission to the House of Representatives Standing Economics Committee

" Appearance before the House of Representatives Standing Economics Committee5

2.6 The committee is pleased to note the broad support, and the recognition that the consultations have led to concrete changes to the proposals; changes that have mostly acknowledged, and resolved, the concerns of most charities and not-for-profits involved in this process.

The structure and role of the Australian Charities and Not-for-profits Commission

2.7 As discussed in chapter one the Bill would establish the statutory office of the Commissioner of the Australian Charities and Not-for-profits Commission (ACNC). The Commissioner will be a fully independent statutory office holder, and will

provide reports directly to Parliament via the Assistant Treasurer.6 An ACNC Advisory Board will also be established under the Bill to advise the Commissioner in

3 The Smith Family, Submission 1, p. 3.

4 Community Council for Australia, Submission 8, p. 2.

5 Philanthropy Australia, Submission 5, p. 1.

6 Department of the Treasury, Not-for-profit reform factsheet, The ANCN and Advisory Board, available at: http://www,treasury.uov.au/Policv-Touics/PeopleAndSocietv/NFP- reform/~/media/Treasurv/Consultations%20and%20Reviews/2011/Australian%20charities%20 and%20not%20for%20profits%20commission%20bill/Key%20Documents/PDF/ACNC Advis orv Board.ashx , accessed on 31 August 2012.

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carrying out the functions of the ACNC. The Advisory Board will consist of between two and eight members, with one of these members being the Chair of the Advisory Board.7

Views received on the structure

2.8 The committee did not receive a significant amount of evidence on the how the Commission will be structured under the Bill. However there were general comments in support of the establishment of the ACNC, and also that it is established under separate legislation than the regulatory framework it will administer. Chartered Secretaries Australia submitted that:

CSA strongly supports the establishment of the independent statutory office, the Australian Charities and Not-for-Profits Commission (ACNC).

We have also been a strong proponent of an approach to reform that

separates the legislation establishing the ACNC from the regulations that will establish the duties, governance arrangements and operation of the entities which the ACNC will regulate. We commend the government for the implementation of this two-staged reform processs and believe that the bill is an important step in ensuring that the regulatory reform will operate to remedy the current inconsistent, inefficient, fragmented and

uncoordinated regulatory framework spread across many agencies and more than one level of government to which charities and other NFP

organisations are subject.8

2.9 The Smith Family commented on the merit of how the ACNC will be set up and the benefits it will bring:

[W]e believe there is merit in:

" separating the role of regulator and revenue collector [the ATO]

" providing a one stop shop for NFPs for reporting, compliance and regulation, initially at the

" Commonwealth level, and ideally over time, at the State/Territory level

" supporting through an educational role, the development of what is a highly diverse sector, and

" having a credible source of information on charities available for public use.9

2.10 However there were some concerns expressed around some of the detail governing how the ACNC will operate. The relationship between the Advisory Board

7 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, p .165.

8 Chartered Secretaries Australia, Submission 3, p. 2.

9 The Smith Family, Submission 1, p. 3.

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and the Commissioner, and whether the independence of the ACNC was assured under the proposed structure was an issue raised with the committee.

2.11 Under the Bill the Advisory Board's function is to provide advice and make recommendations to the Commissioner 'at the request of the Commissioner'.10 11 The Bill also emphasises that 'the Advisory Board cannot give any directions to the

Commissioner'.11 Dr Ogle from the Conservation Council of South Australia pointed to an apparent contradiction between Section 135-15 that states that the Advisory Board's function was to provide advice only 'on request' of the Commissioner, and

section 110-20 which states that:

[T]he Commissioner may (but is not required to) have regard to the advice and recommendations given to her by the Advisory Board (whether or not the advice and recommendations were given in response to a request).12

The latter wording implies that advice could be given other than upon request.

2.12 The Green Institute also commented on the restrictions on how the Board can provide advice to the Commissioner and suggested that these may amended:

The ACNC Advisory Board should have the power to provide advice and make recommendations on its own initiative, not only when requested by the Commissioner,13

2.13 The Treasury confirmed in evidence to the committee that advice is only provided to the Commissioner on request, however they did also commit to providing further information which would possibly explain any inconsistency in the Bill.14

2.14 Another area that was explored by submitters was whether the ACNC should be established as an independent statutory agency in much the same way as other regulatory bodies such as the Australian Tax Office (ATO) and the Australian Securities and Investment Commission (ASIC).

2.15 Mr Joe Zahar from Uniting Care said that with the benefit of hindsight that is something his organisation the sector would have preferred:

The one thing I would say is that, if we had our time again, the sequencing of a lot of the reforms that the government has undertaken would have probably been done differently. I think the issue of the independence of the ACNC by way of a statutory body might have been the preferred option but that horse has now bolted.15

10 Section 135-15, Australian Charities and Not-for-Profits Commission Bill 2012.

11 Section 135-15 Australian Charities and Not-for-Profits Commission Bill 2012.

12 Section 110-20, Australian Charities and Not-for-Profits Commission Bill 2012.

13 The Green Institute, Submission 39, p. 3.

14 Mr Leggett, Mr Jacobs, Department of the Treasury, Proof Committee Hansard, 4 September 2012, p. 61.

15 Mr Zabar, Uniting Care Australia, Proof Committee Hansard, 4 September 2012, p. 33.

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2.16 Again the Green Institute commented in their submission that independence of the ACNC for all matters including setting policy that may impact on the sector:

The ACNC Commissioner *s role is the *general administration * of the Act. Policy remains the domain of the Treasurer through the ATO. Furthermore, the ACNC Advisory Board can only provide advice at the request of the Commissioner. The concern is that the ATO *s focus on regulation and revenue-protection will overwhelm the ACNC *s aim of supporting and sustaining the sector.16

2.17 They proposed that independence could be enhanced if the ACNC

Commissioner was:

...given specific responsibility for upholding the objects of the Act and advising the Minister on its implementation, not merely for *general administration *.17

2.18 YouthCare submitted their concerns that the ACNC would not be sufficiently independent from the ATO because they would be employing ATO staff:

[F]rom a layman's perspective it may be difficult to have confidence that experts from the ATO will be able to maintain an entirely independent perspective in their work with the ACNC.18

2.19 The Independent Schools Council of Australia was also concerned about the relationship between the ACNC and the ATO. They submitted that the ACNC should have no authority to require information that enable taxation compliance as this is contrary to 'the stated aims of increasing transparency to public':

The ACNC should not act on behalf of the ATO and the annual information statement should be framed to give quality public information and not be framed to attempt to "catch out" any supposed Taxation non-compliance.19

2.20 The Department of the Treasury responded that there were significant cost savings inherent in the decision to establish the ACNC as an independent statutory office and that the independence of the office was ensured through the legislation and administrative arrangements:

[Tjhere are significant cost savings from providing the ACNC with back≠ office support from the ATO. There are some examples of how that support is provided, including HR systems and finding of accommodation and premises. So having a relatively small agency having systems being provided by the ATO in this instance has quite significant cost savings. In relation to independence, there is a lot that can be said about ensuring that,

even though back-office support is provided by the ATO, there is a lot of independence that is provided not only through the legislation but also

16 The Green Institute, Submission 39, p. 2.

17 The Green Institute, Submission 39, p. 3.

18 YouthCare, Submission 39, p. 3.

19 Independent Schools Council of Australia, Submission 14, p. 6.

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through the administrative arrangements as to how the ACNC interacts with the ATO in the provision of those services20.

2.21 The Interim Commissioner, Ms Susan Pascoe provided an expanded response on the issue in the Joint Parliamentary Committee on Corporations and Financial Services' hearing:

I note that a number of the submissions are still wary that the enterprise will not be fully independent. Perhaps I can make reference to some of the less formal arrangements *that is, the administrative arrangements, that would

sit alongside the legislative elements that people can see in the bill.

The decision the government took was that the ACNC would take its back office services from the Australian Taxation Office, with the intention being to achieve the economies of scale and the efficiencies that you can get from such an arrangement and, indeed, we have seen them. For example, we have accommodation that was organised by the Australian Taxation Office. We would have needed considerable expertise to organise that accommodation, and I doubt we could have leveraged the kind of leasing arrangement that the ATO can, given the size of the workforce that it needs to accommodate. We use their payroll system, we use their IT backup service and so on *there is a legion of services that we are taking. But we are taking them under a memorandum of understanding with the Tax Commissioner. As evidence of the commitment of the Tax Commissioner to allowing us to operate independently, he has given a full delegation to me, even as an interim commissioner, to both recruit and direct the staff of the ACNC... So I think that, when you look at those elements of

independence, staffing and budgets are critical elements. Further to that, we will table an annual report to parliament through the minister, so that does give us a further element of independence. Finally, we operate with our own appropriation through the budgets already committed through to 2014, and that does give us a level of independence in determining our own

affairs.21

The powers of the Australian Charities and Not-for-profits Commission

2.22 As discussed in chapter one the Bill provides the ACNC Commissioner with powers similar to other regulatory bodies such as the ATO and the Australian Securities and Investment Commission (ASIC). The EM lists the enforcement actions available to the ACNC Commissioner:

" issue warning notices;

" issue directions;

" enter into enforceable undertakings;

" apply to the courts for injunctions;

20 Mr Jacobs, Department of the Treasury, Proof Committee Hansard, 4 September 2012, p. 59.

21 Ms Susan Pascoe, Interim Commissioner, Australian Charities and Not-for-profits Commission Implementation Taskforce, Joint Parliamentary Committee on Corporations and Financial Services, Proof Committee Hansard, 3 September 2012, pp 5-6.

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" suspend or remove responsible entities; and

" appoint acting responsible entities.22

Views on the powers of the ACNC

2.23 The committee heard evidence that the legislation will provide an appropriate framework to deliver on the objects in the Bill. Uniting Care Australia framed their appearance before the committee by saying that:

Our assessment is that the proposed legislation creates a sound oversight framework for the ACNC to regulate the sector but that, with some minor adjustments, it can be improved...

And that:

[T]he act sets out the need for the ACNC to maintain, protect and enhance public trust and confidence in the sector, and we believe that this proposed legislation provides the ACNC with sufficient oversight powers to deliver on this.23

2.24 Others, including World Vision Australia, the Baptist Union of Australia and Anglicare, expressed concern that some of the regulatory powers of the Commissioner are too severe. World Vision Australia stated in their submission that:

...the tone and structure of the enforcement powers continue to suggest a heavy-handed approach weighted against the interests of registered entities and responsible entities. Further efforts should be made to ensure that the powers are better targeted, fairer, not used to inappropriately interfere with an organisation's legitimate operations and do not impose undue costs on an entity in taking action against the ACNC.24 25

2.25 Australian Baptist Ministries commented along similar lines:

Australian Baptist Ministries believe that the regulatory powers contained in the current Bill are too excessive. They are much broader in scope than those of the Australian Tax Office (the current regulator) and in our view are far too excessive for a body (the ACNC) that is supposed to be focussed on education and of the promotion of the Charitable and No-for-profit sector.

2.26 Anglicare Sydney were also concerned that there was no justification for the increase in powers compared to the previous regulatory regime administered by the ATO:

[T]he wide spectmm of enforcement powers conferred upon the ACNC Commissioner and its officers under the Bill, are acknowledged in the

22 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, p. 117.

23 Mr Joe Zahar, Uniting Care Australia, Proof Committee Hansard, 4 September 2012, p. 27.

24 World Vision Australia, Submission 26, p. 15.

25 Australian Baptist Ministries, Submission 10, p. 5.

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Explanatory Memorandum accompanying the Bill as representing an expansion of powers over those exercised by the current default regulator, the ATO. Yet it is unclear to ANGLICARE Sydney what current situations in the sector justify the need for this degree of expansion, particularly in the light of Treasury *s previously stated assumption that *charities operate for charitable purposes, and overwhelmingly most aim to comply with their regulatory requirements. *26

2.27 The power to revoke registration was a particular area that attracted comments from a number of submitters. The Independent Schools Council of Australia voiced concern that the Commissioner can make a judgement to revoke the registration of an entity based on the probability that the entity is 'more likely than not' to contravene the Act. Given the seriousness of revocation of registration and the financial and administrative consequences the Council is of the view that this 'provides the Commissioner with the predictive power to determine the intent of mind of an entity', and is therefore an unacceptable basis for such as substantial power.27

2.28 The Bill also does not define 'more likely than not'. However, the bill would require the Commissioner to take account the nature, significance and persistence of any contravention of the bill was passed or governance standards or external conduct standards.28 The Explanatory Memorandum (EM) argues that there is a high threshold to satisfy the registration criteria could be revoked on the grounds of non-compliance with the statutory of governance requirements:

This ground only covers the situation where there is a substantial or

significant likelihood of a contravention or non-compliance and would not extend to a situation where there was only a small chance of the

contravention or non-compliance occurring.

In determining whether an entity is more likely than not to contravene a provision of this law or is more likely than not to comply with governance standard or external conduct standard, the ACNC Commissioner must have sufficient, reliable and accurate evidence which clearly indicates that there

will be a contravention.

A mere suspicion, rumour or possibility of a likely contravention or likely non-compliance is insufficient with a ACNC Commissioner to take action.

In addition, a 'reasonably believes' test needs to be satisfied which ensures that the ACNC Commissioner will only revoke registration likely contraventions were a reasonable individual, provided with a set of information available to a CMC Commissioner, would conclude that it is more likely than not that a registered entity will contravene a provision of

the Bill.29

26 Anglicare Sydney, Submission 28, p. 5.

27 Independent Schools Council of Australia, Submission 14, p. 5.

28 Section 35-10, Australian Charities and Not-for-Profits Commission Bill 2012.

29 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, paragraphs 3.89 - 3.93.

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2.29 World Vision Australia considered that revocation on the grounds that the entity had not adhered to governance standards or had given false or misleading information would be a disproportionate reaction:

The giving of false and misleading information in an application for registration should not be a standalone ground, as this allows the

Commissioner to revoke registration in circumstances where the entity otherwise remains fully entitled to be registered and where the *offence * may be the result of oversight or mistake...

We also note that no other registration regime has such onerous outcomes as de-registration for failure to comply with governance standards. WVA cannot see a rationale for such an outcome, especially in the NFP sector where it is well-accepted that non-compliance is usually a matter of ignorance or under resourcing/0

2.30 Conversely the Financial Services Council were of the view that revocation was an appropriate sanction on the grounds set out in the Bill:

We agree that the ACNC should be able to revoke the registration of a Registered Entity for the reasons outlined in the Bill. Revocation is a suitable penalty to impose upon a Registered Entity that was either not

entitled to registration, has contravened the ACNC Act, has provided false or misleading information or has requested revocation of registration.30 31

2.31 World Vision Australia also suggested that the appeals process for cases where revocation was applied as a penalty should be strengthened:

Revocation should not take effect until all avenues of appeal or review which an entity wishes and is able to take have been exhausted, unless there is a clear and demonstrated public interest in the decision taking effect

earlier. It cannot be assumed that the Commissioner will always make a correct decision.32

2.32 The Department of the Treasury responded to World Vision's concerns that the enforcement powers of the ACNC Commissioner are too severe at the committee's hearing:

My initial response is that World Vision Australia is a company limited by guarantee as a structure. The enforcement mechanisms as reflected in the ACNC bill are already similar to those that World Vision is subject to being a company limited by guarantee. So from a World Vision Australia

perspective and that of all other companies limited by guarantee that are charities, of which there are a very large number, this regime is not

substantially different... What we can add is that when we developed the regulatory powers for the ACNC we had reference to the existing

regulatory powers of ASIC, the tax office and other Commonwealth regulators that these entities are already subject to. But the way we have

30 World Vision Australia, Submission 26, pp. 12-13.

31 Financial Services Council, Submission 41, p. 5.

32 World Vision Australia, Submission 26, p. 13.

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now implemented it in the ACNC bill they now afford significantly new procedural fairness grounds that they are not already subject to with the existing regulators. 33

2.33 The clarification of the liability of directors was broadly welcomed.34 35 However the Financial Services Council did have reservations about whether the ACNC Commissioner would have the authority to remove trustees from the boards of public (PuAF) or private (PAF) ancillary funds:

It is not appropriate that the ACNC be given the power to make a

determination as to whether a director of a public listed or private company has breached his/her duty to the company. It is also not appropriate for the ACNC to make a determination as to whether a trustee of a charitable fund that is not a PAF or PuAF is in breach of trust. Like with other federal

regulators, such as ASIC or the ACCC, the ACNC should be required to make application to the relevant court if it seeks an equitable remedy against a director of a licensed trustee company or a public trustee of a charitable fund that is not a PAF or PuAF.33

The obligations and duties of registered entities

The reduction of red tape

2.34 One of the objects of the Bill is 'to promote the reduction of unnecessary regulatory obligations on the Australian not-for-profit sector.'36 This object has been often referred to as a commitment to reduce what is colloquially known as 'red tape', describing the administrative obligations placed on entities. The inclusion of the new

object has been broadly welcomed by submitters to the inquiry.

2.35 As discussed in chapter one the ACNC Bill would establish a reporting framework that distinguishes organisations on the basis of their annual revenue. The reporting requirements will correlate with the size of the organisation and will determine their reporting obligations.

2.36 While the new object was generally welcomed there were some submitters expressed reservations that the inclusion offered no assurances that the intent would be delivered. ACOSS stated in their submission that it:

...welcomes and strongly supports the inclusion of a new Object in the Bill following the House of Representatives Economics Committee report, identifying the reduction of red tape as a central objective.37

33 Mr Ronalds, Mr Leggett, Department of the Treasury, Joint Parliamentary Committee on Corporations and Financial Services, Proof Committee Hansard, 3 September 2012, pp. 11-12.

34 For example, Chartered Secretaries, Submission 3, p. 5; Philanthropy Australia, Submission 5, p. 1; Community Council Australia, Submission 8, p. 2.

35 Financial Services Council, Submission 41, p. 8.

36 Section 15-5, Australian Charities and Not-for-Profits Commission Bill 2012.

37 ACOSS, Submission 9, p. 1.

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2.37 Uniting Care were also supportive of the intent of the amendment but were concerned that the ACNC would not be able to deliver red tape reduction beyond its own activities and relations with the sector:

[W]e are concerned that there are limitations to the ACNC *s capacity to deliver any tangible red-tape reduction measures outside of its own activities. The majority of the proposed red-tape reduction benefits of a single national NFP regulator are predicated on State/Territory Government cooperation or agreement which is vet to be secured from other

Commonwealth agencies and regulators.3

2.38 Similarly, while Mission Australia were 'pleased to support the recent changes'38 39 to include the new object, they were disappointed to not to see any concrete proposal to achieve this aim:

We support the notion of the ACNC as a one-stop regulatory stop and support the notion of a Charity Passport that will see us provide our financial and governance information once, to be used often. Yet it is disappointing to see no evidence of how this is being achieved. Our overriding concern is that rather than reducing red tape and compliance burden, the ACNC will add another layer of compliance and that nothing will be taken away.40

2.39 The Conservation Council of South Australia also expressed concern that there were no obligations explicitly set out in the Bill to support the Object:

It is good to have that objective but, when that was added as an objective, there was almost nothing changed in the act... There is little or nothing in the act that would be a positive obligation to support not-for-profit's through community education. We have had conversations with the ACNC

or the task force and are pleased with some of those directions. But there is nothing in the act to reflect that and that creates a disjunct between the conversations we are having with the ACNC staff and what is in the

legislation.41

2.40 The Moore Stephens accountancy network welcomed the 'report-once, use- often' concept but added that a specific function to reduce the regulatory burden should be added to the Commissioner's 'Assistance Functions' in section 110-10 of the Bill:

In recognising the importance of the achievement of this *report-once, use- often * framework we recommend its specific inclusion in the functions of the Commissioner as an additional element in Section 110-10 of the Bill. We also suggest that these functions as defined within the Bill include a

38 Uniting Care Australia, Submission 4, p. 5.

39 Mission Australia, Submission 11, p. 5.

40 Mission Australia, Submission 11, p. 4.

41 Mr Tim Kelly, Conservation Council of South Australia, Proof Committee Hansard , 4 September 2012, p. 8.

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responsibility for *developing, enhancing and maintaining * this *report- once, use-ofiten * framework.42

2.41 The transitional arrangements to allow the ACNC Commissioner to accept reports from other agencies and levels of government until the ACNC develops its own 'report-once use-ofteri framework is in place was also welcomed. This capacity was introduced as a result of a recommendation from the House of Representatives Economics Committee report.43 Chartered Secretaries Australia were confident that this interim arrangement would:

...ensure minimal duplication of reporting, while the ACNC works with other regulators and cooperates with other government agencies to promote the reduction of unnecessary regulatory obligations on the NFP sector.44

2.42 A number of submitters wanted this transitional arrangement to be extended beyond the end of the current financial year 2014-15. The Independent Schools Council of Australia suggested that the period should be extended to coincide with the review of the legislation that is scheduled to take place after five years.4" The Australian Catholic Bishops Conference and Catholic Health both recommended that the Commissioner be 'required' to accept reports,46 while World Vision wanted to see

the arrangements to be extended to include reports that are not required by law.47

2.43 There was discussion about whether the reduction of red tape could be explicitly cited in the Bill. The argument put forward by Primrose Solutions was that if the term was used it would then have to be defined and would then illustrate exactly

what the ACNC Commissioner could and could not do in terms of regulatory obligations on the sector. Dr Primrose emphasised the importance of having the intention clearly set out:

We think there is no option but to use the term 'red tape' in the bill. I

recognise the reluctance of the drafters to accept that but it is possible. If you put it in the definitions, it is possible to define it. Not-for-profit leaders will be looking for something like that and they will be looking for

something that instructs the commissioner to take a very high priority and to achieve *not just set up a working group and maybe have a go at it. So

we suggest that it is important to very clear and very explicit in dealing with that key requirement of the not-for-profit sector... What we are after is

42 Moore Stephens Accountants, Submission 29, p. 5.

43 Department of the Treasury, Submission 30, Appendix A, Summary Table - Changes to the ACNC Legislation, pp. 21-22.

44 Chartered Secretaries Australia, Submission 3, p. 3.

45 Independent Schools Council of Australia, Submission 14, p. 6.

46 Australian Catholic Bishops Conference, Submission 16, p. 2; Catholic Health Australia, Submission 27, p. 2.

47 World Vision Australia, Submission 26, p. 4.

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something that hits the high spots of saying, 'Yes, the government is concerned about the things that really concern you.' 48

2.44 The committee understands that when the sector talks about the reduction of red tape they are often concerned about the duplication of reporting obligations rather than objecting to reasonable reporting requirement that ensure the proper and transparent operation of the entity. Dr Boyd-Cain from ACOSS affirmed this in

evidence at the committee's hearing:

I think it is important to be clear about the difference between a legitimate and a well-structured regulatory framework and overly burdensome regulatory responsibilities... We are not at all wanting to undermine the legitimate regulatory framework that ought to apply to this sector in the same way that we expect the business community to be held to an

acceptable level of regulation.49

2.45 UnitingCare recommended that combining acquittals and audited financial statements is a specific area where red tape could be tangibly reduced. They suggested that:

...an additional clause be inserted in section 60-25, or elsewhere as

appropriate, to the effect of: 'Where a registered entity is required to provide an annual financial statement to the ACNC, that entity will no longer be required to provide a financial audited statement for any

individual grant or grants provided by an Australian government agency unless that agency has reason to suspect fraud in relation to the use of that grant money.'50

2.46 Their reasoning was that:

...the requirement for providing an annual audited financial statement to the ACNC, together with the Auditor-General's recently introduced powers to conduct performance audits on recipients of Commonwealth grants, removes the need for government agencies to require audited financial

statements as part of their acquittal process.51

2.47 However it was widely accepted that this was a long term objective that would require significant liaison between different agencies and levels of government. ACOSS pointed out that the information required for acquittal is not always the same information that should be required by the ACNC:

We do not yet have a model where we can have the acquittal process slide straight into the regulatory process so that it is a single line of report. I am not saying it cannot be done; I am just saying I do not have the model to

propose how that could work... In so far as the ACNC has a role there are

48 Dr Brian Primrose, Primrose Solutions, Draft Committee Hansard, 4 September 2012, pp. 1-2.

49 Dr Tess Boyd-Caine, Australian Council of Social Services, Proof Committee Hansard, 4 September 2012, p. 24.

50 Mr Joe Zabar, UnitingCare Australia, Proof Committee Hansard, 4 September 2012, p. 28.

51 Mr Joe Zabar, UnitingCare Australia, Proof Committee Hansard, 4 September 2012, p. 28.

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all sorts of questions about how government agencies will use the

information that the ACNC collects, but there is information included in acquittals to funders that is not regulatory in its nature and that is not

included in the work that the ACNC has been doing on what it will expect organisations to report on. 52

2.48 The Office for the Not-for-profit Sector were also cautious about combining the two types of report, but did outline reforms that were being earned out within government that was actively looking at situations where it may be possible:

There are some very high risk and very complex situations where a

particular agency might require more detail than what we want to be the standard detail given to the ACNC. But what we are doing in the Office for the Not-for-Profit Sector is making sure that, if agencies are going to make that request, we have tested it, that it is reasonable and that agencies are doing everything they can to reduce the compliance costs.53 54 55 56 57

Registration

2.49 The Bill would require entities to apply, in the, as yet undeveloped 'approved form', to the Commissioner of the ACNC for registration. 2,4 The Commissioner would have 60 days in which to consider the application, an additional 28 days if requesting further information. '1 The Bill does not expressly provide applicants with the right to withdraw the application. However, if the Commissioner has not considered the application within the allowable timeframe, the entity may provide the commission with written notice that they wish the application to be treated as having been refused.16 The EM explains that this is intended to ensure 'that entities have recourse if decision is not made in a set time and can have the decision reviewed where appropriate'.17

2.50 Where an application meets the statutory criteria, the Commissioner would be required to register the entity.58 However, the commission has discretion to revoke registration where the Commissioner reasonably believes that the entity:

" was not entitled to registration when registered;

52 Dr Tess Boyd-Caine, Australian Council of Social Services, Proof Committee Hansard, 4 September 2012, p. 25.

53 Mr Ronalds, Office for the Not-for-profit Sector, Proof Committee Hansard, 4 September 2012, p. 62.

54 Section 30-10, Australian Charities and Not-for-profits Commission Bill 2012.

55 Section 30-15, Australian Charities and Not-for-profits Commission Bill 2012.

56 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, paragraph 3.73.

57 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, paragraph 3.75.

58 Section 30-20, Australian Charities and Not-for-profits Commission Bill 2012.

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" provided false or misleading information;

" has or is more likely than not to contravene a provision of the bill when

passed;

" has or is more likely than not to contravene a governance standard or an

external conduct standards;

" the entity has a trustee in bankruptcy liquidator;

" has requested the revocation.'9

2.51 The Salvation Army raised a concern that the entitlement to be registered was restricted to entities that are 'not operating for the profit or gain of its individual members':59 60

[T]he Salvation Army are concerned with the drafting of the not-for-profit entity definition and its potential interpretation. As stated in our submission, it is of concern that the definition will preclude members from obtaining genuine charitable services and outcomes from the organisation in which they support. A prime example of this problem relates to persons with disabilities who might serve on the board of a disability organisation and/or are members of the disability association. Once this definition is enacted, they will be precluded from receiving genuine charitable services from that supporting organisation.61

2.52 However the Department of the Treasury explained that the definition is based on the current definition within the Income Tax Act 1986, which is then referred to in the Income Tax Assessment Act 1997 which is in turn being amended with a new definition:

*Ü company that is not earned on for the puiposes of profit or gain to its individual members and is, by the terms of the company's constituent document, prohibited from making any distribution, whether in money, property or otherwise, to its members or to a friendly society dispensary.'62

2.53 The effect of this definition is that:

As long as it is not provided to them in their capacity as a member but in

their capacity as a welfare recipient of the church, that is fine within the existing law and fine within the new law... We also have put in place that, where you receive genuine compensation for services provided or for reasonable expenses incurred on behalf of one entity to another, a

59 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, paragraph 3.81.

60 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, paragraphs 3.33 - 3.35.

61 Mr John McIntosh, Salvation Army, Proof Committee Hansard, 4 September 2012, p. 29.

62 Mr Leggett, Department of the Treasury, Joint Parliamentary Committee on Corporations and Financial Services, Proof Committee Hansard, 3 September 2012, p. 66.

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distribution to a member, if they happen to be the same person, is also not a breach of the not-for-profit clause.6

Implementation timeline

2.54 As previously noted, the government intends to commence operation of the ACNC on 1 October 2012, with financial reporting standards to take effect from 1 July 2013, and the first fmancial reports being lodged with the ACNC on 1 July 2014.63 64

2.55 The committee heard from a number of organisations who strongly supported implementation of the legislation in accordance with the intended timeframe. Philanthropy Australia commented:

We are fully aware there is still further work to be done, particularly in terms of finalising the governance and reporting regimes, and as always implementation will determine the ultimate success or failure of such game changing legislation. However, Philanthropy Australia is firmly of the view that now is the time to start.65

2.56 The Australian Council of Social Services agreed:

We strongly support the ACNC opening on 1 October. We acknowledge there is still significant work to be done, not least in relation to the

governance standards, but we see that work as best undertaken once the ACNC is fully enabled. We do not support recommendations for further delay.66

2.57 Community Councils of Australia expressed the same view:

The ACNC Bills have been through an extensive and comprehensive process of consultation and review. They should now be passed so that we can begin to implement a long overdue reform - establishing an

independent regulator for the Australian not-for-profit sector.67

2.58 However some submitters expressed concern about the implementation timeline. Some were worried whether organisations would be able to prepare for the financial reporting requirements in time. Others thought it undesirable that the legislation would be in place before the regulations had been finalised that would set out the governance standards to be required under the new regulatory regime. The Institute of Chartered Accountants was typical of submissions expressing these concerns:

[I]n its current form we do not believe the draft legislation is ready to be passed through the Parliament. Two fundamental pieces of the NFP reform

63 Mr Leggett, Department of the Treasury, Joint Parliamentary Committee on Corporations and Financial Services, Proof Committee Hansard, 3 September 2012, p. 66.

64 ACNC and ACNC consequential amendments Bills EM, pp. 14-15.

65 Philanthropy Australia, Submission 5, p. 2.

66 ACOSS, Submission 9, p. 1.

67 Community Councils of Australia, Submission 8 , p. 2.

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are not yet available for review or consultation * the governance

requirements and the reporting framework. We consider that these requirements are integral to the reform process and should be made available before the legislation is passed by Parliament. These areas do have the potential to increase the burden on many charities, so it is

important that they are clarified up-front and time given so their impact can be assessed appropriately.

We accept that as a consequence of this recommendation the start date of the regulator may need to be delayed. We consider a short delay (perhaps two to three months) acceptable.68

2.59 Some organisations suggested a delay to allow further development of

regulations. Not for Profit Accounting Specialists said:

Our preference would be to have draft regulations as well as the legislation written and available for review before either is passed to ensure that together, the legislation and regulations give the full picture and all bases

are covered prior to introduction of the legislation. It will be more difficult to make changes once the legislation has been approved.69

2.60 The Australian Institute of Company Directors thought the entire process should be delayed while aspects of the Consequential and Transitional Bill were consulted upon:

We are of the view that the Bill should not be passed until adequate time has been provided for the consequential amendments to be properly considered by stakeholders, and the Government and other parties have had

an opportunity to obtain considered feedback.70

2.61 They were also one of the groups that thought the governance standards

should be in the bill rather than in regulation:

We feel strongly, to the extent core governance, reporting and external conduct standards are to be mandated, that they should be included in the legislation rather than in regulations so that their introduction occurs

through a process of parliamentary discussion, debate and voting.71

2.62 CPA Australia had a particular concern about the consequences of the

timeframe for the preparation of accounts:

CPA Australia remains concerned that with the regulations incomplete, some charities may find it difficult to determine what if any new practices they will need to implement to enable them to lodge the financial report with the ACNC for the year ended 30 June 2014 and which must include comparative information for the year ended 30 June 2013. Importantly, the start date of the comparative year information was 1 July 2012. Without the

68 Institute o f Chartered Accountants Australia, Submission 24, p. 1.

69 N ot for Profit A ccounting Specialists, Submission 6, p. 1.

70 Australian Institute o f Com pany Directors, Submission 22, p. 2.

71 Australian Institute o f Com pany Directors, Submission 22, p. 3.

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complete regulations, we suggest the Senate Community Affairs Legislation Committee recommend a further delay by 12 months to the commencement date of that part of the legislation to require charitable entities to lodge their financial report with the ACNC.72

2.63 However, other professional associations had a different view. Chartered Secretaries Australia considered that:

[W]hile we believe that it would have been useful for the draft regulations to be released concurrently with the bill, we accept that the bill provides for sufficient flexibility for the development of the governance and external conduct standards and reporting framework to be developed in consultation with the sector without imposing onerous compliance obligations on the sector.73 74

2.64 Anglicare Diocese of Sydney, while also being concerned about

implementation, and supporting the need for staged introduction of governance arrangements, did not propose delayed implementation as the answer./4

2.65 The committee noted that, while concerns were raised by a number of professional bodies, most peak associations were not concerned, and strongly advocated implementation on the current timeline. The peak body Charities Council for Australia expressed scepticism about whether the financial reporting requirements were likely to be that difficult for organisations to meet. It concluded:

[T]he process that the Australian Charities and Not-for-Profits Commission Taskforce has been through, in consulting with groups about what kind of information they currently have and could provide, would alleviate most people's concerns about the level of onerousness or the level of work required in satisfying the reporting requirements.75

2.66 The committee pursued the issues with government representatives, including the Australian Charities and Not-for-profits Commission Implementation Taskforce. They explained elements of the reforms that are designed to ensure there will not be difficulties resulting from the timeline. These include transitional arrangements and the clear intention on the part of the Australian Charities and Not-for-profits Commission Implementation Taskforce that the financial reporting requirements not be onerous, particularly for smaller organisations.

2.67 Government representatives indicated that the transitional arrangements would assist in ensuring smooth transition to the new reporting requirements, as well as facilitating red tape reduction:

Mr Jacobs: ...For three years, the transitional reporting arrangements would be included to allow the commissioner to treat a statement, report or other

72 CPA Australia, Submission 40, p. 1.

73 Chartered Secretaries Australia, Submission 3, p. 4.

74 Anglicare Diocese of Sydney, Submission 28, p. 3.

75 Mr David Crosbie, Community Council for Australia, Proof Committee Hansard, 4 September 2012, p. 42.

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document provided to another Australian government agency as meeting the financial reporting obligations of a particular registered entity within the proposed ACNC Act. That allows reduction of red tape whilst the reporting arrangements are being sorted and whilst the discussions with the states and territories are progressing.

DEPUTY CHAIR: That gets around the issue that was raised this morning around delaying the start date of reporting.

Mr Jacobs: Yes, so it is a key point./6

2.68 The government also made clear that there was no intention of requiring comparative financial reporting data at the outset:

Ms Ram: The regulations, as Mr Jacobs said, will set out the detail of what is required in the financial report and what specific accounting standards need to be adhered to. The source of comparative year reporting is in the accounting standard. So it is something that we will look at in developing the regulations in terms of turning off the comparative year reporting,

because, if we did not, that would in effect bring the financial reporting forward by one year, which was not the government's intention.

DEPUTY CHAIR: Is it something that will be dealt with within the

regulation?

Ms Ram: Yes.

Mr Jacobs: We clearly understand the issue that if, in saying that the reporting obligations should start from 1 July 2013, you asked for

comparative information then in effect you have brought that forward by 12 months, and the consultation process and development of those regulations can easily solve that issue.76 77

Committee view

2.69 The committee recognises the significant number of inquiries and discussions that have taken place around this issue for many years. It also notes the confidence expressed by those in the sector regarding the work of the Implementation Taskforce and its first commissioner, Ms Susan Pascoe. The comments of the CEO of Catholic Health Australia were typical:

I am satisfied on two fronts that the legislation does establish a sufficiently independent body. That is the nature as to why legislation is underpinning it. I think the government is also to be commended on the appointment of

Susan Pascoe as the initial commissioner. The appointment of the commissioner has given great satisfaction to those of us within the not-for- profit community. The decision of Susan Pascoe's appointment is a good one and gives us some confidence that through the selection of

76 Proof Committee Hansard, 4 September 2012, p. 56.

77 Proof Committee Hansard, 4 September 2012, p. 61.

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commissioner we are likely to see those discretionary powers utilised productively and effectively.78

2.70 The committee concludes that there should be no delays to implementation, and is confident that the new ACNC will work with charities to ensure the new framework is a step forward for the not-for-profit sector.

Thresholds

2.71 The bill would establish a three-tier scheme of reporting.79 80 Small organisations would be required to provide an information statement; medium-sized entities would be required to provide annual financial reports that had been reviewed; large entities would have to provide annual financial reports that were audited.811 The commencement points for the medium and large thresholds are revenue of $250 000 and $1 million respectively.81

2.72 Moore Stephens Australia's representative, Mr Joe Shannon, commented that his organisation believed the thresholds to be too low:

From day one, we have had the view that those levels are very low to set

the types of onerous obligations that are proposed in the act. Our numbers suggest about 45 per cent of the sector will be above the $250,000

threshold. We think that is a lot of the sector to be dragged into this level of onerous requirement that exists in the reporting aspects of this act. We know specifically that under the tax laws there is a threshold of $2 million for large and small organisations. We strongly encourage consideration of $2 million as a more relevant size rather than the $1 million that is in the act. We do acknowledge that the $1 million is the same as the company limited by guarantees but we still think it is a very small number to set these requirements at and we really encourage consideration of that level already in the tax act to be considered small or large from a business point of

view.82

The Institute of Chartered Accountants in Australia agreed.83

2.73 The Conservation Council of South Australia drew attention to examples of existing guidelines or laws under which the thresholds are higher than those proposed in the Bill. It recommended:

that the size thresholds in s205-25 of the bill be increased to better reflect the reality of organisational scale and to bring them into line with

community and commercial understandings. We would suggest that a small

78 Mr Martin Laverty, Catholic Flealth Australia, Proof Committee Hansard, 4 September 2012, p. 33.

79 ACNC Bill, Division 60.

80 ACNC Bill, sections 60-5 to 60-55.

81 ACNC Bill, section 205-25.

82 Proof Committee Hansard, 4 September 2012, p, 15.

83 Ms Kerry Hicks, ICAA, Proof Committee Hansard, 4 September 2012, p. 16.

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organisation be one with revenue below $500,000 p.a. (which is the threshold for a prescribed association in the South Australian Associations Incorporation Act). The threshold for a large organisation should be at least $5m p.a.84

2.74 M r David Crosbie from the Community Council for Australia indicated that their organisation had previously expressed reservations about the thresholds. However, he also pointed out that the information requirements being planned were not onerous, and that it would generally be in an organisation's interests to have that information available. The issue is not simply a compliance issue: it is about ensuring good governance through providing effective guidance to charities about what information they should be keeping and monitoring:

In our original submission we argued for higher thresholds around what a small organisation wras. I think it is 250,000 at the moment, and we argued that perhaps that should be a bit bigger. Also, having seen the outline of the kind of information being requested by the ACNC, having looked at their implementation report and having had further discussions with them about templates for reporting and at what they intend including, I would think it would be very difficult for people to argue that that is a significant amount of additional work. I do not know where people get that from; I do not

know what they are basing that on. The kind of reporting I have seen is

more like a minimum dataset. It is more like fundamental information that a not-for-profit should have if it does not have it.

Senator BOYCE: The submissions I have seen have been suggesting that perhaps $1 million is too low for a large organisation and that perhaps it should be set at $2 million. Within that you could have a couple of grants

and go over *

Mr Crosbie: Yes. I think the thresholds genuinely were low. For me, a small organisation is under $1 million. When we talk about small businesses, for instance, we talk about $5 million as the cut-off point.

Senator BOYCE: Well, some definitions do!

Mr Crosbie: Yes. And we have argued that there is a case for doing that in the not-for-profit sector. But I also think this ends up being about what you ask those organisations to do. At the end of the day, regardless of whether you are small, medium or large, the question is: what is your compliance cost here, or what reports do you have to provide? ...I sometimes listen to the big end of town come in here and talk about massive reporting

requirements, and I wonder whether they have actually read the

implementation report and seen what has been suggested. I cannot think of a single large organisation that could not put their fingers on the kind of information being asked for in less than 10 minutes * and if it took them

84 CCSA, Submission 23, p. 7.

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longer than 10 minutes I would be wondering how that organisation was being run, frankly.85

2.75 The committee asked the government to explain the proposed threshold levels. Mr Martin Jacobs of Treasury indicated that *[tjhose thresholds have come from the requirements for companies limited by guarantee. They are also thresholds which are used by some other jurisdictions.'86 Treasury reviewed the thresholds for reporting requirements of unlisted companies and incorporated associations, and summarised these in its submission to the House Economics Committee .8 * While the matrix of regulations across the various jurisdictions is complex, several jurisdictions set the threshold for small organisations at $250 000 (including the Commonwealth, New South Wales and Victoria), some set it at a lower level (Australian Capital Territory, Queensland) and one sets it higher (South Australia). In other jurisdictions, the legislation is not directly comparable.

Committee view

2.76 The committee notes that the proposed thresholds are based on those currently applying to some of the organisations that will operate under the ACNC's reporting framework, and that only in South Australia does the change appear to represent the lowering of an existing threshold. It further notes that under the proposed thresholds, around four out of every five charities would fall in the 'small' category, with the lightest reporting requirements.88 The thresholds are set on revenue, and so would not be affected by capital held by charities. The committee expects that the government and the ACNC will monitor closely the effects of the thresholds on the reporting burden of charities, and the balance that this strikes with transparency and confidence in the sector. The committee notes that the thresholds can be varied by regulation if required.89

Independence

2.77 Charities are keen to ensure the preservation of their independence and freedom to pursue their stated objectives. There was praise for inclusion in the Bill's objects clause of the goal 'to support and sustain a robust, vibrant, independent and innovative Australian not-for-profit sector'. Some inquiry participants were particularly concerned to ensure that the new regime would protect that independence. Anglicare CEO Grant Millard said:

we would like to see a provision that sets a role for the commissioner in the enforcement of the independence of the sector with a view to the

85 Mr David Crosbie, Community Council for Australia, Proof Committee Hansard, 4 September 2012,pp.41-42.

86 Mr Martin Jacobs, Treasuiy, Proof Committee Hansard, 4 September 2012, p. 55.

87 Australian Treasury Portfolio, Submission to the House of Representatives Economics Committee, July 2012, pp. 33-37.

88 Mr Martin Jacobs, Treasury, Proof Committee Hansard, 4 September 2012, p. 55.

89 Proposed section 205-25 (1) and (2).

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maintenance of the advocacy rights of not-for-profits so that the sector may continue to speak out without fear or favour in the interests of the

marginalised and socially excluded, without the fear of government retribution through contractual gag clauses or targeted funding

withdrawals.90

2.78 There was a particular concern about the relationship between government and charities in their roles as service providers. ACOSS and UnitingCare noted:

Preserving the independence of NFP entities can be challenging where, typically, a Government monopsony exists. The Government monopsony in social service delivery limits the capacity of NFP entities to conduct genuine contract negotiations with the Government. This has led to both an increase in the reporting and administrative obligations placed on NFP entities as well as terms and conditions which have limited the capacity of entities to undertake advocacy (commonly referred to as a *gag * clauses).91

2.79 ACOSS and the Conservation Council of South Australia both recommended that the legislation include, in relation to governance standards, a statement that the standards must 'not prevent or constrain not-for-profit organisations from carrying out advocacy functions in pursuit of their purpose'.92

2.80 UnitingCare proposed that the section of the Bill that includes core concepts be amended to add a reference to what independence means:

Insert 205-45 Independence of the NFP Sector

Independence of the sector means that NFP entities are autonomous entities subject to the direction and control of their Boards or Governance

body(ies). The independence of an NFP entity, particularly in relation to advocacy cannot be set aside, limited or controlled by condition of direct or indirect Government funding.93

2.81 Although independence was strongly defended by many stakeholders, it was not clear whether this could be addressed in legislation in a way that would have concrete effects, since the ACNC will not be in the business of reviewing contracts. Mr David Crosbie from Community Council for Australia reflected on this dilemma:

[T]his is a very difficult issue in many ways, because no-one in the not-for- profit sector wants to see gag clauses introduced. I notice the first object of the ACNC Bill is to promote the independence of the sector: One of the objects of the Australian Charities and Not-for-profits Commission is to promote the independence of the sector.' Independence is written in *and many of us worked around those objects to make sure that independence was included. So I see the ACNC as being about promoting the

90 Mr Grant Millard, Anglicare, Proof Committee Hansard, 4 September 2012, p. 30.

91 ACOSS, Submission 9, p. [3]; UnitingCare, Submission 4, p. 4.

92 ACOSS, Submission 9, p. [6].

93 UnitingCare, Submission 4, p. 6.

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independence of the sector, and respecting and engaging with the sector as independent entities.

I am not sure that you can put in clauses as to the regulator's role that will address issues that arise from individual contracts. It may be positive to reinforce the notion that the independence of the sector needs to be

respected... 1 am not sure that having a clause in the ACNC establishment legislation is going to prevent those kinds of contractual arrangements creating limitations on what a not-for-profit can or cannot do.94

2.82 The Salvation Army responded to the committee's queries in this area. Its proposal reflects the difficulty in trying to give legislative effect to the objective of independence:

On reflection of how practically the NFP sector can be protected from gag clauses in the future, The Salvation Army recommends that consideration is given to amending the Consequential ACNC Bill to include an amendment to the Financial Management and Accountability Act 1997 to at least limit Federal Government funding contracts from including such gag type clauses.95

2.83 Ms Lavarch, Chair of the Not-for-Profit Sector Reform Council, described constraints on independence, such as gag clauses, as 'outrageous', but nevertheless thought it was not the place of the ACNC to deal with them:

In terms of whether it is the place of the Australian Charities and Not-for Profit Commission or the commissioner to step in to ensure the

independence of those organisations registered, I think it would be an oven'each of the role of the regulator. I believe that there should be other mechanisms * they [gag clauses] should not be there in the first place. But I do not believe it is the role of the ACNC to be the advocate, on behalf of

the organisations, to a government that seeks to insert unconscionable clauses in their contracts or funding arrangements.96

2.84 Ms Lavarch also referred to research which suggested there may be other mechanisms available to address gag clauses in contracts:

The observation was made from research undertaken at the Australian Centre for Philanthropy and Nonprofit Studies at QUT that, if you looked at the clauses in the government contracts and then looked at the restrictions under the Australian consumer law as to what can and cannot be included in a consumer contract, then the government contracts would be in breach of their own consumer laws.97

94 Mr David Crosbie, Community Council for Australia, Proof Committee Hansard , 4 September 2012, pp. 42-43.

95 Answer to question on notice from The Salvation Army, received 6 September 2012.

96 Ms Linda Lavarch, Not-for-Profit Sector Reform Council, Proof Committee Hansard , 4 September 2012, p. 48.

97 Ms Linda Lavarch, Not-for-Profit Sector Reform Council, Proof Committee Hansard , 4 September 2012, p. 49.

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Committee view

2.85 The committee believes the fostering of an independent not-for-profit sector is essential, and supports this as an object of the Bill. Gag clauses are an objectionable feature of contracts with not-for-profit entities. They are particularly inappropriate in those contexts where a monopsony exists: where the government offering the contract is the only purchaser of services. The committee believes such clauses should not be introduced.

2.86 The committee does not conclude that there is an effective and appropriate way in the not-for-profit reforms can be a vehicle for legislative change to prevent clauses in contracts that might restrict the independence of charities. Governments should however commit not to use such clauses.

Recommendation 1

2.87 The committee recommends that the bills be passed.

Senator Claire Moore

Chair

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Coalition Members and Senators

Dissenting Report

The Committee *s inquiry covered three bills - the Australian Charities and Not-for- Profits Commission Bill 2012, Australian Charities and Not-for-Profits Commission (Consequential and Transitional) Bill 2012 and the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012.

Rationale for the Legislation

Coalition senators recognise that the current regulatory framework for the sector is fragmented, inconsistent, and uncoordinated across a range of government agencies. It meets neither the sector *s needs nor that of the wider community.

The Objects of the bills are broadly supported by Coalition senators who recognise the importance of maintaining, protecting and enhancing public trust and confidence in the not-for-profit (NFP) sector. Coalition senators also endorse measures to support and sustain a robust, vibrant, independent and innovative NFP sector and to promote the reduction of unnecessary regulatory obligations on the NFP.

The bills establish the Australian Not-for-Profits Charities Commission (ACNC), the role of the Commissioner of the ACNC, and make provision for the NFP sector *s eligibility for taxation concessions.

In essence the Coalition senators see the primary objective of the bills to promote the reduction of unnecessary regulatory obligations on the Australian NFP sector.

The Coalition senators endorse the sentiments expressed by Mission Australia and the Conservation Council of South Australia that suggested there were no obligations explicitly set out in the bill to realise this noble objective.

The Conservation Council of South Australia in its evidence said:

It is good to have that objective but, when that was added as an objective, there was almost nothing changed in the act... There is little or nothing in the act that would be a positive obligation to support not-for-profit's through community education. We have had conversations with the ACNC or the task force and are pleased with some of those directions. But there is nothing in the act to reflect that and that creates a disjunct between the

40

conversations we are having with the ACNC staff and what is in the

legislation.1

The Coalition members of the Committee do not support passage of any of the three bills.

Coalition concern with the legislation centres around the following issues:

" The imposition of additional and unnecessary red tape

" The lack of certainty regarding the governance and responsibilities of the ACNC

" Privacy implications

" Poor policy construction

The Coalition *s Position

The Coalition would support a small Charities Commission as an educative and training body for the sector, and does not support the creation of another regulatory body that will add to the red tape burden for charitable organisations and duplicate state and territory regulation.

The Coalition would retain the regulatory powers that already exist in the ATO, ASIC and other similar bodies and not transfer them to the new Commission.

Issues

The Regulatory Burden

Coalition Senators of the committee believe these bills will increase the regulatory burden being placed on charities and NFPs, many o f whom are already struggling to meet the demands o f government in this space.

Unless and until the States and Territories agree to hand over their powers to the

Commonwealth regulator and harmonise their laws, these bills are going to add an additional layer of red tape which the sector will have to meet.

Uniting Care Australia in its submission said:

While the Objects of the ACNC Bill now include the promotion of red- tape reduction, we are concerned that there are limitations to the ACNC *s capacity to deliver any tangible red-tape reduction measures outside of its own activities. The majority of the proposed red-tape reduction benefits of a

single national NFP regulator are predicated on State/Territory Government cooperation or agreement which is yet to be secured from other

Commonwealth agencies and regulators. While the ACNC Bill mandates

1 Mr Kelly, Conservation Council of South Australia, Proof Committee Hansard, 4 September 2012, p. 8.

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for the ACNC to work towards those agreements it is incorrect to assume they are conclusive savings.2

YouthCARE Inc in its submission said:

The Report claims that the adoption of the Bill and the establishment of the ACNC will result in significant reduction in reporting and regulation requirements for NFP's and Charities. Although many organisations

welcome this objective, the Report does not demonstrate the practical application that will lead to the reduction of red tape. With the exception of companies limited by guarantee, there are no practical examples cited that would give the sector any comfort that such reduction would take place.

Many organisations currently have a high level of reporting and compliance cost related to funding from state and federal government agencies. YouthCARE currently submits audited financials to the Department of Employment, Education, and Workplace Relations (DEEWR), the Western Australian Department of Education, and the Department of Commerce, in addition to numerous local government bodies on an annual basis.

With the introduction of the ACNC there would be further duplication and additional reporting burden placed on organisations in contradiction with the Bill *s objective.3 4

Martin Laverty, Chief Executive Officer of Catholic Health Australia in evidence on September 4 said:

At the moment, a not-for-profit aged-care organisation has to acquit annually to the Department of Health and Ageing. So too does a for-profit aged-care organisation. The challenge in expecting the ACNC to manage reporting through its front door *reporting that is also going to satisfy the

needs of the Department of Health and Ageing on aged care *triggers the question of a two-stream process: one for for-profits and one for not-for- profits. We see that there is an existing reporting framework in relation to that illustration of aged care, whereby possibly all of the type of data that the ACNC would seek is already provided through an existing and

established channel that is open to both for-profits and not-for-profits *and, indeed, government agencies in the case of Victoria. Disturbing that could throw up unforeseen, unintended consequences that we think would be better avoided by the ACNC being required to visit the Department of Health and Ageing to extract the data that it seeks for its purposes/1

Coalition senators were drawn to concerns raised by the Independent Schools Council of Australia which focussed on the relationship between the ATO and the ACNC with

2 UnitingCare Australia, Submission 5, p. 4.

3 YouthCARE, Submission 32, pp. [2-3],

4 Mr Martin Laverty, Catholic Health Australia, Proof Committee Hansard, 4 September 2012, p. 34.

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respect to the authority of ACNC to require information to enable taxation compliance contrary to the stated aims of the legislation of increasing transparency:

The A C N C sh o u ld n ot act o n b eh a lf o f the A TO and the annual

in form ation statem en t sh o u ld be fram ed to g iv e q u ality p u b lic inform ation

and not b e fram ed to attem pt to "catch out" any su p p osed Taxation n on-

com p lian ce.'5

Coalition Senators of the committee believe the reduction of red tape should be a priority issue where any reform of the NFP space is concerned, and it is our contention that these bills will have a detrimental impact on achieving this objective and in fact will impose additional duplication and red tape on the sector.

Powers and Penalties

Stakeholders have expressed concerns that the powers and penalties contained within these bills are heavy handed and may deter members of the public from taking up voluntary roles within the sector.

Sector agencies have raised issues that the reporting requirements, governance standards and the ACNC enforcement powers are inconsistent with or overlap the common law of trusts and state and territory trustee legislation, inconsistent with or overlap the Corporations Law and ASIC's regulatory role, inconsistent with or overlap the ATO's guidelines on public and private ancillary funds, are possibly inconsistent with the Australian Constitution, and inconsistent with the overarching purpose of the

ACNC draft legislation.

World Vision Australia *s submission said:

...in m o st in stan ces, under th e Corporations Act 2001 (Cth), A S IC m ust

seek a court order b efore a director can be d isq u alified from m an agin g a

coip oration . W V A su g g ests th is is a m ore appropriate m od el and can see no

ca se for w h y a d ifferen t approach sh ou ld b e tak en in resp ect o f registered

N FP en tities.6

The Fundraising Institute Australia in its submission said:

W h ile FIA reco g n ises the n eed to en su re co m p lia n ce w ith the draft Bill,

FIA is d isap p oin ted and ex p resses con cern that th e Bill em p h asises

in vestig a tio n o f N FPs and en forcem en t o f co m p lia n ce w ith th e Bill b y

crim inal san ction s, rather than risk m an agem en t and ed u cation for ch arities

and N FPs about co m p lia n ce and governm en t.

FIA u rges A C N C to prefer the ed u cation al and gu id an ce approach to

co m p lia n ce and g overn an ce over the p u n itive approach set out in

C hapter 4 .7

5 Independent Schools Council o f Australia, Submission 14, p. 6.

6 W orld V ision Australia, Submission 26, p. 15.

7 Fundraising Institute Australia, Submission 45, p. 5.

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YouthCARE Inc in its submission said:

YouthCARE notes the concerns raised by the Australian Institute of Company Directors stated in the report at Point 2.107 that the Bill in its current form would place responsibilities and penalties on not-for-profit and charity board members that would be greater than those found under the Corporations Law.8

Coalition Senators note the shared views of World Vision Australia, the Baptist Union o f Australia, World Vision Australia and Anglicare. The heavy-handedness of the enforcement powers were expressed by World Vision Australia:

...the tone and structure of the enforcement powers continue to suggest a heavy-handed approach weighted against the interests of registered entities and responsible entities. Further efforts should be made to ensure that the powers are better targeted, fairer, not used to inappropriately interfere with

an organisation *s legitimate operations and do not impose undue costs on an entity in taking action against the ACNC.9

Lack of certainty

Stakeholders remain concerned that the bills create uncertainty with regard to the obligations and responsibilities of both the entity and those charged with governance of the entity.

This issue arises due to the fact that the requirements of the financial report and the requirements of those charged with governance with respect to financial reports are not presently specified, with these provisions to be enacted by regulation by the Minister. The sector is concerned that this will lead to a situation where NFP agencies have limited input into decisions regarding how they are to be governed. Moreover, it

exposes the risk that these standards can be subject to change frequently and at the whim of the M inister or the government of the day.

The Australian Centre for Philanthropy and Nonprofit Studies in its submission said:

Commonwealth legislative drafters have produced some excellent plain English statutes. Given the complexity of issues involved, the GST legislation and the Corporations Act (particularly the plain English guide for small scale enterprises) are excellent pieces of drafting. The same standard should be reached in these instruments, given that they will affect and will need to be used by ordinary citizens who volunteer their time for

the public good. Terms such as *responsible entity * and *registered entity * are likely to confuse and confound many ordinary people, and make the task of ACNC staff all the more difficult, time-consuming and costly.10

__________________________________________________________________________________________43_

8 YouthCARE, Submission 32, pp. [3M]

9 World Vision Australia, Submission 26, p. 15.

10 Australian Centre for Philanthropy and Nonprofit Studies, Submission 47, p. [7].

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CPA Australia Ltd in its submission said:

CPA Australia remains concerned that with the regulations incomplete, some charities may find it difficult to determine what if any new practices they will need to implement to enable them to lodge the financial report

with the ACNC for the year ended 30 June 2014 and which must include comparative infoimation for the year ended 30 June 2013. Importantly, the start date of the comparative year infoimation was 1 July 2012.

Without the complete regulations, we suggest the Senate Community Affairs Legislation Committee recommend a further delay by 12 months to the commencement date of that part of the legislation to require charitable entities to lodge their financial report with the ACNC. Therefore, charities would lodge their financial report with the ACNC for the year ended 30 June 2015 and include comparative infoimation for the year ended 30 June 2014.11

YouthCARE Inc in its submission said:

Specifically of concern for incorporated associations is the lack of infoimation regarding the winding back of relevant state and territoiy legislation in addition to harmonization with reporting to state and federal government agencies which already takes place.42

Privacy

Concerns were raised about the privacy provisions. Mr David Crosbie, Chief Executive Officer, Community Council for Australia said in evidence September 4:

...there have been clear indications given to people on the reform council and elsewhere that the privacy of personal details in private ancillary funds would compromise philanthropy if they were made public.11 12 13

Philanthropy Australia in its submission said:

Philanthropy Australia is vigorously opposed to proposals which are likely to be detrimental to the growing culture of philanthropy and giving, such as the public release of private infoimation relating to some private givers. Australia needs both public and private giving.14

Consultation process

Coalition senators support meaningful and appropriate consultation in effective policy development. Key stakeholders have continually expressed concerns that the consultation process for the ACNC has been excessively secretive and unnecessarily

11 CPA Australia, Submission 40, p. [ 1 ].

12 YouthCARE, Submission 32, p. [2],

13 Mr David Crosbie, Community Council for Australia, Proof Committee Hansard , 4 September 2012, p. 51.

14 Philanthropy Australia, Submission 5, p. 1.

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rushed, with not-for-profit agencies being provided as little as nine working days in some cases to make submissions on important aspects of the Exposure Draft.

YouthCARE Inc in its submission said:

The Report shows a lack of consultation with state and federal departments on the administration of the ACNC reporting requirements and how this would impact on any government department *s current arrangements with the sector. It fails to resolve the question of how the proposed ACNC framework will co-exist with overlapping existing legislation.*ì5

Mission Australia in its submission said:

Mission Australia remains concerned that the bills as drafted are more prescriptive in certain key areas than had been foreshadowed and do not reflect that sufficient work has been done with Federal agencies and with State Governments and agencies with responsibilities in the charitable

sector to reduce red tape and duplication. In addition, greater attention should be given to ensuring the independence of the charity and not-for- profit sector.15 16

Coalition senators share the concerns expressed by various submitters about timelines associated with implementation of these reforms. Concern was expressed with particular regards to the financial reporting requirements. The Coalition senators share the concerns of the Institute of Chartered Accountants Australia, which said in its submission:

[I]n its current form we do not believe the draft legislation is ready to be passed through the Parliament. Two fundamental pieces of the NFP reform are not yet available for review or consultation - the governance

requirements and the reporting framework. We consider that these requirements are integral to the reform process and should be made available before the legislation is passed by Parliament. These areas do have the potential to increase the burden on many charities, so it is

important that they are clarified up-front and time given so their impact can be assessed appropriately.

We accept that as a consequence of this recommendation the start date of the regulator may need to be delayed. We consider a short delay (perhaps two to three months) acceptable.17

Conclusion

The bills do not meet their objects. The Coalition will not support the creation of a large regulatory body that will add to the red tape burden for NFPs and simply duplicate existing State and Territory regulation.

15 YouthCARE, Submission 32, p. [3].

16 Mission Australia, Submission 11, p. 2.

17 Institute of Chartered Accountants Australia, Submission 24, p. 1.

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These bills introduce complexity, uncertainty and further regulation to a sector that is already struggling with high administrative costs and red tape.

These additional burdens distract charities and NFPs from their primary community role.

Recommendation

That the bills not be passed in their current form.

Senator Bridget McKenzie Senator Dean Smith

Victoria Western Australia

Senator Sue Boyce

Queensland

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Additional Comments by Nick Xenophon

Independent Senator for South Australia

Introduction

It should be acknowledged at the outset the enormous and valuable contribution the charities and not-for-profit (NFP) sector makes to the Australian community. Its value to the social and economic fabric of the nation is difficult to adequately measure - however, without it governments would find it impossible to meet the shortfall of the activities and benefits derived from this sector.

The need for greater regulation in the Australian charity andNFP sector has been evident for some time - appropriate regulation will strength public confidence in the sector and hold to account those few organisations that are not scrupulous. It is encouraging that the Federal Government has taken steps to establish an Australian

Charities and Not-for-Profits Commission (ACNC) in order to educate, regulate, monitor, and - where appropriate - take disciplinary action against Australian charities and NFPs. I am concerned that the effectiveness of such a Commission, in its present proposed form, is seriously at question.

Public knowledge of how contributions are spent and the public benefit these charities and NFPs bring to communities must be improved. The amount of forgone revenue from the inappropriate application of income tax exempt status needs to be addressed as a matter of urgency.

The Australian Bureau of Statistics have stated the level of foregone revenue from income tax exemptions for charities and NFPs is currently *unquantifiable *,1 however Treasury estimate it to be in the order of $1 billion per year.1 2

The Australian Tax Office believes the introduction of the ACNC will result in additional tax revenue of approximately $41 million over four years due to *increased compliance activity to ensure that not-for-profit tax concessions are used only as intended *.3

Greater transparency in the way in which funds are used by charities, and in particular NFPs such as community clubs with poker machines, must be achieved. A recent

1 Treasury, 2009 Tax Expenditures Statement, January 2010, p. 74.

2 Treasury, 2009 Tax Expenditures Statement, January 2010, p. 29.

3 ATO, Non-Profit News Service No. 0325 - 2011-12 Budget: Measures relevant to non-profit organisations, 6 June 2011, available at: http://www.ato.gov.au/nonprofIt/content.aspx7docAcontent/00280460.htm. accessed 11 September 2012.

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study by Dr Charles Livingston revealed that in New South Wales and Victoria, community contributions by poker machine operators amounted to only 1.3 per cent and 2.4 per cent respectively of total poker machine losses for the past year.4 5 The public must be equipped with the information necessary to see through the claims of clubs that they are organisations that operate for the benefit of the community.

The establishment of the ACNC should be used to scrutinise entities whose classification as a charity or NFP is questionable. This is particularly so for entities that purport to be advancing a religion, such as the Church of Scientology. Former members of this organisation have asserted the organisation serves only itself to the detriment of the community/1 Many would argue this is inconsistent with their current charitable status in Australia and the tax exemptions that flow on from that.

In 1999 the Charity Commission for England and Wales refused to grant the Church of Scientology charitable status because the Commission was not satisfied Scientology was a religion within the meaning of English law. Furthermore the Commission held that no public benefit arising from the practices of Scientology had been established.6 This was based on the Commission *s conclusion that the private

nature of Scientology *s auditing, training and practices resulted in a private benefit to its members only, rather than a benefit to the public. Therefore, it is imperative the framework within which the ACNC Commissioner will work will enable the Commission to examine the purposes for which an entity purports to act, and whether those purposes result in a net public benefit.

It is also important that the Federal Government take this opportunity to achieve wider reaching reform of the social economy sector, including improving access to capital for charities and NFPs. The ACNC should work together with the Social Finance

Taskforce proposed by the Senate Standing Committee on Economics in order to develop and promote a capital market for the social economy sector.7

Registration

I fully support the requirement that charities must register with the ACNC before they are eligible for any tax concessions. However, that registration - in the current Bill - is

4 Monash University, Gaming claims don *t add up, 17 April 2012, available at http://www.monash.edu.au/news/show/gaming-claims-dont-add-up, accessed 11 September 2012.

5 Senate Standing Committee on Economics, Report on the Tax Laws Amendment (Public Benefit Test) Bill 2010, 7 September 2010, pp. 47-48.

6 Charity Commission for England and Wales, Decision of the Charity Commissioners for England and Wales (on the) Application for Registration as a Charitable Entity by the Church of Scientology (England and Wales), 17 November 1999, available at: http://www.charitvcommission.gov.uk/Librarv/stai1/cosfulldoc.pdf. accessed 11 September

2012.

7 Senate Standing Committee on Economics, Investing for good: the development of a capital market for the not-for-profit sector in Australia, 25 November 2011, p. xix.

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initially only required for tax endorsed charities, rather than all charities and NFPs, is of serious concern. It appears this is contrary to the Federal Government *s original intention that the ACNC Commissioner:

...will initially be responsible for determining the legal status of groups seeking charitable, public benevolent institution, and other NFP benefits on behalf of all Commonwealth agencies.8

Although the Australian Charities and Not-for-Profits Commission Bill 2012 contains the regulatory framework for extending registration requirements to all charities and NFPs in the future, no time frame for this extension has been established.9

The requirement that all charities and NFPs register with the ACNC will also address concerns that charities and NFPs that self assess their income tax status can operate completely unknown to the ATO and therefore without any monitoring o f their

activities. If the Federal Government is serious about achieving meaningful savings in foregone tax revenue then all charities and NFPs should be required to register with the ACNC within a reasonable time frame - say 12 months.

Recommendation

The Australian Charities and Not-for-Profits Commission Bill 2012 be amended to require all charities and NFPs register with the ACNC within 12 months in order to receive any tax concessions.

The automatic registration by the ACNC of charities already endorsed by the ATO as income tax exempt is also of concern. The ACNC should conduct a review of all such automatic registrations to ensure those charities with income tax exempt status are continuing to meet the obligations necessary to be awarded such status.

A public benefit test

The seven subtypes of charity as defined by the legislation should be expanded to include a requirement that the charity meet a public benefit test. This is consistent with the Senate Standing Economics Legislation Committee recommendation in the inquiry into the Tax Laws Amendment (Public Benefit Test) Bill 2010 that a public benefit test should be contained in legislation.10 Australia should adopt a public

8 The Hon Bill Shorten MP and the Hon Tanya Plibersek MP, Joint Media Release, *Making it easier for charities to help those who need if, 10 May 2011, available at: http://assistant.treasurer.gov.au/Di spl ayDocs.aspx?doc=pressre1eases/201 l/077.htm&pageK>=0 03&mln~brs&Year^&DocTvpe. accessed 11 September 2012.

9 Explanatory Memorandum, Australian Charities and Not-for-Profits Commission Bill 2012, p.7.

10 Senate Standing Committee on Economics, Report on the Tax Laws Amendment (Public Benefit Test) Bill 2010, 7 September 2010, p. 3.

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benefit test for charities and NFPs in line with reforms in England, Wales and Scotland.11

A public benefit test should weigh up both detriments as well as benefits an organisation provides to the community. Tax free status in effect provides a subsidy by all Australian tax payers to such an organisation. If, for example, an organisation was found to have failed to deal appropriately with allegations of abuse (for examply by not reporting such allegations to the police) there ought to be sufficient powers for the Commissioner to compel the organisation to explain its conduct. A repeated and

systematic failure to deal with serious allegations of criminal activity within an organisation ought to be considered as part of any public benefit test. This should be an ongoing requirement.

Recommendation

The legislation be amended to include the requirement that an entity must satisfy a public benefit test before being defined as a charity or NFP in order to receive tax free status. This requirement ought to be a continuing one.

The Register

Information contained in the Australian Charities and Not-for-profits Register will go a long way to assuring the public the entity they are choosing to support is operating according to good governance and accounting standards. The publication of information potentially adverse to an entity, such as enforcement action taken by the ACNC Commissioner, is an important step to making entities accountable to their contributors.

Enforcement Powers

The Committee received conflicting views regarding the appropriateness of the enforcement powers bestowed upon the ACNC Commissioner but did not express a view itself on this point. It is imperative that the Commission be given a set of effective powers in order to discipline those entities who have contravened Australian law.

To that extent, it is concerning the Commissioner *s primary duty appears to be providing *education and guidance *" to assist entities to meet their obligations under law. Furthermore, the Bill and Explanatory Memorandum contain no specific education or advisory functions that the ACNC Commissioner will utilise. It is very concerning the ACNC Commissioner currently has no defined mechanisms in order to

achieve their primary duty.

11 Senate Standing Committee on Economics, Report on the Tax Laws Amendment (Public Benefit Test) Bill 2010, 7 September 2010, p. 37.

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The ACNC Commissioner must have duties beyond education and guidance as proper regulation will only be achieved if the Commissioner can exercise effective enforcement powers. The sector must be put on notice that non-compliance with the legislation will be effectively and fairly dealt with.

Given the enforcement powers are modelled on the current powers of ASIC and the ATO, the ACNC Commissioner should not be discouraged from using their powers despite the apparent lack of enforcement by other agencies charged with regulating industries.

The Structure and role of the ACNC Commissioner

The ACNC Commissioner will be advised by the ACNC Advisory Board. However, the Bill provides that the Commissioner will only receive advice from the

ACNC Advisory Board upon request. The Green Institute made the following recommendation, with which I agree:

The A C N C A d v iso ry Board sh ould h ave the p ow er to p rovide ad vice and

m ak e recom m en d ation s on its o w n initiative, not on ly w h en requested b y

the C o m m issio n er.12

Recommendation

The legislation be amended to expand the ACNC Advisory Board *s function to include the provision of information to the Commissioner at the Commissioner *s request and on the initiative of the Board.

Thresholds

The size of the entity will determine the extent of its reporting obligations. Although there were some concerns regarding the revenue thresholds for small, medium and large entities, I agree with the Committee that these thresholds are appropriate. However, evidence presented to the Committee suggests that the information requirements of reports are not onerous.13 While it is important that smaller and less

resourced entities are not required to submit complex and time consuming reports, this needs to be balanced against the need to ensure charities and NFPs are providing the ACNC Commissioner and the public with the information necessary to assess their activities.

The establishment of the ACNC is an important first step to improving regulation and transparency in the charities and NFP sector. However it is important that the ACNC Commissioner is given a robust set of powers, and that regulation applies to all entities in the sector, not just a select few. Entities applying for charitable and NFP

12 The Green Institute, Submission 39, p. 3.

13 Mr David Crosbie, Community Council for Australia, Proof Committee Hansard, 4 September 2012, pp. 41-42. *

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status must be scrutinised to ensure their activities are deserving of such status and the taxation benefits that follow. The legislation should reflect this through an appropriate set of amendments. Otherwise, there is a concern this legislation will not address the

fundamental concerns for greater transparency and accountability of the NFP sector.

Recommendation

The bills be passed with the appropriate amendments to strengthen its intent and purpose.

Senator Nick Xenophon

South Australia

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Australian Greens

Dissenting Report

Introduction

The not-for-profit sector is large and very diverse with over 600 000 not-for-profit entities in Australia, of which around 10% could be referred to as charitable organisations, and will be directly impacted by this Bill. Many of these organisations

have few, if any, staff and rely heavily on volunteers to run their organisations. It requires significant additional effort to contribute to the various rounds of drafting and review that these Bills have been through given the complexity of the legislation The Australian Greens are aware of the short time frame within which this inquiry was conducted and thank those organisations were able to provide detailed feedback to the inquiry.

There is clearly support and goodwill from many organisations within the not-for- profit sector to proceed with the development of an Australian Charities Commission, if that Commission and the associated legislation can be established in terms that

promote a strong sector through transparency and accountability mechanisms, while also meeting the sector's need for independence, diversity and innovation and delivering significant reductions in administrative and reporting requirements.

Although the Government has resolved many of the issues that were identified by the House of Representatives Committee Economics Committee's inquiry into the drafts of these bills, this committee also heard evidence for a wide variety of submitters such as Western Australian Council Of Social Services, Catholic Health Australia, Uniting Care, the Bishops Council of Australia, the Australian Council for Social Services and the Australian Institute of Company Directors that this has not resolved all of the

significant concerns of the sector. These concerns need to be addressed before the Bills proceed.

This dissenting report from the Australian Greens outlines those concerns as they relate to each of the three bills, the Australian Charities and Not-For-Profit Commission Bill 2012, hereafter referred to as the ACNC Bill; the Australian Charities and Not-For-Profit Commission Bill (Consequential and Transitional) 2012,

hereafter referred to as the ACNC Transitional Bill; and the Tax Laws Amendment (Special Conditions for Not-For-Profit Concessions) Bill 2012, hereafter referred to as the Tax Bill; and proposes recommendations for the Government's consideration.

ACNC Bill

Independence of the sector

One of the stated aims of the Government, in introducing this legislation, has been to support a robust, vibrant, independent and innovative Australian not-for-profit sector, as set out in Section 15-5(l)b of the ACNC Bill. The Australian Greens welcome this approach as a policy setting for Australia's not-for-profit sector, but the inquiry has

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demonstrated that the Bill is heavily slanted towards compliance and regulatory oversight.

Both the ACOSS and Uniting Care submissions propose achieving great independence in the sector by inserting an additional clause at Section 45-10 of the ACNC Bill that limits the powers of the government to insert gag-clauses into the governance standards.

UnitingCare also propose introducing an amendment at Section 205-45 ACNC Bill as follows:

Under Subdivision 205-C - Other concepts, insert:

205-45 Independence of the NFP Sector

Independence of the sector means that NFP entities are autonomous entities subject to the direction and control of their Boards or Governance

body(ies). The independence of an NFP entity, particularly in relation to advocacy cannot be set aside, limited or controlled by condition of direct or indirect Government funding.1

The Australian Greens believe that the references to the independence of the sector need to be strengthened in the text of the Bill.

Recommendation

That further amendments be made to the Objects of Division 45 - Governance Standards to ensure that the Division reflects the Objects of the Act, as set out in Section 15-5(l)b

Recommendation

That the Bill be amended to ensure that the governance standards cannot now or in the future be used to prevent a charity from advocating for its charitable purpose.

The concerns about gag-clauses were also raised in the context of Government contracts. Uniting Care noted in its submission that the Government has a monopsony over funding arrangements for many not-for-profit service providers, which places it at an advantage when negotiating contracts. To fully alleviate the concerns of the sector that it could be prevented from advocating for its mission or criticising a Government policy that relates to its purpose, amendments should also be made to other Commonwealth legislation to prevent Commonwealth contracts from containing *gag-clauses' that restrict a not-for-profit organisation in its advocacy or criticism of Government policy or other issues relating to its mission or purpose.

Recommendation

That an amendment be made to the relevant Commonwealth legislation to ensure that Commonwealth contracts are prevented from containing 'gag-clauses' that restrict a not-for-profit organisation in its advocacy or criticism of Government policy or other issues relating to its mission or purpose.

1 Uniting Care Australia, Submission 4, p. 3.

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Governance and External Conduct Standards

This Bill leaves governance and external conduct standards to be defined by regulations.

These standards were originally intended to be in legislation but during the consultation phase of this Bill it became apparent that drafting these standards would hold up the progress of the Bill.

Regulations are not subject to the same level of Parliamentary scrutiny that legislation is, and governance standards that are embedded in regulation will be flexible and open to frequent revision. Regulation is a tool for determining aspects of legislation that can frequently change, such as annual fees or levies. Governance and external conduct standards do not need to be so flexible and open to constant revision, so it would be more appropriate to introduce them as a schedule to the legislation once appropriate sector-wide consultation has occurred.

Recommendation

That the governance standards and external conduct standards be added to the legislation as a schedule of amendments once appropriate sector-wide consultation has occurred.

The governance and external conduct standards may require a registered entity to 'act, or not act, in a specified manner'. Catholic Health Australia argued that such a power is too broad, and 'gives rise to uncertainty about future independence of a not-for- profit organisations being able to determine how, within the boundaries of the law, they might act, or not act, in a specified manner.'2

The Australian Greens see no reason to retain this broad power within the text of the legislation.

Recommendation

That the reference to 'act or not act' in sections 45-10 and 50-10 be removed.

Consultation on the Regulations introducing the Governance Standards

In addition to improving the governance and external conduct standards, submitters called for a commitment in the legislation that the sector must be consulted about these standards and that their input be adequately considered and included in the final version of the standards.

PilchConnect gave evidence on this requirement:

It will be vital that these standards be developed in close collaboration with the sector, and that they do not unduly interfere with an organisation *s autonomy and independence... A sector-based consultative approach to the

development and ongoing review of the governance standards is in our view ideally enshrined in legislation.3

2 Catholic Health Australia, Submission 27, p. 3.

* PilchConnect, Submission 33, p. 4.

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Robust, public consultation with the affected community is a good standard for any legislation, and particularly relevant in this instance given that significant governance rules are currently proposed and will determine how the organisations should operate.

As noted by PilchConnect, consultation needs to be included in the legislative framework set out by the ACNC Bill and be an integral part of any further work on governance and external conduct standards. The WACOSS submission drew attention to the West Australian Electricity Industry Act (2004) as a template for legislating a robust consultation and review process.

Recommendation

That consultation is a prerequisite for first implementing and subsequently amending the governance standards and external conduct standards, and that the requirement for robust, public consultation be inserted into the text of the Bill.

Revoking Registration

Section 35-10 covers the circumstances under which the Commissioner may revoke the registration of a registered entity. Included in the text of the ACNC Bill is a provision to revoke registration if:

35-10(1) c (i) the registered entity has contravened a provision of this Act, or it is more likely than not that the registered entity will contravene a provision of this Act.

35-10(1 )c(ii) the registered entity has not complied with a governance standard or external conduct standard, or it is more likely than not that the registered entity will not comply with such a standard.4 5

The Bill continues on to state that in deciding whether or not revoke registration, the Commissioner must have regard to:

35-10(2)e 'the extent to which the registered entity is conducting its affairs in a way that may cause harm to, or jeopardise, the public trust and

confidence in the not-for-profit sector mentioned in subsection 15-5(1) (Objects of this Act).3

Taken together, without any insight into what the governance standards might contain, these provisions have generated significant concern from submitters, such as World Vision, the Australian Baptist Ministries, Anglicare and Catholic Health Australia.

The issues with governance standards raised in the previous section must be resolved in order to further clarify the significance of the statements in 35-10(1) c (i) and 35- 10(1) c (ii).

The Government should clarify what is meant by more-likely-than-not and include references to existing usage in Australian case law within the Explanatory Memorandum. The Government should also further clarify that the regard to 'public

4 ACNC Bill, p. 15.

5 ACNC Bill, p. 16.

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trust and confidence' is not a trigger of the Commissioner's powers, and should not be considered in isolation from the other items listed under 35-10(2) of the Act.

Recommendation

That the government further clarify the definition of more-likely-than-not as a trigger of some power for the Commissioner.

Recommendation

That the government further clarify how and in what context the Commissioner may have regard to 'public trust and confidence'.

Other enforcement powers

More-likely-than-not provisions are present in other sections of the bill, for example sections 40-5, 80-5, 85-5 and 100-5, which outline the Commissioner's other powers such as the ability of the Commissioner to issue warnings. The clarification of the definition of more-likely-than-not as a trigger of the Commissioner's powers in the Explanatory Memorandum should be address all instances of 'more-likely-than-not' within the legislation.

Web Reporting of Compliance Issues

Warning notices that are issued by the commission are published online after fourteen days for a minimum of 5 years. Submitters such as World Vision and Australian Catholic Bishops Conference raised concerns that this carries significant reputational

risk, particularly if the ACNC is successful in its aim to create an infonnation portal that donors can use to assure themselves of the accountability and good management of a particular charity.

In this instance, the Government should have regard to the need to publish warnings, particularly when the compliance issue is minor and quickly resolved through education and an undertaking from the entity to resolve the issues, or is successfully appealed.

Recommendation

That the Government should clarify the circumstances in which warning notices will be posted online and have regard for the reputational risk this imposes on charities that are acting in good faith.

The independence of the ACNC from the Australian Taxation Office is discussed at length in the Majority report to this inquiry, and the Australian Greens note in particular the reference to evidence from the Green Institute about the Advisory Board and the possible inconsistency within the text of the Bill, as covered in sections 2.11

to 2.13 of the Majority report, that has still not been satisfactorily resolved.

The Australian Greens also support the suggestion put forth in the Green Institute submission, and set out at section 2.17 of the Majority report, that the independence of the sector could be enhanced if the ACNC Commissioner was:

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...given specific responsibility for upholding the objects of the Act and advising the Minister on its implementation.6

This could be achieved by adding an additional statement to this effect after Section 15-5(2)b(iii) of the ACNC Bill.

Recommendation

That the text of the Bill be amended to give the ACNC Commissioner specific responsibility for upholding the objects of the Act and advising the Minister on its implementation.

Director's Liability

This legislation covers a range of different entities. Some are already registered as corporations and exposed to ASIC rules, but the registry will also extend to a significant number of organisations that are not formed under limited liability arrangements.

Moore Stephens Accountants and the Australian Institute of Company Directors (AICD) raised concerns that, where unincorporated entities fail to meet the ACNC regulation, it is the individual directors who will be deemed to be the legally responsible persons.

AICD argued that while the amendments represent a 'significant improvement' from the draft legislation:

...it is concerning to us that individuals overseeing unincorporated charities will still have the same obligations and will be liable for any and every amount payable by the unincorporated association under the Bill without exception and without access to defences.7

Moore Stephens suggested:

...that the provisions be revised (where possible) to provide for a limited recourse against the members of the committee to that level of the net assets of the registered entity as disclosed in the last Annual Information

Statement lodged immediately prior to the conduct of the offence (or in the case of BRC the level of assets based on the financial records of the

entity).8

The Australian Greens acknowledge the need for a legal person to bear responsibility for criminal or negligent acts that their organisation may engage in, and recognise that in unincorporated bodies, the legal entity is the individual directors.

As there are already provisions in the Bill which allow the Commissioner to have regard to the size and nature of the organisations, the Australian Greens expect the Commissioner to consider whether the directors acted in good faith and the extent to

6 Green Institute, Submission 39, p. 3.

7 Australian Institute of Company Directors, Submission 22, p. 4.

8 Moore Stephens, Submission 29, p. 9.

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which compliance issues can be resolved through education, particularly with volunteer directors of unincorporated organisations.

However, the Australian Greens remain concerned about the extent to which directors of unincorporated entities are exposed to legal liability on behalf of the entity under this legislation. We urge the Government to review the impact this will have on entities that are run by volunteers, particularly the impact on the ability of organisations to recruit volunteer directors.

The Australian Greens note the comments from World Vision Australia that, 'it is well-accepted that non-compliance is usually a matter of ignorance or under resourcing'.9 In light of these comments, the Australian Greens also expect that the Commissioner will take an active role in educating registered organisations about their

obligations, and ensuring that volunteer directors have easy access to plain-English explanations of their duties and responsibilities under this Act and how to perform them.

Recommendation

That the protections already in place in the Bill, that minimise the liability that volunteer individual directors of unincorporated entities will face if their organisation breaches the legislation, should be further described in the Explanatory Memorandum.

Recommendation

That the Government further investigate the opportunities to strengthen the protections available to not-for-profit directors, particularly those who represent unincorporated entities, and consider carving out more protections for volunteer directors.

Broad Principles for Reporting

The Bill does not yet contain reporting standards. Section 60-15(1) states that these will also be contained in regulation after further development work and sector consultation is complete.

Broad principles for reporting should be inserted into the text of the Bill and/or the Minister should clarify in the Explanatory Memorandum, or by some other mechanism, the broad principles that will be used to guide the development of these standards.

Red Tape Reduction

One of the important policy aims that this Bill seeks to fulfil is the reduction of administrative obligations and elimination of duplication, colloquially known as 'red- tape'. The importance of this aspect of the Bill was emphasised by submitters to the earlier Economics Committee Inquiry, and as a result a new object to 'promote the reduction of unnecessary regulatory obligations on the Australian not-for-profit sector' was inserted into the Bill.

9 World Vision Australia, Submission 26, p. 13.

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Paragraph 1.98 of the Explanatory Memorandum states:

The ACNC will advance initiatives to reduce unnecessary reporting, including implementing a *report-once, use-often * framework and developing the charity passport (which is a collection of core information that has already been gathered by the ACNC as part of the registration process or annual information statement) which can then be provided to

other government agencies negating the need for other agencies to collect that information, minimising the interactions that NFPs need to have with government.10 11

The charities passport was welcomed by the submitters, but there were concerns that until this and other initiatives have been successful, the ACNC actually represents an additional compliance burden rather than an improvement on the current

arrangements.

For example, Mission Australia stated:

Our overriding concern is that rather than reducing red tape and compliance burden, the ACNC will add another layer of compliance and that nothing will be taken away.11

These concerns were echoed by submitters such as Uniting Care and the Conservation Council of South Australia.

Recommendation

That the Bill should include under Section 60-25 of the ACNC Bill (or elsewhere as appropriate) a statement to the effect that, 'Where a registered entity is required to provide an annual financial statement to the ACNC, that entity will no longer be required to provide a financial audited statement for any individual grant or grants provided by an Australian Government Agency unless that Agency has reason to suspect fraud in relation to the use of the grant money.'

The Government is currently reviewing all of the grants within the context of the Fair Work Equal Pay obligations, so the ability of the Government to identify who is in receipt of Commonwealth Grants and quickly link this information to the ACNC registry exists.

The Minister could allay some of the sector's concerns by giving an undertaking to move quickly on the red tape aspects of the legislation, and requiring the

Commissioner to develop a timetable that demonstrates the key milestones that need to be reached.

The terms red-tape and unnecessary regulatory obligations need to be defined within the Explanatory Memorandum. This will help to ensure that the Government and other users of tins legislation have regard to the broader policy intent when reviewing the activity of the commission and its success in meeting its objects.

10 Explanatory Memorandum, ACNC Bill, paragraph 1.98

11 Mission Australia, Submission 11, p. 5.

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In addition to the 5 year review that the Government has now promised to undertake, there should be more regular reporting from the Commission on the success of its initiatives to reduce red-tape.

As well as meeting the Annual Reporting Requirement set forth in Section 130-5(2), the Australian Greens would like the ACNC to report to Parliament against its progress on an established timeline for reducing unnecessary compliance burdens and harmonising reporting requirements across both federal departments and the states.

Recommendation

That the ACNC establish a timeline for reducing unnecessary regulatory obligations on the Australian not-for-profit sector and table an annual report to Parliament that details its progress against that timeline.

However, the red tape issues are significantly broader than just those under the direct influence of the ACNC, and while the ACNC has been given the task of 'promoting* greater integration and fewer reporting requirements, the Government as a whole should set forth its commitments to the sector and have on-going regard to delivering on that commitment.

The Government should also commit to ensuring that an independent regulatory impact assessment is undertaken, and should factor in the cost of compliance with the ACNC into its regulatory calculator.

Some submitters also referred to opportunities to strengthen the red-tape reduction mechanism, which is contained in Section 10 of Schedule 1 of the Transitional Bill and which states that the Commissioner may treat a statement or report given to another agency as an information statement or financial statement.

For example, the Australian Catholic Bishops Council suggested that the Government should amend the statement to read, 'The Commissioner will...' and argued that this arrangement would protect organisations from unnecessary duplication as a result of ACNC registration until other arrangements can be resolved.

The Australian Greens agree with the Government's concern that taking this step to amend the text of the Bill may have unintended consequences, but that for all Commonwealth Departments there is no reason why this could not be the standard

until other arrangements have been instituted. The Government should give an undertaking in the Explanatory Memorandum, or through some other mechanism, confirming that for all Commonwealth Departments the Commissioner will accept a report to a Department as sufficient for an organisation to meet its obligations under this legislation and vice-versa: a report to the Commissioner will be sufficient to meet Departmental reporting obligations.

Recommendation

That the Government should give an undertaking in the Explanatory Memorandum, or through some other mechanism, confirming that for all Commonwealth Departments the Commissioner will accept a report to a Department as sufficient for an organisation to meet its obligations under this

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legislation and vice-versa: a report to the Commissioner will be sufficient to meet Departmental reporting obligations.

Basic Religious Charities

Basic Religious Charities are recognised as complex entities that have evolved over time, in a way that is different to other not-for-profit organisations. As a result, there are some different reporting thresholds and responsibilities applied to this type of

entity. The Australian Greens are still concerned that these arrangements may not provide sufficient requirements to ensure their accountability and transparency, and hence maintain public trust and confidence in these organisations.

Recommendation

That the Government should ensure that these arrangements deliver transparency and accountability of basic religious charities, and the conditions and exemptions allowed for basic religious charities should be included in the 5 year review.

Reporting Thresholds

The Bill sets forth definitions of small, medium and large entities and sets different reporting requirements for each. Some submitters have raised concerns about the upper-threshold on the small entity category. This evidence is considered in detail in the Joint Committee into Corporations and Finance Report into these Bills.12

The Australian Greens acknowledge these concerns, but are also aware that a higher threshold may impact on the ability of the Commission to negotiate a handover of powers with state governments which have set low thresholds for unincorporated entities. The appropriateness of these thresholds should be evaluated as part of the five year review.

Recommendation

That the appropriateness of the reporting thresholds that define small, medium, and large entities should be evaluated as part of the five year review.

Conclusion

Although there remain considerable problems with the ACNC and Transitional Bills, The Australian Greens do not believe that they are insunnountable. However, they do need to be addressed before the Bill can proceed.

Recommendation

The ACNC and Transitional Bills should be passed only after the concerns raised in this report have been addressed.

12 See Joint Committee into Corporations and Finance Report into the Australian Charities and Not- For-Profit Commission Bills, p. 15-17

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Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill

The Tax Bill seeks to clarify and standardise the definitions of not-for-profit and in- Australia as they existing across a suite of Taxation legislation. The Tax Bill is bundled with the ACNC and Transitional Bill but the passage of the other Bills is not

reliant on this Bill. Unlike the ACNC Bill, submitters did not express a specific timeframe for the passage of this Bill, and several submitters such as the Salvation Army and World Vision raised significant concerns about the effectiveness of the definitions outlined in this Bill to achieve the aims set forth in the Explanatory Memorandum or in the Government's statements on these issues.

The evidence discussed below demonstrates some of the concerns that exist about the effectiveness of this Bill, but is by no means an exhaustive summary of the issues set out by contributors to the inquiry.

Definition of Not-For-Profit

The committee received evidence that the definition of not-for-profit that is set forth in this Bill may not support a robust, diverse, independent sector.

Particular concern was noted in relation to the wording in Schedule 1, Provision 3, Section 44, which refers to a not-for-profit, 'not being carried on for the profit of gain of its members'. Evidence submitted by Neumann and Tumour, and discussed more extensively in the Joint Committee into Corporations and Finance Report on these Bills, suggests that the wording of the definition could potentially undermine the capacity of organisations, such as disability service organisations, to recmit members who serve on the organisation's board if they also benefit from the services that the organisation provides.13

The response provided by the Department in response to this issue did not satisfy the Australian Green's concerns.

Recommendation

That the definition of not-for-profit is insufficient and that it should be both amended within the text of the Bill and further clarified in the Explanatory Memorandum.

The Australian Greens also acknowledge that additional work is being undertaken to review and refomi the statutory definition of a charity by mid-2013, and recommend deferring codifying the definition of a not-for-profit in legislation until that work is completed.

Recommendation

That the definition of a not-for-profit be reviewed in the context of reviewing and reforming the statutory definition of a charity.

lj See Joint Committee into Corporations and Finance Report into the Australian Charities and Not- For-Profit Commission Bills, p. 57

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In-Australia provisions

The *In-Australia * special conditions for Deductible Gift Recipients (DGR) have been inserted to reverse the effect of the High Court of Australia's decision in the Federal Commissioner of Taxation of the Commonwealth of Australia v Word Investments Ltd (2008) 236 CLR 204 (Word Investments). In that case the High Court *found that charities are considered to be pursuing their objectives principally *in Australia * if they merely operate to pass funds within Australia to another charity that conducts its activities overseas *.14

During the inquiry, submitters such as Neumann and Tumour raised concerns about the application of the In-Australia provisions and the effectiveness of the current wording.

The committee received evidence from Neumann and Tumour about the difficulties associated with the application of the In-Australia rule as it applied to the responsibility of a registered entity to ensure that monies distributed to another entity are not subsequently sent overseas.

Evidence regarding the application of these mles to touring arts organisations also demonstrated the extent of the definitional problems. For example, two touring arts organisations, the Sydney Dance Company and the Australian Chamber Orchestra, have been listed for exemption in Schedule 3 of this Bill. However, the evidence from the Australian Major Performing Arts Group points out that other touring companies of a comparable size and nature, such as Bangarra Dance Theatre and Circus Oz, have not been included.

The supplementary submission from Treasury indicated that, until 2011, the Commonwealth maintained a classification of arts organisations that included four designated 'international touring organisations'. While the classification was recently discontinued, no evidence was received by the committee that explained why two of

those four organisations should now be given a type of exemption while two should not.

The Australian Major Performing Arts Group evidence pointed out that, 'the use of deductible funds for international puiposes can disqualify the fund for all donations - at least the financial year but perhaps for all periods thereafter'. It continued on to say, 'AMPAG members are developing international partnerships and activities to advance the Australian company and artists. It seems that expenses incurred in this regards may still disqualify the fund of the member for gift deductibility.'15

This evidence indicates that the application of the in-Australia test is still problematic.

The Government should investigate ways to address these concerns, such as designating arts and cultural organisations exempt from the *In Australia * rule so that international touring activities do not affect their tax status, rather than granting exemptions on an ad-hoc basis.

Explanatory Memorandum p. 6.

Australian Major Performing Arts Group, Submission 19, p. 2.

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Similarly, the Australian Greens recommend that the Government further clarify the extent to which an entity is responsible for the actions of another entity as it relates to the expenditure of money provided by the first entity. Until these concerns are resolved through further consultation with the sector and the application of expert advice, the Australian Greens recommend that these Bills be deferred.

Recommendation

That the application of the In-Australia rule should be resolved through further consultation with the sector and the obtaining of expert advice.

Recommendation

That this Bill not be passed until further work has been undertaken to resolve the concerns of the not-for-profit sector.

Senator Rachel Siewert

Western Australia

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APPENDIX 1

Submissions and Additional Information received by the Committee

Submission No.

1. The Smith Family

2. The George Institute for Global Health

3. Chartered Secretaries Australia (CSA)

4. UnitingCare Australia

5. Philanthropy Australia

6. Not for Profit Accounting Specialists

7. Australian Association of Medical Research Institutes (AAMRI)

8. Community Council for Australia (CCA)

9. ACOSS

10. Australian Baptist Ministries

11. Mission Australia

12. Research Australia

13. The National Roundtable of Nonprofit Organisations Ltd (NRNO)

14. Independent Schools Council of Australia (ISC A)

15. Executive Council of Australian Jewry (ECAJ)

16. Australian Catholic Bishops Conference

17. Catholic Social Services Australia (CSSA)

18. Jewish Communal Appeal

19. Australian Major Performing Arts Group (AMPAG)

20. FamilyCare

21. Jewish National Fund of Australia Inc. and the Jewish National Fund Environmental Association of Australia Inc.

22. Australian Institute of Company Directors

23. Conservation Council of South Australia

24. Institute of Chartered Accountants Australia

25. Anglican Church Diocese of Sydney

25A. Supplementary Submission

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26. World Vision Australia

27. Catholic Health Australia (CHA)

28. ANGLICARE Sydney

29. National Moore Stephens Australia network of accounting firms

30. The Treasury

30A. Supplementary Submission

31. Uniting Church in Australia

32. YouthCARE

33. PilchConnect

34. Mr John Church

35. The Salvation Army

36. Aid to the Church in Need (ACN) and Catholic Mission (CM)

37. Live Performance Australia's (LPA)

3 8. Neumann and Tumour Lawyers

3 8A. Supplementary Submission

39. Green Institute

40. CPA Australia

40A. Supplementary Submission

41. Financial Services Council

42. Office for the Not-For-Profit Sector Reform Council

43. RSPCA Australia

44. Department of the Prime Minister and Cabinet

45. Fundraising Institute Australia (FIA)

46. Western Australian Council of Social Service (WACOSS)

47. The Australian Centre for Philanthropy and Nonprofit Studies

48. Australian Conservation Foundation

49. Not-For-Profit Project, University of Melbourne Law School

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Additional Information Received

1. Tabled document from Australian Charities and Not-for-Profit Implementation Taskforce, at Canberra public hearing 4 September 2012

2. Tabled document from Department of Prime Minister and Cabinet, at Canberra public hearing 4 September 2012

3. Tabled document from Department of Treasury, at Canberra public hearing 4 September 2012

Answers to Questions on Notice

1. Answer to question on notice from Department of the Prime Minister and Cabinet, received 6 September 2012

2. Answer to question on notice from The Salvation Army, received 6 September 2012

3. Answer to question on notice from the Australian Institute of Company Directors, received 6 September 2012

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APPENDIX 2

Public Hearing

Tuesday, 4 September 2012

Parliament House, Canberra

Witnesses

Primrose Solutions Dr Brian Neil Primrose, Managing Director

Conservation Council of South Australia Mr Tim Kelly, Chief Executive Dr Greg Ogle, Member of Executive Committee

Institute of Chartered Accountants in Australia Ms Kerry Hicks, Head of Reporting

Moore Stephens Australia Mr Joe Shannon, Chair, Not-For-Profit Group

Australian Council of Social Service Dr Tessa Boyd-Cain, Deputy Chief Executive Officer

Uniting Care Mr James Mein, National Coordinator, Charities and NFP Reforms Responses Mr Joe Zabar, Director, Services Sustainability

Salvation Army Mr John McIntosh, Adviser

Anglicare Mr Grant Millard, Chief Executive Officer

Catholic Health Australia Mr Martin Laverty, Chief Executive Officer

Community Council for Australia Mr David Crosbie, Chief Executive Officer

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World Vision Ms Seak-King Huang, Company Secretary, General Counsel Mrs Tanya Fletcher, Legal Counsel

RSPCA Ms Heather Neil, Chief Executive Officer

Not-for-Profit Sector Reform Council Ms Linda Lavarch, Chair Mr David Crosbie, Chief Executive Officer, Community Council for Australia

Department of Treasury Mr Chris Leggett, Manager, Philanthropy and Exemptions Unit Mr Martin Jacobs, Acting Principal Adviser, Indirect, Philanthropy and Resource Tax Division Ms Ronita Ram, Policy Analyst, Indirect, Philanthropy and Resource Tax Division

Department of Prime Minister and Cabinet Mr Paul Ronalds, First Assistant Secretary, Office for Work and Family

Australian Charities and Not-for-Profit Implementation Taskforce Ms Susan Pascoe, Commissioner Designate Mr Murray Baird, Assistant Commissioner

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The Senate

Community Affairs

Legislation Committee

Dental Benefits Amendment Bill 2012 [Provisions]

October 2012

© Commonwealth of Australia 2012

ISBN 978-1-74229-711-8

Secretariat

Dr Ian Holland (Committee Secretary)

Mr Gerry Mclnally (Principal Research Officer)

Mr Jarrod Baker (Senior Research Officer)

Mr CJ Sautelle (Senior Research Officer)

Ms Carol Stewart (Administrative Officer)

PO Box 6100 Parliament House Canberra ACT 2600

Phone: 02 6277 3515

Fax: 02 6277 5829

E-mail: commumty.affairs.sen@aph.gov.au Internet: www.aph.gov.au/senate/conrmittee/senate ca

This document was produced by the Senate Community Affairs Committee Secretariat and printed by the Senate Printing Unit, Parliament House, Canben'a. ii

so

MEMBERSHIP OF THE COMMITTEE

43rd Parliament

Members

Queensland, ALP

Western Australia, AG

Tasmania, ALP

Queensland, ALP

Victoria, NATS

Western Australia, LP

Queensland, LP

Tasmania, LP

Victoria, AG

Tasmania, ALP

iii

Senator Claire Moore, Chair

Senator Rachel Siewert, Deputy Chair

Senator Carol Brown

Senator Mark Turner

Senator Bridget McKenzie

Senator Dean Smith

Participating members for this inquiry

Senator Sue Boyce

Senator David Bushby

Senator Richard Di Natale

Senator Anne Urquhart iii

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%†

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TABLE OF CONTENTS

Membership of committee.........................................................................................iii

List of Recommendations.........................................................................................vii

Chapter 1

Dental Benefits Amendment Bill 2012......................................................................1

Purpose of the Bill.....................................................................................................1

Background................................................................................................................1

Provisions of the Bill................................................................................................ 4

Chapter 2

Reaction to the proposals.......................................................................................... 5

Commencement date ................................................................................................ 7

Details to be determined in the Dental Benefits Rules ............................................ 7

Consultation processes ............................................................................................. 9

Funding arrangements for the Dental Reform Package ........................................ 10

Closure of the Chronic Disease Dental Scheme.....................................................13

Eligibility of the CDBS...........................................................................................15

The role of other dental health professionals.........................................................17

Coalition Senators * Additional Comments...........................................................19

Australian Greens Additional Comments........................................................... 21

Appendix 1

Submissions and Additional Information received by the Committee .............. 23

Appendix 2

Public Hearings..........................................................................................................25

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LIST OF RECOMMENDATIONS

Recommendation 1

2.53 The committee recommends that the bill be passed.

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Chapter 1

Dental Benefits Amendment Bill 2012 1.1 On 20 September 2012 the Senate referred the provisions of the Dental Benefits Amendment Bill 2012 (Bill) to the Senate Community Affairs Legislation Committee (Committee) for inquiry and report by 29 October 2012. The Bill was introduced in to the House of Representatives on 12 September 2012.1

Purpose of the Bill

1.2 The Bill seeks to amend the Dental Benefits Act 2008 (the Act) in order to establish the framework for the Child Dental Benefits Schedule (CDBS), a newly announced policy initiative which will provide funding for the provision of dental services to eligible children between the ages of two and 18 years.1 2 Under the proposed CDBS, more than three million children would become eligible for

government-subsidised dental care.

1.3 The Minister for Health, the Hon Tanya Plibersek MP (Minister), stated in her Second Reading Speech to the Bill:

Since the late 1990s, the prevalence of child caries and the mean number of teeth affected by dental disease in children has increased. A recent Australian Institute of Health and Welfare report showed that 45 per cent of 12-year-olds had decay in their permanent teeth and almost 25 per cent of

12-year-olds had untreated decay. If a decline in oral health of children becomes established, we are going to see a need for increased services in the future.

Investment in our children's teeth is an investment in the future. We know that poor childhood oral health leads to poor adult oral health, and has wide-ranging impacts on general health and wellbeing, including increasing the demand on our health and hospital system.3

Background

1.4 On 29 August 2012 the Minister announced a new dental reform package, with over $4 billion in Commonwealth funding allocated to the package over six years, commencing in 2014.4 The major components of the reform package are:

" $2.7 billion to provide subsidised basic dental services to around 3.4 million eligible Australia children from January 2014 through the proposed CDBS;

1 House of Representatives Proof Hansard, 12 September 2012, p. 2.

2 Explanatory Memorandum (EM), Dental Benefits Amendment Bill 2012, p. 1.

3 House of Representatives Proof Hansard, 12 September 2012, p. 2.

4 The Hon Tanya Plibersek MP, Minister for Health, '$4 Billion Dental Spend on Children, Low Income Adults and the Bush', Media Release, 29 August 2012.

2

" $1.3 billion to provide around 1.4 million additional services for adults on low incomes from July 2014; and

" $225 million in funding for dental capital and workforce, to support expanded services for outer metropolitan, regional, rural and remote areas.5

1.5 The additional $1.3 billion for additional dental services to adults on low incomes will be provided to the states and territories through a National Partnership Agreement, although the government has stated that this funding will be conditional on the states and territories at least maintaining their current level of funding for dental care services.6 The $225 million in funding for non-metropolitan areas will be provided through a Flexible Grants Program, with applications for grants scheduled to open in 2014.7

1.6 The reform packaged was jointly announced by Greens Health Spokesperson, Senator Richard Di Natale, who described the package as 'the most significant reform of dental care in our nation's history'.8

Closure of the Chronic Disease Dental Scheme

1.7 Under the proposed dental reform package, the existing Chronic Disease Dental Scheme (CDDS) will be abolished. The CDDS, introduced in late 2007, provided up to $4250 in Medicare benefits for dental services for individuals with chronic conditions and complex dental care needs.9

1.8 The CDDS was closed to new patients from 8 September 2012, and any

services for existing CDDS patients must now be completed by 30 November 2012 in order to qualify for benefits under the CDDS.

Replacement of the Medicare Teen Dental Plan

1.9 The Child Dental Benefit Schedule would replace the current Medicare Teen Dental Plan (MTDP). The MTDP was introduced in 2008, and provides dental

5 The Hon Tanya Plibersek MP, Minister for Health, '$4 Billion Dental Spend on Children, Low Income Adults and the Bush', Media Release, 29 August 2012; The Hon Tanya Plibersek MP, Minister for Health, 'Transcript - Dental Health Reform Package *, 29 August 2012, http://www.health.gov.au/intemet/ministers/publishing.nsf/Content/tr-yrl2-tp-tpsp290812.htm (accessed 24 September 2012).

6 The Hon Tanya Plibersek MP, Minister for Health, '$4 Billion Dental Spend on Children, Low Income Adults and the Bush', Media Release, 29 August 2012.

7 Department of Health and Ageing, 'Dental Health: Dental Reform', http://www.health.gov.au/inteiTiet/main/Dublishing.nsf/Content/dentalreform (accessed 24 September 2012).

8 Senator Richard Di Natale, 'Better dental care for millions of Australians', Media Release, 29 August 2012, http://richard-di-natale.greensmps.org.au/content/media-releases/better-dental- care-millions-australians (accessed 28 September 2012).

9 Department of Health and Ageing, 'Dental Health: Chronic Disease Dental Scheme', http://www.health.gov.au/intemet/main/publishing.nsf/content/dental+care+services (accessed 24 September 2012).

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benefits of up to $163.05 each year for a preventative dental check for eligible teenagers between the ages of 12 and 18 years old.

Proposed scope of the Child Dental Benefit Schedule

1.10 The proposed CDBS would subsidise dental care services for eligible children between the ages of 2 and 18 years old. and will cover a broader range of services than the current MTDP. The Minister has stated that the CDBS will provide a benefit for basic dental services including prevention and treatment; for example, check-ups, fillings and extractions.10 11

1.11 The benefit would be capped at an entitlement of $1000 per child over two years, and would be available to children who receive (or in households that receive) payments under several existing Commonwealth benefits.11 On this basis, the government estimates that around 3.4 million children will be eligible for the scheme12 (out of a total population of around 4.6 million children).13

Legislative framework for the provision of dental benefits

1.12 The Dental Benefits Act 2008 (the Act) was created to establish a legislative framework for the payment of dental benefits under the Government's Medicare Teen Dental Plan.14 Division 2 of Part 4 of the Act specifies that teenagers between the ages of 12 and 18 who satisfy a specified means test may receive dental benefits.

1.13 The Act does not detail the types of dental services for which benefits can be claimed; rather, the Act provides for many of the details regarding the scope of dental benefits payable to be provided for in a legislative instrument, the Dental Benefit Rules 2009 (Dental Benefit Rules).

1.14 Section 26 of the Act also provides flexibility for groups of people other than eligible teenagers to receive dental benefits, by providing that the Dental Benefit Rules may include a class of persons as qualifying to receive benefits in relation to a specified dental service.

1.15 Division 3 of Part 4 of the Act provides that benefits are to be paid in the form of vouchers issued by the Medicare CEO.

10 The Hon Tanya Plibersek MP, Minister for Health, House of Representatives Proof Hansard, 12 September 2012, p. 3.

11 The Hon Tanya Plibersek MP, Minister for Health, House of Representatives Proof Hansard, 12 September 2012, p. 3.The existing benefits are: Family Tax benefit Part A; Abstudy; Carer Payment; Disability Support Pension; Parenting Payment; Special Benefit; Youth Allowance; Double Orphan Pension; the Veteran's Children Education Scheme; or the Military Rehabilitation and Compensation Act Education and Training Scheme.

12 The Hon Tanya Plibersek MP, Minister for Health, House of Representatives Proof Hansard, 12 September 2012, p. 3.

13 Based on figures for children aged at least 2 but under 18, as of 2011. See Australian Bureau of Statistics, 3101.0 Australian Demographic Statistics, Table 59.

14 EM, Dental Benefits Bill 2008, p. 1.

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Provisions of the Bill

1.16 The Bill contains amendments to the Act to create a framework for the CDBS.

1.17 Section 2 of the Bill states that the commencement date of the amendments is 1 January 2014, consistent with the Minister's announcement regarding the dental care reform package.

Extending the age range of eligible dental care benefits recipients

1.18 Schedule 1 of the Bill contains amendments to the Act which have the effect of extending the age range of persons eligible for dental benefits under the Act. The EM to the Bill explains:

The Act currently provides at section 5 that an *eligible dental patient * includes a person in respect of whom a voucher issued under Part 4 is in effect. Part 4 presently supports the Medicare Teen Dental Plan by requiring vouchers to be issued to children aged at least 12 but under 18 years. The amendments have the effect of extending the age range of children eligible to receive vouchers to those aged at least 2 but under 18 years - the range of children to be eligible for the CDBS.1

1.19 Item 2 of Schedule 1 of the Bill seeks to amend section 22 of the Act, by

providing that a person qualifies for a voucher in a calendar year if he or she is aged 'between 2 and 18 years' during the calendar year. Item 5 of Schedule 1 of the Bill seeks to amend paragraphs 23(1 )(a) and 23(1 )(b) of the Act, to replace current

references to *ä2 years' of age to read '2 years'.

1.20 In order to reflect the expanded age range required for the CBDS, several amendments are made to replace references to qualifying 'teenagers'. Items 3 and 7-16 of Schedule 1 of the Bill replace the word 'teenager' with 'person' throughout sections 23-25 of the Act.

Enabling different monetary caps for different groups or dental services

1.21 Subsection 62(2) of the Act currently provides that the Dental Benefit Rules may place limitations on the amount of benefit payable to an eligible patient for a specified dental service. Item 17 of Schedule 1 of the Bill seeks to amend this subsection to allow different limitations for different classes of patients, or for different dental services. The EM explains:

Item 17 makes an amendment to subsection 62(2) to introduce flexibility in the application of the monetary cap proposed for the CDBS to allow, for example, different caps to apply to different groups of persons or different groups of services. This will allow the government flexibility to implement the outcomes of consultation with dental professions in developing the

schedule of services, which will occur after the passage of the Bill.15 16

15 EM, Dental Benefits Amendment Bill 2012, p. 3 (emphasis in original).

16 EM, Dental Benefits Amendment Bill 2012, p. 3 (emphasis in original).

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Chapter 2

Reaction to the proposals

2.1 While the committee received a limited number of submissions to its inquiry, most contributors welcomed the introduction of the Child Dental Benefits Schedule (CDBS) and the broader dental reform package.

2.2 The Australian Dental Association (ADA) and the Australian Medical Association (AMA) both issued press releases following the government's announcement welcoming the policy and legislative proposals. The ADA stated:

The re-direction of federal funding to Australia *s children and adults on low incomes or in rural areas will prove to be a sound investment. We know that if dental care can be provided to children then their long-term dental health will be significantly improved. Early intervention and preventive treatments are a proven and well-established method to prevent poor dental health in later life...Currently about 65% of Australians receive regular dental care. The ADA believes the new program will provide assistance to many Australian families previously unable to access regular care, as a sure way of helping them to avoid a path where their dental health will deteriorate.1

2.3 The AMA concurred with the ADA:

This is a huge improvement on the existing dental scheme...There is less bureaucracy and red tape, and the program is better targeted at those with the greatest need. While it is not a universal system, it will go a long way towards improving the dental health of the Australian community/

2.4 The Consumers Health Forum of Australia (CHFA) described the reform announcement as a 'big win for the whole community', and commended the focus on preventative dental care for younger generations,1 2 3 while the Australian Council of Social Service also applauded the reform announcement.4

1 Dr F. Shane Fryer, Australian Dental Association Inc., 'Australia's dentists welcome targeted dental reform', Media Release, 29 August 2012, http://www.ada.org.au/newsroom/article.documentid.431928.asnx (accessed 25 September 2012).

2 Dr Steve Hambleton, Australian Medical Association, 'Dental care an important part of holistic primary health care', Media Release, 29 August 2012, http://ama.com.au/inedia/dental-care-important-part-holistic-primarv-health-care (accessed 25 September 2012).

3 Carol Bennett, Consumers Health Forum of Australia, 'Dental spend a game changer for Australia's health', Media Release, 29 August 2012, https://www.chf.org.au/media-releases.php (accessed 25 September 2012).

4 Australian Council of Social Service, 'ACOSS applauds major reform to nationally coordinated dental care', Media Release, 29 August 2012, http://acoss.org.au/media/release/acoss applauds major reform to nationally coordinated de ntal care (accessed 25 September 2012).

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2.5 In their submission the ADA also pointed to the evidence base that supports the investment in child oral health from both a health and a financial perspective:

Investment in the oral health of children is a sound and sensible investment as it may result in a long-term monetary saving for government and the community by minimizing future deterioration in dental health. There is a substantial body of evidence indicating that early intervention and preventive treatments provided early in life are a proven and well-

established method to prevent poor dental health in later life.3

2.6 The CHFA also cited evidence that child tooth decay is on the rise and

expressed support for the proposals on that basis:

According to statistics cited in the National Advisory Council on Dental Health *s final report, the prevalence of child tooth decay and cavities and the average number of teeth affected by dental disease in children has increased since the late 1990s. Poor oral health in childhood is a strong

predictor of poor oral health in adulthood. CHF therefore welcomes the emphasis on children *s dental health, which has the potential to establish good oral health and reduce the likelihood of future problems.5 6

2.7 The Australian Healthcare and Hospitals Association (AHHA) were similarly supportive of the measures, stating in their submission that they accorded with current AHHA policies that include:

" the entitlement scheme for eligible children as it ensures that children and adolescents receive good quality care...;

" enhanced access to public dental services for people on low incomes...;

" ensuring people on low incomes can access treatment earlier...; and

" the creation of an expert group to oversee the implementation of the scheme...7

2.8 While there was broad consensus supporting the expansion and increased resourcing of public funded dentistry there were issues raised on the detail on the measures.

2.9 The main issues identified in both the submissions received by the committee and the oral evidence included:

" the commencement date of the CDBS;

" the details of the services that will be available under the scheme;

" the consultation with the profession;

" the funding arrangements for the proposed scheme;

5 Australian Dental Association, Submission 4, p. 1.

6 Consumers Health Forum of Australia, Submission 1, p. 1.

7 Australia Healthcare and Hospitals Association, Submission 3, p. 1.

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" the transitional arrangements for those patients currently being serviced under the Chronic Disease Dental Scheme (CDDS); and

" the eligibility criteria for the scheme.

Commencement date

2.10 In its lllh Alert Digest of 2012, the Senate Standing Committee for the Scrutiny of Bills (Scrutiny Committee) raised the issue of the Bill's delayed commencement date. The Scrutiny Committee noted:

The bill will commence on 1 January 2014, the planned start date for the Child Dental Benefits Schedule. Although the explanatory memorandum does not expressly address the reason for delayed commencement, it does note that the caps applying to different groups and services that will be applicable under the Dental Benefit Rules (see item 17) will reflect the outcomes of consultations with dental professions in developing the schedule of services, which will occur after the passage of the Bill (see page 3).

In the circumstances, the Committee leaves the question of whether the delayed commencement is appropriate to the Senate as a whole.s

2.11 In response to questions about the issue of the delayed commencement the ADA agreed that it was a period that would allow for 'appropriate consultation and development time *4 in the design of the scheme.

Details to be determined in the Dental Benefits Rules

2.12 Significant details that will affect the operation of the CDBS have not been included in the Bill. The dental services which will be covered under the scheme, as well as the maximum entitlement eligible children under the scheme, having already been announced by the Minister, are not specified in the Bill. Rather, these details are proposed to be included in amendments to the Dental Benefits Rules.

2.13 The ADA discussed the schedule of services that should be available under the CDBS. The expressed the hope that all relevant preventative and therapeutic services should be included with flexibility built in to ensure long term oral health. They also suggested that 'hospital and day-stay procedures provided under general anaesthetic' be included in the scheme.8 9 10 11

2.14 The South Australian Government submitted that the schedule of dental services outlined in the Report of the National Advisory Council on Dental Health should form the basis for the services that should be provided under the CDBS .11

8 Senate Standing Committee for the Scmtiny of Bills, Alert Digest No. 11 of 2012, 19 September 2012, p. 5.

9 Dr Shane Fryer, Australian Dental Association, Proof Committee Hansard, 23 October 2012, p. 22.

10 Australian Dental Association, Submission 4, p. 2.

11 Government of South Australian, SA Health, Submission 7, p. 2.

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2.15 The AHHA and the ADA also recommended that this schedule of services be adopted but the AHHA pointed out that the list includes services for adults and children so 'requires further consideration and refining for application in the child and adolescent oral health arena'.12 During the committee's hearing the AHHA expanded on their submission by saying that it is not only the services available that will need to be clearly defined but also the 'frequency of accessing [the program] ...and the guidelines for operation'.13

2.16 In addition to the Schedule included in the Report of the National Advisory Council on Dental Health the ADA also suggested that there should be scope to treat exceptional cases:

It has been said that the new scheme will include basic services and simple restorative work and simple check-ups and cleans. But in all clinical scenarios, as you would be aware, you are going to get individual variation

and there should be provision put in place, through an exceptional case scenario shall we say, where if the clinician feels that the specific schedule of services does not cover that particular patient there is an avenue that is able to be pursued to provide the appropriate clinical treatment.14

2.17 The Department of Health and Ageing (DoHA) responded to questions on what progress had been made in devising an appropriate Child Dental Benefits Schedule by stating that they had not started working on it in any great detail yet but would do so after the legislation under consideration has passed.15 Mr Maskell- Knight from DoHA also discussed the possibility of modelling the work on that of the

Department of Veterans' Affairs who also run a dental benefits schedule:

The Department of Veterans' Affairs actually run a dental benefits schedule at the moment, so they have dental advisers contracted to assist them. We piggyback off that, so we will be talking to them. We will sketch something out, and I imagine that we will then going to talk to our ADA friends, who

gave evidence earlier, and consulting with them in some detail about what they believe should be in and out, what the conditions should be and so on...

Then we will need to talk to all the hygienists and the therapists. And we will need to talk to the states and territories, as they will clearly be

significant.16

12 Australia Healthcare and Hospitals Association, Submission 3, p. 2.

13 Dr Martin Dooland, Australian Healthcare and Hospitals Association, Proof Committee Hansard, 23 October 2012, p. 12.

14 Dr Shane Fryer, Australian Dental Association, Proof Committee Hansard, 23 October 2012, p. 18.

15 Mr Charles Maskell-Knight, Department of Health and Ageing, Proof Committee Hansard, 23 October 2012, p. 33.

16 Mr Charles Maskell-Knight, Department of Health and Ageing, Proof Committee Hansard, 23 October 2012, p. 34.

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2.18 When asked about the provisions for exceptional cases and whether the department had considered how this would be administered Ms Kerry Flanagan from DoHA responded that for administrative reasons the responsibility for providing that care could lie with the states and territories:

Administratively, the workload involved in that is very significant. One of the factors we took into account in striking the $1,000 over two years was that it allows an appropriate range of services. The other thing we took into account was that even though we are trying to have a clearer responsibility between the Commonwealth covering kids and the states covering low- income adults, it is still possible for the states to deliver services to children. So if there were exceptional circumstances *such as we described earlier on with kids with disabilities, for example *that might need a more complex range of services to be delivered, then we would see the states perhaps providing those.17

Consultation processes

2.19 One of the issues related to the services that will be provided was around the need for consultation with the sector during the development of the schedule of services. The ADA submitted that the administrative arrangements for the Chronic Disease Dental Scheme (CDDS) 'reflected a medical model of service' because '[t]he CDDS required the patient's medical practitioner to act as a gatekeeper for the provision of dental services'.18 The ADA were strongly of the view that in this case the dental profession should be fully consulted to ensure that the scheme is administratively suitable for the their profession rather the medical profession:

The ADA would also like to state that, before the implementation of any new scheme, there is a requirement for a number of factors to be met. There should be full consultation with the profession, to make it dentally effective *that is, it fits into dental practice and not medical practice.19

2.20 The ADA linked the need for full consultation with the need for education processes to combat the caution from the profession that may prevent dentists utilising the scheme:

It is proven that the lack of education of the profession led directly to the high rate of administrative noncompliance in the initial years of the [CDDS] scheme, at least until early to mid-2011.20

There will need to be reassurance from the association, and there will be caution. I do not think there is going to be a surge of dentists taking up any

17 Ms Kerry Flanagan, Department of Health and Ageing, Proof Committee Hansard, 23 October 2012, p. 34.

18 Australian Dental Association, Submission 4, p. 3.

19 Dr Shane Fryer, Australian Dental Association, Proof Committee Hansard, 23 October 2012, p. 18.

20 Australian Dental Association, Submission 4, p. 2.

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new scheme without a full and long lead-up time in the education process on how they need to function under the new program.21

2.21 According to the ADA the consultation process should allow time to ensure that these education processes could be carried out:

...there should be the delivery of that information to the ADA for dissemination to the membership. We have magazines, journals, e-news, the web site and direct email communication *not with every dentist in the country but 90 per cent of them. We are able to get in contact with 90 per cent of dentists in the country.22

Funding arrangements for the Dental Reform Package

2.22 The Minister has announced that the Commonwealth will provide over $4.2 billion for its Dental Reform Package between 2014 and 2020. This comprises $2.7 billion in funding for the operation of the CDBS; $1.3 billion in funding for

adults through state public dental services under a National Partnership Agreement; and $226.4 million for a flexible grants program for both private and public sectors for reforms in dental infrastructure and workforce initiatives.23

2.23 This funding is in addition to that allocated in the 2012-13 Budget to increase the capacity of the dental workforce ($158.6 million over four years); alleviate pressure on public dental waiting lists( $345.9 million over three years); provide support for national oral health promotion activities ($10.5 million over three years);

and pro bono dental services ($0.5 million over three years). 24 The package also involves the closure of the CDDS from 1 December 2012.

2.24 Most submitters agreed that the level of funding is a good first step. The AHHA were supportive of the Commonwealth funding for children's dental services as tliis will 'free up resources for the treatment of more low-income adults'.25

2.25 All submitters agreed that the success of the program in terms of delivering increased publicly funded dental services was dependent on the states and territories maintaining their investment in public dental services. The government expects the money currently provided by the states and territories to deliver services will be re≠

directed to providing services for adults from low-incomes or with other eligible needs.

21 Dr Shane Fryer, Australian Dental Association, Proof Committee Hansard, 23 October 2012, p. 19.

22 Dr Shane Fryer, Australian Dental Association, Proof Committee Hansard, 23 October 2012, p. 23.

23 Department of Health and Ageing, Submission 8, p. 2.

24 Department of Health and Ageing, Submission 8, pp 2-3.

25 Ms Prue Power, Australian Healthcare and Hospitals Association, Proof Committee Hansard, 23 October 2012, p. 11.

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2.26 DoHA said in evidence that they were in the process of developing a

methodology that would make the flow of funds to the states and territories from the Commonwealth contingent on current investment levels in the states and territories:

What we want to do is measure the level of output in 2011-12 and then use that as a baseline level of output and then tie funding under the National Partnership Agreement to increments in the throughput. We invented the notion of the DWAU *I had to get that on record in Hansard. All the states and territories collect information from the public service providers based on the ADA schedule, which is a three digit schedule, so the initial consultation is an item 11. It then goes up until you get into prosthodontics, interdontics and all sorts of other things. As long as we are able to collect the number of each DVA item or ADA items that the states carry out, we can use some sort of relativity to convert that down to a common unit of effort. We will then be able to monitor that over the life of the agreement. As I said, our aim is to link funding to increments in the level of output.26

The department expects an additional 1.4 million adults will be treated through the states and territories as a result of the package.27

2.27 Dr Dooland from AHHA suggested that while the funding may be at a similar level to that for the CDDS it will address more issues than that single program:

With the additional funding that has been outlined in the government's reform agenda, I will point out that when we cost cash flow from year to year, for instance, in 2014-15, this is actually a billion dollars. So it is very much of the scale of the expenditure on the chronic disease dental program. However, it actually has the characteristics that Prue Power mentioned in terms of addressing the various aspects of public policy in dentistry that have to be addressed to make an ongoing, sustainable program.28

2.2S Dr Dooland added that the funding will increase the capacity of both public and private dentistry to meet demand:

With the new funding that has been announced for the public dental sector *both that announced in the previous budget and in the national partnership agreement from 2014 *the states and territories will build up their local infrastructure and local workforce capacity. They will be able to do that. Dentistry has already responded to the workforce shortage of the 2000s and dentists are coming through the training programs at required rates and overseas trained dentists are coming as well. But we will also contract a significant amount of dentistry to the private sector. There is capacity in the dental workforce to do that. It will not lead to price

26 Mr Charles Maskell-Knight, Department of Health and Ageing, Proof Committee Hansard, 23 October 2012, p. 31.

27 Ms Kerry Flanagan, Department of Health and Ageing, Proof Committee Hansard, 23 October 2012, p. 25.

28 Dr Martin Dooland, Australian Healthcare and Hospitals Association, Proof Committee Hansard, 23 October 2012, p. 13.

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problems. The scale is not such that it will lead to cost problems, pressure or inflation *that will not happen.29

2.29 The ADA welcomed the funding, saying it was a sound investment, but a 'limited investment'. Dr Fryer from the ADA also commented that the initial funding for the CDBS in 2013-14 could be as little as $57 per child depending on how many children are treated.30

2.30 DoHA explained that the funding of $194 million in the first year is structured to reflect their estimate that 80 per cent of the eligible population will take up the services on offer, and that they expect this to occur in the latter part of the year as this has been the situation under the teen dental health program that the CDBS is replacing:

The estimates are based, I think, on an 80 per cent takeup in the eligible population...

The experience under the Medicare Teen Dental Plan is that there is a very back-end-of-the-year skewing of when services happen. I think dentists and children all go on holiday in January, families are getting back to school in February and shortly after that you run into Easter. So the first half of the year is very light on. I think from memory it is about one-third to two- thirds, or something close to that, between the first six months and the second six months of the calendar year.31

2.31 Mr Masked-Knight continued that the funding for the second year of the CDBS will be significantly higher and the department expects that this will equate to around $200 per child but that many children will have very low needs:

Yes, $200-ish. I am doing it in my head. It will be around one-fifth of the maximum. That is actually for one year, as well. The $1,000 is for two years...

The thing about dealing with average numbers is that we expect there will be a lot of children who will have very low needs. They will have a consultation, a scale and clean and will be sent home. At the other end there will be children that need lots more significant work done.32

29 Dr Martin Dooland, Australian Healthcare and Hospitals Association, Proof Committee Hansard, 23 October 2012, p. 14.

30 Dr Shane Fryer, Australian Dental Association, Proof Committee Hansard, 23 October 2012, p. 18.

31 Mr Charles Masked-Knight, Department of Health and Ageing, Proof Committee Hansard, 23 October 2012, p. 26.

32 Mr Charles Masked-Knight, Department of Health and Ageing, Proof Committee Hansard, 23 October 2012, p. 27.

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2.32 The AHHA stated that their research suggested that 81 per cent of children would have their needs met by the $1000 cap. The ADA also agreed that 'for the vast majority of children that will cover most of their dental needs'.33

2.33 Associate Professor Zoellner, Chairman of the Association for the Promotion of Oral Health (APOH) was the only contributor to disagree with the $1000 cap being appropriate:

I think that the cap which is proposed of $1,000 spending per patient over a two-year period *and its focus, again, on basic care only *is misguided. First of all, very few children will actually require anything like that sort of amount of funding. Most children in Australia have very good dental health. Nonetheless, although there are only a handful of children, there are

some children who will have particular problems, and they will require more advanced care. It seems to me that, especially in the light of the fact that such children will draw very little upon the public purse, it is particularly mean spirited to suggest that children who require more

advanced care and more advanced dentistry should be denied access to that sendee. This is particularly in the light of the fact that there are some children with chronic disease who have benefited from the Medicare Chronic Disease Dental Scheme and that these children will be particularly disadvantaged by this focus suddenly upon basic dentistry only and this limitation to only $1,000, to be available over a two-year period.34

Committee View

2.34 The committee welcomes the investment generally and is of the view that the levels of funding are appropriate in the current financial climate. With specific regard to the $1000 cap for treatment over two years under the CDBS the committee believes this to be appropriate. However the committee would also support the establishment of an exceptional cases procedure whereby treatment can be provided under the CDBS, in accordance with strict clinical criteria, in cases where the $1000 cap would not be sufficient. The committee would envisage the provision of hospital-based dental treatment to be covered under such a procedure.

Closure of the Chronic Disease Dental Scheme

2.35 The APOH opposed the closure of the CDDS Scheme. Associate Professor Zoellner told the committee that while the scheme was not perfect it correctly targeted the cohort in most clinical need:

...it does not really make clinical sense, because the real burden of dental disease in the Australian community is not in the child population. The real burden of dental disease is in the ageing group. Indeed, the Medicare Chronic Disease Dental Scheme particularly supported care which was medically required, medically indicated. So it really makes, to me, very

33 Dr Shane Fryer, Australian Dental Association, Proof Committee Hansard, 23 October 2012, p. 23.

34 Associate Professor Zoellner, Association for the Promotion of Oral Health, Proof Committee Hansard, 23 October 2012, p. 1.

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poor clinical sense to withdraw medically necessary dental services from the aged group and from, in fact, the population with the greatest clinical need for dental treatment and then to send these services somehow to another group in the population who generally require low levels of care.35

2.36 In contrast Dr Dooland from the AHHA expanded on his previous point by saying that the proposed Dental Reform Package addresses a much broader range of issues than the CDDS did:

The program needs to clearly identify the target group with high needs. It needs to have a balance between short- and long-term focus *that is, a balance between the immediate needs of the high-need group and the long≠

term oral health outcomes of the community. The program needs to address the foundation issues, which are workforce and infrastructure development. And the program needs to do the most good for the greatest number of

people. We believe the government program meets all of these

characteristics much better than the CDDS does at the moment.36

2.37 While supporting the proposed reform package overall, and the closure of the Chronic Disease Dental Scheme (CDDS) the ADA expressed concern regarding the timeframe for the closure of the scheme, claiming that many patients will miss out on essential treatment as a result of the 30 November 2012 cut-off date:

A 12-week period, to complete treatment, will mean that patients under the CDDS will not be able to finalise their treatment plans. Treatment of the chronically ill, for which this Scheme was designed, is often complex,

requiring an extended period of time. Complex treatments are often staged to allow adequate healing... The ADA calls on the Australian Government to recognise that it is critical that arrangements are put in place to allow for treatment services to be completed even if this requires introducing a transition process for existing patients on a case by case basis.37

2.38 Dr Dooland questioned exactly how much impact the closure of the scheme would have, as he argued that many users of the scheme would generally not access public dental services outside the CDDS:

The chronic disease dental program has been used by the state and territory dental services and we advise people about the program; some state and territory dental service more than others, and you can see that in the level of use. I also pointed out that from the example I am most familiar with in teims of data, in the second-highest user of the chronic disease dental program, South Australia, there has been no change in demand for the public dental services at all. That is because a substantial part of the users

35 Associate Professor Zoellner, Association for the Promotion of Oral Health, Proof Committee Hansard, 23 October 2012, p. 1.

36 Dr Martin Dooland, Australian Healthcare and Hospitals Association, Proof Committee Hansard, 23 October 2012, p. 11.

37 Dr Shane Fryer, Australian Dental Association Inc., 'Australian Government must assist CDDS patients', Media Release, 20 September 2012, http://www.ada.org.au/newsroom/articles.categorv.Media.aspx (accessed 25 September 2012).

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of the chronic disease program are cardholders who would not otherwise use the public dental service. In that sense, the public dental services are somewhat insulated against a flow back of demand from the chronic disease closure.38

2.39 Primarily for the reasons above Dr Dooland also told the committee that in the short term the states and territories would have sufficient funding to cover the treatment costs of those transitioning from the CDDS:

People often forget that funds have been put aside in the previous federal budget to provide additional funding to the state and territory dental sendees. Those funds start from December-January in this financial year. With the chronic disease program closing about the same time, there is not

a gap in that situation.39

2.40 The department also told the committee that they believe there will be sufficient capacity through the states and territories to treat those patients who have not completed their treatment under the CDDS. The department stressed the importance of reaching an agreement with the states and territories by the end of November to cover transitional arrangements:

Senator Bushby: ...And the reason I just wanted to ask that is that in your evidence and the evidence of others today is that for those who have access to services under the CDDS, the answer for them in terms of their options

for dental care is the increased money that you are putting in here. That needs to be delivered by the time the CDDS finishes for them to be able to access that *certainly, in the near term.

Ms Flanagan: That is correct, and we are working very, very hard under the direction of government to ensure that we have an agreement signed, sealed and delivered by the end of November.

2.41 The committee noted that both state governments40 that submitted to the inquiry supported the reform package.

Eligibility of the CDBS

2.42 The CDBS replaces the Medicare Teen Dental Plan that provided dental services to teenagers who met the following criteria:

" be aged between 12 and 17 years; and

" satisfy the means test for the program:

" the teenager must be receiving either Abstudy, Carer Payment, Disability Support Pension, Parenting Payment, Special Benefit, or Youth Allowance; or

38 Dr Martin Dooland, Australian Healthcare and Hospitals Association, Proof Committee Hansard, 23 October 2012, p. 16.

39 Dr Martin Dooland, Australian Healthcare and Hospitals Association, Proof Committee Hansard, 23 October 2012, p. 16.

40 The Governments of Tasmania and South Australia.

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" the teenager's family/carer/guardian must be receiving either Family Tax Benefit Part A, Parenting Payment, or the Double Orphan Pension in respect of the teenager; or

" the teenager *s partner must be receiving Family Tax Benefit Part A or

Parenting Payment; or

" the teenager must be receiving financial assistance under the Veterans * Children Education Scheme (VCES) or the Military Rehabilitation and Compensation Act Education and Training Scheme (MRCAETS) and cannot be included as a dependent child for the purposes of Family Tax Benefit because they are 16 years or older.

2.43 The CDBS will have similar eligibility criteria except for extending the age range from 2-17 years, or as DoHA expressed in evidence, 1 it is essentially based on the same architecture.'41

2.44 Associate Professor Zoellner from the APOH submitted that the eligibility criteria 'breaks three fundamental [principles] of Medicare. In that the new scheme is: Means Tested...; Limited with regard to age...; and Limited to basic service only. *42

2.45 The committee did not receive any other evidence in support in this view. As cited in paragraph 2.5 of this chapter the ADA welcomed the focus on the proposed age group by citing evidence suggesting that good dental health early in life has long≠ term benefits. In the committee's hearing the ADA further discussed the evidence that supports the focus on children:

I will quote from a recent report from the Australian Research Centre for Population Oral Health that undertakes all the oral health research for the AIHW, the Australian Institute of Health and Welfare. Their report from 2011 indicates that in 2006 the proportion of children with caries in their baby teeth * the deciduous teeth *ranged from 40 per cent in four- to five- year-olds to up to 60 per cent in six- to eight-year-olds. Even in the

permanent teeth in five-year-olds one per cent had evidence of decay while 58 per cent of 15-year-olds had evidence of decay in their permanent teeth. So we think that the problem is probably at the other end.43

2.46 Dr Fryer from the ADA also cited disadvantage as being a factor in poor oral health:

...there is a differential depending on your socioeconomic status, with it being worse in the more disadvantaged families than in the wealthy.44

41 Mr Charles Maskell-Knight, Department of Health and Ageing, Proof Committee Hansard, 23 October 2012, p. 30.

42 Association for the Promotion of Oral Health, Submission 2, p. 1.

43 Mrs Eithne Irving, Australian Dental Association, Proof Committee Hansard, 23 October 2012, p. 20.

44 Dr Shane Fryer, Australian Dental Association, Proof Committee Hansard, 23 October 2012, p. 22.

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2.47 The AHHA also cited evidence that suggests that good oral health as a child is, at the very least, a good indicator of good oral health as a young adult:

There is internationally published literature to show that children who get regular dental care have ongoing improved oral health up to the stage where that has been assessed well, which is into the teenage years.45

2.48 With regard to Associate Professor Zoellner's evidence that under the new scheme service will be 'restricted to basic service only',46 the committee received no evidence to support this statement given that the schedule of services to be provided

under the scheme has not yet been devised.

Committee View

2.49 The committee agrees with the majority of contributors that the scheme is targeted appropriately at children and will provide long-term health benefits for those that participate in the scheme. The committee also supports the means testing element of the scheme that while agreeing that universal public dental service provision is a long-term goal, adopting a scheme that as a first step attempts to tackle oral health inequality caused by socio-economic disadvantage is the correct strategy. As previously discussed the committee is hopeful that all services required to address children's dental needs will be available, and looks forward to the publication of the children's dental services schedule in the coming months.

2.50 The committee also looks forward to the outcome of the government's negotiations with the states and territories and hopes that the agreements will ensure that there will be no gaps in service provision for any clinically necessary treatment that commenced under the CDDS.

The role of other dental health professionals

2.51 The AHHA submitted that forthcoming discussions with all parties, including the states and territories, on the implementation of the scheme should include the expansion of the role of oral health therapists, dental therapists and dental hygienists.47 The Government of South Australia also supported an increased role for other dental health professionals by supporting the award of MBS Provider Numbers to those professionals independent of dentists:

The current Dental Benefits Rules 2009 only allow dental therapists, dental hygienists and oral health therapists to provide services under the existing Teen Dental Plan on behalf of dentists and dental specialists. One way of ensuring the dental workforce can be most efficient will be to award

Medicare Provider Numbers to dental therapists, dental hygienists, and oral health therapists.48

45 Dr Martin Dooland, Australian Healthcare and Hospitals Association, Proof Committee Hansard, 23 October 2012, p. 12.

46 Association for the Promotion of Oral Health, Submission 2, p. 1.

47 Australia Healthcare and Hospitals Association, Submission 3, p. 2.

48 Government of South Australia, SA Health, Submission 7, p. 2.

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Committee View

2.52 The committee supports the extension of the role of dental therapists, dental hygienists, and oral health therapists within Medicare. The committee received evidence that described the typical services that will be required for children under the scheme and agrees with the Government of South Australia that allowing other dental professionals to administer services under Medicare would increase the efficiency of the scheme.

Recommendation 1

2.53 The committee recommends that the bill be passed.

Senator Claire Moore

Chair

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Coalition Senators * Additional Comments

The Gillard Labor Government has chosen to link the introduction of its new dental benefits scheme to the closing of the Medicare Chronic Disease Dental Scheme (CDDS). The CDDS, introduced in late 2007, was a Howard Government initiative that provided up to $4250 in Medicare benefits for dental services for individuals with

chronic conditions and complex dental care needs.

As outlined in the Majority Report, the CDDS was closed by Labor to new patients from 8 September 2012, and any services for existing CDDS patients must now be completed by 30 November 2012 in order to qualify for benefits under the CDDS.

The CDDS assisted over one million Australians suffering from poor oral health due to a range of chronic illnesses including but not limited to; diabetes, coronary disease and cancer. Over 80 per cent of patients accessing the scheme were health care card holders who would not otherwise have been able to fund the dental treatment they accessed under the scheme.

Coalition Senators are concerned that the closure of the CDDS will leave these patients unable to access the dental care required to assist them with the management of complex chronic illnesses.

Through the Dental Benefits Amendment Bill 2012, the Labor Government is seeking to redirect public dental funding to an entirely different demographic with the establishment of the framework of the Child Dental Benefits Schedule (CDBS).

Under the proposed CDBS, eligible children between the age of two and 18 years will be able to access basic dental health care, capped at an entitlement of $1000 per child over two years. Coalition Senators are concerned that this entitlement is significantly

less than the entitlement for dental care under the CDDS and is also limited to a basic service only. It is also concerning to Coalition Senators that the CDBS does not address adult chronic disease needs and also represents reduced support for children suffering chronic disease.

Coalition Senators share the concerns raised by some stakeholders in relation to the age limit of the CDBS and agree with the points raised in the submission from the Association for the Promotion of Oral Health:

Of particular concern in dentistry is that young adults, becoming

independent of their parents and commencing adult independent life, have essentially equivalent dental needs to older teenagers. One aspect of the teenage population, is an increase in the rate at which decay develops, so that sudden withdrawal of dental services from young people once they reach the age of 18, will result in a corresponding deterioration in dental health in young adults

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There seems no clear reason why the dental care of any individual should be determined on the basis of age...1

At the inquiry, stakeholders also raised concerns in relation to the lack of detail for this policy, with no details in relation to the schedule for treatment under Medicare available at this time. Coalition Senators share these concerns. That such a schedule

has not been included in this bill demonstrates that yet again this Labor Government is trying to implement policy on the run, with the schedule for treatment under Medicare to be introduced through further amendments to this bill. Senators will again be asked to vote on a bill, without full knowledge of how it will, in fact, be implemented.

The CDDS was a successful Howard Government initiative that assisted over one million Australians suffering from chronic disease to achieve better oral healthcare outcomes. The Gillard Labor Government *s decision to close a functional scheme, establish a new scheme to service a completely different demographic of patient and consequently shutting down access to publicly funded dental care for chronic disease

sufferers demonstrates that the Dental Benefits Amendment Bill 2012 is more about political point scoring than providing publicly funded dental care to those Australians who need it the most.

Recommendations

1. That support for children should continue through the CDDS until the CDBS is operational.

2. That the Government considers extending financial assistance above the cap of $1000 for children requiring more complex dental treatment as a result of chronic disease.

Senator Dean Smith

Western Australia

Senator David Bushby

Tasmania

1 The Association for the Promotion of Oral Health, Submission 2, p. 21.

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Australian Greens Additional Comments

The Australian Greens strongly agree with the conclusions of the Committee and the evidence given that suggests the Child Dental Benefits Schedule will reach more people, see more services perfonned and represent a better investment in the nation *s future dental health.

The Greens note remarks in the Final Report of the National Advisory Council on Dental Health regarding a future universal dental scheme for Australia. The Greens share this aim and believe the establishment of the CDBS is consistent with this future for the health system. The Greens do not agree with evidence given by one witness

who suggested that the new scheme would undermine Medicare and the principle of universality. On the contrary, the other evidence presented suggests that CDBS will provide a foundation that can be expanded over time both in tenns of services and eligibility.

The Australian Greens share some of the concerns raised about the timing of the new scheme and the delay between the cessation of the Chronic Disease Dental Scheme and the commencement of the CDBS and the National Partnership Agreement.

Senator Rachel Siewert Senator Richard Di Natale

Western Australia Victoria

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APPENDIX 1

Submissions and Additional Information received by the Committee

1 Consumers Health Forum of Australia

2 Association for the Promotion of Oral Health

3 Australian Healthcare and Hospitals Association

4 Australian Dental Association

5 Australian Dental and Oral Health Therapists Association Inc

6 Tasmanian Government

7 Government of South Australia, SA Health

8 Department of Health and Ageing

Answers to Questions on Notice

1 Answers to Questions on Notice received from the Department of Health and Ageing, 25 October 2012

2 Answer to Question on Notice received from the Department of Health and Ageing, 29 October 2012

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110

APPENDIX 2

Public Hearings

Tuesday, 23 October 2012

Parliament House, Canberra

Witnesses

Australian Dental Association BOYD-BOLAND, Mr Robert, Chief Executive Officer FRYER, Dr Shane, President IRVING, Mrs Eithne, Manager, Policy and Regulations

Australian Healthcare and Hospitals Association DOOLAND, Dr Martin, Executive Director SA and Councillor McAULIFFE, Mr Andrew, Senior Director, Policy and Networks POWER, Ms Prue, AM, Chief Executive

Department of Health and Ageing FLANAGAN, Ms Kerry, Deputy Secretary MASKELL-KNIGHT, Mr Charles, Principal Adviser, Acute Care Division

Association for the Promotion of Oral Health ZOELLNER, Associate Professor Hans, Chairman

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The Senate

Community Affairs

Legislation Committee

Low Aromatic Fuel Bill 2012

September 2012

© Commonwealth of Australia 2012

ISBN 978-1-74229-697-5

Printed by the Senate Printing Unit, Parliament House, Canberra.

MEMBERSHIP OF THE COMMITTEE 43rd Parliament

Members

Senator Claire Moore, Chair

Senator Rachel Siewert, Deputy Chair

Senator Carol Brown

Senator Mark Fumer

Senator Bridget McKenzie

Senator Dean Smith

Queensland, ALP

Western Australia, AG

Tasmania, ALP

Queensland, ALP

Victoria, NATS

Western Australia, LP

Participating members

Senator Sue Boyce Queensland, LP

Secretariat

Dr Ian Holland, Committee Secretary Ms Toni Matulick, Committee Secretary Ms Sandra Kennedy, Principal Research Officer

Mr Gerry Mclnally, Principal Research Officer Mr Patrick Hodder, Research Officer Ms Lauren Camevale, Administrative Officer Ms Carol Stewart, Administrative Officer

PO Box 6100 Parliament House Canberra ACT 2600 Ph: 02 6277 3515

Fax: 02 6277 5829 E-mail: community.affairs. sen@aph.gov.au Internet:

http://www.aph.gov.au/Parliamentarv Business/Committees/Senate Committees?uiT= clac ctte/index.htm

116

TABLE OF CONTENTS

MEMBERSHIP OF THE COMMITTEE .................................

LIST OF RECOMMENDATIONS .............................................

Chapter 1

Low Aromatic Fuel Bill 2012.........................................................

The inquiry...................................................................................

Purpose of the bill.........................................................................

Previous inquiries.........................................................................

Structure of this report..................................................................

Chapter 2

The government response to the 2009 inquiry..........................

Current situation...........................................................................

Conclusion....................................................................................

Chapter 3

The success of low aromatic fuel ...................................................

Evaluation of the Opal strategy ...................................................

Stakeholder perspectives on the success of low aromatic fuel....

Conclusion....................................................................................

Chapter 4

Legislation for Low Aromatic Fuel .............................................

The need for legislation................................................................

Stakeholder arguments in favour of Commonwealth legislation

Current Northern Territory legislation ........................................

The constitutional capacity for Commonwealth legislation .......

State legislation............................................................................

Other aspects of the bill................................................................

Conclusion....................................................................................

vii

...1

...1

...I

...1

...4

..5

...7

15

17

.17

.18

,21

,23

.23

.24

.27

.31

.35

.36

.41

Chapter 5

Technical Issues...................................................................... ................................... ..43

Safety of Opal fuel................................................................................................... 43

Production capacity constraints for regular low aromatic fuel.............................45

Distribution, storage and current subsidy schemes................................................46

Commercial disadvantage.......................................................................................47

Concerns about substitution by sniffers.................................................................48

Premium low aromatic fuel.....................................................................................48

Chapter 6

A holistic approach to petrol sniffing.....................................................................53

Complementary health care strategies .................................................................... 53

Case management.....................................................................................................55

Youth programs........................................................................................................55

Partnerships between stakeholders..........................................................................56

Australian Greens

Minority report...........................................................................................................57

Background...............................................................................................................57

Constitutional powers .............................................................................................. 57

Other concerns with the drafting of the bill ........................................................... 59

'Continuing to consult' or a lack of commitment?..................................................59

Conclusion................................................................................................................60

APPENDIX 1

Submissions and Additional Information received by the Committee...............63

APPENDIX 2

Public Hearings...........................................................................................................67

APPENDIX 3

Analysis Regions and Key Towns............................................................................71

LIST OF RECOMMENDATIONS

Recommendation 1

2.36 The committee recommends that the government release an interim report based on the first round of data collection being undertaken by the Menzies School of Health Research.

Recommendation 2

4.62 The committee recommends that a legislative scheme for low aromatic fuel not be confined to reliance upon the corporations power.

Recommendation 3

4.77 The committee recommends that the government consider whether legislation should define more narrowly the fuels to which the bill would apply, but accepts that there should be capacity to regulate the management of premium fuel in some circumstances.

Recommendation 4

4.83 The committee recommends that there be further examination of the wording of the explanatory memorandum, consultation and exemption clauses, to ensure that fuel manufacturers are properly included, and the bill does not have unintended consequences in the event of supply bottlenecks or disruption.

Recommendation 5

4.86 The committee recommends that the Australian Government continue to consult with the relevant state and territory governments on the possibility of national legislation to mandate the supply of low aromatic fuel to ensure that there is agreed and coordinated action to address petrol supply.

Recommendation 6

4.87 In light of the preceding matters, the committee recommends that the current bill not be proceeded with.

Recommendation 7

5.14 The committee recommends that the Australian government conclude as soon as practical a subsidy review that covers production of up to 100 million litres per annum of low aromatic fuel

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Recommendation 8

5.21 The committee recommends that the Australian government review distribution subsidies and their calculation for remote regions, particularly in Western Australia.

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Chapter 1

Low Aromatic Fuel Bill 2012

The inquiry

1.1 On 10 May 2012 the Senate referred the Low Aromatic Fuel Bill 2012 (the bill) for inquiry and report by 21 September 2012.1 On 21 September the committee tabled an interim report, indicating it would report on 26 September 2012.

1.2 The committee invited interested individuals and organisations to make submissions. Twenty submissions were received and are listed in Appendix 1. The committee held public hearings in Alice Springs and Canberra to take evidence in relation to the bill, details of which are shown at Appendix 2.

1.3 The committee would like to thank all those who made submissions, and all the witnesses and departmental representatives that took part in the hearings. The committee is particularly grateful to people who attended from the communities of Alpurrurulam (Lake Nash), Papunya, Titjikala, Tjukurla, and Yuendumu.

1.4 References to Hansard in this report are to the final Hansard for the hearings of 24 and 25 July 2012 in Alice Springs. References to Hansard for the hearing of 16 August 2012 in Canberra are to the Proof Hansard. There may be some difference in page numbers between the Proof and the Final Hansard for the hearing on

16 August 2012.

Purpose of the bill

1.5 The bill, introduced as a private senator's bill by Senator Siewert, seeks to reduce petrol sniffing in defined areas that would be declared by the minister following a consultation process set out by the bill. In those areas, aromatic fuel could be regulated by:

" Prohibiting the supply of regular unleaded petrol (RULP);

" Promoting and monitoring the use of low aromatic fuel (LAP); and / or

" Regulating the supply and storage of other fuels - in particular premium unleaded petrol (PULP).1 2

Previous inquiries

1.6 The Senate Standing Committee on Community Affairs has completed two previous inquiries into the harmful effects of petrol sniffing which included

1 Journals of the Senate, 10 May 2012, p. 2424.

2 Low Aromatic Fuel Bill 2012, Explanatory Memorandum.

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consideration of the impact of providing low aromatic or non-sniffable fuel in areas where there was petrol sniffing. These reports were presented to the Senate in 2006, Beyond petrol sniffing: renewing hope for Indigenous communities and in 2009, Grasping the opportunity of OpaV: Assessing the impact of the Petrol Sniffing Strategy.

1.7 In 2006 the committee found that sniffing of petrol has occurred in northern Australia since the early 1950s. Between 1981 and 1991, 60 Aboriginal men and three women died from petrol sniffing.3 4 5

1.8 From the mid-1980s a number of inquiries into petrol sniffing and substance abuse have been undertaken. The Senate Select Committee on Volatile Substance Fumes reported in December 1985. This committee found that at the time, about 2000 children were sniffing petrol in Central Australia and the Northern Territory, or about

10 per cent of all Aboriginal children living in those areas. "

1.9 At the time, measures aimed at stopping petrol sniffing ranged from

preventing petrol being obtained and misused, such as locking petrol bowsers, to punishment of abusers and funding of specific programs for petrol sniffers. The Select Committee stated that nowhere did it find complete success in eradicating sniffing although many attempts had been made by communities and by individuals. It did,

however, identify the elements that appeared to be necessary for success.6

1.10 The Select Committee concluded that the act of petrol sniffing should not be made a criminal offence and recommended that no legislative action be taken to create such an offence. Flowever it did recommend that state and territory governments implement enabling legislation to control the supply of petrol to minors who intend to

sniff it and to criminalise the action by non-minors of inciting minors to sniff petrol.7

Previous policies on low aromatic fuel

1.11 The first example of supply and use of low aromatic fuel occurred in the 1990s when Avgas, an aviation gasoline, was provided through the Australian government's Comgas Scheme. The scheme subsidised low aromatic Avgas to replace

3 Opal is the brand name of the low aromatic fuel developed by BP in 2004. It was launched in 2005 and contains lower aromatic compounds than other fuels. For more information refer to http://www.opalfuel.com.au/page.cfm/what-is-opal/low-aromatic-fuel (accessed 16 July 2012).

4 Senate Standing Committee on Community Affairs, Beyond petrol sniffing: renewing hope for Indigenous communities, June 2006, p. 3.

5 Senate Select Committee on Volatile Substance Fumes, Volatile Substance Abuse in Australia, Canberra, 1985, p. 156.

6 Senate Standing Committee on Community Affairs, Beyond petrol sniffing: renewing hope for Indigenous communities, June 2006, p. 5.

7 Senate Standing Committee on Community Affairs, Beyond petrol sniffing: renewing hope for Indigenous communities, June 2006, p. 5.

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regular petrol for registered remote communities in the Northern Territory and South Australia. However due to its high lead content and issues with its suitability in motor vehicles, the program was not successful.8

1.12 In response to the demand for a low aromatic fuel that did not give the 'high' associated with other fuels, BP Australia developed an unleaded fuel called Opal, which has very low levels of aromatic hydrocarbons. These hydrocarbons are the chemical that gives the *high' sought by petrol sniffers. Opal fuel was launched in February 2005.

1.13 In 2005 the Commonwealth scheme to provide Avgas in remote communities was renamed and developed as the Petrol Sniffing Prevention Program. However, the Comgas scheme continued to be used to subsidise the supply of Opal so that the cost to consumers was the same as regular unleaded petrol.9

1.14 In response to increasing demand for the supply of Opal fuel, the 2005-06 Commonwealth Budget provided an additional $9.6 million over four years, and in September 2005, the Commonwealth extended the Petrol Sniffing Prevention Program with additional funding of $9.5 million over two years. This included $6 million for the roll out of Opal fuel to designated Central Desert Indigenous communities and roadhouses. This roll out brought the number of communities and sites provided with Opal fuel to more than 70.10 11 In February 2006 one site in Alice Springs commenced

supply, and by March 2007, all sites in Alice Springs were stocking Opal.11

1.15 In 2005, the Australian government announced a whole-of-govemment Petrol Sniffing Strategy (PSS). The PSS was to be implemented through an Eight Point Plan.12

1.16 The eight points of the PSS were (and remain):

" consistent legislation;

" appropriate levels of policing;

" further rollout of low aromatic fuel;

8 Senate Standing Committee on Community Affairs, Beyond petrol sniffing: renewing hope for Indigenous communities, June 2006, p. 99.

9 Senate Standing Committee on Community Affairs, Beyond petrol sniffing: renewing hope for Indigenous communities, June 2006, p. 100.

10 Senate Standing Committee on Community Affairs, Beyond petrol sniffing: renewing hope for Indigenous communities, June 2006, p. 100.

11 Senate Standing Committee on Community Affairs, Grasping the opportunity of Opal: Assessing the impact of the Petrol Sniffing Strategy, March 2009, p. 16.

12 Australian Government Department of Families, Housing, Community Services and Indigenous Affairs, Petrol Sniffing Strategy, accessed 18 September 2012, http://www.fahcsia.gov.au/our- responsibilities/indigenous-australians/programs-services/communities-regions/petrol-sniffing- strategy

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" alternative activities for young people;

" treatment and respite facilities;

" communication and education strategies;

" strengthening and supporting communities; and

" evaluation.13

1.17 At the time of the committee *s 2009 report, the committee found that the PSS Eight Point Plan had been partially implemented. The PSS remains jointly administered by the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA), the Department of Health and Ageing (DoHA), the Department of Education, Employment and Workplace Relations (DEEWR) and the Attorney-General's Department (AGD). The Central Australian Petrol Sniffing Unit (CAPSSU) is the multi-agency unit responsible for the local implementation of the strategy based in Alice Springs.14

Structure of this report

1.18 Chapter 2 of this report covers developments since the last inquiry including some of the gaps in the current approach. Chapter 3 highlights the success of Opal. Chapter 4 details the legislative options for controlling the supply of fuel and other volatile substances. Chapter 5 investigates technical issues including production capacity, costs, subsidies, storage and distribution of low aromatic fuel, as well as issues around premium fuels. Chapter 6 outlines complementary measures to address petrol sniffing.

13 Australian Government, Submission 19, p. 1.

14 Senate Standing Committee on Community Affairs, Grasping the opportunity of Opal: Assessing the impact of the Petrol Sniffing Strategy, March 2009, p. 4,

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Chapter 2

The government response to the 2009 inquiry

2.1 In March 2009 the Senate Community Affairs committee conducted its Inquiry into Petrol Sniffing and Substance Abuse in Central Australia. The fifth recommendation of that inquiry was that the government should give serious and immediate consideration to legislation:

Given the continuing resistance to Opal fuel by some retailers across all jurisdictions in central Australia, the committee recommends that the Commonwealth government complete, as a matter of priority, the necessary work to determine whether legislation is both possible and practicable.

If these retailers do not voluntarily agree to supply Opal within 6 months, and if it is established that there are no legal impediments to the

implementation of Commonwealth legislation, the Commonwealth government should immediately commence the drafting of legislation to mandate the supply of Opal fuel within the petrol sniffing strategy zone.1

2.2 In June 2009, DoHA commissioned the South Australian Centre for

Economic Studies (SACHS) based at Adelaide and Flinders Universities to produce a cost benefit analysis of legislation to mandate the supply of low aromatic fuel in regions of Australia.1 2 The report was compiled by Jim Hancock, Deputy Director of SACES, and various senior research economists, as well as John Williams, Professor of Law and Anne Hewitt, Lecturer in Law at the University of Adelaide. The Australian government used elements of the SACES report as the basis for its response to the inquiry recommendation regarding Commonwealth legislation.3

2.3 The SACES report evaluated a range of factors in determining the costs and benefits of a legislated approach to petrol sniffing. This included consideration of the increased production and distribution costs of greater low aromatic fuel consumption,

1 Senate Standing Committee on Community Affairs, Grasping the opportunity of Opal: Assessing the impact of the Petrol Sniffing Strategy, March 2009, Recommendation 5, p. 51.

2 South Australian Centre for Economic Studies, Cost Benefit Analysis of Legislation to Mandate the Supply of Opal Fuel in Regions of Australia, Report commissioned by the Australian Government Department of Health and Ageing, Adelaide and Flinders Universities, January 2010.

3 The committee notes that an earlier cost benefit study conducted in 2006 by Access Economics on behalf of the Opal Alliance also found that the benefits of a subsidised supply of Opal fuel through designated regions in the NT, SA and WA exceeded the costs of the measure. See Access Economics, Opal Cost Benefit Analysis, Report for the Opal Alliance, February 2006.

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savings in tenns of health and welfare from avoided harm due to a decrease in petrol sniffing, reduced crime, and improved labour market outcomes.4

2.4 Under the current voluntary scheme, the SAGES report found that

'consumption of RULP in the Analysis Area5 will decline from 93.5 ML [megalitres] in 2009/10 to 89.2 ML in 2012/13' and that 'Opal volumes are expected to rise from 22.4 ML to 31.8 ML over the same period'.

2.5 By contrast, under a scheme that banned RULP across the analysis area, based on consultation undertaken for the study, SAGES estimated 'that about two-thirds of the volume would be transferred to Opal and about one-third to premium unleaded petrol (PULP)'. This would result in an estimated 'additional 64.7 ML of Opal' being consumed in 2012-13 and would mean that Opal consumption would almost reach the

100 ML capacity limit of Kwinana Refinery.6

2.6 In their analysis of the data for the voluntary scheme7, SAGES noted that there had been a significant reduction in sniffing during the time of the Opal rollout and that although the dataset was small and did not disaggregate all the potential contributing elements, low aromatic fuel appeared to have been the major factor contributing to the reduction in sniffing. In modelling their cost benefit analysis, SAGES therefore estimated that a ban on RULP and controls on the sale of PULP would lead to a further 80 per cent reduction in sniffing.8

2.7 The analysis produced by SAGES found that the benefits of legislation that prohibited RULP in the Analysis Area exceeded the costs by $780 million.9 Even if the modelling assumptions about the reduction in sniffing prevalence were overly

4 South Australian Centre for Economic Studies, Cost Benefit Analysis of Legislation to Mandate the Supply of Opal Fuel in Regions of Australia, Adelaide and Flinders Universities, January 2010, p. vii.

5 The table in Appendix 3 shows the SACHS Analysis Area.

6 South Australian Centre for Economic Studies, Cost Benefit Analysis of Legislation to Mandate the Supply of Opal Fuel in Regions of Australia, Adelaide and Flinders Universities, January 2010, Cost Benefit Analysis, pp. vi-vii.

7 A description of the data analysis is included in the section 'Evaluation of the Opal strategy' in Chapter 3.

8 South Australian Centre for Economic Studies, Cost Benefit Analysis of Legislation to Mandate the Supply of Opal Fuel in Regions of Australia, Adelaide and Flinders Universities, January 2010, Cost Benefit Analysis, pp. vii-viii.

9 South Australian Centre for Economic Studies, Cost Benefit Analysis of Legislation to Mandate the Supply of Opal Fuel in Regions of Australia, Adelaide and Flinders Universities, January 2010, Cost Benefit Analysis, p. viii.

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optimistic, SACHS found that a ban on RULP would still 'have a net benefit so long as it reduced sniffing by at least 19 per cent from current levels *.10 11

2.8 The Australian government acknowledged that the SACHS report found the benefits of legislation exceeded the costs. However, the government only partially accepted Recommendation 5 from the 2009 Senate inquiry. There were reservations, firstly, about the quality of the data upon which the conclusions about petrol sniffing prevalence were drawn, and secondly, about the storage and distribution issues upon which a full rollout of low aromatic fuel in northern Australia would depend.11

2.9 In response to the issue of limited data, the Australian government determined to implement a surveillance system that would 'inform future decisions regarding the value of an additional legislative approach once the full voluntary rollout of Opal fuel has occurred in 2012-13'.12

2.10 In response to the issue of storage and distribution, the Australian government 2010-11 budget provided $38.5 million over four years to expand supply to a further 39 retail sites. The program referred to as Expanding the Supply and Uptake of Opal Fuel covered 11 communities in the Gulf region of Queensland, the East Kimberley in Western Australia and the Top End of the Northern Territory.13 The program also included the establishment of 'new storage facilities for Opal fuel in Darwin and northern Queensland', and a communication strategy that aimed to convince all retailers to supply low aromatic fuel.14 15

Current situation

Designated Petrol Sniffing Strategy Zones

2.11 The Petrol Sniffing Prevention Program (PSPP)1' managed by DoHA is currently subsidising the rollout of low aromatic fuel.16 Under the PSPP, the

10 South Australian Centre for Economic Studies, Cost Benefit Analysis of Legislation to Mandate the Supply of Opal Fuel in Regions of Australia, Adelaide and Flinders Universities, January 2010, Cost Benefit Analysis, p. 112.

11 Australian government, Combined Australian Government response to two Senate Community Affairs References Committee Reports on petrol sniffing in Indigenous communities, 22 June 2010,pp.32-33.

12 Australian government, Combined Australian Government response to two Senate Community Affairs References Committee Reports on petrol sniffing in Indigenous communities, 22 June 2010, p. 33.

13 Australian government, Submission 19, p. 3.

14 Australian government, Combined Australian Government response to two Senate Community Affairs References Committee Reports on petrol sniffing in Indigenous communities, 22 June 2010, p. 33.

15 The Petrol Sniffing Prevention Program is the third point of the PSS Eight Point Plan.

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designated PSS zones are the regions targeted for the rollout of low aromatic fuel. Funding for the roll out of low aromatic fuel is $115.86m over five years from 2011≠ 12.1' The designated PSS zones are:

" the Central Desert Region which covers the tri-state cross-border area that includes the Ngaanyatjarra, Pitjantjatjara and Yankunytjatjara (NPY) Lands;

" the Expanded Central Desert Region which extends the Central Desert Region to include up to Kintore, Alice Springs and Ti Tree in the Northern Territory (NT). There are eight major remote communities and Alice Springs in the expanded NT region: Papunya, Mt Liebig, Kintore, Yuendumu, Willowra, Hermannsburg, Areyonga, Haasts Bluff and associated outstations;

" the East Kimberley Region in Western Australia (WA) which extends from Kalumburu to Balgo and along the WA/NT Border; and

" the Queensland Region which covers a small area around Momington Island and Doomadgee in the Gulf of Carpentaria.18

2.12 Since March 2011, the rollout of low aromatic fuel has been expanded beyond the designated PSS zones to communities that are in close proximity to the designated zones. These communities are referred to as 'footprints'.19 The Commonwealth advised that the footprints were now being targeted 'to stem the flow' of sniffable fuel into the PSS zones.20

2.13 Low aromatic fuel may also be made available to individual sites and regions when petrol sniffing is identified as an issue and appropriate distribution arrangements can be established.21

2.14 The Commonwealth provided the following data to the committee on the availability of low aromatic fuel:

As at 1 July 2012, there are 123 sites receiving low aromatic fuel throughout regional and remote Australia. These sites include 74 communities; 40 service station/roadhouses; and 9 other 16 17 18 19 20 21

16 Under the PSPP, DoHA is also responsible for petrol sniffing and low aromatic fuel communication and education strategies, data collection, advice about treatment, and rehabilitation for petrol sniffers (Australian government, Submission 19, p. 3).

17 Australian government, Submission 19, p. 2.

18 Australian government, Submission 19, p. 11.

19 Australian government, Submission 19, p. 11.

20 Ms Sue Campion, Acting First Assistant Secretary, Mental Health and Drug Treatment Division, DoHA, Proof Committee Hansard, 16 August 2012, p. 14.

21 Australian government, Submission 19, p. 2; Ms Sue Campion, Acting First Assistant Secretary, Mental Health and Drug Treatment Division, DoHA, Proof Committee Hansard, 16 August 2012, p. 14.

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businesses/supporting organisations. Of the 123 sites, 67 are within the designated zones and 56 are outside the zones.22

This is reflected in table 2.1.

Table 2.1 Number of receiving sites and targeted sites for low aromatic fuel

State / Territory No. of Sites Receiving No of Sites targeted to receive

low aromatic fuel (planned)#

Total

Northern Territory 77 47 124

South Australia14 6 20

Western Australia26 18 44

Queensland 6 30 36

New South Wales 0 0 0

Total 123 101 224

Notes: # No. of sites targeted to receive (planned and potential sites) include sites that are currently refusing to supply low aromatic fuel.

Source: Australian government, Submission 19, p. 2.

2.15 DoHA advised that it has two staff out in the field to consult with petrol retailers, one based in Alice Springs and one based in Brisbane, and that consultation with petrol retailers in the strategy zone has been extensive.23 The Commonwealth has undertaken to provide the committee with information concerning the history and

current status of negotiations with all outlets in the PSS zones.24

2.16 The committee notes that in the three and a half years since its last inquiry, the Commonwealth communication strategy does not appear to have convinced those outlets still selling RULP within the PSS zones to switch to selling low aromatic fuel.

2.17 The committee also notes that an outlet that does not stock low aromatic fuel may not necessarily be refusing to stock it. Arc Vanderzalm from Wycliffe Well

22 Australian government, Submission 19, p. 2.

23 Ms Sue Campion, Acting First Assistant Secretary, Mental Health and Drug Treatment Division, DoHA, and Ms Julia Mansour, Director, Mental Health and Drug Treatment Division, DoHA, Committee Hansard, 16 August 2012, p. 16.

24 Ms Sue Campion, Acting First Assistant Secretary, Mental Health and Drug Treatment Division, DoHA, Proof Committee Hansard, 16 August 2012, p. 18.

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Holiday Park has advised the committee that, as at 18 July 2012, he has 'never been asked to stock opal fuel'.25

New production, storage and supply arrangements for low aromatic fuel

2.18 At the time of the last inquiry, low aromatic fuel was produced by BP

Australia in Kwinana, Western Australia, and transported to storage facilities in Largs North, South Australia and Kalgoorlie, Western Australia. The fuel was then distributed to retail sites across Australia from these sites.26

2.19 Under new arrangements that commenced on 1 July 2012 designed to expand the supply of low aromatic fuel into new regions, DoHA conducted a procurement process to establish increased production and storage of low aromatic fuel from 2012≠ 13 onwards. BP Australia will continue to supply low aromatic fuel to sites that

currently receive low aromatic fuel.27

2.20 The new arrangements described above will provide for the supply of low aromatic fuel in the following regions:

" the Top End of the NT including Katherine, Mataranka and Pine Creek;

" Tennant Creek and Barkly region in the NT;

" East Kimberley in WA;

" the southern area of the Gulf of Carpentaria and Cape York in QLD; and

" Coober Pedy in SA.28

2.21 DoHA has also commenced separate negotiations to establish bulk low aromatic fuel storage in Darwin. The committee heard that the bulk low aromatic fuel fuel storage facility in Darwin is expected to be completed before the end of the 2013 financial year.29 However, as at 16 August 2012, the engineering study is incomplete, and the ordering of equipment, some of it with a six-month delivery timeframe from overseas, is dependent upon finalisation of the engineering study. 30

25 Mr Arc Vanderzalm, Wycliffe Well Holiday Park, Correspondence received 18 July 2012, Senate Standing Committee on Community Affairs, Low Aromatic Fuel Bill 2012.

26 Australian government, Submission 19, p. 3.

27 Australian government, Submission 19, p. 3.

28 Australian government, Submission 19, pp. 3^4.

29 Ms Sue Campion, Acting First Assistant Secretary, Mental Health and Drug Treatment Division, DoHA, Proof Committee Hansard, 16 August 2012, pp. 14-15.

30 Ms Julia Man sour, Director, Mental Health and Drug Treatment Division, DoHA, and Ms Sue Campion, Acting First Assistant Secretary, Mental Health and Drug Treatment Division, DoHA, Proof Committee Hansard, 16 August 2012, p. 27.

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2.22 The committee notes with concern that there appear to have been delays in the negotiations over the new infrastructure, not necessarily of the Commonwealth's making. DoHA gave a detailed account of the process (emphases added):

The extended nature of these negotiations is explained by the staged approach to the contract adopted by the Department. Stage 1 negotiations between March and August 2011 related to scoping activities for potential storage options. Vopak Tenninals subcontracted the engineering scoping works to Conneq Pty Ltd (now trading as Lend Lease Pty Ltd).

The scoping work identified two potential storage options and the

Department commenced detailed contract negotiations with Vopak Tenninals on the Front End Engineering Design (FEED) study for an interim storage solution in October 2011. These Stage 2 activities were protracted as several new storage options were proposed by Vopak. It was

eventually agreed to progress the work in three discrete elements: a FEED study on the conversion of an existing three million litre tank (an interim storage solution); the identification of equipment required for the tank

conversion; and a separate FEED study to construct a larger 5-7 million tank which would provide the long-term, permanent storage solution. A funding agreement with Vopak Terminals for the first FEED study was executed on 14 May 2012.

Since May 2012, the Department and Vopak Terminals have been involved in Stage 3 activities reviewing options for the permanent storage solution. These options have emerged as a result of separate commercial dealings between Vopak Terminals and third parties.

In progressing these negotiations the Department is seeking to ensure that the storage facilities are available for use in 2012-13.31

2.23 However, in regard to the lead times involved, it also notes DoHA's

observation that the time it may take for equipment to be received need not cause a delay in progress on site:

On advice from Vopak it is the Department of Health and Ageing *s

understanding that some equipment can take up to six months to be

fabricated and received. Vopak has advised that construction can commence prior to the receipt of all equipment.32

Data collection

2.24 An evaluation of the PSS has been arranged by FaHCSIA on behalf of the Commonwealth. The Australian government submission provided some information about this evaluation:

The objective is to evaluate the:

31 Answer to question on notice #12 from Department of Health an Ageing, received 17 September 2012.

32 Answer to question on notice #11 from Department of Health an Ageing, received 17 September 2012.

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" effectiveness, impact and continuing relevance of the PSS as a method of coordinating government effort on petrol sniffing; and

" the extent to which the strategy and the whole-of-govemment

partnership has added value and achieved a greater impact than would have been achieved without its existence.

The Australian government submission went on to say that:

Origin Consultants has been engaged to conduct the evaluation. The consultant will conduct interviews both in phone and in person with Commonwealth, State and Territory and local government representatives, communities, businesses and non-govemment organisations as well as visit sites in the PSS Zones. The evaluation will be completed towards the end of 2012 with an expectation that the final report will be completed in early to mid-2013.

Using the East Kimberley and the Ngaanyatjarra Lands as case studies, the evaluation will focus on how well components of the PSS interact at a specific location, whether it is effective and sustainable at the regional level and how effective the partnership approach is at the whole-of-govemment

level.33

2.25 The evaluation appears to focus on the effectiveness of coordination and cooperation mechanisms, rather than on evaluating harm reduction. Origin Consulting was commissioned on 1 June 2012 and is due to report on 30 November 2012. The team is led by David Marcus, and includes Professor Peter d'Abbs, Gillian Shaw and Maggie Kavanagh.

2.26 Commonwealth representatives advised that the Menzies School of Health Research in Darwin34 35 had been commissioned by DoHA in March 2011 to assess the impact of low aromatic fuel on the prevalence of petrol sniffing and that the study was due to report in June 2014. The study will collect data from 40 communities and compare data with the 2008 study conducted by Dr d'Abbs and Ms Shaw.33 The committee notes that the research was not commissioned until nine months after the tabling of the government's official response to the Senate committee inquiries, and has a reporting date over five years after the March 2009 Senate inquiry. One of the reasons for the length of the study is that it is intended to include two cycles of data- gathering from communities:

Menzies [School of Health Research] is collecting data from communities specially selected to assess defined characteristics and will collect data from

33 Australian government, Submission 19, p. 10.

34 Dr Peter d'Abbs who co-authored the original 2006 and 2008 petrol sniffing prevalence studies is now Professor of Substance Misuse Studies at Menzies School of Health Research.

35 Ms Sue Campion, Acting First Assistant Secretary, Mental Health and Drug Treatment Division, DoHA, Proof Committee Hansard, 16 August 2012, pp. 28 *29.

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40 participating communities twice over a 24 month period to measure the prevalence of petrol sniffing.36 37

2.27 Although data was gathered from 21 communities in September 2011, by the time of the Australian government submission to this inquiry on 14 August 2012, the first data gathering exercise remained incomplete, with the initial surveying of the

remaining 19 communities 'due to commence in August/September 2012 '.31 (The committee understands this data gathering step has now commenced). If the second round of surveys were to be similarly split into two batches a year apart, the study would fail to meet its reporting deadline in 2014.

2.28 There are no plans for there to be an interim report from the evaluation. The committee sought clarification of for why two rounds of data gathering are required for this study. It was advised that:

One-off snapshots are inherently unreliable as an indicator of trends, particularly with respect to behaviours that fluctuate such as petrol sniffing and other forms of volatile substance [ab]use tend to do. There is therefore value in surveying communities at least twice to ensure the reliability and

validity of the data.38

2.29 During discussion with Commonwealth agencies, it became apparent that the Northern Territory government also is gathering data relevant to petrol sniffing. This was revealed when the Commonwealth made a trial release of some of its data:

The feedback from the Northern Territory government was there were some large discrepancies between our data and the data that they collected. So it called the integrity of the data into question and for that reason the decision

was made that at this stage, until we could be more confident, we should not be using it more broadly outside of the Australian government...39

2.30 The government indicated that the Northern Territory data was likely to be of relatively high quality:

I am fairly confident their data probably has a bit more rigour than the data we collect because it comes through their health services but it also identifies down to individuals, so they do not provide that data publicly.40

2.31 The committee queried why the Northern Territory data was not being used by Commonwealth agencies:

36 Answer to question on notice #15 from Department of Health an Ageing, received 17 September 2012.

37 Australian government, Submission 19, p. 4.

38 Correspondence from DoHA to the committee, 17 September 2012.

39 Mr Robert Ryan, FAHCSIA, Proof Committee Hansard, 16 August 2012, p. 22.

40 Mr Robert Ryan, FAHCSIA, Proof Committee Hansard, 16 August 2012, p. 23.

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CHAIR: Why is there a need for two lots of data? If there is a joint focus on this issue, which we have been led to believe people signed up to in 2009, and the Northern Territory government is collecting data specifically on this issue, why then are we collecting our data as well?

Mr Ryan: My understanding at this stage is it is because we do not have

access to the Northern Territory government data. When they looked at our data they provided us with advice that there were discrepancies, but we do not have access to their data. Again, my understanding is that that is

because they collect that in the delivery of their services and there is a higher degree of confidentiality as it does actually identify individuals. That does not mean we should not be able to access some summary of that data.

CHAIR: Has there been a formal request from the federal government to the Northern Territory government for access to their information?

Mr Ryan: I am not certain of that.

CHAIR: Could you take it on notice?

Mr Ryan: It is certainly something we could follow up.41

2.32 FaHCSIA clarified that there had been no formal request, but that one would shortly be made:

Data sharing was a topic for discussion at the Cross Jurisdictional Forum in June 2012 and it was agreed by all present that accessing data would

provide a more accurate overall picture of the extent of petrol sniffing and volatile substance use. Western Australian & Queensland officials were present but South Australian officials did not attend. The Department will write to the relevant State and Territory officials to request access to this

information before the scheduled 9 October meeting of the Cross

Jurisdictional Forum.42 43

2.33 The committee notes that existing data appears to indicate that current problems with sniffing in Central Australia occur in the two communities of Lake Nash and Titjikala where nearby fuel outlets do not stock low aromatic fuel.4j Evidence from community representatives confirmed the patterns already documented within the existing data on sniffing prevalence, firstly that huge reductions in petrol

sniffing have occurred where low aromatic fuel has been comprehensively rolled out

41 Proof Committee Hansard, 16 August 2012, p. 23.

42 Answer to question on notice #7 from FaHCSIA, received 18 September 2012.

43 CAYLUS, Submission 8, p. 5.

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in a region, and secondly, that regions that still have access to sniffable fuels have high levels of sniffing.44

Conclusion

2.34 The committee notes the low aromatic fuel roll-out and the measures being put in place to support its future expansion. At the same time, it expresses its concern at the amount of time that is being taken to implement storage and distribution facilities in northern Australia. The committee believes that the government may need to place more pressure on parties involved in the process to ensure there are no further

slippages in the time frame.

2.35 The committee is concerned at the time frame involved in the Menzies School of Health Research evaluation. It was not clear why the evaluation project would require in excess of a three-year time frame for completion, with final results not available until five years after the Senate committee's 2009 report, though the committee notes that the duplicated surveying of communities would be a factor.

Recommendation 1

2.36 The committee recommends that the government release an interim report based on the first round of data collection being undertaken by the Menzies School of Health Research.

44 Mr Willie Bookie, Lake Nash, Committee Hansard, 24 June 2012, p. 42; Ms Liza Balmer, Deputy Co-ordinator, NPY Women's Council, Committee Hansard, 25 July 2012, p. 1-4; Ms Donna Ah Chee, Acting CEO, Central Australian Aboriginal Congress, Committee Hansard, 24 July 2012, p. 23; Ms Lisa Sharman, Community Leader and Youth Worker, Titjikala, Committee Hansard, 24 July 2012, p. 34; Dr John Boffa, Public Health Medical Officer, Central Australian Aboriginal Congress, Committee Hansard, 24 July 2012, p. 25; Mr David Hewitt OAM, Committee Hansard, 24 July 2012, p. 2; Mr Blair McFarland, CAYLUS,

Committee Hansard, 24 July 2012, p. 39; Mi" Tristan Ray, CAYLUS, Committee Hansard, 24 July 2012, pp. 48-49.

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Chapter 3

The success of low aromatic fuel

3.1 The story of the manufacture and distribution of low aromatic fuel in central Australia, to substitute for sniffable fuel, is a story of spectacular policy success. It is a rare and precious achievement in the challenging field of Indigenous health policy. The initiative has involved a partnership between the private sector, including both large and small businesses, governments at all levels, non-government organisations, and Indigenous communities. This partnership has dramatically curbed the scourge of petrol sniffing, by over ninety percent in some places. As CAYLUS put it:

We consider the LAP roll out to have been a great success to date. It has completely changed the focus of our work. As sniffing has vastly reduced in our service region we have been able to put greater effort into upstream

measures to prevent substance misuse uptake in the first place and to improve quality of life for young people and families in our region.1

3.2 Before the committee engages in any debate about what the next step should be, it wishes to place on record its acknowledgement of this success, and its congratulations to everyone involved in achieving it.

Evaluation of the Opal strategy

3.3 In 2005 and 2006, Dr Peter d *Abbs and Ms Gillian Shaw conducted a baseline study 'across 74 communities from all over remote Australia that were currently using, or shortly to begin using Opal fuel ... to establish an accurate count of the prevalence and frequency of petrol sniffing'.

3.4 DoHA commissioned Dr d'Abbs and Ms Shaw to do a follow-up impact study in 2008 that re-visited 20 of the initial 74 sites to gather prevalence and frequency data.1 2 They found a 70 per cent decrease in sniffing between baseline and follow-up, with 94 and 93 per cent decreases in Central Australia and the Anangu Pitjantjatjara Yankunytjatjara (APY) lands respectively. By contrast, in two communities that had

easy access to RULP, there had been an increase in petrol sniffing. Dr d'Abbs and Ms Shaw also documented:

... a statistically significant relationship between the distance from each community to the nearest ULP outlet, and the size of the decrease in the prevalence of sniffing at each community, which indicates that the use of

1 CAYLUS, Submission 8, p. 3.

2 Dr Peter D'Abbs and Ms Gillian Shaw, Executive Summary of the Evaluation of the Impact of Opal Fuel, October 2008, Australian Government Department of Health and Ageing, Canberra. [The full evaluation report has not been publicly released due to the sensitive nature of data relating to petrol sniffing and to maintain the privacy of individual communities].

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Opal fuel has had a significant role in the decrease in the prevalence of sniffing.3

3.5 Based on these findings and the positive feedback obtained from community members during site visits in Central and Northern Australia, the committee concluded in its 2009 report that 'the supply of Opal fuel has been a resounding

success in helping to reduce petrol sniffing'.4 5

Stakeholder perspectives on the success of low aromatic fuel

3.6 Extensive media coverage of petrol sniffing around the time that the committee held hearings were held in Alice Springs sparked discussion about the factors behind recent petrol sniffing outbreaks including the ongoing issue of access to

sniffable fuels in some communities and the contrast with regions that had a more comprehensive rollout of low aromatic fuel and much lower levels of petrol sniffing.

3.7 Ms Donna Ah Chee contrasted the success of the low aromatic fuel rollout in Central Australia to the ongoing difficulties experienced in other regions where sniffable fuel is accessible from retail outlets in proximity to remote communities:

Further evidence of the effectiveness of Opal unleaded fuel is provided in the recent article 'Cheap, easy, fatal: scourge of sniffing returns to remote northern landscape' by Nicolas Rothwellf The article reveals that all of the current petrol-sniffing hotspots are remote Aboriginal communities in the north that either do not have the benefit of Opal fuel, such as Katherine, or have regular access to non-Opal fuel outside of the community, such as Lake Nash, the Urandangi pub, Yirrkala and Nhulunbuy. If this story had been written in days prior to the rollout of Opal fuel in Central Australia, when there were over 400 active sniffers at any one time, it is sniffing in Central Australia that would have been the feature. The number has dropped to about 20, and this is why the story chose to focus on the north

but did not acknowledge the success in the Centre, which is very

unfortunate. It is clearly not true, and it is poor journalism, to claim: "All that is clear is failure: after millions of dollars, reports, studies and programs, the combined efforts of the commonwealth and NT governments to stop the plague have come to nothing".

On the contrary, the rollout of Opal unleaded in Central Australia

demonstrates what supply-side strategies can achieve. This should be celebrated.6

3 Dr Peter D'Abbs and Ms Gillian Shaw, Executive Summary of the Evaluation of the Impact of Opal Fuel, October 2008, p. 2.

4 Senate Standing Committee on Community Affairs, Grasping the opportunity of Opal: Assessing the impact of the Petrol Sniffing Strategy, March 2009, p. 16.

5 Mr Nicolas Rothwell, 'Cheap, easy, fatal: scourge of sniffing returns to remote northern landscape', The Australian, 23 June 2012, p. 1.

6 Ms Donna Ah Chee, Acting CEO, Central Australian Aboriginal Congress, Committee Hansard, 24 July 2012, p. 23.

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3.8 The majority of submissions noted the success that had been achieved to date with the voluntary rollout of low aromatic fuel, crediting it with being the key, though not sole, factor in the reduction of petrol sniffing. Mr David Hewitt and Mrs Margaret Hewitt have lived and worked in Indigenous communities over several decades and Mrs Hewitt stated that:

... the introduction of the Opal low aromatic fuel has had the biggest single positive impact on the health and welfare of Indigenous people in the 48 years of our work in remote regions.7

3.9 Speaking about her experience with the Mt Theo program, Susie Low said that low aromatic fuel was a crucial element in dealing with petrol sniffing:

Our experience confirms that the use of Opal fuel strengthens communities against petrol sniffing. It removes the supply, which is an essential element. This breaks the cycle and allows communities to concentrate on

diversionary and youth development activities.8

3.10 The NPY Women's Council indicated that petrol sniffing has decreased in many of their communities as a result of the Opal rollout:

There have been many retailers that have taken up the opportunity to sell Opal fuel across the region, however there are still some retailers who are resisting this change and whose actions are undermining the strategy. In the APY Lands the health service collects statistics on petrol sniffers. In the financial year ending June 2011 there are only a few isolated incidences of sniffing, less than 10...

Since the implementation of Opal fuel in Laverton and the phasing out of sniffable unleaded fuel, petrol sniffing has decreased significantly in the area of Warburton, which is where NPY Women *s Council are currently focusing their advocacy efforts...

Since 2006 there has been much progress in the effort to reduce petrol sniffing across Central Australia. The voluntary roll [out of] Opal fuel, has played a substantial role in this reduction...9

3.11 Though the provision of low aromatic fuel is not on its own a solution, it is the most important element of a holistic approach. From their long experience in the field, CAYLUS reiterated the vital role that low aromatic fuel has played:

We know this from experience. We were doing this before Opal, and we would try all the other measures. Before Opal and the VSAP Act, we were there trying to stop sniffing. You could start a youth program in a

community and you would get a lot of the sniffers to stop but not all of

7 Mrs Margaret Hewitt OAM, Committee Hansard, 24 July 2012, p. 6.

8 Ms Susie Low, CEO, Warlpiri Youth Development Aboriginal Corporation, Committee Hansard, 24 July 2012, p. 17.

9 Ngaanyatjarra Pitjantjatjara Yankunytjatjara (NPY) Women's Council (Aboriginal Corporation), Submission 7.

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them. But once you have Opal in a community the sniffing stops and then the youth programs can really go because they are not competing against people who are off their faces all the time. Opal is a necessary precursor to dealing with sniffing. Dealing with those underlying issues of boredom and that sort of stuff is really so much easier once you have got the supply

reductions sorted. Then you can have a window of opportunity to deal with people when they are conscious and able to think and not sneaking off for a sniff of petrol every five minutes.10 11

3.12 The committee also received evidence that even though a long-term best- practice community development program such as the Mt Theo program had succeeded in eradicating sniffing, it would be very difficult to replicate across other communities. Andrew Stojanovski was awarded the Order of Australia Medal for his work at Yuendumu setting up the Mt Theo Petrol Sniffing Prevention Program. He notes that:

One of the biggest causes of the petrol sniffing is the easy availability of something to sniff that makes you high. Other issues are peer group

pressure, youth boredom and community disadvantage.11

3.13 In summing up the advantages of removing sniffable fuel compared to the community development approaches that he helped implement, Mr Stojanovski pointed out that the low aromatic fuel strategy was relatively straightforward to

implement, replicable across communities, and produced results in a short timeframe:

Up until Opal was introduced in Central Australia 1 expected that I would spend my career working on petrol sniffing, community by community. There was incredible community and professional pressure on me to take the Mt Theo solution to petrol sniffing and set up similar programs in other communities using a grass roots, ground up approach. Using the Mt Theo model I expected that it would take a decade *s work in each community to defeat sniffing. Over my career the best I could hope for using this

approach would be to eradicate sniffing in four communities over a period of forty years.

I have to say Opal changed my life. The Mt Theo solution to sniffing was very hard to implement, and extremely hard to replicate. When we told our story at conferences to government and Indigenous leaders, who wanted to

know the secret to our success, they would walk away shaking their heads, saying that what we did was too difficult to reproduce. They claimed the level of personal and community commitment was too much to expect from professional paid program staff, and was not something a government program could replicate.

In contrast Opal is a solution that governments and communities can readily implement. Its use in Central Australia has really taken the pressure off communities and provides a breathing space where community workers can

10 Mr Blair McFarland, CAYLUS, Committee Hansard, 24 July 2012, p. 50.

11 Mr Andrew Stojanovski OAM, Submission 1, p. 1.

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actually focus on programs that address the personal and social issues underlying petrol sniffing. When sniffing is rife in a community it is near impossible to do this, the power, violence and dysfunction caused by sniffing is too overwhelming.

Opal has the ability to effectively reduce the level of sniffing in a short period of time, providing a window of opportunity for real community development. In contrast it may take a decade to achieve a similar reduction

in sniffing using a community development approach based on best practice models.12

3.14 Barkly Shire Council noted that it had ongoing issues with sniffing in some of its communities but that, where low aromatic fuel was used in the communities, sniffing was managed successfully.13 Trevor Edmond lives in an area affected by sniffing and wrote:

I have lived in such areas and seen the devasting effects of the abuse of aromatic fuels. I have used Opal fuel in my vehicle without any problems and have not had fuel stolen from my car because it does not fill up with anything but Opal fuel.

Though the legislation may not stop petrol sniffing completely it will contribute to the reduction of the practice.14

3.15 The Australian government has noted both the effectiveness of non-sniffable fuel, and the need to embed it in a broader program.

Since its establishment the PSS has achieved a substantial and visual reduction of petrol sniffing and associated issues in targeted communities across remote Australia. The roll out of low aromatic fuel has been a

fundamental part of this success. Supporting programs also play a key role in maintaining the reduction of the incidence and impact of petrol sniffing. In particular, these programs ensure that the issue of petrol sniffing is addressed holistically through a combination of approaches as evidence suggests that a holistic strategy is likely to be more effective than actions concentrating on a single aspect of the issue.15

Conclusion

3.16 There is no doubt that the introduction of low aromatic fuel has helped reduce substance abuse in a significant number of communities across Australia. This report now turns to the issues involved in extending that roll-out, and maintaining the benefits it has delivered.

12 Mr Andrew Stojanovski OAM, Submission 1, pp. 1-2.

13 Barkly Shire Council, Submission 9, p. 1.

14 Trevor Edmond, Submission 12.

15 Australian Government, Submission 19, p. 1.

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Chapter 4

Legislation for Low Aromatic Fuel

The need for legislation

Gaps in the current approach

4.1 Evidence from numerous Indigenous witnesses and organisations spoke about the fact that even though their own communities stocked low aromatic fuel, sniffable fuel was being obtained from retailers in proximity to those communities.1 Mr Lance McDonald, an elder from Papunya, a community that has a low aromatic fuel bowser, expressed deep concern about the ongoing presence of sniffable fuel at Tilmouth Well:

Tilmouth Well is the only frightening one for us, because we are living on the same road that it is on. Tilmouth Well is in the middle of where three tribes are mixed up. There is Anmatjere tribe this side, Warlpiri and us mob * Luritja Pintubi tribe. We think that Tilmouth Well needs to change because we do not want to go backwards. We want to go forwards.1 2

4.2 This fear is underscored by recent experiences at Papunya and Kintore where sniffing outbreaks have spread rapidly:

[Tjhere was recently a boy from South Australia who came up for a funeral and got left behind when the other mob left. They left him there with

extended family, but he was falling through the safety net a bit. He started sniffing and he started other people sniffing, and then there were 12 people sniffing in Papunya. That boy's father turned up and took him to Kintore and the sniffing died down there. The youth workers got really involved with them. At Papunya the other 11 stopped. But then he started up another

15 in Kintore. So you really cannot underestimate what one person can do.3

4.3 The majority of submissions were deeply concerned that the actions of a few retailers that still supply RULP and do not stock low aromatic fuel had frustrated the comprehensive rollout of low aromatic fuel in affected regions for several years and in some cases more than five years.

1 Ms Lisa Sharman, Community Leader and Youth Worker, Titjikala, Committee Hansard, 24 July 2012, p. 34; Mr Lance McDonald, Papunya, Committee Hansard, 24 July 2012, p. 37; Ms Susie Low, CEO, Warlpiri Youth Development Aboriginal Corporation, Committee Hansard, 24 July 2012, p. 18; Mr Willie Bookie, Lake Nash, Committee Hansard, 24 July 2012, p. 42; Mr James Billy, Lake Nash Night Patrol, Committee Hansard, 24 July 2012, p. 42.

2 Mr Lance McDonald, Papunya, Committee Hansard, 24 July 2012, p. 37.

3 Mr Blair McFarland, CAYLUS, Committee Hansard, 24 July 2012, p. 38; see also Ms Lisa Sharman, Community Leader and Youth Worker, Titjikala, Committee Hansard, 24 July 2012, p. 34.

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4.4 The Warlpiri Youth Development Aboriginal Corporation (WYDAC) argued that the campaign to eradicate petrol sniffing was at a crossroads because the progress that had been achieved so far was under threat:

[W]e stand at an important juncture in Central Australia, where a new generation of children in much of the region have grown up free of sniffing culture, however due to the irresponsible decisions of a few of retailers, sniffing culture appears to be once again rearing its head in some sites. We know from hard experience that sniffing, once established in an affected community can rapidly spread. Sniffing once accepted by a few as

something that's too hard to deal with quickly becomes viewed this way by all. We stand at this juncture now in Central Australia but it seems to us that governments still have the capacity to act and there are still straight-forward steps that can be taken. We encourage the federal government to take a lead on this issue and for the various political parties to work collaboratively with them. Voluntary roll out of Opal has been a good thing, but the time has come to finish the job.4 5

Stakeholder arguments in favour of Commonwealth legislation

4.5 A majority of stakeholder submissions were in favour of Commonwealth legislation for low aromatic fuel and the main arguments put forward in support of a legislative approach are presented below.3

4.6 A legislative approach that prohibited retailers in designated regions from selling RULP was seen as a necessary step towards closing the gaps in the current program. The voluntary scheme was deemed insufficient for dealing with the petrol sniffing that has been to the historical resistance of a few retailers to stocking low aromatic fuel.6

4 Warlpiri Youth Development Aboriginal Corporation, Submission 11, p. 3; see also NPY Women's Council, Submission 7, p. 3.

5 The submissions from BP Australia ( Submission 15) and Shell Australia ( Submission 20) were impartial on the bill and are discussed later in this chapter in the section on stakeholder concerns.

6 National Indigenous Drug and Alcohol Committee, Submission 2, p. 1; Public Health Association of Australia, Submission 4, p. 4; Aboriginal Peak Organisations Northern Territory, Submission 5, p. 2; NPY Women's Council, Submission 7, pp. 2-4; CAYLUS, Submission 8, p. 3; Barkly Shire Council, Submission 9, pp. 2 *3; Central Land Council, Submission 10, p. 1; Warlpiri Youth Development Aboriginal Corporation, Submission 11, pp. 1-3; Jumbunna Indigenous House of Learning, UTS, Submission 14, p. 2; National Aboriginal Community Controlled Health Organisation, Submission 16, p. 3; Alcohol and other Drugs Council of Australia, Submission 18, pp. 2-4. The Office of the Children's Commissioner Northern Territory, Submission 6, pp. 2-3 expressed concern that children were being exposed to sniffable fuels in their communities and supported the legislation to prohibit RULP. The Gilbert and Tobin Centre of Public Law, UNSW, Submission 17, pp. 2-3 noted the resistance of a few retailers towards stocking low aromatic fuel could undermine the viability of the Opal strategy.

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4.7 Retailers in the Central Australian Region currently stock low aromatic fuel voluntarily and continued adherence to this agreement is crucial to the success of the scheme. Several organisations were very concerned that there is no guarantee that one retailer will not revert to RULP, potentially leading to a 'domino' effect where the voluntary agreement collapsed.7 Legislation was seen as the best way to prevent the unravelling of a voluntary agreement:

Currently all retailers in Alice Springs use Opal voluntarily. Maintenance of this outcome is crucial to the success of Low Aromatic Fuel initiatives in the Central Australian Region. However, if any individual retailer decided to stop stocking Opal and make other types of fuel available for sale - thereby breaching the status quo - it is likely that other retailers would follow suit, in order to avoid any potential commercial disadvantage. The proposed legislation would provide a strong deterrent to prevent this happening and would also provide a path for action should such a situation occur in Alice Springs or in any other site crucial to the effectiveness of the Low Aromatic Fuel initiative.8

4.8 Dr John Boffa argued that a mandatory approach is essential because a large part of the success achieved with the voluntary rollout in Central Australia can be attributed to the unique level of grass-roots inter-agency collaboration and hard work

in that particular region, and that this level of collaboration does not exist in other regions:

[W]e have achieved a comprehensive rollout here ... largely ... because of CAYLUS and the interagency collaboration and the partnerships and the constant talking to outlets and educating them, which has got people to do the right thing voluntarily, but there are still a few outlets that have not. But in other parts of the country they have got nowhere near that comprehensive commitment.9

4.9 The committee also heard that previous strategies to address petrol sniffing such as the renowned Mount Theo program that had originally succeeded in overcoming petrol sniffing could no longer be applied today. Although the comprehensive program of care provided at Yuendumu is an essential element of overcoming petrol sniffing, WYDAC expressed grave concern about the re-emergence of petrol sniffing and urged the government to mandate Opal fuel:

7 CAYLUS, Submission 8, p. 11; Public Health Association of Australia, Submission 4, pp. 4-5; Warlpiri Youth Development Aboriginal Corporation, Submission 11, p. 3; National Aboriginal Community Controlled Health Organisation, Submission 16, p. 4; Alcohol and other Drugs Council of Australia, Submission 18, p. 4.

8 Public Health Association of Australia, Submission 4, pp. 4-5; see also CAYLUS, Submission 8, p. 12; Warlpiri Youth Development Aboriginal Corporation, Submission 11, p. 3.

9 Dr John Boffa, Public Health Medical Officer, Central Australian Aboriginal Congress, Committee Hansard, 24 July 2012, p. 25.

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We know that Opal fuel has proven effective but, unless the sale of Opal is mandated, and across the broader region, there is a real danger of sniffing outbreaks and devastating consequences.

The gains achieved to date through the rollout of Opal fuel are crucial but they are also fragile. We currently have a generation of children in much of the region who have grown up free of a sniffing culture. However, due to what we believe are the irresponsible decisions of some retailers, the sniffing culture appears to be once again rearing its head in some sites. W7e know from hard experience that sniffing, once established in an affected community, can rapidly spread. It is an epidemic we do not wish to relive.

We stand at a junction in Central Australia now and we cannot afford to go back. Our program is known for its hard earned success over many, many years. We cannot emphasise too strongly to this inquiry that the way we tackled sniffing in the Warlpiri communities would not be permitted today

... Increased scrutiny on process and regulations means that the successful strategies that Mount Theo used in the early days would not be considered acceptable. We have welcomed a higher level of accountability and scrutiny. However, we despair at the possibility of a resurgence of petrol sniffing, especially given that our original successful strategies could not be applied today.10 11

4.10 CAYLUS pointed out that by consolidating the progress that has been achieved with the voluntary rollout of low aromatic fuel, legislation would provide communities with the security to focus on community development without having to contend with recurrent petrol sniffing episodes.11

4.11 CAYLUS summed up the views expressed by many community organisations by stating that:

We have often said that if this legislation was in place you may never have to use it. But if you ever did have to use it you would be really glad you had it, as opposed to 'here we are again and we are 12 months away from even getting it written'. We know that we can fix sniffing through the Opal

strategy. This legislation consolidates that victory and makes it possible to replicate that victory anywhere. It does seem like a no-brainer to me.12

4.12 Adjunct Professor Michael Moore observed that the campaign to tackle petrol sniffing has much in common with previous successful public health campaigns:

It is important to remember that successful public health campaigns are never about one thing; they are about a whole series of things. They are about individual responsibility but they are also about tackling underlying causes and operating within particular settings. There is a snowball impact

10 Ms Susie Low, CEO, Warlpiri Youth Development Aboriginal Coiporation, Committee Hansard, 24 July 2012, p. 17.

11 CAYLUS, Submission 8, p.3.

12 Mr Blair McFarland, CAYLUS, Committee Hansard, 24 July 2012, p. 49.

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for effective campaigns *that is, you begin to get everybody on side and it reaches a point where you cannot get the last few, and that is when it is time for legislation.

If I can draw just a very quick analogy: when our community tackled motor car related morbidity and mortality, we began a process of trying to explain about accidents and the power of cars and trying to get people to drive sensibly and lower their speeds. Then a whole series of things happened. There was legislation to improve motor cars, to change the speed limits and particularly to prevent driving under the influence of alcohol, and seat belts requirements and so on. And each one of those steps combined was done,

first of all, with general understanding in the community, which was then followed at the last bit by legislation. I think what is happening here is applying the same sort of principles, and that is why the Public Health Association is supportive of the Low Aromatic Fuel Bill 2012.

4.13 The committee raised the issue that banning a product may lead to potentially unintended consequences. Mr Moore pointed out that the PHAA does not advocate banning substances, but rather advocates imposing restrictions 'to try to change attitudes'. Mr Moore noted that the most successful health campaigns have removed a

dangerous substance and replaced it with a safer alternative. He believed that the bill fits within this broad approach by removing RULP and replacing it with a low aromatic alternative.13

Current Northern Territory legislation

Northern Territory Volatile Substance Abuse Prevention Act

4.14 The benefits and limitations of existing Northern Territory legislation were examined in order to determine firstly, whether the operation of such legislation in conjunction with the voluntary rollout of Opal and the operation of the eight point

plan is sufficient to achieving the objective of eliminating petrol sniffing, and secondly, whether the addition of Commonwealth legislation would have a greater impact than the legislation that currently exists.

4.15 The Northern Territory Volatile Substance Abuse Prevention Act (the Act) was introduced in February 2006, and amended in 2010, in an attempt to reduce the harmful effects of abuse of volatile substances such as petrol, paint and glue.14

4.16 Under the Act, police and authorised persons13 are empowered to remove and dispose of volatile substances from somebody who is inhaling, intends to inhale, or

13 Mr Michael Moore, CEO, Public Health Association of Australia, Committee Hansard, 24 July 2012, p. 10.

14 Northern Territory Government Department of Health and Families, Volatile Substance Abuse Prevention Act, Fact Sheet, p. 2, accessed 7 September 2012, http://www.health.nt.gov.au/library/scripts/objectifyMedia.aspx?file=pdf/16/40.pdf&siteID=l& str title=NT+Volatile+Substance+Abuse+Prev

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has recently inhaled a volatile substance, and take them to a 'place of safety' or into protective custody.15 16

4.17 The Act also provides for assessments of people at risk of volatile substance abuse to be carried out. Assessment findings can trigger a recommendation to the Chief Health Officer to apply to the local court for a treatment order. Court-ordered treatment programs can run for up to 16 weeks and be extended if necessary. If a person fails to participate in a court-ordered program, they may be subject to a warrant to compel them to attend treatment.17

Community Managemen t of Volatile Substances

4.18 Community members and Shire Councils are also able to apply to the Minister for a certain area in their community or a whole community area to be declared a management area under the Act:

A management plan is then developed for the area to establish rules for possession, supply and use of volatile substances. Delegates of the Minister hold community meetings, explaining the workings of management plans and consequences for the communities with such plans. The delegates also

assist and guide communities through the making of the plan.18

4.19 Community members must agree to the area and the plan. Signs must be erected at entry points to the community advising that the community is subject to a management plan. The police are empowered to enforce the management plan.

Unlawful supply

4.20 The Act provides that a person must not *supply a volatile substance to another person if the supplier knows, or ought to know, that the other person intends to inhale the substance. *19

4.21 Likewise a supplier must not give a person a volatile substance if the supplier *... knows, or ought to know, that the recipient intends to give the substance to

15 Authorised persons have to be individually approved by the Minister and can be, for example, health workers, youth workers, councillors, or eiders (see Northern Territory Government Department of Health and Families, Volatile Substance Abuse Prevention Act, Fact Sheet, p. 3).

16 Northern Territory Government Department of Health and Families, Volatile Substance Abuse Prevention Act, Fact Sheet, p. 2.

17 Northern Territory Government Department of Health and Families, Volatile Substance Abuse Prevention Act, Fact Sheet, p. 3.

18 Northern Terri lory Government Department of Health and Families, Volatile Substance Abuse Prevention Act, Fact Sheet, p. 4.

19 Northern Territory Government Department of Health and Families, Volatile Substance Abuse Prevention Act, Fact Sheet, p. 4.

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another person for inhaling. *20 Unlawful supply is an offence under the Act and is punishable by a fine or imprisonment.

Limitations of the Volatile Substance Abuse Prevention Act

4.22 Given the existence of the Act, the committee sought evidence on whether the Act was sufficient to control sniffing in the NT, and whether this model could be used in other jurisdictions to control petrol sniffing.

4.23 The committee notes that two recent coronial inquests that reported in October 2011, one completed in WA and another in SA, recommended the implementation of a law similar to the NT Volatile Substance Abuse Prevention Act in their respective jurisdictions.21

4.24 CAYLUS noted the positive impacts of the Act in enabling some

communities to exert a level of control over sniffing and empowering police to deal with sniffing. Mr McFarland said that the various mechanisms within the act including the management plans and the mandatory rehabilitation make it a 'very powerful

act'.22

4.25 However, CAYLUS drew attention to limitations in the Act regarding the extent to which a management plan can exercise control over fuel outlets in the surrounding area. The three community examples given below demonstrate that the Act is insufficient to remove petrol sniffing.

4.26 CAYLUS stated that they had worked with Anmatjerre Council in 2008 to apply for a management plan under the Act in the hope of being able to force the nearby Ti Tree roadhouse to switch to low aromatic fuel. The NT government advised that the powers under the Act were insufficient to compel a private business outside the management area to stop selling sniffable fuel.23

4.27 The Indigenous community at Lake Nash sells low aromatic fuel and has a management plan. However, unleaded fuel comes into the community from the nearest roadhouse at Urandangi across the Queensland border that does not stock low aromatic fuel, a jurisdiction over which the Lake Nash management plan has no

control.24 CAYLUS also pointed out that it would be unfair to arrest people in Lake

20 Northern Territory Government Department of Health and Families, Volatile Substance Abuse Prevention Act, Fact Sheet, p. 4.

21 Australian government, Submission 19, p. 5.

22 Mr Blair McFarland, CAYLUS, Committee Hansard, Wednesday 25 July 2012, p. 51.

23 CAYLUS, Submission 8, p. 10.

24 Mr Blair McFarland and Mr Tristan Ray, CAYLUS, Committee Hansard, Tuesday 24 July 2012, p. 51.

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Nash for having RULP in their fuel tank when cars coming into the community via Urandangi have no choice but to refill with sniffable fuel.23

4.28 The community at Titjikala elected not to have a management plan because even though the nearby fuel outlet at Maryvale station does not sell RULP, it does sell premium unleaded. Although Titjikala sells low aromatic fuel, cars that need to refuel at Maryvale on a Sunday when the Titjikala outlet is closed bring sniffable fuel back

into the community. Titjikala decided that a management plan would be unenforceable, firstly, because there would be occasions when vehicles would be coming into the community with sniffable fuel in their tanks purchased from Maryvale, and secondly, because there are no police in Titjikala to enforce a management plan.25 26

4.29 Dr John Boffa suggested that ongoing sniffing in certain areas was a clear indication that the Act alone was not enough to solve the problem and that further legislation was required. Responding to the suggestion that further legislation was unnecessary, Dr Boffa said:

It is a furphy. If that were the case, you would not have petrol-sniffing in Lake Nash, Yirrkala and Katherine at the moment. If that act were enough, without Opal being mandated, then we would not have that problem. It is a good act, it is an important contribution, but by itself is not enough. It is no reason not to do this as well. Western Australia, South Australia * they

should all have a similar act; but, even if they did, it is absolutely not a

reason to not go ahead with this legislation as well.27

4.30 Dr Howard Bath acknowledged the beneficial provisions within the Act, in particular the ability to generate community-based approaches to volatile substance abuse:

In the Northern Territory we have the Volatile Substance Abuse Prevention Act, under which there is a comprehensive process where areas can

approach the government and asked to be declared a management area for volatile substances. There is a consultation and they can develop a

management plan for the area which is an enforceable plan. It does cover issues broader than just fuel and fuel supply. That is more possible in a jurisdiction like the Northern Territory. Trying to get coordination across several different jurisdictions we recognise would be extremely hard. We

think the ideal would be that, in addition to imposing restrictions on fuel and the supply of Opal fuel * low aromatic fuel * it is important also that

25 Mr Blair McFarland and Mr Tristan Ray, CAYLUS, Committee Hansard, Tuesday 24 July 2012, p. 51.

26 Mr Blair McFarland and Mr Tristan Ray, CAYLUS, Committee Hansard, Tuesday 24 July 2012, p. 51.

27 Dr John Boffa, Public Health Medical Officer, Central Australian Aboriginal Congress, Committee Hansard, 24 July 2012, p. 31.

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there are local management approaches to the difficulties around sniffing or solvents.28

4.31 However, recognising the difficulties of coordinating approaches across jurisdictions, the position of Dr Howard Bath was that Commonwealth legislation that enforced the prohibition of RULP and controlled PULP would complement the Act.29

The constitutional capacity for Commonwealth legislation

4.32 This section considers whether the Commonwealth government possesses the constitutional capacity to legislate across several jurisdictions with regard to RULP and low aromatic fuel.

The Corporations power

4.33 Section 51 (xx) of the Constitution (Corporations power) gives the Commonwealth Parliament the power to make laws with respect to trading, financial and foreign corporations.

4.34 The SACES report found that the Commonwealth could use the Corporations power to enact legislation and that the legislation would be effective, would very likely be upheld by the courts, and would have relatively low compliance costs. There

would, however, be some risk that a small number of unincorporated outlets may not be controlled by the scheme.30

4.35 Noting that the bill is based on the Commonwealth Corporations power, Mr Sean Brennan stated that the Bill appeared 'legally sound' and 'is likely to be effective in regulating the conduct of at least a very high proportion of fuel suppliers in a given area in Australia'.31 Professor Larissa Behrendt endorsed the conclusions of the

SACES report and the Gilbert and Tobin Law Centre submission to the 2009 inquiry regarding the sound constitutional basis for Commonwealth legislation.32

4.36 However, the SACES report, the Gilbert and Tobin Law Centre, and the Jumbunna Indigenous House of Learning all noted that other Constitutional powers could be used to supplement Commonwealth legislation based on the Corporations power. Mr Brennan and Professor Behrendt suggested that consideration be given to

28 Dr Howard Bath, Committee Hansard, Wednesday 25 July 2012, p. 35.

29 Office of the Children's Commissioner Northern Territory, Submission 6, pp. 3-4.

30 South Australian Centre for Economic Studies 2010, Cost Benefit Analysis of Legislation to Mandate the Supply of Opal Fuel in Regions of Australia, Report commissioned by the Australian Government Department of Health and Ageing, Adelaide and Flinders Universities, pp.14-15.

31 Mr Sean Brennan, Director Indigenous Legal Issues Project, Gilbert and Tobin Centre of Public Law, UNSW, Committee Hansard, 25 July 2012, p. 10; see also Gilbert and Tobin Centre of Public Law, UNSW, Submission 17.

32 Jumbunna Indigenous House of Learning, UTS, Submission 14, p. 3.

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extending the bill to rely on other Commonwealth powers in the Constitution in order to capture commercial suppliers of fuel which are not trading corporations for the purposes of the Constitution, and also to support the rollout of low aromatic fuel in areas beyond the Northern Territory ,33 Two of these powers, the Terri tones power and the Races power, are considered below.

The Territories power

4.37 Under section 122 of the Constitution, the Commonwealth has the power to make laws for the government of a Territory.

4.38 Given that petrol sniffing is a regional problem that traverses state boundaries, the key question regarding the Territories power is whether that power can operate in state jurisdictions beyond the Northern Territory.

4.39 The SACHS report found that the Territories power could not target sniffing activity outside the Territory, but that 'a prescribed region could extend beyond the Territory into areas which have an impact on efforts to reduce sniffing in the Territory'.34

4.40 In his submissions to both the 2009 and 2012 inquiries, Mr Brennan cited legal precedent3" in noting that 'the High Court has repeatedly confirmed that a Commonwealth law relying on the Territories power can operate effectively inside the

boundaries of a State'.36 The High Court has also indicated that in the event of conflict between Commonwealth law and state law, the Commonwealth law would prevail.37 38

4.41 Mr Brennan cited two casesJ8 to argue that:

33 Mr Sean Brennan, Director Indigenous Legal Issues Project, Gilbert and Tobin Centre of Public Law, UNSW, Committee Hansard, 25 July 2012, p. 10; see also Gilbert and Tobin Centre of Public Law, UNSW, Submission 17, p. 4; Jumbunna Indigenous House of Learning, UTS, Submission 14, p. 3.

34 South Australian Centre for Economic Studies 2010, Cost Benefit Analysis of Legislation to Mandate the Supply of Opal Fuel in Regions of Australia, Report commissioned by the Australian Government Department of Health and Ageing, Adelaide and Flinders Universities, p. 13.

35 Lamshed v Lake (1958) 99 CLR 132, 141-142 (Dixon CJ, Webb J agreeing), 154 (Kitto J); Newcrest v Commonwealth (1997) 190 CLR 513, 599 (Gummow J); New South Wales v Commonwealth (the WorkChoices case) (2006) 229 CLR 1, 158 (Glesson CJ, Gummow, Hayne, Heydon and Crennan JJ).

36 Gilbert and Tobin Centre of Public Law, UNSW, Submission 17, p. 5.

37 Gilbert and Tobin Centre of Public Law, UNSW, Submission 17, p. 5.

38 Lamshed v Lake (1958) 99 CLR 132. Attorney-General (WA) v Australian National Airlines Commission (1976) 138 CLR 492.

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The key to constitutional validity is a sufficient connection between government of the Northern Territory and the operation of a law inside a State such as Western Australia, South Australia or Queensland.39

4.42 Based on the cases cited above, Mr Brennan said that the use of a law based on the Territories power within a state such as Western Australia, South Australia or Queensland would be constitutionally valid based on the following proposition:

... regulating fuel supply in these cross-border locations is practically relevant to the effectiveness of supply restrictions within the Territory.40

4.43 Mr Brennan believed that this proposition is supported by 'the evidence presented to the Committee and elsewhere, that the necessary practical, geographical connection exists - indeed, it underpins the regional strategy adopted by

governments'.41 Summing up, Mr Brennan indicated the legislation 'would effectively apply to all those who supply fuel in the relevant sense in a wide region of Central (and, if necessary, northern) Australia'.42

4.44 The conclusions drawn by Mr Brennan about the constitutional validity of extending the bill to draw on the Territories power were endorsed by Professor Behrendt.43

The Races power

4.45 Section 51 (xxvi) of the Constitution gives the Commonwealth Parliament the power to make laws with respect to the people of any race for whom it is deemed necessary to make special laws.

4.46 Opinions differ on the desirability of using the Races power to augment the Corporations power on which the bill is based. The SACHS report noted that the 'use of Race power to impose restrictions on groups is clearly discriminatory and largely undesirable from a public policy perspective'.44

4.47 Mr Brennan was cautious about the use of the Races power but concluded that:

... on balance it was appropriate in this instance to resort to the power. In this respect I have been assisted by the debate which has unfolded over the

39 Gilbert and Tobin Centre of Public Law, UNSW, Submission 17, p. 5.

40 Gilbert and Tobin Centre of Public Law, UNSW, Submission 17, p. 5, emphasis original.

41 Gilbert and Tobin Centre of Public Law, UNSW, Submission 17, p. 5.

42 Gilbert and Tobin Centre of Public Law, UNSW, Submission 17, p. 5.

43 Jumbunna Indigenous House of Learning, UTS, Submission 14, p. 3.

44 South Australian Centre for Economic Studies 2010, Cost Benefit Analysis of Legislation to Mandate the Supply of Opal Fuel in Regions of Australia, Report commissioned by the Australian Government Department of Health and Ageing, Adelaide and Flinders Universities, p. 16.

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last 18 months or so regarding constitutional reform in respect of

Australia *s first peoples. It is clear that the Expert Panel which reported to the Australian Government in January 2012 on constitutional recognition of Indigenous Australians strongly supported the maintenance of a power to make national laws with respect to Aboriginal and Torres Strait Islander people, conditioned by the presence of a non-discrimination clause. This is a position which I support. The retention of a national power to make

Indigenous-specific laws seems to enjoy widespread endorsement.43

4.48 Professor Behrendt states that 'the legislative scheme would clearly be a law "benefitting the people of any race", noting that the communities targeted by the regulatory scheme are predominantly Aboriginal'. Conceding that the scheme would be discriminatory, Professor Behrendt argues that it would be permissible because the

limitations are 'legitimate, necessary and proportionate'. Regarding the findings made in the SACHS report about the undesirability of discriminatory provisions within legislation, Professor Behrendt recommends that those concerns 'can be addressed by strengthening the requirements for consultation under the Act'. Professor Behrendt concludes that the benefit of drawing on the Races power 'is that the law would be capable of consistent application throughout the country and in relation to all people'.45 46

Referral of powers

4.49 Under section 51(xxxvii) of the Constitution, a state or states may refer powers to legislate on particular matters to the Commonwealth.

4.50 SACHS found that a referral of powers by the States to the Commonwealth would provide 'a strong legal foundation' for the scheme, be 'highly effective in controlling legitimate supply activity', and be relatively straightforward for suppliers

to comply with. The disadvantage is that a referral requires not only agreement by the States, but also ongoing support because the SACHS report found that States can terminate a referral.47

4.51 Mr Brennan noted that a further disadvantage of the referral approach is that it 'slows to the pace of the slowest moving state or territory in order to achieve the overall legislative outcome that you want'.48 Professor Behrendt observed that referral might be a preferred response both legally and symbolically, but notes the danger that

45 Gilbert and Tobin Centre of Public Law, UNSW, Submission 17, p. 6.

46 Jumbunna Indigenous House of Learning, UTS, Submission 14, p. 4.

47 South Australian Centre for Economic Studies 2010, Cost Benefit Analysis of Legislation to Mandate the Supply of Opal Fuel in Regions of Australia, Report commissioned by the Australian Government Department of Health and Ageing, Adelaide and Flinders Universities, pp. iii, 16-17.

48 Mr Sean Brennan, Director Indigenous Legal Issues Project, Gilbert and Tobin Centre of Public Law, UNSW, Committee Hansard, 25 July 2012, p. 14.

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governments can change during the negotiation process and that a referral could be rescinded.

State legislation

4.52 Besides considering the Commonwealth capacity to legislate on low aromatic fuel, the SACHS report also examined the potential for state legislation. Subject to the Australian Constitution, the SACHS report noted that the states have the capacity to regulate the sale of petroleum products and regulate controlled substances.

4.53 However, the SACHS study found that State legislation 'has more uncertain prospects of success, greater potential for delay, and greater risks of differences in the specifics of the law from jurisdiction to jurisdiction'.49 50 In contrast, the Commonwealth has a clear capacity to legislate in this area. The SACHS study concluded that leaving

the regulation of this issue to the states was the least preferred option, an opinion with which Mr Brennan agreed."0

4.54 Evidence from other organisations also suggested that a comprehensive state- based approach would be much more difficult to achieve.51 52

Position of WA, SA and NT on state legislation

4.55 The committee is aware that three jurisdictions have made statements regarding the possibility of State and Commonwealth legislation.

4.56 The previous Northern Territory Labor government made a submission to the 2009 inquiry supporting the introduction of Commonwealth legislation that would allow the prohibition of sniffable fuel 'in identified areas of geographical concern'.2 *2

4.57 The Western Australian Minister for Mental Health, the Hon Graham Jacobs was quoted in The Australian on 13 August 2010 stating that Commonwealth legislation to mandate the sale of Opal was necessary to address the problem of petrol sniffing:

It's my belief that we need to have some overarching legislation. We cannot deal with this problem ... by ad hoc state by state (laws).213

49 South Australian Centre for Economic Studies 2010, Cost Benefit Analysis, p. iv.

50 Mr Sean Brennan, Director Indigenous Legal Issues Project, Gilbert and Tobin Centre of Public Law, UNSW, Committee Hansard, 25 July 2012, p. 14.

51 See for example Mr Michael Moore, CEO, Public Health Association of Australia, Committee Hansard, 24 July 2012, pp. 7-8; CAYLUS, Submission 8, p. 9; Warlpiri Youth Development Aboriginal Corporation, Submission 11, pp. 2-3.

52 Northern Territory government, Submission 20, Inquiry into petrol sniffing and substance abuse in central Australia, Senate Standing Committee on Community Affairs, March 2009.

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4.58 The South Australian Minister for Mental Health and Substance Abuse, the Hon John Hill, praised the effectiveness of the current voluntary scheme in the APY lands, but did note that 'some retailers in the far north of South Australia, outside of the APY lands, continue to stock regular unleaded fuel1.34 Minister Hill also states that the South Australian government will contribute to the FaHCSIA evaluation of the PSS and will determine its position on a potential legislative approach in light of that evaluation and the current Senate inquiry into the bill.

Committee view

4.59 The committee notes the strong support for legislative action from organisations in central Australia, organisations involved in drug and health issues, and individuals from affected communities. It also notes that previous studies have identified legislative intervention as cost effective.

4.60 The committee has concerns about an act relying solely on the corporations power to implement a scheme. It is possible that this could even encourage smaller outlets to avoid incorporation in order to avoid being captured by the scheme, though

it received no evidence one way or the other on this matter. The committee notes that witnesses seemed unsure of whether all existing fuel outlets were incorporated.

4.61 The use of the territories power appears prudent and would be likely to cover the main cases of non-cooperation with the scheme that have been raised to date with the committee. The use of the race power presents important policy questions. The committee accepts the valid arguments put by the Gilbert and Tobin Centre of Public Law and Jumbunna Indigenous House of Learning, but believes further consultation with Indigenous communities, particularly those outside the Northern Territory, would be necessary before also seeking to ground legislation in that power.

Recommendation 2

4.62 The committee recommends that a legislative scheme for low aromatic fuel not be confined to reliance upon the corporations power.

Other aspects of the bill

4.63 The submissions from BP Australia and Shell Australia both support the objective of the bill to reduce the potential harm to the health of people living in areas where petrol sniffing has occurred.33 However, they raised some concerns. 53 54 55

53 Ms Debbie Guest, 'State looks to federal solution to cut petrol-sniffing', The Australian, 13 August 2010, accessed 12 September 2012, http://www.theaustralian.com.au/news/nation/state- Iooks-to-federal-solution-to-cut-petrol-sniffing/story-e6frg6nf-1225904664772

54 The Hon John Hill MP, SA Minister for Mental Health and Substance Abuse, letter to the Hon Warren Snowden MP, Federal Minister for Indigenous Health, 23 August 2012, Senate Standing Committee on Community Affairs, Low Aromatic Fuel Bill 2012, Correspondence.

55 BP Australia, Submission 15; Shell Australia, Submission 20.

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Mandate and consumer education

4.64 BP Australia and Shell Australia note that the bill would essentially amount to a mandate for Opal fuel in particular areas. BP Australia and Shell Australia both 'generally oppose mandates due to the market distortions and unintended consequences' they can create, but both companies appreciate the need for governments to create appropriate policy responses to public health matters. As such, both companies are 'impartial' on the bill's policy mechanism.

4.65 Both BP Australia and Shell Australia raise concerns about the ongoing importance of stakeholder acceptance in any future Opal rollout. BP Australia states that:

Significant time and resources are required prior to a launch of Opal fuel into a community. Objectives of this stage include gaining community support and developing technical understanding in key stakeholders.

The success of these pre-launch steps may be diminished where

introduction of Opal fuel is driven by mandate rather than a whole-of- community demand and complete stakeholder acceptance.

Any decision to mandate Opal fuel will need to accommodate existing Opal rollout plans and not assume an *immediate fix * will be in place once the Minister makes a declaration."7

4.66 Similarly, Shell Australia states that:

Mandates however do not equal consumer acceptance and regardless of the outcome of the Bill, we would certainly encourage the work by the

Department of Health and Ageing to continue in rolling out plans to gain community and stakeholder acceptance of low aromatic fuels/

4.67 In addition, both BP Australia and Shell Australia concur with other stakeholders (and with the committee) that the other aspects of the eight point plan are essential complementary aspects of a holistic approach to tackling petrol sniffing.

4.68 The bill also contains provisions whereby suppliers may be subject to certain requirements in low aromatic fuel areas and fuel control areas such as promotion and the provision of information. Shell raised concerns about the extent to which companies may be required to promote and provide information:

Shell supports the current programme conducted by the Department to work with local communities on education and acceptance of low aromatic fuel prior to roll-out. Shell does not support the proposal for companies to take on sole responsibility for consumer education. Shell sees that fuel manufacturers and suppliers are a support to the Department on technical 56 57 58

56 BP Australia, Submission 15, p. 1; Shell Australia, Submission 20, pp. 1, 3.

57 BP Australia, Submission 15, p. 3.

58 Shell Australia, Submission 20, p. 1, emphasis original.

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and fuel quality matters but that Government should take a leading role in consumer/community/customer education and the implementation of complementary initiatives to support health outcomes.59

4.69 The committee asked DoHA to respond to Shell's queries, including in relation to information and consumer education. The Department noted that these decisions would be a matter for consideration by government and could not comment

further.60

4.70 The SACHS report addressed the specific issue of prohibiting RULP as opposed to mandating low aromatic fuel. The legislative options evaluated in the SACHS report did not mandate, nor contained any provision to mandate, the sale of any low aromatic product, but instead focussed on the control of aromatic fuels:

[T]he sale of Opal is not mandated, nor is there a power to mandate it or

indeed to mandate the sale of any other non-aromatic product. This is because it would be an unusual intrusion on individual rights for a

government to require an individual to sell petrol of any sort. Instead the decision to sell non-aromatic petrol is a commercial decision to be taken by the prospective supplier. Obviously the uptake of a non-aromatic product is likely to be boosted by controls on the sale of aromatic petrol (especially if the control is prohibition). Governments may also choose to subsidise the supply of a non-aromatic alternative.61

4.71 The committee notes that the bill contains provisions for prohibiting the sale of RULP in designated zones and controls on the storage and supply of other fuels such as PULP.62 While such provisions might essentially amount to a mandate for low aromatic fuel in prescribed regions, the committee sees that the bill does not mandate

the sale of low aromatic fuel. The decision to sell a low aromatic fuel would still be a commercial decision to be taken by the retailer.

4.72 The committee further notes that the bill does not use a 'blanket' approach to designating regions, but rather places the power in the hands of the Minister to determine particular regions as low aromatic or fuel control areas.63

59 Shell Australia, submission 20, p. 2.

60 Answer to question on notice #9 from Department of Health an Ageing, received 17 September 2012.

61 South Australian Centre for Economic Studies 2010, Cost Benefit Analysis o f Legislation to Mandate the Supply o f Opal Fuel in Regions o f Australia, Report commissioned by the Australian Government Department of Health and Ageing, Adelaide and Flinders Universities, p.9.

62 Low Aromatic Fuel Bill 2012, Clause 9(1).

63 Low Aromatic Fuel Bill 2012, Clauses 14 and 15.

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Scope ofpowers to regulate fuel

4.73 Clause 11 of the bill would allow regulation of the supply, transport, possession or storage of any fuel. Shell expressed concern about this provision:

Shell does not support the broad powers set out in Section 11 which could allow the Minister to limit supply of premium fuels. Shell would like clarity over the right for companies to maintain the overall product mix on sites, including premium fuels which have previously not been affected by the roll out of Low aromatic 91.64 65

4.74 The committee notes this concern, but also notes that in some locations, the supply of premium fuel is already regulated voluntarily (for example through locks on pumps), while in other locations, the availability of premium fuel has been identified as a source of problems with sniffing.63

4.75 BP Australia themselves indicated that premium fuel cannot be ignored as part of the equation, for a number of reasons:

Positive engagement of fuel distributors and retailers has been fundamental to the success of Opal implementation.

Whilst this view has developed from an environment without a mandate mechanism, a future mandate for Opal fuel may simply result in increased PULP availability.

The production of Opal fuel at BP's Kwinana Refinery in Western

Australia is part of a complex supply chain that impacts the production of other liquid fuels such as premium fuels (PULP) and diesel.66

Committee view

4.76 If a regulatory regime were put in place, it would not be prudent to exclude premium fuel from its scope, in certain circumstances. However, the committee does not believe a case has been made that the legislation should have the scope to apply to every fuel including, for example, diesel or gas.

Recommendation 3

4.77 The committee recommends that the government consider whether legislation should define more narrowly the fuels to which the bill would apply, but accepts that there should be capacity to regulate the management of premium fuel in some circumstances.

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64 Shell Australia, Submission 20, p. [2],

65 Ms Lisa Sharman, Community Leader and Youth Worker, Titjikala, Committee Hansard, 24 July 2012, p. 34; Mr Tristan Ray, CAYLUS, Committee Hansard, 24 July 2012, p. 34.

66 BP Australia, Submission 15, p. [3].

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Availability of fuel and consultation

4.78 It remains clear that supply, storage, and distribution remain challenging aspects of the roll-out of low aromatic fuel. Some aspects, particularly the construction of new storage facilities, are discussed elsewhere in this report, in chapters 2 and 5. The committee notes that the bill would require the Minister to conduct consultations prior to designating a low aromatic fuel area or fuel control area.67 It also notes that the bill states that the Minister 'must' have regard to the availability of low aromatic fuel in relation to the area68 when making a decision to designate an area.

4.79 While the bill refers to 'suppliers of fuel' as being amongst those who might be consulted, the committee notes that this might not be taken to include the manufacturers or refiners of fuel. As evidence to the committee has shown, the refining and initial distribution of the fuel is a major element of the supply chain, and one which faces significant potential capacity and cost constraints.

Committee view

4.80 The committee understands the purpose of the consultation provisions, and does not doubt their good intent. It recognises that section 17(1) of the Legislative Instruments Act would be likely to contribute to ensuring that manufacturers or refiners of fuel would be consulted. That section states:

(1) Before a rule-maker makes a legislative instrument, and particularly where the proposed instrument is likely to:

(a) have a direct, or a substantial indirect, effect on business; or

(b) restrict competition;

the rule-maker must be satisfied that any consultation that is considered by the rule-maker to be appropriate and that is reasonably practicable to undertake, has been undertaken.

4.81 It may help clarify the intention behind the bill if the Explanatory

Memorandum indicated that it would be intended that all elements of the supply chain would be considered relevant to consultation when considering declaration of low aromatic fuel areas.

4.82 The committee is also unsure about how the bill would apply in the event that there was a LAF supply problem once a declaration had been made. What would be the consequences if LAF became unavailable to supply to a low aromatic fuel area? On the face of it, it is possible that such a situation would be one to which a

Ministerial exemption under clause 17(1) might apply. However clause 17(1 )(b) states that a Minister can only exempt corporations from the bill's provisions in a low

67 Clause 16(1).

68 Clauses 14(3)(f) and 15(3)(f).

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aromatic fuel area or fuel control area provided that 'it is unlikely that the wellbeing of people will be adversely affected by the exemption'. Even if there was a shortage of LAE, the re-introduction of regular unleaded petrol would still be likely to 'adversely affect' the population within the meaning of the bill, so an exemption may not be able to be granted. A more likely outcome would seem to be that the minister would make a further designation effectively removing the low aromatic fuel area altogether. The committee is unsure if that is the intention behind the bill, or whether this is the best way to deal with such a scenario.

Recommendation 4

4.83 The committee recommends that there be further examination of the wording of the explanatory memorandum, consultation and exemption clauses, to ensure that fuel manufacturers are properly included, and the bill does not have unintended consequences in the event of supply bottlenecks or disruption.

Conclusion

4.84 On 20 July 2012 the Minister for Indigenous Health, the Hon Warren Snowdon MP, wrote to the Northern Territory Chief Minister and the premiers of Queensland, South Australia and Western Australia. He noted the current issues that the government is addressing around storage and distribution issues. He sought their views on the possibility of Commonwealth legislation to control the supply and transport of low aromatic fuel in their jurisdictions. The Minister indicated that, if appropriate, he would 'host a cross-jurisdictional forum to discuss a consistent legislative approach to petrol sniffing including low aromatic fuel'.69

4.85 The committee recognises that any legislative action to mandate the supply of low aromatic fuel needs to consider storage and supply issues, complement voluntary roll-out, and prioritise designated petrol sniffing strategy zones. Some of these issues are considered further in chapters five and six.

Recommendation 5

4.86 The committee recommends that the Australian Government continue to consult with the relevant state and territory governments on the possibility of national legislation to mandate the supply of low aromatic fuel to ensure that there is agreed and coordinated action to address petrol supply.

Recommendation 6

4.87 In light of the preceding matters, the committee recommends that the current bill not be proceeded with.

69 Additional information received: copies of letters from the Hon Warren Snowden MP, Minister for Indigenous Health, to state and territory ministers dated 20 July 2012.

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Chapter 5

Technical Issues

5.1 The manufacture, distribution and use of low aromatic fuel raises issues that, though not relevant to the construction of the bill's clauses, are relevant to how legislation could be implemented, and whether legislation is a good idea.

Safety of Opal fuel

5.2 The issue of the safety of low aromatic fuel arose again at the hearings. The committee expressed its frustration with the fact that the same reasons for not switching to low aromatic fuel that were refuted several years ago are still being given today as a reason not to use low aromatic fuel.1

5.3 Mr Craig Catchlove provided evidence on the safety of low aromatic fuel for engines from the perspective of both his current employment at the Alice Springs Town Council and his former employment in the Central Australian Tourism Industry Association.1 2 Mr Catchlove made the point that having an independent organisation

conducting an investigation is crucial in establishing credibility for the results. The Royal Automobile Association of South Australia (RAA SA) conducted an in-depth investigation of the impact of low aromatic fuel on engines. The RAA SA attended a range of public forums to discuss their findings. It found absolutely no evidence of harm arising from the use of low aromatic fuel and that these findings were seen as credible because the organisation was perceived as authoritative and independent.3

5.4 Mi" Catchlove also stated that fear about the potential impact of low aromatic fuel on engines disappeared in Alice Springs within 6 to 12 months after the introduction of Opal (which occurred in 2006) because there was no evidence for harm. It is now a non-issue in Alice Springs.4

5.5 Mr Coffey stated that in January 2006, he switched his vehicle to low

aromatic fuel and it is now available on every bowser in every Ngaanyatjarra

1 Senator Claire Moore, Committee Hansard, 24 June 2012, p. 15.

2 Mr Craig Catchlove, Director, Corporate and Community Services, Alice Springs Town Council, Committee Hansard, 24 July 2012, p. 11.

3 Mr Craig Catchlove, Director, Corporate and Community Services, Alice Springs Town Council, Committee Hansard, 24 July 2012, pp. 11-13.

4 Mr Craig Catchlove, Director, Corporate and Community Services, Alice Springs Town Council, Committee Hansard, 24 July 2012, p, 16.

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community, and that in the six years since then, Mr Coffey has not received a single complaint about the quality of the fuel/

5.6 A different perspective was presented by the Northern Territory Chamber of Commerce. Ms Kay Bade stated that with low aromatic fuel, 'most mechanics ... say, "Don't use it in your car'". As a consequence, she believed that most businesses ended up using premium and therefore paying more for fuel.5 6

5.7 Evidence from one fuel retailer in remote central Australia typifies the nature of second-hand claims that the fuel may not be safe:

While your studies say that *Opal fuel * will not damage your engine, Pm not convinced, long term use may in fact have a detrimental effect on an engine, we have heard of many people in Alice Springs requiring fuel system repairs after using Opal fuel.7

5.8 The committee also received evidence suggesting that some motorists persist with the mistaken view that the fuel may present a problem for engines. Wiluna Traders, a retail outlet in South Australia, commented:

Yes the other store in Town does have Opal fuel, but because most

travelling people and some locals think that Opal is inferior, we secure a lot of Unleaded sales and none of that is for Sniffers.8

5.9 Representatives of CAYLUS made two points about the view that low aromatic fuel could damage car engines. The first point was that the evidence from the Northern Territory Chamber of Commerce demonstrated that there are limits to an education campaign because there still appeared to be a widespread belief in engine

damage within important sectors of the community despite evidence from motoring organisations, Alice Springs Town Council, Caltex Indervon, and Indigenous communities saying that they are unaware of a single substantiated example of engine damage from using low aromatic fuel. The second point was that the fear about the effects of low aromatic fuel upon engines is an indication of how fragile the current voluntary agreement could be.9 If Wiluna Traders' competitor, for example, accepted their rival's evidence that they were gaining fuel sales because the competitor was stocking low aromatic fuel, it would be a simple business decision to decide to reject low aromatic fuel in order to regain that market share.

5 Mr Gerard Coffey, CEO, Ngaanyatjarra Council, Committee Hansard, 25 June 2012, pp. 17≠ 18.

6 Ms Kay Eade, Executive Officer, Northern Territory Chamber of Commerce, Committee Hansard, 25 June 2012, p. 31.

7 Mr David Cox and Mrs Melissa Cox, Mt Dare Hotel, Correspondence received 13 July 2012, Senate Standing Committee on Community Affairs, Low Aromatic Fuel Bill 2012.

8 Mr Bryce Boxall, Wiluna Traders, Correspondence received 10 September 2012, Senate Standing Committee on Community Affairs, Low Aromatic Fuel Bill 2012.

9 Mr Blair McFarland and Mr Tristan Ray, CAYLUS, Committee Hansard, Wednesday 25 July 2012, pp. 40 *41.

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5.10 In this regard, the committee was concerned to hear that there are cases in which a retailer has ceased stocking low aromatic fuel, and the government has had only limited success in addressing these incidents.10 There are three sites where this remains an outstanding issue. DoHA explained what, to their knowledge, had happened in each case:

Name Reason for moving from stocking low aromatic fuel

Marla Roadhouse, South

Australia

This site received their last delivery of low aromatic fuel in December 2009. The General Manager has concerns regarding the suitability of low aromatic fuel in small engines stating that he has had to dispose of small engines in the past and believes this is a result of low aromatic fuel. The General Manager

has recently agreed to a teleconference with BP Australia (BP) technical support to discuss his concerns. The Department of Health and Ageing is also working with BP to develop a small engines fact sheet in an effort to address some of the perceived issues associated with low aromatic fuel in small engines.

Kings Canyon Resort, Northern T erritory

This site received their last delivery of low aromatic fuel in August 2011. The Resort Manager has concerns regarding the technical qualities of low aromatic fuel and its reliability and effectiveness. The Department arranged a teleconference between the site and BP technical support to discuss concerns. Despite this conversation the site decided to stop stocking low aromatic fuel. The Department attempted to meet with the Resort Manager in July 2012 to discuss his concerns further, however he was unavailable. The Department instead met with the Shell Australia (Shell) Regional Manager for the Northern Territory in Kings Canyon. As the Resort is a Shell branded site, the

Shell representative is going to discuss the supply of low aromatic fuel further with the Resort Manager.

Jervois Roadhouse, Northern Territory

This site received their last delivery of low aromatic fuel in August 2009. This Roadhouse has decided to stock PULP.

Source: Answer to question on notice from Department of Health and Ageing, received 14 September 2012.

5.11 The committee notes that in both cases where there is a claimed reason for discontinuing the sale of fuel, it relates to its fitness for use in engines.

Production capacity constraints for regular low aromatic fuel

5.12 BP Australia pointed out that the production of low aromatic fuel impacts on the production of other fuels such as PULP and diesel. In light of these considerations, BP Australia considered that:

10 Answer to question on notice #17 from Department of Health an Ageing, received 14 September 2012.

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Any mandated decision to rollout Opal fuel will need to be mindful of production and supply chain constraints (which may be considerable). Increases will need to be incremental, forecast well in advance and leverage

existing supply envelopes.

The Kwinana Refinery currently produces some 20 million litres per annum of Opal fuel, and could produce up to 40 million litres per annum at the current production subsidy. Production up to 100 million litres per annum is possible but would require review of the production subsidy.

5.13 The committee notes that the SAGES report to government found that a legislative scheme that prohibited the retail of RULP throughout relevant areas would require the production of almost 100 million litres of low aromatic fuel per annum.11 This figure represents a limit in existing infrastructure capacity. The committee accepts that there will need to be clear communication by Government regarding future production targets and subsidy levels.

Recommendation 7

5.14 The committee recommends that the Australian government conclude as soon as practical a subsidy review that covers production of up to 100 million litres per annum of low aromatic fuel

Distribution, storage and current subsidy schemes

5.15 The committee received evidence about the nature and extent of current subsidies for low aromatic fuel. Subsidies 'are paid to fuel producers to address the higher costs of production of fuel given that it is more highly refined and produced in smaller quantities'. The government also pays subsidies 'to distributors to reflect the additional costs of transporting the fuel, because the only storage places currently are in southern Australia.11 12

5.16 Indervon Pty Ltd is a Caltex franchise owned by Ngaanyatjarra Council that distributes low aromatic fuel through the Northern Territory and Western Australia. Indervon's view was that a storage facility at Port Hedland would be useful for

supplying communities in Western Australia.13

5.17 Indervon's business manager, Ben Clifton, noted that converting existing RULP bowsers to low aromatic fuel involved minimal cost, but that start-up costs for a new outlet were substantial. Mr Clifton estimated that a new 20,000 litre commercial

11 South Australian Centre for Economic Studies, Cost Benefit Analysis o f Legislation to Mandate the Supply o f Opal Fuel in Regions o f Australia, Adelaide and Flinders Universities, January 2010, Cost Benefit Analysis, p. vii.

12 Ms Sue Campion, Acting First Assistant Secretary, Mental Health and Drug Treatment Division, DoHA, Committee Hansard, 16 August 2012, pp. 10-11.

13 Mr Ben Clifton, Business Manager, Indervon Pty Ltd, Committee Hansard, 25 June 2012, p. 17.

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tank for the Tanami would cost $150,000, with the purchase of the fuel being an additional cost.14

5.18 Tilmouth Well Roadhouse alluded to the costs of storage at retail sites:

However, with monthly fuel deliveries only, the roadhouse has limited storage capacity and fuel tanks and therefore cannot facilitate another fuel type.

We have always maintained that we would be willing to sell Opal fuel if the Government was prepared to supply and install a bowser and tank to

accommodate it.15 16

5.19 The committee notes that the intention behind low aromatic fuel roll-out is to replace current aromatic fuel, not to be added as an additional option. Additional bowsers or tanks should not therefore be needed at existing sites.

5.20 Issues were also raised about the level of subsidy available to remote locations, particularly in Western Australia. Concern was expressed that, given the absence of a storage depot in Western Australia, the freight subsidies are not covering remote communities in central Western Australia and the

Recommendation 8

5.21 The committee recommends that the Australian government review distribution subsidies and their calculation for remote regions, particularly in Western Australia.

Commercial disadvantage

5.22 Another reason sometimes given by retailers for not converting to low aromatic fuel is that it may put then at a commercial disadvantage. Wiluna Traders, cited above, referred to their belief that they were gaining fuel sales because a local competitor was stocking low aromatic fuel. They also expressed concern about the risks to changing, if their rivals did not:

In our discussions about changing to Opal fuel we are quite willing to change and all we asked is that the Towns around us, also only had Opal fuel. Meekatharra is our main concern and as a Business decision, after all

cost of transporting fuel to Kimberley.

14 Mr Ben Clifton, Business Manager, Indervon Pty Ltd, Committee Hansard, 25 June 2012, p. 19.

15 Mr Roy Chisholm, Tilmouth Roadhouse Pty Ltd, Correspondence received 18 July 2012, Senate Standing Committee on Community Affairs, Low Aromatic Fuel Bill 2012.

16 Mr Ben Clifton, Business Manager, Indervon Pty Ltd, Committee Hansard, 25 June 2012, p. 17.

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1/3 of our Aboriginal population either live or go there every week to purchase Alcohol or food or do Banking business & possibly get Fuel.17

5.23 Mr Catchlove made the point that to the best of his knowledge, no fuel retailer had suffered any commercial loss as a result of the switch to Opal fuel within Alice Springs.18 The committee notes that the situation in Alice Springs demonstrates that no commercial disadvantage is incurred when a whole community or region switches to Opal. The committee acknowledges that the Commonwealth rollout of Opal is being done on a regional basis.

Concerns about substitution by sniffers

5.24 Ms Bade said that members of the business community were hesitant about the bill because they had concerns that if RULP was prohibited, sniffers would simply substitute RULP with other volatile substances.19

5.25 Dr Boffa, accepted that some level of substitution occurs. However, he noted that organisations such as CAYLUS had a positive impact on reducing the substitution of deodorants and paints.20 Furthermore, Dr Boffa pointed out that even if some

substitution does occur, the effects of other volatile substances are much less harmful than petrol:

Substitution will happen. The point I was making before is that I would not want government or anyone to think that, because substitution could happen, it is not worth mandating Opal, because it clearly is. Even without CAYLUS addressing substitution, and even if some of these young people went from petrol to paint or other things, it is nowhere near as harmful.21

Premium low aromatic fuel

5.26 Some retail outlets that were mentioned during the course of the inquiry stock premium unleaded petrol (PULP) either in addition to RULP, or as the only fuel they keep onsite. Like RULP, PULP is sniffable. However, unlike RULP, it cannot be

substituted using existing low aromatic fuel.

17 Mr Bryce Boxall, Wiluna Traders, Correspondence received 10 September 2012, Senate Standing Committee on Community Affairs, Low Aromatic Fuel Bill 2012.

18 Mr Craig Catchlove, Director, Coiporate and Community Services, Alice Springs Town Council, Committee Hansard, 24 July 2012, p. 16.

19 Ms Kay Bade, Executive Officer, Northern Territory Chamber of Commerce, Committee Hansard, 25 June 2012, p. 31.

20 Dr John Boffa, Public Health Medical Officer, Central Australian Aboriginal Congress, Committee Hansard, 24 July 2012, pp. 26, 29.

21 Dr John Boffa, Public Health Medical Officer, Central Australian Aboriginal Congress, Committee Hansard, 24 July 2012, p. 31.

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5.27 The general view heard by the committee is that sniffing of PULP is not a significant problem. This is at least in part because the overwhelming majority of vehicles used in central Australia run on either regular fuel or diesel, rather than PULP:

I think another factor there is that, to date, there have not been substantial issues with sniffing premium because, largely, people who sniff petrol are not buying it *they are stealing it; and because, largely, the cars that are around them are cars that use standard unleaded.22 23

5.28 The committee is aware of some evidence that RULP fuel consumption may be on the decline in general, in favour of PULP or diesel. Ben Clifton commented on what he was hearing in industry circles:

Unleaded is on the decline in general in the rest of the country and it is all heading towards premium fuels. A lot of that has got to do with the car manufacturers saying, 'You can only put premium 95 or premium 98 in our car,' let alone Opal being not up to the specification but regular unleaded.

The biggest emerging market in the next 10 to 15 years is biofuels. If anything was to come out of this BP would look to make a bio-blended low aromatic fuel. It seems regular unleaded is on the decline, as are unleaded car sales on the decline. It has been documented that diesel has taken over as the preferred choice of vehicle based around fuel economy.22

5.29 The committee asked DoHA about trends in the use of the fuel production subsidy. Noting a small decline in the number of litres for which a subsidy has been claimed, the Department commented:

The fuel industry has reported that in recent years there is a national trend towards the use of diesel and premium fuels rather than the 91 octane unleaded grade of petrol. In addition, the Department of Health and Ageing is also aware that anecdotally there has been a decrease in self-drive tourism which may also affect demand for Opal fuel.24

5.30 CAYLUS representatives indicated that they are aware that the rise of premium fuel could present an issue in future, though it is not yet doing so:

[A]s forecast, there is that discussion about there being less use of standard unleaded down the track. We have not yet seen any evidence of that and, as mentioned, we tend to focus our efforts on where the sniffing is now. Should that start to rear its head *and it sounds like it will, down the track *accepting that there may never be an Opal premium and we have this window of time where all the cars around that generation are standard unleaded cars, to us that is all the more reason we cannot spend five

22 Mr Tristan Ray, CAYLUS, Committee Hansard, Wednesday 25 July 2012, p. 44.

23 Mr Ben Clifton, Business Manager, Indervon Pty Ltd, Committee Hansard, 25 June 2012, p. 19.

24 Answer to question on notice #3 from Department of Health an Ageing, received 17 September 2012.

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years * or 30 years, as someone mentioned yesterday *or even two

negotiating this. We need to do this in a hurry and grab this window of

opportunity, and we think mandating legislation is going to give us the best chance of grabbing the window.25

5.31 In some locations, premium fuel is managed through locking of the bowsers, so that motorists have to get a key, to ensure it is being used only in car fuel tanks.26 The committee understands that a low aromatic fuel of equivalent octane to PULP already exists, though not for use in cars; it has no information on the costs or other factors involved.

Committee view

5.32 The committee was disappointed at the persistence of misinformation about the performance of low aromatic fuel in engines. It remains the case that no first-hand evidence has been provided of engine damage or failure that can be attributed to the use of this fuel, rather than to other factors such as fuel contamination, vehicle age and unrelated mechanical failures.

5.33 The persistence of such myths indicates that there may be limits to what can be achieved through education and awareness campaigns. It also suggests that the voluntary roll-out of low aromatic fuel may never be fully complete: there may always be a number of stakeholders who, for whatever reason, decline to stock the product

even if its safety can be assured, and no economic disadvantage to the retailer arises from its adoption.

5.34 Given that certain retailers have consistently opposed Opal, and that potential commercial disadvantage has been one of the reasons cited for opposing Opal, the committee considers that an approach based on the declaration of low aromatic fuel regions, as envisaged in the bill, may be the best way to ensure consistency of supply within the market for regular fuel and thereby prevent any potential commercial

disadvantage.

5.35 More generally, the evidence received by the committee endorses a regional approach to roll-out, attempting to ensure all retail outlets in an area switch over to the new fuel. The bill is not necessary in order to adopt the regional approach. On the contrary, that has been the tactic for the voluntary program, and as chapter three

showed, it has achieved considerable success. The bill would however make it easier to ensure regional adoption of low aromatic fuel in those known cases where individual outlets refuse to cooperate in the longer term.

5.36 RULP still accounts for the majority of the petrol market in remote regions of Australia. However, the increase in the numbers of cars that require premium fuel

25 Mr Tristan Ray, CAYLUS, Committee Hansard, Wednesday 25 July 2012, p. 44.

26 Answer to question on notice from Voyages Indigenous Tourism Australia, received 25 July 2012; Committee Hansard, 25 June 2012, p. 43.

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means that the current opportunity to tackle petrol sniffing based primarily on substituting Opal for RULP and having some restrictions on the sale of PULP may change if the current growth in premium fuel use continues.

5.37 If the complete substitution of RULP with low aromatic fuel in affected areas does not take place soon, governments risk firstly allowing the petrol sniffing culture to persist, and secondly, being faced with a larger problem in the foreseeable future when low aromatic alternatives to premium fuel might need to be developed in order

to try and contain the problem of petrol sniffing.

5.38 Proceeding with a legislative approach would, as the report to government by SAGES pointed out, provide significant benefits including reduced harm to individuals, families and communities, lower health costs and increased productivity, over and above the costs of implementing the legislation. If the use of premium fuel increases significantly in affected communities, the cost and complexity of the policy could increase. For this reason, the committee believes that timing is critical and that an opportunity to finish the job should be grasped.

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Chapter 6

A holistic approach to petrol sniffing 6.1 Both previous reports by the Community Affairs committee have emphasised the importance of a holistic approach to petrol sniffing that includes a comprehensive low aromatic fuel strategy, the sustained commitment to, and funding of, a range of community-based diversionary and development programs in Indigenous communities, effective policing strategies, and complementary health care strategies.

6.2 Concerns were raised by Mr Brian Gleeson about whether the current bill is a stand-alone measure or part of a 'multi-faceted approach to addressing petrol sniffing'. Mr Gleeson stated 'that effective efforts to address substance abuse must deal with both supply and demand issues with a heavy focus on investing in preventative measures'.1

6.3 The committee acknowledges that Senator Siewert has said that the bill needs to be part of a suite of measures, and that her second reading speech stated that low aromatic fuel is:

a vital element of a broader strategy * a comprehensive response which addresses the underlying causes of petrol sniffing, including a combination of supply, demand and harm minimisation measures. Such a response must include community management plans; youth services; effective and culturally sensitive policing; treatment and rehab services and information services. Many of these components already exist and are quite successful * but the missing piece of the puzzle is the power to regulate fuel,1 2

6.4 The committee notes below some of the elements of a comprehensive approach that were presented in evidence at the hearings into the bill, as well as some of the concerns that were raised about these complementary strategies.

Complementary health care strategies

Early childhood development programs

6.5 The nature of early childhood development was raised as a crucial indicator of future susceptibility to addiction in teenage children. Dr Boffa noted that several major studies have linked addiction, mental health problems and chronic disease to adverse outcomes in early childhood, particularly up to the age of three.3

1 Mr Brian Gleeson, Office of the Coordinator General for Remote Indigenous Services, Submission 3.

2 Senator Rachel Siewert, Low Aromatic Fuel Bill 2012, Second Reading Speech, Senate Hansard, 1 March 2012, p. 1363.

3 Dr John Boffa, Public Health Medical Officer, Central Australian Aboriginal Congress, Committee Hansard, 24 July 2012, p. 27.

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6.6 Dr Boffa said that good support programs for parents with young children 'can make a big difference even in quite alienating, adverse social environments', but these programs are 'not being implemented'. Yet, according to Dr Boffa, the implementation of early childhood support programs now could help prevent a generation of young people susceptible to addiction in a decade.4

Primary healthcare addiction sendees

6.7 Concerns were raised by Ms Ah Chee and Dr Boffa about the fragmentation of primary healthcare service delivery with respect to substance abuse. Dr Boffa said that the current level of funding was not necessarily the issue, but suggested instead that the problem lay with securing agreement on a service model that incorporated a permanent addiction service within each primary healthcare service:

We think the treatment of addictions needs to be a core part of primary healthcare service delivery across the board. Every health service has to have the capacity to treat young people and adults that are addicted to any substance. And it is the same treatment approach. Irrespective of the

substance, it is those three streams of care that Donna [Ah Chee] mentioned earlier. Pharmacotherapies, psychotherapy *often cognitive behaviour therapy *and social support and advocacy are what you need to do,

whether the addiction is paint, petrol, alcohol or marijuana, and I do not think we are very good at that. We fund separate programs for each drug, and then, even within those separate programs, the doctor is sitting over here in the clinic, there are other staff over there dealing with petrol and there are a few other people coming in to deal with some other drug. There

are multiple providers, and it is a privatised mess.

The money is there to do much, much better. If we funded according to need and we agreed on a service model, there is enough money now in the Northern Territory to make sure that every primary healthcare service has a permanent addiction service, and it is one of our bugbears that it has taken

so long. 5

Drug and Alcohol programs

6.8 Ongoing funding for effective complementary healthcare programs means that experienced people and programs are already on the ground ready to respond quickly when outbreaks of petrol sniffing occur, thereby minimising the scale of the sniffing outbreak.6 Makin' Tracks run by the National Indigenous Drug and Alcohol Committee (NIDAC) was a mobile drug and alcohol program that covered a large area of South, Central and Western Australia with a particular focus on rural and remote

4 Dr John Boffa, Public Health Medical Officer, Central Australian Aboriginal Congress, Committee Hansard, 24 July 2012, p. 27.

5 Dr John Boffa, Public Health Medical Officer, Central Australian Aboriginal Congress, Committee Hansard, 24 July 2012, p. 31.

6 Mr Scott Wilson, Co-deputy Chair, National Indigenous Drug and Alcohol Committee, Committee Hansard, 16 August 2012, p. 2.

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communities. Makin' Tracks ran from 1999 until 30 June 2012 and employed two 'highly skilled Aboriginal drug and alcohol workers' that both had a masters in Indigenous health. However, NIDAC had to terminate both workers because they did not succeed in the latest funding round.7

Mental health funding

6.9 Dr Brett Cowling noted several challenges relating to primary health care in the Ngaanyatjarra lands including the geographical size of the area and its remoteness, the absence of tri-state agreements to deal with large patient flows from WA to the NT, and the paucity of funding for mental health support and suicide prevention.8

6.10 Dr Cowling confirmed the evidence received from other groups such as NPY Women's Council that the majority of mental health clients in the Ngaanyatjarra lands would have had contact with some form of volatile substance.9

Case management

6.11 Dedicated resources for youth case management and family engagement that target the core issues underlying petrol sniffing are an important complement to the low aromatic fuel strategy. Ms Williamson expressed the view that intensive work with an identified core group is an ideal addition to youth diversionary activities.10 11 However, funding provision varies and case management is funded in the NT and SA, but not in WA.11

Youth programs

6.12 Youth diversionary programs based on sport and recreation and arts programs are available in the NT, SA and WA. Funding for the programs in the different states and territories comes from different bodies including DoHA, the AGD, and FaHCSIA.12

7 Mr Scott Wilson, Co-deputy Chair, National Indigenous Drug and Alcohol Committee, Committee Hansard, 16 August 2012, p. 3.

S Dr Brett Cowling, CEO, Ngaanyatjarra Health Service, Committee Hansard, 25 July 2012, p. 23.

9 Dr Brett Cowling, CEO, Ngaanyatjarra Health Service, Committee Hansard, 25 July 2012, p. 24.

10 Ms Christine Williamson, Manager, Youth program, NPY Women's Council, Committee Hansard, 25 July, pp. 2-3.

11 Ms Christine Williamson, Manager, Youth program, NPY Women *s Council, Committee Hansard, 25 July, p. 2; Dr Brett Cowling, CEO, Ngaanyatjarra Health Service, Committee Hansard, 25 July 2012, p. 24.

12 Ms Christine Williamson, Manager, Youth program, NPY Women's Council, Committee Hansard, 25 July, p. 2.

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6.13 Outbreaks of petrol sniffing were said to be more likely to occur in

communities with low levels of youth support and services.13 Short-term funding from the AGD currently allows CAYLUS to coordinate the provision of a youth worker as an emergency response to a petrol sniffing outbreak.14 15

6.14 Having a team of local Indigenous youth workers in each community is a good long term goal. This has occurred at Mount Theo over a long period of time, while at Titjikala Ms Lisa Sharman has recently become a youth team leader after five years as a youth worker. There are distinct advantages to having a team, particularly

one that includes some members from outside the community, because a team can operate more effectively across a number of families and across various cultural protocols.13

6.15 The Youth in Communities funding provided by FaHCSIA does not cover a number of regions in the Central Desert and Barkly Shires. Mr McFarland noted that there seems to be a disconnect between the 'commitment to youth service provision and the petrol sniffing strategies zone', and that perhaps the zoning concept needed revisiting if it imposed limits on which Shires could gain access to youth services.16

Partnerships between stakeholders

6.16 Mr Scott Wilson noted the importance of cooperation between the

Commonwealth and states because of the differences in responsibilities. He pointed out, however, that the states have responsibility for the delivery of many programs and services, and emphasised the importance of developing good stakeholder partnerships on the ground and that NIDAC would 'encourage working partnerships between community based patrols, law enforcement, and drug and alcohol treatment services' across all jurisdictions.17

Senator Claire Moore

Chair

13 Mr Blair McFarland, CAYLUS, Committee Hansard, 24 July 2012, p. 45; Mr Scott Wilson, Co-deputy Chair, National Indigenous Drug and Alcohol Committee, Committee Hansard, 16 August 2012, p. 4.

14 Mr Blair McFarland, CAYLUS, Committee Hansard, 24 July 2012, p. 45.

15 Mr Blair McFarland, CAYLUS, Committee Hansard, 24 July 2012, p. 46.

16 Mr Blair McFarland, CAYLUS, Committee Hansard, 24 July 2012, p. 47.

17 Mr Scott Wilson, Co-deputy Chair, National Indigenous Drug and Alcohol Committee, Committee Hansard, 16 August 2012, p. 5.

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Australian Greens

Minority report

Background

The Australian Greens introduced the Low Aromatic Fuel Bill because petrol sniffing is a serious health and community issue that requires action. For many years now, the main strategy has been to ask retailers to voluntarily replace regular unleaded petrol with low aromatic fuel in affected communities. This voluntary roll-out of low aromatic fuel has been very successful in many areas. As the committee notes in chapter three of its report, the many stakeholders who have cooperated in this achievement are to be congratulated.

However, it has been known for many years that the approach is failing in some areas. The Senate Community Affairs committee in 2009 recognised the need for a legislative response to target areas where the voluntary roll-out had not succeeded in preventing access to sniffable petrol.

At that time, the committee noted that some retailers were resisting the sale of low aromatic fuel. The committee's unanimous report stated:

Given the continuing resistance to Opal fuel by some retailers across all jurisdictions in central Australia, the committee recommends that the Commonwealth government complete, as a matter of priority, the necessary work to determine whether legislation is both possible and practicable.

If these retailers do not voluntarily agree to supply Opal within 6 months, and if it is established that there are no legal impediments to the

implementation of Commonwealth legislation, the Commonwealth government should immediately commence the drafting of legislation to mandate the supply of Opal fuel within the petrol sniffing strategy zone.

Six months passed and nothing was done. It is now over three years since that report, and petrol sniffing continues to plague some communities, while others have been freed of this scourge. The Australian Greens have introduced the current bill because the government failed to act on the committee's 2009 unanimous recommendation.

Constitutional powers

There are several constitutional powers upon which legislation to extend the availability of low aromatic fuel could rely. The committee's report draws on submissions by two Sydney-based organisations with legal expertise, the Gilbert + Tobin Centre of Public Law and Jumbunna Indigenous House of Learning, that recommend that the powers upon which the bill draws should be broadened to include the territories power and the races power.

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The Australian Greens understand the desire to ensure that the legislation is as comprehensive in scope as possible.

Nevertheless, both the territories and races powers are ones which the Australian Greens believe are ones that should be approached with caution, and used only when clearly necessary. We have regularly opposed the use of the territories power to impose top-down solutions on unwilling communities. The Australian Greens would want to consult with legal advisors and community representatives from affected areas in the Northern Territory and elsewhere, on their views about relying on other constitutional powers.

We also note that some complications may arise from the reliance on broader constitutional powers. Mr Brennan from the Gilbert + Tobin Centre of Public Law supported reliance on other powers, but nevertheless commented:

How far does the Parliament wish to go in regulating people or entities other than a trading coiporation? I submit that the Bill would move well beyond its present design if it was extended, for example, to *persons * and made referable to the Territories power and the races power. My

understanding of the purpose of legislating in relation to LAP is to

discourage retail fuel suppliers from resisting or subverting the rollout, based on evidence that a small number of suppliers have not responded positively to non-legislative encouragement. However, it is a very different thing to legislate generally for the criminalisation of conduct by individuals

in relation to fuel, an area which is in any case, I understand, already

regulated by legislation at the State and Territory level. In my submission it also complicates the issues surrounding reliance on the races power as well as raising questions about effectiveness, community acceptance and viable enforcement.

For those reasons, I recommend that if the constitutional basis to the Bill is extended to incoiporate reliance on the Territories power and the races power, the targets for legal regulation be confined to a commercial, business or retail setting...

This approach may entail attention to the definition of *supply * so as to confine it to a commercial supplier. Alternatively or in addition it may require careful wording of the entities referred to in the counterpart provisions to ss 8, 10 and 12 proposed above.1

The Australian Greens are willing to consider these issues. We note however that there was no definitive evidence received to indicate that either distributors, or retail outlets refusing to stock low aromatic fuel, were not corporations within the meaning of the bill. Thus we believe that the bill, as presently drafted, could be used to address

known cases of the refusal of retailers to stock low aromatic fuel.

1 Submission 1 7, p. 7.

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Other concerns with the drafting of the bill

The committee makes two further recommendations:

that the government consider whether legislation should define more narrowly the fuels to which the bill would apply, but accepts that there should be capacity to regulate the management of premium fuel in some circumstances

And:

that there be further examination of the wording of the explanatory memorandum, consultation and exemption clauses, to ensure that fuel manufacturers are properly included, and the bill does not have unintended consequences in the event of supply bottlenecks or disruption.

The Australian Greens would support consideration of amendments to either bill or explanatory memorandum to address these recommendations. In particular, we would want to ensure that manufacturers are fully included in consultation processes. BP Australia, as manufacturer of low aromatic fuel, has been a significant player in the

success of this initiative. We acknowledge their vital role, and would want to ensure their future engagement in actions targeting petrol sniffing.

*Continuing to consult' or a lack of commitment?

The fifth recommendation of the current report is

that the Australian Government continue to consult with the relevant state and territory governments on the possibility of national legislation to mandate the supply of low aromatic fuel to ensure that there is agreed and coordinated action to address petrol supply.

The Australian Greens note that formal consultation with state and territory governments on the possibility of national legislation did not commence until months after the bill was introduced into the Senate, and only days before the committee conducted its hearings in Alice Springs. This does not reflect 'continued consultations': it is a late and begrudging decision to commence them.

Having started late, the Commonwealth has also apparently pre-judged some of the issues. Minister Snowdon, in his letter to relevant state and territory ministers, stated: 'It is difficult to understand how Commonwealth legislation will have a greater impact

than local state or territory legislation'.2 The Australian Greens are unaware of any substantial evidence, either before the current inquiry or elsewhere, to support this perception. It also ignores the fact that community representatives, who the Minister says he wants to see 'acting together against petrol sniffing', are often the same people

supporting a national legislative response.

2 Additional information received: copies of letters from the Hon Warren Snowden MP, Minister for Indigenous Health, to state and territory ministers dated 20 July 2012.

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Furthermore, the bill recognises the importance of community engagement. The bill states that, in determining whether to designate a low aromatic fuel area, the Minister must have regard to 'whether people living in the area have expressed their concerns about sniffing fuel' and whether they 'have expressed the view that their wellbeing will be improved if the area is designated as a low aromatic fuel area'.3

The current government appears to lack a proper sense of urgency around petrol sniffing:

" It has been known for some time that there is a potential fuel supply

bottleneck that could affect the roll-out. However, it now appears that a new distribution facility in the Northern Territory will not be ready until mid-2013.

" The government has commissioned two evaluations relevant to the roll-out, with the main one being conducted over a time-frame in excess of three years. Furthermore, it was nearly a year after the Senate committee's 2009 report was tabled before that evaluation contract was even commenced.

" When the committee became aware that there was data being gathered by the Northern Territory about sniffing, but that the data was not being shared, it pursued this with the government, as the committee's report notes in chapter two.4 5 Incredibly, as of 18 September this year, the matter had still not been resolved.3

The government appears to be dragging its heels on both legislation and evaluation.

Conclusion

The bill introduced by the Australian Greens does not in itself cause anything to take place. It is enabling legislation. It gives the government the capacity, within a specified consultation framework, to resolve issues that are hampering the prevention

of petrol sniffing.

The committee's report states that 'any legislative action to mandate the supply of low aromatic fuel needs to consider storage and supply issues, complement voluntary roll≠ out, and prioritise designated petrol sniffing strategy zones'. The Australian Greens do not understand how these points are relevant to the recommendation that the bill not be passed:

" This bill does consider storage and supply issues: it requires the minister to consult on these matters, explicitly setting as one of the criteria: 'the availability of low aromatic fuel in relation to the area'.

3 Clause 14(3).

4 See also Proof Committee Hansard, 16 August 2012, p. 23.

5 Answer to question on notice #7 from FAHCSIA, received 18 September 2012.

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" This bill does complement voluntary roll-out. Where voluntary roll-out is succeeding, no action need be taken under the bill, and the voluntary scheme could remain in place.

" This bill can prioritise petrol sniffing strategy zones. The Minister, in consultation with the communities and other stakeholders affected by the legislation, determines what areas might be declared under the bill. These could well be the current strategy zones.

In short, on the very criteria that the committee identify in the report, the bill can and should proceed.

Recommendation 1

Subject to consideration of the issues identified in recommendations 1 to 4 in the committee's report, the bill should proceed.

Senator Rachel Siewert

Western Australia

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APPENDIX 1

Submissions and Additional Information received by the Committee

1 Mr Andrew Stojanovski

2 National Indigenous Drug and Alcohol Committee

3 Office of the Coordinator General for Remote Indigenous Services

4 Public Health Association of Australia (PHAA)

5 Aboriginal Peak Organisations Northern Territory

6 Office of The Children's Commissioner Northern Territory

7 NPY Women's Council

8 Central Australian Youth Link Up Service

9 Barkly Shire Council

10 Central Land Council

11 Warlpiri Youth Development Aboriginal Corporation (WYDAC)

12 Mr Trevor Edmond

13 Local Government Association of the NT

14 Jumbunna Indigenous House of Learning

15 BP Australia Pty Ltd

16 National Aboriginal Community Controlled Health Organisation (NACCHO)

17 Gilbert + Tobin Centre of Public Law

18 Alcohol and other Drugs Council of Australia

19 Australian Government

20 Shell Australia Limited

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Additional Information Received

1 Copies of letters from the Hon Warren Snowdon MP, Minister for Indigenous Health, to State and Territory Ministers dated 20 July 2012

2 Additional Information from Warlpiri Youth Development Aboriginal Corporation, received 29 July 2012

3 Tabled document from Mr David Hewitt, at Alice Springs public hearing 24 July 2012

4 Tabled document from Central Australian Youth Link Up Service (CAYLUS), at Alice Springs public hearing 24 July 2012

5 Tabled document from Central Australian Youth Link Up Service (CAYLUS), at Alice Springs public hearing 24 July 2012

6 Tabled document from Department of Families, Housing, Community Services and Indigenous Affairs, at Canberra public hearing 16 August 2012

7

Correction from the Department of Health and Ageing to evidence given at Canberra public hearing 16 August 2012

Correspondence

1 Correspondence from Warlpiri Youth Development Aboriginal Corporation (WYDAC), received 10 July 2012

2 Correspondence from Mt Dare Hotel, received 13 July 2012

3 Correspondence from Tilmouth Roadhouse Pty Ltd, received 18 July 2012

4 Correspondence from Wycliffe Well Holiday Park, received 18 July 2012

5 Correspondence from South Australian Minister for Mental Health and Substance Abuse, John Hill, received 27 August 2012

6 Correspondence from Wiluna Traders, received 10 September 2012

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Answers to Questions on Notice

1 Answer to question on notice from Voyages Indigenous Tourism Australia, received 25 July 2012

2 Answers to questions on notice from the Department of Education, Employment and Workplace Relations, received 10 September 2012

3 Answers to questions on notice from the Attorney-General's Department, received 10 September 2012

4 Answers to questions on notice numbers 4,5,6,8,10,13,14,18,19,20,23,24,25, 27,29 from the Department of Health and Ageing, received 13 September 2012

5 Answers to questions on notice numbers 17 and 30 from the Department of Health and Ageing, received 14 September 2012

6 Answers to questions on notice numbers 1,2,3,9,11,12,15,21,22,26,28 from the Department of Health and Ageing, received 17 September 2012

7 Answers to questions on notice from Department of Families, Housing, Community Services & Indigenous Affairs, received 18 September 2012

8 Answers to questions on notice number 16 from the Department of Health and Ageing, received 19 September 2012 9

9 Answer to question on notice number 7 from the Department of Health and Ageing, received 25 September 2012

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APPENDIX 2

Public Hearings

Tuesday, 24 July 2012

Chifley Resort, Gum free Room, Alice Springs

Witnesses

Alice Springs Town Council Mr Craig Catchlove, Director, Corporate and Community Services

Mr Willie Bookie, Lake Nash, Private capacity

Central Australian Aboriginal Congress Ms Domia Ah Chee, Acting Chief Executive Officer Dr John Boffa, Public Health Medical Officer

Central Australian Youth Link Up Service Mr Blair McFarland Mr Tristan Ray, Policy Project Manager

Mr David Hew itt, Private capacity

Mrs Margaret Hew itt, Private capacity

Lake Nash Night Patrol Mr George Anderson Mr James Billy

Papunya Mr Lance McDonald

Public Health Association of Australia Inc.

Adjunct Professor Michael Moore, Chief Executive Officer

Titjikala Ms Lisa Sharman, Community Leader and Youth Worker Mr Terry Simmons

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Warlpiri Youth Development Aboriginal Corporation Ms Susie Low, Chief Executive Officer Mr Eddie Robertson, Chairperson Mrs Lottie Robertson, Chairperson

Wednesday, 25 July 2012

Chifley Resort, Gumtree Room, Alice Springs

Witnesses

Central Australian Youth Link Up Service Mr Blair McFarland Mr Tristan Ray, Policy Project Manager

Chamber of Commerce NT Ms Kay Eade, Executive Officer

Gilbert and Tobin Centre of Public Law Mr Sean Brennan, Director Indigenous Legal Issues Project

Mrs Nerida Giles, Private capacity

Indervon Pty Ltd Mr Benjamin Clifton, Business Manager

Ngaanyatjarra Council Mr Gerard Coffey, Coordinator

Ngaanyatjarra Health Service Dr Brett Cowling, Chief Executive Officer

NPY Women's Council Ms Liza Balmer, Deputy Co-ordinator Ms Christine Williamson, Manager, Youth Program

Officer of the Northern Territory Children's Commissioner Dr Howard Bath, Children's Commissioner

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Thursday, 16 August 2012

Parliament House, Canberra

69

Witnesses

Attorney-General's Department Mr Daniel Abraham, Acting Assistant Secretary, Indigenous Policy and Service Delivery Branch

Mr Kym Duggan, First Assistant Secretary, Social Inclusion Division

Department of Families, Housing, Community Services and Indigenous Affairs Ms Caroline Edwards, Group Manager, Strategic Priorities and Land Group Mr Robert Ryan, Branch Manager, Remote Priorities Branch, Strategic Priorities and Land Group

Department of Health and Ageing Ms Sue Champion, Acting First Assistant Secretary, Mental Health and Drug Treatment Division

Ms Julie Mansour, Director, Mental Health and Drug Treatment Division Mr John Shevlin, Assistant Secretary, Mental Health and Drug Treatment Division

Department of Education Employment and Workplace Relations Ms Joanne Skinner, Acting Branch Manager, Youth and Inclusive Education Group

National Drug and Alcohol Committee Mrs Denise Gilchrist, Manager Mr Scott Wilson, Co-deputy chair

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APPENDIX 3

Analysis Regions and Key Towns

Region Key Towns

Gulf(Qld) Aurukun, Doomadgee, Momington Island, Mount Isa.

East Arnhem (NT) Groote Eylandt, Milingimbi Island, Nhulunbuy.

Jabiru and Katherine (NT) Jabiru, Katherine, Maningrida, Wadeye.

Darwin (NT) Adelaide River, Darwin, Howard Springs.

Kimberley (WA) Balgo, Broome, Halls Creek, Mulan.

Tennant Creek (NT) Tennant Creek, Barkly Homestead, Wauchope.

Northern Central Australia including Alice Springs (NT) Alice Springs, Ross River, Ti Tree, Tilmouth Well.

Western Central Australia (NT) Hermannsburg, Kintore, Rabbit Flat.

Southern Central Australia (NT) Docker River, Finke, Titjikala.

Anangu Pitjantjatjara and surrounds (SA)Coober Pedy, Marla, Mintabie.

Ngaanyatjarra Lands (WA) Cosmo Newbery, Laverton, Warburton.

Great Australian Bight (SA/WA) Kalgoorlie, Nundroo, Yalata.

Source: The South Australian Centre for Economic Studies, Cost Benefit Analysis of Legislation to Mandate the Supply of Opal Fuel in Regions of Australia , Report commissioned by the Australian Government Department of Health and Ageing, Adelaide and Flinders Universities, January 2010, p. viii, Table 1.

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The Senate

Community Affairs

Legislation Committee

National Gambling Reform Bill 2012

[Provisions]

National Gambling Reform (Related Matters) Bill (No. 1) 2012 [Provisions]

National Gambling Reform (Related Matters) Bill (No. 2) 2012 [Provisions]

November 2012

193

© Commonwealth of Australia 2012

ISBN 978-1-74229-733-0

Secretariat

Dr Ian Holland (Committee Secretary)

Mr Gerry Mclnally (Principal Research Officer)

Mr Jarrod Baker (Senior Research Officer)

Mr Patrick Hodder (Research Officer)

Ms Carol Stewart (Administrative Officer)

PO Box 6100 Parliament House Canberra ACT 2600

Phone: 02 6277 3515

Fax: 02 6277 5829

E-mail: coimnunity.affairs.sen@aph.gov.au Internet: www.aph.gov.au/senate/connnittee/senate_ca ii

This document was produced by the Senate Community Affairs Committee Secretariat and printed by the Senate Printing Unit, Parliament House, Canberra.

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194

MEMBERSHIP OF THE COMMITTEE

43rd Parliament

Members

Senator Claire Moore, Chair

Senator Rachel Siewert, Deputy Chair

Senator Ronald Boswell (til 22 November 2012)

Senator Carol Brown

Senator Mark Fumer

Senator Bridget McKenzie (from 22 November 2012)

Senator Dean Smith

Participating members for this inquiry

Senator Nick Xenophon

Queensland, ALP

Western Australia, AG

Queensland, NATS

Tasmania, ALP

Queensland, ALP

Victoria, NATS

Western Australia, LP

South Australia, IND

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iv

196

TABLE OF CONTENTS

Membership of committee.........................................................................................iii

Gambing Reform package......................................................................................... 1

Coalition Senators * Dissenting Report....................................................................3

Extension of Commonwealth influence .................................................................. 4

Timeframe for implementation and costs of implementation.................................5

Risk of non-compliance............................................................................................7

Matters concerning the use of ATMs.......................................................................8

Conclusion.................................................................................................................9

A Breach of Trust........................................................................................................11

Dissenting Report by Senator Nick Xenophon..........................................................11

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Gambing Reform package

On 20 November 2012, the Senate referred the gambling reform package of bills to the Community Affairs Legislation Committee, for inquiry and report by 27 November 2012. The bills were:

a. National Gambling Reform Bill 2012;

b. National Gambling Reform (Related Matters) Bill (No. 1) 2012; and

c. National Gambling Reform (Related Matters) Bill (No. 2) 2012.

On 30 September 2010 the Parliament agreed to establish a Joint Select Committee on Gambling Reform. One of the terms of reference of that committee is to examine 'any gambling-related legislation that has been tabled in either House, either as a first reading or exposure draft1.

On 1 November 2012, the gambling reform package of bills was introduced into the House of Representatives, and the Joint Select Committee accordingly commenced an inquiry into the bills. The Joint Select Committee wrote to stakeholders inviting

evidence, ultimately receiving and publishing 20 submissions. It held a public hearing on 13 November 2012, and tabled its report on 23 November 2012.

Upon receiving the reference, the Community Affairs Committee wrote to the Joint Select Committee, asking for an outline of the inquiiy process that it had followed. The Community Affairs Committee considered the Joint Select Committee's response, inquiry evidence, and reviewed the Joint Select Committee's report. The Community Affairs Committee concluded that the Joint Select Committee had canvassed all the major stakeholders and thoroughly reviewed the issues before it. Accordingly, the Community Affairs Committee did not make a separate call for submissions, and

endorses the conclusions and recommendations of the Joint Select Committee's report.

Senator Claire Moore

Chair

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COALITION SENATORS * DISSENTING REPORT

1.1 Coalition Senators are deeply concerned about the lack of time the

Government has permitted for proper consultation and review of this legislation.

1.2 Above all else, Coalition Senators add their voice to the calls of many others that legislation of such alleged significance to addressing problem gambling in our community deserves much greater scrutiny and community consultation. Coalition Senators believe a more thorough inquiry should be undertaken into the legislation.

1.3 Tins is significant legislation that, if implemented, will require cooperation from State and Territory Governments through the COAG process as well as the active participation of the gaming industry, the hospitality sector and other stakeholders.

1.4 Despite this, the Government has allowed insufficient time to examine the provisions of this legislation and has roundly ignored warnings from experienced bodies about potential pitfalls in the bill.

1.5 Likewise, those who expressed a concern about other potential negative consequences of this legislation, particularly the impact on employment in the hospitality sector, have not had their voices adequately heard.

1.6 The legislation was introduced to the House of Representatives on

1 November, with the subsequent Joint Select Committee on Gambling Reform given a mere week to take submissions and a further one week for hearings. Given the scope of this legislation and the dimensions of the challenge it seeks to address, this was far from adequate.

1.7 Similarly with the Senate process, the evidence clearly identifies that there has been very poor consultation on the proposed legislation by Government with all parties that have a responsibility in ensuring the ultimate success of national gaming reform legislation.

1.8 Coalition Senators support the concept of voluntary pre-commitment as one of a variety of tools for addressing the complex issue of problem gambling in Australia. However, we disagree with the approach as proposed by this Government and contained in its ill-conceived legislative proposals.

1.9 Coalition Senators do not believe the legislation should be supported in its current form.

1.10 Coalition Senators believe the Government *s national gaming reform legislation is far from perfect and can be characterised by its lack of appreciation for the concerns of State and Territory Governments; its decision to ignore important technical advice and suggested improvements from key industry participants; and a failure to provide much needed clarity and flexibility in the proposed legislative measures.

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1.11 The Productivity Commission itself stated that the issue of addressing problem gambling is a complex task for public policy and that coverage and design of regulation require particular care to ensure that the benefits exceed the costs, and that account is taken of what is often imperfect evidence.

1.12 At its core, the Government *s national gaming reform legislation has ignored the legitimate comments and suggested improvements to the legislation by those who will ultimately be judged as to the effectiveness of the proposed reforms.

1.13 Closer examination of the evidence suggests a number of initiatives should be supported that will significantly improve the effectiveness of the legislation.

1.14 Coalition Senators have identified six areas of concern with the Governments legislation, being the:

" Extension of Commonwealth influence over State and Territory jurisdictions;

" lack of time given to industry to effectively prepare for implementation of the new measures;

" cost of implementation;

" negative impact on industry and employment especially on smaller venues, those in regional and rural areas and those premises already experiencing financial hardship;

" the risk of widespread non-compliance; and

" matters associated with the use of ATMs.

Extension of Commonwealth influence

1.15 At the outset, Coalition Senators are concerned the legislation is a further over-reach of Commonwealth authority into a State responsibility.

1.16 As significant as the issue of problem gaming appears to be for many in the community, the seriousness of the issue does not necessarily require the accumulation of authority and responsibility in this area by the Commonwealth.

1.17 This point is best demonstrated by the evidence of respected Professor of Constitutional Law at The University of Sydney, Dr Anne Twomey, who stated:

... gambling is fundamentally a State matter that should be dealt with by State laws ... it would be more consistent with the federal system and with the principle of subsidiarity for such laws to be applied at the State level.1

1.18 The success of allowing and encouraging State based legislative responses to reducing the occurrence of problem gambling should be given greater attention.

1.19 This point is best demonstrated by the success of Western Australia in developing a unique and successful gaming regime where the low prevalence of

1 Dr Anne Twomey, Submission 1 to the Joint Select Committee on Gambling Reform's inquiry on the National Gambling Reform Bill 2012 and other related bills , p. [1],

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problem gambling has been attributed to permitting destination gaming and not having electronic gaming machines available in the wider community.

1.20 Coalition Senators are disappointed the COAG process was not fully utilised to ensure a more fulsome consultation process with State and Territory Governments to allow for earlier technical input into some of the design and implementation features of the proposed gaming reform legislation.

Timeframe for implementation and costs of implementation

1.21 The bill seeks to impose uniform timelines and conditions on all States and Territories. The evidence suggests the consequence of this arbitrary approach will be extensive compliance costs and administrative burdens.

1.22 The imposition of uniform timelines and conditions runs counter to the expert evidence of the Productivity Commission. It has stated:

Realistically, most State and Territory governments could not quickly implement a genuinely binding pre-commitment system. Full-scale implementation and advanced interfaces with the gambler would also

require all machines to have card readers (or other player identification devices) and software upgrades - a costly measure if required to be done quickly.2

1.23 Instead, the Productivity Commission proposed a staged approach involving partial pre-commitment and a trial of full pre-commitment.

1.24 Coalition Senators believe the imposition of a uniform timeline for implementation is a reckless rejection of the advice of the Productivity Commission and could undermine the overall success of the implementation of a voluntary pre≠ commitment regime.

1.25 Furthermore, technical evidence received by suppliers of gaming technology such as the Gaming Technologies Association (GTA) suggested the timelines for implementation could not be observed, not least because the term *"pre-commitment * has not been clearly defined.

1.26 The GTA stated:

...while everyone is talking about pre-commitment, no one in the

Government can explain what that means in practice for the design of the gaming machine and its software.3

1.27 It is important to note that GTA is the sole body of industry technical

expertise in Australia. On the issue of implementation its evidence is significant: 'GTA states categorically that the implementation timelines in the bill cannot met.'4

2 Productivity Commission, Gambling, vol. 1, Commonwealth of Australia, Canberra, 2010, p. 28.

3 Gaming Technologies Association Limited, Submission 10 to the Joint Select Committee on Gambling Reform's inquiry on the National Gambling Reform Bill 2012 and other related bills, p. [1].

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1.28 This evidence was reinforced by other industry participants. Aristocrat, a global company with more than sixty years' experience also provided evidence regarding the bill *s implementation timeframes and their associated costs. Aristocrat stated:

Any solution needs to be affordable and practical within the technological complexities and lead times of the industry. It must also have the support of both the players and operators if it is to succeed.

Upgrading these to ensure compliance with any new regulatory requirement would involve a huge investment and redirection of resources towards the development of the necessary mathematics models, artwork and feature sets. Aristocrat believes the implementation timeframes being discussed ...

are wholly unrealistic.4 5

1.29 To assist progress to full implementation as soon as possible, Coalition Senators suggest the bill include provision to grant recognition to all existing pre≠ commitment technology that meets the requirements proposed by the bill.

1.30 It is noted the bill currently does not recognise the significant investment already made by some premises to provide for pre-commitment systems. These systems should be recognised as soon as possible to extend some regulatory certainty to the gaming industry.

Recommendation 1

1.31 Coalition Senators recommend that to ensure full successful implementation, timelines for implementation are incorporated in the regulations and not in the legislation thus reflecting the pre-existing technical variations between jurisdictions.

Recommendation 2

1.32 Coalition Senators recommend that existing pre-commitment systems that already meet minimum requirements proposed in the bill be automatically recognised as compliant to assist in delivering regulatory certainty to some gaming premises.

Disproportionate negative impact on smaller venues, those in regional and rural areas and premises suffering economic stress

1.33 The bill has ignored the fact that many gaming premises do not have the capacity to implement and comply with the proposed regime. This is particularly the case for smaller venues, those in regional and rural areas and financially marginal premises.

4 Gaming Technologies Association Limited, Submission 10 to the Joint Select Committee on Gambling Reform's inquiry on the National Gambling Reform Bill 2012 and other related bills, P∑ [1 ]-5 Aristocrat, Submission 15 to the Joint Select Committee on Gambling Reform's inquiry on the

National Gambling Reform Bill 2012 and other related bills, p. 4.

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1.34 It is nonsense to require this category of gambling premises to uphold the same implementation timeframe and costs of city casinos, not least because of the obvious differential in the average annual revenue collected per machine.

1.35 Coalition Senators would like Government to more genuinely revisit the suggestion provided in the evidence by Clubs Australia that a venue *s average revenue per machine should be used when assessing issues around timeliness and cost of implementation of the new regime.

1.36 The positive effect of this approach has already been identified by the Productivity Commission. It stated:

...the Commission proposes an even slower pace of change for small

venues (mostly small regional clubs and pubs). Temporary exemptions for some measures are appropriate as their machines are often played at lower intensity and the lifecycle of their machines is longer than larger *cashed up * venues. Given these characteristics, the benefits from early reform in these small venues are lower, and the costs of achieving it are higher, justifying their (temporary) special treatment.6

1.37 The merit of revisiting this issue is most obvious when reviewing the revenue derived from gambling by varying forms of premises. Hotels derived 28 per cent of their revenue from gambling, clubs 61 per cent and casinos 78 per cent.

Recommendation 3

1.38 Coalition Senators recommend that Government undertake more targeted consultation to address the concerns of some gambling premises regarding the implementation of the bill *s measures. This consultation should specifically address the needs of smaller venues and those in regional and rural areas that may be more financially marginal operations, and make proposals to ameliorate the time and cost pressures of implementing measures proposed by the bill.

Risk of non-compliance

1.39 The evidence also suggests that speed at which the bill *s measures are to be introduced could inadvertently encourage widespread non-compliance with the new regime and undennine its overall effectiveness.

1.40 A wide cross section of evidence, from the Productivity Commission to the Australian Hotels Association to the manufacturers and suppliers of gaming technology, have pointed to the risk that a hasty, ill-conceived approach to implementation timeframes may have the unintended consequence of widespread non≠ compliance.

1.41 Clubs Australia noted the problem in its submission:

...the Government *s proposed three year implementation timeframe for venues with more than 20 poker machines fails to provide sufficient time

6 Productivity Commission, Gambling, vol. 1, Commonwealth of Australia, Canberra, 2010, p. 29.

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for clubs to absorb compliance costs and is likely to result in widespread non-compliance across the industry. Clubs Australia believes that feasible implementation timeframes must accommodate those states and territories that face the most burdensome compliance requirements. The Productivity Commission recommended that venues be given a minimum of six years to amortise the capital investment associated with implementing state linked pre-commitment.7

1.42 Coalition Senators encourage the Government to consider the seriousness to which its efforts to combat problem gambling are being undermined by its own belligerence on the timeframe for implementation.

Matters concerning the use of ATMs

1.43 Two important issues have been raised in the evidence concerning the use of ATMs.

1.44 The first is the proposed $250 per day ATM withdrawal limit and the second involves the use of self-exclusion ATMs.

1.45 It is important to note that evidence linking access to ATMs with problem gambling is not conclusive. Evidence from the ATM Industry Reference Group highlights an important historical fact:

In the past decade, the prevalence of problem gambling has decreased, yet the number of ATMs in gaming venues has dramatically increased over this period.8

1.46 Coalition Senators support industry calls for an extension of the lead time of not less than 12 months for the commencement date of the proposed daily ATM withdrawal limit. Coalition Senators recognise that this has been the consistent and long held view of the ATM Industry Reference Group since the national debate on gambling reform began in 2007.

1.47 It is accepted that implementation of the proposed change across all State and Territories in gaming venues across geographically diverse locations is subject to differing legislative and regulatory models. Furthermore, there will be a requirement to make technological arrangements that differentiate between ATMs across networks

and sites.

1.48 Coalition Senators believe the evidence supports raising the proposed daily withdrawal limit from an ATM from $250 to $400. Raising the proposed daily withdrawal limit to $400 would appear a fair mitigation against the adverse effect on food and beverage sales of hotel and clubs that may operate gaming premises.

1.49 Further consultation with all parties would also identify opportunities for enhanced use of self-exclusion ATMs by problem gamblers. Greater attention should

7 Clubs Australia, Submission 7 to the Joint Select Committee on Gambling Reform's inquiry on the National Gambling Reform Bill 2012 and other related bills, p. 5.

8 ATM Industry Reference Group, Submission 16 to the Joint Select Committee on Gambling Reform's inquiry on the National Gambling Reform Bill 2012 and other related bills, p. 4.

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be given to this initiative while ensuring it does not knowingly interfere or inconvenience other patrons.

1.50 Coalition Senators believe greater attention should be paid to the evidence of the ATM Industry Reference Group when considering approaches to limiting access to ATMs as a means of addressing problem gambling. In particular the proposal to raise the daily ATM withdrawal limit from $250 to $400, the use of self-exclusion as an alternate to the daily withdrawal limit and excluding ATMs in regional and remote locations from the daily limit proposal.

Recommendation 4

1.51 Coalition Senators recommend the daily withdrawal limit for ATMs be raised from $250 to $400 and that attention be given to use of self-exclusion mechanisms on ATMs for problem gamblers.

Conclusion

1.52 The package of bills is not supported by Coalition Senators.

1.53 In summary, Coalition Senator believe the bills need improvements to ensure the success of the problem gambling reform measures are not inadvertently undermined by unnecessarily speedy and prescriptive legislative measures.

1.54 These improvements could be more easily identified and endorsed by all parties if there had been a more appropriate and comprehensive consultation process.

1.55 Coalition Senators concur with the approach of the Productivity Commission which suggests problem gambling measures should seek to increase competition across some segments, expand and improve consumer choice and reduce the harms of problem gambling while seeking to maintain its entertainment value.

Recommendation 5

1.56 Coalition Senators recommend that the bills not be passed in their current form.

Senator Dean Smith Western Australia

Senator Bridget McKenzie Victoria

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A BREACH OF TRUST

Dissenting Report by Senator Nick Xenophon

1.1 Following the 2010 election, Prime Minister Julia Gillard announced on 2nd September 2010 she had struck a deal for poker machine reform with independent Member for

Dens ion Andrew Wilkie (a copy of which is attached). Those who have been fighting for real reform in this area have been waiting to see if the Government would live up to

its promise. With the introduction of this legislation, it is finally clear that they have not.

1.2 At the outset, Mr Wilkie pushed for the Government to commit to introducing $1 maximum bets and maximum average $120 hourly losses on poker machines, in line

with the Productivity Commission *s 2010 report.1 That unambiguous recommendation is set out as follows:

Recommendation 11.1

Governments should require that by 2012, all new EGMs include the capability of being played at a maximum intensity o f$ l per button push, with this being activated in 2016.

In 2016, all EGMs should be limited to a $1 bet, with an exemption until 2018 for venues with less than ten machines that also face significant implementation costs

relative to revenue.1 2

1.3 Instead, the Prime Minister offered to implement a mandatory pre-commitment scheme, which was a secondary recommendation from the Productivity Commission3, in

exchange for Mr Wilkie *s support to an ALP Government. In good faith, Mr Wilkie

agreed to this arrangement, and relied on the Prime Minister *s written word.

1.4 In response, Clubs Australia and the Australian Hotels Association launched what was

nothing more than a scare campaign against the reform, targeting Government members in marginal seats. Assertions from these organisations included the claim that people

would need a *licence to punt *, that the Government was going to track people *s

gambling activity, and that any type of gambling reform would see clubs no longer able

to make contributions to their local communities. I have attached a letter sent from Mr Wilkie and myself to all Members of Parliament in 2010, refuting those claims.

1 Productivity Commission, Gambling, vol. 1, Commonwealth of Australia, Canberra, 2010, p. 11.29 2 Ibid 3 Ibid, p. 10.44

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1.5 It is worth noting at this point that several studies, including one by the Productivity

Commission, have raised concerns about how much sporting clubs actually return to their local communities in exchange for the tax breaks they receive as not-for-profit

organisations. Most recently, a report commissioned by Uniting Care and undertaken by

Charles Livingstone, Chebiwot Kipsaina and Angela Rintoul of the School of Public

Health and Preventative Medicine at Monash University found that, on average, clubs in New South Wales returned the equivalent of only 1.3 per cent of their poker machine

losses to the communities they claim to support.4

1.6 However, in early 2012, the Government gave in to the pressure from the gambling industry, following the recruitment of the Member for Fisher, Peter Slipper MP, into the

Speaker *s Chair. No longer in need of Mr Wilkie *s support to stay in government, the ALP withdrew support for mandatory pre-commitment and instead said it would trial

mandatory pre-commitment in the Australian Capital Territory, and work towards implementing a form of voluntary pre-commitment across Australia. This was a blatant

breach of the agreement Mr Wilkie had entered into with the Prime Minister.

1.7 It is also important to note that the Opposition has sided with the industry throughout

this process. It did briefly consult with the intention of forming its own policy for

reform, but it appears this has not progressed.

1.8 Ultimately, this issue must be about problem gamblers and those directly affected. I

acknowledge the Committee for the time they have taken to speak to people who have been affected by addiction, either directly or indirectly. I thank the Committee for its

efforts in this area, because those discussions have played a vital part in informing

Committee members and putting a human face on this issue.

1.9 Sadly, however, what should have been about human suffering and a dangerous product

has now become all about vested interests. Instead of being a fight for what is right, it has become a fight for what is least offensive to those with the most money.

1.10 I wish to formally note that I consider both Mr Wilkie and the Australian Greens have

acted in good faith throughout this process. I believe them when they say this is only the first step and they will continue to fight for reform.

1.11 However, I am fundamentally unable to support this bill. I cannot support legislation

that is so qualified and conditional, and fraught with technical difficulties. It will also

not help problem gamblers in any significant way. Further, this legislation is a direct

4 Livingstone, C., Kipsaina, C., & Rintoul, A. Assessment of Poker Machine Expenditure and Community Benefit Claims in Selected Commonwealth Electoral Divisions, April 2012, p. 4. Available online: http://www.unitingcare.oi-g.au/images/stories/resources/120412 researchpokermachine expe nditure and_community_benefit.pdf

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result of a fundamental breach of trust on the part of the Government and, as is set out below, the Government cannot credibly explain its position.

1.12 Voluntary pre-commitment does not work. Formal studies have repeatedly shown that these systems are not effective at limiting losses.

1.13 A study into poker machine pre-commitment schemes prepared for the Nova Scotia Gaming Foundation in Canada found that voluntary schemes consistently failed because they relied on the willpower of players.3

1.14 The Nova Scotia study found that high risk players were unlikely to use a voluntary

system. It also found that high risk players would often continue to gamble beyond their limits unless they were locked out of play and that they lost more money than they intended "most times they play".5 6

1.15 The take-up of voluntary pre-commitment schemes has also been shown to be woeful.

In South Australia, Worldsmart Technology *s J-Card loyalty scheme allows a player to set self-imposed limits on time and spending. After reviewing Worldsmart *s scheme, the Productivity Commission reported:

* *Relatively few consumers have enabled their loyalty card for pre-commitment features. By mid-September, 233 o f just under 32,000 loyalty card members (or 0.7percent) had enabled pre-commitment options. *7

1.16 Ultimately, the idea of voluntary pre-commitment seems to be based on how

governments believe people should behave, rather than how they actually behave.

1.17 Beyond this fundamental issue, it is important to note that the bills also contain significant flaws and weaknesses. I will be moving a number of amendments in the

Senate to highlight these, but my main concerns relate to the structure of the pre≠ commitment systems and the lack of incentive for any party to establish such a system.

For example, the penalty provisions in the National Gambling Reform Bill 2012 contain an exemption for where *there is not an approved pre-commitment system for a State or

Territory *.8 A similar exemption applies to the gaming machine regulation levy, which

13

5 T Schellink, et al, 'Evaluating th e Impact of th e "My-PI ay" S ystem in N ova Scotia', Nova Scotia G aming

F ou n d atio n , O cto b er 2 0 1 0 ,

h ttp ://w w w .n sq amin q fo u n d atio n .o rg /u p lo ad s/Research /Tech n ical% 2 0 Rep o rt% 2 0 P h ase% 2 0 1 % 20M v-

Plav% 20Benchmark% 20Final% 20% 20 Focal_% 20lan% 2028% 20201 1 .p d f (accessed 1 9 N o v emb er 2 012).

6 T Schellink, et al, 'Evaluating th e imp act of the "My-PI ay" System in N ova Scotia', Nova Scotia G aming

Foundation, O cto b er 2 0 1 0 ,

h ttp ://w w w .n sq amin q fo u n d atio n .o rg /u p lo ad s/Research /Tech n ical% 2 0 Rep o rt% 2 0 P h ase% 2 0 1 % 2 0 M v -

Plav% 20Benchmark% 20Final% 20% 20. Focal % 20lan% 2028% 20201 1 .p d f (accessed 1 9 N o v emb er 2012).

7 Productivity Commission, Gambling, vol. 1, Commonwealth of Australia, Canberra, 2010, p. c2-3.

s National Gambling Reform Bill 2012, Section 58(2)

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is d esign ed to en cou rage co m p lia n ce am on g organ isation s that are n ot con stitu tion al

corporations.

1.18 Th e o n ly p la ce FA HC S IA cou ld p oin t to a requirem ent for a p re-com m itm en t sy stem to

ap p ly across a w h o le state or territory (and th erefore co v er all m ach in es in that state or

territory) is in th e Exp lan atory Mem oran d um to th e b ill.9 10 11 Further, the p en alty

p ro v isio n s to require co m p lia n ce d o not ap p ly if there is n o sy stem , so it is hard to see

h o w this leg isla tio n co u ld b e en forced at all.

1.19 Mo st im portantly, this leg isla tio n w ill not p rovid e im m ed iate assistan ce to p rob lem

gam b lers, or th o se at risk o f p rob lem gam b lin g. Th e fact that the volu n tary sy stem s are

n ot required ev en to h ave a d efau lt lo ss lim it is very p rob lem atic.

1.20 I w ou ld h ave b een m ore in clin ed to support this leg isla tio n if it had also m andated that

m ach in es at least sh ou ld b e cap ab le o f b ein g lim ited to $1 b ets and h ou rly lo sses o f

$ 1 2 0 , as recom m en d ed b y th e Prod u ctivity C o m m issio n .11 Th is m easu re w a s inten ded

to w ork in co n ju n ction w ith p re-com m itm en t, and is vital in red u cin g the in ten sity o f

p lay. Pok er m ach in es in A u stralia operate at an in cred ib ly h igh in ten sity, w h ich m an y

con sid er in creases their ad d ictiv en ess.

1.21 For a product that is tou ted as *en tertain m en t *, it seem s u n b elievab le that gam b lers can

lo se up to $ 1 ,2 0 0 an h o u r.12 Th is co st can hardly b e con sid ered a form o f recreation.

Lim itin g lo sses to $ 1 2 0 an h our w ill not o n ly red u ce the harm cau sed b y th ese

m ach in es, but bring th em m ore into line w ith an average p erso n *s id ea o f *recreational

sp en d *. The C o m m issio n *s research ind icates that so m e 88 per cen t o f recreational

p layers and about 80 per cen t o f all p layers n ever sp en d m ore than $1 p er b utton p u sh .13

1.22 N o t o n ly has the Govern m en t d isregarded this k ey reform , it refu ses to g iv e the reasons

for this p o licy p osition . Prev io u sly , it has cla im ed that th e co st o f im p lem en tation w ill

b e ex cessiv e, w ith the Min ister for Fa m ilies, C o m m u n ity S erv ices and In d igen ou s

A ffairs, the Hon. Jen n y Mack lin MP, claim in g in January this year that it w o u ld cost

$1.5 b illio n .14 Ho w ev er, d esp ite p rom isin g at that p ress con feren ce that th e D epartm ent

w o u ld release the b asis for th ose figu res, th ey h a v e n ev er b een p u b licised .

9 Ibid, Section 85(4)

10 Department for Families, Housing, Community Services and Indigenous Affairs, response to Question on Notice 26.

11 Productivity Commission, Gambling, vol. 1, Commonwealth of Australia, Canberra, 2010, p. 11.29 12 Ibid, p. 11.5

13 Ibid, p. 11.12 14 Press conference with Minister Macklin and the Prime Minister, 21 January 2012. Online: http://iennvmacklin.fahcsia.gov.au/node/1706

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1.23 Indeed, tw o Freedom o f Inform ation requ ests from m y o ffice failed to reveal the b asis

for that figure, and resulted in docu m en ts that w ere m ore redactions than inform ation.

1.24 Further, the Goverm nent has not exp lain ed w ith any cred ib ility h o w it w illin g to m ak e

the m ach in es m andatory p re-com m itm en t ready (at the *flick o f a sw itch *) but refu ses to

do the sam e for m axim u m $1 bets. The m axim u m $1 bets reform w as the prim ary

reform recom m en d ed b y the Prod u ctivity C o m m issio n , yet the Governm ent refu ses to

ev en h ave m ach in es capable o f supporting it.

1.25 I understand that this has b eco m e a d ifficu lt p o litica l issu e for the m ajor parties.

Tragically, it appears this has n o w b eco m e a *tick and flick * ex ercise for the

Govern m ent, ju st to get th e *p rob lem * o ff th e table.

1.26 How ever, this issu e w ill not go aw ay. Earlier this year, the Stop the Loss C oalition

released data from a su rvey b y A MR R esearch that revealed o ver 70 per cen t o f

A u stralian s w ant p oker m ach in e reform , and o n ly tw o in ten b eliev e no further action is

n eed ed . Further, over 80 per cent supported the introd uction o f m axim u m $1 bets,

w h ich rose to a m a ssiv e 90 per cent for in ten d in g A LP v o ters.15

1.27 To put this in con text, m ost A ustralians w o u ld k n ow o f so m eo n e w h o has b een a ffected

b y p ok er m ach in e addiction. The Prod u ctivity C o m m issio n figu res from 2 0 0 8 /0 9

indicate that over $10 b illio n a year is lo st on p oker m a ch in es,16 w ith problem gam blers

accou n tin g for b etw een 22 to 60 per cen t o f that figure, w ith 4 0 per cent the accep ted

average. A lso accord in g to the Prod u ctivity C o m m issio n , there are b etw een 8 0 ,0 0 0 and

160,000 adult A ustralians w h o are su fferin g from *sign ifican t p rob lem s w ith their

g a m b lin g *, w ith a further 2 3 0 ,0 0 0 to 3 5 0 ,0 0 0 at risk o f d ev elo p in g further p ro b lem s.17

On average, each o f th ese problem gam blers affects sev en other p eo p le.18

1.28 Too m an y A ustralians h ave first-hand k n o w led g e o f the d am age cau sed b y poker

m ach in es for th e issu e to disappear from the p o litica l radar, as perhaps both the

Govern m ent and the Op p osition hope.

1.29 U ltim ately, to use gam b lin g term in ology, in m y v iew th is legislation is a *lo ss d isgu ised

as a w in *. It w ill n ot do en ou gh to help ex istin g gam b lers or curb problem gam b lin g in

the future, and th ose m easures it d oes con tain m ay not b e en forceab le.

_______________________________________________________________________________________________ 15

b Stop the Loss Coalition. Online: https://www.droDbox.eom/s/wincvwlfslu5x933/STOP%20THE%20LQSS SURVEY%20REV EALS%20MAJORITY%20SUPPORT%20FOR%20STRONGER%20PQKER%20MACHINE %20REFQRM.pdf 16 Productivity Commission, Gambling, vol. 1, Commonwealth of Australia, Canberra, 2010, p. 2.1 17 Ibid, p. 5.1 18 Productivity Commission, Australia *s Gambling Industries, Commonwealth of Australia, Canberra,

1999, p. 2.

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1.30 To that end, I ca ll on th e Govern m en t and the Op p o sitio n to support a p leb iscite on the

issu e o f m a xim u m $1 b ets and $ 1 2 0 m axim u m average h ou rly lo sses to d eterm in e the

w ill o f the A u stralian p eo p le.

1.31 The Govern m en t has n ot ex p la in ed w h y it is w illin g to h a v e m ach in es m an d atory p re≠

com m itm en t ready b ut n ot m a xim u m $1 b et ready, w h ich is argu ab ly a cheaper,

sim p ler, and easier to exp lain op tion that w ill b e m ore effectiv e. The Go v ern m en t *s

failure to support th is m easu re as recom m en d ed b y th e Prod u ctivity C o m m issio n is, I

b eliev e, a cyn ica l act o f bad faith on their part.

Recommendation 1: That the bills not be passed unless amended to include provisions for the implementation of maximum $1 bets and hourly losses of $120 on all gaming machines in Australia.

Recommendation 2: That there be a plebiscite to be held at the next Federal Election to determine the will of the Australian people on the maximum $1 bet and $120 hourly loss recommendation of the Productivity Commission.

NICK XENOPHON

Independent Senator for South Australia

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The H on Julia Gillard & M r Andrew Wilkie ('the Parties') - Agreement

Between;

The Hon Julia Gillard MP Prime Minister

And

Mr Andrew Wilkie MP - elect MP Denison

1. Purpose

1.1 This agreement establishes a basis for stable and effective government.

1.2 Mr Wilkie will maintain his right to vote on all legislation according to the needs of his electorate and his conscience, but undertakes to involve himself in negotiations with the Government before exercising that right.

1.3 Mr Wilkie will vote with the Government to ensure supply.

1.4 Mr Wilkie will oppose any motion of no confidence in the Government unless the motion is moved or seconded by Mr Wilkie.

2. Principles

2.1 The Parties agree to work together to pursue the following principles:

a) transparent and accountable government;

b) improved process and integrity of parliament; and

c) policies which promote the national interest.

3. Promoting open and accountable government

3.1 The Parties will work together and with other parliamentarians to promote open and accountable government.

3.2 The Parties acknowledge specifically that reform proposals are being developed on:

a) Online registering of lobbyists

b) Establishing a Leaders' Debate Commission

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c) Funding of political parties and election campaigns

d) An Information Commissioner and public interest disclosure

e) Producing a Statement of Legislative Intent at the beginning of each Parliamentary Sitting to set out the Government's legislative program

f) Idoiding referenda during the 43rd Parliament or at the next election on Indigenous constitutional recognition and recognition of local government

3.3 The Parties agree to work collaboratively with each other and other parliamentarians on the reform proposals detailed in Clause 3.2.

3.4 The Parties agree to introduce legislation to protect whistle blowers and seek to have such legislation passed by 30 June 2011.

4. Improved processes and integrity of parliament

4.1 The Parties agree to work together and with other parliamentarians to implement parliamentary reforms.

4.2 The immediate reforms include:

a) Improving Question Time in the House of Representatives by setting fixed time limits for questions and answers with supplementary questions given at the discretion of the Speaker.

b) A fixed and fair allocation of questions for independent and minor party members with the first question no later than the 6th question in each Question Time.

c) At least 2.5 hours dedicated for debating and voting on prix *ate members * bills including a fixed and fair allocation of time for independents and minor party members in every full sitting week in both houses.

d) In addition to clause 4.2(c), dedicated time for voting on motions from independents and minor party members in every full sitting week in the House of Representatives.

e) The House of Representatives will debate and vote, during Government Business time, private senators' bills as passed by the Senate within 6 sitting days of the message being received by the House.

f) Amending the Standing Orders of both Houses so that there can be a recommittal of any vote within one sitting day where a member was absent from that vote due to inadvertence.

g) Agreeing that in the House of Representatives, *pairs' may be made by private arrangement during votes, similar to the arrangements which currently occur between Whips in the Senate or that another arrangement to facilitate Members who cannot attend due to ill health, family circumstances or performing Government or electorate business be agreed.

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h) Providing for 90 second statements and three minute electorate statements in the chamber and main committee.

i) Estabiishing a Code of Conduct and behavioural standards for Members of the House and Senate.

j) Reforming and strengthening parliamentary committees by reducing the number of general purpose committees, enhancing the role of cross-bench members, conducting an external review of committee staffing and establishing a new cross-party committee on staffing and appropriations.

4.3 Further reforms include:

a) Establishing within 12 months a Parliamentary Budget Office within the Parliamentary Library with the structure, resourcing and protocols being the subject of decision by a special committee of the Parliament which is truly representative of the Parliament.

b) Establishing within 12 months a Parliamentary Integrity Commissioner, supervised b)r the Privileges Committees from both houses to:

i. provide advice, administration and reporting on parliamentary entitlements to report to the Parliament;

ii. investigate and make recommendations to the Privileges Committees on individual investigations, to provide advice to parliamentarians on ethical issues; and

iii. uphold the Parliamentary Code of Conduct and to control and maintain the Government's lobbyists register.

5, Working relationships

5.1 The following arrangements will govern the working relationship between Mr Wilkie and Ms Giliard for the duration of the 43rd Parliament. These arrangements may be altered by mutual agreement.

a) When Parliament is in session, Ms Giliard will meet with Mr Wilkie each sitting week, principally to discuss and negotiate any planned legislation.

b) When Parliament is not in session, Ms Giliard, or her delegate, will meet with Mr Wilkie, or his delegate, at least once each fortnight, principally to discuss the upcoming legislative agenda.

c) The Government will endeavour to give at least six working days notice of the introduction of legislation to the House.

d) The Parties will ensure that the Government's budget is subject to an exchange of information and views between the Parties as follows:

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i. Mr Wilkie receiving economic and financial briefings from the Treasurer and the Minister for Finance and the Secretaries of the Departments of Treasury and Finance and Deregulation at regularly agreed times.

ii. Mr Wilkie having regular discussions with the Treasurer and the Minister for Finance on economic circumstances, fiscal strategy and budget preparation.

e) Should Mr Wilkie wish to propose new policies, these proposals may be formally submitted to the Office of the Prime Minister and forwarded to the appropriate Department and Minister for analysis. Where the proposal is likely to involve costs, it may also be sent to the Department of Treasury, and the Treasurer, and the Department of Finance and Deregulation, and the Minister for Finance, for costing.

i. The number of proposals that may be considered in this way is not limited in number but the Parties will ensure that the workload arising is reasonable.

ii. Every endeavour will be made to provide required advice within ten business days.

in. The Parties acknowledge that during the six week period leading up to the Federal Budget, the turnaround time may be greater than ten business days.

f) The Parties acknowledge that the above mechanism can be used to have any of Mr Wilkie's policies for the 2010 election considered.

g) Senior staff members of the Office of the Prime Minister and Mr Wilkie's Office will liaise to ensure that Mr Wilkie has access to Ministers, key public servants and Ms Gillard, as outlined above.

h) The Parties recognise that providing appropriate staffing support to Mr Wilkie requires urgent consideration and the Parties will work to ensure this task is undertaken at the earliest opportunity by the new cross-party committee on staffing and appropriations, which will be formed the first week that Parliament sits.

i. Until such time as the staffing review is complete, Mr Wilkie will be allocated two staff, both of which will be personal staff, in addition to Ms electorate office staff.

6, Royal Hobart Hospital

6,1 The Parties agree that the redevelopment of the Royal Hobart Hospital is of vital importance to the people of Tasmania.

6.2 The Labor Government will contribute $100 million upfront to enable the construction of the Women and Children's Hospital in Hobart to commence by the end of 2010.

6.3 The balance of the Labor Government's contribution to the E565 million redevelopment of the Royal Hobart Hospital announced during the Tasmanian State election campaign will be delivered from and following a new national round of the Health and Hospitals Fund

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6.4 Hie Labor Government will open a new round of applications to the Health and Hospitals Fund (HHF) for investments in major hospital projects, commencing 1 October 2010. All States and Territories, major hospitals, health research institutes and universities will be able to apply for funding to upgrade hospital infrastructure,

6.5 The Tasmanian Government will be invited to make an application to the HHF for up to $240 million (for a total contribution to the RHH redevelopment of $340m), to be used towards the $565 million redevelopment of the Royal Hobart Hospital.

6.6 The Parties acknowledge that the Tasmanian Government's application for funding for the Royal Hobart Hospital redevelopment will be assessed by the HHF Advisor}' Board, alongside other submissions which may be received from any other parties.

6.7 The Parties acknowledge that the Tasmanian Government's application for funding will need to meet the HHF evaluation criteria in order to receive funding, including that the proposal:

a) addresses national infrastructure priorities (including that it will contribute to meeting the Government's health reform targets);

b) demonstrates high benefits and effective use of resources;

c) efficiently addresses infrastructure needs; and

d) meets established standards in implementation and management.

6.8 The Parties acknowledge that the Tasmanian Government has previously applied for funding for the Royal Hobart Hospital from the HHF, but that circumstances surrounding the Tasmanian Government's plans for the Royal Hobart Hospitals have since changed:

a) In early 2009, the Tasmanian Government submitted an application to the HHF for $60 million for improvements to the existing Royal Hobart Hospital site.

b) Hie Parties acknowledge that the HHF Advisory Board recommended against the application at the time, on the grounds that the Tasmanian Government's business case could not stipulate what the longer term solution for the Royal Hobart Hospital would be.

c) The Parties acknowledge that the Tasmanian Government has undertaken further work on a long term solution to the Royal Hobart Hospital.

d) Hie Parties acknowledge that the Tasmanian Government is now in a position to make a submission to the HHF board for a long-term project solution to the Royal Hobart Hospital.

e) The Parties note a new call for applications to the HHF for major hospital projects was envisioned under Clause 13 (d) of the National Health and Hospitals Network Inter-governmental Agreement.

f) The Parties acknowledge that the new call for applications for the HHF funding is occurring in this time frame because of this agreement.

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g) The Parties acknowledge that all spending out of the Health and Hospitals Fund would need to be fully offset, consistent with the Government's fiscal rules.

6.9 The Parties acknowledge the unique circumstances of the Royal Hobart Hospital redevelopment, in that a small state like Tasmania does not have the financial capacity to invest in a major hospital infrastructure project without assistance from the Commonwealth Government.

6.10 The Par ties acknowledge that the National Health and Hospitals Network Agreement states that in addition to the Commonwealth's 60 per cent contribution to public hospital capital, the Commonwealth may also choose to invest in national priority areas, or in geographic or functional areas of identified capital under-investment, following consultation with relevant states or territories.

6.11 The Parties agree that this investment in the redevelopment of the Royal Hobart Hospital is intended to, and will lead to, the provision of extra hospital services in Tasmania.

6.12 The Parties agree that the National Health and Hospital Network agreement struck on 20 April 2010 (which would be terminated by a Coalition government) provides an unprecedented opportunity to permanently lock in more Commonwealth support for Tasmanian hospital and health services, and associated capital investments, into the future, including at a redeveloped Royal Hobart Hospital. This is because:

a) the redevelopment of the Royal Hobart Hospital will increase the Hospital's service capacity, attracting a greater Commonwealth contribution under its reforms to provide 60 per cent of the efficient price of each public hospital service;

b) the Commonwealth's contribution towards 60 per cent of capital funding is automatically linked to the number of services delivered, according to a pre≠ determined formula; and

c) accordingly, greater capacity for sendee throughput will also expand support to the Tasmanian Government for maintenance, ongoing refurbishment and other capital needs into the future, beyond any one-off contribution to the redevelopment of Royal Hobart Hospital.

7. Poker Machines

7.1 The Parties agree that problem gambling, especially through poker machines, is an important issue which must be addressed by all governments.

7.2 The Parties acknowledge that given gambling is predominantly regulated by State and Territory governments that addressing problem gambling requires co-operation between the Commonwealth and State and Territory Governments.

7.3 Tne Parties also acknowledge that the Commonwealth may be able to exercise greater legislative authority, if required, and agree to commission and receive no later than 1 February 2011 comprehensive legal advice about the Commonwealth's constitutional competence and prospects for successfully legislating in this area.

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7.4 The Parties also acknowledge and agree that any approach taken to address problem gambling must be evidence based and that the Government has commissioned and received a comprehensive Productivity Commission report on problem gambling.

7.5 The Government commits to adopt a Commonwealth Government position on gambling reform that will include the initial response released on 23 June 2010 to the Productivity Commission report and further commits to the following additional measures:

a) Implementing a best practice full pre-commitment scheme - that is uniform across ail States and Territories and machines - consistent with recommendations and findings of the Productivity Commission. Implementation of pre-commitment arrangements will commence in 2012, with the full pre commitment scheme commencing in 2014,

working with States and Territories to achieve this outcome. The full pre≠ commitment scheme will include the use of technology that is expected to have the best chance of reducing problem gambling.

b) Supporting the Productivity Commission recommendations in relation to poker machine dynamic warning displays and cost of play displays.

c) Implementing a $250 daily withdrawal limit for ATMs in venues with poker machines (excluding casinos).

7.6 The Parties agree that the Government should seek agreement of all jurisdictions to the reforms detailed in Clause 7.5, including a timetable, and then each jurisdiction would amend their own State and Territory laws to implement the agreement. Regulation of the gambling industry would remain a State and Territory responsibility.

7.7 In the absence of agreement with the Stales by 31 May 2011 on any of the reforms detailed in Clause 7.5, the Government will unilaterally seek to legislate in order to achieve these reforms, subject to the legal advice received in accordance with Clause 7.3. If required, the Government will support Commonwealth legislation through the Parliament by Budget 2012.

7.8 The Parties acknowledge the need for an evidence based approach addressing problem gambling.

a) Therefore, ihe Parlies agree that it is appropriate to commission an independent study of the impacts of a reduction in problem gambling on other revenue flows and individual spending behaviour to report by the end of 2011.

b) The Parties also agree that it is appropriate to task the Productivity Commission to conduct a thorough examination of the impact of the pre-commitment scheme on problem gambling from 2014 and to determine what further harm minimisation measures may be necessary.

c) The terms of reference for the Inquiry will be set by no later than 30 June 2013.

d) The Government agrees that it would rely on the Productivity Commission's further advice in determining further action on problem gambling.

7.9 The Government agrees that as soon as practicable, it will seek to establish a Select Committee of the Parliament to act in an advisory role to the Minister for Families, Housing, Community Services and Indigenous Affairs, the Assistant Treasurer and the Prime Minister

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to progress a national response to the full set of recommendations in the Productivity Commission report,

a) The Select Committee will include wide representation, including Mr Wilkie, Senator Xenophon and other parliamentarians.

b) Tire Select Committee will be advised on the legal advice obtained under Clause 7.3 and will be able to inquire into the reasoning that supports the legal advice and the consequences which flow from it.

c) The Select Committee will be able to provide direct input in to the Commonwealth position Ministers will take to the COAG Select Council on Gambling Reform.

d) The Select Committee will inform the design of the full pre-commitment scheme outlined at 7.5 (a).

e) The Select Committee will be able to provide direct input in to decision making about any Commonwealth legislation, the terms of reference of the further Productivity Commission process and the monitoring of the impact of the reforms detailed in Clause 7.5.

8. Administration

8.1 The agreement will come into effect on the day the Government is established and last for this parliamentary term of the Gillard Government.

Signed on this 2rd day of September 2010.

The Hon Julia Gil bird MP Prime Minister

Mr Andrew Wilkie MP -elect Member-Elect for Denison

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SENATOR NICK XENOPHON Independent Senator for South Australia Lvl 2 / 31 Ebenezer Place ADELAIDE SA 5000

Phone (EO): 08 8232 1144 Phone (PH): 02 6277 3551

ANDREW WILKIE MR Independent Member for Denison 188 Collins Street HOBART TAS 7000

Phone (EO): 03 6234 5255 Phone (PH): 02 6277 4766

Wednesday 29 September 2010

Dear Member,

RE: Response to claims by Clubs Australia regarding poker machine reform

You may be aware of recent reports that Clubs Australia Executive Director, Anthony Ball, has been leading what has been described as a highly organised campaign against poker machine reform.

We write to provide some background surrounding this issue, and to offer to meet with any Member or Senator who wishes to discuss this matter further.

We also seek to provide some additional information relating to unsubstantiated claims made by Clubs Australia in recent weeks.

On 23 June 2010, the Government released the Productivity Commission's Report into Gambling.

What the Productivity Commission said -The Productivity Commission concluded that "the number o f Australians categorised as 'problem gamblers' ranges around 115,000, with people categorised as at 'moderate risk' ranging around 280,000 "1.

The PC concluded that *most policy interest centres on people playing regularly on the 'pokies'. Around 600,000 Australians (4 percent o f the adult population) play at least weekly *1 2.

The PC also found that *around 15 percent of these regular players are 'problem gamblers'," and "their share of total spending on machines is estimated to range around 40 percent "3

1 Productivity Commission Inquiry Report into Gambling 2010, pg 2 2 Productivity Commission Inquiry Report into Gambling 2010, pg 2 3 Productivity Commission Inquiry Report into Gambling 2010, pg 2

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This is because, as the report pointed out, using an average poker machine, *it is easy to lose $1200 or more in one hour'*.

The PC concluded that the social cost of problem gambling was "at least $4.7 billion dollars a year'4 5 6.

What the PC report recommended -As a result the PC made a number of recommendations, including:

* That the amount of cash that players can feed into machines at any one time should be limited to $20 (currently it is up to $10,000);

* There are strong grounds to lower the bet limits to $1 per button push, instead of the current $5 and $10;

* Shutdown periods for gaming in hotels and clubs should commence earlier and be of longer duration;

* There should be a progressive move over the next six years to implement full 'pre-commitment' systems which allow players to set binding limits on their losses;

* There should be increased 'warning displays' and 'cost of play displays' on poker machines which tell individual gamblers how much they will lose in a set time period if they continue playing at their current level of gambling intensity; and,

* ATMs should be relocated away from gaming floors and a $250 daily cash withdrawal limit should be imposed.6

What the Government has agreed to -The Gillard Government has agreed to implement "a best practice full pre-commitment scheme - that is uniform across all States and Territories and machines - consistent with the recommendations and findings o f the Productivity Commission "7.

Implementation will commence in 2012 with the full pre-commitment scheme commencing in 2014. The Government also agreed to support the recommendations of the Productivity Commission in relation to warning displays and cost of play displays on machines and to implement a $250 daily withdrawal limit for ATM with poker machines (excluding casinos).

The Federal Government acknowleged that these reforms should initially be attempted through consensus with the States and Territories, but if this consensus could not be reached by 31 May 2011 the Federal Government agreed to act unilaterally, passing the necessary legislation by Budget 2012.

4 Productivity Commission Inquiry Report into Gambling 2010, pg 2 5 Productivity Commission Inquiry Report into Gambling 2010, pg 2 6 Productivity Commission inquiry Report into Gambling 2010, pg 2 and 3 7 The Hon Julia Gillard & Mr Andrew Wilkie Agreement, 02 September 2010

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What Clubs Australia has been claiming -Clubs Australia has frequently made the claim that only 0.5 percent of Australians are problem gamblers.

According to the Productivity Commission statistics like this are "misleading'*.

As the Productivity Commission concluded:

*It is common to report prevalence as a proportion o f the adult population, but this can be misleading for policy purposes, given that most people do not gamble regularly or on gambling forms that present significant difficulties .,a

The PC report is unambiguous. Of those who regularly play poker machines, "15 percent are 'problem gamblers' and they are responsible for 40 percent of the money lost * *8 9 10 *.

Clubs Australia has also claimed that a system of mandatory pre-commitment for all poker machines would be "completely untested'*1. Again, this is not true.

There have been results on full pre-commitment in Norway, as well as studies of optional pre≠ commitment in Nova Scotia. There are also optional pre-commitment schemes being tested here in Australia, in Queensland and South Australia. Clubs Australia would be aware of these studies.

Clubs Australia Executive Director, Anthony Ball, has also claimed that problem gambling is higher in Tasmania where ATMs are banned from venues, compared with other states such as NSW, Queensland and South Australia.

What he has failed to point out is that there are two recognised categories of problem gamblers; 'problem gamblers' and 'those at moderate risk of becoming a problem gambler'.

The number of people at 'moderate risk of becoming a problem gambler' is higher in all of those states and if you count those groups together, Tasmania actually has the lowest rate of problem gambling.

Clubs Australia has also argued that a full pre-commitment scheme would be an unfair burden on recreational gamblers. They offer no evidence to support this claim.

However, there is significant evidence to prove that this claim is simply wrong.

For example, a Victorian Government study titled *Impact of Gambling Machine Characteristics on Play Behaviour of Recreational Gamblers, released in September 2009 concluded:

*From a recreational gambler perspective, it is quite apparent that the new policy decision of compulsory limits during play is not likely to adversely impact the gaming experience of recreational gamblers, as most indicate that this wou/d only very marginally affect their play. Similarly, the same applies to the concept of having a compulsory set limit past a certain expenditure point - this was not seen as a major issue for recreational gamblers and hardly affected play enjoyment. "12

8 Productivity Commission Inquiry Report into Gambling 2010, pg 2 9 Productivity Commission Inquiry Report into Gambling 2010, pg 2 10 Productivity Commission Inquiry Report into Gambling 2010, pg 2 Media Release: Clubs Australia, 02 September 2010

12 Impact of Gambling Machine Characteristics on Play Behaviour of Recreational Gamblers, September 2009

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Clubs NSW has also claimed that if their machines were made safer they would have to reduce their community contributions.

Much is made by Club Australia about these contributions, but the Productivity Commission has questioned the value of these claimed contributions, making the following conclusions:

* Many of the benefits go to members, not the public at large; and,

* The gross value of social contributions by clubs is likely to be significantly less than the support governments provide to clubs through tax and other concessions.13 14

In other words, according to the PC, the clubs industry takes much more tax breaks than it gives back in community benefits.

Clubs Australia has also tried to argue that any move to make machines safer would cost jobs. The Productivity Commission also rejects this.

It says:

"Many people are employed in the gambling industry. However, most are highly employable and would be in demand in other parts o f the service sector were the gambling industry to contract. In that sense, the gambling industries do not create net employment benefits because they divert employment from one part o f the economy to the other.,M

A report commissioned by the Tasmanian Department of Treasury and prepared by the South Australian Centre for Economic Studies found that:

"Gambling facilities employed an average o f 3.2 persons per $1 million in gambling income, 8.3 persons per $1 million income from sales of liquor and other beverages and 20 persons pe r $1 million income from meal and food sales. "15

Clubs Australia Executive Director, Anthony Bail, has rejected the PC's claim that around 40 percent of poker machine revenue comes from problem gamblers.

In a submission to the New South Wales Independent Pricing and Regulatory Tribunal, Clubs Australia argued that the figure was 23.1 percent.16 They offered no evidence to support this.

But even if we did accept this seemingly arbitrary figure, the clubs industry is conceding that at least $800 million in poker machine losses in their own clubs is coming from problem gamblers - people who shouldn *t be on their machines.

Mr Ball is on the record as saying he supports "people *s right to set their own limits on what they can afford to spend gam bling *17.

A full pre-commitment system, as proposed by the Government, will achieve this.

We would respectfully suggest to Mr Ball and clubs around Australia that if they truly support a person *s right to set their own limits, they must also support a person's right to set those limits before they enter a venue and for those limits to be binding.

13 Productivity Commission Inquiry Report into Gambling 2010, pg 6.1 14 Productivity Commission Inquiry Report into Gambling 2010, pg 6.1 15 South Australian Centre for Economic Studies, June 2008, pg vii

16 Clubs Australia Submission to Productivity Commission Inquiry Report into Gambling 2010, pg 92 17 Media Release: Clubs Australia, 02 September 2010

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We would once again like to extend our offer to meet with any Member or Senator who would like to discuss this issue further.

Alternatively we are happy to work towards making ourselves available to sit in on any meetings you may be having with clubs, if you see value in that option.

Please do not hesitate to contact our offices if you have any queries at all.

Yours Sincerely,

NICK XENOPHON Independent Senator for South Australia ANDREW WILKIE Independent Member for Denison

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The Senate

Economics

Legislation Committee

Clean Energy Amendment (International Emissions Trading and Other Measures) Bill

2012 [Provisions] and related bills

October 2012

229

© Commonwealth of Australia 2012

ISBN 978-1-74229-710-1

Printed by the Senate Printing Unit, Parliament House, Canberra.

230

Senate Economics Legislation Committee

Members

Senator Mark Bishop, Chair Senator David Bushby, Deputy Chair Senator Doug Cameron Senator Alan Eggleston Senator Anne Urquhart Senator Nick Xenophon

Participating Member(s) participating in this inquiry

Senator Simon Birmingham

Secretariat

Mr Tim Bryant, Secretary Dr Sean Turner, Principal Research Officer Mr Joshua See, Research Officer Ms Kate Campbell, Administrative Officer

PO Box 6100 Parliament House Canberra ACT 2600 Ph: 02 6277 3540 Fax: 02 6277 5719 E-mail: economics.sen@aph.gov.au Internet: http://www.aph.gov.au/senate/committee/economics

Western Australia, ALP Tasmania, LP New South Wales, ALP Western Australia, LP

Tasmania, ALP South Australia, IND

South Australia, LP

ctte/index.htm

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TABLE OF CONTENTS

Membership of Committee................................................ iii

Abbreviations and glossary.....................................................................................vii

Chapter 1: Introduction and conduct of the inquiry..........................................1

Conduct of the inquiry..............................................................................................1

Policy context and background to this inquiry.......................................................2

History of the policy of linking ............ ..................................................................3

Removal of the price floor and introduction of 'designated limits'........................4

Natural gas provisions............................................................................................. 4

Consultation..............................................................................................................5

Chapter 2: Overview of the bills...............................................................................7

Overview of each bill...............................................................................................7

Effects of the amendments.....................................................................................10

Scrutiny of Bills Committee...................................................................................13

Chapter 3: Linking carbon markets.....................................................................15

Promoting lowest cost abatement...........................................................................15

Strengthening the Australian carbon market and enhancing risk management capacity................................................................................................................... 16

Building on the global push to price carbon and tackle climate change ............. 17

Business and industry issues regarding competitiveness......................................18

Assessing the strength and integrity of the EU ETS.............................................19

The impact of linkage on Australian policy control..............................................20

Fungibility of European Union Aviation Allowances (EUAAs) ......................... 22 Committee view......................................................................................................22

Chapter 4: Amendments to the price floor and access to international permits...........................................................................................................................23

Removal of the price floor.....................................................................................23

The limit on Kyoto units and 'designated limits'...................................................24

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26 The credibility of Kyoto units and the 12.5 per cent limit

Impact on revenue...................................................................................................27

The role of the cap in determining Australia's aggregate emissions .................... 28

Committee view.......................................................................................................29

Chapter 5: Natural gas and concluding comments ........................................... 31

Concerns expressed by industry groups.................................................................31

Committee view....................................................................................................... 33

Concluding comments.............................................................................................33

Coalition Senators * Dissenting Report .................................................................. 35

APPENDIX 1: Submissions and additional information received ................ 49

APPENDIX 2: Public hearings and witnesses ..................................................... 51

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Abbreviations and glossary

AFMA Australian Financial Markets Association

AIGN Australian Industry Greenhouse Network

AIIU Australian-issued international unit

ANREU Australian National Registry of Emissions Units

ANREU Act Australian National Registry of Emissions Units

2011

APPEA Australian Petroleum Production & Exploration

Association

COM Clean Development Mechanism

CE Act Clean Energy Act 2011

CER Certified Emission Reduction unit

Clean Energy Amendment Bills The package of bills including the Clean Energy Amendment (International Emissions Trading and Other Measures) Bill 2012; the Excise Tariff Amendment (Per tonne Carbon Price Equivalent) Bill 2012; the Ozone Protection and Synthetic Greenhouse Gas (Import Levy) Amendment (Per- tonne Carbon Price Equivalent) Bill 2012; the Ozone Protection and Synthetic Greenhouse Gas

(Manufacture Levy) Amendment (Per tonne Carbon Price Equivalent) Bill 2012; the Clean Energy (Charges-Excise) Amendment Bill 2012; the Clean Energy (Charges-Customs) Amendment Bill 2012; and the Clean Energy (Unit Issue

Charge-Auctions) Amendment Bill 2012.

Clean Energy Legislative Package The package of Acts including the Clean Energy Act 2011; the Clean Energy (Consequential

Amendments) Act 2011; the Clean Energy Regulator Act 2011; the Climate Change Authority Act 2011; the Clean Energy (Unit Shortfall Charge-General) Act 2011; the Clean Energy

(Unit Issue Charge-General) Act 2011; the Clean Energy (Charges-Excise) Act 2011; the Clean

vii 235

Energy (International Unit Surrender Charge) Act 2011; the Ozone Protection and Synthetic Greenhouse Gas (Manufacture Levy) Amendment Act 2011; the Ozone Protection and Synthetic

Greenhouse Gas (Import Levy) Amendment Act 2011; the Fuel Tax Legislation Amendment (Clean Energy) Act 2011; the Excise Tariff Legislation Amendment (Clean Energy) Act 2011; the

Customs Tariff Amendment (Clean Energy) Act 2011; and the Clean Energy Legislation Amendment Act 2012.

CPM Carbon Pricing Mechanism

DCCEE Department of Climate Change and Energy

Efficiency

EUAA European Union Aviation Allowance

EU European Union

EUETS European Union Emissions Trading System

European allowance unitAn allowance within the meaning of the European Union Greenhouse Gas Emission Allowance Trading Directive , but excluding allowances issued in respect of aviation activities

GSTGoods and Services Tax

ICAA Institute of Chartered Accountants Australia

IETA international Emissions Trading Association

Kyoto unitAn Assigned Amount Unit, a Certified Emission Reduction unit, an Emission Reduction Unit, a Removal Unit or a prescribed unit issued in accordance with the Kyoto rules

MRV Measurement, reporting and verification

NGER Act National Greenhouse and Energy Reporting Act

2007

RIS Regulation Impact Statement

Chapter 1

Introduction and conduct of the Inquiry 1.1 On 20 September 2012, the Senate jointly referred the provisions of the following bills for inquiry and report by 29 October 2012:

" Clean Energy Amendment (International Emissions Trading and Other Measures) Bill 2012;

" Clean Energy (Charges-Excise) Amendment Bill 2012;

" Clean Energy (Charges-Customs) Amendment Bill 2012;

" Excise Tariff Amendment (Per-tonne Carbon Price Equivalent) Bill 2012;

" Ozone Protection and Synthetic Greenhouse Gas (Import Levy) Amendment (Per-tonne Carbon Price Equivalent) Bill 2012;

" Ozone Protection and Synthetic Greenhouse Gas (Manufacture Levy) Amendment (Per-tonne Carbon Price Equivalent) Bill 2012; and

" Clean Energy (Unit Issue Charge-Auctions) Amendment Bill 2012.

1.2 These bills (the Clean Energy Amendment Bills) make amendments to the Clean Energy Act 2011 (CE Act) and other acts which cover:

" arrangements to link Australia's carbon pricing mechanism (CPM) to other countries' trading schemes, including the European Union (EU) Emissions Trading System (ETS);

" the removal of the price floor and the repeal of the Clean Energy (International Unit Surrender Charge) Act 2011 ;

" consequential changes to the equivalent carbon pricing of liquid fuels and synthetic greenhouse gases;

" the streamlining of arrangements for relinquished carbon units;

" limits on issue of carbon units at auction without a pollution cap in place;

" the content of measurement determinations under the National Greenhouse and Energy Reporting Act 2007 (NGER Act);

" the treatment of natural gas under the CPM; and

" the treatment of Goods and Services Tax (GST) joint venture operators in the Opt-in Scheme.

Conduct of the inquiry

1.3 The committee advertised the inquiry on its website and wrote directly to a range of individuals and organisations inviting written submissions. The committee received 19 submissions, which are listed at Appendix 1.

1.4 The committee also held a public hearing in Canberra on 19 October 2012. Witnesses representing seven submissions appeared at the hearing, along with

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representatives of the Department of Climate Change and Energy Efficiency (DCCEE) and the Treasury. The names of the witnesses who appeared at the hearing are at Appendix 2.

1.5 The committee thanks all who contributed to the inquiry.

Policy context and background to this inquiry

1.6 The Clean Energy Amendment Bills build on the Clean Energy Legislative Package passed by the Senate on 8 November 2011, which implemented the CPM and provided (inter alia) that this mechanism could be linked to credible overseas emissions trading schemes.1

1.7 The primary purpose of the Clean Energy Amendment Bills is to facilitate the first of these links, between the CPM and the EU ETS, and to allow for other links with overseas schemes in the future. This follows discussions between the Australian Government and European Commission that commenced following agreement to terms of reference on 5 December 2011, and a subsequent announcement by the two parties on 28 August 2012 that the two schemes would be linked from 1 July 2015.1 2

1.8 The EU ETS is a mandatory emissions trading scheme covering all 27 EU member states, along with Norway, Iceland and Liechtenstein. The EU ETS began operation in 2005, and is the world's largest emissions trading scheme, covering some 11,000 facilities.

1.9 An interim one-way link between the CPM and the EU ETS will operate from 1 July 2015, allowing Australian liable entities to use European allowance units for compliance under the CPM. Under this arrangement, Australian liable entities will be able to meet up to 12.5 per cent of their liabilities using Kyoto units, and up to 50 per cent using European allowance units (taking into account the use of Kyoto units) during the interim linking period.

1.10 Linking the CPM to the EU ETS will provide Australian liable entities with access to a broader range of credible, low-cost abatement from an established market, and help facilitate the transition from a fixed carbon price to a market-based emissions trading scheme.3

1.11 A full two-way link, by means of the mutual recognition of carbon units between the two systems, is to commence no later than 1 July 2018. As the

Explanatory Memorandum notes, the full linking of the two schemes will 'allow

1 The Explanatory Memorandum for the Clean Energy Bill 2011 is available at: http://www.comlaw.gov.au/Details/C201 IB00166/Explanatorv%20Memorandum/Text.

2 The Hon Greg Combet MP, 'Australia and Europe strengthen collaboration on carbon markets,' 5 December 2011, http://www.climatechange.gov.au/en/minister/greg-combet/2012/media- releases/March/mr20120329b.aspx; and the Hon Greg Combet MP, 'Australia and European Commission agree on a pathway towards fully linking emissions trading systems,' 28 August 2012, http://www.clirnatechange.gov.au/minister/greg-cornbet/2012/media- releases/August/JMR-20120828.aspx.

3 Replacement Explanatory Memorandum, p. 7.

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companies that operate in both Europe and Australia to access units which are fully transferable in both jurisdictions, making compliance simpler and making it easier to manage emissions across operations.'4

History of the policy of linking

1.12 The policy of linking an Australian carbon pricing mechanism to credible international schemes is not new. On the contrary, the concept of international linkages has, as DCCEE told the committee, been:

...a continuous feature of government policy on emissions trading since the development of the Shergold Report [the report of the Prime Ministerial Task Group on Emissions Trading] and the former Coalition government's response to it in Australia's climate change policy in July 2007.5

1.13 The Shergold Report stated that, as *a supporter of the development of a global system, Australia has a direct interest in promoting links between comparable [carbon pricing] schemes. * On this basis, the report contended that any Australian trading scheme *should be designed to enhance the scope for links, both formal and

informal, with as many different systems as possible. *6

1.14 The Shergold Report further suggested that Australian recognition of credible foreign permits or credits:

...will assist in seeking out abatement opportunities at least cost and optimising the timing of exploitation. Any of these links will provide a conduit for the transmission of emission abatement prices and serve to enhance efficiency globally.7

1.15 The Carbon Pollution Reduction Scheme was also designed, as the green paper that preceded it explained, *to link with other schemes overseas to contribute to a global solution and to ensure that Australian businesses can access low-cost pollution reduction. *8

4 Replacement Explanatory Memorandum, Clean Energy Amendment Bills, p.7. Available at http://www.comlaw.gov.au/Details/C201 lB00166/Explanatory%20Memorandum/Text.

5 Mr James White, Proof Committee Hansard , 19 October 2012, p. 36. The Shergold Report (more properly known as the Report of the Task Group on Emissions Trading), was prepared by the Prime Ministerial Task Group on Emissions Trading. Australian Government, Report of the Task Group on Emissions Trading (hereafter Shergold Report) (2007), http://pandora.nla.gov.au/pan/79623/20071127-

1411/www.dpmc.gov.au/publications/emissions/index.html.

6 Shergold Report, p. 111.

7 Shergold Report, p. 112.

8 Australian Government, Carbon Pollution Reduction Scheme: Green Paper (July 2008), pp. 23-24, http://www.climatechange.gov.au/--/media/publications/green-paper/greenpaper.ashx. Also see Australian Government, Carbon Pollution Reduction Scheme: Australia's Low Pollution Future: White Paper (December 2008), vol. 1, chapter 11,

http://www.climatechange. gov.au/publications/cprs/white- paper/~/media/publications/cprs/CPRS-report-vol 1 .pdf.

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1.16 The Clean Energy Future Plan also anticipated that Australia *s carbon price would be linked to international carbon markets from the start of the flexible price period, allowing *reductions in carbon pollution to be pursued globally at lowest cost. *9 As DCCEE told the committee, the fact that discussions proceeded faster than originally expected was, in part, a reflection of *European confidence in the arrangements we have proposed or now implemented here in Australia. *10 11

Removal of the price floor and introduction of 'designated limits'

1.17 The CPM, as currently legislated, was to include a price floor of $ 15 per tonne commencing on 1 July 2015, rising at four per cent in real terms each year. The price floor was intended to 'reduce the risk of sharp downward movements in the price, which could undermine long-term investment in clean technologies.'11

1.18 The Clean Energy Legislative Package made provision for the price floor by combining auction reserve prices for domestic carbon permits and a surrender charge for international units.

1.19 As part of the linking arrangement with the EU, the Australian Government agreed to remove the price floor and restrict the quantity of eligible Kyoto units that liable entities could use to discharge their carbon pricing liabilities. The Government will also have the capacity to introduce additional or alternative quantitative limits on the use of eligible international emissions units, through the use of a 'designated limit' mechanism.12

1.20 The Explanatory Memorandum suggests these amendments are necessary to facilitate the convergence of EU and Australian carbon prices. As a result, from 1 July 2015, Australia's carbon price will 'reflect that of our second largest trading bloc, and be consistent with at least 30 other countries - including the United Kingdom, France and Germany.'13

Natural gas provisions

1.21 The bills also make amendments relating to the treatment of natural gas under the Australian scheme. These amendments are unrelated to the link to the EU ETS.

1.22 The Explanatory Memorandum states that the:

...natural gas industry involves a complex array of supply aiTangements which can change over time. Currently, the natural gas provisions cater for the vast majority of supply arrangements in use. In order for the CPM to

9 Australian Government, Securing a Clean Energy Future: The Australian Government *s Climate Change Plan (2011), p. 30, http://www.cleanenergyfuture.gov.au/wp- content/uploads/2012/06/CleanEnergyPlan-20120628-3 .pdf.

10 Mr James White, DCCEE, Proof Committee Hansard, p. 36.

11 Australian Government, Securing a Clean Energy Future: The Australian Government's Climate Change Plan (2011), p. 27.

12 Replacement Explanatory Memorandum, p. 7.

13 Replacement Explanatory Memorandum, p. 7.

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maintain effective and complete coverage of natural gas, a power will be included in the CE Act to allow regulations to be made to provide for coverage of alternative natural gas arrangements. This will help maintain competitive neutrality by supporting the complete coverage of natural gas under the CPM over time.14

Consultation

1.23 The Government invited comments on the drafts of the Clean Energy Amendment Bills following the announcement of the linking with the EU ETS on 28 August 2012, and indicated that the legislation would be introduced in the 2012 Spring Parliamentary sitting period. Several public consultation sessions and technical working group discussions were held, including in Sydney, Melbourne and Canberra, and 20 submissions on the draft legislation were received.

1.24 DCCEE informed the committee that it also had approximately 25 direct discussions with interested stakeholders regarding the bills. Some of these stakeholders may have also participated in formal consultations arranged by DCCEE.15

1.25 The House Standing Committee on Economics also conducted an inquiry on the Clean Energy Amendment Bills.

14 Replacement Explanatory Memorandum, p. 52.

15 DCCEE, Response to Questions on Notice, 19 October 2012, Question No. 1.

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Chapter 2

Overview of the bills

2.1 As noted at the start of the preceding chapter, the Clean Energy Amendment Bills make amendments to the CE Act and other acts.

2.2 The most important of these amendments, and those which submissions focused on, relate to:

" the linking of Australia's CPM with other countries' trading schemes,

including the EU ETS;

" the removal of the floor price and surrender charges on international permits;

" a new limit of 12.5 per cent on the Kyoto units that Australian liable entities can use to meet their liability, and a new concept of 'designated limit' that can be applied in the future to specific types of carbon permits and offsets; and

" the treatment of natural gas under the CPM.

2.3 In addition, the Clean Energy Amendment Bills also cover:

" consequential changes to the equivalent carbon pricing of liquid fuels and synthetic greenhouse gases;

" the streamlining of arrangements for relinquished carbon units;

" limits on the issue of carbon units at auction without a pollution cap in place;

" the content of measurement determinations under the NGER Act; and

" the treatment of GST joint venture operators in the Opt-in Scheme.

2.4 After a brief overview of each of the bills, the provisions in the legislation relating to all of the above matters are addressed, under the heading, 'Effects of the Amendments'.

Overview of each bill

Clean Energy Amendment (International Emissions Trading and Other Measures) Bill 2012

2.5 The Clean Energy Amendment (International Emissions Trading and Other Measures) Bill 2012 amends the CE Act to facilitate the linking of the CPM to the EU ETS; remove the floor price; limit the use of Kyoto units to 12.5 per cent of an entity's liability; provide for the calculation of an equivalent carbon price that reflects liable entities' cost under the arrangement; limit advance auctions of carbon permits to no more than three years in advance of their vintage year, while increasing the volume of advanced auctioned carbon units; change the treatment of relinquished carbon units; and allow regulations to be made relating to the treatment of natural gas.

2.6 The bill also amends the Australian National Registry of Emissions Units Act 2011 (ANREU Act) to enable European allowance units to be held in the Australian National Registry of Emissions Units (ANREU), and used for compliance purposes

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under the CE Act; and in the event that a direct link with a foreign emissions trading scheme, including the EU ETS, is not possible, to enable the Clean Energy Regulator to issue Australian-issued international units (AIIUs) which correspond to foreign emissions units withdrawn from circulation within the relevant foreign registry, and which can be used for compliance purposes under the CE Act.

2.7 The bill also amends the Fuel Tax Act 2006 to adjust the calculation of the equivalent carbon price to ensure that it remains equivalent to the effective carbon price for liable entities under the CPM.

2.8 The bill also repeals the Clean Energy (International Unit Surrender Charge) Act 2011, which imposed a surrender charge on eligible international emissions units.

2.9 Finally, the bill amends the NGER Act to provide the Minister for Climate Change and Energy Efficiency the power to determine the measurement methods to adjust the amounts of designated fuels for the purpose of ascertaining potential greenhouse gas emissions.

2.10 Sections 1, 2 and 3 commence on the date the bill receives the Royal Assent. Schedule 1, Parts 1 and 3, which make general amendments to the CE Act and the ANREU Act, will commence on the day after the bill receives the Royal Assent.

2.11 Schedule 1, Part 2, which makes amendments relating the fuel to the CE Act and the NGER Act, will commence on 1 July 2013. The amendments to the NGER Act made by this Part will apply to reports relating to the 2012-13 financial year and all subsequent years.

Clean Energy (Charges * Excise) Amendment Bill 2012

2.12 The Clean Energy (Charges *Excise) Amendment Bill 2012 will amend the Clean Energy (Charges *Excise) Act 2011 by repealing the definition of 'eligible international emissions units' and the methods by which the units are auctioned, providing that the reserve price is removed. It also provides for the creation of a legislative instrument by a Minister to set a 'reserve charge amount1 to a specified auction.

2.13 The first schedule in the bill will take effect at the same time as Part 1 of Schedule 1 to the Clean Energy Amendment (International Emissions Trading and Other Measures) Act 2012. The remainder of the bill will take effect the day the Act receives the Royal Assent.

Clean Energy (Charges * Customs) Amendment Bill 2012

2.14 The Clean Energy (Charges *Customs) Amendment Bill 2012 will amend the Clean Energy Charges *Customs) Act 2011 consistent with the provisions of the Clean Energy (Charges *Excise) Amendment Bill 2012.

2.15 The first schedule in the bill will take effect at the same time as Part 1 of Schedule 1 to the Clean Energy Amendment (International Emissions Trading and Other Measures) Act 2012. The remainder of the bill will take effect the day the Act receives the Royal Assent.

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Excise Tariff Amendment (Per-tonne Carbon Price Equivalent) Bill 2012

2.16 The Excise Tariff Amendment (Per-tonne Carbon Price Equivalent) Bill 2012 will change the treatment of the liquid fuels, by applying the new 'per-tonne carbon price equivalent' in place of the average carbon unit auction price.

2.17 Schedule 1 takes effect immediately after the commencement of Part 1 of Schedule 1 to the Clean Energy Amendment (International Emissions Trading and Other Measures) Act 2012. All other sections of the bill take effect the day that Act receives the Royal Assent.

Ozone Protection and Synthetic Greenhouse Gas (Import Levy) Amendment (Per- tonne Carbon Price Equivalent) Bill 2012

2.18 The Ozone Protection and Synthetic Greenhouse Gas (Import Levy) Amendment (Per-tonne Carbon Price Equivalent) Bill 2012 amends the Synthetic Greenhouse Gas (Import Levy) Act 1995 to repeal the definition of 'benchmark average auction charge' and introduce a 'per-tonne carbon price equivalent'. It provides that the per-tonne carbon equivalent is applied to the import of synthetic greenhouse

gas.

2.19 The first schedule will take effect immediately after the commencement of Part 1 of Schedule 1 to the Clean Energy Amendment (International Emissions Trading and Other Measures) Act 2012. All other sections of the bill take effect the day that Act receives the Royal Assent.

Ozone Protection and Synthetic Greenhouse Gas (Manufacture Levy) Amendment (Per-tonne Carbon Price Equivalent) Bill 2012

2.20 The Ozone Protection and Synthetic Greenhouse Gas (Manufacture Levy) Amendment (Per-tonne Carbon Price Equivalent) Bill 2012 amends the Ozone Protection and Synthetic Greenhouse Gas (Manufacture Levy) Act 1995 to repeal the definition of 'benchmark average auction charge' and introduce a 'per-tonne carbon

price equivalent'. It provides that the per-tonne carbon equivalent is applied to the manufacture of synthetic greenhouse gas.

2.21 The first schedule will take effect immediately after the commencement of Part 1 of Schedule 1 to the Clean Energy Amendment (International Emissions Trading and Other Measures) Act 2012. All other sections of the bill take effect the day that Act receives the Royal Assent.

Clean Energy (Unit Issue Charge * Auctions) Amendment Bill 2012

2.22 The Clean Energy (Unit Issue Charge *Auctions) Amendment Bill 2012 amends the Clean Energy (Unit Issue Charge * Auctions) Act 2011 to remove the requirement for a minimum auction reserve price.

2.23 Schedule 1 takes effect at the same time as Part 1 of Schedule 1 to the Clean Energy Amendment (International Emissions Trading and Other Measures) Act 2012. The remainder of the bill takes effect the day that Act receives the Royal Assent.

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Effects of the amendments

Linkage of Australian CPMto international markets, including EU ETS

2.24 The Clean Energy Amendment Bills allow for the linking of the Australian carbon pricing mechanism with overseas emissions trading schemes, including the EU ETS.

2.25 The CE Act currently allows eligible international emissions units to be surrendered to meet liabilities under the CPM after 1 July 2015. Some units issued under the Kyoto Protocol have already been defined as eligible international emissions units in the CE Act. Under the linking arrangement with the EU ETS, European allowance units will be able to be used for compliance under the CPM from 1 July 2015.

2.26 As the Explanatory Memorandum explains, amendments to the ANREU Act ensure that links to other countries' schemes can occur, even in the event it is not possible to implement a direct registry link. Indirect linking may be given effect by the Government issuing AIIUs to holders of an ANREU account, where these units are backed by foreign emissions units. The Government has also been given powers to open and operate an overseas registry account and to alter the way in which AIIUs are managed in the ANREU as circumstances require.1

Removal of the floor price and the surrender charge on international units

2.27 Under the linked arrangement, the floor price will no longer operate in the first three years of the flexible price period. As the Explanatory Memorandum explains, this will facilitate the convergence of the EU and Australian carbon prices.1 2

2.28 This will be achieved by removing the requirement for a minimum auction reserve price for the years 2015-16, 2016-17 and 2017-18; and by removing the requirement for a surrender charge on eligible international emissions units by repealing the Clean Energy (International Unit Surrender Charge) Act 2011.

2.29 The Minister may still determine an auction 'reserve charge amount' to entrance price discovery at auctions. The Explanatory Memorandum explains that:

...a reserve charge amount can serve to counteract bid shading (that is, bidding an amount which is less than the amount that the participant believes that the unit is worth) or collusion by auction participants by minimising the potential gains from such behaviour. When there is a

secondary market for carbon units, the reserve charge will ensure that the clearing price of the auction does not significantly diverge from the secondary market price.3

1 Replacement Explanatory Memorandum, p. 9.

2 Replacement Explanatory Memorandum, p. 9.

3 Replacement Explanatory Memorandum, p. 21.

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Kyoto units and 'designated limits'

2.30 As the Explanatory Memorandum explains:

...the Government may, through regulations, introduce additional or alternative quantitative limits on the use of eligible international emissions units. This will provide the Government the flexibility to respond to changing international circumstances as needed.4 5

2.31 In order to support a stable market and investment environment, the Government has also made a commitment to provide at least three years * notice ahead of the introduction of a new designated limit or change to an existing limit. 3

The treatment of natural gas

2.32 The Explanatory Memorandum indicates that under the current provisions of the CE Act concerning emissions embodied in natural gas, there is the potential for certain commercial arrangements to lead to situations where liability may not be captured. It further states that the amendments proposed will provide greater flexibility around how the supply and use of natural gas is treated under the CE Act, and 'help to maintain competitive neutrality by supporting the complete coverage of natural gas under the carbon pricing mechanism.'6

2.33 Under the existing CE Act, liability applies to a liable entity for a facility where natural gas is used. Alternatively, the liability can apply for a natural gas supplier when they supply natural gas to a person and the natural gas is withdrawn from a natural gas pipeline for use. The CE Act also enables the Obligation Transfer Number to apportion liability between suppliers and end users.

2.34 The amendments provide that where the existing direct emitter or natural gas supply provisions of the CE Act do not apply, regulations may set out specific circumstances in which liability would arise for a supplier or end user of natural gas. Own-use notifications' and 'follow-up notifications' are mechanisms intended to enable suppliers to identify when the gas they supply is applied to a person's use. This will allow suppliers to determine where liability applies. Regulations may modify the definition of supply for the purpose of the new provisions and determine when supply occurs to facilitate their application.

2.35 The Explanatory Memorandum explains that these provisions:

...are intended to apply to specific commercial arrangements in the natural gas sector. In general, they are not intended to cover natural gas used at large gas consuming facilities as liability would ultimately arise from the direct emitter provisions. Furthermore, the amendments are not intended to apply to small end users, such as households, as they obtain gas through

4 Replacement Explanatory Memorandum, p. 8.

5 Replacement Explanatory Memorandum, p. 8.

6 Replacement Explanatory Memorandum, p. 10.

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generic supply arrangements which give rise to liability for a supplier under section 33 of the CE Act.7

2.36 The regulation would be a legislative instrument for the purposes of the Legislative Instruments Act 2003 and is a disallowable instrument.

Setting the equivalent carbon price on liquid fuels and synthetic greenhouse gases

2.37 The bills also update the approach to calculating the equivalent carbon price on liquid fuels and synthetic greenhouse gases from 1 July 2015. The updated approach will ensure that the equivalent carbon price closely tracks the carbon price faced by liable Australian entities.

Treatment of relinquished units

2.38 The Government has decided that there will no longer be auctions of relinquished carbon units. Instead, if a carbon unit is relinquished, it will be cancelled, and a new carbon unit will be auctioned.8

Amendments to the auction scheme

2.39 The bills include technical amendments to enhance the auction of carbon permits.

2.40 Under the Clean Energy package, a carbon auction limit was established to limit the amount of units from a compliance year that can be auctioned in an earlier year. This limit is aimed at preventing over-allocation before the pollution cap is known for a given compliance year.

2.41 The amendments increase the limit on advance-auctioned carbon units to 40 million units for carbon units whose vintage is 2015-16 that are auctioned in 2013-14, and 20 million units for other advance auctions where there is no carbon pollution cap number for that year. The Explanatory Memorandum indicates that the final details of the auction arrangements are determined by the legislative instrument under section 113 of the CE Act which is expected to be made in early 2013 after further consultation with industry.

Measurement determinations under the NGER Act

2.42 Technical amendments to the CE Act and the NGER Act provide the Minister with the power to determine methods to measure amounts of designated fuels for the purpose of ascertaining potential greenhouse gas emissions.

Treatment of GST joint venture operators in the Opt-in Scheme

2.43 Minor amendments to the CE Act clarify the treatment of GST joint venture operators in the Opt-in Scheme.'

7 Replacement Explanatory Memorandum, p. 53.

8 Replacement Explanatory Memorandum, p. 9.

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Scrutiny of Bills Committee

2.44 The Senate Scrutiny of Bills Committee, in its Alert Digest number 12 of 2012, noted that Schedule 1, item 79, proposed subsection 123A(l) of the CE Act would grant the Government the power to make legislative instruments to introduce one or more designated limits on eligible international emissions units. The committee noted that there is a guarantee from the Government to provide at least three years notice before new limits are to be introduced, or changes to existing designated limits

are due to take effect. The Committee questioned whether this reference could be inappropriate delegation, as there is no statutory guarantee that the notice periods will be respected.

2.45 The Senate Scrutiny of Bills Committee also raised concerns about the operation of proposed subsection 57(2) of the ANREU Act, which provides for what is referred to as a Henry VIII clause (that is, a clause that enables the Executive

branch of government to modify the operation of primary legislation passed by the Parliament). The provision in question will enable regulations to be made which 'modify' the provisions of new Division 3 of Part 4 of the ANREA Act in relation a specified class of AIIUs.9

2.46 The committee draws these concerns to the attention of the Government.

9 Senate Scrutiny of Bills Committee, Alert Digest no. 12 of 2012, p. 2.

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Chapter 3

Linking carbon markets

3.1 Submissions to the inquiry and testimony to the committee indicated broad support for the concept of linking to international carbon markets.

3.2 Submissions identified a range of advantages that would accrue to Australia as a result of linkages to international carbon markets generally and to the EU ETS specifically. These advantages included promoting access to low cost abatement for Australian liable entities, strengthening the Australian carbon market and improving

its efficiency, and building on and contributing to a growing global push to price carbon and tackle dangerous climate change.

3.3 While most submissions indicated support for the link to the EU ETS, several submissions expressed some concerns regarding the integrity of the EU ETS and the impact the linkage would have on Australian control over the CPM.

Promoting lowest cost abatement

3.4 The Minister for Climate Change and Energy Efficiency explained the logic of linking Australia's CPM to international markets in his second reading speech:

It is common sense to support international linking because it assists in providing emissions reduction at least cost and contributes to knitting together different national and regional schemes. It develops a common

carbon price across economies, a common incentive to cut emissions, and fairly shares the burden of doing so.1

3.5 The committee heard that the structure of the Australian economy makes linkage to international carbon markets key to low-cost carbon abatement. The fact that Australia is a primary producer and exporter of fossil fuels and energy means, as the International Emissions Trading Association (IETA) explained:

...we will always have a challenge of how we effectively meet the increases in our emissions trajectory from our own domestic economic capability. It is important for us that we are linked into effectively the mitigation frameworks of our trading partners so that we are able to source abatement at its lowest cost.1 2

3.6 IETA also made the point that Australia is an open economy, and it is

appropriate that Australia seeks to ensure its scheme includes 'all the flexibility mechanisms that we can have to be able to make the adjustments that an open economy has to have.' Australia has been 'very successful' in building an open

1 The Hon Greg Combet MP, Minister for Climate Change and Energy Efficiency, House of Representatives Hansard, 19 September 2012, p. 1159.

2 Mr Emile Abdurahman, BETA, Proof Committee Hansard, p. 27.

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economy through reform and economic regulation and deregulation; there is no reason to approach Australia's carbon policy any differently.3

3.7 In assessing the linkage, submissions from industry groups tended to emphasise the importance of lowest-cost abatement, and welcome the linkage, at least in principle, as a step in this direction. As Mr Alex Gosman of the Australian Industry Greenhouse Network (AIGN) told the committee, 'we do welcome movement towards linkages and we do welcome the move towards an international approach on carbon pricing, so this is one step towards that.'4 5

3.8 In a similar vein, the Institute of Chartered Accountants Australian (ICAA) told the committee that it was 'imperative that Australian businesses be allowed to access the lowest cost abatement through accessing global carbon markets.'" Expanding on this point, ICAA told the committee that its support for allowing Australian businesses to access lowest cost abatement through international carbon markets was very much related to its advocacy of the broader principles of ensuring that Australian business can compete effectively on a level international playing field.6 7

3.9 Conversely, the costs of Australia pursuing a stand-alone carbon pricing scheme would, as IETA told the committee, prove 'exceptionally high.' Without access to international carbon markets, domestic power and manufacturing costs would rise 'to levels that would be exceptionally disadvantageous to the economic structure.

3.10 In evidence to the committee, Treasury officials were able to quantify the impost a stand-alone scheme would create for Australian entities: even at the more modest end of the emissions reduction spectrum, if the CPM did not allow access to

international units, the price of carbon would likely rise to about $62 per tonne.8

Strengthening the Australian carbon market and enhancing risk management capacity

3.11 Both ICAA and IETA explained to the committee how the link to the EU ETS would provide the Australian carbon market with the liquidity and depth it required to operate efficiently. This advantage was underlined by the fact that, whereas the Australian carbon market was relatively small and might struggle to generate

sufficient liquidity and depth if operating in isolation, the EU ETS is the largest and most liquid carbon market in the world.9

3 Mr Emile Abdurahman, Proof Committee Hansard, p. 31.

4 Mr Alex Gosman, AIGN, Proof Committee Hansard , p. 18.

5 Mrs Geraldine Magarey, ICAA, Proof Committee Hansard , p. 18.

6 Mr Yassar El-Ansary, ICAA, Proof Committee Hansard, pp. 18-19.

7 Mr Emile Abdurahman, Proof Committee Hansard, pp. 27, 29.

8 Mr James White, DCCEE, Proof Committee Hansard, p. 38.

9 Mrs Geraldine Magarey, Proof Committee Hansard, p. 18; and Mr Emile Abdurahman, Proof Committee Hansard, p. 25.

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3.12 IETA further explained that the linkage with the EU ETS would promote price discovery and provide investors in power generation and other assets with an enhanced capacity to manage long-term price risk. Under the proposed arrangements, Australian businesses can 'link to Europe, which has a very well-developed long-term pricing structure,' meaning 'that we now have the ability to tap into market-based mechanisms to manage long-term price risks.'10 11

3.13 In its submission, the Australian Financial Markets Association (AFMA) made similar points, suggesting that links with "sound international schemes has been consistently requested by AFMA as a mechanism to increase market depth, achieve least cost abatement and reduce overall risks for participants/ 11

Building on the global push to price carbon and tackle climate change

3.14 The committee heard that the link to the EU ETS both reflected and would further add to the growing global momentum towards pricing carbon and tackling climate change.

3.15 IETA told the committee that the linkage would promote additional bilateral trading links with other nations, and provide the architecture for new and emerging carbon pricing schemes. There needs to be an efficient, low-cost, and consistent global

approach to reduce carbon emissions and prevent dangerous climate change, and IETA suggested 'the current amendments are [a] step in the right direction.'12

3.16 The Climate Institute made a similar point, suggesting the linkage would provide 'a template for how future linkage arrangements between other countries are developed, and that is a good thing.' Australia's negotiating position in seeking other

linkages, including linkages with emerging carbon markets in China, South Korea and other parts of Asia, would be strengthened by its link to the EU ETS.13

3.17 Sustainable Business Australia also argued that "the linking arrangements between Australia and the EU will strongly influence similar agreements with other emission trading markets.*14 15

3.18 ICAA, meanwhile, noted the importance of Australia remaining alert to the possibility of additional links with new and emerging carbon markets.1"

3.19 As IETA explained to the committee, the linkage arrangement will allow a new global pricing benchmark to be established, providing a 'more robust mechanism'

10 Mr Emile Abdurahman, Proof Committee Hansard, pp. 24, 27.

11 Australian Financial Markets Association, Submission 8, p. 1.

12 Mr Emile Abdurahman, Proof Committee Hansard, p. 24.

13 Mr Erwin Jackson, The Climate Institute, Proof Committee Hansard, pp. 25-26.

14 Sustainable Business Australia, Submission 14, p. 1.

15 Mr Yassar El-Ansary, Proof Committee Hansard, p. 20.

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for new entrants to carbon pricing markets, particularly Australia's trading partners in Asia and the United States.16

3.20 WWF Australia emphasised that the link to the EU ETS would strengthen the environmental integrity of the global carbon market at a time when there is growing global momentum toward carbon pricing, including in nations like China and South Korea.17

3.21 The committee also heard from DCCEE that international linkage would promote 'greater global ambition' to reduce emissions, and foster the growth of global carbon markets.18 19

Business and industry issues regarding competitiveness

3.22 A number of submissions argued that the linkage would do little to address the broader impact of Australia's carbon pricing scheme on the competitiveness of Australian industry.

3.23 The Australian Petroleum Production & Exploration Association (APPEA) argued that while the link may provide short-term cost savings, the competitive challenge to trade exposed industries, including the Australian TNG export industry, continues to be from countries that are not taking action to introduce carbon pricing.10 The Australian Coal Association, AIGN and the Cement Industry Federation

expressed similar concerns to the committee.20

3.24 The Australian Coal Association also told the committee that Australia was locking in the world's 'highest explicit economy-wide carbon cost impost on industry over the next few years.'21

3.25 However, some of these claims from industry bodies were challenged by other submitters. For instance, the Climate Institute contended in both its written submission and in evidence to the committee that Australia's carbon price is neither the highest in the world nor unusually broad in its coverage.22

3.26 The Australian Coal Association also acknowledged that while Australian and European coal producers did not compete in Asian export markets, they did compete in providing coal to European markets, particularly in thermal coal.23

16 Mr Emile Abdurahman, Proof Committee Hansard, p. 27.

17 WWF Australia, Submission 11, p. 3.

18 Mr James White, Proof Committee Hansard, p. 36.

19 Mr Damian Dwyer, APPEA, Proof Committee Hansard, p. 7.

20 Australian Coal Association, Submission 17; AIGN, Submission 16; and Cement Industry Federation, Submission 4.

21 Mr Peter Morris, Australian Coal Association, Proof of Committee Hansard, p. 9.

22 Mr Erwin Jackson, Climate Institute, Proof Committee Hansard, p. 25. Also see the Climate Institute, Submission 1, p. 3.

23 Mr Peter Morris, Proof of Committee Hansard, p. 15.

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3.27 On the whole, concerns raised by some business and industry groups related to pre-existing concerns with the broader Clean Energy Package, rather than with the amendments under consideration. These concerns should be weighed against the acknowledgement from business and industry groups that the linkage to the EU ETS will provide new compliance options and likely result in potential cost savings for Australian entities in meeting their carbon liabilities.

Assessing the strength and integrity of the EU ETS

3.28 While there was broad support for the concept of linking Australia's CPM to international markets, some submissions expressed concerns regarding the integrity of the EU ETS. Areas of particular concern included the apparent over-allocation of permits and less-than-rigorous monitoring, reporting and verification (MRV) mechanisms.

3.29 While supportive of the linkage, COzero noted that over-allocation of permits had proven problematic in the EU ETS. The EU experience highlights the importance of regularly reviewing carbon inventory, and COzero suggests that the Government should consider a higher frequency of inventory reviews than is currently mandated in the CPM.24 25

3.30 Professor Paul Frijters and Mr Cameron Murray (School of Economics, University of Queensland) were particularly concerned with these integrity issues, as was evidenced in both their joint written submission and their subsequent evidence to the committee. They discussed at some length the problems of over-allocation of permits in the EU ETS, and what they characterised as weak MRV systems that were

subject to fraud, manipulation and politically driven 'fudge factors. *"

3.31 Prof. Frijters and Mr Murray expressed strong doubts regarding the capacity of the European Commission to enforce more robust MRV systems in individual member states. The EC does not have any budgetary powers, making it difficult for it to provide incentives for concerted action by member states to implement proper accounting systems. Moreover, tackling climate change is now a secondary political concern in Europe, and that makes it even harder 'to corral all of those countries into an equally strong enforcement system.'26

3.32 ICAA also noted well documented problems around integrity and fraud in the EU ETS. ICAA told the committee that to address these issues, the EU has undertaken a review, and in October 2011 the European parliament passed regulations to improve

the integrity of both its energy market and its emission trading scheme.27

3.33 From ICAA's perspective, the problems that have previously been apparent in the EU ETS serve to highlight the importance of regulators in Australia working 'closely with their EU counterparts in order to minimise the risk or likelihood of

24 COzero, Submission 9, p. 2.

25 Prof. Paul Frijters and Mr Cameron Murray, Submission 6.

26 Prof. Paul Frijters, University of Queensland, Proof Committee Hansard , p. 4.

27 Mrs Geraldine Magarey, Proof Committee Hansard , p. 18.

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disruptive or confidence-damaging shocks to the linked schemes.'28 In contrast to Prof. Frijters and Mr Murray, the ICAA suggested the EU ETS remained fundamentally robust and efficient. Indeed, compared to the Australian carbon market, the European carbon market:

...is a more mature market that has had the benefit of a longer time frame over which to develop and refine those safeguards and protections that ultimately will flow through to the benefit of Australian businesses as well.29 30

3.34 In an exchange between Senator Cameron and Mr Emile Abdurahman from IETA, the point was made that fraud and manipulation, far from being unique to the EU ETS, can and does occur in all markets. What matters, then, is having a robust regulatory and enforcement framework to prevent occurrences of fraud and manipulation to the greatest extent possible. Mr Abdurahman told the committee that integrity problems could be largely avoided through 'mechanisms of diligent oversight and also sanction,' adding that Australia had a proven capacity to implement robust financial regulatory mechanisms/0

3.35 For its part, DCCEE assured the committee that it remained confident that the EU ETS MRV system was sound.

3.36 DCCEE told the committee that it believed the European approach of having MRV settings made a central level (that is, by the European Commission), but implemented at a national level (that is, by individual EU member states), was sound.

Indeed, this approach was analogous to how Australian governments work together through the Council of Australian Governments *except that in the EU, agreements between governments are legally binding. There may be variations in the how EU

member states undertake MRV, just as there are variations in Australia when the Commonwealth and states need to work together on national reforms. However, there are also review processes in place to ensure MRV systems are not compromised. In

particular, the overall EU ETS system is subject to an external review by the United Nations. This ensures that units that will be transferred between the Australian and EU systems 'are matched by equivalent emission reductions in each economy.'31

The impact of linkage on Australian policy control

3.37 Some submissions expressed concern about the apparent heavy reliance of EU member states on policy drivers to shape the EU carbon market. A related concern was that Australia would be surrendering a substantial measure of control over its CPM to the EU, with a corresponding reduction in Australia's control over the price of carbon itself.

28 Mrs Geraldine Magarey, Proof Committee Hansard , p. 18.

29 Mr Yassar El-Ansary, Proof Committee Hansard, p. 19.

30 Mr Emile Abdurahman, Proof Committee Hansard , p. 31.

31 Mr James White, Proof Committee Hansard, p. 43.

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3.38 Professor Frijters told the committee that the unequal treatment of Australian permits under the one-way linking arrangement did not augur well for Australia's likely influence over European decisions affecting the price of carbon. Europe's decisions will be informed by internal considerations and dynamics, and Australia's interests 'will count for very little in the internal deliberations of the European Union.'32 33

3.39 Others submitters suggested that, due to the imbalance in market size, the Australian carbon price will effectively be determined by policy decisions in Europe. As Mr Peter Morris of the the Australian Coal Association put it, this raises the risk

*that the EU will be making scheme design decisions in line with their own interests and economic structures that will not necessarily be in Australia's interest.'j3

3.40 Similarly, in its submission, the Business Council of Australia suggested that a key question for business was how, in the negotiations for the two-way link, Australia's competitiveness and economic strengths will be ensured, given 'the EU will be making scheme design decisions in line with their own interests and economic

structures/34

3.41 The Business Council of Australia expressed particular concern regarding the Government setting the Australian carbon price ceiling in reference to the likely EU ETS price in 2015-16, given the EU "will determine the price in their scheme to suit its policy agenda and economy. This may not be in Australia *s best interest.'35

3.42 This being the case, the Business Council of Australia recommended that the Government consult with business in the course of setting a new price ceiling and negotiating the two-way link between the CPM and EU ETS.36

3.43 The Cement Industry Federation questioned whether the Australian Government would have 'sufficient negotiating power with the EU on future scheme changes (particularly after the establishment of a two-way link) given the relative size

of the two schemes. * On this basis, Cement Industry Federation argued that Australia should not surrender control over scheme design unless the scheme becomes truly international. Moreover, Australia *should adopt an aggressive stance toward supporting Asian friendly (international) scheme design, particularly with regard to

allowable offsets. *37

3.44 DCCEE conceded that given the larger size of the European carbon market, *decisions about the parameters of the European emissions trading scheme will have

32 Prof. Paul Frijters, Proof Committee Hansard , p. 5.

33 Mr Peter Morris, Proof of Committee Hansard, p. 12.

34 Business Council of Australia, Submission 2, p. 3.

35 Business Council of Australia, Submission 2, p. 3.

36 Business Council of Australia, Submission 2, pp. 3-4.

37 Cement Industry Federation, Submission 4, p. 5.

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more influence on the overall price than decisions about the parameters of the Australian emissions trading scheme.138

3.45 Consistent with this analysis, a Regulation Impact Statement (RIS) prepared by DCCEE acknowledged that under the linking arrangement the domestic carbon price *will be affected by decisions taken in Europe to support the price of European allowance units *. However, on balance this cost was outweighed by *the advantages of providing liable entities with access to another secure source of international units, greater effective assistance to recipients of free permits and reduced administrative complexity. *38 39

Fungibility of European Union Aviation Allowances (EUAAs)

3.46 In its submission, Qantas registered its concern that the draft legislation does not allow for the use of EUAAs in the Australian CPM. Qantas argues that EUAAs should have the same fungibility as European allowance units.40

3.47 The Explanatory Memorandum notes that EUAAs are a subclass of European allowance units that can currently only be used for compliance by aircraft operators that have a liability under the EU ETS. They are not intended to be eligible for

surrender in the CPM.41

Committee view

3.48 The committee commends the linkage of the CPM to the EU ETS, and the broader principle of linkages to international carbon markets, on the basis that such linkages will assist in facilitating emissions reduction at least cost.

3.49 The committee acknowledges that international linkages will help develop a common carbon price across economies and a common incentive to cut emissions and tackle dangerous climate change.

3.50 The committee recognises that, for an open, growth-orientated and outward focused economy like Australia, it is common sense to seek out market-based linkages to international carbon markets. It further notes that such linkages build on the growing global push to price carbon through market-based mechanisms, and will place in Australia in a good position to link to new and emerging markets, particularly in the major economies of Asia.

3.51 The committee notes that some submitters were concerned by issues relating to the integrity of the EU ETS, but concludes that there is strong countervailing evidence to suggest the European carbon market is robust and well regulated.

38 Mr James White, Proof Committee Hansard , p. 43.

39 RIS summary in Replacement Explanatory Memorandum, pp. 13-14.

40 Qantas, Submission 15, p. 2.

41 Replacement Explanatory Memorandum, p. 25.

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Chapter 4

Amendments to the price floor and access to international permits 4.1 As noted in chapter one, to facilitate the link to the EU ETS, the Australian Government has agreed that it would remove the price floor and restrict the quantity of eligible Kyoto units that liable entities can use to discharge their carbon liabilities.

4.2 For the most part, submissions were supportive of the removal of the price floor and the surrender charge on international units. Several submissions from clean energy and environmental groups expressed some reservations about the removal of

the price floor, while acknowledging that the link to the EU ETS is a good alternative mechanism to provide certainty to the CPM.

4.3 Submissions were sharply divided on the amendments limiting the use of Kyoto units in the CPM and the introduction of the concept of *designated limits. * Whereas a number of business and industry groups argued that sub-limits were inconsistent with the principle of least-cost abatement, other submissions noted that

such limits were necessary to protect the Australian carbon price from falling too low to drive investment in clean energy.

Removal of the price floor

4.4 For the most part, submissions supported the removal of the price floor.

4.5 A number of submissions argued that the price floor would have potentially distorted the market, created inefficiencies, and imposed an administrative burden on liable entities. For example, IETA suggested its preference was for market-based

mechanisms, and the proposed link to the EU ETS 'was a lot more robust than what was previously proposed by the carbon price floor mechanism.'1

4.6 Several submissions suggested that the removal of the price floor created a measure of uncertainty regarding the Australian carbon price. The Climate Institute argued that a gradually rising price floor has three beneficial effects:

1. it helps deter investment in highly emission-intensive technologies that would become stranded under the stronger policies needed in the future;

2. it reduces downside financial risk premiums associated with low carbon investments, thereby reducing the costs of such investments; and

1 Mr Emile Abdurahman, Proof of Committee Hansard, p. 24. Also see Business Council of Australia, Submission 2; Cement Industry Federation, Submission 4; Greenfleet, Submission 5; APPEA, Submission 7; Australian Financial Markets Association, Submission 8; COzero, Submission 9; ICAA, Submission 10; AGE Energy, Submission 12; Sustainable Business Australia, Submission 14: AIGN, Submission 16; and the Australian Coal Association, Submission 1 7.

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3. it encourages investment in low emissions technologies through more predictable price signals. This brings down their costs through 'learning by doing' and economies of scale.2

4.7 While expressing a preference for an extended price floor, the Climate Institute acknowledged that a link with the world's largest market (that is, the EU ETS) was a good alternative, as long as it was combined with strong complementary

policies for domestic clean energy and energy efficiency.3

4.8 The Clean Energy Council made a similar argument in its submission. While the removal of the price floor might reduce certainty for businesses making investment decisions and *potentially lower the incentive for developing low-carbon technologies," linking with the EU ETS is a *good alternative * to the price floor:

It safeguards the Australian carbon price framework from future political pressure as repeal will now also mean severing connection to the world *s largest carbon market. Furthermore, mutual recognition of carbon units between the two cap and trade systems sends the message that Australia is not acting alone.4 5

4.9 In its submission, WWHF Australia noted that the possibility that there will be a price significantly lower than the former proposed floor underscored the importance of complementary clean energy policies, such as the Renewable Energy Target.3

The limit on Kyoto units and *designated limits *

4.10 Business and industry groups were generally critical of the 12.5 per cent limit on the use of Kyoto units and the concept of a 'designated limit.' Such limits, it was argued, are inconsistent with the principle of least-cost abatement. Mr Dwyer,

representing APPEA, underlined this apparent inconsistency for the committee:

It is certainly the case that the introduction of a possible range of sub-limits does seem to run against accessing permits as long as they are credible wherever they may be available. It seems strange to us to acknowledge that access to international markets is a positive development and then seek to then arrange ways to constrain that access.6

4.11 Mr Mortis of the Australian Coal Association made the case that Australia, as a net buyer of permits, needs to access markets that need to sell permits. Yet the EU is also a net buyer of permits. In effect, this means that Australian entities will be

restricted from freely purchasing permits from markets with lower marginal costs of abatement, and this will have the effect of making the EU carbon price the Australian price floor.7

2 Climate Institute, Submission 1, p. 2.

3 Climate Institute, Submission 1, p. 2.

4 Clean Energy Council, Submission 3, p. 1.

5 WWF Australia, Submission 11, pp. 6-7.

6 Mr Damian Dwyer, Proof Committee Hansard, p. 12.

7 Mr Peter Morris, Proof Committee Hansard, pp. 10-12.

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4.12 In addition to the representations from APPEA and the Australian Coal Association, the committee received submissions expressing opposition to the limits on Kyoto units or the concept of designated limits from BCA, the Cement Industry Federation and Qantas.

4.13 Some submissions also suggested there is a lack of scrutiny in the

amendments providing the Minister with the regulatory power to introduce new designated limits or change existing limits. For instance, AGL Energy suggested that providing the Minister with these regulatory powers would create uncertainty, increase risk premiums and thereby adversely impact on investment in low-carbon projects.8

4.14 On the same matter, the Cement Industry Federation suggested the government enshrine in legislation its commitment to neither introduce a new designated limit or change an existing limit without three years notice. Moreover, any such changes should be subject to greater public scrutiny, including analysis by the Productivity Commission.9

4.15 However, both AIGN and APPEA indicated they were satisfied with changes made to the legislation since the exposure draft was released, which limited the Minister's capacity to change designated limits with little notice (although APPEA reiterated that it would prefer the concept of designated limits to be removed altogether).10 11

4.16 By way of contrast, other submissions argued that it was important to maintain carefully considered limits on the importation of international offsets to prevent the Australian carbon price falling too low to drive clean energy investment. As the Climate Institute told the committee:

If you have no limit on Kyoto units and you have no price floor then the

Australian price would have crashed, and it would have been a mechanism which we had gone through a whole bunch of pain to implement, which would not have driven the outcomes that we are already starting to see in the electricity sector and across the broader economy *that is, reducing

emissions.1

4.17 Similarly, the Clean Energy Council argued that the limit would ensure that the Australian carbon price was not set in the Clean Development Mechanism (CDM)

8 AGL Energy, Submission 12, p. 2.

9 Cement Industry Federation, Submission 4, pp. 6-7.

10 Mr Damian Dwyer, Proof Committee Hansard, p. 12; Mr Alex Gosman, Proof Committee Hansard, p. 12.

11 Mr Erwin Jackson, Proof Committee Hansard, p. 26.

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market,12 and safeguard against Australia *s carbon price falling too low to encourage clean energy investment.13

4.18 IETA told the committee that the 'fundamental fact' is that Australia needs to have a 'level of domestic national ambition' for reducing emissions, and the price of CERs does not align to that level of ambition. Therefore, it 'makes eminent sense * that this is the way we will become linked to EU ETS and global markets.14

4.19 The committee also heard from DCCEE that while greater access to Kyoto units might help Australia meet abatement targets at a lower cost in the short term, this would not necessarily produce a least-cost outcome in the period beyond 2020. That is, unrestricted access to Kyoto units might undermine efforts to transition to clean energy and meet the longer term target of 80 per cent emissions reductions by 2050. As DCCEE told the committee:

The objects of the Clean Energy Act include to achieve Australia's international obligations and commitments *which, within those, would include our target range for 2020, to contribute to achieving an 80 per cent reduction in emissions by 2050 and also to encourage investment in clean energy *and to do this in a flexible and cost-effective way. So if you narrowed the target range down to 2020 only and you had no concern whatsoever about what happened after 2020, then access to Kyoto units, which are trading at very low levels at the moment *if those prices were to continue through that period, it may have that effect at 2020, but it may not set Australia up very well for the further emissions reductions that will be required to 2050 or for achieving the 80 per cent the reduction target.15

The credibility of Kyoto units and the 12.5 per cent limit

4.20 With regards to the CDM and the CERs it produces, the committee heard from Professor Frijters that the low price and credibility issues in the CDM market suggested 'a market in decline.'16

4.21 However, the Climate Institute told the committee that while there had been problems with Kyoto units in the past, the rules have become more stringent regarding the development of units. It further emphasised the importance of the Kyoto mechanism in developing the global carbon market and investment in clean energy.17

12 The CDM is a mechanism under the Kyoto Protocol that provides for emission reduction projects in the developing world. These projects generate Certified Emission Reduction units (CERs), a type of Kyoto unit which may be purchased by developed countries to meet part of their emission reduction commitments under the Kyoto Protocol.

13 Clean Energy Council, Submission 3, pp. 1-2.

14 Mr Emile Abdurahman, Proof of Committee Hansard , p. 30.

15 Mr James White, Proof of Committee Hansard, p. 37.

16 Prof. Paul Frijters, Proof of Committee Hansard, p.3.

17 Mr Erwin Jackson, Proof Committee Hansard, p. 30.

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4.22 In its submission, COzero provided a strong endorsement of Kyoto units, stating that it *believes in the integrity of credits generated through the Kyoto flexibility mechanisms and the additional social/economic benefits that many projects bring to developing countries. *18

4.23 In contrast to the views expressed by Professor Frijters, IETA argued that Kyoto units were a 'victim of [their] own success.' The number of units generated had proven far in excess of what anyone had expected, and with essentially only one market for these units to be utilised in - that is, the European Union - the price collapsed as a result of oversupply. The solution to this problem will come from 'the expansion of other emissions trading schemes that would be able to absorb those.'19

4.24 DCCEE assured the committee that Kyoto units 'are credible and reliable sources of abatement,' and noted that they are backed up by sound validation and verification processes. DCCEE further noted that 'the methodologies that are used to create them go through the CDM executive board, which makes decisions about the additionality of those methodologies.'20

4.25 DCCEE told the committee that the 12.5 per cent limit on Kyoto units is not related to their reliability or credibility, but instead to the Government's position that Australia's carbon price should match or be similar to the carbon price that applies in

most other developed countries that are operating market-based carbon pricing mechanisms. DCCEE did, however, allow that it was legitimate to raise questions about continued reliance on Kyoto units 'when the continued existence of those units depends on the international negotiations and also the extent to which the current price trajectories of Kyoto units may actually be sustained in the future.'21

Impact on revenue

4.26 The committee heard that the Treasury has not amended its projection of a $29 per tonne carbon price in Australia in 2015-16. Treasury explained that:

...the fundamental assumptions in the modelling...have not changed in the sense that [the modelling] always envisaged Australia linking to credible international markets and was essentially a proxy for an international cost of abatement. I think we would regard the European scheme as the largest, deepest, most liquid market currently trading, as consistent with those modelling assumptions that were outlined.22

4.27 Treasury further pointed out that because of the volatility in spot prices for carbon and even futures market expectations, Treasury tends to rely 'on longer term

18 COzero, Submission 9, pp. 1-2.

19 Mr Emile Abdurahman, Proof of Committee Hansard, p. 30.

20 Mr James White, Proof of Committee Hansard , p. 37.

21 Mr James White, Proof of Committee Hansard, p. 37-38.

22 Mr Robert Raether, Treasury, Proof of Committee Hansard, p. 39.

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estimates rather than intermittent peaks and troughs that might come through with the spot market.23

4.28 Treasury also pointed out that the:

...fundamental environmental targets and commitments that were embodied in the Treasury modelling have not changed. The modelling was based on commitments of 89 countries through the [United Nations Framework Convention on Climate Change] process to emission reductions by 2020. It assumed a long-term environmental target of stabilisation of atmospheric greenhouse gases of 550 parts per million. Those assumptions remain valid.24 25

4.29 Professor Frijters expressed scepticism regarding Treasury's revenue projections. Drawing on projections produced by Deutsche Bank and Point Carbon, and taking into account the over-allocation of permits in the EU ETS and reduced economic growth in Europe, he suggested that 'revenue is going to be something like a third of what has been forecasted.'23

4.30 Treasury acknowledged that economic growth in Europe is now projected to be somewhat slower than predicted at the time of the modelling. However, it was Treasury's view that what matters for carbon price projections from a modelling point

of view 'is a very long-term outlook for world GDP growth,' and assumptions about long-term world GDP growth remain valid.26 Treasury did, however, acknowledge that these are projections that refer to 'three years into the future with an

internationally traded commodity where there are a lot of variables, so in that sense it is less certain than over the shorter term when the price is fixed.'27

4.31 The Climate Institute pointed out that there is a broad spread of views on where the carbon price will be in coming years. The Climate Institute's own view is that the chance of the carbon price being under $ 10 per tonne by 2020 has diminished, and it is more likely prices will be in the $15 to $20 by that time. IETA further

suggested that, while the carbon price over the short-term might not be sufficient to drive sufficient investment in clean energy, a linked Australian CPM will serve as a mechanism to reduce emissions over the long term.28

The role of the cap in determining Australia *s aggregate emissions

4.32 Professor Frijters suggested that the likely low price of carbon under the arrangement made carbon abatement less likely:

23 Mr Robert Raether, Proof of Committee Hansard , p. 39.

24 Mr Benjamin Dolman, Treasury, Proof of Committee Hansard, p. 39.

25 Prof. Paul Frijters, Proof of Committee Hansard, p. 5. Also see Prof. Paul Frijters and Mr Cameron Murray, Submission 6, p. 1.

26 Mr Benjamin Dolman, Proof Committee Hansard, p. 40.

27 Mr Robert Raether, Proof Committee Hansard, p. 40.

28 Mr Erwin Jackson, Proof Committee Hansard, p. 29.

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[T]he internal incentives in Australia to reduce carbon emissions depend directly on the price and, since that will be fairly low, the local impacts on innovation will be fairly minor as well and there will be certainly almost no knock-on effect within the European Union because it is expected that they

are just going to sell us reserve permits if we buy any of them at all and the reserve permits are so enormous they already have three times more than our total annual usage in reserve permits that there is no pressure on their

internal system from the meagre demand that we might actually put on their 29 system.

4.33 In response, Treasury made the point to the committee that ultimately it is not the price of carbon that determines Australian's aggregate emissions so much as the cap, at least from 2015-16 onwards:

Aggregate emissions are fundamental to the scheme and are determined by the cap, and to the extent that the cap binds, and we would all expect it to bind, that determines Australia's aggregate emissions. It is the reduction in the cap that achieves Australia's emissions reduction target/0

Committee view

4.34 The committee considers that the removal of the price floor will help facilitate the linkage of the Australian CPM to the EU ETS.

4.35 The committee acknowledges concerns expressed by some submitters regarding the 12.5 per cent limit on Kyoto units and the concept of'designated limits'. However, the committee believes that some limit on Kyoto units is necessary to drive the transition in Australia to a low-carbon economy, consistent with the objectives of the CE Act.

4.36 The committee further notes that unlimited access to Kyoto units might create a higher long-term cost to the Australian economy in the transition to a clean energy future.

4.37 The committee acknowledges the need to establish provisions for the future introduction or setting of designated limits to, as the Explanatory Memorandum put it, provide 'flexibility in both setting and changing limits over time, reflecting maturation of Australia's emissions trading arrangements, the enhancement of existing links with

overseas emissions trading schemes and the development of new links and international emissions trading systems.'29 30 31

29 Prof. Paul Frijters, Proof Committee Hansard, p. 5.

30 Mr Robert Raether, Proof Committee Hansard, p.41.

31 Replacement Explanatory Memorandum, p. 26.

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Chapter 5

Natural gas and concluding comments 5.1 As noted in chapter two, amendments relating to the treatment of natural gas aim to ensure that the liability for carbon emissions is realised as high as possible in the natural gas supply chain, and that the principle of universal coverage for liable

entities applies.

5.2 The committee heard concerns from a number of submitters regarding the amendments. DCCEE, meanwhile, assured the committee that the provisions would not come into effect unless and until the necessary regulations are made, and that the

Government would conduct consultations on the development of these regulations before they are implemented.

Concerns expressed by industry groups

5.3 Several submissions from business and industry groups suggested the amendments and yet-to-be-determined regulations relating to the treatment of natural gas created a number of concerns, including the possibility of commercial distortions and administrative complexities. These submissions recommended the removal of the

amendments relating to natural gas, pending further consultation with stakeholders.1

5.4 In part, industry concerns related to the apparent uncertainty the amendements create. As APPEA explained to the committee:

We are in a situation where we do not necessarily disagree with the proposals that have been made, but we are not sure. Why [are we] rushing this through? Why has this emerged so quickly? There is an unrelated legislative change going through the parliament in the form of the linking provisions we have been talking about, raising a range of uncertainties that

we now have to deal with and try to fix to regulation. While we

acknowledge the consultation process has been set forward, our deep concern is that, if we reach a point of time through that consultation when we find the legislation which has been developed very rapidly does not quite address the problems that the department thinks it has identified, how do we fix it? Amending next year or amending late this year amendments that we have just put through parliament is not a situation that I think anyone wants to see happen. It limits our ability through the regulations to

fix those issues if those issues are identified.1 2

5.5 As APPEA *s comments indicate, some submissions suggested that the Government *s consultation process regarding the amendments was inadequate. This

1 These points were made, in varying degrees, in the following submissions: Business Council of Australia, Submission 2; AIGN, Submission 16\ APPEA, Submission 7; and AGE Energy, Submission 12.

2 Mr Damian Dwyer, Proof Committee Hansard , p. 14.

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argument was made, in varying degrees, by the Business Council of Australia, AGL Energy and AIGN.3

5.6 In its submission, AGL Energy argued that the coverage of natural gas supply under the current legislation is very near complete, suggesting the amendments are not required at this time. AGL Energy recommended that, at a minimum, the first compliance year should be completed and a review of any coverage issues be undertaken, before any amendments are made to the legislation on this front.4

5.7 In addressing these concerns for the benefit of the committee, DCCEE emphasised that the bill would create the capacity for the government to make regulations consistent with the general principle that liability should be at the highest point in the natural supply chain and that there should be universal coverage for all liable entities.5

5.8 DCCEE further indicated that the amendments do not make any current changes to coverage arrangements or compliance requirements. Such changes would only be given effect through regulations, which are yet to be drafted.6

5.9 The committee also heard from DCCEE that it has put in place a process for consultation on the development of any regulations resulting from the amendments, and the Minister has outlined this process to relevant industry groups and market participants. This process will inform 'the development of those regulations so that the detail can be worked through with them and those quite specific concerns that they have raised' can be considered and addressed.7

5.10 AIGN noted that since the amendments came forward, DCCEE had been in consultation with AIGN, and 'we welcome that.'8

5.11 APPEA also noted that it has now received correspondence from the Minister for Climate Change and Energy Efficiency, 'setting out a more detailed consultation process to produce the regulations that will underpin the natural gas liability aspects of the bill. We felt it important in participating today to acknowledge that development.'

Still, APPEA maintains its recommendation that the consultation process should precede the introduction of the amendments.9

3 See Business Council of Australia, Submission 2; AIGN, Submission 16; and AGL Energy, Submission 12. Also see APPEA, Submission 7.

4 AGL Energy, Submission 12.

5 Mr Simon Writer, DCCEE, Proof Committee Hansard, p. 45.

6 Mr Simon Writer, Proof Committee Hansard, p. 45.

7 Mr Simon Writer, Proof Committee Hansard, p. 45.

8 Mr Alex Gosman, Proof Committee Hansard, p. 7.

9 Mr Damian Dwyer, Proof Committee Hansard, p. 8.

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5.12 The committee recognises that the provisions in the bill relating to the treatment of natural gas supply and use are necessary to ensure the policy intent of the original legislation is properly realised.

5.13 The committee welcomes the Government's commitment to undertake detailed consultations with interested stakeholders in developing any regulations consequent to the legislation relating to the treatment of natural gas under the CPM.

Recommendation 1

5.14 The committee recommends that the Government continue to consult with interested stakeholders in the development of regulations resulting from the bills, including regulations that impact on the treatment of natural gas under the carbon pricing mechanism. This recommendation should be brought to the

attention of the Department of Resources, Energy and Tourism.

Concluding comments

5.15 The committee notes the long-standing commitment by successive Australian governments to link an Australian carbon pricing mechanism to credible international emissions trading schemes.

5.16 Linking to the European Union Emissions Trading System is the first step toward ensuring that the Australian carbon pricing mechanism has a strong foundation that will provide necessary incentives to drive the transition to a clean energy future in Australia.

Recommendation 2

5.17 The committee recommends that the Senate pass the bills.

Senator Mark Bishop Chair

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Coalition Senators * Dissenting Report

1.1 The Coalition has opposed Labor *s carbon tax at every step of its

implementation, based on our concerns about its impact on the competitiveness of Australian industry, consequences for employment in Australia and significant hit to the costs faced by every Australian household and business, as well as its failure to

achieve its stated objective and address Australia *s domestic emissions.

1.2 We will continue to oppose every aspect of the carbon tax, including by opposing these dramatic changes to a policy that is only a few months old. Our concerns that once again Labor *s changes run contrary to what had been promised, are ill considered and will have negative consequences for many parts of the Australian economy were matched by evidence from a range of stakeholders, which is highlighted in this report.

Overall lack of policy transparency/consultation

1.3 Coalition Senators share the concerns expressed by, in particular, industry groups regarding a lack of consultation and lack of policy transparency over what are significant changes to a policy having potentially and intended huge ramifications for the Australian economy.

... the ability to comment in detail on the original significant policy changes was limited by the lack of previous consultation and limited explanatory notes, as well as limited time for appropriate and comprehensive analysis of the issues.1

APPEA believes the consultation process that has given rise to this package of Bills has been inadequate.2

1.4 This is hardly surprising given the carbon tax was itself borne of a political deal rather than as a result of broad community support and these changes have come just months into its implementation.

1.5 This mismanagement of good public policy process was especially on display in the proposed changes to the treatment of gas liability arrangement, which were highlighted in particular by the Australian Petroleum Production and Exploration Association in their submission:

... changes to the natural gas liability arrangements ... Raise a series of

potential commercial distortions, complications and administrative burdens that extend to the entire natural gas liability provisions currently contained in the Clean Energy> Act 2011 ... and Appear targeted at a problem that has

1 Australian Industry Greenhouse Network, Submission 16, p. 1 " Australian Petroleum Production and Exploration Association, Submission 7, p. 1

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not been fully assessed before the first compliance period under the Act has even been completed.3

European control

1.6 Labor ministers have lined up to hail the linkage of Australia *s carbon tax to the European ETS, as enabled by this bill. However, evidence indicates this linkage would see the level of Australia *s carbon pricing mechanism, or the rate of Australia *s carbon tax, effectively set by decisions made in the European Union.

1.7 Decisions made in the European Union will now have a direct impact on the rate of Australia's carbon tax, as a result of the linkage, with evidence indicating that impact will almost certainly be greater than similar policy positions taken in Australia.

Mr Dwyer: Very explicitly, the explanatory memorandum to the bill sets out, at paragraph 1.34, that the intention of the designated limit, for example, is to drive convergence between the two schemes * and, I think, by convergence what we are really talking about is the EU price. So it

follows from that that changes to the price in the EU scheme flow directly to the Australian scheme.

Mr Morris: We have already seen with the 1214 per cent decision, which I understand was a policy decision, that that was probably necessary for having a relationship with the EU.

Senator BIRMINGHAM: So Australia is, in a sense, paying a price in its public policy determinations there to get the agreement with the EU?

Mr Morris: There was clearly a relationship, yes.

Senator BIRMINGHAM: And that being a decision *the 1214 per cent subquota *that you have each expressed concerns about because it limits the capacity to achieve lowest cost abatement through this type of process?

Mr Morris: Yes. There is other evidence before the committee in

submissions that suggests there will be some $1 billion and growing each year to buy permits from the EU. That could be a lower sum if there were availability of alternative abatement purchasing options *for example, if the 1214 per cent were a higher figure or if there were opportunities to buy

abatement from other areas of the world.4

1.8 Evidence regarding Europe *s control over Australia *s carbon pricing mechanism or carbon tax rate was also given by the Department of Climate Change and Energy Efficiency at the most recent round of Senate Estimates:

Senator BIRMINGHAM: If Europe were to take steps that saw them

adopt a more ambitious target than they currently have, that would result in

%† * Australian Petroleum Production and Exploration Association, Submission 7, p. 3 4 Mr Damian Dwyer, Australian Petroleum Production and Exploration Association Limited, and Mr Peter Morris, Australian Coal Association, Proof Committee Hansard, pp. 13-14.

a higher carbon price in Europe and therefore a higher carbon price in Australia?

Mr Comley: Other things being equal, that is right.

Senator BIRMINGHAM: If Europe were to, as they are discussing doing, potentially restrict the number of permits that are available, that would result in a higher carbon price in Europe and all other things being equal a higher carbon price in Australia?

Mr Comley: That is right.

Senator BIRMINGHAM: If the Australian dollar were to deteriorate relative to the euro, that would result in the relativity of the Australian carbon price being higher once those transactions occurred?

Mr Comley: Assuming, again, that the thing that caused the Australian dollar change was not either linked or had a consequence for the carbon price in Europe, which I think is an important caveat here, then that would be the case.3

1.9 Submissions by industry groups have also noted with the concern the level of control that rests with decision making in Europe and over which Australia has little if any influence.

Of concern to Qantas is that the EU will have the ability to artificially control the price of carbon in Australia and the impact on Australian industries through the EU carbon price.* * 6

... it appears that Australia has very little say over any major scheme

changes that are contemplated by the European Union.7

The GIF is concerned that Australia *s future scheme design, the setting of caps and the inclusion of allowable offsets may be unduly influenced by the European Union...8

1.10 It should also be noted that, at present, only a one-way linkage with Europe has been negotiated, where Australian entities may utilise European permits, but this cannot occur in reverse. Full linkage still needs to be negotiated, with witnesses suggesting Australia may have to further compromise its policy objectives to achieve this outcome:

Mr Jackson: The commission now needs to get a mandate from the

member states to negotiate a full treaty to have full linkage. This is why we have pointed out, for example, that our [Australia *s] posture on the Kyoto Protocol over the next few months will be important ... it is also critical to understand the decision-making processes in the EU. We have an

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: Senate Environment and Communications Legislation Committee Proof Hansard, 15 October 2012, pp. 20-21 6 Qantas Airways Limited, Submission 15, p.2

7 Cement Industry Federation, Submission 4, p. 5 8 Cement Industry Federation, Submission 4 , p. 6

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agreement with the European Commission but that needs to be ratified by member states in terms of a mandate to negotiate a treaty. If Australia is not playing ball in Doha and not playing ball in Kyoto, that will have an

impact on how European member states view the negotiation of the links between the two schemes...

1.11 It was also suggested that other changes, particularly limits this legislation will place on the use of other international permits by Australian entities through a sub threshold mechanism, would not only result in higher prices (as discussed elsewhere) but also see Australia having already traded away a potential negotiating point in

future discussions with the European Commission over full linkage:

It is ... difficult to see how a sub threshold during the one way linking

period could impact negatively on the European scheme to an extent greater than the negative impact of losing access to lower cost abatement for Australian liable entities. The sub threshold serves only to prop up the

European price, while giving away a point of negotiation with respect to the scheme design at the two way linking stage.9 10 11

Integrity

1.12 Given the importance placed by the Government on this link with Europe, Coalition Senators are concerned at the evidence provided to the inquiry, including by Professor Paul Frijters of the University of Queensland, regarding doubts about the integrity of the EU ETS and scope within it for fraud and manipulation:

If we then look at the verification mechanisms, the crucial aspect of the scheme whereby you see how much a company has actually used, this is to a large extent self-reported. The verification scheme is that you have almost like a yearly account, you say on the books how much you have used, how

much of the various fuels, what your efficiency factor is, and then you have a verifier come in to look at your reports. So all that the verifier in principle needs to do is just look at the documentation that you have provided.

Nominally, they are supposed to do spot checks, but as yet there are is still no operational peer review mechanism for these verifiers and hence there is a strong possibility that people choose the verifiers who go easy on them. This is, of course, an unverifiable statement in itself precisely because there

is no peer review mechanism as yet *it is a murky world of verifiers. 11

If you then think about further worries about the enforcement mechanisms, you look at the actual verification documents. We went through some of the actual documents which verifiers have to send in and there was a lot of room for interpretation or manoeuvring in what we saw. So there is a lot of room to manoeuvre on what you actually count as the fuel that went into a

9 Erwin Jackson, The Climate Institute, Proof Committee Hansard, p. 28

10 Cement Industry Federation, Submission 4, p. 4 11 Professor Paul Frijters, University of Queensland, Proof Committee Hansard, p. 4

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company, as to the efficiency factors that you would allocate and the level of cross-border trades that had these carbon components in them. This then falls back to the local national legal system to enforce proper accounting mechanisms. Of course the incentives to, as it were, penalise your own companies are very limited within the European Union. So those were the main concerns we had.12

... there has been some room for concern recently as a result of it becoming known that the EU emissions trading scheme being exposed to various integrity issues around registry security and fraud.13

1.13 These integrity issues and question marks over the effective operation of the European scheme also bring into doubt the level of available permits, the impact on actual emissions and highlight the exposure to risk faced by Australian industry, as identified by various witnesses:

Because of these reserve over *allowances, Australia could be sold EU permits without any change to the price or volume for any emitter in

Europe, implying that we would buy *spare * permits from the EU, without anything happening to overall carbon emissions.14

... the overall levels of permits will be determined by an intra-EU game of transfers and limited enforcement.15

the EU ETS involves substantial assistance to industry. In the EU the majority of permits have been, and continue to be, allocated without charge to the traded sector during a lengthy transitional period. The linkage with the EU ETS highlights the disadvantage imposed on Australian coal producers.16

Removal of floor price

1.14 The Coalition is concerned at the policy confusion and apparent hypocrisy of the Gillard Government in removing the floor price. Labor have, on no fewer than eleven occasions, affirmed their commitment to the floor price as a crucial element of their carbon tax legislation:

The bill also provides for a price cap and a price floor to apply for the first three years of the floating price period.

12 Professor Paul Frijters, University of Queensland, Proof Committee Hansard , p. 4 13 Institute of Chartered Accountants Australia, Submission 10, p. 2 14 Professor Paul Frijters and Cameron Murray, University of Queensland, Submission 6 , p. 1

13 Professor Paul Frijters and Cameron Murray, University of Queensland, Submission 6, p. 7 16 Australian Coal Association, Submission 17, p. 2

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This will limit market volatility and reduce risk for businesses as they gain experience in having the market set the carbon price.

Julia Gillard, House Hansard, 13 September 2011

Well we have set a floor and cap so that there can be stability in pricing but by internationally linking the scheme we will see the Australian price linked to the global price when we move to the emissions trading scheme in

three years time, but we did think it was appropriate, because people are making very long term investments, to have a band in which the price will move so that we *ve got the benefits of linking with the international price but also the benefits of stability.

Julia Gillard, Doorstop Interview, 9 November 2011

PM: There is a price ceiling and price floor which we announced yesterday. The price ceiling is $20 more than the international price.

JOHN LAWS: Why?

PM: Well we just thought for stability, particularly when we move to an emissions trading scheme where the market is setting the price that it was wise for a period to have bands, a ceiling and a floor.

Julia Gillard, Radio 2SM, 11 July 2011

GREG COMBET: We have legislated the floor price, that's quite well- known. I am discussing with the European Union the linkage of our

schemes, it is an issue that *s in those discussions but we are committed to the arrangements we have legislated.

DAVID SPEERS: At $15.

GREG COMBET: That's the floor price.

Greg Combet, Sky News, 21 August 2012

This bill imposes the charge payable by a person to the Commonwealth for the surrender of an international unit in the years beginning on 1 July 2015, 2016 and 2017, as a tax within the meaning of section 55 of the

Constitution.

The bill imposes the charge, but only to the extent the charge is neither a duty of customs nor a duty of excise. The charge will ensure that a

minimum charge *or in economic terms, a *price floor * *applies to all units that are surrendered by liable entities for the first three flexible charge years of the carbon pricing mechanism, whether they are domestic units or international units. I commend the bill to the House.

Greg Combet, House Hansard, 13 September 2011

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Well we've put in a floor price and a price cap to provide some confidence over the first few years about the potential variability of the price.

Greg Combet, ABC Radio National, 12 July 2012

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Mr Combet told The Australian last night that the federal government had negotiated the price floor as part of the Multi-Party Climate Change Committee agreement "and we have legislated a three-year fixed price period". "We are committed to the whole package," he said.

Greg Combet, The Australian, 5 July 2012

Climate Change Minister Greg Combet said yesterday the price floor and ceiling would avoid sharp price spikes or plunges.

*This will reduce risks for businesses as they gain experience in having a market set the carbon price, * Mr Combet said.

Greg Combet, The Australian Financial Review 28 September 2011

It is the case that our policy does include a price floor which acts as a safety valve for investors in low-emissions technology by establishing a minimum price for the first few years of a flexible price period.

Penny Wong, Senate Hansard, 28 February 2012

For the first three years of a flexible price emissions trading scheme there will be a price floor mechanism that aims to ensure the price of permits do not fall below a pre-determined level. A price floor provides participants with greater certainty upon which abatement decisions to make. For those investing in abatement technologies whose value is sensitive to the level of the carbon price, a price floor helps reduce downside risk.

Mark Dreyfus, Address to Carbon Expo 2011, 8 November

1.15 These arguments advanced by the Government in very recent times either make a case against the Government's own actions now in abolishing the floor price, or stand testament to the lack of credibility attached to any arguments advanced by the Government over its carbon tax and climate change mitigation policies.

1.16 While Coalition Senators note some evidence to the inquiry in favour of the abolition of the floor price, we note also evidence provided by The Climate Institute conversely in favour of a price floor extension:

... the Institute *s preference is for an extended price floor because of the predictability it provides investors and the economic efficiencies it could deliver.

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The signal sent by a gradually rising price floor has three beneficial effects:

it helps deter investment in highly emission intensive technologies that would become stranded under the stronger policies needed in the future.

it reduces downside financial risk premiums associated with low carbon investments thereby reducing the costs of investments.

it encourages investment in low emissions technologies through more predictable price signals. This brings down their costs through *learning by doing * and economies of scale.

Among others, these are the reasons why the UK and California have

implemented price floors and why China is considering floors in its emerging pilot schemes.1'

1.17 Removal of the floor price is among significant and substantial changes given effect by this bill to the carbon tax, itself implemented despite express commitments taken to the most recent election, in 2010, that there would be no carbon tax under a government led by the current Prime Minister.

1.18 There is already substantial community angst at the carbon tax itself and the manner of its implementation against express election promises to the contrary.

1.19 For the Government to seek to make such a major structural change to its carbon tax inside three months of its operation gives little comfort to those who opposed its original introduction in its original form, and gives rise to Coalition Senators * serious concerns about the soundness of the Government *s policy

development processes and all arguments it prosecutes for their implementation.

Policy and budgetary uncertainty

1.20 Consideration of the Government *s significant carbon tax policy changes is done against a backdrop of enormous uncertainty over what the carbon price will be in just a few years. The Government has provided no updated modelling, insisting previously released modelling completed years ago remains current, despite the

changes to the policy or the many global economic factors its assumptions were built upon.

1.21 At recent Senate Estimates hearings, the Department of Climate Change and Energy Efficiency refused to endorse the Government *s estimated carbon price in 2015-16 of $29, not even ruling out a rise to $50:

Senator BIRMINGHAM: We will come to some of the policy rationale or otherwise behind that decision shortly. What is the estimated carbon price meant to be in 2015-16? 17

17 The Climate Institute, Submission 2, p. 2

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M r Comley: The number that is, I believe, in the budget papers is round $29 in 2015-16.

Senator BIRMINGHAM: Is that an accurate reflection?

M r Comley: It is the current government estimate of the price in 2015-16.

Senator BIRMINGHAM: Is the current government estimate of the price in 2015-16 an accurate estimate of the price in 2015-16?

M r Comley: I am not going to revise the estimate, Senator.

Senator BIRMINGHAM: Is it the best available estimate?

M r Comley: This is where I think again we are straying a little bit into Treasury's territory which is responsible for that price. We obviously provide advice to them. It is longstanding government practice that at each point where you have a major economic publication you put out your best

estimate of a particular parameter at that point in time and it is also

longstanding practice to not speculate about the change of the parameters between releases of major economic updates.

Senator BIRMINGHAM: Does that mean you are standing by the $29 price as the best estimate?

M r Comley: The point I am making is that it is not my position or

accountability to stand by a particular estimate or to revise that estimate between major updates. I would comment that much of the commentary about what is happening with carbon prices tends to have a very short-term focus. We are talking about a price which is three years away. We are also

talking about a price in a market where there is current regulatory action by the European Union to directly influence that price. I suppose what I would say is that while 1 am not going to say that this is the best estimate or move away from the estimate in any way, I think there are quite reasonable arguments that that is not an implausible estimate of the price in 2015-16.

Senator BIRMINGHAM: Was it updated in this year's budget papers, in the last major economic statement of the government?

M r Comley: I think it is fair to say that it was in with a range of

parameters. They were all reconsidered. Whether there is any change made is a matter for the Treasury. My understanding is that there was not a

change made in the budget from the previous parameter estimate in the previous major economic release. Senator BIRMINGHAM: Is that because the government believed it was still the best estimate or is it because it was too hard to model or estimate an update?

M r Comley: Again, I think that is really a matter for Treasury.

Senator BIRMINGHAM: Mr Comley, I have given you numerous

chances to say that the carbon price that will apply now in less than three years' time is an accurate price or a best estimate, and you are going to great lengths to avoid using anything that might sound remotely like a convincing endorsement of that price.

CHAIR: Senator Birmingham, this is a commentary on the response that you got. I do not think that is appropriate. Mr Comley *

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Senator BIRMINGHAM: Mr Comley is quite able to respond.

CHAIR: It is not my view of what Mr Comley said. If you want to keep up

the commentary, that is fine but, Mr Comley, you do not need to respond to any commentary.

M r Comley: Thank you, Chair. I suppose what I am trying to do, Senator, is be very careful between two things. One thing is the institutional

accountability within the government as to who makes and puts within the budget the estimate of the carbon price. I am probably taking a little bit of licence in going to areas of Treasury to be helpful to the committee but

trying to draw that clear distinction between the institutional accountability for the carbon price into the budget, which is the Treasury, in the same way that the Treasury has institutional accountability for a range of estimates that figure in budget reckoning. The second thing * and where I think there is a slight distinction but it is related to the first * is what is actually

happening in carbon markets at the moment and what that may mean for the future.

It is the case that in the institutional accountabilities within government we take great interest and monitor what is happening in carbon markets at the moment and what implications that may have for further budget estimates. We then provide that information to Treasury. What I have said to you is that it is not my role to stand by and endorse or reject any particular budget parameter and, given my understanding of carbon markets * particularly the European carbon market *I do not think the current market estimate is implausible.

Senator BIRMINGHAM: You do not think that the current estimate of $29 is implausible?

Mr Comley: No.

Senator BIRMINGHAM: Okay. If that is the best endorsement we can get for it, that is what I will take *the not implausible $29.'8

Senator BIRMINGHAM: Indeed, which I appreciate is the nature of those markets. As to the changing variability of such prices, then, is it plausible that by 2016 the European carbon price could be $50?

Mr Comley: It is an interesting figure to pluck. Is it plausible? It is not what is in the budget papers as the current estimate, and I am not aware of any market commentators even outside the futures market that have picked that number. It is true, though, that in the recent past the European Union allowances did trade up to $50.

My recollection is that probably before the global financial crisis was the last time we saw a trade of around the $50 mark. In the sense that European

18 Senate Environment and Communications Legislation Committee Proof Hansard, 15 October 2012, pp. 7-8

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Union units have traded at that price so is it completely conceivable, it is not completely inconceivable.19

1.22 Professor Paul Frijters and Cameron Murray gave evidence of a potential revenue variation of $6 billion based on differences between Treasury carbon price projections and their own expectations20 21, while The Climate Institute highlighted that the totality of these latest changes by Labor would likely result in higher prices than would otherwise have been the case:

Note that the EU price has been over $30 in the last three years. ... What can be predicted with confidence is that based on the proposed linkage and limits, Australian carbon prices in 2020 will likely be substantially higher

than the recent forecasts... 1

1.23 The simple fact is that if Labor *s estimates of the future rate of the carbon tax prove too low, Australian households and businesses will face even higher electricity and other bills as a result, while if it is lower than forecast it will blow yet another hole in Labor *s budget predictions.

Surrender limits for Kyoto units

1.24 Coalition Senators acknowledge concerns by submitters that sub-limits applying to Kyoto permits as a result of this legislation are at odds with the Government's stated intention to achieve lowest cost abatement:

If the Australian coal producers are to reduce their emissions at least cost, they should be allowed unrestricted access to international permits. If Australia is happy to link with the European Union, why impose a constraint on the proportion of permits being purchased overseas? Why not go all the way to secure the lowest cost abatement solutions? There is also a policy determined quota of \2'*î per cent for CDMs which represents a high cost to be paid as a trade-off for linkage with the EU price.22

...businesses can still only use international pemiits to acquit 50 per cent of their carbon tax liability. This restriction has been made more onerous by limiting the use of low-cost Kyoto carbon units to 12.5 per cent.23

The limit proposed in the Bill is 12.5 per cent.... the limitation ... introduces additional cost and uncertainty for liable entities and is inconsistent with the policy goal of reducing greenhouse gas emissions at least cost.24

19 Senate Environment and Communications Legislation Committee Proof Hansard, 15 October 2012, pp. 10-11 20 Professor Paul Frijters and Cameron Murray, University of Queensland, Submission 6, p. 1 21 The Climate Institute, Submission 1, p. 5 22 Peter Morris, Australian Coal Association, Proof Committee Hansard, p. 8 23 Australian Coal Association, Submission 17, p. 2

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... the limit reduces our flexibility to meet our liabilities under the schemes and artificially increases our cost of compliance.24 25

Sub thresholds are a major concern for the GIF. ... There has been little

justification or rationalisation for this feature other than it was a condition of achieving an agreement.26

1.25 Once again the Gillard Government has been exposed through these changes of saying one thing, but doing another, to the detriment of Australian businesses and industry.

Carbon Tax is hurting Australian industry

1.26 Ultimately, while there are many concerns about specific detail within this legislation, the Coalition *s greatest concerns remain those about the total cost of Australia *s carbon tax, which is imposing greater costs on more of Australia *s economy than any other vaguely similar scheme worldwide.

1.27 Submitters to the inquiry highlighted that these proposed changes do nothing to alter the bad fundamentals that lie at the heart of this policy, especially its costs and its impact on Australia *s economic competitiveness:

Despite the changes proposed in the Amendment Bill, Australia will still lock-in the world's highest economy-wide carbon tax for the next three years. While the EU permit price is currently around AUDS9 a tonne, the carbon tax locks in fixed carbon prices, starting at $23 a tonne and rising to

$25.40 plus inflation over the next three years. This cost is simply not borne by competitors to Australia *s coal export industry.27

Imposing an additional cost on Australia *s coal industry in the form of a carbon tax that is not imposed by our trade competitors simply diminishes our competitive advantage. ... Any loss in coal supply from Australia will be made up by one of our competitors in countries such as Canada,

Colombia, Indonesia, Mongolia, Mozambique, Russia, South Africa and the US. ... Australia risks losing investment, export and taxation revenue and jobs, without actually realising the concomitant reduction in global emissions.28

The current amendments, and the yet to be released regulations, create considerable uncertainty and disquiet for all gas market participants. ... AIGN does not support the approach taken in the Bill and we recommend further industry consultation on these matters. ... many of Australia *s trade competitors are outside of the EU. Concerns with respect to international

24 Australian Petroleum Production and Exploration Association, Submission 7, p. 2 25 Qantas Airways Limited, Submission 15, p.l 26 Cement Industry Federation, Submission 4, p. 6 27 Australian Coal Association, Submission 17, p. 1 28 Australian Coal Association, Submission 17, p. 3

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competitiveness have not reduced as a result of the decision to legislate and operationalise a unilateral link with the EU ETS. ... Australian industry has concerns as to how will Australian competitiveness be *preserved * if the EU continues to use policy drivers to change their scheme. The EU will do that in their interest which will not necessarily be in ours. It will simply drive up our costs and should be addressed in both the bilateral agreement and the regulation.29

In terms of cement manufacturing, our major competitors are based in South East Asia.

Australia is at risk of losing competitiveness against countries that do not have market based mechanisms to deal with carbon of a similar design to Australia *s scheme.30

.. the competitive challenge to Australian liquefied natural gas (LNG) projects continues to be from countries that are not taking action to introduce carbon pricing. Most importantly, a link between the Australian

and EU schemes will do little to alter the fundamental cost/competitiveness issues facing the Australian LNG industry. Indeed, in the medium-term, should a higher EU-ETS price eventuate, this will place additional competitive pressure on trade-exposed industries, like LNG.31

1.28 Put simply, the carbon tax is a bad tax, which has a seriously negative impact on Australia *s economic competitiveness and the cost of living pressures faced by all Australians. In some instances these changes look set to compound these problems, with no demonstrable improvement in the meagre environmental outcomes this tax purports to achieve.

Recommendation

1.29 That the Senate does not pass the bill; and, further, that it repeal the Clean Energy legislative package.

Senator David Bushby Deputy Chair

29 Australian Industry Greenhouse Network, Submission 16, p. 3 Cement Industry Federation, Submission 4, p. 4 31 Australian Petroleum Production and Exploration Association, Submission 7, p. 2

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Senator Alan Eggleston Senator for Western Australia

Senator Simon Birmingham Senator for South Australia

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APPENDIX 1

Submissions received

Submitter

The Climate Institute

Business Council of Australia

Clean Energy Council

Cement Industry Federation

Greenfleet

Professor Paul Frijters and Cameron Murray

Australian Petroleum Production & Exploration Association (APPEA)

Australian Financial Markets Association (AFMA)

COzero

Institute of Chartered Accounts Australia (ICAA)

WWF-Australia

AGE Energy

International Emissions Trading Association (IETA)

Sustainable Business Australia

Qantas

Australian Industry Greenhouse Network (AIGN)

Australian Coal Association (ACA)

Institute of Public Affairs

Name withheld

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Additional information received

" Answers to three Questions on Notice taken at a public hearing in Canberra on 19

October 2012, received from the Department of Climate Change and Energy Efficiency on 23 October 2012.

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APPENDIX 2

Public Hearings and Witnesses

CANBERRA, 19 OCTOBER 2012

ABDURAHMAN, Mr Emile, Co-Chair, Australia/New Zealand Working Group, International Emissions Trading Association

BESLEY, Mr Daniel, Acting Director, Carbon Price Architecture, Department of Climate Change and Energy Efficiency

DOLMAN, Mr Benjamin Trevor, Acting General Manager, Macroeconomic Modelling Division, Treasury

DWYER, Mr Damian Michael, Director, Economics, Australian Petroleum Production and Exploration Association Limited

EL-ANSARY, Mr Yasser, General Manager, Leadership and Quality, Institute of Chartered Accountants Australia

FRITTERS, Professor Paul, School of Economics, University of Queensland

GOSMAN, Mr Alex Tod, CEO, Australian Industry Greenhouse Network

JACKSON, Mr Erwin, Deputy Chief Executive Officer, The Climate Institute

MAGAREY, Mrs Geraldine, Manager, Sustainability and Regional Australia, Institute of Chartered Accountants Australia

McDERMOTT, Mr Jai, Acting Deputy Chief Executive, Australian Coal Association

MORRIS, Mr Peter, Director, Economic Policy, Australian Coal Association

MURRAY, Mr Cameron, School of Economics, University of Queensland

PANKOWSKI, Dr Andrew Henry, Director, Coverage Section, Department of Climate Change and Energy Efficiency

RAETHER, Mr Robert, Principal Adviser, Industry, Environment and Defence Division, Fiscal Group, Treasury

WHITE, Mr James Ronald, Assistant Secretary, Carbon Pricing and Markets Division, Department of Climate Change and Energy Efficiency

WRITER, Mr Simon, Acting First Assistant Secretary, Carbon Pricing and Markets Division, Department of Climate Change and Energy Efficiency

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Legislation Committee

Renewable Energy (Electricity) Amendment (Excessive Noise from Wind Farms) Bill 2012

September 2012

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© Commonwealth of Australia 2012

ISBN 978-1-74229-687-6

Printed by the Senate Printing Unit, Parliament House, Canberra.

Senate Economics Legislation Committee

Members

Senator Mark Bishop, Chair Senator David Bushby, Deputy Chair Western Australia, ALP Tasmania, LP

New South Wales, ALP Western Australia, LP Tasmania, ALP South Australia, IND

Senator Doug Cameron Senator Alan Eggleston Senator Anne Urquhart Senator Nick Xenophon

Secretariat

Mr Tim Bryant, Secretary Ms Sharon Babyack, Senior Research Officer Ms Kate Campbell, Administrative Officer

PO Box 6100 Parliament House Canberra ACT 2600 Ph: 02 6277 3540

Fax: 02 6277 5719 E-mail: economics.sen@aph.gov.au Internet: http://www.anh.gov.au/senate/committee/economics ctte/index.htm 111

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TABLE OF CONTENTS

Membership of Committee.......................................................................................iii

Renewable Energy (Electricity) Amendment (Excessive Noise from Wind Farms) Bill......................................................................................................................1

Background to the bill................................................... .......................................... 1

Committee comment................................................................................................5

Dissenting report by Senator Madigan and Senator Xenophon ....................... 7

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Renewable Energy (Electricity) Amendment (Excessive Noise from Wind Farms) Bill 2012 1.1 The Renewable Energy (Electricity) Amendment (Excessive Noise from Wind Farms) Bill 2012 was introduced into the Senate on 28 June 2012.' On

16 August 2012 the Senate referred the bill to the committee for inquiry and report by 31 October 2012 via the adoption of a Senate Selection of Bills Standing Committee report.1 2

Overview of the bill

1.2 The bill is a Private Senators Bill, introduced by Senators Madigan and Xenophon. It proposes to amend the Renewable Energy (Electricity) Act 2000 to give powers to the Clean Energy Regulator (the Regulator) to ensure that wind farms do not create excessive noise.3

1.3 The bill proposes a definition of where a wind farm 'creates excessive noise' and proposes that:

" a wind farm be prevented from receiving accreditation if it 'creates excessive noise';

" wind farms be required to publish on the internet information about noise, wind speed and direction, weather conditions and power output; and

" the discretion of the Regulator to suspend accreditation of a power station is removed and replaced with a mandatory requirement for the Regulator to act when a power station contravenes the law (including where a wind fann 'creates excessive noise' or does not publish the required information proposed by the bill).

Background to the bill

1.4 The bill was introduced in response to evidence gathered by the Senate Community Affairs References Committee as part of its inquiry and report on The social and economic impact of rural wind farms (the report) which was tabled in June 2011. In his Second Reading Speech for the bill, Senator Madigan commented:

Everyone in this place is fully aware that on 23 June 2011, just over 12 months ago, the Senate Community Affairs References Committee tabled its report into the social and economic effects of rural wind farms. In its report, the Committee made 7 recommendations... To date nothing has

1 Journals of the Senate , 28 June 2012, pp 2700-2701.

2 Senate Selection of Bills Standing Committee, Report No. 9 of 2012, 16 August 2012 as cited in Journals of the Senate, 16 August 2012, p. 2775.

3 Explanatory Memorandum, Renewable Energy (Electricity) Amendment (Excessive Noise from Wind Farms) Bill 2012, p. 2.

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been done. If it had been done, this legislation may not have been

necessary.4 5

1.5 Senator Madigan highlighted the concerns of individuals impacted by the development of wind farms and noted the call in the report for 'further independent health studies incorporating experts from all related fields' on the matter and stated:

This Bill will hopefully go some of the way to alleviating the sufferings of some of these people and allow some to return to their homes. It may not solve all the issues but it is a start and should be put in place as soon as

possible...

Neither I nor Senator Xenophon can bring about these studies; that is up to the Government. But what we can do is to have legislation put in place to ensure that power stations deriving some or all of their power from wind must comply with acceptable standards and must openly disclose the data that is necessary to ensure these health issues do not occur.3

Senate Community Affairs Committee inquiiy into rural wind farms

1.6 The inquiry attracted considerable public interest, and received over 1000 submissions, 535 in support of wind farms and 468 that highlighted various detrimental effects of the wind fann industry. The final report addressed the key themes of the inquiry as outlined in the terms of reference:

a) Any adverse health effects for people living in close proximity to wind farms;

b) Concerns over the excessive noise and vibrations emitted by wind farms, which are in close proximity to people's homes;

c) The impact of rural wind farms on property values, employment

opportunities and farm income;

d) The interface between Commonwealth, state and local planning laws as they pertain to wind farms; and

e) Any other relevant matters.

1.7 The report examined at length concerns raised by submitters in relation to the impact of wind farm noise on the health and quality of life for residents located near a wind farm, including the impact on property values.6

1.8 The report also provided a thorough examination of wind farm noise in relation to:

" different state and local government noise standards used in the development and planning processes for wind farms.

4 Senator John Madigan, Senate Hansard, 28 June 2012, p. 4999.

5 Senator John Madigan, Senate Hansard, 28 June 2012, p. 5000.

6 Senate Community Affairs References Committee, The social and economic impact o f rural wind farm s, June 2011, pp 18 *28, pp 54-65.

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" different forms of noise measurement adopted by states and territories;7 8

" different noise standard compliance measures across jurisdictions including the adequacy of local government resources to enforce compliance with development approvals.9

1.9 The report made seven recommendations, the two most relevant to the bill are recommendations one and six which stated:

1. The Committee considers that the noise standards adopted by the states and territories for the planning and operation of rural wind farms should include appropriate measures to calculate the impact of low frequency noise and vibrations indoors at impacted dwellings.

7. The Committee recommends that the National Acoustics Laboratories conduct a study and assessment of noise impacts of wind farms, including the impacts of infrasound.10 11 12

The interface between Commonwealth, state and local planning laws

1.10 In response to concerns raised by submitters, the report considered in detail local government planning laws as they pertain to wind farms, and noted the limited role that the Commonwealth has in these matters:11

Although the wind energy industry depends on emissions reduction laws enacted by the Commonwealth and state parliaments, the planning of wind energy facilities is a matter principally for the states and local

governments...

Each state and territory is constitutionally responsible for energy matters within its own jurisdiction. Consequently, the national energy policy is mainly implemented at the state and territory level using existing planning 12 systems.

7 Senate Community Affairs References Committee, The social and economic impact o f rural wind farms, June 2011, pp 10-12.

8 Senate Community Affairs References Committee, The social and economic impact o f rural wind farms, June 2011, pp 12 *15.

9 Senate Community Affairs References Committee, The social and economic impact o f rural wind farms, June 2011, pp 15-18.

10 Senate Community Affairs References Committee, The social and economic impact o f rural wind farms, June 2011, pp 15, 28.

11 Senate Community Affairs References Committee, The social and economic impact o f rural windfarms, June 2011, Chapter 3.

12 Senate Community Affairs References Committee, The social and economic impact o f rural wind farms, June 2011, pp 29, 30. The report notes as an example the Renewable Energy (Electricity) Act 2000 (Cth) and Climate Change Act 2010 (Vic).

The report also notes the provisions of the Environment Protection and Biodiversity Conservation Act 1999 would, in some instances, result in the Commonwealth's involvement in the approval of a wind fann proposal (see pp 50-51).

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1.11 The report highlighted evidence from some submitters that the multiplicity of planning systems 'can cause confusion and uncertainty * and that 'the interface between planning systems [is] not necessarily transparent or well understood'.13 One submitter, however, did speak out in opposition to 'special purpose Commonwealth legislation'

for wind energy and argued that it 'would be unprecedented for the Commonwealth to step in and apply regulatory requirements to one particular energy industry to the exclusion of all others'.14 The report, however, concluded that there is a greater need for 'certainty, consistency and transparency in Australia's wind farm planning processes'.15

1.12 Currently at a national level, planning for wind farms is provided only in draft guidelines and these are not accepted by all jurisdictions and wind farm operators.16 The report canvassed some submitters' criticisms of the noise assessment provisions in the draft guidelines:

Origin Energy Limited referred to a report which it had commissioned into the effect of the Draft Guidelines' proposed noise requirement. The technical consultancy, Sonus, reported that the guideline, which includes a 5 dB penalty for 'unpredictable audible characteristics', could require the removal of two-thirds of proposed turbines from a typical project. Origin Energy Limited submitted that that this would create an unviable situation for any new wind farm project and suggested that the 'noise section' be rewritten prior to any further consideration of its adoption by the states.17

The bill's proposed definition of 'creates excessive noise'

1.13 As mentioned, the bill proposes to introduce a definition of 'creates excessive noise' to insert into Commonwealth law through the Renewable Energy (Electricity) Act 2000. The proposed definition states:

For the purposes of this Act, a wind farm creates excessive noise if the level of noise that is attributable to the wind farm exceeds background noise by 10 dB(A) or more when measured within 22 metres of any premises:

(a) that is used for residential purposes; oi≠

ls Senate Community Affairs References Committee, The social and economic impact o f rural wind farms, June 2011, p. 31.

14 Dr James Prest, Australian National University , Australian Centre for Environmental Law and Centre for Climate Law and Policy, Submission 631, p. 2 in Senate Community Affairs References Committee, The social and economic impact o f rural wind farms, June 2011, pp 43-44.

15 Senate Community Affairs References Committee, The social and economic impact o f rural wind farms, June 2011, p. 44.

16 Environment Protection and Heritage Council, National Wind Farm Development Guidelines Draft, July 2010. See discussion in report pp 46^19.

17 Senate Community Affairs References Committee, The social and economic impact o f rural windfarms, June 2011, p. 49. See Sonus Pty Ltd, Draft National Wind Farm Development Guidelines, Review o f Noise Aspects, November 2010, p. 7 and Origin Energy Limited, Submission 591, p. 15.

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(b) that is a person's primary place of work; or

(c) where persons habitually congregate.

Committee comment

1.14 The committee notes that this bill seeks to provide some certainty and consistency on wind farm noise standards at a national level by amendment to a Commonwealth Act. \

Social and health impacts * scientific analysis required

1.15 The committee notes the extensive evidence that was collected, and thoroughly examined, by the Senate Community Affairs References Committee on the impact of rural wind farms (the report). The report highlighted that the predominant issues surrounding wind farm noise pertain to the health and quality of life of residents living near wind farms. The committee commends this thorough examination of these issues to those seeking further information on public debate on this matter.

1.16 The committee recognises that appropriate noise standards for wind farms is not a foregone conclusion, and is a matter for serious consideration. A determination in noise standards poses impacts for residents located near wind farms, as well as practicalities for wind farm operators themselves. This bill goes to the heart of this debate and requires empirical scientific data to reach a formal conclusion * a matter well outside the scope of this committee.

1.17 These are complex issues that require adequate consideration in a more suitable forum. The committee highlights for example, recommendation six of the report 'that the National Acoustics Laboratories conduct a study and assessment of noise impacts of wind farms, including the impacts of infrasound'.ls The committee considers that further in depth research, by the appropriate body, is required in order to properly examine the merits of this bill.

Practical considerations of the Regulator and interaction with local government laws

1.18 Additionally, this bill seeks to amend the Renewable Energy (Electricity) Act 2000, responsibility for which lies with the Department of Climate Change and Energy Efficiency. That Act and the following areas of the bill in need of examination are all outside this committee's portfolio responsibilities:

" the practical operation of the bill;

" its interaction with state and local government laws;

" and its impact on the Regulator.

Concluding remarks and future debate

1.19 The committee notes that the opportunity remains for the bill to be referred to another committee, should the sponsors so wish, during the second reading stage of the bill. 18

18 Senate Community Affairs References Committee, The social and economic impact of rural wind farms, June 2011, p. 28.

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1.20 The committee also takes the opportunity to acknowledge the considerable work undertaken by Senator Madigan on this issue and his desire for prompt action on the matter.1Q The committee notes the Senator's comments in his Second Reading Speech regarding the pending government response to the wind farms report and its recommendations.

1.21 The committee highlights that the government is considering the report and the important issues that it raised. The committee reiterates the need for adequate consideration of these issues and notes that the government response to the complex issue of noise created by wind farms is still in development.

Senator Mark Bishop

Chair 19

19 See Senator John Madigan, Senate Hansard, 7 February 2012, p. 205.

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Dissenting Report by Senator John Madigan and Senator Nick Xenophon

Introduction

1.2 The Renewable Energy (Electricity) Amendment (Excessive Noise from Wind Farms) Bill 2012 was introduced as a result of the disappointing response of the Federal Government to the Community Affairs Committee *s report into the Social and Economic Impact of Rural Wind Farms. The Community Affairs Committee inquiry received over 1000 submissions and heard evidence from a wide variety of witnesses,

including rural residents, doctors, lawyers, community groups, environmental groups and wind farm operators. In response to the evidence received the committee made the following seven unanimous recommendations:

Recommendation 1

The Committee considers that the noise standards adopted by the states and territories for the planning and operation of rural wind farms should include appropriate measures to calculate the impact of low frequency noise and vibrations indoors at impacted dwellings.

Recommendation 2

The Committee recommends that the responsible authorities should ensure that complaints are dealt with expeditiously and that the complaints processes should involve an independent arbitrator. State and local government agencies responsible for ensuring compliance with planning permissions should be adequately resourced for this activity.

Recommendation 3

The Committee recommends that further consideration be given to the development of policy on separation criteria between residences and wind farm facilities.

Recommendation 4

The Committee recommends that the Commonwealth Government initiate as a matter of priority thorough, adequately resourced epidemiological and laboratory studies of the possible effects of wind farms on human health.

This research must engage across industry and community, and include an advisory process representing the range of interests and concerns.

Recommendation 5

The Committee recommends that the NHMRC review of research should continue, with regular publication.

Recommendation 6

The Committee recommends that the National Acoustics Laboratories conduct a study and assessment of noise impacts of wind farms, including the impacts of infrasound.

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Recommendation 7

The Committee recommends that the draft National Wind Farm Development Guidelines be redrafted to include discussion of any adverse health effects and comments made by NHMRC regarding the revision of its 2010 public statement.

1.3 It should be noted that Recommendations 4 and 6, relating to epidemiological studies of wind farms and human health and studies of the noise impacts of wind farms are yet to be conducted, despite the passing of more than a year since the committee reported. Furthermore, recommendations 1 and 2 are yet to be acted on by any of the states or territories.

1.4 The NHMRC is currently undertaking a *systematic review of the scientific literature to examine the possible impacts of wind farms on human health including audible and inaudible noise *. Given the NHMRC's *rapid review * in 2009 could not reasonably be referred to as a thorough examination of the evidence, we welcome this further examination of all available literature. We understand the 2009 review did not

include an examination of a report by the United Kingdom *s Department of Food and Rural Affairs entitled *A Review of Published Research on Low Frequency Noise and its Effects *. Given the relevance of such a study to the NHMRC review, we encourage the NHMRC to include this report in their examination of the literature.

1.5 With respect to the current NHMRC review, there are concerns that the bulk of anecdotal evidence (in the form of personal testimonies from affected residents) will not be included in the review unless it is submitted in an *organised * fashion with accompanying analysis. Such an examination of first hand claims is precisely what the Community Affairs Committee recommended, but no studies of this kind by independent researchers have taken place. Should affected communities be able to collate their experiences in the required format, any analysis they may perform could

be labelled as *amateur * or *non-scientific * due to their lack of qualifications.

1.6 Therefore, appropriate weight may not be afforded to individual testimonies, even where analysis has been attempted.

1.7 Over the past 12 months we have spoken to many residents who have

complained about the noise produced by nearby wind farms. Many of these residents had requested the wind farm operators conduct noise monitoring at their properties. To our knowledge, none of these residents has been given access to a full range of noise monitoring results.

1.8 It should also be noted that AGL withdrew their development application for the Hallett 3 wind farm only days before they were due to produce noise monitoring data, including wind mast data, for their Hallett 2 wind farm, as ordered by the Enviromnental, Resources and Development Court in South Australia.

1.9 Wind farm operators claim their wind farms are compliant with noise guidelines. For instance, Acciona have said their Waubra wind farm is operated in such a way so as to ensure that all noise compliance guidelines are met. However, noise monitoring by acousticians who are not employed by wind farm operators have

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revealed that some wind farms are not. Relevantly, a study by acoustician Dr Bob Thome has found that the wind farm at Waubra is operating outside noise regulations.

1.10 In June 2012 Senator Madigan submitted a copy of Dr Thorne *s report to the Victorian Minister for Planning, the Hon Matthew Guy MLC, who had committed to suspending the operation of any wind farms found to be non-compliant with noise guidelines. No response has been received from the Minister *s office to date.

1.11 We are also aware of concerns raised by acousticians independent of the wind industry that the noise monitoring conducted by wind fami operators is not performed using equipment sensitive enough to measure infrasound and low frequency noise. Furthermore, we have been told that when noise monitoring equipment is installed, it is not positioned inside homes.

1.12 Of further concern are doubts that the current noise guidelines - with which wind farm operators purport to comply - do not protect the quality of life which was enjoyed by nearby residents prior to the constmction of the wind farm.

1.13 If the Federal Government is to subsidise wind farms by way of Renewable Energy Certificates (RECs) this must not be at the expense of the quality of life of nearby residents. Therefore, RECs should only be issued where an operator can show they are consistently operating within acceptable noise standards.

1.14 We acknowledge the Economics Committee believes an examination of the practical operation of the bill, its interaction with state and local government laws and its impact on the Clean Energy Regulator falls outside of the expertise of this committee. However, we believe that the property rights of residents are affected by wind farm developments as many are being denied the quiet enjoyment of their homes, and in some cases are being forced to abandon their properties without compensation, just or otherwise.

1.15 It has been reported that over 20 homes have been abandoned at Waubra in western Victoria. We are told a further 5 homes in Waterloo, South Australia, have also been abandoned. Investment in the property markets in mral communities may suffer as a result, particularly if populations begin to dwindle. Declining rural populations and the associated reduction in economic productivity are, in our view,

economic issues worthy of further examination.

1.16 Therefore, whilst we disagree with the Economics Committee *s view (given the quality and depth of the reports provided by the committee in relation to other inquiries), we will seek for this matter to be referred to another committee for inquiry which ought to involve public hearings and evidence called by both sides of the wind

farm debate. It is also worth nothing there is an urgency that the empirical and scientific research necessary to thoroughly examine the issue of noise standards for wind farms and human health take place within a reasonable time frame.

Adequacy of current noise guidelines

1.17 Currently the South Australian Environment Protection Authority *Wind Farm Environmental Noise Guidelines 2009 * ( *SA EPA Guidelines) and the New Zealand Standard *NZS6808:2010 Acoustics - Wind Farm Noise * are the primary guidelines

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against which wind farm noise are assessed. These documents address both audible and inaudible characteristics of noise.

1.18 However, these standards require the use of dB(A) sound meters, which do not adequately take infrasound and low frequency noise into account. Infrasound can only be measured using equipment that does not use an A-weighted scale.

1.19 Wind farm operators have also been known to compare their noise emissions with the World Health Organisation *s *Guidelines on Community Noise *. It should be noted the WHO Guidelines do not address the inaudible characteristics of noise and were written in the context of issuing guidelines for densely populated European cities rather than rural environments.

1.20 Concerns have been raised that the SA EPA Guidelines do not protect nearby residents from *adverse noise impacts *, which is contrary to the aim of the Guidelines. This is partly due to the belief that the background noise level which has been set by the EPA is already too high for rural zones. Another concern is the lack of attention paid to infrasound and low frequency noise in these guidelines, other than describing them as *annoying characteristics * of noise which are not *present at modern wind farm sites. *

1.21 Until such time as the recommended epidemiological study into the possible effects of wind farms on human health and the National Acoustics Laboratories study have been conducted, complaints from residents about the possible effects of wind farms noise cannot continue to be dismissed as *hysteria * or the results of a *nocebo * effect.

Difficulty faced by residents in obtaining noise monitoring results

1.22 Given the confident assertions of wind farms operators that they are operating within the current noise guidelines, their reluctance to release noise monitoring data to residents must be viewed with suspicion. That residents have been forced to initiate legal proceedings in order to access this data serves to compound the suspicion surrounding wind farm operators * claims.

1.23 The Renewable Energy (Electricity) Amendment (Excessive Noise from Wind Farms) Bill 2012 sought to create transparency in the operation of wind farms by requiring the publication on the internet information about noise, wind speed and direction, weather conditions and power output. It is our belief that the publication of such data would be of immense benefit to both communities and wind farm operators alike.

1.24 Such data would make it clear when wind farms are non-compliant which will enable their operators to take steps to adjust their operations in order to achieve compliance. Developers spend large amounts of time and money convincing communities around proposed developments that they take noise concerns seriously. However these efforts are undermined by the lack of transparency when it comes to releasing noise data from existing wind farms.

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Concerns about wind energy intermittency and RECs

1.25 The intermittent nature of wind energy raises concerns about wind *s ability to cope with peak demand. The Australian Energy Market Operator (AEMO) anticipates the contribution of South Australian wind farms during future summer and whiter peak demand will be 5% and 3.5% respectively of installed wind farm capacity.

Furthermore, figures obtained by the AEMO demonstrated that during the heatwave between 20 January 2011 to 2 February 2011 *as demand (for electricity) increased, the contribution from wind generation fell *.

1.26 We hold reservations that this technology should be subsidised to the extent that it is, given its shortcomings in replacing baseload power due to its inherently intermittent nature. Further there is a concern that in economic terms, given the nature of the structure of the REC scheme and the issue of RECs in their current form, that

investment in alternative renewable energy sources is being compromised, particularly geothermal, solar thermal and tidal power. Those forms of alternative energy have the real potential to replace coal fired power stations.

1.27 Further to the previous paragraph, wind fami output can be bid into the National Electricity Market at zero dollars because wind farm owners can access RECs as an income stream once eligible energy has been generated. As the lowest cost output is the first to be dispatched to the grid, wind energy - with the assistance

of RECs - has the ability to displace electricity from sources that have higher marginal costs of generation. This leads to the following questions:

" Is wind energy the most cost efficient form of renewable energy to achieve greenhouse gas abatement? and;

" Are RECs driving out investment from other forms of renewable energy technology that could provide baseload generation, such as geothermal technology?

" It is time the energy production and efficiency of wind farms is examined against the impact this technology is having on rural communities. Wind farm operators cannot continue to be rewarded with RECs if wind farms are not complying with acceptable noise standards.

1.28 It is hoped the Senate will support a resolution to refer this bill to another Senate Committee in order to allow for public submissions and evidence to be called from those who both support and oppose this bill.

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Senator John Madigan Democratic Labor Party Senator for Victoria

Senator Nick Xenophon Independent Senator for South Australia

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Economics

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Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 [Provisions]

August 2012

307

© Commonwealth of Australia 2012

ISBN 978-1-74229-670-8

Printed by the Senate Printing Unit, Parliament House, Canberra.

Senate Economics Legislation Committee

Members

Senator Mark Bishop, Chair Senator David Bushby, Deputy Chair Western Australia, ALP Tasmania, LP

New South Wales, ALP Western Australia, LP Tasmania, ALP South Australia, IND

Senator Doug Cameron Senator Alan Eggleston Senator Anne Urquhart Senator Nick Xenophon

Secretariat

Mr Tim Bryant, Secretary Ms Sharon Babyack, Senior Research Officer Mr Robert Crofts, Research Officer Ms Kate Campbell, Administrative Officer

PO Box 6100 Parliament House Canberra ACT 2600 Ph: 02 6277 3540 Fax: 02 6277 5719

E-mail: economics.sen@aph.gov.au Internet: http://www.aph.gov.au/senate/committee/economics_ctte/index.htm 111

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TABLE OF CONTENTS

Membership of Committee.....................................................................................iii

Glossary......................................................................................................................vii

Abbreviations............................................................................................................ ix

Chapter 1: Introduction and conduct of the inquiry..........................................1

Conduct of the inquiry............................................................................................2

Policy context and background to the inquiry........................................................2

Structure of this report .......................................................................................... 10

Chapter 2: Overview of the bill.............................................................................11

Tax treaties and Division 13 of the Income Tax Assessment Act 1936 ............. 11

OECD guidance.................................................................................................... 13

Thin capitalisation................................................................................................ 14

Administrative penalties ....................................................................................... 15

Retrospective application ..................................................................................... 16

Chapter 3: Revenue implications and judicial commentary .......................... 19

Revenue implications ........................................................................................... 19

Judicial rulings on treaty taxation powers............................................................25

Chapter 4: Australian Taxation Office rulings ................................................. 31

Testing ATO rulings in Court...............................................................................31

Speeches by the Commissioner............................................................................35

Committee view....................................................................................................37

Chapter 5: Submitters * views on Parliament *s intention ................................ 39

Tax treaties - a sword or shield?..........................................................................40

Chapter 6: Parliament's intention since 1982 ................................................... 49

19S2 introduction of Division 13.........................................................................50

1984 amendments to the penalty provisions..........................................................54

1995 explanation of franking credits......................................................................56

Committee view.......................................................................................................58

Chapter 7: Parliament's intention expressed in the 2003 amendment ........ 61

Submitters' views.....................................................................................................61

Amendment to subsection 170(14) - definition of'relevant position' ................. 63

Committee view.......................................................................................................65

Chapter 8: Implications for taxpayers and

international trading partners ...............................................................................67

Implications for taxpayers...................................................................................... 67

Relationship with foreign trading partners.............................................................70

Further guidance on retrospective application of the bill requested.....................79

Committee view.......................................................................................................80

Chapter 9: Transaction based arm's length assessments ................................. 81

Customs laws...........................................................................................................87

Treasury's response..................................................................................................90

Committee view and concluding comments ......................................................... 92

Coalition Senators' Dissenting Report .................................................................. 95

Appendix 1: Submissions and additional information received ..................... 99

Appendix 2: Public hearings and witnesses........................................................101

Appendix 3: The ATO *s Tax Rulings 103

Glossary1

A rm 's length prin cip le Based on the price that two unrelated/independent parties would agree to for a transaction.

A ssociated enterprise A component of a multinational group.

C om p arab le

un con trolled prices

m ethod

An arm's length method which compares the dealings between related parties to third party dealings in terms of product characteristics and market characteristics.

Mu ltin ation al

En terp rises (MN Es)

An enterprise operating in several countries but managed from one (home) country. Generally, any company or group that derives a quarter of its revenue from operations outside of its home country is considered a multinational enterprise.

Profit shifting A form of transfer pricing manipulation where a multinational group engages in

practices to reduce its overall tax bills.

This is usually done by shifting profits from entities based in higher taxing countries to an associated entity in a lower taxing country through under-charging or over-charging on intra-group trade.

Tax treaty A mechanism to coordinate taxing rights between two countries.

Thin capitalisation When the capital of a company is made up of a much larger contribution of debt

than equity.

This form of leveraging may be utilised as the distribution of interest on debts may be deducted as interest whereas the distribution on stock are non-deductible dividends.

Tran saction al net

m argin m ethod

An arm's length method which compares the functions (taking into account the assets used and risks assumed) in the related party dealings with third party dealings and the arm's length net margins obtained.

Tran sfer pricing A transfer price is used to determine costs between individual entities of a

multinational enterprise for transactions between each other for goods and services.

Tran sfer pricing

ad ju stm en t

A tax adjustment made by the ATO when it determines that the pricing scheme of an enterprise falls outside the range of what is considered to be an arm's length transaction between related enterprises.

Tran sfer p ricin g b en efit Based on the difference between the profits that an entity would have made

having regard to the arm's length principle, and the amount it actually made.

Terms of this glossary are adapted from material within this report; Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012; Investopedia, htttp://www.investopedia.com/terms/t/transferprice.asp#axzzlyJYWAaU3 (accessed 20 June 2011); Australian Taxation Office, 'International transfer pricing: applying the arm's length principle', April 2005, http://www.ato.gov.au/content/downloads/LBI 35285 Applying arms length principle.pdf (accessed 27 June 2012); BusinessDictionary.com, http://www.businessdictionarv.eom/definition/multinational-corporation-MNC.htrnl#ixzzlwGVrwkt (accessed 27 June 2012).

vii

313

314

Abbreviations

ALP Arm's length principle

APA Advanced Pricing Agreement

ATO Australian Taxation Office

Commissioner Commissioner of Taxation

CUP Comparative Uncontrolled Prices (test)

Division 13 Division 13 of the Income Tax Assessment Act 1936 which contain transfer pricing rules

Division 820 Division 820 of Income Tax Assessment Act 1997 containing provisions on thin capitalisation

DTA Double Tax Agreement

ITAA 1936 Income Tax Assessment Act 1936

ITAA 1953 International Tax Agreement Act 1953

ITAA 1997 Income Tax Assessment Act 1997

IT(TP) Act 1997 Income Tax (Transitional Provisions) Act 1997

MAP Mutual Agreement Procedure

OECD Organisation for Economic Co-operation and Development

OECD Guidelines OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

OECD Model OECD Model Tax Convention on Income and on Capital

SNF case Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74

TAA 1953 Taxation Administration Act 1953

ix 315

316

Chapter 1

Introduction and conduct of the inquiry

1.1 The Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) was introduced into the House of Representatives on 24 May 2012.1 The bill was passed in the House of Representatives on 19 June 2012 without amendment. On 19 June 2012, the Senate referred the provisions of the bill to the committee for inquiry and report by

14 August 2012.1 2

Cross-border transfer pricing

1.2 Treasury outlined that '[transfer pricing refers to the prices charged when one part of a multinational group buys or sells products or services from another part of the same group in a different country. The prices charged will impact their level of profits, and therefore the amount of tax they have to pay, in the respective countries'.3 Transfer pricing rules are intended to require multinational firms to price intra-group goods and services to properly reflect the economic contribution of their Australian operations.4

1.3 In his second reading speech, the Hon Mr David Bradbury, MP, Assistant Treasurer and Minister Assisting for Deregulation, outlined that transfer pricing rules 'are critical to the integrity of the tax system':

This bill will play an important role in ensuring that an appropriate return, for the contribution of Australian operations to a multinational group, is taxed in Australia for the benefit of the broader community.

This is an important issue: in 2009 cross-border trade within multinational groups was valued at approximately $270 billion, or about 50 per cent of Australia's total trade flows.5

1.4 The Assistant Treasurer outlined that the amendments 'reflect the bargain we have struck in our treaties' and that they 'are consistent with internationally accepted

1 Votes and Proceedings, House of Representatives, 24 May 2012, p. 1487.

2 Selection of Bills Standing Committee, Report No. 6of2012, 19 June 2012 as cited in Journals of the Senate, 19 June 2012, p. 2258.

3 Treasury, 'Review of transfer pricing rules - Modernising Division 13', http://www.ato.gov.au/taxprofessionals/contei'it.aspx?doc=/content/00300689.htm&nc=001/005 /054/007/005&mnu=0&mfp=&st=&cv= (accessed 19 June 2012).

4 Mr Bernard Pulle, 'Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012' Bills Digest No. 160, 2011-12, Parliamentary Library, 19 June 2012, p. 4.

5 The Hon. David Bradbury, MP, Assistant Treasurer and Minister Assisting for Deregulation, House of Representatives Hansard, 24 May 2012, p. 5480.

Page 2

transfer pricing rules'. He noted that the measures are intended to clarify the operation of the current law.6

Conduct of the inquiry

1.5 The committee advertised the inquiry on its website and wrote directly to a range of individuals and organisations inviting written submissions. These included government departments, industry groups, and academics. The committee received 23 submissions, which are listed at Appendix 1.

1.6 The committee also held a public hearing in Canberra on 26 July 2012. The names of the witnesses that appeared are at Appendix 2.

1.7 The committee thanks all who contributed to the inquiry.

Policy context and background to the inquiry

1.8 The Organisation for Economic Co-operation and Development (OECD) stated in its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations'.

The role of multinational enterprises (MNEs) in world trade has increased dramatically over the last 20 years. This in part reflects the increased integration of national economies and technological progress, particularly in the area of communications. The growth of MNEs presents increasingly complex taxation issues for both tax administrations and the MNEs themselves since separate country rules for the taxation of MNEs cannot be viewed in isolation but must be addressed in a broad international context.

These issues arise primarily from the practical difficulty, for both MNEs and tax administrations, of determining the income and expenses of a company or a permanent establishment that is part of an MNE group that should be taken into account within a jurisdiction, particularly where the MNE group *s operations are highly integrated.

In the case of MNEs, the need to comply with laws and administrative requirements that may differ from country to country creates additional problems. The differing requirements may lead to a greater burden on an MNE, and result in higher costs of compliance, than for a similar enterprise operating solely within a single tax jurisdiction.

In the case of tax administrations, specific problems arise at both policy and practical levels. At the policy level, countries need to reconcile their legitimate right to tax the profits of a taxpayer based upon income and expenses that can reasonably be considered to arise within their territory with the need to avoid the taxation of the same item of income by more

than one tax jurisdiction. Such double or multiple taxation can create an impediment to cross-border transactions in goods and services and the

6 The Hon. David Bradbury, MP, Assistant Treasurer and Minister Assisting for Deregulation, House of Representatives Hansard, 24 May 2012, p. 5480.

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movement of capital. At a practical level, a country *s determination of such income and expense allocation may be impeded by difficulties in obtaining pertinent data located outside its own jurisdiction.7

1.9 The Tax Justice Network Australia (TJN-Aus) provided an overview of global mispricing activities and trends with an emphasis on the impact of mispricing on developing countries:

Anti-corruption non-government organisation, Global Financial Integrity, estimated collectively developing countries lost US$418 billion from transfer mispricing in 2009, much of this money laundered through secrecy jurisdictions. Africa lost US$25 billion in transfer mispricing, while the

Philippines lost US$8.1 billion, Cambodia US$721 million and Indonesia US$8.5 billion. Globally overseas aid in 2009 was only US$120 billion...

Christian Aid commissioned calculations also found that Australia lost 1.1 billion euros in tax revenue through transfer mispricing to the EU in the period 2005-2007 and US$1.5 billion in tax revenue through transfer mispricing to the US in the same period....

The TJN-Aus is concerned by allegations of well known multinational companies being engaged in tax dodging, suggesting that it cannot be taken for granted that all companies will seek to comply with the spirit of the tax laws in the countries they operate in.8

International developments and the arm's length principle

1.10 In 1995 the OECD published the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD guidelines); these were updated in 2010. The guidelines have been largely followed in domestic transfer pricing regulations in OECD Member countries. The guidelines provide an overview

of the 'arm's length principle' which is used to establish a transfer price that is based on a price that two unrelated/independent parties would agree to for a particular transaction in similar circumstances. There are five different transfer pricing methods used to calculate an arm's length price which are divided into two categories:9

Traditional transaction methods

" comparative uncontrolled price method;

" resale price method; and

7 Organisation for Economic Co-operation and Development, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, p. 17.

8 Tax Justice Network Australia, Submission 12, p. 1; see Dev Kar and Sarah Freitas, *Illicit Financial Flows from Developing Countries Over the Decade Ending 2009 *, Global Financial Integrity, December 2011, pp 5, 48-50; see David McNair and Andrew Hogg, *False profits: robbing the poor to keep the rich tax-free *, Christian Aid, March 2009, pp 20, 27.

9 UN Tax Subcommittee on Practical Transfer Pricing Issues, 'An introduction to Transfer Pricing', Background Paper, pp 6 *7, 8. The arm's length principle is found in the UN Model Convention Article 9(1).

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" cost plus method.

Transactional profit methods

" transactional net margin method; and

" transactional profit split method.10 11

1.11 The majority of discussion on methodology within this report relates to the comparative uncontrolled price method and the transactional net margin method. Figure 1.1 provides a simplified comparison of arm's length methodologies.

1.12 The Australian Taxation Office (ATO) guide, International Transfer Pricing: Applying the arm *s length principle describes the arm's length principle as follows:

The arm *s length principle uses the behaviour of independent parties as a guide or benchmark to determine how income and expenses are allocated in international dealings between related parties. It involves comparing what a business has done and what a truly independent party would have done in the same or similar circumstances. 1

1.13 The secretariat to the UN Tax Subcommittee on Practical Transfer Pricing Issues outlined the rationale for the arm's length principle:

...because the market governs most of the transactions in an economy it is appropriate to treat intra-entity or intra-group transactions as equivalent to those between independent entities. Under the arm's length principle, the allocation of expenses and profits with respect to intra-group transactions is tested and adjusted, if the transfer prices are found to deviate from comparable aim *s length transactions. The arm's length principle is argued to be acceptable to everyone concerned as it uses the marketplace as the norm...

Overall, the underlying idea behind the ann *s length principle is the attempt to place transactions, both uncontrolled and controlled, on equal terms in teims of tax advantages (or disadvantages) that they create. It has been widely accepted and has found its way into most transfer pricing legislation across the world.12

10 Organisation for Economic Co-operation and Development, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, pp 59-107; Australian Taxation Office, 'International transfer pricing: applying the arm's length principle', April 2005, pp 6-7, http://www.ato.gov.au/content/downloads/LBI_35285 Applying arms length principle.pdf

(accessed 27 June 2012).

11 Australian Taxation Office, 'International transfer pricing: applying the arm's length principle', April 2005, p. 3, http://www.ato.gov.au/content/downloads/LBI 35285 Applying arms length principle.pdf (accessed 27 June 2012).

12 UN Tax Subcommittee on Practical Transfer Pricing Issues, 'An introduction to Transfer Pricing', Background Paper, pp 9, 11.

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Figure 1.1: Comparability issues in methodology selection

______________________________________________________________________________________ Page 5

Are reliable Can you establish

independenttransactional comparables YES comparability on

available from --------^price or using

external or arm's lengtn

internal sources?gross margins?

Can you establish reliable comparability on price or ami's length gross margins with increased aggregation of related oarty dealings?

YES 9

Use traditional %†Pansactional methods but witn the comparaoilrty

analysis having a broader focus.

What comparability analysis compares when using: Comparable uncontrolled price method Compares the dealings betw een related parties

to third party dealings in terms of product characteristics and market characteristics."

Resale price method Compares the dealings betw een related parties to third pahy dealings in terms of the functions

performed (taking into account assets used and risks assumed) and the arm's length gross margins obtained. Product similarity is considered in the light of the functions performed and the market conditions.*

Cost plus method Compares the dealings betw een related parties to third party dealings in terms of the costs incurred and the arm's length gross margins in the light of the functions performed and the market conditions*

Can you

establish reliable comparability using transactional profit methods?

U se transactional profit methods but with the

comparability analysis having a broader focus.

Can you

establish reliable comparability with increased aggregation of

related party dealings?

Use other approaches Determine the use arid scope of any compatibility analysis on the facts and by the need to find an answer.

What a comparability analysis compares when using: Profit split method Comparability analysis is directed at identifying and establishing the relative importance of the contributions of the parties.

Transactional net margin method Compares the functions (taking into account the assets used and risks assumed) in the related party dealings with third party dealings and the arm's length net margins obtained.*

* may need to consider specif conditions,

mciudng 'actors bearing on compa-abllitv, such as the economc circumstances and the business syaiegies you nave adopted.

Source: Australian Taxation Office, 'International transfer pricing: applying the arm's length principle', April 2005, p. 7.

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Australian transfer pricing rules

1.14 The Explanatory Memorandum (EM) outlined that under Australia's current regulatory framework, the arm's length principle is established in Division 13 of Part III of the Income Tax Assessment Act 1936 which provides transfer pricing rules to both:

" capture fiscal evasion, including inappropriate profit shifting to overseas jurisdictions with lower tax regimes; and

" relieve double taxation.13

1.15 Australian tax treaties also contain articles pertaining to transfer pricing rules: the associated enterprise article (usually article 9) and the business profits article (usually article 7).14 The treaties are incorporated into domestic law as part of the International Tax Agreement Act 1953 and are generally based on the OECD Model

Tax Convention on Income and on Capital which also incorporates the arm's length principle.

1.16 The EM placed a strong emphasis on the Commissioner of Taxation's position that 'Division 13 and/or Australia's tax treaty provisions could be used in making transfer pricing adjustments'.

1.17 It argued that income tax law has made specific provision for transfer pricing amendments based on treaty rules since 1982. The EM outlined that under the current regulatory framework it has been understood that 'a treaty power to make a transfer pricing adjustment could apply if inconsistent with Division 13' of the Income Tax Assessment Act 193&.

The Parliament not only assumed that the treaty transfer pricing rules could be applied to increase a taxpayer *s liability, but intended this outcome be both facilitated and clarified through further amendments to the income tax laws (notably through the enactment of section 170 and former section 226 of the IT A A 1936).

The plain words of subsections 170(9B), 170(9C) and 170(14) of the ITAA 1936, introduced in 1982 (with Division 13), assume the treaty transfer pricing rules provide a power to amend assessments.15

13 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, p. 11; Mr Bernard Pulle, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012', Bills Digest No. 160, 2011-12, Parliamentary Library, 19 June 2012, p. 5.

14 Australian Taxation Office, 'Legal database: Australian Tax Treaties' http://law.ato. gov.au/atolaw/view.htm71ocid-RPC/19530082/ATQtoc'&PiT=9999123123 5958 (accessed 25 June 2012).

15 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, p. 9.

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Recent court proceedings

1.18 In June 2011, a matter relating to transfer pricing was brought before the Federal Court. Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (SNF case) concerned the transfer pricing provisions in Division 13 and their application to SNF (Australia) Pty Ltd's (SNF) purchase of chemical products from overseas companies, all of whom were owned by the same parent company as SNF. The proceedings challenged the interpretation and application of transfer pricing adjustments.16

1.19 Between 1998 and 2004, SNF sold polyacrylamide products, used in the cleansing of water, to Australian businesses. It purchased these chemicals from a number of overseas companies owned by the same parent company as SNF. During this period, SNF incurred trading losses, which it said were the result of significant Australian competition, poor management and poor employee sales performance.

1.20 The Commissioner of Taxation (Commissioner) disagreed with these reasons, attributing the losses wholly to SNF paying its suppliers more than arm *s length consideration. Accordingly, the Commissioner issued transfer pricing adjustments under Division 13 of the ITAA to account for these allegedly inflated prices and to

increase SNF *s taxable income for financial years ending on 30 June 1998 to 2000 and 2002 to 2004.

1.21 SNF appealed the Commissioner's decision to the Federal Court, where it successfully argued that the transactions with its related companies were at arm's length and its losses were due to other factors. SNF argued that whether or not a transaction was at arm's length should be assessed by reference to the prices paid for the same or comparable products by third parties, referred to as comparable uncontrolled prices. The Federal Court found at first instance that the prices paid by

SNF to its related company suppliers were less than the prices paid by third parties for the same or similar products. Accordingly, the Federal Court ruled that the Commissioner should not have adjusted SNF *s taxable income. The Commissioner appealed to the Full Court of the Federal Court (Full Court).

Full Court *s Decision

1.22 The Commissioner argued before the Full Court that the third party transactions upon which SNF relied were not sufficiently comparable to the transactions between SNF and its related company suppliers to show that the SNF's consideration was at arm's length. Because there were no comparable transactions, the

Commissioner argued, the Court could not use the comparable uncontrolled prices method to determine whether or not SNF's consideration was at arm's length and should use an alternative method. The Commissioner argued that the appropriate method was the transactional net margin method, which looked at the median

______________________________________________________________________________________ Page 7

16 Commissioner of Taxation v SNF (Australia) Pty Ltd [2011 ] FCAFC 74, 1 June 2011, http://www.austlii.edu.au/au/cases/cth/FCAFC/201 l/74.html (accessed 25 June 2012).

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Page 8

operating profit margins of other businesses with similar functions and risk profiles to determine the operating profit margin SNF should have made and the prices it should have paid for the products.

1.23 The Full Court rejected this argument. It found that the transactions upon which SNF relied were sufficiently comparable and that by using the comparable uncontrolled prices method, SNF had paid less for the chemical products than had third parties.17

1.24 The Commissioner also argued that the transfer pricing provisions in Division 13 of the IT A A should be inteipreted consistently with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines). The Commissioner stated that the OECD Guidelines required an inquiry into what a purchaser in identical circumstances to those of the taxpayer would have paid, but for its membership of the group.

1.25 The Full Court also rejected this argument. It found that the OECD Guidelines did not support 'the Commissioner's submission that one was required to examine only putative purchasers who were in the same circumstances as the taxpayer'18. Further, the Full Court found that the OECD Guidelines were not a legitimate guide to interpreting either the double taxation treaties underlying Division 13 of the IT A A or, accordingly, Division 13 itself.19 This was because the OECD Guidelines could only be used to assist interpretation of taxation treaties where they reflect the subsequent agreement or practice of the relevant State's parties. As there was no evidence of such agreement or practice, the Commissioner could not rely on the OECD Guidelines to interpret either the treaties or Division 13.20 The Full Court did, however, note that materials relevant to the interpretation of the double taxation treaties could be used to resolve ambiguities in Division 13 of the ITAA. This was because the double taxation treaties and Division 13 should be interpreted consistently.21

1.26 The Full Court upheld the trial judge's interpretation of the arm's length requirement, endorsing the trial judge *s statement that:

The essential task is to determine the arm's length consideration in respect of the acquisition. One way to do this is to find truly comparable transactions involving the acquisition of the same or sufficiently similar

17 Commissioner of Taxation v SNF (Australia) Pty Ltd [2011 ] FCAFC 74, 1 June 2011, 70, http://www.austlii.edu.au/au/cases/cth/FCAFC/201 l/74.html (accessed 25 June 2012).

18 Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74, 1 June 2011, 106, http://www.austlii.edu.au/au/cases/cth/FCAFC/2011/74.html (accessed 25 June 2012).

19 Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74, 1 June 2011, 118, http://www.austlii .edu.au/au/cases/cth/FCAFC/201 l/74.html (accessed 25 June 2012).

20 Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74, 1 June 2011, 117, http://www.austlii.edu.au/au/cases/cth/FCAFC/2011/74.html (accessed 25 June 2012).

21 Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74, 1 June 2011, 118-120, http://www.austlii.edu.au/au/cases/cth/FCAFC/201 lZ74.html (accessed 25 June 2012).

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products in the same or similar circumstances, where those transactions are undertaken at arm's length, or if not taken at arm's length, where suitable adjustment can be made to determine the arm's' length consideration that would have taken place if the acquisition was at aim's length.22

1.27 The EM outlined the Commissioner of Taxation's position in relation to the recent court proceedings:

The Commissioner of Taxation (the Commissioner) has long held and publicly expressed a view that the treaty transfer pricing rules, as enacted, provide an alternate basis to Division 13 [of the Income Tax Assessment Act 1936] for transfer pricing adjustments...

This case was argued only on the basis of Division 13; the Court did not have to decide whether the Commissioner could apply the relevant treaty rules as an alternate basis for transfer pricing adjustments. However, the decision in SNF highlighted that Division 13 may not adequately reflect the

contributions of the Australian operations to multinational groups, and as such in some cases treaty transfer pricing rules may produce a more robust outcome.23

Consultation on reforms

1.28 On 1 November 2011 the government announced a consultation process on reforms to transfer pricing rules highlighting that 'recent court decisions suggest our existing transfer pricing rules may be interpreted in a way that is out-of-kilter with international norms'.24 The Hon Bill Shorten, MP, Minister for Financial Services and Superannuation stated:

International thinking on transfer pricing has moved on since the current transfer pricing rules were inserted in the income tax law... Last year, for example, the OECD substantially updated its Transfer Pricing Guidelines, which are used by governments and business alike.25

1.29 In line with the announcement, Treasury released a consultation paper, Income tax: cross border profit allocation review of transfer pricing rules.

22 Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74, 1 June 2011, 121, http://www.austlii.edu.au/au/cases/cth/FCAFC/201 l/74.html (accessed 25 June 2012).

23 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, pp 6-7.

24 The Hon Bill Shorten, MP, Minister for Financial Services and Superannuation, 'Robust Transfer Pricing Rules for Multinationals', Media release 145, 1 November 2011; see Treasury, 'Review of transfer pricing rules - Modernising Division 13', http://www.ato.gov.au/taxpiOfessionals/content.aspx?doc=/content/00300689.htm&pc=001/005 /054/007/005&mnu=0&mfp=&st=&cv= (accessed 19 June 2012).

25 The Hon Bill Shorten, MP, Minister for Financial Services and Superannuation, 'Robust Transfer Pricing Rules for Multinationals', Media release 145, 1 November 2011.

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Submissions to the paper closed on 30 November 2011 and 28 submissions were received.26

1.30 An exposure draft and explanatory memorandum for the bill were released on 16 March 2012. Submissions closed on 13 April 2012 and 22 submissions were received.27

1.31 In addition, three consultation meetings were held on 18 November 2011, 7 February 2012 and 4 April 2012 where tax practitioners, peak body representatives and industry representatives were invited.28

Structure of this report

1.32 Chapter 2 will provide a broad overview of the bill, and subsequent chapters will discuss certain provisions of the bill in greater detail as they relate to concerns raised by submitters to this inquiry.

1.33 Chapter 3 will discuss revenue implications in the context of the retrospective nature of the bill as well as judicial commentary on treaty based transfer pricing rules.

1.34 Chapter 4 will explore submitters' views on Australian Taxation Office rulings.

1.35 Chapters 5, 6 and 7 will address the justification of'Parliament's intention' on tax treaty powers:

" Chapter 5 will canvass submitters' views;

" Chapter 6 Treasury *s views; and

" Chapter 7 will examine the two opposing views on the 2003 amending Act which the date for retrospectivity is based.

1.36 Chapter 8 will address the impact of the bill on taxpayers, particularly in relation to the retrospective nature of the bill. It will also explore arguments that the bill discriminates against tax treaty countries.

1.37 Chapter 9 will discuss submitters' concerns regarding methods of arm's length assessments for transfer pricing with suggestions that the bill favours profit based methods at the expense of transaction based pricing methods.

26 Treasury, 'Submissions: Consultation Paper - Income Tax: Cross Border Profit Allocation - Review of Transfer Pricing Rules', http://archive.treasury.gov.au/contentitem.asp?Nav'l.d=066&ContentID=23Q5 (accessed 20 June 2012).

27 Treasury, 'Stage One Transfer Pricing Reforms: Submissions', http://www.treasurv.gov.au/ConsultationsandReviews/Submissions/2012/Stage-one-Transfer- Pricing-Reforms/Submissions (accessed 20 June 2012).

28 Treasury, Submission 21, p. 6.

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Chapter 2 i

Overview of the bill

2.1 The bill proposes to amend the Income Tax Assessment Act 1997 to insert a new Subdivision 815-A on 'Treaty-equivalent cross-border transfer pricing rules'. It also makes a number of consequential amendments to the Income Tax Assessment Act 1936. The bill addresses four key issues:

" the relationship between tax treaties and Division 13 of the Income Tax Assessment Act 1936',

" the application of OECD guidance on transfer prices in Australian law;

" thin capitalisation; and

" administrative penalties.

2.2 It is proposed that Subdivision 815-A will take effect retrospectively from 1 July 2004. The rationale for this approach is discussed below.

Tax treaties and Division 13 of the Income Tax Assessment Act 1936

2.3 Item 6 of Schedule 1 to the bill inserts proposed Subdivision 815-A intended to address debate on whether a transfer pricing adjustment may be made under either:

" Division 13 of the Income Tax Assessment Act 1936 ; or

" the transfer pricing provisions of a tax treaty, which are interpreted through the framework of OECD guidance on the arm *s length principle.1

2.4 The Explanatory Memorandum (EM) outlined that the proposed subdivision will ensure that the transfer pricing measures in Australia's tax treaties can be applied independently of Division 13:

In addition to the current law, a transfer pricing adjustment may be made under Subdivision 815-A (which, for practical puiposes will give the same result as the application of the transfer pricing provisions of a tax treaty).

The new law addresses the debate under the current law around the

application of the treaty transfer pricing articles * it ensures that the transfer pricing articles contained in Australia *s tax treaties are able to be applied and operate to provide independent assessment authority through the rules contained in Subdivision 815-A.1 2

1 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, pp 3, 6-7, 17.

2 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, p. 17.

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2.5 The EM provides further detail on how proposed Subdivision 815-A will interact with Australia's tax treaties:

A number of provisions in Subdivision 815-A refer to international tax agreements, as well as parts of those agreements, as given effect by the ITAA 1953. These references are important in determining when Subdivision 815-A will apply and ensure that the question of whether an entity gets a 'transfer pricing benefit', and the amount of any such benefit, is consistent with Australia's international tax agreements. Despite drawing upon aspects of the terms and text of Australia *s international tax agreements in this manner, the liability to tax that may be imposed under Subdivision 815-A arises under the domestic law rather than the operation of the relevant tax treaty itself.

Subsection 4(2) of the ITAA 1953 will continue to apply in the (unforeseeable) event of an inconsistency between Australia *s international tax agreements and Subdivision 815-A.3 This Subdivision only allows for

upwards adjustments to a taxpayer *s Australian tax position. However, nothing in this Subdivision prevents Australia's international tax agreements from applying in circumstances where the outcome under an agreement could result in a lesser adjustment relative to a taxpayer's position under the domestic law provisions.

Subdivision 815-A will only apply where profits have not accrued to an entity because of non-arm's length conditions and the entity *s Australian tax position is negatively affected from the perspective of the revenue as a result.4

2.6 The bill states that an entity may receive a transfer pricing benefit under proposed Subdivision 815-A by satisfying either the:

" requirements in the associated enterprises article of the relevant tax treaty * proposed subsection 815-15(1); or

" the business profits article of the relevant tax treaty *proposed subsection 815-15(2).

2.7 Proposed paragraphs 815-15(l)(d) and 815-15(2)(c) outline that the amount of the transfer pricing benefit is the difference between:

3 Subsection 4(2) o f the International Tax Agreement Act 1953 provides that, in the case o f

inconsistency with the Incom e Tax A ssessm ent Acts (1936 and 1997), the treaty provisions

have precedence.

See Mi∑ Bernard Pulle, 'Tax Laws Am endm ent (Cross-Border Transfer Pricing) Bill (N o. 1)

2012', Bills Digest No. 160, 2011-12, Parliamentary Library, 19 June 2012, p. 6; see also

discussion in Explanatory Mem orandum , Tax Laws Am endm ent (Cross-Border Transfer

Pricing) Bill (N o. 1) 2012, pp 10-11.

4 Explanatory Mem orandum , Tax Law s Am endm ent (Cross-Border Transfer Pricing) Bill (N o. 1) 2012, p. 8.

328

" the amount of the taxable income of the entity for an income year being

greater than its actual amount;

" the amount of a tax loss of the entity for an income year of the entity being

less than its actual amount; or

" the amount of the net capital loss of the entity for an income year being less than its actual amount.

OECD guidance

2.8 Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (SNF case) (as discussed in chapter 1) found that 'the Guidelines are not a legitimate aid to the construction of either Division 13 or the treaty transfer pricing articles'.5 Under proposed section 815-20 on 'Cross-border transfer pricing guidance', the determination of a transfer pricing benefit is based on the application of the arm's length principle 'which is to be determined consistently with the relevant OECD guidance (or other prescribed documents)' these include:

" the Model Tax Convention on Income and on Capital and its Commentaries as last amended on 22 July 2010 by the OECD Council;

" the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations as last amended on 22 July 2010 by the OECD Council; and

" any other documents prescribed by regulations.6

2.9 The EM outlined the rationale for using this guidance material to determine when an entity gets a transfer pricing benefit, and the amount of the benefit:

The use of OECD material in relation to parts of Subdivision 815-A is potentially available under the ordinary rules of treaty interpretation. To provide a more direct legal pathway for accessing certain guidance material, two new rules will supplement the general rules of treaty interpretation: one rule applies to income years starting on or after 1 July 2012, and a transitional rule applies for prior income years from 1 July 2004.

Australia *s international tax agreements are negotiated on the basis of the OECD Model and associated guidance material. The OECD is the primary international tax forum for Australia. The OECD material * the Model, its Commentaries and the Guidelines * are initially developed by working parties of the Committee on Fiscal Affairs, vetted by that Committee, and

finally approved or adopted at OECD Council level. Australia is represented at each of these stages and the OECD consults extensively with the international business community as part of this process.

Most of Australia *s trading and investment partners look to OECD material to ensure consistent application of transfer pricing rules. This consistency

_____________________________________________________________________________________Page 13

5 [2011] FCAFC 74.

6 Explanatory Memorandum , Tax Laws Am endm ent (Cross-Border Transfer Pricing) Bill (N o. 1)

2012, pp 17, 24-28.

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Page 14

improves certainty of application of these rules for enterprises operating across borders. Further, if different standards were used, there would be a greater risk that jurisdictions might each tax the same amount under their transfer pricing rules (resulting in double taxation), or not tax an amount at all (leading to double non-taxation).7

Thin capitalisation

2.10 When the capital of a company is made up of a much larger contribution of debt than equity it is said to be thinly capitalised. This form of leveraging may be utilised where the distribution of interest on debts may be deducted as interest and this could be compared favourably to the distribution of stock that has non-deductible dividends.8

2.11 Currently within Australia's regulatory framework, there is no specific legislative provision that addresses the relationship between transfer pricing and thin capitalisation rules. The EM noted, however, that Taxation Ruling TR 2010/7, finalised in October 2010, addressed this issue and gave the same outcome as the

proposed law will provide.

2.12 The ruling outlined the Australian Taxation Office's (ATO's) views on how the thin capitalisation provisions in Division 820 of the Income Tax Assessment Act 1997 interact with the transfer pricing provisions as set out in Division 13 and Australia's tax treaties:

It is clear from the wording of paragraph 820-40(1 )(b) that the operation of Division 820 is limited to costs incurred by an entity in relation to a 'debt interest' issued by the entity, that it can otherwise deduct from its assessable income. Accordingly, all provisions relevant to deductibility, including the transfer pricing provisions, must be applied before Division 820 comes into operation.

Therefore, the transfer pricing provisions apply firstly to require an aim's length consideration for debt funding that is provided on a non-aim's length basis, with the thin capitalisation provisions then operating on the amount of debt deductions determined based on that consideration.

The puipose of Division 820 is to set an upper limit, in the case of a non- Authorised Deposit-taking Institution (ADI), on the amount of debt in respect of which an entity can claim tax deductions. Where an entity's level of debt (that is, the 'adjusted average debt') exceeds its statutory upper limit

(the 'maximum allowable debt'), Division 820 achieves this outcome by denying a proportion of the otherwise allowable debt deductions of the entity...

7 Explanatory Mem orandum , Tax Law s Am endm ent (Cross-Border Transfer Pricing) Bill (N o. 1)

2012, pp 2 4 -2 5 .

8 U N Tax Subcom m ittee on Practical Transfer Pricing Issues, 'An introduction to Transfer

Pricing', Background Paper, pp 2 8 -2 9 .

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Division 820 addresses only the amount of debt an entity can have for purposes of deductibility of its debt deductions, while the transfer pricing provisions alone deal with the pricing of the consideration given for this

debt.9

2.13 Schedule 1, item 6, (proposed subsection 815-25(1)) and item 7 (note to section 820-30) to the bill propose amendments to clarify how Subdivision 815-A will interact with Division 820 of the Income Tax Assessment Act 1997 :10 11

Where Division 820 (about thin capitalisation) applies to a taxpayer and the transfer pricing benefit relates to profits (or a shortfall of profits) that is referable to costs that are debt deductions, the calculation of the amount of the taxpayer *s transfer pricing benefit is modified to ensure that Subdivision

815-A applies to establish an arm *s length rate in relation to a debt interest before Division 820 applies.

Administrative penalties

2.14 Currently an administrative penalty may apply to a tax payer where a transfer pricing adjustment has been made by the Commissioner. These penalty provisions are set out in Subdivision 284-C of Schedule 1 of the Taxation Administration Act 1953. The guide to subdivision 284-C states:

You are liable to an administrative penalty if you attempt to reduce your tax-related liabilities or increase your credits through a scheme. This Subdivision sets out when the penalties apply and how the amounts of the penalties are calculated.12

2.15 Items 13 and 14 of schedule 1 of the bill make amendments to the Taxation Administration Act 1953 so that penalty provisions apply to a scheme benefit calculated under proposed subdivision 815-A of the bill for a particular income year starting on or after 1 July 2012.13

2.16 Under the bill, it is proposed that penalties that relate to proposed

Subdivision 815-A, will not apply retrospectively. That is, even though Subdivision 815-A will apply to income years starting 1 July 2004, the penalties under the

9 Australian Taxation Office, 'Income tax: the interaction o f D ivision 820 o f the Incom e Tax

A ssessm ent Act 1997 and the transfer pricing provisions', TR 2010/7,

http://law.ato.gov.au/atolaw/view.htm ?docid=TXR/TR 20107/N AT/A TO/00Q01 (accessed

25 June 2012)

10 Explanatory Memorandum , Tax Laws Am endm ent (Cross-Border Transfer Pricing) Bill (N o. 1)

2012, p. 3.

11 Explanatory Memorandum , Tax Laws Am endm ent (Cross-Border Transfer Pricing) Bill (N o. 1)

2012, p. 17.

12 Taxation Administration Act 1953 , Guide to subdivision 284-C, p. 366.

13 Mr Bernard Pulle, 'Tax Laws Am endm ent (Cross-Border Transfer Pricing) Bill (N o. 1) 2012',

Bills Digest No. 160, 2011-12, Parliamentary Library, 19 June 2012, p. 14.

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proposed subdivision will only apply in respect of income years beginning on or after 1 July 2012:

Generally, additional penalties (such as administrative penalties) will be inappropriate in cases where amendments have application to prior years. In this case the application of that general principle is less clear as there is an argument that the law already applies in a way consistent with these amendments.

To the extent these amendments have retrospective application penalties will be calculated as though Subdivision 815-A had not applied. That is, penalties in relation to income years commencing prior to 1 July 2012 will be limited to amounts that can be substantiated under the provisions existing immediately prior to the enactment of Subdivision 815-A.14 15

2.17 As aptly expressed by the Assistant Treasurer, '[a] transitional rule is included in these amendments to ensure the penalty provisions of the income tax law apply as though this bill was never enacted.1"

Retrospective application

2.18 Item 12 of Schedule 1 of the bill inserts proposed section 815-1 into the Income Tax (Transitional Provisions) Act 1997 which states that proposed Subdivision 815-A of the bill applies to income years starting on or after 1 July 2004.

Financial impact and parliament's intention

2.19 The Assistant Treasurer explained that 2004 'is the first income year following the parliament's last statement [on the matter], demonstrating the longstanding legislative intent that the law operated in this way'.16

2.20 The EM outlined that the 'introduction of retrospective legislation is not done lightly... only where there is a significant risk to revenue that is inconsistent with the Parliament's intention'. The EM states that the 'measure has no revenue impact as it is a revenue protection measure'.17

14 Explanatory Memorandum , Tax Laws Am endm ent (Cross-Border Transfer Pricing) Bill (N o. 1)

2012, p. 14.

15 The Hon. David Bradbury, MP, Assistant Treasurer and Minister A ssisting for Deregulation,

House of Representatives Hansard , 24 May 2012, p. 5480

16 The Hon. David Bradbury, MP, Assistant Treasurer and Minister A ssisting for Deregulation,

House of Representatives Hansard , 24 May 2012, p. 5480.

17 Explanatory Mem orandum , Tax Laws Am endm ent (Cross-Border Transfer Pricing) Bill (N o. 1) 2012, p. 3.

332

2.21 The EM sets out in some detail 'evidence that Parliament understood the law to operate consistently' with the amendments set out in the bill:18

Given the consistent assumption by Parliament since at least 1982 that treaties provided a separate basis for making transfer pricing adjustments, the proposed amendments could apply from the commencement of

Division 13 and the accompanying changes to section 170 and former section 226 of the IT A A 1936.

Subdivision 815-A, however, will only apply to income years commencing on or after 1 July 2004. The 2004 income year commenced immediately after the Parliament *s most recent amendment to the income tax laws in 2003 which again evidenced the Parliament's understanding that tax treaties could be used as a separate basis for making transfer pricing adjustments. The 2003 amendments included a modification to the definition of 'relevant provision' contained in subsection 170(14) of the IT A A 1936 and contained

explicit statements as to the ability for such provisions to allow for adjustments to the profits of permanent establishments or associated enterprises on an arm *s length basis (see paragraph 3.5 of the Explanatory Memorandum relating to Act No 123 of 2003).19

2.22 Chapter 3 will discuss submitters' views on the retrospective application of the measures in the bill in relation to the impact on revenue. Chapter 4 will explore ATO rulings in greater depth followed by discussions on Parliament's intention in subsequent chapters.

______________________________________________'_____________________________________ Page 17

18 Explanatory Memorandum, Tax Laws Am endm ent (Cross-Border Transfer Pricing) Bill (No. 1)

2012, pp 5, 7-13.

19 Explanatory Memorandum, Tax Laws Am endm ent (Cross-Border Transfer Pricing) Bill (No. 1)

2012, pp 7-8.

333

334

Chapter 3

Revenue implications and judicial commentary

3.1 This chapter will discuss submitters' concerns in relation to:

" revenue implications and the retrospective nature of the bill including the impact on open tax disputes and settled cases; and

" judicial rulings on treaty-based transfer pricing rules including obiter comments and SNF Australia Pty Ltd v Commissioner of Taxation [2011] FCAFC 74 (SNF case).

Revenue implications

3.2 Treasury noted that 'the introduction of retrospective legislation is not done lightly' and outlined that it is 'only done where there is a significant risk to revenue that is inconsistent with the Parliament's intention'.1 The Explanatory Memorandum (EM) to the bill outlined that there will be no revenue gained as a result of the measures in the bill, and stated that 'it is a revenue protection measure'.1 2 Treasury elaborated:

The ATO has advised that there is $1.9 billion of tax in dispute related to transfer pricing issues in current audits.

It is important to note that the risk to revenue is not the same as the financial impact of not proceeding with the amendments. This Bill is a revenue protection measure and does not raise additional revenue in the Budget. It ensures the law operates in accordance with the way Parliament intended and the way it has always been administered. That is, it is about maintaining the base and protecting against base erosion rather than expanding the base.3

3.3 Dr John Kunkel, Deputy CEO of the Minerals Council of Australia, stated that this was 'a curious juxtaposition' and argued contrary to Treasury *that there is a reasonable expectation that the proposed bill will result in additional revenue:

The government has noted that these measures are aimed only at maintaining the revenue base, not expanding it, and the explanatory memorandum states that there are no financial impacts from these amendments. Yet it has also stated in the EM that the decision to change the

law from a date before announcement is not taken lightly and only done where 'there is a significant risk to revenue1. This is a curious

1 Treasury, Submission 21, p. 1.

2 Explanatory Memorandum, Tax Laws Am endm ent (Cross-Border Transfer Pricing) Bill (N o. 1)

2012, p. 3.

3 Treasury, Submission 21, p. 5.

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juxtaposition... There is a reasonable expectation that there will be additions to revenue. If there will be no revenue impacts, the question may be raised as to why there is the need for retrospectivity from 1 July 2004. The MCA urges this committee to recommend that this legislation not be made retrospective. Quite simply, such extreme action is not justified and the case for it has not been made.4

3.4 Some submitters questioned Treasury's statement on revenue and asserted that the bill provides the Commissioner with new powers and, therefore, there is scope to raise revenue under the bill.5 KPMG stated:

Contrary to paragraph 1.8 of the EM, which states that "There is no financial impact from these amendments as they protect the existing revenue base", passage of the Bill could result in a significant additional tax

burden for many taxpayers. The financial impact of the Bill will only be nil if the transfer pricing rules in Australia's tax treaties currently provide a separate and independent power to Division 13 of Part III of the Income

Tax Assessment Act 1936 (Division 13). As noted in paragraph 1.35 of the EM, the courts have not directly considered this issue and views differ on what the answer might be under existing law.6

3.1 The Tax Institute provided a diagram and flowchart which illustrated the impact on government revenue when the two opposing positions on the scope of treaty taxing powers are adopted.

4 Committee Hansard, 26 July 2012, p. 1.

5 For exam ple Moore Stephens, Submission 18, p. 2; Moore Stephens, 'Transfer Pricing Reform

and its Impact on Australian Multinationals', 1 July 2012, attachment to Supplementary

Submission 18, p. 5.

6 KPMG, Submission 13, p. 1.

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________________________________________________________________________________________________Page 21

Figure 1: Juxtaposition of likely scope of treaty powers and revenue impact

The scope of a tax treaty based power is not the same as the scope of Division 13

Overlap of scope

Scope of Division 13

&f Scope of tax treaty based power is broader than scope of Division 13 as allows:

A w id er ran g e o f meth o d s to b e u sed

- Reco n stru ctio n o f tran s actio n s

- Thin cap italisatio n issu es to b e ad d res s ed

* Scope of Division 13 is broader than scope of tax treaty based power:

Can ap p ly to n o n -arm's len g th d ealin g s b etw een

in d ep en d en t en terp ris es

Is the potential revenue impact of the Bill likely to be nil?

Potential revenue

impact of th e Bill

is nil

P otential rev en u e

impact of th e Bill

is nil

If yes, potential

rev en u e imp act o f th e

Bill is nil

DTAs provide a

sep arate b u t n o t

in d ep en d en t pow er to

Div 13?

Do matters covered

by amen d ed

assessment(s) fall

w ithin area of

*o v erlap of sco p e'?

If no, potential revenue

impact of th e Bill is

positive - significant

ad d itio n al reven u e

likely to b e collected

Do matters covered

by amended

assessment(s) fall

w ithin 'sco p e of Div

1 3 ' bu t no t w ithin

'sco p e of tax treaty

b ased p o w er *?

Do matters covered by

amen d ed

assessment(s) fall

w ithin 'sco p e of tax

treaty b ased p o w er *

b u t n o t w ithin 'sco p e

of Div 13'?

Do DTAs provide a

sep arate an d

in d ep en d en t p o w er

to Div 13?

The courts have n o t

directly considered

this issue and views

differ on the answer

Source: The Tax Institute, Submission 15, Appendix D, pp 69-70.

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Decisions currently before the judiciary

3.5 The Corporate Tax Association of Australia (CTAA) highlighted that the Australian Taxation Office (ATO) has a small number of related party debt cases under examination which involve significant amounts. It suggested that the retrospective application could amount to a more favourable outcome for the ATO in these cases and an increase to revenue:

It may well be that the ATO rates its prospects of success on those cases more highly if it had greater powers to recharacterise the transactions actually entered into...

Without purporting to speak for any of the taxpayers involved, it seems likely that a significant amount of additional revenue could be raised from these cases under the existing domestic transfer pricing rules - provided the ATO stops being dogmatic and doesn *t overreach. For those audit cases that are in progress, it would not be accurate to say that there are no prospects of collecting any significant additional revenue under the existing law nor, for that matter, that the collection of a very large amount of additional revenue is virtually assured by 'clarifying' the power of the treaties retrospectively.7

3.6 An article provided by PricewaterhouseCoopers (PwC) made the following comment:

In the circumstances, it would seem likely that the ATO has indicated material shortfalls in budgeted revenue collections to the government and this has influenced the government *s decision to retrospectively change the

law. It is hoped that these changes are not connected with any particular disputes on foot with the ATO. It would be galling to discover that the ATO were advocating retrospective law changes in an endeavour to "protect" revenue based on controversial and long-held ATO views which have been found to be shaky by the courts.8

3.7 PwC strongly opposed the retrospective nature of the bill, and further argued that it was 'unfair' to introduce a law that could impact open disputes:

...illuminating were the comments made by Deputy Commissioner Mark Konza at a Large Business Advisory Group meeting on 1 June 2012, in which he indicated that the ATO has 40 transfer pricing audits in progress which may be impacted by Subdivision 815-A and that the proposed adjustments at stake are worth approximately $1.9 billion.

Introducing a new law which could be applied to disputes that are already in progress is unfair to taxpayers who have made genuine efforts to comply with the law as it stood at the time. This again illustrates that it is inappropriate to introduce the proposed changes retrospectively.9

7 Coiporate Tax Association, Submission to Consultation Paper, 30 November 2011, p. 8

8 PricewaterhouseCoopers, Submission 17.

9 PricewaterhouseCoopers, Submission 17, p. 4.

338

3.8 In response to these concerns Treasury outlined that the bill is not designed to target open tax disputes:

In the context of targeting any specific individual dispute, I think the answer to that is clearly no. But I guess it may, at least in some people's eyes, be difficult to distinguish that from the point that is made in page 5 of our submission, about the revenue risk if this law is not enacted. There are a significant number of transfer pricing issues in current audits and that gives an amount of $1.9 billion in tax that is in dispute. So I would not say that this legislation is designed to resolve specific disputes, because I do not think that is accurate. But on a broader level I can see why some people could get that impression.10 11

3.9 In the context of broadly discussing the retrospective nature of the bill, Mr Bruce Quigley, Second Commissioner at the ATO, commented:

To me, the concern that is being expressed about the retro spec tivity is that the commissioner is going to take a different approach. What I am saying is that we will not be changing our compliance approach, nor expanding our audit activity, in this area as a result of this bill, because it merely confirms longstanding practice. To me, that is the important thing about this.

Settled cases

3.10 The EM outlined that despite the retrospective nature of the bill, 'where a taxpayer has properly entered into a settlement with the Commissioner in relation to their non-arm's length international dealings, the Commissioner would generally be prevented by the terms of the settlement deed from applying Subdivision 815-A to

impose a less favourable outcome on the taxpayer'.12

3.11 Moore Stephens was not reassured by this Treasury and ATO advice:

Treasury states that: "...the ATO has advised that it will not be opening settled cases as a result of the legislative amendments proposed by this bill." This statement appears incorrect and is arguably an oversimplification of the situation. The more appropriate guidance, in any event, is to be

sought from the Explanatory Memorandum and not oral non-binding comments that may be made by the ATO. The Explanatory Memorandum states that settled cases "...would generally be prevented by the terms of the settlement deed...." from being reopened. The key words here is the word

"generally" (and 'settlement deed') which, absent protective legislation, leaves this matter wide open for inteipretation by the ATO. The ATO comment of which I am aware which perhaps touches on this matter is the

statement made by our Commissioner of Taxation, when questioned before

__________ _________________________________________________________________________ Page 23

10 Mr Tony McDonald, General Manager, International Tax and Treaties Division, Revenue Group, Committee Hansard, 26 July 2012, p. 55.

11 Committee Hansard, 26 July 2012, p. 62.

12 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, p. 14.

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the Senate Economics Legislation Committee on 30 May, 2012, whereat he stated:

"When we talk about the retrospective application of these laws, we do not see it as if all of a sudden the ATO will be using new laws to go back. It was really a method of maintaining the status quo."13

3.12 Mr Frank Drenth, Executive Director of the CTAA, also commented:

The Treasury submission makes the point that settled cases will not be reopened. We have been encouraged by Second Commissioner Quigley from the tax office when he said at a CTA convention last month that the

tax office does not propose to reopen settled cases. I am sure Mr Quigley meant what he said. We will do our best to keep the tax office to that. However, I should point out, there is nothing in the law that prevents the tax office from going back to July 2003 in whatever case it deems

appropriate.14

3.13 Conversely, Deloitte have noted that any attempt by government to prevent taxpayers from reopening cases in order to benefit from the recent ruling in the SNF case, are unfounded and there are substantial impediments to taxpayers to re-open

settled accounts:

A further reason offered by Treasury for the Government's decision to retrospectively amend the law is the prevention of taxpayers making credit amendments to reduce taxable profit following the SNF decision. We are of the view that this concern is unfounded, both in practice and as a matter of

law. In relation to audit cases and [Advance Pricing Arrangements] that have been previously settled or agreed with the ATO, we note that there would be practical (and possibly legal) impediments to reopening these cases.15

3.14 Mr Bruce Quigley, Second Commissioner, reiterated that the ATO had no intention to re-open settled cases using the provisions in the bill:

For decades the ATO has consistently held the view that it is parliament's intention *and the tax treaties provide a separate head of power to make transfer pricing adjustments. We have no intention whatsoever *and have made public statements to this effect *to reopen any cases that have been settled on the basis of the existing law, given that the proposal will clarify what the existing law was. We see no change to our procedures, so we will not be reopening any settled cases, any concluded advance pricing arrangements and also any settled mutual agreement procedure cases...

13 Moore Stephens, Supplementaiy Submission 18, p. 1; see also Moore Stephens, Submission 18, pp 2-3.

14 Committee Hansard, 26 July 2012, p. 16.

15 Deloitte, Submission to Consultation Paper, p. 2.

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There is quite a formal process of settling a case, and that involves entering into a deed of agreement and settlement. Indeed...those deeds would preclude any reopening of those settled cases in any event.16 17

Calls for greater transparency

3.15 A number of submitters requested that Treasury release further documentation supporting its claims that the provisions will only be used to protect the revenue base, and not to increase it .11

3.16 For example, the Tax Institute have called for greater transparency on the revenue estimates and recommended that:

Treasury make publicly available further information on the inputs and underlying bases of calculation that have resulted in this estimation that there is no financial impact from these amendments'.18

3.17 Treasury undertook to provide further information to the committee. It explained that:

At any point in time, a large proportion of the primary tax in dispute figure is attributable to a relatively small number of cases. At this point in time, the 10 largest cases account for around 80% of the primary tax in dispute in the transfer pricing audit program.19

Judicial rulings on treaty taxation powers

3.18 The EM to the bill outlined that the court has not made an explicit ruling on the taxation powers contained within treaties:

The application of treaty transfer pricing rules has not been specifically tested before the courts or the Administrative Appeals Tribunal, although judges have made obiter comments in two cases. In neither case was the issue extensively argued before the court or tribunal. And in both cases it

was accepted by the parties that the outcome of the case did not turn on this issue. In his obiter comments Justice Downes noted there was a lot to be said for the proposition that treaties do not confer a power to assess; while Justice Middleton saw some force in the argument that by the operation of subsections 170(9B) and 170(14) of the ITAA 1936 there is a clear legislative intention that the Commissioner may rely on either Division 13 or the relevant transfer pricing article.20

16 Committee Hansard, 26 July 2012, p. 53.

17 The Institute of Chartered Accountants in Australia, Submission 19, p. 4.

18 The Tax Institute, Submission 15, pp 6-7.

19 Treasury, answer to question on notice, 26 July 2012, (received 9 August 2012), p. 7.

20 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, p. 12. See Roche Products Pty Limited and Commissioner of Taxation [2008] AATA 639 (22 July 2008) and SNF Australia Pty Ltd v Commissioner of Taxation [2010] FCA 635.

Page 26

Obiter comments

3.19 Obiter comments supporting both opposing arguments on the taxation power of treaties were cited in evidence to the committee (see discussion in Chapter 4 on section 170(14)).

3.20 Some submitters highlighted obiter comments that supported the argument that treaties do not confer taxation powers. For example, Chevron asserted:

... the Courts have refuted the notion that separate taxing power is conferred by the [Double Tax Agreements] DTAs on several occasions. Lamesa, Chong and Undershaft are all authority for the proposition that the DTAs do no more than allocate taxing rights. In Undershaft, Lindgren J stated:

"A puipose of a DTA is to avoid the potential for the imposition of tax by both of the Contracting States on the same income. It is appropriate to say that the Contracting States achieve their objective by "allocating" as between themselves the right to bring to tax a particular item to one Contracting State while the other State agrees to abstain from doing so ...

A DTA does not give a Contracting State power to tax, or oblige it to tax an amount over which it is allocated the right to tax by the DTA. Rather, a DTA avoids the potential for double taxation by restricting one Contracting State's taxing power" (emphasis added by Chevron).21 22

3.21 Treasury reiterated that tills comment, and others cited by submitters, were obiter comments, and importantly, these cases did not test the law as to the treaty taxing powers:

Submissions in consultation on this Bill cited other judgements commenting on the general role of allocation rules in tax treaties, which considered other treaty rules allocating taxing rights: Goldberg J in Chong v Commissioner o f Taxation (2000) 101 FCR 134 at [27], [44]; Middleton J in GE Capital Finance Pty Ltd v Federal Commissioner of Taxation (2007) 159 FCR 473 at [27], [29], [36], [45] and [46]; and Lindgren J in

Undershaft (No 1) Ltd v FCT (2009) 175 FCR 150 at [17] and [27]. But, importantly, these cases did not specifically test the question of whether transfer pricing articles had been incorporated into Australia's municipal law so as to give rise to a power to make or amend assessments."2

21 Chevron Australia Pty Ltd, Submission to Consultation Paper, p. 4; see Undershaft (No 1) Limited v Commissioner of Taxation [2009] FCA 41, 45-46 and Commissioner of Taxation v Lamesa Holdings BV (1997) 77 FCR 597, 600, Chong v Commissioner of Taxation (2000) 101 FCR 134, 24-27.

22 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, p. 12.

342

Treaty powers and the SNF case

3.22 Many submitters agreed with Treasury's assertions that the court has yet to specifically make a ruling on the matter; some also noted that the issue was not addressed in the recent SNF case.23 For example, the Law Council of Australia and the Rule of Law Institute of Australia asserted that in the eight years since 2003, despite questions being raised by the Courts, the ATO has made no attempt to clarify the law.24 25

3.23 Some submitters questioned why Treasury, despite the opportunity, did not raise the taxation power of treaties in the recent SNF case.2:5 The Institute of Chartered Accountants in Australia stated:

In SNF, the Commissioner had the opportunity to have the Full Federal Court declare the law on the operation of the ami's length rule in a DTA. For whatever reason, the Commissioner chose not to have the Federal Court declare the law. Had the Commissioner not abandoned the DTA argument during the course of the SNF proceedings, there would be no need to legislatively clarify the existing operation of the law or, in the alternative, any retrospective amendments would unambiguously alter the existing operation of the law.26

3.24 A number of submitters suggested that the ATO intentionally avoided raising the matter in the SNF case in order to instead address the matter through legislative amendment. Moore Stephens commented:

Indeed, some say that the very reason that the ATO did not run the Treaty taxing power argument in the SNF case was to provide it with the 'trigger' or excuse for a rewrite of our transfer pricing legislation. Certainly, not to have run the Treaty 'taxing power' argument in either or both these cases evidences a strategy much to be desired.27

3.25 Mr Frank Drenth of the CTAA also commented:

In the SNF decision, the commissioner made written submissions about the power of the articles. It is on the public record. Go and look it up. The court did not accept those submissions and the commissioner chose not to appeal

Page 2 7

23 For example, The Tax Institute, Submission 15, p. 6; Chartered Accountants in Australia, Submission 19, p. 1; Chevron Australia Pty Ltd, Submission to Consultation Paper, p. 5.

24 Law Council of Australia, Submission 9, pp 1-2; Rule of Law Institute of Australia, Submission 20, p. 2.

25 Chevron Australia Pty Ltd, Submission to Consultation Paper, pp 4, 7; Moore Stephens, 'Transfer Pricing Reform of Australia's Transfer Pricing Regime', 1 July 2012, p. 3; Institute of Chartered Accountants in Australia, Submission 19, p. 2.

26 Institute of Chartered Accountants in Australia, Submission 19, p. 4.

27 Moore Stephens, 'Transfer Pricing Reform of Australia's Transfer Pricing Regime', 1 July 2012, p. 3.

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against the full federal court decision. Taxpayers have taken this as far as they can. It is the commissioner you have to ask.

The commissioner, as I said, chose [instead] to go to the government and get the government to say that the law has applied since 2003 in the way the commissioner always wished it would. But no amount of foot-stomping by

the commissioner should encourage the parliament to enact his view of the law, going back as far as 2003 when taxpayers were entitled to rely on what the law said and what the commissioner said.

...none of the accounting firms were saying that the treaties impose a separate power *not if you look at what they say, carefully. That really leaves the Treasury arguments in about the same spot as Dennis Denuto in The Castle: 'It's the vibe, Your Honour. *28

3.26 Treasury refuted assertions that the rules are intended to 'overcome' the SNF decision. It explained that the SNF decision 'related to the application of Division 13 and, as such, is of limited relevance to the question of whether the treaty based transfer pricing rules apply':

While courts have commented broadly on the allocative function of treaties, no case has specifically tested the question of whether the transfer pricing articles as currently incorporated into Australia's domestic law give rise to a power to make or amend assessments, although judges have made obiter comments in respect of this issue in two cases, namely Roche Products Pty Limited v Commissioner o f Taxation and SNF Australia Pty Ltd v

Commissioner of Taxation. During consultation on this Bill, a number of submissions cited a number of obiter comments, however in none of those cases was the status of the treaty based transfer pricing rules in issue.29

3.27 Moore Stephens refuted Treasury's statements that '[t]he SNF case is of limited relevance':

This is misleading and arguably 'false'. This is so insofar as the ATO foreshadowed the need for legislative change in the event that it lost the SNF case; this is well documented in the Financial Press; and secondly, the

Commissioner's Annual Report for 2010-2011 alludes to the need to change the law given the loss in the SNF case.30

3.28 Mr Andrew England, Chief Tax Counsel for the ATO, commented on the approach taken in the SNF case. He outlined that the Commissioner's approach was taken on the ATO's understanding that Division 13 was likely to give the same kind of outcome as the treaty based transfer pricing rules:

Judgments were made at the time on the basis of our view that essentially the transfer pricing provisions in the division 13 area gave the same kind of

28 Committee Hansard, 26 July 2012, p. 17.

29 Treasury, Submission 21, p. 12.

30 Moore Stephens, Supplementary Submission 18, p. 2.

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outcome as the provisions in the treaty area. A judgment was made at the time, given the complexity of the facts, that there was not any value-add in complicating the case with arguments about the treaty powers. So the argument was run on the basis of the transfer pricing provisions in division

13 and in rules.

...and we thought that our case had merit and that we were able to argue it, given the nature of the facts, on that basis. In hindsight, given everything that has happened, it probably would have been better if we had thrown all

of the arguments at the court...but that judgment was not made at the time, and we are where we are now.31

31 Committee Hansard, 26 July 2012, p. 60.

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Chapter 4

Australian Taxation Office rulings

4.1 This chapter will explore submitters' responses to Australian Taxation Office (ATO) rulings on treaty based transfer pricing rules with particular reference to:

" testing the ATO rulings in court and the different appetites for risk amongst taxpayers;

" the weight of the Commissioner's interpretation of the law; and

" speeches by the Commissioner.

Testing ATO rulings in Court

4.2 Treasury have set out a number of rulings issued by the ATO which it argued demonstrate that the ATO 'has publicly maintained its position in respect of the treaty based transfer pricing rules for some time'.1 These are set out in Appendix 3 to this report.

4.3 The Minerals Council of Australia (MCA) outlined that the onus is on the Commissioner to instigate court proceedings in order to have the ATO's position tested in court.1 2 Ms Amanda Leckie, Tax Manager at GE, commented on this aspect in relation to the taxing power of treaties:

...we would have loved the opportunity to seek clarity, but we cannot seek clarity until the commissioner issues us with an assessment, which he has not done. We have no ability to raise this matter or pursue it through the courts until the ATO issues us with an assessment.3

Taxpayers' appetite for risk

4.4 There was much debate at the committee's hearing on mlings issued by the Commissioner, and the weight that taxpayers afford ATO mlings. The committee heard from a number of witnesses that taxpayers will approach the matter differently according to their appetite for risk.

4.5 Mr Damian Preshaw, a member of the Tax Institute's Transfer Pricing Committee, commented:

Taxpayers and their advisers would not ignore comments of the

commissioner, the second commissioner and deputy commissioners which

1 Treasury, Submission 21, pp 22-23.

2 Mr Richard Atkinson, MCA Taxation Committee Representative and General Manager Transfer Pricing, Rio Tinto, Committee Hansard, 26 July 2012, p. 6.

3 Committee Hansard, 26 July 2012, p. 14.

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are directly on point, I acknowledge that. They do so at their peril. But acknowledging those comments does not mean that those comments are correct necessarily in law. It does not mean that those comments necessarily have fully fleshed out the various issues and considerations that might need

to be addressed by taxpayers in determining what position they wish to take when lodging their tax returns and the extent to which in doing so they may be taking an aggressive position, a middle-of-the-road position or a very, very conservative position which may be consistent with tax office rulings. But even for those taxpayers who may take a perceived aggressive position

it does not mean that that position is wrong in law. At the same time, it does not mean that the commissioner's view as expressed in taxation rulings is correct in law...

There is a risk element that they take into account having regard to all the information at their disposal * for example, tax office rulings around how the laws apply generally or specifically to particular types of dealings, OECD transfer pricing guidelines to the extent that they provide any assistance and are relevant, papers and articles that circulate within the transfer pricing community at least, and commissioners' speeches, as we are

saying...

Not all taxpayers want to litigate, but some do. So that *as I think you are suggesting *tempers the approach that they want to take as taxpayers within the Australian community. That is absolutely right. They are all on a spectrum. They are not all the same.4 5

The weight of the Commissioner's interpretation

4.6 Submitters have argued that the Commissioner's view may not necessarily equate with Parliament's intention. GE, for example, argued that a public ruling by the Commissioner 'is merely an expression of the Commissioner's opinion' which can be found as incorrect in court."1 PricewaterhouseCoopers (PwC) concurred with this argument and stated:

It is a matter for the Courts to decide how the existing law applies. If the Courts interpret the law in a manner that Parliament finds to be inconsistent with its intentions, then any changes should only be made on a prospective basis. There is evidence available (as outlined in the PwC Supplementary

Submission) which indicates that the Courts do not agree with the view that Australia's tax treaties provide a separate taxing power to the

Commissioner.6

4.7 The Institute of Chartered Accountants in Australia argued that taxpayers' should have the right to challenge the Commissioner's interpretation of the law, and that the retrospective nature of the bill removes this ability:

Page 32_____________________________________________________________________________________

4 Committee Hansard, 26 July 2012, pp 40-41.

5 GE, Submission 1, p. 2; Australian Private Equity and Venture Capital Association Ltd, Submission 22, p. 2.

6 PricewaterhouseCoopers, Submission 17, p. 3.

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In the absence of judicial precedent, taxpayers were entitled to take a position that is contrary to the Commissioner's view of the operation of the arm's length provisions of the DTAs and expect to have the right to

challenge any assessment to confirm the position taken. Any retrospective amendment will take away a taxpayer *s ability to challenge to

Commissioner's view of the law. We consider this a breach of the rule of law.7

4.8 Mr Chris Peadon, a barrister and member of the Law Council of Australia, argued it is Parliament's legislative intent that is important for interpretation of the law, and the Commissioner's opinion is of limited relevance:

...I do not demean the Commissioner of Taxation by saying this: the

Commissioner of Taxation's view of the law is no more important than mine. It is no more important than the punter on Manuka Oval in

determining the primacy of parliament's intention. The real point is that it is your [Parliament's] intention that is important. It is your intention that we must divine by the words that you have put into the legislation.8

4.9 Mr Frank Drenth, Executive Director of the Corporate Tax Association of Australia, spoke at length on the issue. He highlighted the varying emphasis taxpayers place on court rulings when interpreting the law as issued by parliament:

What the commissioner thinks is always important to large corporates and their advisers because the way the commissioner thinks the law applies can have an impact on a particular issue so of course you want to know what the commissioner *s view on a technical issue is. But that is all you need to know. It does not mean the commissioner is always right. The

commissioner says lots of things about technical issues. Have a look at the commissioner's track record in the full Federal Court and the High Court over the last two years. He has been up dozens of times and has been on the wrong side of the decision well over half the time, especially before the

High Court. Just because the commissioner says something and nobody pulls him up on it and he stomps his feet and says the treaties have a

separate taxing power does not make it so...

This place [Parliament] makes the laws, the commissioner applies the laws and the courts interpret the law. Between the parliament and the courts is where the laws are determined. Beyond that, what PWC thinks, what the commissioner thinks is neither here nor there...

Under self-assessment, the commissioner has a say about what he feels the law means and people will take notice of that, but that should not tell anyone what the law actually means. The courts are the place for that. Are taxpayers negligent in ignoring what the commissioner said? Of course they are not. Taxpayers do not do that. They weigh up what the commissioner says and then they get their advice from senior counsel, from the big four

7 Institute of Chartered Accountants in Australia, Submission 19, p. 4.

8 Committee Hansard, 26 July 2012, p. 29.

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advisers, and then they form a view about what sort of risk they want to

take.9

4.10 PwC also highlighted that the Commissioner's view has been challenged in the courts. It provided an academic article, Tax Rulings: Opinion or Law? The Need for an Independent 'Rule-Maker', which cited a number of cases where the Commissioner's position had been found incorrect before the judiciary.10 11

4.11 While not directly related to the provisions of the bill before this committee, PwC drew attention to a matter in the Full Federal Court as an example of where the Commissioner was 'reprimanded' for applying the law contrary to court determinations.11

4.12 An extract from the additional comments by Stone J in Commissioner of Taxation v Indooroopilly Children Sendees (Qld) Pty Ltd stated:

Considered decisions of a court declaring the meaning of a statute are not to be ignored by the executive as inter partes rulings binding only in the earlier lis. As Mahoney J (as his Honour then was) said in P & C Cantarella v Egg Marketing Board [1973] 2 NSWLR 366 at 383:

"The duty of the executive branch of government is to ascertain the law and obey it. If there is any difficulty in ascertaining what the law is, as applicable to the particular case, it is open to the executive to approach the court, or afford the citizen the opportunity of

approaching the court, to clarify the matter. Where the matter is before the court it is the duty of the executive to assist the court to arrive at the proper and just result.12

4.13 Many arguments presented to the committee challenged the importance of the ATO's rulings for taxpayers applying self-assessment. An article by Moore Stephens, however, emphasised the importance of ATO rulings and guidance, albeit in the context of a discussion on the difficulties in applying ATO rulings:

Until very recently, Australia's transfer pricing landscape has been devoid of litigation as to the meaning of "arm's length"; accordingly, absent legal precedence, the ATO has issued numerous rulings and guidance on the topic. This guidance, historically, has been the primary reference point for taxpayers seeking to ensure that they conduct their international related party dealings in a manner consistent with the ATO view. The ATO view is important as, for the most part, taxpayers are very focussed upon the

9 Committee Hansard, 26 July 2012, pp 16 *17.

10 Diana Scolaro, 'Tax Rulings: Opinion or Law? The Need for an Independent 'Rule-Maker',' Revenue Law Journal: Volume 16: Issue 1, Article 7, 2006, pp 13-18.

11 Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16 in PricewaterhouseCoopers, additional information, exhibit D, received 31 July 2012.

12 Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16 in PricewaterhouseCoopers, additional information, exhibit D, received 31 July 2012.

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significant, non-deductible, penalties that may apply, (in excess of 50% of the tax avoided), when the ATO successfully prosecutes a transfer pricing adjustment.13

Speeches by the Commissioner

4.14 Some submitters have suggested that the Commissioner's view on treaty based transfer pricing rules has not always been certain and highlighted extracts from certain speeches delivered by the Commissioner and Deputy Commissioner.14

4.15 In an opening speech at the Corporate Tax Association Convention in Melbourne, Commissioner Michael D'Ascenzo stated:

We have long held the view that the treaties do provide a separate power to assess. This view has been questioned in some decisions. For example, in the Roche case, Downes J stated in obiter:

"In the result I do not need to decide the issue (of whether the treaties in question conferred a power to assess) although I note that there is a lot to be said for the proposition that the treaties, even as enacted as part of the law of Australia, do not go past

authorising legislation and do not confer power on the Commissioner to assess."

...In the most recent case on this issue Undershaft (No 1) Limited v Commissioner o f Taxation (2009) FCA 41 (3 February 2009) [45], [46], Lindgren J cited, inter alia, Chong and reiterated that the double tax treaty does not give the contracting State a power to tax, or oblige it to tax but, rather, avoids the potential for double taxation by restricting one contracting State's taxing power.

However, in these cases the Administrative Appeals Tribunal and the Federal Court have focused on the International Agreements Act and have not had to fully consider the power to assess in accordance with the treaty provisions under the provisions of the Income Tax Assessment Act, and in particular the amendments made at the time of the introduction of Division

13 in 1982. These amendments provide for a separate source of power to amend an assessment in reliance upon the associated enteiprises article. For example, refer to sections 170(9B) and (9C) and the accompanying explanatory memorandum at Clauses 19 and 21-23, and also to the

associated amendments to the penalty provisions [ss226 (2B) - (2F)] and also the later enacted s225 (and refer also to the explanatory memorandum to the 1984 penalty provisions). We have also received recent legal advice

13 Moore Stephens, Transfer Pricing Reform and its Impact on Australian Multinationals', 1 July 2012, attachment to Supplementary Submission 18, p. 1. The article discusses at length 'inherent problems' with relying on rulings which are based on various OECD Guidelines and highlights the tensions between profit and transaction based arm's length methods (pp 2-3).

14 For example, PricewaterhouseCoopers, additional information, exhibits B and C, received 31 July 2012.

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which supports the view that the treaties as incorporated into the Income Assessment Act provides a separate taxing power.

However, in the light of comments by the Administrative Appeals Tribunal and the Federal Court, we have raised this issue with Treasury with a view to considering whether a law change is needed to remove any doubts about the intended policy or the current operation of the law. 5 (emphasis added by PwC)

4.16 In a speech to the Tax Institute's Victorian State Convention on

9 October 2008, the Deputy Commissioner (Large Business and International), Mr Jim Killaly commented:

The constitutional and legislative standing of the Associated Enterprises Articles in Australia's treaties is not free from doubt and it seems clear that the debate around this issue could possibly continue until finally determined by the Courts. For its part the Tax Office will continue to reflect on the issue.15 16

The use of extrinsic materials

4.17 Mr Chris Peadon of the Law Council of Australia highlighted sections 15AA to 15AB of the Acts Interpretation Act 1901 which were introduced to ensure that, as far as possible, legislation was given a purposive interpretation (considering the object of an Act). Section 15AB lists the extrinsic material that can be used in the inteipretation of an Act (including treaties, explanatory memorandums and documents declared relevant by the Act being interpreted). Section 15AA of the Acts Interpretation Act 1901 states:

In interpreting a provision of an Act, the inteipretation that would best achieve the purpose or object of the Act (whether or not that puipose or object is expressly stated in the Act) is to be preferred to each other

interpretation.

4.18 In the context of these interpretive provisions, Mr Peadon suggested that it is unreasonable to expect taxpayers' advisers to consider the Commissioner's inteipretation of Parliament's intention (as outlined in Treasury's submission and the EM to the bill) to form a view of what the law says:

It should not be necessary in advising anybody on these highly complex issues which, as we have heard, can involve hundreds of millions of dollars, to trawl through statements made even in parliament but much less by a

15 Michael D *Ascenzo, Commissioner , 'In the best interests of Australia', Opening speech at the Corporate Tax Association Convention, Melbourne, 15 June 2009 in PricewaterhouseCoopers, additional information, exhibit B, received 31 July 2012.

16 Jim Killaly, Deputy Commissioner (Large Business and International), 'Distinguishing between business driven and tax driven restructuring', speech by the to The Tax Institute's Victorian State Convention, 9 October 2008 in PricewaterhouseCoopers, additional information, exhibit C, received 31 July 2012.

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public servant * and I am not being disparaging of the Commissioner of Taxation; he is a public servant *at meetings he may have attended with the Coiporate Taxpayers Association, at a luncheon he went to in Perth four years ago. It would be impossible to advise a taxpayer on that basis.

The legislation should have primacy. This idea that one should look at the legislation, form a view about what it says in accordance with the normal interpretative principles that are laid down by parliament in the Acts Interpretation Act then go out and have a look at all this other material that is said to be out there and has been selectively quoted in the back of the

Treasurer's submission; and then what I am being asked to do as an adviser is form a view as to whether I think that something a public servant has said should take primacy or change my view of what the law says. With respect,

that is just hopeless tax policy implementation if it is to be the way that this is dealt with.1

Committee view

4.19 The committee acknowledges that ATO rulings provide an interpretation of the law that taxpayers may choose to heed or ignore at their own risk.

4.20 The committee considers the comments made by the Commissioner and Deputy Commissioner in speeches did not cast doubt upon the ATO's consistent interpretation on the taxation power of treaties. The speeches merely made a reflection on the 'doubt' surrounding debate on the issue of treaty taxing powers, and were not in themself a reflection of the ATO's position.

4.21 The committee adheres to the view that the ATO has long held a position that Australia's tax treaties do provide the Commissioner with a separate taxing power in alignment with Parliament's intention.

4.22 Parliament's intention will be discussed in the following chapter. 17

17 Committee Hansard, 26 July 2012, p. 28.

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Chapter 5

Submitters * views on Parliament *s intention

5.1 The Explanatory Memorandum (EM) stated that proposed Subdivision 815-A will apply on or after 1 July 2004 as 'the 2004 income year commenced immediately after the Parliament's most recent amendment to the income tax laws in 2003'.1 The EM sets out in some detail 'evidence that Parliament understood the law to operate consistently' with the amendments set out in the bill:1 2

Given the consistent assumption by Parliament since at least 1982 that treaties provided a separate basis for making transfer pricing adjustments, the proposed amendments could apply from the commencement of Division 13 and the accompanying changes to section 170 and former section 226 of the ITAA 1936.

Subdivision 815-A, however, will only apply to income years commencing on or after 1 July 2004. The 2004 income year commenced immediately after the Parliament's most recent amendment to the income tax laws in 2003 which again evidenced the Parliament's understanding that tax treaties could be used as a separate basis for making transfer pricing adjustments.3

5.2 In the context of questioning Parliament's intention on the matter, the majority of submitters involved in this inquiry strongly opposed the retrospective nature of the bill. The Institute of Chartered Accountants in Australia commented for example:

A signal of the importance of freedom from retrospective laws has been held to be so critical to the basic rights of individuals and corporations that the constitutions of both the United States and Sweden have explicitly prohibited such a practice. Whilst Australia's constitution does not expressly prohibit the making of retrospective laws, the generally accepted practice of parliament has been to only exercise those powers sparingly, often only in extreme and exceptional circumstances,4

5.3 An article provided by PricewaterhouseCoopers (PwC), in support of their view, further highlighted concerns around the use of retrospective legislation:

1 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, p. 7.

2 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, pp5, 7-13.

3 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, pp 7-8.

4 Institute of Chartered Accountants in Australia, Submission 19, p. 1.

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Retrospective legislation has been labelled as "...unjust, undemocratic, unreliable and contrary to human rights, individual autonomy, the rule of law and the Constitution". Some even claim that it is not law at all.5

5.4 Submitters suggested that the bill proposes amendments that are not a 'mere clarification', as reported in the EM, but amount to a retrospective change to the law. For example, the Corporate Tax Association of Australia (CTAA) stated:

It is most disappointing that our objections (and those of other parties) have been met with not much more than the repeated assertion that the proposed new law merely 'clarifies' what was always the intention of the Parliament. Other than comments from senior ATO officials (who administer but don't make the law) there is scant evidence of any such intention. And even if there were, the court decisions referred to in our earlier submission suggest that any such intention was never in fact achieved. Taxpayers are entitled to rely on the law as it has been consistently interpreted by the courts over many years, and retrospective changes like this can only erode business confidence in Australia's revenue laws.6

Tax treaties - a sword or shield?

5.5 Submitters suggested that treaty taxing powers were not intended to increase taxation within a jurisdiction, but were an agreement between States to avoid double taxation.

5.6 This limitation of the treaty powers suggested by submitters has been explained using a 'sword and shield' analogy whereby the treaty is used to 'shield' taxpayers and limit Australian taxation as opposed to a 'sword' to extend taxation.7 In summary, the two arguments that surrounded debate on whether the bill made changes to the existing law, or merely clarified it, were presented as follows:

" Treasury asserted that the bill clarified Parliament's intention that the tax treaties do provide an additional taxing power to make adjustments to transfer pricing assessments; and

" other submitters suggested that the bill proposes changes to the existing law as the domestic law is the basis for taxation and the treaties should be used to relieve non-residents from Australian tax.

5 Andrew Palmer and Charles Sampford, 'Retrospective legislation in Australia: looking back at the 1980s', 22 Federal Law Review 217, 1994, p. 223 in Peter Collins et al, The smoke and mirrors around the "stage one" transfer pricing reforms', The Tax Specialist: Volume 15, June 2012, p. 210.

6 Corporate Tax Association of Australia, Exposure Draft Submission, p. 1.

7 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, p. 10. See also Moore Stephens, 'Transfer Pricing Reform and its Impact on Australian Multinationals', 1 July 2012, p. 1.

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5.7 The committee received extensive evidence on the matter of Parliament's intention regarding tax treaty powers and the retrospective application of the bill. This chapter will highlight some of the key points raised by submitters including:

" advice in the explanatory material for treaties;

" representation of the two opposing interpretations of treaty powers in the EM;

" views of the Joint Standing Committee on Treaties;

" retrospective application of the thin capitalisation rules;

" interpretation of subsection 4(2) of the International Tax Agreement Act 1953; and

" interpretation of subsection 170(9B) of the Income Tax Assessment Act 1936.

5.8 The following chapter will provide evidence from Treasury which outlined various amending Acts that demonstrate Parliament's intention to use the treaties as a taxing power since 1982.

Explanatory material in treaties

5.9 GE asserted that none of Australia's major trading partners apply tax treaties as a separate basis for taxation. It also argued that Treasury's understanding that the treaties hold an additional taxing power has not been stipulated in explanatory material to the treaties:

Surely, to justify a law going back eight years and a significant departure from international practice, evidence of a clear and direct parliamentary intention should be required *such as, a clear statement in the explanatory memorandum to a tax treaty that the treaty can be applied to impose tax. Over 22 double-tax agreements and protocols have been signed since 1982, and not one of the EMs introducing these double-tax agreements has made reference to treaties providing a taxing power. In fact, the opposite appears to be the case. For example, the EM to the UK double-tax agreement

specifically recognises that the purpose of Australia's tax treaties is to provide relief from double taxation.8

5.10 GE highlighted an extract from explanatory material for the 2003 tax treaty with the UK as an example:

What is the purpose of Australia's tax treaties?.... generally preserving the application of domestic law rules that are designed to address transfer pricing and other international avoidance practices ...9

_____________________________________________________________________________________ Page 41

8 Ms Ardele Blignault, Vice President Government Relations, GE, Committee Hansard, 26 July 2012, p. 9.

9 GE, Submission 1, p. 2.

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A balanced approach to examining Parliament's intention

5.11 A number of submitters argued that Parliament's intention on the taxation power of treaties is not as clear as the EM to the bill portrays. They argued that the approach taken by Treasury is not balanced, and does not reflect other legislative amendments that suggest treaties do not have the taxation powers stipulated in the bill. Further, some highlighted that the EM does not consider explanatory material for treaties which express a contrary view (as discussed above).10 11

5.12 The CTAA suggested that the extracts used by Treasury do highlight that treaties have a taxing power, but not a taxing power to increase the amount of tax required to pay. It also argued that Treasury's interpretation and selection of material is 'unbalanced':

Look at the provisions that are actually quoted and the highlighted bits. Ignore, for the moment, what Treasury have been saying about how all this works and just read the things that have been quoted, in the context that the reference to the treaties. It is no more than saying the domestic law

increases your income by $100, because of a transfer pricing adjustment, but if the treaty increases your taxable income by $70 then the treaty prevails. The treaty overrides the domestic law in that regard and you get a smaller adjustment. So yes, the treaty can be seen as imposing the $70

additional tax but it only works because that is a smaller amount than the $100 that the tax office was trying to apply under the domestic law.

Depending on your mindset and how you choose to interpret this

explanatory material, you get quite a different outcome.

I am not going to sit here like Treasury and say: 'It's been a clear and

obvious intention of the government from as far back as 1982 * because that is nonsense. Any objective person reading this could not possibly come to that conclusion. I am prepared to say that the evidence is equivocal but I am also suggesting that you should not have to read obscure amendments to mechanical provisions, like the entrails of a chicken, to come to the conclusion that the government wanted to impose taxing powers through treaties * something that no other country does... None of our treaty

partners rely on treaties to make transfer pricing adjustments. You would have thought that if the government wanted to go that way they would have bothered to tell people rather than the remarkably obtuse way of doing it through the explanatory material.11

10 PricewaterhouseCoopers, Submission 17, p. 3; Ms Ardele Blignault, Vice President Government Relations, GE, Committee Hansard, 26 July 2012, p. 9; Mr Frank Drenth, Executive Director, Corporate Tax Association of Australia, Committee Hansard, 26 July 2012, p. 17.

11 Mr Frank Drenth, Executive Director, Corporate Tax Association of Australia, Committee Hansard, 26 July 2012, p. 17.

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Taxation Laws Amendment Bill (No. 3) 1994

5.13 The Tax Institute cited paragraph 5.4 of the Supplementary EM to the Taxation Laws Amendment Bill (No. 3) 1994 as an example. It suggested that the extract demonstrated Parliament's intention that treaties should provide taxpayers with more favourable outcomes than that provided under domestic law:

5.4 The new Part assists a foreign bank in calculating the taxable income from its Australian branch by identifying certain amounts of income and expenditure that are properly to be regarded as attributable to the branch. If, however, a [Double Tax Agreement] DTA is applicable in relation to the bank and if in relation to the calculation of the taxable income of the bank for a particular year of income the outcome for the bank would be more favourable under the DTA than if the Part taken overall applied, then the bank will be free to choose that the new Part not apply in respect of the calculation of its taxable income for that year1" (emphasis added by The Tax Institute).

5.14 The institute recommended that the EM to the bill should be amended 'to more accurately reflect differing views in the tax community and judiciary' and in particular that it should acknowledge the extract from the Supplementary EM to the 1994 tax law amendment bill.12 13

The Joint Standing Committee on Treaties

5.15 The Tax Institute also provided some extracts from reports of the Joint Standing Committee on Treaties that discussed whether tax treaties are intended to impose greater obligations on taxpayers than that of domestic tax law:

Report No.25 (dated 21 September 1999) Re: South African DTA:

Paragraph 6.14 includes the following statement with respect to obligations imposed by the treaty: "In general, it does not impose any greater

obligations on residents of Australia than Australia's domestic law would otherwise require."

Report No.28 (dated 23 November 1999) Re: Argentina DTA: Paragraph 5.13 states the following with respect to obligations imposed by the treaty: "The proposed Agreement does not impose any greater obligations on Australian residents than are imposed by existing domestic tax laws."

Report No.37 (dated 28 November 2000) Re: Russian DTA: The National Interest Analysis (Appendix B of the report) includes the following statement with respect to obligations imposed by the treaty: "In general, the Agreement does not impose any greater obligations on residents of Australia than Australia's domestic tax laws would otherwise require."14

____________________________________________________________________ _________________Page 43

12 The Tax Institute, Submission 15, p. 4.

13 The Tax Institute, Submission 15, p. 7.

14 The Tax Institute, Submission 15, pp 4-5.

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Retrospective application of thin capitalisation rules

5.16 Some submitters argued that the provisions on thin capitalisation are 'outside the scope' of clarifying the law as the taxation ruling on which the provisions are based was not formalised until 2010, six years after the proposed year for retrospective application.13 Deloitte stated:

A key component of the new legislation relates to the interaction of the transfer pricing rules with the thin capitalisation rules, and effectively legislates a position on which the Commissioner only provided his formal view in 2010. The thin capitalisation rules are particularly important for inward investors seeking certainty on the tax treatment of forms of foreign direct investment into Australia, and backdated changes in this area will be particularly damaging to Australia's reputation as an investment destination.15 16

5.17 Moore Stephens argued that the proposed debt, debt deduction and thin capitalisation provisions present a 'substantive change to the status quo' and quoted the EM to the bill:

Historically there has been "...no legislative provision specifically addressing the relationship between transfer pricing and thin capitalisation rules" [as stated in the EM, page 17.] To suggest that the retrospective nature of this element of the legislation is in any way justified is false. This element should only be implemented on a prospective basis...17

Interaction with subsection 4(2) of the International Tax Agreement Act 1953

5.18 Treasury has argued that subsection 4(2) of the International Tax Agreement Act 1953 (IT A A 1953) 'may result in the provisions of a Double Tax Agreement being applied instead of Division 13'.18 Subsection 4(2) of the ITAA 1953 states:

The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than Part IVA of the Income Tax Assessment Act 1936) or in an Act imposing Australian tax.19

5.19 An article provided by PwC highlighted that the Commissioner had initially relied on section 4 of the ITAA 1953 to support the argument that tax treaties hold a separate taxing power. The authors of the article explained, however, that this position

15 The Tax Institute, Submission 15, pp 9-10; Deloitte, Exposure Draft Submission, pp 2-3.

16 Deloitte, Submission 8, p. 1.

17 Moore Stephens, Submission 18, p. 3; see also Moore Stephens, 'Transfer Pricing Reform and its Impact on Australian Multinationals', attachment to Supplementaiy Submission 18, p. 5.

18 Treasury, Submission 21, p. 19.

19 International Tax Agreement Act 1953, Comlaw website, htti3://www.comlaw.szov.au/Details/C2011C00513 (accessed 25 July 2012).

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had been challenged in GE Capital Finance Pty Ltd v the Commissioner. The article highlighted the decision of the court:

By the operation of s 4(1), the Agreements Act incorporates the Assessment Act subject to s 4(2). However, each Act retains its own identity and the imposition of the relevant tax is still imposed by and at the rates declared by the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act

1974 (Cth) and the Income Tax Rates Act 1986 (Cth) by reference to the Assessment Act. The incorporation has the consequence, as a matter of a drafting technique, of incorporating the text of the Assessment Act into the Agreements Act (emphasis added by Collins et al).20

5.20 Treasury's position on subsection 4(2) of the ITAA 1953 is discussed further in the following chapter on Parliament *s intention.

Subsection 170(9B) of the Income Tax Assessment Act 1936

5.21 To illustrate Parliament's intention on treaty taxing powers, Treasury

highlighted subsection 170(9B) introduced into the Income Tax Assessment Act 1936 (ITAA 1936) as part of the 1982 amending Act which introduced Division 13.21

5.22 Subsection 170(9B) allows for adjustments to transfer pricing assessments to consider Division 13 or a 'relevant provision' which is defined as the associated enterprises and business profits articles contained in Australia's tax treaties.22 23 24

Subsection 170(9B) states:

Subject to subsection (9C), nothing in this section prevents the amendment, at any time, of an assessment for the purpose of giving effect to a

prescribed provision or a relevant provision (emphasis added by Treasury).2

5.23 The PwC article suggested that Treasury's position is 'not supported by the rules of statutory interpretation':

...although seemingly persuasive, the s 170(9B) position is not supported by the rules of statutory interpretation, as it unnecessarily departs from the literal meaning and operation of the provisions. It also fails to recognise that the legislative intention noted in the EM to s 170(9B) was affected by

the erroneous assumption that s 4 of the Agreements Act was effective in

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20 GE Capital Finance Pty Ltd v Federal Commissioner of Taxation (2007) 159 FCR 473, 40 in Peter Collins et al, 'The smoke and mirrors around the "stage one" transfer pricing reforms', The Tax Specialist: Volume 15(5), June 2012, pp 212 *213.

21 Income Tax Assessment Amendment Act 1982, s. 21, www.coinlaw.gov.au/Details/C2004A02588 (accessed 24 July 2012).

22 Taxation Laws Amendment Act 1984, ss. 170(14), www.comlaw.gov.au/Details/C2004A02987 (accessed 24 July 2012).

23 Taxation Laws Amendment Act 1984, www.comlaw.gov.au/Details/C2004A02987 (accessed 24 July 2012) in Treasury, Submission 21, p. 16.

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incoiporating the Agreements Act into the Assessment Act. Furthermore, the position is inconsistent with Parliamentary documents which relate to Australia's DTAs, case law and international practice...

...s 170(9B) and (9C) need to be interpreted in the broader context of ss

169, 170, 173 ITAA36, the decision in GE Capital, and s 170(11) IT A A3 6. In particular, the subsections need to be interpreted in the context of the Commissioner's general power of assessment under s 169, as modified (limited) by s 170...

The confusion regarding the effect of s 170(9B) and (9C) arises from the erroneous assumption, which existed at the time these subsections were introduced, that s 4 of the Agreements Act effectively incorporated the Agreements Act into the Assessment Act and that, consequently, art 9 needed to be applied in priority to Div 13 IT A A3 6 in some instances. This is reflected in the EM to s 170(9B) and (9C). However, the EM is clear that the aim of the subsections was only to provide the Commissioner with a power, which it was perceived he had, as a result of s 4 of the Agreements Act. Where the Commissioner does not have this power, it is inappropriate to infer such a power.24

5.24 In addition, the authors o f the article highlighted their understanding that

written submissions lodged with the Administrative Appeals Tribunal in Roche Products Pty Ltd v Commissioner (2008) by both parties addressed the issue of the taxing power o f treaties under section 170:

The Commissioner's view relying on s 170(9B) was fully explained and considered by the Tribunal. In this regard, having considered the s 170(9B) position, Downes J stated:

"...there is a lot to be said for the proposition that the treaties, even as enacted as part of the law of Australia, do not go past authorising legislation and do not confer power on the Commissioner to assess. They allocate taxing power between the treaty parties rather than conferring any power to assess on the assessing body. On this basis Division 13 should be seen as the relevant legislative enactment pursuant to the power

allocated" (emphasis added by authors of article).24 25

5.25 The ATO acknowledged that there had been two cases which specifically

addressed the operation of treaty powers in relation to transfer pricing in obiter:26

" Roche Products Pty Ltd v Commissioner of Taxation in 2008 before the Administrative Appeals Tribunal (as discussed above);2, and

24 Peter Collins et al, 'The smoke and mirrors around the "stage one" transfer pricing reforms', The Tax Specialist: Volume 15(5), June 2012, pp 212-213.

25 Peter Collins et al, 'The smoke and mirrors around the "stage one" transfer pricing reforms', The Tax Specialist: Volume 15(5), June 2012, p. 214.

26 Mr Andrew England, Chief Tax Counsel, Australian Taxation Office, Committee Hansard, 26 July 2012, p. 57.

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" SNF Australia Pty Ltd v Commissioner of Taxation.2*

5.26 Treasury emphasised, however, that discussion on treaty based transfer pricing rules were limited to obiter comments.29 Treasury highlighted that in Roche, Justice Downes *clearly prefaces this statement with the qualification that he was not required to decide on the issue'.30

5.27 In contrast to the comments in Roche, Treasury noted obiter comments in the SNF case by Justice Middleton specifically in regard to subsections 170(9B) and 170(14) of the ITAA 1936 which stated:

As the stand alone taxing power issue was raised in written submissions, I make the following very brief comment. I do see some force in the

argument that by operation of s 170(9B) of the ITAA and the terms

"prescribed provision" and "relevant provision" as defined in s 170(14) of the ITAA, there is a clear legislative intention (at least from the time of the introduction of s 170(9B)) that the Commissioner may in amending an assessment, rely on either s 136AD or the relevant associated enterprises article, as conferring upon the Commissioner, as a separate power, a power to amend an assessment. I say this although there is no provision expressly stating that "the relevant provision" (namely, the associated enterprises article) has been incorporated into the ITAA. However, it seems to me that the express words in the ITAA necessarily and naturally imply the required

incorporation of the relevant associated enterprises article into the ITAA.31

(

5.28 The following chapter will discuss various amending Acts that, in opposition to the views of submitters presented above, demonstrate Parliament's intention to use the treaties as a taxing power dating back to 1982. The chapter will then conclude with the committee's view of Parliament's intention on treaty based transfer pricing rules. 27 28 29 30 31

27 [2008] AATA 639 (22 July 2008), 191.

28 [2010] FCA 635, 23-24.

29 Treasury, Submission 21, p. 12. Treasury also argued that, although submitters cited a number of obiter comments opposing the use of treaties to make adjustments, none of these cases directly addressed the status of the treaty based transfer pricing rules. For example, Goldberg J in Chong v Commissioner of Taxation (2000 101 FCR 134 at [27], [44]; Middleton J in GE Capital Finance Ptv Lt v Federal Commissioner of Taxation (2007) 159 FCR 473 at [27], [29], [36], [45] *[46]; Lindgren J in Undershaft (No 1) Ltd v FCT (2009) 175 FCD 150 at [17] and [27].

30 Treasury, Submission 21, p. 13.

31 Middleton J in SNF Australia Pty Limited v Commissioner of Taxation [20108] FCA 635, 23 * 24.

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Chapter 6

Parliament *s intention since 1982

6.1 In the context of noting that 'the best evidence of Parliament's intent is what Parliament says when it passes legislation',1 Treasury set out five legislative provisions and accompanying explanatory material that it argued 'show an

unmistakably consistent approach by the Parliament * that treaty based transfer pricing rules provide an alternative basis for making transfer pricing adjustments:

" The 1982 amendments which introduced Division 13 and related

penalty provisions;

" The 1984 amendments to the penalty provisions;

" The 1995 explanation of franking credit changes;

" The 2001 explanation of new thin capitalisation rules; and

" The 2003 changes to the definition of 'relevant provision'.1 2

6.2 These points will be discussed below, with the exception of the 2003 amending Act which will be discussed in the following chapter.

6.3 In the context of highlighting these amending Acts, Treasury outlined that 'it is not the signing of the treaty that expands the taxing power; it is the way in which it

is incorporated into the domestic law that does that':

I understand that the Joint Standing Committee on Treaties, JSCOT, has detailed scrutiny of all of the treaties that we enter into, so the mere signing of a treaty is not enough to incoiporate it into law; it needs to be ratified by the parliament in order to take effect. Otherwise, the executive would have its own law-making power. Lawyers at the table will know better than I do the broader consequences of that, but it is the way in which those treaties are then incoiporated into the Australian law and then become binding on the Australian government. That process is done through the 1953 act and interacts with the 1936 act.3

1 Mr Tony McDonald, General Manager, International Tax and Treaties Division, Revenue Group, Committee Hansard, 26 July 2012, p. 55.

2 Treasury, Submission 21, p. 15.

3 Mr Tony McDonald, General Manager, International Tax and Treaties Division, Revenue Group, Treasury, Committee Hansard, 26 July 2012, p. 57.

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1982 introduction of Division 13

6.4 The Income Tax Assessment Act 1982 (Act No. 29 of 1982) (1982 amending Act) introduced the transfer pricing rules set out in Division 13.4 The provisions for the 1982 amending Act replaced section 136 of the Income Tax Assessment Act 1936 (ITAA1936).

6.5 Treasury asserted that the Explanatory Memorandum (EM) to the 1982 Act made repeated reference to provisions in Division 13 'and the fact that in addition to these, the treaties "contain their own provisions" or carry out the same functions'. Treasury highlighted an explanation of section 170 as further evidence of this.5

Section 170- amendment of assessments

6.6 Treasury outlined that as part of the introductory pages describing 'the main features' of the 1982 amending Act, the EM stated:

Reflecting the position that exists in relation to existing section 136 [replaced by Division 13], an assessment may be amended to give effect to the revised Division 13 at any time, so long as the Division has not previously been applied in relation to the same subject matter. Where a double taxation agreement provision operates to reallocate profits,

amendment of assessments will be authorised on the same basis (emphasis added by Treasury).6

6.7 The EM to the 1982 amending Act specifically addressed subsection 170(9B) (as discussed by submitters in the previous chapter) further on:

In their practical effect, proposed sub-sections 170(9B) and (9C) will clarify the powers of the Commissioner to amend an assessment where a provision of a double taxation agreement that deals with profit shifting may be applicable. Sub-section 4(2) of the Income Tax (International Agreements) Act 1953 provides that the provisions of that Act are to have effect notwithstanding anything inconsistent with those provisions contained in the Principal Act [IT A A 1936], Technically, therefore, the provisions of a double taxation agreement that deal with profit shifting, either under a "business profits" article ... or an "associated enterprises" article ..., may have to be applied instead of Division 13. Where the profit shifting provisions of a double taxation agreement are to

apply in these circumstances, sub-sections 170(9B) and (9C) confer the

4 Income Tax Assessment Amendment Act 1982, www.comlaw.gov.au/Details/C2004A02588 (accessed 24 July 2012).

5 Treasury, Submission 21, p. 15.

6 Explanatory Memorandum, Income Tax Assessment Amendment Bill 1982, p. 6, www.austlii.edu.au/au/legis/cth/bill em/itaabl982330/memo O.pdf (accessed 24 July 2012), see Treasury, Submission 21, p. 16.

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same specific powers of amendment of an assessment as are to be provided in relation to revised Division 13 (emphasis added by Treasury).7

6.8 Treasury asserted that '[underpinning subsection 170(9B) is the clear assumption that the treaty based transfer pricing rules operate as a separate and independent basis for making transfer pricing adjustments'.8

Explanation of section 136AB - operation of Division 13

6.9 Treasury also highlighted section 136AB which pertains to the operation of Division 13. It states:

(1) Nothing in the provisions of this Act other than this Division shall be taken to limit the operation of this Division.

(2) In the application of this Division, the operation of section 31C shall be disregarded.9

6.10 The EM to the 1982 amending Act makes the following comments on section 136AB of the Act:

The basic purpose of the proposed section 136AB is to give to Division 13 an overriding operation in relation to the general provisions of the Principal Act, similar to that of Part IVA.

It is not proposed that Division 13 will override the Income Tax (International Agreements) Act 1953. The double taxation agreements which appear as Schedules to that Act contain their own provisions to deal with profit shifting arrangements which occur in an agreement context, and these provisions are based on application of the arm's length principle (emphasis added by Treasury).10

Section 226 - penalty provisions

6.11 Treasury also highlighted comments in the EM of the 1982 amending Act relating to the powers of the administrative tribunal relating to its assessments of profit shifting cases. Section 22 of the 1982 amending Act amends section 193 of the ITAA 1936 to give the Taxation Board of Review powers to review decisions of the Commissioner on adjustments for profit shifting cases.

7 Explanatory Memorandum, Income Tax Assessment Amendment Bill 1982, p. 79, www.austlii.edu.au/au/legis/cth/bill em/itaabl982330/memo_0.pdf (accessed 24 July 2012); see Treasury, Submission 21, p. 17.

8 Treasury, Submission 21, p. 16.

9 Income Tax Assessment Amendment Act 1982, www.comlaw.gov.au/Details/C2004A02588 (accessed 24 July 2012).

10 Explanatory Memorandum, Income Tax Assessment Amendment Bill 1982, pp 63-64. www.austlii.edu.au/au/legis/cth/bill em/itaabl982330/memo O.pdf (accessed 24 July 2012); see Treasury, Submission 21, p. 15.

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6.12 The extract from the EM also refers to section 23 of the 1982 amending Act which amends section 226 of the ITAA 1936 to insert new sub-sections (2B), (2C) and (2D). The explanations of section 23 of the 1982 amending Act (which is said to complement the changes set out in section 22) stated that it:

...proposes the amendment of section 226 of the Principal Act [ITAA 1936] to insert new sub-sections (2B), (2C) and (2D) by which statutory additional tax at the rate of 10 per cent per annum will be imposed where, in calculating the tax assessable to a taxpayer, the revised Division 13 or a corresponding provision of a double taxation agreement has been taken into account and the application of the Division or agreement provision has resulted in an increase in the amount of tax assessable to the taxpayer.11

6.13 Treasury highlighted the following explanation in the 1982 amending Act which outlined that it will insert:

...new sub-sections (2B) and (2D) to statutorily impose additional tax by way of penalty on a taxpayer in relation to whom the revised Division 13 or a corresponding provision of a double taxation agreement has been applied to increase the tax assessable to the taxpayer (emphasis added by Treasury).11 12

6.14 Treasury argued that this 'clearly indicates that a transfer pricing adjustment to increase a tax liability can be made under either the domestic law or the provisions of a tax treaty'.13

6.15 Subsection 226(2C) (since repealed)14 which made provision for penalties described as 'additional tax' (as outlined above). Treasury explained that subsection 226(2C) was a determination that imposed a penalty amount on the taxpayer as a result of treaty provisions applying, and the penalty amount if Division 13 was applied instead:

(a) for the purpose of making an assessment, the Commissioner has calculated the tax that, but for this sub-section, is assessable to a taxpayer in relation to a year of income; and

(b) in calculating the tax assessable to the taxpayer, a prescribed provision was not applied in a particular case by reason of the Income Tax

11 Explanatory Memorandum, Income Tax Assessment Amendment Bill 1982, p. 81, www.austlii.edu.au/au/legis/cth/bill em/itaabl982330/memo O.pdf (accessed 24 July 2012).

12 Explanatory Memorandum, Income Tax Assessment Amendment Bill 1982, p. 80, www.austlii.edu.au/au/legis/cth/bill em/itaabl982330/memo O.pdf (accessed 24 July 2012); see Treasury, Submission 21, p. 15.

13 Treasury, Submission 21, p. 16.

14 For discussion on its repeal refer to *ä984 amendments to the penalty provisions' below.

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(International Agreements) Act 1953, the Commissioner shall determine the following amounts: ... (emphasis added by Treasury).15

6.16 Treasury explained that subsection 226(2D) then provided that a taxpayer was liable for a penalty equal to the lesser of the two amounts determined under Division 13 or the treaty.16 The EM to the 1982 amending Act outlined:

By sub-section 226(2D), additional tax is to be imposed where a prescribed provision has not applied because of the Income Tax (International Agreements) Act 1953, that is, where by virtue of sub-section 4(2) of that Act (under which the provisions of that Act have effect notwithstanding

anything inconsistent therewith in the Principal Act) the provisions of a double taxation agreement dealing with profit shifting have applied instead of a prescribed provision. Paragraph (3) of Article 5 and paragraph (1) of Article 7 of the Australia/U.K. agreement and

corresponding articles in other agreements are such agreement provisions.)

Sub-section 226(2C) applies for purposes of subsection (2D) and provides for the calculation of additional tax on two bases. In effect, additional tax of 10 per cent per annum is to be calculated, on the basis set out in subsection (2B), by reference to the tax that would have been assessed if Division 13 had been applied (paragraph (c)) and by reference to the tax that has been assessed upon the application of the provision of the double taxation agreement that has displaced the application of Division 13 (paragraph (d)).

Where the amount calculated under each of the two paragraphs is the same, the taxpayer will be liable, by subsection 226(2D), to pay that amount as additional tax. In a case where different amounts are calculated under paragraphs 226(2C) (c) and (d), the taxpayer will be liable to pay the lesser of the two amounts (emphasis added by Treasury).17

6.17 Treasury also highlighted an extract in introductory comments from the EM to the 1982 amending Act which clearly outlined the intention that treaties could be used to 'increase' a taxpayer's tax liability:

Where a taxpayer's tax liability is increased under corresponding provisions of a double taxation agreement in circumstances where, but for the agreement, the Division would have applied to the same effect, the additional tax will also be payable.18

15 Income Tax Assessment Amendment Act 1982, www.comlaw.gov.au/Details/C2004A02588 (accessed 24 July 2012); see Treasury, Submission 21, p. 17.

16 Treasury, Submission 21, p. 17.

17 Explanatory Memorandum, Income Tax Assessment Amendment Bill 1982, p. 81, www.austlii.edu.au/au/legis/cth/bill em/itaabl982330/memo O.pdf (accessed 24 July 2012); see Treasury, Submission 21, p. 18.

18 Explanatory Memorandum, Income Tax Assessment Amendment Bill 1982, p.6, www.austlii.edu.au/au/legis/cth/bill em/itaabl982330/memo O.pdf (accessed 24 July 2012); see Treasury, Submission 21, p. 18.

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6.18 Treasury argued that the explanation of these provisions provided in the EM 'clearly assumed that both the treaty transfer pricing rules and Division 13 could independently impose a tax liability and that these amounts may differ with either being greater than the other1:

...the legislative provisions and the accompanying Explanatory Memorandum for the penalty provisions clearly assume that a tax liability may be imposed as a result of either Division 13 or the transfer pricing articles contained in a double tax agreement. Moreover, these penalty provisions explicitly envisaged that an adjustment made as a result of a

double tax agreement could take precedence over Division 13.19

1984 amendments to the penalty provisions

6.19 The Taxation Laws Amendment Act 1984 (1984 amending Act) amended penalty provisions of taxation laws including those associated with transfer pricing.20 21 The EM to the 1984 amending Act addressed transfer pricing as part of its

introductory comments. It noted that the primary change was an increase in the penalty rate set out in subsections 226(2B) and (2D) of the ITAA1936. The 1984 amending Act replaced these subsections with new section 225:

In regard to international profit shifting arrangements, the existing income tax law provides that additional tax of 10% per annum is payable where the Commissioner has adjusted a taxpayer *s declared income or claimed deductions to counter the avoidance of tax through transfer pricing or profit shifting arrangements. Under proposed amendments the additional tax payable will be (subject to a general power of remission by the Commissioner) either 200% flat or 25% per annum.

Additional tax of 200% will be payable where the arrangements are blatant schemes to avoid Australian tax * that is, schemes entered into with the sole or dominant purpose of avoiding tax. Additional tax at the rate of 25% per annum will be payable in other cases - that is, where tax avoidance is not the key purpose of the arrangements.

Where a taxpayer *s tax liability is increased under corresponding provisions of a double tax agreement where, but for the agreement, the profit shifting tax avoidance provisions would have applied to the same effect, the appropriate additional tax will also be payable (emphasis added by Treasury)/1

19 Treasury, Submission 21, p. 18.

20 Taxation Laws Amendment Act 1984, Comlaw website, www.comlaw.gov.au/Details/C2004A02987 (accessed 24 July 2012).

21 Explanatory Memorandum - Part A, Taxation Laws Amendment Bill 1984, p. 12, www.austlii.edu.au/au/legis/cth/bill em/tlabl984258/memo_l,pdf (accessed 24 July 2012), see also p. 32.

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6.20 Treasury highlighted this reference which, as consistent with the previous penalty provisions above, noted that a taxpayers tax liability could be 'increased' as a result of the operation of treaty provisions.22

6.21 Following on from this, the EM to the 1984 amending Act further outlined the approach taken for the calculation of penalties for profit shifting which included consideration of treaty provisions:

In determining the increase in tax attributable to the application of Division 13 or of a corresponding double taxation agreement provision, and on which the 25% per annum or 200% additional tax is based, it is necessary first to calculate a base amount of tax: The base amount of tax for this purpose will, broadly, be the tax that would be payable if the taxpayer were to be assessed as having the taxable income revealed by the taxpayer's return. The tax payable as the result of the application of Division 13 or of the relevant agreement provision having been calculated, the additional tax - in cases where the profit shifting arrangements are not connected with blatant tax avoidance arrangements - will be 25% per annum of the difference between that amount and the base amount, calculated from the last day allowed for furnishing the return to the date of assessment. Where tax would not have been assessable to the taxpayer but for the application of Division 13, or of a relevant agreement provision, the additional tax will be 25% per annum for the abovementioned period or 200% flat, as the case may be, of the tax payable (emphasis added by Treasury).23

Interaction with subsection 4(2) of the International Tax Agreement Act 1953

6.22 The 1984 amending Act made reference to subsection 4(2) of the

International Tax Agreement Act 1953 (ITAA 1953) which states:

The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than Part IVA of the Income Tax Assessment Act 1936) or in an Act imposing Australian tax.24

6.23 In its submission to this inquiry, Treasury highlighted commentary in the EM on how the 1984 amending Act interacts with subsection 4(2) of the ITAA 1953 and argued that it 'may result in the provisions of a double tax agreement being applied

22 Treasury, Submission 21, p. 18.

23 Explanatory Memorandum - Part B, Taxation Laws Amendment Bill 1984, p. 33, http://www.austlii.edu.au/au/legis/cth/bill em/tlabl984258/memo O.pdf(accessed 25 July 2012).

24 International Tax Agreement Act 1953, Comlaw website, http://www.comlaw.gov.au/Details/C2011C00513 (accessed 25 July 2012).

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instead of Division 13'. Treasury highlighted that this understanding was consistent with the amendments to subsection 170(9 B).2: i

6.24 In the case of the 1984 amending Act, the EM outlined that when the

provisions of a treaty were to be applied instead of Division 13 (according to subsection 4(2) of the ITAA1953) penalties were to be calculated under the previous subsection 226(2C):

By new sub-section 225(2) (replacing existing sub-section 226(2C)), additional tax is to be imposed where a prescribed provision has not applied because of the Income Tax (International Agreements) Act 1953 * that is, where by virtue of sub-section 4(2) of that Act (under which the provisions of that Act have effect notwithstanding anything inconsistent therewith in the Principal Act) the provisions of a double taxation agreement dealing with profit shifting have applied instead of a prescribed provision. (Paragraph 2 of Article 7 and paragraph 1 of Article 9 of the Australia/USA Convention, and corresponding articles in other agreements, are such agreement provisions).

In effect, additional tax of 25% per annum or 200% flat is to be calculated on the basis set out in subsection 225(1), by reference to the tax that would have been assessed if Division 13 had been applied (paragraph (c)) and by

reference to the tax that has been assessed upon the application of the provision of the double taxation agreement that has displaced the application of Division 13 (paragraph (d)).

Where the amount calculated under each of the two paragraphs is the same, the taxpayer will be liable, by sub-section 225(3), which replaces sub≠ section 226(2D), to pay that amount as additional tax. In a case where different amounts are calculated under paragraphs 225(2)(c) and (d), the taxpayer will be liable to pay the lesser of the two amounts (emphasis added by Treasury).25 26

1995 explanation of franking credits

6.25 The Income Tax (Franking Deficit) Amendments Act 1995 (Act No. 172 of 1995) (1995 amending Act) amended Part IIIAA of the ITAA1936.27 The EM to the 1995 amending Act outlined that a component of the Act:

Amends the income tax law to deny franking credits under the imputation system for tax paid by companies as a result of a transfer pricing or non≠

25 Treasury, Submission 21, p. 19. See submitters' comments on ss. 4(2) of the ITAA 1953 in Chapter 5.

26 Explanatory Memorandum - Part B, Taxation Laws Amendment Bill 1984, p. 33, http://www.austlii.edu.au/au/legis/cth/bill em/tlabl984258/memo O.pdf (accessed 25 July 2012); see Treasury, Submission 21, pp 19-20.

27 Income Tax (Franking Deficit) Amendments Act 1995, www.comlaw.gov.au/Details/C2004A05019 (accessed 24 July 2012).

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arm's length dealing adjustment made under the Income Tax Assessment Act 1936 or a double taxation agreement.28

6.26 Treasury highlighted an extract from Chapter 4 of the EM to the 1995 amending Act and argued that the explanation demonstrates that 'the amendment to the franking credit rules assumes that the treaty has a taxing power' to 'increase' revenue in accordance with arm's length principles:

4.2 ...In certain circumstances, franking credits could, instead of relieving the second tier of tax on company profits, be used to frank profit distributions that would not otherwise be franked dividends. This could occur where the 'profits' which have been taxed under the transfer pricing or non-arm's length dealing adjustment provisions of Division 13 of the Act or a double taxation agreement have been

misallocated to an offshore affiliate. Where 'profits' have been shifted or misallocated offshore, unlike other additional tax situations, they are not available for distribution by an Australian resident company.

[...]

4.4 Both Division 13 and the double tax agreements entered into by Australia with other countries contain provisions aimed at ensuring that the Australian revenue is not disadvantaged by transfer pricing practices and non-arm's length dealings which shift or misallocate profits offshore. For taxation purposes, these provisions provide for profits to be notionally increased in accordance with arm's length principles i.e. a misallocation of profit adjustment (emphasis added by Treasury).29

2001 explanation of thin capitalisation rules

6.27 Treasury have also highlighted that there are a number of statements on transfer pricing treaty articles contained in the EM to the New Business Tax System (Thin Capitalisation) Act 2001 (Act No. 162 of 2001) (2001 amending Act).30 Treasury noted that comments in the EM to the 2001 amending Act explained that Division 13 and the treaties go beyond thin capitalisation provisions. The EM also mentioned that the ami's length principle in the transfer pricing mles apply to a wider breadth of transactions, and is not limited to thin capitalisation:

1.78 ... Further, there may be instances where the purpose of the application of the arm *s length principle under Division 13 and comparable provisions of DTAs to a particular case is not the same as for applying the aim's length test under the thin capitalisation rules. In these cases, the arm's

length principle articulated in Division 13 and comparable provisions of

28 Explanatory Memorandum, Income Tax (Franking Deficit) Amendments Bill 1995, p. 5, www.austlii.edu.au/au/legis/cth/bill em/itdabl995327/memo O.pdf (accessed 24 July 2012).

29 Treasury, Submission 21, p. 20

30 Treasury, Submission 21, pp 20 *21; see also New Business Tax System (Thin Capitalisation) Act 2001, www.comlaw.gov.au/Details/C2004A00897 (accessed 24 July 2012).

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DTAs should apply. For example, the application of the arm's length principle to determine whether a rate of interest is greater than an arm *s length amount can only be done under Division 13 and comparable provisions of DTAs.

1.79 The thin capitalisation rules also interact with Division 13 and comparable provisions of DTAs... in relation to the amount of a debt deduction which would otherwise be allowable. In normal circumstances, the amount otherwise allowable is that determined under section 8-1 of the IT A A 1997. However, Division 13 and comparable provisions of DTAs may also impact on the amount otherwise allowable. The thin capitalisation rules apply, therefore, to the amount of a debt deduction which is otherwise allowable having regard to any other provision in the income tax law or in the DTAs (emphasis added by Treasury).31

6.28 Treasury argued that this is 'clearly based on the assumption that the thin capitalisation rules interact with the transfer pricing provisions of both the domestic legislation and Australia's tax treaties and that each might impact on the amount of a debt deduction'.32

Committee view

6.29 The committee accepts that there are differing views on whether the treaties provide an independent taxing power and that this has created uncertainty on transfer pricing assessments. Further, the committee acknowledges that the issue is yet to be tested by the courts.

6.30 Following a careful examination of both arguments, it is clear that the introduction of this bill and its retrospective nature 'is not done lightly' as evidenced by Treasury's thorough reporting of relevant amending Acts dating back to 1982.

6.31 The committee agrees with Treasury's assertions that the bill does indeed clarify the intent of Parliament on the taxation power of treaties. The bill does not introduce a fundamentally different regime, it re-states a pre-existing position that has on numerous occasions been announced publicly through taxation rulings by the Commissioner, and never challenged by relevant ministers.

6.32 Further, the committee appreciates the rights of a taxpayer to test the assessments of the Commissioner in court. It notes, based on the evidence submitted, the apparent long-standing view of many taxpayers which are in opposition to the stated position of the Commissioner.

31 Explanatory Memorandum, New Business Tax System (Thin Capitalisation) Bill 2001, www.austlii.edu.au/au/1egis/cth/bill em/nbtscb2001489/memol.html (accessed 24 July 2012); see Treasury, Submission 21, p. 21.

32 Treasury, Submission 21, p. 21.

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6.33 Where there is a perceived lack of clarity between the stated law and the Commissioner's interpretation, the committee encourages taxpayers to draw it to Parliament's attention and not limit such debate to the finality of court proceedings. The committee confirms the separation between the two bodies but highlights to taxpayers Parliament's ability to bring further clarity to taxation legislation in consultation with industry.

6.34 However, as discussed in the previous chapter, it is of some concern to the committee that explanatory material to Australia's treaties do not expressly clarify parliament's intention on taxing powers in relation to transfer pricing. The committee encourages Treasury officials to further examine this matter in due course.

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Chapter 7

Parliament *s intention expressed in the 2003 amendment

7.1 Treasury emphasised the International Tax Agreements Amendment Act 2003 (Act No. 123 of 2003) (2003 amending Act) as Parliament's most recent 'statement' on the taxation power of treaties, using this as justification for the retrospective application of the bill to 1 July 2004 (the first financial year after the statement).1

7.2 The 2003 amending Act amended the International Tax Agreement Act 1953 (ITAA 1953) to give force to the United Kingdom Convention and the United Mexican States Agreement. The 2003 amending Act also made amendments to subsection 170(14) of the Income Tax Assessment Act 1936 (ITAA 1936) to provide a 'generic description' of transfer pricing articles.

7.3 Treasury argued that paragraph 3.5 of the Explanatory Memorandum (EM) to the 2003 amending Act 'contained explicit statements' that certain provisions of tax treaties could be used to make transfer pricing adjustments on an arm's length basis.1 2

Submitters' views

7.4 Some submitters, however, were not persuaded that there was a specific announcement in Parliament in 2003 that pertained to the measures in the bill.3 Chevron contended:

...the reference to an 'indication by Parliament' in 2003 appears to refer to discussions regarding the renegotiation of Australia's Double Tax Agreement with the United Kingdom. The related material in no way

suggests, infers or provides that the treaty should be an alternative to, or override, our domestic laws.4

7.5 In addition, the Rule of Law Institute of Australia argued:

We can find no evidence that this was the intention of Parliament. No Member of Parliament who spoke in reference to the original Bills said anything which would convey that was the intent. There is nothing in the second reading speeches which offers any support nor anything in the Senate... Explanatory Memorandum on Tax Bills do not represent in

1 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, p. 3.

2 Explanatory Memorandum, Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, paragraph 1.17, pp 7-8.

3 The Tax Institute, Submission to Consultation Paper , p. 12; Chevron Australia Pty Ltd, Submission 16 , p. 6; Law Council of Australia, Submission 9, pp 1-2; Institute of Chartered Accountants in Australia, Submission 19, p. 1.

4 Chevron Australia Pty Ltd, Consultation Paper Submission, p. 4.

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practice the intention of Parliament, but the Commissioner's interpretation of the Bill.5

7.6 PricewaterhouseCoopers (PwC) attached an article to its submission which argued that the amendment in the 2003 amending Act does not directly relate to treaty provisions, but to amendments to section 170(14) of the ITAA 1936. It argued that any intention by Parliament to use treaties as a taxing power should be outlined

explicitly in the EM in its discussions of Article 9 for ease of reference for treaty partners, and this is not the case:

Paragraph 3.5 of the EM to the UK [Double Tax Agreement] DTA does not directly relate to the UK DTA. Rather, it relates to amendments to s 170(14), specifically the definition of the term "relevant provision", to reflect the replacement of the existing UK DTA text in the Agreements Act.

If the comments are intended to reflect Parliament's intention that art 9 can be applied in a way which imposes tax, this should be noted in the section of the EM which deals with art 9 of the UK DTA which is not the case. In particular, given that this would represent significant departure from

international practice, such a reference would be expected. That is, taxpayers reading the EM to determine the implications of the DTA on their financial situation would expect this information to be highlighted, rather than having to read an obscure and dated EM to a specific amendment provision.6

7.7 PwC also provided a full copy of the EM to the 2003 amending Act in which it highlighted a number of extracts it suggested 'sets out Parliament's understanding of how tax treaties work, including their purpose'. These extracts contrast with the position adopted by Treasury and are outlined below.

7.8 In introductory comments, the EM to the 2003 amending Act stated:

Tax treaties allocate to the country of source, sometimes at limited rates, a taxing right over certain income, profits or gains derived by residents of the treaty partner country...

Australia's tax treaties are primarily concerned with relieving juridical double taxation, which can be described broadly as subjecting the same income of a taxpayer to comparable taxes under the taxation laws of two different countries.7

7.9 Continuing on as part of the general outline, the EM to the 2003 amending Act stated:

5 Rule of Law Institute of Australia, Submission 20, p. 2.

6 Peter Collins et al, 'The smoke and mirrors around the "stage one" transfer pricing reforms *, The Tax Specialist, June 2012, p. 215.

7 Explanatory Memorandum, International Tax Agreement Bill 2003, p. 4, http://www.austlii.edu.au/au/legis/cth/bill_em/itaab2003389/inemol.html (accessed 10 August) in PricewaterhouseCoopers, additional information, exhibit A, received 31 July 2012.

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Australia *s tax treaties are designed to:

- avoid double taxation and provide a level of security about the tax rules that will apply to particular international transactions by:

o allocating taxing rights between the countries over different categories of income;

o specifying rules to resolve dual claims in relation to the

residential status of a taxpayer and the source of income; and

o providing a taxpayer with an avenue to present a case for

determination by the relevant taxation authorities where the taxpayer considers there has been taxation treatment contrary to the terms of a tax treaty; and

- prevent avoidance and evasion of taxes on various forms of income flows between the treaty partners by:

o providing for the allocation of profits between related parties on an arm *s length basis;

o generally preserving the application of domestic law rules that are designed to address transfer pricing and other international avoidance practices; and

o providing for exchanges of information between the respective taxation authorities, (emphasis added by PwC).8

Amendment to subsection 170(14) - definition of *relevant position'

7.10 Item 1 of Schedule 3 of the 2003 amending Act amended subsection 170(14) of the ITAA 1936 on the definition of 'relevant provision *.

7.11 The amendments set out in the 2003 amending Act replaced paragraph 170(14)(a) of the ITAA 1936. The repealed section stated that 'relevant provision' means:

(a) paragraph (3) of Article 5, or paragraph (1) of Article 7, of the United Kingdom agreement or a provision of any other double taxation agreement that corresponds with either of those paragraphs;9

7.12 The 2003 amending Act replaced paragraph 170(14)(a) with the following 'generic description' of'relevant provision' (paragraph b is included for context):

(a) a provision of a double taxation agreement that attributes to a permanent establishment or to an enterprise the profits it might be expected to derive if it were independent and dealing at arm's length; or

8 Explanatory Memorandum, International Tax Agreem ent Bill 2003, p. 4,

http://www.austlii.edii.au/au/legis/ctl~i/bill em /itaab2003389/m em ol.htm l (accessed 10 August)

in PricewaterhouseCoopers, additional information, exhibit A , received 31 July 2012.

9 Incom e Tax A ssessm ent Act 1936 (Act N o. 30 o f 2003), volum e 11, p. 136,

http://w w w .com law .gov.au/D etails/C 2004C 04679 (accessed 10 August 2012).

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(b) paragraph 7, 8 or 9 of Article 5, or Article 7, of the Taxation Code in

Annex G to the Timor Sea Treaty or a provision of any other international tax sharing treaty that corresponds with any of those paragraphs or that Article.10 *

7.13 The EM to the 2003 Act outlined that the new definition of 'relevant

provision' is a consequential amendment of replacing the former UK tax treaty with the new UK treaty. It replaced references to specific provisions in the UK Convention with a 'generic description of the relevant provisions found in Australia's tax treaties'.11 The EM to the 2003 Act stated:

3.5 Subsections 170(9B) and (9C) of the ITAA 1936 deal with time limits for amending income tax assessments for the purpose of giving effect to a relevant provision. Paragraph (a) of the definition for relevant provision in subsection 170(14) defines relevant provision as paragraph (3) of Article 5

or paragraph (1) of Article 7 of the existing tax treaty with the United

Kingdom (currently defined as United Kingdom agreement within subsection 170(14)), or a provision of any other tax treaty that corresponds with either of those paragraphs. These paragraphs in Australia's tax treaties allow for adjustments to the profits of permanent establishments or associated enterprises on an arm *s length basis.

3.6 This amendment replaces the references to the provisions in the existing tax treaty with the United Kingdom with a broad, generic description of the relevant provisions found in Australia's tax treaties. Examples of such provisions in Australia *s tax treaties are paragraph 2 of Article 7 (Business profits) and paragraph 1 of Article 9 (Associated enterprises) of the new tax

treaty with the United Kingdom). Substituting this general description will reduce the need to amend the definition of relevant provision as a result of future tax treaty changes.

3.7 As a consequence of the change to a generic description of paragraph (a) of the definition of relevant provision, the definition of United Kingdom agreement in subsection 170(14) is no longer necessary and will be

repealed by this bill (emphasis added by Treasury).12

10

11

12

Income Tax Assessment Act 1936, http://w w w .austlii.edu.au/au/legis/cth/consol act/itaal936240/sl70.htm l (accessed

10 A ugust 2012).

Explanatory Mem orandum , International Tax Agreem ent Bill 2003, p. 140.

Explanatory Mem orandum , International Tax A greem ent Bill 2003, p. 140; see Treasury,

Submission 21, p. 21.

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7.14 The 2003 EM provides examples of 'relevant provisions' in Australia's tax treaties as paragraph 2 of Article 7 (Business profits) and paragraph 1 of Article 9 (Associated enterprises) of the new tax treaty with the United Kingdom.13

7.15 To provide context, paragraph 1 of Article 9 (Associated enterprises) of the treaty with the United Kingdom states:

W here:

(a) an enterprise o f a C ontracting State participates d irectly or indirectly in

the m an agem en t, control or capital o f an enterprise o f the other C ontracting

State; or

(b) the sam e p erson s participate d irectly or indirectly in the m anagem ent,

control or capital o f an enterprise o f a C ontracting State and an enterprise o f

the other C ontracting State;

and in either ca se con d ition s operate b etw een the tw o enterprises in their

com m ercial or fin ancial relations w h ich d iffer from th ose w h ich m igh t b e

exp ected to operate b etw een ind ependent en teip rises d ealin g w h o lly

in d ep en d en tly w ith on e another, then an y p rofits w h ich m ight, but for th ose

con d ition s, h ave b een exp ected to accrue to on e o f the en teip rises, but, b y

reason o f th ose con d ition s, h ave n ot so accrued, m ay be in clu d ed in the

p rofits o f that enterprise and taxed a cco rd in g ly .14

7.16 Treasury emphasised that the EM for the Act demonstrated Parliament's intention that the Commissioner can use the 'relevant provisions' of a tax treaty to make adjustments to the profits of permanent establishments and associated enterprises.15

Committee view

7.17 Consistent with its comments in the previous chapter, the committee reiterates that the bill confirms Parliament's intention on treaty tax powers as expressed in amending Acts passed by the Parliament dating back to 1982. The 2003 amending Act is a further expression of this uniform position.

13 Paragraph 2, Article 7 of the UK Convention states: 'Subject to the provisions of paragraph 3 of this Article, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated in that other State, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar

activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment or with other enterprises.' http://law.ato.gov.au/atolaw/view.htm?docid=RPC/19530082/Schl-Agt0-Art7 (accessed 24 July 2012).

14 United Kingdom Convention, http://law.atO-gov.au/atolaw/view.htm?docid=RPC/19530082/Schl-Agt0-Art9 (accessed 24 July 2012).

15 Treasury, Submission 21, p. 21.

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7.18 The 2003 amending Act provides a 'generic description1 of relevant treaty Articles that can be used by the Commissioner to make adjustments on an arm's length basis and thus provides farther evidence of the taxation power of treaties consistent with the provisions in the bill before the committee.

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Chapter 8

Implications for taxpayers and international trading partners

8.1 Submitters highlighted issues created by the retrospective nature of the bill in relation to taxpayers and international trading partners.

8.2 The Senate Scrutiny of Bills Committee also drew attention to the

retrospective provisions of the bill 'as they may be considered to trespass unduly on personal rights and liberties, in breach of principle l(a)(i) of the Committee's terms of reference'. It did, however, state that:

In the circumstances the Committee leaves the question of whether the proposed approach is appropriate to the consideration of the Senate as a whole.1

8.3 This chapter will explore the issues taxpayers may encounter when applying the bill to previous years including:

" difficulties in applying 'multiple transfer pricing rules';

" the burden of proof for assessments; and

" time limits for adjustments.

8.4 The chapter will also address submitters' concerns on the impact of the bill on international trading partners including:

" Australia's trading reputation in the global market;

" discrimination against international trading partners;

" Article 1(2) of the US treaty; and

" double taxation and Mutual Agreement Procedures (MAPs).

8.5 The chapter concludes with submitters' requests for further clarity about how the Commissioner will apply the retrospective elements of the bill.

Implications for taxpayers

8.6 The Tax Institute highlighted that retrospective legislation can be disadvantageous to taxpayers on the following grounds:

" may 'disturb' bargains struck between taxpayers;

" may expose taxpayers to penalties in cases where they have adhered to the law as it was previously written;

1 Senate Scrutiny o f Bills Com m ittee, Alert Digest 6/12 , p. 94.

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" financial accounts may be deemed incorrect and as a result, have adverse implications for investors and capital markets;

" may materially impact on a taxpayer's financial viability for investment decisions; and

" may exacerbate concerns in the international community of the policy risk of investing in Australia.2

Multiple transfer pricing rules

8.7 PricewaterhouseCoopers (PwC) asserted that the proposed changes will increase the complexity of doing business in Australia. It suggested that proposed Subdivision 815-A creates 'a patchwork of different transfer pricing rules that could apply to a particular transaction depending upon whether or not a treaty applies, which treaty applies and which period the relevant transaction occurred'.3 Moore Stephens provided further detail on the application of this 'patchwork' of rules:

If one assumes that the retrospective nature of the law has its desired effect, a critical issue all Treaty based taxpayers with international related party transactions will need to consider is what do they need to do, if anything, to attend to their "potential" taxation obligations of the past? This will involve a review of the pricing of their international related party transactions and profitability and a consideration of two versions of the OECD Transfer

Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines), along with other legislated/prescribed material.4 5

8.8 Ernst and Young suggested that the retrospective application could drive taxpayers to take an audit defence strategy to maintain existing positions rather than adjust their approach to transfer pricing to the proposed new rules:

...where a taxpayer makes a change in existing transfer pricing practices as a result of 815-A this change could be seen as an admission by the taxpayer that the prior position was incorrect. We would suggest that taxpayers would then be concerned that such an admission could be used by the ATO to support a position that the prior transfer pricing position should be

adjusted. To avoid potentially undermining earlier transfer pricing positions, taxpayers may be motivated to maintain existing positions and to develop audit defence strategies that take into account the new rules. This will only lead to more audits and lower rates of change in taxpayer

behaviour.3

2 The Tax Institute, Submission 15, p. 2.

3 PricewaterhouseCoopers, Submission 17, p. 2.

4 Moore Stephens, Submission 18, p. 2.

A revised version o f the OECD Guidelines w as introduced in 2010.

5 Ernst and Y oung, Submission 4, p. 3.

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8.9 Ernst and Young therefore suggested that a transition period for the bill could help mitigate these adverse consequences. It suggested as an example that taxpayers could be given 12 months to align with proposed Subdivision 815-A 'with the assurance that earlier transfer pricing positions would not be adjusted and penalised'.6

Burden of proof

8.10 The Law Council of Australia expressed concern that, under the provisions of the bill, taxpayers retain the burden of proof even though the bill increases the Commissioner's powers. It argued that this approach is inconsistent with international practice where the onus is on tax administrators to prove a taxpayer's pricing is not consistent with the arm's length principle (see paragraph 18 of the OECD Guidelines):

The amendment provided for in the Bill gives the Commissioner an independent and additional taxing power and increases the scope for application of profit based analysis using information more readily available to the Commissioner than taxpayers. As already observed, the burden of compliance with the proposed new laws, as well as the existing domestic transfer pricing regime which will continue to apply, will be significant for taxpayers. Accordingly, the Committee considers that the burden of proof in relation to the new measures should properly lie with the Commissioner. In the alternative, either the taxpayer should bear no legal or evidential onus to prove that the assessment is excessive or, upon leading evidence in support of positions taken, it should be expressly incumbent on the Commissioner to demonstrate that the taxpayer's position is manifestly wrong.7

Time limits

8.11 A number of submitters expressed concern that no time limit was specified for when adjustments could be made by the Commissioner. Submitters argued that, should the retrospective application pass the Senate, the time limit for amendments

should be limited to four years.8 The Law Council of Australia commented:

The Law Council's submission is that there should be a time limit. It should be the usual time limit of two years or a maximum of four years, but also with the usual provision that applies in other cases that, if the

Commissioner of Taxation, while conducting an audit, foims the view that he needs more time in order to determine whether tax is properly payable, the commissioner can approach the court and seek an extension. That seems to us to be a wholly sensible approach.

Taxpayers should be given certainty in relation to previous years income so they can draw a line underneath it. There are also the issues about how long

6 Ernst and Young, Submission 4 , p. 4.

7 Law Council of Australia, Submission 9, p. 3.

8 Minerals Council of Australia, Submission 7, p. 3; Law Council of Australia, Submission 9, P-3.

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people keep records and keep all the relevant people around. If you go back further and further, it disadvantages taxpayers who have probably had a turnover of personnel and have probably moved their warehouses several times. How long do they need to keep the documentation? These are issues that crop up. It seems to us to be a very sensible reform just to insert a time limit, perhaps on the usual basis.9

Relationship with foreign trading partners

8.12 Submitters argued that the bill creates uncertainty for Australia's international trading partners and the retrospective application of the proposed measures 'will be seen as an example of sovereign risk and bad faith by the governments of trading partners and multinationals doing business in Australia'. For example, Moore

Stephens stated:

We are exceptionally concerned at the likely adverse impact on the reputational damage to the Australian Taxation Office (ATO) (and Australia, as an investment destination) that can be expected to follow in

the event that the legislation is back-dated as planned.10 11

8.13 The Australian Private Equity and Venture Capital Association commented:

...we note that retrospective legislation by its nature undermines business confidence, and as such is bad policy other than in the most exceptional cases. The retrospective nature of the proposed amendments is another example of why international investors now perceive investment in Australia to have greater sovereign risk than previously. Once investors' attitudes in this regard have been formed, it is, in our assessment, difficult to reverse. A stand by the Senate against legislative amendment with retrospective application in this instance will be a strong signal towards rectifying this worrying development.11

8.14 RSM Bird Cameron is particularly concerned that the bill will have a negative impact on Australia's reputation in the global market. It argued that the approach proposed by the bill to assess Australia's 'fair share of profits' is unworkable:

We are greatly concerned that the direction the Government is seeking to head with regard to its review of Australia's cross-border taxation policies represents a departure from this internationally accepted model, and an erosion of international consensus. The focus of consultation thus far appears to be on ensuring Australia taxes its "fair share of profits" (as opposed to receiving aim's length consideration). What is Australia's "fair share of profits" (based on relative economic contribution) in any given transaction or circumstance is a highly subjective question and will receive

9 Mr Chris Peadon, Mem ber, Taxation Com m ittee o f the Business Law Section Law Council o f

Australia, Committee Hansard, 26 July 2012, p. 30.

10 Moore Stephens, Submission 18, p. 1.

11 Australian Private Equity and Venture Capital A ssociation Ltd, Submission 22, p. 2.

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a different answer from every Revenue authority worldwide. As does the reciprocal question of any international authority's "fair share" when asked of the ATO. For this reason, the move in Australia to taxing based on a "fair

share of profits based on relative economic contribution" is unworkable. What is proposed appears to be a form of 'free for all1. The impact of this will be, in our view, business uncertainty and concern over the Australian political process. It will result in increased disputes, double taxation and reduced international investment. If Australia wishes to be highly involved

in the global economy, it must conform to global inteipretations or risk losing investment.12

8.15 The American Chamber of Commerce in Australia (AmCham) represents the interests of American companies undertaking business in Australia. It noted that 'the most significant source of foreign investment in Australia is the United States'. AmCham expressed concern that the bill, and in particular the retrospective application of it, creates 'unnecessary uncertainty and business risk, which in turn will negatively affect foreign investment in Australia'.13

8.16 The Business and Industry Advisory Committee to the OECD (BIAC) is an independent organisation officially recognised as the representative of the OECD business community. BIAC highlighted that 'the global business community is concerned about recent developments in the tax field in Australia' and raised the retrospective application as one of its key concerns:

We are concerned that retroactivity is not only unwelcome for the future of Australia's investment climate, it will also send a signal to other countries that retroactivity is an acceptable route, including those countries with which Australia trades and in whom Australian business invests . Currently, many countries have rules that forbid such retroactivity or have through other means indicated that retroactivity is not a course that will be used by

their legislator. Retroactive rules will serve to cause a downturn in global economic activities.14 15

8.17 Deloitte asserted that retrospectivity 'is not the approach to international tax law expected from a sophisticated trading nation and does considerable damage to Australia's reputation for fair dealing in international trade and taxation'.1'

Discrimination against tax treaty countries

8.18 A number of submitters have argued that the bill discriminates against countries that hold tax treaties on the basis that they will be required to adhere to

12 RSM Bird Cameron, Submission 11, p. 3.

13 Am erican Chamber o f Com m erce in Australia, Submission 14, p. 1.

14 Business and Industry Advisory Com m ittee to the OECD, Submission 10, pp 1-2.

15 D eloitte, Submission to Consultation Paper, p. 2.

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obligations in both Division 13 and the relevant tax treaty while non-treaty countries will only be subject to Division 13.16 Chevron Australia commented:

...we note that the proposed amendments only apply to countries with which Australia has a tax treaty - it does not apply to 'tax havens'. This has the perverse outcome that companies from our treaty countries are unfairly and inappropriately discriminated against compared to companies which operate in tax havens.17

8.19 KPMG argued that this 'outcome is counter-intuitive as the impact of the retrospective aspects of the Bill will only affect taxpayers who transact with associated enterprises in tax treaty countries'.18 AmCham also commented:

The proposed retrospective amendments solely relate to companies owned by residents of countries which have an agreement with Australia for the avoidance of double taxation. Accordingly, the proposed amendments would not affect any investor from a country with which Australia does not have an agreement. This includes tax havens and foreign investors who

choose to divert their investment through another jurisdiction. We consider that this element of the legislation is highly discriminatory against investors from countries such as the United States, which remains by far the most significant county of investment in Australia.19

8.20 GE suggested that preferential treatment of tax havens is inconsistent with Australia's position of Chair of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes.20 At the committee's hearing GE further asserted:

On the matter of applying stricter rules to tax treaty partners, if treaties confer an additional taxing power, this means there would be two ways of making tax adjustments to increase the taxable income of entities conducting business with treaty countries. By contrast, there would only be one more restrictive basis for assessing tax haven entities. If we accept the Treasury position *which we do not *that this is not a change in the law and that treaties have always operated to confer a taxing power, then we are accepting that parliament has for over 30 years sought to apply harsher rules to dealings with treaty countries. We do not accept that this would be parliament's intention. If we do not accept that parliament intended to apply

16 R SM Bird Cam eron, Submission 11 , p. 3; The Tax Institute, Submission 15, p. 8;

PricewaterhouseCoopers, Submission 17, p. 3; Institute o f Chartered Accountants in Australia,

Submission 19, p. 4.

17 Che w on Australia Pty Ltd, Submission 16, p. 1.

18 KPMG, Submission 13, p. 3.

19 Am erican Chamber o f Com m erce in Australia, Submission 14, p. 1.

20 GE, Submission 1, p. 3.

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stricter mles to dealings with treaty countries than would apply to tax havens, then we should not pass this bill, as it achieves exactly that.21

Non-discrimination article

8.21 Some submitters suggested that the bill could breach the non-discrimination article in some of Australia's tax treaties.22 Moore Stephens highlighted Article 24 and noted that a non-discrimination article provides, among other things, that:

Nationals of a Contracting State shall not be subjected in the other

Contracting State to any taxation or any requirement connected therewith, which is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances...are or maybe subjected.23

8.22 Treasury have responded to these concerns by outlining that the non≠ discrimination article would not apply to a transfer pricing adjustment in this context. It explained that, broadly, the article applies where a contracting State subjects resident foreign nationals to a more negative tax treatment than residents who are nationals. Treasury offered the following explanation:

In the case of enterprises, Article 24(5) may apply where a Contracting State subjects a resident enterprise that is owned or controlled by foreign residents to a more onerous tax burden than that imposed upon another resident enterprise owned or controlled by residents. Article 24(5) may also apply where an adjustment is made for both enterprises, but is more

onerous for the enterprise that is owned or controlled by foreign residents as a result of its ownership or control status.

A transfer pricing adjustment that is made as a result of a tax treaty

applying would not offend a non-discrimination article contained in that treaty. This is because the relevant power upon which such an adjustment would be based would not distinguish enterprises on the basis of

nationality, or the residence or nationality of its owners or controllers. That is, the treaty transfer pricing rules apply to enterprises without

discrimination as to nationality or ownership.

Moreover, even if such an adjustment did result in differential treatment, the non-discrimination articles contain specific carve-outs in relation to transfer pricing adjustments that would preclude the article from applying.

21 Ms Ardele Blignault, V ice President Governm ent Relations, GE, Committee Hansard, 26 July

2012, p. 9.

22 GE, Submission 1, p. 3; Business and Industry A dvisory Com m ittee to the OECD, Submission 10, p. 2; PricewaterhouseCoopers, Submission 1 7, p. 3; Moore Stephens, Submission 18, p. 2; Moore Stephens, 'Transfer Pricing Reform and its Impact on Australian Multinationals *, 1 July 2012, attachment to Supplementary Submission 18, pp 5-6.

23 A rticle 24 o f the N ew Zealand Treaty and Article 26 o f the Japan Treaty provided as an

exam ple in Moore Stephens, Submission 18, p. 2.

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These carve-outs apply to the relevant treaty powers given that they are conferred under the domestic law.24

Article 1(2) of the US treaty

8.23 Some submitters expressed concern that the bill could potentially breach Article 1(2) of the Australia-US Convention.2" For example, GE asserted that under Article 1(2) of the US treaty, the treaty may not increase tax above the liability that would result under the domestic law. Where the domestic law provides a more

favourable outcome than the treaty, the taxpayer may apply the provisions of the domestic law. It argued that the bill circumvents the spirit of this agreement.26

8.24 Chevron Australia provided an extract of the 2006 US Model Income Tax Convention Technical Explanation on Article 1(2):

Paragraph 2 states the generally accepted relationship both between the Convention and domestic law and between the Convention and other agreements between the Contracting States. That is, no provision in the Convention may restrict any exclusion, exemption, deduction, credit or other benefit accorded by the tax laws of the Contracting States, or by any other agreement between the Contracting States.

... Paragraph 2 also means that the Convention may not increase the tax burden on a resident of a Contracting States beyond the burden determined under domestic law. Thus, a right to tax given by the Convention cannot be exercised unless that right also exists under internal law.

It follows that, under the principle of paragraph 2, a tax-payer's U.S. tax liability need not be determined under the Convention if the Code would produce a more favourable result.27

8.25 PwC provided a full copy of the 'technical explanation' of the convention between the US and Australia treaty. It highlighted extracts which it argued 'confirm that the Australia-US tax treaty was never meant to and cannot apply to increase tax liability *as accepted by the Government when it signed the treaty and when it was passed into law':28

The technical explanation is an official guide to the Convention. It reflects policies behind particular Convention provisions, as well as understandings reached with respect to the interpretation and application of the Convention...

Paragraph 2 [of Article 1] provides that the Convention may not increase tax above the liability that would result under domestic law or under other

24 Treasury, Submission 21, p. 11.

25 GE, Submission 1, p. 3; Chevron Australia Pty Ltd, Submission to Consultation Paper, p. 6.

26 Ms Amanda Leckie, Tax Manager, GE, Committee Hansard, 26 July 2012, p. 10.

27 Chevron Australia Pty Ltd, Consultation Paper Submission, p. 6.

28 PricewaterhouseCoopers, additional information, received 31 July 2012.

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agreements between the Contracting States. If domestic law provides a more favourable treatment than the Convention, the taxpayer may apply the provisions of domestic law. For example, if certain interest income derived by non-residents is exempt from tax by statute, but the Treaty authorizes a

tax at source of not more that 10 percent, the statutory exemption will apply. A taxpayer, however, may not make inconsistent choices between the rules of the Internal Revenue Code and the Convention rules.29

8.26 In reference to Article 1(2) of the US treaty, AmCham expressed concern that the bill is not in accordance with signed treaty agreements:

The consequences of the proposed amendments are said to be in accordance with double taxation agreements signed. However, the double tax agreement with the United States specifically provides that the agreement cannot be used to increase taxation, only to ensure an appropriate allocation of tax between the two countries (Article 1(2)). Accordingly, the basis upon which retrospectivity has been justified by reference to interpretation of the agreement, is not sound for the purposes, at least, of the double taxation agreement with the United States.30

8.27 In response, Treasury outlined that Article 1(2) does not specifically apply to the transfer pricing rules. It explained that in operation, the article is required to identify a relevant and specific exclusion, exemption deduction rebate or allowance. It outlined that the proposed rules provided in the bill do not provide this type of 'specific benefit'. Treasury offered the following explanation:

Even if it were possible to construe Division 13 as providing the type of specific benefit set out under Article 1(2), Article 1(2) would still have no application as it would not be the convention of itself operating to restrict the benefit but rather the operation of another domestic law. There is no suggestion that Article 1 (2) prevents the implementation of the Convention, in whole or part, in the domestic law.

Further, even in the event that all of the issues above could be overcome Article 1(2) would still not apply in transfer pricing cases as Article 1(3) must also be considered.

Broadly, Article 1(3) of the Convention authorises either Australia or the United States to tax its own residents in any manner irrespective of any other provision of the Convention, including Article 1(2). Article 1(3) very deliberately takes precedence over Article 1(2), and would apply to all cases involving the application by Australia of Article 9 of the Australia-US Convention (involving associated enterprises).31

29 U S Treasury, Technical Explanation o f the Convention Betw een the Government o f the United

States o f Am erica and the Government o f Australia Signed in Sydney on August 6, 1982 (Australia-US tax treaty), pp 1-2 in PricewaterhouseCoopers, additional information, exhibit E,

received 31 July 2012.

30 Am erican Chamber o f Com m erce in Australia, Submission 14, p. 2.

31 Treasury, Submission 21, p. 11.

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Double taxation and Mutual Agreement Procedures

8.28 A number of submitters raised concerns that the rules will increase the risk of double taxation and highlighted the time and costs involved for Mutual Agreement Procedures (MAPs) in these instances. KPMG stated:

The retrospective aspect of the Bill has the potential to lead to significant unresolved double taxation for which positive resolution using the MAP in Australia's tax treaties would be unlikely. This in turn would have a

negative impact on the profile of Australia as an OECD member country and raise issues of sovereign risk for prospective future investment decisions.32

8.29 GM Holden suggested the portrayal of MAPs in the EM was oversimplified and argued that such an outcome can be time-consuming and costly:

Holden does not agree that relief from double taxation will be as easy to obtain as Parliament has portrayed in the EM. It is a matter of public record that Holden is currently involved in a Mutual Agreement Procedure which has been on-going for some considerable time and as a result, Holden does not believe that future relief from double tax will be easy to obtain in as timely and inexpensive a fashion as Parliament predicts. This problem will be exacerbated for companies, like Holden, that deal with related parties on several transactions in multiple jurisdictions, and represents an unfair compliance burden on these taxpayers should transfer pricing adjustments be made going back to 1 July 2004.33

8.30 In addition, Moore Stephens highlighted that escalating a transfer pricing dispute is not in the interest of taxpayers as this can be a costly course of events which may reflect adversely on the taxpayer:

As to the question of the possible imposition of double taxation suffice it to say that I am aware of some horrendous situations where double taxation has arisen... I believe that under the proposed law this position will

deteriorate further, contrary to Treasury's statement that: "...these amendments will not change the capacity of the competent authorities to reach a satisfactory solution should double taxation occur." The Senate must appreciate that many taxpayers do not have the financial capacity to fight transfer pricing disputes through the courts because of the enormous costs involved and, for some, the fear of the attendant adverse publicity. I submit that it is beholden upon our Government to protect taxpayers from the creation of laws that may be misinterpreted by an overly enthusiastic Revenue authority.34

8.31 The Institute of Chartered Accountants in Australia also commented:

32 KPMG, Submission 13 , p. 2.

33 GM Holden Ltd, Submission 5, p. 2.

34 Moore Stephens, Supplementary Submission 18, pp 1 *2.

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Paragraphs 1.47 to 1.50 of the EM provide comment on Mutual Agreement Procedure (MAP). The Institute considers this to be an oversimplification of the practicalities involved.

Notwithstanding the MAP mechanism, the Institute is of the view that there is the potential for significant unresolved double tax to be brought into existence for which positive resolution would be unlikely. This in turn would have a negative impact on the profile of Australia as an OECD member country and raise issues of sovereign risk for prospective future investment decisions.35

MAP statutes of limitation

8.32 The Minerals Council of Australia (MCA) outlined the process of MAP. It highlighted that a number of countries have a statute of limitation on the years covered by MAP which would prevent taxpayers from having access to MAP in certain cases dating back to 2004:

The typical option would be to go to treaty partner, through their tax office, and apply for a mutual agreement procedure whereby the allocation of tax between Australia and that other country is agreed so that there is no double taxation. However, there are two problems with that. One is that in a

number of countries there is a statute of limitation. An example is the United Kingdom, where there is a six-year statute of limitation. As this legislation is retrospective over eight years, there would already be two years that could not be covered under a MAP process. It is also important to remember that the MAP process is not a binding position that has to be agreed between countries. It is a best endeavour, so there is still a very significant risk that a company could be left with double taxation.36

8.33 In response, Treasury argued that MAPs will continue to provide relief in situations where automatic relief is not provided:

Subdivision 815-A is modelled on the transfer pricing rules in Australia's tax treaties. Multinational groups that are subject to Australian tax as a result of Subdivision 815-A will be able seek to offset that liability in the treaty partner jurisdiction through mutual agreement procedures (MAP) in cases where automatic relief is not granted. All of Australia's tax treaties contain a MAP article that is intended to resolve cases of double taxation

should they arise. The ATO has been successful in reaching agreements with other jurisdictions through MAP and these amendments will not change the capacity of the competent authorities to reach a satisfactory solution should double taxation occur. This ensures that in treaty cases the

internationally accepted approach to resolving transfer pricing issues is

35 Institute o f Chartered Accountants in Australia, Submission 19, pp 4 *5.

36 Mr Richard Atkinson, MCA Taxation Com m ittee Representative and General Manager

Transfer Pricing, Rio Tinto, Committee Hansard, 26 July 2012, p. 5. See also Mr Frank Drenth,

Executive Director, Corporate Tax A ssociation o f Australia, Committee Hansard, 26 July 2012,

p. 16.

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adopted, which will decrease rather than increase the likelihood of double " 3 7

taxation.

8.34 Mr Tony McDonald, General Manager of the International Tax and Treaties Division at Treasury, and Mr Michael Jenkins, Assistant Commissioner at the ATO, told the committee:

Mr McDonald: Obviously, because this legislation is only applicable to treaty partners and the mutual agreement procedures are an element of our treaties, all relevant cases have the mutual agreement procedures available to them. The way these procedures operate is for the ATO to work through with our treaty partners. My observation is that, while these processes can be lengthy, they do in the vast majority of cases result in a resolution and the ATO has a very good record in this area. But I might ask my ATO

colleagues if they would expand upon that.

Mr Jenkins: To amplify a couple of the points made by Mr McDonald, the ATO has a good record of settling disputes at the MAP table. Over a long period of time there have been only two matters, I think, where we have not been able to reach full relief on the double tax issue, and that has not been the totality of the double tax in question; it has just been a portion of that. 37 38

8.35 The ATO provided the following table which outlined the number of MAP cases that have been resolved over the last eight years including inbound and outbound matters (where the ATO is seeking relief and also where other jurisdictions

are seeking relief).

Table 8.1: MAP agreements resolved over eight years and amounts involved

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Number of

cases resolved

10 12 3 9 8 5 11 5

Agreed income

adjustment ($m)

113 338 40 371 466 530 24 434

Source: Treasury, answer to question on notice, 26 July 2012 (received 9 August 2012).

8.36 The table above refers only to MAPs specifically related to transfer pricing and Treasury *noted that transfer pricing MAP matters tend to be more complex [than other fonns of MAPs] and frequently involve significant amounts'.39

37 Treasury, Submission 21, p. 8.

38 Committee Hansard, 26 July 2012, p. 54.

39 Treasury, answer to question on notice, 26 July 2012 (received 9 August 2012), p. 2.

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8.37 Treasury also provided a table of data based on an OECD compilation of country MAP statistics 2006-2010 which include both general treaty interpretation cases and specific transfer pricing cases. Treasury outlined that:

Although Australia has generally had fewer MAP cases when compared against the average for the OECD reporting countries (see columns A and B of Table 2 below), Australia has completed and/or closed a higher

percentage of cases over recent years in comparison to the OECD average (see Column C of Table 2 below).40

Table 8.2: OECD Country Mutual Agreement Procedure Statistics 2006-2010

OECD reporting

period

Total of ooenlns cases and cases initiated

during the reporting period

(A)

Number of comoleted/closed

cases during the reporting period

(B)

Completed/cl reporting per

opening a

osed cases during the od as a percentage of

nd initiated cases

C = B/A)

OECD reporting

countries average

Australia OECD reporting

countries

average

Australia OECD

reporting

countries average

Australia

2010 144 37 43 18 30% 49%

2009 129 41 35 18 27% 44%

2008 119 31 35 10 29% 32%

2007 115 26 30 5 26% 19%

2006 109 32 33 18 30% 56%

Source: Treasury calculations based on OECD Country Mutual Agreement Procedure Statistics 2006-2010

Source: Treasury, answer to question on notice, 26 July 2012 (received 9 August 2012), p. 2.

Further guidance on retrospective application of the bill requested

8.38 CPA Australia, while opposed to the retrospectivity, argued that if it is agreed to by the Parliament, 'that further guidance on the underlying policy intent be provided in the fonn of specific examples as to when it would be appropriate for the

Commissioner of Taxation to apply the law retrospectively'. It recommended that these examples be included in the EM, and also outline when it would not be appropriate for the Commissioner to apply proposed subdivision 815-A retrospectively.41

8.39 Although strongly opposed to the retrospective application of the bill, RSM Bird Cameron also called for further guidance on transfer pricing rules to promote stability and attract foreign investment:

Going forward, the review of the transfer pricing legislation should be focused on ensuring taxpayers have clear guidelines on how to comply with

40 Treasury, answer to question on notice, 26 July 2012 (received 9 August 2012), p. 2.

41 CPA Australia, Exposure Draft Submission , p. 1.

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the arm's length principle. It will follow from meeting this obligation, that the correct transfer prices will be arrived at and paid. This will ensure a more stable environment to attract foreign investment, will facilitate prompt and accurate payments of tax, and maximise the potential for correct collation of supporting documentation.4"

Committee view

8.40 The committee acknowledges the concerns raised by submitters on application of the measures proposed by the bill and its retrospective nature. As with any taxation law, it is incumbent upon the Commissioner to take measures to provide clarity to taxpayers, particularly in light of self-assessment processes.

8.41 With this in mind, the Committee notes the consistent position adopted by the ATO on treaty based transfer pricing rules, and that measures in this bill do not create a new set of rules but reiterate Parliament's position since 1982. In addition, the ATO has taken measures to provide clarity on the application of the bill. The committee notes for example statements in the EM, and from the Commissioner, that settled cases will not be reopened.

8.42 The committee also acknowledges submitters' concerns about Australia's relationship with its trading partners. The committee emphasises that Mutual Agreement Procedures (MAPs) give strength to these relationships. Although, submitters have suggested that MAPs may be costly and time consuming, the committee asserts that MAPs nevertheless provide an avenue for resolution between contracting States. The committee highlights comments from Treasury officials that 'the ATO has a good record of settling disputes at the MAP table'.42 43

42 RSM Bird Cameron, Submission 11, p. 4.

43 Mr Michael Jenkins, Assistant Commissioner, Jurisdictional Income Practice, Large Business and International, Australian Taxation Office, Committee Hansard, 26 July 2012, p. 54.

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Chapter 9

Transaction based arm *s length assessments

9.1 Many submitters expressed concern that proposed Subdivision 815-A favoured a profit based approach to arm's length assessments. Submitters advocated for a transaction based approach to be given equal consideration in ATO arm's length assessments of transfer pricing. This issue will be explored in this chapter, as well as the interaction of the proposed transfer pricing rules with customs laws.

The description of 'profits' in the object of the bill

9.2 The object provisions of the bill in section 815-5 outline that:

The object of this Subdivision is to ensure the following amounts are appropriately brought to tax in Australia, consistent with the aim's length principle:

(a) profits which would have accmed to an Australian entity if it had been dealing at * aim's length, but, by reason of non-aim's length conditions operating between the entity and its foreign associated

entities, have not so accrued;

(b) profits which an Australian peimanent establishment (within the meaning of the relevant ^international tax agreement) of a foreign entity might have been expected to make if it were a distinct and

separate entity engaged in the same or similar activities under the same or similar conditions, but dealing wholly independently.1

9.3 The Federal Chamber of Automotive Industries (FCAI) expressed concern that the object of proposed Subdivision 815-A was too broad in its description of 'profits':

The objects clause fails to link the concept of dealing at aim's length with either a specific person or persons, or a specific transaction or transactions. As there is no link to an underlying transaction or specific activity, the concern is that the term "profits", used in this context, may be construed very broadly to include a consideration of overall profitability, and to peimit the imposition of additional income tax without reference to any

specific dealing or dealings of the taxpayer.1 2

Definition of transfer pricing benefit

9.4 According to the bill a transfer pricing benefit is the difference between the profits made by an entity, having regard to the arm's length principle, and the amount it actually made.

1 Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. I) 2012, pp 4 *5.

2 Federal Chamber of Automotive Industries, Exposure Draft Submission, p. 2.

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9.5 The Australian Bankers' Association (ABA) argued that this definition could 'skew' transfer pricing analysis towards a profit-based method rather than a transaction method:

The use of this term in the Bill runs the risk of unduly skewing the analysis now required (in order to be able to comply) towards a profit-based transfer pricing method instead of transactional transfer pricing methods. Introducing such a skew has the potential to put Australian transfer pricing

methodologies out of step with the intention and impact of the OECD international standards, which require the "most appropriate" method to be adopted and do not prescribe a hierarchy of methods.

This concern is referred to on pages 8 and 9 of our 2 December 2011

submission, in relation to 'Broadening of scope' and 'Transfer pricing methods', and has a real and practical impact on banks and financial institutions who mostly utilise the traditional transactional methods (and not the profit methods) to support their internal transfer pricing outcomes.3

Determinations negating transfer pricing benefit

9.6 Similarly, a number of submitters expressed concern that the Commissioner's determinations to make adjustments under proposed subsection 815-30(1) do not adequately require the Commissioner to specify what particular item of income, expenditure or capital gain/loss is affected and that 'it departs from the principle that transfer pricing should be primarily concerned with the pricing of transaction/s'.4 5 The Law Council of Australia asserted that this approach was not equitable or transparent.'

9.7 Proposed subsections 815-30(1) and 815-30(2), 'Determinations negating transfer pricing benefit' state:

(1) The determinations the Commissioner may make are as follows:

(a) a deteimination of an amount by which the taxable income of the entity for an income year is increased;

(b) a deteimination of an amount by which the tax loss of the entity for an income year is decreased;

(c) a determination of an amount by which the *net capital loss of the entity for an income year is decreased.

(2) If the Commissioner makes a detennination under subsection (1), the deteimination is taken to be attributable, to the relevant extent, to such of the following as the Commissioner may determine:

3 Australian Bankers' Association, Submission 8, p. 2.

4 For example Ernst and Young, Exposure Draft Submission, pp 2-3; Corporate Tax Association of Australia, Exposure Draft Submission, p. 2; Minerals Council of Australia, Submission 7, p. 3; Moore Stephens, Submission 18, p. 3.

5 Law Council of Australia, Submission 9, pp 3 *4.

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(a) an increase of a particular amount in assessable income of the entity for an income year under a particular provision of this Act;

(b) a decrease of a particular amount in particular deductions of the entity for an income year;

(c) an increase of a particular amount in particular capital gains of the entity for an income year;

(d) a decrease of a particular amount in particular capital losses of the entity for an income year.6

9.8 Deloitte suggested that paragraph 1.53 of the Explanatory Memorandum (EM) outlined that subsection 815-30(1) only takes into account 'an overall adjustment' which does not apply to individual items of the entity's assessable income, particular deductions or capital gains/losses. It argued that individual transactions arc only addressed at the general discretion of the Commissioner as stipulated in subsection 815-30(2), with no direct link between the two subsections:

In our view the Commissioner should be required in all cases to identify and characterise what specific item is being adjusted so as to link that adjustment to the other provisions of the Act. We recommend that s.815- 30(2) be amended to require that the Commissioner make determinations in all cases attributing the adjustment under 815-30(1) to a particular amount of assessable income, deduction or capital gain/loss.

Requiring the Commissioner to identify the particular item(s) to which the profits that are subject to a s.815-30 adjustment are attributable would accord with subsection 815-22. Subsection 815-22 essentially defines

"transfer pricing benefit" as an amount of profits within the meaning of the applicable treaty article, interpreted so as to best achieve consistency with the OECD Model Tax Convention and the OECD Transfer Pricing

Guidelines. Both the Commentary to Article 9 of the OECD Model Tax Convention and the Transfer Pricing Guidelines make clear that the amount of "profits" to which Article 9 applies is determined by reference to transactions.7

9.9 Deloitte argued that the approach taken in section 815-30 could prove to be inadequate for tax-payers seeking clarity on a determination by the Commissioner and provided the following example:

Say the taxpayer has various categories of cross-border dealings, including trading stock purchases, with numerous related parties resident in numerous offshore jurisdictions. The ATO conducts an audit and makes an adjustment under s.815-30 applying a transactional net margin method on a whole of

entity basis. The issues raised for the taxpayer by its lack of knowledge of the basis for the adjustment, if the Commissioner in this case does not make

6 Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, pp 8-9.

7 Deloitte, Exposure Draft Submission, pp 1 *2.

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determinations under s.815-30(2) attributing the adjustment to particular items, include:

- The extent to which the adjustment is referrable to an applicable Associated Enterprises Article for purposes of s.815-22 and knowing whether the adjustment relates to a "transfer pricing benefit" as

defined for Subdivision 815-A, so that the Commissioner has

authority to make the adjustment under that provision;

- The extent to which the adjustment is referrable to an applicable Associated Enterprises Article for purposes of requesting correlative relief or Mutual Agreement Procedure under that treaty;

- The extent of the effect of the adjustment, if any, on the treatment of deductions for trading stock under other provisions of the Act;

- The extent of the effect of the adjustment, if any, on the valuation of the trading stock purchases for other purposes, eg. customs duties payable.8

9.10 The ABA emphasised that using transactional transfer pricing was the preferred method for Australian banks. It outlined that establishing an arm's length profit for a range of diverse entities within a multinational enterprise requires considerable resources:

Australian banks who (in line with OECD guidance) typically deal with transfer pricing on a separate transaction basis using transactional transfer pricing methods... There is very good reason that they do so: it is often

difficult for financial service entities to determine the overall aim *s length profit allocation for each entity within their group which is attributable to inter-group dealings. Each entity in a group may comprise several business

units and a combination of back, middle and front office functions and will enter into numerous transactions both with external and group

counterparties. Given the diverse nature of each entity, it would be

practically difficult and require significant time and effort resulting in material compliance costs to seek to identify an aim's length 'profit' outcome for a full range of material intra-group dealings. It is important to note that financial services entities operate in a significantly different manner than other businesses which means that an overall profit outcome is not as easy to establish as it may be for taxpayers with business operations similar to those in the SNF case.9

OECD Guidelines on transaction based methods

9.11 In the context of the adjustment powers given to the Commissioner under the bill, the Institute of Chartered Accountants outlined that the Organisation for Economic Co-operation and Development, Transfer Pricing Guidelines for

8 Deloitte, Exposure Draft Submission , p. 2.

9 Australian Bankers' Association, Submission to Consultation Paper , pp 8-9.

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Multinational Enterprises and Tax Administrations (OECD Guidelines) state that reconstruction of transactions should only occur in two circumstances:

- Where the economic substance of a transaction differs from its legal form; and

- Where the arrangements made in relation to a controlled transaction differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner.10 11

9.12 A number of submitters also noted the 'cautionary words' in the OECD Guidelines which place an emphasis on transactional arm's length methods.11 The guidelines state:

In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured.12

9.13 RSM Bird Cameron is concerned that the bill represents 'a significant departure from the internationally accepted arm's length principle' and has a focus on profits rather than transactions.13 The Business and Industry Advisory Committee to the OECD (BIAC) also commented on this apparent 'departure' from OECD

Guidelines:

Sub-division 815-A refers to the aim's length profit accruing to an entity, and does not necessarily require that this profit be referenced to a specific underlying transaction. This is not in alignment with OECD which looks to transactions rather than a broader profit concept. This will lead to

significant practical difficulties and may preclude the ability to contemporaneously set prices as aim's length parties would. In the not uncommon circumstance where an entity has dealings with multiple associates in multiple countries or with a mixture of 3rd party and

connected party dealings, it will not be practical to determine a broad profit outcome. This is a common problem with multinationals setting up global service centres or global hub operations to services multiple local operations to maximise value add, efficiency, standardisation and control. To overcome this issue the legislation needs to refer to the profit in relation to a transaction or set of similar transactions. The UK has recently changed

10 The Institute of Chartered Accountants, Submission 19, p. 3; Organisation for Economic Co≠ operation and Development, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2010, paragraph 1.65 (paragraph 1.37 of the previous version).

11 For example see Institute of Chartered Accountants, Submission 19, p. 4.

12 Organisation for Economic Co-operation and Development, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2010, paragraph 1.64 (see paragraph 1.36 of the previous version).

13 RSM Bird Cameron, Submission 11, p. 4.

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its transfer pricing rules (2010) and they have effectively brought in the concept of profit in relation to a transaction or series.14 15

Recommended approach for re-characterisation of transactions

9.14 The Minerals Council of Australia recommended that section 815-30(2) should be amended to require the Commissioner to specify which specific item is being adjusted.1

9.15 Deloitte also recommended that subsection 815-30(1) should be amended to require the Commissioner to ensure all determinations attribute the adjustments to a particular amount of assessable income, deduction or capital gain/loss as specifically provided in subsection 815-30(2). It asserted that this is in line with subsection 815- 20(2) which requires a transfer pricing benefit to be determined in line with a number of documents, including the OECD Guidelines and Model Tax Convention:

Both the Commentary to Article 9 of the OECD Model Tax Convention and the Transfer Pricing Guidelines make clear that the amount of "profits" to which Article 9 applies is determined by reference to transactions. Thus, for instance, paragraph 1 of the Commentary to Article 9 states:

"This Article deals with adjustments to profits that may be made for tax purposes where transactions have been entered into between associated enterprises (parent and subsidiary companies and companies under common control) on other than aim's length terms."

In accordance with this, the Guidelines recognise five aim's length pricing methods to be used in applying Article 9, with these methods categorised as "traditional transaction methods" and "transactional profit methods". Under the Guidelines, the comparability analysis prescribed for applying those methods is performed at the level of individual transactions or an

appropriate level of aggregation of transactions. The Commentary and the Guidelines do not contemplate the arm's length principle under Article 9 being applied to adjust profits in a way that does not attribute that

adjustment to particular transactions between the associated enteiprises. Accordingly, we do not see how the Commissioner can satisfy s.815-22(3) and hence make a valid adjustment under s.815-30 unless he deteimines the transfer pricing benefit by reference to the profits in respect of a particular transaction or transactions.16

9.16 Similarly, Ernst and Young recommended that there should be clarification that the references in sections 815-20 and 815-30 'do not endorse the departure by the Commissioner from the pricing of transaction/s':

Consistent with the OECD Transfer Pricing Guidelines [see

paragraph 1.65], the proposed legislation should clearly reflect the

14 Business and Industry Advisory Committee to the OECD, Submission 10, p. 3.

15 Minerals Council of Australia, Submission 7, p. 3.

16 Deloitte, Exposure Draft Submission , p. 2.

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circumstances under which the reconstruction principle may be applied [see also example 1.4 in the EM].., In this regard, the fundamental principle that should be used as the basis for determining the arm's length principle is that the actual transactions should be recognised unless:

1. the legal form of the transaction does not match the economic

substance; or

2. there is no evidence of similar arrangements (as opposed to the

transaction) between unrelated parties, and the arrangement when viewed in its totality would not reasonably be expected to exist between unrelated parties dealing in a commercially rational manner, and the

actual structure practically impedes the Commissioner from determining an appropriate transfer price for the transaction.17

9.17 In its submission to the Consultation Paper, PwC made the following recommendations on arm's length method selection:

- A 'most appropriate method' approach is suitable.

- There should be no bias for any one particular approach.

- There should be no requirement to use a profit based method to test the ami's length nature of the outcome where a transactional method has been selected as most appropriate.

- Legislation should reference OECD guidance rather than provide prescriptive rules on method selection.18

9.18 In response to these concerns, Treasury asserted that the bill does not prioritise profit methods. It outlined that the bill has provisions which require that OECD Guidelines are considered and, therefore, that the 'most appropriate' method be

adopted. It conceded that where a range of methods are available, transaction based methods should prevail.19 Treasury's response is discussed further below.

Customs laws

9.19 A number of submitters perceived that the bill will have difficulties interacting with Customs valuation rules. Submitters highlighted the potential for taxpayers to be required to defend transfer prices under the two different sets of rules.20 For example, GM Holden stated:

Holden submits that there should be a "whole of Government" approach in respect of the drafting of revenue laws. It is unfair and unreasonable to

17 Ernst and Young, Exposure Draft Submission , p. 3.

18 PricewaterhouseCoopers, Submission to Consultation Paper, p. 10.

19 Treasury, Submission 21, p. 9.

20 Corporate Tax Association of Australia Inc, Exposure Draft Submission, p. 2; Federal Chamber of Automotive Industries, Submission 6, p. 3; PricewaterhouseCoopers, Exposure Draft Submission, p. 8.

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place a company in the position of having to defend the transfer price of the importation of a product under two separate sets of transfer pricing valuation rules.

Whilst Holden acknowledges that there has been some disconnect between income tax and Customs Duty valuation rules for some time, the Bill, if enacted, will only serve to widen the chasm between the two sets of

valuation rales. The Bill will bring in a "profits-based" approach, whereas the Customs Duty rules are very much based on a transactional approach to valuation.

In the event that the ATO adjusts a company's transfer price, there is no guarantee that an equal and offsetting adjustment will be made for Customs Duty purposes...21

9.20 The Corporate Tax Association of Australia (CTAA) also highlighted the tensions between the two sets of rules:

In relation to imported goods, there is a tension between the two, in the sense that tax administrators would be concerned that the price goods imported from a foreign associate may be overvalued, while Customs

officials would be concerned that those goods may be undervalued. Where the ATO rales that the imported goods were overvalued, the taxpayer should not then also be liable to import duty on the higher unadjusted amount...

More broadly, we note that despite various efforts made over a number of years to achieve better alignment between income tax and Customs valuations in respect of the same imported goods, very little progress has so far been achieved. The CTA appreciates there is an inherent inconsistency

between profits based and transactions base methods. Given that we are likely to see an increase in profits based transfer pricing adjustments if the draft legislation is passed, however, it is in our view imperative that a more effective mechanism be developed for harmonising the two where

possible.22

9.21 Ms Vanda Davis, Chair of the Taxation Committee of the FCAI, described the process that both Customs and the ATO currently take when assessing transactions. She highlighted the collaboration that has been undertaken to reach the current

'harmony' that exists between the two regulatory bodies:

As the act stands, it is fine for us from a customs duty perspective because our cars come in off the ship and it is the price paid or payable, unless the relationship influences the price. My understanding from Customs is that something like 95 per cent of world trade comes in at transaction value, which means the price paid or payable on the invoice * unless the

relationship influences the price. The CEO of Customs will then look at the relationship between the parties. He would look at the position of the seller,

21 GM Holden Ltd, Submission 5, p. 2.

22 Corporate Tax Association, Exposure Draft Submission, pp 2-3.

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or the exporter, as well as the position of the importer. Once Customs is satisfied the relationship did not influence the price, the commissioner again looks at the arm's-length standard *very similar to what the CEO does. As the rule is currently enacted, there is a wonderful bridge and there is quite good harmony. That is not to say that in some instances that there has not been tension, and everyone will accept that. But, generally speaking, it has been my understanding over the years I have been

practising that, provided the commissioner is concentrating on those transactions *looking at the transactions, the arm's-length nature of the transactions and the pricing of those transactions *he will satisfy both the Customs Act and the Income Tax Assessment Act.23

9.22 CTAA argued that the ATO and Customs should be compelled to mutually agree on a transfer price in the case of tangible property:

It is unacceptable for a business to be required to satisfy two arms of the same government, one demanding a higher price and the other a lower price in respect of the same transaction.

In addition, the OECD guidelines express a higher level of preference for the use of traditional transaction methods for testing the aim's length character of transfer prices for transfers of tangible property. Where the importation of tangible property is involved the ATO and Customs should be compelled to reach agreement of what the arm's length price is, with appropriate input from the taxpayer.24

9.23 In addition, PwC and FCAI noted that time limits for seeking duty refunds (four years) are likely to have expired.25

9.24 The Australian Customs and Border Protection Service (Customs) concurred with submitters' concerns on the 'disconnect' between the two sets of rules:

In summary, the position of submitters who refer to Customs and Border Protection is that the passage of the Bill will confinn in legislation the disconnect between transfer pricing rules for income tax purposes and those for customs valuation puiposes. The submitters further submit that the retrospective application to 2004 of the amendments could mean that price

adjustments for puiposes that result in an increase in income tax on profits may be out of time for customs duty refund applications (generally 4 years) in relation to the imported goods the subject of the price adjusted

transactions.

Customs and Border Protection considers that the factual analysis of the submitters in relation to the disconnect between the tax and customs rules and the availability of refunds is accurate.

23 Committee Hansard, 26 July 2012, p. 23.

24 Corporate Tax Association, Submission to Consultation Paper, 30 November 2011, pp 4 *5.

25 PricewaterhouseCoopers, Exposure Draft Submission, p. 8; Federal Chamber of Automotive Industries, Submission 6, p. 2.

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Customs and Border Protection would not, however, support any

amendments to Customs valuation rules, which are consistent with Australia's obligations under the World Trade Organization (WTO) Customs Valuation Agreement.26

9.25 Customs referred the committee to pages 84 to 86 of the WTO publication A Handbook on the WTO Customs Valuation Agreement as a guide to the treatment of transfer pricing in a customs valuation context.27

Treasury *s response

9.26 Treasury outlined that taxpayers with related party dealings are required to disclose transfer pricing documentation in a schedule to tax returns. This includes the type of transfer pricing methodology applied by the taxpayer. Treasury noted that while ATO fieldwork indicates significant variability in the quality of transfer pricing documentation, it indicated that 85 per cent of the 6,720 taxpayers disclosing related party dealings applied a transfer pricing method to price dealings. Treasury provided

the following table on method usage among taxpayers.

Table 9.1: Percentages on arm's length method usage among taxpayers

Method category

Percentage by value of dealings

Method type

Transactional 53% &f 2996 related to applying a comparable uncontrolled price (CUP) method.

" 2496 related to applying another 'traditional transaction method' such as the cost plus or resale price methods."

Profit based 34% &f 32% related to applying the transactional net margin method

(TNMM)

* 2% related to applying the profit split method.

Other 13% &f Other methods could include cost contribution arrangements,

Marginal cost pricing or Apportionment of costs.

Source: Treasury, answer to question on notice, 26 July 2012, (received 9 August 2012), p. 6.

9.27 Treasury argued that the bill does not prioritise profit methods. It agreed that the OECD approach 'requires the "most appropriate" method to be adopted and provides that where a range of methods are equally appropriate, that transaction based

methods prevail'. It explained that Subdivision 815-A provides an interpretative provision 'to ensure consistency between the proposed rules and the OECD approach':

The interpretive provision applies to the evaluation of whether an entity gets a transfer pricing benefit, as well as the interpretation of the provisions of an international agreement insofar as it relates to Subdivision 815-A (to

the extent such guidance material is relevant). The selection and application

26 Australian Customs and Border Protection Service, Submission 23, p. 1.

27 Australian Customs and Border Protection Service, Submission 23, p. 1.

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of different methodologies in a given case falls squarely within the scope of this interpretive provision.28

9.28 Ms Kristen Baker, Manager of the International Tax Integrity Unit at Treasury, provided further comments on the 'interpretative provision':

In terms of any emphasis given to the profit methodologies, these amendments certainly were not drafted with that intention in mind. The rules seek to allow the full suite of OECD methodologies to be available, which includes the traditional transaction based methods and the profit based methods. The key provision that does that in the amendments is section 815-20. That is the provision that requires that the rules be interpreted consistently with the OECD guidelines. As Mr McDonald pointed out, the OECD guidelines require that the most appropriate method be applied.

To add to that comment, the OECD guidelines also require that where methods are equally appropriate the transaction based methods are in fact to be preferred over the profit based methods. So these rules would give effect to the guidelines in that way. Rather than giving an emphasis to profit

methods, they are simply ensuring they are available. Profit methods are very important in a number of instances, particularly in terms of our Advance Pricing Arrangement Program, where comparables in terms of future transactions often will not be available. So profit methods are an

important element in the suite of methods available.29

9.29 The Advance Pricing Arrangement Program (APA program) 'involves a mixture of education and enforcement activities'.30 The guide to the APA program states:

6. The aim of the APA Program is to give taxpayers the opportunity to reach agreement with the ATO on the method of application of the arm's length principle to their international related party dealings on a prospective basis, thereby resolving any uncertainty around those dealings.

7. Taxpayers who require a level of assurance as to the ATO view of their transfer pricing risk without the cost and time associated with undertaking

28 Treasury, Submission 21, p. 9.

29 Committee Hansard, 26 July 2012, pp 54 *55.

30 An APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (for example, method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing of those transactions over a fixed period of time.

An APA will generally apply for three to five years but may be longer, for example, where the covered international related party dealings continue for a period in excess of five years. An APA can be concluded either unilaterally, bilaterally or multilaterally. See Practice Statement

Law Administration PS LA 2011/1, 'ATO's Advance Pricing Arrangement Program', http://law.ato.gov.au/atolaw/view.htm?docid=PSR/PS20111/NAT/ATO/OOOOl (accessed 6 August 2012).

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an APA have access to the ATO risk assessment and self assessment risk products.31

9.30 Mr Michael Jenkins, Assistant Commissioner at the ATO, challenged assertions that most companies use transaction based methods and noted that the dominant method used in the APA program is the profit based method:

One example would be the functioning and functional APA program that the ATO has. Over a long period of time, a number of taxpayers have accessed that program, and when the three- to five-year period expires they will come back into the program. The dominant method that is used in the APA program is the profit based method.32

9.31 Treasury provided a table (below) that highlighted the use of profit based methods in the APA program and stated:

Taxpayers seeking clarity in respect of their transfer pricing arrangements always have the option of seeking an APA with either the ATO or the ATO and other tax administrations.

The ATO publishes an annual *Ü*°*ë Program Update' which includes information regarding transfer pricing methods. In APAs, profit based methods (and the transactional net margin method (TNMM) in particular) are consistently the most frequently used methods. This reflects that APAs are forward looking, and that taxpayers and administrators can often more readily obtain and verify profit related data rather than data on comparable

prices for transactions that have not yet occurred.33

Table 9.2: Profit based methods in the APA program

Year Total APAs concluded Total APAs using profit

methods (TNMM and profit split)

Percentage use of

profit methods

2010-11 53 39 74%

2009-10 39 30 77%

2008-09 29 22 76%

Source: Treasury, answer to question on notice, 26 July 2012, (received 9 August 2012), p. 7.

Committee view and concluding comments

9.32 The committee acknowledges the inherent tensions between ATO and Custom's arm's length assessments and submitters' concerns on this issue. The

31 Australian Taxation Office, Practice Statement Law Administration PS LA 2011/1, 'ATO's Advance Pricing Arrangement Program', http://law.ato.gov.au/atolaw/view.htm?docid=PSR/PS20111/NAT/ATO/OOOOl (accessed 6 August 2012).

32 Committee Hansard, 26 July 2012, p. 61.

33 Treasury, answer to question on notice, 26 July 2012, (received 9 August 2012), p. 6.

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committee notes previous successful measures taken to overcome these tensions through the former National Tax Liaison Subcommittee on Transfer Pricing and the resultant dialogue between Customs and ATO officials. The committee urges

Treasury to revisit this approach and consider addressing these tensions through a similar body such as the Large Business Advisory Group.34

9.33 The committee reiterates its position, as expressed in previous chapters, that the bill does not deviate from Parliament's long-stated position on treaty based transfer pricing rules and highlights the following statement from Mr Brace Quigley, Second Commissioner at the ATO:

...we will not be changing our compliance approach, nor expanding our audit activity in this area as a result of this bill because it merely confmns longstanding practice.35

Recommendation 1

9.34 The committee recommends that the bill be passed.

Senator Mark Bishop

Chair

34 See discussions by Ms Vanda Davis, Chair of the Taxation Committee of the Federal Chamber of Automotive Industries, Committee Hansard, 26 July 2012, 25.

35 Committee Hansard, 26 July 2012, p. 62.

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Coalition Senators * Dissenting Report

1.1 Coalition Senators do not support the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No.l) 2012 in its current form. Of primary concern to the Coalition is the proposed retrospective implementation of this bill. The Coalition is generally opposed to retrospective tax changes, particularly in instances such as this, where a retrospective implementation will impose a significant and detrimental tax change upon taxpayers. This bill is yet another poorly drafted piece of legislation from a Government that often attempts to shift the goal posts by introducing retrospective legislation into the Parliament.

1.2 Throughout this inquiry process the Senate Economics Legislation Committee heard from a number of stakeholders who all raised valid concerns in relation to the unjust implications this bill will impose on them, primarily as a result of its retrospective implementation. Many stakeholders are concerned with the issues they may encounter when applying this bill retrospectively including the burden of proof

for assessments, time limits for adjustments and difficulties in applying multiple transfer pricing rules. However, submitters to the inquiry also raised concerns in relation to the effect this bill will have on our relationship with our international trading partners and our trading reputation in the global market.

1.3 The Institute of Chartered Accountant *s submitted in relation to the retrospective nature of the bill, that a signal of the importance of freedom from retrospective laws has been held to be so critical to the basic rights of individuals and coiporations that the constitutions of both the United States and Sweden have explicitly prohibited such a practice. Whilst Australia's constitution does not expressly prohibit the making of retrospective laws, the generally accepted practice of Parliament has been to only exercise those powers sparingly, often only in extreme and exceptional circumstances.1

1.4 PricewaterhouseCoopers submitted that the proposed changes will increase the complexity of doing business in Australia by creating a *patchwork * of cross transfer pricing rules that could apply to a particular transaction depending upon whether or not a treaty applies, which treaty applies and which period the relevant transaction occurred.1 2

1.5 The Law Council of Australia *s submission to the inquiry outlined concern that no time limit has been specified for when adjustments can be made by the Commissioner, therefore creating uncertainty for taxpayers in relation to confirming their income for previous years.3

1 Institute of Chartered Accountants in Australia, Submission 19, p. 1.

2 PricewaterhouseCoopers, Submission 17, p. 2.

3 Law Council of Australia, Submission 9, p. 3.

Page 96

1.6 Coalition Senators hold concerns in relation to the impact this bill will have on Australia *s tax treaties and our relationship with our foreign trading partners and many submitters to the inquiry hold similar views.

1.7 Moore Stephens stated that they are exceptionally concerned at the likely adverse impact on the reputational damage to the Australian Taxation Office (ATO) (and Australia, as an investment destination) that can be expected to follow in the event that the legislation is back-dated as planned.4 5

1.8 The American Chamber of Commerce in Australia (AmCham) which is the peak organisation for representing the interests of American companies undertaking business in Australia, noted in its submission that *the most significant source of foreign investment in Australia is the United States *. Additionally AmCham

expressed concern that the retrospective nature of the bill creates *unnecessary uncertainty and business risk, which in turn will negatively affect foreign investment in Australia/

1.9 Chapter eight of the majority report includes further quotes from other organisations which are also strongly opposed to this bill on the basis that it will impact on Australia *s capacity to trade in the global market. These organisations include the Australian Private Equity & Venture Capital Association, RSM Bird Cameron, the Business and Industry Advisory Committee to the OECD and Deloitte.

1.10 The Coalition is concerned that the Government has not consulted with any partner countries to tax treaties with Australia, and whether or not those partner countries have raised concerns as to the perceived impacts this will have on the negotiated tax agreement, in addition to the consequences of this bill on trade and

investment in the future.

1.11 Coalition Senators note with interest that the concerns raised above have been highlighted in detail in the majority report, despite the final recommendation made in that report of passing this bill.

1.12 Coalition Senators agree with the concerns raised by witnesses to the inquiry in relation to the retrospectivity of this bill and as the majority report states, the Senate Scrutiny of Bills Committee also highlighted that the retrospective provisions of the bill *may be considered to trespass unduly on personal rights and liberties, in breach

of principle 1 (a)(i) of the Committee *s terms of reference *.6

1.13 Retrospective tax changes can change the substance of bargains struck between taxpayers who have made every effort to comply with the prevailing law at the time the agreement was entered into. Additionally, they can also expose taxpayers

4 Moore Stephens, Submission 18, p. 1.

5 American Chamber of Commerce in Australia, Submission 14, p. 1.

6 Senate Scrutiny of Bills Committee, Alert Digest 6/12, p. 94.

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to penalties in circumstances where they could not possibly have taken steps at the earlier time to mitigate the potential for penalties to be imposed and they can alter a taxpayer *s tax profile. Retrospective tax changes can also potentially cause significant damage to Australia *s sovereign risk profile.

1.14 Coalition Senators are not convinced that the Government has adequately justified the need for the retrospective implementation of this bill nor has the Government sufficiently addressed the numerous stakeholder concerns highlighted throughout the inquiry process. Coalition Senators also hold concerns in relation to the

impact this legislation will pose to heightening Australia *s perceived level of sovereign risk.

1.15 The Coalition believes that Taxpayers have the right to rely on the law as it has consistently been interpreted by the courts for many years and as such, Coalition Senators do not support this bill.

Recommendation 1

1.16 That this bill not be passed in the Senate

Senator David Bushby

Deputy Chair

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414

APPENDIX 1

Submissions received

Submission Number Submitter

I GE

2 Corporate Tax Association

3 Australian Bankers' Association Inc.

4 Ernst and Young

5 GM Holden Ltd

6 Federal Chamber of Automotive Industries

7 Minerals Council of Australia

8 Deloitte

9 Taxation Committee of the Business Law Section, Law Council of Australia

10 Business and Industry Advisory Committee to the OECD

11 RSM Bird Cameron

12 Tax Justice Network Australia

13 KPMG

14 American Chamber of Commerce in Australia

15 The Tax Institute

16 Chevron Australia Pty Ltd

17 PricewaterhouseCoopers

18 Moore Stephens Melbourne Pty Ltd

" Supplementary Submission

19 Institute of Chartered Accountants in Australia

20 Rule of Law Institute of Australia

21 The Treasury

22 Australian Private Equity and Venture Capital Association Ltd

415

23 Australian Customs and Border Protection Service

Additional information received " PricewaterhouseCoopers, cover letter and index to exhibits, received 31 July 2012

" PricewaterhouseCoopers, Exhibit A, received 31 July 2012

" PricewaterhouseCoopers, Exhibit B, received 31 July 2012

" PricewaterhouseCoopers, Exhibit C, received 31 July 2012

" PricewaterhouseCoopers, Exhibit D, received 31 July 2012

" PricewaterhouseCoopers, Exhibit E, received 31 July 2012

" PricewaterhouseCoopers, Exhibit F, received 31 July 2012

" PricewaterhouseCoopers, Exhibit G, received 31 July 2012

" PricewaterhouseCoopers, Exhibit H, received 31 July 2012

Page 100

416

APPENDIX 2

Public Hearings and Witnesses

CANBERRA, 26 JULY 2012

ATKINSON, Mr Richard, Taxation Committee Representative, Minerals Council of Australia; and General Manager, Transfer Pricing, Rio Tinto

BAKER, Ms Kristen, Manager, International Tax Integrity Unit, International Tax and Treaties Division, Department of the Treasury

BLIGNAULT, Ms Ardele, Vice President, Government Relations, General Electric

CALLEJA, Mr Pete, Partner, PricewaterhouseCoopers

CLIFTON, Ms Lisa, Manager, International Tax Integrity Unit, International Tax and Treaties Division, Department of the Treasury

COLLINS, Mr Peter, Partner, PricewaterhouseCoopers

DAVIS, Ms Vanda, Chair, FCAI Taxation Committee, Federal Chamber of Automotive Industries

DRENTH, Mr Frank, Executive Director, Corporate Tax Association of Australia Inc.

DYSON, Mrs Teresa, Chairman, Business Law Section, Tax Committee, Law Council of Australia

ENGLAND, Mr Andrew, Chief Tax Counsel, Australian Taxation Office

HEFEREN, Mr Rob, Executive Director, Revenue group, Department of the Treasury

JENKINS, Mr Michael, Assistant Commissioner, Jurisdictional Income Practice, Large Business and International, Australian Taxation Office

JEREMENKO, Mr Robert, Senior Tax Counsel, The Tax Institute

KUNKEL, Dr John, Deputy CEO, Minerals Council of Australia

LECKIE, Ms Amanda, Tax Manager, General Electric

McDONALD, Mr Tony James, Director, Industry Operations, Federal Chamber of Automotive Industries

McDONALD, Mr Tony, General Manager, International Tax and Treaties Division, Department of the Treasury

McNAB, Mr Paul, Partner, PricewaterhouseCoopers

PEADON, Mr Christopher James, Law Council of Australia

PRESHAW, Mr Damian, Director, KPMG; and The Tax Institute

QUIGLEY, Mr Bruce, Second Commissioner, Compliance, Australian Taxation Office

SPIRASON, Mr Theodore Doniphan, Taxation Committee Representative, Minerals Council of Australia; and Manager, Tax Australia, BHP Billiton Ltd

VANDERKLEY, Mr Chris, Tax Director, General Electric

Page 102

418

APPENDIX 3

The ATO *s Tax Rulings'

The Australian Taxation Office (ATO) has publicly maintained its position in respect of the treaty based transfer pricing rules for some time. This attachment sets out a number of rulings that have been issued which articulate this position.

1986-IT 2311

The Tax Ruling was on remission of penalties where Division 13 or comparable treaty provisions are applied (issued 18 June 1986), consistently refers to adjustments being made under Division 13 or the Treaty provisions.

1992-IT2670

IT 2670 on the meaning of trading stock (issued 5 March 1992) states that the Treaties can operate to make transfer pricing adjustments to Australian taxpayers (paragraph 18).

1992 - TR 92/11

TR 92/11 on transfer pricing and loan arrangements and credit balances (first issued 1 October 1992), refers to adjustments being made under the Treaty provisions (paragraphs 63-79).

1994 - TR 94/14

Taxation Ruling TR 94/14 *Income tax: application of Division 13 of Part III (international profit shifting) * specifically addresses the interaction between Division 13 and Australia's Double Taxation Agreements. It explicitly states that *The Commissioner may apply the provisions of Division 13 and/or the treaty provisions * (paragraph 18) and that *Australia's double taxation agreements, which appear as schedules to the Income Tax (International Agreements) Act 1953 ("the IT(IA)A"), contain their own provisions to deal with profit shifting arrangements in certain circumstances * (paragraph 184); and that *...the Commissioner may apply the provisions of Division 13 and/or the treaty provisions * (paragraph 186).

1995 - TR 95/23

TR 95/23 on advance pricing arrangements (issued 22 June 1995) refers to the Commissioner making transfer pricing adjustments under Division 13 and/or the Treaty (paragraph 35). 1

1 The following appendix is taken directly from Treasury, Submission 21, pp 22-23.

Page 104

1997- TR 97/20

TR 97/20 on transfer pricing methodologies (issued 5 November 1997) notes that the Treaties may apply in cases to which Division 13 also applies (paragraphs 1.10-11).

1999 - TR1999/1

TR1999/1 on intra-group services (issued 20 January 1999) refers to the Commissioner making transfer pricing adjustments under Division 13 and/or the Treaty (paragraphs 1, 14-15, 29).

2001 - TR 2001/11

TR 2001/11 on the operation of Australia *s pennanent establishment attribution rules (issued 31 November 2011), states that both Division 13 and the Treaty provisions may apply and that furthermore, the Business Profits articles of the Treaties are self- operating (paragraphs 2.1 to 2.9).

2001 - TR 2001/13

TR 2001/13 on interpreting Australia *s double tax agreements (issued 19 December 2001), reiterates the position of earlier rulings that the transfer pricing rules in Australia *s Treaties are *empowering * rather than merely *permissive * (paragraphs 29-33).

2002 - TD2002/20

TD2002/20 on film production companies (issued 22 August 2002) refers to transfer pricing adjustments being allowable under Division 13 and the Treaty.

2007- TR2007/1

TR2007/1 on the effects of transfer pricing determinations (issued 7 March 2007) refers to subsections 170 (9B) providing an unlimited time to make transfer pricing amendments under a prescribed provision or a relevant provision (paragraph 26).

2010 - TR 2010/7

TR 2010/7 on the interaction of Division 820 and the transfer pricing provisions (issued 27 October 2010), notes that *an adjustment applying the arm's length principle to the pricing or profit allocation in respect of a taxpayer's international dealings is authorised on the basis of Australia's transfer pricing provisions in

Division 13 and those related treaty provisions. * It goes on to refer to the amendments made in 1982 to section 170 as well as the favourable comment, in obiter , from the Federal Court (Middleton J) in SNF (Australia) Pty Ltd v Commissioner of Taxation (paragraphs 39-42).

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2011 - TR 2011/1

TR 2011/1 on the application of the transfer pricing provisions to business restructurings (issued 9 February 2011), notes that the Treaty permits transfer pricing adjustments (paragraphs 9 and 44).

422

The Senate

Economics

Legislation Committee

Treasury Legislation Amendment (Unclaimed Money and Other Measures) Bill 2012 [Provisions]

November 2012

© Commonwealth of Australia 2012

ISBN 978-1-74229-723-1

Printed by the Senate Printing Unit, Parliament House, Canberra.

Senate Economics Legislation Committee

Members

Senator Mark Bishop, Chair Senator David Bushby, Deputy Chair Senator Doug Cameron, Chair of the sub-committee Senator Alan Eggleston Senator Anne Urquhart Senator Nick Xenophon

Participating Member(s) participating in this inquiry

Senator Mathias Cormann

Secretariat

Ms Jackie Morris, Acting Secretary Dr Sean Turner, Principal Research Officer Ms Kate Campbell, Administrative Officer

PO Box 6100 Parliament House Canberra ACT 2600 Ph: 02 6277 3540

Fax: 02 6277 5719 E-mail: economics.sen@aph.gov.au Internet: http://www.aph.gov.au/senate/committee/economics

iii

Western Australia, ALP Tasmania, LP New South Wales, ALP Western Australia, LP

Tasmania, ALP South Australia. IND

Western Australia, LP

ctte/index.htm

425

426

TABLE OF CONTENTS

Membership of Committee ........................ , *.iii

Abbreviations..............................................................................................................vii

Chapter 1: Introduction and conduct of the Inquiry .......................................... 1

Conduct of the inquiry...............................................................................................1

Background to this inquiry.......................................................................................2

Financial impact....................................................................................................... 2

Chapter 2: Overview of the Bill................................................................... 3

Schedules 1, 2 and 3 - Bank Accounts, First Flome Saver Accounts and Life Insurance Policies.....................................................................................................3

Schedule 4 - Superannuation...................................................................................4

Schedule 5 - Corporations........................................................................................ 5

Chapter 3: Views on the Bill......................................................................................7

Schedules 1, 2 and 3 - Bank Accounts, First Home Saver Accounts and Life Insurance Policies......................................................................................................8

Schedule 4: Superannuation....................................................................................12

Committee View......................................................................................................17

Coalition Senators * Dissenting Report...................................................................19

APPENDIX 1: Submissions and additional information received.................35

APPENDIX 2: Public hearings and witnesses ...................................................... 37

427

428

Abbreviations

ABA Australian Bankers' Association

ADI Authorised deposit-taking institution

AFA Association of Financial Advisers

AISTAustralian Institute of Superannuation Trustees

ASFA Association of Superannuation Funds of Australia

ASIC Australian Securities and Investments Commission

ASIC Act Australian Securities and Investments Commission Act 2001

ATO Australian Taxation Office

Banking Act Banking Act 1959

CBA Commonwealth Bank of Australia

Corporations Act Corporations Act 2001

CPI Consumer Price Index

CUMSA Companies and Unclaimed Monies Special Account

FHSA First Home Saver Account

FHSA Act First Home Saver Accounts Act 2008

FSC Financial Sendees Council

ICAA The Institute of Chartered Accounts in Australia

Life Insurance ActLife Insurance Act 1995

MYEFO Mid-Year Economic and Fiscal Outlook

SIS Regulations Superannuation Industry (Supervision) Regulations 1994

SUMLM Act Superannuation (Unclaimed Money and Lost Members) Act 1999

vii 429

430

Chapter 1

Introduction and conduct of the Inquiry 1.1 On 1 November 2012, the Senate referred the provisions of the Treasury Legislation Amendment (Unclaimed Money and Other Measures) Bill 2012 for inquiry and report by 19 November 2012.

1.2 The Bill makes amendments to the Banking Act 1959 (Banking Act), First Home Saver Accounts Act 2008 (FHSA Act), Life Insurance Act 1995 (Life Insurance Act), Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLM Act), Australian Securities and Investments Commission Act 2001 (ASIC Act), and

Corporations Act 2001 (Corporations Act) to give effect to the unclaimed moneys measures announced in the 2012-13 Mid-Year Economic and Fiscal Outlook (MYEFO).

1.3 These measures include:

" reducing from seven years to three years the period of inactivity before bank accounts, First Home Saver Accounts (FHSAs) and life insurance moneys are treated as unclaimed and transferred to the Australian Securities and Investment Commission (ASIC);

" increasing the threshold below which small lost member superannuation accounts are required to be transferred to the Australian Tax Office (ATO) from $200 to $2000, where the account has been inactive for a period of five years or the member is uncontactable;

" reducing from five years to 12 months the period of inactivity before which the superannuation accounts of unidentifiable members are transferred to the ATO;

" providing for unclaimed moneys and proceeds from the sale of unclaimed properties under the Corporations Act transferred to ASIC to be recognised directly in the Commonwealth Consolidated Revenue Fund, rather than deposited and held for six years in the Companies and Unclaimed Monies

Special Account (CUMSA), which will be closed; and

" providing for the payment of interest on unclaimed moneys from 1 July 2013, with the interest rate to be calculated according to regulations, with the intention being that the rate would be calculated in accordance with the Consumer Price Index (CPI).

Conduct of the inquiry

1.4 The committee advertised the inquiry on its website and in the Australian (7 November 2012), and wrote directly to a range of individuals and organisations inviting written submissions. The committee received 13 submissions, which are listed at Appendix 1.

1.5 The committee appointed a sub-committee, chaired by Senator Cameron, to conduct the hearing and prepare this report.

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Page 2

1.6 The sub-committee held a public hearing in Canberra on 12 November 2012. The names of witnesses who appeared at the hearing are at Appendix 2.

1.7 The sub-committee thanks all who contributed to the inquiry.

Background to this inquiry

1.8 The unclaimed money measures covered in the Bill were announced in the 2012-13 MYEFO.1

1.9 As described in greater detail in the next chapter, these measures are intended to help reunite people with their unclaimed money, while preserving the value of this money.

Financial impact

1.10 The measures in this Bill will result in estimated savings over the forward estimates of:

(a) $92.3 million from measures in Schedules 1, 2 and 3, which relate to bank accounts, FHSAs and life insurance monies;

(b) $675.2 million from measures in Schedule 4, which relates to

superannuation; and

(c) $118.5 million from measures in Schedule 5, which relates to the holding and handling of unclaimed property (including unclaimed moneys) arising under the Corporations Act.1 2

1 Australian Government, Mid-Year Economic and Fiscal Outlook 2012-13, pp. 10, 46, 277-78. Available at http://www.budget.gov.au/2012-13/content/mvefo/download/2012-13 MYEFO.pdf.

2 Explanatory Memorandum, Treasury Legislation Amendment (Unclaimed Money and Other Measures) Bill 2012, p. 3.

432

Chapter 2

Overview of the Bill

2.1 As noted at the start of the preceding chapter, the Bill makes amendments to the Banking Act, FHSA Act, Life Insurance Act, SUMLM Act, ASIC Act and Corporations Act to give effect to the unclaimed moneys measures announced in the 2012-13 MYEFO.

2.2 The amendments in the Bill will commence the day after the Act receives the Royal Assent.

Schedules 1, 2 and 3 - Bank Accounts, First Home Saver Accounts and Life Insurance Policies

2.3 Schedules 1, 2 and 3 to the Bill amend, respectively, the Banking Act, the FHSA Act and the Life Insurance Act.

2.4 Under current arrangements, authorised deposit-taking institutions (ADIs) are required to transfer to ASIC bank account moneys where there has not been a deposit or withdrawal for seven years. FHSA providers are also required to transfer FHSA

moneys to ASIC where the account has been inactive for seven years. Similarly, life insurance moneys must be transferred to ASIC within seven years of the money becoming payable (such as when a policy matures).

2.5 The amendments reduce from seven years to three years the period of

inactivity before banks accounts, FHSAs and life insurance moneys are treated as unclaimed.

2.6 As a transitional measure, the Bill provides for an extension from

31 March 2013 to 30 April 2013 on the deadline for ADIs and life insurance providers to report on, and transfer to the Commonwealth, unclaimed bank account and life insurance moneys as at 31 December 2012.

2.7 As is currently the case, under the new arrangements details of unclaimed moneys will be published by ASIC and can be searched via the ASIC website. Owners of unclaimed moneys will continue to be able to lodge a claim for the return of their money at any time through funds appropriated by Parliament for that purpose.

2.8 According to the Treasury's submission to the inquiry, by bringing forward the time in which money is recognised under the relevant law as lost or unclaimed, and thereby bringing forward the time when details of this money is published in publicly searchable databases, the measures will help reunite people with their money

sooner.1

2.9 Currently, no interest is payable on reclaimed moneys. The amendments will allow for the payment of interest on unclaimed moneys from 1 July 2013. The interest

1 Department of the Treasury, Submission 10, p. 3.

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rate will be determined by regulations, and is intended to be equivalent to CPI. This will ensure that unclaimed moneys maintain their real value.

Schedule 4 - Superannuation

2.10 Schedule 4 to the Bill amends the SUMLM Act to change the circumstances in which small lost member accounts and accounts of unidentifiable members must be transferred to the ATO, and to provide for the payment of CPI interest on unclaimed superannuation money.

2.11 The amendments will increase the account balance threshold below which accounts of lost members are required to be transferred to the ATO from $200 to $2000.

2.12 The definition of a 'lost member' is set out in the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). The current regulations define a member of a fund as a lost member if:

(a) the member is uncontactable - that is, the provider has never had an address for the member, or two written communications to the member (or one written communication if the trustee so chooses) has been returned to the provider unclaimed; or

(b) the member's account has not been active for five years.2 3

2.13 The policy rationale for this change is that transferring small lost member accounts to the ATO would protect these accounts from being eroded over time by fees and charges. As the Parliamentary Secretary to the Treasurer explained in his second reading speech, these fees and charges typically exceed average investment earnings on small accounts, even for accounts with $2000.J

2.14 The amendments will also decrease the period of inactivity before accounts of unidentifiable members must be transferred to the ATO from five years to 12 months. Accounts of unidentifiable members are accounts where the provider is satisfied 'that it will never be possible for the provider, having regard to information reasonably

available to the provider, to pay an amount to the member.'4 5 These accounts, according to the Parliamentary Secretary's second reading speech, 'represent only a tiny proportion of superannuation *in fact, less than 0.1 per cent.' '

2.15 According to the Parliamentary Secretary, the reduced period of time for which an account of an unidentifiable member can be held will 'encourage funds to

2 Superannuation Industry (Supervision) Regulations 1994, Regulation 1.03 A. Available at http://www.coin law.gov.au/Details/F2012C00564.

3 The Hon Bemie Ripoll MP, Parliamentary Secretary to the Treasurer, Proof House of Representatives Hansard, 30 October 2012, p. 54.

4 Explanatory Memorandum, p. 17.

5 The Hon Bemie Ripoll MP, Proof House of Representatives Hansard, 30 October 2012, p. 54.

collect sufficient information to identify members during the period when contributions are being made.'6

2.16 As reported in a joint press release by the Minister for Financial Services and Superannuation, the Hon Bill Shorten MP, and the Assistant Treasurer, the Hon David Bradbury MP, the ATO already has in place a number of strategies to help reunite members with their lost superannuation accounts. ATO programs, such as

SuperSeeker, helped to reunite people with around 1.1 million lost and unclaimed superamiuation accounts worth $3.2 billion in 2011-12. This was the first time that the amount of lost and unclaimed super has declined over the course of a financial year, after reaching a peak of almost $21 billion as at 30 June 2011. However, there are still around 6.1 million lost and unclaimed accounts, with a value of around $17.7 billion.7

2.17 Currently, no interest is paid on unclaimed superannuation moneys. The Bill provides for the payment of interest on unclaimed superannuation from 1 July 2013. The interest rate will be determined by regulations, and is intended to be equivalent to the CPI. This is intended to preserve the value of unclaimed superannuation over time and further boost individuals' retirement savings.

Schedule 5 - Corporations

2.18 Schedule 5 of the Bill amends the Corporations Act and the ASIC Act to close CUMSA and establish new processes for the receipt and payment of unclaimed property (including unclaimed moneys) arising under the Corporations Act.

2.19 Currently, ASIC credits unclaimed moneys under the Corporations Act to CUMSA upon receipt. Similarly, other unclaimed property is sold or disposed of by ASIC, and the proceeds are credited to CUMSA. The funds are held in CUMSA for six years, after which the funds are debited and recognised in the Commonwealth Consolidated Revenue Fund.

2.20 The Bill will close CUMSA, and allow for unclaimed property to be

recognised directly in the Consolidated Revenue Fund upon receipt by ASIC.

2.21 As is currently the case, claimants of unclaimed property will continue to be able to claim and receive the return of their property currently or previously held by ASIC on behalf of the Commonwealth.

2.22 Currently, no interest is paid on unclaimed property arising under the Corporations Act. The Bill provides for the payment of interest on unclaimed property from 1 July 2013. Once again, the interest rate will be determined by regulations, and is intended to be equivalent to CPI.

Page 5

6 The Hon Bemie Ripoll MP, Proof House of Representatives Hansard, 30 October 2012, p. 55.

7 The Hon Bill Shorten MP and the Hon David Bradbury' MP, Amount of Lost and Unclaimed Super Falls for the First Time, 29 October 2012, http://ministers.treasurY.gov.au/DisplavDocs.aspx7doc-pressreleases/2012/07 l.htm&pagelD=Q 03&min=brs&Year=&DocTvpe=0.

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Chapter 3

Views on the Bill

3.1 As noted in the preceding chapter, the Bill makes amendments which bring forward the time at which money is recognised under the relevant law as lost or unclaimed.

3.2 According to Treasury, the benefits from these amendments for consumers would be twofold. First, the amendments would, in effect, bring forward the time when details of unclaimed moneys are published in publicly searchable databases and the ATO can use its data matching resources 'to match more of these accounts with an

active account the owner may have,' thereby helping reunite people with their money sooner.1

3.3 Second, the amendments would, Treasury argued, help to protect unclaimed moneys from erosion by inflation and fees and charges. Treasury provided a number of examples in its submission of how the amendments would protect unclaimed moneys, and pointed to several of these examples during the public hearing:

A n a ly sis that w e h ave included in our su b m ission p oin ts to the typ ical fees

and ch arges and the typ ical earnings on sm all accoun ts. For exam p le, a

sm all [superannuation] account o f $ 1 ,0 0 0 o f so m eo n e w h o w a s 20 years old

w o u ld h ave earnings, based on average industry earnings, o f around $54

and w ou ld h ave fees o f that sam e am ount as a result o f the m em b er

p rotection p rovision s but w ou ld h ave insurance ch arges o f typ ically $116.

That accou n t w ou ld go backw ards b y $ 116 as op p osed to if it w ere h eld as

lost m o n ey , u n claim ed m o n eys, w ith th e tax o ffice, w h ere it cou ld be

exp ected to earn interest at C PI. ... [A ] 20-year-old w ith insurance ...

[p aying] typ ical fees and charges and [receivin g] typ ical earnings over a

five-year-p eriod cou ld be around $ 7 0 0 better o f f [under the prop osed

arrangem ents, than if he or she w ere] h avin g an in active account eroded

over that tim e.1 2

3.4 While several submissions questioned the timing and particulars of the Bill, submissions were generally supportive of its policy intent, and the potential benefits the amendments would provide for consumers. For instance, CHOICE suggested that, with the earlier transfer of unclaimed monies, 'the erosion of balances through fees, commission and adverse market movements is substantially reduced.' Furthermore, the payment of interest in accordance with CPI *will ensure that the real value of the unclaimed money is preserved/∑3

1 Mr Paul Tilley, Treasury, Proof Committee Hansard, p. 17; and Treasury, Submission 10, p. 1.

2 Mr Paul Tilley, Treasury, Proof Committee Hansard, p. 17; and Treasury, Submission 10, p. 1.

3 CHOICE, Submission 8, p. 1.

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Schedules 1, 2 and 3 - Bank Accounts, First Home Saver Accounts and Life Insurance Policies

The reduction of the inactivity period from seven to three years

3.5 As explained in the previous chapter, Schedules 1, 2 and 3 of the Bill amend the Banking Act, FHSA Act and Life Insurance Act to reduce the period of inactivity before bank accounts, FHSAs and life insurance moneys are treated as unclaimed from seven years to three.

3.6 Submissions from the Australian Bankers' Association (ABA), the Commonwealth Bank of Australia (CBA) and the Association of Financial Advisers (AFA) suggested three years was too short a period of inactivity to deem an account unclaimed, particularly given the growing number and type of accounts that customers intentionally leave inactive for extended periods.4 5

3.7 The committee also heard concerns that the shorter period of inactivity would increase the number of transfers of moneys that are not genuinely *unclaimed * from ADIs to ASIC. These moneys w'ould, in turn, need to be transferred back to the ADI, imposing unnecessary costs on both ADIs and the government. For instance, in its submission, CBA noted that the amendments would add to its costs, as more accounts needed to be transferred to ASIC and in turn recovered, with an attendant increase in customer enquiries throughout this process.3

3.8 Several banks and banking groups also suggested that customers would experience stress and inconvenience as a result of discovering that accounts they thought were still held by the ADI were in fact closed, and the ensuing process they would need to go through to reclaim their money.6

3.9 Several submissions also challenged the government *s claim that owners of inactive accounts would be better off once the money in those accounts was transferred to ASIC. Abacus, for instance, refers to examples of accounts where the interest paid is higher than CPI.7 8 Similarly, ING Direct reports that its basic savings account pays higher-than-CPI interest and does not charge fees.s An analysis by CBA, meanwhile, reported that the majority of account balances held by CBA that would be impacted by the amendments actually receive a higher-than-CPI rate of interest.9

3.10 AFA also suggested that some customers may have accounts wLere a higher rate of interest is dependent on an absence of transactions, so requiring a transaction in

4 ABA, Submission 7, p. 2; CBA, Submission 13, p. 1; and AFA, Submission 12, p. 3.

5 CBA, Submission 13, p. 1.

6 Abacus, Submission 2, p. 3-4; CBA, Submission 13, p. 1; and Mr Steven Miinchenberg, Proof Committee Hansard, p. 12.

7 Abacus, Submission 2, pp. 2-3.

8 ING Direct, Submission 11, pp. 1-2

9 CBA, Submission 13, p. 2.

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such cases to avoid a transfer of the funds to the government will leave the customer worse off.10 11

Government response

3.11 However, Treasury explained that until an account was transferred to ASIC and entered into ASIC *s online database as unclaimed money, there was no easy way for people to search for old accounts. The three year timeframe therefore enhanced the

likelihood of unclaimed money being reunited with its owner:

The data sh ow s that if p eop le are g o in g to fin d u n claim ed m on eys, th e

shorter the period b etw een w h en the accou n t w a s last u sed and w h en it is

fou n d the m ore lik ely it is to be m atch ed and actually returned to the

rightful ow ner. S o it is really about getting th o se accoun ts onto the A S IC

register w h ere it is p u b licly searchable so o n er.11

3.12 Treasury *s submission maintained that the typical unclaimed money owner will be financially better off as a result of the amendments. According to Treasury, the low balances of most unclaimed accounts indicates many of these accounts are likely to be transaction accounts, which typically attract negligible or zero interest. Moreover, life insurers do not pay interest on insurance policies. Further, even if unclaimed accounts are earning interest, this is likely to be insufficient to keep up with

inflation in many cases, and interest earnings are normally subject to tax, whereas the government intends to introduce legislation in early 2013 to exempt the CPI interest paid against government-held unclaimed moneys from tax. Moreover, Treasury submitted that while *interest rates on savings accounts can be higher, quoted rates often include time limited special offers that may only last for a few' months before reverting to a lower rate. *12

3.13 Treasury also notes that fees can significantly erode inactive bank accounts, with many accounts having fees of between $2 and $6 a month.13

Exemption of certain account types

3.14 Submissions from ABA, Abacus and CBA recommended that certain types of accounts that are often intentionally left inactive should be exempted in part or in full from being considered 'unclaimed' after only three years of inactivity. Accounts referred to in this respect include first home saver accounts; term facilities and deposits, although submissions suggested the need here was simply to confirm that the current exclusion of such accounts from unclaimed money provisions would be maintained; youth accounts, which are often set up shortly after a child's birth, but then left inactive for a number of years; offset and redraw accounts; and linked

accounts.14

Page 9

10 AFA, Submission 12, p. 3.

11 Mr Justin Douglas, Treasury, Proof Committee Hansard, p. 15.

12 Treasury, Submission 10, pp. 4-5, 13.

13 Treasury, Submission 10, p. 5.

14 ABA, Submission 7, pp. 2-3; CBA, Submission 13, p. 2; Abacus, Submission 2, pp. 6-8

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3.15 Abacus also pointed out in its submission that if an account is inactive it must be transferred to ASIC even if the account holder has been in touch with the ADI and expressed a desire to maintain the account. To remove the possibility of such accounts being treated as unclaimed, Abacus suggested it would be 'sensible if the need to transfer an account where no transactions have been made was waived where an ADI has contacted the account holder and the account holder has confirmed that they wish to continue holding the account with the ADI.'15

3.16 Submissions from Abacus, ING Direct and CBA suggested that where a customer holds multiple accounts with an ADI, activity in one account should be sufficient to ensure all accounts are treated as 'active' and therefore not transferred to ASIC as unclaimed moneys.16

3.17 While ABA reiterated its concerns to the committee regarding the type of accounts that might be captured by the amendments, the ABA also reported to the committee that it had been in regular discussions with Treasury about the amendments generally and had found Treasury to be 'very good in seeking to understand the issues that have arisen'.17

Government response

3.18 Responding to concerns about the range of accounts that could be deemed unclaimed after three years of inactivity, Treasury emphasised that there is nothing in the current Bill that changes the long-standing definition of unclaimed moneys in the Banking Act.18

3.19 Moreover, as the Explanatory Memorandum indicates, regulations may be used to 'exclude certain accounts and deposits from being treated as unclaimed moneys.' Specifically, the Bill adds new subsections (in Schedule 1, item 4, proposed subsections 69(1B), 69(1C), 69(1D) and (69(1E)) to the Banking Act which, in effect, provide the necessary regulatory power to define if and when certain types of accounts

and deposits are deemed 'unclaimed moneys.' This provides the government with the flexibility to exempt certain types of inactive accounts from being captured as *unclaimed money * when it is considered necessary to do so.

Timeframe for implementation of amendments

3.20 Submissions from ABA, Abacus and banks were critical of the short

timeframe for implementing the amendments.19 As ABA put it:

...the proposed implementation for this change does not allow sufficient time for banks to make the necessary changes to systems, procedures,

15 A bacus, Submission 2, p. 9.

16 Abacus, Submission 2, p. 9; ING D irect, Submission 11, p. 2; C BA , Submission 13, p. 2.

17 Mr Steven Miinchenberg, A BA , Proof Committee Hansard, p. 10.

18 Mr Justin D ouglas, Treasury, Proof Committee Hansard, p. 16.

3 9 A BA , Submission 7, p. 5; A bacus, Submission 2, pp. 4-6; ING Direct, Submission 11, p. 3; and C BA , Submission 13, p. 1-2.

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p rocesses, term s and co n d ition s, cu stom er com m u n ication s and other

d ocu m en tation and other co m p lia n ce requirem ents or to p rovid e their

cu stom ers w ith n ecessary com m u n ication s about the n ew arran gem en ts.'20

3.21 Abacus acknowledged in its submission that the normal deadline for ADIs to report and transfer unclaimed moneys as at 31 December will be extended by the Bill from 31 March 2013 to 30 April 2013. However, Abacus contended that this extra month for reporting and transferring unclaimed money is of little benefit to the ADIs

its represents, as most 'of the activity around managing unclaimed monies and account transfers needs to be dealt with in the period prior to 31 December cut-off.' In particular, ADIs need to contact potentially affected account holders to inform them of the ADIs obligations to transfer inactive account funds. The difficulties of getting in touch with potentially affected members in a one month period (assuming the Bill is passed in late November), according to Abacus, is compounded by the fact that many account holders will be on holidays, and the change in the inactivity timeframe means

five times as many account holders will need to be contacted this year than would usually be the case.21

3.22 The committee was also informed that banks freeze their IT systems in the lead up to the Christmas period to reduce the risk of system instability. As a result, it was argued that it would be difficult to implement the changes in the timeframe currently proposed. As ABA informed the committee:

W hat w e do ... at th is tim e o f the year, is w in d d ow n and freeze any

ch an ges to th ose sy stem s b ecau se any ch an ge to the system can cau se

d isrup tion s if som eth in g g o es w ron g. The v iew th e banks take is that, w h ile

w e w o u ld n ot w an t that at any tim e o f the year, particularly in the run-up to

C hristm as, w e w o u ld n ot w an t to see, for exam p le, p aym en t sy stem s

p rob lem s.22 23

3.23 Abacus also suggested in its submission that the implementation challenge was likely to be particularly significant for smaller ADIs:

...w h ich do not ty p ica lly h ave the cap acity to rapidly im p lem en t and scale

up the n ew p ro cesses n eed ed to im p lem en t th is sort o f ch an ge. A s a

co n seq u en ce, it is lik ely that it w ill sim p ly not b e p o ssib le to con tact m any

affected accoun t h old ers b efore the initial 31 D ecem b er d ead lin e, w h ich

also in creases the lik elih ood o f m on ies b ein g transferred to A S IC w h ich are

n ot truly 'un claim ed.'2J

3.24 The tight timeframe would, in Abacus * analysis, result in a higher level of unnecessary transfers of funds and this, in turn, would lead to a higher incidence of

20 ABA, Submission 7, p. 1.

21 Abacus, Submission 2, p. 5.

22 Mr Steven Milchenberg, ABA, Proof Committee Hansard, p.7. Also see CBA, Submission 13, p. 1; and ING Direct, Submission 11, p. 1.

23 Abacus, Submission 2, p. 5.

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double-handling of money as money is transferred to ASIC and then back to the ADI, at a cost to both the government and ADIs.24 25

3.25 Despite the implementation difficulties, the ABA conceded that these difficulties were not insurmountable. Rather, it would be a case of committing additional resources in order to implement the amendments in time.23

Government response

3.26 Treasury *s submission points out that ADIs and life insurers already have systems in place to identify and transfer unclaimed moneys to ASIC: the amendments simply bring forward the relevant time period in which the transfers need to occur.26 Treasury also told the committee that while banks and banking groups had expressed concerns regarding the timeframe for implementation, it believed that banks would ultimately be able to implement the changes in a timely manner.27

Schedule 4: Superannuation

Raising the threshold below which 'lost member' accounts are transferred to the A TO

3.27 As explained in the previous chapter, the Bill will increase the account balance threshold below which lost accounts are required to be transferred to the ATO from $200 to $2000, effective from 31 December 2012. A Tost account * is one where the member is *uncontactable, * as defined in the relevant regulations, or where the account has been inactive for a period of five years.

3.28 The increase in the threshold is intended to protect more small lost accounts from being eroded by fees and charges. As Treasury explained, an 'account up to an amount like $2,000, if it is an account that is not having contributions made to it, would typically be going backwards.'28 This is because the fees and insurance premiums on smaller accounts represent a higher proportion of the account balance and will typically exceed any account earnings.29

3.29 In its submission, the Institute of Chartered Accountants in Australia (ICAA) welcomed the proposed increase in the threshold:

A t th is lev el, m ean in gfu l am ounts o f retirem ent sa v in g s can still be

protected from ero sio n th rou gh fees and also be elig ib le for earn in gs in the

fo n n o f interest p aym en ts o n ce am ounts are w ith th e A TO. W e b eliev e this

is in th e interests o f m em b ers. It also p rovid es a lon ger term v iew o f the

24 Abacus, Submission 2, p. 5.

25 Mr Steven Muchenberg, ABA, Proof Committee Hansard, p.8-9.

26 Treasury, Submission 10, p. 6.

27 Mr Justin Douglas, Treasury, Proof Committee Hansard, p. 19.

28 Mr Paul Tilley, Treasury, Proof Committee Hansard, p. 13.

29 Mr Paul Tilley, Treasury, Proof Committee Hansard, p. 18; Treasury, Submission 10, pp. 7-8.

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super system whereby amounts protected now will lessen the impact of reliance on aged pension and government resources later.j0

3.30 While supporting the policy intent of the measure, submissions from ASF A, the Australian Institute of Superannuation Trustees (A1ST) and the Financial Services Council (FSC) suggested that the increase in the threshold would inadvertently

increase the number of active accounts that needed to be transferred to the ATO. These submissions argued that lost member accounts that are still receiving contributions are, as Mercer put it in its submission, *not lost in the true sense of the word, even though they technically satisfy the definition of lost members. * These submissions argue that the transfer of such accounts would not be consistent w ith the policy intent of the Bill, and *will often w-ork against the interests of members. *1

3.31 As AIST explained in its submission, the $200 threshold in effect limits the number of active 'lost member' accounts that need to be transferred to the ATO, as anyone earning over $2222 in a six month period would have received at least $200 in

superannuation contributions in that period. As a result, an active account of anyone earning above $2222 within six months would not be eligible for transfer, even if mail is returned unclaimed within this period. In contrast, a member would need to earn over $22,222 in a six month period to receive contributions of $2000, and an active account of an 'uncontactable' member earning under this amount would therefore need ->2 ∞ to be transferred to the ATO.J 3.32 AIST also noted that the problem of transferring active accounts to the ATO is 'most likely to impact new employees, young people, and low-income earners.'" *' *

3.33 AIST told the committee there were a number of scenarios wherein a member can be both uncontactable (and therefore deemed a 'lost member') and still have an active account:

That can include a member not supplying their address to their super fund when they join; their employer not supplying a proper address to the super fund at the time the member joined the fund; the details provided to the super fund being incorrect; or the member having changed address and not

having notified their superannuation fund. *4

3.34 FSC added that as the regulations and Bill are currently wrritten, it would be possible for a member to be deemed a 'lost member' and have their account transferred to the ATO 'within a matter of months of joining the fund or of moving house and changing their address without notifying the fund. 5

30 1CAA, Submission 9, p. 2.

31 Mercer, Submission 5, p. 3.

32 AIST, Submission 6, p. 5.

33 AIST, Submission 6, p. 3.

34 Mr David Haynes, AIST, Proof Committee Hansard , p. 2.

35 Mr Blake Briggs, FSC, Proof Committee Hansard , p.2.

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3.35 ASF A suggested that the increased transfer of active accounts would result in a 'merry-go-round' of money. For instance, an active 'lost member' account might be closed and the money transferred from the superannuation provider to the ATO. The next employer contribution would then trigger the creation of a new account with the provider and, after the new account was reported to the ATO on the Member Contribution Statement for the year, the ATO would need to transfer the unclaimed money back to the provider for deposit in the new account/6

3.36 To reduce the incidence of active accounts being deemed 'lost', the FSC suggested a minimum two year membership period before this can occur/ Similarly, AIST suggested that the regulations stipulate a minimum period of membership before an account can be deemed 'lost.'- *8

3.37 To prevent active accounts being transferred to the ATO, AIST recommended that the definition of 'lost member accounts' in regulation 1.03A(l)(a) of the SIS Regulations exclude accounts where there has been a contribution or rollover within the last two years/9

3.38 In its submission, AIST also argued that the returned mail trigger for deeming a member 'uncontactable' should be revised to reflect technological changes. For instance, it is currently the case that if a trustee has a member's phone number, and an outbound call to that number results in confirmation that it is the correct number, that member can still be considered 'uncontactable.' Specifically, AIST recommended that trustees be able to determine that an account of an 'uncontactable' member does not need to be transferred to the ATO where the member has had contact with the fund within a specified period, for example, by email or by contacting a call centre.36 37 38 39 40

3.39 Similarly, ASFA noted that the 'lost member' definition is around 20 years old. ASFA suggested that in an era where engagement with members is much broader than mailed communications, trustees should be able to recognise a broader range of ways in which members engage with the fund - for example, by accessing their account online or contacting a call centre. ASFA also emphasised that contact between a fund and members, particularly in the current day, is a two-way street: 'If a member makes contact with the fund, obviously they know which fund they are in and they are engaging with their membership.'41

Government response

3.40 Treasury told the committee that, in cases where a lost member account is still receiving contributions:

36 ASFA, Submission 1, p. 6.

37 FSC, Submission 4, p. 3-4.

38 AIST, Submission 6, p. 6.

39 Mr David Haynes, AIST, Proof Committee Hansard, p. 2; and AIST, Submission 6, pp. 6-7. ASFA makes similar recommendation. ASFA, Submission 1 , p. 9.

40 AIST, Submission 6, p. 6.

41 Ms Fiona Galbraith, ASFA, Proof Committee Hansard , p. 2.

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...in most circumstances that should give a reasonably good line of investigation for funds to be able to make contact with such members. If the member is actively making contributions then by pursuing a line of inquiry through, for example, the employer where those contributions are being made in most circumstances that should give a reasonable prospect of being able to make contact. It may be that under this measure with the increased threshold there is a greater incentive for funds to do that.42

3.41 Treasury told the committee that superannuation providers also had a number of other options for locating lost members, including for lost member accounts that remain active. Such steps might include checking the superannuation provider *s own data to see if the member has other accounts with more current information, or engaging a company like Australia Post to undertake database searches to locate a member.43

Crossover with auto-consolidation measures

3.42 In its submission, ASF A noted that legislation is already being developed to implement an auto-consolidation of accounts process, which is proposed to commence from 1 January 2014. ASFA suggested that this auto-consolidation process, which is envisaged to apply to superannuation accounts of under $1,000, would generate much the same outcome as the unclaimed money process for accounts under $1000, but in an eight month longer timeframe.44 45

3.43 Mercer referred to the same issue in its submission, and suggested that greater efficiencies could be achieved by integrating the superannuation amendments in the Bill with the proposed legislation on the consolidation of accounts within and between superannuation funds. 43

3.44 Treasury acknowledged that there will be some crossover between the superannuation measures in the Bill and the auto-consolidated measures being developed, and noted 'this is something that the government will need to give further consideration to'.46

Loss of insurance coverage

3.45 Submissions from ASFA and AJST noted that 'lost members' will lose insurance coverage when their accounts are transferred to the ATO. It is already the case that accounts transferred to the ATO lose any attached insurance coverage, but

the $200 threshold limited the impact of this, as an account with less than $200 would be unlikely to have sufficient funds to pay for insurance premiums in any case. However, these submissions suggested that accounts nearer to $2000 often have

42 Mr Paul Tilley, Treasury, Proof Committee Hansard, p. 14.

43 Ms Ruth Gabbitas, Treasuiv, Proof Committee Hansard, p. 18; and Treasury. Submission 10, pp. 8-9.

44 ASFA, Submission 1, p. 8.

45 Mercer, Submission 3. p. 5.

46 Mr Paul Tilley, Treasury, Proof Committee Hansard, p. 14.

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sufficient money to maintain insurance coverage for a number of years. To illustrate the point, ASFA referred to the example of a 25 year old member in an industry-' fund, who might have $300,000 of life insurance cover at a cost around $150 a year.47

3.46 AFA and Mercer also suggested that inactive accounts might be at risk of losing insurance, even in situations where a member has made a decision to retain an inactive account in order to maintain insurance coverage. As AFA explained:

This is a deliberate strategy, where the existing insurance is better than the alternative. In this case, the member might top up the fund from time to time to ensure that there [are] sufficient funds to pay the insurance. It is possible that at the end of a 5 year period, where there have been no further contributions, the balance has fallen to under $2,000. There is a genuine risk that this legislation might lead to superannuation fund members losing insurance that they intentionally held via an account that does not receive regular contributions.48

3.47 ASFA suggests that accounts with insurance should not be transferred to the ATO. However, ASFA argued that if accounts are transferred, consideration should be given to providing trustees with statutory protection so they are not liable where members lose insurance coverage.49 50

3.48 In its submission, Treasury noted that cancellation of insurance coverage already occurs in a number of superannuation funds when account balances fall below a certain threshold or when accounts are transferred to an eligible rollover fund. Treasury also noted that individuals who are still employed are likely to have another active account with insurance attached.

Transfer of 'unidentifiable' members

3.49 As outlined in chapter two, the Bill reduces the period of inactivity before accounts of unidentifiable members must be transferred to the ATO from five years to 12 months. As is currently the case, for 'unidentifiable' members the superannuation provider must be satisfied that it will never be possible for the provider, having regard to information reasonably available to the provider, to pay an amount to the member/0

3.50 AFA contended in its submission that 'unidentifiable' accounts are more likely to be returned to the member when held by the superannuation fund. On this basis, it argued that it would be preferable to maintain the current arrangement where the money remains with the superannuation fund for five years.51

47 Treasury, Submission 10, p. 8.

48 AFA, Submission 12, p. 3; Mercer, Submission 5, p. 4.

49 ASFA, Submission 12, p. 9.

50 Explanatory * Memorandum, p. 17.

51 AFA, Submission 12, p. 3.

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3.51 However, Treasury argued that if a super fund had determined that it will never be possibly to identify a member after one year, then this is likely to still be the case after five years.'2

3.52 Treasury also told the committee that there had been a great deal of confusion regarding the distinction between the amendments affecting small 'lost member' accounts and the amendments affecting the treatment of 'unidentifiable' members.

Treasury outlined the difference between these two components for the committee:

For small lost accounts that are inactive for five years or uncontactable, the threshold is being increased to $2,000, but there is no decrease in the period of inactivity for inactive small accounts. That stays at five years. Those small lost accounts represent the vast majority of accounts covered by the

measure. The second component of the measure was for unidentifiable accounts. For that small proportion of accounts, the period of inactivity is being decreased from five years to one year. As we have pointed out in our submission *and it is also in the minister's press release of 29 October * those accounts represent less than 0.1 per cent of superannuation/"

3.53 AIST made a similar point, noting that the meaning of 'unidentifiable' accounts was often misunderstood. Moreover, in contrast to AFA, AIST told the committee that 'funds really have no business hanging on to superannuation contributions where they do not know and cannot find out who the rightful owner of that superannuation is.' AIST further suggested that the one-year period for

transferring moneys from unidentifiable member accounts was appropriate."4

Committee View

3.54 The committee believes the amendments given effect by the Bill will be of significant benefit to consumers. The amendments will help reunite people with their unclaimed money sooner, and will protect the real value of that money while it remains unclaimed.

Bank accounts, FHSAs and life insurance policies

3.55 The committee acknowledges concerns expressed by a number of ADIs that the reduction in the period of inactivity before accounts are treated as unclaimed could potentially lead to moneys that are not genuinely unclaimed being treated as such.

3.56 However, the committee also notes that the Bill provides for regulations to be implemented which would exclude certain accounts and deposits for being treated as unclaimed moneys, where it was considered necessary to do so. This provides an appropriate measure of flexibility to address the concerns of financial institutions and protect the interests of consumers as required. The committee further notes that Treasury has been in regular contact with representatives of the banking industry, and

52 Mr Paul Tilley, Treasury, Proof Committee Hansard, p. 15.

53 Mr Paul Tilley, Treasury, Proof Committee Hansard, p. 17.

54 Mr David Haynes, AIST, Proof Committee Hansard, p. 5.

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these industry representatives have expressed satisfaction with Treasury's efforts to understand and address industry concerns.

3.57 The committee is confident that, on balance, owners of unclaimed moneys will be better off as a result of the amendments. In particular, the amendments will increase the likelihood of people being reunited with their money sooner, and will protect that money from erosion through fees, charges and inflation while it remains unclaimed.

3.58 The committee also acknowledges that some financial institutions are concerned about the implementation timeframe for the amendments. However, the committee is reassured by suggestions from the banking industry and Treasury that the challenges of implementing the amendments in the timeframe envisaged in the Bill are manageable, provided sufficient resources are allocated to the task.

Superannuation

3.59 The committee notes concerns expressed by the superannuation industry that the increase in the threshold below which lost member accounts are required to be transferred to the ATO could potentially result in the transfer of active 'lost member' accounts, which would be inconsistent with the policy intent of the Bill.

3.60 The committee is reassured by Treasury's advice that, in instances where an active account holder is 'uncontactable,' the superan