COMMONWEALTH OF AUSTRALIA

PARLIAMENTARY DEBATES

SENATE

Official Committee Hansard

ECONOMICS LEGISLATION COMMITTEE

(Consideration of Estimates)

THURSDAY, 20 NOVEMBER 1997

BY AUTHORITY OF THE SENATE CANBERRA 1997 CONTENTS

THURSDAY, 20 NOVEMBER

Department of Industry, Science and Tourism— Program 2—Australian Industrial Property Organisation ...... 740 Program 1—Department of Industry, Science and Tourism—Subprogram 1.5—Industry policy ...... 745 Program 9—Australian Customs Service— Subprogram 9.1—Border management ...... 745 Subprogram 9.2—Commercial services ...... 765 Program 1—Department of Industry, Science and Tourism— Subprogram 1.5—Industry policy ...... 767 Subprogram 1.1—AusIndustry ...... 769 Subprogram 1.2—Industry Liaison ...... 782 Subprogram 1.5—Industry Policy ...... 788 Subprogram 1.2—Industry liaison ...... 792 Subprogram 1.4—Sport and Recreation ...... 795 Program 10—Australian Sports Commission ...... 795 Program 11—Australian Sports Drug Agency ...... 795 Department of The Treasury— Program 1—Treasury— Subprogram 1.4—Taxation ...... 807 Subprogram 1.8—Financial and currency ...... 844 Subprogram 1.8—Finance and currency ...... 847 Program 7—Insurance and Superannuation Commission—Subprogram 7.4—Superannuation ...... 851 Thursday, 20 November 1997 SENATE—Legislation E 737

SENATE Thursday, 20 November 1997

ECONOMICS LEGISLATION COMMITTEE

Portfolios: Treasury; Industry, Science and Tourism; Workplace Relations and Small Business Members: Senator Ferguson (Chair), Senator Jacinta Collins (Deputy Chair), Senators Bishop, Chapman, Murray and Watson

The committee met at 9.02 a.m. DEPARTMENT OF INDUSTRY, SCIENCE AND TOURISM Proposed additional expenditure, $58,307,000 (Document A). Proposed additional expenditure, $37,550,000 (Document C). Consideration resumed from 17 November 1997. In Attendance Senator Parer, Minister for Industry, Science and Tourism Executive Mr David Mazitelli, Deputy Secretary Office of AusIndustry Mr Michael Dillon, Division Head Mr Denis Taylor, General Manager, AusIndustry Services Dr Andreas Dubs, General Manager, R&D Start Mr Phil Constable, General Manager, R&D Tax Concession Mr John Dean, General Manager, SME Programs Dr Alan Jones, Manager Policy Research and Analysis Ms Tricia Berman, Manager, Policy Ms Jennifer Wardle, Finance Officer Industry Division A Mr Alan Evans, Division Head Information Industries Task Force Mr Mike Todd, Leader, Information Industries Task Force Industry Division B Mr Keith Croker, Acting Division Head Sport and Tourism Division Mr Keith Maxted, Acting Division Head Mr Mike Edwards, Acting General Manager, International Tourism and Industry Development Branch

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Mr Paul Davies, Acting General Manager, Regional and Environmental Tourism Branch Ms Jenny Harrison, Office of National Tourism Ms Lyn Franks, Acting Manager, Market Development Section Mr Peter Robins, Acting Director, Bureau of Tourism Research Mr Bill Rowe, Manager, National Office of Sport and Recreation Policy Industry Policy Division Ms Margaret Fanning, General Manager, Business Environment Branch Mr Barry Jones, General Manager, Industry Analysis Branch Mr Mike Roberts, Manager, Export Credit Policy Group Consumer Affairs Division Mr Philip Noonan, Division Head Mr John Wunsch, Manager, Resources and Co-ordination Science and Technology Division Dr Paul Wellings, Division Head Mr Eric James, General Manager, Science and Technology Advisory Branch Mr Bob Summerville, Manager, Science and Technology Policy Section Dr John Boyd, General Manager, National Science and Technology Programs Branch Mr Brian Delroy, Acting General Manager, International Science and Technology Branch Analytical and Mapping Division Mr Drew Clarke, Division Head Dr Sandra Hart, General Manager, Australian Government Analytical Laboratories Mr Barry Leigh, Australian Surveying and Land Information Group Corporate Services Division Ms Bev Clarke, Division Head Mr Steve Payne, General Manager, Ministerial and Co-ordination Branch Mr Lyn Hansen, Director, Portfolio and Policy Co-ordination Section Mr Krishan Singh, Portfolio and Policy Co-ordination Section Mr Chris Dainer, Manager, Corporate Resource Planning Unit Mr Peter Moore, Corporate Resource Planning Unit Mr Frank Barbaro, Corporate Resource Planning Unit Australian Industrial Property Organisation (AIPO) Mr Andrew Bain, Director General Mr David McEwan, Deputy Director General, Information Technology Services Mr Peter Richards, Deputy Director General, Business Services Mr Les Rymer, Acting Deputy Director General, Corporate Strategy Mr Bruce Murray, Commissioner, Patents and Designs Mr Ross Wilson, Registrar, Trade Marks

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Ms Shirley Keating, Director, Finance Australian Tourist Commission (ATC) Mr John Morse, Managing Director Mr John Hopwood, Manager, Business Services Ms Margaret Hudson, Manager, Corporate Strategy Mr Andrew Larcos, Government Relations Officer National Standards Commission (NSC) Dr Grahame Harvey, Acting Executive Director Australian Institute of Marine Science (AIMS) Dr Russell Reichelt, Director Australian Nuclear Science and Technology Organisation (ANSTO) Prof. Helen Garnett Dr Adam Jostsons, Director, Materials Division Mr George Malosh, Director, Nuclear Technology Mr Pat Bull, Manager, Nuclear Materials Mr Richard Baker, Director, Corporate Services Commonwealth Scientific and Industrial Research Organisation (CSIRO) Dr Chris Mallett, Deputy Chief Executive, Agribusiness Mr Bob Garitt, General Manager, Corporate Finance Ms Marilyn DeVere, Acting Manager, Ministerial Liaison Anti-Dumping Authority (ADA) Mr Jock McGuire, Acting Member Ms Margaret McLeod, Administration Officer Australian Customs Service (ACS) Mr Lionel Woodward AO, Chief Executive Officer Mr John Drury, Deputy Chief Executive Officer Mr Mick Roche, Deputy Chief Executive Officer Mr John Jeffery, Acting National Director, Commercial Services Mr Graham Bannister, National Director, Business Development and Technology Ms Marion Grant, National Manager, Industry Ms Sue Pitman-Hobbs, National Manager, Budgets Ms Debbie Bates, National Manager, Intelligence Mr Mark Harrison, National Manager, Dumping and Self Assessment Mr Bryan Box, National Manager, IT Outsourcing Project Mr John Howard, Acting National Manager, Border Operations Mr Peter Hallett, National Manager, Passenger Processing Mr Richard Hunt, Acting National Manager, Excise Mr Jeff Buckpitt, Director, Budget Policy and Operations

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Australian Sports Commission (ASC) Mr Jim Ferguson, Executive Director Mr Bob Hobson, Director, Commercial and Business Services Mr John Boultbee, Director, Australian Institute of Sport Australian Sports Drug Agency (ASDA) Ms Natalie Howson, Chief Executive Officer Ms Helen Quiggin, Manager, Corporate Services Mr John Mendoza, General Manager, Sports Services Industry Division A Mr Doug Williams, General Manager, Textiles Clothing and Footwear Branch Mr Ivan Donaldson, General Manager, Australian Building Codes Board Mr Doug Stuart, Acting General Manager, Pharmaceutical, Aerospace and Supplier Development Branch Department of Finance and Administration— Mr Wayne Turner Mr Gordon Lister CHAIR—I call the committee to order. We will continue with the estimates process for the Department of Industry, Science and Tourism. We are going to commence with program 2, the Australian Industrial Property Organisation, in order to accommodate those officers in that organisation. [9.03 a.m.] Program 2—Australian Industrial Property Organisation Senator BISHOP—Mr Mazitelli, turning to page 105 of DIST’s annual report, you have some facts in goal one which suggest that there has been an increase in patent applications, designs and trademarks. Is that a one-off increase? What is the trend in this area in recent years? What is your anticipation of future growth, if any? Mr Mazitelli—I will ask Mr Bain from the Australian Industrial Property Organisation to take that answer. Senator BISHOP—Mr Bain, while you are doing that, can you tell us why designs were only marginally up and if there is any significance to that? Mr Bain—First of all, if I could turn to patents and trademarks, it seems to be a trend increase. The increase is much faster in trademarks than it is in patents. We have been working on an expectation of about 10 per cent per annum. Last year we had an increase, from memory, of the order of 17 per cent. The increase in patents is less. I cannot recall the precise percentage figure. I would suspect it is of the order of 10 per cent. It is very hard to predict if that is a long-term trend or not. We have, at times, done quite a bit of work in trying to predict demand for patent and trademark applications. We have tried to use as predictors the state of the economy and other things and have not been very successful. We have had discussions with equivalent officers in other countries who have also tried to do the same thing without much success. A lot of the applications come from all around the world and they are generated by all sorts of activity, so it makes prediction difficult. Our expectation for the immediate future is an ongoing upward trend.

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Senator BISHOP—Perhaps we could come at it in a slightly different way: is the increase in trademarks and patents across the board, or can we identify it as occurring relatively in manufacturing, services, sub-sectors of services, resources or particular areas? Mr Bain—We could do that. We could do it by patent classifications on the patent side. We have not done that. I think it is, broadly speaking, occurring in all areas of technology although some areas are bound to increase faster than others. I think biotechnology is marginally faster than some other areas. Senator BISHOP—Which area was that? Mr Bain—Biotechnology. Senator BISHOP—Is there generally any growth across the services sector: education, medical, health, those sorts of areas? Mr Bain—There would be growth in the medical area, in particular some of the biotechnology work relates back to drugs and so on. The services area would be a low area of patenting activity because it is not the subject of patents in general. I am not sure about trademarks. My guess is trademarks would be very broad across the entire economy. Senator BISHOP—Can you go to table 11.2, second column, second row, where it says, ‘remain competitive with selected offices’. Which offices are they? What are the criteria you use to try and obtain or retain them? Mr Bain—It is difficult to make that comparison because offices work around the world on very different bases. We are a fully cost recovered organisation. Some offices around the world are like that and others are not. The one that we increasingly use is the US, which is again a totally cost recovered office and it is renowned as being a good office. Our fees are roughly comparable with their fees. They are having a fee increase this year which I think will push their fees above ours. The other office we compare with is the European patent office whose fees are substantially higher than ours. There is a very wide mix, so it is difficult to do that comparison. Senator BISHOP—Do you seek to compete with those offices on terms other than cost? Mr Bain—I believe that we can. We have had quite a few discussions and try to get feedback on our quality. On timeliness we clearly do, on quality of search and examination work we are now getting increasingly good feedback. We do some work for other countries, for example we do work for New Zealand and a fair proportion of work for Singapore. New Zealand has an option as to whether they come to us, America or the EPO for their work. When the US opened that up, a fair bit of it went to the US. It is now coming back to us. Senator BISHOP—Are we looking to develop a dominant position in the Asian region in this area? Mr Bain—We would like to have a strong position in the region. As the region develops its intellectual property arrangements, we would like to have a strong role in that. Senator BISHOP—Apart from revenue gain or cost recovery, what is the net benefit in becoming a central office in this area? Mr Bain—We would not necessarily be a central office. I think a benefit would be that, if we are to some extent influential in the way the region develops, we are more likely to have a region in which it is easy for Australian industry to work. Senator BISHOP—So it gives advantage to industry domiciled here?

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Mr Bain—Yes. Not necessarily, in any sense, an unfair advantage, but we would like to be part of developing a system in the region which Australian industry can find it simple to work with. Senator BISHOP—You seek to market yourself on that basis? Mr Bain—We seek to market ourselves to some extent on that basis. We do some work in the region in training examiners, helping them to develop legislation and those sorts of issues, as well. Senator BISHOP—With the increasing globalisation of the economy, growth in transnationals and freer trade around the world, you would anticipate that practice continuing, developing, or growing? Mr Bain—Yes. Senator BISHOP—Are there any possible caveats on that? Mr Bain—In terms of the globalisation of these processes? Senator BISHOP—And the growth of your operation. Mr Bain—That is very difficult to answer. We have taken the position that the world internationally is unduly complex in terms of trying to obtain intellectual property protection internationally, and so have a lot of other countries—the US in particular. Our expectation is that over time it will rationalise itself. As it rationalises itself that sort of globalisation of process is likely to happen. How it will happen is very difficult to predict. Whether it will happen by concentrating all of the work in a few offices, which has some significant implications for sovereignty in different countries, or whether it will happen by a much more modern use of IT arrangements and so on, and have a sort of distributed network of offices that could work much better together, is very unclear at this stage. Senator BISHOP—You cannot glean any indicator? Mr Bain—No, I cannot. We look at those two options and we say we would like to be robust against both of them. It is very difficult to predict which way it will go. Senator BISHOP—In terms of the primary international offices that you outlined earlier, the US and within Europe, does your department monitor their activities on a regular basis? Mr Bain—Yes, we do. We have pretty close relationships with those offices as well. We talk to them and work with them. Senator BISHOP—There is a fairly free exchange of information that occurs there? Mr Bain—There is a pretty free exchange of information amongst offices. There are also fairly active international arrangements through the World Intellectual Property Organisation, which has got a number of activities happening at the moment. One is refining the Patent Cooperation Treaty arrangements, which is a subcommittee of that body, which we chair, which gives us a good knowledge of what is happening in the rest of the world. It has established a committee to try to improve and harmonise IT arrangements around the world. We have chaired some of those meetings which, again, is very good for our linkages with other countries. We have played a fairly significant role in the development of the Patent Law Treaty, which is a harmonisation treaty. That is ongoing in terms of harmonising arrangements. Being involved in those is important, I think, for two reasons: one is that it does allow you to have a say in what the outcomes are directly. The other thing is that it involves you very closely with the other offices that are working in the area.

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Senator BISHOP—The three tables on pages 106 and 107 show there has been quite a significant improvement in a range of key indicators. Again, are they one-off increases due to radical change within the agency, or do you anticipate further improvements in forthcoming years? Mr Bain—They are one-off in the sense that I would be surprised if we could duplicate those for many years. If you look at the productivity increases there, they are of the order of 14 per cent. If you could achieve 14 per cent productivity every year that would be wonderful. That productivity increase has come from a number of things. It has come from staff working better and smarter. It has also come from the new trademarks legislation which is easier to work with; it was designed to be an administratively more simple legislation to work with so that has helped. Some of those things are going to be a bit one-off. We are looking at ongoing productivity improvement over future years, but I doubt if it is going to be of that magnitude. Senator BISHOP—So you would be looking for further improvements in the matters referred to in 11.4 and 11.5, but not of that magnitude? Mr Bain—Yes. The timing arrangements for patents is different to most other areas in that many applicants do not want it to happen quickly. There are a lot of staged processes on the way through. It suits a lot of applications to, in a sense, put a peg in the ground at application time and then have some time to see whether their product is going to be commercial or not before finalising the process. We are looking to have a very fast response time on the way through. So when an applicant says, ‘We would like you to do the next step,’ we will do that quickly. We will go on working towards that. In trademarks, we have reduced the time to the first report from a little bit under a year down to about three months. After the first report, it is also in the hands of the applicant as to how long an interactive process takes. We intend to get that down to somewhere between one and two months, and our clients tell us that that is about right. They would not want to go much faster than that. Senator BISHOP—One of the tests of how countries perform, relatively, is growth in patents, designs, trademarks and that sort of thing. In recent years, we have not been performing as well as we could have, compared to major countries in the northern hemisphere. Has that relative decline been arrested or are we still in relative decline on those critical scores? Mr Bain—I think it has been arrested. Patent numbers are not easy to compare because what is considered to be an application in one country is a bit different to what is considered to be an application in others, and so on. If we look at the most recent figures—actually for the last couple of years we have got figures and I am trying to remember which they are, they are always a bit dated—Australia was either at the top or very high in terms of growth amongst OECD countries, but it is growth from a lower base than a lot of those other countries. Senator BISHOP—Is it a significantly lower base? Mr Bain—Again, it is a very wide spread and that is what makes it difficult. The US, Japan and Germany have very high patenting activity. Sweden has quite high patenting activity. You then go down to other countries that fit with Australia—New Zealand, Canada and so on. We have the same order of magnitude as those, but we are growing faster than them. Senator BISHOP—Australia, New Zealand and Canada?

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Mr Bain—Yes, Australia, New Zealand and Canada, but we are growing faster. Senator BISHOP—Whilst we have high growth in recent years, are we still at the bottom of the list of 16 or 17 OECD countries in comparative terms? Mr Bain—I cannot answer that. My memory says we are somewhere in the middle. I could confirm that and provide that information. Senator BISHOP—That would be fine. You are funded off-budget, not through any appropriations. From memory, I think your outlays are in the order of $7.5 million. Is that right? Mr Bain—No, our budget for this last year is a bit less than $70 million. Senator BISHOP—What are the major sources of that? Mr Bain—Fees. Senator BISHOP—It is pure cost recovery? Mr Bain—It is pure cost recovery, yes. Senator BISHOP—Do you generate a surplus? Mr Bain—Yes, we have been generating a surplus, particularly this year because of the productivity improvement, but our obligation is cost recovery. Senator BISHOP—What is the order of magnitude of that surplus? Mr Bain—Last year it was about $10 million. Senator BISHOP—Is that remitted into consolidated revenue or retained within the organisation? Mr Bain—It forms part of consolidated revenue, but because of the way the trust fund works it remains with us. In other words, we have the right to operate with that. Senator BISHOP—So you could choose to use that to fund expansion into new or different areas that require your attention? Mr Bain—Yes, we could, provided it was within the terms of the trust account. Senator BISHOP—Are you increasingly having to allocate extra resources to activities derived from international treaties, protocols, meetings and that sort of thing? I notice that there are a lot of references in the report to AIPO meetings, regional outcomes and negotiations, discussions with the United States and Europe and those sorts of things. Mr Bain—We do, but it is a very small proportion of our total expenditure. We would be allocating more resources to it. I can think of people in the organisation who spend more time on aeroplanes and things at the moment. It is a very small part of our— Senator BISHOP—Less than five per cent? Mr Bain—Yes. Senator BISHOP—Even if there was significant growth in the demands in that area, it is not going to impact greatly on the bottom line? Mr Bain—No, it is not a major issue for us. CHAIR—If there are no further questions for the Australian Industrial Property Organisation, thank you, Mr Bain. We will now move to programs that were part-heard at our previous hearings. I understand that we were doing program 9, the Australian Customs Service, and subprogram 1.5,

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AusIndustry, together. We have completed the Anti-Dumping Authority. We would like to do program 9 and subprogram 1.5 together because I think the questions will overlap. [9.22 a.m.] Program 1—Department of Industry, Science and Tourism Subprogram 1.5—Industry policy Program 9—Australian Customs Service Subprogram 9.1—Border management CHAIR—I welcome officials. There will be some questions initially on Customs from Senator Bishop but, as I said, if we have the industry policy people here where it overlaps, I think we can do it that way. Senator BISHOP—I turn to subprogram 9.1, Border management, and the annual report. Page 36 of the annual report shows a significant increase in the budget from $154 million up to $221 million. Can you tell the committee how many extra staff, if any, have been employed on border management and in what ports? Mr Woodward—I will answer that question in a general way from the beginning. We expect our average staffing level for the coming year, this year, to be about 4,200. That com- pares with just over 4,000 for the year before. As part of the budget processes, a number of specific measures have resulted in allowance for staffing increases. The biggest single component was 103, which was allowed for passenger processing, which flows from a formula. The second biggest single component relates to diesel fuel substitution, where I think we will have about 58 extra in a full year. In this coming year there will be about 29. They are the two largest identifiable components. In addition, staffing capacity will flow from the decision taken to purchase eight new vessels, and they will have to be staffed. The way in which we handle the staffing is not that we budget on the basis of individual ports, which I think your question implies. We are given a budget and it is then my responsibility—within priorities set by the government and within the legislation—to decide just how those resources are going to be allocated. You did mention what has happened to the border. I can give that an historical perspective. At the early part of the decade, Customs had a staff of 5,156. Of those, just over 2,000 were employed on the border. In other words, about 38.8 per cent of our staff were employed on the border at the beginning of the decade. As at last financial year, our staffing had dropped by about 900. We had just over 4,200 staff years employed. Of those, just over 2,100—about 50 per cent—were employed on the border and that will go up slightly in this coming financial year. Over the decade, the proportion at the border has risen from 38.8 per cent to last year 50 per cent. In the coming year, it will be 52.1 per cent. I would be happy to take specific questions in the light of that, Senator. Senator BISHOP—So has your border staffing remained relatively constant or marginally increased? Mr Woodward—In terms of actual numbers, it has been floating around the 2,000 figure for about the last eight or nine years. The highest point that I can see was 1991-1992 with 2,151. It then dropped back and over the last couple of years has been rising again. As a proportion of the total staff—and I must say I cannot explain why the percentages were so low eight or nine years ago—the proportion on the border has been increasing. Senator BISHOP—Does that refer to total bodies or staff years?

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Mr Woodward—It is average staffing levels. In other words, two part-time people equals one. When I talk about 4,200, I am talking about full-time equivalent staff. Senator BISHOP—Full-time equivalent. Mr Woodward—We have at the moment about 4,400 actual people, including part-timers, on deck. Senator BISHOP—All right then. On page 38 of the annual report, there is a reference to a risk management report. Could I ask that that report be tabled? Mr Woodward—I am not sure we have it actually with us, but I can certainly make it available to the committee. Senator BISHOP—Okay then. Can the minister confirm that the surveillance equipment, including closed circuit television and backscatter X-ray machines, will be bought with the additional $25.7 million over the next three years? Is that part of the plans for those moneys? Senator Parer—Mr Woodward can answer that. Mr Woodward—The budget a couple of years ago provided about $26.8 million as a new technology program. I think that two budgets ago, the government agreed to $26.8 million additional for new technology. The new technology that we envisaged included closed circuit televisions in our various ports. We are developing a program which will extend the small number that we currently have. It would also enable us to purchase more of some forms of technology that we currently have, such as the backscatter X-rays you mentioned, which we have in our airports and in some facilities, including in the postal area. We will also get into newer technologies: ion scan devices which are used in relation to drug detection and some devices which we will be using to detect drugs under water attached to vessels—in other words, marine devices. There are some other newer technologies emerging from North America and Europe which we will be looking at as well. We are doing it on a very close cooperative basis with other organisations. Senator BISHOP—Does that constantly purchasing new technology for your operations derive from the budget figures that you announced two years ago or is that part and parcel of this new decision recently announced by the Prime Minister? Mr Woodward—The $26.8 million—I think that is the correct figure—was announced two budgets ago. It was not the last budget, it was the budget before. We have always put money into technology so that is in addition to the money we have been putting into technology. The recent illicit drugs strategy did involve a number of assets that would be bought, including quite sophisticated communications technology which will link the computing systems of the National Crime Authority, the AFP, ourselves and some communications facilities which will be put up in the Torres Strait. That money is in addition to the $26.8 million that I mentioned earlier. Senator BISHOP—Can you quantify that amount? Mr Woodward—Yes, I can. Can I come back to that in a second? I have it in the papers here. Senator BISHOP—Yes. Mr Woodward—The actual total amount, if I can divide it into the Torres Strait initiatives, cargo initiatives, communications and IT and customs analysts, during this financial year would be $3.668 million. Of that, $477,000 relates to the Torres Strait initiatives; $1.6 million is for cargo initiatives—that is profiling and a new covert cargo examination facility which we will

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 747 be putting up; communications and IT, which would be between ourselves, the AFP and NCA, is $1.271 million; and the new intelligence analysts would be $250,000. There are a succession of figures over each of the years. If you want them, we can give them to you or make them available. Senator BISHOP—You can provide them on notice. Mr Woodward—We can make that available. Senator BISHOP—Turning to the new Wauri vessel purchased in September 1996, can you provide the details of the dimensions of that vessel and what speed the vessel can travel at? Mr Woodward—I am not sure whether there is anyone here who has that. Senator BISHOP—On notice is fine for that. Mr Woodward—Sure. It is about 34 metres and can do something like 24 knots. I have actually been on it. They have given me the answer, but I have forgotten it. Senator BISHOP—Could you check that and provide it in due course? Mr Woodward—Yes. Senator BISHOP—Can the minister table any of the reports by the quality improvement team provided by the Customs automation help desk? Mr Woodward—We can certainly provide that. I can give you one piece of information. Under our new approach to quality, we have been encouraging quality improvement teams, which are groups of workplace members at various levels—from the very bottom to more senior people—to get together to work out how they can improve the way in which they do their work. We have encouraged areas throughout Customs to do it. One small group of five or six people, the sea cargo automation help desk in Sydney, got together and developed a program to reduce the pressures which were coming in, particularly from brokers and forwarders, but also from importers. We were getting up to 2,000 to 2,500 calls a week, which was putting great demands on us. They came up with a revised approach which we thought was so good that we entered it in a quality contest. That team then proceeded to win the New South Wales open award. It has won the Australian award and this month will be competing in an international contest in Singapore against the private sector and the public sector. So we would certainly be proud to give you a copy of all of the information we have on that. Senator BISHOP—Thank you. Mr Woodward, I am informed that the international passenger processing times are increasing and significantly longer compared to other ports in the port of Adelaide. Can you, firstly, confirm that, and, secondly, offer an explanation? Mr Woodward—About passenger processing times at the Adelaide airport? Senator BISHOP—Yes. Mr Woodward—I cannot give it to you offhand. I am not sure whether anyone else here has the information. There are not a large number of flights going through Adelaide. If you had made the same comment in relation to Sydney, I would not have been quite as surprised. I do not know whether it is a fact. Senator BISHOP—Could you have your department check that? Mr Woodward—Yes, I certainly will. Senator BISHOP—If it is a fact, could you offer an explanation on those? Mr Woodward—Yes, I will.

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Senator BISHOP—Could you do the same for Darwin? Mr Woodward—Once again, I do not know whether that is a fact. We will check it out and we will certainly give you that information as well. Senator BISHOP—Thank you, Mr Woodward. Have there been any extra resources allocated to the advance passenger clearance due to the increase in the utilisation of the program by international airline passengers? Mr Woodward—Additional resources? Senator BISHOP—Yes. Mr Woodward—I was going to use the analogy that it is a ‘when are you going to stop beating your mother’ question. We are encouraging the airlines to take up advance passenger clearance. At the moment, I think the figure is about 18 per cent of incoming passengers. Certainly Sydney use the advance passenger clearance system because that means we can process people in about 30 seconds compared with about 55 seconds for a normal passenger. Our aim is to put far more in the way of effort and capacity into advance passenger clearance, but what we are doing is diverting staff from the normal processing into advance passenger clearance. As the percentage goes up— Senator BISHOP—You shift staff over. Mr Woodward—We divert staff from there. There are more resources going in. Senator BISHOP—So there is diversion of resources over time as demand increases. Mr Woodward—Yes. Senator BISHOP—Fine. Mr Woodward, are there any documents and information held by the electronic travel authority accessible to other overseas agencies of a similar nature, or is that information limited to this country? Mr Woodward—Electronic travel authorities are a responsibility of the Department of Immigration. I think that question would need to be directed to them Senator BISHOP—Mr Woodward, can you tell us the average amount of staff deployed on a surveillance exercise? Is it just different for each exercise? Mr Woodward—Once again, that is a very difficult question to answer. We have surveillance teams. We have not made public just what capacity and resources we actually have in surveillance. We do work very closely with the Australian Federal Police, National Crime Authority and some of the state police forces, where we share surveillance capacity. There may be a particular exercise we are conducting where we seek assistance from other agencies. It could be the reverse where we provide capacity to them. I would need to think about whether it would be appropriate in a public forum to reveal any more in relation to our surveillance capacities. Can I take that question on notice? Senator BISHOP—You might take that on notice then. Mr Woodward—Yes. Senator BISHOP—Can you tell us the cost of developing the passenger analysis clearance and evaluation system? Mr Woodward—The contract price is $5.4 million. It has been awarded to EDS and is underway now. Senator BISHOP—Was that awarded on a competitive contract basis? Mr Woodward—Yes.

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Senator BISHOP—How many contractors applied? Mr Woodward—There is probably someone here who can give me the answer to that roughly. The answer is nine. Senator BISHOP—How, where and who is responsible for the destruction of drugs that are seized by your officers in the various ports? Mr Woodward—The processes are that as soon as we have reason to believe that an object that we find is a drug—and we have basic analytical tools—the Australian Federal Police are called in. The police then take responsibility for the custody of all of the material. The only exception that I can recall to that is the post, where the quantities involved are usually pretty small and can be minute. We have an arrangement with the Australian Federal Police. We keep them in a protected environment; they periodically call in and collect them. The drugs are destroyed at the end of the day. That is not a Customs responsibility; that is all the responsibility of the AFP. Senator BISHOP—Once the drugs are handed over to the AFP, is that the end of your responsibility for those drugs you formerly had in your possession? Mr Woodward—In a physical sense it is the end of the responsibility but it could well be there are court cases where our officers are required to give evidence. Senator BISHOP—Does the agency intend to continue the detector dog breeding program? Mr Woodward—We certainly are intending to continue the program. Not only are we wanting to continue it, we actually have a breeding facility and a scientifically endorsed breeding program that has got international interest. Some of the dogs coming through the breeding program have in fact been sought by a number of international customs and other agencies. Some of them are being used in an explosive environment. We have no intention of cutting back on the drug detector dog program. Senator BISHOP—Is that operated on a cost recovery basis? Mr Woodward—No. Senator BISHOP—Is there any cost recovery in that? Mr Woodward—No. The only element of cost that is involved is that we do train some handlers—and we provide the dogs—from some overseas services. It is a possibility that those that can afford to pay may well pay for that. Some come through aid processes and there is certainly no intention to cover the cost of those. If we, for example, provide our handlers and dogs to a state service for a major exercise that they are involved in, or, say, to the ACT, we do it on a free of charge basis on the basis that the states will reciprocate in providing assistance to us. Senator WATSON—Can I come to the dumping of paper issue, which I think we concluded on the other day. I notice Mr Harrison is not with us today. Have we got a person? Mr Woodward—In a sense we have upgraded the stakes, Senator. We have the chief executive officer and the deputy chief executive officer. The reason Mr Harrison is not here, but Mr O’Connor is, is as was explained last time—we have to take a major decision today on Australian paper. We cannot be doing the final work on that, which has to be done back in the office and here at the same time, so we split our forces and Mark Harrison is working on that back in the office and we are here to do the best we can to answer your questions. Senator WATSON—From that response, I gather a decision has not yet been made? Mr Woodward—A decision has not yet been taken.

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Senator WATSON—Do you still expect a decision to be made today? Mr Woodward—Yes. Senator WATSON—Thank you. There is some concern, reading some of the— Senator GEORGE CAMPBELL—When will that decision be available to the interested parties? Mr Woodward—The decision will be made today. The interested parties will then be told of the decision. At the moment we have a team of people still very busy back in the office working to take the decision. Senator GEORGE CAMPBELL—I understand. Are you saying they will be told of that decision today? Mr Woodward—Very late today would be the answer. Senator WATSON—Who is going to make this final decision? From the paperwork, it appears that in the past it has been made by the delegate. I have some concerns about that. Shouldn’t it be a more senior person, such as the national manager on dumping or even you, Mr Woodward? Mr Woodward—The national manager on dumping is Mark Harrison, who is back in the office. He will be taking the decision. Senator WATSON—And not the delegate? Mr Woodward—He is my delegate. Senator WATSON—There is a delegate evidently under Mr Harrison, isn’t there? Mr Woodward—There is a range of delegates. We have a system of delegations where a number of people can exercise delegations. Mr Harrison is a delegate. There are other delegates. We decide internally as to who is going to take a decision on any particular case. Senator WATSON—So it would be taken by a person no less than Mr Harrison or you? Mr Woodward—Yes. Senator WATSON—What is the progress of the Willett report in terms of dumping? That was a report commissioned by the government in relation to dumping. Mr Woodward—The stage we are at in relation to the Willett report is that there was a public announcement in, I think, December 1996 that the government had decided to refer the matter to the Productivity Commission. I am not aware of any government decision that has been announced that takes that, in any formal sense, any further, but I would have to defer to my colleagues from the industry department. Mr Wright—That is correct. The terms of reference are still a matter of discussion between ministers. Senator WATSON—How far away is the decision on that? Is it a matter of weeks, days or months? Mr Wright—It has been with ministers for some time. I do not know how much longer it will be. Senator WATSON—So you are waiting for a government response? Mr Wright—The draft terms of reference are with ministers for their consideration. This is for the IC report on anti-dumping.

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Senator WATSON—Obviously, if it is still at the terms of reference stage there is a long way to go. Mr Wright—Yes. Senator WATSON—When reading a detailed analysis of the examination of the 14 countries in relation to the problems with Australian Paper and alleged dumping, I noticed in quite a number of instances there was a high degree of lack of cooperation. What sort of coercive powers or adverse reports do you put in where you find that refusal to cooperate? Can that result in an adverse decision? Mr Drury—There are no coercive powers. I seem to recall that on Monday morning Mr Harrison answered a question and made that same disclaimer. The real consequence thereafter is that the pricing arrangements that are then visited on the overseas exporter are beyond the overseas exporter’s control. In other words, Customs goes and finds information from other sources. Once that information is put together and a finding is made, it may be inimical to the exporter. As a result, often the frustration or the resistance on the part of the overseas exporter might be at the margin. It is not all that often that they totally refuse to cooperate with Australian Customs. Senator WATSON—But in such an environment, that can lead to a situation where the alleged dumper is in a stronger position to refute your claims, and result in litigation and further delays in the final decision. It can result in further protracted decision making. Mr Drury—That might occur but, as I said, there are no coercive powers. We do not visit a company overseas with a warrant or with any authority other than what is provided for in our domestic legislation. Senator WATSON—It seems to me that if a company is dumping, or may be dumping, the logical course of action is for it to fail to cooperate, then it leads you on a wild goose chase, they have the detailed information and selectively bring it out in court action. Surely, it is a process that does not assist you or the Australian company that is the subject of dumping, because of the protracted nature of the arrangements where companies deliberately embark on a process of failure to cooperate. Mr Drury—It is a gamble for them, because Australian Customs could go to other sources and establish that there is, in fact, dumping and that the margins are perhaps higher than the company has gambled on by refusing to cooperate with us. Senator WATSON—But if you use other manufacturers and other merchants, using other companies’ costs, no two companies costs are the same. Mr Drury—That is correct, but that could still be adverse to us. Senator WATSON—That is the difficult position that you are placed in. Mr Drury—Yes. Senator WATSON—And I submit that there is an inherent weakness in the system so far as Australian companies are concerned and yourselves. Mr Woodward—Mr Chairman, can I just interrupt on this point? I understand what you are saying, Senator, but the difficulty that we have—and I listened to what was said on Monday—is that we can only operate within the law. If there is a problem with the system, then the law needs to be changed.

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Senator WATSON—The purpose of my questioning at the moment is to identify those areas which could be impeding successful pursuit of the customs claimed by yourselves, because of deficiencies or inadequacies in the law. That is the purpose of my questioning. In determining the cost to make and sell, do you always include interest and other charges relating to debt servicing? It is quite obvious that some companies are very highly geared, where interest costs are a major component of their operations and structures. There is suggestion in one or two cases that interest and other things were not taken into account. If not, why not? Mr O’Connor—Certainly, interest and financing charges and the like are considered as part of the analysis of the cost to make and sell the goods. That is what we are trying to identify. Senator WATSON—The interest is? Mr O’Connor—It is a requirement that we address financing charges and the like as part of the cost to the make and sell analysis. As to the second part of the question, I am not familiar with all of the details of the 22-odd reports that were prepared in relation to the case to which you have referred, and I cannot comment on that. Senator WATSON—I refer you to the situation in Germany in relation to, firstly, Hannover Paper. They were reluctant to cooperate, and they actually threatened Customs with legal action. Is that true? Mr O’Connor—I am not aware of that threat, Senator. Senator WATSON—Could you take that on notice? Mr O’Connor—We will. Senator WATSON—Also in relation to Germany, it is reported that Nordland (UPM- Kymmene) and Stora Fine Paper AB generally withheld information; that only limited verification occurred; only standard costs to make and sell were provided, not actual; that interest and other charges relating to debt services were not included in the cost to make and sell; and also that they were quite uncooperative. To make matters worse, the mill was not visited and the verification was done from a Swedish location. In terms of the outcome, I hope some of the matters that have been raised today will be taken into consideration. Mr Woodward—An essential element of the process, as was explained on Monday, is that we do have a public file system. There have been numerous occasions when either Australian Paper representatives, or consultants associated with it, have sought access to the file, have been given it and, in fact, have been given the opportunity to discuss and debate some of the issues that have been raised. I am not sure whether you are aware, for example, that the managing director and one of his senior officers actually called on me about a week ago to talk about the issue. What I am saying is that Australian Paper has been given every opportunity in the process to look at the material which has come in. They come in from a vast number of countries and a vast number of individual firms. Our responsibility is to favour neither one nor the other. Our role in relation to dumping is not one of having a predisposition to protect Australian industry. That is not written into the law. We are required to do what is required of us. What we then do is put material on the file and, as was explained to you towards the end of Monday, some material which will have come in, perhaps over the last few days, we will be unable to take into account in the decision that will be taken today. It will be on the file, and the Dumping Authority will be able to take that into account in the event of a negative preliminary finding in any part of the process. If that would have been influential in the

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 753 judgment that at the end of the day will be exercised, the ADA will undoubtedly reverse our findings. Senator WATSON—In relation to the question that I asked, can you confirm that interest and other charges relating to debt servicing were not included? If that is the case, do you impute a figure for such a—? Mr Woodward—One of the difficulties that I guess I was trying to get across was that the experts on Australian Paper—Mr O’Connor is not the expert on it—are actually working on the case today. I will take that question on notice and I will provide you with the answer. The people who are trying to resolve the case are the people who could probably answer the question for you. I will take it on notice and get back to you. Senator WATSON—It hinders us a little bit in terms of the questions that we can ask if the people with the relevant day-to-day knowledge are not here. I suppose that is unfortunate. In relation to the Austrian situation with KNP Leykam, we found that there is a positive dumping recommendation arising from the visit report, but it was reversed by the delegate. Does that happen very often? If so, why was that reversed? What were the factors that led to the reversal? That is why I am concerned about the role of some of these delegates. Mr O’Connor—I will respond to that question, and I will also come back and address the issue of the significance of the cost to make and sell in the process, because that may address some of the concerns that I think the committee may hold in relation to some of our procedures. An investigation team is sent overseas in response to a detailed submission submitted by an exporter. The purpose of that visit is to verify the information in the submission and to gather additional information. The report that comes out of that verification visit is merely a recommendation from the investigation team to the delegate as to the appropriate method that should be applied to determine normal value. It is not viewed as a final decision or a decision which is anyway set in concrete, to use that phrase. It is not unusual for recommendations contained within verification visit reports, to be not accepted by the delegate. The reason for that is that it is often the case that information comes to light subsequent to the visit report, or information already exists in Customs files, which it has obtained from other sources, which makes it inappropriate to accept the recommendation from the verification visit team. The purpose of the visit report is not to establish for all time a method by which normal value is to be determined. It is merely to provide guidance to the delegate, based upon the view of the investigation team on the information before them. It does not take into account the totality of the information which is in Customs’ hands. Senator WATSON—That might be true but, after all, there was a positive dumping recommendation arising from the visit. It was reversed by the delegate, and in the environment in which the delegate reversed his decision there was reluctance by the company to cooperate. The company refused to provide the make and sell costs or third party export prices. It did not provide Customs with the information required. With that background, I raise legitimate questions about the role of the delegate where he actually overruled the decision. I would like you to give me on notice—because obviously you cannot provide the information now—the reasons why the delegate overruled the decision, in those extenuating circumstances, given all that surrounding information. It does not look

ECONOMICS E 754 SENATE—Legislation Thursday, 20 November 1997 particularly good to senators and members, particularly those of us who have constituents working for companies that are affected. Mr Woodward—I think Mr O’Connor might have a couple of points to make on that, but can I make one point. You used the words ‘preliminary finding’. There is no preliminary finding yet. Customs has not yet arrived at a preliminary finding. It will be arrived at today. What has been provided to the company and to others is what I would describe as—and I am sure there is a much more technical term—tentative conclusions. Our job is to come up with a preliminary finding. We have not yet arrived at one. Senator WATSON—With reference to the positive dumping recommendation in the preliminary report and the authority of the delegate, I would still like the question of how and why that occurred to be taken on notice. Mr Woodward—We will certainly do that after the preliminary finding has been handed down. Senator WATSON—Thank you. Mr O’Connor—I have some comments in relation to the significance of the cost to make and sell. You referred a moment ago to the extenuating circumstances in the context of non- provision of information regarding cost to make and sell and third country sales. Senator WATSON—That is right. Mr O’Connor—The non-provision of those details is not necessarily viewed as extenuating circumstances. It is not uncommon for exporters to choose not to provide such information. The reason for that is that the WTO agreement specifies that the starting point for a normal value determination is to be an examination of domestic selling prices. Our legislation mirrors that requirement. Dumping is defined under the agreement and our legislation as the difference between a normal value and an export price. Exporters may choose not to provide all the information we request because they believe that their domestic selling price when compared to an export price does not generate a margin. Alternatively, they may consider that their cost to make and sell information is so confidential that they are reluctant to provide it to government officials—this is in an environment when if such information were provided to officials from their own governments, they could not be satisfied as to its security. Senator WATSON—I accept that as an academic answer. However, coming back to the actual environment in which your officers were placed, the domestic sales that you referred to in your answer were not at arm’s length in this particular case and therefore I submit that they could not be used to determine normal values. So, again, I would like you to take that into account in preparing your report. CHAIR—Thank you, Senator Watson. Before we return to Senator Bishop’s interrupted line of questioning, I understand that Senator Murphy has a few questions. Senator MURPHY—I would just like to ask whether you could provide me with a written report of the process you used to obtain the normal value reports that related to all of the companies under the application of Australian Paper. I would like to know in that what they did when they visited each of the companies concerned—what they actually did—whether they visited the actual production lines of those companies; how long they spent there, and what questions they asked— CHAIR—Just before the question is answered, Mr Woodward, Senator Watson—

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Senator MURPHY—You can do that after you give the preliminary finding, I understand. CHAIR—No. I am concerned that Senator Watson has asked for a written report and you are now asking for written reports. I was nearly going to say something to Senator Watson on the same issue. The object of estimates is to provide answers to questions. I am not sure that it is the responsibility of estimates to ask for written reports. I think that if there is a question asked, certainly get an answer to a question, but to ask for a written report to the estimates committee is something I would have to take some advice on because I think that that is perhaps going beyond the boundaries of questioning programs or annual reports. I know what you are after and I am quite happy about that, but a written report can be— Senator MURPHY—The reason I am asking for a written report, rather than sitting here asking a heap of questions is that I am just trying to ask one question and they can provide a whole host of answers and I can save your time and, hopefully, that of the officers. CHAIR—I will let Mr Woodward answer it, but I am just concerned at the process—as it affects Senator Watson as well as he said he wanted to read the report. Senator MURPHY—Mr Chairman, just before you do, if Senator Watson has asked for some written material, then I do not mind if they include the information I am asking for in with Senator Watson’s— CHAIR—It all comes to the committee anyway. Mr Woodward—On the specific question that was asked—and I have got one caveat on this which was the point you were making at the end—much of the material that you are seeking, if not all, is on the public file.I do not know how many files there are, but there are hundreds of pages of documents publicly available. I do not know what the normal processes are. Does the secretariat to the committee have access to the public file, or do we simply pull it together and provide it to the committee? But where I do hesitate is where you were talking about raising the issue of the questions that we asked in the process. I would have some reservations about detailing the questions that are asked of our officers in 23 companies throughout the world, some aimed at eliciting confidential information. I would draw the line at that, I think. Senator MURPHY—I would like to know the time, if you like, that was spent, whether it was a day, two days, three days, or four days. Did they visit the mills? If so, how much time was spent at each production place? And then, if it is possible, you might outline the type of information that was required, what you sought and what was given. Mr Woodward—I leave it to you, Mr Chairman. CHAIR—Mr Woodward, the question has been put on notice and all questions on notice have to be cleared by the minister’s office anyway in the same way that in any questioning here a minister can intervene and answer. So I think the question is on notice and you will have to provide the answer to the question. Mr Woodward—We will do our best to provide the information— Senator MURPHY—I have a question with regard to whether Customs is of a view that it has sufficient resources to deal with these cases. Mr Woodward—It was a question that was asked on Monday as well and I think the answer that was given was pretty good. I cannot remember the precise words, but in effect this Australian Paper case has stretched our resources to the limits. We did it, and I have every reason to believe that it was done professionally. Every person in our dumping branch, every

ECONOMICS E 756 SENATE—Legislation Thursday, 20 November 1997 officer we have overseas—with the exception of two people—was involved in some way in dealing with the Australian Paper case. It was a massive case by our recent standards and it really stretched us. But I have no reason to believe that that would have resulted in an answer which I would regard as being unprofessionally reached. Senator MURPHY—I asked Mr Harrison who was here on Monday about the normal value reports—and if Senator Watson or somebody else has already asked this, fine. What if the delegate who may be here and may not have been part of the process of investigation, changes the finding in some cases? I would just like to get an outline. I think that Mr Harrison said that it might not have some application to the act. I am curious about how officers of Customs can go overseas and conduct an investigation and not necessarily conduct it in accordance with the relevant sections of the act. That is what Mr Harrison seemed to be inferring. Could you just give me some explanation of the process that takes place for the delegate to somehow make a different finding from the normal value report of the investigators overseas? You can take that on notice, if you like. CHAIR—Senator Watson has put a similar question on notice. If you can incorporate those issues in the one answer to the committee, I think that would serve the purpose. I am conscious of the time and I do not want to go over the same ground. Senator BISHOP—I want turn to the Prime Minister’s drug strategy. Mr Woodward—Just as you are answering those questions, could I correct one or two things that I mentioned to you before in response to your earlier questions, and provide one additional piece of information? CHAIR—Yes. Mr Woodward—I mentioned 58 staff for field substitution. It should have been 58 staff in relation to business franchise fees—that is the High Court decision that transferred responsibility to us. The second point you mentioned concerned page 38. You asked me for a copy of a report and I said that I would provide it. I will just read the words. It says, ‘A formal risk management process commenced.’It does not say that there has been a report. So if there has been no report, obviously, I cannot give you a copy of the report. The third point is that you asked for the dimensions of the Wauri. I have been told that it is a 26-metre vessel, and it has got a maximum speed of 26 knots. If there is any change in that, we will provide that information in writing. Senator BISHOP—Thank you, Mr Woodward. Turning now to the Prime Minister’s drug strategy, what role will the department play in that strategy to stop the importation of illegal drugs? Mr Woodward—I was a member of the Prime Minister’s task force, so we had a very heavy role in the task force processes. Senator BISHOP—But what will be the role of the department in the implementation? Mr Woodward—There are very significant aspects of the decision that flowed from the Prime Minister’s government decision on the task force report. Roughly half of the money, or about $43.8 million, I think, will find its way into control of the supply side of the equation, as distinct from demand and harm minimisation. There are a number of components of that which are solely the province of Customs. Just by way of example, we will be putting on more intelligence analysts, for which funding was

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 757 specifically provided. There will be seven more intelligence analysts. Customs has also been given quite specific responsibility in relation to the development of a profiling system for cargo—we will be starting with air cargo—and the development of a covert sea container examination facility that relates to that. They are just examples. But there are other examples. Communications and information technology are part of this where, in all probability, Customs will be appropriated the money—as it has to go somewhere—but the determination of priorities and the precise way in which it will be spent will be worked out between ourselves, the AFP, and the National Crime Authority. There will be a similar exercise in relation to the development of communications facilities in the Torres Strait. There are some other specific initiatives that will come to Customs which we will be driving. For example, four Torres Strait Islanders will be working on our vessels in the Torres Strait. We will get funding for that. We will also have funding to employ our representatives, if I can describe them as that, on at least the larger islands in the Torres Strait. So we are up to our ears in all that has to flow from the Prime Minister’s report, working very closely with all the relevant agencies. Senator BISHOP—Do you anticipate any particular problems in meeting the requirements of the drug strategy? Mr Woodward—Do you have any particular requirements in mind, Senator? Senator BISHOP—No. You just outlined a range of measures that you are going to implement—analysis, IT, equipment, staffing, resources and priorities up north in the Torres Strait. Are there other areas identified in the task force that as yet have not been given a priority in terms of implementation? Mr Woodward—The Prime Minister, in his announcement, and in the statement he made orally when it was launched, indicated that this is stage one and that there will be a second stage. I do not know what will be in the second stage. Obviously, Customs and any other agency involved in law enforcement can do more if it is given more in the way of resources but, frankly, we do not know what will come out of phase two. Senator BISHOP—In the Prime Minister’s announcement on 2 November he promised to increase the capacity of the Australian Customs Service cargo profiling system, the examination facilities in Sydney and the additional intelligence analysis that you referred to a moment ago. In dollar amounts, what sort of increase will this mean over the next three years? Mr Woodward—From memory, the profiling system and the cargo examination facility will result in the establishment cost of about $2½ million and ongoing costs of about half a million dollars. I have a complete listing of all the things we are going to spend money on. I can provide that separately if it is easier or I can read it out. Senator BISHOP—If you could provide that on notice to save time. Thank you, Mr Woodward. In 1996-97, compared to 1995-96, I think the annual report identified that there were only three more heroin seizures accounted for by your agency, yet the amount of heroin seized more than doubled. That obviously leads to a conclusion that the amount of heroin imported into Australia being trafficked is increasing dramatically. Is the department concerned about the lack of increase in the number of seizures of imported drugs in more recent times? Mr Woodward—There might be some people in the department who would be concerned.

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Senator BISHOP—Are you, Mr Woodward? Mr Woodward—No, I am not concerned. I was going to say that I think some of those who might be concerned who sometimes speak out publicly may not be enlightened. My view is that the number of seizures is a relevant statistic, but we have as many as something like 1,500 seizures out of the post each year. Some of those are minute. The difference in preventing the major drugs entering Australia going between 1,500 and 2,000 or between 1,500 and 1,000 is minuscule. My view is that the more relevant statistic and the one that we track more carefully is either the weight, or in some cases the quantity, of tablets or whatever. That is the thing that we ought to be looking at. At the end of the day, when you are looking at the final consumption, it is how much is getting through rather than how many individual items we stop. There are major aberrations. A couple of years ago we seized 120 kilos of heroin in Darwin. That has got a massive implication for the amount of heroin coming into Australia but it is counted as one, compared with a tiny little piece coming through the post. They are both the same. Senator BISHOP—In last week’s press there was a series of newspaper reports on the Prime Minister’s strategy and on drugs being imported into the northern part of our country. The Australian reported that Australia’s northern coastline is increasingly vulnerable to growing illicit drug manufacturing operations in Asia and the cannabis trade. Does the department have a comment on that? Is it a major concern in the northern part of the country? Mr Woodward—I guess all parts of Australia are of concern to us. Senator BISHOP—In terms of accessing of drugs. Mr Woodward—I understand what you mean. So far as the Torres Strait is concerned, I think that has been, as far as one could reasonably expect, dealt with in the Prime Minister’s announcement. I think there will be a major increase in law enforcement capabilities there. But the north of Australia covers a very significant area and a very significant area of our coastline. While there have been seizures all around the Australian coastline, there has been a trend towards major seizures taking place on the east coast of Australia. But there have been major seizures on the west coast, from Geraldton further north. I guess the worrying feature for us is the fact that, in a period of 10 days, from a virtual zero result in Adelaide—that may be overstating it—we have had a huge heroin seizure, a huge cannabis seizure and, more recently, a very large ephedrine seizure. The ephedrine could have produced something like 300 to 400 kilos of ecstasy. So in 10 days, from virtually nothing in the way of major seizures in Adelaide, we have had three major ones. The concern for us is the possibility that some of the groups that are involved in major importations have sensed that we are doing pretty well in some of the traditional areas and are moving to other areas. Our approach is to work with other agencies, develop better intelligence—we have established the linkages between at least a couple of those that occurred in Adelaide and the east coast—and be matching those who are trying to outwit us. Senator BISHOP—Mr Woodward, you have just told us that there are very recent major problems in the port of Adelaide. We know you have allocated significant extra staff in Darwin and the Torres Strait for stuff coming in via the coastal trade; we know that Sydney has been a major importation centre for heroin and a range of other drugs; you outlined continuing and developing problems on the west coast, north of Geraldton, and there seems to be a report in

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 759 the press almost every two or three months, these days, of very large seizures on the west coast. Is it fair to conclude that those involved in this business are, essentially, diversifying their ports of entry across nearly every port of Australia and that this is going to have huge resource and structure implications for your agency? Mr Woodward—So far as the diversification is concerned, clearly, I do not think it is just coincidence or luck so far as Adelaide is concerned. I think those who are involved in the trade have consciously targeted Adelaide, and there may well be targeting of some other ports. But what we have developed and are continuing to develop is an intelligence capability that is not restricted to looking at Sydney, Melbourne, Brisbane or any other particular port. The intelligence capabilities that we have are sophisticated and becoming more sophisticated. Indeed, it was through some of those intelligence capabilities that we actually picked up the possibility of a couple of the major seizures in Adelaide and in some of the other smaller ports. Any organised group will of course look at weaknesses in the Australian system. Our job is to be ahead of them and I think we are doing reasonably well. Senator BISHOP—I was not offering any criticism at this stage, Mr Woodward. I have personal knowledge that there are hundreds of miles along the west coast of Australia where there are no inhabitants at all. It is a lot of wasteland or beach land, whatever. There are no residents and very few persons travel through because the main roads are somewhat inland. Is that of concern to the department, as allowing drops of material all along that west coast, essentially anywhere north of Geraldton? Mr Woodward—It is not just that area. You have the same coastline problems through vast tracts of Australia. Senator BISHOP—There is significantly less population all along that northern part than, say, north of Sydney. Mr Woodward—Yes. What we have is a system that does not rely just on our staffing or on our intelligence capabilities or technology. What we have developed in recent years is also a relationship with the shipping, importing-exporting community, where they are our eyes and ears as well, and, secondly, a community based set of arrangements where we encourage the local community—a lot of work has been done recently in relation to Aboriginal communi- ties—to tell us if they see something unusual. There is a 1800 number that they ring. The fact that that is working is proven by a number of— Senator BISHOP—Is it working? Mr Woodward—It is working. We get the usual bogus calls, crank calls and all the rest of it, but every now and again we get a call through that that is a real goldmine for us. Through some of those arrangements we have had quite significant successes. So it is not just our own people or our systems; the community is working for as well. We are working much more closely with the state police forces, of course, and they are well spread out throughout those communities. Senator BISHOP—Has the department done a formal evaluation yet of those relatively new systems? Mr Woodward—I am not sure whether you would describe it as an evaluation in the normal performance evaluation arrangements, but there certainly would be information in relation to the product, the outcome, of that. I will see what I can do to make that available to you. There are some who are uneasy about having it being known that they may have been the source of information that led to someone’s arrest for a major—

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Senator BISHOP—Persons who informed, do you mean? Mr Woodward—Yes. So if there is any information I can give you on that, I will, but it would need to be pretty closely edited to ensure that we do not reveal information that might put anyone at risk. Senator BISHOP—It seems to me, without being greatly critical, that those surveillance mechanisms for hundreds of miles of sparsely populated coastline—I suppose, right up the west coast and across the top of the country—rely enormously on the goodwill of local populations, whether they be indigenous communities or otherwise. Is that a second-best strategy, in that it is essentially a ‘Dad’s Army’ of people you are relying upon to give you information, as opposed to on the ground, regular, trained personnel? Mr Woodward—I think you get different views from within Customs. My personal view is that it is not a ‘Dad’s Army’ arrangement. The view that I have formed from talking to some of these people myself, community people and some of those who work at seaports or in some of the coastal towns and villages, is that they are the people who really know what is going on. They can tell whether there are strangers in town. In fact, there was a major heroin seizure on the west coast where some of the locals reported to us that a couple of people had booked into a motel and had made some comments that did not seem to add up, and made a telephone call to us. As a result—I have forgotten the amount—we got something like nine or 10 kilos of heroin off that couple. We would never have got that information if we had had a huge staff there. We may or may not have got it, but the fact is we got an alert local person who thought there was something odd about it and was community-minded enough to make the phone call, so I do not regard that as a Dad’s Army type arrangement, no. Senator BISHOP—The agency is satisfied then that the current arrangements for surveillance of illegal drugs in those sparsely populated areas are adequate? Mr Woodward—Of course we can improve them and we need to improve them. I would never suggest that we have got the ultimate, but with our port surveillance—our CCTV facilities—we are developing a strategy which targets the high risk ports. We will be putting in closed circuit television, in all probability back to a centrally monitored, 24 hour a day, seven day a week operation, so that we can then bring local forces to bear if we need to. I think that there are perhaps some technological developments that will be coming on stream over the next few years that will help us. We are not the only ones with these problems. Others that we work closely with—the United States and Canada—have got similar problems. They in fact put more money than we do into technology and we keep close to them so that if they come up with something that will help us we will be spending something on that. Senator BISHOP—The Prime Minister last week advised the establishment of three, I think it was, fast reactor police teams to be based at that stage either on the east coast or in Sydney, that could be deployed relatively quickly to attack these problems of illegal drug importation. That decision to place them on the east coast has been the subject of some considerable criticism, obviously in Western Australia, but also in the parliament by a range of persons. Was that decision made on advice by the department? What was the rationale for it? Why is it apparently not appropriate to place those surveillance teams in other areas of the country where there are major problems, particularly on the west coast? Mr Woodward—These are the AFP response teams? Senator BISHOP—Yes.

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Mr Woodward—I am afraid that would be a question you would need to put to the AFP. I am not involved in that. Senator BISHOP—Did you have any input into that decision? Mr Woodward—No, I did not. Senator BISHOP—Did the task force strategy that you were on earlier consider it at all? Mr Woodward—The concept of teams was certainly considered as part of the task force. I cannot recall that the disposition was actually mentioned in the task force itself; there were a lot of subsidiary committees under way. I would have thought that that would be pretty largely an operational responsibility which would have been vested in the commissioner. Certainly, if it was Customs, I would have expected to take the decision. In this case I would have expected the commissioner to think through— Senator BISHOP—When you say ‘the commissioner,’ who do you mean? Mr Woodward—The Commissioner of the AFP, Mr Palmer. The only way to find out would be to ask him, I guess. Senator BISHOP—Wouldn’t it be reasonable to assume that Customs would have been consulted on those sorts of matters? You have considerable expertise in that area. Mr Woodward—No, I do not think that is unusual. I know what the outcome was, but I had no contribution to making that process and I am not surprised that I was not asked. I think it is a matter for the AFP. The commissioner is far better than me at saying how best he can run his groups. Senator BISHOP—We are not talking about the running— Mr Woodward—Or how he disposes them. He has to arrive at the best way of running his police force. As I say, in the same way, if those groups had been allocated to me I would have expected to take the decision. Senator BISHOP—But you had no input into the decision that made them allocate them to the AFP? Mr Woodward—I was not asked and I did not provide any information. Senator BISHOP—And you would not have expected to have been asked? Mr Woodward—I would not have expected to, no. Senator BISHOP—I want to turn now to some specific aspects of program 9.1, in particular with regard to spot checking of containers. How many occurred last year, what are the plans for this year, and what percentage of the total shipping volume does this equate to? Mr Woodward—There have been a number of questions asked in relation to searches of containers. It does produce difficulties for me because it is a concept that relates to the way in which Customs did business maybe 20 years ago or more. We do not do business that way any more. In fact, I was flipping over the 1985-86 annual report recently and I saw, even in that report of 12 years ago, that there was reference to the development of a risk management approach to the way in which we go about our business of detecting drugs and ensuring, at the same time, the fast movement of cargo and people through the border. What we do in fact is have systems in place that enable us to select those consignments— and I use the word consignments as distinct from containers—that are of interest to Customs. The computer systems are actually looking in some way. There are, for example, some postal items and items of mail which are not picked up in an individual sense, but anything of any

ECONOMICS E 762 SENATE—Legislation Thursday, 20 November 1997 size and significance is tracked through our computer systems. We have the ability, through our profiles which exist now, and which we are wanting to improve—they are not perfect—to pick out those things of interest to us, not just in relation to drugs, but where we believe there may be: commercial fraud; they have undervalued particular items; there may be pornographic material—a whole range of community protection issues. We do not look at how many sea containers because we simply do not believe it is relevant. It has been put to us a number of times, even if it is irrelevant: how many do you search? We do not keep that sort of record of sea containers, but my recollection is I think it was sea consignments as distinct from containers. Last year we looked at about 8½ thousand for the range of purposes that Customs looks at consignments, and it is not just for drugs. Senator BISHOP—Eight and a half thousand consignments for spot checking is a significant number, isn’t it? That is not a minor part of your work. Mr Woodward—Can I stress that it is not spot checking. We do not have a random system whereby we look at every hundred containers or every hundred consignments. We have information on all of the significant items that move across the border. We have systems into which profiles are built that trigger alerts in some way or other that say, ‘This is something that is out of the ordinary and we should look at it.’ The approach which was adopted in Customs many years ago of looking at every hundredth or every tenth, or whatever it is, basically produced little of any consequence. We have changed to a more intelligence-based system. Senator BISHOP—Going back to the drugs issue but away from the Prime Minister’s strategy, along the West Coast, do you break up the entire coast into parts that are relatively easy targets for drug importation and others that are more difficult, or is the entire coast regarded as relatively equal? Mr Woodward—No. We do not regard the whole coast as relatively equal. As I mentioned earlier in relation to our closed-circuit television coverage, which will be port by port, we are doing a risk analysis of all of the significant ports throughout Australia, and there are some that will be higher in the priority ranking than others. In fact, we did put more staff into the Pilbara area, over a period starting about 12 months ago, because we believed that there were risks that required more resources in that area. Senator BISHOP—Anecdotally, I would say that is quite correct. Has it proven to be the case? Mr Woodward—I am not sure that there have been any stunning successes since we increased the staff, but I would have to check on that. Senator BISHOP—Have you identified any other weak entry points, apart from the Pilbara, along the west coast? Mr Woodward—The work that has been done to conduct the risk analysis of each of the ports throughout Australia is still under way. It has not been completed. Undoubtedly there will be other weak points but, at the moment, I am not in a position to pass that on. Secondly, I am not sure I would want in a public way to say what our riskiest ports are, in any case. Senator BISHOP—When do you think that report will be concluded? Mr Woodward—I would need to check with my experts, because it is comprehensive: it is port by port. I think it would be over the next six to 12 months but, if there is any major variation in that, I will let you know in the written response.

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Senator BISHOP—Do you maintain figures on the percentage of illegal drug importation through the Western Australian borders? Mr Woodward—Percentage of what? Senator BISHOP—Illegal drug importation as a percentage of total. Mr Woodward—The proportion of illegal versus legal? Or the proportion that we actually get— Senator BISHOP—No, coming through Western Australian borders, as opposed to all others. Mr Woodward—There would be statistics of that kind. I personally do not have them with me, because I tend to focus on the aggregate, the year-on-year information and the major seizures. As I said before, some of the seizures are in fact relatively minor and, in the total scheme of things, not terribly useful for statistical purposes. If, for example, you are interested in number and weight in Western Australia versus the rest of Australia, I am sure we can provide that for you. Senator BISHOP—Thank you, Mr Woodward. Finally, with regard to illegal fishing vessels, how many have been seized this year, and what is the process when those vessels are seized? Is that within your area of activity? Mr Woodward—By ‘illegal fishing vessels’, do you mean a vessel arriving without appropriate clearance or duty payments, or do you mean one bringing in drugs or people? Senator BISHOP—No: vessels engaged in illegal activity, particularly with respect, firstly, to fishing and, secondly, to people. Mr Woodward—I am sure we have got information on Coastwatch, and that is a point that I omitted when I was talking about the range of coverage throughout Australia. Obviously, the Coastwatch facility is an integral part of that. We do have information on the number of sightings by our Coastwatch aircraft and on the number of those sightings that are reported back to our client agencies, being state fisheries, federal fisheries or whatever. We can construct something that might be useful to you. In the annual report which you were looking at before, I do not know whether this provides all the information, but it says that, during the year, ‘over 870 foreign fishing vessels were detected as possibly in breach of Australian fishing laws’ and that, at the request of AFMA, ‘Coastwatch coordinated the interception of almost 300 of these vessels and 130 were apprehended.’ Were you looking for more than that? This is on illegal fishing, of course. Senator BISHOP—Yes; on the issue of illegal immigrants. Mr Woodward—We will have a look and see. I know the drift of your question, and we will provide whatever information we can. Senator BISHOP—The drift of the question is the number of vessels seized relating to illegal fishing activities, and the number of persons detained coming down from northern parts in the past 12 months. Mr Woodward—Okay. We may have to interpret that a little. If necessary, we will talk to your office to make sure we have got it right. Senator BISHOP—Okay. I want to turn now to an article in the Sydney Morning Herald on 1 November, which had some criticisms of customs office numbers at Port Kembla. The report details cuts to Port Kembla in night patrols and office numbers over the past two budgets. Does the Prime Minister’s drug strategy remedy those concerns at Port Kembla?

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Mr Woodward—If the thrust of the question is whether we are going to put more staff into Port Kembla— Senator BISHOP—That is the thrust. Mr Woodward—Unless someone is prepared to give me a direction, the answer is no. The staffing numbers that we have in Port Kembla now were determined by me. They were determined, admittedly, following a fairly significant adjustment to our budget a year or two ago. But Port Kembla was not the only port where staffing adjustments took place. We actually closed nine district offices. We reduced our staff in the district offices by something like 30, including in some politically sensitive places. But the judgment that I have is that the resources that we have in Port Kembla at the moment are appropriate. They are certainly less than we had 12 or 18 months ago— Senator BISHOP—Significantly less, Mr Woodward? Mr Woodward—I suppose it depends very much on what you mean by ‘significantly’. Let me give you the numbers. At some time before 1985-86—the words used to me were ‘in the mid-1980s’—there were something like 26 people at Port Kembla. By 1985-86, the number had been reduced by 10 to 16. In 1995-96, there were 12, and there are now five people there. As I say, it is all relative, but I would have thought— Senator BISHOP—So it is a significant reduction over time. Mr Woodward—Yes: over the past 12 or 15 years, a reduction from 26 to five. Senator BISHOP—Is it true that Port Kembla does not have any officers on duty after 5 p.m. or on weekends? Mr Woodward—It is a fact that we have a five-day operation at Port Kembla. It is not a fact, when intelligence or other requirements determine it, that we do not have people working at night or at weekends. What we have in Port Kembla is the same as we have in many other ports throughout Australia: we assess the level of risk. The risk has been assessed in Port Kembla, based on what has actually been achieved—including as far as back as the point where we had 26 people, when there were virtually no significant seizures at all. The occasional bit of cannabis was seized, or the odd firearm; but, with 26 people, we were still seizing nothing in relation to the major drug problem that is confronting Australia. Unless there is some evidence put to me, apart from mere assertion, that there is a major problem there—and there has been some risk analysis work done recently by our intelligence people—I could not rate Port Kembla highly enough to put more resources there and take them out of somewhere else. The risk is not there. If we do get specific intelligence that suggests that we need to conduct an operation at Port Kembla at any hour of the night or at the weekend, firstly, we have an intelligence capability in Sydney that will detect it; and, secondly, we have 46 members of what we describe as a ‘fast team’, which is an action oriented team ranging from one to 46 in number, that could be deployed to handle a major exercise at Port Kembla. Our assessment of the risk at the moment is that it does not justify it. Obviously, if there is hard information provided to me that would suggest that I ought to reassess that, I would immediately reassess it. So far, what I have had is suggestions that we have reduced our staff and that we are not producing any results. But the fact is that we were not producing any results with 26, nor with 12. Senator BISHOP—You are essentially shifting your resources into intelligence gathering and intelligence analysis and, depending on the evaluation of that, you are allocating manpower

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 765 to particular problems in particular ports, as opposed to having an ongoing local presence, aren’t you? Is that the thrust of where you are going? Mr Woodward—What we have said is that we are going to put far more emphasis on intelligence and technology: the point we have discussed earlier. We have not said that we are going to pull out from our presence throughout Australia. We have something like 29 district offices, and some of those offices are absolutely critical to our work. Unless there were some major act or direction either taken or given to me, I would continue to have staff deployed in those offices where, on the basis of an assessment of risk, there is need for a presence. What I would not have is a presence merely because there are local pressures to have a presence. Senator BISHOP—Yes, I understand that. That concludes my questions on 9.1, Chair. Is it fair to go on to 9.2? CHAIR—Yes. [10.51 a.m.] Subprogram 9.2—Commercial services Senator BISHOP—I want to turn to page 68 of the annual report—in particular, to table 3.14 where there is reference to overpayment in the diesel fuel rebate scheme. How common is that issue of overpayment to individuals and in a broad budget sense? Mr Jeffery—The diesel fuel rebate scheme is a self-assessment scheme, and it has very specific activity criteria. It is not uncommon in audit or in reporting to find that there have been overclaims and underclaims. Adjustments are made either through recoveries or through a process which is known as set-offs, whereby a subsequent claim will be reduced by the amount of the previous claim. So it is not unusual. The recoveries here are normally in the areas where there has been action taken against a company and a penalty applied. But, because of the nature of self-assessment and the nature of the reporting, companies will say they have been over or under in a period and will report that to us. We will also find out that some have overclaimed. Senator BISHOP—The recoveries have increased from $41 million in 1994-95 up to $57 million in 1996-97, as shown at the top of table 3.14. There has also been an increase in the outlay side on the DFR scheme. Is that increase in recoveries and refunds consistent with the overall increase in outlays, or is it disproportionate? Mr Jeffery—My understanding is that those recoveries are not solely related to diesel fuel. They relate to recoveries as a result of compliance activities in a number of areas, some of which will be diesel fuel but others of which will include bounties and other commercial activities; and so I cannot specifically answer that question. I can have a look at diesel fuel, if you wish. Senator BISHOP—Could you disaggregate diesel fuel to answer the question? Mr Jeffery—To the extent that it is possible, I will give you some information on that, Senator. Senator BISHOP—Presumably it is possible, because the table is— Mr Jeffery—It is possible out of this table, but it may not be representative because, as I say, we have got a process of set-offs which are not referred to here. Your question was whether the overclaim/underclaim consistent with the growth in the scheme. That is a different question from this table, Senator.

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Senator BISHOP—Is the issue of overpayments a problem under control, or is it a growing problem? Mr Jeffery—In diesel fuel? Senator BISHOP—Yes. Mr Jeffery—We believe it is an issue that is under control. We have not had very substantial overclaims. In our audit activities, we are detecting some areas of overclaim. They often relate to misunderstandings. At times, they will relate to issues where there are disagreements between ourselves and the claimants as to eligibility, and they are determined either in consultation or through the courts. We do not believe that it is a growing problem, but there are always areas where either there are disputes about eligibility or someone will have claimed more than they are entitled to—for a variety of reasons, some of which are quite innocent but others of which are not. Senator BISHOP—Okay. Ignoring those with administrative mess-ups or varying legitimate interpretations, is out-and-out fraud a significant issue in the DFR area? Mr Jeffery—Not in the totality of the outlays under DFRS, but it is an issue we are always conscious of; and the government addressed that issue in the recent amendments to the act to beef up audit and compliance requirements. But, in terms of the totality of the scheme, we have not had significant frauds of a high order. They have come and they have gone, but they are not a significant problem, I believe. Senator BISHOP—Have those amendments to the act been implemented as yet? Mr Jeffery—The eligibility amendments were enacted from August. The actual audit amendments take effect from 1 January. Senator BISHOP—Are you going through an education process with the audit amendments? Mr Jeffery—We are, Senator. Senator BISHOP—What is the feedback on that, to date? There was a lot of criticism at the time the bill was passed. Mr Jeffery—There was criticism in particular of one area of those amendments, which related to some perceptions about log books. That provision was actually amended so that log books are not mandatory. We are talking to peak bodies and to individuals to educate them on the nature of record keeping. We have recently published an introductory booklet and are in the process of distributing that to all claimants. It explains the new provisions. Our feedback at the moment is that people are reasonably satisfied. We will certainly have some questions as it is implemented; but, on the issue of log books, I think we have managed to satisfy most people, and there are alternative methods of complying with the legislation. Senator BISHOP—Thank you, Mr Jeffery. I have finished 9.2. CHAIR—Senator Bishop has indicated that he does have some other questions but, because of the time constraints that we are under, we have agreed that he may put the remainder of those on notice, if you are quite happy with that, and I will move to Senator George Campbell, who has some general industry policy questions. If the relevant officers are not here, we will call them when we need them, Mr Mazitelli. That concludes Customs, so Mr Woodward is free to go. Thank you.

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[10.58 p.m.] Program 1—Department of Industry, Science and Tourism Subprogram 1.5—Industry policy Senator GEORGE CAMPBELL—These questions are principally to the minister, but he may want the department to answer them. They relate to the automotive and TCF industries reports and the response of the government to them. When the Prime Minister announced the decisions on these issues, he said they would be implemented as part of a legislation package, including the tariff freeze and the export facilitation scheme as well as the import credit scheme. Has the package for the automotive industry been finalised? Mr Mazitelli—Mr Croker will look after that, Chairman. CHAIR—Did you hear the question, Mr Croker? Mr Croker—I did. The automotive package has not been finalised in its entirety. It is still in progress. Senator GEORGE CAMPBELL—How far advanced is it? Mr Croker—Well advanced in terms of consideration of an alternative to the EFS scheme to apply beyond the year 2000. But there are significant details still to be finalised. Senator GEORGE CAMPBELL—Can you give us any indication when it will be finalised? Mr Croker—We are hopeful that this calendar year will see the finalisation of the arrangements. But, of course, ministers need to consider those details. I am unable to speak about when there will be some announcement of the new arrangements. Senator GEORGE CAMPBELL—I understand that, but what I am really asking you is: how far advanced is the package? When will it be ready? Is it 90 per cent complete or 95 per cent complete? Is it at a stage where it is really waiting on the ministers to determine when the legislation is placed before the House or is it still in the hands of the department? Mr Croker—It is still in the hands of the department—and not just this department. As you would appreciate, Senator, there are other departments with a significant interest in this and other portfolios as well. Senator GEORGE CAMPBELL—Has the package for the TCF industry been finalised? Mr Evans—No. You would be aware that a decision was announced in September. It had quite a number of components in it, not only in an investment fund but also in areas such as the overseas assembly provision and technology development, et cetera. I would expect that we will have the details of the package finalised early in the new year. Senator GEORGE CAMPBELL—Has any of the legislation been prepared? Mr Evans—In parallel with the other work that is going, yes, the legislation has been prepared. Senator GEORGE CAMPBELL—So when you say that you expect to have it finalised next year, when next year? Early in the new year? Mr Evans—Early in the year, Senator. We have been having some discussions with industry. Those discussions will progress, and we intend to work through December and January on it. It really is a question of making sure that we are able to consult with all of the relevant people in that period.

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Senator GEORGE CAMPBELL—Has there been any discussions about when the legislation is likely to be introduced into the parliament? Has any time frame been set down? Mr Evans—No, there has been no time. The legislation is prepared. I think it is a package and we are looking at making sure that we cross all the t’s and dot all the i’s. Senator GEORGE CAMPBELL—Is that the same in respect to the auto industry package? Mr Croker—Yes, Senator, the same sort of time frame. Senator GEORGE CAMPBELL—Is there any likelihood of this legislation being introduced before the next election? Mr Croker—I cannot answer that question, Senator. Senator GEORGE CAMPBELL—Well, obviously there would be or the legislation would not have a major impact on when it can get into the parliament. Mr Evans—It would be our intention to have the legislation produced early next year, Senator. Senator GEORGE CAMPBELL—So are you saying that, as far as the department is concerned, you will have it at a stage of preparedness where it could be introduced in the autumn session, for example? Mr Evans—Yes, Senator. Senator GEORGE CAMPBELL—Could I please ask the minister, is there any chance that it will not be introduced before the next election? CHAIR—We do not know when the election is going to be, Senator Campbell. Senator Parer—I think that is sort of hypothetical. I think that is the plan, and that is all we can comment on at this stage, Senator. Senator GEORGE CAMPBELL—It is not a frivolous question. These are two very important industries. There is a lot of concern out there amongst the community about the implications of the government’s decision making for these industries. Obviously, there is concern to have the legislation introduced and effected as soon as possible. Senator Parer—I agree, Senator. All I can say to you is that I have no indication at all from the minister that that is not the intention. Senator GEORGE CAMPBELL—Has the government given priority to ensure that this legislation is introduced at the earliest possible date? Senator Parer—Senator, I will refer that to the minister. Obviously, one of the problems we have is, as you are aware, that when you introduce legislation these days in one session it cannot be debated in the Senate until the following session, unless it is given special leave to do so in the Senate. But I will refer that to the minister. CHAIR—Senator Cook was going to be here by 11 o’clock. I know he had some questions in the same area. If I could ask the officers to stay, because I think Senator Cook does have some questions, bearing in mind that we do have a finite finishing time. Senator Campbell has some questions on AusIndustry, and I would like to move to that now. We will conclude with these other officers as soon as we have finished AusIndustry.

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[11.06 a.m.] Subprogram 1.1—AusIndustry Senator GEORGE CAMPBELL—My questions relate mainly to the issue of the R&D tax concession scheme. It has now been more than a year since the R&D tax concession was cut from 150 per cent to 125 per cent. With the benefit of that time, does the department now believe that the tax concession will result in less R&D being carried out in Australia? Mr Dillon—Prima facie, if you cut government incentive schemes, you are likely to see some reduction in the gross amount of R&D. Our view is that the government has focused on the quality of R&D, so we are anticipating that the policy changes made over the past year will have increased the quality and the effectiveness of R&D that is undertaken by business in Australia. Senator GEORGE CAMPBELL—How do you measure the quality of R&D? Do you have a criteria for measuring what is quality and what is not quality? Mr Dillon—In particular, by removing bad policy. I am referring, in particular, to the syndication scheme. Senator GEORGE CAMPBELL—Are you saying that no quality R&D has come out of the syndication scheme? Mr Dillon—No, I am saying that there has been some good quality R&D in the R&D syndication scheme. I have given evidence on this on a number of occasions. In essence, the message I have put to this committee is that the R&D that has been encouraged by that scheme was very expensive. We were paying in excess of $1.30 in some cases to encourage $1 worth of R&D. In latter times there are increasing indications—monitoring of the existing syndication scheme—that syndicates are not moving towards commercialisation of the research at a level that we would have expected had the scheme been good policy. That has reinforced in our minds that the right decision was taken by the government over a year ago. Senator GEORGE CAMPBELL—I want to come back to the question of the syndication scheme because I have a series of questions for you in relation to that. I want to go back to the question of R&D in general and ask: how much has R&D fallen off since the reduction in the level of the tax concession? Have you been monitoring and measuring that? Mr Dillon—The answer to that question will not become available until next year. In fact, we answered a question on notice to Senator Harradine on this very point. Senator GEORGE CAMPBELL—You have to humour me. I am a new senator; I was not here for the last hearings. Mr Dillon—I understand. We will not get final returns in under the new rate until the end of this financial year for the bulk of most registrants. In the first half of next year we are expecting the first statistics to emerge on actual R&D undertaken under the revised rate. Senator GEORGE CAMPBELL—Can you provide me in writing with whatever data you have in relation to the number of companies claiming the R&D tax concession in 1996-97 as compared to 1995-96 and 1994-95 and the total value of the claims made under the concession in 1996-97, 1995-96 and 1994-95? Mr Dillon—We would be happy to. Senator GEORGE CAMPBELL—At this stage you do not even have a rough idea of how much it has dropped?

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Mr Dillon—You asked about monitoring. Senator Cook, at previous hearings of this committee, asked a similar question. I indicated to Senator Cook at the time that we did have some in-house work under way to survey company responses. Senator Cook asked me whether I could make that in-house work available to the committee. I said I would check with the minister’s office. I have done so. That work has basically been used for policy work of the government. It has cabinet-in-confidence status. I am not in a position to provide that material to the committee. Senator GEORGE CAMPBELL—The minister was reported as saying that the Australian private sector is failing to pay its research and development bill and that businesses in no way match the contribution from the public purse. This was in response to a question in the House on 17 November. Is this true? What data was the minister relying on? Mr Dillon—I have not seen the minister’s words, and I am not in a position to answer the question. Senator GEORGE CAMPBELL—At 3.3 of the Portfolio Budget Statements for Industry, Science and Tourism it says that, in 1994-95, 46 per cent of Australia’s R&D expenditure was undertaken by the private sector. Was that the data that the minister was relying on? Mr Dillon—I cannot put myself in the minister’s mind, so I just do not know. Senator GEORGE CAMPBELL—Do you want me to read to you what the minister said? Will that help you? Mr Dillon—It may do. Senator GEORGE CAMPBELL—He said: In response to the honourable member, it is quite clear the Australian government’s response to R&D is very strong. There is $3.5 billion spent or conceded by the government on research and development in Australia and we are very committed to it. On top of that, the spending that we directly put in through the CSIRO is a very significant contribution which teams up with the private sector. I cannot comment on the figure that you gave but I can assure you that the figures I have indicate that the federal government’s contribution to R&D far exceeds that of the private sector. Mr Dillon—You want me to now indicate what data he was— Senator GEORGE CAMPBELL—Do you agree with that statement? Mr Dillon—I think I would put it differently. Australia is in the top ranking internationally in terms of our public sector support for R&D. In terms of business expenditure on R&D, we are essentially middle ranking. I think that is how I would articulate the issue. Senator GEORGE CAMPBELL—But isn’t it the case that, in 1995-96, business expenditure on R&D significantly increased while the government’s spending was static? Mr Dillon—That may well be the case. Senator GEORGE CAMPBELL—You are not aware of that? Mr Dillon—I am aware that the trend has been, over the past decade, for an increase in business expenditure on R&D. Senator GEORGE CAMPBELL—Mr Allan Rocher said in the parliament on Monday that private sector expenditure in 1995-96 on R&D exceeded public expenditure by $700 million. Is that correct? Mr Dillon—That private sector expenditure exceeded public sector expenditure? Senator GEORGE CAMPBELL—By $700 million. Mr Dillon—Without knowing what components are involved, I really cannot comment.

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Senator GEORGE CAMPBELL—Are you aware of the level of business expenditure in 1996-97 on R&D? Mr Dillon—Yes, in broad terms, I am. Senator GEORGE CAMPBELL—Has it declined? Mr Dillon—You mean as against previous years? Senator GEORGE CAMPBELL—Yes. Mr Dillon—Business expenditure. My understanding is no, it has not. Senator GEORGE CAMPBELL—It hasn’t? Mr Dillon—No. Senator GEORGE CAMPBELL—Are you aware of the survey that was conducted by Deloitte Touche Tohmatsu analysing the consequences of reducing the R&D tax concession? Mr Dillon—I am aware that the firm did undertake a survey. Senator GEORGE CAMPBELL—Are you aware of its contents? Mr Dillon—I was at the time. I cannot recall the detail. Senator GEORGE CAMPBELL—Do you agree with its findings? Mr Dillon—I was very sceptical of the findings because I was not persuaded the methodology used was accurate or useful. Senator GEORGE CAMPBELL—Are you aware of the article that appeared in the Financial Review on 12 November written by Steve Lewis in respect to a letter signed by Mark Paterson, chief executive of the Australian Chamber of Commerce and Industry, to the Prime Minister warning of the slump in R&D? Mr Dillon—I am aware of that article. Senator GEORGE CAMPBELL—Do you agree with its contents? Mr Dillon—As I said earlier, we will not know the actual outcome in terms of the quantity of R&D expenditure by business until next year. The point I would make and remake is that the correct question to ask is: what is the quality of the R&D that this nation is undertaking? Senator GEORGE CAMPBELL—The clear indication in this article coming from major business associations is that R&D is in a slump and is going down. You are saying that the department is not aware of this trend; that you will not be able to measure it until next year. Mr Dillon—No, I am not saying that. Senator GEORGE CAMPBELL—Business is obviously very conscious of it because they have taken the time to write a letter to the Prime Minister. Mr Dillon—I am aware of the article. I am aware of the sentiments of business. We are monitoring the situation. Senator GEORGE CAMPBELL—I am asking: do you agree with the sentiments of the business community? Mr Dillon—It is not my role to make guesstimates as to what the likely outcomes will be. Prima facie, if you— Senator GEORGE CAMPBELL—I am not asking you to make guesstimates. I am asking whether or not you agree and whether there is any information available to you that would confirm the trends that business obviously assumes are occurring in respect to R&D.

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Mr Dillon—Prima facie, if you abolish a major scheme like R&D syndication and reduce the rate of the tax concession, if those schemes are working as they intended and encouraging R&D, you will see some flattening off in R&D. I would make the simultaneous point that you will also see an increase in the quality of the R&D being undertaken. Senator GEORGE CAMPBELL—Why would you assume that? Mr Dillon—Because growth in the quantity of dollars being spent on a lot of the R&D, that is inherent in the figures that you are basing your questions on, may not be leading to beneficial outcomes for the nation because it is poor quality R&D. Senator GEORGE CAMPBELL—But why do you assume it is poor quality R&D? You are talking about the syndication. Mr Dillon—Unless the R&D that is undertaken by business leads to commercialised outcomes, that money may as well not have been spent. The fundamental issue for public policy in this area is to see that business takes a focused approach to the issue, takes risky decisions to invest in innovation and carries through to the end of the process to commercialise the results of that R&D and increase the GNP of the nation. Senator GEORGE CAMPBELL—Are you suggesting that, if you set aside the syndication issue, all other R&D that is done automatically leads to commercialisation? Mr Dillon—No, Senator. I am suggesting that, if you set aside the syndication issue, the major growth in the amount of business R&D that has been undertaken over the last five or six years would not look as dramatic. It would be a much flatter curve. Senator GEORGE CAMPBELL—I understood you to say that, if you set aside the syndication, you get a substantial increase in the quality of the R&D performed. Mr Dillon—I did say that, Senator, because inherent in those syndication schemes were a proportion that were poor quality R&D. Senator GEORGE CAMPBELL—We may not all understand that and we will come back to that at a later point. In respect to the other R&D that is being conducted outside of the syndication, how do you measure the quality of the R&D being conducted there? Do you have a formal method of measurement? Mr Dillon—At the end of the day, the only measure is whether that R&D has been commercialised successfully. Senator GEORGE CAMPBELL—Do you have a measure of that? Mr Dillon—By looking at the companies that have received the government support and identifying whether they have commercialised products out of the projects that they have undertaken. Senator GEORGE CAMPBELL—Do you have any data to that effect? Mr Dillon—Data on that is very hard to come by. Senator GEORGE CAMPBELL—How do you then measure it? Mr Dillon—The problem is that there has not been a focus on commercialisation in terms of government policy up until very recent times. No-one has really been interested in measuring commercialisation. They have been far more interested in measuring the amounts of inputs, not the outcomes. I acknowledge that it will be important for us to develop measures of commercialisation.

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Senator GEORGE CAMPBELL—You made a very definitive statement saying the quality had increased. Mr Dillon—I would not say it was a definitive statement. It was a confident statement and my confidence is based on the fact that the government has removed a scheme which is basically very poor policy. Senator GEORGE CAMPBELL—So is it really an assumption? Mr Dillon—They are your words, not mine. I have seen enough information. Senator GEORGE CAMPBELL—I am really asking: is it an assumption on your part or do you have definitive data that backs that assumption up? Mr Dillon—I do not have the data, but I am not making an assumption. I have seen enough information in the course of my work on innovation policy to satisfy myself that the syndication scheme involved a degree of poor quality R&D. Senator GEORGE CAMPBELL—I am not talking about the syndication scheme at this stage. I am talking about the rest of it. Mr Dillon—My earlier statement though was based on syndication and the R&D tax concession. Unfortunately, that was the basis of my conclusion that there was poor quality R&D that is now not going to be supported by government. Senator GEORGE CAMPBELL—Has the department conducted any survey work of its own to ascertain the consequences of reducing the R&D tax concessions? Mr Dillon—Yes, as I indicated earlier we have undertaken some in-house work to ascertain what is happening with R&D. Senator GEORGE CAMPBELL—Can you tell us what the outcomes and the findings of that are? Mr Dillon—No, Senator, because the survey is basically being used in policy development and has cabinet-in-confidence status. Senator GEORGE CAMPBELL—Can you tell us what time elapsed between the decision to scrap the R&D syndication program and the start-up of its replacement program? Mr Dillon—I stand to be corrected, but I understand the decision was taken in May or June 1996 and the START program did not really get underway until December 1996. Senator GEORGE CAMPBELL—What impact did this have on the level of R&D being conducted and how many companies were affected? Mr Dillon—There were transition arrangements. This committee was involved in some quite extensive work and there were some retrospective provisions in the legislation. Although there was a large gap between the decision and the new program, there was much more of a transition than those two dates might appear to indicate. In particular, from memory, 22 X syndicates were funded under the START program and special provision was made for those X syndicates in the design of the program. Senator GEORGE CAMPBELL—Can you tell me off the top of your head what the impact was on the level of R&D being conducted? Mr Dillon—I cannot, Senator. I do not have that data at my fingertips. Senator GEORGE CAMPBELL—Can you take that on notice and supply us with the information?

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Mr Dillon—I would be happy to see what I can do. Let us be specific. We can provide data on the amount of R&D involved in those early rounds of START. What I cannot tell you, and what is essentially unknowable, is how many firms decided not to undertake R&D for whatever reason following the government’s decisions. Senator GEORGE CAMPBELL—Are you aware of the number of companies that are currently claiming the concession that are considering moving their research and development offshore? Mr Dillon—I do not have any knowledge of that issue. There is a lot of scope for strategic behaviour on R&D by firms and by the companies that service those firms to attempt to influence policy outcomes. One obvious way to do that is to claim that the government’s policy decisions will lead to firms locating R&D offshore. Senator GEORGE CAMPBELL—Are you telling me that no companies have indicated to you their intention to move offshore if the concession remains at 125 per cent? Mr Dillon—Not to me personally. In terms of whether companies have made such an assertion to the department, I am sure some have. But, as I say, I do not have any specific data. Senator GEORGE CAMPBELL—Could you advise us of the number? Can you take that on notice and provide that information? Mr Dillon—I could endeavour to. It could be quite an extensive piece of work because we would have to go back over a year’s correspondence from companies. I am not confident that we could, within reasonable workloads, pull out that data. Senator GEORGE CAMPBELL—I am not too sure what you mean by that. Is it that significant? Is it that extensive? Mr Dillon—The problem is— Senator GEORGE CAMPBELL—The statement you just made would tend to support the article in the Financial Review. Mr Dillon—No, what I am saying is that there might be five letters where companies claim that they will be moving R&D overseas, but they would be embedded in files with, potentially, thousands of letters. To read every one of those thousands of letters to find the five or 10 would be a massive task. Frankly, I do not believe the minister would authorise us to undertake that level of work. Senator GEORGE CAMPBELL—I am incredulous that your filing system is of such a nature that you would not keep information on the trends developing out of a significant policy change like this. CHAIR—Senator Campbell, could I suggest that it is possible for you to put that question on notice. The minister will decide whether the resources of the department should be used and determine how much time it would take to do it. For a number of years, there has always been ministerial approval as to the amount of time the department can spend on answers to questions on notice. But if you put it on notice, then a determination will be made. Senator GEORGE CAMPBELL—I understand. I have already put it on notice. I find it incredible that it could be the complicated administrative task that has been outlined by Mr Dillon. I might ask the obvious other question then. Are you aware of any companies who have moved their R&D offshore since the decision to reduce the concession?

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Mr Dillon—I am not aware of any companies that have moved offshore. I do not discount the possibility that some companies may have done so, but I am not aware of it. Senator GEORGE CAMPBELL—Can you advise us of the increase in costs incurred by the companies intending to claim the tax concession from changes in the Industry Research and Development Board procedures? Mr Dillon—Compliance costs are an issue for the tax concession, and I am aware of claims from the industry that they have increased. To answer this question would be attempting to measure something that is within the purview of companies themselves. Most companies seek technical advice from R&D advisers and choose to pay the extra concerned. Essentially, it is like decisions you and I take about whether to go to a tax adviser in terms of maximising our possible return. The short answer to your question is: ‘No, I am not aware of what the alleged increase in compliance cost is.’ Senator GEORGE CAMPBELL—You have no indication of what the average increase in costs to companies might be in terms of meeting the new compliance rules? Mr Dillon—I am aware that companies are claiming that there are increased compliance costs. When you make any change to complex legislation, there is no doubt that you do impose, at the very minimum, one-off costs. The point I would make is that the benefits normally significantly outweigh those costs. Those costs are obviously business expenses that are claimable in themselves. Senator GEORGE CAMPBELL—Are you aware of how many companies that have claimed the tax concessions in the past are no longer claiming the concession, despite continuing their R&D activities as a result of these increased costs? Mr Dillon—There is clearly always a turnover in the registrants. We have about 4,000 registrants at any one time, but I would suspect that 8,000 to 10,000 companies might claim it over any three-year or four-year period. I am not aware of any company that is actually saying, ‘The compliance costs outweigh the potential benefits and therefore we are not going to claim it.’ In essence, I would be very sceptical of such a claim. Senator GEORGE CAMPBELL—No companies have directly re-established yet? Mr Dillon—Not that I am aware of. Senator GEORGE CAMPBELL—They certainly indicated it in the Deloittes survey. Mr Dillon—As I indicated before, I am very sceptical of the methodology of that survey. I made the point about the logic of some strategic behaviour by industry advisers to put pressure on the government to amend policy in directions that they might like to see it go. Senator GEORGE CAMPBELL—Are you aware that the unduly restrictive eligibility and definitional provisions of the R&D concessions is preventing legitimate research activity? Is there any move to review or change these provisions? Mr Dillon—You have hit a sensitive spot there. Senator GEORGE CAMPBELL—I am glad I have done something. Mr Dillon—The definition of R&D is always a contentious issue. It is something that we look at on an ongoing basis. In essence, the spectrum of what might be entailed in R&D is something that can vary between reasonable people. If you are reasonable and I am reasonable, we might both— Senator GEORGE CAMPBELL—Be careful. The minister is very unreasonable.

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CHAIR—You are both being very reasonable. I have been trying to let as free a flow as possible without interrupting. Mr Dillon—But we might both disagree on what R&D entails. In essence, you need a definition. At the margins it is going to be arbitrary. We have fairly elaborate processes to decide whether R&D is within or outside the definition. In essence, the tax concession committee of the R&D board fulfils that role. That is not to say that the statutory definition is necessarily the best definition and could not be finetuned, not least because, although we think we know what it means, the courts over time decide that it might mean something different. Although the words stay the same, the actual meaning may change over time as courts take decisions on particular issues. That may then engender a need to finetune the definition. It is not much of an answer but, in essence, it is an issue that we have constantly under review. Senator GEORGE CAMPBELL—Let me put it in a different way. The claim made in the Financial Review article by those major business organisations said it was a major issue and it is hampering and restricting legitimate R&D activity. Given that those organisations represent the substantive section of Australian business, wouldn’t that in itself move you to review the provisions? Have there been any discussions with business about the nature of the eligibility provisions and the definitional provisions and about the areas that need change? Mr Dillon—As we assess particular applications, of course we discuss the definition with particular companies. There is always discussion at that level. In terms of macro policy, at the moment there are no formal discussions going on with business, but I do not discount that that might occur in the future. Senator GEORGE CAMPBELL—Given the claim that the businesses made in that article, wouldn’t the department itself take the initiative to contact those organisations and discuss the issue with them? Mr Dillon—I saw the article but I did not see the letter. It was not directed to the Minister for Industry, Science and Technology. Senator GEORGE CAMPBELL—I presume the journalist saw the letter. He quotes from it extensively. Mr Dillon—Well, he has a wider network than I have. Senator GEORGE CAMPBELL—But given the claim, wouldn’t that warrant you taking some action to talk to these organisations about the definitions about that issue? Mr Dillon—No, Senator. There are claims all the time in all directions. My professional concern in terms of my involvement in administering this legislation and this scheme is to protect the revenue. There are always people out there saying, ‘I’ve done R&D; this is R&D’, but when you look at it closely, you find that it is, in essence, product development or marketing or whatever, but not innovative testing of an idea. Senator GEORGE CAMPBELL—I understand the purpose of the scheme is actually to promote innovation by Australian industry to get new products, to get new innovation, to get jobs growth and to get new industries going. It is not just a question of protecting revenue. I understand the need to protect and ensure that the revenue is spent in accordance with the scheme. But I would have thought that the main objective of the scheme is about driving innovation. It is not the first time in another capacity that I have been contacted by government departments when something has appeared publicly and been asked why that statement has

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 777 been made or what the concerns are. It just seems to me that that is a major concern expressed by a group of major business organisations. It seems to me a bit odd that you would not be even contemplating taking any initiative to talk to them about some of those issues raised in the letter. Mr Dillon—Senator, I agree with you completely. The major focus of the scheme is to promote innovation. Every dollar that we save on activities that are not R&D is a dollar that we can direct to real R&D. So the effectiveness of the program does depend on protection of the revenue. Senator GEORGE CAMPBELL—Who is currently the chair of the R&D board? Mr Dillon—The chair of the R&D board is John Bertrand. Senator GEORGE CAMPBELL—I thought Mr Bertrand had stood aside. Mr Dillon—He has, but he is still formally the chair of the R&D board. Senator GEORGE CAMPBELL—Is there an acting chair of the board? Mr Dillon—There certainly is—Dr Terry Cutler. Senator GEORGE CAMPBELL—Is Mr Bertrand being paid a stipend as the chair of the R&D board? Mr Dillon—Yes, he is. Senator GEORGE CAMPBELL—Is Mr Cutler being paid a stipend as the acting chair of the R&D board? Mr Dillon—Yes, he is. Senator GEORGE CAMPBELL—So we have two chairs of the R&D board? Mr Dillon—No, you have a substantive chair and an acting chair. Senator GEORGE CAMPBELL—Why would we be paying a stipend for someone who stood aside? Mr Dillon—We are paying that stipend because the act and the remuneration arrangements under the act require that the chair be paid. Senator GEORGE CAMPBELL—Even during the period he stood aside as the chair? Mr Dillon—That is correct, Senator. Senator GEORGE CAMPBELL—I just move on to the issue of the syndication of R&D and ask: what are the implications of the termination of syndication of R&D through government legislative action in terms of the continuation of monitoring of current syndications? Mr Dillon—There are roughly 245 existing syndicates. I think they involve something like $3½ billion of R&D, by business and core technology valuations. There is a cost to revenue of $1.5 billion in those 245 syndicates. They are in place. Under the syndication arrangements, there are complex contractual arrangements put in place between investors, researchers and the government. There are commitments entered into to both undertake research and move that research towards commercialisation. So, in terms of our role in protecting the revenue that I mentioned earlier, we have an obligation to do our best to ensure that the obligations entered into by syndicates are complied with, and we have in place a monitoring scheme to facilitate that. Senator GEORGE CAMPBELL—What does that monitoring scheme consist of?

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Mr Dillon—It is based on some risk assessment criteria, and we have obligations on each of the syndicates to report to us I think quarterly. We monitor the syndicates through those two mechanisms. Senator GEORGE CAMPBELL—Given your statement about the tax exposure of the Commonwealth in respect of those syndicates, do you agree with Trevor Boucher’s statement of 10 November that it is in the interests of all Australians that syndicated R&D projects are completed as proposed and, where R&D is successful, every effort is made by the syndicate to exploit it commercially? Mr Dillon—Yes, Senator, I do. Senator GEORGE CAMPBELL—Do you agree with his assertion that some syndicates have brought onto the market innovative and commercially valuable products? Mr Dillon—Yes, Senator, I do. Senator GEORGE CAMPBELL—You were very sceptical of the whole scheme not so long ago. Mr Dillon—Because it is so expensive. At a previous committee hearing before you joined the Senate I made the point that this scheme is equivalent to buying a Holden sedan but paying the price of a Rolls Royce for it. No-one would do it if they were of sane mind. We are paying a $1.30 plus, or we were, to encourage people to do a dollar’s worth of R&D. It would be much better to pay them a dollar or to do the R&D yourself. That is the major basis of my concern with the scheme. Senator GEORGE CAMPBELL—So you are actually saying it should be reduced even further than where the government take it? Mr Dillon—The scheme no longer exists, and the syndicates that are in place cannot be unwound. So they are there, and all I say is the onus is on those syndicates and the government to attempt to get the best R&D result possible out of that scheme. Even though we have paid for a Rolls Royce, we still want to see the Holden on the road, working effectively. Senator GEORGE CAMPBELL—During the period that the scheme was in place, did the department at any time do an analysis of it or the benefits of the syndicates? If so, what were the conclusions? Mr Dillon—I understand there were a series of reports. They essentially pre-date my time in the department. Some were external and some were internal. The scheme at first was, I think, reviewed quite favourably but, as time went on and as the structured finance arrangements that are involved became more and more outrageous, it became more and more apparent that the scheme was, in essence, bad policy. A number of changes were made to the scheme over time to attempt to rein in the cost that was blowing out, but at the end of the day it became apparent that it was not possible to keep a step ahead of the structured finance specialists and so it was better to abolish the scheme. Senator GEORGE CAMPBELL—Have the syndicates been reviewed by the IR&D Board? Mr Dillon—Senator, the board keeps the existing syndicates, as I mentioned earlier, under a close eye. The TCC in particular has taken a strong interest. Trevor Boucher is the chair of that committee and, yes, the board does monitor them as well as it can.

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Senator GEORGE CAMPBELL—Can you tell us what steps have been taken in the course of the board monitoring? Have there been any specific steps taken as a result of that monitoring process? Mr Dillon—Each case is different, but all I can say is that there are a number of syndicates are under investigation, yes. Senator GEORGE CAMPBELL—So they are the only steps that have been taken? Mr Dillon—I outlined earlier, Senator, that there is a monitoring process that syndicates have to comply with—quarterly reports—and we have a risk based assessment process where we go in and look at particular syndicates in more detail based on the risk factors that we have identified. Senator GEORGE CAMPBELL—I understand that, but what I am really asking you is: what steps have been taken as a result of that view by the IR&D Board? You said that some syndicates were under investigation. Have you required some other syndicates to do certain things? Mr Dillon—I do not have detailed knowledge of particular cases, but I would expect that, yes, we have asked particular syndicates to do things, or to provide certain information, or to account for their activities in certain ways. Senator GEORGE CAMPBELL—Can you tell us how many of the syndicates provided business plans at the time of registration to ensure commercialisation of any successful results? Mr Dillon—No, Senator, I cannot tell you that at the moment. Presumably, the records would be on file. Senator GEORGE CAMPBELL—Can you take that on notice? Mr Dillon—Yes. Senator GEORGE CAMPBELL—In the twelve months before the syndication was abolished, was it harder to get finance schemes approved and if so, why? Mr Dillon—My understanding is that—and I would stand to be corrected by my colleague here—as the scheme went on, the IR&D Board and, in particular, the tax concession committee, became more and more concerned with the operation of the scheme. I think that there were a number of finance scheme guidelines—there were at least two versions adopted by the board—and a more rigorous approach was taken over time particularly as the schemes that were being thrown up to the TCC for approval, transmogrified and changed shape and became more complex and, in a sense, more risky. Senator GEORGE CAMPBELL—Do you have a list of the number of syndicates that, in your assessment, were purely tax driven? Mr Dillon—Senator, I think that that is an impossible question to answer because the reality is that tax considerations drove virtually all syndicates. That is not to say that there was not also a strong— Senator GEORGE CAMPBELL—It is probably also true in respect to the other elements of R&D, as well. Mr Dillon—To some extent, yes. CHAIR—I think that Mr Dillon has actually given the answer.

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Senator GEORGE CAMPBELL—It is being asked in a different way. Have you a list of those that, in your assessment, were purely tax driven, as opposed to those that did have a genuine R&D? CHAIR—Senator Campbell, I have been letting a free flow of questioning go on as long as possible, but I think that you are actually asking the officer to make a judgment on evidence that he may not even possibly have before him regarding whether a syndicate was tax driven, or whether it was research driven. While I am keen to let a free flow of questioning go on, I think that you are putting undue pressure on the officer in asking him to make a judgment on that sort of matter. Senator GEORGE CAMPBELL—I understood the officer to say, when I asked him a previous question, that the department did have a list. CHAIR—I did not get that impression. Mr Dillon—No, Senator. We have a list of all the syndicates, obviously, that we could go through. But the point I am making is that tax considerations are relevant to virtually all those syndicates and, as a consequence, to say which of them are purely tax driven is a question that is impossible to answer. Senator GEORGE CAMPBELL—Is there regulation of the technical review committee reports for accuracy and relevancy? Mr Constable—The technical review reports is a requirement by the board on registered syndicates to report quarterly on the R&D activities that are undertaken by the syndicate. As Mr Dillon indicated, this is one of the aspects of monitoring syndicates with compliance with their undertakings made at the time of registration. There is a pro forma for the way in which those reports should be provided to the board. The board has sought undertakings to be given by syndicate members to the accuracy and authenticity of those reports. I think your question asked whether there are regulations or regulation requirements. I presume that is what you are referring to. Senator GEORGE CAMPBELL—Yes. Also I suppose I am asking whether or not there is an assessment made of those reports with respect to their accuracy and relevancy. Mr Constable—Those reports are looked at when they are received. However, bearing in mind that there are over 200 active syndicates at the moment, which would be submitting those reports on a quarterly basis, means that we get something like 800 reports each year. It is not possible to look at each of those reports thoroughly. However, they are looked at for completeness and to see whether any obvious issues arise from them that need to be pursued with the individual syndicates concerned. Senator GEORGE CAMPBELL—But wouldn’t those reports be fairly critical in terms of making an assessment as to the legitimacy of those syndicates with respect to their R&D? Mr Constable—These are reports that are prepared by the syndicates themselves. Senator GEORGE CAMPBELL—Yes, I understand that. Mr Constable—So they are the views of the syndicate on the outcomes or the progress towards outcomes of the R&D. Senator GEORGE CAMPBELL—That does not answer my question. Aren’t these critical to making an assessment by the department of the legitimacy of the R&D work that is being carried out by these syndicates?

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Mr Constable—The aim is to see that the R&D that is being carried out complies with the R&D that was indicated by the syndicates they were going to take out when they were registered originally. I am not too sure of what you are getting at when you use the term ‘critical’. Senator GEORGE CAMPBELL—Mr Boucher seemed to think it was fairly important in terms of measuring the level to which those syndicates were making the commitments that they entered into when they applied for the concessions. Mr Constable—The concern that the tax concession committee and the board have is that because syndicate members have been loathe to sign off on these reports in the way that the board would like them to, the board feels that they cannot place the reliance on those reports that they would otherwise like to. Senator GEORGE CAMPBELL—Given that statement, what is occurring, either through the department or the board, in terms of what action you are taking where those syndicates are not providing reports or information that enables you to effectively assess the commitments that they entered into? Mr Constable—We have been following up with syndicates that have not been providing those reports to get them to provide those reports. Where they have been providing reports but not signing off on the reports in the way that the board has required, we have been returning those reports to syndicates, asking them to sign them off in the way that the board does require. We are currently also seeking legal advice on the actual powers of the board to enforce the providing of that information. Senator GEORGE CAMPBELL—Does that go to the extent of disallowance? Mr Constable—It could do. Senator GEORGE CAMPBELL—You are currently seeking legal advice on that? Mr Constable—That is correct. There is some dispute between the syndicate members and the board as to whether the board has the power to require the authentication that the board requires. We are seeking legal advice on that. Senator GEORGE CAMPBELL—Given the number of companies or syndicates involved and the degree of tax exposure there is to the Australian public, what is the level of concern? Is it with one or two syndicates, is it with 30 or is it with one-third? Mr Constable—Of the reports we have received, about one-quarter are complying with the board’s requirement and the balance are not. So in response to your question, yes, there is quite a high degree of concern. Senator GEORGE CAMPBELL—What urgency has been attached to looking at remedial measures? Mr Constable—Quite a bit of urgency because of the importance that the board attaches to this. As I have indicated, we have taken steps to seek legal advice on this to see what other action the board can pursue to ensure it gets the reports in the form that it wishes. Senator GEORGE CAMPBELL—When can we expect some outcomes? Mr Constable—It is a high priority in the compliance area. We will be expecting legal advice as soon as possible—hopefully within a week or two—so that we can then formulate letters to syndicates to require them to provide the information. We would certainly be hoping that before the end of this year we would be getting some action.

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Senator GEORGE CAMPBELL—Do you have any idea what the 75 per cent who are not complying would represent in terms of the total exposure? Mr Constable—No, I do not. Senator GEORGE CAMPBELL—Could you provide us with those figures? Mr Constable—Yes, we could certainly look into that. CHAIR—That concludes AusIndustry. Thank you, Mr Dillon and Mr Constable. We will move onto subprogram 1.2, Industry liaison. I would ask officers from subprogram 1.5 to come forward as well because I know that Senator Cook has some issues to raise with EFIC. [11.59 a.m.] Subprogram 1.2—Industry Liaison Senator COOK—I have some questions concerning EFIC. Does EFIC have any vacancies on its board at present? Mr Roberts—Yes, there are currently three vacancies on the EFIC board. Senator COOK—How long have there been three vacancies? Mr Roberts—There have been two vacancies for approximately two months and one for approximately three or four weeks. Senator COOK—I know that in the past there has always been a concern to ensure that the EFIC board has a spread of backgrounds for its directors which reflect the industry sectors that EFIC is active in. Without going to the individuals who have left the board, from which industry sectors were they drawn? Mr Roberts—Construction, mining and financial services, from memory. Senator COOK—Are there any members currently on the EFIC board who have backgrounds in those industry sectors? Mr Roberts—Financial services, yes; mining, I do not believe so; and I do not believe so with construction either. Senator COOK—Were the vacancies created by directors concluding their term of appointment and not being appointed? Mr Roberts—That is correct. Senator COOK—No-one resigned? Mr Roberts—No-one resigned. All terms expired. Senator COOK—So the government would have had notice as to knowing what the length of the term was and when these terms would have concluded? Mr Roberts—Yes, Senator. Senator COOK—How many other directors are there on the EFIC board? Mr Roberts—There is a total of 11, so that leaves a balance of eight. Senator COOK—Of the remaining eight, how many are from the private sector and how many are from the public sector? Mr Roberts—If you count the managing director of EFIC, Graeme Lawless, as a government member, the secretary to our department, the chairman of the Australian Trade Commission and the deputy secretary of the Department of Foreign Affairs and Trade, they would represent the government. The balance would be private sector.

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Senator COOK—Of the eight, four are from the public sector and four are from the private sector? Mr Roberts—Yes. Senator COOK—Is there a requirement, in the case of EFIC, that the number of private sector directors should be greater than the number of public sector directors? Mr Roberts—No, Senator. The only provision there in relation to the public sector is that there is to be a government member and also the chairperson of the Australian Trade Commission is to be on the board. Other than that, the balance is up to the minister to decide. Senator COOK—This is a body which trades in insuring in insurance among other things but is required to act commercially. Clearly, it is desirable to have people used to commercial activity—that is, private sector people on the board. Mr Roberts—Yes, that is true. There are a number of other considerations involved in the sort of business that EFIC does as well which could justify other representation. Senator COOK—Is there any reason why the board is being left, if I can use this term, undermanned for this length of time? Mr Roberts—There are difficulties in filling positions on boards. As a general comment, that is probably true. The EFIC board is no different in that regard. It sometimes takes a length of time that none of us like but it seems to be inevitable to get the people we want to be approached to accept and to get the appointment process completed. Senator COOK—I accept all of that. However, everyone knew when the terms of these directors would expire and, knowing those difficulties, could have taken action earlier so that there would be a continuity of directors. That would have been possible. Mr Roberts—That is something we try to achieve. It has not happened in this case. Senator COOK—Where is the hold-up? Is there a lack of people prepared to serve or is there some clog-up in the approval mechanism? Mr Roberts—I cannot comment on the first aspect. The approval mechanism, which you will probably remember from your days, can sometimes be quite drawn out. There is a number of processes to go through, and I think that is the case with the replacement members. Senator COOK—Is there an expectation then that there will be some appointments made shortly? Mr Roberts—Yes, I believe so. Senator COOK—You say that two vacancies have not been filled for two months and one for three to four weeks. During this time we have had what has become colloquially known as the Asian currency crisis. This would impact on considerations of EFIC. Mr Roberts—Yes, that is correct. Senator COOK—What has been the impact of the crisis on EFIC? Mr Roberts—There has been no substantial impact at this stage. EFIC has processes in place to monitor very carefully its exposures, and therefore the government’s exposures, to events all around the world. Those processes are working in relation to the Asian currency crisis as well. I believe I am correct in saying that there has been no substantial increase in claims or even overdues in relation to that crisis. Senator COOK—Are you saying then that in assessing country risk, when insurance was placed with EFIC by exporters, EFIC anticipated the crisis and modified its risk margins

ECONOMICS E 784 SENATE—Legislation Thursday, 20 November 1997 accordingly or have you always acted conservatively and can therefore absorb the sort of risk that is now more obvious than it was perhaps a couple of months back? Mr Roberts—EFIC has a process by which it monitors audits exposures and all markets on a continuing basis. I believe that EFIC anticipated the crisis to some extent in relation to Thailand. I think Thailand was assessed more than 12 months ago as being a market that needed watching. I think the processes have picked up other issues certainly as they have developed, if not beforehand. Senator COOK—Did you downgrade your country risk for Thailand in the expectation that there might be some weakening in its financial and property sectors? Mr Roberts—No, Senator. Thailand was downgraded on the basis of the economic fundamentals at the time. Senator COOK—Did that occur in the case of Indonesia? Mr Roberts—I do not believe so. Senator COOK—So that is unchanged? Mr Roberts—That is unchanged. Senator COOK—Even though it has put itself in the hands of the IMF? Mr Roberts—Yes. Senator COOK—Was any change made to the ratings of Malaysia? Mr Roberts—I do not believe so. Senator COOK—Its currency has fallen by over 30 per cent, but that did not mean that you have made any reassessment? Mr Roberts—Certainly EFIC would have made a significant reassessment but I do not believe that that has led to a downgrading of the country risk at this stage. Senator COOK—Does that mean that you always thought it was risky? Mr Roberts—I am not sure exactly where the country falls in EFIC’s list of six categories from A to F, A being the best, F being the worst, but it certainly would be in the area that the lay person would regard as risky. Senator COOK—Is your assessment of these economies able to be made public or is it private, for clients only? Mr Roberts—The board assessments would be confidential but country gradings are public information in that EFIC does tell its clients. This information is obviously out there in the marketplace. So to the extent that any downgradings happen, I can certainly provide information to you. Senator COOK—I would appreciate that. While we are on a roll, do you know whether any adjustment was made in the Philippines? Mr Roberts—I think my previous answer probably covers the Philippines as well. Senator COOK—The speculation in the press at the moment—in fact, I think the front page of this week’s Economist magazine covers it—is that the Republic of Korea is looking shaky. Have you had any reason to make a reassessment of Korea? Mr Roberts—I understand that Korea has been downgraded, both for short-term and medium-term risk. Senator COOK—To what extent has it been downgraded?

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Mr Roberts—Probably from category 2B to category C or 3. I am not exactly sure on that point. Senator COOK—I will not hold you to those figures. You say it would be category 2 to 3. Can you just explain to me what the significance of those categories might be? How would a lay person understand the meaning of those categories? Mr Roberts—It basically means that you have different pricing in terms of the risk that it would be accepting, depending on where on the scale of markets that particular market fell. If it was downgraded from two to three, you as an exporter would expect to pay more for your insurance cover to that particular market. Senator COOK—Has it become more risky? Mr Roberts—Yes, it has become more risky. Senator COOK—Do you have a way of describing this assigning a category to it? Is it low risk, medium risk or high risk? Do you have some sort of scale like that? Mr Roberts—It would be in the medium risk area. Senator COOK—What would category 2 be? Mr Roberts—Category 2 would be a reasonable risk. I am a bit uncomfortable with these lay terms. Senator COOK—I know; I appreciate that. I am trying to understand the significance of the categories. I am not wanting to attach any more importance to it than that. Is the Republic of Korea under continuing review or are you rested on this change? Mr Roberts—It would be under continuing review, as would any country that is obviously going through a financial crisis. Senator COOK—What reasons did you have for re-assessing the ROK’s risk levels? Mr Roberts—I cannot give you that detail; it would need to be provided by the EFIC senior economist. They would look at the debt levels of the companies that they happen to be dealing with, where their exposures lie and what currencies their exposures are denominated in, et cetera. I cannot give you more detail than that, I am sorry. Senator COOK—I just move to Japan. This week the government of Japan bailed out the eighth largest bank to the tune of $A86 billion. Have you had any reason to reassess the risk of Japan in any way? Mr Roberts—No, I do not believe so. I think it is probably fair to say that companies dealing with Japan or Japanese companies probably would not normally look for insurance cover. Senator COOK—Because it is regarded as blue chip basically? Mr Roberts—Basically. Senator COOK—So any reverberations in the Japanese finance or banking system is not yet registering on the scale? Mr Roberts—Not in relation to the sort of activities that EFIC does. Senator COOK—Has EFIC lost any senior staff in recent months? Mr Roberts—EFIC has a very high turnover of staff, given the sort of financial market activities it is engaged in. Yes, it loses staff and hires new staff on a continuing basis. Senator COOK—So that means yes, but it is a common feature?

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Mr Roberts—It means yes, but it is a common feature. Senator COOK—There has not been any unusual high staff turnover or loss of key officers? Mr Roberts—They have recently lost one of their three general managers from the finance and insurance side. To the extent that he is one of the four important people in the organisation, yes, you would call that an important loss. Senator COOK—Has that position been replaced or is it still vacant? Mr Roberts—I understand that it is still vacant. There are interim arrangements in place while EFIC looks at recruiting a replacement. Senator COOK—What is that position again? Mr Roberts—One of the three general manager positions. Senator COOK—Do you have any idea when that position will be filled? Mr Roberts—No, I do not. Senator COOK—Is EFIC preparing itself for privatisation? Mr Roberts—I might defer to my colleague, Mr Jim Wright, on that. Mr Wright—The short answer is, no. Senator COOK—It is not? Mr Wright—It is not, no. There is, as you know, a requirement to look at bodies like EFIC. They have had an internal review to look at their future role and those kinds of issues have come up, but at this stage I think it is a distant prospect at best. Senator COOK—It is a gleam in someone’s eye but it is not a practical issue for EFIC at the moment, is that what you are saying? Mr Wright—I think somebody may have thought of it as a possibility, but I do not think it is a practical possibility in the short term. Senator COOK—Has EFIC been chastised in any way for getting into business areas that are deemed by particular ministers not to be appropriate for it? Mr Wright—Not to my knowledge. Mr Roberts might have a broader one. Mr Roberts—No. Senator COOK—It has not been advised, for example by the minister for finance, that it should not participate in particular business activities? Mr Wright—No, it has not. The minister for finance as a general rule always has difficulties with the sort of activities that EFIC undertakes—all finance ministers. Mr Roberts—Finance ministers as a class? Mr Wright—As a class, and perhaps treasurers as well. Senator COOK—Are they uncomfortable with publicly owned commercial activity? Mr Roberts—They are uncomfortable with contingent liabilities. Senator COOK—Is that the area of concern? Mr Roberts—That has traditionally been their area of concern, yes. Senator COOK—Has EFIC experienced an increase in the number of inquiries about cover for export because of the currency turbulence in Asia or because of a general perception that the regional trading environment is less stable?

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Mr Roberts—I believe that is correct, yes, both from individual companies and also from Australian financial institutions such as banks who may be looking at the amount of exposure they are willing to take in those countries. Senator COOK—EFIC could be a collateral beneficiary of the currency difficulties and economic problems of this region? Mr Roberts—I would say rather it demonstrates EFIC’s value to the export community. Senator COOK—But we could expect a better surplus from EFIC because of heightened activity due to the uncertainty this year? Mr Roberts—There are a lot of factors which lead at the end of the year to a surplus or not. It depends on the risks taken and individual transactions, so it is hard to extrapolate. Senator COOK—How much did the government recover from EFIC for consolidated revenue purposes or payments to the government from its surplus in its last trading period? Mr Roberts—The l996-l997 EFIC report will show that the organisation had a surplus of a bit over $10 million. As I understand it, there has been no decision taken on a dividend in relation to that yet. Senator COOK—Is that still in your reserve? Mr Roberts—It is still in EFIC’s reserves. There will be a dividend to be paid at some stage, I would anticipate, but I do not think that a decision has been made or at least communicated. Senator WATSON—If it was not for EFIC, would not some of these transactions be undertaken by overseas banks? At least we are keeping the business in Australia. Mr Roberts—The rationale for EFIC’s existence is that these sorts of transactions are basically unattractive to the private sector. In other words, EFIC is filling a market gap. Senator WATSON—Even in respect of the loans for the development of the mining operation in the Argentine where EFIC has been very active. Mr Roberts—EFIC has been involved, in conjunction with other export credit agencies from countries involved in developing the mine at Alumbrera. ACTING CHAIR (Senator Watson)—What I am suggesting is that, if it was not for EFIC, perhaps some of that business would have gone offshore. Mr Roberts—In relation to Alumbrera what is of benefit to the nation is the Australian investment in the mine, no matter who underwrites it and the dividend that would flow back from that investment. ACTING CHAIR—Is the investment being encouraged by EFIC? Mr Roberts—EFIC has specific powers under its act to encourage investment overseas, yes. Senator COOK—I think you are being too modest, Mr Roberts. While your answer is exactly right, nonetheless the fact that this work is being done in Australia by an Australian company, irrespective of whether it is private or public sector owned, is of benefit to the nation. Mr Roberts—Yes. Senator COOK—I have no further questions. ACTING CHAIR—Can we release the policy people from industry?

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Senator BISHOP—I have some questions on the industry division flowing from the matters that were raised with Senator Kemp. [12.21 p.m.] Subprogram 1.5—Industry Policy Senator BISHOP—These questions are for the minister and the department. You are aware of the draft report prepared by the Industry Commission into state and local government as- sistance to industry? Mr Wright—Yes, we are aware of it. Senator BISHOP—Has the industry division done any analysis on that report to date? Mr Wright—We have not done anything that is publicly released. There have been some meetings of an IDC which we have participated in. Senator BISHOP—Who is participating in that IDC? Mr Wright—I do not have the full membership. It is chaired by Treasury. Senator BISHOP—How many meetings have been held to date? Mr Wright—I do not know how many meetings. Senator BISHOP—Can you take that on notice? Mr Wright—Yes. Senator BISHOP—What time frame is there before the IDC concludes its deliberations? Mr Wright—I do not know that we have got a specific time frame. As you probably know, this report addresses state issues more than Commonwealth issues and one of the processes they have to go through is liaison with state governments and state departments. It is not really a report that the Commonwealth will take action on or that the states will take action on. That inter-relationship with the states is something that is being worked through. I think it is a bit unclear exactly how long that is going to take. It is probably an ongoing task. Senator BISHOP—Whilst it obviously has major, if not total, impact at state level, it is a report in which the Commonwealth has significant interest I would assume? Mr Wright—Obviously, the Commonwealth commissioned it from the Industry Commission. The issues addressed are ones that have implications for the nation as a whole. So it is in that sense that we are participating in it and that we are trying to work with the states. The bulk of that burden is being carried by Treasury at the moment. Senator BISHOP—The bulk of that work is being carried by Treasury? Mr Wright—Yes. Senator BISHOP—Your division is having input into that work by Treasury or are you carrying out any separate analysis? Mr Wright—No. We participated in the IDC. There has not been a meeting of that for a while because, as my understanding is, Treasury have some processes going with their state colleagues. Senator BISHOP—What do those processes extend to? What is your understanding of those processes? Mr Wright—I do not know the detail at all, I am afraid. Senator BISHOP—You have not made any inquiries?

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Mr Wright—No. Treasury are leading this exercise. We have responded as requested, but we are not driving it in any sense. Senator BISHOP—No. But you have an interest in the outcomes of that IDC and, presumably, you have had some policy guidance given to Treasury in terms of what they are seeking to achieve. I am asking you whether you can confirm that, and what your policy advice was to Treasury. Mr Wright—It is an ongoing internal process at this stage. I do not know that I can go into any great detail about it. I am not personally aware as the IDCs were held without me being present. Senator BISHOP—Was anyone at the table involved in that process? Mr Wright—No, I do not believe so. Senator BISHOP—Which officer was involved in that process then? Mr Wright—I would have to check who went. Senator BISHOP—Someone from the department must know which subordinate officer of the department was involved in that IDC review. Mr Wright—We could certainly find out. Senator WATSON—Wait a minute— Senator BISHOP—This is not a difficult question to answer, Senator Watson. Mr Wright—There are lots of IDCs and, as far as I know, the last meeting was some time ago. Senator BISHOP—How long was ‘some time ago’? Mr Wright—I do not know. I would have to find the date for you. Senator BISHOP—Is there anyone at the back of the room who has any information on this? This is a bit farcical. Mr Mazitelli—We will need to take that on notice and come back to you. Senator BISHOP—Mr Mazitelli, do you know of anyone in the room who would be able to assist the committee on these questions? Mr Mazitelli—Mr Wright is the division head. Senator BISHOP—Mr Wright? Mr Wright—We can certainly find out. Senator BISHOP—I am sure you could find out. I am asking you whether there is anyone in the room. There are about 40 people behind you. Mr Wright—No. Senator BISHOP—No-one? Mr Wright—No, I do not think that there would be anyone in the room. The person who would have gone would have been from my division. Senator BISHOP—Who would that have been? Mr Wright—I have no idea who it was. There has not been a meeting for some time. Senator BISHOP—Do you know when the next meeting is going to be? Mr Wright—No. Treasury is driving this process, not us.

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Senator BISHOP—Yes, you have told us that. I am asking you what policy advice has been given to the IDC, and by whom from your department. Mr Wright—I cannot say that because it is part of an internal policy process that is going on at this stage. Senator BISHOP—Can you take all of those questions on notice? Mr Wright—Yes. We can take on notice when the last meeting was, who went and that kind of thing. Senator BISHOP—And if advice was given by your department? Mr Wright—I would have to look at that and see what is involved. Senator BISHOP—All right. Has your division or department had any consultation with state counterparts regarding this whole report and its analysis? Mr Wright—On this particular report? Senator BISHOP—Yes. Mr Wright—Not specifically. We liaise with state departments on industry policy issues, of course, but not specifically on this report in recent times. At the time of the IDC meetings, there may have been contact. Senator BISHOP—Can you check that and advise us? Mr Wright—Yes. Senator BISHOP—Are you aware of whether any of the states have expressed a view either in support or against the key findings of the report? Mr Wright—Not from memory. Senator BISHOP—Okay. Could you check and advise that as well? Mr Wright—Yes. Senator BISHOP—Has the industry division done any similar work on the subject of state based industries assistance? Mr Wright—No, I do not think we have. That report represents the main body of work that is around. Senator BISHOP—Does the industry division have a view on bidding for industries by states? Mr Wright—We do. Clearly, we recognise that this kind of thing can be expensive in terms of the nation’s interests and that there is value in having some coordination and broader consideration of the overall interest of the nation when these things happen. We only have to look back at the power stations in the late 1980s and aluminium smelters to see the dangers of this kind of thing. Senator COOK—As I recall, the industry promotion and facilitation branch in the department actively tries to attract investment and industry to Australia. Mr Croker—Correct. Senator COOK—What would be the practice of that branch as to how it would go about encouraging a company to relocate in Australia? What is the practice with regard to which state it might suggest or be involved with? Mr Croker—Perhaps a discussion of the construct of the national effort would be useful. The investment promotion and facilitation branch is the domestic arm of the national effort.

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We have an arrangement with Austrade to employ a number of overseas investment facilitators. Essentially, when a proposal is in its formative stages and our network becomes aware of that, then we work with that potential investor to discuss the benefits to them of an investment in Australia. We would also facilitate contact with relevant state government bodies to ensure that they were aware of the particular proposal. In many instances, the state bodies that have their own facilitative arrangements become part of the overall effort to attract a particular investment into Australia. Ultimately, of course, it is a commercial decision by the company involved as to where they will locate. Senator COOK—Are you aware, Mr Croker, of examples where state governments, on becoming aware of a company being interested in coming to Australia, have indulged in a bidding war to try to attract them to their particular state? Mr Croker—We are aware that state governments have access to particular incentive arrangements that they may exercise and, in some cases, we have some idea of what those incentives have been. But whether one calls that a bidding war, is, I think, a question of interpretation. Senator COOK—Whatever we call it, you are aware of practices where one state puts in a better bid than another state, causing— Mr Croker—Certainly I am aware of some competition between states to attract particular investments, and that may go so far as specific investment incentives. Senator COOK—To offer direct investment incentives? Mr Croker—They come in different forms. Senator COOK—Like the waiver of payroll tax and things of that nature? Mr Croker—Those sorts of things are possible, yes. Senator COOK—The waiver of other state taxes and charges, or their amelioration? Mr Croker—I think you are asking me to speculate about what they are. There are quite a lot of individual actions that states can choose to take, and they may cocktail those up in some cases into a package of measures. Senator COOK—Yes. How widespread is it? Mr Croker—I think there are two elements to that question. One is: how frequently are incentives offered? And perhaps the other one—which is probably unknowable—is the value of the incentives. I would suspect that the frequency of incentives of some kind would be pretty high. The value of them is unknown to us. That is obviously a commercial decision that has been made by a state government and only they and the company involved would know the details. Senator COOK—It would, of course, affect taxpayers in the state to the extent that taxpayers’ funds were diverted for this purpose. Mr Croker—Is that a question or a statement? Senator COOK—I guess it is a statement, Mr Croker. I am not asking you to answer it. It is a statement of fact that, to the extent that their funds were diverted to this type of activity, taxpayers would be affected. It is also not a question to say that those taxpayers are entitled to know. If the issues are unknowable, we will wait with bated breath for the Industry Commission report to eventually find the light of day.

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Senator BISHOP—Do you monitor disbursements or incentives or packages offered by the states to a range of firms and industries in this area, Mr Croker? Mr Croker—No. We do not, because they are very much commercially confidential arrangements that have been entered into. We therefore do not have any way of getting access to them. Senator BISHOP—Not through the public accounts and the budget figures in the various states? Mr Croker—Without certainty knowing just how those incentives are provided. But many of them would be in the form of revenues forgone or something of that nature which would presumably not appear in any direct way. Senator BISHOP—But do you not by the same token make any inquiries of the states or the relevant departments in those areas? Mr Croker—We do not make inquiries on project by project arrangements. We do have an arrangement for exchange of information at a general level with states and the Commonwealth, so that in broad terms we understand how the whole investment attraction activity is operating and we get a sense of the sorts of things that might be considered by states from that sort of dialogue. That is as far as it goes. Senator BISHOP—Has that draft report we referred to earlier done any work on identifying the quantum of the figures involved in various states? Mr Croker—Which report are you speaking about, Senator? Senator BISHOP—The Industry Commission report. Mr Croker—I am not aware that it has been possible for them to do that. I think the answer is no. [12.37 p.m.] Subprogram 1.2—Industry liaison Senator GEORGE CAMPBELL—My questions are in relation to the telecommunications industry and, more specifically, the electronics industry. My first question is: what arrangements have there been within the department in respect to the monitoring arrangements of the impact on the local electronics industry of the post-1997 telecommunication arrangements? Mr Todd—I am head of the information industries task force. That task force was previously the information industry’s branch. Industry division A is now a separate task force. In terms of the monitoring arrangements for the industry development plans, we have now approved some nine carrier plans. I think two of those coupled together would have three subsidiaries. As a general comment, I think a detailed response to your question will come through with a report by the minister, which was included as an element of the legislation that was passed earlier this year. In terms of local content—and I think you were previously briefed by the Department of Foreign Affairs and Trade on this issue—there is the difficulty that we need to stay within WTO constraints, so local content per se is not explicitly highlighted under the guidelines. That having been said, the carrier plans are measured against aspects such as strategic relationships, R&D activities, export development plans, employment and training activities and those types of areas. That very much translates through to the territory that you are

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 793 interested in, Senator. It is not an explicit element of the criteria against which the various plans are measured. Senator GEORGE CAMPBELL—The question I was really interested in was: what arrangements have been made within the department for the monitoring of the industry impacts of the post-1997 arrangements? Mr Todd—Within the department there is a section within the task force that is dedicated to this task and basically undertakes the ongoing assessment under ministerial cover of the carrier plans. To date, some nine have been approved by the minister and further carrier plans will be coming forward over the months ahead. Senator GEORGE CAMPBELL—How many people are involved in the monitoring process? Mr Todd—I would need to take that question on notice, but approximately five. Senator GEORGE CAMPBELL—At what level of importance within the public sector structure is the person in charge of the monitoring process? Mr Todd—I think a general comment on level of importance might be given by the department’s participation at a seminar in Sydney yesterday. It was convened by AEEMA and was basically telecommunication carriers making presentations and interacting with, particularly, local suppliers. At that seminar, I gave the presentation from the department side. You can count in terms of involvement, myself as an SES officer, running down to a section head and then supporting staff underneath that section head. It is a key plank of the task force’s industry development activities and couples with the partnerships for development program, another very important area. Senator GEORGE CAMPBELL—I understand, Mr Todd. What I am trying to elicit from you is what real importance the department has placed on this monitoring process. Mr Todd—I am really just trying to respond to that by saying a very high level of importance. It is not something that is simply delegated out at a section level. It is something in which SES officers have a continuing involvement. I was referring to my activities in that respect yesterday. It is certainly a very high priority program. Senator GEORGE CAMPBELL—Are you the SES officer responsible for the monitoring? Mr Todd—I am the SES officer responsible for the information industry’s activities within the portfolio. One of our key programs in that respect is the telecommunication carriers program. Senator GEORGE CAMPBELL—Have any guidelines been set down for the staff doing the monitoring to follow in terms of how they conduct that monitoring? Mr Todd—Yes. The guidelines essentially come through in the legislation and requirements in terms of the criteria against which the plans are assessed. They are areas that I have previously alluded to, such as strategic commercial relationships, R&D activities and other matters. Senator GEORGE CAMPBELL—I understand that element of it. Have any specific instructions been laid down for the personnel within the department conducting the monitoring process? Mr Todd—I would need to take that question on notice including the cascading down from the particular constraints that are in legislation through to the precise details of how the monitoring arrangements are undertaken.

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Senator GEORGE CAMPBELL—Could you provide us with those guidelines and also with the information on the number of people who are involved in the day-to-day monitoring process and their level within the structure? Mr Todd—Certainly, Senator. Senator GEORGE CAMPBELL—At this stage, have any trends been identified on the impact on the local industry of the new arrangements? Mr Todd—It is still very early days. We have been going some five or six months. General estimates that I have seen are that R&D investment in the next five years by licensed carriers is estimated to be around $1 billion. Capital investment over the next five years is estimated to be around $15 million. After only five months of the program, in many respects it is premature—particularly when, after a 12-month period, there will be more formal reporting obligations under the minister. Senator GEORGE CAMPBELL—At this stage, has there been any ability to measure the competitive nature of the industry which now exists and what its impact has been on either the expansion or contraction of the local industry? Mr Todd—It is difficult to make that assessment at this point in time, but it is accepted that that is a concern that is raised by suppliers: with increasing competition, it is becoming a more competitive environment not only for the carriers themselves but for suppliers. Senator GEORGE CAMPBELL—What consultative arrangements have been put in place for ongoing consultations between the carriers, the suppliers and the department, in terms of this monitoring process? Mr Todd—At present, an example of the types of feedback that we get on that would be the seminar that AEEMA held in Sydney yesterday. That seminar was one that we jointly sponsored and it provided us with the opportunity for carriers, suppliers and departments—in this case, in a public forum—basically to test how the process was developing. It also allowed for carriers to highlight their interests and the types of services that they were looking for from suppliers, such as circuit board suppliers, component manufacturers, et cetera. Senator GEORGE CAMPBELL—My question really goes to whether you have set up any specific ongoing structure to enable dialogue to take place between the players and, more importantly, to be able to identify any trends, particularly negative ones, very quickly and take remedial action. Mr Todd—At this stage, my response would be that it has been along the lines that I have discussed: basically by establishing fora that bring all the parties together, such as the conference that we sponsored in Sydney yesterday. Senator GEORGE CAMPBELL—Do you think that is adequate? Mr Todd—That is something that we need to monitor closely, and that is something we are undertaking. Senator GEORGE CAMPBELL—Do the local suppliers think that is adequate? Mr Todd—Again, I would not want to respond immediately on the conference that was held in Sydney because we need to assess the responses from that, but the feedback was generally positive. All parties—carriers, suppliers, and the Department of Industry, Science and Tourism—have benefited from the collective appraisal of how the process is moving forward. After five months, it is too early to say, and it is something that will need to be continually assessed. I certainly would not claim any particular level of satisfaction at this stage, because

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 795 only a number of our plans have been approved and we are still at an early stage of assessing it. Senator GEORGE CAMPBELL—I understand that and I realise that after five months it is difficult. I suppose all I am doing is putting some stakes in the ground for the future in terms of where we might go. But at this stage you have not had any specific discussions with the suppliers or the carriers about some ongoing structure to assist in this process of monitoring? Mr Todd—Not that I am aware of, Senator. ACTING CHAIR—Subprogram 1.2, Industry liaison, has now been completed. I thank and discharge the delegates. We now move to subprogram 1.4, Sport and Recreation, and we will deal with programs 10 and 11 at the same time. [12.50 p.m.] Subprogram 1.4—Sport and Recreation Program 10—Australian Sports Commission Program 11—Australian Sports Drug Agency Senator LUNDY—I will begin by asking some questions of the department on subprogram 1.4. How much was spent in transferring Sport and Recreation from the former Department of Environment, Sport and Territories to the Department of Industry, Science and Tourism? Mr Mazitelli—The answer to that is that it is not a case of expenditure but rather a transfer of the functions, and of the appropriations that are associated with those functions, to the department. If there were costs, they would have been associated with consolidating the location of the National Office of Sport and Recreation Policy from the accommodation that it was in at the time of the amalgamation to the accommodation that it is now in. That would have been probably of a very low order of magnitude, involving the transfer of officers’ desks and files into the building closer in town. Senator LUNDY—Can you provide the committee with the details of those costs that you have referred to? Mr Mazitelli—Certainly. Senator LUNDY—Thank you. Has the structure of Sport and Recreation changed in any way? Mr Mazitelli—Essentially, it has not. The two statutory bodies remain as they were. The policy advising unit, which is the National Office of Sport and Recreation Policy, still reports through a divisional structure within the department, and so from that point of view there is no significant change. Senator LUNDY—What has been the impact of the cuts in the budget from $142 million in 1995-96 to $90 million in the past financial year, in terms of programs? Mr Mazitelli—Mr Rowe will answer that. Mr Rowe—The bulk of those funds from the figures that you have quoted appear to be about $50 million. That would represent the last payment in 1995-96 of a grant of $150 million to New South Wales for facilities at Homebush. Senator LUNDY—Can the whole difference be accounted for in that respect?

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Mr Rowe—No, it cannot. I think that from the figures you quoted there was more than $50 million. We would have to take the detail on notice. There would have been a number of adjustments, as well as the $50 million. Senator LUNDY—Yes; please provide that information to the committee. Were there any staff lost with respect to that difference that is still outstanding? Mr Rowe—I can comment only with regard to the National Office of Sport and Recreation Policy, and there was a decrease in ASL from 11.2 to 6.2. There may have been some other adjustments with respect to the Sports Commission and the Australian Sports Drug Agency, but my colleagues at the other end of the table will be better able to answer that question. Mr Ferguson—Senator, could you repeat the question? Senator LUNDY—I thought that Mr Rowe was actually referring the point to the Sports Commission with respect to any staff retrenchments that have occurred as a result of the balance of the difference in the reduction of funding between last financial year and this. Mr Ferguson—There was no reduction in the commission’s funding from last financial year to this financial year, and no consequential staff changes. Senator LUNDY—Mr Rowe, can you clarify what you were referring on to the statutory authorities? Mr Rowe—I think that the officer was unsure of whether in fact there were implications for the other two statutory authorities and he was not confident that he had those details at his fingertips. He did make the point that there were a number of other relatively minor adjustments, and we will provide those to you on notice, which is the best way to deal with them. Senator LUNDY—Thank you. I have another question from the annual report with respect to 4.1, recreation development. What is the impact of the cuts in the budget from $52 million down to $3 million? Can that be explained in the same way as Mr Rowe did? Mr Rowe—Could you refer me to the page in the report, please, Senator? Senator LUNDY—Page 113, on total outlays and actuals for l995-96. Again, there is a difference of around $50 million. Can that be explained in the same context? Mr Rowe—Yes; that is for the same reason: the grant to New South Wales for facilities at Homebush being paid out. The bulk of the remaining amount is for monies to be paid to the Paralympic Organising Committee. Senator LUNDY—Is it possible for the minister to provide the committee with a gender breakdown of programs funded by the department? Mr Mazitelli—A gender breakdown of programs? Programs, as such, are relatively neutral in gender terms, as I understand. Senator LUNDY—Mr Mazitelli, I mean in terms of grants provided or support programs. What I have asked for is an indication of the gender balance that is associated with the application of those programs. Mr Mazitelli—I beg your pardon, Senator: that was a misunderstanding. We can certainly do that for you. Senator LUNDY—Does anyone here have that? Mr Mazitelli—We will have to go through the details of that. We will take that on notice.

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Senator CHAPMAN—I thank Senator Lundy for allowing me to intervene to ask one question, because I have to go to a parliament luncheon. In the context of the department of sport and recreation now being part of the Department of Industry, Science and Tourism, are any initiatives being taken in the context of the 2000 Sydney Olympics to capture the benefits of those Olympics for the broader industry portfolio? I mean that in the sense of not simply relating to sport and tourism aspects but of making some efforts to get people who might be coming here for the Olympics and who have business involvements or whatever to take opportunities to see Australian industry and Australian business, in terms of encouraging investment in Australia and perhaps broadening trading opportunities with Australia? Mr Ferguson—Mr Mazitelli and I are both on a senior officials committee, which was established under the chairmanship of the Department of Prime Minister and Cabinet, which is looking at that issue in relation to the Commonwealth government’s involvement in all those matters which are Commonwealth responsibilities relating to the Olympics, such as customs and so on, as well as how to make the most out of the Olympics for Australia more broadly through tourist promotion, industry promotion and so on. Mr Mazitelli might want to add something. Mr Mazitelli—There are some specific initiatives being undertaken within the portfolio in conjunction with other states and territories—indeed, with the New South Wales people and SOCOG. One of those initiatives is known as ‘Australia open for business’, which is specifically directed at maximising the benefits that flow to Australia in the broad industrial sense—the broad industry development sense. There is also in existence what is known as the New South Wales business round table. The Commonwealth has an involvement in that. It is directed at endeavouring to maximise the benefits and, indeed, to disperse those benefits around Australia. So, yes, there is some activity already under way. There are a number of other government agencies that also have an involvement, such as Austrade, for example. Senator LUNDY—Can the department provide details of funding provided by the department on the basis of federal electorate? Mr Mazitelli—Senator, you specifically want it for the sports and recreation funding under this program, I take it? Senator LUNDY—Yes. Mr Mazitelli—We can provide that. We can provide the details of the funding. Senator LUNDY—Thank you. Mr Mazitelli—Senator, I am advised that we do not have it on the basis of electorate because it is not broken down that way in the department. It is broken down by way of state and by location of recipient. So it would be, in effect, by street address and an amount of money by state. Senator LUNDY—I am sure you would be in a position to cross-reference. If you could take that on notice, that would be appreciated. What was the federal government’s contribution to the netball stadium in South Australia? Mr Rowe—Senator, we would have to take that on notice. If we are referring to the former community cultural and sporting facilities program, that information is not immediately at hand. I would have to take that on notice. Senator LUNDY—Are you aware of the ballpark figure that was involved with that particular initiative?

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Mr Rowe—No, there were 1,400 grants made under that program. I could not advise you as to what the ballpark figure was, if that is the program. Senator LUNDY—So no-one is here with any information on that? Mr Rowe—No, we have to take it on notice. Mr Mazitelli—We would have to check it back on the list. Senator LUNDY—While you are there, can you check on how much federal government money was spent on the extensions to the soccer stadium in Hindmarsh? Mr Mazitelli—We will do that as well. Senator LUNDY—Can you also provide information as to how many people utilise or are anticipated to utilise those facilities with respect to soccer and netball? Mr Mazitelli—Yes. Senator LUNDY—Minister, can you explain to the committee why the Prime Minister’s women’s sports awards have been axed? Mr Ferguson—They have not been axed. We are in the process of changing the arrangements for sports awards. We came to the conclusion that there were a large number of them. In some cases they were overlapping. What we have done, through agreement with the Confederation of Australian Sport, is to agree that CAS should be responsible for the higher level awards, which includes female athlete of the year, and that the commission will pick up the more community level awards. We would do that in a somewhat different fashion than has been done in the past. There has been some delay in being able to implement that. But it is our intention to do so and that will certainly provide for women who are involved in community activities. Senator LUNDY—You say it has not been axed. But was there a women’s sports award for this year or last year? Mr Ferguson—No. Part of that agreement was that we would not have a specific women’s sports awards, that they would be included in these two other award frameworks. Senator LUNDY—So it has been axed and now you are reviewing what you are going to do next? Mr Ferguson—Yes. On that interpretation I would agree. Senator LUNDY—The review process that you have described, will that involve any other sports awards? Can you tell the committee precisely what awards are covered by that review and what awards have not been awarded in the last year or two under this government? Mr Ferguson—It covered also the coaching awards. I believe those were the three. They were certainly the three main ones. We had found that in each case we were organising very extensive and very expensive awards presentation nights which had a certain overlap. We thought it would be sensible to rationalise those so that, in terms of the coaching awards, the main coaching awards are now provided during the sport Australia awards, which are run by the confederation. The other, if you like, lower level coaching awards are picked up at the annual coaches seminar in a much smaller, more informal ceremony. There was another group of awards, the volunteer awards, which are also incorporated into this idea of having community awards. Senator LUNDY—Perhaps you could take on notice just precisely what awards are caught under that particular review. Can you also tell the committee what the timing is for that review

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 799 to report back and what the process will be for ministerial consideration of the recommenda- tions arising from that review. Mr Ferguson—Yes. I can do that except to say that it is not a formal review which has been set up with specific terms of reference; it is an internal review within the commission and involves the commission in discussions with the confederation. But, certainly, with that proviso, I am happy to provide you with the information. Senator LUNDY—So how, in terms of some level of public accountability, will that advice become available so we can get an indication of the views of the commission and the subsequent ministerial decision relating to the structure of those awards? If you could take that on notice that would be appreciated. Mr Ferguson—I am happy to provide that to you or to raise it in a further estimates hearing—whatever would be convenient. Senator LUNDY—You mentioned costs as being a motivating factor in axing this series of awards. Can you provide the committee with the estimated savings that you anticipated out of: one, not proceeding with the awards over the last year or two; and, two, what sorts of savings you actually hope to achieve out of rationalising the awards program? Mr Ferguson—Yes, I can provide that. Senator LUNDY—Are you able to give the committee a figure today on the sorts of savings you have achieved by axing the women’s awards and the other awards? Mr Ferguson—What we found, particularly with the way the women’s awards were being run, was that we were spending almost the entire budget we had allocated for women’s sport, as well as a significant amount of staff time, on the administration of those awards. We believe that by not conducting the awards in the same fashion some of those funds could be transferred to other program areas for the benefit of women in sport. Senator LUNDY—Can you provide some comparisons as to what is spent on awards generally, under what categories, as opposed to what was spent on the women’s awards? Mr Ferguson—Under what categories in terms of— Senator LUNDY—In other areas of the awards that are still in existence? Mr Ferguson—Yes, indeed, but bear in mind that the commission does not fund the major awards which are run by the confederation. Senator LUNDY—But that information is available to you? Mr Ferguson—We would have to seek it from the confederation. I am not sure whether it is available. I do not imagine they would have any problem in providing it. Senator LUNDY—Who is going to replace the late Margaret Pewtress as head of the Women’s Sports Unit? Mr Ferguson—The Women’s Sports Unit as it previously existed has been integrated now into the suite of programs which make up Active Australia. We did a review of the participation programs and that review determined that rather than have a series of discrete programs, that is, for people with disabilities, for women, for mature aged people, for volunteers and so on, those programs should all be integrated and become one larger integrated program which is becoming Active Australia. In that sense, the formal structure of the women in sport unit does not exist now. Senator LUNDY—It has been axed?

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Mr Ferguson—Well, it does not exist. It has been incorporated into the overall program delivery within the Active Australia framework. Senator LUNDY—Do you think the fact that the women’s sports awards has been ditched and the Women’s Sports Unit is now not in existence gives some indication of this government’s lack of commitment to women in sport, Minister? Senator Kemp—I think that is an exceedingly unfair question to put to an officer. Senator LUNDY—I am putting it to you. Senator Kemp—In that case I will answer it, Senator. Senator LUNDY—Thank you. Senator Kemp—This government does not lack any commitment to women in sport. Senator LUNDY—I know that! Senator Kemp—Senator, you have asked me a question. I would like to complete it. We have a great commitment to women in sport. We have not axed the awards. There are revised arrangements—I think they are the words you used—to apply awards in a different manner. That is not the same as the implication that was carried in your question. It is important to put that on the record. Mr Ferguson—Certainly, from the point of view of the commission, the axing of awards is not the case. We still are as committed to the development of women’s sport as we have ever been. The funds provided for women’s activities in our budget have not been decreased in any way for the last couple of years. In fact, they have not been decreased for many years; they have been increased. In the last two years when we suffered a reduction in our budget, the amount spent for women’s sport was retained. Senator LUNDY—Thank you, Mr Ferguson, I will probably revisit this area. What has been the extent of the department’s involvement in the appointment of Dr Ekkart Arbeit? Mr Mazitelli—The department has not had any involvement in that particular matter. Senator LUNDY—So no officer has handled any correspondence in relation to that matter or dealt with any specific inquiries? Mr Mazitelli—No departmental officer has, Senator, no. Senator LUNDY—Thank you. Perhaps I should direct my questions to the Australian Sports Commission. When and why did a vacancy occur with respect to the coaching position in Athletics Australia? Mr Boultbee—In late December 1996 or early January 1997, the incumbent in the position of head coach of Athletics Australia resigned, and that was when the position became open. Senator LUNDY—Was that resignation related to the end of a contract? Can you provide a general reason as to why that resignation occurred? Mr Boultbee—It was a contract that related to the employment of a coach by Athletics Australia, not by the institute or by the commission, and the information would have to be provided by Athletics Australia. Senator LUNDY—So you are not aware of the reasons surrounding that resignation? Mr Boultbee—I have some awareness but it is likely not to be as accurate as you would want.

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Senator LUNDY—I do not want to speculate on that so I will move on. Did Athletics Australia advertise for the position of coach following that resignation? Mr Boultbee—Yes, it did, but not immediately following that resignation. There were other positions that were vacant in Athletics Australia, notably that of the chief executive. They advertised and filled that position first, and then they advertised for the position of a director of coaching, a slightly changed title and a slightly changed position. Senator LUNDY—What date was that? Mr Boultbee—The advertisement was placed in the Australian on 22 March 1997. It was sent to a number of large athletics federations around the world in April 1997, and it was placed in a magazine, Athletics Weekly, in the same month. Senator LUNDY—Can you provide the committee with copies of all of those advertisements or correspondence that were circulated and the precise dates on which they were circulated? Mr Boultbee—They were not our advertisements; they were advertisements of Athletics Australia. We would have to obtain them from them. Senator LUNDY—Is that a problem? Mr Boultbee—No. Senator LUNDY—Thank you. Senator BISHOP—Do you fund Athletics Australia? Mr Boultbee—Yes. Senator BISHOP—Is it fully funded by your department? Mr Boultbee—They receive substantial funds from the commission through the Institute of Sport but they have other funding from other sources as well. Senator LUNDY—With respect to the advertisement you mentioned for the executive director of Athletics Australia prior to advertising for the head coach position, can you also provide some detail of that to the committee, that is, the date of that advertisement and a copy of that advertisement. Mr Boultbee—We can obtain and provide them, yes. Senator LUNDY—What is your knowledge about the reasoning behind the changing of the position for the director of coaching? You mentioned a slightly redefined position. Mr Boultbee—The changes in the job description and the title were aimed at making it clear that this was not a person who was expected to be doing hands-on coaching of athletes but rather directing other coaches in their coaching of athletes. So the position, rather than being called ‘head coach’, was changed to ‘director of coaching’. The job description in general terms was that the person filling the position would work with coaches in planning, in monitoring training and so on, rather than directly with athletes as a coach. Senator LUNDY—Why was that change made? Mr Boultbee—It was not so much a change in substance but clarifying what was already the case. The previous incumbent did not coach directly either, but it needed to be made clear to potential applicants that that was what was sought, rather than somebody who would be coaching athletes directly. Senator LUNDY—What was your involvement or the Sports Commission’s involvement in advising Athletics Australia on that matter?

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Mr Boultbee—On the matter of— Senator LUNDY—On the matter of clarifying the position that was being advertised. Mr Boultbee—My recollection is that Athletics Australia indicated that that was the direction in which they wanted to go, and we thought it was appropriate. Senator LUNDY—It was a decision of their board, they advised you of it, and you said that that was a good thing. Is that correct? Mr Boultbee—That is my recollection, yes. Senator LUNDY—Did any correspondence exchange hands on that matter? Mr Boultbee—It probably did. I would have to look for it. Senator LUNDY—Could you provide copies to the committee of any correspondence in relation to that issue. What was the selection process followed by Athletics Australia? Perhaps I should ask first how many applications were received for the position. Mr Boultbee—I understand that initially there were 18 applicants, as at 29 April. Some people applied later, following some searching done by Athletics Australia around the world, beyond the advertising. Senator LUNDY—There were 18 initially, and then some more on top of that? Mr Boultbee—That is right. Senator LUNDY—And how many more? Mr Boultbee—I do not know. They were provided to Athletics Australia, not to us. It was not our appointment. I am told that at one stage there was a list of 27 applicants. Senator LUNDY—Was Dr Arbeit one of the late applicants? Mr Boultbee—Yes. Senator LUNDY—Can you tell the committee the dates on which the late applications were received? Can you also tell the committee when the actual closing date was for the initial applications? Mr Boultbee—I would have to check on the closing date for the initial applications and I would have to check on the exact date of Dr Arbeit’s application. In general terms, the applications closed in April; Dr Arbeit’s application was submitted, I think, in August. Senator LUNDY—In August? Mr Boultbee—Yes. Senator LUNDY—It was accepted four months after applications closed? Mr Boultbee—Yes. Athletics Australia was not satisfied that the initial group of applicants had enough people of sufficient standing for the position, and they conducted— Senator LUNDY—So, out of a global search, with 27 respondents, including late applicants, there was not one applicant that Athletics Australia found suitable in that group? Mr Boultbee—I cannot answer that for Athletics Australia. All I can answer is that in the end there were two short-listed applicants. Senator LUNDY—Mr Boultbee, are you aware of when first contact was made with Dr Arbeit? Mr Boultbee—Yes. Senator LUNDY—Who made that contact?

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Mr Boultbee—I think I made the first contact with Dr Arbeit. As I understand it, Dr Arbeit was first brought to Athletics Australia’s notice by a British applicant who indicated that he probably was not interested, but recommended that Dr Arbeit might be a suitable applicant. Senator LUNDY—Did you approach Dr Arbeit to apply for that position? Mr Boultbee—No, I did not. Upon his name being put forward to Athletics Australia, I was in Europe and Athletics Australia requested me to meet with Dr Arbeit to see if he was an interested party. Senator LUNDY—So you did have the first contact with him in that respect? Mr Boultbee—I think I had the first personal contact. I cannot say whether people from Athletics Australia had any sort of contact before I met him. Mr Ferguson—Senator, can I just interpose? I think it is fair to say that Dr Arbeit was recommended to Athletics Australia. Senator LUNDY—My next question was: who from Athletics Australia requested that you meet with Dr Arbeit? Mr Boultbee—The president of Athletics Australia. Senator LUNDY—Can you provide the committee with the date of that and any correspondence in relation to the matter of that first approach? Mr Boultbee—The date of my meeting with Dr Arbeit was 13 July. There was no correspondence between Professor Dwyer and me—just a telephone call. Senator LUNDY—For the committee’s benefit, can you describe the nature of that telephone call? Mr Boultbee—The nature of that telephone call was that in London I had met the potential British applicant in whom Athletics Australia had some interest. He had indicated that his level of interest was such that it was unlikely that Athletics Australia would be interested in him— namely, he was only interested in doing it part time as a consultant. He recommended Dr Arbeit as a possibility. In fact, he had sent a fax to Athletics Australia recommending Dr Arbeit, which I had not seen before then. I then telephoned from London to Professor Dwyer, the President of Athletics Australia, and informed him that the British applicant was not available as a full-time applicant but that he had made a recommendation to me that we should talk to Dr Arbeit. Senator LUNDY—What date was that phone call? Mr Boultbee—That would have been between 8 and 13 July. Senator LUNDY—In the request from Professor Dwyer to meet with Dr Arbeit, what were you asked to discuss with Dr Arbeit? Mr Boultbee—It was very much in general terms to see if he was interested and to form a very rudimentary opinion as to whether he might have the qualifications for the position. Senator LUNDY—Do you think that could be generally described as headhunting, Mr Boultbee? Mr Boultbee—It is not a word I would use for what I did. Senator LUNDY—As part of your meeting, did you put forward a request to Dr Arbeit to submit an application for the position? Mr Boultbee—No.

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Senator LUNDY—You said before that Dr Arbeit’s application was received in August. What contact was had with Dr Arbeit following your meeting with him in July? Mr Boultbee—I reported back to Professor Dwyer about my meeting and Athletics Australia took it from there, remembering that it was their appointment. Senator LUNDY—What is your knowledge of what happened following your report back to Athletics Australia? Mr Boultbee—I do not know what contact was then made between Athletics Australia and Dr Arbeit, initially. I do know that Professor Dwyer and Mr Soust met Dr Arbeit during the World Athletics Championships in Athens in August. Senator LUNDY—Was that before or after Dr Arbeit’s application was received? Mr Boultbee—I think, but I do not know, that it was after the application was received. That is information which Athletics Australia has. CHAIR—Order! Senator Lundy, I need to say at this point that the committee determined that it would conclude the hearings into the Department of Industry, Science and Tourism at 1.30 p.m. in order to have an hour’s break before we commence Treasury at 2.30 p.m. I understand that there are more questions that some senators wish to ask. In consultation with the secretary, we would be prepared to allow questions on notice to come until midday on Monday because today is Thursday, and I hope officials would be quite happy with those arrangements. We would allow further questions to be put on notice until 12 o’clock to give people a chance to put those questions down or to sort out what questions you have already asked. Senator LUNDY—Mr Chairman, I have approximately five minutes worth of questions here, and I am prepared to put the rest on notice. CHAIR—Senator Lundy, I understand what you are saying but I think that, having been here for 28½ hours already, and another 4½ hours this afternoon, it was made quite clear— Senator LUNDY—Had the timetable been set and held to rigidly that would be a reasonable request. I am asking for five or 10 minutes. CHAIR—I am sorry, but I am not prepared to extend for five minutes. I know it may seem rather hard, but an agreement was reached yesterday that it would be 1.30 p.m. I am not prepared to extend any longer because many of us think we need an hour’s break and I am not prepared to start the next one after 2.30 p.m. Senator LUNDY—I would like to lodge my concern about the manner in which this committee is being approached. CHAIR—Certainly, you may do that and we will take it up, no doubt, with your party and our party and managers of business when it comes to be determined in the future. Senator LUNDY—No doubt. Senator MURPHY—Before you adjourn, Mr Chairman, I just want to ask you a question in regard to your saying that questions can be put on notice until noon on Monday. That being the case, can you also ask the department, firstly, if they might provide answers to the questions on notice and, secondly, that they provide those answers before the completion of this session of parliament? CHAIR—It has already been agreed on and decided at the opening statement of the very first meeting of estimates—which I think was about 10 days ago, or it seems that long—that

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12 December is the date for the return of answers to questions on notice. That is the date that has been determined. Senator LUNDY—I was advised that Sport was going to start at 11.30 a.m. today, which provided ample time for my questions, which I have been waiting approximately 1½ weeks to put to the department. I am concerned that through the course of today I am being denied the opportunity to ask the questions that I have clearly identified I needed one hour to ask, and you are now applying a rigid closure of the committee in an attempt to block my questions to the department. CHAIR—You must take that up with your Labor Party colleagues. Senator LUNDY—No, you are the chair of this committee and I am taking it up with you, because I believe I have been treated unfairly in terms of the position I have always maintained in this series of questions. CHAIR—Senator Lundy, the allocation of time was decided by your colleagues, not by me, and you must take that up with your colleagues, not me. The only agreement that we came to was that we would finish at 1.30 p.m. I said that how the time was to be divided up was to be sorted out by your colleagues. Sitting suspended from 1.33 p.m. to 2.34 p.m. CHAIR—I call the committee to order. We will proceed with the examination of the Treasury estimates, continuing from where we were when we adjourned last Thursday night. Senator LUNDY—I request that you consider bringing back before this committee the Australian Sports Commission for 30 minutes further questioning. It is my understanding that the Sports Commission officials are still in the building and are available to participate in 30 minutes questioning before we proceed with the program. CHAIR—Senator Lundy, I will adjourn in a minute to have a private committee meeting to determine your request. But I need to put it on the record prior to that that agreements were reached and agreed to by the opposition members of the committee, the Democrat member of the committee and the government members of the committee that there would be a strict timetable today, and we intend to adhere to that strict timetable. I informed the Deputy Secretary of the Department of Industry, Science and Tourism that we had concluded the hearing of estimates. I think he has gone home, but I am prepared to adjourn to have a private meeting to discuss your request. Senator LUNDY—Thank you. Sitting suspended from 2.35 p.m. to 2.42 p.m. CHAIR—I call the committee to order. Prior to the adjournment, Senator Lundy had made a request to the committee. The committee, in a private meeting, has not agreed to that request. We will be moving straight on with Treasury. Senator LUNDY—Mr Chair, can I just put a statement on the record that the opposition senators acknowledge that you did not accede to the request made to you and we understand that it is within our capacity to call for a division within the committee. Because you have made it clear that the government senators will not support such a request, we will not persist with a division but understand and interpret your activities as placing a gag on our line of questioning with respect to Dr Arbeit. We would like to place on the public record our gravest concern about the fact that the government senators on this committee have chosen to stifle that line of questioning on what is a very critical public issue.

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CHAIR—In response to your statement, Senator Lundy, all that the government senators are doing is continuing with an agreement that was reached yesterday. To be honest with you, I was not even listening to the line of questioning, so whether it was Dr Arbeit or anybody else at that stage made no difference to me—1.30 was the time. We are not gagging any questioning. The Senate sits next week and any further questioning that you may wish to have along that line can certainly be proceeded with in the Senate on Monday, which is not very far away. I would suggest that you do that. [2.42 p.m.] DEPARTMENT OF THE TREASURY Proposed additional expenditure, $204,346,000 (Document A) Proposed additional expenditure, $96,650,000 (Document C) Consideration resumed from 14 November 1997 In Attendance Senator Kemp, Assistant Treasurer Department of the Treasury— Mr Ted Evans, Secretary Mr David Borthwick, Deputy Secretary Mr Jim Murphy, First Assistant Secretary, Business Law Division Mr Mike Callaghan, First Assistant Secretary, Economic Division Dr Barry Gray, Assistant Secretary, Economic Division Mr Graham Matthews, Assistant Secretary, Economic Division Mr Greg Smith, First Assistant Secretary, Financial Institutions Division Mr John Jepsen, Acting First Assistant Secretary, Fiscal Policy Division Mr Stephen French, Assistant Secretary, Fiscal Policy Division Mr Mike Kooymans, Acting Assistant Secretary, Fiscal Policy Division Mr Tony Hinton, First Assistant Secretary, International and Investment Division Mr Neil Hyden, First Assistant Secretary, (International) International and Investment Division Mr Peter McCray, Assistant Secretary, International and Investment Division Mr Gary Johnston, Assistant Secretary, International and Investment Division Mr Chris Stevens, Section Head, International and Investment Division Ms Caroline Walker, Section Head, International and Investment Division Mr Andrew Johnson, Section Head, International and Investment Division Mr Richard Murray, Acting First Assistant Secretary, Taxation Policy Division Dr Ken Henry, First Assistant Secretary, Tax Reform Group Ms Karen Chester, Assistant Secretary, Personal Income and Corporate Tax Branch, Taxation Policy Division Ms Lynne Curran, Assistant Secretary, Commonwealth/State Taxation Branch, Taxation Policy Division

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Mr Bruce Paine, Assistant Secretary, International Taxation Branch, Taxation Policy Division Mr Terry Lowndes, Assistant Secretary, Business Taxation Provisions, Taxation Policy Division Mr Stuart Sargent, Acting Assistant Secretary, Indirect Taxation and Taxation Review Branch, Taxation Policy Division Mr Chris Hood, Assistant Secretary, Taxation Reform Group Mr Allan Read, Assistant Director, Accounting and Finance Directorate. Australian Taxation Office Mr Peter Simpson, Second Commissioner Mr Mano Manoranjan, First Assistant Commissioner (Legislative Services) Mr Michael D’Ascenzo, Chief Tax Counsel Ms Catherine McPherson, Director, Parliamentary Business Unit Mr Simon Matthews, Executive Officer, Legislative Services Mr Peter Achterstraat, Assistant Commissioner (Small Business Income) Mr Neil Mann, Assistant Commissioner (Small Business Income) Mr Leo Bator, Assistant Commissioner (Superannuation) Insurance and Superannuation Commission Mr Tom Karp, Acting Commissioner Mr Keith Chapman, Deputy Commissioner Superannuation Mr Bob Glading, Deputy Commissioner Life Insurance Mr Greg Plummer, Assistant Commissioner Superannuation Group Mr Darryl Roberts, First Assistant Commissioner Policy, Legal and Actuarial Mr Craig Thorburn, Australian Government Actuary Mr Richard Smith, Deputy Commissioner General Insurance Mr David Holmesby, Assistant Commissioner Corporate Services Mr Pat McInerney, Director Financial Management Mr Stuart Evans, Assistant Director Financial Management Department of Finance and Administration— Kelly Ralston Program 1—Treasury Subprogram 1.4—Taxation CHAIR—I want to proceed with Treasury and subprograms 1.4, 1.8, 4.1 and 7.4. We were in continuation with each of those subprograms. Senator COOK—Thank you, Mr Chairman. I think I was discussing with Dr Henry the question of the tax reform task force. I had almost completed those questions. Indeed, I recall that my penultimate question was: what is a mega tax package? You described it—again, as I recall; I have not got the Hansard here—as an effective tax package, which goes to its quality not its size. I do not propose to explore that issue any further. What consultations have

ECONOMICS E 808 SENATE—Legislation Thursday, 20 November 1997 been occurring with industry and the tax task force on the issue of taxation reform? Have there been consultations of any sort? Dr Henry—There have been no formal consultations as such with industry or indeed with any other group. Consultations are occurring, however, directly with government ministers. Of course, one of the principal functions of the government members task force is to undertake consultations with interested bodies, but the task force itself is not formally undertaking consultations with any particular group. That is not to say that members of the task force would not from time to time find themselves in conversation with various people, but there are no formal consultations. Senator COOK—There have been no formal ones. Are there any plans for formal ones? Dr Henry—No, there are no plans for formal consultations. Senator COOK—Are there any plans to seek opinion outside of the Public Service and the circle of ministers that you have referred to, to consult with universities or to get private consultants to offer advice? Dr Henry—The taxation reform group in the Treasury, which, as I indicated last time, constitutes a secretariat to the task force, has engaged consultants and no doubt will continue to engage consultants in various aspects of our work. But input on broader policy issues from members of the community, business groups and so on we would expect to see come through the government members task force. Senator COOK—And are you monitoring that? Dr Henry—Not at this stage, because the government members task force has called for submissions by the end of February next year, but we would expect to be apprised of the contents of at least the major submissions received by that group. Senator COOK—They will all be public? I imagine they will be public. Dr Henry—I am not aware what the intention is. Senator COOK—You say that the secretariat has been involved in obtaining some views on a consultancy basis. Have groups that may have been consultants been paid for their work? Dr Henry—I do not think we have engaged any groups as such on a consultancy basis but we have engaged individuals on a consultancy basis. Where we have, yes indeed, they have been paid for their work. Senator COOK—Can we know the names of these individuals? Dr Henry—Yes. I do not have that information with me but I can make that information available to the committee. Senator COOK—Thank you. That would be the extent of consultations outside of the Public Service sector, would it? Dr Henry—In terms of formal consultations, that would be true. But, as I indicated, members of the task force would from time to time no doubt have meetings with people who would have an interest in tax reform. In fact, it would be difficult to avoid. Indeed, members of the taxation reform group, the secretariat in the Department of the Treasury, would also be meeting with interested persons on, I guess, a more informal basis, not receiving formal submissions as such but no doubt discussing issues, more likely to be rather technical issues, of interest to particular people. Senator COOK—This is not the informality of, say, meeting someone in a coffee break and having a chat or turning up at some function and being cornered by everyone that knew

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 809 you were a member of the task force and wanted to talk to you; this is a structured form of informality, is it? Dr Henry—It may indeed be as informal as running into somebody in a coffee bar, although that is not really what I had in mind, no. But I was trying to draw a distinction between conversation with somebody on an issue that they have a particular interest in and would make an approach to somebody in the Treasury to discuss the issue, and the calling of formal submissions. I was indicating that the task force has not called for formal submissions and there is no intention for the task force to call for formal submissions. Senator COOK—What I am trying to get at—I might as well confess it to you and you might help me get at it—is this. As far as these consultations are concerned, obviously it is a very serious subject. The committee itself has given some thought to whom it might approach, gone out and done that on an informal basis to gather up information or to get some perspective on analysis or a piece of work that it has got. It just does not happen by happenstance. This is a structured approach. If I were a member of your task force, and I had a little badge saying, ‘I am member of the tax task force,’ I would never turn up at an airport or go to a party because people would corner me. It does not happen like that. You would never get out of the room. This happens in an organised and structured way, I take it. Dr Henry—In part, but only in part. Where we have seen the need for particular technical expertise, or to benefit from a particular perspective on an issue, and that would usually be a technical issue, we have engaged consultants. So that is structured. But there have been occasions on which people have made contact with us, rather than us making contact with them, and indicated that there is a particular issue that they think we could benefit from learning about, and in some cases members of the Treasury secretariat have met with some of these people. I would not say that was structured, at least not by us. Senator COOK—Okay. Can you tell me what relationship there is between your committee and the Gibson committee? Dr Henry—There is no operational relationship at this stage. As I indicated earlier, the government members task force has called for submissions to be lodged by the end of February next year, and it may be at that stage that a more operational relationship is developed. But certainly at this stage there is no operational relationship between the two task forces. Senator COOK—Were you consulted at all on their terms of reference? Dr Henry—No. Senator COOK—Do you know what their terms of reference are? Dr Henry—Yes, I do. They have been made public by way of a press release by the Prime Minister, as I recall. Senator COOK—Have you been consulted on identifying interest groups who it would be desirable to have make submissions to the Gibson task force? Dr Henry—No. Senator COOK—That is all I have on that. Not surprisingly, I have got some further questions on tax, however. CHAIR—Perhaps I could even enlighten you, Senator Cook. As a member of the Gibson task force, I can concur with everything that Dr Henry has said. In fact, there has been no contact whatsoever. I do not know of any in the future and submissions were invited by way of advertisement. That is just by way of adding to that answer.

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Senator COOK—It all sounds right to me. CHAIR—You have finished with taxation, I take it. Senator COOK—No. CHAIR—All right. Just continue, Senator Cook. Senator COOK—Thank you. I am turning now to a heading, ‘Tax and electronic commerce: the impact of the Internet on the tax base.’ The Australian Taxation Office recently released a report on the Internet and its potential impact on the tax base. Could someone please enlighten this committee as to the major issues involved in that report? Mr Simpson—I can best answer that under three broad headings. There are issues around tax policy, existing policy, and the international taxation regime. There are issues around tax administration, and a subset of that is the question of the ability of the Internet to provide service. My colleagues from Treasury may have some more words on the policy dimension but taken at a very broad level the international tax regime operates with significant regard to notions of residence and source: residence of a taxpayer; source of income. Another significant feature is the notion of permanent establishment or branch whereby one country will generally agree by treaty not to tax a resident of another country unless that resident has a permanent establishment, a real physical economic presence, within the territory concerned. With the Internet, people may well be able to conduct business from anywhere in the world through simply having a terminal and a server and it might be very easy to circumvent those fundamental principles of the international tax regime. There is a lot of work going on in relation to that. I have been involved at the OECD— Australia, along with the United States and Canada, has taken a leading role there. Mr Michael Carmody, the commissioner, is at a conference in Finland this week on the whole issue of the Internet, of which tax is a major part. From a tax administrator’s point of view there are also significant issues about tracing transactions and cash. We have all heard of e-cash and it is a lot easier to take out a plastic card than a suitcase full of money. Certainly some challenges will be presented to us in this regard. How businesses might operate in an electronic commerce world is one of the things we are starting to learn about. We are pursuing work on what the further dimensions for tax administration might be. A subset of that is the opportunity which the Internet might offer for tax administration in the sense of providing better client service. Certainly at the Taxation Office we are looking at things like the ability of people to file returns electronically by using the Internet. I would hope that in the not too distant future we might be able to give effect to one of the recommendations of the Joint Committee of Public Accounts to allow some access to our technical research facility and database. So it is both challenging and exciting. Senator COOK—It certainly is. Thank you for that comprehensive answer, Mr Simpson. I understand the government has ruled out a bit tax as is being considered in the European Union. Is that correct? Mr Paine—No, to my knowledge the government has made no statement on its attitude to a bit tax, Senator. Senator COOK—Is that still under consideration? Mr Paine—I think the matter has been raised with the government but there has been no statement to my knowledge. Senator COOK—No, I appreciate that, but is it still for consideration?

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Mr Paine—I think that is a policy question, Senator. Mr Evans—Senator, to the best of my knowledge it is an issue that is for consideration in the sense that it is in the future. There is no decision taken. Is it under active consideration? That depends on whether you talk in terms of it being a cabinet submission, et cetera, but it is an issue for the future, to the best of my knowledge. Senator COOK—Thank you, Mr Evans. It is not ruled out but it is not ruled in. It is sort of on the back burner. Mr Evans—That is right. Senator COOK—It is true, is it not, that the government intends to tax transactions conducted over the Net which are taxable in normal circumstances? Mr Simpson—Those fundamental principles of the international tax regime I mentioned earlier have probably been developed over the last 50 years. They were post-war measures—a time that was exciting, when the world started to expand in terms of commerce, and they were probably equally threatening to tax administrations at that time. The principles themselves hold very fast in an Internet world. There is no reason why you would not adhere to them. It is a question of whether, as a matter of practice, you can do it, given the ability of people and things to disappear. Senator COOK—You are anticipating me, Mr Simpson, because this is my next question: given that e-commerce is a serious threat to the indirect tax base, how do you intend to enforce the tax that is currently payable on goods purchased over the Net? Mr Simpson—I cannot answer that precisely. As you know, a major report was released by the commissioner. There is a team within the office looking at that. I can take the question on notice and provide you with some information, but I do not know that we are all that far advanced in some of our research. It is a major topic of study for us. Senator COOK—I think we share the view that this is a major issue. Is there any timetable that you are looking at to complete consideration of the matter? Mr Simpson—I am not sure whether there is anyone here who could answer about a timetable, Senator. I know it is proceeding as a matter of priority. It is one of the risk areas, at a high level, that we have identified. As I have said, there is a team, under senior executive leadership, working on that. The commissioner is actually driving it himself. I cannot give you a timetable. I can say that electronic commerce transactions are occurring now. You can buy shirts and CDs on the Internet—we all know that. It will not take long to get much bigger, and we are giving it a very high priority. Senator COOK—I have not bought anything on it, but I know of people who have. As you say, it is going on now. Do you have an estimate of what the leakage to the tax base might be from the incidence of this type of transaction? Mr Simpson—No, I do not, Senator. Senator COOK—How do you categorise it then—as a serious threat, a medium-level threat, or something that we can get to in due course because it is not important? Mr Simpson—I believe it is a serious threat. Senator COOK—You believe it is a serious threat? Mr Simpson—Potentially a serious threat. Senator COOK—Within what time span do you think you would remove the prefix ‘potential’? It is growing all the time. I saw some sort of report in the press the other day

ECONOMICS E 812 SENATE—Legislation Thursday, 20 November 1997 about the usage of home purchasing in Australia, and it showed quite a dramatic growth in figures state by state. I have no idea how accurate it was but certainly, from a layman’s point of view, it seemed to show quite a dramatic increase—the pundits about the future, which seems to be about everyone, have the view that this is going to be a major issue. Meanwhile, we know of these purchases going on as common folklore. Is there no way of giving some sort of a categorisation or quantification of the potential leakage? Mr Simpson—I cannot now, Senator. I am not an expert in this area, but there are issues about security on the Internet, encryption and safety of cash transactions and the like, all of which tend to slow things down a little bit. The only other comment I would add at this stage is that—you have probably also seen reports on this—we seem to be a nation which grabs hold of new technology much faster than others. Perhaps we see it as an earlier threat here than some other countries do, who are a little slower in adapting to these things. I will take on notice the question of time lines we have put on the work, which is proceeding as a matter of priority. Senator COOK—I would appreciate that very much. If, for example, we move to a comprehensive tax on services, as is being considered—it is under review—have you any views about how we will tax the transactions that occur on services electronically, over the net? Mr Simpson—As I have said, the fundamental rules remain the same; it is a question of your ability to enforce them, Senator. I do not have information on that. I know that the issue of the effect of the Internet on consumption taxes has now become a priority issue at the OECD. I have not at this stage followed it, so I cannot really take that any further, Senator. Mr Paine—The OECD committee on fiscal affairs has a particular working party that looks at consumption taxes. Of course, Europe has a higher reliance than we have on value added taxes. That has exercised their minds. Basically it boils down to applying the fundamental rules, which are actually much the same as the income tax system, so they are concerned about the source of the transaction. So there are similar issues to what people are grappling with on the income tax side. Mr Simpson—I mentioned that Mr Carmody was attending an OECD conference this week. It is looking at a whole range of issues that the OECD is interested in on the Internet, of which tax is a major focus. I understand there is a possibility of a joint APEC-OECD meeting in Canada next year on the subject, and the hope is that they might develop some broad rules at that time. But that conference is still not definite yet. Senator COOK—Thank you very much. Mr Simpson, you are a member of the National Tax Liaison Group, are you not? Mr Simpson—I am, Senator. CHAIR—Senator Watson wants to ask one question on the Internet. Senator COOK—Yes, sure. Senator WATSON—As to the Internet, it is really a question of balance in terms of a threat to the tax base on the one hand and the potential for driving Australian business offshore on the other. Given the opportunities on the Internet to set up web sites all over the world, a number of witnesses to the JCPA have indicated that the submission that you put forward would actually drive business offshore. Would you like to comment on that?

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Mr Simpson—I have not been a part of that process, Senator; I am not able to answer it. I am not sure whether there is someone else here from the tax office who might be able to answer it. I will take it on notice. Senator WATSON—Okay. Senator COOK—Mr Simpson, we have just established that you are a member of the National Tax Liaison Group. Did you attend a meeting of that group in which the group was consulted on the trust loss legislation? Mr Simpson—I think it was a subset of the National Tax Liaison Group—different representatives but a subset of the National Tax Liaison Group. Senator COOK—A subcommittee of some sort? Mr Simpson—I did attend one meeting. No, it is not a subcommittee. Often when there is consultation on any sort of matter—whether it is administrative, legislative or whatever—we generally turn to the members of the National Tax Liaison Group and invite them to send participants. They often are not members of the National Tax Liaison Group but other representatives of the bodies that are represented on that group. Senator COOK—And you attended such a meeting at which the trust loss legislation was being discussed? Mr Simpson—I attended one meeting on trust losses. I think there was more than one. Senator COOK—Did you give any undertaking to the National Tax Liaison Group that they would be consulted, once the legislation was out, on the legislation? Mr Simpson—No. I never do that, Senator. In terms of consulting on legislation, it always comes down to a government decision, and there are questions of timing and everything else. I would never commit myself on that, unless I had authority from government beforehand to do so. I attend a lot of these meetings—I cannot remember. One of the things I usually say is that I totally support consultation and, if it can be arranged, I would certainly arrange it. But I never commit to it unless I have authority before. Senator COOK—Did anyone on the committee request that that be the case? Mr Simpson—I think there was some discussion about further consultation, but there was no commitment by me or anyone. I chaired the meeting, and there was no commitment to do so. Senator WATSON—How do we know the National Tax Liaison Group is completely independent—in other words, that it is balanced so it may not represent a particular focus of opinion in relation to trust losses? In other words, do we have academics and other people on that as well? Mr Simpson—I cannot recall precisely. I can remember one or two people who were there, but I cannot remember everyone who was there, Senator. It is sometimes the situation where bodies will invite people who are from academia to represent them, but it does not happen very often. There were no people from academia specifically invited as such. Senator COOK—What discussions have you had with international counterparts regarding electronic commerce in their nations and what type of international action there might be about that, if any? Mr Simpson—I have participated in and in fact led a number of discussions at the OECD committee on fiscal affairs on the taxation implications of international commerce and communications revolution. There is another group, the PATA—the Pacific Association of

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Tax Administration—where the question of the Internet has been a substantial focus for some little time now. Work has been done around that—I do not have it all in my mind, Senator. I believe that there is to be a meeting early next year, in January in London, between PATA and another group which comprises predominantly European tax administrations. It will be just before the next committee on fiscal affairs meeting. It is looking at issues of tax havens and bank secrecy, but it has a focus on the electronic commerce Internet environment. We are interacting more and more with other tax administrations, and this has been a focus area. Senator COOK—You would confirm then the press report which cites the Commissioner of Taxation, Michael Carmody, as confirming that he has expert advice that a cyber tax system was technically feasible but that such a system would require international cooperation to ensure that all computer programs matched the tax needs of individual nations, such as Australia. Mr Simpson—I am aware of his statement. I am not aware of everything he based it on, but I am aware of the statement. Senator COOK—How close are we to getting such an international agreement? Mr Simpson—I think we are a fair way away yet. Senator COOK—Do you? Mr Simpson—I said earlier that we are particularly concerned because the use of the Internet is extremely high in this country compared to the rest of the world. That is why we have been taking a leading role. A lot of other nations are not so anxious to make the same haste we are. Senator COOK—I have a copy of the Australian of 12 November, and it starts with: Taxpayers may face an automatic tax every time they use the Internet to buy goods and services under plans being developed by the Australian tax office. I would salute that as being a necessary way of preventing the tax base leaking away, but it does not seem that we are very close to the automatic tax then. It is still in a conceptual form. Mr Simpson—When you talk about automatic, I guess you are talking about bit tax. I am not sure what else might be involved. There would still be a long way to go to achieve some of those goals. But, as I say, we are looking at all types of possibilities. Senator COOK—We are skirting the issue in generalities too. It seems to me that we cannot take this much further at the moment because not sufficient progress has been made. Mr Simpson—To the best of my knowledge, I will provide whatever information I can. Senator COOK—Thank you very much. I would appreciate that. Senator WATSON—Given the increasing investment and the magnitude of that investment with the Argentine, how far off is Australia from signing an international tax agreement with that country? We have agreements with smaller countries in respect of Vietnam. Given the level of investment, particularly in the mining and related industries, how far are we off signing that? Mr Paine—I think we will have to take that one on notice about exactly where that process is up to. Senator CONROY—On Tuesday, the tax office told the Financial Review that draft legislation issued late last week to counter misuse of franking credits would apply to CBA’s buyback, and I understand today an agreement has been reached. Could someone give us some advice on what is happening?

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Mr Simpson—There seems to be an implied assumption here that you can rely on everything you read in the press. My understanding of the situation is that a member of our staff was asked some ‘what if’ questions, and it was no more than that. It is true that we have been working with the Commonwealth Bank, which issued a press release today announcing that there had been a solution reached to facilitate their buyback. Senator CONROY—Would you be able to tell us what the modified transaction is or at least give us an outline? Mr Simpson—Mr D’Ascenzo might be able to help me out here, but the broad basis of it was that the potential for a capital loss was significantly reduced and there was a debit to the franking account. But I think Mr D’Ascenzo may be able to give you some more information. Mr D’Ascenzo—As Mr Simpson said, basically our concerns were in relation to the use of franking credits and streaming arrangements. Basically, those concerns have been addressed in the modification done by the Commonwealth Bank. I notice from their press release that they do not go into details of what those modifications are, and perhaps it is outside the appropriateness of the tax office to comment on their arrangements. But, from their press release, one can gather that, to the extent to which there were unintentional capital losses or capital losses arising in that context because of the use of franking credits and streaming arrangements out of that process, the modified proposal would address largely those concerns. Senator WATSON—What were they—the capital losses as well as the franking credits? Mr D’Ascenzo—I think both issues are important. Senator WATSON—Yes, that is right. Mr D’Ascenzo—Again, without going into the precise details, if you look at what the press release mentioned, there was a reduction in the franking credit account of the Commonwealth Bank. There was also an increase in the capital that was payable on the shares from $2 to $7, plus a reduction of $25 million in the franking debit account. Senator CONROY—Do you have a copy of that press release which you can furnish to the committee? That would probably be useful to committee members because not everyone has had a chance to get the wire. What is the potential loss in revenue now? Is there no loss in revenue? Some fairly large numbers were being floated earlier this week and late last week about the size of the potential loss. Mr D’Ascenzo—I really cannot say that without going into the precise details of the arrangements, but I can say that we have largely addressed the revenue concerns. Senator CONROY—I would be concerned that the question of whether part IVA applies was determined by the level of the potential haemorrhaging. I would have thought that, if some legislation is applicable to it, the size of the dollars involved would not be the determining factor. Mr D’Ascenzo—No, it is not necessarily the determining factor, but one looks at whether or not the underlying mischief has been addressed. In circumstances where that underlying mischief has been addressed in an otherwise commercial setting, I think the provision has achieved its purpose, whether it has been applied or not. Senator CONROY—There are still manufactured capital losses, though, are there not? Mr D’Ascenzo—The share price is higher. In terms of the buyback, it was $2; it is now $7. Senator CONROY—That is not what I asked.

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Mr D’Ascenzo—But it depends on what the shares fall as to whether or not you had a capital loss. The second point is that the franking credit side of the Commonwealth Bank has been debited by C class shares to the tune of $25 million. Senator CONROY—What is the current price of CBA shares? Mr D’Ascenzo—I do not know. Senator BISHOP—There was a certain capital loss at $2, and there will now be a capital loss at $7. What Senator Conroy is asking you is what the difference overall is to revenue. Mr D’Ascenzo—But it depends on what price you bought the shares for. Senator BISHOP—Let us assume that you bought the issue price of the warrants and paid the extra. If you paid $11, it has gone to a market price of around $17. Mr D’Ascenzo—But if you bought it at $5.80 you would actually make a capital gain. Senator BISHOP—Yes. Mr D’Ascenzo—So it really does depend. There is a weighing both up and back in that sense. Senator BISHOP—A lot of taxpayers bought them at the warrant price of the round. Mr D’Ascenzo—Again, I think the calculations that we have done on this basis prove that, to the extent that there may be any capital losses, they are insignificant in the scheme of things. Senator CONROY—The issue is not whether there is $5 billion or $10 worth of manufactured capital losses; the issue is whether or not manufactured capital losses fall within the general tax avoidance provisions. Mr D’Ascenzo—The bank has agreed to a one-off non-cash reduction of $25 million. That actually requires an application of part IVA. Senator CONROY—For your information, I am advised that it has been a long time since the Commonwealth Bank shares were below $7. CHAIR—Are there any further questions on taxation matters? Senator COOK—I have some questions on the leakage from the PAYE tax base. There is a major compliance project under way looking at this question. Could you please explain the number of taxpayers involved? Mr Simpson—I cannot give you an answer on the number of taxpayers involved. I have just been joined by Mr Peter Achterstraat, one of our assistant commissioners from Sydney who is heading up this project. I cannot tell you the number of taxpayers involved. I am not sure whether Mr Achterstraat can. The other side of it is that PAYE revenue continues to rise, so there are different issues there. Mr Achterstraat—The compliance project we have initiated is the PAYE enhancement alienation project. It is to review the operations of the PAYE provisions to test their effectiveness et cetera. The alienation side of it is mainly to do with the splitting of income, which is a related but quite separate issue. The typical situation is having a work force being provided to a typical organisation in a number of ways, either via an employee or a contractor or, in certain situations, via an interposed entity. The alienation project is looking at the issue where there is a corporation or interposed entity deriving the income, whereas the PAYE enhancement project is looking at the contractor situation. As far as the income splitting

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 817 arrangement is concerned, we have written to in excess of 1,000 tax agents to express our views. It is mainly an education program with some enforcement as well. Mr Simpson—There is one thing I can add. There are reports of about eight, nine and 10 per cent of people dropping out of employment arrangements and going into contracting. I cannot tell you the number of employees. A lot of the moves to some of the arrangements that Mr Achterstraat has described involve the incorporation of companies. You will find that they will sometimes finish up with two or three pay as you earn taxpayers out of the arrangements, albeit with the income being split instead of one pay as you earn taxpayer. So it is a matter of getting across some of those issues. It is a fairly large job. Senator WATSON—Is there quite a lot of leakage with the salary sacrifice? Mr Achterstraat—It is not part of this project. Senator WATSON—Why not? It has the same effect of leakage. Mr Simpson—Salary sacrifice. There is a fringe benefits tax regime that interacts with the income tax regime. There may be some leakage to the extent that there are some benefits there. I do not really see it as part of the same project. We are looking at that issue. Senator WATSON—As a separate issue? Mr Simpson—Yes. Senator COOK—I appreciate that it is a large project and that it is importance. If you cannot quantify what the number of taxpayers involved is—I accept that you cannot; that is what you have said—can you give us an idea of the amount of revenue that is at risk? Mr Achterstraat—As part of the project, we are doing analysis work. The first part of the project is an education part. We have issued a new ruling which sets out the Australian Taxation Office’s views on when PAYE is appropriate and when it is not, which is taxation ruling 97 draft 9. The first step, as I said, is the education one. We will then be looking at the analysis and enforcement side subsequently to be able to determine whether it is possible to look further to see the size of the issue. Senator COOK—Have you factored in any revenue from this exercise into the forward estimates? Mr Achterstraat—I will have to take that on notice. Senator COOK—Given the state of work that you are up to, is there anything factored into the forward estimates, or will any revenue flowing from the inquiry be additional to what is currently published into the forward estimates? You can take that on notice. The government chose not to proceed with Labor’s amendments on this, yet the ATO is clearly identified as a major problem, as evidenced from the compliance project. Will the government admit that it was wrong and now proceed with Labor’s amendments to tighten up the system? Senator Kemp—No. Senator COOK—Why not? Senator Kemp—I think the amount of work being done has been explained to you. That is the process that was discussed at the time. I have nothing further to add. Senator COOK—If you had proceeded with Labor’s amendments, you could have closed the stable door then, not later. Senator Kemp—There were other problems with Labor’s amendments. For example, small business was highly critical of the Labor approach.

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Senator COOK—On PAYE? Senator Kemp—On the provision that you brought in. The government received representations that the proposed changes would in some circumstances have brought payments to independent contractors within the PAYE provisions. You will be aware that this would contravene our belief that the tax laws should not undermine the independence of contractors. The short answer, in response to the representations, is that the government decided not to proceed with legislative changes foreshadowed and introduced into the parliament by Labor. We are concerned that the Commissioner of Taxation will take all appropriate steps to safeguard the operation of the law. Senator COOK—I will look forward to what quantification can be given of the amount of revenue at risk or lost because of leakage from the PAYE system. We will see what delay may have done to that and balance it against the factors that you have raised. It is obviously a matter for some consideration down the track. I understand that a number of consultants to the Wallis inquiry were paid through interposed entities. Perhaps you might tell us whether the government is satisfied that none of these payments were made to entities that were purely established for tax minimisation purposes. Mr Simpson—I cannot answer the specific question. I do not know who worked for the Wallis inquiry or who did not. Beyond that, it really would go to the personal affairs of the taxpayers concerned. I could not, by virtue of the confidentiality provisions, reveal that information. Senator COOK—I appreciate that. Mr Simpson—I do not think I could ever speak for the intention of anyone in establishing a company, trust or whatever else. Senator COOK—Are you able to confirm that a number of consultants were paid through interposed entities? Senator Kemp—I do not have any information on that. I do not know whether anyone else can assist the committee, but I cannot provide any information. Mr Evans—Stopping short of what the facts of the situation might be, it is certainly conceivable that that could occur. When we or anyone else hires consultants, it is not unusual that we are hiring a private company, for example. One can speculate as to why that might be the case. It happens to be a normal way of doing business. We do not need to be hiring consultants to be aware that there is potentially a problem of alienation. The tax office is looking at that problem in its own right. The fact that, while they are looking at it, such practices might go on completely within the law, I might add, is a separate issue. We certainly would not want to say that we will not hire the best consultants because they choose to operate within the law in a way that costs us revenue. Senator COOK—I appreciate that point. Mr Evans—I do not think we can say more than that. Senator COOK—Perhaps I could say that it does emphasise the urgency of getting to grips with a project in which there is clearly some, but as yet unquantifiable, leakage from the PAYE tax base where some taxpayers can have access to that type of facility and other taxpayers cannot. It constantly raises the issues of the integrity of the tax base and fairness. CHAIR—Perhaps we are debating the issue. Senator COOK—I do not think we are at odds.

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CHAIR—Maybe not, but we are discussing it. I would rather we had questions. Senator COOK—You are quite right. I take your point. I return to the question of leakage from the PAYE tax base. How does the Australian Taxation Office propose to overcome, under the current legislation, the precedent set in—I think I have this right—the Vabu Crisis Couriers case? Mr Achterstraat—A number of court cases in the last 18 months or so have clarified or given guidance to the operations of section 221A of the Income Tax Assessment Act, which deals with the definition of ‘employee’ and similar provisions in other legislation. We have issued, as I have indicated, a draft ruling, which sets out our views on the definition of ‘employee’. To a certain extent, the case you refer to, the Crisis Couriers case, is a restatement of many of the factors that are taken into account in determining whether an individual person is an employee or not. Our previous ruling was issued 10 years ago. We looked at a number of criteria to determine whether a person was an employee. Our subsequent draft ruling has expanded that to a certain extent to take into account some of the judicial comment. That draft ruling, D9, is open for public comment. When we have analysed the public comment, we will be looking to issue a final ruling with respect to the definition of ‘employee’. Senator COOK—Perhaps you can help me. Does the government support the principles opening up the PAYE tax base as set down in that judgment? I am not familiar with your draft ruling. Mr Simpson—My understanding is that the work we are doing was done at the request of the government when it made its decision that it would not open up those provisions. I would expect that the outcome of our work will be a report back to government on what we have been able to achieve and where we still see some difficulties. It is very difficult. You have to deal with these things one by one. Senator COOK—That goes to the process part of my question. Going to the question of the principles opened up by that decision, what have you said in your tax ruling about that? Senator Kemp—Before you go on, you should stress that the government has asked the ATO to apply the existing law, including part IVA. In the 1996 budget, the government asked the Commissioner of Taxation to look at these PAYE issues. I think that is what we are being briefed on now. Senator COOK—The tax office is saying that it is. What is your position on the principles established in this case? Senator Kemp—The tax office is saying that they are looking at it. Mr Achterstraat—The difference, in summary, between the draft ruling and our original ruling IT2129 is that in IT2129—I think I have the reference correct—about 10 years earlier, we indicated that the primary tests for determining whether an individual was an employee centred around the question of control and integration. If a person was under the control of another organisation, it would tend to suggest that that person was an employee. In the draft ruling we have issued recently, we have taken a broader approach. We suggest that, in line with what the courts are saying, we look at a range of issues to determine whether an individual is an employee or not, not just the control and integration factors. We look at factors such as the risk and the degree of assets provided et cetera. We are taking on board those things to help assist in the definition.

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Senator COOK—It is a well-trodden path in industrial law as to whether a person is an employee or a subcontractor. From what you are saying, it sounds as though the principles you are taking on board are the latest dicta laid down about the difference between a worker and an employee and a contractor. Is that where you derive the background information for your draft ruling? Have you had regard to other principles? Mr Simpson—We have not been driven to that to a large extent. We took another case on taxi drivers recently, which we lost as well. One of the problems we face is that invariably these cases are tried in state courts. I would have to say that I do not believe they are very sympathetic to Commonwealth revenue. Crisis Couriers may have even been an aberration, because that was a case under the superannuation guarantee. The court got into its mind that they were giving a benefit for the taxpayer rather than taking some tax off them. Be that as it may, that came out the same way as the others. This is one of the difficulties. Despite a very clear purpose clause in the law, PAYE provisions are there to facilitate the collection of the revenue. Courts, over a long time, have applied the master-servant concepts and industrial vicarious liability concepts and we have been stuck with them. We are not alone. The same situation applies in the United States, where they have gone to enormous lengths and written pages and pages of legislation to try to distinguish between independent contractors and employees. I am not quite sure what the Canadians have done. They have attempted to do other things, though. It is a universal problem. Senator COOK—When the current fashion is to downsize, outsource and subcontract, working out whether a person is a worker or a contractor is a complex thing. Quite a lot of effort is put into trying to disguise what they are, often. Mr Simpson—A lot of those things are not for tax reasons. There are a lot of non-tax reasons why people do not want to be employees as well. Senator COOK—That is also true. Here, though, we are only concerned about tax reasons, I guess, and the impact on revenue and whether people are evading taxes. The draft ruling that you have brought down does not have the force of law. Someone could use the Crisis Couriers case as a means of challenging your ruling, could they not? Mr Achterstraat—To a certain extent, the ruling is not inconsistent with Crisis Couriers. Basically, the cases and the rulings say that each situation has to be weighed up on its merits. It depends on the weighting that a particular situation is given. You are correct: the ruling is a draft. We are analysing public comment on that. Generally, the ruling takes the position that we weigh up the factors in the case to determine whether the risk element or the control element is the more dominant. Senator COOK—This is IT2129? Mr Achterstraat—That was the previous one. That was the ruling which was issued approximately eight or 10 years ago. The one we are referring to now is TR97/D9, which was issued in August this year. Senator COOK—Out of considerable interest in this subject, I will familiarise myself with it. I have a series of questions, Mr Chairman, that relate to transfer pricing. CHAIR—Senator Conroy had to leave for about 15 minutes and indicated that he had some questions on taxation. You ask those questions now, as Senator Conroy has been called away.

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Senator COOK—I have a fair few tax questions to ask. Recently, the Australian Taxation Office handed down a 74-page ruling, TR97/20, on transfer pricing. Can you advise the committee what the substantive issues that have been canvassed in that ruling are? Mr Simpson—I might ask Mr D’Ascenzo. Before I do, I might record the fact that that is the first ruling that has been issued by our new international tax rulings panel which Mr D’Ascenzo chairs. Like our other panel, that panel has external consultants as members, who contribute to it. Senator COOK—International consultants? Mr Simpson—They are people with a lot of international tax experience, such as academics, economists and lawyers. Senator COOK—Who are not Australians? Mr Simpson—They are Australians. The panel is comprised of our staff plus these externals. Mr D’Ascenzo—That ruling was on methodologies. Basically, it tries to explain to Australian companies with dealings with related parties the processes and principles that are applicable to how they go about ensuring that their prices with their related parties meet the arms-length standard. That is really the guts of that ruling. We have provisions in the double tax agreements and we have division 13, which deals with transfer pricing, amongst other things. Those provisions basically are based on what we called the arms-length principle, which says that, when you deal with related parties, ensure that you deal with them as though it were on an independent third party basis. That benchmark then allows the right amount of profit to emerge in Australia vis-a-vis the amount of profit emerging in another jurisdiction. What we tried to do under D22 is provide some principles about how we think taxpayers can take that broad principle and apply it to their circumstances. That ruling will be enhanced by a further ruling, which goes one step further. In other words, D22 starts to talk about the sorts of principles and approaches that you take in answering that question. Our next ruling, which will be D23, looks at the nitty-gritty in terms of the sort of papers that people might need rather than the approaches outlined in this ruling. Senator COOK—Thank you, Mr D’Ascenzo. That is a comprehensive treatment. Can you tell me whether there are major changes in this ruling compared with the previous practice of the Australian Taxation Office? If there is, what are the main features of those changes? Mr D’Ascenzo—The ruling in large measure follows the OECD approach to transfer pricing in principle. To that extent, it is the approach that Australia has been taking in terms of its tax administration as long as I have been there. There has been no change in terms of those fundamental principles. Those principles have been developed over time through the OECD and other practices. What we did in this ruling was say that we adhered to OECD principles. We pointed out that one specific provision of our law, which is 136AD4, allows us to make an approximation of what the arms-length price might be in circumstances where there is not other information available. I suppose we singled out of that ruling the fact that there will be situations where we may have to find an answer to a transfer pricing matter even if some of the more purist approaches are not available because the information is not available. It is a significant message that we send to the community. Other messages are in terms of the benefit for taxpayers in going through a process of analysing all the circumstances in setting their prices as ordinary, prudent business persons would in dealing at arms length. They are basically the principles in respect of any changes to them.

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Senator COOK—Are there any revenue implications in the changed position? Mr D’Ascenzo—We are hoping that, by educating Australian taxpayers in this area—saying this is how you go about doing a transfer pricing analysis—where they have dealings with related parties, that of itself will mean that they will better comply with arms-length principles. We think that will have a positive revenue effect. I suppose that that is the whole idea of it. It is to help people understand what their requirements are under the law and to help them through that process. That will help in circumstances where an Australian subsidiary takes on its face the price quoted to it by its parent without going through any of this analysis. We say to those taxpayers that that may not meet the arms-length principle and that this is the way they should go about the process. Senator COOK—So there are revenue implications? Mr D’Ascenzo—We hope that that will help compliance in these areas. Senator COOK—How do you describe current transfer pricing arrangements? Are they a threat to the tax revenue base at all? I think the answer is yes, they are. It is a question of to what degree. Mr D’Ascenzo—I remember being asked this at a previous committee some 10 years ago. Senator COOK—I am sorry to repeat the question. Mr D’Ascenzo—It is a fair question. Senator COOK—If there is a 10-year gap, I will not be pulled up on the grounds of tedious repetition. Mr D’Ascenzo—Basically, it is a question of the number of dealings that Australian companies have with related overseas parties. That is the ballpark. When many of those taxpayers comply, we apply normal market principles in setting their prices. So there is less of a risk in that process. While I cannot tell you how big the problem is, we think it is significant. We thought it was significant to the extent to which we have created a new international section in the organisation that focuses more strictly in that area. We think this process of trying to provide some guidance about how transfer pricing should be put into effect and setting some benchmarks, standards and expectations will help improve compliance. We have a range of compliance checks, such as an expanded 25A schedule, which asks for more information from taxpayers with related overseas party transactions. We then say that in those circumstances and with all that information and background, you can profile the community at risk. We can say, ‘This is more of a risk for Australia. Therefore, we will look at you through our audit and compliance activities.’ Other taxpayers who have been trying to follow the approaches we have outlined will be very low risk and will be doing the right thing. Senator COOK—I think Mr Simpson may have anticipated this question to some extent in an earlier answer. How does this ruling compare with transfer pricing practice in other major industrialised countries? I think Mr Simpson said something about OECD consultations and so forth. How would you answer that question? Mr D’Ascenzo—I said that, if you look at that ruling, we are coming up with a statement which says that we basically apply OECD thinking. We have been very active in the OECD in trying to develop that thinking. We make the proviso that the Australian context is not necessarily generic to all other jurisdictions. We have specific provisions in our law which allow us to, at the end of the day, reach a result in a particular matter. There is perhaps a difference in that area.

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Senator COOK—I will try a two-on-one question just to speed the proceedings along a little. There have been reports that the Australian Taxation Office has become concerned that many foreign owned businesses appear to operate in Australia at rates well below Australian industry tax averages. This obviously suggests that there is a degree of transfer pricing going on. Can you comment on that? Are there particular industries that one ought to be concerned about here? Are there industries that perhaps the ATO has targeted for transfer pricing minimisation practices? Mr D’Ascenzo—The first question is a relatively easy one. Foreign owned businesses having a lower ratio of profits than, say, domestic companies dealing with arms-length parties is one of the indicators that there may be transfer pricing and there might not be. That puts it into risk categorisation. I suppose at the very least, with that sort of information, it is our job to ensure that there is a commercial reason why that difference occurs. The first answer is that that does prompt us to look further. The second one relates to the types of industries. There are areas that are high on our risk approaches, but I do not have specific information. Perhaps I will have to take that part on notice. Senator COOK—I will now move to rental income and negative gearing. As with the PAYE tax base, I understand that there is a compliance project under way regarding an investigation of claims made for negative gearing. Can you give me an outline of what this compliance project is about? Mr D’Ascenzo—I am not sure whether there is a project on negative gearing, to be honest. That is something that we might need to take on notice. There may well be a project in relation to rental income which basically looks at the total range of claims in that area relative to income to see whether they are bona fide. That does not narrow itself to only a negative gearing perspective. I will have to take that on notice. Mr Simpson—I believe there is a project on rental income, but I do not have its terms of reference with me. As Mr D’Ascenzo has said, perhaps we can take it on notice. Senator Kemp—I have a limited amount of information here. As indicated by the officers, the ATO has commenced a national rental compliance program. This follows the identification of a number of serious compliance problems unearthed during recent research and analyses of the 1996 tax returns. The ATO is adopting a balanced approach in its interaction with taxpayers, including a range of measures to promote education and awareness of the relevant law as well as audits in specific cases. I would stress that there is no reason whatsoever for taxpayers who make legitimate claims to be concerned. Senator COOK—No, all the good guys should go free. I am happy for you to take the question on notice. I would like to add to that a fairly predictable series of follow-up questions. We have established that there is a compliance project. My follow-up questions are: how many taxpayers are involved in the inquiry? What is the average claim for negative gearing? What class of income group are the most prolific users of negative gearing as a means of minimising their tax? What is the cost to revenue from negative gearing? What alternatives are there to negative gearing? They are my follow-up questions. You might care to take them on notice as well. Mr D’Ascenzo—I want to make the point that the rental income project looks at a range of deductions, some of which do not necessarily relate to the negative gearing aspect. Senator COOK—I think my colleague Senator Watson— CHAIR—Senator Watson was referring to matters other than negative gearing as well.

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Senator WATSON—I think your investigations have found that it is not only negative gearing but also capital items that are being claimed, whereas the legitimacy of the deduction and entitlement is revenue related items being incurred. Senator Kemp—I think some of the things that have been looked at are initial capital improvements that have been claimed as repairs, and loan interest and expenses that have been claimed when the property is not available for rent. Non-commercial rates of rent have been charged to friends and relatives, and inflated estimates of construction costs have been used for building that were right off calculations. Senator COOK—I look forward to receiving that information. I now want to turn to the Tax Pack. Recently the NTAA claimed that, despite personal assurances from the tax commissioner, thousands of people who had relied upon the Tax Pack to complete their returns had been penalised by the Australian Taxation Office. What is the tax office’s view of the NTAA’s claims about thousands of people being penalised for relying on the Tax Pack? Mr Simpson—I am aware of the claims that were made. I understand that our preliminary work indicated that there had been no complaints about the matter but that the commissioner nevertheless decided to take action in relation to it. I recall that he placed an advertisement in the newspapers inviting people who felt they had been affected by this matter to come forward so that we could examine and rectify the matter if there was a need to do so. Senator Kemp—Senator, I think you would be aware that the tax commissioner put out a press release on 26 October on that matter. Among other things, the press release said, ‘The tax commissioner, Michael Carmody, has reaffirmed his guarantee that taxpayers who use Tax Pack will not be penalised for honest mistakes.’ He further stated in that press release, ‘I stick by the guarantee. We have no evidence that it has not been properly applied.’ I think a similar question was asked in the parliament by Senator Conroy, if I remember rightly. Senator COOK—The NTAA’s claim was that in 1996, 235,376 taxpayers were audited with 164,268, or 70 per cent, identified as having errors resulting in $67 million in fines and penalties. That is the claim in specific terms. Can you confirm that? Senator Kemp—I will leave it to the tax office. From memory, I think there were some figures that were given to the parliament. Mr Simpson—I understand that around 2.7 million taxpayers prepare their own returns. Tax agents prepared 7.1 million. Of these 2.7 million, I believe that less than 10,000 were adjusted by the Australian Tax Office as a result of auditing activities. That does not include income matching activities. Of course, income matching involves checking interest dividend information against returns and looking for omitted income. Of course, a person who omitted income has not followed Tax Pack and is, of course, not entitled to the guarantee. Only about 3,200 cases had penalties imposed. I believe, in relation to that, that only a fairly small number of those came forward when the commissioner placed an advertisement in the newspaper asking for any people who felt disaffected. Senator COOK—I did not take down the full figure—three thousand— Mr Simpson—Two hundred. Senator COOK—So 3,200 had penalties imposed? Mr Simpson—Yes. Out of the 10,000 where we found discrepancies other than income matching discrepancies. Senator COOK—Is that the number of taxpayers who relied upon the Tax Pack who had made errors and have been penalised?

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Mr Simpson—There were 2.7 million tax returns that taxpayers lodged themselves. Of those, there were 10,000 adjustments made as a result of audit not including income matching activities. Senator COOK—Right. Mr Simpson—In only 32 per cent of those 10,000 cases—3,200—were there penalties imposed. That has defined the field of the number of people using Tax Pack who have had a penalty imposed who might be subject to whatever claims the NTAA has made and in relation to whom the commissioner has placed advertisements in the press asking people to come forward so that we can investigate any claims that might be made. Senator Kemp—The figure is 3,200? Mr Simpson—Yes. Senator COOK—What is the Tax Commissioner’s guarantee regarding those taxpayers who have made honest mistakes using the Tax Pack? Mr Simpson—The guarantee is that if people follow Tax Pack they will not be penalised. Senator COOK—As straight and simple as that. Mr Simpson—It does not mean, of course, that they will not be subject to additional tax— the time value of money for late payment. Obviously, if you leave income out you are not covered by this guarantee and if you have not followed the instructions in Tax Pack, if you have just thought of a number and put it in— Senator COOK—If you have just thought of a number and put it in you are a suspect already. Senator Kemp—I think the point is that the taxpayers who follow Tax Pack will not be charged a penalty for honest mistakes. Senator COOK—That is the 3,200, is it? Mr Simpson—That is the field that we believe is the absolute maximum. It is the maximum number of penalties for Tax Pack cases. Mr D’Ascenzo—That is the field, it does not mean those errors occurred because they had followed Tax Pack. All the other reasons can apply to all those 3,200 people. Senator COOK—So we do not know exactly at this stage how many people followed Tax Pack and are subject to notional penalties? Mr D’Ascenzo—Exactly. It might be none. Senator COOK—It may be none. Mr Simpson—It could well be. Senator COOK—What do you think it will be? Mr Simpson—We have had no complaints. We have had people who have said, ‘I followed Tax Pack and you have penalised me.’ Senator COOK—Can you tell us what the process is that you have put in place to ensure the taxpayers that use Tax Pack do not get penalised? What are the processes? Mr Simpson—I cannot tell you that, Senator. I will take that on notice if I may. Senator COOK—Thank you. Senator Sherry asked a question on notice at the Senate Economics Legislation Committee of August 1997 as follows:

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Senator SHERRY—In this year’s Tax Pack has there been any evaluation of the minimum level of education and literacy that the ATO considers is necessary in order to allow a reasonable taxpayer to make use of it to lodge their tax return? The answer was: Senator Kemp—The answer to the honourable senator’s question is: the ATO has undertaken several rounds of focused testing and telephone interviews as part of Tax Pack 1997 evaluation and consultation developmental processes. Then it goes on: The testing covers many different target groups, including people from different educational levels. Respondents were asked if they could understand the sections of the Tax Pack being evaluated. It goes on: Generally people gave favourable comments. It goes on for another sentence or two. If people generally gave favourable comments, what were the adverse comments that people gave? Mr Simpson—I cannot tell you, Senator. I will have to find that information. Senator COOK—Is it possible to find out? Mr Simpson—I will endeavour to do so. Senator COOK—Do you know who did the testing? Mr Simpson—No, I do not. Senator COOK—Can the committee have a copy of the results of that? Mr Simpson—I will give what we can find. Senator COOK—Mr Chairman, I now wish to move to the ATO audit of tax agents. I have a series of questions under that heading. Many members of parliament have received letters from tax agents concerned about the practice of multiple audits of clients. Could you explain the changed approach of the ATO regarding this matter? Mr Simpson—You would be aware, Senator, of the very significant impact of electronic lodgment and the fact that in 1996-97, 74 per cent of returns were lodged electronically— almost all of those by a tax agent. This has led to a situation where, when we contrast the work that we are doing in the pay-as-you-earn and the alienation where we do cases one by one to try to establish things, we are attempting to leverage up our activities to get the highest compliance outcome for the lowest investment. We have started to do work around looking at returns lodged by tax agents. Obviously, they lodge the bulk of the returns. That has had the misfortune of being labelled auditing tax agents. I do not really believe it is about auditing them; it is auditing their clients and leveraging our activities to get the best possible outcome. The agents, of course, play a very significant role in ensuring that taxpayers meet their obligations. It is for that reason the compliance improvement programs have, to some extent, shifted towards the work of tax agents. We do not expect tax agents to audit their clients or act as an assessor or agent of the tax office. But we do look to tax agents to take reasonable care and act in a proper and professional way in lodging returns and making sure they do not put themselves in a position where they are lodging returns that they know are false or misleading in any way. We have worked with the professional bodies, the chartered accountants and the society of CPAs, to establish joint taxation standards that reflect the responsibilities of tax agents. We

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 827 are currently in the process, through agency bargaining arrangements, of working to adopt those same standards of working in the tax office. Senator COOK—Thank you. I understand that there has been a court case, and a decision arising from that case, relating to this issue. Mr Simpson—As I understand it there was a Federal Court decision that did confirm the commissioner’s power to conduct programs focused on compliance with the assessment act. I am not right across the details, Mr D’Ascenzo might know more about it. Mr D’Ascenzo—It was the Knuckley case. Basically, it challenged our right to seek information from tax agents about their clients as part of our compliance work, but the court agreed that that was well within the scope of our administration. Senator COOK—The other matter raised with members was the possibility that the government would be altering the standards as applied of tax agents. Could you outline what the proposals are, if there are any proposals, and how they differ from the current practice? Mr Simpson—I do not have all that information with me. As I mentioned a little earlier, the proposals that are being looked at are joint task force proposals. The tax office and the two accounting bodies produced the proposals. I understand that the process that has gone on is close to finality, but I am not right across that. I could let you know. Senator COOK—Thank you, Mr Simpson, I would appreciate that. If there is nobody here to answer that question it probably renders an answer to my next question very difficult indeed, but let me try the question and see if I am right. The agents that raised these matters with members claimed that the new standards would massively add to their responsibilities and hence costs to their clients. The first question, Minister, is to you. Is the government aware of that and what weight does it place on those claims? Does it accept those claims? Senator Kemp—I have received letters on that matter. I guess other people have as well. I am aware of that concern. It has been expressed that it is certainly not the intention of the government to massively add to compliance costs. In fact, as a government we try to reduce compliance costs wherever possible. I do not know whether Mr Simpson might like to make a comment. Mr Simpson—My understanding is that a lot of the concern is around issues of standards and continuing professional development, and what it will cost them to undertake that. There is a judgment question there. Given the responsibilities that these people have to their clients, and to the tax system, it is essential that they keep themselves abreast of current information. Mr D’Ascenzo—The background to this has been a joint exercise between the accounting profession, the legal profession and the tax office in terms of standards. There was a joint committee developed to prepare recommendations in relation to that matter. So when you talk about standards and recommendations, it is recommendations that have actually been agreed to by the relevant representative bodies. Senator COOK—Are you saying that nothing has changed yet? Mr D’Ascenzo—No. We had a review looking at the question of standards. That was a joint review between the professions and ourselves. The outcome of that review was a range of recommendations. You are saying that there are some accountants and agents who have been raising with the committee their concerns about those standards and those recommendations, but I am just making the point that they are joint recommendations and joint standards agreed

ECONOMICS E 828 SENATE—Legislation Thursday, 20 November 1997 not just by the tax office but also by the professions themselves through their representative bodies. Senator COOK—That is a fair point. You are saying that the responsibility is wider than just the government: there has been input from the private sector as well. The minister says it is not the intention for this to be the case. My first question was: is it the case? I accept that it is not the intention. I accept the comment you have made, of course, that this was the best a committee of private and public sector people could do. All that is interesting, but the issue I am concerned about is this: is it true that there are additional responsibilities that add to the cost for agents and their clients under the new standards? Mr Simpson—I cannot give you specific details, Senator, as there were something like 148 recommendations. A number of them are related to the proposal to abolish the current state-by- state arrangements for registering tax agents and instituting a national system which we believe would be much more efficient. I mentioned earlier that a lot of the recommendations were about professional standards, continuing professional development. I know that some of the smaller accounting firms are concerned that that will involve them in more cost than they feel they have had to bear in the past. There are a number of recommendations too about disciplinary action, although I do not have those in my head. As Mr D’Ascenzo has said, the professions have been pushing for the conclusion of this matter more strongly than the tax office has been reacting. We are near a conclusion. As you would appreciate, there is a very wide range of people belonging to different bodies who have to be catered for and there have been some different interests that we have had to work our way through. I believe we are near agreement on those things now and we will be bringing something forward for government in the near future. Senator COOK—Thank you, Mr Simpson, but does that mean there is an increase or does it mean there is not an increase? Mr Simpson—I cannot answer that, Senator. I would have to look at the information we have to see if there is something I can provide you with on that. Senator COOK—I appreciate that. Please appreciate the position we are in. We have claims saying this is true. This is an opportunity to ask you whether you agree with that. It is hard for us, as representatives of the public, to make decisions about whether the claims are overstated, understated or accurate. Has the tax office received these complaints as well? Mr Simpson—I am aware that these claims have been made. Senator COOK—Have you investigated those? Mr Simpson—We have, but I would need to take it on notice and give you an answer. Senator COOK—Okay, thank you very much. It would be true that in essence it would drive up costs to small business through more government red tape being imposed on tax agents if those claims were true, would it not, Minister? Senator Kemp—You are not looking at the broad field, only the specific—not at what other actions the government is taking to lessen red tape on business. Mr Simpson has indicated that he will look at the issue you have raised. We will take it on notice and see what information we can give you.

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Senator COOK—You have indicated that you have received these complaints. I have indicated that we have received them. The tax office has. If they are true, it is a bigger impost on small business. Is that a yes by a shaking of the head? Senator Kemp—I am saying that in terms of the overall costs on small business you have to take quite a wide range of things into account. Of course, you would be aware there are announcements that were made by the government in relation to red tape on small business. It would probably be a mistake to look at everything in isolation but you have raised a question and we will see what we can do to assist. Senator COOK—If this was earlier in the day and I had more energy I would probably pursue you on this, Minister, because I think the answer is clearly yes. It stands there as an obvious answer but you do not want to give it out and you are trying to avoid giving it. Senator Kemp—No, I am just providing you with an overview, with accurate information. Senator COOK—I know you are providing me with an overview but you are not answering the question. I will just register that. Mr Simpson—Another dimension, Senator, is that there are potentially significant costs to the revenue if they do not meet standards. Senator COOK—Of course, but the art here is to collect the tax that is payable in the simplest way without imposing costs in the collection that are unwarranted. That is the issue here. The government tells us it is able to do this in a minimum way and I am interested to see if it has achieved that. The complaints from the tax agents are that it has not. However, you are still looking at it on behalf of the government and hopefully you will achieve that. Senator Kemp—It is also worth noting, as has been mentioned, that we are working with other tax accounting bodies on this issue and my understand is there has been very extensive consultation. Senator COOK—So if you have not got it right it is not entirely the government’s fault, the private sector as well has to shoulder some of the blame because it has not devised a formula to get it right. That is your view. Senator Kemp—I do not know why you misinterpret my comments. Senator COOK—No, I do not. I do not at all. There have also been press reports that a change to substantiation rules is being considered whereby taxpayers would have to provide more evidence to justify deduction claims. Are those reports correct, and if they are, what types of changes are being considered? Mr D’Ascenzo—I have not heard of those claims. I suspect they are not correct, but if they are, we will certainly get back to the committee with that information. Senator COOK—The claims you have not heard of are not correct? Mr D’Ascenzo—I have not heard of those claims. But, if I am not correct and that occurs, I will certainly advise the committee accordingly. Senator COOK—I had better produce some evidence of the press reports to help you. Mr Simpson—I have just been informed that there was a claim by the NTAA and the commissioner issued a press release. I do not have it here. I will provide a copy. The answer is, no. Senator COOK—The answer is, ‘No, not correct’? Mr Simpson—Not correct, I believe.

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Senator COOK—And you are not considering therefore any further changes? Mr Simpson—Not to my knowledge. Senator COOK—Will you check that that is the case? Mr Simpson—Yes. Senator COOK—You have said not to your knowledge and I take it basically that they are not happening. I just want to square that off and you will check that. Mr Simpson—I will check that. Senator COOK—If they were happening, then you might then go to the other question which I will foreshadow now. Would they be compatible with the ATO’s increasing use and encouragement of electronic lodgment? Mr Simpson—I will take that on notice. Senator COOK—Thank you. In relation to the heading of new taxes, could you please provide the committee with a list of names of the statutes that impose taxes under section 55 of the constitution that have been enacted since March 1996 both within and outside the Treasury portfolio? CHAIR—I presume that is a question on notice? Senator COOK—Yes. I do not expect Mr Simpson or anyone else at the table to have them to hand. CHAIR—They have indicated that they will take that on notice. Senator COOK—I have some question on negative income tax. Recently in the media there have been some discussions about negative income tax as a possible replacement for our current social security system. Has Treasury got a view on the desirability of a negative income tax system? Mr Murray—On the issue of negative income tax, this and other sorts of proposals in relation to the interface between the tax system and the social security system are issues that really are matters in relation to tax reform. There is probably not much more that I could really add to that. Senator COOK—You could add to it all the details of what your considerations are, if you are kind to me this afternoon. Mr Murray—Because these are matters about tax reform, I do not think really they are matters that I could discuss here today. Senator COOK—In the privacy of this public hearing? Mr Murray—That is right. Senator COOK—So they are part of a tax review? I take from that that they are under consideration? Is that a fair conclusion? Senator Kemp—I am not sure the officer would wish to speculate at all. Mr Murray—You could speculate that the whole area of tax is under review. I do not think this is the time or the place for me to be adding to speculation on what may or may not be in that tax reform arena. Senator COOK—You are not an adventurous soul? Mr Murray—That is certainly true at this stage.

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Senator COOK—Then let me put the question to you in another way so that you may be able to answer, even with a lack of adventure. Have you done any work on this matter in the last few years? Mr Murray—On negative income taxes? Senator COOK—Yes. Mr Murray—There are various bits of research on lots of issues that we do in the tax policy division and certainly interfaces between the personal tax system and the social security system from time to time have been looked at and they have come out up various areas of both research and policy analysis. There are a number of areas that we have looked at this particular topic, not necessarily negative income tax, but certainly that interface with the social security system. Senator COOK—That is a classic answer—‘Not necessarily negative income tax.’ Has negative income tax been included in this interface between the tax system and the welfare system in the work you have done? Mr Murray—It has from time to time as part of our research been one of the areas we have looked at and certainly in relation to important research on incentives to work. But we have certainly looked at various options over the years. Senator COOK—Can the committee have details of papers that you have written regarding that? Mr Murray—I would have to take that on notice to see what papers might be available. A lot of that work I suspect has been of a confidential nature, because it has related to possible policy developments both for previous governments and for this government. So I would have to take that on notice. Senator COOK—You are of course aware of the work of Professor Dawkins in this. Have you done any analysis of Professor Dawkins’s work on the subject of negative income tax? Mr Murray—We have certainly looked at some of Professor Dawkins’s work. Senator COOK—You have looked at it, which suggests you have read it, but have you analysed it? Mr Murray—I would say it would be difficult to read it without analysing it. Senator COOK—So you have analysed it? Mr Murray—To some extent, yes, that is certainly true. Senator COOK—What is your view of his work? Mr Murray—Interesting. Senator COOK—That is the extent of your analysis? Mr Murray—It is certainly not the extent of it. Senator Kemp—It may not be the extent, but I suspect it may be what you wish to share with us, is that right? Mr Murray—That is about as far as I would be prepared to go at this stage. Senator COOK—In the privacy of a public hearing? Senator Kemp—That is right. Senator COOK—What is your view of his work, Minister?

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Senator Kemp—I have not examined his work, but if I have time to examine his work and we have an opportunity to discuss these matters, we will discuss them. What is your view? Senator COOK—I find it interesting. Senator Kemp—That is a very perceptive answer. CHAIR—Could I suggest that perhaps we are moving a little bit away from questioning on estimates? Senator COOK—I am in the policy development phase. CHAIR—We are looking a new Labor Party policy. Senator COOK—We have written our policy. I am quite happy to engage in a discussion about it with you, Minister, if you wish, because I do think it is genuinely interesting. The implications for getting people back to work in areas of poverty traps is quite important for Australia. I do commend that work to you and I might wish to discuss it with you at some future time. Senator Kemp—Excellent. CHAIR—But not today. Senator COOK—Because of your ruling, Mr Chairman. Mr Murray, would you say there are significant or not significant barriers to the introduction of the negative income tax system in Australia? Mr Murray—I am not sure what you mean by ‘barriers’. Senator COOK—Obstacles, difficulties or problems. Mr Murray—Of a technical nature? Senator COOK—Yes. Mr Murray—Certainly, if you make a change of any sort, there are going to be technical difficulties. It is just a matter of analysing those difficulties to see whether those technical barriers can be overcome. Senator Kemp—I think the secretary may be able to share some views with us. Mr Evans—You are aware that what Mr Murray is saying is that indeed we do look at these matters and we have for a long time but we cannot share much of that information with you. To answer your latest question—and I do not think we can go beyond that—the negative income tax has a lot of conceptual attractions. It has one significant barrier to its introduction in a system which already has a lot of the issues being addressed on the outlay side, with tight targeting of those outlays expenditures. That is, to change that into a negative income tax system costs a large amount of revenue—an extraordinary amount. Senator COOK—Yes, it does. Mr Evans—So that is a significant barrier. Senator COOK—Getting that quantified in order to make sense as to how such a proposal would operate in Australia is one of the problems that people like me have in coming to terms with what the value of it might be. From a social point of view, there is, as you have said, up-front, obvious conceptual advantages, one of them being that it may encourage people who are unemployed and in receipt of unemployment benefits to actually seek work. But without knowing what the end cost is or only being stuck with ballpark figures, it is a hard argument to engage in.

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Mr Evans—The issues are not difficult conceptually. I think people will understand the advantages and disadvantages, and the cost issue is probably the significant barrier to introduction. So if you were looking at it in a serious sense, you would be looking at compromises. But we cannot say more than that because we are indeed looking at it as you cannot look at the issues of tax reform without doing so. Senator COOK—You are not going to tell me a figure of what you think it might be. Mr Evans—Sorry, what was the question? Senator COOK—You are not going to tell me a figure. Mr Evans—No. Senator COOK—No. Mr Evans—That is right. I think we have said as much as we can say. CHAIR—I am loath to intervene but I am concerned that we are developing into a policy discussion cum round table conference and I am not really sure that estimates is the place where that should take place. Senator Cook, I am not directing you but I am just wondering whether we can concentrate on some direct questions and answers, rather than have a discussion on issues as they arise. Senator COOK—Yes, although we are trying to get to the detail. CHAIR—I know. I do not want to have a policy discussion or round table conference in estimates, that is all. Senator COOK—Okay. I have actually exhausted my questions in the face of an obvious decision not to be able to answer them, given the policy development work that is involved here. Can I turn to the Ombudsman’s report and the ATO prosecution of taxpayers. There have been some recent press reports regarding the Ombudsman’s report into the ATO’s debt recovery processes and the use of section 218 notices. Can the ATO say whether it is aware of those reports? Mr Simpson—We are aware. I will just seek some specific information on 218. Certainly, in relation to debt recovery matters, we have been doing a range of benchmarking and we are in the process of implementing a lot of initiatives. I think the Ombudsman acknowledged that complaints about the tax office have fallen, and that was against the general upward trend. There were, nevertheless, some 400,000 debt collection cases and it represents a very significant part of our work. We have also, of course, as I said, been doing a lot of benchmarking around debt collection. Now with the taxpayers charter, the problem resolution service and the case reporting arrangements that we have, we are dealing with these cases much better. There is not much else I can say there. I am not aware of the section 218 issue. I am not sure if anyone here has that information. I am not aware of anything on section 218. ACTING CHAIR (Senator Watson)—With the new restructuring of the tax office, you have consolidated into four main units in terms of administration, haven’t you? Mr Simpson—Sorry, the structure of the tax office? ACTING CHAIR—Yes. You have changed it into four major offices now? You have taken the deputy commissioners out of some states and consolidated them. Mr Simpson—No. We reorganised. We commenced reorganising the tax office on 1 July 1994 into business lines. That was following a lot of market research that we did and as a major move to develop a much better client focus within the organisation.

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Those processes have been put in place, but what has happened is that the law only refers to commissioners, second commissioners and deputy commissioners and, because the new arrangements are that we had given the authority and the responsibility for decisions and all operations to national program managers in Canberra, we actually renamed them deputy commissioners. What you now find is, for example, assessment notices come out in the name of a deputy commissioner, who is in fact the national program manager in the ACT. Because they are done on a business line basis now, the notion of the branch office under the control of a deputy commissioner is no longer a feature of our organisational arrangements. ACTING CHAIR—There is a some concern in my own state that a lot of functions have actually been taken out of Tasmania and transferred to other states or other jurisdictions without anything coming back. Is that true? Mr Simpson—The new arrangements that were put in place have changed us from an organisation where virtually all functions were done in all offices to operating more on a regional basis. That has meant that in a number of places—not just Tasmania; it can also be in some of our offices in major cities like Sydney and Melbourne—some of the functions have been removed and they are done on a regional basis from somewhere else. When we moved to that situation, Tasmania was linked with the southern region and I think there were a number of functions there that are now performed from the Victorian area, but equally there are functions that are being performed in Tasmania that reach into Victoria. ACTING CHAIR—Not too many. I think that is the problem. Although it might occur to some extent in a major metropolitan area, the impact on a place like Hobart is very significant when you transfer functions out of a place like Hobart. Mr Simpson—Yes, I realise that. ACTING CHAIR—Have you got any plans to put anything into Tasmania from other areas? Mr Simpson—I understand that a lot of the organisation there is around the withholding tax arrangements that operated out of Hobart, but I believe it will not lead to any reductions there. On top of that— ACTING CHAIR—We lost all the superannuation. That went out to the mainland. Mr Simpson—That is now being handled from Melbourne. But as another example— ACTING CHAIR—PAYE is now sent on to the mainland and all these sorts of functions. There is not a lot left, quite frankly. Mr Simpson—But it is not just Tasmania. For example, there have been a lot of functions taken out of Canberra and there have been other ones put in there. I understand that there are activities actually done in Tasmania that extend beyond the Tasmanian border into Victoria. It is just the way we have reorganised our work. ACTING CHAIR—If you could give me a list of those it would be welcomed. Mr Simpson—I will give you that information. Senator COOK—I am just coming back to the Ombudsman’s report and the press reports about how, in particular, attention was focused on two extremes where the ATO were owed $2 million, of which the taxpayer paid $1.3 million in good faith while still having $2.3 million in his bank account. When it came to recover the balance and the ATO issued a section 218 notice against the taxpayer’s bank, they discovered the account had been cleaned out. Subsequently, the taxpayer declared himself bankrupt and the ATO therefore lost the

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 835 opportunity to recover the money. I am trying to find that in the report. Do you recall that reference in the Ombudsman’s report? Mr Simpson—I have a vague recollection. The details are not in my mind. I know that one of the central features of the report was debt collection activity but I do not have the details. Senator COOK—That has a familiar ring to you? Mr Simpson—The issue of debt collection has a familiar ring. Senator COOK—That example? Mr Simpson—Not the particular case. Senator COOK—The reference is on pages 166 and 167 of the Ombudsman’s report under the heading ‘The problem of judgment—winners and losers’ and another heading ‘Case study: from one extreme to another’ where the case study is set out. I think you will find that is the reference to which I just referred. Do you know how this compares with the case of an unemployed social security recipient who owed the ATO $1,500 where the tax office also issued a section 218 notice to his bank which left him a balance of 28c in his account and also forced him to move into an old caravan to survive? Mr Simpson—I am not aware of the facts of that case either. I would have to take that on notice. I am aware that, as a result of the Ombudsman’s report, we moved quickly to bring forward some work that we were doing on the whole question of debt collection. We have done international benchmarking on our debt collection activities. We have also done benchmarking against commercial enterprises and, I think, against some, if not all, state revenue authorities in Australia. Our concern, when we looked at that, was that we believed elements of quality control and quality assurance were lacking. We have moved to implement the recommendations in the benchmarking report and we have set a time frame to look at that with a possibility of market testing our performance at the end of that period. Mr D’Ascenzo—Can I add to that? In the use of 218, unless there is some reason to suspect the worst, we do not normally jump to that as the first course of action in the sorts of circumstances that you mentioned. So there could well be a whole range of background between some of the case studies that the Ombudsman might have raised. Senator COOK—If we juxtapose these two cases, you could say, on one hand, from the second example I gave that the ATO is vigorous in forcing a person into near destitution but, on the other, appears to be quite happy for a taxpayer to continue to hold $2.3 million in his account when he still owes the tax office several hundred thousand dollars in outstanding tax. That is the dilemma you face. Is that what you refer to as poor quality control? Mr Simpson—A lot of the issues, as I recall, in the Ombudsman’s report were around that perception of different treatment across taxpayers and that is a quality control issue. Senator COOK—Is it consistent with the taxpayers charter? Mr Simpson—That outcome? Senator COOK—Yes. Mr Simpson—That outcome is not consistent with the taxpayers charter, and I mentioned that as one of the things that we have implemented as part of the response to address these sorts of issues. Senator COOK—How should that matter be handled to be consistent with the taxpayers charter?

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Mr Simpson—It is a matter of looking at the processes you have—analysing them and finding out where the faults and the weaknesses are, where there is a lack of training, or whatever it might be, so as to develop quality processes to get consistent treatment across the country. One of the things that we are doing is instituting technological support for our staff where people share information. There is the issue of training as well. They are all just avenues that are aimed at improving the quality of the performance and a particular focus on consistency, but on the two cases I cannot comment. Senator COOK—All right. Can I raise some questions about farming tax. I understand there is going to be an equity distribution to farmers in respect of a wool stockpile and the restructuring of the Australian Wheat Board. Can you explain the tax consequences for primary producers receiving these equity entitlements? Mr D’Ascenzo—Basically it involves a particular taxable entity making that distribution. It is difficult for us to comment without somehow disclosing information in relation to that particular taxpayer and its affairs. Also, I notice that the newspaper reports have talked in terms of a range of possible outcomes. The matter is before the ATO. We are working through that exercise to produce an outcome which reflects the law. We have not yet completed that review so, firstly, it is premature for me to say so and, secondly, I am a little bit concerned about the secrecy provisions in terms of the main distributing body, Wool International. ACTING CHAIR—There are two components: there is the dividend, which would be assessable for tax, and there is a distribution of shares representing your equity. Are you suggesting that there is a possibility that those shares may be subject to tax of some form? Mr D’Ascenzo—Again, just from the newspaper reports I gather it is not actually shares; it is a unit. There is a whole range of different processes in place. All I am suggesting is that we need a little bit more time to work out the tax consequences. We are not in a position to provide an answer. ACTING CHAIR—These are people who are in receipt of an entitlement in the form of shares which may have represented some form of equity—some form of a combination of a couple of other factors. So, between yourselves and the Wool Corporation, you will send a statement out to members? I think there is a general belief that the share component may not be subject to a form of tax at the moment. Mr D’Ascenzo—That may well be right. All I am saying is that that question is with us; it has been a little bit more complicated than we expected, and it is taking a little bit more time than we would like. We are working hard to get an answer out. We think we will need a little bit more time to do that. ACTING CHAIR—Thank you. Senator COOK—I understand that the contributions which were made to entitle the farmers to this equity were, in fact, tax deductible at the time of the payment. Do you know if that is correct? Mr D’Ascenzo—That is right. Senator COOK—Will the capital receipt that is returned to the farmers be taxable, either fully or partly? Mr D’Ascenzo—Again, that merges into my previous answer. We have not yet worked out the nature of that receipt.

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Senator COOK—I see. Do you know if there are any other examples in the tax system where a tax deductible payment can lead to a tax-free receipt? Mr D’Ascenzo—It may well be a situation that came out of a recent Rowe decision where there is not a complete matching between deductions and receipt. So there are situations where that situation does arise, although in many situations, once it does arise for other reasons, it may be classified as income. It was not in the Rowe case. Rowe was a situation where there was a retired government official who, I think, was dismissed. He claimed unfair dismissal, and was able to claim legal costs but the ex gratia payment given to him by the Queensland government was found by the court to be on capital account. So your short answer is that there are situations in the law where that occurs. Senator COOK—Is that the only other one you know of? Are there any other examples? Mr D’Ascenzo—There may be others. Basically, the broad proposition is that there is no automatic matching principle in the Income Tax Assessment Act, although in many situations the Income Tax Assessment Act does bring forth a result that does make something deductible and the compensating amount assessable. While a general accounting principle is relevant, it is overriding. Senator COOK—Isn’t it the case that any receipt flowing from a tax deductible payment is in fact taxable? Mr D’Ascenzo—I am saying there is no overriding principle of that nature which says that, because you have a deduction, the receipt will automatically be assessable. It does operate that way in many situations, but that principle is not determined yet. Just to add to that, Mr Simpson mentioned insurance and superannuation being two other areas where that also occurs. Senator COOK—I have some questions on infrastructure borrowings tax concession. Regarding the government’s new infrastructure arrangements, how much of the $37.5 million available for 1997-1998 has been committed to date? Mr Murray—This is a program that is under the responsibility of the Minister for Transport and Regional Development. It is in its formative stage, so I am not aware at the moment of how much that program is committed. That probably is a question that I should take on notice. Senator COOK—I would appreciate that. While you are at that, could you let me know as well what projects have received assistance? Can the committee have a list of the projects and the annual cost to revenue for each of them? I am not sure when this bill might pass the parliament. Do you have any idea, Minister, about the priority the government has assigned to it? Senator Kemp—It is in the TLAB 5 bill, but we do not have a date. Senator BISHOP—What is the batting order, Senator? Senator Kemp—I think we were originally keen to get it through this session, but you would be as aware as I am how the whole thing has got rather blocked up. I suspect that in discussions with your party and other members we have had to work out a program which we could put through. I think that information I have given you is correct. Senator COOK—We are pretty keen to clear the Senate agenda so we can get onto the Wik bill. Senator Kemp—I am delighted to hear that. Senator COOK—We keep being told we are obstructing it, but we are waiting for you to bring it on.

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Senator Kemp—I am delighted to hear that, but I think we have a couple of bills yet to go, if my memory is correct on that. Senator COOK—We have the superannuation bill. Senator Kemp—If we can speed the journey on that, Senator, I take your comments as encouraging. Senator COOK—They are encouraging. Senator Kemp—Good. Thank you. Senator COOK—Since I am being encouraging, when the bill passes—we could ask you this at the next hearing of the committee—I would be interested in seeing what projects will be approved, if you were to have a list of those projects. Mr Chairman, I have run out of questions on tax. Senator CONROY—Returning briefly to the CBA issue, I have two questions for Dr Henry. Is he here at present? Mr Murray—As I understand it, Dr Henry had another appointment. But we could check. I do not think he is that far away. Mr Evans—I might take the questions for him, Senator, if you wish. Senator CONROY—Briefly returning to CBA, you were saying that you are picking up $25 million in the franking account. They have $1.1 billion. Twenty-five million is a fairly small amount out of $1.1 billion. Could you give an indication of why you appear to suggest that $25 million is a great— Mr D’Ascenzo—I understand, Senator. Again, as I started out in my discussion on these questions, when I am dealing with a specific taxpayer, I really cannot go into the details of that taxpayer. I have tried to provide an indication of the broad outcome that we received, and I have tried to rely on the press release that the bank itself has made public. I can assure the committee that there is a calculation in place that reached that figure. I know the calculation, and I know what we took into account. But, if I go into the steps of that calculation, I am getting far too close to the reasons for doing so in the particular circumstances of a particular taxpayer. Those calculations reach a result and, on our best judgment, that amount will effectively cover a revenue risk associated with the capital losses that were possible in this area. That is over and above the further outcome of increasing the— Senator CONROY—I accept your point that you made a calculation. I still come back to the question I either half asked or directly asked in terms of manufactured capital losses. While I accept that you can draw up a formula which protects you from capital losses, the question really is about manufactured capital losses. Obviously, you are indicating that you do not necessarily believe this is a manufactured capital loss. Mr D’Ascenzo—What I am saying is that there was a debit in the franking account of $25 million. There was also an increase in the share arrangements from $2 to $7. Senator CONROY—So the $25 million offsets the future tax lost from the manufacture of the capital losses because of that $7. Mr D’Ascenzo—That, and the increase in the price. ACTING CHAIR—That would be subject to the vagaries of people and the time at which they bought their shares.

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Mr D’Ascenzo—That is right. We have had to work on mediums and averages. Senator, you yourself mentioned the share price, and we have worked on mediums and the like to try to reach a conclusion. You have to factor in the type of taxpayer who may have a benefit for these losses. For instance, under the proposal, corporate shareholders could not have a benefit to these. Under the arrangements also, you are looking at a number of individuals who cannot offset those losses or are unlikely to have obvious capital gains to offset quarantine losses in that sense. So you have to take all those different factors into account in trying to reach a result. Senator CONROY—I refer you to the draft legislation 160AQCBA, further provisions relating to dividend streaming, and section 2B in the proposed legislation. I wonder if you can indicate whether or not it was 2B that this particular proposal potentially would have been in breach of? Mr D’Ascenzo—I cannot say what precise original plan by a particular taxpayer fell foul in terms of our discussions with them. But, basically, what the Commonwealth Bank have said is that, following discussions with the ATO, they have modified their arrangements, they have increased the share price from $2 to $7, and they have also had a one-off non-cash reduction of $25 million. Senator BISHOP—Mr D’Ascenzo, I do not understand why you are so hesitant to answer this question. We are not having a policy discussion here. This is not commercial in confidence where you are being asked to give us names of individuals. It is about your tax relationship with a public company. It is not a policy issue or commercial in confidence. Mr D’Ascenzo—No. Just to explain: a public company is still a person under the law. I have a secrecy provision that says I cannot talk about the tax affairs of a person, whether it be a public company, an individual or otherwise. In other words, basically, if I disclose, other than in the course of my duties— Senator CONROY—I would have thought you would want to publicly disseminate it widely, so that other people would not try the same scam. Mr D’Ascenzo—Sometimes there is a benefit in doing that. But the law says that I cannot talk about it in the terms of a particular individual. What I can do is issue public rulings to indicate our approach in these sorts of cases. Senator BISHOP—I thought you were using the standing orders, I am sorry. Senator CONROY—As to section 2B and this question of disadvantaged shareholders, you now would be confident that the CBA buyback, therefore, is not in breach of this proposed section 2B—that is, assuming or given that you are prepared to live with it. Mr D’Ascenzo—Again, I am not in a position to talk about how that provision applies to that taxpayer. Senator CONROY—You did not dream this particular proposal up; this was put into the marketplace by the Commonwealth Bank, and they advertised it fairly substantially. I can only presume that you do not believe that the new revised proposal is in breach of section 2B. The question of whether or not a shareholder receives any other benefits is an important point; and there also is the question of whether, by refusing to take up the offer, a shareholder or the company falls foul of the disadvantaged shareholder clause. This is a matter of public information: whether or not a proposal is in breach of the law or not—not whether you have haggled a price out of them so that you think it does not.

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Mr D’Ascenzo—You may have a newspaper that earns $1 million, and you may ask a tax officer whether that amount is assessable or not in terms of that specific taxpayer and that specific provision. But I would still have to say that I am not in a position to tell you. ACTING CHAIR—From the chair: I think we have to accept the views that are put by senior tax counsel in relation to issues of privacy, Senator. Perhaps we should take a break at this stage. Sitting suspended from 5.04 p.m. to 5.20 p.m. Senator CONROY—Mr D’Ascenzo, I will take you away from CBA and introduce you to company ABC. ABC has decided to have a buyback whereby it will pay its shareholders $5 per share and a $10 special fully franked dividend. If the shareholder bought the shares for, say, $8, will they have incurred a capital loss of $3 per share? Mr D’Ascenzo—I think that seems to follow. Senator CONROY—Is that an actual economic loss? Mr D’Ascenzo—It would depend on how the price was set. But, basically, if you pay a certain amount and you recover less than that certain amount, that would be a real economic loss. If you are compensated by, let us say, a dividend or a distribution, then that would offset that loss. Really, if at the end of the day you have a certain amount in your hands which is more than you paid for it beforehand then, in economic terms, that would not be a loss. Now you have to take away the distribution of any tax liability that might be imposed upon that. But, if you net all that out, and you paid out this much on one hand and you got this much out of the other hand, and this is greater than that, then in economic terms that is not a loss. Senator CONROY—Could any shareholders who did not take part in the buyback be caught by the new provisions in 2B? Mr D’Ascenzo—In the company ABC that offered that buyback, if someone did not participate in it, I am not sure how those new provisions apply. I would need to take some expert advice on the application of those provisions. Perhaps I could take that on notice and provide some answers on that hypothetical on the company ABC. Senator CONROY—Thank you. I have some general questions on tax. Unfortunately, Dr Henry has left us, so Mr Evans will have to put up with me. I am interested in the general principle about incentives and tax rates—and there is a lot of associated argument and debate, so I am just interested in your views. If I am a marginal taxpayer at 46c or 47c in the dollar, but I have effectively minimised my tax by perfectly legal means so that, let us say, I am only paying 10c in the dollar, at what point would the top tax rate have to be lowered before I would bother abandoning my tax structure, do you think? CHAIR—I just want to say one thing, Senator Conroy. I think I said it while you were not here earlier. We have to be very careful that we do not get into a policy discussion or a round table discussion. What you have put to Mr Evans is really, in context, a hypothetical question. When we are doing estimates, I am not sure that hypotheticals should be used. I will let Mr Evans answer in the way he so chooses. But I am a bit wary about having round table discussions on a question and answer estimates program, which is what we are supposed to do. Mr Evans, you may choose to answer. Mr Evans—The question bears no relationship to estimates. It is a question that is leaning to policy, even if put in a generalised form of policy principles. But, as it happens, there is not much that can be said on it in any case. If I understand the question correctly, it is going

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 841 to: what do we know about the incentives to react to particular tax rates? We do not know a lot about that in terms of— Senator CONROY—There are no studies from overseas? Mr Evans—In terms of sound empirical information, I do not think there is much that can be said on that. We can talk about directions, but not much more than that. Senator CONROY—If I asserted that there was strong evidence from around the world that lowering the top tax rate would lead to people working harder or being more willing to pay tax at a lower rate, you would say that there is nothing Treasury has whatsoever to— Mr Evans—I would say that we would agree with the proposition; we simply would not be able to measure the effects. Senator CONROY—And would it be on any basis that you would agree with the proposition? Mr Evans—If the proposition were that lowering tax rates would lead to increased incentive to earn income—that is, to work—then we would agree with that on pure theoretical grounds. Senator CONROY—But you do not have any empirical data to support that, or any overseas studies, or anything at all, other than a first year text book? Mr Evans—There are studies, but you have to go and look at each individual one to decide just how good they are. But these are pure policy issues. CHAIR—Senator Conroy, I am loath to rule any questions out of order because I do not think it helps the free flow of questions and answers. But, in fact, we must deal with matters that are related to estimates or the annual reports. You are straying into areas of policy, and I am listening very carefully. Senator Kemp—Also, we do not want to put the officers of the department in a difficult position. They are here to answer specific questions. Senator CONROY—If I were to ask the minister, would that be all right? CHAIR—Yes, you can ask the minister, and then he can choose to answer if he wants to. Senator CONROY—Earlier we were discussing leakages in the tax base. I wonder whether you would be able to confirm the following—not necessarily now, but perhaps on notice. I saw some figures recently suggesting that, of 3,393 Australians with incomes over $100,000— they were farmers, with farm incomes—only 789 made a profit. Are you able to see whether that figure is accurate? Can we have a comparable figure? That is not a policy question, is it? Mr Evans—I do not recognise the figures. Senator CONROY—The remaining three-quarters made a loss, on average, of $34,000. CHAIR—Just as a point of clarification: are you talking about gross incomes? Senator CONROY—Yes. CHAIR—You are not talking about net incomes. Senator CONROY—No. Those with over $500,000 in income lost more than $100,000 each. Please just take that on notice and see whether these figures are right. I am just interested in whether these are factually correct, and I am coming to the tax base question, if you will bear with me.

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Senator Kemp—Senator, we will take those on notice and, if we can provide the information, we will. Mr Evans—Is there a question to be answered? Senator CONROY—No, I am just trying to ascertain whether this information is correct, firstly. Please take it on notice and, if you are able to, say yes or no. There are some figures I saw to do with property rentals. Senator WATSON—Mr Chairman, it might help if Senator Conroy gave his source of this information to enable the people to verify it. Senator CONROY—I should apologise. I left it in Melbourne. I do not have my backup source with me. So I apologise. They are on the public record in terms of newspaper articles and things like that. But I just apologise as I do not have them handy. CHAIR—I am trying to think of a way around it, Senator Conroy. I wonder whether you could provide your information on notice, and then get to the question that you want to use as a basis. Senator CONROY—I just have some notes. I apologise. CHAIR—I really am trying to help. If you can get to the question you want and provide the other information on notice, the officials might be able to answer your question. Senator CONROY—I am trying to look at areas where there is possible leakage in the tax base, which is an issue we have already discussed today. Partnerships and trusts: 25 per cent of partnerships and trusts have zero or negative incomes. Could you see whether that is available, whether it can be corroborated through Treasury? Mr Simpson—I do not have the figures in my head. But the commissioner’s statistics that are published give indications of partnerships, trusts and companies, by level of income. It is quite true that, if you take companies—and I am not sure of the position in trusts—a lot of them do have no income because it is paid out as salary and wages to the shareholders. It could well be the same with trusts. But that information is available. Senator CONROY—Private companies: 57 per cent lost money or made no income. One million renters made a grand total of $5 million profit; that is just about $5 for each of the one million net rental. Over half a million unprofitable landlords reduced their assessable income by $2.3 billion by rental losses. Could you please chase them up? Senator Kemp—Senator, are you asking us to confirm these figures? Senator CONROY—Yes, that is all; nothing very exciting. Senator Kemp—I assume you got these from a well-sourced document. I think it would be better if you just forwarded the document to Mr Diamond and the Treasury. Senator CONROY—I do not have it with me, I apologise. I just have notes of it. Senator Kemp—If you could do that, the Treasury, to the extent that they are able to, may make a comment on it. Senator CONROY—Has Treasury got any information on the compliance costs to do with WST that would be available to the committee? Mr Simpson—I would have to look into that, Senator, and see what we could provide. Senator CONROY—Has Treasury done any studies or work on the compliance costs of a GST single rate? Senator Kemp—Senator, I do not think this is a question that it is fair to—

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Senator CONROY—You can feel free to come in and answer, Senator Kemp. Senator Kemp—I am sure I could too. But, Senator, I do not think this is a question that the Treasury should be required to respond to. It is well known that we have a major tax reform agenda; it is well known that a lot of work is being done on that. But I am not at liberty to go further than that. After all, Senator, I do not think you will share with us what your party is doing. Senator CONROY—Unfortunately, we are not the government, so we do not— CHAIR—I am not sure that that is the point, Minister. But, Senator Conroy, I have been listening very carefully. I am trying very hard to relate your questions to estimates or the annual report, and I am finding it pretty difficult. So, if you have this information that you want to give to the Treasury on notice, I am sure we would be quite happy to accept that on notice with the source that it comes from, so that the Treasury can comment. But you really are asking policy questions to officers. Senator CONROY—No, I have just asked for some information about the WST. CHAIR—I know. But officers— Senator CONROY—That was not a policy question. That was just a question about whether there was any information available. They are going to take that question away. Senator Kemp—Senator, we are not resisting that sort of factual question, if there is any information that the government is able to provide. Senator CONROY—That is right. Senator Kemp has said that they cannot provide any information on compliance costs of a GST, so that is the answer. Senator Kemp—Apparently, we do not have that information with us. Senator CONROY—There was a recent study done by a bloke called Stephen King, I think, out of the ANU. It was to do with tax evasion; he did an equilibrium analysis. Is Treasury familiar with that at all? Has that passed by anyone? Mr Evans—No, we do not have anyone familiar with that. Senator CONROY—Thank you. I am at a loss now, because Senator Cook will be away for another few minutes, and I am ready almost to pass back to him. Senator Kemp—Senator, let me put it this way: if you wish the committee just to wait quietly for Senator Cook to return in 10 minutes, we will do that because that is part of our agreement. But you should not feel compelled to ask us questions. CHAIR—Perhaps we will adjourn for five to 10 minutes until Senator Cook returns. Sitting suspended from 5.35 p.m. to 5.38 p.m. CHAIR—Senator Cook has a couple more questions on taxation, before we go to subprogram 1.8—Financial and currency. Senator COOK—When we met on Friday, mention was made of a new agency agreement under discussion at Treasury. Can the committee get a copy of the agreement and, in particular, those sections dealing with the proposed salary repackaging arrangements? I think the evidence was that it had not concluded yet but that it was close to resolution. Senator Kemp—Sorry, Senator, did you say you want a copy? Senator COOK—Yes, a copy of the agency agreement for the Department of the Treasury and, in particular, those sections dealing with the proposal concerning salary repackaging.

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Mr Evans—It is a draft agreement that has been given to all staff for consideration and it will have to be negotiated. But, given that it is basically a public document, of course we are happy to make relevant sections available to you, recognising that it is purely a draft to be negotiated with staff. Senator COOK—I recognise the caveat. Is it currently only SES officers who are offered salary repackaging arrangements? Mr Evans—It is a matter of definition. We have never in Treasury explicitly offered salary packaging, but we offer elements of remuneration that amount to the same thing. Last time we spoke I instanced, for example, SES motor vehicles and more longstanding superannuation which is offered at all levels, but which is one of the most significant elements of salary packages. We have never used the terminology ‘salary packaging’, but that is what it is. So it is all levels of staff. Senator COOK—If I can use that terminology to explain what I mean as well for my third question. Is there any indication in regard to extending salary repackaging beyond the SES to lower income levels? And at what levels would salary repackaging be available to be taken up? Mr Evans—The draft agreement is drafted on the basis that it would be available to all staff. Senator COOK—Yes. I think you made that point on Friday. Senator WATSON—Is there potential for any loss of revenue to the Commonwealth as a result of salary repackaging? Mr Evans—Yes, there is. Senator WATSON—Why has it been agreed to then? Mr Evans—There is a policy issue here. The government has taken a decision that salary packaging will be available. [5.42 p.m.] Subprogram 1.8—Financial and currency Senator COOK—Can I just ask some questions under subprogram 1.8. I think that is the right section. The questions are concerning the Reserve Bank board. It is my understanding that Janet Holmes a Court and Solomon Lew left the Reserve Bank board on about 18 August. It is now almost three months since that occurred and they have not been replaced. It does raise some questions about the government’s commitment to the Reserve Bank board and the Reserve Bank structure. Is it correct that there are still two vacancies on the Reserve Bank board? Mr Evans—Yes, that is correct. Senator COOK—Can you say for how long those places have been vacant? Mr Evans—From August 1997, I think. We do not have a precise date, but it is available. It is public information and we will check it for you. Senator COOK—Is there a requirement in the Reserve Bank Act that there be a balance on the board between appointees from the public sector and the private sector? Mr Smith—I do not believe there is. There is specific provision in the act for the appointment of some ex-officio members of the board, but not a provision that says there needs to be a balance between public and private sector. There is in fact a provision that the appointees, other than the ex-officio members, may not be members of the Public Service.

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Senator COOK—How many seats are there on the board in total? Mr Smith—I cannot recall the precise number. I think it is 11. Mr Evans—I think so, too. Mr Smith—I will have to get back, if I am incorrect. I think it is 11. Senator COOK—The ex officio members of that board are basically public servants, are they? Mr Smith—There are the Secretary to the Treasury, the Governor and, I think, the two Deputy Governors. Senator COOK—So the 11, if that is the right figure, are the non ex officio members and therefore—I just want confirmation of this—are not drawn from the public sector; they are drawn from the community? Mr Smith—Yes; they are appointed by the Governor-General. Senator COOK—I think they are all appointed by the Governor-General, aren’t they? Or the ex officio members are there by entitlement within the act? Mr Smith—Yes—entitlement in the act. Senator COOK—Is there a reason for the delay? Mr Smith—The government is considering the appointments. I do not have any further information about that. Senator COOK—These directors that retired on 18 August—Holmes a Court and Lew— retired at the conclusion of their statutory term, didn’t they? Mr Smith—That is correct. Senator COOK—And the government would have known when their statutory term was concluding and prudently have had an opportunity to make arrangements to make appointments. So this is a bit odd, isn’t it, that two key positions are open for so long? Mr Smith—My understanding is that there have been vacancies of this kind at different times over many years. Senator COOK—What was the reason for the delay that you gave us? Mr Smith—I do not have a reason for the delay. I am just saying that the appointments are matters for government consideration. Senator COOK—I suppose this question is for you, Minister. Is the government concerned that not filling these positions in a timely way indicates a lack of support for the Reserve Bank by the government? Senator Kemp—No, Senator, you should not at all assume that. I think, as Mr Smith said, vacancies have occurred from time to time over, I think the word was, many years. So you should not read any lack of support at all for the Reserve Bank from this. The government will make a decision. I cannot give you any particular information on it. If I can obtain some I will inform the committee. Senator COOK—Is there a dearth of qualified candidates? Senator Kemp—I am sure there is quite a range of appropriate people and the government has just to make a decision on the appropriate appointments from that group. Senator COOK—Is there an intention within a reasonable time span from now for the government to actually fill those appointments?

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Senator Kemp—As I said, I do not have any particular information on the actual timing of any appointments. I will seek some information and see if I can supply the committee. Senator COOK—Thank you very much, Minister. The list of consultancies in the Treasury’s annual report includes an entry for ‘Executive Search for Candidates for Board Appointment’ by Cordiner King Hever. The amount involved is $59,319. Which board appointments does that amount relate to? Mr Smith—I am aware of firms being used for two. I do not know which one that particular reference refers to. Senator COOK—Is there an executive search on for board appointments to the Reserve Bank? Mr Smith—A consultancy with a search firm, do you mean? Senator COOK—Yes. Mr Smith—Not to my knowledge. Mr Evans—No there is not, Senator. Senator COOK—Then that reference in the report would refer to some other boards? Senator WATSON—It would be unusual. Mr Evans—On my recollection—and I will double check this—it referred to the appointment of a deputy governor of the bank who is then ex officio a board member. Senator COOK—The Cordiner King Hever reference in the Treasury’s annual report uses the word ‘candidates’. Obviously that refers to getting a short list together or some list for consideration, does it, for one appointment? Mr Evans—I will confirm it. Senator COOK—Is that $60,000 just for the one appointment of deputy governor? Mr Evans—I might as well confirm it all at the one time and I will give you the information. Senator COOK—Given that it is a deputy governor’s appointment and therefore a board member appointment, is it entirely transparent to explain it as a board appointment? It just seems to be an odd way of expressing it. Senator Kemp—I missed that phrase. Senator COOK—I am just bemused by this. The entry in the annual report says, ‘Executive search for candidates for board appointment’. We understand from the evidence that this is for a deputy governor of the Reserve Bank who then becomes automatically a member of the Reserve Bank board. I just ask: would it not be more accurate to express that entry in the annual report as an executive search for a deputy governor, rather than a board? The way it is written seems to be obscure. Mr Evans—Let me check the facts on it. My recollection is that it was that position, but I will check that. Senator COOK—I have some questions on the implementation of the Wallis reforms. CHAIR—Which program would that come under? Senator COOK—I think it is 1.8, finance and currency. CHAIR—That concludes taxation. We will go onto subprogram 1.8, finance and currency. Senator Cook, do you have some questions on subprogram 1.7, investment?

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Senator COOK—At the rate that we are proceeding, I am not sure that I will get to it. I will review those questions, if that is acceptable procedure, and I will put them in writing within a very short space of time. CHAIR—We have said Monday lunchtime for answers to questions on notice, does that sound alright? Senator COOK—Yes, but I am happy to let the officers on subprogram 1.7 go on that. CHAIR—The officers here for subprograms 1.7 and 4.1, income and other taxes, can go. That leaves the officers for subprograms 1.8, 7.4, 1.9 and 1.10. We will just keep the other officers here. We have whittled people down pretty well. [5.54 p.m.] Subprogram 1.8—Finance and currency Senator COOK—What is the government doing to ensure that the transition to the new Wallis regulatory structure is as smooth as possible? In asking that question what I have in mind is the concern that has been expressed about setting up a whole new regulatory structure alongside of or closely paralleling some of the work that the Reserve Bank might normally have done in the new financial areas and getting the right people with the appropriate background and quality to carry off that new work at the desired level of competence. What is being done to ensure that in the new regulatory structure the APRA is set up as smoothly as possible? Can some report be given on that? Mr Smith—Yes. The APRA at the Commonwealth level involves the amalgamation of the bank supervision area of the Reserve Bank and the ISC. If the states agree—and that is something that is still outstanding—then, in addition to APRA, would be transferred functions of the financial institutions scheme. Whilst the Reserve Bank and the ISC remain responsible for their areas of activity in the financial system and retain the full powers and roles that they have always had in those areas, a joint steering committee has been established between those two institutions to begin the process of coordinating the shift towards a single institution. The states have not yet been formally involved in that because the premiers are still considering their responses to the Wallis inquiry. The Prime Minister has asked the premiers to respond by the end of this year, and we anticipate that those responses will be received in that time frame. That will enable, from then on, the involvement of the state regulators in this process as well. They have not been involved as we have been awaiting that in principle response from the states.However, we have been in regular contact with the Australian Financial Institutions Commission, most of the state regulators and all of the state officials involved in this sphere on an informal basis. Similarly, there is a joint steering committee for the establishment of the ACFSC, which is the other regulator in the system that is to be established. That is the disclosure regulator built on the ASC. Both of those processes have been established and are working quite successfully at this time. Senator COOK—So you say that there is sufficient experienced staff available to do this work for APRA? Mr Smith—The situation with APRA is that, in the first instance, we will be bringing together existing staff of the Reserve Bank and the ISC. APRA, of course, cannot be established until legislation is introduced and passed to do so, which we anticipate will occur through 1998. The arrangements at the moment are, of course, necessarily informal because we have not as yet established the legislation. We anticipate some senior appointments being made before the establishment of APRA, if that is possible. That is something we are looking

ECONOMICS E 848 SENATE—Legislation Thursday, 20 November 1997 at at the present time in order to have, as we have had with previous examples of this kind, a person who can take charge and carry through the transition to the new institution. But at the moment we are waiting for the response from the states so that we have a full picture of what this job will involve. Senator COOK—Thank you very much, Mr Smith. The Governor of the Reserve Bank has said that, under the new regulatory arrangements, the Reserve Bank would be almost a second banking regulator. In other words, he envisages a substantial degree of duplication between the Reserve Bank and the Australian Prudential Regulation Authority. Do you share the government’s view of the overlap between APRA and the Reserve Bank? Mr Smith—We would expect that there would be some overlap. That is to say, we would expect that the Reserve Bank would retain a close interest in the deposit taking system. At the present time, as you would be aware, the Reserve Bank does not have prudential regulation responsibility for the whole of the deposit taking system in Australia. It does, however, have a full unit staffed to monitor those institutions for which it does have responsibility. An illustration of the point you are making is that it does monitor the institutions that are currently regulated under the FI code. We would expect a similar arrangement to that would happen. It is intended that the Reserve Bank retain a strong interest, analogous to the situation which exists in most of the other countries that have this type of structure. The classic illustration would be Germany where the Bundesbank is not the prudential regulator of banks but has a strong internal capacity to ensure that it knows exactly what is happening in the banking system. We expect the bank to build on its existing staffs, remembering that it will provide a significant number of the board appointments to APRA. It will have other close working relationships with APRA, which have been announced, and it will also continue to be the regulator of the payment system of which banks are significant participants. For all of those reasons, it is inevitable and desirable that there be this close involvement of the central bank in the scheme of regulation of these institutions. Senator COOK—Thank you. Just to flesh this out one further stage: you have explained to me what is being done to recruit the staff for APRA. That is fine. To put it in plain English, this will not involve poaching from the Reserve Bank and weakening it, will it? Mr Smith—We would expect a significant number of the staff of the prudential regulation area of the Reserve Bank to transfer to APRA. Senator COOK—I understand the point. Mr Smith—The people that are currently supervising, of course, will be— Senator COOK—Would this be not poaching but a transfer that does not denude the RBA of key personnel? Mr Smith—No, they would only go with function. Senator COOK—They go with function. In a recent speech, Paul McCarthy of the Commonwealth Bank said: The system can undoubtedly work effectively, but only if the generals in APRA are of exceptional calibre. They have an elite force at their disposal and the communication links and the esprit de corp with the RBA high command are uniquely effective. What steps is the government taking to ensure that experienced staff are not lost from the Insurance and Superannuation Commission ahead of the establishment of APRA? Mr Smith—As I have mentioned, we have established a joint steering committee and we are monitoring closely the situation with staff at the ISC. The key to this is really the salary

ECONOMICS Thursday, 20 November 1997 SENATE—Legislation E 849 structure. The problem that has been experienced across the system has been that we have not been fully competitive in the salary structure that we have been able to offer. The Reserve Bank, because it is independent of the public service arrangements, has been able to significantly upgrade remuneration and thereby preserve its staffing complement. The ISC, in shifting to APRA, will participate in that change. The government has made it clear that it will be giving remuneration autonomy to APRA, analogous to that already achieved by the Reserve Bank. That is what provides the key ingredient to make the retention of staff an attractive proposition. However, we anticipate the recruitment of further staff into APRA in addition from the private sector. That only becomes viable when you have comparable salaries. Senator COOK—Where is APRA going to be located? Mr Smith—The government has not announced a decision on the location of the headquarters. The operations of APRA will be spread amongst all the major cities. Senator COOK—Right. Is the government concerned that shifting ISC staff to, say, Sydney, which would seem to suggest itself as a likely headquarters, will lead to a major loss of experienced insurance and superannuation regulators? Mr Smith—The remuneration issue, as I have mentioned, is critical to that. In addition, we are currently looking at the pace of any transfer. You have made the point of Sydney. I just stress we have not made a decision that it is Sydney at this time. Senator COOK—Does the government accept that changing the regulators, opening up the financial system to greater competition and changing the regulatory structure all at the same time involves some risks? Mr Smith—That is the position that I know has been put actively by a couple of CEOs of major banks, and we understand that, but I think that it overstates some of the fields of change that are being proposed. The principal change is the structural organisation of regulation. The changes to the form of regulation will be more gradual, substantially evolutionary, and will at all times maintain current standards of prudential supervision and prudential standards across the board. By definition, that means that the pace of new entry or the development of new classes of institutional entry are not as great as perhaps some people have been anticipating or claiming. Senator COOK—In last Monday week’s Sydney Morning Herald Glenda Korporaal reported that the United Kingdom’s new FSA regulator is currently being assembled a good 12 months ahead of formal legislation being passed by parliament. Has the government considered using something like the Productivity Commission model to start bedding down as far as is possible the new regulatory authorities ahead of legislation being formally put in place? Mr Smith—As I have mentioned already, the fundamental difference between Australia and the United Kingdom is that we have states and territories, and part of the scheme is to get agreement of the states and territories, which we hope to have in principle by the end of this year. Once we have that, that then provides the opportunity for more activities along the lines that the United Kingdom have adopted. There is a fundamental benefit in the United Kingdom system that we will not have, which is that they already have an institution that is being charged with these new functions, whereas APRA is a new institution, so we do not have that analogous situation. But it would be possible to build the type of steering committee and joint operation process that I have been mentioning after we know what is happening with the states.

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So there is that little hiatus until the end of this year, early next year, before we could take that step. Senator COOK—But that approach does commend itself? Mr Smith—Significant aspects of that approach commend themselves, yes, in particular the idea, as I have already mentioned, of the possibility of making some senior appointments before the establishment of APRA so that people know who they are working for, what the culture will be, et cetera. Senator COOK—Okay. The Wallis inquiry recommended that the new financial system advisory council be implemented as soon as practicable. The government has indicated that it supports that recommendation but the council has still not been established. Is that right? Mr Smith—The council has not yet been established. Senator COOK—Is there a reason why that is so? Mr Smith—The arrangements for the council are currently under consideration by the government. Senator COOK—Is there a time by which the council will be established? Mr Smith—We expect the first meeting early in the new year. Senator COOK—That is in the first quarter of next year? Mr Smith—That is my expectation. Senator COOK—What steps is the government taking to ensure that the new ACFSC is properly resourced? Does the government accept that the ACFSC will need greater funding than the existing ASC? Mr Smith—Yes, the ACFSC will have greater funding than the current ASC has. The key to the funding, both of the ACFSC and of APRA, is that it will be industry funded. Both of them will be funded through levies on industry. They will have their own revenue sources rather than rely purely on budget allocations. Senator COOK—The ASC has a deputy chairman, a statutory member and a chairman. I understand that the deputy chairman and statutory member were only recently appointed. Can you confirm that? Mr Smith—I am happy to confirm that, although I would mention that you have strayed into subprogram 1.9. Senator COOK—That means we are making great pace. Senator Kemp—Does that mean that 1.8 is finished? Senator COOK—I did not pick the break in the tectonic plate, Minister. But I do not have any more questions on the FSA. CHAIR—What about 7.4? Hang on. This is somewhat irregular, but I am being very tolerant. Senator COOK—You are being very tolerant. I have a few questions that relate to program 1.10, and I think we have excused the officers, have we not? CHAIR—Yes. Senator COOK—Can I read them out and put them on the record? CHAIR—I do not think there is any need to read them out. We can arrange for them to be answered by the appropriate officers.

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Senator COOK—Thank you. CHAIR—That means that we do not have to treat 1.10 now. That leaves 7.4 and 1.9. [6:13 p.m.] Program 7—Insurance and Superannuation Commission Subprogram 7.4—Superannuation Senator COOK—Subprogram 7.4 is the one that is before me now. With regard to excluded superannuation funds, I believe that the ISC has done a comprehensive audit of these types of funds. Do you have a report of the findings on excluded super funds? Mr Chapman—We did a survey of about 1,000 funds and we followed that up with a range of field review work on about 120. From that, we did not prepare a public report but we made some recommendations to government, and government is currently considering them. Senator COOK—Is it possible for the committee to obtain a copy of those recommenda- tions? Senator Kemp—That is a report to government and it is being considered. I think that, in the normal practice, it would not be made available. Senator COOK—Are there any problems with these excluded super funds? Mr Chapman—We would say that there were problems with lots of different types of funds. Excluded funds are clearly a fast-growing area in terms of numbers of funds. We are not particularly convinced, from a lot of the work we do, that some of those funds have been set up for particularly appropriate reasons. That might not mean that the members and trustees are trying to evade the legislation; it might mean that some of those people have set up funds which are too small to be viable. Indeed, in some cases, there is a very strong view of ‘I desire control above all else, and therefore I will set up an excluded fund’, and people do not think about the ramifications that might flow from that retirement income. So there are specific problems with specific funds but, overall, lots of different issues come through. Senator COOK—That said, though, do you think there is a need to clamp down on their use? Mr Chapman—I think there are some areas of the legislation as they apply to excluded funds that could be clarified or could be strengthened. What those areas are and any decisions that might be made are a matter for the government to consider as a result of the views we put to them. Senator COOK—Minister? Senator Kemp—I think it was mentioned that there are proposals which have been put to government. Those are being considered. Senator COOK—Can you give us some idea of what you see the specific abuses being? Senator Kemp—One example was given, related to putting control above other considerations. Mr Chapman—You have asked the question: could I give some examples of abuses? I think the broader issue, in a more general sense, is the propriety or the correctness of the decision by the individuals to enter into that market. I think that is a bigger question. Excluded funds are treated separately in the legislation at the moment because they do not have the same level of prudential control. One of the reasons they do not have that is because they are small, and the policy intent behind the legislation was that the members of those funds

ECONOMICS E 852 SENATE—Legislation Thursday, 20 November 1997 would be closely related to one another and, therefore, would know lots about the operations of the funds. One specific example of where that policy intent perhaps has broken down is that there are about 10 to 15 per cent of excluded funds where there are arms-length members. So, rather than a husband and wife who would have a very close relationship, it is a husband and wife running the local milk bar with an employee in there. Clearly that is an area where consideration needs to be given as to whether the definition should be changed. I think that was a Wallis recommendation, and a government response was that these funds should be transferred to the ATO, but consideration needs to be given to definitions. That is one example where the position in the marketplace is perhaps not what the view was when SIS was put into place as the legislation governing these funds. Senator COOK—Does the ISC have a view about the proposal you referred to, the transfer of responsibility to the ATO? Mr Chapman—Generally we support the proposal. As I said, there are some definitional issues to be worked out, and there would be some operational issues to be worked out, a bit along the lines of your questions to Mr Smith about how APRA is going to be created from the current regulators. There will be some operational issues in terms of how part of the industry transfers to what will be a third regulator, if you like, in the superannuation market. But if funds are in a situation where they are being used for improper purposes—and I will not attempt to define improper purposes—then the skills that will be needed are more akin to the ATO type of tax skills than the ones we would have as a prudential regulator. Senator COOK—Right. I have some questions on superannuation tax, concerning state superannuation schemes. Can you say how the negotiations are going with the states to pass the complementary surcharge tax legislation? Mr Bator—The only answer I can give you there is that Treasury have been dealing with most of the negotiations with the states. I have attended a couple of meetings where we have discussed some of the operational issues, and have worked through with them how this will work and how the ATO can assist. Senator COOK—If Treasury has been dealing with it, is Treasury able to answer the question? Mr Smith—I am sorry, Senator, I do not have any specific information nor do I have an officer here who can give you any further information tonight. I can take any question you have on notice. Senator COOK—I was asking for a general overview, but I will also ask some other questions which I will put into the record now. Which states have agreed to pass complemen- tary surcharge tax legislation and which states have not? In those states which have not agreed to pass complementary legislation, how will the surcharge tax be collected? I can give these questions to you later, Mr Smith, to save you writing them down. In constitutionally protected superannuation schemes, is the collection method a tax on an individual rather than a tax on the fund? For how many members of constitutionally protected schemes will the ATO have to keep surcharge tax accounts? Do you have an approximate estimate of how much this will cost the ATO to administer? Will this require additional resources? If so, where will those resources come from? Will the ATO have to put on extra staff to administer this measure and, if so, how many? Mr Bator—I can probably answer some of those questions.

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Senator COOK—Go for it. Mr Bator—The tax surcharge is on the member. It will be levied and calculated at the end, when they draw their benefits. At that time the member will have the surcharge assessment sent to them for payment. They can, as I understand it, commute their pension and at the time of that commutation find any moneys necessary to pay a surcharge. The ATO will be maintaining the records on behalf of these constitutionally protected schemes. We have been working on development of the system. It is obviously very close to being finalised. We can accommodate that part of the work within our existing resources. I hope I have answered most of those questions. Senator COOK—You have answered most of them. The concluding questions were about an estimate of the cost of all this. Mr Bator—A cost of ATO doing the work? Senator COOK—Yes, to administer it. Mr Bator—We believe the funding allocated by government will be adequate for us to handle that particular workload into the future. Senator COOK—You will not have to put on any extra staff in addition to what has been allowed for? Mr Bator—Not for the constitutionally protected schemes, no. Senator COOK—What about the non-constitutionally protected schemes? Mr Bator—We have been funded to do the work on the surcharge. Senator COOK—Can you explain how the tax will be collected for members of funds which are not constitutionally protected? Mr Bator—The assessments will be issued to the trustee. The trustee is liable to make payment of the surcharge assessment levied on that particular fund, based on the benefits or contributions made to the fund. Senator COOK—That means there are some inconsistencies in the way the super tax is collected, depending on what type of fund you are in. Mr Bator—The fact that they are called constitutionally protected schemes means that while the money is in that scheme the Commonwealth cannot levy a tax or a charge on the property of the state. Up to that point, the mechanism is, by and large, the same. It is at that end point where the only way we can effectively handle that is to ensure that the member in that last instance—in the constitutionally protected scheme—pays the surcharge. In all other cases it is the trustee, except where the member leaves the fund—they retire or something. Senator COOK—I refer to an Australian Taxation Office press release of 9 November, titled ‘Quote your tax file number to avoid 15 per cent tax.’ That also included a fax sheet entitled, ‘Tax file numbers and your super.’ I am not sure if you are the right person to ask about this. Mr Bator—I am quite happy to talk about that. Senator COOK—Why does the title of the press release refer to the 15 per cent tax yet the body of the press release refer to the 15 per cent surcharge? Mr Bator—We felt that it would be more of a grab and people would actually pay attention to that headline. The Senate did make changes to call it a tax. We would prefer to call it a surcharge—that is the name it has had from the start. One of the key things we are trying to achieve throughout is to ensure that as many people as possible quote their tax file numbers

ECONOMICS E 854 SENATE—Legislation Thursday, 20 November 1997 to their superannuation fund. We do not want low and middle income earners affected by this through non-quotation of tax file numbers. It is cheaper for funds and the ATO if people quote their tax file numbers to their funds so we were trying to get a grab; we were trying to make that thing effective. Senator COOK—I am pleased to note that you have some regard for the Senate’s amendment on the question of surcharge and tax. Do you think it is a bit confusing to the public to mix these terms ‘surcharge’ and ‘tax’ in the same release? Mr Bator—When it actually came down to it, the headlines that were put in the press did not actually pick up that at all, from my recollection of reading them. They basically picked up the line that people should quote their tax file number to their funds. Senator COOK—We could debate that. Your headline was ‘15 per cent tax’ for the reasons you have given. Why was the term ‘surcharge’ rather than ‘tax’ used in the advertising campaign which the ATO recently ran on TFNs? Mr Bator—A lot of the funds will actually refer to it as ‘surcharge’ in the material they are sending out to members seeking their tax file numbers. My understanding is that they will probably say ‘surcharge’ in the members’ statements that are going out to members just so that it is not missed or confused with the current tax on contributions. Senator COOK—Thank you. Does the ATO have any knowledge of the percentage of fund members who have supplied their file numbers to their funds? Mr Bator—We have had two benchmark surveys of 5,000 superannuation funds in order to ascertain that. From memory, at the end of September it was standing at 29 per cent. At the end of their last survey in October it was 39 per cent. We are doing another benchmark survey quite soon but I am pleased to say that in a lot of the discussions I have had with the superannuation industry the benchmark number seems to be around 65 per cent capture at the moment, which is entirely consistent with our plans and where we wanted to be at this stage. Under the system, in cases where there is no quotation of tax file number the commissioner will go through a range of processes. We believe that if we can get around 65 per cent overall we are in pretty good shape to do a lot more data matching and to write additional letters to a smallish number of people. Senator COOK—That would mean 35 per cent of people may have to pay the tax when many of them do not qualify. Mr Bator—No, in our data matching we anticipate matching around 65 per cent of the remainder. The point I was going to make is that it is only just around now that a lot of the public sector and corporate funds are actually seeking their members’ tax file numbers. Recently a bank got around 65 per cent on the first mail out in the first few days, so we are pretty confident that most people, because of our advertising and activities, will get their tax file numbers to their funds. Senator COOK—On those figures there is still likely to be a sizeable minority. Mr Bator—Yes, but there are still a range of issues we can work through in administration. We are sending out the two letters, we are doing our data matching and we think that there will be some that may well be self-evidently not subject to the surcharge. CHAIR—Can I clarify what you have said: 65 per cent have returned tax file numbers and another 65 per cent can be data matched. So you are not talking about 35 per cent, you are getting down to 15 per cent. Mr Bator—We are getting down to smaller numbers, yes.

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Senator COOK—What actual number of people is that, though? Mr Bator—I do not have that number in my head. Senator COOK—It is a very large number. CHAIR—I will not debate it, but earlier suggestions were that it was 20 per cent who had returned, and we seem to be now at 65. Mr Bator—The other thing that I think we need to bear on is that people who have amounts of less than $2,000, if their accounts opened before 7 May, do not have the surcharge imposed if they do not quote the tax file number. I am pretty confident that there will be a small number of people ultimately in that position of potentially having the surcharge. Senator COOK—Small number or small percentage? Mr Bator—Small percentage who are in that lower and middle income group. Senator COOK—Mr Chairman, I too have to go at this point— CHAIR—I would like to say I am disappointed, Senator Cook. Have you further questions that you want to put on notice? Senator COOK—Yes, I have. I will have to give some thought to what questions I do in fact put on notice. I will do it within the time frame. CHAIR—We are happy as long as we get questions on notice by midday Monday. Senator COOK—I want to thank the department and the officers who have given evidence. It has been a long process and I must say my first exposure to it at this level, and I appreciate the cooperation I have been given. CHAIR—I too thank the officers. You had to come back a couple of times. It has been a very long estimates process this time. We are down to about 32½ hours because we did not— Senator Kemp—Mr Chairman: and the minister. CHAIR—And the minister. I was getting around to the minister. But thanks to everybody for their cooperation, particularly over the last couple of days. That concludes these hearings into the additional estimates. Committee adjourned at 6.32 p.m.

ECONOMICS