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COMMONWEALTH OF AUSTRALIA

Proof Committee Hansard

SENATE

ECONOMICS LEGISLATION COMMITTEE

Estimates

(Public)

WEDNESDAY, 22 OCTOBER 2014

CANBERRA

BY AUTHORITY OF THE SENATE

[PROOF COPY]

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This is an uncorrected proof of evidence taken before the committee.

It is made available under the condition that it is recognised as such.

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SENATE


Wednesday, 22 October 2014

Members in attendance: Senators Bernardi, Bushby, Canavan, Dastyari, Edwards, Heffernan, Ketter,

Leyonhjelm, Ludwig, Madigan, Marshall, Milne, O'Neill, O'Sullivan, Siewert, Whish-Wilson, Wong, Xenophon.

Wednesday, 22 October 2014 Senate Page 1


TREASURY PORTFOLIO

In Attendance

Senator Cormann, Minister for Finance

Senator Fifield, Assitant Minister for Social Services

Department of the Treasury

Ms Jan Harris, Acting Secretary to the Treasury

Output Group 1.1—Macroeconomic Group/Corporate Strategy and Services Group

Ms Luise McCulloch, Acting Executive Director, Corporate Strategy and Services Group

Mr Matthew King, Acting Group General Manager, Corporate Strategy and Services Group

Mr Nick Creagh, Acting Chief Finance Officer, Financial and Facilities Management Division

Mr Peter Alexander, Chief Information Officer, Information Management and Technology Division

Mr Luke Hickey, General Manager, Ministerial and Communications Division

Ms Emma Greenwood, Acting General Manager, People and Organisational Strategy Division

Mr Barry Sterland, Executive Director International

Ms Jenny Wilkinson, Acting Executive Director Domestic

Mr Brenton Goldsworthy, Acting General Manager, Macroeconomic Conditions Division

Mr Bryn Battersby, Acting Principal Adviser, Macroeconomic Conditions Division

Mr Simon Duggan, General Manager, Macroeconomic Modelling and Policy Division

Ms Angela Woo, Principal Adviser (Macroeconomic Policy), Macroeconomic Modelling and Policy Division

Mr David Drage, Principal Adviser (Financial Markets), Macroeconomic Modelling and Policy Division

Dr Michael Kouparitsas, Principal Adviser (Modelling), Macroeconomic Modelling and Policy Division

Mr David Woods, Acting General Manager, International Policy and Engagement Division

Ms HK Holdaway PSM, General Manager, G20 Policy Division

Ms Kerstin Wijeyewardene, Manager, G20 Global Resistance and Strategy Unit, G20 Policy Division

Ms Mary Balzary, General Manager, G20 Operations and Logistics Division

Mr Martin Bolton, Manager, G20 Operations and Logistics Division

Output Group 2.1—Revenue Group

Mr Rob Heferen Executive Director Revenue Group

Mr Steve French, General Manager, Tax Analysis Division

Ms Marisa Purvis-Smith, Principal Adviser, Tax Analysis Division

Mr Matthew Maloney, Manager, Tax Analysis Division

Ms Angela Baum, Manager, Tax Analysis Division

Mr Paul Palisi, Manager, Tax Analysis Division

Mr Anthony King, Manager, Tax Analysis Division

Mr Tony Regan, Principal Adviser, Law Design Practice

Ms Brenda Berkeley, Principal Adviser, Law Design Practice

Mr David Pearl, General Manager, Corporate and International Tax Division

Mr Matthew Brine, Manager, Corporate and International Tax Division

Mr Brendan McKenna, Manager, Corporate and International Tax Division

Mr Michael Atfield, Manager, Corporate and International Tax Division

Mr Greg Wood, Manager, Corporate and International Tax Division

Mr Hector Thompson, General Manager, Small Business Tax Division

Mr Paul Tilley, General Manager, Personal and Retirement Income Division

Mr Roger Brake, General Manager, Tax White Paper Taskforce

Dr John Clark, Senior Adviser, Tax Analysis Division

Senate Wednesday, 22 October 2014


Output Group 3.1—Fiscal Group

Mr Nigel Ray, Executive Director, Fiscal Group

Mr Peter Robinson, General Manager, Commonwealth-State Relations Division

Ms Sam Reinhardt, Acting General Manager, Commonwealth-State Relations Division

Ms Leesa Croke, General Manager, Social Policy Division

Mr Chris Foster, Principal Adviser, Social Policy Division

Mr Robert Raether, Principal Adviser, Social Policy Division

Mr Damien White, General Manager, Infrastructure, Industry, Environment and Defence Division

Mr Chris Legg, Chief Adviser, Infrastructure, Industry, Environment and Defence Division

Mr Paul Horrocks, Principal Adviser, Infrastructure, Industry, Environment and Defence Division

Ms Melissa Cranfield, Principal Adviser, Infrastructure, Industry, Environment and Defence Division

Ms Amanda Cattermole, General Manager, Budget Policy Division

Mr Patrick Boneham, Principal Adviser, Budget Policy Division

Mr Jonathan Rollings, Principal Adviser, Budget Policy Division

Mr Robert Ewing, Manager, Intergenerational Report Unit, Budget Policy Division

Output Group 4.1—Markets Group

Ms Meghan Quinn PSM, Acting Executive Director, Markets Group

Ms Diane Brown, Acting General Manager, Financial System and Services Division

Mr David Crawford, Acting Principal Adviser (Capital Markets), Financial System and Services Division

Mr Kevin Tee, Acting Manager, Financial Services Unit, Financial System and Services Division

Mr Paul McCullough, General Manager, Deregulation Division

Mr Rob Donelly, General Manager, Foreign Investment and Trade Policy Division

Ms Deidre Gerathy, Chief Adviser, Foreign Investment and Trade Policy Division

Mr Ben Dolman, Acting General Manager, Small Business, Competition and Consumer Policy Division

Ms Anne Scott, Principal Adviser, Small Business, Competition and Consumer Policy Division

Ms Jenny Allen, Acting Principal Adviser, Small Business, Competition and Consumer Policy Division

Mr Peter Martin, Australian Government Actuary

Mr Michael Burt, Actuary, Australian Government Actuary

Clean Energy Finance Corporation

Mr Oliver Yates, Chief Executive Officer

Ms Meg McDonald, Chief Operating Officer

Mr Andrew Powell, Chief Financial Officer

Ms Jillian Broadbent AO, Chair

Australian Bureau of Statistics

Mr Jonathan Palmer, Acting Australian Statistician

Mr Ian Ewing, Deputy Australian Statistician, Economic and Environment Statistics Group

Mr Peter Harper, Deputy Australian Statistician, Population, Labour and Social Statistics Group

Mr Chris Libreri, Acting Deputy Australian Statistician, Chief Operating Officer

Mr Paul Jelfs, First Assistant Statistician, Social, Health and Labour Division

Ms Gemma Van Halderen, First Assistant Statistician, Population, Education and Data Integration Division

Mr Bernard Williams, Assistant Statistician, Labour Statistics Branch

Mr Michael Davies, First Assistant Statistician, Macroeconomic Statistics Division

Ms Linda Fardell, Acting Assistant Statistician, Office of the Statistician and External Engagement

Ms Jenine Borowik, First Assistant Statistician, Program Delivery Division

Ms Christine Williams, Acting First Assistant Statistician, Business, Industry and Environmental Statistics

Division



Mr Glen Sward, Acting Assistant Statistician, Human Resources Branch

Australian Securities and Investments Commission

Mr Greg Medcraft, Chairman

Mr Peter Kell, Deputy Chairman

Ms Cathie Armour, Commissioner

Mr Greg Tanzer, Commissioner

Mr John Price, Commissioner

Mr Greg Kirk, Senior Executive Leader

Mr Chris Savundra, Senior Executive Leader

Mr Tim Mullaly, Senior Executive Leader

Mr Warren Day, Senior Executive Leader

Ms Joanna Bird, Senior Executive Leader

Australian Prudential Regulation Authority

Mr Wayne Byres, Chairman

Mrs Helen Rowell, APRA Member

Mr Charles Littrell, Executive General Manager, Policy, Statistics and International

Australian Taxation Office

Mr Neil Olesen, Acting Commissioner of Taxation

Mr Geoff Leeper, Second Commissioner, People Systems and Services

Mr Andrew Mills, Second Commissioner, Law Design and Practice

Mr Shane Reardon, Acting Second Commissioner, Compliance

Ms Frances Cawthra, Chief Finance Officer

Ms Jacqui Curtis, First Assistant Commissioner, ATO People

Mr David Diment, Deputy Commissioner, Client Account Services

Mr Steve Hamilton, First Assistant Commissioner, Major Programs

Mr Michael Cranston, Deputy Commissioner, Private Groups and High Wealth Individuals

Mr Tony Poulakis, Assistant Commissioner, Private Groups and High Wealth Individuals

Mr Stephen Vesperman, Deputy Commissioner, Small Business / Individual Taxpayers

Mr Matthew Bambrick, Assistant Commissioner, Superannuation

Mr Stuart Forsyth, Assistant Deputy Commissioner, Superannuation

Mr Michael O’Neill, Assistant Deputy Commissioner, Private Groups and International

Australian Charities and Not-for profit Commission

Ms Susan Pascoe AM, Commissioner

Mr David Locke, Assistant Commissioner

Mr Murray Baird, Assistant Commissioner

Office of the Inspector-General of Taxation

Mr Ali Noroozi, Inspector-General of Taxation

Mr. Andrew McLoughlin, Deputy Inspector-General of Taxation

Productivity Commission

Mr Peter Harris, Chairman

Mr Daryl Quinlivan, Head of Office

Australian Competition and Consumer Commission

Mr Rod Sims, Chairman

Ms Rayne de Gruchy, Chief Operating Officer

Mr Rami Greiss, Executive General Manager Merger and Authorisation Review



Mr Scott Gregson, Executive General Manager Consumer Enforcement

Mr Michael Cosgrave, Executive General Manager Infrastructure Regulation

Ms Jo Schumann, Executive General Manager People and Corporate Services

Mr Brenton Philp, General Manager Enforcement Australian Capital Territory and National Projects

Mr Neville Matthew, General Manager Product Safety Chemicals and Compliance

Mr Warwick Anderson, General Manager, Network Finance and Reporting

Committee met at 09:00

CHAIR (Senator Edwards): I welcome the Department of Treasury. The Senate has referred to the

committee the particulars of proposed expenditure for the 2014-15 year and related documents for the Treasury

and industry portfolios. The committee has set Friday, 31 October 2014 as the date by which senators are to

submit written questions on notice and has set Friday, 12 December 2014 as the date by which answers to

questions on notice are to be returned.

Under standing order 26, the committee must take all evidence in public session. This includes answers to

questions on notice. Officers and senators are familiar with the rules of the Senate governing estimates hearings.

If you need assistance, the secretary has a copy of the rules. In particular, I draw the attention of witnesses to an

order of the Senate of 13 May 2009 specifying the process by which a claim of public interest immunity should be

raised and which I now incorporate in Hansard. Witnesses are specifically reminded that a statement that

information or a document is confidential or consists of advice to government is not a statement that meets the

requirements of the 2009 order. Instead, witnesses are required to provide some specific indication of the harm to

the public interest that could result from the disclosure of the information or the document.

Officers called upon for the first time to answer a question should state their name and position for the Hansard

record and witnesses should speak clearly into the microphone in front of them. Please make sure that all mobile

phones are switched off or turned to silent. I remind senators and witnesses that microphones remain live, unless I

instruct otherwise—for example, at suspension or adjournment today. I would ask photographers and cameramen

to follow the established media guidelines and the instructions of the committee secretariat. Please ensure that

senators' and witnesses' laptops and personal papers are not filmed. I remind members of the public and everyone

in the gallery that they are not permitted to speak or interfere with proceedings or with witnesses at any point

during the hearing. Security is present and they will be asked to remove anyone who does not follow these

instructions.

The extract read as follows—

Public interest immunity claims

That the Senate—

(a) notes that ministers and officers have continued to refuse to provide information to Senate committees without properly

raising claims of public interest immunity as required by past resolutions of the Senate;

(b) reaffirms the principles of past resolutions of the Senate by this order, to provide ministers and officers with guidance as to

the proper process for raising public interest immunity claims and to consolidate those past resolutions of the Senate;

(c) orders that the following operate as an order of continuing effect:

(1) If:

(a) a Senate committee, or a senator in the course of proceedings of a committee, requests information or a document

from a Commonwealth department or agency; and

(b) an officer of the department or agency to whom the request is directed believes that it may not be in the public

interest to disclose the information or document to the committee, the officer shall state to the committee the ground on which

the officer believes that it may not be in the public interest to disclose the information or document to the committee, and

specify the harm to the public interest that could result from the disclosure of the information or document.

(2) If, after receiving the officer’s statement under paragraph (1), the committee or the senator requests the officer to refer

the question of the disclosure of the information or document to a responsible minister, the officer shall refer that question to

the minister.

(3) If a minister, on a reference by an officer under paragraph (2), concludes that it would not be in the public interest to

disclose the information or document to the committee, the minister shall provide to the committee a statement of the ground

for that conclusion, specifying the harm to the public interest that could result from the disclosure of the information or

document.

(4) A minister, in a statement under paragraph (3), shall indicate whether the harm to the public interest that could result

from the disclosure of the information or document to the committee could result only from the publication of the information



or document by the committee, or could result, equally or in part, from the disclosure of the information or document to the

committee as in camera evidence.

(5) If, after considering a statement by a minister provided under paragraph (3), the committee concludes that the statement

does not sufficiently justify the withholding of the information or document from the committee, the committee shall report

the matter to the Senate.

(6) A decision by a committee not to report a matter to the Senate under paragraph (5) does not prevent a senator from

raising the matter in the Senate in accordance with other procedures of the Senate.

(7) A statement that information or a document is not published, or is confidential, or consists of advice to, or internal

deliberations of, government, in the absence of specification of the harm to the public interest that could result from the

disclosure of the information or document, is not a statement that meets the requirements of paragraph (1) or (4).

(8) If a minister concludes that a statement under paragraph (3) should more appropriately be made by the head of an

agency, by reason of the independence of that agency from ministerial direction or control, the minister shall inform the

committee of that conclusion and the reason for that conclusion, and shall refer the matter to the head of the agency, who shall

then be required to provide a statement in accordance with paragraph (3).

(d) requires the Procedure Committee to review the operation of this order and report to the Senate by 20 August 2009.

(13 May 2009 J.1941)

(Extract, Senate Standing Orders, pp 124-125)

Fiscal Group

The committee will begin consideration of the Treasury portfolio with questions for the Department of the

Treasury Fiscal Group and then will follow the order set out in the circulated program. The committee's scheduled

break times are listed in the program or as required. I welcome the Assistant Minister for Social Services, Senator

the Hon. Mitch Fifield—welcome, Minister—representing the Treasurer, and the officers for the Treasury.

Minister or officers, would you like to make an opening statement?

Senator Fifield: I do not have an opening statement but I should indicate to the committee that Senator

Cormann will be here at about 11 o'clock and I will be here in this place until then.

CHAIR: I would just inform senators present that, in consultation with the deputy, we are looking to try to

stick relatively closely to the program today. With that, I will go to the opposition. Senator Wong.

Senator WONG: Can I first go to FBO. Mr Ray, I just want to go through the changes between the PEFO and

the FBO, please. Firstly, can you take me through the 2013-14 budget bottom-line position?

Mr Ray: Yes. At PEFO, the 2013-14 underlying cash balance was forecast to be $30.1 billion. At FBO, the

outcome is $48.5 billion.

Senator WONG: Can we go through the various components of that, please?

Mr Ray: Yes.

Senator WONG: How much of that was additional spending decisions?

Mr Ray: I will have to do some numbers. You will to have bear with me while I do some numbers in my

head, I suspect.

Senator WONG: It is 10.8, policy decisions; the remainder are parameter changes, I think. But I would like

that confirmed. Perhaps we can go through. Then what I want to do—just so that you can prepare—is go through

the various parameters changes as well.

Mr Ray: Yes. I get 10.8.

Senator WONG: That is 10.8?

Mr Ray: Yes.

Senator WONG: What are you looking at?

Mr Ray: I am looking at the—

Senator WONG: It might be good to work off the same page; that is all.

Mr Ray: I am looking at page 321 in budget statement No. 3, which is the reconciliation table.

Senator WONG: So 10.8 is additional spending—correct? —the net position of policy changes—

Mr Ray: It is the net effect of policy decisions, yes.

Senator WONG: They are essentially the spending and savings position. But essentially the government has

spent $10.8 billion more than was anticipated by the departments at the pre-election fiscal and economic outlook.



Mr Ray: I think I would put it slightly differently, that since the pre-election economic and fiscal outlook—

that is, since the election—the government has made, in net terms, policy decisions of $10.8 billion. We would

not anticipate policy decisions at PEFO.

Senator WONG: No.

Mr Ray: That is what I—

Senator WONG: But the expenditure you estimated at PEFO—

Mr Ray: It is $10.8 billion in terms of policy less—

Senator WONG: Less, correct.

Mr Ray: Than the outcome.

Senator WONG: So it would be fair to say that this government spent $10.8 billion more than was anticipated

by you in PEFO?

Mr Ray: I do not think at PEFO we were anticipating what a future government would spend. That is the

point I am getting to.

Senator WONG: That then was estimated?

Mr Ray: That was estimated at PEFO; fine.

Senator WONG: Sure; you cannot anticipate policy decisions, right.

Mr Ray: Yes. I am sorry; I do not want to be—

Senator WONG: But they spent more than was in the budget bottom line at PEFO?

Mr Ray: Correct.

Senator WONG: Can we unpack the $10.8 billion? That includes the$8.8 billion grant to the RBA; is that

right?

Mr Ray: It does.

Senator WONG: What else does it include? What are some of the major spending decisions?

Mr Ray: To get that, I would need to go to MYEFO. At MYEFO, $10.3 billion of that $10.8 billion was

decisions taken by MYEFO, and those major policy decisions are set out on page 35 of MYEFO: the $8.8 billion

grant to the Reserve Bank; a range of measures associated with the repeal of the carbon tax; the land transport

infrastructure projects, including the Bruce, Princess and Pacific highways projects and the New South Wales F3

to M2 extension; border protection, which was $904 million in 2013-14 at MYEFO; and additional funding for

the students first package. They are the major policy decisions. Then, on the other side of the ledger, there were a

number of decisions that reduced payments, including what was at that point the abolition of the schoolkids

bonus, some redirecting of funding and some rephasing and amalgamation of spending in restoring the balance in

the Murray-Darling Basin. They are the major ones. At budget, the impact was only about $500 million.

Senator WONG: Regarding the deterioration in terms of policy decisions, all decisions were made by this

government, were they not? The deterioration of the bottom line for the 2013-14 year, in relation to policy

decisions, was all decisions of this government?

Mr Ray: Correct.

Senator WONG: Can we go to parameter changes?

Mr Ray: Yes.

Senator WONG: What can you give me, in terms of the just under $8 billion worth of parameter changes,

please?

Mr Ray: The big impact there was between PEFO and MYEFO and it was on the revenue side. Between

PEFO and MYEFO, parameter and other variations decreased tax receipts in 2013-14 by $6.3 billion.

Senator WONG: I am sorry; could you—

Mr Ray: I am sorry.

Senator WONG: It is just that you are looking—

Mr Ray: Yes, I am looking at the page. I do not have my glasses. I cannot see the number. But the

deterioration between PEFO and MYEFO in 2013-14 from parameter and other variations on the tax side was

$6.3 billion. On the payments side—

Senator WONG: I was actually asking for the parameter, PEFO to FBO.



Mr Ray: Yes. The problem is that we do not have PEFO to FBO in one spot.

Senator WONG: No, you do not, but you know it.

Mr Ray: What I am trying to do is work through each set.

Senator WONG: We can come back to this.

Mr Ray: One option is for us to take it on notice and—

Senator WONG: No, I do not want you to take it on notice. I am prepared to go to another question and have

someone work it out. I can give you an indication: I am trying to get parameter variations—

Mr Ray: Yes.

Senator WONG: I want to unpack the parameter variations as between PEFO and FBO.

Mr Ray: Yes.

Senator WONG: I want to get quantum and I want to understand which parameter variations drive what

aspect or what component of the revenue.

Mr Ray: If you want to go to the detail on the revenue side, our revenue group colleagues can do that for you

later.

Senator WONG: But you can assist me with the parameter variations?

Mr Ray: I can.

Senator WONG: That is what I would like.

Mr Ray: Okay.

Senator WONG: Do we want to come back to that? I am happy to go on to something else, if someone

behind you can start to—

Mr Ray: Someone in the department will need to do it, but we will get onto that.

Senator WONG: Do you think they are listening?

Mr Ray: We will make sure that they are.

Senator WONG: In terms of the deficit blowout of $18.4 billion, is there something that you can assist me

with?

Mr Ray: I beg your pardon?

Senator WONG: Is there something out of that that we need to—

Mr Ray: What Mr Bottom is going to do is get someone in the department to do the calculations that you

were asking for.

Senator WONG: Excellent. Thank you; that will be very helpful. I think this might have been covered with

your MYEFO answer, the top five spending decisions contributing to the increase in spending between PEFO and

FBO.

Mr Ray: Yes; that was covered by MYEFO.

Senator WONG: That was the MYEFO answer?

Mr Ray: Yes.

Senator WONG: Are you able to indicate to me, apart from the top five, what additional spending decisions

were made in 2013-14, over and above MYEFO, that are reflected in FBO?

Mr Ray: Yes, they are in the budget. I think the big one would have been the deferral of the start date for the

schoolkids bonus, but I will get that checked.

Senator WONG: I am sorry?

Mr Ray: The deferral of the start date for the repeal of the schoolkids bonus is probably the big one, but we

will get that checked.

Senator WONG: You are saying that it is the big one—the big one of what group? We will just make sure

that we are on the same page.

Mr Ray: Between MYEFO and the budget, the net impact of policy is about half a billion dollars.

Senator WONG: Correct.

Mr Ray: I think that accounts for a fair proportion of that.

Senator WONG: Is there anything in FBO that is not reflected in the budget?



Mr Ray: On policy?

Senator WONG: Yes; that is, a decision taken which is not reflected in the budget but which had an impact,

like the schoolkids bonus.

Mr Ray: Yes.

Senator WONG: Any kind of retrospective spending decisions.

Mr Ray: That is the only one that I have got in my head.

Senator WONG: If there is something else, are you able to come back on that?

Mr Ray: Yes. I am just trying to think—between the middle of May and the end of June. The same person

who has gone to do that, our expert on—

Senator WONG: I am sure; thank you. We will come back to that, perhaps. I would like to go to the terms of

trade. I assume that I can ask some questions here and also in macro.

Mr Ray: Yes.

Senator WONG: You will probably remind me of where I look in Budget Paper No. 1, but I am trying to get

the assumptions around the terms of trade in the 2014-15 budget and also some sense of how that parameter is

tracking as against the budget assumption.

Mr Ray: I think that would be—

Senator WONG: I am having trouble hearing Mr Ray.

Mr Ray: I am sorry; I am probably mumbling.

Senator WONG: No. I am just looking at Hansard; thank you.

Mr Ray: I was having trouble hearing you as well, which is unusual.

Senator WONG: I am very quiet!

Senator Leyonhjelm interjecting—

Senator WONG: Senator Leyonhjelm, I would have expected Senator Bushby to laugh but not you.

CHAIR: Order! There is too much frivolity this morning.

Mr Ray: If you want to go to the difference between the forecasts of budget and current conditions, it would

be better to ask the macro group.

Senator WONG: I will ask them about some of what is driving that. In terms of my questions to you, what I

am interested in is what the changes are—you do not have to unpack it—and how that is flowing through, in

terms of the effect on revenue. So I am trying to get a sense of the fiscal impact of the deterioration in the terms of

trade.

Mr Ray: From when?

Senator WONG: Let us start with the budget. BP1 says that terms of trade are expected to decline. You then

have the assumption, which I assume is the assumption that flows through the forward estimates, which is 6¾ per

cent in 2014-15 and 1¾ per cent in 2015-16.

Mr Ray: They are forecasts; 2014-15 and 2015-16 are forecasts.

Senator WONG: Yes. What do you do in the out years?

Mr Ray: Then we have an assumption where we bring the terms of trade down over, I think, 15 years.

Senator WONG: Did that change for this budget from what it was previously, from memory?

Mr Ray: I thought it changed at MYEFO.

Senator WONG: Remind me of what that change was?

Mr Ray: Again—

Senator WONG: But you are very good at this, Mr Ray.

Mr Ray: You are asking the wrong person.

Senator WONG: But I know how much you know.

Mr Ray: At page 17 of MYEFO, box A sets out the change in the methodology for projecting the terms of

trade, which is out over the medium term; it is not just over the two projection years. Do you have that in front of

you?

Senator WONG: Yes, I have.



Mr Ray: I do not know that I need to read it out to you, but it is set out there. By bringing the terms of trade

down more steeply, there is a reduction in nominal GDP in the projection period, as a result of which we get less

revenue, and—

Senator WONG: 'Projection' is the out years, isn't it?

Mr Ray: The last two years.

Senator WONG: They are always counterintuitive terms to me.

Mr Ray: Yes. As is set out in the box, the impact of that was $2 billion across the forward—

Senator WONG: So it is not—

Mr Ray: It is not a major impact; the change in methodology does not affect 2013-14.

Senator WONG: So we have the change in methodology, which is applied at MYEFO?

Mr Ray: Yes.

Senator WONG: I am trying to get where the terms of trade are currently tracking as against the budget

assumptions.

Mr Ray: That is a question for the macro group.

Senator WONG: But you know? Surely you know how they are tracking.

Mr Ray: I would rather that you asked an expert.

Senator WONG: But then I would have to call you back again to ask you about the fiscal impact of it.

Mr Ray: I think the best person to ask about the fiscal impact is Mr Heferen because it is revenue, and I think

he is coming at 5.15.

Senator WONG: Yes.

Mr Ray: He comes after macro, so I think that ought to work.

Senator WONG: I am sure that you can help me, Mr Ray, but I am happy to ask Mr Heferen, if you would

prefer me to ask him. Would it be right to say that the assumption—this is in the public arena—is that the terms of

trade are tracking below the budget assumption?

Mr Ray: I have in my head individual commodity prices rather than terms of trade, so I think it is better to ask

the experts.

Senator CANAVAN: I have a follow-up to that. On page 1 you say that the smaller than anticipated decline

in the terms of trade was largely driven by higher than expected prices. Has there been a smaller reduction in the

terms of trade than anticipated?

Mr Ray: That is in 2013-14.

Senator WONG: We are talking about the budget period.

Mr Ray: I think Senator Wong is talking about the current budget year now.

Senator WONG: And the forward estimates, and what the assumption is going to be.

Mr Ray: Therefore, what goes forward.

Senator WONG: I will ask some of these revenue questions of Mr Heferen. Can I turn now to the Paid

Parental Leave scheme? I think this was announced by the Prime Minister, as Leader of the Opposition, two or

three years ago. Obviously, it was an election commitment. I have asked previously how it is that it does not

appear in the budget, given that it is a 'signature policy'—

Senator BUSHBY: Like the NBN.

Senator WONG: Which appeared in the budget.

Senator Bushby interjecting—

Senator WONG: Because it is equity. If it is the government's position now to have the NBN in the budget

papers, you should probably speak to the Treasurer, because it is not.

CHAIR: Order on both sides!

Senator WONG: That is called an own goal. When I have asked previously about how it is possible that the

Prime Minister's signature policy is not in the budget, I have been given answers like, 'Oh, we've got all this

negotiation to do; we've got to work out the costing,' et cetera. Where are we at, in terms of this extraordinary

length of time to work out the cost and make it transparent to the parliament and the public, with the signature

policy of the Prime Minister?



Mr Ray: Is that a question for me?

Senator WONG: Yes.

Mr Ray: Ms Croke might be able to help you, but it is not actually our portfolio responsibility.

Ms Croke: The Department of Social Services has the lead for the policy.

Senator WONG: Yes, Ms Croke. I do not know whether it was you previously, but I also was told—either in

this estimates or those relating to Finance—that Treasury was engaged in discussions with the states.

Ms Croke: Yes.

Senator WONG: This was one of the big justifications for the government not putting in the budget that there

was going to be a major change to the costing as a result of negotiations with the states. Are you negotiating with

the states?

Ms Croke: We have been negotiating with the states and we—

Senator WONG: Is that you personally?

Ms Croke: Yes. I was working with state and territory treasuries on a methodology for working out how

states would contribute to the Commonwealth scheme. That methodology has been worked out. The methodology

looked to three things. The first element was the replacement wage of state public servants; the second element

was how long state public servants' Paid Parental Leave schemes lasted; and the third element was wages.

Basically, that has been agreed in principle. That piece of work now has flowed through to first ministers'

departments, so to our Department of the Prime Minister and Cabinet, and they are leading that work through a

COAG process.

Senator WONG: Let us unpack a little bit of that. First, in terms of process, when was this finalised?

Ms Croke: It was certainly towards the first half of 2014 that we agreed, essentially, the methodology for

working out how states and territories would contribute.

Senator WONG: And that was agreed at officer level?

Ms Croke: Yes.

Senator WONG: Was it agreed at a Treasurer-to-Treasurer level?

Ms Croke: No. The methodology agreed in principle has now flowed into first ministers' departments, with

Prime Minister and Cabinet now taking the lead.

Senator WONG: Was it agreed before the budget? You said that it was in the first half of this year.

Ms Croke: It probably was in principle, but work was still going on around what the actual design of the

scheme would look like. So, in a way—

Senator WONG: What do you mean?

Ms Croke: That would be who would be the paymaster. Would the paymaster be the Commonwealth? Would

the state and territory governments then pay the Commonwealth their share, or would the states and territories

continue to be the paymaster? So those negotiations are still ongoing and they have been discussed at COAG.

Senator WONG: Tell me if this is a fair way of summarising that aspect of your evidence: what is

outstanding is what you might call the administrative arrangements around who administers the scheme and pays

the employees et cetera?

Ms Croke: Yes.

Senator WONG: But not the entitlement parameters?

Ms Croke: I think that would be fair, although in the design there still might be other issues that they are

working through; and I do not have, I suppose, as much visibility of the day-to-day negotiations that are

happening.

Senator WONG: Do the implementation details change the fiscal impact at different levels of government?

This is what I am trying to discern: you have said that there are administration issues—who is the paymaster

et cetera.

Ms Croke: Yes.

Senator WONG: Do the negotiations that you are describing about 'paymaster'—I will use your word—

actually go to whose bottom line it comes from, or is that already agreed? Who pays?



Ms Croke: No. I suppose there is one bit to it in that there is an administration element in terms of what is the

role of DHS in the negotiations with the states and territories. So there is an administration component that may

well have a departmental costing, depending on what systems might need to be—

Senator WONG: Yes, the implementation costings. I am more interested in: is it agreed as to who pays?

Ms Croke: That is not agreed yet.

Senator WONG: That is not agreed?

Ms Croke: As far as I know.

Senator WONG: Does it come out of the Commonwealth budget or does it come out of the states' budgets?

Ms Croke: The decision about—

Senator WONG: I am talking about the entitlement, not administration. Is it agreed that Paid Parental Leave

for state public servants will be at a cost to state governments?

Ms Croke: No. Those negotiations are not finished, because it depends on where the money flows to.

Senator WONG: I am a little confused, because I thought you said that the methodology had been agreed.

Ms Croke: That is true.

Senator WONG: But which level of government is liable is still a live issue, is it?

Ms Croke: That is right, and that issue is with Prime Minister and Cabinet.

Senator WONG: What is the cost of what is in negotiation here? I am trying to get a sense of how many

public servants we are talking about.

Ms Croke: I would have to take that on notice. I do not have those numbers. I know it was in the tens of

thousands. If you think in public service terms in New South Wales, that would be all nurses and teachers, so it is

a large number. I do not have that with me.

Senator WONG: Is it fair to say that the states were quite happy with the Commonwealth having to pick up

that tab?

Mr Ray: For them not to be, that would overturn the history of Federation, I think.

Senator WONG: True. But, essentially, it is a shift. As I understand it, even for state public servants where

you have Paid Parental Leave already as an entitlement, the states' position is that the Commonwealth should pick

up the tab for a Commonwealth component of that Paid Parental Leave.

Ms Croke: They would pay for what their existing scheme is and the Commonwealth would pick up the

difference up to 26 weeks.

Senator WONG: Are they all more generous?

Ms Croke: No; they are less generous.

Senator WONG: They are all less generous?

Ms Croke: Essentially, yes.

CHAIR: Senator Wong?

Senator WONG: I have more on PPL, but I am happy to come back to it.

CHAIR: Right. We will go to Senator Leyonhjelm.

Senator LEYONHJELM: Has the Treasury done any work on how many people are on the minimum wage?

Ms Croke: We have some data, but mainly that work would be done by the department of employment.

Senator LEYONHJELM: Have you reviewed the work of any others on that? If you have not done it

yourself, have you reviewed the work of the department of employment on it, or anybody else's work?

Ms Croke: I would have to take that on notice. I do not think so—not from recent memory. But I could take

that on notice.

Senator LEYONHJELM: Okay. Are you able to make an estimate of the coverage of the minimum wage?

Ms Croke: I have some data here, from May 2012. For people on award only, it is around 1.5 million.

Senator LEYONHJELM: Just to be clear, is that on the minimum wage or on awards?

Ms Croke: That is on award. So 104,000 were paid the national minimum wage in 2012. That was award

only—I am sorry; the first figure was the wrong figure.

Senator LEYONHJELM: So it is 104,000?



Ms Croke: Yes. That is 2012 data.

Senator LEYONHJELM: This might require you to speculate a bit but, if the minimum wage were reduced,

are you able to estimate what proportion of people being paid the current minimum wage would move to the new

minimum wage?

Ms Croke: I certainly do not have that; it would be best answered by the department of employment.

Senator LEYONHJELM: Thank you.

Senator WONG: Senator Leyonhjelm, can I follow up on that?

Senator LEYONHJELM: Yes.

Senator WONG: Have you been asked to model any reduction in the minimum wage?

Ms Croke: Not that I am aware of, no.

Senator WONG: Mr Ray?

Mr Ray: Since PEFO perhaps? Is that where you are going? The answer is no.

Senator LEYONHJELM: Has Treasury recently been engaged in any work on aviation or shipping cabotage

restrictions and options to reduce them?

Mr Legg: We are aware that work has been done elsewhere in the Public Service on these issues and we have

contributed a briefing, if you like, but it has not been a major part of our work over the last little period.

Senator LEYONHJELM: Amongst that, have you reviewed work on the experience of reduced aviation

cabotage with restrictions within Europe and the US?

Mr Legg: No, we have not.

Senator LEYONHJELM: You have not looked at that at all.

Mr Legg: This is an issue which the prime carriage of rests in another department.

Senator LEYONHJELM: I might leave it there; thank you.

CHAIR: Senator Canavan.

Senator CANAVAN: I want to ask some questions about an article in the Australian Financial Review year

last week by John Kehoe. I think he was an alumnus of your organisation; he is a good, fine financial

correspondent. He reported last week that the Obama Administration had reported a budget deficit of 2.8 per cent

for their last financial year. As you would be aware, Mr Ray, I think our deficit in the financial budget outcome is

3.1 per cent of GDP. Why does the US have a lower budget deficit than we do?

Senator Wong interjecting—

CHAIR: Order!

Senator WONG: I'm just making a quiet joke.

Mr Ray: The short answer is because, as a proportion of GDP, the gap between their spending and revenue is

smaller than ours. If you want to go to questions in detail about the state of the US economy, it would be better to

ask—

Senator CANAVAN: Sure.

Senator WONG: Their unemployment rate is lower, isn't it?

Senator CANAVAN: It is; that is right, Senator Wong. Our GDP growth, I think, is higher. I remember a few

years ago the former Treasurer, Wayne Swan, saying that, if we are going to be Keynesians in the downturn, we

should be Keynesians in the upturn. Are we there yet? Are we Keynesians in the upturn?

Mr Ray: I think a better way to put it is: are there Keynesian elements in the 2014-15 budget? The answer to

that is probably yes.

Senator CANAVAN: If we are going to get back to a better budget deficit situation, we obviously have to

pass savings. What proportion of the savings announced in the budget have been passed by the Senate?

Mr Ray: That is not a number that we track in that form, so I would need to take that question on notice.

Senator CANAVAN: Okay; take that on notice.

Senator WONG: Could you also take on notice the fiscal cost of the deal that the government did with

Mr Palmer in the context of the MRRT repeal legislation, over the forward estimates.

Mr Ray: We can take that on notice.



Senator CANAVAN: The Treasury Secretary said in June: 'It's quite another thing—budgetary strategy—to

exhort to vague notions of fairness to oppose any form of reform. If you do that, if you use such an argument to

defend what is an unsustainable status quo, what you are doing is consigning Australia to a deteriorating future.'

Can you explain to the committee how failing to fix the budget would lead to a deteriorating future?

Mr Ray: If you look out over the next decade, without change Australia faces a period of historically slow

growth in national income. That will mean a period of quite slow revenue growth. In that world, without policy

action, it will take a long time for the budget to return to a more sustainable position than it currently is in. That is

why successive governments have taken policy action to put the budget on a path towards surplus. When I talk

about 'over the next decade', that is without any adverse external shock. Were we not to restore the budget to a

more sustainable position, it would put us at significant risk from an external shock.

Senator CANAVAN: Are you aware of the Productivity Commission's report late last year on the future

financial situation over the period to 2060, looking at projecting future government revenues and expenses to

2060?

Mr Ray: Yes, I am aware of that; and I am aware of the last Intergenerational Report that the former

government published that we worked on.

Senator CANAVAN: So do you have estimates yourselves on what the gap between revenue and expenses

will be over the next, 20, 30 or 40 years? Do you look that far out at the moment, or is that just part of the IGR

work?

Mr Ray: That would be part of the IGR work. We do look out over the medium term—so over the next 10

years. Those projections have been published in each update for a number of years now. In budget statement

No. 3, chart 2, which is on page 3-9, shows projections out over the next decade effectively with and without the

budget policy action.

Senator CANAVAN: Do you have the numbers there in front of you which say what the gap will be in the

next 10 years with the budget policies and what will be the gap without them?

Senator WONG: What does 'with the budget policies' mean?

Senator CANAVAN: I might have misquoted you there, Mr Ray, but you mentioned that there is one

projection not taking action—

Senator WONG: We went through this at the last estimates.

Senator CANAVAN: I am sorry, Senator Wong; I was not here at the last estimates.

Senator WONG: No.

Senator CANAVAN: I think I have the call, though.

Senator WONG: No. But the point I will make, Mr Ray, is that we went—

Senator CANAVAN: Senator Wong, if you have a point of order, you can make it through the chair.

Senator WONG: Are we talking about the changed spending assumptions that the government put in the

budget that you and I discussed at the last estimates; is that what this question is about?

Mr Ray: No.

Senator CANAVAN: No, Senator Wong. I am asking about the chart that Mr Ray has referred to me.

Senator WONG: Which has the changed spending assumptions?

CHAIR: So you are clear, Mr Ray, on the question?

Mr Ray: I am.

Senator WONG: Which chart are we at?

Mr Ray: Chart 2 on page 3-9.

Senator WONG: Of BP1.

Mr Ray: Of BP1.

Senator WONG: Yes. These include the political assumptions.

Mr Ray: I do not have with me the gap, but I think that the chart shows—

Senator CANAVAN: That is fine, Mr Ray.



Mr Ray: It is nearly three percentage points of GDP by the end of the projection. That is the difference. One

other point, that I think the secretary was referring to: if we continue to rely on fiscal drag to return the budget to

surplus, there will be costs associated with that because of the rising effective tax rates.

Senator CANAVAN: Thank you. The Treasury Secretary also said just before the budget that the books as

they stood, if they continued as they were, would mean that the budget would not return to a surplus over the

medium term and, given the last few years, we would end up with 16 years of deficits in a row.

Mr Ray: Correct.

Senator CANAVAN: Would that be a record in Australian history?

Mr Ray: Certainly since 1970-71.

CHAIR: Senator Whish-Wilson.

Senator WHISH-WILSON: My questions are about the Joint Commonwealth and Tasmanian Economic

Council. I want to get an update as to how many times the council has now met.

Mr Ray: Twice.

Senator WHISH-WILSON: Is a next meeting scheduled? If so, can you give us the date of that?

Mr Ray: I think the answer to that is that it is under active consideration.

Senator WHISH-WILSON: In the initial correspondence we had it was going to be quarterly; so you are

obviously due for a meeting fairly soon.

Mr Ray: Correct. As well as the meetings of the council, there have been a number of meetings of, for

example, the business members of the council. So it is not just, if you like, the whole council meetings that count.

Senator WHISH-WILSON: In regard to that, have any requests been given to other departments for the

papers or studies or research to be conducted in Tasmania on Tasmanian economic issues? I understand that was

also one of the principles: the council was to commission reports and studies into different areas of the economy.

Mr Ray: Yes. We certainly have had discussions with other departments about elements of conditions in

Tasmania, but council has not commissioned a study from another department that I am aware of—not a

Commonwealth department, anyway.

Senator WHISH-WILSON: Or a state body, perhaps—or local government?

Mr White: We have definitely been talking to other Commonwealth agencies and we understand that the

Tasmanian government is also talking amongst some of its agencies. Also some of the Commonwealth agencies, I

think, are helping us out on various ideas and aspects of the work, but I would not call it commissioning a study.

Senator WHISH-WILSON: Not yet, but still the aim is to potentially identify areas of need?

Mr Ray: It is possible; it is not necessarily a—

Senator WHISH-WILSON: In relation to the meetings themselves, you say that you publish a brief record of

the meetings on your website. Will we have access to the minutes and more detailed information from these

meetings, or are they under some sort of commercial confidentiality?

Mr White: I thought that we would be publishing that. I would have to check, but there is definitely

something on the website about it. I thought it had included the minutes, but I can—

Senator WHISH-WILSON: There is a brief record of the meetings, such as when they occurred and who

attended. But in terms of what is being discussed, will there be more access to information?

Mr Ray: The only information that is available is what is on the website.

Senator WHISH-WILSON: If we request more information, is it possible that we will get access to that?

Mr Ray: If you are interested in more information and you want to seek that through the normal channels,

then of course we will—

Senator WHISH-WILSON: For example, have any of the recommendations in the Productivity

Commission's report into Bass Strait been discussed and what actions have been taken? That would be an

example of the type of detail I would be interested in. Lastly, will there be any plans to allow the public to access,

or get direction for, submissions to the council? Will there be any process available for various stakeholders to

make submissions or will there be public forums where perhaps research might be directed into reports into

various areas of the economy?

Mr Ray: The members of the council talk to a lot of people; so that is an avenue. At this stage, there is no

thought of a public consultation process involving town hall meetings and that sort of thing.



Senator WHISH-WILSON: That is all for me, thank you, Chair.

CHAIR: We have some questions on clean energy from Senator Dastyari; then I intend to go back to Senator

Wong.

Senator WONG: It is up to you, Chair, but there are a bunch of additional fiscal group questions that I have. I

do not know if other senators have any. Do you intend to finish them before going to the Clean Energy Finance

Corporation?

CHAIR: No. What I am trying to do is clear clean energy.

Senator WONG: That is fine; I am relaxed about that.

CHAIR: And then come back to you so that you have the run of the time.

Senator WONG: I am happy with that, thank you.

CHAIR: I probably was not all that clear.

Senator WONG: I did not understand that.

CHAIR: Clean energy, could you come to the fore?

Senator WONG: They are coming back?

CHAIR: They are coming back but do not go away.

Senator DASTYARI: Stay in the building.

Clean Energy Finance Corporation

[9:48]

CHAIR: I will go to Senator Dastyari and then to Senator Leyonhjelm.

Senator DASTYARI: Whom should I be directing the questions to? Is that you, Mr Yates?

Mr Yates: Yes.

Senator DASTYARI: I do not have too much here. I just want to get my understanding right. The expected

return is around seven per cent. That was the last information that was publicly available. Is that where we still

think we are at?

Mr Yates: The issue is that it is important to understand that, with every loan we are making, we are lending

above the government's cost of funds. We have a portfolio of loans and some of those we are directing towards

aggregated transactions, say, in energy efficiency. They may carry a lower coupon—you know, maybe five—and

some of them will be more traditional project financing transactions and they will have a higher return. But we are

expecting overall on our portfolio, once it is fully invested, to generate a return of around seven per cent.

Senator DASTYARI: And we are still on track to do that? I am just checking. They are the figures that you

have given us in the past. How many actual individual projects were funded in 2013-14?

Mr Yates: The financial year? I can come back with the exact numbers in answer to that question.

Senator DASTYARI: And the total investment figure itself for that year?

Mr Yates: We currently have about $930 million of investment in place over those transactions.

Senator DASTYARI: How much is that?

Mr Yates: It is $930 million.

Senator DASTYARI: I am sorry; I was asking a question about the investment figures for the 2013-14 year.

We are talking about the last financial year that ended in July of this year.

Mr Yates: In July of this year.

Senator DASTYARI: At this point in time, I am asking for last year. I just want to get from you the figure for

the rate of return on last year's investments.

Mr Yates: I think it is 17 projects and $733 million.

Senator DASTYARI: And the rate of return?

Mr Yates: The rate of return is weighted and I do not have it, over the whole portfolio.

Senator DASTYARI: That is over the last financial year. I assume that makes it part of the annual returns.

Mr Yates: It does make up our annual return, but it actually comes through a whole series of different

investments at different times. I do not have that exact figure with me, but I will take it on notice.

Senator DASTYARI: If you can take it on notice.



Mr Yates: Yes, I will.

Senator DASTYARI: For the 2013-14 financial year, what was the rate of return?

Mr Yates: I will take that on notice.

Senator DASTYARI: And you are saying that, for this year so far, you have $970 million; was that the figure

you said?

Mr Yates: Yes, $930 million is the figure.

Senator DASTYARI: So how much do you have left to invest?

Mr Yates: We have more than enough. Each year we get an allocation of $2 billion; so we currently have

available funds of $4 billion. If $930 million is invested, we have got about $3.1 billion available.

Senator DASTYARI: Obviously you are well aware that there is a live public debate about the role of the

Clean Energy Finance Corporation and whether it is or is not to exist, and that is obviously a matter for politicians

and the parliament to resolve. The question I would like to ask you is: what contingency plans have been put in

place in case you are abolished? It is a tough question to ask someone to answer.

Mr Yates: No. We have had detailed discussions with Treasury about managing, in an orderly fashion, our

portfolio in the event that parliament decides to wind up the CEFC. I think the minister himself has expressed an

understanding that this would be done in an orderly fashion and the assets would have to be managed

appropriately to maximise return for the taxpayer. We would be expecting that to happen, cautiously and

appropriately and in an orderly manner, to make sure that was done to minimise the disruption to the market and

to maximise the return to the taxpayers, should parliament decide to do that.

Senator DASTYARI: So there is a kind of uncertainty. There is a cloud of uncertainty over what you do. I

just want to get your understanding of what that actually does. What does it do in terms of securing financial

support, what does it do to staff, what does it do to morale, what does it do to an organisation when there is such a

cloud over whether or not you are going to exist? Do not take this the wrong way, Mr Yates, but your showing up

at estimates is a case-by-case proposition and this could be the last time you are here.

Mr Yates: The position that we are in is not very different to many private sector companies. Many

employees today face very challenging work environments. We are in an environment where, yes, we are subject

to existing at parliament's will. Our staff know that. Our staff are very dedicated to what they are doing. We have

very low staff turnover, less than 10 per cent. We are continuing to deploy money appropriately and cautiously

and not in a hurry. We have plenty of money to deploy, but we are looking for good investments which will

generate a positive public purpose outcome. We are continuing to do that and we are able to do that. This is the

environment in which we have been operating from the first day that we started the organisation.

Senator DASTYARI: I do not want to take up any more time, but I want to ask just one more question and

then maybe a small thing will come from that. On your proposition and the numbers you have stated today, the

Clean Energy Finance Corporation is acting appropriately. Obviously you are lending money; you are doing it at

an expected return rate of more than seven per cent—that is your figure. You achieved that in the previous

financial year and you are on track to achieve that now. I do not understand why we are having any discussion

about abolishing your organisation.

Mr Yates: I think that is a question for our minister; it is not for me.

CHAIR: Senator Lyonhjelm.

Senator LEYONHJELM: I may be confused here because there are a number of organisations with names a

bit like yours that I get a bit mixed up on. But am I right in assuming that your organisation is responsible for

dispersing funds for renewable energy certificates?

Mr Yates: No, that is not correct.

Senator LEYONHJELM: Have I got the wrong organisation?

Mr Yates: That is the Clean Energy Regulator, I believe.

Senator LEYONHJELM: In that case, I have no questions for you.

Senator WHISH-WILSON: Mr Yates, I am interested in whether you accept the proposition that your

financing body crowded out, or potentially risks crowding out, private investment in the renewable energy sector.

Mr Yates: I do not accept that proposition, and I do not accept it from the reality of what we are seeing from

the transactions that we are doing. We are deploying capital to enable investments to happen that would not

otherwise happen if we were not on the field. There are numerous examples within our portfolio now of



transactions which required a focused, dedicated lender to be available to work through the projects and move

early to help them gain confidence to carry that transaction forward. There are good examples that you can see on

our website, whether they be from the transaction for Sundrop Farms, which is in Port Augusta, which is quite

unique—the idea of growing tomatoes hydroponically using solar energy and desalinating the water. That is

innovative, it is new and the banks have not done it. Another transaction that we are working on is a waste-to-

energy project in Western Australia. It is using internationally applied technology, which has not been applied in

Australia, and ensuring that that project also can receive finance. It is through these projects that we encourage

and work in partnership with the other banks so that they can gain confidence and then take those projects

forward.

Senator WHISH-WILSON: On that point, have you seen much co-investment at all from the banks?

Mr Yates: A lot of co-investment. With nearly all transactions that we participate in, we have co-investment.

Obviously we have it with equity, but we also have it with the banks. And we always encourage co-investment.

We believe that it is fundamental to create experience and greater experience and depth within the banking sector

so that ultimately we will not be required to provide assistance. We would love the banking sector to always be

there to help innovative projects get there. But obviously, sometimes the banking sector is not able to respond to

the needs of the market that we have.

Senator CANAVAN: Can I just ask a follow-up there. When you first start this, do you typically take on

equal risks with the co-investors or do you take on more risk or less risk?

Mr Yates: Typically, it is equal and, typically, one of the key things we will be doing is sitting down with

them and explaining why we think that risk is reasonable and encouraging them to equally take. It is a good

arrangement because, obviously, as we go through that analysis, we are strengthening our analysis and our

understanding of the project not only to ourselves—and the equity—but also to the banks and their own credit

committees.

Senator WHISH-WILSON: Last question: do you expect more co-investment or more interest from the

banks in financing renewable energy in the future?

Mr Yates: Obviously, our mandate is more than renewable energy. It covers energy efficiency; it covers low-

emissions technology, fuel changing, waste to energy and biomass.

Senator WHISH-WILSON: Batteries?

Mr Yates: It is a very broad. I am sorry?

Senator WHISH-WILSON: Are batteries your area?

Mr Yates: Battery and storage, yes. Anything that facilitates the economy moving efficiently to a cleaner

energy outcome is within our remit. Our pipeline is quite strong still. We have about $1.2 billion worth of

potential investments within our pipeline and they would generate another $3 billion worth of economic activity,

if we could move them forward. Obviously, at the moment, the market is on hold from a large renewable

investment scenario pending the outcome of the RET review. But when that policy decision is clear, we are

expecting that maybe the market will restart for the large sector. But for other areas—waste to energy, biomass,

biofuels—there is still a lot of activity and people are still trying to develop projects.

Senator WHISH-WILSON: Can I perhaps ask for your personal opinion? How far away do you think we are

on battery technology before it becomes disruptive in the sense of our power grid?

Mr Yates: The issue is that it can be stabilising as well as disruptive. I think battery technology is going to be

a stabilising force because renewables actually are a fluctuating force. So they are becoming more economic. We

are seeing overseas, in Germany now, I think one in three solar systems going in with a battery system attached. I

would be expecting most people to be attaching a battery system to their solar panel system within 24 months.

Senator WHISH-WILSON: Within 24 months?

Mr Yates: Within 24 months.

CHAIR: Thank you for that technical assessment from the finance corporation; that is very good.

Senator WHISH-WILSON: We need to understand it.

CHAIR: I understand. If there are no further questions of the Clean Energy Finance Corporation, I will let you

get back to work. I call the fiscal group back to the table. Senator Wong?



Fiscal Group

[10:00]

Senator WONG: Can I start with the methodology. I want to understand that a bit better. You said there were

three components broadly to the methodology which has been agreed with the states at officer level.

Ms Croke: Yes

Senator WONG: They go to replacement wage, length of PPL and wages. I do not quite understand what you

meant. Can you explain each of those concepts?

Ms Croke: What we were trying to work out is a methodology for calculating how much the states—and

territories—contribution would be for the national scheme. We needed to ascertain what length the existing Paid

Parental Leave schemes are in each jurisdiction, what the actual usage of Paid Parental Leave is and then work

out what a replacement wage is. We were trying to do that using, as much as possible, actual real data rather than

estimates.

Senator WONG: Was it envisaged under this methodology that you would not have a situation where a

person on leave would have different paymasters, with the state paying one bit and the Commonwealth paying

another; rather, there would be an aggregated contribution—subject to negotiation—from the state to the federal

government, and the federal government would then pay or vice versa?

Ms Croke: Initially, it was thought about as being a national scheme, I suppose, with one paymaster. This

would best be answered by Prime Minister and Cabinet. During the course of COAG—

Senator WONG: They did not answer very much that I asked them, actually.

Ms Croke: During the course of COAG discussions there were different views from states about how they

might like to see their role. That is the design that is still being discussed.

Senator WONG: I will put some questions on notice, now that I understand where it is at, of PM&C, or we

might recall them. I am trying to get to how it works. What are the options as to how it works fiscally? This

methodology is geared to calculating an aggregate figure that broadly reflects what the Commonwealth

understands to be the states' components of the cost?

Ms Croke: Yes.

Senator WONG: Is that a fair way—

Ms Croke: Yes.

Senator WONG: How that works in terms of how that liability is reflected is still up for discussion?

Ms Croke: That is right. Whether or not the Commonwealth is the paymaster, and we invoice states, states are

the paymaster and the Commonwealth is then invoiced for its component of the 26 weeks.

Senator WONG: The government needs to go down a component route because it does not want to have a

transaction-based individual person approach because the administrative costs of that would be very large?

Ms Croke: You could look at whether or not that is a Treasury-to-Treasury—

Senator WONG: Correct; okay.

Ms Croke: Those options are still in play and still being discussed through first ministers' departments.

Senator WONG: However that is administered, what you have created is a methodology which does a

reasonable estimate of the states' component liability?

Ms Croke: Yes, that is right.

Senator WONG: Is there any suggestion in the context of that methodology of any change to the entitlement

that state public servants currently enjoy?

Ms Croke: It is about how we get to the 26 weeks?

Senator WONG: Yes. Can I rephrase the question, because it was poorly phrased: in terms of the

assumptions around the methodology, is there any change or lessening of the entitlement of public servants

employed by state governments for the purpose of calculating state liability?

Ms Croke: No. It would be on just terms. That then is a question best answered by the Department of Social

Services. They are developing the legislation.

Senator WONG: You took as read existing entitlements. You worked out a methodology as to how you

calculated as an aggregate?

Ms Croke: Yes.



Senator WONG: And how that then is negotiated in terms of state-federal relations is now at the COAG?

Ms Croke: That is right.

Senator WONG: When did you first start meeting with state treasuries about this?

Ms Croke: We started having discussions with state and territory treasuries before Christmas. I would have to

confirm that. I think we had our first telephone conference before Christmas.

Senator WONG: You think it concluded some time after the budget?

Ms Croke: Certainly, it was around May. I would have to take on notice an exact time. I do know, though,

that at the COAG meeting in May PPL was discussed.

Senator WONG: Are you able, on notice, to give me details of those meetings? How many meetings were

held? Was it a steering group or a working group? How did you describe it?

Ms Croke: It was a working group. I could certainly take on notice how many times—

Senator WONG: Yes, take it on notice so that I can get a sense of that.

Ms Croke: Okay.

Senator WONG: Mr Ray or Ms Croke, I think the evidence has previously been that the estimated cost of the

PPL scheme is in the contingency reserve?

Mr Ray: That is correct.

Senator WONG: Can I ask you: what is the amount that is provisioned?

Mr Ray: You can ask me that. I can take it on notice.

Senator WONG: It is sort of like a game, a dance. I am surprised, Senator Fifield, why the government

continues to want to hide the cost of this scheme.

Senator Fifield: I do not think we are endeavouring to hide anything, Senator Wong.

Senator WONG: Tell us what it is.

Senator Fifield: I think officers have made that clear.

Senator WONG: I am asking you, as the minister: why will the government not make public the cost of the

PPL scheme?

Senator Fifield: I am endeavouring to answer your question. As has been made clear, there are still design,

implementation and administrative details being worked out. Once those are worked out then the government will

be in a position to indicate cost. Officers have sought to be as helpful as they possibly can be—

Senator WONG: They have been helpful. You are just not helpful.

Senator Fifield: in an area where the prime policy responsibility is with the Social Services portfolio and

some of the key intergovernmental discussions are taking place under the auspices of the Department of the Prime

Minister and Cabinet. At this stage it is probably difficult for officers to go any further. There will probably be a

need to refer it to the Department of the Prime Minister and Cabinet and also the Social Services portfolio.

Senator WONG: Has the cost of the PPL scheme that is currently provisioned, or the estimated cost, been

shared with the coalition party room? It is a question for you, Minister.

Senator Fifield: Matters in the coalition party room are not matters for Senate estimates.

Senator WONG: It is the secret cost of the PPL.

Senator Fifield: Senator Wong, if you are prepared to share deliberations of the caucus, we can establish a

brand-new precedent.

Senator WONG: It is not actually—

Senator Fifield: I know your caucus probably has a little more colour and movement than ours does.

Senator WONG: It is just so interesting, isn't it? This is a signature policy of the Prime Minister. He

announced it two years prior to the election at an International Women's Day event. We are now over a year into

your government and you still will not share your estimated cost of the Paid Parental Leave scheme. You are still

hiding it. You could share at least, 'Well it will be around this depending on states and territories.' Why are you so

embarrassed about it?

Senator Fifield: Senator Wong, as has been indicated, the final costs will be determined once the policy and

implementation arrangements have been finalised.



Senator WONG: In terms of the CR provision which you have taken on notice, Mr Ray, what I am interested

in is what broad assumptions were made as to the state component. Was it assumed that the states would pick up

their existing share?

Mr Ray: Anything that goes to the detail of what is in—

Senator WONG: It is not detail. It is a broad assumption.

Mr Ray: the contingency reserve, we would need to take on notice.

Senator WONG: It is a pretty important point. If you did not assume the states would pay their share—

Mr Ray: We do not do the costing.

Senator WONG: Does the provision in the contingency reserve assume the states will pay their share or not?

Mr Ray: I have taken on notice what is in the contingency reserve. I am happy to take on notice how that has

been calculated and refer it to the relevant agencies. As you know, it is not Treasury's—

Senator WONG: But you are the fiscal group in Treasury.

Mr Ray: We are.

Senator WONG: You would know that Treasury has been the lead agency in negotiating with the states. It is

a very simple question. Does the Commonwealth budget currently assume the states will pay their share or not?

Senator Fifield: Senator Wong, I think you know, having spent a lot of time on this side of the table, that

when matters get to policy design and implementation—

Senator Fifield: You do not have to speak this slowly, Mitch; we can hear. I know you want to chew up time

but we are capable of listening.

CHAIR: The minister was—

Senator Fifield: The number of words per minute coming from the mouth of a minister: I think this is a new

area for a point of order on a minister.

CHAIR: Minister, please continue.

Senator WONG: Just finish, would you please, so that we can go to the next question.

Senator Fifield: I would be finished already, Senator Wong, if you had not interrupted. As I was saying, as

Senator Wong knows well, from being on this side of the table, obviously the fiscal group of Treasury have a

broad overview, given their task. However, when matters get to design and implementation that are part of the

policy responsibilities of other portfolios then it is appropriate that questions be directed to those portfolio areas in

the relevant Senate estimates.

Senator WONG: Thank you for that lengthy answer. I am not asking any question like that. What I am asking

is whether or not what is provided for in the Commonwealth's budget bottom line assumes that the states will pay

their share of the PPL or not.

Mr Ray: What you are asking, Senator, is how the number that was put in the contingency reserve was

calculated. I am happy to take it—

Senator WONG: I am not even asking that.

Mr Ray: Well, you are asking for an element of that.

Senator WONG: I am only asking whether you assumed any contribution by the states of the cost of the PPL.

Mr Ray: We did not do the costing.

Senator WONG: You would know that, Mr Ray.

Mr Ray: We did not do the costing.

Senator WONG: Mr Ray, you would know that.

Mr Ray: I am happy to take it on notice and ask.

Senator WONG: Minister, you can have a think about this. Are you seriously going to say we did not assume

that the states would pay their share? Politically, you should at least say, 'We assumed the states should pay their

share'; otherwise you have another hit on the budget, potentially.

CHAIR: Minister, just before you answer—

Senator WONG: I do not think he knows what the answer is.

CHAIR: Just before you answer, Senator Wong, we did broadly agree that we would stick to the time frame.

Senator WONG: I have more questions.



CHAIR: You have more?

Senator WONG: Yes. I will try and whip through them.

CHAIR: That is all right. Minister?

Senator Fifield: Thank you, Chair. The job of the Treasury is not to give an account for decisions and

assumptions in other portfolio areas.

Senator WONG: Okay. Take it on notice, Mr Ray: at the highest level is there any assumption of state

contribution in terms of the provision in CR?

Mr Ray: I have taken it on notice.

Senator WONG: Thank you. I think this is right in terms of the time frame, Ms Croke: at the time that the

budget was put together the methodology was not finalised?

Ms Croke: There was still work underway. There were still negotiations, yes.

Senator WONG: What happened is that you probably used your best assumptions, given where the

negotiations were. Would that be right, Mr Ray?

Mr Ray: I am sure that the people who made the provision, which would be the departments of social services

and finance, would have used their best assumptions.

Senator WONG: Can I go to the ERC process. Does the Prime Minister technically chair ERC?

Mr Ray: Yes.

Senator Fifield: I am not sure that it is necessarily a technical point. It is a fact that he is the chair of ERC.

Senator WONG: Thank you for that answer. I will follow that up. How many ERC meetings has the Prime

Minister actually attended?

Mr Ray: That would be a question for PM&C.

Senator WONG: Oh, come on!

Senator Fifield: ERC is a subcommittee of the cabinet.

Senator WONG: Really? I didn't know that!

Senator Fifield: Which is why I think you would ask the question of PM&C and not here.

Senator WONG: Goodness; hold the press!

Senator Fifield: Senator Wong, I thought you would know some of these things. If you did, you would not be

asking here; you would be asking in PM&C.

Senator WONG: I am asking you, Mr Ray, because I know that Treasury attends ERC. Who chairs in his

absence? The Treasurer?

Mr Ray: I think that is public information and I think that is correct.

Senator WONG: Well, why don't we do it that way around?—because it is your minister. How many ERC

meetings since the Budget has the Treasurer chaired? You will probably have to take it on notice.

Mr Ray: I do have to take it on notice.

Senator WONG: I will be fair.

Mr Ray: As you know, the arrangements for Cabinet and Cabinet committees are matters for the Prime

Minister's portfolio.

Senator WONG: Does Ms Credlin attend ERC meetings?

Mr Ray: Consistent with longstanding practice, senior members of ministers' offices attend Cabinet

committee meetings at the discretion of ministers.

Senator WONG: How many of those meetings where the Prime Minister was not present were attended by

the Prime Minister's Chief of Staff or his office?

Senator Fifield: Chair, these are matters for the Prime Minister and Cabinet portfolio.

Senator WONG: Okay. I am asking it; you can take it on notice—refer it, if that is what you want.

Mr Ray: Yes.

Senator WONG: I presume ERC is meeting regularly at the moment—although the Treasurer is away, G20.

Mr Ray: He is not at G20. He was at APEC this week.

Senator WONG: I am saying that he is away currently and there is the G20 in the offing.



Mr Ray: In November, yes. I think the best answer is that ERC meets as necessary.

Senator Fifield: It never stops meeting.

Senator WONG: Is that the answer—that it never stops meeting?

Mr Ray: No it is not.

Senator Fifield: It is never suspended.

Mr Ray: I think it meets as necessary.

Senator WONG: How many meetings of ERC have there been in the last two months that you have attended?

I am asking about your attendance, Mr Ray.

Mr Ray: I would need to check my diary—honestly.

Senator WONG: Are we talking 20 or three?

Mr Ray: I was on leave, so I was away. So it is not that many.

Senator WONG: Who was acting for you—Ms Harris?

Mr Ray: No. Ms McCulloch was acting for me.

Senator WONG: Can Ms McCulloch tell me how many she attended while you were away?

Mr Ray: You can ask her when she comes later. Normally we do not go to how many meetings we attend, as

you know.

Senator WONG: I might ask some questions about defence operations. Are defence operations such as the

Iraq operation still budgeted on the basis of an assessment? To what extent are they reflected in the current budget

year and to what extent is there an assumption about subsequent budget years?

Mr Ray: I am happy to talk in general about defence operations. The latest obviously is a matter for MYEFO.

Senator WONG: It does not mean I am not going to come back to it. But let us start in general.

Mr Ray: It has been longstanding practice for defence operations to be budgeted on a budget-year by budget-

year basis.

Senator WONG: On an annual basis. And that continues to be the case? There is no change to that approach

by the current government?

Mr Ray: No.

Senator WONG: To a lay person that means that you only budget for your current financial year for your

defence operations at any one time; is that right?

Mr Ray: Yes, and there are national security reasons for that.

Senator WONG: Yes. No, I am not critical—I am just making sure that what I understand to be the approach

has not been changed since the change of government. That would mean MYEFO will reflect a provision for

defence operations, possibly transparently for the current financial year, but not otherwise—not one for the next

financial year?

Mr Ray: There are a couple of times when there might be a little tail into the next financial year. There have

been some examples of that.

Senator WONG: Capability?

Mr Ray: Capability is separate. As a general rule, operations are budgeted for on a year-by-year budget year.

The budget year, and then in MYEFO the current year basis.

Senator WONG: Just remind me: what did the Prime Minister indicate publicly? Was it $500 million? Was

that the public indication?

Mr Ray: I think I need to be very careful.

Senator WONG: I am only talking about the Prime Minister's public statement at this stage, Mr Ray.

Mr Ray: My understanding of the Prime Minister's public statement was that it was an estimate rather than, if

you like, a final number.

Senator WONG: Sure. Were you asked to provide advice in relation to the Prime Minister's statement?

Mr Ray: Not to the Prime Minister about his statement. But you can expect that we provided advice to the

Treasurer. We provide advice to the Treasurer on a lot of things.

Senator WONG: Sure. Was the Prime Minister's statement made as a result of advice from the Treasury?



Mr Ray: The costing—to the extent that there is, that would be a matter between defence and the Department

of Finance rather than the Treasury.

Senator WONG: Yes. My question still stands.

Mr Ray: I am not trying to be difficult here. You can expect that the Prime Minister operated on advice, but it

would be advice more from the responsible agencies than us.

Senator WONG: Okay. That is a fair answer. Has the government made a decision about offsetting savings

for that deployment? Please note: I am not asking you what or how much in that question.

Mr Ray: The government will set out at MYEFO—

Senator WONG: That is not the question.

Mr Ray: decisions and any offsetting savings.

Senator WONG: Has a decision already been made?

Mr Ray: That is something which, if you want to push, I will take it on notice but it is not normal that we

would go into individual decisions—

Senator WONG: I am not asking you to disclose a MYEFO decision. I am not asking you what the offsetting

decision is. I am not asking how much it is. I am asking a process question which, Mr Ray, I am pressing. I can

ask the Chair to read the Senate resolutions again. I am carefully asking the question because I do not want to put

you in too difficult a position.

Mr Ray: Yes, and I am happy to take the question on notice.

Senator WONG: The Prime Minister also talked about 'broad balance'; about the budget getting to 'broad

balance' by 2017-18.

Mr Ray: That is not just the Prime Minister's language; I think that is the language that the Treasurer and the

Minister for Finance have been using since the budget. If you look at the projections in the budget—

Senator WONG: What page are we on? Table 1?

Mr Ray: The chart on 3-9 that we were talking about before would do it. I think 2017-18 is—

Senator WONG: It is $2.8 billion on the current—

Mr Ray: That is right.

Senator WONG: What is the definition of 'broad balance'?

Mr Ray: I think you need to ask the Prime Minister what his definition is.

Senator WONG: Well I am asking the Treasurer.

Mr Ray: I think in a budget of $400-odd billion on either side, two or three billion dollars—

Senator WONG: I understand what you are saying. I am just trying to get a sense. Is there a percentage

figure, is there a nominal figure that you work to which provides some parameters for the phrase 'broad balance'?

Mr Ray: No, but I think we would say that anything that is within a few tenths of a percentage point of GDP

would be 'broad balance'. We would tend to look at it as a proportion of GDP, and it is two-tenths in 2017-18 at

budget.

Senator WONG: What about a 0.6—six-tenths of a per cent—is that 'broad balance'?

Mr Ray: Once you get to half a per cent of GDP—

Senator WONG: So anything under half a per cent.

Mr Ray: And as you know, that is a number of years out, so you do not want to be too precise.

Senator WONG: Speaking of which, do you want me to do revenue downgrades with Mr Heferen? Yes, you

want me to do that, don't you?

Mr Ray: That would be the best place to do that.

Senator WONG: 'Stop asking me questions, Senator Wong. ' Have you seen Mr Gittins' article from today?

Mr Ray: No, I have not.

Senator WONG: Let me find it. I think he is working off data released a few weeks ago in relation to health

expenditure—the Australian Institute of Health and Welfare report on health spending in 2012-13. I have some

questions about that. Is there someone who knows about that? There would be someone who knows about this

because it looks at growth and expenditure.

Mr Ray: Senator, why don't you ask the question and we will see how much we can help you?



Senator WONG: These figures show that there is a 1.5 per cent increase in health expenditure in 2012-13

after inflation—the lowest growth since the mid-1980s and less than a third of the average annual growth for the

past decade.

Mr Ray: Correct.

Senator WONG: Correct?

Mr Ray: That is my understanding, broadly, of what the figures show.

Senator WONG: That is total spend, so that includes both levels of government; is that right?

Mr Ray: I am not an expert on that AIHW data.

Ms Croke: I think that is right.

Senator WONG: The figures that are reported say that federal health spending in 2012-13 fell by 2.4 per cent

in real terms.

Mr Ray: In real terms?

Ms Croke: Would you mind saying that again?

Senator WONG: The reported figure is that federal health spending in 2012-13 fell by 2.4 per cent in real

terms.

Mr Ray: I would not normally comment on a journalist, but given Mr Gittins' standing, it would be very

unusual if he had his numbers wrong; that is, if they weren't the AIHW numbers.

Senator WONG: Surely Treasury has looked at health spending trajectories?

Mr Ray: We have; we do.

Ms Croke: Yes.

Senator WONG: Are you the person, Ms Croke?

Ms Croke: Yes.

Mr Ray: She is.

Senator WONG: Yes, I thought so. Is it the case that federal growth in health expenditure in 2012-13—this is

Commonwealth government—showed a decline?

Ms Croke: I think that is right, yes.

Senator WONG: That is correct?

Ms Croke: I am pretty sure, yes.

Senator WONG: Does 2.4 per cent sound correct?

Ms Croke: I would have to take on notice that particular figure.

Senator WONG: So we saw a decline in health spending from the Commonwealth government level in 2012-

13. Mr Gittins also says—and I think previous budgets have suggested—that one of the reasons behind the

containment of health spending in that year was the changes to the private health insurance rebate; would that be

correct?

Ms Croke: Again, I would have to take on notice the details underneath that analysis. I do not have them with

me.

Senator WONG: Would you agree that that was one of the fastest growing health item expenditures?

Mr Ray: It was, yes—before the changes.

Senator WONG: You would also agree that the former government's changes significantly contained the

growth in that?

Mr Ray: Yes.

Senator WONG: If we had a reduction in spending in 2012-13 at the Commonwealth level, can you explain

to me what the health minister and the Treasurer are basing their—unsustainable health spending—rhetoric on?

Mr Ray: Leaving aside the word 'rhetoric', they are referring to the medium-term projections of

Commonwealth spending on hospitals.

Senator WONG: And tell me how a GP tax lessens that? Sorry, tell me how a $7 GP co-payment lessens that

item of expenditure?

Mr Ray: That is a separate question.



Senator WONG: Can you provide any indication as to how a $7 GP co-payment reduces expenditure on

public hospitals? It doesn't, does it?

Mr Ray: It is not about that. The co-payment is a separate question. That is what I am saying.

Senator WONG: There is no evidence, and no policy argument, to suggest that a $7 co-payment would

reduce spending on public hospitals, is there?

Mr Ray: No.

Senator WONG: Thank you. If the unsustainability of health spending, as you put it, if the policy argument

for that, is spending on public hospitals, unsustainability cannot be an argument for the $7 co-payment?

Mr Ray: You are debating.

Senator WONG: Sorry. Never let the facts get in way of a good piece of—

CHAIR: All done?

Senator WONG: I am not having a go at him.

Senator FIFIELD: Now you are having a monologue.

Senator WONG: Yes, I am. I will try to finish up now, Chair, because I know you want to move on.

CHAIR: I do. Do you want a go for a while?

Senator WONG: Are there any people working on climate change within Treasury anymore?

Mr Ray: I do not know what you mean by 'working on climate change'.

Senator WONG: There used to be a dedicated climate change team within Treasury.

Mr Ray: There used to be. We do not have a dedicated climate change team.

Senator WONG: You do not have?

Mr Ray: No.

Senator WONG: How many people actually do any work on climate change matters? Who has responsibility

for it?

Mr Ray: Fiscal group.

Senator WONG: Fiscal group?

Mr Ray: Yes.

Senator WONG: How many of your people do any work on climate change? What do they do?

Mr Ray: Mr White is the general manager of that division. There are about six or seven in a unit that looks at

a range of matters, including climate change.

Senator WONG: What are the matters in climate change that you are actually working on?

Mr Ray: In the past the biggest thing that that team worked on was supporting the government with the repeal

of the carbon price.

Senator WONG: The economic analysis of the economic costs of the changing climate?

Mr Ray: As part of the understanding that the Treasurer reached with Senator Milne over the

intergenerational report, there is work being done on elements of climate change for the intergenerational report.

That is done in that team in Mr White's division.

Senator WONG: I think that is it from me for this group.

CHAIR: Thank you, Senator Wong. Senator Ludwig.

Senator LUDWIG: Thank you. I just wanted to follow up on something that is in the budget 2014-15 budget

paper No. 2 page 175.

Mr Ray: I have to rely on others because I did not bring BP2 with me.

Senator LUDWIG: It has got a dot point three down on that page, which is the Toowoomba second range

crossing in Queensland. Is there a figure that is held by Treasury which is the figure that is put to that project?

Mr Ray: Mr Legg would come to the table and take it on notice but I can do it for him. We will take it on

notice.

Senator LUDWIG: What I was wanting to know is: is there a figure? Has any of that been released or

expended at this point?

Mr Ray: Okay.



Senator LUDWIG: Is there an agreement with the state government as to what contribution they will make?

Has it stalled? In other words has it stalled or is—

Mr Ray: It is actually infrastructure, isn't it?

Senator LUDWIG: I think some of those are infrastructure. I will check those with infrastructure. I wanted to

at least close the loop so that they do not send me back to you.

Mr Ray: Sure.

Senator LUDWIG: If you take on notice what you are able to answer I can then follow up with industry.

Mr Legg: It obviously is part of the infrastructure investment program administered by the department of

infrastructure. They will in fact be the font of wisdom on all of that. We will look into what we can tell you and

consult with them as well.

Senator LUDWIG: Thank you.

CHAIR: Thank you very much.

Australian Bureau of Statistics

[10:35]

CHAIR: If we could now move to ABS. I will go straight to Senator Leyonhjelm when the officers are at the

table. I welcome the officers of the Australian Bureau of Statistics. I ask: do you have an opening statement?

Mr Palmer: Yes, we do.

CHAIR: Go ahead.

Mr Palmer: Thank you. I would like to make a short opening statement on the topic of labour force statistics.

In our most recent release of the monthly labour force publication we took the step of not applying our usual

seasonal adjustment factors. We have not done this before. We did it because over the last three months we have

not seen the usual seasonal pattern in the numbers. For example, if we had applied the previously observed

seasonal factors to the September data there would have been an unprecedented movement in the seasonally

adjusted numbers of people employed full time. This, coupled with other unusual movements in estimates over

the past three months, led us to the conclusion that setting the seasonal factors to one would produce the best set

of labour force estimates.

We appreciate that the production of high-quality labour force numbers is essential. We are undertaking a

review in an effort to understand why the numbers are behaving as they are. The investigation is drawing on the

expertise within the ABS and internationally. We are looking carefully at it, and systematically. We will, as

always, be very transparent about what we find and any adjustments that we make. I cannot speculate on the

cause, but the September publication outlined the various aspects we are considering. Mr Harper would be

pleased to elaborate if the committee wishes.

There has been some speculation that a lack of resources has been a factor. Producing core economic statistics

to a high quality is the top priority for the ABS. We would not under-resource these important statistics. We

would reduce lower priority activities before we cut corners on major economic indicators.

The labour force program was not impacted by any of the recent work program reductions. Indeed, we cut

some statistics precisely so that we could maintain the quality for the remaining program. Thank you.

CHAIR: Thank you, Mr Palmer. When do you think we will see the results of the review?

Mr Palmer: The results of that technical review are needed to inform how we treat the next release. That will

be in the next few weeks.

CHAIR: Thank you very much. Senator Leyonhjelm.

Senator LEYONHJELM: Thank you. I am not going to ask you about unemployment. I am going to ask you

about something else, household tobacco expenditure. Are you aware of any recent public discussion on this

subject as part of the national accounts?

Mr Palmer: Yes, I am aware but I am not across all the details.

Senator LEYONHJELM: It was raised in the context of the debate on the advocacy of the government's anti-

smoking policy, such as plain packaging. In the most recent national accounts covering the June quarter 2014 why

were there no changes to the seasonally adjusted household tobacco expenditure estimates for previous quarters

when their revisions are the norm?

Mr Palmer: I will refer that to Mr Michael Davies. He compiles the national accounts.

Mr Davies: The question was: why were there no revisions?



Senator LEYONHJELM: Sorry?

Mr Davies: The question was: why were there no revisions?

Senator LEYONHJELM: Let me explain a bit more.

Mr Davies: I will try the question, I think.

Senator LEYONHJELM: Okay. There is a very close congruence between March vintage data and June

vintage data. Professor Sinclair Davidson has plotted these as almost identical and he says that in fact the March

2014 estimate was not revised at all. He goes on to say that it turns out that, of the 18 seasonally adjusted time

series for household expenditure, tobacco was the only item that was not revised. Of the data, seven items revised

up and 10 items revised down. Only tobacco consumption remained unchanged.

Mr Davies: I was not aware of that detail. However, I can describe how we estimate the volume of tobacco—

Senator LEYONHJELM: Tobacco expenditure, yes?

Mr Davies: Perhaps we can base some comments on that. What we use is aggregate sales data that we get

from suppliers. As we do with many national accounts estimates and components of household final consumption

expenditure, we come up with a nominal value for effectively purchases of tobacco. We get that nominal number.

In our prices program, where we calculate the consumer price index, we collect very detailed information on the

price of tobacco and the price of tobacco there is per stick, per cigarette. There are some adjustments done to take

into account changing sizes and changing pack size and contents.

The volume estimate effectively deflates that current price estimate, the nominal estimate of purchases, to

produce a volume estimate. It is a chain volume; so it is not a simple deflation. That is the way we do it. Then we

apply seasonal adjustment to that. There was no special treatment for tobacco which would exclude it from any

revisions. It is simply part of our normal production processes.

Senator LEYONHJELM: The point was made by Professor Davidson that tobacco expenditure figures have

not been revised. That was his main point. He said that, of the seasonally adjusted time series for household

expenditure, tobacco was the only item that was not revised.

Mr Davies: To clarify the mechanics of that again, there would be two reasons the numbers change in

seasonally adjusted terms. And we are focusing on the seasonally adjusted estimates. One is that there is new

information available. New information has become available. We change either the nominal purchase or the

price index, and the actual original value changes. The other is that the seasonal adjustment process and the way

we perform our seasonal adjustment does frequently result in changes to recent estimates in seasonally adjusted

terms.

I can take that on notice and we can look at the mechanics of why that came about in this particular instance.

But there was no special treatment afforded to tobacco differently from any other component of household

consumption, other than, perhaps, given it had been in the press we kept a closer eye on it.

Senator LEYONHJELM: He notes that the last time the tobacco data series was not revised, apart from the

most recent one in 2014, was in March 2010. That is quite a long time ago. The conclusion—it is not a

conclusion—

Mr Davies: Implication, yes.

Senator LEYONHJELM: The implication is that this is a politically sensitive number and it is not being

treated with the same level of care and accuracy as—

Mr Davies: I can guarantee that it was treated with a lot of care and accuracy. We were aware it was

politically sensitive. We always look at the economic statistics in that context and say, 'Let's double-check this

particular one.' The double-checking was in terms of: do we have it right? Are we making full use of the

information we have available, et cetera? We have in fact checked against more detailed sources in terms of some

transactional information we have about sales by retailers.

Senator LEYONHJELM: Tobacco expenditure would not be on your list of essential statistics, presumably?

Mr Davies: The tobacco number we are talking about is one component of household final consumption

expenditure, which is one component of total final expenditure in the economy. So at times when it is not the

focus of attention, it is just one on a list of many expenditures which include mobile phones et cetera. It is just one

component and we have processes in place to make sure we get a robust estimate, particularly in volume terms,

every quarter. That is the context of it.

It happens frequently with components of the national accounts, which is a huge system which has to tally, line

up and reconcile internally, that the spotlight suddenly comes on to what is normally one relatively obscure corner



of that, and that is what has happened here. But because of that we did pay particular attention to make sure that

we got the numbers right.

Senator LEYONHJELM: So it is not a matter of discontinuing looking at that because it is not an essential

statistic?

Mr Davies: What do you say, Peter, about the status of a particular component as an essential statistic?

Mr Harper: As you suggest, we have had an exercise in recent times to define the essential statistics for

Australia. Tobacco statistics in and of themselves are not on that list. But tobacco is reflected in a number of the

essential statistics. It is a component of the national accounts. It is an important component of the CPI. It is part of

our household expenditure survey. Tobacco-related information is an important component of our health survey.

So tobacco is reflected in a range of statistics that are on that essential statistics assets for Australia listing.

Senator LEYONHJELM: I am signalling to you that some people find it curious that the figures have not

been revised and it is a long time since—

Mr Davies: We will take that on notice. I am interested.

Mr Palmer: We would be quite happy to describe the treatment we gave it. The key message is that there was

no special treatment, in that we did not decide consciously to do something different with those numbers. Indeed,

given the sensitivity around tobacco numbers, if there was any special treatment, there is a bit of extra care in

making sure what the numbers are.

Senator LEYONHJELM: I anticipated that. That is why I was curious as to why there were no revisions. I

might leave it there.

Senator KETTER: Thank you for your opening statement in relation to recruitment. I want to start by

touching on that issue of the unemployment figures and the review that you have now instigated in respect of

what has happened, which you announced in September. Did the government ask you to undertake that review?

Mr Palmer: No. We decided to undertake the review when we decided how to treat the September numbers

and revise the earlier months. So we decided that. We announced that in our publication and in the media release

prior to that.

Senator KETTER: There is speculation in various media reports about the causes of the fluctuation in the

data. You said in your opening statement that the usual seasonal pattern was not there in the numbers. Could you

explain what that usual seasonal pattern is?

Mr Palmer: The usual seasonal pattern would show an increase in some months and a decrease in others due

to systemic seasonal influences. So the seasonal adjustment would remove those seasonal movements. That is the

adjustment we normally apply. What we decided to do was not to apply those usual adjustments.

Senator KETTER: That relates to the figures in August versus the figures in September?

Mr Palmer: With respect to the figures for July, August and September; the ones we released earlier, we

revised to have a seasonal factor of one, so effectively no seasonal factors were applied.

Senator KETTER: How often do you review the seasonal adjustment methodology?

Mr Palmer: Continuously because the seasons change over time. So it is a very technical process of looking

at the pattern in the data and adjusting the seasonal factors accordingly. Do you agree with that, Peter?

Mr Harper: That is true. It is done on a continuous basis. Every time we get new information, which in the

case of the labour force is every month, we go back and we review.

Mr Palmer: It takes some years to establish a pattern. One swallow does not make a summer.

Senator KETTER: I understand there have been a few issues with the labour force figures this year. There is

that seasonality issue that you referred to. There were problems earlier in the year when the sample group was

changed. The ABS website states that the incoming rotation group in February contributed to 37 per cent of the

increase in total employment and 29 per cent of the decrease in persons not in the labour force in February 2014.

Are these the only two categories of issues with those labour force figures or are there others that have led to

volatility in the unemployment numbers throughout the year?

Mr Palmer: I would ask Mr Harper to make some added remarks. Basically, the labour force survey is a

sample survey. It does result in volatility. With the methodology which involves rotation groups, sometimes you

get a strange rotation group; so the numbers are subject to volatility. That is why we emphasise the need to look at

them with care and to, in most cases, regard the trend as your friend. I will refer to Peter as to whether there were

any other numbers that generated commentary.



Mr Harper: We do know from time to time—this is not a recent thing; this has been around for decades—that

there can be some unusual contributions from the sample rotation. That is part of our regular methodological

practice of rotating out one-eighth of a sample every month and rotating in another one-eighth of a sample. We do

that to make sure that the sample remains representative and also so that the people are not in the survey forever.

You would appreciate their patience would wear pretty thin if we did not take them out of the survey.

In terms of volatility, the labour force series has been produced monthly since the 1970s. There have been

volatile numbers right throughout that series. We get questioned when there are particular episodes of volatility.

We investigate those to make sure that we are measuring the labour force estimates in the best way that we can

and we have not made any errors in their compilation. Our analysis has shown, notwithstanding the volatility

around the July and August numbers originally, that volatility is no worse in recent times and for some series

there is evidence that volatility has actually been lessened in recent times compared to the history of the survey.

The labour market is complex in the real world. So there is real-world volatility that impacts on the numbers.

Because we use a sample survey, that also potentially adds statistical volatility to the series. I reinforce what

Jonathan said: we produce the trend estimates to help users extract from that volatility and get an underlying

picture as to what is going on in the labour market

Senator KETTER: Apart from the sampling issue that I referred to in my question and the seasonality

adjustment issue, there are no other problems identified with the unemployment figures this year?

Mr Harper: Not in the sense of having identified problems. We have made some changes in the way we have

gone about producing our labour force estimates. We did that on the basis that we believed it would be unlikely to

have a significant statistical impact associated with those changes. The review that we have commissioned will

look into those things and come up with its conclusions as to whether any of those things are having an impact or

not on the estimates.

Senator KETTER: Are you referring there to the change in the methodology of the survey questions?

Mr Harper: Yes, we made some changes to the questionnaire in July. We did that to keep it in line with

international standards and to produce a more relevant set of labour force estimates. We have also introduced

electronic reporting into the collection. Householders can choose to report via the web. We did that to both reduce

costs and provide a different alternative for householders to respond. We have also slightly reduced the response

rates for the survey. Again, we did that so we could maintain timely output within the budget that is available for

the collection. The analysis we did leading to that change indicated it was not likely to have a statistical impact.

Senator KETTER: I am aware of some commentary from Bill Evans, the Westpac chief economist, where he

talked about the fact that the ABS must be incredibly embarrassed about the review of those figures that occurred.

His explanation—and I am interested in your feedback on this—was that the list of questions that were asked in

respect of one of the months led to a distortion in the response from the respondent. I am interested in your

reflection on that.

Mr Harper: We run what we call supplementary surveys off the back of our monthly labour force survey.

There has been some analysis in the past that has suggested in some circumstances they may impact on the labour

force estimates themselves. We did not expect the changes that we had made would have an impact on the series

that would be statistically significant. Again, this is one of the things that the review is looking into. We made

those changes for good reasons. We made those changes to ensure that we continue to produce a high quality and

relevant set of labour force statistics.

Senator KETTER: With respect, Mr Harper, wouldn't the change in that methodology, whereby you remove

a whole stack of questions and it changes the respondent's answer, have been foreseeable?

Mr Harper: It was foreseeable that there was potentially an issue. That is why we did some analysis as to

whether we would expect to see a statistically significant impact or not. The analysis that we undertook suggested

that there would not be. But as I said, this is one of the things that the review is looking into.

Mr Palmer: I would not say that we removed a whole stack of questions. The changes are more subtle than

that. But even subtle changes can have an impact; we are aware of that. We try and assess the impact up front. We

are very transparent about the changes that we are making—so people can speculate on their impact. The

investigation we are going to undertake is going to look carefully at whether there is any evidence that those

changes had an impact.

Senator KETTER: This is a key economic indicator that we are talking about here.

Mr Palmer: So they have to be changed with great care.



Senator KETTER: Exactly. A layperson like me would expect that it is reasonably foreseeable that a change

of methodology such as that may lead to a change of behaviour of respondents. Isn't that something which needs

to be carefully considered before it gets activated?

Mr Harper: It was carefully considered.

Senator KETTER: Can I ask by whom?

Mr Harper: By me and by my team.

Senator CANAVAN: Mr Harper, when you did the July-August, or when this change was made, did you do

surveys based on the old methodology as well as the new, so that you could benchmark the changes directly, or

did you just make the change?

Mr Harper: No, we did not undertake what we would call a parallel survey to measure the impact of that.

Senator CANAVAN: Was there any consideration given to conducting such parallel surveying before the

change was made?

Mr Harper: There was consideration given to it. I must admit that we dismissed the idea fairly quickly. It

would have been very expensive to conduct a parallel survey. Because of the types of changes we were making,

you would have to have conducted it for at least 12 months. So we would have been looking at expenditure

upwards of $13 million plus in order to do that. We would have imposed a significant burden on households to

conduct the parallel survey. In our view, even if we had conducted a parallel survey, the chances were that it

would not actually be able to tell us anything statistically significant in terms of the impact of the changes,

because of the fact that both the survey itself and the parallel survey would be subjected to sample error. The

types of changes we were looking at were generally within the range of sample error.

Senator CANAVAN: Have you done that parallel surveying before, when you have changed methodologies?

Mr Harper: When we have made changes historically we have put in place measurement strategies which

have tried to identify the impact of changes. They have typically been unsuccessful in being able to come up with

anything conclusive in that regard. One of the challenges we have as statisticians is: how do we make changes in

a way which minimises disruption to statistical series in terms of the practical things we are able to do? We do not

want to keep our statistics constant because then they would become irrelevant. We need to make professional

judgments about those things.

Senator KETTER: So with a significant change to methodology for a key economic indicator you decided

not to undertake a parallel survey methodology?

Mr Harper: Yes.

CHAIR: Gentlemen, can I interrupt? We are overdue for a break. I would like to take that break now and

bring you back in in 15 minutes? Is that okay?

Senator KETTER: Yes, sure.

CHAIR: I will suspend the session until 16 minutes past 11.

Proceedings suspended from 11:01 to 11:16

CHAIR: We will now reconvene with the Australian Bureau of Statistics. Welcome Minister Cormann.

Senator Ketter.

Senator KETTER: Thank you. If I could resume my questioning in respect of the decision not to have the

parallel survey, when this type of change of methodology has occurred in other key statistics is it normal for the

parallel survey to be there as a safeguard for the statistics?

Mr Harper: It would depend on the type of change and whether we judge that a parallel survey was the right

vehicle for measuring the impact of the change. We have used them in, not in the labour force, other surveys in

the past when we have made changes. They are not something that is done necessarily as a matter of course. We

judge the efficacy of each approach based on our expectation of what we are likely to find.

Senator KETTER: If I could just go back to Mr Palmer, I firstly preface my question by making the

comment that a number of people have commented on the difficulties that are being experienced by ABS at the

moment. The Treasurer has indicated there are some issues and there is a review going on. You have identified

your own issues. You are conducting a review into the labour force statistics in particular. I am interested in the

fact that there seems to be something of a state of flux in the senior management positions in the ABS at the

moment, including yours, Mr Palmer. You are in an acting Australian statistician role at the moment. I had a look

at the annual report for 2013-14 and I note there are quite a few positions in that senior management level of the

ABS that are acting positions. Is that unusual?



Mr Palmer: Do you mean 'quite a few' in that there are a number of people acting at the SES level?

Senator KETTER: Yes.

Mr Palmer: I do not think that is unusual. We often have a number of people acting at the SES level. I would

have to take it on notice. I suspect there are slightly more than there has been in the past.

Senator DASTYARI: A statistical anomaly?

Mr Palmer: I would have to check.

Senator KETTER: I am not good at maths but I counted 16 acting positions.

CHAIR: You sound very confident.

Mr Palmer: In the 16, there is a bit of a cascading effect. I act and someone acts up. That number must be

right.

Senator KETTER: I compared that number to the annual report for 2012-13 and I found no positions were

acting at that point in time.

Mr Palmer: I find that really strange. I find that very strange actually because at any point in time we have a

few people acting.

Senator WONG: It is your annual report, I suspect.

Mr Palmer: I am not arguing the number. I am just saying I find it strange. But it is the case that without the

Australian statistician I am loath to permanently appoint people or to make significant structural changes. I do not

think that would be appropriate as an acting statistician. Also remember, in the public service there has been a

period of downsizing and uncertainty. It is good to have a bit of a buffer by acting people.

Senator KETTER: But 16 positions in an acting capacity out of about 44 in that band that we are looking at

in your annual report is quite a significant proportion, would you agree?

Mr Palmer: Yes, I would. I agree.

Senator KETTER: Would you agree that has got to have some impact on decision-making functions within

the ABS at the present time?

Mr Palmer: It would. I would point out that the people acting are all very capable officers with considerable

experience. I would not say that it is a significant reduction in the bench strength of our leadership.

Senator KETTER: Mr Palmer, have you any news—perhaps it is a question best directed to the minister—in

terms of a permanent appointment for your position?

Mr Palmer: I think that is a question best directed to the government.

Senator KETTER: I would ask Senator Cormann if he has any news he can share with us in respect of that.

Senator Cormann: Not particularly, no. I think the officer at the table is answering the questions

appropriately.

Senator DASTYARI: You did not listen. The question was: what is the process for filling the vacancy? He

said it is a matter for the minister.

Senator Cormann: It is not a matter for me to fill the position in relation to the ABS. I think the officer has

provided a full and complete answer. If the Treasurer wants to add to that answer, I will take that on notice.

Senator DASTYARI: To follow on from that, I want to understand the process. The process is that it is an

appointment by the Treasurer through cabinet?

Senator Cormann: It is an appointment that would be made based on a recommendation of the Treasurer, I

would envisage. It ultimately goes to the Governor-General. It is a statutory appointment.

Senator DASTYARI: A statutory appointment?

Senator Cormann: Yes. The point is that this is not a matter for me as minister representing the Treasurer.

This is ultimately a matter for the official government processes.

Senator DASTYARI: I am just asking what is the process to fill the vacancy. I do not think that is an

unreasonable question.

Senator Cormann: The process of filling the vacancy is that there will be a recommendation to the Governor-

General.

Senator DASTYARI: The recommendation comes from?

Senator Cormann: The government.



Senator DASTYARI: No, my question is: different appointments have different processes, as we are all

aware. Different appointments through agencies have different structures in which appointments are made. My

question is: for the ABS is it a different process than obviously it would be if it was a DG of a department or not?

Senator Cormann: It is a statutory appointment. It is an appointment that is made, on the recommendation of

the government, by the Governor-General.

Senator DASTYARI: The short list would go to cabinet. Cabinet would make a decision?

Senator Cormann: It is a position that is appointed by the Governor-General on the recommendation of the

government.

Senator DASTYARI: Sure.

Senator Cormann: If the Treasurer wants to add any more to this, I have already taken that on notice.

Senator DASTYARI: Minister, we are not asking for state secrets here.

Senator Cormann: Sure. And I have been as helpful as I can be. If the Treasurer wants to add anything else

to that answer he will do so on notice.

CHAIR: Senator, he has taken it notice. He has answered it twice now.

Senator DASTYARI: He has not answered it. That is not answering it.

CHAIR: He has the right to take it on notice.

Senator DASTYARI: Sure. I am just asking a question around that.

Senator Cormann: I have answered to the extent that I can answer, and to the extent you are looking for other

information I have already taken that on notice. If the Treasurer, who I represent here in relation to these matters,

has anything else that he can add to the answer that I have given to assist the committee, I am sure he will do so.

Senator DASTYARI: Can we be clear about what we are taking on notice then? Senator Cormann, the two

questions you are taking on notice are, firstly, what is the process—the process question—for filling the vacancy

still created—

Senator Cormann: I have given you that answer.

Senator DASTYARI: No. The answer you have given me is that the Governor-General makes the

appointment advice to the government.

Senator Cormann: That is right. That is the process.

Senator DASTYARI: Exactly. I know. It is just embarrassing.

Senator Cormann: There is nothing embarrassing about that at all. That is actually the process.

Senator DASTYARI: No, the question we are asking is: what is the process that leads to this? This is what I

want to clarify you are taking on notice. What is the process prior to that in terms of how a recommendation is

given to the Treasurer?

Senator Cormann: My answer to that is that the process prior to that is going to be consistent with the

process prior to that when you were in government, which is not that long ago.

Senator WONG: If I could ask a question on this, I will be very brief. Is it a cabinet appointment?

Senator Cormann: It is an appointment by the Governor-General.

Senator DASTYARI: He does not know. Let's not beat around the bush.

Senator Cormann: No, it is an appointment—

CHAIR: The minister has agreed to—

Senator WONG: It is a statutory appointment; it is a statutory office.

Senator Cormann: It is an appointment by the Governor-General on a recommendation of government. The

internal processes of government are consistent with the internal processes of government that were followed by

the previous government. If the Treasurer wants to add anything further to that question—

Senator WONG: Minister, you know what the chair read out earlier. I am not asking who or even timing

questions. But these are reasonable questions that the Senate would expect an answer to first. This is a statutory

position, isn't it?

Senator Cormann: I already said that before you joined the conversation.

Senator WONG: It is a statutory position. It is at a level that would generally require cabinet consideration?

Senator Cormann: I have already said that too.



Senator WONG: Have you been asked whether or not the matter has been before cabinet?

Senator Cormann: As I have said, I am not going to talk about what is or is not before cabinet.

Senator WONG: Incorrect. Don't misinterpret the question.

Senator Cormann: I am not going to go through what is before cabinet. I have conclusively dealt with this.

What I have indicated is that this is a statutory appointment. It is a statutory appointment that will be made by the

Governor-General on advice from the government. The internal processes followed by government as we are

preparing an advice for the Governor-General are consistent with the processes that were employed by the

previous government, including of course cabinet consideration as appropriate. If you ask me to go into the detail

of where and when and how cabinet considerations are taking place, then I will say to you that, consistent with the

approach taken by the previous government—

Senator WONG: No, that is not right. Do not mislead the Senate.

Senator Cormann: I am not going to assist you, but if there is anything else that I can add to this answer,

based on the views that the Treasurer might want to share with the committee in order to assist the committee in

its deliberations, then of course I will provide that information on notice.

Senator WONG: I hope Senator Leyonhjelm might have some regard to this. It is the case that in the past

both governments and the Senate have accepted that the content of cabinet deliberations is not something that will

be answered. It is also the case that the Senate has expected, and governments have provided, answers as to the

timing of matters before cabinet.

Senator Cormann: In—

Senator WONG: Let me finish, Senator Cormann—the process question as opposed to the content question.

If the government is going to avoid a process question that has been asked and answered by previous ministers,

including Minister Minchin when Minister for Finance, I think that is a significant downgrade in accountability

and transparency to this committee. Now I am asking again: has this appointment been before cabinet? If so,

when?

Senator Cormann: Again, Senator Wong, I completely and utterly reject the inaccurate assertion that you

have repeated and put in Hansard again now.

Senator WONG: I am right and you are wrong. Sorry.

Senator Cormann: If you can let me finish my answer.

Senator WONG: You are wrong.

CHAIR: Order! Let the minister speak.

Senator Cormann: I completely reject the inaccurate assertion that I am refusing to provide an answer. I am

absolutely not refusing to provide an answer.

Senator WONG: You just did before.

Senator Cormann: Honestly, give me a basic courtesy.

Senator WONG: But that—

Senator Cormann: If I can just finish—

Senator WONG: You just said you would not answer it.

Senator Cormann: I am still responding.

Senator WONG: You just said you would not answer it.

Senator Cormann: I am still responding to Senator Wong's intervention. What I have done and what I have

been very clear about—what I have been very clear about—is what the process is in relation to the appointment

that I have been asked about. There have been some further questions asked and I have said that I would take

further questions on notice in order to consult the minister responsible for this area so that he can provide an

accurate and well-informed response to the committee. This is not an area for which I have direct portfolio

responsibility. I am not at liberty to essentially start providing information to the committee that might not be

accurate. So consistent with the practice of the previous government and governments before that, I am taking

advantage of the opportunity offered to me to take this question on notice, as Senator Wong did when she was in

this position. The suggestion that I am refusing to answer it is false.

CHAIR: I have heard that you have taken the question on notice to provide the Treasurer with the

opportunity, if he wants, to provide some more information. We will move on.



Senator KETTER: I would also like to explore the process leading up to that point and what steps have been

taken to fill the position—calling for expressions of interest, advertising? What steps have been taken?

Senator Cormann: Again, I have said that I have taken that part of the question in relation to the internal

processes of government—

Senator DASTYARI: We had not asked that question yet.

Senator Cormann: My taking on notice covered the internal processes of government other than the

government providing advice to the Governor-General about the appointment.

Senator WONG: You are not prepared to answer a question as to whether the position has been advertised?

Seriously, are we at that point?

Senator Cormann: Mr Palmer can answer the question for you.

Mr Palmer: Brian Pink, the former Australian Statistician, retired in January, I think. The position was

advertised in March, internationally. I think an advertisement appeared in the Economist.

Senator KETTER: Can you tell us how many applicants there were?

Mr Palmer: No, I cannot tell you how many applicants or when the interviews were.

Senator WONG: Who was the contact point for expressions of interest in that advertisement?

Mr Palmer: It would have been the Secretary of the Treasury.

Senator WONG: So you have no role in that?

Mr Palmer: No.

Senator DASTYARI: People have to fill out 40 forms a week, don't they?

Senator Cormann: Again this is entirely consistent with well-established processes.

Senator WONG: Can you just stop talking, Mathias. Nobody has asked a question.

Senator Cormann: You would not expect the Acting Australian Statistician to have a role in filling the

substantial position.

Senator WONG: No, and I do not think it is—

CHAIR: Senator Ketter has the call.

Senator WONG: It is not controversial. You are fighting something that is not controversial.

CHAIR: Senator Ketter has the call.

Senator KETTER: Mr Palmer, have you put forward the names of any potential replacements for the

position?

Mr Palmer: Senator, that is not my role. The process is that the position is advertised, people apply and they

are considered. I have no role in that process unless I am myself an applicant.

Senator DASTYARI: Are you an applicant?

Mr Palmer: I may be asked to provide input as a referee in relation to other applicants. As the Acting

Australian Statistician, I really do not play a role in the appointment of the statistician.

Senator KETTER: The recommendation to government comes from who?

Mr Palmer: It would come from the chair of the selection process.

Senator WONG: Is ABS represented on the selection panel?

Mr Palmer: No, I do not think so, not on this occasion.

Senator WONG: But the selection panel has been identified?

Mr Palmer: The selection panel was formed and it has undertaken interviews. I cannot offer any more detail

beyond that.

Senator WONG: We can ask that of Treasury. Do you know who is on the selection panel?

Mr Palmer: It was chaired by the Secretary of Treasury.

Senator Cormann: I might interpose here. We actually do have a session, in this Senate economics

committee estimates—

Senator WONG: If he keeps interrupting we are going to have to make up—

Senator Cormann: If I may, I am assisting the committee here. There is a section in these estimates where we

deal with corporate affairs—



Senator WONG: We were getting along much better before he turned up.

Senator Cormann: for Treasury, which is in macroeconomics. Questions around selection processes that

involve the Secretary of the Treasury are most appropriately asked then. These questions are not actually

appropriate questions for the Acting Australian Statistician.

Senator WONG: Thank you for that. But do you know?

Mr Palmer: Do I know?

Senator WONG: Yes.

Mr Palmer: Yes, I do.

Senator WONG: Who are they?

Mr Palmer: Who is on the panel?

Senator WONG: Yes.

Mr Palmer: I really would prefer that the Secretary of the Treasury answer questions about—

Senator WONG: Oh, come on!

Senator DASTYARI: But it is not a selection process.

Senator WONG: It is in your knowledge. You are a public servant before Senate estimates—

Senator Cormann: It is not the way it works, Senator Wong.

Senator WONG: What is the basis on which you do not want to answer that?

Senator Cormann: It is not his responsibility.

Senator DASTYARI: Is that his claim for immunity?

Senator Cormann: No.

Senator WONG: It is a public interest immunity claim—'it is not my responsibility'?

Senator Cormann: You are asking him about something that he is not responsible for.

Senator WONG: You are making him look bad and he does not need to.

Senator Cormann: The person that is responsible is the Secretary of the Treasury. The appropriate area of

Senate estimates to deal with these matters is when corporate matters in relation to the Treasury portfolio are dealt

with, which is in the section on macroeconomics.

Mr Palmer: Perhaps I could explain. I do not know with authority who was on the panel. I was not an

applicant. I was not interviewed.

Senator WONG: Were you consulted on the selection panel?

CHAIR: Order!

Mr Palmer: No.

Senator WONG: Okay.

CHAIR: I ask that we ask that question in the relevant area.

Senator WONG: You cannot tell us to do that, Chair.

CHAIR: I am just asking.

Senator KETTER: Is it a priority for the government to replace this position?

Senator Cormann: Of course.

Senator KETTER: Can I ask why it has not happened?

Senator Cormann: Because we want to make sure we get the right person. We want to make sure that we get

the best possible person for the job.

Senator KETTER: We knew in December last year that the previous chief statistician was retiring. That took

effect in January.

Senator Cormann: Sure. You are telling us things we all know. So we are going through the process to

appoint a replacement.

Senator WONG: You are very sensitive, Mathias.

Senator Cormann: In the meantime we have an Acting Australian Statistician who is doing an outstanding

job, and we are going through the process to identify the best possible person to replace him.



CHAIR: Senator Ketter.

Senator KETTER: I will move on to retail trade figures, just moving away from labour force figures for the

time being. With the retail trade figures, I ask: how reliable do you believe your retail trade figures are?

Mr Palmer: I think our retail trade figures are world-class.

Senator KETTER: Have you been contacted by any major retailers concerning the reliability of your retail

trade figures?

Mr Palmer: I have not, no. Has the ABS been contacted?

Senator KETTER: Yes, that is my question.

Mr Davies: I do not believe so.

Senator KETTER: Has the ABS been contacted by any media concerned about the reliability of retail trade

figures?

Mr Palmer: No.

Senator KETTER: Not recently?

Mr Davies: Not that I know of.

Mr Palmer: Mr Davies said that he was not aware of any inquiries, and they would be referred to him.

Senator KETTER: Moving on to changes to the future work plan of the ABS, Mr Palmer, I think it was in

your media release on 5 July in response to budget constraints that you announced you would discontinue six

programs, reduce the size of seven and review one program. Was that particular list seen or approved by a

government minister? If so, which minister?

Mr Palmer: It was seen by my minister, the Parliamentary Secretary to the Treasurer. It was not approved by

government. The Australian Statistician decides the work program, with some minor exceptions. None of those

changes required government approval.

Senator KETTER: Did the parliamentary secretary have any input into the priorisation of those cuts?

Mr Palmer: We undertook a consultation process where we talked to a number of stakeholders. I certainly

had a discussion with the parliamentary secretary about his views.

Senator KETTER: Did he have any input into the prioritisation of the cuts?

Mr Palmer: I had a discussion with him about his views. He was not directive as to what should be the

priorities. He left that to me.

Senator KETTER: I noticed that one of the programs that has been discontinued is the Measures of

Australia's Progress program; is that correct?

Mr Palmer: That is correct. Yes, the program. We still produce the underlying measures. I am correct in that,

aren't I, Peter?

Mr Harper: That is true. It is the product that was discontinued.

Mr Palmer: So the product that pulls those measures together in that reporting framework has been

discontinued.

Senator KETTER: If I understand you correctly, the components still exist but the suite is discontinued?

Mr Palmer: That is right.

Senator KETTER: That measure covered a range of issues. I would have thought it was useful in assisting

modern thinking on how policy should be evaluated. Can you tell us why the decision was made to discontinue it?

Mr Palmer: I will again make the point that the underlying measures are still there and the work that we put

into the conceptual framework for presenting measures of wellbeing remains, so that framework is still there for

people to draw on. We decided that continuing the product in the form that we developed would be a lower

priority than some other things that we have to do. We had to make a difficult choice around which things to cut.

Our judgement was that was one that would be a lower priority than other statistics.

Senator KETTER: You also indicated that there was a review of the house price index to be conducted in

August?

Mr Palmer: Yes.

Senator KETTER: Can you tell us about that review?



Mr Palmer: I can tell you that that review has been undertaken and we are in the process of implementing the

results of that. I will ask Ian Ewing to give you a bit more detail on that.

Mr I Ewing: A review has been undertaken. We are looking now at implementing the outcome of that review,

which involves looking at alternative sources of information that will compile some of the statistics that relied on

the data that had come from the house price index. We would also note that the house price index is an index for

which there are alternatives available in the marketplace.

Senator DASTYARI: Talking about the retail trade, and following on from that, I slipped out for one minute

so I may have missed the answer to this. The reliability of the retail trade figures: you are aware that they are kind

of in dispute, Mr Palmer, or are you not?

Mr Palmer: No. I am aware that there is healthy interest in our numbers and lots of speculation in the media.

Senator DASTYARI: 'Speculation' is probably a more appropriate term. Your position is that you are saying

your retail trade figures are reliable?

Mr Palmer: Yes, I think I used the word 'world-class'.

Senator DASTYARI: I know from time to time you conduct reviews and an investigation—'investigation' is

my word, not your word—into different bits of information that you produce. You do not have that view in terms

of your retail trade figures?

Mr Palmer: No. We have a review at the moment of our labour force statistics. We do not have a similar

review underway—

Senator DASTYARI: Have you been contacted by any major retailers concerned about the reliability of the

retail trade figures?

Mr Palmer: No.

Senator DASTYARI: You have not?

Mr Palmer: No.

Senator KETTER: Returning to the house price index, I noticed in your media release that you were talking

about discontinuing that index pending the identification of alternative sources to meet the Australian national

accounts and other requirements. It sounds to me like it is a fairly important statistic.

Mr Palmer: Yes.

Senator KETTER: The ABS would not have been asked to compile that unless there was some degree of

importance for it. It obviously is very important. Why are you considering outsourcing that particular program?

Mr Palmer: Again, I will refer to Mr Ewing. But the suggestion was that there might be an alternative to the

index we produce and we undertook to look into that. We have done that. We plan to continue producing a price

index; is that right?

Senator KETTER: So it is a cost-cutting exercise?

Mr Palmer: This list of things that we were ceasing, discontinuing and reviewing was a cost-cutting exercise.

With this review you would put it under the category of a potential cost saving if the review found that there was

an opportunity to do so. So we were simply saying this was something we were looking at.

Mr I Ewing: The data that is used to compile the house price index also feeds into a number of other statistics.

Whilst we could look at ceasing to continue to produce the house price index, given that there are other house

price indexes in the market that may be potential alternatives, we still needed to find alternatives to the underlying

data that we need to feed into the national accounts where they estimate the value of dwellings and also they feed

into information on household wellbeing. The reason why we did not just cease it was because we needed to

either collect the existing data or find a suitable alternative.

We have undertaken a review which looks like it has found a suitable alternative. We are now in the process of

looking into securing access to that data and then evaluating whether or not it is suitable. The outcome of that

review will determine whether or not we will be able to make savings or whether or not we will have to continue

with our current practice. It depends on finally making arrangements to acquire that alternative source of data and

evaluating its quality.

Senator KETTER: Will that alternative source come at a cost?

Mr I Ewing: It will come at a cost, but potentially it will come at a lesser cost than what we were doing

before. So we are investigating alternatives that will produce data of sufficient quality but potentially at a lower

price.



Senator KETTER: Thank you.


Senator CANAVAN: I want to ask some questions about the follow-up from the criminal charges made

earlier in the year in regard to leaking of information. I understand there was a review conducted after those

charges became public. Are you able to inform the committee of the outcomes of that review or

recommendations?

Mr Palmer: Yes, so we commissioned a review. It was undertaken by Ms Gibson. We published the findings

of the review. The review found that our—if I can summarise it—systems of controls were broadly consistent

with those that you would expect in agencies undertaking similar sort of work. There are a number of

recommendations as to how we might strengthen our culture around information security and promote awareness

of the need to maintain information security. Those recommendations are being implemented now.

Senator CANAVAN: So you are going to implement all of the recommendations?

Mr Palmer: Yes, we will.

Senator CANAVAN: Including those that require staff to declare their financial assets annually?

Mr Palmer: Yes. The precise nature of that disclosure is something we are working through at the moment.

We basically want to increase the level of disclosure by staff. We also want to increase the rigour and formality

around identification reporting of potential conflicts of interest. They are both areas in the review that we are

working on.

Senator CANAVAN: In the review the author said there were a number of limitations on the review—she did

not look at the IT strategies the ABS is developing and also the controls on access to information within the ABS.

Are you conducting any other investigations to review those aspects?

Mr Palmer: I think part of the reason she did not look into those things is they are covered by other reviews,

audit programs, government security standards and appropriate vetting of those. Her review sat in the context of

other controls which are operating effectively.

Mr Libreri: Ms Gibson's first recommendation was to conduct a close review of IT access. We have

conducted that.

Senator CANAVAN: And you are implementing the recommendations of that review now?

Mr Libreri: Yes, and the ongoing nature of reviewing those accesses in a far more pervasive way than we had

done in the past.

Senator CANAVAN: Presumably there are markers for this kind of activity. You usually release stats at

11.30 am; is that correct?

Mr Palmer: Yes.

Senator CANAVAN: So presumably in the markets there can be some indications of unusual trades before

that time. Do you work with ASIC or any other regulators to potentially identify fraudulent activities through the

publicly available market trading that might occur before a statistical release?

Mr Palmer: We do work together. This recent prosecution was an example of that. ASIC detected something

unusual, came and talked to us and we worked together.

Senator CANAVAN: So that is how it was identified—unusual trading, or was it identified by NAB?

Mr Palmer: You would have to talk to ASIC. I did not talk to NAB. I am not sure on what basis they

conducted their investigation.

Senator CANAVAN: Okay.

Senator LEYONHJELM: A couple of questions on unemployment again and your calculation of

unemployment statistics. Your source of data for unemployment statistics is surveys; is that correct?

Mr Palmer: The labour force survey; that's right.

Senator LEYONHJELM: There is an ongoing debate with one of the market research companies—Roy

Morgan says you underestimate unemployment fairly substantially on a continuing basis. Are you aware of that

debate?

Mr Palmer: I will refer that to Mr Harper.

Mr Harper: I am aware of the fact that Roy Morgan has made comments about that in the past.



Senator LEYONHJELM: Do you consider Department of Social Services data—or should, considering you

are looking at this now—in relation to firming up the unemployment figures; the Newstart figures for example?

Mr Harper: The short answer is that people who are registered for unemployment benefits may not be the

population we are interested in, in terms of the unemployment estimates themselves. It is highly unlikely, but

there could be people who are receiving unemployment benefits who are not 'unemployed' by our definition or,

alternatively, there could be people who are 'unemployed', by our definition, who are not receiving unemployment

benefits. Over the long term the two series track reasonably well together. But in the short term it is just not

possible to use the Social Services information as an alternative measure of unemployment, in terms of the

statistical definition of unemployment.

Senator LEYONHJELM: So where is the concern in relation to accuracy? Is it sampling, or your

adjustments for seasonal factors?

Mr Palmer: Our September publication identified the various issues that we think need to be investigated.

Senator LEYONHJELM: Senators are really bad at reading—

Mr Palmer: That is fine. Pete is probably in a better position to enumerate them.

Mr Harper: Are you talking about Roy Morgan's concerns?

Senator LEYONHJELM: No, your own concerns.

Mr Harper: About our statistics?

Senator LEYONHJELM: Yes.

Mr Harper: A range of possible factors have created the situation that we find ourselves in. I have mentioned

what they were earlier; I will go through them again. There could be real world change in seasonality. There

could be impacts because of some of the changes we have made to our collection, including the questionnaire,

some of the content around our supplementary programs, the introduction of web-based forms or a minor

reduction we have made to response rates. I would not like to speculate as to which of those is the main driver of

the situation we are seeing now. As we have said earlier, there is a review under way which is looking into those

things.

Senator LEYONHJELM: Okay. I am interested as to whether Roy Morgan's criticisms of the statistics have

any validity—I have no opinion on that. They argue that it is a sampling error, that if you did it their way you

would be right.

Mr Palmer: We have heard from one expert that it is a sampling error; from another that it is because of our

changes to our supplementary questions. People have differing views.

Senator LEYONHJELM: Fair enough.

Mr Harper: There are two issues here. One is that Roy Morgan, for some time, has been suggesting that the

ABS unemployment numbers are too low. That has been an issue that the company has been on about for several

years, to my knowledge. Roy Morgan runs a survey which produces an unemployment estimate. That survey is

about one-tenth of the size of the ABS's survey. We know relatively little about it because there is not a lot of

information in the public domain about that particular survey. We know it is a small survey compared to our

survey. We also know they ask the question about unemployment in a different way to the way we ask the

question. We use a definition, and questions drawn from that definition, which is based on an international

standard. We have used the same definition from time immemorial.

I think where there is a bit of confusion is between 'unemployment' and 'underemployment'. We produce

supplementary measures of underemployment. These are people whom we consider are employed but who are not

working as many hours as they would like to work. At the moment, at least, we produce that information

quarterly. We will be aiming to produce that monthly at some stage in the future.

Senator LEYONHJELM: I will leave it there. Thanks.

CHAIR: Thank you very much. No more questions of ABS—so we will let you go. Thank you very much.

Mr Palmer: Can I just slip in one minor correction?

CHAIR: Absolutely.

Mr Palmer: I said that the position for the Statistician was advertised in March. I have just been advised it

was in February.

Senator WONG: Is there only one advertising round to date?

Mr Palmer: That is my understanding.



Senator WONG: Only the February round of advertising?

Mr Palmer: That is my understanding, yes.

CHAIR: Thank you very much.

Australian Securities and Investments Commission

[11:54]

CHAIR: I now call on the Australian Securities and Investments Commission. Mr Medcraft, do you have an

opening statement?

Mr Medcraft: I do. Congratulations, Chair—it is good to meet you.

CHAIR: Thank you very much; that is very generous of you.

Mr Medcraft: I want to brief on our response to the committee of inquiry into ASIC's performance, which has

just been completed. Consistent with my statement to the PJC in June, ASIC has welcomed the Senate inquiry.

We have used our lessons from the inquiry, I believe, to do a better job. We have been improving our processes

and procedures to address many of the concerns that were raised in that inquiry. That involves three key themes of

the inquiry. One is about improving communications across the board. A second is identifying emerging risks.

The third is a commitment to strong, swift enforcement action.

Normally in my statement I would give a brief update of our achievements against the three strategic priorities

we have. Just to remind everyone: first, making sure that investors and financial consumers have trust and

confidence in the markets; secondly, that markets are fair, orderly and transparent; and thirdly, that we have an

efficient and accessible registration system. As I say, the update is not exhaustive. It gives the committee a feel of

our ongoing work.

On the first priority—investor and financial consumer trust and confidence, and under that in particular

financial literacy—we announced a new national financial strategy for 2014-17. It provides a framework for

stakeholders across the country: governments; business; community leaders and community groups; and

education sectors. They have all been involved and coordinated by ASIC informing that. It follows 12 months'

consultation with more than 200 stakeholders. We believe that it is very important, as part of this, to provide very

clear and practical information for consumers and financial investors, particularly through our ASIC MoneySmart

program.

The second key aspect to underpinning investor trust and confidence is holding gatekeepers to account. As an

example, the Senate inquiry into ASIC's performance raised the issue of Macquarie Private Wealth and its advice

to clients. In mid-August 2014 we announced that Macquarie Equities would write to around 160,000 clients, past

and present, about possible remediation for flawed financial advice. This remediation is part of the ASIC 2013

enforceable undertaking with Macquarie Equities, which was the result of surveillance where we identified

concerns about Macquarie Private Wealth and their compliance process and risk processes.

The second priority was fair, orderly and transparent markets. An example of activity there was Hanlong. We

continued to pursue insider trading and market manipulation, which is an important priority in our markets area.

This month the former Hanlong mining managing director, Steven Xiao, appeared in court on 104 counts of

insider trading. This followed a very long-running ASIC investigation, which actually resulted in Mr Xiao being

extradited to Australia. Since ASIC appeared in front of this committee in June this year we have actually taken

action against eight people for insider trading or market manipulation.

Another example in the markets area is action we have taken is in the Federal Court this year. The court

actually imposed a $1.2 million penalty on Newcrest Mining for contravening its continuous disclosure

obligations. Again this followed proceedings which alleged that analyst briefings that Newcrest had made had

disclosed gold production capital expenditure outside the normal notification process through the exchange.

On priority 3, which is efficient and accessible registration, currently we are assisting the government with a

scoping study around the possible sale of ASIC's registry business. Last week in relation to that business we

actually released a series of videos to actually help business owners use our business names register and other

online services. Frankly, part of our objective is actually working with our registry businesses to make it much

easier and simpler for Australian business.

Then finally in terms of additional initiatives, we did release—and I would hope that we have distributed it to

those who are here—ASIC's strategic outlook. We have released that this week. It is very important because it

actually sets out the key risks that we see in markets that we regulate and, most importantly, how we respond. It

has identified the key risks around gatekeeper conduct, innovation-driven complexity, globalisation. A very



important thing that was highlighted in the Senate inquiry was the expectation between what the public expect

ASIC may be doing and in fact practically what they do.

Chair, we are now happy to take your questions, thank you.

CHAIR: Thank you, Mr Medcraft. Are you planning to do that strategic outlook annually?

Mr Medcraft: Yes, we are. And then next year we are going to match that with a more detailed corporate plan

as part of our really dealing with a better understanding of what we do and accountability.

CHAIR: Any budgetary implications with producing that?

Mr Medcraft: No. We are doing this as part of our general communication budget.

Senator DASTYARI: I am impressed.

Mr Medcraft: Thank you. We think it is important to try to deal with the expectations and some of the issues

raised previously.

Senator WHISH-WILSON: On the same subject, Mr Medcraft, how did the recommendations from the

Senate inquiry fit into that?

Mr Medcraft: One of the recommendations was to better communicate to do with managing the expectation

gap and also dealing with identifying emerging risks. We think that deals with two of those key themes, which is

dealing with emerging risk and better communication. This outlines what we see as the key risks in what we

regulate. It is also, most importantly, how we intend to deal with them, how we intend to establish priorities so

that it is very clear. Also, I think it is important in that it sends a signal to industry as to really what we are going

to be focused on in the coming year. But equally, it sends that message to the community that this is what we are

focusing on.

CHAIR: Just for senators' benefit, I am going to go very quickly to Senator Heffernan, then Senator Williams,

Senator Dastyari, then Senator Madigan and then the Greens. Senator Heffernan, you are in and out quickly, I

believe.

Senator HEFFERNAN: Yes, fairly. I understand, Mr Medcraft, there has been some commentary in recent

days about the resource capacity of ASIC. Can I just say that I have taken this parliament through the resource

problem with security and the department of finance, which is at the back of it, not making money available to

secure the building. It is much the same way with the circumstances of Storm Financial, Great Southern,

Timbercorp, et cetera. Would it be fair to say that you are an easy touch if you have not got the resources to catch

the shonks?

Senator Cormann: Senator Heffernan, when you started your question you did not direct it to me. Let me put

a perspective from the government and Mr Medcraft will add to it. From the government's point of view, in the

context of the resources available to government from taxpayers, we obviously have taken the view that ASIC is

appropriately resourced. We did inherit the very challenging fiscal situation with $123 billion of projected

deficits. Right now we are borrowing from our children and grandchildren to fund recurrent expenditure. Having

said that, we are reviewing right now the roles and responsibilities of ASIC through the financial systems inquiry,

including how ASIC is most appropriately resourced. ASIC has put a proposal to government recommending that

we consider a cost-recovery approach which would put us more in line with the approach taken in other

jurisdictions around the world, most notably the United States. I can advise you, senator, and I can advise the

committee that the government is currently considering that proposal from ASIC.

Senator DASTYARI: On that note, on that exact same point—and I know Mr Medcraft has been speaking

about this on several other occasions—it is not a new thing. Mr Medcraft has been very clear in his view that

there is an ability to do this and not be directly a burden on taxpayers. Is the proposal that you are referring to is a

publicly available proposal or is that just between you and government at this stage?

Senator Cormann: Obviously there are internal processes of government where we have to make judgments

to ensure that we live within our means over time—

Senator DASTYARI: This question is—

Senator Cormann: No, let me finish. Right now there is a proposal from ASIC to the government which the

government is considering—

Senator DASTYARI: I am saying, is that a public proposal?

Senator Cormann: There is a proposal from ASIC to the government which the government is considering. I

was about to finish my answer. When we have finished that consideration we will be making a public



announcement. Of course all aspects of any proposal that the government decides to proceed on will be made

publicly available.

Senator HEFFERNAN: I guess you are aware, Mr Medcraft, of the settlement in the Victorian Supreme

Court due on the 27th and the 28th—the settlement deal on Great Southern Investment's failure in relation to

some investors, former directors, liquidators and the Bendigo and Adelaide banks, which, if it goes ahead, would

give the people who made a $1.8 billion investment a return of $3.35 million or 0.6c in the dollar. Of course the

lawyers have got to take a fair bit of the cake; they get $20 million out of the insurance claim. The decision would

also cut off various cases of maladministration brought against Bendigo Bank's handling of the Great Southern

loans that are being pursued with the Financial Ombudsman, which has been suspended pending a decision. Are

you acutely aware of time being the essence in this case, which is next week?

Mr Medcraft: I will perhaps pass it over to Mr Tanzer.

Mr Tanzer: Yes, we are aware of the circumstances surrounding the Timbercorp and Great Southern

settlement that you referred to.

Senator HEFFERNAN: Are you aware of the background where there are 23,000 investors?

Mr Tanzer: Yes. There is in fact.

Senator HEFFERNAN: They were knowingly sold unproductive wood lots. Some of the wood lots were

never planted. Some of the grapevines were never planted. I chaired the inquiry originally back a few years ago; it

was the dodgiest scheme. The Great Southern cattle scheme turned into the biggest cattle thieving operation, for

which no-one has been brought to brook, in Australia's cattle history. There is approximately $2 billion lost. A

pittance settlement is alleged. Is ASIC going to go into bat for the 23,000 investors?

Mr Tanzer: ASIC did take action at the time of the collapse of the scheme in 2009. In fact we looked at a

range of actions at the time. We investigated the role of the directors in terms of the overall governance of the

scheme. We looked at over a thousand pieces of financial advice that were given to investors.

Senator HEFFERNAN: Talk up, mate.

Mr Tanzer: We looked at over a thousand pieces of advice that were given to investors at the time.

Senator HEFFERNAN: You do have the power to intervene?

Mr Tanzer: We have the power to conduct inquiries and investigations into matters and a wide-ranging suite

of powers to commence action where we see—

Senator HEFFERNAN: Are you intervening? I have not got much time. This court case comes up next week.

The proposed settlement does away with an earlier case. Is it your intention to intervene in that matter?

Mr Tanzer: We are looking at the circumstances of that case as we stand. But that was a matter in which

ASIC was not directly involved. That was an action that was taken by the investors.

Senator HEFFERNAN: This is next week. Why can't you say you are going to intervene and halt the

proceedings, which you have the power to do?

Mr Tanzer: Because we are not—sorry, Tim.

Mr Mullaly: We are not a party to those proceedings. Yes, we have the ability to intervene.

Senator HEFFERNAN: You have the power to intervene?

Mr Mullaly: We have the ability to intervene. In terms of that particular settlement, part of it will require a

scheme of arrangement. Under the Corporations Act that scheme of arrangement will need to be, in a sense,

served on ASIC and ASIC will have to have the opportunity to go to the court in relation to that scheme. At the

moment it is not our intention to intervene in the proceedings.

Senator HEFFERNAN: These guys are very cunning. They are using the law to avoid the truth. You would

be aware that the courts are not driven by the truth.

Mr Mullaly: I cannot comment on that.

Senator HEFFERNAN: The courts are driven by the law.

Senator WHISH-WILSON: They are questions for the legal experts.

Senator HEFFERNAN: Could I just keep going?

Senator Cormann: That is your opinion.

Senator HEFFERNAN: No, it is not an opinion. It is a fact. Talk to any judge. In regard to this particular

case are you confident that in the settlement deal that Great Southern and Bendigo Bank are coming to with a



group of investors—just a few—that group of investors have not been offered something that we do not know

about as an incentive? As you know, the deal says that if this goes ahead the bank can collect from the mums and

dads, sell their houses, et cetera. Can you be confident you have got the resources to work out whether the group

of investors—and bear in mind these blokes are cunning—have not been offered a side deal?

Mr Mullaly: I might answer that. There are obligations on the lawyers in relation to this settlement to go to

the court and explain to the court what has happened. The court has to consider the settlement and the lawyers

have an obligation. I would be concerned if there is a suggestion that the lawyers might be party to some

agreement that is not being brought to the attention of the court.

Senator HEFFERNAN: Let me take you to something else. I am going to come to Mr Medcraft in a minute.

One of the financial planners—I will not name him at this stage, I am prepared to name him if you insist—told me

in confidence, and I am breaching the confidence, he was before the courts in a $50 million action by some of the

investors against him. During the proceedings of the court—this is him telling me—the judge called him into his

chambers and said, 'Mate, you've got no chance of winning this. The best thing you can do is go into bankruptcy,'

which he did. That cancelled the whole thing. What sort of a carry-on is that for a judge to give that advice during

a hearing?

Mr Mullaly: I am not in a position to comment.

Senator HEFFERNAN: It is time you blokes had a look! Can you assist the committee by taking this

question: do you think there are similarities between Bendigo and Adelaide Bank's involvement with Great

Southern Finance through a shell company and CBA's involvement with Storm Finance in running an alleged

illegal MIS? It is very handy to be able to take a shell company into bankruptcy, if you are cunning enough to

know it is no good taking on Great Southern Finance. You have got to buy the books and then take on the people

that they lent the money to, which is all the home owners. Do you think there is a similarity between Bendigo's

involvement with Great Southern and CBA's involvement with Storm Finance?

Mr Medcraft: Mr Tanzer, perhaps you could comment on the similarities, in terms of a managed investment

scheme and ANZ. ANZ was involved as well.

Mr Tanzer: There may be some differences and there may be some similarities. Your question needs much

more detailed consideration of the facts of both cases than I can reasonably go into in the time that is available.

There are some differences, obviously, between the cases. In the Storm case we were dealing with an unregistered

managed investment scheme, whereas the Timbercorp and the Great Southern schemes were registered schemes.

So there is a responsible entity that has direct responsibility under the law. The case that we were making in

Storm Financial was about an unregistered scheme and all of the players that might have been involved in that. I

mentioned earlier that we looked at the conduct of directors and we also looked at a sample—a reasonably large

sample—of advice, with respect to the Timbercorp case. We would need to assess that to consider whether or not

the prospects for taking action of the sort that you are talking about would be as strong as we felt was the case

with respect to Storm and the CBA.

Senator HEFFERNAN: Do you have the power to intervene before next Tuesday, or whenever it is that this

Bendigo Supreme Court matter comes to court in Victoria?

Mr Tanzer: As Mr Mullaly explained, we are not a party, but we can intervene as an amicus—

Senator HEFFERNAN: On behalf of 23,000 investors and because of the threat to all of Australia's financial

participants—a lot of them are mums and dads and people on retirement who take advice from all sorts of people

who have had a three-week financial planners course—can you give consideration today to intervening, before

next week, in this matter? This matter is one of the dodgiest. How smart are you? Obviously, I have spoken to the

Bendigo bank, to Mr Hirst and others; I do not have an axe to grind with anyone. We are going to have an inquiry,

so we will not show all our cards today. But if you are the bank, the ASIC obligation is to maximise profits for

shareholders—and banks make money out of lending money and not borrowing it. So if you can see that the shell

company—very cunning to put a shell company into receivership—is going to yield you nothing, you buy the

book two weeks before they go insolvent and then you can pursue the people that they lent the money to. All of

those things destroy the confidence of people. When you go to your local GP, you believe what he tells you. A lot

of people who do not have the skill and the time go to a financial planner and believe what they are told, and there

are just too many grubs in the industry. As I said at the beginning, the courts are not driven by the truth; the courts

are driven by the law. So if you are guilty and you are going to court, you get a smart lawyer—

Senator WHISH-WILSON: What is your question?

Senator HEFFERNAN: to avoid the truth and not to tell a lie. Can you give a commitment today, on behalf

of all those people, that you will intervene?



Mr Tanzer: No, I cannot give a commitment today that we will intervene, because that would depend on the

facts of the particular matter, but I can certainly—

Senator HEFFERNAN: Yes, but—

CHAIR: Senator Heffernan, let the witness answer the question.

Mr Tanzer: say that we are happy to look at it.

Senator HEFFERNAN: Today is Wednesday; this happens next Tuesday.

Senator WHISH-WILSON: Chair, can I ask a point of clarification? In regard to what was said earlier in

relation to this question, you said that you have to approve a scheme of arrangement for any deal that is done next

week. Does that mean that you can reject this at that point when you see the scheme of arrangement? If you think

there has been malfeasance, fraud and other issues, can you do it then?

Mr Mullaly: It is not so much a matter of us rejecting it; we can make submissions to the court. A court has to

approve a scheme of arrangement under the act. We must be notified and we must be given sufficient time to

consider it and make submissions to the court. We might make submissions to the court about any concerns we

have regarding the scheme of arrangement.

Senator WHISH-WILSON: Would that be potentially enough to cancel any deal that is done next week?

Mr Mullaly: We cannot speak for the court, of course.

Senator WHISH-WILSON: No, of course not.

Mr Mullaly: But one would expect—and given that the legislation is written in that way—that the court will

have a significant consideration of our views in relation to it. Just in relation to the proceedings that are on next

week, I should say that the group members that are concerned about the settlement have the ability to lodge

objections to it. My understanding is that there are a significant amount of objections that have been lodged. The

court has extended the time frame in which objections can be lodged pretty much until the time of the hearing.

Many of those people are separately legally represented as opposed to the lawyers that are representing the lead

plaintiffs. They will be much better placed to be able to talk about the scheme of arrangement than we are. We

will not be in a position—

Senator HEFFERNAN: M+K has dumped a lot of its clients after collecting its fees. Following the

insolvency and the growers stopping payments, it was not hard for the banks to work out where they had to go,

because any recourse to GSF, Great Southern Finance, was a waste of time. So the tactic now is to scour the

mums and dads. I am just dealing with a court matter where I told the bloke, 'Don't go to court'—he was telling

the truth; not driven by the truth—against a big company that I will not name. It has cost him, over 2½ years of

their dragging it out—they drag you out and run you out of money—$10 million in court costs. These mums and

dads do not have those resources and, if you are prepared to sit there calmly and say, 'Well, they can take them to

court,' I know what I would do about it. That comment is reprehensible. These people do not have the resources to

take Bendigo bank and the dodgy people in Great Southern to court. It is up to the system.

CHAIR: Senator Heffernan, do you have a question?

Senator HEFFERNAN: Yes. My question is: you have confirmed similarities between what Storm and CBA

were up to and what the mob in this are up to; correct?

Mr Tanzer: I have said that we would need to look at the facts of both of those matters. I have pointed to

some similarities—

Senator HEFFERNAN: But this has been in the news.

Mr Tanzer: and I have pointed to some differences. With respect to the mum and dad investors here, one

thing that I might suggest is that it is for that very reason, the cost of the court system, that, within the financial

services regulatory regime, there is an extensive external dispute resolution regime, which is available for people

at no or very little cost. That is called the Financial Ombudsman scheme.

Senator HEFFERNAN: I am aware that this case bypasses that, if it settles.

Mr Tanzer: If it settles.

Senator HEFFERNAN: That is right. That is why I am asking you to do something about it. For god's sake,

blood will be on your hands. Do something about it. You are sitting around here comfortably.

CHAIR: Senator Heffernan, do you have a question?

Senator HEFFERNAN: Let us fix this up and give the Australian public confidence in the financial system

and in the good work, given the limited resources, of ASIC.



CHAIR: Do you have any more questions?

Senator HEFFERNAN: No; that will do me for a while. I might put some more on notice and I might come

back.

CHAIR: We would welcome that. By agreement, I am assured, Senator Xenophon is here for a short time.

Senator XENOPHON: Can I ask a general question that can be taken on notice. In relation to the accounting

standard AASB8, in terms of cost allocation between companies, could you take on notice what ASIC's views are

as to whether that is an adequate standard or whether there is room for improvement? You are aware of the issues

that I have raised in respect of Qantas and its cost allocation between divisions. Can I go to the issue of

continuous disclosure—and I know that Mr Medcraft has spoken out on this. Are there any plans or has any

consideration been given to improving the standards of continuous disclosure—this whole issue of having

companies giving private briefings to institutional investors that mum and dad investors do not have access to?

Would ASIC endorse or consider a more robust system of transparency as to when a company meets institutional

investors, who they met, the date and what was said or if it was anything different from what has been previously

put out to the market? Is that something that ASIC has looked at?

Mr Price: By and large, can I say at the outset that we think Australia has a good and robust continuous

disclosure regime; that is not to say that things cannot improve. We did put out a report on handling confidential

information; from memory, that was mid this year. It did suggest a number of measures of good practice that

companies might consider; that includes things like making their briefings—

Senator XENOPHON: I will cut you off because of my time constraints. Perhaps you could take that on

notice.

Mr Price: I will.

Senator XENOPHON: What I want to understand is that there are—

Mr Price: We have made some good practice suggestions and we encourage companies—

Senator XENOPHON: But they are not mandatory?

Mr Price: They are not mandatory.

Senator XENOPHON: And a small investor does not have the same access to information as big investors.

Mr Price: That is potentially the case.

Senator XENOPHON: That is fundamentally wrong, from your point of view, isn't it?

Mr Price: I think everyone has the same level of access to information for material information, but there can

be a perception of unfairness if other information, not material, goes to some people and not others; I would agree

with that.

Senator XENOPHON: In relation to the issue of being concerned about insider trading and issues of

continuous disclosure regarding having material information that others do not have, does ASIC have (a) the

resources and (b) the tools in order to deal with that? For instance, can you find out who has been dealing with

equity derivatives or CFDs?

Ms Armour: We do have good tools; they have recently been enhanced. We are moving to a system of trade

reporting for OTC derivatives, which will pick up reporting of contracts for equity derivatives. The tool that we

would like to have is a tool that would allow us to analyse that information in the context of our current market

surveillance system. We do not have that at the moment.

Senator XENOPHON: By not having that, that means things can slip through the net?

Ms Armour: And it can take substantially more time for us to analyse matters.

Senator XENOPHON: Finally, on notice, can you indicate what the cost of that would be in order to cover

those trades?

Ms Armour: Yes.

Senator XENOPHON: Thank you.

CHAIR: Thank you very much, Senator Xenophon. I flag for senators, the department and the minister that I

will be breaking for lunch at one o'clock. Therefore, if any senators have any pressing need to be somewhere else

after we come back, you might want to arrange that with the deputy chair and any Independents. ASIC will be

back and the program will continue; I am just breaking for lunch at one o'clock.

Senator WONG: So ASIC will continue until one o'clock?



CHAIR: The program will just continue. I thought that might be helpful. We will break at one o'clock, but I

am just trying to flag, Senator Madigan, if you have some pressing issues beyond that, you might want to do a

deal with the deputy chair on some time because I am about to go to Senator Williams for 15 minutes, as

promised.

Senator WILLIAMS: Mr Medcraft, welcome to paradise!

Mr Medcraft: Thank you, Senator. It is wonderful to be in paradise!

Senator WILLIAMS: The paradise of white-collar crime. You are a media tart—Fairfax, Murdoch and ABC.

You said yesterday that Australia is a paradise for white-collar crime?

Mr Medcraft: I will put this in context. In fact, if you had looked at the whole interview, the point I was

making was not that we are a paradise, but we need to be careful that we are not seen as a haven and, therefore,

regarding the issue we have raised previously about corporate penalties and which the Senate inquiry has actually

recommended, we need to make sure that our penalties are consistent with the rest of the world. That is the point I

have made on a number of occasions about making sure that we are consistent in terms of our penalty regime.

Senator WILLIAMS: I spoke to journalists this morning. I went through the paper clippings and I went

through the internet. You said Australia 'is' a paradise.

Mr Medcraft: So I will—

Senator WILLIAMS: Hang on; let me finish.

Mr Medcraft: Can I just say—

Senator WILLIAMS: So it is a paradise for white-collar crime.

Mr Medcraft: I correct that. Basically the point is that we want to make sure that we do not become a

paradise.

Senator WILLIAMS: So all those media quotes are wrong?

Mr Medcraft: No. I did say that but I did correct it.

Senator WILLIAMS: You did say—

Mr Medcraft: In the latter part of my discussion with the journalist—

Senator WILLIAMS: You did say that Australia is a paradise?

Mr Medcraft: I did actually say, 'Look, I want to make it clear that what we are talking about is making sure

that we don't end up in that situation.'

Senator Cormann: I might add here, as a point of record, obviously, after certain reporters felt that that is

what the chair of ASIC said, I rang the chair of ASIC to ask him myself the question: 'Do you believe that

Australia is a paradise for white-collar criminals, because if that is what you believe, I would be very concerned

about that?' The clear, crisp and unambiguous answer that the chair of ASIC put to me was, 'No.' Then he

elaborated to say that his concern was that we needed to remain vigilant to ensure that we do not become a

paradise for white-collar crime, which of course I fully and 100 per cent endorse.

Senator WILLIAMS: Minister, thank you for that; but I have said for 5½ years that we should have a royal

commission into white-collar crime because I believe that Australia is today a paradise for white-collar crime.

Mr Medcraft, there was a pretty scathing report on ASIC from the Senate Economics References Committee with

61 recommendations—I have never been involved in an inquiry with so many recommendations. That was a

pretty scathing report, wasn't it?

Mr Medcraft: Perhaps I will pass over to Mr Kell to comment.

Mr Kell: Yes, there were a lot of recommendations there about actions that ASIC should be taking to improve

the way it works.

Senator WILLIAMS: Yes, I know. It was a pretty scathing report. We are short of time. Thank you, Mr Kell.

Mr Kell: We are looking at implementing those.

Senator WILLIAMS: Thank you. I made this point to you, Mr Medcraft: just recently, you went to Rio de

Janeiro—correct—and you were elected again as the chairman of IOSCO?

Mr Medcraft: That is correct, yes.

Senator WILLIAMS: We had Sean Hughes as a witness in front of the PJC Oversight of ASIC committee

just recently. He went over to the Financial Markets Authority in New Zealand and cleaned it right up—I think he

pulled out of IOSCO meetings and concentrated on his backyard to do that job in New Zealand. Shouldn't you



have done the same—pulled out of the international arena to concentrate on your backyard here, which you are

responsible for, to see that the body that you represent and are paid well for performs better, especially after that

Senate inquiry?

Mr Medcraft: Mr Hughes did stand for IOSCO and failed to be elected at the Asian Regional Committee

three years ago.

Senator WILLIAMS: Can you speak up a bit, please?

Mr Medcraft: Mr Hughes stood for election to IOSCO Asian Region when he was chair of the FMA. He

failed to be elected to the Asian Region board, and as a member of the IOSCO board. In my case, I was

successfully approached and elected as chairman of the world's securities regulators. That also means that I am

also a member of the Financial Stability Board of the G20. It has given Australia a voice—

Senator WILLIAMS: Mr Medcraft, let me interrupt you. You are making very good points. How long have

you been boss of ASIC?

Mr Medcraft: For three years.

Senator WILLIAMS: How long have you been on IOSCO?

Mr Medcraft: For three years.

Senator WILLIAMS: The point I am making is that we have had a Senate inquiry that is damning the

underperformance of ASIC, but you persist with the international stage. I am asking: shouldn't you have wound

down your activities in IOSCO and concentrated on fixing your backyard here first? That is the point I make—

after a damning inquiry.

Mr Medcraft: In relation to IOSCO, Australia is a major capital importer. It is important that the way in

which financial services and markets are regulated, and what is imposed on us—

Senator WILLIAMS: I could not agree with you more—

Mr Medcraft: Other parts of the world—

Senator WILLIAMS: But I think it is important that you fix your own backyard here too.

Mr Medcraft: I would have thought that is part of fixing it: making sure that, in our backyard, we do not have

imported inappropriate regulation, that our institutions are not subject to hundreds of millions of dollars of

additional costs and that there can be confidence. Globalisation is a fact of life; we are very much part of a global

economy.

Senator WILLIAMS: I am well aware of that.

Mr Medcraft: We have a very capable team at ASIC, and that shows the confidence I have in the team that

we have in front of you.

Senator WILLIAMS: You say 'a very capable team at ASIC' and that is fine. I could disagree with some of

those things—I have for the last six years since I have been in this job; you are probably aware of that. Mr Kell,

regarding the Oversight committee, I said to you—and I will quote from Hansard:

[Mr Kell has] put to me that the Penske File—

This is the cheat file that Macquarie Private Wealth, Macquarie Bank, used when their financial planners sat the

exam: 'Here are the questions of the examiner and here is the cheat file'—

was copied and given to an ASIC officer and it's been lost.

You said, 'That is incorrect.' Let me split those questions. Was that Penske file given to ASIC?—a 'yes' or 'no'

answer.

Mr Kell: There was material presented to ASIC around allegations of cheating and irregularities in exams.

There is no file that has with big red letters—

Senator WILLIAMS: Okay. Was it lost?

Mr Kell: No.

Senator WILLIAMS: Was it misplaced for a while?

Mr Kell: We had the file, we acted on those allegations. To my knowledge that is the situation.

Senator WILLIAMS: Mr Kell—

Mr Kell: Can I just finish? We incorporated the findings of our surveillance that there were irregularities in

the way that Macquarie advisers were trained, including allegations of cheating, explicitly into the enforceable



undertaking that we took out against Macquarie. Part of that then required them to institute significant additional

training for their advisers of 11,000 hours—

Senator WILLIAMS: Yes; that is all on Hansard.

Mr Kell: and to institute a new training regime, including more robust arrangements that were not open to

gaming. We are undertaking further investigations into those allegations around cheating. So I would prefer not to

talk about them more at this stage because it has the significant capacity to undermine those investigations.

Senator WILLIAMS: If I was in your position and I was given a cheat file, the first thing I would have done

would have been to take it down to Macquarie Bank and throw it on their desk and say, 'What are you doing,

cheating in your exams?' That is what I would have done, but you obviously did it differently. I was in a room—

four of us were in a room—at Sydney airport when a message was played off a phone where one of your officers

phoned a person and said, 'That file you gave us—we've lost it. Do you have another copy?' So it must have been

a dream time.

Mr Kell: I have not heard that before and I do not know that—

Senator WILLIAMS: I know it was lost—I don't know who found it.

Mr Kell: I am—

Senator WILLIAMS: You are what?

Mr Kell: struggling to see, given that we are doing an investigation there, what more we can say on that issue

at this point in time.

Senator WILLIAMS: Okay. I want to move you to your inquiry and your media release into the insurance

industry, where you conclude that 37 per cent of advice that consumers received failed to comply with the laws

relating to appropriate advice. This looks like mark 2 of financial planning again. With the life insurance review,

who did you use as consultants and how much did it cost, given that it took almost a year to complete?

Mr Medcraft: Mr Kell is handling that.

Mr Kell: The files that we assessed were assessed by an internal team and then by an additional set of staff

that had financial planning qualifications, and a sample was assessed by external consultants Holley Nethercote. I

do not have the answer off the top of my head about how much that cost; I am happy to take it on notice.

Senator WILLIAMS: Okay. Did you exclude CBA and Macquarie from the survey?

Mr Kell: Yes, we did. We excluded a range—and we were quite open about this; the methodology sets it

out—of firms, both big and small, that we had recently taken action against.

Senator WILLIAMS: We know the history of CBA, Commonwealth financial planning and Macquarie

Private Wealth. CBA is one of the biggest life insurers; so excluding that from the survey is like doing a sports

industry review and leaving out the AFL. Why weren't they included?

Mr Kell: I would disagree with that. We simply do not have the resources to review every single life insurer

and every single advice firm in the country. We aim to have a representative sample of large, medium and small

advice firms and advisers from those firms within the sample that we looked at, which started with 240 pieces of

advice and ended up assessing a bit over 200. We believe it is a representative sample of the industry and sends a

very strong message that it is an industry-wide problem.

Senator CANAVAN: Did you randomly select those?

Mr Kell: It was not entirely random in that we sought to ensure that the advisers that were included in our

sample were active in the life insurance sector; so not, for example, selling a policy every year or so. So it was a

sample of advisers who were reasonably active in the sector within a range of different firms.

Senator WILLIAMS: When you did shadow shopping on planners, you wrote to certain institutions outlining

what you specifically found wrong. Have you done the same here with the insurance industry and advisers?

Mr Kell: Just to clarify: it was not strictly a shadow shop in that we did not send out consumers to purchase

the insurance. But in terms of our surveillance, are we undertaking follow-up work where we have found poor

quality advice? Yes, including some investigations that may well lead to enforcement outcomes and, if we have to

take those either against individual advisers or against licensees, we will certainly do so. So there is a major piece

of follow-up work, which may well lead to enforcement outcomes, arising from this surveillance.

Senator WILLIAMS: So some serious problems with advice on insurance. How will you make sure that this

industry will be fixed and repaired?

Mr Kell: That is the key question. It is the right question—



Senator WILLIAMS: We have a problem; we need to fix it.

Mr Kell: Yes. There are a couple of responses there. The first is, as I said, we will be undertaking follow-up

investigations with particular advisers and firms that were part of the surveillance. But, more broadly, we have put

the industry on notice effectively that they need to ensure that standards are lifted in this area. In particular, we

have said that it is time to stop the industry dynamic whereby insurers point the fingers at advisers, and advisers

point the fingers back at insurers. This needs a collective response to ensure that that unacceptable level of failure

is addressed, and we are working with the industry to look at the sorts of measures that they might introduce to

deal with these problems. They are very much aware of the issue. It is clear that, unless they can come up with a

collective solution that addresses some of these problems, there is just going to be more enforcement, more action

taken against them and more reputational damage. So they are very clearly in the sights here to come up with

some solutions.

Senator WILLIAMS: I want to move on now to financial products and their ratings—Mr Medcraft or

Mr Kell or whoever wants to answer the question. Product manufacturers can shop around and pay for a rating; is

that correct? We went out to Standard and Poor's and, with the GFC, we saw many shire councils around

Australia lose so much money investing in those AAA credit ratings that were just dogs of things. Councils lost

millions. For example, if I were to start a financial product and kick it off out there in the big wide world of

finance, I would have to pay someone to rate that financial product; correct?

Mr Tanzer: Ratings are a very substantial part of many product offerings; that is right.

Senator WILLIAMS: So I would pay someone to rate—

Mr Tanzer: I would not say that they are absolutely essential, but they are a very common feature of many

securities offerings.

Senator WILLIAMS: So I could shop around and pay someone for a rating of my financial product; correct?

Mr Tanzer: A range of regulatory arrangements apply to credit rating agencies. In Australia, a credit rating

agency has to have an Australian financial service licence and, as part of that, it has an obligation to conduct its

business efficiently, honestly and fairly and a range of the other regulatory requirements that go with holding a

licence. In addition, international work has been done which is very much aimed at the proposition that you are

putting about shopping around for ratings. In codes of conduct, and increasingly in regulatory arrangements, the

obligation is that, if there is shopping around or if a rating agency refuses to give a rating, it will disclose that. But

I may defer to the—

Senator WILLIAMS: No; that is fine. I just think it is conflicted when we have people shopping around for

ratings, and billions of dollars being invested, and then the ratings are not even true. The AAA credit ratings put

on those financial products in America were a disgrace.

Mr Tanzer: No. That was certainly one of the great lessons from the crisis.

Senator WILLIAMS: One of the great lessons from?

Mr Tanzer: From the global financial crisis. But quite an amount of work has been done on the regulatory

regime and, indeed, by the rating agencies themselves on the robustness of the methodologies. Perhaps we should

get you a more detailed briefing on this.

Senator WILLIAMS: So you have tightened the regulations on research houses; that is correct, isn't it?

Mr Tanzer: Certainly in this area—

Senator WILLIAMS: I hope that is part of the PJC inquiry into financial products because if we sell cars

without brakes people are going to crash, and if we sell bad financial products, people are going to crash as well.

CHAIR: Senator Williams, I did promise to go to a few others, but I am very happy to come back to you. If

you are finishing up now, that is fine, but I am very happy—

Senator WILLIAMS: I have more; so go to someone else.

CHAIR: All right, because we will be continuing after lunch.

Senator WILLIAMS: That will be fine.

CHAIR: Senator Milne.

Senator MILNE: Thank you, Chair. I will only take a few minutes. I have some questions in particular with

regard to the relief that ASIC provides to companies that are part of foreign-controlled groups that are not large.

They do not have to provide annual financial reports. I want to ask in particular about Facebook Australia. Is it

true that Facebook Australia has not filed any annual financial report for the years 2009 to 2013 because, it says,

it is not part of a large group?



Mr Price: We will take that on notice, if we can, please. But it is the case that Facebook has indicated that

they are able to avail themselves of that particular exemption to the law; that is correct.

Senator MILNE: They say they are able to do that because they must be permitted to under the law. Did

ASIC, through class order 98/98, give relief to those companies? Is it an actual ASIC action that has allowed

these companies to avoid putting in annual financial reports?

Mr Price: As I say, I would prefer to take that question on notice, if I can, just to make sure that I get the

correct answer.

Senator MILNE: This is an issue with regard to tax evasion. As you would be very well aware, there has

been a lot about this. This is an actual ASIC order.

Mr Price: Yes.

Senator MILNE: Can you tell me whether or not ASIC made that order?

Mr Price: Certainly ASIC makes a number of financial reporting relief orders. The order you refer to, which

is in relation to small proprietary companies controlled by foreign-owned companies, is an order that has been in

place, as I understand, since 1998. It is up to companies to work out whether they fall within the terms of that

order, at least initially. Then ASIC has an active program to identify and follow up on companies that appear to be

required to lodge financial reports but, in fact, have not done so.

Senator MILNE: Has ASIC pursued Facebook? I do not think by any stretch of the imagination you could

suggest that Facebook is anything other than a large company.

Mr Price: As I say, I would prefer to take that question on notice, if I might.

Senator DASTYARI: Mr Price, you are taking that on notice. I assume you are saying that you have to check

your facts as to whether that is the case or not. Is that something that you could possibly do over the lunch break?

Mr Price: I am not sure. I will make some inquiries, but I am not sure.

Senator MILNE: What I am asking is: is that the case and why has not ASIC followed that up? I am also

asking it on notice, then, if you cannot give it to me now.

Mr Price: Yes, sure.

Senator MILNE: How many subsidiaries of large foreign-controlled corporations are exempted under this

same provision from making annual financial reports?

Mr Price: I doubt we will be able to provide you with the answer to that question, and the reason is that these

exemptions operate in such a way that, if my memory is right, you do not need to notify us if you are relying on

the exemptions. If you meet the various conditions that are set out, you are able, as of right, to rely on that

particular exemption.

Senator MILNE: So basically any company can just say, 'Oh, no; the company that owns us is a small

company and therefore we are exempt.'

Mr Price: Any company can take the risk of breaching the law and risk the consequences that penalties will

flow when it is found that they are breaching the law.

Senator MILNE: What is the audit that ASIC does on all these relief orders to check out whether this is true

or not?

Mr Price: In terms of what checking do we do to make sure that people are complying with individual class

orders? Typically we would not undertake such a process. That is part of our general surveillance to see that

people are complying with the law.

Senator MILNE: But you have just said that people would be running the risk of penalties being imposed and

you have just told me that you do not even audit it. So I would suggest that there is no risk.

Mr Price: No. You are asking me whether we go through each and every class order and make sure that

people are compliant. That extends way beyond financial reporting. We have very many class orders that cover

disclosure, takeovers, financial reporting. If you are asking me whether we run an active program to identify

companies that appear to be required to lodge financial reports but do not, the answer is yes, we run an active

program to identify and follow up on companies that appear to be required to lodge financial reports but are not so

lodging them.

Senator MILNE: It is the 'appear to be required to' bit. You have said that, if they are a subsidiary of a

company that is not large, they do not have to. So their legal teams would say that they do not have to?

Mr Price: Correct.



Senator MILNE: If they declare their parent company to be small?

Mr Price: Yes.

Senator MILNE: What I am asking is: what actual auditing do we do to make sure that we are not being

conned by a company like Facebook, by a company like any other of the large corporations?

Mr Price: Just to make sure that I understand exactly what you are asking for, you are asking for details of

what the program is, what we do to identify those companies that should be reporting but may not be reporting; is

that correct?

Senator MILNE: And I am asking you: how many companies in this regard are currently exempted from

providing financial accounts? I am asking, in particular, about Facebook. And I am asking, in particular, whether

an audit or any investigation has ever been done of Facebook Australia to see whether it is a wholly owned

subsidiary of a small company.

Mr Price: I am happy to take those questions on notice. I will see whether I can get some answers during the

break.

Senator DASTYARI: In relation to the Facebook questions—

Mr Price: But I am happy to take those questions on notice.

Senator CANAVAN: Can I ask a follow-up on that? Have you ever prosecuted a company for incorrectly

relying on this particular exemption?

Mr Tanzer: Last year we had seven successful criminal prosecutions and secured fines of between $6,000 and

$25,000 for seven public companies which had failed.

Senator CANAVAN: For this particular exemption, for this particular issue that they relied on there being a

small parent company?

Mr Tanzer: This was with respect to an assertion that they were not subject to the obligation.

Senator CANAVAN: So based on a range of—

Mr Tanzer: I cannot tell you that they were all within the class order or whether they were asserting that

under the law, the rest of the law, which means that small proprietary companies do not need to lodge. But yes,

we do.

Senator CANAVAN: Can you provide, on notice, the details of those companies that were prosecuted?

Mr Tanzer: Yes, we can.

Senator MILNE: Can I ask, if you have not done an audit on Facebook Australia, whether you will do it

specific to this requirement. I am very keen to know on what basis you classify Facebook to be a small company.

CHAIR: We will look forward to a response to that from the department after the break.

Senator DASTYARI: Yes, whatever you can.

Senator MILNE: The second question on the same issue goes to tax evasion. I am trying to understand the

line between ASIC and the tax office regarding ASIC's database, for the purposes of obtaining audited financial

reports of Australian companies that are owned by multinationals. I am asking: does the tax office have access to

ASIC's database in order to do that; and, if not, why not? Is it a legal requirement that you do not provide it, or do

you provide it under certain circumstances? What is the story?

Mr Price: My understanding is that we do provide it, but I will take that on notice too.

Mr Day: Perhaps it may assist: if you like, a mirror imagine of our database is available to the tax office. They

can access that; every minute of the day, they can see what they need to see. Whatever financial records are

required to be lodged by any company, the ATO, just like any other party, is then able to see those lodgements.

Senator MILNE: Is ASIC aware of any systemic accounting irregularities in the audited financial reports of

Australian large proprietary companies, for example, failure to comply with accounting standards, failure to lodge

accounts on time or accounts that are missing altogether?

Mr Price: Yes. In terms of financial reporting surveillance of a selected number of larger proprietary

companies, my recollection is that we did do financial reporting surveillance. We went over their accounts to see

whether we were happy. I will check the figure, but my recollection is that, in around four per cent of cases, we

did have problems. We raised those and the problems were resolved one way or the other.

Senator MILNE: Is there any way that we can tighten up those reporting practices of the large proprietary

companies so that we get a more stringent response?



Mr Price: The financial reporting requirements in Australia really mirror international requirements. The

international financial reporting standards have been largely adopted here in Australia. There is a separate

standard setter, which is the Auditing and Assurance Standards Board. They are responsible for setting the

accounting standards here in Australia. It might be a question that is better directed to that body.

Mr Tanzer: I might add that, for large proprietary companies, under that program of following up on non-

lodgements, we do also have a program of following up, firstly to inquire of the company whether they fit within

the definition of being a small proprietary company, because otherwise they are a large one, and then follow up

on their accounts.

CHAIR: Senator Dastyari.

Senator DASTYARI: Thank you. I have a whole bunch of topics that I would not mind touching on after

lunch but, before we break, I do want to finish up on things that were being raised by Senator Heffernan. Firstly, I

want to thank Mr Medcraft and the team for the incredibly detailed submission you made to our forestry-managed

investment scheme inquiry that we are doing at the moment. I do not know whether other senators have had a

chance to read it—I know that everyone is pressed for time—but it is a really worthwhile submission. Thank you.

Mr Medcraft: Thank you; that is good.

Senator DASTYARI: I appreciate the fact that a lot of times, with the role you play with ASIC, accidents

happen, something terrible happens, and people come to you and say, 'What are you going to do about it now?'

With the issue of forestry-managed investment schemes, frankly, there has to be a question about how, from 1993

to 2007, there was a complete failure of political leadership to allow all this to happen. I do not mean that in a

conservative or Labor sense; I just mean it in a broader sense. I do not think ASIC themselves are the sole people

responsible. I think it is a systemic failure.

Here is the issue: you have got this situation—and we are kind of at the pointy end and Timbercorp is much the

same thing—where there are matters that have gone on for a long time, with a whole lot of bad financial products

being sold to investors by people using questionable tactics. Frankly, the practices that were engaged in by places

like Timbercorp Finance or Great Southern and others have now been deemed illegal and we have subsequently

changed the law regarding a lot of those practices with conflicted remuneration because we found that the

practices that happened at the time were so deplorable that they led to such bad outcomes for the industry as a

whole and for these consumers.

There is this issue where Great Southern, as we were saying before, is involved in a legal matter that happens

next week. We can have a longer debate later about future laws and how we stop these things happening in the

future and all this, but there is this pressing issue now. Senator Heffernan asked the question, 'Can you intervene?'

You said, 'We have the power to intervene'.

Mr Tanzer: Yes.

Senator DASTYARI: But to intervene, how does the decision get made? Do the commissioners get together;

how does it work?

Mr Tanzer: It depends on the particular matter. But effectively, it is a matter of understanding the public

interest in innovating and, firstly, weighing up what sort of evidence there is to support the case that we might

want to put forward and, secondly, weighing that up against the available resources that we have.

Senator DASTYARI: Could I ask this question then, Mr Tanzer: is the decision to intervene or not intervene

yours or Mr Medcraft's? Do the commissioners get together? What is the process?

Mr Tanzer: It depends on the matter, but it is a commission decision or a commissioner's decision or, in

matters of less significant public interest, a decision that is made by a senior executive.

Senator DASTYARI: To intervene, effectively, I guess we would be asking: would it be within your power,

should the criteria be met—as a hypothetical—to intervene and to conduct a bit of an ASIC investigation into

what has happened here and notify or let the court know that is what you want to do? Is that something that is

within your power to do? Obviously the court will act on its own behalf. But if you were to intervene and say,

'We're going to do an investigation of this'—I am sorry; I am asking a legal question perhaps—is that within your

power?

Mr Mullaly: It is a little unclear. An investigation into what? Into the court process? I do not think we would

be saying to the court—

Senator DASTYARI: No, not into the court process. I think Senator Heffernan might want to jump in here.

CHAIR: You had better be quick; you have 40 seconds.



Senator DASTYARI: I would appreciate it if we could perhaps stay one or two minutes after one o'clock just

to finish off on this point before we get to anything else.

CHAIR: All right. Off you go.

Senator DASTYARI: What worries us here—and I can tell you that this is the perception, and I know that I

am speaking for a bunch of senators here—is that we have been inundated with emails, phone calls,

correspondence of some really harrowing tales, really harrowing stuff. People are losing their houses. People are

in an incredible amount of financial pain and an incredible amount of financial stress over practices that, frankly,

are highly questionable.

I personally believe the banking sector, and particularly in this case, Bendigo Bank and Adelaide, have a lot of

questions to answer. We end up with a situation that started off with smaller debts that have now become so

exorbitant. It started off with people at $40,000 or $50,000. Perhaps there was some bad legal advice along the

way, but now with the way the interest has compounded that has put them in hundreds of thousands of dollars of

debt.

I think there is going to be a court case next week and my worry is that it ends up creating a situation where

there is going to be a whole lot people. Senator Heffernan quoted the figure of 23,000. I do not know how many

of these people are going to end up, at the end of this process, being bankrupted.

I propose—and I appreciate that it is not ASIC's responsibility that it has got to this point—that ASIC get

involved, that ASIC conduct a review of what has gone on here and ASIC conduct an investigation. I appreciate

that you are completely independent and they are decisions that you make on an independent basis, but what I was

proposing is if the Senate Economics Committee were to meet and ask you to investigate a matter does that weigh

on the decision that you make?

Mr Tanzer: Obviously we take into account the views of Senate committees and the like. What primarily

weighs is the facts of the particular matter, so in terms of the complaints that you have received by all means refer

them on to us so that we can assess those complaints.

I did mention, in answer to Senator Heffernan's question, that at the time of the collapse in 2009 we conducted

inquiries into the actions of the directors of the scheme and into the advice that was obtained by certain investors,

not necessarily all investors. As you have mentioned, none of the investors have taken their own actions with

respect to that. We are always willing to look at the facts of the particular matter and the particular allegations that

are being made. As I also mentioned earlier with respect to concerns, if it was poor advice that was involved,

there is a direct avenue with respect to the Financial Ombudsman.

Senator DASTYARI: Without over pressing—and I know about the limited resources and we can talk about

that after the break—

Mr Medcraft: Do you want a comment for us to establish an investigation and the basis upon which we can

do it?

Mr Mullaly: That was the purpose of my question before. To conduct the investigation we would need to

have a suspicion that one of the laws in which we regulate has been broken and that it is in the public interest for

us to do that. As Mr Tanzer has said, we have looked at a number of these issues. We would need to see

something new or we would need to be convinced that there is something in a sense that we have missed or

overlooked.

Senator DASTYARI: Who is we?

Mr Mullaly: That is ASIC.

Senator DASTYARI: Who? Is that Mr Medcraft or Mr Tanzer?

Mr Mullaly: The process in which it would happen in a very practical sense is we would have senior people,

lawyers, involved in making an assessment of the material that we have. We would expect in something like this

that we would get external advice from senior counsel in relation to the matters. They would advise whether we

have standing to intervene in relation to the matter, whether there is a public purpose for us to do that and a whole

range of factors about whether we should intervene. That advice will come through to myself and I would discuss

that with our chief legal officer and our—

Senator DASTYARI: I propose then—and again, this is going to be a matter for the committee, so we will do

this in camera—that if you are telling me that if the committee were to write to you and say to you, 'As the Senate

Economics Committee, as a group of senators who have received a lot of correspondence about this matter'—and

we believe in our opinion that we are not the judge and juror on this—'and in our opinion this meets the public

interest criteria for this to be looked at', and we were to write to ASIC and say, 'This is something that we would



like you to look at', you would then take that and run it through a process to see whether there is something to

look at or not? That is fair enough.

Mr Mullaly: We would hope that there would be some clarity about what it is that is to be investigated. As I

said, if it is the court process then it is obviously inappropriate for us to be investigating that.

Senator DASTYARI: No, it is not the court process. It is the process that has taken place since.

Mr Mullaly: If it is the advice process, as I say we have made that clear.

Mr Medcraft: In the public interest what would give us a clear view as to what—

Senator HEFFERNAN: I think that is the point. Bear in mind we are all likeable rogues. Do you think it is

fair that right up until before they went into administration Great Southern Finance would continue to issue loans

knowing that they were going down the chute and then all of a sudden magically Bendigo says, 'We will buy your

book', two weeks before they go down the chute? These things do not happen like that. They would be talking to

one another. Do you think that it is fair that a judge hearing a case would tell the bloke who is before the court,

'Hey mate, you have got to go into liquidation. You are going to lose here'? I mean if that is not enough then what

is? Are you telling me that you have not had a look at this stuff? It has been all over the press. I know you have

got limited resources and I appreciate that, but for God sake let us get off our backsides and do something about

this over the weekend. After lunch come back and tell us that you are going into it.

CHAIR: We will return at 14.06.


CHAIR: We will resume. Senator Dastyari.

Senator DASTYARI: I wanted to move on from what we were talking about before lunch, which was about

the managed forest investment schemes and go onto a few other topics. Firstly, I wanted to say that I have read

ASIC's strategic outlook document and I have to say that apart from this fantastic photo of Greg who also appears

in it that it is actually a really good initiative. I think this idea of clarity in terms of priorities and making that

publicly available is a fantastic move. Clearly Mr Savundra is the one who prepared it because he is the one who

appears on the cover.

Just to take a step back, Minister Cormann, I would like to get your opinion on this. There is a huge challenge

for ASIC as there is with any kind of a regulator of its type where the demands on ASIC are constantly increasing.

You are dealing with some very sophisticated businesses and what-not that you are regulating and monitoring.

These are not small organisations; these are huge organisations who have an incredible amount of resources at

their disposal and trying to investigate them or keep an eye on them to meet your priorities is obviously a huge

challenge. Within that context there are those of us, in this environment and other environments, who have

expressed real concern about moves to reduce the budget allocation available to ASIC. We went through this in

the last estimates and we can go through Budget Paper No. 2 again. There has been a real cut in the resources that

have been given to ASIC.

Minister, you said earlier today that perhaps one of the ideas on how you can reconcile what are really two

challenges—one is minimising the expense on the taxpayer but also maximising the resources available to an

organisation like ASIC—is going down the path that has been explored by Mr Medcraft in the past, who has been

very open about this, and this idea of pushing the burden back onto businesses which we all appreciate does, in

the long run, also mean consumers because that is the way the world works. Now my question, Minister

Cormann, is where is that process now up to?

Senator Cormann: Touching on the various points that you have raised, firstly the challenge that you

describe in terms of how best to deal with the growing demand in the context of the necessarily limited resources

of government, that is a challenge that is faced by organisations right across government, and obviously at a time

when we are dealing in a fiscally constrained environment, particularly in the context of the budget situation that

we inherited from our predecessors, obviously the government has had to make some decisions on how to best

allocate the limited resources that government gets from taxpayers.

In terms of the process that I flagged in my answer to a question from Senator Heffernan, you are quite right.

The chairman of ASIC has been very public about his suggestion that one of the things that policymakers may

want to consider and one of the things that the government may want to consider is to move ASIC more into a

domain in line with what is the practice in jurisdictions around the world, including in particular in the United

States where organisations like ASIC are funded on a cost recovery basis drawing essentially on businesses that

are being regulated.



I am happy for Mr Medcraft to talk to what he has said publicly on this, but you would not be surprised to hear

me say that the government is currently considering these matters through the internal processes of government

and when we are in a position to make an announcement we will be making it.

Senator DASTYARI: I am sorry, I am just not aware of the process. Is that as part of the financial systems

inquiry or is it separate to that?

Senator Cormann: It is separate to that. That is a fair question. Obviously we are dealing here with budget

estimates. This is something that is inherently core business of the budget process which is managed by the

Expenditure Review Committee of the cabinet.

Senator DASTYARI: Mr Medcraft, would you like to add anything to that?

Mr Medcraft: No. We have had good discussions and very good engagement with the minister, as he said.

We have a document that I believe we have already distributed to this committee which outlined the user pays

funding model in very simplistic terms. I am very happy to circulate that again to essentially outline that. We may

not have done it for this committee but in the Senate inquiry into ASIC I think we outlined this particular

document.

Senator DASTYARI: That has come back to the forefront again with the recent inquiry in terms of insurance.

I would like to talk about the issue of conflicted remuneration. Is there a clear definition that you use for what you

mean when we talk about conflicted remuneration? I just want to make sure that we are using the right definition

here.

Ms Bird: There is a broad principles based definition in the legislation about conflicted remuneration. It is

basically anything that would influence the advice that is given.

Senator DASTYARI: One of the issues that we have obviously explored in other places, and the minister is

well aware of the debate around this, is this whole issue of sales bonuses and whether or not sales bonuses fall

into the category of, or have the potential to be, conflicted remuneration. Minister, you can tell me.

Senator Cormann: I am very happy to answer that. As I have said on many other occasions, any incentive

payment that conflicts the advice given is banned. We have not removed the ban on conflicted remuneration. If

there is remuneration which conflicts the advice given, that remuneration arrangement continues to be banned.

In relation to any payments in the context of general advice, we have made very explicit in the regulations that

were put in place by the government that a payment is banned if it is made solely because a product in relation to

which general advice has been given has been sold.

Senator DASTYARI: I am sorry, minister, can you say that again?

Senator Cormann: I am essentially, off the top of my head, referencing a specific provision in the

regulations. There is a very explicit prohibition in relation to general advice which effectively bans explicitly

upfront and trailing commissions, but the general principle remains in place that conflicted remuneration remains

banned. Some people have asked us question around this sort of proposition of balanced score card based

payments. The whole point of balanced score card based payments is that they are structured such as not to

conflict the advice given, and that is entirely consistent with what was envisaged by the former government. If

you look at the explanatory memorandum of the original FoFA legislation, if you look at the second reading

speech of the then Minister for Financial Services, Minister Shorten, he made very clear that payments which did

not conflict the advice given would continue to be permissible and continue to—

Senator DASTYARI: But as the law now currently stands following the regulation changes, it is permissible

for a bonus to be paid to someone where complex products are sold via general advice.

Senator Cormann: It is not permissible to pay a bonus which would conflict the advice given.

Senator DASTYARI: But in whose eyes?

Senator Cormann: It is explicitly prohibited in the regulation to pay a bonus because a product has been sold

solely because of the general advice that is given. It is explicitly prohibited to provide an ongoing—

Senator DASTYARI: I think the concern with that, and I would like to Mr Medcraft some questions.

Senator Cormann: I did not finish my answer. It is explicitly prohibited to provide an ongoing payment on

general advice given.

Senator DASTYARI: But the incentive is there.

Senator Cormann: Why? Just to conclude on this. At no point has there ever been any suggestion that people

who provide a service, whether that is through the banking system or whether that is independent small business

financial advisers, at no point has there been a proposition put credibly that all payments should be banned. The



payments that as policymakers we are concerned about and should be concerned about are those payments that

conflict the advice given and of course because there is the overarching requirement for advisers to act in the best

interests of the client, a requirement remains in section 961B of the Corporations Act, that is the important

protection that consumers are now able to rely on, which is a new protection that was introduced into the

Corporations Act as a result of the bipartisan recommendations that came out of the so-called Ripoll inquiry

which the coalition has consistently supported.

Senator DASTYARI: I think there is a fundamental policy difference between us on this side of the table and

your side of the table.

Senator Cormann: I disagree.

Senator DASTYARI: Let us take a few steps back. Minister, can a bank teller or adviser earn sales incentives

and benefits as a result of advising clients on complex products?

Senator Cormann: No, they cannot receive incentive payments that would conflict the advice given.

Senator DASTYARI: Can they earn sales incentives and benefits?

Senator Cormann: They can earn payments as long as those payments do not conflict the advice given. As

then Minister Shorten made very clear, there is nothing wrong with incentive payments per se as long as those

incentive payments do not conflict the advice given. It is a very important distinction. Secondly, as long as the

advice that is given prioritises the interests of the client ahead of the interests of the adviser, and as long as the

advice given is in the best interests of the client.

Senator DASTYARI: Are the sales incentives capped? Is there a cap on these incentives?

Senator Cormann: These questions, with all due respect and I understand where you want to go, but there is

no proposition ever that the government is going to regulate what businesses in the free market can charge. What

we are interested in and what the government and the parliament has prohibited is payments which would conflict

the advice given. If you ask me about whether fees charged by banks are controlled by government, no, they are

not, but what is controlled by government and by the law is fees that could conflict with advice given.

Senator DASTYARI: Is there any requirement for these sales incentives to be disbursed to the consumer?

Senator Cormann: Whenever you talk about sales—

Senator DASTYARI: I am asking the question.

Senator Cormann: Whenever you talk about sales incentives, to be frank—

Senator DASTYARI: Bonuses. We will use the word 'bonus', because that is what we are talking about. We

will call it sales bonuses.

Senator Cormann: Our interest relates to sales incentives that would conflict the advice given and they are

prohibited. Let me say it again. Incentive payments or sales bonuses that would conflict the advice given are

prohibited, so if anyone provides incentive payments or sales bonuses that would conflict the advice they are

breaking the law.

Senator WHISH-WILSON: That is one specific set of advice.

Senator DASTYARI: That is not on general advice.

Senator Cormann: I know that that is an interpretation that the industry super funds are putting on it, who do

not come to this in a disinterested way, but that is not an accurate interpretation.

Senator WHISH-WILSON: You mentioned general advice in your previous answer to Senator Dastyari.

Does the same apply for personal advice?

Senator Cormann: With personal advice the regulatory requirements are very stringent, so all remuneration

that would conflict the advice given is banned, and the overarching requirement for the adviser to act in the best

interests of the client remains in place.

Senator WHISH-WILSON: I understand that.

Senator Cormann: In an effort to be as helpful to the committee as I possibly can be, where there has been

some debate on whether what the government is doing is appropriate is the whole proposition of balanced score

card payments. Balanced score card payments are intentionally structured in a way to ensure that any such

payments do not conflict the advice given. It is essentially giving effect to what then Minister Shorten put into his

second reading speech when he said incentive payments that do not conflict the advice given will continue to be

permissible. All the government has done in its regulations in relation to these matters is give effect to the explicit

intentions of the previous government.



Senator WHISH-WILSON: Financial planners offering personal advice can achieve up to 10 per cent

additional bonuses on the sale of complex products.

Senator Cormann: You are making a broad assertion here.

Senator WHISH-WILSON: As part of the score card approach. That is my reading of the legislation.

Senator Cormann: This is as part of the overall incentive payment?

Senator WHISH-WILSON: Yes.

Senator Cormann: Let us just be very clear. The balanced score card payments have to cover a whole range

of other criteria such as compliance with the law, customer service training, et cetera, and as long as the incentive

that relates to a sale is very small as part of the overall remuneration structure then consistent with what was put

in place by the previous government in those circumstances the judgment is that such payments would not

conflict the advice given because the remuneration that relates to the sale is such a small proportion of the overall

remuneration arrangement that it is actually not influential in terms of the advice that is given. The important

point here, to consistently repeat, is the overarching requirement for the adviser to act in the best interests of the

client and to prioritise the needs of—

Senator WHISH-WILSON: I understand that.

Senator Cormann: You say that you understand it but I am not sure that you understand the implication of it.

The implication of it means that the adviser is not allowed to provide the product, to sell a product, to a client if

that is not in the client's best interest. He would be breaching the law if he did.

Senator WHISH-WILSON: Yes, and you have removed the catch-all phrase.

Senator Cormann: That goes to the safe harbour provision that the previous government put in place.

Senator DASTYARI: That—

CHAIR: Order! Senator Dastyari, no arguments. Direct the questions at the minister and do not talk over each

other.

Senator DASTYARI: I will take a step back. Minister Cormann, you know our view and your view on this is

different. We have a chamber to debate this so I wanted to use the opportunity to ask Mr Medcraft a few

questions. Mr Medcraft, what steps has ASIC taken to guard against the potential for consumers to be mis-sold

products via general advice? What is ASIC's role and what are you doing in this space?

Mr Medcraft: I will pass over to Ms Bird.

Ms Bird: We are currently looking at sales under general advice as part of our regular work. It would be one

of the things that we would look at as part of our general work.

Mr Kell: We are building it into our surveillance and work program for the upcoming period. I do not have

enormous details about that at the moment but we have always had a role, if you like, of providing oversight of

products sold through general advice.

Senator DASTYARI: Does your surveillance focus on general advice sales of different kinds of product as

well as superannuation, investment products and geared products?

Mr Kell: I am sorry, I did not hear the beginning of that question.

Senator DASTYARI: Effectively you are saying that you do it as part of your regular work?

Mr Kell: Yes.

Senator DASTYARI: That is your answer?

Mr Kell: Yes.

Senator DASTYARI: You are saying that you are not doing anything special or more, that it is just as part of

the regular workflow or are you saying that you are reassessing it?

Mr Kell: We are saying that we are building some additional work into our upcoming work program. At this

stage I would rather not go into details about what sectors we are proposing to target as part of this.

Senator DASTYARI: Is that just because you are still working on that at the moment?

Mr Kell: Yes, and we also do not necessarily want to flag to groups as well where we are going to be

targeting, but we are still working through how that is going to be developed and implemented.

Senator DASTYARI: When will you be making that announcement, or you will not be?

Mr Kell: I cannot give you a date. I do not have a date around that at the moment.



Senator DASTYARI: So going back to the surveillance work, you are saying that you are doing this as part

of your general surveillance work. I would just like to be clear. Are you putting additional resources into this

space?

Ms Bird: We are putting additional resources into the whole space of financial advice, so both general and

personal.

Mr Kell: And that is one of the projects within that expanded set of work that we are looking to—

Senator DASTYARI: At the last estimates we had Mr Medcraft say that because of the budget cuts that were

being experienced by ASIC there was going to have to be a greater emphasis on whistle-blowers and less ability

for surveillance and that surveillance was going to be cut as part of the fiscal position that ASIC had found itself

in—and they are my words and not from Mr Medcraft—so how are you finding resources to be able to put into

this?

Mr Kell: There are a couple of points to make. One is, as you will see from the strategic outlook document

you referenced earlier, this is a very high priority area for us. We are looking at switching resources to ensure that

we have the appropriate capacity in this area.

Senator DASTYARI: Switching from where? What is getting cut?

Mr Kell: One of the ways that we are funding this is through a decision that was made by the government to

allow us to access our enforcement special account for these sorts of matters. That is a very important and positive

decision that allows us greater capabilities in this area.

Senator DASTYARI: This is this fund that is up to $50 million?

Mr Kell: Yes.

Senator DASTYARI: How much is in that fund at the moment?

Mr Medcraft: About 50.

Mr Kell: That will allow us some access to additional funding in this area.

Senator DASTYARI: That was funding that was designed, primarily as I understand it, and it was a really

good initiative to have a pool of money that when you are going after some of the big players who have really

deep pockets that you can effectively compete with what are incredibly effective and well paid legal teams.

Mr Kell: The focus for that is on the largest players in the sector.

Mr Medcraft: This is exactly what we are doing.

Senator DASTYARI: So you are telling us that you are using that fund now. When you in the media in the

past few days outlined, quite publicly, that you wanted to target financial planners—and there is a whole bunch of

stories about this—you are funding it by accessing the $50 million fund?

Mr Medcraft: Not just that. The actual terms of the fund are that we can use it where we actually have an

investigation which basically meets the criteria where it is something where it is investigation or related to an

investigation. It cannot be related to our ongoing normal surveillance activity. That is separate. However, in this

financial advice space, as you know, there is arguably a whole pattern across the sector, so we are looking at it. It

is consistent with the criteria for the actual fund. It is not an individual; it is actually looking at it as a group.

Senator DASTYARI: Mr Medcraft, this might put you in a difficult position so if you cannot answer I

completely understand. This whole issue of sales bonuses that you obviously follow and you have seen us talk

about, you in the past had been fairly outspoken in your concerns about those types of payments, have you not?

Mr Medcraft: I do not believe I actually have been.

Senator DASTYARI: Yourself and Mr Kell have—.

Mr Medcraft: Mr Kell may want to comment on that.

Senator DASTYARI: Commission type structures.

Mr Kell: Yes. Obviously we have raised concerns about conflicts of interest in the past and that is why we

have supported the FoFA prohibition on commissions going forward. Obviously there has to be somewhere where

a line is drawn to allow some commercial reality to come into play. That is ultimately a decision for government

but there is a balance that has to be struck there. We are very strongly supportive of the prohibition on

commissions and trail commissions.

Senator DASTYARI: What is the difference in your opinion between a sales bonus and a commission?



Mr Kell: With the bonuses that are a part of the balanced score cards I think it has been explained that they

have a number of other elements built into them, including that they have to be low, they have to factor in things

like compliance with the law and so on.

Senator DASTYARI: So you are saying that the test is that it has to be legal?

Senator Cormann: Compliance with the law importantly includes compliance with the requirement to act in

the best interests of the client. Again, that is the relevant bit. I do not know why you keep ignoring it but it is

actually the most important bit of all.

Senator DASTYARI: I suppose this is a question to Mr Kell. Is there a concern that these types of incentive

based structures create an environment where it is more likely and it creates an environment where there is an

increasing possibility, and that is the understanding that I think that a lot of us have and that why we are asking

questions about the availability of resources in ASIC to monitor this.

Senator Cormann: The implication of your question is that you think that we should prohibit all payments.

Senator DASTYARI: My implication is I think we should prohibit secret sales bonuses.

Senator Cormann: Obviously bonus payments should be open and transparent.

Senator DASTYARI: If they are transparent then we are going to have to tell the consumer that they are

going to get bonuses in selling the product.

Senator Cormann: The point here is—and this was the approach taken in the legislation that was initiated by

your government—that what we ought to prohibit is conflicted remuneration. Again, conflicted remuneration

remains prohibited. The requirement for any advice given to be in the best interests of a client remains the

requirement in the law. There is a whole range of other requirements, of course, that remain in the law that are

very important, such as section 96(1)G requiring the advice to be appropriate; section 96(1)H, which requires an

adviser to provide a warning if there is incomplete or inaccurate information; section 96(1)J, which requires an

adviser to prioritise their client's interests ahead of their own and section 96(1)L which requires licensees to

ensure that their representatives are complying with all of these sections.

Senator DASTYARI: I was asking Mr Kell a question.

Senator Cormann: The thing is that I take the prerogative as the minister at the table to deal with matters that

are of relevance from the government's point of view, as Senator Wong would—

Senator DASTYARI: I do not believe the question was an unreasonable question that I asked Mr Kell.

Senator Cormann: The implication of your question that you are putting to Mr Kell is that you are suggesting

that all payments for services in the financial services sector should be—

Senator DASTYARI: No. You are rephrasing my question. That is not the question that I asked.

Senator Cormann: You are implying that there should be no payments. Obviously nobody reasonably

sensible suggests—

Senator DASTYARI: Can I ask the question and then if you choose to not answer it that is your business? Let

me ask the question. Mr Kell—are there concerns and, if expressed, concerns to this effect in this past—are there

concerns that structures that allow sales bonuses to be paid that do not have to be revealed to the customer in this

instance creates an environment where there is a potential for the existence of conflicted remuneration?

Mr Kell: That was a long question. The bottom line is if we see remuneration structures that breach the law

we will act and we will be very concerned about that.

Senator DASTYARI: Well we would like to think so. That is matter of fact. If they break the law then it is

your job to enforce it and no-one is disagreeing with that. We are talking about the—

Senator Cormann: That is a very important point. The law requires for the adviser to act in the best interests

of the client and the adviser cannot give advice lawfully that is not in the best interest of the client.

Senator DASTYARI: But the client does not have to know about the bonuses?

Ms Bird: In the personal advice world the client should be told about the bonuses in the Financial Services

Guide.

Senator DASTYARI: But not in general?

Ms Bird: No.

Senator DASTYARI: We are playing a game here.

Senator Cormann: Let me read it to you straight out of the regulations, 'Any payment made solely because a

financial product of a class in relation to which the general advice was given has been issued or sold to the client.'



Senator DASTYARI: That is one product.

Senator Cormann: No, it is any product.

Senator DASTYARI: It is one product.

Senator Cormann: No, it is not. It is any product. Any recurring payment made because the person has given

general advice.

Senator DASTYARI: This is so—

Senator Cormann: You might try to detect a conspiracy. There is no conspiracy here.

Senator DASTYARI: It is worse than a conspiracy. You are open about what you are doing. That is even

worse.

Senator WHISH-WILSON: Can I ask a similar question to Mr Medcraft? I do not know if you have made

comments about the bonus culture before but I am interested in your comments about culture which you have

been very clear about. There have been issues, for example, at Commonwealth financial planning. You have had

concerns about culture in the industry. That culture can include lots of things but my interpretation, and you can

tell me if this is incorrect, was that you were talking about a sales based contract as well as cover-ups because

higher managers were getting paid bonuses based on what their junior financial planners were getting paid.

Mr Medcraft: When I talk about culture I am actually talking about generally a much higher level. If you

have a look at our strategic outlook we comment on that. We basically say that if markets are going to operate at

the end of the day investors and financial consumers need to have trust and confidence in that because if they do

not have trust and confidence they do not exist and they cannot do their job. In order to do that one of the things

that we actually say is that culture is critical and putting the customer at the centre of what you do so that they can

have trust and confidence is critical. That is a comment that we talk about. Having trust and confidence is

fundamental.

Senator WHISH-WILSON: That is what I understood you meant. What Senator Dastyari is asking is

essentially whether you think the retainment of a volume based remuneration structure is going to be enough to

change the culture and transition the industry towards personal advice and tailored advice for Australians who

seek financial advice? Rather than it being illegal in terms of the philosophy and the culture of what we are trying

to change here, do you think that enough change has occurred through FoFA?

Mr Medcraft: That is an issue for the government. We enforce the law that is in place. As I said, in order to

make sure that investors have got confidence and trust in the financial system there are myriad dynamics and

drivers behind that and it is really hard to comment about one single thing. It probably does come back to the

government. Both sides of government have the objective to make sure that consumers and investors have got

confidence in the market and different governments will have different approaches to it.

In returning to the financial advice, frankly what I have always said about financial advice is that it is like any

business, that at the end of the day the advisers themselves have got to win the trust and confidence of

Australians. That in itself is a broader cultural issue.

Senator DASTYARI: Has there been a failure?

Senator Cormann: You cannot prescribe that by regulation. That is the point. There is a limit to how much

you can prescribe. There is actually a very important point there.

Senator DASTYARI: I want to speak about the regulated change in culture.

CHAIR: Order! The minister has the call.

Senator Cormann: You cannot regulate consumer attitude. At the end of the day you can put a framework in

place. What is our policy objective? Our policy objective is to have a robust but efficient regulatory system in

place which is competitively neutral and where people can have confidence that they can have access to high

quality advice that they can trust which is also affordable. If you impose excessive red tape which does not make

a difference on the consumer protection front you are actually hurting consumers because you are forcing them to

incur costs which come out of their savings, which does not help them. That is what we need to prevent. We must

ensure that the system is robust but efficient and competitive. I know that industry funds do not like the

competitive neutral bit, but that is something that is very important to the government.

Senator HEFFERNAN: Can we just get this in the touch and feel consequences? In the Great Southern

matter a lot of the financial planners advised thousands of people. A lot of the people they advised tell me and tell

other people on this committee that they had a firm belief that the security for the loans they were taking out

against the shelf dummy company called Great Southern Finance—which Bendigo Bank was smart enough to



wake up to and bypass—they were told that the security for the loan was the trees or the grapes or whatever.

Should those people go to jail? That is clearly not jumping the best interests of the client. It is one of the most

basic things that goes on in banking. If I am taking a loan out what is my security against it from the bank's point

of view and what am I up for if it goes bad from the client's point of view?

Senator Cormann: I will make an opening comment and then pass over to the chairman of ASIC. The first

point I would make—and obviously it is very difficult for me to comment on specific cases without having all the

facts in front of me—but the important point here goes to when these events occurred. The law actually has

changed since then. The law imposed the best interest duty. The law was changed in 2012, introducing the

requirement for advisers to act in the best interests of the client. The law changed in 2012 to ban conflicted

remuneration, and both of these features of our Corporations Law continue to be important features of our law

now.

Senator HEFFERNAN: With great respect, this happened after the law changed.

Senator Cormann: The Great Southern?

Senator HEFFERNAN: Did you say 2005?

Senator Cormann: No, 2012. Obviously I cannot give legal advice on whether I think somebody should or

should not go to jail, particularly without having any information about the specific circumstances, but the

important point is that there were real issues in this industry. Nobody disputes that. There was a high quality

parliamentary joint committee inquiry which was conducted in a very bipartisan way and chaired by the now

shadow minister for financial services, Bernie Ripoll, in a very competent way and the recommendations that

came out of that inquiry are now reflected in our Corporations Law. There has been a change to the law, which

this government continues to support.

Senator HEFFERNAN: But the law said that you had to act in the best interests of—

Mr Medcraft: Not before 2012.

Senator HEFFERNAN: Before 2012 surely you would still cut the head off a person who misled their

clients.

Senator Cormann: I will pass it on to Mr Medcraft.

Senator HEFFERNAN: It should not be words in a law.

CHAIR: Senator Heffernan, we are actually—

Senator Cormann: Words in a law matter when you put people in jail.

CHAIR: Before I move on do we have an agreement to table the user pays funding model for ASIC? We are

all in agreement. We will go to Senator Whish-Wilson.

Senator WHISH-WILSON: I have a couple of questions about ASIC resourcing. Can you give me an

indication of how many people have actually left ASIC because of budget cuts or around the time since you have

had cuts?

Mr Medcraft: To put it in perspective the cut in our budget was a combination of new cuts, old cuts and

writing off of old programs. We lost approximately 200 people. We were actually able to effect the bulk of the

cuts through voluntary redundancies and then in the forward estimates next year, with the cuts that are forecast in

the forward estimates, we would anticipate losing approximately 100 people next year.

Senator WHISH-WILSON: Are you selective about who you let go with that voluntary process?

Mr Medcraft: Yes. It is voluntary. We open it up. We are selective. People can apply for voluntary

redundancy but we have to be satisfied that we are happy to actually let them go.

Senator WHISH-WILSON: I know they are finance industry and, as you know, the finance industry is very

competitive. Firms are offering salaries and benefits. I am wondering if you have had a brain drain from ASIC?

Senator Cormann: The brains are still here.

Mr Medcraft: With any voluntary redundancy what tends to happen with voluntary redundancy is that you

lose a lot of long-term employees because they are paid out a lot more money. At the end of the day we lost a lot

of the experience. To put it another way, a sign of a good organisation is frankly making sure that you have good

staff across all your areas and if you do face cutbacks, which is like when you are banking, just because

somebody takes a redundancy sometimes there is an opportunity. It was a wonderful thing for many of our staff.

They were recruited by investment banks and are actually earning a lot more money both here and abroad, which

was almost a compliment to the quality of the people we have, that they were able to move on to new

opportunities.



Senator WHISH-WILSON: I agree that is a compliment but you have lost that quality now to people who

will pay more money.

Mr Medcraft: We have still got very capable staff and, most importantly, we have very motivated staff. We

actually did a staff survey after the redundancies and the level of morale is actually higher than ever.

Senator DASTYARI: The survivors.

Mr Medcraft: No. Our staff are actually very resilient and they are really committed to what we want to try to

do for Australians. That is why they come. They come for good reason.

Senator WHISH-WILSON: Could you give me an idea of which parts of your organisation may have been

worse off from the cuts or where the cuts would come from in terms of—

Mr Medcraft: We basically applied the cut, which was around 12 per cent, across the organisation. As I am

sure you know, I am not a micro manager. I believe in people managing to their budget, so we cut the budgets in

dollar terms across the forward and we left it basically up to the individual. We did it at the overall level. We have

two clusters which are headed by each of two commissioners and then below those clusters are the individual

teams. We really allowed the clusters to manage the cut so there was essentially starting with the 12 per cent but

then adjusted within the cluster. Some took a bit less and some a little bit more. We tried to think about the areas

of highest risk, for example, financial advisers. We looked at it on a risk based approach as well. Again, we made

sure that from a bottom-up perspective that we tried to protect as much as we could and focused on risk.

Senator WHISH-WILSON: Just a couple of questions in relation to the Senate recommendations. You have

talked today about what you can do internally and the changes you can make. I am interested in whether there has

been any activity on what we are supposed to do in terms of legislative changes, for example, with

recommendation 12, the changes to the Corporations Act 2001. Then you have the whistle-blower Public Interest

Disclosure Act. There were several other changes to the Corporations Act in recommendations 17, 23 and 19. In

going through it here, also on the National Consumer Credit Protection Act 2009, there are lots of suggested

changes.

Senator Cormann: This is a question for me.

Senator WHISH-WILSON: I will get to you in a moment, Senator Cormann. I am wondering if you have

had briefings from the minister?

Mr Medcraft: We have presented briefings.

Senator Cormann: Obviously the government has worked in a very considered, methodical and orderly

fashion to consider all of the recommendations that were made by the Senate Economics Committee and we are

very close to finalising the response for tabling. Let me lock myself in. I am very confident that we will be

providing an official response to the Senate inquiry recommendations before parliament goes back next week.

Senator DASTYARI: Can you say that again?

Senator Cormann: Before next week.

Senator DASTYARI: You will have a response before next week?

Senator Cormann: Yes, and it will be tabled in parliament.

Senator WHISH-WILSON: Obviously you have worked with Senator Cormann and the department on those

recommendations.

Mr Medcraft: Yes.

Senator WHISH-WILSON: We will look forward to bringing that up at the next estimates. In relation to the

ASIC report that we have talked about today on retail life insurance, the study demonstrated that the quality of the

advice improved after FoFA was introduced. Is that a correct interpretation of that?

Ms Bird: It is a very small difference.

Mr Kell: It is not a large difference. The advice we sampled fell immediately on either side of the introduction

of FoFA so we do not think it is a report where you can draw a strong conclusion as yet about the impact of

FoFA, but it did go up a little after that came in.

Senator WHISH-WILSON: Although the insurance market was not subject to the same scrutiny—

Mr Kell: That is right.

Senator WHISH-WILSON: you felt that overall because financial planners were selling bundled products to

their clients they probably should apply the same standards to insurance as they would have to any complex

products?



Ms Bird: We only looked at the conduct obligations, the best interest duty, the appropriate advice and the duty

to give priority to the interests of the client, and they apply to life insurance.

Senator WHISH-WILSON: Ms Bird, you mentioned earlier that you were going to do some work on the

general advice area. I note from your own report that 42 per cent of all insurance sold is general advice and yet

you excluded that from this study. Was there any reason why general advice was excluded from the study?

Ms Bird: No. We were looking at personal advice in relation to life insurance; we were not looking at direct

sales. It was just the scope of the study. We cannot do everything. That was the issue that we were concerned

about so that is what we limited it to.

Mr Kell: I should note that we are interested in all the major channels for distributing life insurance. We

monitor all of those but we had a particular focus on the advice channel here because it had continually come up

as a problem area in our broader surveillances of the financial advice sector.

Senator WHISH-WILSON: Personal advice in respect to that?

Mr Kell: That is right. It recognised it as an area that needed to—

Senator WHISH-WILSON: Could you also argue that since FoFA has come in it has had much stricter

regulations in general?

Senator Cormann: I can make a point here just in order to assist proper factual understanding, there was

actually a deliberate decision made by the previous government, in fairness supported by the then opposition, the

coalition, to exclude life insurance commissions from the scope of FoFA when it came to the banned

commissions.

Senator WHISH-WILSON: I am aware of that.

Senator Cormann: It is important to clarify that for good public policy. There are very good public policy

reasons for the judgment that the previous government made at the time, which was supported then and we will

continue to support, but the final point is that does not exempt anyone from the requirement to act in the best

interests of their clients which is, of course, a continuing requirement in the Corporations Act.

Senator WHISH-WILSON: I have no problem with what you have just said but my question still stands in

terms of personal advice versus general advice. We would like to call it general information.

Senator Cormann: Is it in relation to risk insurance or not?

Senator WHISH-WILSON: No. The study itself only focused on personal advice.

Ms Bird: In fact, there was a committee recommendation, following the fact that life insurance commissions

were not banned, that we look at it, so that was another prompter for us to look at it.

Senator WHISH-WILSON: That is good. I suppose my question still stands as to why you have looked at it

but you have only done it for personal advice. I was wondering whether that was because since FoFA has been

brought in you have had much stricter regulations around personal advice, banned commissions and things that

we have discussed today, whereas under general advice you—

Senator Cormann: If you go to a policy question that is a matter for government. The matter for ASIC and

the matter that ASIC explored in that particular report is compliance with the law.

Senator WHISH-WILSON: That is my point and the law seems to be more stringent for personal advice than

it is for general.

Ms Bird: It is more stringent.

Senator WHISH-WILSON: There you go. That is what I was leading to.

Senator Cormann: The takeaway message out of the report is that there is a serious need to keep lifting

compliance with the law as it has been improved, with bipartisan support.

Senator WHISH-WILSON: Correct, and it is a serious message. It is very stark when you look at a third of

those you surveyed you have had issues with. Had you included general advice I wonder how much more you

would have had issue with in terms of insurance. That is a pretty valid point to make because it is 42 per cent. The

population you sampled was personal advice not total financial advice, because it did not include general advice.

Ms Bird: It did not look at direct sales, which would be through general advice. It would be a totally different

set of laws that would apply to that. We would be looking at things like misleading and deceptive conduct.

Senator WHISH-WILSON: That is correct. That is why I was interested in hearing why you did not do that.

I understand it was probably a logistical issue as well. In terms of what Senator Dastyari just implied, in ASIC's

view would the state of the life insurance market change overnight if commissions were banned? I know that is



the government's decision to make on whether commissions would be banned on insurance products, but would

you see that industry being significantly impacted?

Mr Kell: I should be quite fair. One of the key findings of our report was that there is a different set of types

of commissions that are paid in the industry like upfront commissions, hybrid commissions and level

commissions. What we found was that there was a greater chance that poor quality advice would be associated

with the high, upfront commission models. It is not necessarily the case and certainly ASIC did not argue in the

report that commissions should be prohibited. We have clearly pointed to a structural issue around a particular

type of commission and then we have said to the industry, 'You need to look at how you manage that issue to

ensure that the quality of advice is not impacted.' That may require additional compliance programs.

Senator WHISH-WILSON: I am sorry to cut you off, Mr Kell, but in relation to that point you also made

some recommendations about how the industry might do that. You mentioned that the first mover advantage is a

disadvantage to go there first.

Mr Kell: Indeed.

Senator WHISH-WILSON: Do you think voluntary measures are going to work for the life insurance

industry, for example, or do we need regulation to ban upfront commissions based on your data?

Senator Cormann: You are asking for an opinion here and it also goes to a matter of policy for the

government. The government's attitude is that ASIC has identified that there are issues in terms of compliance

with the law. ASIC's job is essentially to enforce compliance with the law. From the government's point of view

we note and have welcomed the fact that the industry has put its hands up to say, 'We recognise that there is a

problem here that we, as an industry, have to do better.' We think it is appropriate to give the industry a chance to

get their act together, to be frank, but of course it is the responsibility for every individual adviser to act in

compliance with the law of the land, as it is the responsibility of any business that employs advisers to ensure that

they are complying.

Senator WHISH-WILSON: So you will monitor it over time?

Senator Cormann: That is right.

Senator WHISH-WILSON: It is interesting, given that you have obviously got strong views around other

complex products that we talked about with FoFA, as in the necessity for getting rid of commissions, for example.

I am wondering why we do not do that for insurance.

Senator Cormann: I will tell you why we do not do it for insurance. In the United Kingdom they tried to do it

for insurance and essentially the take-out of insurance collapsed in that market. The truth is that taking out life

insurance, as much as it is a very important tool of managing financial risks through life, it is a grudge purchase.

People do not spontaneously and enthusiastically take out life insurance. We already have a significant under

insurance problem in that space. If the start of a conversation that an adviser has with a potential client is to

impose a fee in order to pay for the service that is about to be provided, then the likelihood that that particular

client is going to pursue the conversation is further diminished. So the judgment on balance that has been made is

that in order not to further worsen the problem of under insurance, when it comes to life insurance in particular

and other forms of risk insurance, is that it was not sensible to ban commissions in this space all together.

The policy concern from the government's point of view, to the extent that there is inappropriate churn which

would be inconsistent with the legal requirement to act in the best interests of the client, then that needs to be

addressed. If somebody has moved from one life insurance policy to another in order to take advantage of the

high upfront commission, then that is entirely inappropriate and in fact, arguably it is unlawful because it is not

acting in the best interests of the client, but it is very important here that you do not throw the baby out with the

bath water and that you take a measured approach.

Senator WHISH-WILSON: Is that the case for insurance products, that you have to act in the best interests

of your client?

Ms Bird: Yes.

Senator Cormann: Yes.

Senator WHISH-WILSON: In relation to comments about under insurance—and that was certainly one of

the things that ASIC commented on—my understanding is that you also commented that these upfront

commissions had the highest rate of abandonment.

Mr Kell: Lapses.

Senator WHISH-WILSON: Clearly that has had a negative impact on the level of under insurance as well, if

that is one of your objectives. It adds more weight to banning upfront commissions on insurance.



Senator Cormann: It is in the public interest for as many people as possible to manage the financial risk of

unfortunate early death of the income-earner in the family. It is quite important in terms of the social good for

people to take out appropriate levels of life insurance cover, let us say the financial risk that families face. With

whatever we do we do not want to worsen the problem of under insurance. It is also appropriate for advisers to be

remunerated for the services they provide but we do not want advisers to act contrary to the best interests of their

clients, so to churn people through different policies is entirely inappropriate and arguably unlawful.

Senator WHISH-WILSON: I understand that. On that point, could I ask ASIC if Australian consumers are

paying too much for life insurance and whether you did any work on international benchmarks for these types of

products?

Mr Kell: We did not look at that. What we pointed to in the report is that we think the industry needs to

carefully consider some of the problems that are there at the moment because they may lead to premiums

increasing. That is something that needs to be guarded against because that could then contribute down to the

track to the under insurance issue.

Senator WHISH-WILSON: To the under insurance.

Mr Kell: We have highlighted that there is a risk but we did not do any comparison.

Senator WHISH-WILSON: I will keep in touch with you on that. In relation to Senator Milne's question

earlier, we are happy to get it on notice.

Mr Medcraft: We have some information. We have an update on that.

Mr Price: We have some information so I will give that to you. I am happy to take the other aspects on notice.

It will take us a little while to get the current number of companies relying on that particular relief that Senator

Milne referred to. Figures from a couple of years ago indicated that there were 1,134 companies relying on that

relief. As I said, we can update those. The other very important point that I would raise is when this relief applies.

I will try to summarise that without the legalities. People can rely on this relief if the head company is a foreign

company. That is the first part of it. Then when you look at that overall corporate group and you add in the

companies that are registered in Australia and the companies that are carrying on business in Australia, those

companies fall below various thresholds that are set out in the law. So, you are not looking at the entire corporate

group that is operating over the entire world; you are asking yourself: what companies are operating in Australia

or carrying on business in Australia? That is the way the large group is calculated.

Senator WHISH-WILSON: My question then, I suppose, Mr Price, we have got the G20 at the moment and

the Treasurer has been very vocal about cracking down on tax avoidance—

Mr Price: Yes.

Senator WHISH-WILSON: or minimising tax avoidance, especially multinational and personal. Have you

had any directions from the minister to focus on this area, for example, to assist in cracking down on that tax

minimisation?

Mr Price: The very short answer is: not that I am aware of, but I would make the point that just because you

do not lodge financial reports that are audited does not mean that you are avoiding tax. They are completely

different things. The other point I would make is, if it transpires that it appears that people are abusing the relief

that we provide, it is always open for ASIC to change the conditions of the relief after an appropriate consultation

period.

Senator WHISH-WILSON: But information sharing is a critical part of a global movement to reduce tax

minimisation, so obviously if they are not lodging returns then obviously that is going to present a problem for

sharing information.

Mr Price: To be clear, we are quite open to looking at the various terms and conditions of our relief and

consulting on whether those should change.

Senator WHISH-WILSON: We would ask you again if you could have a look, specifically at Facebook, as

an example. I think the Australian public would be very interested in who is paying tax and not paying tax.

Mr Price: Of course.

CHAIR: We are going to go to Senator Bushby, then Senator Madigan and then we will come back to Senator

Dastyari.

Senator BUSHBY: Thank you to ASIC for assisting us today. Just before I get into some other questions,

Senator Dastyari was talking before—and correct me if I am wrong, Senator Dastyari, but I understood you said

you were in favour of banning any form of payment based on sales performance in the financial services industry.



Senator DASTYARI: No. Firstly, I am not the one being questioned here. The point I made was if the

question was whether I believe that secret sales bonuses should be banned and when we talk about selling

financial advice, yes, that is a position that a lot of us have held over a long period of time. The idea of secret

sales bonuses, where people are getting kick-backs in the form of bonuses without having them disclosed to

people that they are getting them, yes, I think that is a bad thing.

Senator Cormann: Sorry, but I cannot leave that comment uncorrected.

Senator DASTYARI: That is a bad thing, Minister.

Senator Cormann: I cannot leave that uncorrected, because what you are saying—

Senator DASTYARI: Well, no, he asked me a question.

Senator Cormann: —is false.

Senator BUSHBY: No, it was a question.

Senator Cormann: There are kick-backs, as you describe it, that would conflict the advice given. They are

explicitly prohibited in the law. Anybody who pays kick-backs, that is unlawful.

Senator DASTYARI: I made the point, and the question was asked. I am not quite sure why I was the one

being asked questions. He asked the question that related to my answer.

Senator BUSHBY: No, I did not ask you the question, I said correct me if I am wrong, and so you have

corrected me. You have put it slightly differently. The question I was going to ask after the prelude was, there are

other industries where employees are remunerated on the basis of sales performance, including in commissions,

and, in fact, we have just had a discussion then about the life insurance industry where there still are commissions.

I think it was Mr Kell that was saying that you are looking at the impact of different forms of commissions and

how that then played out in terms of people's behaviour. Is it generally accepted that, particularly in the sales

culture, performance based forms of remuneration are reasonable? Is there any problem from ASIC's perspective

in terms of that as a general rule?

Senator Cormann: If I could just take this question; the law prohibits any such payments which would

conflict the advice given. The key here is, payments that would conflict the advice given are prohibited; payments

that do not conflict the advice given are permissible, which is entirely consistent with what was set out by former

Minister Shorten when he was the Minister for Financial Services. That is the distinction.

Senator BUSHBY: That is the point that I was trying to get to. There are some forms of sales performance

incentives—

Senator Cormann: Well, you should not call them sales performance based.

Senator BUSHBY: Some form of remuneration incentive that can lead to the employees' behaviour being

corrupted in some ways. Those are what you have been trying to address.

Senator Cormann: Yes, but you are using the wrong terminology that you would expect.

Senator BUSHBY: Okay, that is fine.

Senator Cormann: The key here is that under FoFA, in implementing the changes that the previous

government set out as outlined in former Minister Shorten's second reading speech, and his explanatory

memorandum, where payments to advisers do not conflict the advice given they are permissible. In order to

ensure that certain payments are not conflicting the advice given, they have to be structured as part of a balanced

score card arrangement, which means that they have got to be very small in volume as part of the overall

remuneration arrangement. When you talk about sales incentive payments the way you are talking about them,

you are sounding—

Senator BUSHBY: I am talking about more general—

Senator Cormann: Yes, but in the financial services space—

Senator BUSHBY: Yes, I was going to come down to that.

Senator Cormann: you are going very close to the conflicted remunerations page. Any remuneration that

conflicts the advice given is banned, remains banned, has been banned under the previous FoFA, and remains

banned under the current form of FoFA.

Senator BUSHBY: Is that because the previous government and the current government identified that form

of remuneration, a conflicted form of remuneration that, in effect, conflicts the advice that will be given, is not in

the best interest of the people?



Senator Cormann: In context of payments for financial advice, nobody has ever credibly suggested all

payments should be banned. What has been credibly suggest and what has been legislated, what remains

legislated today, is that any payments, incentive payments or other, that would conflict the advice given ought to

be banned. They were, and they are, and they will remain so in the future.

If you talk about outside the financial services space, whether there are other industries where they are

commission based payments, sure, but that is irrelevant for the purposes of the discussion on FoFA.

Senator BUSHBY: It is, and I understand why you are saying that, but I am just raising it in the sense that

paying people on the basis, not just in terms of the hours worked, is a normal practice. The only reason why

conflicting remuneration has been singled out and treated separately is because it has the potential to deliver

perverse outcomes for those who are buying the product.

Senator Cormann: There are a couple of things. If you walk into a car dealership to purchase a car,

obviously, I would think that there would be a general appreciation that there are commission based sales

incentives for the person that is going to sell you the car. Financial advisers essentially, at their best, help people

with their financial health and wellbeing. They help them manage financial risks through life; they help them

maximise opportunities through life, but they are dealing with other people's money. Obviously, it is appropriate

to have a robust regulatory framework in place to ensure that there is an appropriate level of consumer protection.

The argument that we have put forward, and the argument that has been going on for some time now is that it is

important to get the balance right, that you put in place appropriate levels of consumer protections while also

ensuring that the consumer protection arrangements are efficient so that they are not excessively expensive,

because ultimately the cost for whatever regulatory arrangements you put in place comes out of peoples

retirement savings or out of people's pockets. People often somehow say that the government that is arguing the

case for deregulation is arguing the case for the banks; it is not so.

The banks are in a better position than anybody else in the financial services space to deal with additional red

tape. Arguably, it actually helps them strengthen their competitive position. It leads to increased concentration in

the marketplace, which is arguably not in the consumers' best interests. What we are saying is that we need to

ensure that whatever additional red tape we impose, and whatever additional costs we impose, has actually got a

proportionate consumer protection benefit that comes with it because otherwise we are forcing consumers and

investors to pay more for their advice than they should. That is why I previously said, in answer to a question by

Senator Whish-Wilson, that the policy objective of the government is to have an appropriately robust but efficient

regulatory system in place where people across Australia saving for their retirement and managing financial risks

through life can have access to high quality advice they can trust, but which is also as affordable as possible.

We want to have a financial system that is as efficient, as transparent and as competitive as possible where

there are good corporate governance arrangements so that people can trust that the returns on their savings are

maximised, but also that their savings are safe. This is obviously going to be a continuous work in progress, and it

is an area where there are a lot of different players with different commercial interests. A lot of the debate is often

driven depending on where a particular provider group fits in the overall market structure.

Senator BUSHBY: Thank you. Those comments about making sure it is affordable and the desirability of as

many Australians as possible having access to quality advice at an affordable level reminds me—and I can see the

Chairman nodding—of evidence that the Chairman gave at the first hearing that ASIC appeared at during the

ASIC performance inquiry where you noted that 50 per cent of the Australian population should really be

receiving quality advice, but only 20 per cent are at the moment.

Okay, well I will move on from there to something which I have already touched on a number of times, and

that is ASIC's review of retail life insurance. I found that very interesting, particularly in the context of the fact

that there have been numerous media reports recently of unions who have been entering into life insurance

arrangements to cover their members. Is ASIC aware of those media reports and had a look at all at whether that

is in fact occurring?

Mr Kell: Could you be a little more specific? I mean, obviously life insurance—

Senator BUSHBY: Most of the reports that have been written are about a reason out of the Heydon royal

commission. The evidence has been presented to that.

Mr Kell: We have seen some recent media reports but it is not something that we have investigated or

reviewed.

Senator BUSHBY: The reason why I am asking is that I am just curious to know, if a union is negotiating

with life insurance providers, would that invoke any requirements to have an AFSL?



Ms Bird: You would really need to know the circumstances in which they were doing them and exactly what

they were doing.

Senator BUSHBY: So, would the reports or the evidence that has been educed before the royal commission

be something that would pique your interest in having a closer look at those circumstances?

Ms Bird: I think I would have to take that on notice. I think someone has drawn it to our attention, but I am

sorry, I cannot remember the details.

Senator BUSHBY: If you take that on notice that would be appreciated. If you could also, when you take it

on notice, have a look at—if these reports are true—whether they would also be subject to the best interest duty in

making those decisions and whether the payment of any commission to the union in return would be something

that would be of interest to you. That is fine, thank you.

CHAIR: Senator Madigan.

Senator MADIGAN: In ASIC's recent report, you identified that there is a significant problem with

inappropriate scoping of financial advice. Can you explain how scoping might lead to poor outcomes for

consumers?

Ms Bird: In circumstances where the adviser did not take into account the full facts and circumstances of the

person in front of them; so, they have said, 'I am looking at this particular narrow issue, but I have failed to look at

other issues, which would clearly impact them.' They might have ignored the super. They have said, 'I am not

going to look at the life insurance that you might have in super,' or something like that. It is circumstances where

the adviser has narrowed the scope of advice in a way that we would consider not to be appropriate.

Senator MADIGAN: Do the recent FoFA changes and the current FoFA bill establish a mechanism whereby

an adviser can get a client to agree to leave things out of the advice, or limit the scope?

Senator Cormann: Sorry, if I can take that question. In the way you are positioning it, it is as if this is

entirely driven by the adviser. If your question whether there are changes the adviser and the client can agree on

the scope on the advice, yes, absolutely. That was a deliberate and intentional change. The reason being is that we

do not want a client to be forced to pay way more because there is a legal requirement for advice to be provided

on a whole range of things, many of which are likely to be irrelevant to the specific needs and requirements of the

client at that time. It is really the equivalent.

If you wanted to go and buy a tyre of a car, but there is a legal requirement that there has to be a full

explanation on every aspect of the car as a whole, then obviously that is going to become a more expensive

process than if you are able to say that in this particular circumstance I have got this particular need. I am keen to

get some advice on this particular issue, then the client and the adviser, in our view, should be able to reach an

agreement to limit the area on which advice is sought in order to keep the costs down for the client.

The important point here, and I will go back to what I said to Senator Dastyari before, is that none of this

removes the overall requirement for the adviser to act in the best interests of the clients. While they might be able

to limit the scope of the advice consistent with the changes we have made in order to bring down costs, the

adviser continues to be required under the law to act in the best interests of the client.

Senator MADIGAN: In ASIC's experience, to what extent did consumers understand the impact of limiting

the scope of the advice? Did they appreciate the impact of matters left out of the advice? Did they appreciate that

the adviser possibly benefited from the way the advice was scoped?

Mr Kell: In relation to the poor quality advice that we saw, for example we believe it did not satisfy the best

interest test, often the client would not have understood that issue, that they have breached their best interest in

other tests.

Ms Bird: If I can say, we have seen many circumstances of inappropriately scoped advice, not just in this

project but also in the shadow shot we did in relation to superannuation. We would say that when the adviser

scopes the advice, that scoping has to be in the best interests of the client and the advice still has to be appropriate.

Senator Cormann: That is the key point. If you are asking me, 'Are there still people out there that break the

law?', I suspect that there are still people out there that are breaking the law. There are still people out there that

are speeding, there are still people out there that are stealing, there are still people out there that are killing people,

and there are probably still people who are not complying with all of the requirements of our Corporations Law.

They should, and of course ASIC's job is to enforce compliance. The key point here, though, is that if an adviser

inappropriately scopes the advice without acting in the best interests of the client, he or she would be breaching

the law. That is of course—

Senator DASTYARI: Who has the claws to investigate that?



Senator Cormann: The point being here is that the law obviously changed somewhat recently, that is the

initial changes to FoFA that have been in place for a reasonably short period of time, and of course ASIC is

working to lift compliance with the law. Part of the reason why ASIC went through this exercise that was reported

on recently in relation to risk insurance is that it is part of its job to lift compliance with the law.

Mr Price: It may be worth noting that in about 2010, I think, there was an ASIC report on access to advice.

That indicated that a substantial number of people who do receive advice actually do not want a full financial

plan; they want something that is more specific to their circumstances.

Senator MADIGAN: In the 37 per cent of cases that you identified in your life insurance report where the

advice failed, how many of these cases involved inappropriate scoping and advice?

Ms Bird: I could not tell you that, I would have to take that on notice.

Senator MADIGAN: Thank you.

ACTING CHAIR (Senator Dastyari): I am now the Acting Chair, and I will use that prerogative to ask

questions myself. Mr Medcraft, a very wise man on page 9 of the ASIC Strategic Outlook Report wrote, 'We

remain concerned about the culture of financial service businesses and the incentive structures they use.' Can you

just expand on that?

Mr Medcraft: Certainly. Mr Kell, would you like to comment on that?

Mr Kell: Yes. You have seen reasons for that comment in our recent life insurance report. We had some

concerns about the way in which those incentive structures were playing out in terms of the quality of advice. We

still have those concerns. We have those concerns where people are actually providing incentives that are in

breach of the law. We have those concerns in relation to situations where, for example, managers and executives

are potentially being given incentives to drive sales, which is one of the reasons why we have asked for additional

powers to help us levy penalties against managers and executives who often set the culture in these sorts of firms

as part of our submissions to both the Senate inquiry and the FSI inquiry. In a range of context, we want to make

sure that we are keeping on top of that issue because those incentives can drive behaviours.

ACTING CHAIR: Is it fair to say, Mr Kell, that your concern—and you have been quite open and vocal

about this as ASIC as an organisation for a long time—has traditionally always been not just whether the letter of

the law states that people have to operate in best interests of consumers, but what culture is created by different

incentive structures that create an environment where there can be inappropriate behaviour, which is, by your own

definition, very hard to monitor?

Mr Kell: That is true. That has been a broader issue for ASIC around the culture that firms have, whether they

are prioritising sales over the interests of the client or ensuring compliance with the law. That is why I think we

are focusing on those sorts of issues to ensure, to give one example, that firms are far more consistent, active and

responsible in the way they report breaches of the law to ASIC.

Senator DASTYARI: I am sure you are familiar with this article, a Westpac whistle-blower came out a few

weeks ago, a senior executive, and claims that pressures on selling products has become entrenched in the bank's

culture in that coveted bonuses are being calculated by the volume and value of bank branded products staff can

still flog. It goes on with quotes and the culture that has been created. Are they the types of financial incentive

structures that you are concerned about?

Mr Kell: I have not seen that article. I do not know enough about the details, but I think we have clearly sent a

message to the industry more generally that culture is something where we think that the standards need to be

raised. There is a lack of—

Senator Cormann: Just to be very clear again, if there were incentive payments which conflicted the advice

given, that would be unlawful. If there were incentive payments to encourage advice that is not in the best

interests of the clients, that would be unlawful. If you have evidence of unlawful conduct, Senator Dastyari, then

obviously you should really pass that on.

Senator DASTYARI: I am more than happy to table the document, but Minister Cormann, perhaps the

question is to you, I think the point we are making here—and this becomes a difference of policy—and there are

two issues here; firstly, there is an enforcement problem in this in areas—

Senator Cormann: It is an enforcement challenge, because the law changed relatively recently.

Senator DASTYARI: because it is a very hard and difficult thing. Mr Kell has outlined himself that resources

are limited; there have been cuts to ASIC; this is a very expensive and difficult space to monitor and you are

never going to be able to monitor everyone 100 per cent of the time, nor should you be able to.



Senator Cormann: I have got to say, it is comparatively easy to monitor organisations like the four big banks,

because—

Senator DASTYARI: Really? Then how about things like ComBank and other things? There has been a

complete failure to do that.

Senator Cormann: The law changed, as I said, relatively recently. I think you will find that the truth is—

Senator DASTYARI: If it is so easy—

Senator Cormann: If you can let me finish.

CHAIR: Excuse me, Senator Dastyari! Please let—you have asked a question.

Senator Cormann: I think you will find that it is very important to publically listed companies and major

institutions like, dare I say it, the big four banks, that they are in substance and that they are seen to be complying

with the law of the land. I do not think that there can be any proposition that businesses of the size of the big four

banks would deliberately and intentionally break the law.

The law is that advice provided to clients has to be in their best interests and that conflicted remuneration

payments are banned. Obviously, post any change of the law, there necessarily is a period where these changes

have to be bedded down, and that includes changes in culture, of course, that have to flow through these sorts of

organisations and the industry as a whole over a period of time.

Senator DASTYARI: I think the concern that is shared by myself and a lot of others, and I am interested to

get yours, Mr Kell's and Mr Medcraft's view on it. I know your view on it, Minister, your view on this is very

clear, but when you have ASIC itself talking about their own concerns about the culture of financial services

business, their own concern about incentive structures—and this is coming from your own report from yesterday,

or was it the day before?

Mr Medcraft: Monday, yes.

Senator DASTYARI: Yes, Monday. So, as late as Monday we had ASIC telling us that you were concerned

about incentive structures. The concern, Mr Medcraft and Mr Kell, that you have expressed about incentive

structures has never been simply a concern about breaking the law, per se, but is about creating an environment

and a culture—and what you have said previously is that these incentive based structures create a culture of

activity which is detrimental to consumers. Is that a fair assessment?

Mr Medcraft: Mr Kell?

Mr Kell: I think one of the key points here, and I suspect you appreciate this, is when it comes to lifting

standards and improving conduct in the financial services sector, there is not one single bullet. There is dealing

with some incentive structures and FoFA has sought, through the prohibition on commissions to do that. There is

changing the law so that the best interests of the consumer are prioritised. There is entrenching the law about

providing appropriate advice. There is raising professional standards and there is a process underway to do that at

the moment and there is a separate parliamentary inquiry.

We would say that all of those bits of the puzzle need to be put together to help lift that issue around poor

culture in these firms. So, have the incentive structures been part of it? Absolutely. Are there still some problems

there in some areas? We have pointed to some in our life insurance report, but we are also saying professional

standards; we are also saying best interests; those sorts of things need to be part of the way of addressing things.

Senator DASTYARI: There has been recent regulatory changes and proposed legislation—

Mr Medcraft: I was just going to say, our view about sales incentives, just to put this in perspective of

financial products—

Senator DASTYARI: Can we call them secret sales bonuses?

Mr Kell: I prefer the line that they are unlawful.

Mr Medcraft: The issue about sales incentives—I think that the fundamental discussion here is really dealing

with whether there is a conflicted remuneration that drives the wrong outcome—

Senator DASTYARI: It is also about culture.

Mr Medcraft: Well, culture is critical to anything.

Senator Cormann: What matters though is the outcome, right? The outcome is actually—

Senator DASTYARI: The process matters too, Minister.

Senator Cormann: The thing is—

Senator DASTYARI: Are you saying that the end justifies the means?



Senator Cormann: All of the payments that would conflict the advice given have been banned. Any business

that provides incentive plans is acting unlawfully.

Senator DASTYARI: Yes. We hear the regulator that has the job of enforcing that is getting funding cut. You

are cutting the funding of the regulator whose job it is to enforce that.

Senator Cormann: We are making the necessary decisions given the mess that Labor left behind with the

budget to make sure that we can get ourselves back onto a situation so that we do not have to put our hands into

our children's pockets in order to fund our lifestyle today.

CHAIR: Can I suggest that you move onto the next point?

Mr Medcraft: I think culture is important in making sure that we get the right outcome.

Senator DASTYARI: Mr Medcraft, there has been some recent—

CHAIR: Sorry, I think Mr Medcraft was just finishing his sentence.

Senator DASTYARI: Sorry.

Mr Medcraft: I was going to say, I think the focus better be on the outcome, making sure that these incentives

do not drive the wrong outcome. Conflicting remuneration often can cause the wrong outcome. I think that is

what we are all hopefully focused on.

Senator DASTYARI: You are aware of regulations that have changed in this area that were kind of brought

in at the eleventh hour, I will not go into the politics of that. In addition to that, there is proposed legislation

around the streamlining of financial advice. Are you aware of all of that?

Mr Medcraft: Yes.

Senator DASTYARI: Were you consulted on the regulatory changes and the regulations before they were

signed off on?

Mr Medcraft: Mr Kell?

Mr Kell: I think the nature of the consultation is something that would occur naturally through the Treasury,

but we are not going to comment on that.

Senator DASTYARI: No, I am not asking you about what your advice is, I was asking whether you were

consulted. Were the regulations brought to you before they were introduced?

Ms Bird: The Treasury would routinely send us copies of regulations before they are made. We can often

point out if there are technical errors or things like that.

Senator DASTYARI: Did they?

Ms Bird: Yes.

Senator DASTYARI: Okay, so when did you see them?

Ms Bird: I do not know when we saw them. I could not say that, I am sorry.

Senator DASTYARI: But are you saying that you saw a draft copy of the regulations before they were

introduced?

Ms Bird: Which particular regulations are you talking about?

Senator DASTYARI: I am talking about the regulations—and Minister Cormann will be more aware of the

date than I am—around 28 June, 29 June?

Senator Cormann: The ones that I made a statement on that came into effect on 1 July.

Senator DASTYARI: Yes, the eleventh hour ones.

Senator Cormann: Which have been supported by the Senate twice.

Senator DASTYARI: The ones you snuck in on a Sunday afternoon. You might have seen it on a Saturday.

Ms Bird: We routinely see them before they are made, just as a normal process. I cannot tell you whether we

saw those ones.

Senator DASTYARI: Can you take on notice the question about whether or not you saw a—

Mr Kell: We did.

Ms Bird: I just cannot say now if I saw it on a particular date.

Mr Medcraft: We will take it on notice and we will come back with it.

Mr Kell: There were discussions between ASIC and Treasury about the regulations. That is par for the course.



Mr Medcraft: We generally see proposed regulations, as Ms Bird said, to make sure—

Senator Cormann: We will take the specific dates on notice so that we can assist you.

Senator DASTYARI: Yes, the question is the dates.

Senator Cormann: Let me just very explicitly say on behalf of the government that the government, of

course, appropriately consulted with all of the relevant organisations within government, including with ASIC.

Senator WHISH-WILSON: In terms of the costs and the outlays, they wanted to avoid the back office

compliance enforcement issues around the regulation. Presumably, you guys would have been quite heavily

involved in that, or at least would have been consulted on that?

Senator Cormann: It is very important that I put a bit of context around this. We have been like an open book

on this. This is a coalition. We announced the policy in March 2012 and we took it to the election. Let me just go

through the process because you have asked the question.

Senator DASTYARI: You could have signed up hours before—

Senator Cormann: Chair?

CHAIR: Senator Dastyari! Tone it back.

Senator Cormann: If I could have a bit of space to provide an answer, we announced the policy—

Senator DASTYARI: An early—

Senator Cormann: to give effect to our improvements to Labor's FoFA in March 2012. We took it formally

to the last election. After the election we put out an exposure draft on which we consulted extensively, both in

terms of the substance of the legislation and the regulation. After that, as you know, I became the Acting Assistant

Treasurer in March. I paused the process, pending a Senate Economics Committee inquiry into the legislation. It

was then chaired by my good friend and valued colleague, Senator Bushby. That committee, of course, reported

on 16 June, so what I did, appropriately, was wait for the recommendations from that inquiry before I made final

judgments—

Senator WHISH-WILSON: The government led inquiry—

Senator Cormann: Sorry, you have asked the question.

Senator WHISH-WILSON: And—

Senator Cormann: There was a question asked on timing—

CHAIR: Order! The minister has the floor. Order!

Senator Cormann: and I am explaining the timing. So, in March I paused the process. I conducted some

further consultations myself. It was very important though for me to have the benefit of the findings of the Senate

Economics Committee inquiry into that legislation, which reported on 16 June. Immediately after, within four

days, that committee having reported the government announced its approach to FoFA in a comprehensive

statement, a five-page statement, on 20 June and we gave effect to that, as outlined in that statement by

regulations which came into effect from 1 July 2014. Importantly, the Senate was asked on two occasions by

Labor, in fact by yourself, Senator Dastyari, to disallow those regulations and of course the Senate on two

occasions has voted in support of those regulations.

Senator DASTYARI: Chair—

Senator WILLIAMS: I make—

CHAIR: Order! The minister still has the floor.

Senator Cormann: So, any suggestion that somehow we have rushed this process, that we have put it in at the

last minute or any such thing, is a statement that is completely ignorant of the facts as they have actually played

out. We have followed proper and due process over an extensive period of time. We consulted widely, we took

on-board the findings of the Senate Economics Committee inquiry, which has of course reported a second time—

Interjector: Chair—

CHAIR: Order!

Senator Cormann: now, as a result of an inquiry chaired by my other good friend and valued colleague,

Senator Edwards.

Senator WHISH-WILSON: Could I get an answer to my question? The question was very specific to ASIC.

The issue that was made very clear in the same Senate inquiry that Minister Cormann is talking about was the

back office costs of compliance of the FoFA regulations in relation to the best interest duties, all of the things that



we have discussed. You guys are the regulators. Presumably you would have been aware of those costs to the

banks which were apparently hundreds of millions of dollars. Is that something that you, ASIC, were aware of in

negotiations and consultation?

Senator Cormann: That is actually not ASIC's job. Sorry, this is a matter for Treasury. The question you are

asking is—

Senator WHISH-WILSON: Who oversees those regulations and enforcement of those regulations?

Senator Cormann: The question that you are asking about costs, specifically, of regulations is a question for

the Office of Best Practice Regulation, which is—

Senator DASTYARI: It is consumer costs.

Senator Cormann: part of the Prime Minister's department.

Senator WHISH-WILSON: You are talking about—

CHAIR: Order!

Senator Cormann: You have raised the question of costs of regulations, so the point I would make is when

the previous government introduced the changes to FoFA, Bill Shorten, the then minister, sought an exemption

from then Prime Minister Gillard from the requirement to have them properly assessed in terms of their cost

benefit equation, even though that was a requirement by that government. The upfront cost was estimated by

industry of about $750 million cost of implementation and a $375 million cost a year ongoing, in additional costs,

for business ultimately incurred by people saving for their retirement. The result of our changes has reduced—

Senator WHISH-WILSON: The budget was given to you by—

Senator Cormann: that cost on an ongoing basis by $190 million.

CHAIR: Senator Whish-Wilson!

Senator Cormann: As a result of the changes that we have made, there is now a reduction in business related

costs of—

CHAIR: Order, Minister!

Senator Cormann: —excessive red tape of $190 million a year.

CHAIR: If you are going to ignore me, we will have a meeting. If you have got the call I will give you the

same protection, but whoever has got the call has got the call. Senator O'Neill.

Senator O'NEILL: I want to deal with the register of advisers. This was part of the conversations that

happened with the Palmer United Party and Senator Cormann, that a new register of advisers was announced. Is

the government consulting with ASIC with regard to the register of advisers?

Senator Cormann: You are quite right, we, the government, formalised that announcement as part of the

agreement that we reached with the Palmer United Party and the Australian Motoring Enthusiasts Party. It is a

suggestion that was made both by the Senate Economics Committee inquiry into ASIC and also it has been raised

in the context of the Financial Systems Inquiry in the context of the interim report. As we said at the time, the

government has been conducting consultations. We did set up a working group with all relevant industry

stakeholders, and ASIC, of course, has been appropriately involved in that process. We are very close to making

an announcement about the specific operation of that register very soon.

The key here is to ensure that clients across Australia who are considering accessing a financial adviser should

be able to have easy access to information about the status of that adviser in the industry, their credentials, their

qualifications, who they work for and so on, and in very good faith we have gone through a consultative process

with all relevant industry stakeholders to come up with the best possible approach to make that happen. It will be

ASIC that will be responsible for running that register.

Senator O'NEILL: Okay, so Mr Medcraft, you have clearly been involved in the consultations. Could you

elaborate on your involvement?

Mr Medcraft: Yes, Mr Kell?

Mr Kell: We have been a member of the working group that the minister just outlined that was chaired by

Treasury and we have been separately liaising very closely with Treasury about the sorts of requirements and the

way that such a register might operate. I should say that we are obviously very strong supporters of such a

register. We welcomed the announcement that it was going to be introduced because we think it has been a gap in

the regulatory system for some time now.



Senator O'NEILL: Just to clarify, the minister made a remark there that it looks like ASIC is going to be

responsible for regulating the register.

Senator Cormann: Sorry, ASIC is not going to be responsible for regulating the register, ASIC is going to be

responsible for running the register. The specific announcement, the specific detail, will be announced when we

are in a position to make the announcement.

Senator O'NEILL: So, Mr Kell, are you able to explain to me what the difference between regulating and

running the register will be?

Mr Kell: I think the difference is this, there will have to be some elements of the register, some of the

information that is required to be inputted into the register that will have to be set out in the law or regulations—

Senator Cormann: By government.

Mr Kell: by government. Then there is actually operating the register, gathering the information from the

industry, putting it up on the website in such a way that it is going to be easy for consumers to run, in effect,

running the IT that sits behind the register. That will be ASIC's role.

Senator O'NEILL: Is this an additional piece of work for you to do that you do not have to currently

undertake?

Mr Kell: It is indeed. We currently have a partial register in relation to authorised representatives, but yes, this

will be an additional and expanded register, and one that will be designed to have a much more, if you like,

consumer friendly interface so that actual clients, consumers, can use it. It will be additional, but it is one that we

very much welcome.

Senator O'NEILL: So, this is in addition to your workload at a time when your funding is decreasing?

Senator Cormann: Sorry, if I can just cut through here. Your question obviously goes to the level of

resourcing. What I would invite you to do is to wait for the government's announcement and you will find that the

issue of resourcing in relation to the enhanced public register of financial advisers will be addressed as part of the

announcement that the government will be making.

Senator O'NEILL: It sounds like Christmas might come early to ASIC. There could be additional funding

going to you. I wonder where it is going to come from. Are you currently resourced to take on this new level of

work?

Senator Cormann: I have just answered that question. This is obviously a new initiative. It is, as you quite

rightly pointed out, an initiative that was the result of an agreement reached between the government, the Palmer

United Party and the Australian Motoring Enthusiasts Party that was supported, incidentally, by the Liberal

Democrat and the Family First senators as well. The government has been working very hard to get that particular

initiative ready for implementation and we are very close to being able to make a public announcement and that

will cover off on the resourcing related issues. Obviously, given that it is a new initiative ASIC is, by definition,

not currently resourced to do this, but ASIC will be resourced to do this.

Senator O'NEILL: So, will they be required to shift any of their funding allocations from other areas to

accommodate this additional demand for the government?

Senator Cormann: That is right. As part of the statement announcing the register we will be making it very

clear on how that register will be resourced.

Senator O'NEILL: With regard to the register of advisers, we have been taking evidence in our inquiry

through the joint parliamentary committee that there is an incredible degree of confusion about advisers and the

types of guidance that is received, the status of RG146 and the allocation of qualification. RG146 turns out to be a

very miserly qualification at the moment. We have had evidence just in the last week that people can acquire it in

eight hours. We have had evidence that it ranges in cost from $1,200 down to a very low price; in fact, we even

had a piece of evidence that said it was now available for free in an online format. Are people who have RG146

eligible to go on the register of advisers?

Senator Cormann: You have got to really wait for the announcement because the government announcement

will cover off on those sorts of issues. Let me make the general point, I am sure all of us in this committee would

share a commitment that we need to continue to lift professional, ethical and educational standards across the

financial advice industry. To be fair to the industry, there has been some significant progress made, including, and

in particular, driven by some of the reforms pursued by the previous government. I readily acknowledge that, but

I think that essentially the parliamentary joint committee inquiry that you are mentioning is again an initiative that

has been supported by the government in order to come up with further suggestions on how we can sensibly



continue to lift professional, ethical and educational standards across this industry. ASIC is not in a position to

provide to you the detail of government announcements that are yet to be made.

Senator O'NEILL: Thank you for that enlightenment; however, the reality is that the current tool that allows

people to participate in this field of financial advice—the core tool that they are required to have is RG146. Is

there an anticipated change in people being able to acquire that or the quality of people who hold it before the

government makes this announcement?

Senator Cormann: You cannot pre-empt. As you have rightly pointed out, you are participating in a

parliamentary inquiry through the Parliamentary Joint Committee on Corporations and Financial Services that is

looking at exactly that question. You used to chair that committee. What you are asking us to do—

Senator O'NEILL: I am very happy to be back on it, Minister.

Senator Cormann: Indeed. What you are asking us to do is to pre-empt the government's response to a

committee inquiry which has not, as yet, reported. We are not going to do that. What I say to you—

Senator O'NEILL: That is actually not my question. Let me just ask the question again.

Senator Cormann: It is your question.

Senator O'NEILL: We can put an adviser record together—

Senator Cormann: I have not finished. What we are all sharing, and what the government is very genuinely

putting forward here is that we are totally committed to work with this committee and any other committee of the

parliament on sensible measures to keep lifting professional, ethical and educational standards across the financial

advice industry.

We have got a completely open mind, but we think that we need to let the processes of the parliament run their

course rather than to try and get ASIC or the government to pre-empt what we might do in relation to

recommendations that have not yet been made.

Senator O'NEILL: With respect, Minister, you are indicating that very soon the government is going to make

a series of announcements around a register of people who are advisers.

Senator Cormann: Not a series of announcements, one announcement in relation to a register that we have

already announced.

Senator O'NEILL: My question to ASIC is: the current qualification to be calling yourself an adviser is an

RG146. When people go to this register on the day, and I am sure there will be great fanfare and huge media

attention, people will go to this and they will be expecting that they are going to get something of quality. My

question is: will there be any difference in standard on the day that this register opens than we have had reported

to us currently about what RG146 means, which is incredibly variable in terms of the quality of training and

assurance that people should have when they go and look at an adviser. Would RG146 get you on the list?

Senator Cormann: Senator O'Neill, if you were to phrase your question differently we might be able to assist

you, but what you are asking Mr Medcraft to do is something that he cannot do. You are asking him to make the

announcement on how the enhanced register of financial advisers is going to be structured. He is not in a position

to do so, because, appropriately, that is a prerogative of the government.

The government sets the policy after having gone through appropriate consultations, including with ASIC. It is

the government that sets the policy on how these arrangements are put together and it is the government that will

make the announcement. You can phrase the question whatever way you want, but if you are inviting Mr

Medcraft to give you details on what will or will not be reflected on the register in relation to the current

minimum educational standards, then he cannot possibly answer that question.

Senator O'NEILL: Let me go back to the current RG146. Is the status of that, as a qualification for financial

advisers, compromised because of the practices that we are hearing about in the sector?

Mr Medcraft: One thing I will say just on all of this is that we have made a submission to your inquiry and

said that—

Senator O'NEILL: Ms Bird gave excellent evidence.

Mr Medcraft: The bottom line is that we are very strong supporters of focusing on outcomes and we think

there should be a national exam, which we think we should not be looking to micro manage standards, we should

be focused on outcomes. I will just make that very clear that is our position. Mr Kell?

Mr Kell: As you may be aware, ASIC had embarked on a process of reviewing RG146. That was overtaken

by events in the government. Obviously, now it has a working group underway; it is being considered as part of

the Financial System Inquiry and it is also being considered by the other parliamentary committee. ASIC has very



clearly flagged that we think that professional and educational standards in the financial advice sector need to be

lifted, that we need a national exam, and that we need improvements across the board in that sector. That is why

we are very supportive of the current processes, including the government convened working group to arrive at a

higher standard, which we think is very much needed.

Senator O'NEILL: So, is that a yes that RG146 is compromised as an indicator?

Senator Cormann: No.

Mr Kell: Not compromised.

Senator Cormann: Sorry, you cannot verbal Mr Kell. What Mr Kell has said and what the government says is

that we are all committed to do what is required to keep lifting professional, ethical and educational standards. We

do believe that we can and must do better. We have got to recognise that there have been significant

improvements in the past, but it is an ongoing journey and there is more that we can do.

Part of the journey of determining what else we can sensibly do is to work with the Parliamentary Joint

Committee of Corporations and Financial Services, which is exploring exactly this question, with the active

support of the government. ASIC is one voice into that process. I am sure that as a committee you are considering

other voices that are relevant to this process and at the end of the process you will make some recommendations

on what you think is sensible, which the government, which is separate to our own processes going on at the

moment through the working group, will consider.

We will consider all of that and we will continue to make adjustments as a further initiative to help lift

standards that we are now about to announce formally. The establishment of the enhanced register of financial

advisers is an important step when it comes to improving the transparency of who is who and what their

qualifications and what their status in the industry are. There are other things that we should sensibly continue to

explore, but this is a process that is currently underway and so really what we are saying is let's continue to work

together on sensible ways to keep going down that path.

Senator O'NEILL: Ms Bird, do you have anything to add on RG146?

Mr Kell: 'Compromise' is not the word I would use. We clearly recognise that the standards need to be lifted

and also—there is a question about the level to which advisers should be trained or qualified and then the

mechanism to ensure that is robust. If you like it is a quality assurance, and that is why we think the national exam

can potentially play an important role to ensure that we have got the level right and that we have got confidence

that people are meeting that level. There are those two elements, if you like, to ensure that we have a robust

system in place. That is where we would like to see things go.

Mr Medcraft: I think as I said in the press yesterday, pilots simply pass a national exam and how they get

there is really open, but it is actually that is administered by CASA and it is done very successfully. We think

there are good examples where you can have a national exam. We do not get involved with setting standards. We

make sure that it is very open and anyone can really sit it.

Senator Cormann: This is actually an important point. I know that historically, as a country, in this financial

services base we have always looked at educational standards and RG146 is a set of minimum educational

standards, but in a way is it really relevant how much input there is or is it more relevant that the right level of

competency has been achieved? From my point of view—and I am not pre-empting any decisions on what that

might look like down the track—I would have thought that it is much more relevant that we can satisfy ourselves

that minimum competency standards have been achieved rather than to have a conversation on whether somebody

has spent four weeks, five months or three years. I do not care how long somebody spends getting a particular set

of skills and experiences that are required. What I do care about is that they have got the appropriate levels of

competency in order to be able to competently provide financial advice. I think we have got to shift our thinking

here a bit away from inputs towards outputs.

Senator O'NEILL: I think there are a lot of questions around professionalism though that go counter to what

you have just said. There is a minimum amount of required hours of study for people to acquire degrees and

increasingly people are expecting that when they go and get financial advice that somebody has had—

Senator Cormann: The point that I am making, and I am really candidly and genuinely engaging on the

conversation, and I would invite you to reflect on it: is it more important that you can say that you have spent four

years at university or is it more important that you can say that you have been able to satisfy and that you have got

all of the required competencies in order to provide competent, high quality advice that complies with the law,

that is skilful and that is appropriate to the needs of the client and so on. I would have thought the most important

thing that can be achieved is satisfying ourselves that advisers have got the right level of competency rather than

to have a discussion on how long they have been spending in a particular course.



Mr Medcraft: Just to add to what Minister Cormann said, and also Senator Whish-Wilson, when I was in the

United States I had to sit a six hour exam for series 7 to become an authorised broker dealer in the United States.

That was the outcome, but how I got there was up to me. Basically I had to pass a very long, pretty high level

exam.

Senator WILLIAMS: Was it—

Mr Medcraft: No, it was actually in a secure testing station. I also passed a series 24, which is also extremely

tough.

Senator O'NEILL: I am sure that—

Mr Medcraft: It is outcome focused to what Minister Cormann said.

Senator O'NEILL: Absolutely, but outcomes are achieved by long periods of education in good institutions

developing your skill-set to learn.

Mr Medcraft: What is interesting is actually to what Minister Cormann said, it was actually focused on the

outcome at a national level. Level playing field, not reliant on any single institution. I do think in a digital

environment we need to think more creatively about having a system that is flexible that allows people to achieve

that outcome. Rather than mandating how people achieve the inputs, you do need to focus on the outcome and

have a level playing field for everybody, frankly.

Senator O'NEILL: I am sure doctors have been well trained as well. Can I take you to the recommendations

of the inquiry into the performance of ASIC? With Rec 136, have you had your education campaign targeting

retail customers changed since the inquiries reported?

Mr Kell: I thought there were 61?

Senator Cormann: There were 61 recommendations. I am not sure how that works.

Senator O'NEILL: Rec 1 and Rec 36, about the education campaigns.

Mr Kell: We already have quite extensive education campaigns to educate retail customers about investing,

borrowing and so on and so forth. We are reviewing those to make sure they are as relevant as they can be in the

light of—

Senator O'NEILL: So, they are under review but are not changed?

Mr Kell: They are changed on a regular basis. As we work our way through those education campaigns and

fact sheets and whatnot, we are reviewing them in the light of the information that has come forward with that

inquiry.

Senator O'NEILL: Can I ask if you have given—just to move along because I have got quite a few of these I

would like to scoot through if I can—the government any advice regarding strengthening the penalties for the

Australian Financial Services Licences that failed to report significant breaches within the required time?

Mr Tanzer: That was in the report about relative levels of penalties, particularly for unauthorised financial

services conduct compared to credit licencing.

Senator O'NEILL: Have you had a response?

Mr Tanzer: We also raised it in the context of the financial system inquiry. I do not know if we formally had

a response from government but my expectation is that it will be dealt with in the ramp-up of the Financial

System Inquiry.

Senator O'NEILL: How have you changed how you deal with whistle-blowers since the inquiry report?

Mr Kell: I might ask Mr Day to speak about that.

Mr Day: We have changed in two major ways. Across all of and each of ASIC's operational teams there are

now identified whistle-blower liaison officers in each of those teams. Similarly, the area of ASIC that I am

responsible for, misconduct and breach reporting, where effectively all of the information from the public comes

into, initially all of those staff have been run through a new set of procedures about how we will identify and

communicate and handle and assess matters from whistle-blowers.

What we have now is effectively an end to end process. Whistle-blowers who approach us are identified; we

give them the best information we have got about ASIC's approach to dealing with whistle-blowers, which is

embodied in our revised information sheet 52, off the top of my head, which we revised during our submissions to

the Senate inquiry, which effectively now is a document that speaks to a whistle-blower about what they can

expect from us.



The matter will be assessed. We will ensure that they are given that information, assess their matter and start

effectively recording and monitoring that matter as it goes through. If the matter is assessed as a matter that needs

further action from ASIC, as that matter progresses to one of our other operational teams the whistle-blower will

be informed of the change of arrangements and a whistle-blower liaison officer in that operational team will then

take responsibility for the regular contact and communication with the whistle-blower. As a minimum, we would

expect that every three months, if we had matters taking a while, we would ensure we would have gone back to

the whistle-blower to give them an update within the limits of what we can tell them.

Again, obviously if the matter had finalised in that we have achieved some outcome or ASIC has decided that

it cannot action the matter further, we will again go and communicate that with the whistle-blower. What we have

also done, which I think is important, is all of the matters that we then identify as relating to whistle-blowers are

being recorded and collated into a report. That is recorded every month. About every six months we will be

providing a report to the commission so that the commissioners see what matters we have dealt with and what

have been the outcomes, the handling of that, have we complied with the process we have set up, those types of

things. In fact, the first of those six monthly reports was provided to the commission in the last few weeks. From

that then, we can see whether or not our procedures are working well, whether the right types of matters are

actually being actioned and can we improve our processes from there.

Senator O'NEILL: So, there is some significant process change there. Did I hear that you said there has been

an office of the whistle-blower being established?

Mr Day: We are looking at that at the moment and we have been consulting with government about the

establishment of that. We have already effectively done that in that we have a virtual team of people across the

organisation who are providing that service and the report is a way of us monitoring that we are doing what we

said we would do in relation to better handling of whistle-blower matters.

Senator Cormann: You might not have been here when I advised Senator Dastyari or Senator Whish-Wilson

earlier that the government expects to release the full informal response to the Senate inquiry into ASIC before

parliament resumes next week.

Senator O'NEILL: Okay. Can I just ask a question there around the assessment? In the middle of your

explanation you said that you make an assessment about whether it is ASIC's response capacity that should be

enacted there.

Mr Day: Yes.

Senator O'NEILL: Could you provide us on notice with what methodology you use to determine that

assessment?

Mr Day: That is the type of question that has been asked generally on a number of occasions by this

committee. There is some great information about the types of factors that we take into account when we assess a

matter and those are set out in two sets of information sheets. One is information sheet 151, which says the types

of things we take into account when we initially assess a matter that is raised with ASIC. There is also the

information sheet that was put out last year in relation to which matters we would take into account when we take

on an enforcement matter.

Senator O'NEILL: I know there is a lot of concern from people who have lost everything about the

enforcement action that is taken and the triggers to get an enforcement undertaking, let alone going to further

criminal action.

Mr Medcraft: It is interesting in terms of when we get the reports. There are some key things that we do. We

get around 20,000 reports of this type coming in per annum of which 12,000 are directly from the public of

misconduct reports. There are probably six or seven things that are interesting to hear about what we do with that

information. It is quite interesting. We do try to connect the dots on this.

Mr Day: When a matter comes in we will look at whether we have had contact from that person before,

whether we have had any other contacts about effectively the entity or the person that they are complaining about

before, so we triangulate all of those. We will look at any other antecedent information that we have got about

that particular type of practice; is it a systemic issue. We will look at other data that we may have received from

other agencies and departments and referrals from them. That might include AUSTRAC data. That might also

involve contacting international counterparts as well. We will take all of those things into effectively that

assessment. We will then look at the matrix of the laws that might apply. We do that on an inclusive basis. We

will look at everything that is raised and what are the various laws that might apply and then from that process

start to filter down to those things that may still appear, on the basis of the information that we have been



provided with, that have potentially been breached. From that point there will be discussions internally with our

specialist teams and with our enforcement teams about what might be the appropriate next steps.

Senator O'NEILL: Does the annual report contain any commentary on the compliance with enforceable

undertakings?

Mr Tanzer: My recollection is yes.

Senator O'NEILL: Have you improved your procedures for updating press releases to reflect court

developments?

Mr Tanzer: Yes.

Senator O'NEILL: Are they more prominent on your website?

Mr Tanzer: Yes. We are in the course of revamping the website. The new website should be coming out very

soon, within a week or so. It picks up the core recommendations about having clearer information for consumers,

in particular, with a 'For Consumers' tab. It will have a reduced number of tabs across the top. It has 'For

Consumers', 'For Financial Professionals' and 'For Companies' and less clutter on the front page in particular

about recent media releases.

Senator O'NEILL: I would like to go to the Westpac reference that Senator Dastyari mentioned previously

where a senior executive has advised ASIC of great concern about culture within that particular organisation. You

would have been monitoring some of the evidence that we have been taking in our hearings where we have heard

from bank employees running parallel to financial advisers that bank employees are receiving incentive payments

to refer customers in-house to their own financial advice team and that they are getting bonuses paid when those

meetings are fulfilled and when particular products that they might recommend that the financial adviser provides

are taken up by clients. What are you doing with that information? It is very concerning to me.

Mr Kell: We are most certainly aware of the information. At this stage we are assessing it to see where we

might need to make further inquiries to test whether there have been any breaches of the law and we will follow

up on that. It is a bit too early to say. We have not launched an investigation or anything like that at this stage, but

it is certainly an issue that we are aware of and we will be looking at the evidence very closely.

Senator O'NEILL: I might have missed a little bit of this. In terms of the best interest duty, as a regular

person in the community who goes to a bank to seek out a loan, to get advice on that and they have their loan

received, they are then introduced to a financial adviser and the financial adviser gives them the guidance about

what they should purchase in their financial advice but only provides advice about products that are within that

bank.

Senator Cormann: When you talk about loans you are not actually talking about the wealth management side

of the bank.

Senator O'NEILL: No. There is a conversation going on between the two arms.

Senator Cormann: If you walk into the Commonwealth Bank in order to inquire about a loan or talk to a

teller about taking out a loan, firstly there are relevant laws that specifically regulate arrangements in terms of the

writing of the loans, but I suspect that nobody would expect a Commonwealth Bank teller to sell a loan with ANZ

or with Westpac or with NAB or with anybody else. If you walk into a Holden car dealership you would not

expect them to try to sell you a Ford. If you walk into a Mitsubishi dealership you would not expect them to

recommend a Holden, so if you walk into a particular bank to take out a mortgage or to take out a loan in order to

purchase a house, that really is not part of the conversation that we were having earlier in relation to financial

advice in the context of wealth management. This is really a separate area of regulation, to be honest. It is

explicitly excluded from this.

Senator O'NEILL: Yes. I agree with that. I have absolutely no problem there, but on the back of that

relationship with the bank people are being advised by financial advisers from whom many people would believe

that they are getting independent advice in their best interests.

Senator Cormann: In talking to a bank teller?

Senator O'NEILL: Not from a bank teller. They go through the process. They get the loan and they have

established a relationship.

Senator Cormann: With a bank teller?

Senator O'NEILL: No, with the bank. We are hearing that the bank teller or their loan consultant are making

formal arrangements and making connections across to another part of the bank to a financial adviser who for all

intents and purposes to many consumers seems to be an independent person.



Senator Cormann: They are different points. If you are dealing with a financial adviser of the bank by

definition they are not independent. Historically there may have been issues. I readily admit that there have been

issues that needed to be addressed and that progressively have been addressed.

There used to be this problem that there were financial advisers that were presenting themselves, for all intents

and purposes, as independent advisers but the concern was that they were providing advice on products not based

on what was in the best interests of the client but based on where they would get the best commission and would

channel decision-making consistently.

If you are talking with an employee of a particular bank in relation to any matter I would have thought it is a

reasonable expectation that the employee of that bank is going to talk to you about the products of that bank.

Having said that, in relation to all of the matters that are covered by FoFA in our financial advice laws the legal

requirement is for anybody providing advice, whether that is general advice or personal advice, to a particular

client, to act in the best interests of that client, to prioritise the interests of the client ahead of their own interests

and any payment to that particular adviser cannot be a conflicted remuneration payment. That is the context. The

proposition that you can walk into a bank and have a relationship with a financial adviser in that bank and have an

expectation that that is an independent adviser is wrong.

The final point here is that is also where the register is going to assist because there ought to be transparency

around what the employment relationships are so that if you are a consumer and you want to know the relevant

information about your adviser, what their status is in the industry, what their qualifications are and who they

work for, then you should be able to see that. If you are a client that goes into a particular bank, obviously the

conversation around whatever product may be recommended will be focused on the products of that particular

bank.

Senator O'NEILL: Have you had any reports from the public that indicate that the general consumers are

often unaware that when they are getting advice from a financial adviser within a bank that they are only being

offered a suite of products that are provided by that bank?

Mr Kell: I would have to take on notice as to whether we have had any reports or complaints about that

matter.

Senator O'NEILL: Ms Bird, can you add anything?

Senator Cormann: It has been taken on notice.

Mr Kell: Yes, just to give you accurate information.

Senator Cormann: The deputy chairman of ASIC has taken that question on notice and will assist you to the

best of our ability after we have considered your question.

Senator O'NEILL: Ms Bird looked like she might have been able to add something.

Senator Cormann: The question has been taken on notice.

Senator O'NEILL: All right. We are not going there. Do ASIC statutory officers have their own code of

conduct?

Mr Tanzer: No, we do not. What we are expecting to do is to publish on the website all of the APS code, all

of the aspects of the legislation that currently exist and to make clear what the obligations are to which we are

subject, which covers off the sorts of things that you would expect to see in a code of conduct.

Senator O'NEILL: So you are not expecting there to be any significant difference from the APS code of

conduct?

Mr Tanzer: Our legislation is different. As commissioners we are subject to our own legislation as well as

APS code of conduct.

Mr Kell: Our intention, as Commissioner Tanzer has made clear, is to publish that in a clear and concise way

on the website so that people understand what ASIC commissioners' obligations are and what other issues that we

need to satisfy.

Senator O'NEILL: Will there be any dimensions of it that are specific to the role that ASIC plays that will

differentiate it from the general APS?

Mr Kell: There are specific elements because there are specific elements in our—

Senator O'NEILL: Is that under construction at the moment?

Mr Kell: Yes. That is correct.



Senator O'NEILL: Has ASIC offered any advice to the government on reviewing the corporate insolvency

laws?

Mr Price: We had some discussions with the Financial System Inquiry about the insolvency laws in Australia

and in turn we will provide a report to the government very shortly. We have previously said at Senate estimates

and PJC that we think there are elements of the US Chapter 11 regime that may be worthwhile considering for

Australia. We do not consider that a wholesale adoption of the US Chapter 11 regime would be workable, given

the smaller nature of the Australian market.

Senator O'NEILL: Senator Cormann, would you be able to table the participants of the working group

around financial advisers?

Senator Cormann: Yes, I would be very happy to. Obviously I need to get that organised but we have

previously provided that in answer to a question on notice. If somebody in my office is listening to this can you

please organise for this to be tabled? I am happy for it to be tabled.

Senator O'NEILL: Do you see any timing crossover problems between the announcement that you have

heralded is imminent with regard to the financial advice register and the inquiry of the corporations and financial

services committee into the qualifications and the standing of that sector?

Senator Cormann: The implication of your question is that you would want us to wait until that committee

has reported. Previously I was concerned that you might be asking us to pre-empt the findings of the inquiry. Now

you are asking us to wait until the inquiry has reported before pressing ahead.

Senator O'NEILL: I did not actually ask that.

Senator Cormann: If I can finish.

Senator O'NEILL: I am asking for the consideration that you have given to the order—

Senator Cormann: Obviously the government clearly and carefully considered the sequencing. There was

obviously the element that we made a firm commitment as part of an agreement with the Palmer United Party and

the Australian Motoring Enthusiasts Party to press ahead with that particular initiative. Secondly, we actually

think that is a sensible initiative.

We do not believe that the Parliamentary Joint Committee on Corporations and Financial Services would

recommend against us doing what we are doing. We believe that whatever is likely to be recommended by the

parliamentary joint committee can complement the initiative of having this enhanced public register of financial

advisers which I think is a meritorious initiative in its own right. If, down the track after it has been put in place,

there are suggestions on how that register can be further improved then of course the government is very happy to

consider any suggestions for further improvements. In the meantime we felt that it was important to press ahead

as part of our commitment to efficiently and speedily contribute to a further lifting in standards.

CHAIR: I will just let everybody know that we will be breaking after we have finished with Senator

Williams's questions.

Senator WILLIAMS: Mr Medcraft, you might have to take this on notice. Apparently pre-2005 a financial

adviser working for an institution had to clearly have displayed the institution's logo on business cards and any

other promotional material to clearly demonstrate who they represented and the very likely direction of advice.

Now, after 2005 this requirement suddenly disappeared, allowing institutionally aligned and owned advisers to

masquerade as independent advisers, duping consumers and only selling their owner's products. Do you know if

that was the case? Perhaps you need to take on notice why it was changed. I say because we are talking about

transparency. We know that the four big banks plus Macquarie and AMP have such a share of the financial

products in Australia, yet they have these little companies running underneath that they actually own. I think it is

misleading if a financial planner hands a card over saying that they are working for Financial Wisdom that is

actually owned by the Commonwealth Bank. Should it have the Commonwealth Bank logo on it as well or if it is

Colonial or Macquarie? Could you check that out please?

Mr Kell: We will take it on notice. I might very quickly note that in our recent submission to the Financial

System Inquiry one of the points that we suggested they consider included a clearer indication of the ultimate

owner of the financial firm that the consumer is dealing with. We support that.

Senator WILLIAMS: Well done. Just on the issue from Senator Dastyari and the minister answering as far as

FoFA under the previous government and this government, the minister just mentioned that if you work for

Holden you are going to try to sell a Holden car, you are not going to try to sell a Ford. No matter what FoFA did

pre the last election, none of it addresses that issue of vertical integration in my opinion. None of it. What is there



to stop it? If you are going to work for a company and be proud of the company that you are working for then you

want to sell their products.

Senator Cormann: If you walk into a bank and you talk to an employee of that bank then I would have

thought that your expectation ought to be that the employee that you are dealing with is going to talk to you about

the products of that bank; that is right.

Senator WILLIAMS: That is a good point but if I sold cars for Holden and you came to me and you said that

you wanted to buy a Holden Statesman and I asked you what was your condition and you said that you lived 50

kilometres down a dirt road with a lot of kangaroos et cetera, then I would say that if you want an Australian

made car you would probably be better off with a Ford Territory all wheel drive with independent suspension. I

am not going to do that but under the law you have got to give the best advice in the interest of the client, but you

are still linked to your company. That is why I think it is—

Senator Cormann: The problem that we had historically and the problem that we are trying to address and

that the FoFA reforms, the work of ASIC and others is trying to address is what has been described as culture.

Historically, if you walked into a bank and somebody in an unsolicited fashion started to talk to you—I guess you

are a captive audience—and is trying to sell you a product that you may actually not need, then that is something

that we have got to stop. If you have incentive payments that drive that sort of conduct, that drive conduct which

conflicts the advice given and which encourages actions that are not in the best interests of the client then that is

something that we have got to stop. The FoFA legislation, as it has been in place and as it continues to be in place,

prohibits that sort of conduct.

Somebody is not going to be able to convince you to buy a car unless you want to buy a car, whereas if you are

talking to a bank teller and they start talking to you about other things that you may need, then it is important that

there is a consumer protection framework around that to ensure that the advice is in the best interests of the client,

and that remains in place.

Senator WILLIAMS: That is true. When you buy a car in Australia with Australian standards where the car

has to have brakes and if the power steering pump breaks you are still going to be able to steer the vehicle, et

cetera. That is not the issue.

Mr Price, I find concerning ASIC's media release of August 2013, 'Liquidator Mark Levi expelled for fraud'.

Are you familiar with that?

Mr Price: I am familiar with Mr Levi.

Senator WILLIAMS: ASIC issued a media release dated 23 August 2013 stating, 'ASIC will cancel the

registration of liquidator, Mark Darren Levi, following a successful application to the CALDB. CALDB found

that Mr Levi was persistently and seriously dishonest and, therefore, not a fit and proper person to remain

registered as a liquidator.' That is a registered liquidator. Are you aware now that the situation is that pursuant to

section 532 (Fraud) of the Corporations Act 2001, 'In a members voluntary winding up of a proprietary company

the liquidator need not be a registered liquidator'?

Mr Price: I am aware of that.

Senator WILLIAMS: Are you aware that Mr Levi is still liquidating two companies; Shark People Pty Ltd

and Queens Park Terrace Pty Ltd?

Mr Price: I am aware that he is undertaking member voluntary liquidations that do not require him to be

registered as a liquidator.

Senator WILLIAMS: I am trying to think of an analogy. If I was banned from every pub in the town or

banned from drinking alcohol that means that I can go to the club instead of the pub. I see this as a problem

because you have kicked him out for wrongdoing. I mean $92,000 to pay his own tax bills is something, but he is

still practicing in the same industry. How do we fix it?

Mr Price: If the government were minded to change the section you refer to, to require the person to be a

registered liquidator, I do not think ASIC would have an issue. Of course the broader practitioners may have an

issue.

Senator WILLIAMS: That is a good point. So we actually need some sort of regulation or whatever to say

that if you are banned from being a liquidator that means a registered liquidator or—

Mr Price: Members voluntary.

Senator WILLIAMS: If you are banned from playing rugby league for something terrible that you have done

on the field you should be banned right throughout Australia and not just banned in the city and play in the

country or whatever.



Mr Price: People could make an argument that that is an anomaly.

Senator WILLIAMS: Yes, but you know what I mean. I think we need to help you and work with you on

that. Who is handling QFS 150?

Mr Tanzer: QFS 150 is wholesale and retail investors.

Senator WILLIAMS: In 2004 you brought in the wholesale being a minimum of $10 million. I must say

every institution that I think—

Ms Bird: We did not bring any of this in. This is the law. The law is particularly unclear.

Senator WILLIAMS: Who brought it in? How did it appear?

Mr Price: It came in with the financial services reforms which was the Financial Services Reform Act in

2002. We simply provided guidance on the provision. Unfortunately the provision is not drafted in the clearest

manner, and that has recently been recognised, for example, in a Treasury discussion paper which dealt with the

retail/wholesale client distinction.

Senator WILLIAMS: I think all institutions abided by that QFS 150, except one.

Mr Price: I think that is the very—

Mr Medcraft: One at a time.

Senator WILLIAMS: You do not think that they did?

Mr Price: I think there were very mixed views.

Senator WILLIAMS: I will put the question. How do we fix that? I think that if you are on $2.5 million of

net assets including your house that is far too low to be classified as a wholesale investor. How can we help you

fix that?

Mr Price: There was a Treasury discussion paper, as I said, at the time that the original FoFA reforms went

out. That Treasury discussion paper talked about what the right thresholds should be between retail and wholesale

clients. If the government were minded to address that situation I think it is a question of finalising that law

reform process that was already started by the Treasury discussion paper.

Senator WILLIAMS: I am glad to help you if we can make them put it back. If you need a stronger power.

make wholesale $10 million net assets plus CPI perhaps each year.

Mr Price: Yes. It would be a case of changing the law to provide a greater degree of—

Senator WILLIAMS: I do not want to see people thrown into wholesale when they really are ignorant and

getting bad advice. We can do what we want to about the advice but we are not going to make it bullet proof.

Mr Price: I understand that point. The argument that is sometimes put to the contrary is if someone is

classified as a retail client it might prevent them from accessing some investment opportunities that are only

available to the wholesale people. That is the policy balance that needs to be considered.

Senator WILLIAMS: I just want raise another issue. Mr Medcraft, are you familiar with the new daily

newspaper by the industry super funds?

Mr Medcraft: Yes.

Senator WILLIAMS: Have they put about $6 million into that now?

Mr Tanzer: We have raised this before.

Senator WILLIAMS: I have raised this with you before with the industry super fund using our money,

because I am part of Australian super, establishing a newspaper, while the rest of the newspaper industry seems to

be winding down, to feed information to their members. I believe they have spent up to $6 million now

employing about ten people. They do not have a big audience. The Herald Sun report says, 'The website which

has received $6 million from six industry super funds to start is already seeking more money from other players in

the finance industry.' Is this in the best interest of us, the members of those super funds?

Mr Tanzer: The issue from ASIC's perspective was much more around whether the website itself was

misleading and deceptive. I think the issue about the appropriate use of members' funds is not really a matter for

ASIC.

Senator WILLIAMS: Can you speak up because I am having trouble hearing you.

Mr Tanzer: The issue that we looked at with respect to that website was really about whether it was engaging

in misleading and deceptive conduct with respect to the provision of the information that was being put out there.

I think the issue that you are raising, which is whether it is appropriate use of members' funds or superannuation



funds—and I hesitate to say this but our colleagues from APRA who are in the room will be following this—I

think it is an issue of—

Senator WILLIAMS: Are you telling me I should throw that in the APRA file?

Mr Tanzer: No. I hesitate to throw anything towards anybody else.

CHAIR: Please do. They are after the break.

Senator WILLIAMS: That is my next file here. Should I raise that with APRA?

CHAIR: Yes.

Senator Cormann: I think the carriage lays with APRA but if they cannot help you they will tell you.

Senator WILLIAMS: Mr Medcraft, I agree with you for slack punishment. Jonathon Moylan got out with a

slap on the hand and a $1,000 bond for the trouble he caused and Firepower escapes prosecution over investors

losses of $100 million. Are you familiar with the Firepower issue?

Mr Medcraft: Yes.

Senator WILLIAMS: Another shonk?

Mr Mullaly: There was a lot of action taken that was quite successful in that particular matter in terms of

criminal prosecution. As we indicated, we provided a brief of evidence to the DPP. That was considered and a

decision was reached that there was insufficient evidence to prosecute.

Senator WILLIAMS: Australia's a paradise for white collar crime; I agree totally. Thank you, chair.

Mr Medcraft: There was a clarification from Mr Tanzer.

Mr Tanzer: It was really in the context of the discussion that we had about Timbercorp. We had mentioned a

scheme of arrangement. Mr Mullaly would like to make a small clarification that the scheme of arrangement does

not cover all aspects of the settlement but certain aspects.

Mr Mullaly: I mentioned earlier that the hearing to take place next week to consider the settlement then

moves to a scheme of arrangement. There are some aspects of the settlement that do not rely upon the scheme of

arrangement that will become final if the settlement is approved by the court. I just wanted to clarify that piece of

evidence.

CHAIR: Thank you very much. Anything else, Mr Medcraft?

Mr Medcraft: No, thank you.

CHAIR: I thank you and your officers for the three and a half hours that you have been with us. Before I

suspend the session I would like to seek the concurrence of the committee to table a letter from Nigel Rae, the

Executive Director of Fiscal Group, just clarifying some evidence which he gave this morning which was in

relation to a story that was written that he had not read. Are we all in favour? Carried. Thank you very much. We

will return at 4.45.


CHAIR: We will reconvene our session. Let me apologise to you profusely for being hours late. On 25 June,

some senators in their wisdom created an amendment called section 26(4), I think we affectionately know it as,

which means there are no rules on the time here anymore. Hopefully we are not here till 11, because I know that

Hansard will not be here after 11. That is our only saving grace, I must say, given the new rules.

Senator Cormann: We support the working conditions of Hansard. I would just say for the benefit of

Hansard that putting up a thumbs-up is really not visible in Hansard. I have now made sure that it is very clear.

Australian Prudential Regulation Authority

[16:46]

CHAIR: Hansard may save us from those people's original intentions. I welcome The Australian Prudential

Regulation Authority. Do you have any opening statement at all, Mr Byres?

Mr Byres: If you will bear with me, I would like to make a short opening statement, but in the interests of

time I will try to make sure it is short.

CHAIR: You have got until 11.

Mr Byres: I would just like to talk about two issues of current interest to APRA. The first concerns recent

media reports regarding the potential introduction of so-called macro prudential measures in Australia. Recent

comments in the Reserve Bank's financial stability review about emerging imbalances in the housing market and

the need to reinforce sound lending practices have been interpreted in many instances as Australia being on the



verge of macro prudential intervention of a type that has been instituted in a number of other jurisdictions around

the world, such as hard limits on certain types of loans or minimum deposit requirements on the part of

borrowers.

While we are still very much in the investigation stage and certainly have not decided what further action we

might need to take, I would like to make two points in response to the general commentary that is taking place.

The first is that within our regulatory framework APRA generally seeks to avoid outright prohibitions on

activities where possible. Instead our regulatory philosophy is to focus on institutions setting their own appetite

for risk. We use the regulatory capital framework to create incentives for prudent lending and to ensure that, while

institutions remain free to decide their lending parameters, those undertaking higher risk activities do so with

commensurately higher capital requirements. That is not to say we never use the sorts of tools that are being

employed elsewhere, but they are not the ones we are likely to reach for first.

That brings me to my second point, which is that responding to potential risks in the housing market is not

new. We see a standard supervision. In the period from 2002 to 2004, for example, there was a strong run-up in

house prices and similar concerns about high-risk lending and emerging imbalances. We are doing now what we

did then. We collect more information, we are counselling more aggressive lenders, and we seek assurances from

the boards of our lenders that they are actively monitoring lending standards. We are about to finalise guidance on

what we see as sound mortgage lending practices, and we have conducted a comprehensive stress test of the

largest lenders. The sources of risk are different this time around. Last time we were interested in low doc and no

doc lending, but the response of higher supervisory intensity and regulatory requirements in the face of higher risk

activity is not new; it is APRA doing its job.

The second issue I wanted to quickly mention was the recent publication of MySuper statistics. Earlier this

month APRA released its initial quarterly MySuper statistic reports covering the four quarters ending September

2013 to June 2014. These publications mark an important milestone in the Stronger Super reform process and are

part of a much broader and richer suite of superannuation publications that APRA is implementing. Over time we

will be publishing additional statistics for both MySuper and Choice products, and also in respect of trustees and

funds. The significantly enhanced transparency provided by APRA's publications is expected to promote

competition and efficiency within the superannuation sector.

However, it is important that users of the statistics remember that long-term performance is the key

determinant of member retirement outcomes, not just investment returns over short periods. For MySuper

products in particular it will be some time yet before there is sufficient information available to assess the impact

of the reforms in enhancing outcomes for members. With those opening remarks, my colleagues and I would be

very happy to answer your questions.

CHAIR: Thank you very much, Mr Byres. Senator Canavan.

Senator CANAVAN: Sorry I missed most of that introduction, but I just wanted to ask some questions about

the committed liquidity facility, and to start with understand your role in designing the facility. I know the RBA

has had a role as well. Exactly what has APRA done and what has the RBA done in establishing that facility?

Mr Byres: Let me give some background and then Mr Littrell might well jump in with some of the detail. The

committed liquidity facility forms part of the new liquidity coverage ratio requirements, which were one of the

components of the Basel III reforms that the international community agreed to in the aftermath of the global

financial crisis. The liquidity coverage ratio requires banks to make sure they have sufficient high quality liquid

assets such that they could cover their expected cash outflows in a period of stress, and we measure that over a

period of 30 days.

The difficulty we had in Australia in implementing that international agreement as it was originally envisaged

was that the sorts of assets that are high quality and liquid in Australia are actually few and far between. Primarily

that is because the Australian government generally has relatively low levels of debt compared with the needs of

the banking system. So, whereas that was not necessarily a problem in other jurisdictions, it was one here. We

needed to find a way of filling that gap. The way we did that was, firstly, to get an alternative mechanism

recognised within the Basel framework. So, what we have done is entirely consistent with the international

standard that has been endorsed by the G20.

Our way of filling that gap is this committed liquidity facility with the RBA. It has been a facility I would say

that has been, in a sense, jointly designed, because both APRA and the Reserve Bank had an interest in making

sure that we could implement the new standards in a way that worked for Australia. Obviously, ultimately it is the

central banks providing that facility. They are the ones that are ultimately determining the final terms and



conditions of it, but it was important that whatever was designed would be fit for purpose in terms of the liquidity

framework that we were implementing.

I would say it was very much a joint exercise in making sure that what the Reserve Bank was happy to provide,

and the terms and conditions on which the Reserve Bank was happy to provide it were suitable for inclusion

within the liquidity coverage ratio that we were implementing. Do you want to add anything, Mr Littrell?

Mr Littrell: We should also add that, although the RBA is providing the line of credit, APRA determines

which ADIs are eligible and the extent to which they are eligible. We have a substantial supervisory annual round

of consideration of how much each applicant ADI can have.

Senator CANAVAN: So, can the ADIs have an amount there at this line of credit, as you said, Mr Littrell,

equivalent to their net cash outflows over 30 days?

Mr Littrell: There are three issues of supervisory interest there. One is a fairly complicated calculation of the

net cash outflow. We try to ensure that the ADIs are not unduly aggressive in maximising that number in a way

that in turn maximises their access to the public credit. Second, there is an agreement about how much HQLI,

high-quality liquid assets, which is mainly Commonwealth government securities and some state securities, each

ADI is expected to hold. The RBA is quite influential in working out that amount. So, net cash outflows less the

HQLI position is the CLF.

Senator CANAVAN: My understanding is that in South Africa, the other country doing this, they are capping

it at 40 per cent of their NCLF. Are you expecting that, after you take out the state and government securities, we

will be above or below 40 per cent?

Mr Littrell: The CLF will cover about 75 per cent of the net cash outflows for those ADIs that ask for that

facility, which not all of them do.

Senator CANAVAN: That was my next question. I know the legal documentation came out early last month.

Have any ADIs applied yet to access the facility?

Mr Littrell: Yes, there was a shadow round last year essentially working through but without any actual

contract being passed. In the last couple of weeks we have just completed, if you will, the first real round of the

application, the supervisory vetting and the assignment of amounts. That will come into effect in January of 2015.

Senator CANAVAN: So, how many ADIs have applied at this stage?

Mr Littrell: I would have to take that on notice. I cannot remember the exact number off the top of my head.

Senator CANAVAN: That is what I would presume. Do you know how much the outstanding value of those

will be then at this stage? Or do you have an idea of what it would be?

Mr Littrell: Yes. For an exact number we could take it on notice, but it is roughly $300 billion, if you are

asking about the CLF numbers.

Senator CANAVAN: $300 billion. Correct me if I am wrong, but those ADIs having that line of credit will

need to pay 15 basis points per year; is that right?

Mr Littrell: Correct.

Senator CANAVAN: What is 15 basis points or $300 billion?

Mr Littrell: It is $450 million.

Senator CANAVAN: So, will that net the government $450 million of revenue a year?

Mr Littrell: That fee is flowing to the RBA as a commitment fee on the line of credit.

Senator CANAVAN: So, it goes to the RBA as equity until the government decides what to do with it?

Mr Littrell: It goes to the RBA's revenue. Beyond that you would have to ask them what then happens to it.

Senator CANAVAN: What role did APRA have in setting the 15 basis point fee?

Mr Littrell: The 15 basis points was largely determined by the RBA.

Senator CANAVAN: Is that the same with the repo margin as well? The cash rate plus or minus 25 basis

points.

Mr Littrell: The conditions of the line of credit are largely determined by the RBA.

Senator CANAVAN: I note there was an RBA research paper by Morten Bech and Todd Keister a couple of

years ago, which stated, 'The reasoning laid out here suggests it may be desirable to take a flexible approach to the

CLF pricing, possibly adjusting terms as more experience is gained with this new policy tool.' Do you envisage

adjustments being made over time?



Mr Littrell: The program has not actually started yet. Over time, certainly, we will be reviewing the way that

the whole program works.

Senator CANAVAN: So, you will be reviewing it on a regular basis. Can ADIs continue to have access to the

facility, say during, if there is—God forbid—a future crisis? Can they continue to have access to it? Who

determines when they may no longer have it?

Mr Littrell: The determination is based on the terms and conditions in the RBA's line of credit contract with

each ADI, all of which are in common terms and conditions. To broadly summarise, as long as the ADI is asking

for an amount within the line of credit amount, as long as they provide sufficient qualifying collateral of the type

that is specified in that contract, and as long as, should the RBA ask us to form an opinion, we form an opinion

that that ADI has sufficient capital, they will get the money.

Senator CANAVAN: So, they have to have sufficient capital?

Mr Littrell: I cannot recall the exact phrase in the RBA's contract, but the ADI needs to be an operating

concern to still have unfettered access to the money. Subject to those conditions being met, they will get the

money. It is not a rescindable commitment until the expiration date.

Senator CANAVAN: Until it is deemed that they do not have a sufficient net worth or something like that?

Mr Littrell: Yes.

Senator CANAVAN: Correct me if I am wrong here, but banks in other countries—other than South Africa

and Australia—will be required to hold certain assets to meet their LCR commitments, and largely government

bonds, although there are some other assets with more limitations on them.

Mr Littrell: I cannot speak to every country, but for every other country in the G20 that is correct.


Mr Littrell: It is not necessarily the case they will mainly hold government bonds. In many countries there is

a so-called HQLA 2; a second level of, for example, federal agency securities or securitisation or covered bonds

or whatever. In this country we do not consider that there are any currently eligible bond categories for HQLA 2.

Senator CANAVAN: This is my final line of questions on this. These have presumably been provided in case

markets become illiquid again, as we experienced a few years ago. In that environment, you would expect

government bond yields to fall, as they did in the previous crisis, and therefore the opportunity cost of holding

government bonds to increase, because you are taking a lower yield. So, those other banks in those other countries

will suffer those extra costs, so to speak, during a liquidity crisis. But that will not actually happen here, because

you are charging a fixed fee. Do you understand where I am going, Mr Littrell? Is that a problem with the design

of this system; banks here will have a slight advantage over overseas banks, given the fixed fee arrangements?

Mr Littrell: The fact that our banks will not be incurring market losses on securities portfolios in a financial

crisis is not a disadvantage.

Senator CANAVAN: There are two issues here, are there not? There is, yes, we want to maintain liquidity,

but we do not want to provide undue incentives for too much risk in the system either, ex-ante a potential crisis.

Mr Littrell: Yes. The way we recognise that is the amount of CLF a bank can receive is reviewed every year.

It is reviewed on the basis that banks are, as an APRA supervisory matter, expected to make all reasonable efforts

to minimise that amount. So, we are not really looking to maximise the amount that the RBA is placing into this

facility. It is a reasonable balance.

Senator CANAVAN: But they are going to get 75 per cent of their NCOFs?

Mr Littrell: Roughly 75 per cent of their net cash outflows. But again that is a reflection of the fact that we do

not have deep liquid bond markets with lots of government debt. Again, this is not a disadvantage for Australia,

but it does make for some technical issues in meeting the LCR.

Senator CANAVAN: Finally, you do accept that there are trade-offs here between providing banks with

adequate liquidity during a crisis but not wanting to exacerbate the obvious moral hazard problems which exist

through financial markets?

Mr Littrell: Yes, and I would suggest that $450 million a year is a reasonable downpayment against moral

hazard.

Senator CANAVAN: I will finish there.

CHAIR: I will send the call to Senator Bushby. Sorry, who was next on the list? Senator Ketter.



Senator KETTER: I think I had the call, as I recall. Welcome, Mrs Rowell and gentlemen. I do want to touch

on the two issues that you have raised in your opening statement and another line of inquiry. Firstly, starting with

the macro prudential tools—what tools has APRA been using to curb high-risk activity in the housing market

over the past year?

Mr Byres: What we have done thus far is largely intensified our supervision. So, as I alluded to earlier, we

started to collect some additional information about the lending practices of banks and the extent to which they

might be undertaking higher risk lending activity. We have sought assurances from the boards of the lenders that

they are closely watching what is happening with credit standards in their institution and in the market. We have

spoken to those lenders who we thought were at the more aggressive end of the spectrum and provided them with

information to demonstrate that they were, indeed, at the more aggressive end of the spectrum.

We put out guidance—currently in draft form, but which will soon be finalised—on how we see good practice

in residential mortgage lending and the sorts of things that a prudent lender would be doing. We have just

completed a comprehensive stress test of the largest lenders, which was focused amongst other things on a

significant housing downturn.

What we have done over the past couple of years, in a sense, is try and increase the intensity of our

supervision. We have not necessarily made any regulatory changes per se, but we have tried to make sure that this

is front and centre, firstly, of our supervisory staff, and they have made sure that the risks that are potentially

emerging are front and centre in the minds of the major lenders.

Senator KETTER: If that is the case, what are the triggers, if you like, that are going to involve APRA doing

more to curb demand?

Mr Byres: I think this is just something that is necessarily judgmental. As the Reserve Bank alluded to in the

financial stability review, we are taking advice from other members of the council about how they see the housing

market and how they see the emerging risks. I do not think there is any issue that it is a competitive marketplace.

Lending standards are being stretched. The Reserve Bank has expressed some concern about imbalances in

relation to investors. We have been watching other sorts of lending, high serviceability or issues with high

serviceability ratios, high loan to value ratios, and owner occupiers taking out interest only mortgages. There are a

number of areas that we are looking at and it will ultimately be some judgment about what is the point at which

we next turn up the dial a little bit and ratchet up that intensity just a little bit more.

Senator WHISH-WILSON: Do you also have the ability to break down the level of foreign ownership of

residential real estate in Australia versus domestic?

Mr Byres: Just to be clear, we have some statistics on bank lending. There may be a number of owners of

property which are not borrowing from Australian banks; they may not be borrowing at all. To your specific

question of do we know about totality of ownership—no.

Senator WHISH-WILSON: Do you have any—

Senator Cormann: But that is information that is held by state land titles offices. That is not part of APRA's

scope, so really as Mr Byres is very politely saying, no, APRA does not collect or hold that information.

Senator WHISH-WILSON: Just when you talked about imbalances, I was interested around the arguments

about foreign ownership of residential land.

Mr Byres: We do not really have the information that would significantly enlighten that debate. Our focus has

been very much on what sorts of lending practices banks are engaging in in the current environment.

Senator KETTER: The RBA has recently said that those macro prudential tools would be targeted at the high

risk and problematic areas of the housing market. What tools can be used to target the high risk investor segment

of the market?

Mr Byres: I think there is probably a range of things. In fairness, I used the term so-called macro prudential,

and I do not think the Reserve Bank has actually used the word macro prudential, because that tends to conjure up

the sorts of things that have been instituted in New Zealand, where they have put a very hard cap on high loan to

value lending and said banks shall lend no more than X per cent in high LVRs. Or in the UK where there is a hard

limit that says banks can only lend a certain proportion where the loan to income ratio is above four and a half

times, I think is the number.

As I tried to say in my opening remarks, we tend not to reach for those tools of hard caps and limits, at least not

as our immediate response to these things, because they can tend to be rather blunt and harsh. Our focus will

likely be looking at things that are more in a sense incentive based. So, tweaking capital requirements or other

things, which still allow banks to set their own lending standards and decide who they want to lend to and the



terms that they want to lend to customers on, but from our perspective to make sure that if there is higher risk

activity there is higher capital to back that up.

Senator KETTER: But the RBA has an input into this decision-making process as well, does it not?

Mr Byres: There is not a formal requirement, but clearly we use the Council of Financial Regulators, which is

the RBA, ASIC, Treasury and APRA, through which we discuss these sorts of emerging issues, particularly as

they relate to system-wide risks. We obviously talk to them about what we are thinking, they talk to us about what

they are thinking, and in this particular instance the tools, the policy responses—the supervisory and policy

responses—are likely to be things that are in our toolkit. Ultimately, we will have to make a decision based on our

mandate and responsibilities and the tools that we have, but clearly we are going to take advice from all of the

members of the council on what is the most appropriate thing to do in the current circumstances. Just to be clear,

the most appropriate thing may be nothing. We have to talk those things through.

The financial stability review of the RBA just simply acknowledged there is a concern about an emerging

imbalance and potential systemic risks. It is appropriate that we talk about them, and we want to make sure that

we are reinforcing sound lending standards.

Senator KETTER: Are there any policy measures in that toolkit that you talk about that are under

consideration that have never been used before?

Mr Byres: Not at this point. As I said, if we were to go down a path at some point in the future of putting in

hard caps and things, that would certainly be a new approach for APRA. I would not say it is unprecedented,

because four decades ago those sorts of quantitative controls were just the way the banking system was managed,

but they are not something that APRA has used. As I said, they are not the first sort of tool that we would reach

for. Perhaps to give you an illustration. Back in 2002 to 2004 we had a similar scenario. We had this run-up in

housing prices, concern about higher risk lending practices, and we went through a similar sort of process of

ratcheting up the supervisory intensity, trying to keep institutions focused, but there was this concern that the

competitive dynamics in the market, particularly around low doc and no doc loans, which were the issue at that

time, the lending was getting a little bit too reckless and without proper regard to prudent practices.

In that particular instance we ended up changing our capital requirements in a way that lower capital

requirements applied to full documentation mortgages—the standard thing where you would go in, you verify

your income, they check your employment and all that sort of thing—and for the no doc and low doc types of

loans, where clearly the banks were operating with higher risk levels, we had some higher capital requirements.

So, low doc and no doc loans are not the issue of concern anymore. They are not the issue in this particular cycle,

but that sort of response is the sort of thing that we would probably think about.

Senator KETTER: But I do not hear you ruling out those potential policy measures.

Mr Byres: Well, I never say never, but I did say in my opening remarks they are not likely to be the first ones

we are going to reach for.

Senator KETTER: What involvement has Treasury had in looking at these types of considerations?

Mr Byres: Treasury is obviously on the Council of Financial Regulators, so they are involved in the

discussions. We also have a working group that reports to the council that is made up of people at a slightly lower

level of seniority in the council agencies who are trying to work through the issues and make sure we are clear

about where the risks are and what are the appropriate response to them. Treasury is involved in that process.

Senator KETTER: Has APRA provided any advice to the Treasurer on these issues?

Mr Byres: No. We would keep the Treasurer informed, obviously, of whatever we propose to do, but at this

point we have not reached a point where we have decided anything.

Senator KETTER: If you were to decide to take—

Senator Cormann: 'If you were to decide' is a hypothetical question. I think the standing orders prevent

hypothetical questions being asked. By definition, 'if you were to decide'; you might want to rephrase your

question.

Senator KETTER: With the macro prudential tools that you have talked about previously, Mr Byres, how do

you effectively target those tools when cities like Sydney and Melbourne are booming while other centres are

seeing moderate growth?

Mr Byres: That is a good question and that is one of the challenges we have. Clearly we would want a

response that is as targeted and as proportionate as possible. There are trade-offs to be had. The difficulty when

you impose a policy which is postcode based, geography based or city based is inevitably what happens at the

boundary. Do you just shift activity elsewhere?



We have the same discussion—the impact of large banks versus small banks, the difficulty of trying to

distinguish between the two is simply that the activity flows to just on the other side of wherever you draw the

boundary. It is a highly relevant issue that you raise. We have to think that through.

Senator KETTER: When you ramp up those macro prudential tools, would it be an indicator that we are

seeing an emergence of a bubble-type behaviour in property prices?

Senator Cormann: Sorry, are you asserting that APRA is going to do this?

Senator KETTER: I am saying, if you do—

Senator Cormann: But 'if' makes it hypothetical, and you are really trying to pre-empt what may or may not

happen. Again, we are very keen to assist so you might just want to rephrase that question.

Senator KETTER: Would you say that as you ramp up macro prudential tools it is an indicator that we are

seeing the emergence of a bubble in the property market?

Mr Byres: The reason we have been ratcheting up our intensities to this state has been more supervisory than

regulatory intensity, because we are seeing emerging risk and higher risk lending practices. That is why we put

out the guidance and that is why we have done the stress tests. It is what we are focused on. The housing market

and the housing lending portfolios are about 60 per cent of the aggregate balance sheet of the banking system. It is

a big important part of the financial system, and we need to make sure we are keeping a close eye on it and

responding to emerging risks.

Senator KETTER: Would you say that Australian households that have entered the market in the past year

are at risk of seeing their properties devalued?

Senator Cormann: Sorry, but are you asking Mr Byres to do something that he cannot do? And that is to give

you market predictions. It is not Mr Byres's job to provide advice to this committee or to anybody else about what

may or may not happen to property prices into the future. You might just want to consider that.

Senator KETTER: Perhaps I would rephrase that. Don't macro prudential tools effectively reduce demand? Is

that the effect of it?

Senator Cormann: I would not have thought that is the intention of it.

Senator KETTER: My question was—

Senator Cormann: The role of APRA is to essentially be a prudential regulator. It might well be the effect of

what APRA may or may not do, but that is certainly not what drives APRA decision making.

Mr Byres: Yes. Maybe to add to the minister's comments—our primary focus is about resilience of a financial

system to potential risks. Clearly as we change the parameters within which the financial system operates—and in

this particular case, the banking system operates—that will have flow-on effects, and we understand that very

well. Just to be very clear, we are not setting out with an objective to target the level of house prices or something

of that nature. Our focus is making sure that financial institutions continue to manage their business in a sensible,

sustainable, long-term way.

Senator KETTER: You would be aware that the RBA has said that it is the risks to households that they are

worried about in this scenario?

Mr Byres: Yes. They come at this from a slightly different perspective. They are looking at it from a

macroeconomic perspective, a broader perspective. We are looking at it from slightly narrower perspective. The

nature of the risks are ones that we are both interested in, but as I alluded to earlier when we decide that we have

to do something else that will have to be because we have reached a view that it is consistent with the APRA

mandate to do something, and the action is the action that was within our powers to do and consistent with what

our objectives are.

Senator KETTER: Do you agree with the RBA that a small fall in house prices could precipitate a large fall

in household spending, with broader adverse consequences for the economy?

Mr Byres: I guess that is within the realms of possibility so, yes, it could.

Senator KETTER: I was going to leave mine there and move to a different line, the second point that Mr

Byres mentioned in his opening statement.

CHAIR: Senator Williams.

Senator WILLIAMS: I am getting a lot of complaints about Trio Capital, along with Timbercorp and Great

Southern and many other financial products that turned to tears. With regards to Trio Capital collapse, would you

please provide me with the terms of appointment when you appointed ACT Super Management Pty Ltd on 16

December 2009 as acting trustee of the funds? Would you be able to do that on notice?



Mr Byres: I do not know whether Mrs Rowell would have anything she could say at this point.

Mrs Rowell: We will have to take that on notice.

Senator WILLIAMS: That will be fine. Would you confirm that you also approved the fees to be charged to

investors be changed to an hourly rate and that this was undertaken without the knowledge or approval of the

investor? I believe it is supposed to be on a commission rate, and in came the trustee and it went to an hourly rate.

Next question: are the acting trustees, ACT Super, acting as trustees or liquidators?

Mrs Rowell: There is a separate liquidator. ACT Super is appointed as an acting trustee, and there is a

separate liquidator, but we can confirm that on notice as well.

Senator WILLIAMS: I question how an acting trustee can charge such exorbitant hourly rates, which impact

on their available funds. Anyway, those hourly rates are nothing new. Has APRA sanctioned the acting trustees,

ACT Super, to refuse paying investors their unimpaired, unencumbered and cleared funds, which have now been

retained by them since their appointment in 2009? There is unimpaired, unencumbered money there, but it is not

going out to the investors and it has been locked up since 2009.

Mrs Rowell: There is only a very small amount of funds remaining. There are some legal disputes that need to

be resolved before the remaining funds are able to be paid. ACT Super has proposed to make the final

distribution, which is around $8 million, in a single payment to the members. Each payment to members involves

significant cost in terms of processing, mailing out, drawing cheques and all of that, and so rather than doing

multiple payments of the cleared and then a subsequent payment the decision has been made that for this final

payment or distribution it will be done in a single round for cost-saving reasons, to reduce the costs.

Senator WILLIAMS: This is since 2009, I believe. This is five years.

Mrs Rowell: These matters are complex and difficult to resolve, and there have been a number of issues to

resolve, including trying to recover as much of the asset values as possible. As I said, there are still some

outstanding legal disputes to be settled.

Senator WILLIAMS: So, Mrs Rowell, APRA did not sanction acting trustee ACT Super to refuse paying

investors with this fund? Did you have anything to do with it?

Mrs Rowell: It is not our role to approve those processes.

Senator WILLIAMS: At the same time, can you confirm that these unimpaired assets were quarantined into

a separate account and that those funds are still available untouched and accruing interest?

Mrs Rowell: They are.

Senator WILLIAMS: They are? Good. APRA approved the part 23 compensation for fraudulent actions

undertaken by Astarra, one of the investment arms of Trio Capital. You have also worked with the acting trustee

on another part 23 conversation for Uallen, another investment arm for Trio Capital, again for fraudulent activity

that was the same as Astarra. Would you please explain why no action has been taken by APRA or the acting

trustee, ACT Super, against David Millhouse and Millhouse IAG Limited, the third main investment arm of Trio

Capital, as their activities are the same as Astarra and Uallen and deemed to be in the same boat?

Mrs Rowell: We have negotiated an enforceable undertaking in relation to the Millhouse matters.

Senator WILLIAMS: Is it progressing well? Has it been beneficial to the investors?

Mrs Rowell: You need to distinguish the action taken by APRA in terms of enforcement action from the

recovery of investments. The recovery of investments is not a matter for APRA to pursue. That is a matter for the

acting trustees.

Senator WILLIAMS: So, you put the enforceable undertaking on them, though?

Mrs Rowell: We put the enforceable undertaking on the directors that were involved in all of the Trio

activities at each stage.

Senator WILLIAMS: Do you monitor that and progress with it as it continues on? Or do you just put in an

enforceable undertaking and say, 'That's it. Goodbye'?

Mrs Rowell: The enforceable undertaking is that they do not take on any responsible person role within the

superannuation industry or with a custodian or other. We monitor to ensure that they are not undertaking those

roles.

Senator WILLIAMS: I understand now. Thank you. What agreement/understanding did APRA and/or ASIC

come to with Mr David Millhouse to not pursue this matter further? Obviously, the enforceable undertaking was

the issue. Is that why you did not pursue this any further?



Mrs Rowell: I cannot speak for ASIC, obviously. I am only speaking for APRA. We sought external counsel

advice on the behaviours and the issues and looked at all of the activities that were involved in the Trio collapse

and sought legal advice on the approach to dealing with those, including the prospects of success through court

proceedings or disqualification proceedings. Our advice was that the prospects were not necessarily strong, and

therefore achievement of an enforceable undertaking for an appropriate period was the better outcome to pursue.

Senator WILLIAMS: When you investigate these problems—I guess we can call them that—do you also

look out for evidence of criminal activity?

Mrs Rowell: We do.

Senator WILLIAMS: And if you find any evidence of criminal activity do you forward that referral to the

DPP?

Mrs Rowell: We would refer that to the Federal Police or the DPP or, depending on what the nature of it was,

possibly to ASIC to pursue.

Senator WILLIAMS: Through this whole Trio bucket of tears was there any evidence of criminal activity?

Mrs Rowell: The Trio matter is, as I said, quite complex and quite involved.

Senator WILLIAMS: Very complex.

Mrs Rowell: I think there has clearly been some evidence of criminal activity. For example, Shawn Richards

has admitted guilt and been jailed. I understand that ASIC has also investigated some matters. APRA's role is not

necessarily to pursue criminal activity per se, but as you say if we identify matters that may warrant pursuing we

refer them to the police or to other agencies.

Senator WILLIAMS: As we are all obliged to do.

Mrs Rowell: That is what we have done.

Senator WILLIAMS: The only other issue I have is this new daily online newspaper run by industry super

funds. Who is handling that issue?

Mrs Rowell: That would be me.

Senator WILLIAMS: I am throwing all of the bombs at you, Mrs Rowell. Sorry about that.

Mrs Rowell: That is okay.

Senator WILLIAMS: The Herald Sun reported the other day—and I was part of the report—that the website

has received $6 million from six industry super funds to start up, and it is already seeking more money from other

players. I, probably like Senator Cormann, Senator Whish-Wilson and Senator Ludwig—though he might be on

the pension plan; I do not know how it works—are with Australian Super, and they have been contributing to this

magazine. Australian Super has my email. I imagine they would have all the emails of their clients if they want to

relate to their clients about investments or assistance or anything. Why are they putting $6 million into what

appears to me a dudded new daily newspaper? Who oversees this?

Mrs Rowell: It is a decision for the trustees as to the nature of the investments that they undertake or the types

of marketing initiatives that are appropriate.

Senator WILLIAMS: Are you the oversight of the trustees?

Mrs Rowell: We would oversight the general processes and procedures followed by the trustees. We do not

necessarily discuss with them specific decisions that they take. We have had discussions with the relevant funds

about the process they went through to decide to either make an investment in this initiative or to undertake

marketing activities. We are satisfied that it is within the bounds of their role as trustees under the SIS Act

obligations. It is actually a relatively small investment or expenditure in the context of these funds and we have—

Senator WILLIAMS: In the context of funds, $6 million, yes, but it is still a lot of money.

Mrs Rowell: —followed up with the trustees to ensure that they are continuing to monitor this investment or

marketing initiative to make sure that it is delivering its objectives and remains in the best interests of members.

At this stage there is nothing that raises a prudential concern, from our perspective.

Senator WILLIAMS: This has been going on for a couple of years at the most.

Mrs Rowell: Less than a year. It has only just—

Senator WILLIAMS: Less than a year?

Mrs Rowell: It was launched about—



Senator WILLIAMS: With about 10 people employed? Six million dollars? Would you please make sure

you keep an eye on the trustees of this organisation for us, please?

Mrs Rowell: We will.

Senator WILLIAMS: Thank you.

ACTING CHAIR (Senator Bushby): Senator Whish-Wilson.

Senator WHISH-WILSON: Very quickly, can I just ask whether APRA has provided any information or

briefings or consultation to Foreign Affairs, Defence and Trade on the trades and service agreement negotiations?

Mr Byres: Sorry, with China?

Senator WHISH-WILSON: Yes, or regional TSA.

Mr Byres: I do not know that I could say that we have provided advice. We have been sent some materiel and

asked for comment about I would not necessarily call that advice per se.

Senator WHISH-WILSON: Have you been consulted?

Mr Byres: Yes. 'Consulted' is probably the word.

Senator WHISH-WILSON: Could I ask the same question in relation to the Trans-Pacific Partnership

Agreement? What consultation or input have you had into—

Mr Byres: I would have to take that on notice. I am personally not aware of us having seen something, but I

could not say that within the organisation someone has not seen something. I will take both of those on notice and

come back to you with a better response.

Senator WHISH-WILSON: Thank you.

ACTING CHAIR: I have a few questions as well, so bear with me.

Senator KETTER: I indicated I had a few. For your benefit, in the interests of time, I was going to seek to

put those on notice.

ACTING CHAIR: If you have them there you can hand them to the secretariat. I have some questions

regarding the impact of changes to the Fair Work Act on the Australian superannuation sector, particularly as they

relate to default funds. Are you aware of the independent research undertaken by Rave Consulting released in

June this year which outlines their views on the impact on the superannuation industry?

Mrs Rowell: I am.

ACTING CHAIR: Have you reviewed the findings contained in that report?

Mrs Rowell: I have read the report.

ACTING CHAIR: In that report it talks about there being potentially 1.25 million employees that will need to

be redirected to alternative superannuation arrangements. Do you accept that that is a reasonable estimate?

Mrs Rowell: I think it is difficult to form a view about the impact, because it would depend very much on the

way in which any changes to the arrangements would be implemented.

ACTING CHAIR: As the law currently stands, in the absence of any changes, would that require roughly

1.25 million Australian workers to have their funds redirected to new arrangements?

Mrs Rowell: As I said, it is hard to make that judgment, because it depends on whether the changes are made

for existing employees or only new employees into the system. Depending on what changes are made, they can

have a very big impact.

ACTING CHAIR: When you say 'depending on what changes are made', is that depending on what changes

the government makes to the rules or to the legislation?

Mrs Rowell: Yes.

ACTING CHAIR: So, you are assuming that there will be changes?

Mrs Rowell: No, I am not. I am just saying that if there were to be changes made, their impact would depend

very much on what the specific changes were. Without knowing what those specific changes might be it is very—

ACTING CHAIR: What I am trying to do is work out what would happen if the legislation that requires the

new default fund arrangements to take effect on 1 January next year proceeds without change. Have you looked at

what would happen in the absence of change?

Senator Cormann: To be fair, you asked a question like what would happen 'if'?



ACTING CHAIR: No. I am not asking 'if'. I am asking 'in the absence of any'. I am saying 'given the law

they currently face'. I am not asking you to look at what might happen if the government tries to change things. I

am saying, given the law that is currently in place which requires certain things to happen on 1 January next year,

have you looked at what is likely to occur given what the law is currently as it stands?

Mrs Rowell: We have not specifically considered that.

ACTING CHAIR: I would have thought that, if there are 1.25 million or a similar scale of employees who

have their SGC contributions that are forwarded to a new default fund as a result of decisions that are made under

the Fair Work Act, that may well increase the likelihood of additional lost super accounts. Is that something that

you have considered?

Mrs Rowell: Not specifically, because it is not necessarily falling within our remit as a prudential regulator.

ACTING CHAIR: What about the impact on employees? I presume that there will be an effort to try to

minimise lost super accounts. So, at some point there will be a need for people to move or a desire for people to

move their current balances from existing default accounts to those which they are required to move to or that

their employers are required to move to. If there is a significant degree of success in that or if the employees

themselves realise what is happening and choose to move their funds across, have you looked at all at the impact

on tax liabilities and lower prices as illiquid assets are sold down on mass to assist that, depending on the pace of

that transition?

Mrs Rowell: We have not undertaken any specific analysis. What we have been raising for trustees to

consider is what impact they might experience if there were changes to their cashflow or movement of members

as a result of any changes so that they are prepared and considering the issues around investment strategy,

liquidity and the like that would be associated with that.

ACTING CHAIR: That was going to be my next question, the impact particularly on smaller funds that have

little or no capital backing if they are unable to achieve listing on a material number of awards. They may well

lose future funds at a rate that is sufficient to make them potentially subscale or put them at risk of needing to

winding up or merge. Is that something that APRA would be interested in?

Mrs Rowell: It is an issue that we have asked trustees to consider as part of their assessment of their strategy

going forward.

ACTING CHAIR: Has there been any consideration of concentration risk as it appears possible that over half

of the members of default funds, and if not half then certainly a substantial proportion, could end up with their

moneys in funds sharing the same infrastructure support, the same administrators, the same asset consultants, the

same investment vehicles or insurers?

Mrs Rowell: Concentration risk is an issue that APRA considers in all of its industries. Obviously there is

potentially some concern if you have a material concentration of third-party providers to any industry, including

superannuation. It is not something that is of particular concern to us at the moment, but it is something that we

are monitoring.

ACTING CHAIR: The potential out of the law as it currently stands in terms of default funds is that there is

an increasingly small pool of funds to which default funds will be directed in the absence of changes.

Mrs Rowell: I think we are a long way from overconcentration in the super fund space.

ACTING CHAIR: But that is something that you are keeping an eye on?

Mrs Rowell: Yes.

ACTING CHAIR: Have you done any analysis of the proportion of funds under management that are

currently being held by people who have an entitlement to withdraw assets immediately—over 60s, people who

are old enough to withdraw it all in one hit, and the potential impact of an incident that might undermine

confidence in the system, which may lead to widespread desire of those people to actually withdraw rapidly?

Mrs Rowell: Again, we have not done any specific analysis on that point, although we have raised with a

number of trustees the need for them to be monitoring the demographics of their fund and what would happen to

their liquidity and their investment strategy as that membership ages. It is something that we would ask—

ACTING CHAIR: On the basis of an orderly withdrawal, as opposed to a rapid one?

Mrs Rowell:

Indeed. That sort of change in demographics is reasonably predictable.



ACTING CHAIR: The change in demographics is. I am just wondering, if there was some form of shock that

undermined confidence that demographic would have the ability to withdraw immediately in a way that other

demographics would not have.

Mrs Rowell: Potentially, yes.

ACTING CHAIR: A point of order?

Senator WONG: Firstly, it was an 'if' question, to pick up the minister's previous—

ACTING CHAIR: No, it was not. I was asking whether they had done any work to look into that.

Senator WONG: Can I finish my point of order?

ACTING CHAIR: Yes. Point of order.

Senator WONG: I think it was an 'if' question so I think it is hypothetical. I also wonder if it would be

possible for you to consider putting some questions on notice in this area, unless these are time critical. The

opposition sought to do that, because obviously revenue is an important area.

ACTING CHAIR: There are a couple of questions that I would like to ask in public rather than on notice. I

will move off from that and on to a different thing. The evidence from the royal commission into trade unions has

found that an employee of a super fund has wrongly released confidential member data, including names and

home addresses, to a union official. Given there appears to be uncertainty regarding what can be released and to

whom, has APRA given any consideration to refining the rules as to who names and addresses can be released to,

maybe confining just to the ATO and the courts?

Mrs Rowell: That is not a matter that is within APRA's purview.

ACTING CHAIR: We will leave it there in the interests of Senator Wong's plea. Do other senators have any

questions?

Senator KETTER: I will put my questions on notice, just to be fair.

ACTING CHAIR: You have time to do that. Thank you very much to the officers from APRA for assisting

us. Thank you very much, Mr Byres, for your first appearance. We will now move on to the Department of

Treasury, Revenue Group, who are appearing with the Australian Tax Office.

Senator Cormann: While there is a break, I undertook in a response to an inquiry by Senator O'Neill to table

the membership of the industry working group on the Establishment of an Enhanced Public Register of Financial

Advisers and Related Matters. I am happy to table that.

ACTING CHAIR: Thank you for that.


[17:43]

ACTING CHAIR: Welcome, Mr Heferen and officers from the Revenue Group of Treasury, the Australian

Taxation Office and also the ACNC. Would either Mr Heferen or the acting Commissioner like to make an

opening statement?

Mr Heferen: No, thank you.

Mr Reardon: No, thank you.

Senator DASTYARI: Thank you for all being here. I acknowledge and appreciate that we are running a little

bit late at the moment. I acknowledge we have received correspondence from Mr Jordan, who made it quite clear

that he is at a summit in Geneva.

Mr Olesen: He is at the Forum of Tax Administration in Dublin.

Senator DASTYARI: Mr Mills, I am sure you are aware there has been a fair bit of public discussion recently

around matters relating to multinational taxation. I am also sure you know that part of this committee is going to

conduct an investigation into these matters.

Mr Mills: Yes.

Senator DASTYARI: I assume that the ATO will be making a submission to that inquiry.

Mr Mills: I believe we will, yes.

Senator DASTYARI: I do not want to cover too much ground that we are going to cover as part of that

process, because there is an appropriate channel to go through that. What I wanted to ask, because I think this is

something that is on a lot of people's minds at the moment, is: how is it the case that you can have Australian

registered corporations that are paying an effective tax rate of zero or close to zero per cent?



Mr Olesen: I can take the lead on that question and we can move around as necessary. There has been a pretty

big debate on that, and what I wanted to start by doing is, firstly, deal with the impression it creates that large

public companies in Australia are not meeting their obligations under the tax law. Secondly, the impression it

creates that we are not active in that space. Thirdly, the impression that we may not have the capability to do our

role properly in that space. Now, none of those three things are true. What concerns me about the debate around

that is the impression it can create that corporates are not paying their fair share of tax, because perceptions like

that are quite damaging for other people who might see their own taxpaying behaviour. I am not saying that there

is not a risk.

Senator DASTYARI: You acknowledge there is a problem?

Senator Cormann: Can we just pause. I think it is going to be very important for Mr Olesen to be able to

provide a proper answer.

Senator DASTYARI: Shall I treat it as an opening statement?

Senator Cormann: If I can just put a bit of context here. I assume that your line of questioning is based on the

paper that was released by the Tax Justice Network and United Voice?

Senator DASTYARI: Not just that.

Senator Cormann: There were some fundamental flaws in that paper. For example, it considered what

effectively was gross revenue to assess the tax that was paid rather than actually considering the proper corporate

tax base. You have to make sure that you do not try to draw conclusions from that. There are issues that need to

be dealt with, but it is very important for these sorts of debates to be properly informed, so it is going to be very

important for us to know what you are basing your decisions on.

Senator DASTYARI: I have not made any reference to anything.

Senator Cormann: You did talk about zero per cent tax.

Senator DASTYARI: What I said was that there has been an ongoing public discussion where others,

including the Treasurer, have been very vocal. The Treasurer has been very vocal on this himself, and I note that

the correspondence this committee wrote to some of the largest Australian corporations cited and actually

included a copy of the Treasurer's speech on this matter.

Senator Cormann: The government is very committed to ensuring that all companies that generate profits in

Australia pay their fair share of tax in Australia. Nobody is disputing that. But when you make an assertion such

as companies are paying around zero per cent tax, then obviously you need to be able to source that. The only

recent report that I have seen make a claim such as this one was a very low quality report that was released by the

Tax Justice Network and United Voice.

Senator DASTYARI: Mr Olesen, I think you were going through giving a broader explanation. The point I

want to make, as you make that explanation, and the point you are making, which I think is actually an important

point, is there is a distinction between the question of legality and the question of appropriateness. That is where

the debate falls as well. I want to go back to ask the question: what kind of measures and tools are out there to

allow these Australian based companies to be paying such low levels of tax in some cases?

Mr Olesen: The point I was trying to make is that I am worried about the perception it creates for the rest of

the community that people are not paying their appropriate share under the laws as they stand. That is an unfair

impression to leave, and a damaging one from a tax administrator's point of view, because perceptions of fairness

of the system and how it operates with people paying their fair share is an important element of the success of any

tax system.

Where I was going to go next on that is that companies pay tax at 30c in the dollar on their taxable income. To

the extent that some conclusions are drawn about rates of tax, having a look at accounting profit as opposed to

taxable income is meaningless to the extent that taxable income and accounting profits are two fundamentally

different concepts, so you cannot draw a conclusion.

Senator Cormann: That is a very important point.

Senator DASTYARI: I am not disputing that.

Senator Cormann: It is a point that the Tax Justice Network and United Voice missed.

Senator DASTYARI: That is a matter for them.

Mr Olesen: The next layer of that is then to say, why are they different? There is a whole range of reasons

why taxable income as defined in the tax laws is different from accounting profits. There is any number of

reasons. It can be, for example, timing differences around capital allowances, or it might have to do with exempt



foreign dividends, or it might have to do with express concessions in the tax law, say, around offshore banking

units. It might have to do with trusts and the way that income flows through trusts. There is any number of

reasons why you get a big difference between accounting income and taxable income, but the truth is when you

are looking at taxable income all companies pay tax at 30c in the dollar.

Senator DASTYARI: Is there a problem with Australian companies and international companies operating in

Australia using tax minimisation schemes—I am not saying they are breaking the law in doing this, but to find

avenues to minimise their taxation; is this a major problem?

Mr Olesen: As you would appreciate, our role is to administer the existing set of laws. There is a range of

risks we look at, and we allocate our resources according to the risks we see. Absolutely we see risks in

multinational enterprises and Australian companies that have offshore operations in those dealings. That is not

because there is necessarily anything inappropriate, but there are complications, and reasonable minds can differ

on how Australia's tax laws applies when you have international dealing. For example, we are interested in prices

that get set for trades in goods and services. We are interested in the price set for the transfer of intellectual

property offshore and the royalties that might be charged for access to that. We are interested in debt levels,

because Australia has some rules around interest deductions. We are interested in a whole range of things like

that, and we can see through the data that we have access to there are reasons for us to keep a close eye in those

areas, which we do.

Senator DASTYARI: Can you explain what you mean by that? What data?

Mr Olesen: If you look at some of the analysis that I have seen, if you look at the growth in international trade

at an economic-wide level in Australia and you compare the growth against some of those items that we can see

that is happening between related parties, we can see there is sometimes a mismatch between the related party

growth in certain flows and the equivalent growth that you would see at an economy wide level. So, when you see

that kind of differential it gives you cause to go, 'Maybe we need to have a closer look and be satisfied that those

flows and the mismatch are appropriate.'

Senator DASTYARI: Is it a problem?

Mr Olesen: It is a risk.

Senator Cormann: I need to intervene here again, because I am looking at your press release with the shadow

Assistant Treasurer earlier in the week, which stated, 'This week the committee chairman, Senator Sam Dastyari,

has written to a range of major firms which have been alleged to pay as little as 10c in the dollar on their local

earnings.'

Senator WONG: Point of order. Is this an answer?

Senator Cormann: I am responding to the question.

Senator WONG: Is this a response? This sounds like a statement, not an answer to a question.

Senator Cormann: I am providing context.

ACTING CHAIR: A point of order has been raised. Do you want to speak to the point of order?

Senator DASTYARI: Let's just deal with the matter.

ACTING CHAIR: I think the minister is responding to matters that were raised.

Senator WONG: It is always very important.

Senator Cormann: It is very important for you to have the right context. Senator Dastyari, the only

organisation that has made such a claim is the Tax Justice Network, and it is an erroneous claim, because they

inaccurately and inappropriately mixed up different concepts of profit in order to come up with misleading

representations.

The other point I would make is that what was obvious in that particular report is that in Australia we actually

rank second highest in the OECD behind Norway when it comes to company tax revenue as a share of overall

revenue. If there is a proposition somehow that there is a general problem with the level of revenue that is raised

from company tax, that is not accurate. There are always issues.

The next important point to make is that Australia's anti-avoidance laws are amongst the toughest and the most

stringent in the world. Having said that, of course there are always developments in the market. There are always

risks at any point in time that need to be managed, and of course the tax office deploys all of its professional skills

to ensure that these risks are properly managed. If there are policy and systematic issues the government works

very hard to address them even as required, and we are, of course, providing leadership in that regard. The

Treasurer, Joe Hockey, is providing leadership in that regard through the G20 presidency as we speak.



Senator DASTYARI: Thank you for that political intervention.

Senator Cormann: I was being helpful.

Senator DASTYARI: I am sure you were.

Senator Cormann: Your questions are not political questions, are they? You are not making political

assertions?

ACTING CHAIR: Senator Dastyari, you have the call.

Senator DASTYARI: You used the term 'risk'. Further to that, you also raised concern in your opening

remarks about the perception it creates, and a perception that companies are not paying their fair share of tax in

Australia. Do you also accept statements by Richard Goyder and others that it also fundamentally hurts the

confidence if there is a perception or view—

Senator Cormann: 'If' there is? That is a hypothetical question, as Senator Wong very helpfully outlined

earlier. You cannot ask hypothetical questions.

Senator DASTYARI: I did not realise that this issue of multinational taxation had suddenly—I thought there

was bipartisanship on this issue, which suddenly seems to have disappeared when your comments are so at odds

with what the Treasurer has been saying about this.

Senator Cormann: The Treasurer and I are completely at one, but the standing orders of this committee

require that you do not ask hypothetical questions.

ACTING CHAIR: Senator Dastyari, please do not debate this.

Senator Cormann: You intervened before, Senator Wong.

Senator WONG: Just ask him to rephrase the question.

ACTING CHAIR: Senator Wong. Senator Dastyari has the call. Please ask a question.

Senator DASTYARI: What recent steps has the ATO taken to increase its activity on this issue around

multinational taxation?

Mr Olesen: We have taken significant steps.

Senator DASTYARI: I note the Treasurer said last week or the week before that he was going to ask the

ATO—and I am quoting him here at the moment, but my words may be off by a word or two—that you were

going to double your efforts.

Mr Olesen: Yes. We have a very significant program running at the moment to examine international

restructures and potential profit shifting arrangements that are happening amongst Australian companies and

multinationals operating inside Australia. We have been through that exercise focusing very heavily on the

available data that would give us an insight to the level of risk that might exist in that area. We are working quite

systematically through those risk assessments and as we work through those risk assessments there are some of

those groups that we are looking at that we will be commencing audit activity on. That is a significant ramping up

from what we had been doing previously. That has happened over the last couple of years and we are in the midst

of that program at the moment.

There are other activities that we have done. We have been working very actively with other revenue

authorities around the world to understand better and share intelligence between ourselves about the different

business models that are used by so-called ecommerce companies.

Senator DASTYARI: To minimise their taxation?

Mr Olesen: The tax planning that they use around the globe; that is right. We have been understanding

through cooperative efforts with other revenue authorities to better understand those business models, and that has

helped us enormously in the work we do locally to have a close look at how those business arrangements are in

fact operating. That is another thread to what we are doing.

Senator WHISH-WILSON: Isn't the issue that some of these avoidance measures taken through tax planning

are not actually illegal and that we have to look at ways of perhaps changing legislation or rules and regulations?

There are all these loopholes in different countries.

Mr Heferen: If I could intervene. I think it is important in this discussion, given the overall importance, as

acting Commissioner Olesen has said, the impact or the effect that it might have on people's confidence in the

system to have the concepts clearly separated. Clearly in the international debate led by the G20, and supported

by the OECD, there is the work at the multinational corporation level, and the issue that the world finds itself in

with a range of large multinationals parking money in tax havens, not repatriating that back on shore and then



utilising conflicting rules. The common case often argued is with the United States and with Ireland about tax

residence and where the taxpayer needs to remit tax, and then you have large multinationals that have a zero rate

of tax but clearly make profit.

Mr Olesen: Yes.

Mr Heferen: So, there is that issue, which Senator Whish-Wilson was getting at, but my urge to this

committee and any other committee that follows it is to conceptually separate that from observations that there are

Australian companies on the ASX 200 that have a zero or 10 per cent rate of tax. It has nothing to do with that

issue. It is all about, well, they did not make any profit so they should not pay tax, or they made some accounting

profit but because of their accelerated depreciation or their research and development or their carried forward

losses or their foreign source income they are actually not subject to tax. The report that talks about zero and 10

per cent tax rates is actually an analysis of what is an appropriate tax treatment for those, given the tax system we

have.

Senator Cormann: We have reached an appropriate conclusion.

Mr Heferen: It is a separate issue from the one I think we are getting at. The worry where I sit, the same as

where the ATO would sit, is that when they conflated on one hand you have got some that looks pretty egregious

and, on the other hand, you have got, 'Well, this is how the system ought to work.' When they are conflated,

because they are so difficult, complicated and hard to pick apart, it can colour the debate.

Senator CANAVAN: I have a follow-up on that. I know a few years ago Treasury made a lot of comments

about the effect of the economic downturn on accumulated losses and its subsequent effect on tax, particularly

corporate tax revenue. How is that washing through the system now? Is that still impacting on companies' liability

for tax, those forward tax losses, accumulated over the years?

Mr Heferen: I am sure there are still some companies that will have losses that are still being carried through

the system and, of course, there will still be companies that post the GFC would still make losses in a particular

year. With those losses, of course, the company has to carry those losses forward to a future year under the tax

system until they have the profit to offset that against, and so there would no doubt be an element that would carry

over from the GFC and there would be some generated in years after the GFC.

In an accounting profit sense those losses are accounted for then, but in the tax world they have to be carried

forward. Hence you can easily see a situation where a company in a particular year, and particularly as some

reports have looked at, say, in the 2012-13 year or the 2011-12 year, would be at the sharp end of still having to

account for their carried forward losses.

Senator CANAVAN: So, given that relationship any analysis which relied on gross profit and not taxable

income would have even larger errors given the recovery process?

Mr Heferen: It is more fundamental than that. It is not just an error. It is just comparing an apple with an

orange and not being about fruit. With accounting profit and taxable income for some businesses some of the time

there could be a degree of similarity, and, in fact, a recent report said that if you used accounting profit a lot of

firms are earning 26 per cent rather than 30. I must confess I was surprised it was so high. But when you get right

down to it, there are intended significant differences. Research and development tax concessions are a classic.

Accelerated depreciation is another standard. The carried forward loss is another one.

For our ASX 200 companies, for the large ones, what would be critically important would be the fact that if

they have foreign income, so they have an investment overseas, when the dividend comes back it typically would

have been paid in the other country, so when it comes into Australia it is treated as non-exempt, non-accessible

income. Yet from an accounting profit point of view, it could still show up as a profit. Once you go to that level

then it is a situation where for a company to work out its taxable income, which starts with the accounting profit

and then says, 'What do we need to deduct?'. The other one is interest cost.

Senator CANAVAN: Is it your understanding that the Tax Justice Network report did not cover those factors?

Mr Heferen: It did not go anywhere near them.

Senator Cormann: They did not look at taxable income, because if they had looked at taxable income it

would have shown that these top 100 ASX companies actually paid the corporate tax rate of 30 per cent. That was

very misleading.

Senator DASTYARI: The point that is being made that I think needs to be explored, and I think a point future

meetings of this committee will explore—but let us be clear here with what we are not saying. No-one here is

saying or making the allegation that at this point there were not deductions that were legitimately able to be made

to allow some of these companies to pay an effective tax rate that is quite low. We will leave it at that, because we



are going to explore it. You said there were two separate things. There is the international multinationals that are

well documented, the Googles and the Apples of the world, that use international lawyers and structures to

minimise tax. Back in the day it used to be the Cayman Islands and now it seems to be Ireland.

Mr Heferen: It is still the Cayman Islands. Ireland is just part of that.

Senator DASTYARI: Then, on the other hand, you have Australian firms that make a series of deductions.

The point you are making is that they are legitimate deductions in that they are deductions that exist in the current

tax regime. The question is: is there an exploration or at the moment as part of the tax white paper process that we

are going through to look at what these currently legal exemptions are to look at ways in which we can ensure that

they are not being misused tactically by firms to pay less tax than they otherwise would even though they are not

committing a crime by using those loopholes?

Mr Heferen: The government and the Treasurer are starting to think about the process for the white paper, but

as far as the white paper goes in relation to corporate tax the sorts of things that are commonly used to convert

accounting profit to taxable income are not really the sorts of things that a white paper would examine, such as

the ones I listed before—research and development tax breaks, accelerated depreciation, which I must say in the

Australian system is pretty well cleaned out. The Howard government's response to the Ralph review back in

2000, when the rate went from 36, 33 down to 30, the big trade-off there was broadening the base and reducing

the rate. A lot of the accelerated depreciation is out of the system. There is still a bit for oil and gas pipes, tractors,

planes and buildings, but I think people who work in this area, either tax experts or public policy people, are

pretty content that that is probably a sensible spot to be. In essence, like the 30 per cent rate, there is still an

element of arbitrariness about them, but they have landed in a spot and they have been there for quite a while.

I guess the main one that you might be alluding to would be interest deductions, where those interest payments

are to a foreign parent. In those cases I do not think anyone would run an argument to say our corporate tax

system should disallow interest deductions. The question is: how much should that interest payment be? That is

when it falls back into the transfer pricing rules.

There is a case at the moment that is in the press—and I will not name the company—but there is an active

dispute with the commissioner at the moment about whether the interest payment back to the parent was

commercial, at arm's length or too high, and the current rules facilitate that. When you think about a reform, there

is really no reform there to be had. There is a question of maybe better documentation, and clearly the country-by-

country documentation. That is an issue that the G20 has on its work program.

Senator DASTYARI: I will have to pull you up there. Just to go back. You said there is not a reform that

needs to be had?

Mr Heferen: Yes.

Senator DASTYARI: So, your belief is that the current Australian taxation deduction regime, as it applies to

domestic Australian firms, needs no reform?

Mr Heferen: I do not want to pretend that I am in the world of the policy making as opposed to policy

advising. Clearly that sort of thing rests with ministers. I was making the observation when one thinks about a

reform, like a change in the way something is done, whether the write-off period should be 10 years or five years

for something is not really in that world. These are arbitrary things. So, a black hole deduction, for argument's

sake. A capital payment where there is not a depreciable asset written off over five years, which I think is the

black hole. If you took it to 10 you would raise money; if you took it to one you would give away money.

Those sorts of things are not the kinds of things that you would examine through a reform process, but they

might be the kinds of things that governments look at to say, 'Does this need for examination?' All governments,

ever since I have been doing this, would examine those issues.

Senator Cormann: The important point here is that we are actually, right now, trying to pursue a budget

measure of the previous government, which is to ensure that tax deductions for research and development are

appropriately targeted and do not go to the biggest companies and that they can't deduct excessive costs. But the

Senate of course right now, the opposition and the Greens, are not facilitating passage of what was a Labor

initiated budget measure to limit tax deductions for research and development to make sure it is more

appropriately targeted. There is a whole range of deductions. That is the whole point. That is about protecting the

taxpayers.

Senator WONG: That was part of the Gonski school funding, which you have walked away from. He wants

to make a political statement. It is another broken election promise, and thank you for your drawing everyone's

attention to it.



Senator DASTYARI: Mr Heferan, I will take a step back. You initially said that there were two sets of issues

when it comes to taxation. You said that there is a multinational tax avoidance structurally huge problem, well

documented, G20 is trying to deal with it, and hopefully there can be a way—you are herding cats. Park that to

one side. That is a big problem and that is acknowledged to be a big problem. But your submission is the

domestic problem with Australian firms. You can look at their accounting profits and you are saying that there is

a difference between the accounting profits and taxable income. The point being that the concern that some of us

have and that we want to explore is that what constitutes taxable income involves a whole set of deductions made

prior to that that effectively allow some Australian companies, through how they structure themselves, to be able

to pay a minimal amount of taxation.

Senator Cormann: Such as research and development.

Senator DASTYARI: Your submission, though, is that that is not really a problem?

Mr Heferen: That is right. In fact, I will go further. I would say that to me it is clearly not a problem.

Senator Cormann: It is as intended by the parliament.

Mr Heferen: The intention of those elements—where a firm undertakes the eligible research and development

activity—

Senator DASTYARI: I was not saying research and development per se. I was saying the whole series. You

listed them yourself.

Mr Mills: I can answer the question and just by way of example, if you have an Australian company where

most of its operations are actually based in the US it will pay tax in the US. We will not seek to try to tax it again

when it comes back to Australia. Its apparent rate of tax might be zero, but in fact it has been paying 35 or higher

in the US. That will not necessarily come through, depending on what the structure is. That is why there is a lot of

noise in this thing. The other point that I wanted to make is—

Senator DASTYARI: We are worried that it is more than just noise.

Mr Mills: Unfortunately there is a lot of noise. I do want to make this point.

Senator DASTYARI: So, you guys are saying there is no problem?

Mr Mills: No. I want to make a few points about the structure. Because of changes over recent years we have

probably the strongest anti-avoidance and transfer pricing rules in the world. We have a system where companies,

particularly listed companies, like to return profits and they like to tell the world that they are making profits. That

then goes, in part, although they are different bases, it goes to an encouragement of ensuring that there is a taxable

income. Why? Because they pay tax. Why does that matter? Because they can frank dividends. The market wants

them to frank dividends and they will punish them if they do not. We actually have some of the structural things

in place that encourage Australian companies to pay Australian tax.

Senator Cormann: In response to your proposition that we do not think this is a problem, is this so serious an

issue in terms of the integrity of raising revenue for government and our economic prosperity into the future that

we need to be very clear on what the actual problem is or is not? Mr Heferan very candidly and in a very detailed

way sought to explain to the committee where the problem actually was as opposed to where the problem is not. It

is very important that we are clear on that.

Senator DASTYARI: I am not sure whether the question of staff cuts is for Mr Olesen or Mr Mills. I have a

figure here of how many staff you are shedding over the next four years, but what is your understanding of the

figure over the next four years?

Mr Leeper: Compared with a base of budget 2013, decisions by previous and the current governments have

us looking at a staffing adjustment on current indicates of 4,700 by 2017. Next month we will have completed the

3,000 that we were expected by the government—

Senator DASTYARI: Is that 4,700?

Mr Leeper: Yes.

Senator DASTYARI: Out of how many?

Mr Leeper: FTE in head count terms, 22,000 to 23,000.

Senator DASTYARI: So one in four roughly?

Mr Leeper: One in five.

Senator Cormann: Initiated by the former government and supported by us.



Senator DASTYARI: I am asking the Taxation Commissioner a question. So, one in five staff are getting

cut?

Mr Leeper: One in five if the forward estimates remain at their current levels. At the moment we have

reduced by 3,000 as at the end of this month. That is the task in front of us.

Senator DASTYARI: No organisation can lose one in five people without it having some kind of an impact

on the organisation as a whole. I refuse to accept that one in five people were doing nothing. I suppose the

question has to be asked: if you are losing one in five people where are you losing them from? Is this across-the-

board in every division and every department?

Senator Cormann: The mining tax administration area, given that the mining tax is gone, there are more than

100 people there.

Senator DASTYARI: So, you have 4,600 to go. Keep going.

Senator Cormann: It is well over 100.

Senator DASTYARI: Let us give you 200. Where are the other 4,500 people coming from?

Mr Leeper: From a range of job families, a range of areas in the tax office. As previously advised to this

committee, we are focusing hard on layers of management, back office functions, which we are in the process of

bringing together while we do the reduction. There are some losses in the accounting and auditing areas.

Senator DASTYARI: Let us stop there. Do you have a breakdown of how many accounting and auditing in

the forward estimates?

Mr Leeper: I do not have the forward estimate figure, but at the present time to the end of September this year

we are showing redundancies of about 2,200. That is the baseline figure of where we are up to.

Senator DASTYARI: In which division?

Mr Leeper: Across the ATO. The standout areas there would be in our auditing area approximately 500 of

that 2,200.

Senator DASTYARI: What did you say about the auditing? How many were there?

Mr Leeper: It is 500 or so out of the 2,200.

Senator DASTYARI: You seem to be reading from a table. Are you able to table that?

Mr Leeper: That is a decision for the minister.

Senator Cormann: I will have to consider that. I have to take advice.

Senator WONG: It is not a decision of the minister.

Senator DASTYARI: It is not a decision of the minister.

Senator Cormann: We are taking it on notice. I need to assess whether the—

Senator WONG: Can I just follow up on—

Senator Cormann: If I had asked Senator Wong to table it—

ACTING CHAIR: Senator Wong first.

Senator WONG: Mr Leeper, I think in answer to a question from Senator Dastyari you confirmed the 4,700

figure, correct?

Mr Leeper: Yes, that is right.

Senator WONG: Which is a forward estimate cumulative figure?

Mr Leeper: Yes, that is right.

Senator WONG: Of FTE reductions?

Mr Leeper: Head count. I would stand to be corrected, but I think it is FTE.

Senator WONG: So would the head count be higher?

Mr Leeper: The head count would be higher.

Senator WONG: Do we have the equivalent head count figure for the 4,700?

Mr Leeper: It is head count.

Senator WONG: So, it is head count, not FTE?

Mr Leeper: Yes.

Senator WONG: Are you able to give me the FTE figure, the equivalent?



Mr Leeper: I do not have that with me.

Senator WONG: Perhaps take it on notice.

Mr Leeper: Yes. As a shortcut, if the minister is concerned about tabling it, perhaps over the dinner break you

could just look at whether or not you could give or are able to just read out what the 4,700 comprises?

Senator DASTYARI: That is what they were just doing.

Mr Leeper: The 4,700 is a figure which is implicit in our budget bottom line.

Senator WONG: I appreciate that.

Mr Leeper: In response to Senator Dastyari's question I was about to say that of the 2,200 redundancies that

we have currently done I could provide the three or four major areas where that was being sourced from. But the

4,700 ahead of us is a budget adjustment. It is our task to find where they need to come from over the next two to

three years.

Senator WONG: So the 4,700 is on top of the 2,200?

Mr Leeper: No. It is the total adjustment task to the end of 2017.

Senator WONG: Are you saying as part of the budget task you have not worked out where the remaining

2,500 are?

Mr Leeper: Our focus at the present time has been—

Senator WONG: Have you or have you not?

Mr Leeper: Our focus at the present time has been to reduce by the 3,000 by the end of October that the

government's decisions required us to do. We are on track to do that. We do not need to make further adjustments

for a further two years.

Senator DASTYARI: Can we have the 3,000 breakdown?

Senator WONG: You must have the 3,000.

Senator DASTYARI: You must have the 3,000.

Mr Leeper: I have 2,200 at the moment.

Senator WONG: If you have already worked out where the 3,000 are from, which is what your evidence was,

then surely you can give us from which areas the 3,000 comes and how they are distributed.

Mr Leeper: Given that 416 of them are still to exit the organisation and it is still technically possible for

people to withdraw, I actually could not give you the 3,000 with any certainty. I was using the 2,200 as an

approximation.

Senator WONG: This is a very long way of doing this. You can do it with a caveat. People have already been

advised or have put in voluntary redundancy?

Mr Leeper: In large part, yes.

Senator WONG: An expression of interest. Why not give us to date where the 3,000 is up to and from which

areas? We accept the caveat that people can make the decision to change it.

Mr Leeper: What I was saying to Senator Dastyari is that the figure I have at the present time sum to about

2,200 and I would not expect those proportions to change materially. I can give you the three or four major job

family headings in that. That was auditing, 509; administration, 305; operations and processing, 250; law, 221—

Senator WONG: Law?

Mr Leeper: Yes. The next largest one is management, 149. There are others.

Senator DASTYARI: What was management?

Mr Leeper: There were 17 job families. Law was 221.

Senator DASTYARI: Let us cut to the chase. Would the investigative component of what the ATO does

when it goes out largely fall into auditing?

Mr Olesen: Yes.

Senator DASTYARI: So, the largest group cut is the group whose job it is for enforcement?

Mr Olesen: The largest group of people we employ in the organisation happen to be people that do that kind

of work. Out of 20,000-odd we have about 10,000 of those doing that kind of work.



Senator DASTYARI: You have already cut 509 auditors. By your own submission, if the proportions

relatively stay the same, one in four of the people you are cutting are from front line of enforcement, effectively. I

am sure out of those 221 lawyers some of them are working in enforcement.

Mr Olesen: There is another dimension to it. There is a simple dimension about who are the people who have

sought voluntary redundancies, have accepted those and have either now left or are about to leave—and next

Friday is the end of the process—but as part of that overall process we have been looking, in particular, at our

back office administrative functions.

Senator DASTYARI: But can you just tell me—

Mr Olesen: The reason it is important is some of the people that found their way into what you would call our

back office functions originally came from the front office. As we work through the rebalancing process of what

we in fact need to run our back office, what we are discovering or rediscovering is that we need fewer of those

people.

Senator DASTYARI: If you lose 4,700 staff members at the ATO—and I do not think you are saying this—

they are not all going to be back office. That is not what you are saying, is it?

Mr Leeper: No, absolutely not. I am saying that there is some potential to use the back office staff in the front

office.

Senator DASTYARI: What impact does this have on the ability of the ATO when it comes to enforcement?

Mr Leeper: We said in our evidence last time, as I recall, that we were confident there would be no

significant impact on revenue and no impact on our service provision.

Senator DASTYARI: You believe that you can lose 4,700 of your own staff and it is going to have no impact

on the services being provided? Will you be conducting the same level of investigations?

Mr Leeper: To a significant extent, yes.

Senator WONG: It is extraordinary how you can—

Senator DASTYARI: Where are these 4,000 people coming from?

Senator Cormann: I will intervene here. This is feigned outrage from the Labor Party in relation to savings

the Labor Party initiated and banked in the budget.

Senator WONG: This is not even relevant.

Senator Cormann: All we are doing here is bringing forward some of the savings that the Labor Party

initiated and banked in the budget. I am not sure why you are jumping up and down and trying to suggest that the

world is going to fall apart, because these are things that we are implementing. We are doing the hard yards.

Senator DASTYARI: Before you told us that there is no problem in the taxation space.

Senator CANAVAN: In the 2012-13 budget my understanding is that the former government reduced ATO

staffing levels by more than 1,000 but in the same budget booked a compliance program saving of around $200

million and over the forward estimates nearly a billion dollars. I do not know whether you can remember that, Mr

Heferan. Was that reasonable enough to do given they were reducing numbers and still book a compliance

saving?

Mr Heferen: If it was in the budget it was very reasonable.

Senator Cormann: Apparently it is no longer reasonable.

Senator DASTYARI: I just feel that if there was any fat in the system it has already been taken out. That is

the point that we are trying to make. We removed the back office staff and now they are going after enforcement.

Senator CANAVAN: They left us a perfect tax system.

Senator DASTYARI: Apparently the tax system is perfect, from what the minister tells us.

ACTING CHAIR: Senator Leyonhjelm has a couple of questions that he wants to ask and then he has to go.

Senator LEYONHJELM: I am going to change the subject to tobacco. The Department of Health has a

publication called Tobacco key facts and figures, and its webpage reproduces this and was last updated on 17 July

this year. It states, 'The Treasury has advised that tobacco clearances (including excise and customs duty) fell by

3.4% in 2013 relative to 2012 when tobacco plain packaging was introduced.' Are you familiar with what I am

referring to? I am not sure who I will be talking to here.

Mr Heferen: This side of the table is from the Treasury, so if we advised the Department of Health—

I suppose there are two things. Firstly, did we actually do it?



Senator LEYONHJELM: Or they misquoted you.

Mr Heferen: I am sure they would not have done. I am sure we said that. We may have some officers here

who are familiar with that. If you could continue with the question.

Senator LEYONHJELM: You may need to consult somebody, and I acknowledge that. If there is no-one

here who can answer it, we will put it on notice. The question is: did the process where branded packs were

destroyed and replaced by newly imported plain packs boost tobacco clearances in 2012?

Mr Heferen: I am not aware. We will have to take that one on notice.

Senator LEYONHJELM: There is a follow-up to that. Were tax refunds for the destroyed products issued in

2013 and, if so, did this depress clearances in 2013?

Mr Heferen: Again, we would have to take that on notice, noting that the excise payment is paid on the

clearance. So, once it is cleared out of customs or the excise store that is when the tax is paid.

Senator LEYONHJELM: We understand. It is just that the impact would suggest that tobacco clearances

fell, as I said, by 3.4 per cent in 2013 relative to 2012. I am trying to understand whether that was real or whether

it was as a result of refunds.

Mr Heferen: Also when clearances fall, there is always the case that, if there are increased taxes, that has

some effect on demand but it also has an effect on timing. So, when excise changes are scheduled to occur that

may have some effect. It may be the case here, but that is something we will take on notice.

Senator LEYONHJELM: Just to follow that up. In Budget Paper (No. 1), page 518, it shows rising estimated

nominal receipts from tobacco duty each year. I have the figures here, if you need to refer to them. My question

is: is this solely due to rising rates of duty or is tobacco consumption estimated to increase?

Mr Heferen: I suspect it is rising rates of duty. We do not assume any increase in consumption.

Senator LEYONHJELM: You do not assume any increase in consumption?

Mr Heferen: No.

Senator LEYONHJELM: And you do not assume tobacco consumption per capita is estimated to increase?

Mr Heferen: No.

Senator LEYONHJELM: So, no overall consumption?

Mr Heferen: Correct.

Senator LEYONHJELM: No consumption per capita increase?

Mr Heferen: That is right.

Senator LEYONHJELM: The other questions I will put on notice. Thank you very much.

ACTING CHAIR: You said that you had a few questions and then we will finish up.

Senator DASTYARI: We will finish on that and then there are other things we can talk about when we come

back. We went through the breakdown you gave us. Your proposition is that largely the proportions insofar as the

2,200 is roughly the proportions that we could anticipate for the 4,700?

Mr Leeper: No. It is for the 3,000. We have to make decisions about how to get from the 3,000 reduction to a

further 1,700. We have two years to plan our way through that. We have not decided where to make those

reductions at this point. We have scaled it on the 3,000. I would say the 2,200 is indicative of those numbers.

Senator DASTYARI: It defies belief that you as an organisation could be losing that quantity of staff, that

you could be losing so far at the end of this month in the vicinity of 700 or so people in auditing, and yet it would

have no impact on the level of investigation or activity.

Mr Olesen: I am happy to try to explain that to you as I have been trying to do.

Senator DASTYARI: Can you? It does not make sense.

Mr Olesen: There are a few reasons for it. The level of staffing that you have got is one side of the equation.

The other side of the equation is the way in which you go about the work that you do, and another part of the

equation is the kind of structure that you have in the teams that you have operating. If you look inside, for

example, the people who are in the auditing job family and are leaving us, a substantial number of those are at the

senior officer levels. When you look inside the team structures we have had in the past, we have had relatively

small spans of control and—

Senator DASTYARI: That is not true in the structure you gave us, because you had management as a

separate category, but keep going.



Mr Olesen: I am not sure what you are referring to.

Senator DASTYARI: You and others.

Mr Olesen: It is the case that we have had a reduction in layers of management and we are trying to increase

team sizes.

Senator DASTYARI: There are 191 jobs there. They are not the auditing jobs, though. The auditing jobs are

a separate category of 509 jobs.

Mr Olesen: Maybe I am confusing you and confusing myself in the process. What I am trying to say is that

amongst the auditing jobs that we are losing some of those people who have been in management positions and as

we reconsider the structures that we have in those auditing teams we need fewer of those people at that level, and

so you end up with managers with broader spans of control, different team structure requirements and resourcing

to do the work they did before.

Senator Cormann: This is because the Tax Commissioner, Chris Jordon, on 5 June actually answered the

exact question you just put in response to a question put by Senator Bishop. He asked, 'Are you putting to us that

the revenue collection you would be providing to government is not going to be materially affected by a reduction

of almost 5,000 people over four or five years?' Mr Jordan: 'Yes, that is what I am putting to you.' Secondly, I

refer you to the actual measure in the budget, page 214 of Budget Paper (No. 2). What you will see there is the

government's total staffing reductions of 4,700 were to occur—

Senator DASTYARI: What page?

Senator Cormann: Budget Paper (No. 2), page 214. The ATO is bringing forward staff reductions that were

already to occur as a result of decisions made by the previous government. All we are doing is bringing forward

the staff reductions that were otherwise happening in 2015-16. So, over the forward estimates the efficiencies in

terms of staff in the Australian Taxation Office are entirely consistent with what was initiated by the previous

Labor government. It is just that we are in government while these things are being implemented.

Senator DASTYARI: With any organisation surely there is a point. I refuse to accept that you are not at that

point already, but that is your submission. You are entitled to give the evidence that you want. I do not have to

accept it. With every organisation there is a point at which the loss of staff starts having a fundamental impact on

the ability of the organisation, and in this case the ability to collect revenue. There is a point; you would accept

that?

Mr Olesen: At some point inevitably.

Senator DASTYARI: You are not of the view that we are at that point?

Mr Olesen: No.

Senator DASTYARI: And your view is that you can comfortably take another 1,700 job cuts?

Mr Olesen: As Mr Leeper has been saying, we have another two years to work through what the impacts of

the budget might be, and we will work through that systematically over the next two years.

Senator DASTYARI: So, 1,700 is not an issue?

Mr Olesen: The other way for me to answer your question is to say that what we are doing is monitoring

closely our business performance this year.

Senator DASTYARI: So, you are effectively saying—

Mr Olesen: Our business performance this year is consistent with prior years. Revenue is being collected. Our

audit results are higher than at the same time last year. Our service standards are being met and complaints are

down. If I use business data to give us a sense of whether we are currently dealing with the reduction in staff, the

evidence before me is that we are. We will naturally continue to monitor that performance and make adjustments

as we need to.

Senator DASTYARI: Your message to the remaining 1,700 or so that you are trying to find, your submission

to this Senate inquiry and to your own staff and the 22,000 or 23,000 people who still work for the ATO is

effectively this: 'We can lose 4,500 of you. We can continue to lose in the next two years another 10 per cent'?

CHAIR: Is that a question?

Senator DASTYARI: I am coming to a question. 'In the next two years we can lose another 10 per cent of

you and it will have no impact on the functions or material impact on what the ATO does.' That is what you are

telling your own staff?

Senator Cormann: That is the evidence that the ATO consistently provided in the estimates in June.



Senator DASTYARI: I am asking Mr Olesen a question.

Senator Cormann: The tax commissioner has answered that as a yes.

CHAIR: It is the prerogative of the minister to take the call.

Senator Cormann: I have just indicated that the tax commissioner himself has already answered that question

with an unambiguous and very crisp, yes, full stop.

Senator DASTYARI: That says a lot about what you think of your own staff.

CHAIR: A follow-up question?

Senator Cormann: We should always aim to do things in an efficient way.

CHAIR: A follow-up question?

Senator BUSHBY: In a speech earlier this month I understand the commissioner said, 'More than 95 per cent

of revenue received comes in voluntarily with relatively little assistance or intervention from us.'

Senator DASTYARI: Why do we need enforcement at all?

CHAIR: Order!

Senator BUSHBY: Less than five per cent comes in from compliance enforcement measures.

Senator DASTYARI: Because—

CHAIR: Order! Senator Dastyari, do you want to go into a private meeting?

Senator Cormann: He wants us to send a tax officer—

CHAIR: Senator Bushby you have the call.

Senator Cormann: A personal tax compliance officer for every household.

Senator BUSHBY: As the ATO's processes become more efficient with better use of data you already have to

pre-fill tax returns and greater use of standard business reporting software, are your programs and resources to

counter tax avoidance and tax evasion also becoming more effective?

Mr Olesen: As I was trying to explain before, yes, we are changing the business processes that we use to do

the work that we do around enforcement. Some of those changes occur because of some of the things that you

have just mentioned, because they effectively evaporate demand on us in other parts of our business and free up

resources for us to apply resources where risks are still present. At a more fundamental level we are revisiting the

way in which we go about auditing work or investigative work, including the cycle times we take to do that. We

are certainly using data and analytics in a more sophisticated way to better target the activities that we do. Those

things combined are some of the reasons why we are able to maintain our performance notwithstanding that we

are having to let go a number of people.

Senator CANAVAN: I was not here obviously for earlier estimates. Just to clarify, Senator Dastyari

mentioned there will be 4,700 staff reductions. They were decisions made by the former government; is that

right? Were they projections in your forward estimates of staff reductions?

Mr Leeper: Yes. The minister has already provided that. It is on page 214 of Budget Paper No. 2. The

measure indicates that the impact on the ATO in this budget was the bring-forward of staffing reductions which

were already factored into the forward estimates. In practice, 1,600 were brought forward from 2015-16 into

2014-15, otherwise the profile of staffing reductions, which is consistent with the accumulation of efficiency

dividends, was already in our forward estimates.

Senator CANAVAN: So, when those efficiency dividends and of course subsequent staff reductions were

baked in the cake, so to speak, from the former government, did the former government make any downward

revisions to its revenue projections based on those staffing reductions?

Mr Heferen: No.

Senator CANAVAN: I have one final follow-up. I would like to go back to the Tax Justice Network report

that we were talking about earlier. The leader of the opposition had an opinion piece in the Sydney Morning

Herald a couple of weeks ago stating, 'Because successful businesses are always looking for a competitive edge

some multinational corporations are leading the way in tax avoidance too. As we have seen in the pages of The

Herald over the past few days'—which is reference to the reporting on the Tax Justice Network report—'these

efforts can substantially erode a nation's company tax base.' Mr Heferan, you said earlier that the assumptions of

that report were way off. Is it, in your view, reasonable to use that report as evidence of an erosion of the nation's

tax base?



Mr Heferen: I have not read the piece by the leader of the opposition, but what I said before I would stand by,

that there is clearly a serious issue about the tax paid by a range of multinational corporations where there is

pretty well documented material that the G20 has considered and an enormous OECD work plan has tried to come

to grips with that issue. That is the multinational staff led by a range of in particular US multinationals and often

in the IT area. That is an issue that the world needs to grapple with and it goes to the question of the sustainability

of the corporate income tax system that most developed countries use, more multinationals, greater emphasis on

intangibles, the capacity to locate the intangibles in low tax jurisdictions, and loose anti-avoidance rules, unlike

Australia, in a range of other countries. That is clearly something.

I do not want to come across in any way as playing down the gravity of that, because that then plays directly

into the concerns that Commissioner Olesen raised about the public perception of the validity of the system. I do

not want to be interpreted as in any way underplaying that risk. It is there. It is clear. Action is needed. The

previous government and the current government pursue that through the G20.

Senator CANAVAN: But you did not see anything in that Tax Justice Network report that would indicate an

erosion of the tax base?

Mr Heferen: The Tax Justice Network deals with something completely different. It is not even in that debate

or discussion. It is fundamentally a misunderstanding of what taxable income in Australia ought to be about. On

page 8 of the report in the findings it states, 'The research presented here suggests that the tax planning activities

of the ASX200 allow Australia's largest publicly listed companies to avoid up to an estimated $8.4 billion in

corporate tax annually.' That is patently false.

Senator Cormann: I wonder whether the Sydney Morning Herald is going to correct this front page story.

Mr Heferen: To me that is patently false. When someone reads 'tax planning activities' in the common

parlance that is about a scheme, arrangement or some sort of, if you like, funny business going on. What they

mean by 'tax planning activity' in the context here is that a firm has sat down and filled out its tax return. It has

filled out its tax return. It has figured out how much money it made. It has figured out its allowable deductions. It

has lodged its return and it has paid its tax.

Senator DASTYARI: The point is—

Senator Cormann: No, it is not the point. A business generates revenue and it incurs legitimate business costs

as it is generating that revenue. Unless you are suggesting—

Senator DASTYARI: There are genuine business costs and deductions and an opportunity for further—

Mr Heferen: Senator, if I could?

CHAIR: Mr Heferen has the call.

Mr Heferen: My point is that it talks about an estimated $8.4 billion in corporate tax annually. It does not say

in some other taxes. It is in corporate tax. The fundamental proposition of corporate tax is that revenue outlays are

deductible and with capital outlays you can have a deduction for depreciation or in some cases a special deduction

through capital allowances and black hole deductions. I think they are making the proposition that if our tax

system was changed to no longer be a corporate tax but something that has been mooted, a comprehensive

business income tax, where you do not get that range of deductions, then maybe there is a discussion to be had,

but that discussion I think as we have seen in the past belongs with the theoreticians and not in a practical sense.

I apologise if I am labouring this, but I do think it is a very important point, because it goes to the heart of the

public acceptance of what is going on, and where there is a proper meaningful debate to be had through the G20

and the OECD to get it, if you like, almost coloured by something like this is extraordinarily unfortunate, because

people will quite rightly look at this report and say, 'Hang on. Is the proposition that you get rid of research and

development tax breaks?' You do the double taxing across different countries? I am talking about completely.

You no longer have the capacity to carry forward losses. You actually tax capital gains on an accrual basis, as

they do in accounting profit or declare, rather than on realisation, and in that world our tax system would be

unrecognisable. It would not be unrecognisable but very difficult to recognise from the one it is today.

Senator CANAVAN: Very simply, do you think the report was misleading?

Mr Heferen: Yes.

Senator Cormann: Mr Heferen is being very generous in suggesting that that is probably what they are trying

to get across, but they are not being explicit about it. They are making it look as if this is because something

dodgy is going on within our current tax system and as if the government is not properly administering our tax

laws when—

Senator DASTYARI: That is not what they are saying.



Senator Cormann: That is exactly the impression that is created and that was the reporting. It was inaccurate

reporting on the front page of the Sydney Morning Herald.

Senator DASTYARI: That is not what they were saying at all.

CHAIR: You can give your answer.

Mr Heferen: In answering the question, there is one more element that I would like to mention. Again, on

page 8 it had, 'Key findings on the ASX200 companies include nearly one-third have an average effective tax rate

of 10 per cent or less.' I would make the point that that did include companies that made no profit, and so their

effective tax rate is zero. It also included some trusts. Trusts should have an effective tax rate of zero, because it is

taxed in the unit holder's hands. There is an issue there about the legitimacy of that. I think importantly—

and this is a bit of a techie issue, so I apologise in advance—but one of the contested issues in the corporate tax

system, and I think capitalisation rules, that is, where you have a multinational putting too much debt in Australia

and claiming an excessive amount of debt.

We have these rules in place to say that you cannot be too thinly capitalised so, therefore, there needs to be a

certain amount of asset other than debt, and there was a safe harbour of 75 per cent and that has now been reduced

to 60 per cent. But that is only for companies who are not financial institutions—banks or non-bank approved

deposit institutions. They have a very different one. As you would expect with a bank it has to have a different

one because clearly it could not get by with such a high rate of equity. I think there have a 20:1 ratio or something

in that order. The final dot point: '60 per cent of companies on the ASX200 report debt levels in excess of 75 per

cent of equity, suggesting that high levels of debt may artificially lower taxable profits.'

Mr Mills: The calculation that is made is wrong. We have had independent people look at it and it is more like

43 per cent just based on the numbers.

Senator Cormann: It is a dodgy report.

Mr Heferen: In fact, even the debt to equity definition they use needs some testing, but the fundamental point

is that there is a whole bunch of companies out there, financial companies, banks and so forth, that have a

different ratio, and to bundle them all in gives a very misleading representation of that. I think further in the text

in the report it might allude to it but it never actually teases it out. I guess, disappointingly, it does not qualify that

in the findings.

CHAIR: Senator Milne.

Senator MILNE: I wanted to follow up on what Senator Dastyari was saying in terms of the number of

people that are going to be leaving. At the G20 there is the plan to tackle profit sharing and tax avoidance by

multinational corporations. If the tax office is so confident that you are as efficient as ever, in fact more so with

less people, why have you asked for a delay of 12 months in providing the information sharing that at least 26

other countries have agreed to be early adopters of, and we have had to ask for a delay of 12 months? If losing all

these people makes no difference why can't we be one of the early adopters and get people on the job?

Mr Heferen: If I could, as it is a bit unfair for the ATO to go to that, because it came from us. There are a

couple of things there. One is that that report is about individuals. It does not go to the corporate tax issue.

Senator MILNE: It goes to the number of people in the tax office to be doing this work.

Mr Heferen: The point of the delay that Australia needs is that the countries that are early adopters in fact

already have this in train. The bulk of the early adopters come from the European countries, which already have

the common reporting standard and they already share information on that basis. There are a range of other

countries who have agreed to be early adopters. I think it would be fair to say that when those countries are

examined in a few years time where they did the full early adoption that would be problematic for those countries.

The main thing is the cost for Australian business to put those systems in place, because what those systems

will entail is that where you have an Australian financial institution and they have people from other countries

who have money deposited in them the automatic exchange will be that the Australian bank—if you like to make

it easy—has to provide the information to the tax office and the tax office automatically provides it. It is an

automatic exchange with the tax office. It is provided to the tax office and there is the automatic exchange from

the tax office to the tax jurisdiction of the signatory countries. What is critical is that the bank, insurance

company, building society or whatever it might be has the systems in place to be able to identify who are

residents of other countries.

I have recently gone through a process with the US under what is known as FATCA—I cannot remember the

spelt out version—and that is where we had to do that with the US. The US insisted that all countries did that with

the US. Australia, like many other countries, has done that and complied. So, there is a model in place but at the



moment it is only for US citizens. The next step is all the financial institutions, insurance companies, building

societies and so forth have to do it for residents of other countries, and that takes time. Systems have to be built in

some cases and certainly in some cases redesigned. This is not so much a resource issue from the ATO. There will

be some, of course, but the key reason why Australia was not able to be an early adopter was the cost it was

imposing on other Australian firms. Bear in mind that this is about people who have money in the bank or money

in the institution. It does not go to the question of a profit that a firm is making. It does not go to the issue of—

Senator MILNE: The point I am making is that you are losing thousands of people from their jobs and we

have asked for a delay of one year to implement this system. What I was asking is: why? If we have so many

people who can do all of this so efficiency why are we asking for one year? You are saying we are asking for one

year because business wants another year, not because the tax office cannot do the work? Is that what you are

saying?

Mr Heferen: I am not saying business wants another year. I am not aware of business actually requesting

more time.

Senator MILNE: Then why are we giving it to them? Why are we not an early adopter?

Mr Heferen: Because the systems would not be in place in time for this to occur.

Senator Cormann: What Mr Heferan has pointed out is that businesses in other parts of the world, systems in

other parts of the world, are already geared for this. We need a bit of a run-up. If we were to impose a more rapid

or more accelerated timetable, it would impose excessive costs, so it is much better, in terms of getting things

right, to do it in a proper orderly fashion. That is generally a better way of running government administration.

Mr Heferen: I would make the point that this is about Australia being part of the international grouping, so

other countries are aware of their citizens who are in Australia with money in Australian banks and about

Australian citizens overseas with money in their banks. This is going to pure evasion, not tax avoidance.

Senator MILNE: Business did not ask for it and we have the capacity to do it so why are we not doing it by

2017 if they have not asked for the delay?

Mr Heferen: The Australian system does not have the capacity to do it. When we have consulted with

business, business are making the point and basically saying, 'We would not be able to do it. We would not be

able to get our systems done in time.' In that environment would you say, 'We will do it and people will get

penalised for doing something which they patently could not do?' or would a more rational response be to say,

'Let's try to get this …' This is a system that is going to be built hopefully for a long time. The judgment was

made—and I think it is the right one—to say, 'Let's make sure this thing works', rather than putting something in

that is destined to fail and is never going to provide the good quality information that we need to be part of that

system. I will make the point that the countries who are the early adopters already had this in place. The countries

who do not have this in place and who are serious about putting this in place are not early adopters, but there is a

commitment to do it as soon as feasible. I think certainly the finance minister's communique is very sharp on that

point. So, the G20 has committed to doing this. Countries will do it as soon as they possibly can. This is outright

tax evasion. This is not the multinational voice. It is outright tax evasion by high wealth individuals hiding money

in bank accounts in countries other than their own. The last thing the system needs is some rushed implementation

where you get a bunch of countries sign up, cannot do the thing properly and then we look back as the G20 or

whoever in three or four years time and say, 'That one was a failure.' The G20 countries, in particular, need this to

be a success, because it is such an important issue and to take the time to enable the system to be put in place

seems to be a pretty sensible thing to do.

CHAIR: I will just let everybody know that we will be suspending at 7 o'clock or when the line of questioning

is finished, which is in five minutes time. Senator Canavan.

Senator CANAVAN: I just wanted to clarify something that was said earlier. Minister Cormann raised

originally the blocking of the R&D tax credit changes and Senator Wong said they were actually in response to or

to fund the Gonski reforms, which is my understanding. I think this is a question for the minister. Wayne Swan in

February last year announced their innovation plan, stating:

When the government announced our plan to support innovation in our economy we also announced the savings that will pay

for this. We said we would remove the R&D tax concession for large companies with a $20 billion Australian turnover or

more, to ensure innovation spending is directed to where it will have the biggest benefit. This saving will also deliver benefits

to the bottom line over and above funding the package—so it's a down payment on the repair that the budget needs.

Minister, is that your understanding, that the former government wanted to use the R&D tax credit change to help

repair the budget bottom line over the forward estimates?



Senator Cormann: That is a statement of fact. When former Treasurer Swan announced the measure to

remove the R&D tax concession for large companies with A$20 billion turnover or more that was described by

former Treasurer Swan as a measure to repair the budget. The general point I would make in response to this is

that the current opposition, the former government, not only are they opposing savings measures and revenue

measures that the current government has put forward but they are actually opposing their own savings and

revenue measures which they initiated when in government, which they banked in their last budget and which we

are setting out to implement. This is a very explicit example.

If members of the opposition, senators from the opposition are concerned about the erosion of our tax base, one

of the things they could do is to implement the Labor budget measure to ensure that research and development tax

incentives are properly targeted to businesses that are below $20 billion in turnover.

Senator CANAVAN: Thank you, Minister.

CHAIR: We are going to suspend, but with your indulgence can we come back at 8 o'clock with ACNC? We

will deal with them and then we will go back.

Senator Cormann: We are always happy to assist.

Mr Heferen: Does that mean you have not finished with Revenue Group?

CHAIR: No.


Australian Charities and Not-for-Profits Commission

CHAIR: I welcome officers from the Australian Charities and Not-For-Profits Commission. I invite you to

make a brief opening statement should you so wish.

Ms Pascoe: No, thank you.

CHAIR: We will go straight to questions then.

Senator SIEWERT: I have some questions that you might say need to be asked of the department, so just tell

me. I am sure you will. I want to ask you about some of the latest data that has come out both from the Curtin

charities report and from EY—we are supposed to say that now, aren't we—because it relates to a number of the

areas that I want to ask you about anyway. Perhaps we will do that first, and then I will ask you about the ongoing

process around consultation and whether there is ever going to be a transition et cetera.

I have the comments that you made at the release of the Curtin charities report. I want to go to the issue first off

of the 10 per cent of charities that the data shows that account for 90 per cent—sorry, not that one. It is the issue

of the regulations, where 10 per cent of the charities are experiencing 80 per cent of the administrative burden. I

keep getting it mixed up with the 90 per cent of the full-time jobs. Can you take us through that a little bit. The

figure on its own looks quite dramatic. Can you just take me through that, because I want to deal with the issue of

red tape. Does that make sense?

Ms Pascoe: Yes. In doing so, it makes sense to refer initially to the EY report because they had a substantive

finding that the bulk of the reporting obligations and therefore the administrative burden was in the contractual

arrangements that charities entered into when they interacted with government. If you then look at the fact that

some 70 per cent of charities are small charities, they are less likely to be entering into contractual arrangements

and therefore they are less likely to be having quite the same level of administrative burden. That is, I think, how

you can get a rationale for why that would be.

Senator SIEWERT: One of the things that people say about the ACNC is that in fact you have increased red

tape, not reduced red tape. Can you take me through what your position is—I am not allowed to ask for

opinions—in terms of what you do compared to the finding in the EY report and the findings of the Curtin study

as well?

Ms Pascoe: One of the benefits of the EY report is that it actually provides an evidence base, and that was the

intent. If we look at the genesis of the work, it goes back a couple of years to a whole-of-government not-for-

profit committee that had consensus that, in the absence of real data on what the red-tape burden was, we were

always estimating and we did not have a proper basis for policymaking. In addition to that, the ACNC held a red-

tape-reduction forum for charities in December last year. There was a unanimous recommendation from that

event of over 100 charities from across the sector that they also wanted to have it accurately quantified what the

burden was.

So we went to the market. We sought tenders for this piece of work. We carefully constructed it so that it

corresponded to the research that had been done earlier by the then Department of Finance and Deregulation on



estimating the red-tape impost on businesses. That piece of work had been done by KPMG. The methodology was

a case study approach and then, when the data was in the use of the business cost calculator, to get to some

assessment of what the impost on business was.

There was a very similar methodology in Ernst & Young: case study. They added a survey instrument and had

nearly 400 people respond to the survey instrument, and they did a mapping of the requirements—some literature

analysis and some analysis of the requirements that a number of departments made for the charities that were

involved in the case studies—so they had a range of methods that they used.

As I mentioned earlier, probably the signature element of that is that it is not actually the legislative

requirements that are creating the burden. Indeed, when it comes back to the ACNC, the estimated average burden

imposed by the ACNC was $150 per annum, and that equates to 0.1 per cent of the total annual Commonwealth

burden.

Senator SIEWERT: Let us be clear: 0.1 per cent?

Ms Pascoe: Yes, 0.1 per cent of the total annual Commonwealth burden. So, contrary to what had been feared

by the establishment of the ACNC, in fact it is the funding agreements—it is the requirements to maintain

databases for monitoring purposes and, in particular, it is the acquittal arrangements that come through interacting

with Commonwealth departments—that create the burden.

I would like to add—and it is a point that one of the Curtin researchers has made—that many of the

administrative requirements of government are sensible. For example, if you are in the welfare area working with

vulnerable clients then you need to have accreditation standards and the like.

Senator SIEWERT: Yes. That takes me to the question of the work that was being done on the passport

process, where that is up to, and what happened to the commitment to table in parliament a report on red-tape

reduction?

Ms Pascoe: That will be part of our annual report, which is being tabled next week. You will get the update in

the annual report.

Senator SIEWERT: That is going to be done through the annual report?

Ms Pascoe: Yes. But, in relation to the Charity Passport, it has continued. It was formally released in June.

There are now a number of Commonwealth government departments that have signed up for access to the Charity

Passport: the Attorney-General's Department, the Department of Health, Cancer Australia, the Department of the

Environment and DFAT. That is very pleasing.

Senator SIEWERT: I think we are missing a couple of departments, and I do not want to verbal you. That

was DFAT, Environment, A-G's—and I missed the others.

Ms Pascoe: It was the Department of Health and Cancer Australia.

Senator SIEWERT: So Health and Cancer Australia have. DSS has not yet?

Ms Pascoe: No.

Senator SIEWERT: What about PMO, the Prime Minister's office, or PM&C?

Ms Pascoe: No.

Senator SIEWERT: They are doing the administration for most of the ATSI funding now.

Ms Pascoe: The reality is that there would be particular departments that would be likely to be interacting

with charities and therefore be more likely to make use of the Charity Passport. It is not clear to me that PMO

would have a use for it, but we could look into that.

Senator SIEWERT: It is PM&C that are now organising all the Aboriginal funding—

Ms Pascoe: True.

Senator SIEWERT: so wouldn't they have use for it?

Ms Pascoe: True.

Senator SIEWERT: And isn't DSS the biggest funder for charities?

Ms Pascoe: Yes.

Senator SIEWERT: So the two bodies that actually provide the biggest amount of funding for charitable

organisations have not signed up yet?

Ms Pascoe: No.



Senator SIEWERT: Is there a time line? I understand that it can be a difficult process. Is there a time line for

those two in particular?

Ms Pascoe: No, we are quite happy at any point. Indeed, in addition, we have offered it to the states and

territories. We are yet to have a jurisdiction sign up, but we are happy to take on an agency at any time.

Senator SIEWERT: Are you in negotiations with DSS or PM&C around how you progress that issue?

Ms Pascoe: DSS has chosen not to participate at this stage.

Senator SIEWERT: You are joking!

Ms Pascoe: That is a decision for DSS, but they have chosen not to participate at this stage.

Senator SIEWERT: That is obviously a question for tomorrow. If I interpret—and please tell me if I am

wrong here—both what you have just said and what the EY—Ernst & Young—and the Curtin report indicate is

that the biggest way you can make a difference to red tape is to address all the admin that is associated with

contracts and funding arrangements. That is correct, isn't?

Ms Pascoe: Yes, it is.

Senator SIEWERT: I just wanted to be really clear about that.

Mr Locke: We now have 45,000 charities who have filed their annual information statement with the ACNC.

We have a whole range of up-to-date verified information with regard to those 45,000 organisations. We also

have the governing rules of 24,000 of those charities and we have the current accounts that have been voluntarily

provided of over 7,000 of those. We are now in a situation where we have a lot of information on the charity

register that can be transferred through the Charity Passport and would not therefore have to be provided again by

any organisation. We have offered it to all Commonwealth agencies and all the states and territories.

Senator SIEWERT: Of the states and territories, is it still only South Australia?

Ms Pascoe: South Australia and the ACT have publicly committed to aligning. In addition, another

jurisdiction approached us some time ago. The state revenue office in that jurisdiction believes that, if it took the

ACNC's determination of charitable status, it could achieve considerable cost savings: it would not need to get its

own register, it would need in-house expertise, and it would not need the IT backup that is required for the

maintenance of the register. Given that charity law is common law, it can see a considerable saving, as can we.

We are in quite advanced discussions, looking at the legislation of both agencies to see how we can progress that.

That is something that other state revenue offices may wish to take up in future.

Senator SIEWERT: At this stage, you cannot tell us who that is, I presume; you cannot tell us which

jurisdiction that is?

Ms Pascoe: No.

Senator SIEWERT: There is no harm in me trying it on. In terms of the uncertain future that is hanging over

ACNC, has that curtailed your work?

Ms Pascoe: In terms of the red tape in particular?

Senator SIEWERT: Generally, but let's take it issue by issue.

Ms Pascoe: There is no doubt that it has. Having said that, if you take the example I just gave you of the

jurisdiction that approached us, we had been in dialogue with that jurisdiction about nine months ago and in fact

they withdrew because of the uncertainty. They have approached us again, because they have taken the view that

there needs to be some regulatory arrangement in the future. They can see that, if they set up an arrangement with

us, that a future regulator, whether it is the ACNC or another regulator, could carry that arrangement forward.

However, having said that, other jurisdictions have not moved in the same direction.

I also want to emphasise though that we enjoy very strong collaborative relationships with the state and

territory regulators and with the relevant Commonwealth regulators. For example, in the area of compliance,

where they may be complaints made about a charity that is registered in a particular jurisdiction, we will routinely

be in touch with that regulator. In relation to the enormous task that we have got cleansing the data on the register

because much of the original data was out of date, the ATO, for example, have run the dataset passed their PAYG

and other datasets. State and territory regulators have run it past their datasets to see the proof of life—to see if the

entity is still operating. Despite the fact that we may not have entered into formal arrangements with some

jurisdictions, there are some quite constructive informal administration arrangements going forward.

Senator SIEWERT: With the passport, where the agencies have signed up will that endure depending on

what happens to the ACNC?



Ms Pascoe: We note that the Minister for Social Services said on radio on 10 September, 'There's no reason

we can't keep a single system in which people can look up and ascertain the status of various organisations if they

are charitable or not. The idea of a passport can still be maintained.' We have taken some comfort from that, and

perhaps others have as well. We are certainly progressing those discussions. One of our colleagues is a member of

the community of practice for those involved in the deregulation units. He has certainly provided all of the

information on the charity passport and he is trying to progress further arrangements with other Commonwealth

government agencies.

Senator SIEWERT: So there is no real reason why other government agencies could not sign up?

Ms Pascoe: No.

Senator SIEWERT: As I am sure you are aware, the DSS is undertaking at the moment a very big tender

process with all that broadbanding. Have they indicated whether that is the reason they will not sign up or have

not engaged?

Ms Pascoe: We do not have much communication but we understand that it was initially an understanding

that the minister was not supporting the charity passport. I think the clarity that the minister is certainly not

opposed to the charity passport could lead to a modification of that stance.

Senator SIEWERT: Can you update us on where you have been engaged in the consultation process for a

possible replacement.?

Ms Pascoe: In a moment I will pass to my colleague, but as we mentioned at the last Senate estimates we are

really planning for two future scenarios depending on the voting of both houses. Obviously one is that the repeal

bill is supported and the arrangements are passed to the tax office and to ASIC; the other is that the repeal bill is

not supported and the ACNC continues. I suppose in relation to the likely continuance of the ACNC, we have

been putting great effort into the build of the register. That has involved a series of minor projects underneath the

major project, which is to have it up as a fully complete, credible register as soon as we possibly can. We had by

30 June, which was the deadline, about 40,000 charities complete their annual information statement. We

identified those areas where there were low compliance rates, using postcode analysis, and we have held sessions

across Australia to try to improve the submission rates for the noncompliers. We are now at about 45,000. We

think there are about 7,000 who have not submitted—there are a number of reasons this does not add up to

60,000, which I am happy to go into—but we will be issuing tomorrow advice that time has run out and that from

early November there will be a mark in red against their site on the register that notes that they are not meeting

their reporting obligation. If there is a case where it is clear that there is a charity deliberately not meeting its

obligation, a penalty would be applied.

Senator SIEWERT: Is it possible to say from those 7,000—if it is easy to explain why the numbers do not

add up, that is great—which are big and which are not? Are their characteristics of the organisations that are not

complying?

Ms Pascoe: They are predominantly small. One of the reasons we have been loath to move and that we have

given extension after extension is that we are reluctant to enact penalties in a first year of operation in an

uncertain environment. We have had two exercises where we have identified groups of charities, or samples, and

we have had the staff phone them and remind them that they have not met their obligation. That has led to full

compliance but in some cases it has taken three phone calls to achieve that. Amongst the reasons that are given,

generally it is, 'Whoops, I forgot!' But there are a significant minority who say, 'I thought you'd been abolished,'

and there are also, sadly, a very small minority who did not know we existed in the first place. There is still that

information gap that we are trying to fill.

Just to finish off the last of the work that we are doing: we have a return-to-sender project. When the data was

passed over to us from the ATO, they had been operating on a paper based system, so we have had a series of

mail-outs. We have then used those returned to sender for follow-up. As I mentioned earlier, we have done these

proof-of-life exercises, running the datasets against other datasets. When we have got to the group that we think

are non-operative, we have then proceeded to do desktop searches and phoning. But there is a point at which you

would have to say that they appear to be inactive, so we have been progressively withdrawing them from the

register.

Senator SIEWERT: I can understand that.

Ms Pascoe: Even this week another 400 have gone up on our website, where we invite people to check in case

one of them has just slipped through the net. But then they are revoked.

Senator SIEWERT: How many overall have been revoked?



Mr Locke: I can give you that figure. In total, since we have been going, we have actually removed from the

list that was provided to us over 5,700 organisations. Most of those will be voluntary revocations; some will be

charities who were able to opt out of the regulation under the transitional arrangements; and some are these

return-to-sender organisations that the commissioner has been talking about.

We are progressively working our way through these organisations. Out of about 5,000 we have managed to

locate 1,800 who have updated their details. We have contacted over 3,700 of these organisations. We have

people trying to track down individuals involved. We are doing everything we can, matching against every list, to

try and ensure—if these organisations do exist, we do not want to revoke them. Because the ATO had no

obligation to maintain up-to-date details, some of these will be charities who got tax endorsement status 25 years

ago. It is a big task, but we are making good progress on it.

Senator SIEWERT: Thank you. That is really useful. What is the process that is being undertaken to look at

where to next if the bill is successful?

Mr Locke: There is a project group that has been established with the ATO. Susan Pascoe jointly chairs that

with Michael Cranston from the ATO. We had some workshops in September where we did some joint work to

see how, if the legislation goes through, we could deliver the smoothest transition and the best possible solution

for charities. The ACNC is working on the assumption of the proposals that were put forward by DSS in the

consultation that they carried out, which would be for the charity register to be archived and for the regulation to

be transferred back to the ATO.

Senator SIEWERT: Sorry, I am missing something. What do you mean by archived and handed back?

Mr Locke: The proposal that DSS consulted on over the winter period was a proposition that all charities

would be required to have their own website, and they would self-report on their own website.

Senator SIEWERT: Okay, that is what you are talking about when you are saying that.

Mr Locke: And the charity register would just be an internal document. It would be archived in terms of the

public. DSS have not been a party to those discussions we have been having with the ATO. Some of the

difficulties from the ACNC perspective are that, without an indication of the budget or staff numbers or final

proposals, it is difficult to move forward on that. But we have a good relationship with the ATO, and we are

working to assist.

Senator SIEWERT: Thank you. I know I have tested the patience of people. I have one more question. Is

there an explanation—sorry, I did lose track of time a bit; I apologise. Is there a reason why the DSS are not

engaged with that process?

Mr Locke: The DSS are working with the ATO but not with the ACNC.

Senator SIEWERT: Thank you.


Senator CANAVAN: I just have some questions about Friends of the Earth Australia, which is a charity

registered with the ACNC, and it operates in five states, it is my understanding. It is also on the Register of

Environmental Organisations, and I asked questions earlier this week of the Department of the Environment, but

here I would just like to know: must Friends of the Earth abide by the applicable governance standards for

registered charities?

Mr Baird: Yes, all but religious organisations need to comply with the governance standards.

Senator CANAVAN: I refer to standard 3 of your standards, 'Compliance with Australian laws', which,

among other things, states:

Charities must not commit a serious offence (such as fraud) under any Australian law or breach a law that may result in a

penalty of 60 penalty units (currently $10 200) or more.

In light of that obligation, I refer to a report in The Weekend Australian which alleged that the activist group

GetUp! organised for Friends of the Earth to be a conduit for a $130,000 donation from Mr Graeme Wood in

order that Mr Wood could gain a tax deduction for money which had been secured from GetUp!. Do you have the

capacity to investigate this kind of conduct by these entities?

Mr Baird: We would certainly have the capacity to investigate any complaint that was made to us and we

would do that by an initial risk assessment. Then, should the matter be considered serious within that risk profile,

we would proceed to an investigation.

Senator CANAVAN: Have you investigated or are you investigating this particular allegation?

Mr Baird: I am not able to comment on particular cases, so I cannot give you any information about that.



Senator CANAVAN: For your information, the Department of the Environment on Monday confirmed that

they have sent a letter to Friends of the Earth, inquiring about this particular allegation; indeed, I think that letter

was sent before the issue was aired in the media. They received a response from Friends of the Earth, apparently,

and are considering that response at the moment. I note that, on the ACNC website, it says:

Fraud is a form of dishonesty—where someone acts in a dishonest way so that they receive a benefit or someone else

experiences a loss.

The facts alleged in this case, if they are true, seem to meet that criterion, where the entity allegedly acted in a

dishonest way and the Australian taxpayer is experiencing a loss. Do you agree with that? Is that potentially a

fraudulent matter, in this case?

Mr Baird: We would have to look into it on a complaint and be aware of all the facts, so I would not be able

to comment on that.

Senator CANAVAN: Okay. Are you aware of any other examples of donations to environmental

organisations in particular that are being used to mask donations to other groups?

Mr Baird: We are not aware of any matters of that nature.

Senator CANAVAN: Thank you.

CHAIR: Senator Di Natale.

Senator DI NATALE: I also have some questions for the ATO. Could I perhaps direct my question, firstly,

to them?

Senator Cormann: Is it in relation to [inaudible]

Senator DI NATALE: No, it is a different issue.

CHAIR: Is it on ACNC?

Senator DI NATALE: It relates to a complaint that has been looked at by the ACNC, but the thing pre-dated

the ACNC; so it involves both.

Senator DI NATALE: Mr Poulakis, I think I might have asked you the question a year ago now, and it was a

general question about how an organisation is granted DGR status. If an organisation were to put an application in

for DGR status on the basis of being a health promotion charity, what is the criteria that is used to assess that in

fact they qualify as an organisation that is promoting health? A year ago—I have written and tried to get an

answer to this question—you could not actually tell me what the assessment process used was; I think you were

unclear about that. Can you now tell me what the process is for assessing whether a particular organisation

qualifies as a health promotion charity?

Mr Poulakis: Yes, I have more information for you. When it was the domain of the ATO to work out whether

an organisation was a health promotion charity, we made our determinations in accordance with a taxation ruling

we have, TR 2004/8.

Senator DI NATALE: You will need to speak up.

Mr Poulakis: Sorry. The taxation ruling was TR 2004/8, and so we made our determinations in accordance

with that ruling. That ruling is quite a sizeable ruling and there are a number of legal interpretations within it, but

it also indicates a process. I have some extracts of the more relevant parts of that ruling and I will read from them

if you like. In paragraph 7, we say:

The institution's principal activity must promote the prevention or the control of diseases in human beings.

It is a bit of a threshold type question around the words of the legislation. Within the ruling, we state a number of

examples of what are considered to be diseases. They include asthma, cancer, acquired immune deficiency

syndrome—there are a whole lot of examples. It goes on in paragraph 20 to say:

Recognition by medical authorities will no doubt assist in concluding whether newly identified conditions fall within the term.

Without going into further detail about the ruling itself, what is implicit in the ruling is that there are a number of

things that are clearly accepted as diseases but, with newer conditions, there are a number of things that will need

to be taken into consideration. One of the things we take into consideration is whether medical authorities

acknowledge it as a disease. But that is just a factor, it says, that will assist in the determination; it is not

determinative in any way.

What it really comes down to is looking at the ruling and also, most importantly, for the process, looking at all

the relevant factors that the organisation puts forward in its application to support its argument.



Senator DI NATALE: Okay. What you are saying to me is that somebody can be registered as a health

promotion charity but they do not actually have to promote health. You say, 'We are only going to consider that

the condition exists as a factor in the ruling,' but in fact there will be other considerations given. Let me put a

specific example to you. A health promotion charity for a condition that has no medical basis in fact submits an

application for registration. Are you saying that, under those guidelines, it would still be entitled to be registered

as a health promotion charity, even though there is no medical basis in fact for the condition it is supposed to be

assisting with?

Mr Poulakis: What we will do with any application is look at the supporting documentation that is provided.

There will be arguments from various experts or—

Senator DI NATALE: But what if there is no supporting evidence by any credible expert?

Mr Poulakis: If there were no supporting evidence, I would be surprised if we were to make that sort of a

determination.

Senator DI NATALE: Well, that determination has been made for a condition that does not exist; it has been

made for a condition called wind turbine syndrome, which has no medical basis in fact. It is not proven by any

medical body, it does not exist within the DSM IV criteria, there is not one credible medical expert in the world

who accepts that this is medical condition, and yet you have granted DGR status on the basis of promoting health

because this organisation prevents wind turbine syndrome—a syndrome that simply does not exist in medicine.

Mr Poulakis: I am unable, because of confidentiality provisions, to talk about the specifics.

Senator DI NATALE: I am just talking to you about wind turbine syndrome as a medical condition. What

advice would you have got as an organisation to demonstrate the veracity or otherwise of this being a medical

condition?

Mr Poulakis: It is my understanding that the application had a number of—

Senator DI NATALE: I am not talking about any specific application.

Mr Poulakis: No, that is right, and I thank you for pointing that out. In relation to this wind turbine syndrome,

it is my understanding that there are arguments from certain areas that it is some sort of syndrome and it is

recognised by—

Senator DI NATALE: What advice did you get to confirm that this is in fact a recognised medical condition?

Mr Poulakis: I do not think, under the confidentiality provisions, I can really go into that information.

Senator DI NATALE: If I put in an application tomorrow to get DGR status because I am going to start up a

charity that prevents wind turbine syndrome, who would you consult with?

Mr Poulakis: What I can talk about is the past, because tomorrow an application would be dealt with by the

ACNC.

Senator DI NATALE: Okay.

Senator DASTYARI: They are at estimates tomorrow. [inaudible]

Senator DI NATALE: Let me finish with one—

CHAIR: Senator, two minutes—no problem—and then Senator Canavan has some questions.

Senator WONG: Does the opposition get to—

CHAIR: I have not asked a question all day.

Senator WONG: You are the chair of the committee. It is 25 to nine and we started at 8 pm. We have not

asked a question.

Senator DI NATALE: What you have said to me is that there is no process for verifying whether a condition

is a medical condition or not.

Mr Poulakis: No, there is a process and it was set out in that ruling. Whether that process completely aligns

with the ACNC's process, I cannot say for certain. At the moment I think it is on the public record that the ACNC

is looking into these things. The ATO is interested to see what process the ACNC adopts and to learn, possibly,

from that process as to where our ruling, our position, might—if charity regulation were to return to the ATO—be

improved.

Senator DI NATALE: I want to talk specifically about a case. I understand that you are not going to be able

to give me details. A year ago we were here in Senate estimates and were talking about the process. We talked

about the length of time that this would take, because a complaint has been lodged about a specific organisation. I

specifically asked how long the process would take for a review, such as the one we are not supposed to be



talking about. I got an answer from Ms Pascoe, who said, 'We are talking weeks, not months.' That was a year

ago, and I still have not had any resolution to this specific issue. Can you please outline why it has taken a year

for me to come back in here and find out where we are up to.

Mr Baird: I can comment on that case, because it is common knowledge that both the complainant and the

respondent have published the complaint and the correspondence on public websites.

Senator DI NATALE: Excellent.

Mr Baird: This is a matter that will now be governed by the Charities Act, which came into effect on 1

January this year. You may be aware that a 'show cause' notice was issued early in the year following the

Charities Act coming into effect, and there was a response to that in April from the charity. It came with a

plethora of evidence, of scientific evidence, to be considered. Since then, there has been extensive consultation

and sifting of that evidence and a further 'show cause' notice on the basis of that evidence.

Senator DI NATALE: When was that further 'show cause' notice issued?

Mr Baird: That is one thing that has not been published on a website, but I can say a further 'show cause'

notice has issued. This is a vexed issue involving scientific evidence. It has taken some time to receive the

evidence, process the evidence and look at all the research. At the same time, you may be aware that the National

Health and Medical Research Council has also brought out a report commenting on this particular issue and the

scientific evidence that addresses this issue.

Yes, it has taken some time. It has been a challenging matter to consider. We anticipate that the final decision

will come out shortly. As soon as it does, I would think it would appear on both the register and other websites.

Senator DI NATALE: This year?

Mr Baird: I would expect that it would be this year.

Senator DI NATALE: That is great. Thank you.

CHAIR: Mr Poulakis, Senator Canavan is going to catch you in the next session.

Senator KETTER: Ms Pascoe, I acknowledge that Senator Siewert has already asked you a number of

specific questions in the area that I want to touch on, but I will just ask generally: in what way does the operation

of the ACNC reduce the regulatory burden of charities?

Ms Pascoe: There is a number of ways and some of them are only partially complete. If you look at it in terms

of the regulatory architecture, when states and territories align their regulatory arrangements, you have only one

set of reporting to be done in those jurisdictions. Given that you have a significant minority of charities operating

across jurisdictions, that is a significant one.

In addition to that, on the long debated promise that we will get a harmonisation of fundraising regulation

across this country, which is currently administered by the states and territories, with the ACNC in place you have

the regulatory architecture to enable that to happen. That would be a dramatic reduction in red tape for charities

because most of them, if they are fundraising, do use the internet and technically they are supposed to register and

report in each jurisdiction, and each jurisdiction has different statutes—so they have to familiarise themselves

with all of that legislation.

In addition, there is the charity passport, which I will not repeat, which is an administrative arrangement that

allows us to push out data to the Commonwealth and other state and territory agencies that want to get involved in

this—it enables the 'report once, use often'. Once the ACNC has the information—that is the core corporate

information as well as the financial and governance information—all they need to give to the government agency

that they are interacting with is their ABN or their legal name. For those that are involved with a lot of

submissions for grants, that is a dramatic saving as well.

I also mentioned the initiative of another jurisdiction to use the charitable determination of the ACNC.

Curiously, that saving is within that jurisdictional agency— not only are there savings to the red tape impost on

charities but there are considerable savings if you start to add up the fundraising savings within jurisdictions, the

offices of state revenue or the state revenue offices—they get different nomenclature across jurisdictions. If the

state-based regulators were to follow the lead of South Australia and the ACT then you would again see not only

the reduction in requirements for charities but dramatic cost savings in those jurisdictions.

Senator KETTER: Are you able to quantify that benefit to charity in terms of the reduction of red tape in

relation to the charitable donations that it saves?

Ms Pascoe: I can take that on notice. There is one piece of work that was done by the ACT when they were

investigating whether they would proceed with an arrangement with the ACNC. I cannot find it quickly in my



notes; I will get it to you on notice. Across Australia, the estimate was a saving of $125 million per annum. It is

$2 million for the ACT.

Senator KETTER: Would those figures go to the issue of the compliance cost for charities if they had to self-

report?

Ms Pascoe: If they had to self-report—not only do you have to add the cost of that reporting but only seven

per cent of small charities have a website—there would be a significant financial cost to them. The administration

of a website, the IT systems that are required and the in-house expertise in small volunteer based organisations

would be considerable. Certainly in the sessions that we have had, as we have done our sessions around the

country, it is a generalised fear amongst the small charities that that impost could be coming.

Senator KETTER: Since the legislation to abolish the ACNC was tabled, have there been any reductions in

the number of frontline staff at the agency?

Ms Pascoe: At the ACNC?

Senator KETTER: Yes.

Ms Pascoe: I will get my colleague to take you through the staffing.

Mr Locke: During the last financial year we had a high attrition rate, which to a large extent could be

attributed to the uncertainty. We lost 23 per cent of our staff during that period. We have lost six staff since 1 July

this year. It has no doubt impacted on our ability to regulate successfully. Fortunately, as a result of the

relationship that we have with the ATO and the way in which we were established, the ATO has been able to

second people to the ACNC where we have had critical needs in particular areas. We have been able to bring in

some very capable, experienced staff as well to assist. In terms of our operational delivery, I am pleased to say

that our performance is well ahead of our performance indicators. We registered 3,800 charities last year, we are

registering new organisations in 10 days, which is a very short time period, and the customer satisfaction from our

advice services team remains very high. I think, in terms of the customer, they are probably not seeing any

significant impact, but I think in terms of operational management it has made it much more challenging.

Senator KETTER: What about staff morale?

Mr Locke: I think we have a great group of people. We really do and I think they are very committed to the

work that we do. We have deliberately recruited people with experience of the sector, who have volunteered in

the sector, worked in the sector or have a passion empathy for the sector. I think they are very committed to doing

a good job. There is no doubt that it is challenging. Different people deal with uncertainty in different ways and

that is why some people have found that they could not cope with that. But I think the morale is pretty high and

we are committed to doing the very best job we can to deliver on the legislation we have until parliament decides

otherwise.

Senator KETTER: How has the not-for-profit sector reacted to the uncertainty surrounding the future of the

ACNC?

Ms Pascoe: I think as I mentioned earlier what we found in the submission rate for the 2013 annual

information statement was that many of them were confused. We really have tried to assist in getting those rates

to where they need to be. We have a number of consultative groups that we engage with. I think there is a general

tiredness and a general sense that people want some stability and some certainty going forward. Certainly, in the

recent report that was co-released by PwC and the Centre for Social Impact that was a key finding. That was

released only last week. Also the week before, Pro Bono Australia released their survey which they had

conducted in the previous 12 months and they found similar things. People want some certainty going forward.

Senator KETTER: But the Pro Bono Australia survey found that 82 per cent of charities believe that the

ACNC was important or very important. The PwC report that was released last week, which the commissioner

has talked about, showed that 90 per cent of charities supported a national register and that 87 per cent supported

the national harmonisation of state-based regulation. There was strong support for a dedicated charity regulator.

During the events that we have been doing around the country, we have seen over 3,500 charities in all states and

territories. Most of them have been small, volunteer-led organisations. Certainly, the views that have been

expressed very strongly in those meetings echo these sorts of findings.

CHAIR: On 23 May this year, during testimony to the Senate inquiry, Mr David Crosbie—a member of the

ACNC advisory board—admitted that he publicly had advocated that Australian charities and not-for-profit

organisations should violate state fundraising laws through deliberate noncompliance. It seems that you have a

member of the ACNC advisory board who is publicly advocating wilful lawlessness via the very same sector over



which the ACNC exercises regulatory powers. Do you think it would be fair to describe Mr Crosbie's blatant and

unequivocal advocacy of lawlessness as intemperate?

Senator DASTYARI: A point of order, chair. Normally, if you were not the person asking this question, you

would make the observation of just what an unbelievably ridiculous question that is to be asking the ACNC.

CHAIR: What is your point of order?

Senator DASTYARI: My point of order is that you cannot possibly expect the ACNC to make a comment on

something like that.

CHAIR: Why not?

Senator Cormann: Senator Dastyari, as you quite accurately pointed out before, it is not actually your job to

answer questions in this committee.

Senator DASTYARI: I am asking a point of order to the chair, who is asking the questions.

CHAIR: There is not point of order.

Senator DASTYARI: There is a conflict here.

CHAIR: Ms Pascoe?

Ms Pascoe: No comment.

CHAIR: No comment?

Senator Cormann: The officer is absolutely entitled to answer that way because you cannot—

CHAIR: No, I am aware. In your professional judgement, do you think that Mr Crosbie's advocacy enhances

or erodes the ACNC's institutional credibility?

Senator WONG: Point of order, Chair. That is clearly a request for an opinion, it is not in order.

Senator Cormann: Asking a question 'do you believe' is a request for an opinion and—

Senator WONG: It is clearly not in order.

CHAIR: I just asked for a professional judgement.

Senator Cormann: No, but you cannot ask for an opinion.

CHAIR: Does Mr Crosbie's presence on your advisory board constitute a conflict of interest with the ACNC's

regulatory responsibilities?

Ms Pascoe: I do not believe so. The ACNC advisory board is made up of people who have got expertise in

law, in accounting and in the not-for-profit sector. He is the chief executive officer of one of the peak bodies in

the sector and, as such, was appointed to the board.

CHAIR: Okay. Have you had any discussions with Mr Crosbie over his remarks, intemperate or otherwise?

Have you chastised or reprimanded him?

Ms Pascoe: If there were an issue, I imagine that the chair of the board would take it up. I am not really in a

position to comment.

CHAIR: Do you know where the chair of the board is taking it up?

Ms Pascoe: I am unaware.

CHAIR: Right. Now I would like to ask you about the government's policy agenda on the ACNC. What is

your understanding of this issue?

Ms Pascoe: My understanding is the government intends to bring forward ACNC repeal bill No. 2 later in the

year to abolish the ACNC.

CHAIR: And what about replacement arrangements for the ACNC? Can you bring us up to speed as to what

you know and what you are preparing for your agency for any possible changes that might be in the offing if the

government succeeds in its agenda?

Ms Pascoe: We are obviously aware that the government intends to return the regulatory functions to the ATO

and to ASIC. I have not personally been involved in some of the planning that has been underway. My colleague

made reference to that before. He has been involved in some workshops with the ATO. We have had no

discussions with the DSS on this matter.

CHAIR: Do you recall during the ACNC's appearance before the inquiry in May, Assistant Commissioner

Baird, that you took issue with the testimony of Mr Peter Hersh of Logicca Chartered Accounts on the issue of the

powers of an independent auditor?



Mr Baird: I recall a discussion about the ASIC powers being switched off and the ACNC powers being

switched on in relation to some reporting matters. I do not recall the particular auditing question, but I certainly

recall the discussion that ASIC is now responsible for the incorporation of companies limited by guarantee and

their winding up and that other matters between those two points are dealt with by reporting to the ACNC.

CHAIR: He put in a supplementary submission to the committee where he argued that despite the superficial

similarities between section 60 of the ACNC Act and sections 310 and 312 of the Corporations Act, the ACNC

Act did not have the teeth of the Corporations Act to enforce compliance with the law on the following grounds—

and I will go through them very quickly. If you want me to repeat them, I will. Section 310 gives an auditor right

of access to any organisations' financial records and it requires the provision of information, explanations of other

assistance for the purpose of auditor review. Section 312 of the Corporations Act is a requirement of the officers

of accompanied to assist the auditor and provide information to the auditor with the failure to comply an offence

of strict liability under 6.1 of the Criminal Code. Section 310 sets out the powers of the auditor to obtain

information. By contrast, section 60 of the ACNC Act contains reporting requirements that impose a duty of

disclosure on the company, writ large rather than on the individual officer. Failure to comply with section 60 of

the ACNC Act is not defined as a criminal offence. By contrast, section 60 of the ACNC Act is not a criminal

offence and disclosure requirements as stipulated by the Corporations Act defined an entities' books as including

registers, records of information, financial reports or records, however compiled, and documents. And (a); a

register and (b); any other record of information and (c); financial reports or financial records however compiled,

recorded or stored, and (d); a document. So no similar definition appears in the ACNC Act. In essence, Mr Hersh

is saying that while the requirements of section 60 of the ACNC Act might be superficially similar to sections 310

and 312 of the Corporations Act, in point of fact the ACNC lacks the teeth of the Corporations Act to enforce

compliance with the law. How do you respond to Mr Hersh's critique of your argument?

Mr Baird: The ACNC did put in a supplementary submission on that question. It does involve matters of

professional judgement and legal interpretation, and I would prefer to take that on notice and provide a thorough

answer.

CHAIR: That is your right. Finally, I have an email from a Mr Edward H Cooper, honorary secretary of St

Stephen's Presbyterian Church, West Tamworth. It is to [email protected], for the Australian Charities and

Not-for-profits Commission, Melbourne:

Dear recipient.

I am the Honorary Secretary of the Parish of Tamworth, Manilla. To my knowledge, all information required for the 2013

annual information Statement has been submitted. To my knowledge this is your third letter and the fourth communication

with you.

Our Church is now in receipt of your letter of the 22 September 2014. This letter asks me to disregard this letter if the

information has been submitted. Unfortunately that is not possible, because I would suspect that these letters are computer

generated and if that is the case then the computer information is sensing that something is missing.

Instead of sending me these indefinite letters, with no specification of a problem, please be specific.

I have contacted your phone contact person after the previous letter, who assured me that all information had been

completed and received and that I should ignore the letter and now another is received and in addition you are now

threatening penalties for failure to lodge. Why?

Your organisation would have to be the most exasperating government body that I have ever dealt with. Is it because you

are so under- resourced that you just hit the button to send another letter so that you can report to the Minister that you are

doing your best?

Yours in exasperation …

Comment?

Mr Locke: I will take that particular issue on notice. What I can say is that obviously we take any complaints

very seriously. We also receive a very high number of compliments. In the last two months we have had 269

compliments. Many of these are in writing. I could sit here and read those out to you but I will not. What we will

do, though, is take that issue on notice. We do take it seriously. If people have been sent letters by mistake or they

have not had the service that they should receive then obviously that is a matter of significant regret for us. We

will get back to you on that.

Senator DASTYARI: We were talking about David Crosbie, who is on your board, correct? Is this the

anarchist David Crosbie when he is not burning down buildings? Is this the same David Crosbie who is the chief

executive officer of the Community Council for Australia, CEO of the Mental Health Council of Australia,

previous CEO of Odyssey House Australia, CEO of the Alcohol and Other Drugs Council of Australia, who



served as the co-chair of the National Compact Expert Advisory Group and as a member of the Community

Response Task Force and the National Council on Drugs. Is this the same Crosbie we are talking about?

Ms Pascoe: Yes.

Senator DASTYARI: . So it is the same one that Reverend Tim Costello said has an excellent reputation for

achieving real outcomes in organisations and management experience of working collaboratively across sectors in

complex policy areas? As well as being an anarchist—

CHAIR: So he probably should not be advocating—

Senator WONG: Chair, on a point of order: it is not appropriate for you to intervene that way if a question is

being asked—

Senator DASTYARI: I just wanted to check that we are talking about the same David Crosbie.

CHAIR: Good on you. Thank you officers of the ACNC. We bid you goodnight. I am sorry we are so late. I

didn't vote for the change!

Senator DASTYARI: You didn't vote to keep them alive, either. You voted to abolish them.

Senator WONG: Chair, you are reflecting on a decision of the Senate, and you have done it a number of

times today. And maybe if you did not read out legislation we might not be quite as late as we are.


[20:59]

Senator WONG: You previously indicated on 5 October that you were not ruling in or ruling out a tax

increase to pay for the Iraq mission. Is that still government policy or is government policy as per the Prime

Minister subsequent ruling it out a day or two later?

Senator Cormann: I made a very clear statement of principle that—

Senator WONG: 'I am not going to rule anything in or out it is self-evident you have to make some

adjustments.'

Senator Cormann: And, after that the Prime Minister ruled out new taxes. Let me explain again the statement

of principle that I made. After budgets are delivered, as you would know, Senator Wong, there are from time to

time unexpected events which cause new expenditure, and obviously the question in front of government at any

one point in time is: how do you deal with that initial expenditure. Either you reduce spending elsewhere or you

incur higher deficits, which is inevitably what happened under the previous government; or you have to look at

other measures. The Prime Minister very clearly and very explicitly ruled out tax measures.

Senator WONG: So tax measures to pay for the deployment are out. Are cuts to foreign aid still out as well as

per the foreign minister's statement?

Senator Cormann: As per whose statement? I am not aware that the foreign minister has made any such

statement as you are suggesting.

Senator WONG: I think it has been reported that the foreign minister has made clear that—

Senator Cormann: I am not going to rely on your thoughts.

Senator WONG: Do you want me to tell you what I am referencing or do you just want to imagine it?

Senator Cormann: Read out a quote if you have one.

Senator WONG: I do not have it here. The foreign minister is reported as having made very clear that there

will be no further cuts to aid to pay for the Iraq—

Senator Cormann: I am not aware of such comments. If you have such comments, I would be interested for

you to reference them.

Senator WONG: Tax increases are ruled out but not cuts to aid—is that right?

Senator Cormann: The Prime Minister has very explicitly ruled out tax increases. Obviously, matters in

relation to foreign aid are not matters for this committee.

Senator WONG: That is a good answer.

Senator Cormann: This is the revenue group of Treasury, and you know that in the revenue group of

Treasury that you can ask me questions in relation to tax. If you want to ask questions in relation to foreign aid,

the best place is—

Senator WONG: I am asking questions of you, Minister.

Senator Cormann: the Department of Foreign Affairs and Trade.



Senator WONG: I am asking questions of you and I am trying to get clear the parameters of what is ruled in

and ruled out.

Senator Cormann: We are dealing with matters relating to the revenue group—

Senator WONG: Can I finish? They are finish? Chair!

Senator Cormann: and any questions in relation to the revenue group I am very happy to answer.

Senator WONG: I am trying to finish a question. Can I finish the question?

CHAIR: Yes.

Senator WONG: Thank you. I am trying to get clear what the parameters of government policy are here. The

Prime Minister has ruled out of tax increases. Correct? You say that you do not agree that the foreign minister has

ruled out cuts to aid. Is that correct?

Senator Cormann: That is not what I said. What I said was—

Senator WONG: I am giving you the opportunity.

Senator Cormann: I asked you to point me to the comments that you were referencing and you told me that

you did not have a reference for those comments.

Senator WONG: Not in front of me.

Senator Cormann: And, further, I suggested to you that matters in relation to foreign aid are appropriately

dealt with in the Senate Committee on Foreign Affairs Defence and Trade.

Senator WONG: No, you are representing the Treasurer and you are the finance minister. It is really very

simple: what is on the table and what is not. I think—

Senator Cormann: It is not the finance committee.

Senator WONG: I am asking you as the minister representing the Treasurer at the table. I understand that the

Prime Minister has ruled out tax increases. Is anything else ruled out?

Senator Cormann: Foreign aid is not a matter that falls into the revenue group of Treasury.

Senator WONG: Is anything else ruled out?

Senator Cormann: Foreign aid is not a matter that comes under the purview of the revenue group of

Treasury.

Senator WONG: In relation to reported plans to make further cuts to Australia's foreign aid budget, the

foreign affairs minister told the ABC:

There has been no discussion in cabinet along those lines.

…

We will abide by the commitments we made in relation to foreign aid.

I am simply clarifying—

Senator Cormann: Those comments are accurate.

Senator WONG: They are accurate?

Senator Cormann: Those comments are accurate, yes.

Senator WONG: That we will abide by our commitments made in relation to foreign aid?

Bishop’s public stand against further cuts followed a report in the Australian indicating the government was considering the

foreign aid budget as it looked for ways to fund military operations in Iraq…

Senator Cormann: Comments made by Minister Bishop that you have just read out are an accurate reflection

of her comments; and matters in relation to foreign aid are not matters for the revenue group of Treasury.

Senator WONG: No, I am not asking questions about foreign aid. I am asking, in terms of you representing

the Treasurer in the context of tax cuts being ruled out, if there is any other area of expenditure which has been

publicly ruled out by the government.

Senator Cormann: As you have just indicated, you are asking questions about expenditure. Expenditure in

relation to foreign aid is not a matter for the Revenue Group of Treasury or the ATO, which is what we are

dealing with now. These questions are appropriately dealt with either in the Finance estimates or in the estimates

for the Department of Foreign Affairs, Defence and Trade.



Senator WONG: Sure. I am happy to deal with it in Finance on Thursday if you wish, but I am surprised that

you are not backing in the Deputy Leader of the Liberal Party. Anyway, it is up to her to deal with you about that,

I suppose, not me. I only had one thing on in revenue—

Senator Cormann: I am not sure what you think you are proving here—

Senator WONG: I am moving on.

Senator Cormann: in Senate estimates dealing with the Revenue Group of Treasury.

CHAIR: Senator Wong, you have the call.

Senator WONG: Thank you very much. Mr Heferen, can I just ask some very quick questions about the

terms of trade assumptions and commodity price assumptions as part of that. At 2.14—charts 6, 7 and 8—can you

remind me—

Mr Heferen: I beg your pardon, Senator?

Senator WONG: Budget paper No. 1; 2.14 and 2.15; charts 6, 7 and 8. I cannot recall whether you answered

these questions on the last occasion, Mr Heferen, but remind me of what you make clear in terms of your

assumptions as to commodity prices. Did I ask you for that previously?

Mr Heferen: No, that would go to the Macro colleagues in the Macroeconomic Group. They are up next.

Senator WONG: I know when they are up.

Mr Heferen: There might be issues about the terms of trade in particular that you said it would be worth—

Senator WONG: I am interested in how the terms of trade are tracking and what that means in terms of

revenue as against budget forecasts.

Mr Heferen: If I could say 'generally speaking' to try to be helpful, if you take it to a level of detail about the

terms of trade, a fall in the terms of trade would have an effect: lower prices of goods and services we export, and

therefore nominal GDP. So our output in dollar terms would be lower than it otherwise would be. The key thing

there is that that would mean that company tax receipts, or company profits, are lower. All other things being

equal to the extent that company profits are lower—because they have less export income, because those prices

are down—that would decrease company profits, and that decrease in company profits would typically flow

through to the tax system.

Senator WONG: Do you know how the terms of trade are tracking as against the budget assumptions?

Mr Heferen: No, I do not.

Senator WONG: You are kidding.

Mr Heferen: I suspect they might be a bit lower, but I think that what you are probably after is something that

has a little bit more precision from someone who actually knows what they are talking about.

Senator WONG: What I am asking is: how is that manifesting in terms of revenue to date?

Mr Heferen: There are a couple of things. Collections are broadly on track. As you would probably recall, we

go through the proper economic and revenue forecasting rounds to provide government with advice for the budget

and MYEFO, and the process of doing that has not been finalised. I would not necessarily say that is a swing

variable. The other thing that is relevant is the exchange rate. As the exchange rate moves, it will also have an

effect on profitability. Particularly when we are talking about mining companies, a lower exchange rate may

increase the profitability.

Senator WONG: Sure. What is the general rule-of-thumb relationship, for example, between the bulk

commodity export prices and revenue? I think we might have had a discussion previously about one of our most

talkative commentators, Mr Richardson, suggesting that a dollar fall in the price of iron ore would lead to revenue

falls of around $300 million.

Mr Heferen : That may well be Mr Richardson's view. In fact, I am sure it is because that is what he said. Ms

Purvis-Smith has found something that you might want outlined.

Ms Purvis-Smith: Senator, I refer you to page 3-33, where there is a sensitivity analysis.

Senator WONG: I was looking at a component of it, which was commodity prices. Actually, it was those

two, which were in charts 6 and 7.

Ms Purvis-Smith: On 15 and 16?

Senator WONG: Yes.



Ms Purvis-Smith: The sensitivity analysis is more on the receipt side of what is a terms of trade fall and how

that would flow into the—

Senator WONG: I understand what that is.

Mr Heferen : I think we have a reasonable sort of working rule of thumb about the change in nominal GDP

and how that tracks through to revenue.

Senator WONG: But not in relation to a particular commodity?

Mr Heferen : No. With the terms of trade forwards there are all manner of things; but, given Australia's

export basket, certainly iron ore and coal make a big difference there. In relation to a rule of thumb which we may

have discussed before, that is probably more in relation to 'after' when looking at the terms of trade and what

effect that has had on nominal GDP. So it is relationship to nominal GDP and tax revenue.

Senator WONG: Can you tell me what FBO showed in terms of the performance of the revenue take,

particularly the income tax take, as compared to what was anticipated at budget?

Mr Heferen : What the FBO does is reconcile the 2013-14—this FBO—estimate at budget to the 2013-14

outcome. It then does not make any projections on what that might mean for future years. But having said that, I

think on page 5 of the FBO this does the reconciliation of tax receipts. Do you have it?

Senator WONG: Yes.

Mr Heferen : So on page 5—let's say we are talking about income tax—the estimate at budget for income

tax—that is all those taxes listed above—is $243 billion. The actual outcome was $242.553 billion and the change

is minus $1.437 billion. The change on the 2014-15 budget is really driven by the company tax. That would be the

biggest reduction, which is minus $727 million.

Senator WONG: What is reason for that? Was there any particular parameter? Was there any particular driver

which resulted in that? Or was this just within the bounds of what your estimate might have been?

Ms Purvis-Smith: Senator, I refer you to the top of the same page where it states that it is in relation to a

higher level of refunds relating to previous income years. It is based on lower than expected monthly collections.

Senator WONG: Was that monthly instalment expectation consistent with what you included in the budget

over the forward estimates? Do you see what I am saying? You have said these taxes underperformed as against

the budget because of this.

Mr Heferen : Yes.

Senator WONG: What was the assumption over the forward estimates? Do you see what I mean?

Mr Heferen : I see: now we know this, what is that going to do to the forward estimates?

Senator WONG: Correct. What did you put into the budget? Which assumption? Was it the lower end or the

higher end, given that dot point on page 5?

Mr Heferen: Part of the dot point is the high level of refunds relating to previous income years. So, to the

extent there is a higher refund coming out of the income from a previous year, that would not ordinarily flow

through. With the budget estimates on, say, corporate tax, we are talking about what was forecast in the budget

compared to what was actually collected. So there we are talking about actual collections, analysing the actual

collections, and saying there were refunds.

Senator WONG: I understand that but the explanation given as to why the actuals and the estimate were

different is, I assume, that you had lower than expected monthly instalments and a high level of refunds relating

to previous income years. To what extent would that be reflected in the forward estimates? You are saying the

second component will not be—what about the first one?

Mr Heferen: The first one probably would.

Senator WONG: Would?

Mr Heferen: Probably. I say that to be helpful—it probably would because there are only two or three

monthly instalments, and they were lower than expected—there is a question about how much lower. It was only

$700 million, which in the scheme of revenue forecasting is not a great deal. To be safe we would need to take

that on notice.

Senator WONG: Can you do that.

Mr Heferen: Yes.

Senator WONG: I will put the rest on notice. I assume the G20 is a macro?

Mr Heferen: Yes, unless there were specific international tax issues.



Senator WONG: I am interested in the two per cent, which I assume is macro?

Mr Heferen: Yes.

Senator WONG: And Treasury corporate services is also macro?

Mr Heferen: Yes.

Senator MILNE: In the Tax Justice Network report they suggest a number of things that could be followed

up. One is to support the OECD's action plan on base erosion and profit shifting. Is that something that the ATO

agrees with?

Mr Olesen: We are an active participant in helping the OECD working parties work through that action plan.

What action Australia takes in that is a decision for the government at the end of the day.

Senator MILNE: Are you participating in that?

Mr Olesen: Yes, we are active participants.

Senator MILNE: Have you got anything to report on what you have been doing on that, in the working

groups?

Mr Olesen: One thing to report is the fact that the commissioner is not here today because he is at the FTA

helping other commissioners on a joint understanding about those action items and what they might mean from an

administrator's point of view. We have been very active in pursuing cooperative arrangements between revenue

authorities. In fact, work we have done, and which I referred to earlier tonight, with five other revenue authorities

to help understand business models that are used by various e-commerce companies was a breakthrough approach

to cooperation between revenue authorities. We will be looking to continue those approaches in respect of other

aspects of international taxation where we could usefully cooperate more closely with our other authorities. We

talked earlier tonight about the automatic exchange of information and certainly we have had a hand in helping to

understand what the implications might be in a practical sense, moving forward with the adoption of the

automatic exchange standard. We have been an active player in the working group looking at country by country

reporting and transparency proposals around documentation for transfer-pricing. We cannot go through all of

them because you will recall there are 15 action plans and if you break them all down there are a series of

working parties, and we have been a participant in pretty much all those working parties, providing our

contribution from the insights that we get from where we sit in the system.

Senator MILNE: Another one I would like to ask about is the feasibility of legislating to require Australian

corporations to disclose all foreign subsidiaries in their financial statements.

Mr Olesen: That is not an issue that I have particularly turned my mind to. I am not even that close to what

the current obligations are to report. In financials, ASIC would be closer to that at the moment than I would be.

Senator MILNE: So the tax office has not looked at the feasibility of that happening?

Mr Olesen: We have been working closely with ASIC in terms of the accounting reporting that they receive.

That is a matter that we are interested in because we can see the benefit of there being financial reporting to the

greatest extent possible. That is information that can be helpful from a broader perspective. Greater transparency

is generally a good thing from our perspective. We will continue to have that dialogue with ASIC.

Senator MILNE: Is the tax office given free access as and when required to ASIC's database so that it can

obtain the audited financial reports of Australian companies that are owned by multinationals?

Mr Olesen: Yes, Senator. That is my understanding, yes.

Senator MILNE: Are you aware of any systematic accounting irregularities in the audited financial reports of

large Australian proprietary companies—for example, failure to comply with accounting standards, failure to

lodge accounts on time and accounts that are missing altogether? I refer you to Glencore, Tom Waterhouse and

Hancock Prospecting for example—all of those have been reported in some of those capacities.

Mr Olesen: I am not close enough to give a definitive answer on that. Perhaps it would be wisest to take that

on notice.

Senator MILNE: If you would take that on notice, that would be good. In terms of these financial reporting

practices of large proprietary companies, what work is the tax office doing to really crack down and clean up the

regulatory activities and make sure they are actually complying?

Mr Olesen: Sorry, their obligations to report financial information which is part—

Senator MILNE: Yes, because at the moment there is a suggestion that they are pretty slaphappy in terms of

their financial reporting practices.



Mr Mills: There is a distinction between the reporting that they are required to do in terms of financial

disclosure for ASIC purposes and the amount of information that we are able to obtain under our powers, which is

much greater. That will not be in the public domain necessarily, but we have great powers to be able to access all

of that information anyway.

Senator MILNE: Yes. That is why I was asking if you have got those powers and are accessing that

information about systematic accounting irregularities that are turning up—

Mr Mills: Sorry. I was talking about the information in relation to tax related things, such as subsidiaries

overseas and so on. Financial accounting irregularities are a matter for ASIC rather than for the tax office.

Senator MILNE: And you have not had any engagement with them about noticing any of that, or that is up to

their compliance procedures et cetera?

Mr Mills: We do have a good relationship with ASIC, but I would have to take that one on notice.

Mr Reardon: As Second Commissioner Mills said, that is something for ASIC. In terms of your earlier

question, we are working closely with ASIC about access to financial accounts. They are useful for us to look at

as part of our information gathering and as part of our understanding of the way large corporates report, structures

et cetera. As Second Commissioner Mills said, we have got a good relationship and that work is progressing.

Senator MILNE: I talked to ASIC earlier today about the requirement of them to report on overseas. ASIC

had basically been giving them a get out of jail free card.

Mr Reardon: As Second Commissioner Mills said, on an individual taxpayer basis we can ask for

information, including access to their structures, their subsidiaries et cetera, and they are obliged to supply that to

us and they do.

Senator MILNE: I want to go to facilitation payments. How much have Australian companies, as a big

picture figure, claimed as tax deductions under sections 26.52(4) and 26.52(5) of the Income Tax Assessment Act

during the last five years? Do you have that information? First of all, how do you define a facilitation payment?

Mr Mills: Facilitation payments are very broadly defined in those sections. In fact, the second one you

referred to is disallowing it. It is not an entitlement to a claim; it actually prevents a claim. It is very broadly

defined. It would catch almost any range of payments that are made to effectively get preferential treatment—

what you would otherwise describe as a bribe, in colloquial terms, if I can put it like that. It is an extremely broad

definition.

Senator MILNE: Are you capturing that in the records?

Mr Reardon: I would say we would have to take that on notice to see what the actual amounts are and

whether we have captured that information.

Senator MILNE: Yes, because in other countries they have legislation to publish what you pay. They require

that in their public reporting as opposed to their tax records et cetera. In the last five years, has the tax office

audited any Australian company to verify facilitation payments claimed as a tax deduction?

Mr Olesen: We would have to take that on notice.

Senator MILNE: Does the tax office provide specific resources for scrutinising facilitation payments? If so,

how many full-time equivalents do you have on that?

Mr Olesen: We would not allocate resources on such a specific basis. We allocate according to risk. If

facilitation payments presented as a particular risk on an issue with a particular corporation or group, then we

would look at that issue. Our officers are trained to look at a whole range of issues, and we would certainly be

able to deal with the particular issue that we are talking about.

Senator MILNE: Is it common? Do many of them claim their facilitation fees?

Mr Olesen: Sorry, I do not have any information on the incidence of it here. I will have to take that on notice.

Senator MILNE: Has anyone had a look at the rate at which Australian companies—actually, the number of

them? Is it systemic that they are paying facilitation fees? What is the kind of quantum?

Mr Olesen: I would love to be helpful. I just have not got anything that gives me an indication of what data

we collect and what analysis we can do from that data. I am happy to take that on notice.

Mr Mills: Part of the problem will be that some companies do self-assess. If they are following the law in

terms of making a self-assessment, when they lodge their tax return they are disallowing it themselves, in many

cases. As long as they have treated it properly, they are already not claiming the deduction that they are not

entitled to. As to whether any specific audit action or similar would pick up any further amounts, I would have to

take that on notice, as my colleagues have said.



Senator MILNE: Has the tax office ever requested additional resources to scrutinise facilitation payments?

Mr Olesen: No.

Senator MILNE: Is there a reason for that?

Mr Olesen: I can recall pretty much most of the bits that we have done in the last little while, and we have not

specifically targeted resources for facilitation payments.

Senator MILNE: Given the number of resource companies operating here and around the world, and

facilitation fees are commonly paid, ought that not be something the tax office has a look at?

Mr Olesen: As I said before, it is something we may well look at. I am sorry, I do not have data here to give

us that indication, but our teams would be well qualified to look at that as part of a whole range of things they

might look at in a company audit.

Senator MILNE: I just want to go to the tax amnesty that you have offered. How many individuals have

taken up the tax amnesty offered since it opened in March?

Mr Olesen: From memory, 840 individuals have taken it up now.

Senator MILNE: Have we got an aggregate sum of the revenue as a result?

Mr Olesen: I understand it is about $170 million.

Mr Reardon: There is $140 million in income and over $900 million in assets have been disclosed to us to

date.

Senator MILNE: Can you tell me the lowest and the highest individual sums that were stored offshore?

Mr Reardon: Deputy Commissioner Cranston might have some information.

Mr Cranston: The actual largest disclosure has been about $50 million in income and about $150 million in

assets.

Senator MILNE: And the lowest?

Mr Cranston: The lowest could potentially be $10.

Senator MILNE: Yes, all right. Obviously, that is a very substantial one. Have we got any notion of the

average?

Mr Cranston: The greater majority probably could be at that smaller end. I can get you some figures. There is

one thing I will say. When we have actually looked at some of the disclosures—and we classify taxpayers

according to what we understand about their wealth—we would consider about 35 per cent of them to be wealthy

Australians.

Senator MILNE: As high as 35 per cent? When you told me 840, were you referring to high-wealth

individuals? I am coming to companies, and I have mixed it all up. Were you just referring to high-wealth

individuals then?

Mr Cranston: I was talking about wealthy Australians, which are Australians with a net asset wealth of $5

million or more; high wealth is $30 million.

Senator MILNE: Can you go through the categories?

Mr Cranston: Of the disclosures there is 11 per cent of high-wealth individuals, 24 per cent of wealthy

Australians and 65 per cent of other individuals.

Senator MILNE: In terms of companies and corporations that have taken up the tax amnesty, it is all just

individuals?

Mr Cranston: Individuals. There may be some companies that are linked to individuals, but generally it is

individuals.

Senator MILNE: The company tax cut: what is your net estimate of the impact on revenue in the forward

estimates of a 1.5 per cent tax cut?

Senator Cormann: That is not for the tax office; that is or Mr Heferen.

Mr Heferen: The proposed 1.5 per cent tax cut has not yet been a measure included in the budget or in

MYEFO.

Senator Cormann: It is a decision taken but not yet announced—it is not separately identified. We went over

this ground when we last met in the budget estimates, when we had a discussion in the context of the Paid

Parental Leave Scheme as well. The Paid Parental Leave Scheme expenses in the contingency reserve and the



related revenue implications of dealing with the company tax cut and the temporary paid parental leave levy are

essentially reflected in—

Mr Heferen: They are factored into the revenue estimates but the separate amount has not yet been identified

and would not be in the budget papers until such time as the government makes the formal decision to proceed.

Senator MILNE: The same then applies to the impact on GDP et cetera?

Mr Heferen: Yes.

Senator Cormann: That is a question for macroeconomics; but, in principle, yes.

Mr Heferen: In principle, yes; that is right.

Senator BUSHBY: There have been news reports recently coming out of the trade union royal commission

which suggest that certain union officials have obtained super fund member details from an associated super fund.

Member details that the super fund would hold would include tax file numbers and tax details.

Senator DASTYARI: Point of order—

Senator Cormann: These are manifestly questions for the tax office.

CHAIR: Senator Dastyari, what is your point of order?

Senator DASTYARI: If there are questions regarding the documents involving the superannuation funds,

wouldn't they be matters for APRA?

Senator BUSHBY: The taxation consequences of them—

CHAIR: That is not a point of order.

Senator DASTYARI: It is a point of order. He has answered it.

Senator BUSHBY: Does the leaking of such information—that is, TFNs and tax details, where it occurs—

constitute a breach of any of the legislation that you administer?

Mr Olesen: Without commenting on the details of that, because I am not close enough on those details, as you

would be aware there are a range of laws around the provision of tax file numbers and their on-disclosure that, in

essence, limit the ability to disclose or not disclose tax file numbers; so I cannot answer specifically.

Senator BUSHBY: But there are prohibitions on that?

Mr Mills: I might add that under the law the practice of many large institutions, super funds included, is to

acknowledge in their documentation that they have received a tax file number, for example, that has been quoted

by a member, but make sure—because of the privacy law requirements—that they are kept separate from any

member details, or destroyed in some cases. But that does not mean that it is impossible; it just means that there is

a process.

Senator BUSHBY: Yes. Even in the news reports, there are no suggestions or talk about TFNs, as far as I am

aware. If TFNs were passed on—

Senator Cormann: If you have circumstances that you want to ask about—

Senator BUSHBY: Where they have reason to believe that that sort of activity is occurring, would the ATO

have an interest in that?

Mr Olesen: Yes.

Senator BUSHBY: Also at that royal commission, there was evidence of alleged improper use of funds that

were levied from union members for fighting funds—so-called slush funds. If money from those fighting funds—

to be charitable about the terminology—were used by individuals for private expenses, what impact would that

have on—

Senator Cormann: 'If' and 'would' are hypothetical, so, if you are dealing with specific instances, you have

to—

Senator BUSHBY: Do the allegations that were made at the royal commission in relation to moneys from

such funds being used for personal expenses attract the interest of the tax office in terms of tax consequences?

Senator WONG: Chair—

Senator Cormann: The officers can decide how they want to answer.

Senator WONG: Can I just make a point?

Senator BUSHBY: A point of order or are you making a point?

CHAIR: Is it a point of clarification or—



Senator BUSHBY: These guys make points. Do we ask questions?

Senator WONG: I will make a point of order about the stupidity of the question, if you want to play it that

way.

CHAIR: Senator Wong, please come to your point.

Senator Cormann: There is no need to be rude.

CHAIR: Come to your point.

Senator WONG: I was not being, until I was provoked.

CHAIR: Enough!

Senator WONG: I was not being, till I was provoked. My first point is that these are matters and allegations

which are made before a tribunal, a royal commission, so it is not appropriate for these officers to be asked about

consequences associated with those. Those are issues for the royal commission. My second point is that you are

asking officers to talk about the consequences in relation to a particular taxpayer. I would have thought that they

cannot do that. It would be good at some point if we could move on. We still have macro and markets to do this

evening.

Senator BUSHBY: If you do not let me ask a question, I might struggle through and see how many times I

can ask it till I can get right.

Senator WONG: You are just trying to make a political point about the royal commission, and I am saying

that you are making the political point before a very expensive royal commission anyway.

Senator Cormann: You are making a political point about an allegation of political points, so we can go

round and round in circles or we can get through it.

CHAIR: We have seven minutes before we break, and we will break.

Senator Cormann: The officer is happy to make a general comment, so let us see what we can—

CHAIR: Let us hear from the officer.

Mr Mills: The general point that I would make is that if a fund has paid amounts out, then we would be

interested in whether or not they were deductible to the fund. That is the first tax consequence. The second tax

consequence for the people who receive those amounts is whether or not that would be an income amount for

them. That would be the tax interest that we would have generally have in such a situation.

Senator BUSHBY: Thank you. That is very interesting. That is what I wanted to hear.

Senator WONG: It was not what you asked.

Senator BUSHBY: That was exactly what I asked.

Senator CANAVAN: I am just following up on some questions that Senator Bushby raised at the last

estimates to do with section 30.270 of the Income Tax Assessment Act. That provision stipulates that

environmental organisations that receive DGR status should not act as a conduit for their services. I want to

specifically ask about the situation that has been reported in the media, but I am not asking about the specific

case. The details of that are that a substantial donation was made to an environmental organisation that received

DGR status in what appears to be an arrangement that was intended to benefit a third-party that did not have DGR

status. I do not want to ask about the eligibility of being on the register of environmental organisations; I just want

to ask: could the gaining of, or an attempt or conspiracy to claim, a tax deduction for a donation in excess of, say,

$100,000, using such an arrangement as I have outlined, be an offence under the Criminal Code or any other

taxation law?

Mr Olesen: I think it might be more sensible for us to take that on notice, given the complexity of the laws

involved.

Senator CANAVAN: Can I further ask: under the Criminal Code, are offences committed by persons who

aid, abet, counsel or procure the commission of offences?

Mr Olesen: Senator, we are not necessarily experts on the Criminal Code. We can do our best to take that on

notice.

Senator CANAVAN: Can you also take on notice, if you aware of any such offences—to the extent that they

are offences based on the previous questions—which might have been committed in the circumstances there

outlined, and the penalties which would be applicable in those circumstances.

Mr Olesen: Again, I will take that on notice.



Senator WONG: If your people had not shut down our people in other committees, we would not have had to

do this.

Senator CANAVAN: They are not our rules.

Senator WONG: That is fine, we can come back, Matthew. We can all come back on Friday because we do

not even need you to do that.

Senator CANAVAN: They are not our rules. We live with the implications of them.

Senator WONG: That is right.

CHAIR: It is not a problem.

Senator WONG: You talk to Ian Macdonald because he is the reason that we had to put them in.

Senator CANAVAN: One senator!

Senator WONG: Well, you cannot control him.

Senator CANAVAN: He is very powerful!

Senator WONG: You cannot control him, that is the problem.

CHAIR: At the last estimates I asked about the wine equalisation tax, and I believe that there is a report

pending on the effects of the changes of 12 December 2012 on the wine blending rules. We will give you some

notice, and we will talk about it a little bit later.

Mr Heferen: Chair, when you say a little bit later, do you mean a little bit latter tonight or a little bit later in

the future?

CHAIR: I am quite happy to put it on notice. We will break and we will come back just prior to 10 o'clock.

Senator DASTYARI: There are a whole bunch of questions but we will put them all on notice.


Macroeconomic Group

CHAIR: I want to welcome officers from the Macroeconomic Group. Do you have any opening statement?

Ms Harris: I think that Jenny has an opening statement, just to talk about the economy.

CHAIR: Ms Wilkinson?

Ms Wilkinson: Thank you. I have an opening statement which covers recent outcomes in the international and

domestic macroeconomies.

Recent economic developments have been broadly consistent with the outlook presented in the budget but the

global economy has had a disappointing start to 2014 and key commodity prices have fallen more sharply than we

and other forecasters had expected. It is fair to say that the global recovery has been softer than had been

predicted. In their most recent statement on the global economy, the IMF downgraded their forecast for world

economic growth in 2014 to 3.3 per cent from 3.6 per cent six months earlier. Global growth is still expected to

pick up in 2015 but the risks clearly remain tilted to the downside. These risks have generated some volatility in

global financial markets over the past couple of weeks, with markets questioning whether growth will be strong

enough to justify the increasingly elevated equity values seen recently.

China's GDP grew by 7.3 per cent throughout the year to the September quarter of this year, compared with 7.8

per cent to the same quarter last year. The 2014 growth target of around 7.5 per cent is still likely to be met,

supported by policy stimulus and improving external demand. More moderate growth is likely in the years ahead

as authorities continue to pursue market-based reforms and shift away from investment-led growth. However,

there will be a delicate balancing act between pursuing these longer-term reforms and providing support to the

economy amid current cyclical weakness.

The United States economy contracted in the March quarter, following severe winter weather. This looks to

have been a temporary setback, though, with a strong and broad-based rebound in the June quarter. Fundamentals

remain supportive of strong growth in the United States, with household balance sheets substantially repaired,

labour market conditions improving and business investment increasing. In addition, the fiscal policy drag and

fiscal uncertainty that marked last year has abated.

In the Euro area, the recovery remains especially weak, uneven and fragile, losing whatever momentum it may

have had at the start of the year. Persistent very low inflation and continued weak growth has led the European

Central Bank to announce further monetary policy easing measures. In Japan, a clear read on the economy has

been made difficult by timing effects around the consumption tax increase in April this year. This saw a large



bring-forward of consumption in the March quarter followed by a larger than expected contraction in the June

quarter. Well-known longer term structural challenges remain in both the Euro area and Japan.

One of the key objectives of Australia's G20 presidency has been to strengthen this global outlook and increase

economic resilience. A key commitment has been the ambition to lift G20 growth by an additional two per cent

over five years through structural reforms and infrastructure policies. As at the Cairns meeting last month,

countries have brought forward measures that will achieve 90 per cent of this goal, or 1.8 per cent. The key now is

to ensure implementation so these games are realised. My colleague Barry Sterland can speak in more detail if

you wish on the G20 agenda.

Back in Australia, recent economic developments have supported the view that was presented in the budget

that the economy will grow at a slightly below trend pace before growth in the non-mining sectors starts to pick

up. The latest national accounts—this is for the June quarter—showed that real GDP growth eased to 0.5 per cent

in the June quarter after growing by a strong 1.1 per cent in the March quarter. New business investment

continued to detract from growth as resource investment unwinds from its peak. Dwelling investment and

household consumption have continued to support growth. Corporate profits fell in the June quarter, mainly due

to the impact of the decline in non-rural bulk commodity prices, such as iron ore and coal. Iron ore prices in US

dollars have fallen 40 per cent since the beginning of 2014 and around 20 per cent since the budget. The large

decline in iron ore prices mainly reflects strong growth in world supply, notably from mining companies in

Australia. However, a subdued global economy and risks around China's growth outlook also appear to be

weighing on prices. The fall in non-rural bulk commodity prices has reduced growth in nominal GDP, with no

growth recorded in the June quarter.

Still, the outlook for the economy remains positive. Growth in commodity export volumes is looking especially

strong and to some extent the depreciation of the exchange rate will cushion the economy against the effect of

weaker commodity prices, supporting growth in export oriented sectors and easing conditions in import-

competing sectors. Non-mining business conditions and confidence have been positive over much of this year.

The most recent ABS capex survey provided some tentative signs that the anticipated recovery of investment in

the non-mining sector is starting to take place.

Growth in household consumption has been a bit below average over the first half of this year. Retail trade and

consumer sentiment measures released since the month of June suggest that growth in the September quarter may

continue to be below trend. Household consumption growth will need to strengthen further to support the

transition to broader based growth. Activity in the dwelling sector has continued to pick up, with house prices,

building approvals and credit for new dwellings all pointing to a continued recovery. The pick-up in the housing

sector is an important transition channel for monetary policy, boosting household wealth and ultimately

consumption. Still, while recent house price growth has been supported by fundamental demand and supply

factors, there is a risk that speculative demand in some pockets of the market could amplify the property price

cycle. In this regard, investor activity appears to be particularly pronounced, with investor housing finance

increasing by 27.6 per cent through the year to August.

As foreshadowed in the budget, conditions in the labour market remained subdued. While there is some

uncertainty surrounding recent ABS labour force statistics, the unemployment rate remains elevated, hovering at

about six per cent since the start of this year, and the participation rate has remained relatively low. Consistent

with overall spare capacity in the labour market, wages growth has been weak. The wage price index rose by 2.6

per cent over the year to the end of the June quarter. This was well below its 10-year average growth rate of 3.6

per cent and represents the weakest through-the-year growth since the start of the series in 1997.

This slowing in wage growth is an important mechanism for supporting employment until growth in the

nonmining sectors strengthens sufficiently. Consistent with this weak wage growth, inflationary pressures are

expected to remain contained, notwithstanding some upward pressure from the depreciation of the exchange rate

on the prices of tradeable goods. The CPI released this morning reaffirms this view, with through-the-year

inflation falling to 2.3 per cent, and with this quarter's role in part reflecting the effect of repealing the carbon

price.

CHAIR: Thank you very much. Any others?

Ms Harris: In relation to the macro space? We also have some material we can table in relation to the

corporate, but I was not sure how you wanted to run it—whether you wanted to do the macro first?

Senator Cormann: Why don't we just go to questions—

CHAIR: We will get into questions.



Senator WONG: Arising out of that, I will just ask a couple of quick questions—and I will try to work

through these fairly quickly. Did you say that the growth in the wage price index was the weakest since 1997?

Ms Wilkinson: That is correct.

Senator WONG: How would you explain that in layperson's terms?

Ms Wilkinson: In layperson's terms, in a period in which there is softness in the labour market—and we are in

a period in which there is quite a lot of restructuring taking place in the economy—one of the ways in which this

manifests itself is that you tend to get lower wages growth.

Senator WONG: People are getting lower wage increases than they previously did?

Ms Wilkinson: Which is accommodating a fairly soft inflation outlook and so accommodating lower interest

rates.

Senator WONG: You talked about the drop in corporate profits, which I think you said was primarily due to

the drop in prices of non-rural bulk commodities. Right? So 40 per cent reduction in iron ore was a number you

used?

Ms Wilkinson: So, the price of iron ore—

Senator WONG: Sorry, do you have your statement for tabling?

CHAIR: It is coming.

Senator WONG: Sorry, it is right in front of me—there you go! Here we go: iron ore prices in US dollars

have fallen 40 per cent since June 2014 and 20 per cent since budget. How does that figure compare with the

budget assumption, which I assume is what underpins the charts I was talking to, or not talking to, Mr Heferen

about?

Ms Wilkinson: At budget time we projected that there would be a fall in iron ore prices over time. That was

consistent through the budget forecast. I do not have the—

Senator WONG: What was the assumption of the fall at budget time?

Ms Wilkinson: This is in A$ terms; when we are thinking about the impact on the domestic economy, what

we need to know is what the iron ore price is in Australian dollar terms—

Senator WONG: Correct.

Ms Wilkinson: and what the price actually is for the exports that we have produced—the right quality,

quantity and everything. The average unit price for 2013-14 was $116.20 and the assumption for 2014-15, or the

forecast, was for it to be $94.30. And for 2015-16 it was to be $89.

Senator WONG: For both of the projection years?

Ms Wilkinson: For the two forecast years.

Senator WONG: Forecast—see? Counterintuitive! And $89 for the two outyears.

Ms Wilkinson: No, sorry, it was $94.30 for 2014-15 and $89 for 2015-16.

Senator WONG: This is not the spot price; this is unit price?

Ms Wilkinson: That is right. First of all, it is in Australian dollar terms not in US dollar terms. It is the price

which reflects our best estimate of the prices that exporters will actually receive for the iron ore that they export.

When we are trying to forecast this we have to take into account factors like contracts which are in place,

expected delivery times and freight costs. There is a range of different things that you have to adjust the spot price

for in order to work out what the average export unit price would be.

Senator WONG: The best assumption about what an exporter actually gets in their pocket?

Ms Wilkinson: That is right.

Senator CANAVAN: Senator Cormann, is it correct that the former government did not release those figures?

Is that right?

Senator Cormann: That is exactly right.

Senator CANAVAN: I congratulate you on the increased transparency.

Senator Cormann: You have got a very good memory. There was a very enthusiastic opposition that was

working very hard to try and get hold—

Senator CANAVAN: It was hard, wasn't it?

Senator Cormann: We used to work together in a previous life.



Senator DASTYARI: You do not work together now?

Senator Cormann: In a different capacity—on things related to the mining tax and the like.

Senator WONG: Thank you for that. I have one set of questions on the G20 agenda. You referenced the two

per cent target. Currently we are at 1.8 per cent, which I think has been publicly reported. Have you made public

what comprises the policies Australia is putting forward for our component of the two per cent?

Mr Sterland: That will be made public. The comprehensive growth strategy is being finalised for the summit

next month and they will be published on the web, along with that of other countries. You can imagine what is in

it—the infrastructure package in the budget, the red tape reduction—

Senator WONG: Abolition of the carbon tax and the minerals tax?

Mr Sterland: Things like that.

Senator Cormann: We are happy to grow a stronger and more prosperous economy and create more jobs—

abolishing the mining tax and the carbon tax.

Senator WONG: Yes. Treasury is well known for its opposition to both of those policies, Minister.

Senator Cormann: Sorry, I could not hear what you were saying.

Senator WONG: Are you saying you do not wish to tell me the list of the policies we are putting forward to

achieve the two per cent target? What have we put on the table at the G20? I am happy for you to take it on

notice, but do you want to do a quick summary?

Mr Sterland: It would be the investment package in the budget, the measures to increase labour market

participation and the red tape reduction. Those would be some of the policies that you would know about.

Senator Cormann: One-stop shop on environmental approvals for more seamless approvals.

Senator WONG: In terms of modelling or calculating a growth dividend from those, has that work been done

in Treasury?

Mr Sterland: The modelling is done by the international organisations—the IMF, in consultation with the

OECD.

Senator WONG: So we do not do it ourselves as well before we put it up?

Mr Sterland: No.

Senator WONG: Have they modelled ours at two per cent?

Mr Sterland: They would have modelled all the countries in an aggregate sense.

Senator WONG: Do they disaggregate and say, 'We calculate your contribution to be worth approximately

this'?

Mr Sterland: They largely present it to ministers in broad categories. They report those broad categories; they

report the amount of growth. Because all the countries are doing it together, the sum is greater than the parts.

There are positive spillovers to different economies. That is all being finalised for the publication in the summit.

Senator WONG: Regarding the policies that Australia has put on the table, would they lead to a two per cent

increase to GDP?

Mr Sterland: There is not a lot of precision around the country modelling, but I think they are broadly

proportional to the aggregate, the G20 number in Cairns.

Senator WONG: How broadly proportional are they—1.9, 1.8, 1.7, 2.1?

Mr Sterland: Do you mean to the 1.8 per cent that was announced in Cairns?

Senator WONG: I am trying to get a sense of what you say these policies will lead to in terms of impact on

Australia's GDP.

Senator Cormann: Senator Wong, you previously indicated that you were prepared for the question to be

taken on notice, and Mr Sterland has been extremely helpful. Then you followed up by saying—

Senator WONG: No, we moved onto a different bit.

Senator Cormann: No, he tried to enter into specifics.

Senator WONG: No, that was in relation to the list of policies. He did a summary and I said, 'Fine, we'll

move on to a different bit.' What I am asking about now is what the quantitative impact would be.

Senator Cormann: Sure, but I think you will find—

Senator WONG: He has not asked to take it on notice.



Senator Cormann: You can hardly give the qualitative results of proper and scientific presentation to

quantitative that goes beyond—

Senator WONG: I am just asking what percentage of GDP increase there will be as a result of this suite of

policies that we presented to the IMF.

Senator Cormann: The answer is that the global target is two per cent.

Senator WONG: No, I am asking about the domestic target.

Senator Cormann: I am using my prerogative as the minister at the table—

Senator WONG: To not answer the question.

Senator Cormann: to answer on behalf of the government. As has been indicated, the global target is an

additional two per cent growth above the business-as-usual trajectory.

Senator WONG: Thank you for telling me something that we all know.

Senator Cormann: As Mr Sterland has indicated—

Senator WONG: Chair, if this continues—

CHAIR: Senator Wong, I am trying to listen to the minister's answer.

Senator WONG: That's fine. We might have to get macro group back on Friday too if this continues, don't

you think?

Senator Cormann: I am providing an answer to the question. The work to assess the specifics, as has been

indicated by Mr Sterland, has been done by the IMF and the OECD. There is really nothing else that we can do to

assist you on this now other than to take the question on notice.

Senator WONG: If the minister continues to give monologues we may have to get macro back.

CHAIR: He said he would take it on notice.

Senator Cormann: You can be as patronising as you like, Senator Wong. I will use my prerogative to answer

questions on behalf of the government as I see fit.

Senator WONG: There is a thing called the royal prerogative too! Can we be clear on what you are now

proposing to take on notice. I would not have thought it was controversial. You do not even want to tell the

parliament and Australians how much you say your policies will increase GDP by.

Senator Cormann: The work through the G20 is obviously still evolving. The work, in terms of assessing the

specifics, is still evolving.

Senator WONG: That is not right. That is not what the evidence is.

Senator Cormann: It is evolving, absolutely.

Senator WONG: Okay, if that is the evidence let the officer give it.

Senator Cormann: The G20 heads of government meeting is yet to happen. As you know, it will happen in

Brisbane on the weekend of 15 and 16 November. In order to ensure that the information we provide to you is

accurate, we have taken on notice the specific list of measures that is included for Australia. To the extent that we

can assist you, we will also provide you with information on the degree to which Australia is contributing,

through those measures, to the two per cent additional growth above the business-as-usual trajectory at a global

level.

Senator WONG: You want to take all of these questions on notice?

Senator Cormann: That is what I have just indicated.

Senator WONG: Can you also take on notice the additional GDP growth resulting from these policies, over

and above the budget forecasts, if any. Mr Sterland, you said to me, 'We would know about most of them.' You

gave a little summary. Are there domestic policies, as part of this two per cent target that Australia is putting on

the table, which are not yet public?

Mr Sterland: I will have to take that on notice because the final submission is going in soon and it has been

prepared for the summit.

Senator WONG: You said the IMF do both the aggregate and country-by-country modelling.

Mr Sterland: Country-by-country models are not presented to ministers. I will take on notice how much

detail there is behind that at the very working level.

Senator WONG: Could we have on notice the IMF aggregate modelling and also the country modelling—

obviously just for Australia.



Mr Sterland: Yes.

Senator WONG: Can I just ask about the finance ministers meeting in the United States. I get confused about

what is Treasury and what is PM&C. Was it Treasury that managed that meeting?

Mr Sterland: Yes. You are talking about the G20 meeting in Washington DC a couple of weeks ago?

Senator WONG: Correct. It was being reported that a celebrity chef was flown to Washington to wine and

dine G20 ministers. Can you tell me about the details of that event?

Mr Sterland: We have put on four events this year. We were funded to do so. We have used innovation and

worked very hard to create the right environment for these international events. We have acted within our budget

and been careful to seek value for money and also to create the right environment for the working meetings the

next day. We have found that this approach has brought a marked change to the interaction in the room. With that

preface, I might hand over to Mary to answer any of the detail on the specific events.

Senator WONG: How many people attended the event? You may have to take some of these questions on

notice.

Ms Balzary: The dinner in Washington was for finance ministers and governors. There were 58 guests at the

dinner.

Senator WONG: On notice, could you provide us with a guest list.

Ms Balzary: Certainly.

Senator Cormann: There would be 20 finance ministers and 20 central bank governors. That is a matter of

public record. Then there is—

Senator WONG: I have asked if, on notice, you could provide us with a list. Did the Treasurer host at the

event?

Ms Balzary: That is correct.

Senator WONG: Where was the event held?

Ms Balzary: The Library of Congress.

Senator WONG: Can you give me the menu on notice as well, please.

Ms Balzary: We will have to take that on notice.

Senator WONG: That is fine.

Senator Cormann: You do know that the budget for all these things was set by the previous Labor

government, of course.

Senator WONG: Do I get to ask questions?

Senator Cormann: I am just adding information that is relevant.

Senator WONG: Was Mr Delia the chef?

Ms Balzary: No. It was Serge Dansereau from the Bathers Pavilion.

Senator WONG: Mr Delia was an earlier one; is that right?

Ms Balzary: Correct.

Senator WONG: Who chose Mr Delia and Mr Dansereau? What is the process by which they were chosen?

Ms Balzary: The process we went through for selecting Mr Delia for the dinner in April was that we sought a

number of quotes from several chefs. We looked at a range of things, including their availability to deliver such

an event and their profile around being able to effectively showcase Australian food and wine and the food

industry. In the process with Mr Delia in April, we sought a number of quotes. In relation to Mr Dansereau in

April, the process was slightly different. The cost was minimal for his attendance at the meeting. He did not

charge a fee. It was a $9,000 out-of-pocket expense that Treasury paid for him for that dinner.

Senator WONG: Who chose him?

Ms Balzary: Treasury.

Senator WONG: You just decided you liked him?

Ms Balzary: We have used a number of chefs for our host year from a range of different high-profile

restaurants. He was chosen on the basis of—

Senator WONG: Who chose him?

Ms Balzary: Treasury.



Senator WONG: Who in Treasury?

Ms Balzary: Me.

Senator WONG: So you made the decision on a half of the government. Who else was involved in the

decision?

Ms Balzary: I made the recommendation to the Treasurer's office.

Senator WONG: Was anyone else involved in that?

Ms Balzary: No.

Mr Sterland: I would be made aware of the event. We would go through it in broad terms. I would trust Ms

Balzary's judgement and it would go through to the Treasurer.

Senator WONG: So it was not what you would call a competitive tender process? It was a direct source.

Ms Balzary: It was a direct source.

Senator WONG: So you just decided who you thought would be good and recommended them; is that

broadly right?

Ms Balzary: That is correct.

Senator WONG: But you are saying that there was a different process for Mr Delia?

Ms Balzary: Yes.

Senator WONG: Was that a competitive tender?

Ms Balzary: It was not a competitive tender; it was a quotes process.

Senator WONG: How many quotes did you get?

Ms Balzary: I think we got three different quotes for that one.

Senator WONG: At any point were you aware, directly or because Mr Sterland or someone else told you, of

either Mr Delia's or Mr Dansereau's names being suggested by the Treasurer's office?

Ms Balzary: I certainly had conversations with the Treasurer's office about both chefs.

Senator WONG: Who in the Treasurer's office?

Ms Balzary: The Treasurer's staff and the Treasurer himself.

Senator WONG: The Treasurer himself?

Ms Balzary: Correct.

Senator WONG: Did he have a view about which of the chefs he liked?

Ms Balzary: Well, both were recommended by me, so he agreed with the recommendation on the basis of the

recommendation we provided.

Senator WONG: Before you recommended them, did you have a discussion with the Treasurer about either

of these names?

Ms Balzary: I do not recall.

Senator WONG: Sure. Perhaps you can take that on notice?


Senator WONG: Before you recommended them, did you have a discussion with the Treasurer's office about

either of these chefs?

Ms Balzary: Most certainly, yes.

Senator WONG: Can you tell me about those discussions?

Ms Balzary: It would have been as simple as talking to them about the conclusions that we reached and the

plan to recommend them to the Treasurer.

Senator WONG: Sorry, I do not need to know names, but could you just give me perhaps level of where we

are talking? Chief of staff, adviser, DLO, like which level?

Senator DASTYARI: Just the staff, not the names!

Senator WONG: I do not know who the Treasurer's chief of staff is.

Ms Balzary: I could not, honestly, in terms of levels and specifics be able to—

Senator WONG: No, all I am asking you, Ms Balzary, is who you spoke to.



Ms Balzary: Yes, certainly.

Senator WONG: You do not recall?

Ms Balzary: No, but it is—we have reasonably regular briefings—

Senator WONG: No, on this issue.

Ms Balzary: Yes, I understand. It was probably with a variety of people in the Treasurer's office.

Senator WONG: Would you have taken a file note in relation to any of those conversations?

Ms Balzary: A folder?

Senator WONG: A file note.

Ms Balzary: No I do not believe—

Senator WONG: Or some record of the conversation?

Ms Balzary: No.

Senator Cormann: Let us just be very clear about the evidence of the officer. The evidence of the officer is

that she had an interaction with the Treasurer's office, advising that the recommendation will be coming up to the

Treasurer. I am not sure what your line of questioning is trying to achieve, but I do not think that there is anything

strange or conspiratorial here that is in any way close to being established. So I am not quite sure what it is that

you are trying to prove here.

Senator WONG: I am just asking questions, Minister. Well, Ms Balzary, on notice, for both of these

functions, I cannot quite recall if we have asked you on notice previously about the Delia function or not? Do

you?

Ms Balzary: No.

Senator WONG: We have not, okay. So perhaps on both of them you could just provide me with total cost,

and if you could just aggregate that between locations—what is the appropriate phrase? Wherever it is.

Ms Balzary: Yes.

Senator WONG: Meal, alcohol, et cetera—guest lists, menu—the total cost of the function.


Senator WONG: Can you tell me also, sorry, which of these is the function Mr Murdoch attended?

Ms Balzary: The Library of Congress.

Senator WONG: Library of Congress. And who determined to include Mr Murdoch on the guest list?

Mr Sterland: Let me answer that. Our processes this year have been to create a variety of innovative formats.

I think in the last meeting of the year, which was the last dinner of the year for ministers, we suggested that a

guest speaker might be appropriate. The Treasurer accepted this recommendation and decided that Mr Murdoch,

as a global business leader with beginnings in Australia, would be an appropriate choice of speaker.

Senator WONG: Okay. Was Mr Murdoch on your recommendation or did you recommend the notion of a—

Mr Sterland: We recommended the notion. We have had quite different formats to the G20's normal

approach this year and have had three different styles of meeting. The dinners have been quite different. This last

one had a different nature and we suggested that it might be good to change the format again.

Senator WONG: But ultimately it was the Treasurer's choice to invite Mr Murdoch?

Mr Sterland: Yes.

Senator WONG: Ms Balzary, what other costs would have been associated with either of these functions that

I might not have identified? Probably travel—yes?

Ms Balzary: Yes.

Senator WONG: For the chef or chefs concerned.

Ms Balzary: Yes.

Senator WONG: Would both of these arrangements have complied with the Commonwealth Procurement

Rules?

Ms Balzary: Absolutely, yes.

Senator WONG: Because time is short and you may want to consider this, but could you indicate how the

processes complied with the CPR—on notice?



Ms Balzary: Yes.

Senator WONG: Thank you.

Senator DASTYARI: I have a fair bit—I will work out what we can and cannot put on notice because I am

very aware of how pressed we are for time.

This is probably a quick thing: as I am sure you are aware we have been doing a bit of stuff on housing

affordability and a few other discussions we have had around the place. I just want to get my head around this.

There is the Council of Financial Regulators—correct?

Ms Harris: Yes.

Senator Cormann: This is a matter for Markets Group—

Senator DASTYARI: Well—

Senator Cormann: Ask the question and we will see whether we can assist you, but it is not strictly—

Senator DASTYARI: Sure. I actually want to have a conversation and I have had this conversation with Dr

Gruen before so that is kind of why I thought this would be the right place to have it.

Senator Cormann: But there are different aspects to this. If your questions are about the Council of Financial

Regulators that is, strictly speaking, a markets issue. If you want to ask us about macroeconomic trends relating to

housing affordability—

Senator DASTYARI: What I want to get my head around is that there is an open discussion at the moment

around whether or not there is going to be the use of macroprudential tools. Obviously, we have spoken to APRA

and the RBA about this. I just want to understand the role of Treasury within these conversations and my

understanding is the role of Treasury kind of comes through the role you play with the council? Is that correct?

Senator Cormann: Ms Wilkinson is able to assist you.

Ms Wilkinson: I am not sure I got the question.

Senator Cormann: What is the specific question?

Senator DASTYARI: With respect to the role of Treasury and what role you are playing with APRA and the

RBA and others about tackling this issue, in your opening statement you make a one-paragraph reference to the

risks associated with the housing bubble. They are my words, not yours. Are you able to talk around that. Your

words were:

Still, while recent house price growth has been supported by fundamental demand and supply factors, there is a risk that

speculative demand in some pockets of the market could amplify the property price cycle.

I understand that there are obviously ongoing discussions, with APRA being the relevant people here. However, I

just want to understand the feedback and what role you play in that.

Ms Wilkinson: The role that Treasury plays in these discussions is that we are part of the Council of Financial

Regulators. So the Council of Financial Regulators is: APRA, ASIC, the RBA and us, so we have engaged with

those other agencies in those discussions about trends in the housing market.

Senator DASTYARI: The council regularly meets four times a year and then as needed. Is that correct?

Ms Harris: Yes.

Senator DASTYARI: Have you met since September? We know there was a meeting in the first week of

September—that is, according to the RBA. Have there been any further meetings around this?

Ms Harris: No, so I do not have the exact dates.

Senator DASTYARI: So is what you are saying, Ms Wilkinson, the last conversation that Treasury had on

this issue formally was in September?

Ms Wilkinson: I think the last meeting of the Council of Financial Regulators was in September.

Senator DASTYARI: But if you are saying your only involvement in this is through the Council of Financial

Regulators—

Ms Harris: If I could clarify. The Council of Financial Regulators obviously has the heads of the relevant

organisations, so head of Treasury, APRA, ASIC and the Reserve Bank. That does not mean that conversations

only happen in that one static space. So there will be conversations continuing, as we would normally talk with

one another. The process of the actual council meeting is a way of coming together and sharing information.

Senator DASTYARI: I think the evidence to date from other agencies has been there are ongoing discussions

about what tools will and will not be used?



Ms Harris: There are ongoing discussions about what you might be doing in relation to that.

Senator DASTYARI: Do you agree with the RBA's assessment that the housing market is becoming

unbalanced? I am only using the word 'unbalanced' as their word, not my word.

Ms Wilkinson: We would generally agree with the advice that, I think, the RBA has provided to this

committee. There are pockets of the housing market where there seems to be some very significant price growth.

Like the RBA, we are keeping an eye on this.

Senator DASTYARI: The RBA has previously used a term in respect of risk—that this poses a risk to the

market and to the economy as a whole. Is that your assessment?

Ms Wilkinson: I guess the way in which we have been thinking about this, and I think this is not dissimilar to

the way the RBA is thinking about it, is that we have got a very well-regulated financial market.

Senator DASTYARI: Some would like us to see it more regulated, but we will keep going.

Senator Cormann: You go on that platform to the next election, Senator Dastyari!

Senator DASTYARI: I believe I already did!

Senator Cormann: More red tape!

Senator DASTYARI: Protections for consumers, Senator Cormann. We have already had that debate.

Ms Wilkinson: We do not have concerns about the stability of the financial system. We are conscious that a

sharp correction in any asset prices—in this particular case, a sharp correction in house prices—could have flow-

on effects through the rest of the economy, through the normal sorts of channels: wealth and consumption effects.

The sense in which we are talking about macro prudential measures is thinking about whether there should be

some prudential measures that would be explored or used in order to try and make sure that we get the right sort

of macro outcomes for the economy.

Senator DASTYARI: There are two things that stem from that. Firstly, if APRA were to implement them—

obviously, that is a decision for APRA—would you be consulted or have a say? How would it work? How does

the process work? APRA is obviously independent, so how does it work?

Senator Cormann: APRA and the RBA are both independent. That is a very important point to make. They

are both independent statutory organisations.

Senator DASTYARI: They are independent but they are within a system that is inter-related.

Senator Cormann: Sure, but the reason I stress that again is that the questions you are asking very much go

to the responsibilities of the RBA and APRA. You are really asking Treasury to provide a commentary on things

that are in the core purview of APRA and the RBA.

Senator DASTYARI: But as Treasury themselves are prepared to say—and so they should be—they are all

part of the same system in which they work together. They all play a role within a broader system and a broader

framework. I want to get an understanding from Treasury. It is sometimes hard for us to make an assessment of

how big an issue this is. Sometimes it gets sensationalised in the media and sometimes it is hard for us to get a

handle on how much of a real risk this is and how much of a problem. What you are saying, Ms Wilkinson—I

want to check that this is correct, and perhaps you can say it back to me in your words because your words will be

better than mine—is that you do not see this as a risk to the entire financial system. You see this as what the

pockets of activity have created—is it localised risk or risk of confidence? Touch on that a bit if you can.

Ms Wilkinson: We are very much aligned with the statements that the Reserve Bank Governor has made.

There was a statement that he had made on 3 September—

Senator DASTYARI: Sure, but nine months ago the Reserve Bank Governor was saying that there was not a

problem in the housing market.

Ms Wilkinson: He has talked about the importance of taking a prudent approach to avoid boom-bust cycles.

More recently, the head of financial stability at the Reserve Bank has made a number of different comments about

the sorts of concerns that they think we want to think about—whether we should be addressing through macro

prudential measures. We are engaging with APRA and the RBA in discussing a range of different policy issues

over the course of any given week, but, in the end, these are decisions for the RBA and APRA to implement. We

engage with them as we are talking generally about how the macro economy seems to be evolving, and that

involves discussing how individual sectors are evolving. That is the way in which we engage with them in this

process.

Senator DASTYARI: At this stage, has the formal council met more than—I guess I can ask the Markets

Group this—



Ms Wilkinson: Yes, you can ask Markets. I am sure they are sitting right behind, watching—

Senator DASTYARI: No, I think they have gone home.

Ms Wilkinson: We will advise them that you will be asking.

Senator DASTYARI: I will save the questions for them. I am conscious of time. Very quickly, there are two

other things that I wanted to touch on. I will put the other things on notice. You have all worked with Ken Henry

and you know him quite well. Are you all familiar with the speech he gave at ANU?

Senator Cormann: We all wait for Ken Henry's next speech so we can read it.

Senator DASTYARI: Ms Wilkinson, are you familiar with whom I am referring to?

Ms Wilkinson: I am generally aware. I am not sure which particular speech you are talking about.

Senator DASTYARI: He spoke at the ANU economic outlook conference.

CHAIR: Which particular point do you want to bring to the attention of the witness?

Senator DASTYARI: I just want to know if they are aware of the speech that I am talking about, because

then I can—

Senator Cormann: Why don't you table a copy and we can have a look at it?

Senator DASTYARI: I am not sure that I am going to get it tabled in time.

Senator CANAVAN: I have some questions, Chair.

Senator DASTYARI: You can jump in while I get this sorted. I will bring you a copy of it.

Senator CANAVAN: I want to ask about the transition of the domestic economy. I know that for awhile

Treasury, and I believe the RBA as well, have been hoping or projecting that, while the mining investment stage

will taper down, other types of investment will pick up. How close are we to that happening? Are other sectors of

investment starting to pick up to fill that gap?

Ms Wilkinson: I think you are generally talking about the rebalancing in growth that is taking place in the

economy. I think it is important to keep in mind that there are a couple of elements to this transition. One of them

is actually within the resources sector, moving from an investment phase to an exports phase. That is clearly

occurring. We have had strong growth in exports in the resource sectors which, to some degree, is offsetting the

reduction in investment which is taking place. Given the investment of the last few years, we are expecting there

to be a substantial increase in the capital stock, something like a fourfold increase in the capital stock in the

resources sector which would continue to support ongoing growth in exports from that sector for some time. It is

certainly clear that one area of the economy that has been contributing to this transition has been the housing

market. Low interest rates have certainly supported an increase in construction activity. Dwelling investments

already supported growth. We have a sense that there is a significant amount of work still in the pipeline, given

the quantity of approvals that we have seen in recent years. Those signs are certainly there. I think there are early

signs within the capital expenditure survey that the non-resources investments are perhaps starting to pick up. But

I have to admit that those are early signs at this stage. I guess we remain optimistic because some of the business

surveys for both business conditions and business confidence have remained positive through this year and those

are usually quite good precursors to—

Senator CANAVAN: Where are business confidence levels at the moment?

Ms Wilkinson: According to the most recent National Australia Bank survey, both business confidence and

business conditions remain positive. The net balance is positive. I cannot quite recall where they are relative to

low and average levels.

Mr Goldsworthy: Certainly, for much of this year both confidence and conditions have been higher than

average levels. They did dip a little bit in September but, if you take a bigger picture and look at the core of the

averages and averages over the year, they have been at high levels.

Senator CANAVAN: I am just going back to house-dwelling investment. Do you still see that as a big area

where we could fill the gap, so to speak, when mining investment tapers down or is tapering down?

Senator Cormann: Not totally, I suspect.

Senator CANAVAN: Not totally, but contributing to help fill that gap?

Senator Cormann: I believe that has already been happening to a large degree.

Ms Wilkinson: Absolutely. As I said, we have already seen a big increase in approvals. Quite a lot of those

approvals are for medium density dwellings, so they typically take longer to actually construct than single



dwellings. The leading indicators suggest that there is a significant pipeline of construction work that will take

place—

Senator CANAVAN: Do you see any tension between wanting to pin hopes on dwelling investment to take

off, to help the broader economic transition? At the same time, the Reserve Bank, APRA and your own advice

previously in questions from Senator Dastyari are saying that their market is over here. There is too much of an

increase in prices, so to speak. Is there tension there? Presumably, we need higher prices to encourage the

investment.

Ms Wilkinson: One of the channels through which lower interest rates actually stimulate activity is through

increasing prices. Increasing prices increases the incentives for people to actually invest in new dwellings. So

there is a balance here. We think that supply and demand conditions are supportive of continued strong growth in

construction activity within the dwelling sector. Having said that, you want to keep in mind that, if there are

pockets of the dwellings sector where it looks like prices are moving away from what you would expect based on

fundamentals, that is a separate concern that one might want to address.

Senator CANAVAN: I just quickly want to ask you about the unemployment figures you mentioned in your

opening remarks. We had the ABS earlier today. Where do you see the current status of the employment market?

Are you trusting the ABS figures? Are you using other data? It is obviously a very important metric to judge the

state of the economy.

Ms Wilkinson: No, absolutely. We still place a lot of reliance on the ABS figures and we have confidence in

the ABS figures. When we look at the ABS figures, both employment and unemployment figures tend to have a

fair bit of volatility in them. It is always the case when you look at trends in these sorts of monthly figures that

you want to pay some attention to the original data, some attention to the seasonally adjusted data and some

attention to the trends. The trend data has, for some time, shown a pattern that we think is a similar pattern to that

which we would actually expect to see based on other information like surveys and other feedback we get through

business liaison.

Senator CANAVAN: Are you working with the ABS or providing them advice at all on their review of the

way they measure unemployment?

Ms Wilkinson: On the technical review?

Senator CANAVAN: Yes. I do not know what they are calling it, but they did mention it earlier today to the

committee that they are reviewing their practices at the moment.

Ms Wilkinson: That is right. We have offered to assist the ABS through that review process, and we are

continuing to engage closely with them.

Senator CANAVAN: Okay. Do you have any views at the moment, whether you think it is in survey design

or sampling error or simply random noise?

Mr Wilson: It is honestly too early to tell. I think they are going through a very careful process to rule out as

many possible factors as possible and to come to a considered conclusion about what has led to this volatility over

the last few months.

Senator CANAVAN: Finally of my series of questions, I just wanted to ask about China as well and their

growth. I do not know if you have seen that Larry Summers had a paper the other day-he used to be an economic

advisor to the US President. He has some interesting data saying that China has grown above six per cent a year

for 36 years, which is much longer than any other country in modern history. Most countries tend to only do eight

or nine years at that sort of pace. Do you share the concerns of Mr Summers about the potential reversion to the

mean for China?

Ms Wilkinson: I might just hand over to one of my colleagues.


Mr Woods: I will kick off. I have not seen the article that you are referring to. If we look at the results which

were published yesterday, we can see that China is growing at 7.3 per cent through the year. A couple of points

come out of that. The first would be that it is largely consistent with what their target is for the year, which is 7.5

per cent. It is consistent with what we have in our budget—this is just by the by. But where it is is clearly slower;

it is the slowest result since the first quarter of 2009. Clearly that is reflecting the longer term structural changes

within the economy; it is also reflecting what is happening in terms of weaker domestic demand that is being

brought about both through a tightening of monetary policy last year and by a correction within the housing

market, where we have seen persistent falls in housing prices since May of this year. I think the time of seeing

persistent growth above 10 per cent is past us. The Chinese authorities are taking steps now to address some of



the weakness that has been brought about in the housing market with a mix of targeted policy interventions

through both the operation of monetary policy and some of the housing restrictions it has imposed on some of the

individual cities. This is what gives us confidence that they will hit their target of around 7½ per cent this year.

But if we look forward to next year and beyond then we would expect their growth would continue to be

something that would more likely start with a seven or a six than the nines and the 10s that we have seen over the

last 30 or so years. That is pretty much what you would be expecting from an economy that has the changing

demographics that China is facing. It is ageing. It has drawn on much of the excess labour supply that has moved

from the country into the cities. So we would expect that the rate of urbanisation that has been a big driver of past

growth will slow. There are two things compounding that. One is that the reform dividend which they have

enjoyed or experienced as a result of the changes that they made back in the early 2000s has run its course. They

have articulated what will be the next set of reforms. Beyond that, I guess the most fundamental thing is that after

30 years of development they have moved towards a technology frontier. They are getting to a point of

converging with higher income countries. You would expect their growth rate, as you move towards the frontier,

to be slower than at the start of their process.

Senator CANAVAN: Can you explain the effect of some of the developments that you have talked about,

particularly in relation to the Chinese housing market, on the Australian economy?

Mr Woods: I will start off and then I might hand over to my colleagues, to my left. What we saw in the

housing market was a strong up-tick in prices through 2013. In the tier 1 cities, which are cities like Shanghai and

Beijing, we saw prices increasing by up to 22 per cent in the 12 months to December last year. But, clearly over

the course of this year, 2014, we have seen significant declines in the level of investment in the sector. Real estate

investment was down from 22 per cent through the year to December last year—reflecting the same peak in prices

that I just mentioned—to around nine per cent now. That is quite a drop. As I mentioned previously, prices in the

major cities have been falling—not merely slowing in growth, but falling in absolute terms—since May this year.

As I said before, the slowdown is due to a number of reasons. One was on account of the authorities moving

last year to tighten monetary policy to address some of the imbalances that the economy has experienced since the

financial crisis, with its heavy reliance upon credit and investment in driving growth. So we have seen credit grow

at very high levels since the financial crisis, and clearly it has caused some concerns about the sustainability of

that and about the efficiency of some of the investments and where that credit was going. It has shown up in

excess capacity in a number of sectors such as steel and cement production, and it has shown up in terms of those

very strong growth rates and prices in the housing sector.

So in terms of what impact the slowdown in the housing sector has on the Australian economy, in the first

instance, it has an impact upon the Chinese economy. Real estate investment accounts for more than 20 per cent

of the fixed asset investment over the last 20 years. So that direct impact of a slowdown in the housing sector is

going to result in a slowdown in the economy and we saw that in the results that were published yesterday.

It has also raised a concern about the impact of those falling asset prices upon the health and viability of the

shadow banking sector that has financed much of that growth over the last period since 2009. But what does that

mean for Australia? Clearly, the impact of the reduction in investment in housing and the reduction in new starts

for projects will lead to a reduction in demand for our commodity exports.

We talked a little earlier about what had been happening with the price of iron ore and, clearly, what is

happening in the housing sector is contributing to that. That is not the only factor but a contributing factor.

Senator KETTER: What about the implications for Australia if China rebalances more towards consumption-

led growth?

Mr Woods: I think we would probably see more of the same of what we have been describing. The move

away from investment, particularly in the housing sector and the slowdown in the urbanisation of China, will

clearly have implications for the demand for our commodity exports. The flipside to that would be the extent to

which consumption, by increasing a price for its middle-class, or the demand for our service exports offers

different opportunities for Australian exporters.

Senator CANAVAN: I note that the US have had a remarkable consolidation in their budget position, going

from negative eight per cent of GDP to just over two per cent. There were many warnings a few years ago that

that would lead to economic chaos because of the Tea Party and all that sort of thing. That little fiscal

consolidation has not coincided with that, as in your remarks the UK economy is strong. Just so the committee is

clear, are you saying we can consolidate fiscally without having a negative effect on economic growth? Is that

now true, having seen the data from the US?



Senator Cormann: I think the short answer is that yes, we can of course pursue fiscal consolidation and

pursue policies that drive stronger economic growth at the same time. That is of course exactly what the

government is seeking to do. Repairing the budget is obviously an important objective in itself. It is manifestly

unfair for us to keep borrowing from our children and grandchildren in order to fund a large part of our recurrent

expenditure today because it forces them to accept lower living standards and potentially higher taxes in order to

pay the price for our recurrent expenditure today. As you have indicated, on the face of it, the evidence of the

United States seems to indicate that of course that is exactly what can and should happen.

Senator DASTYARI: There is a lot from that that I would like to discuss with you, Minister, but I note we

have run out of time.

CHAIR: You do protest too much! With 30 seconds to spare, we will now adjourn.

Senator DASTYARI: We obviously did not get to a whole lot of questions that we wanted to ask you. We

will put them on notice. Before we adjourn, I did want to take the opportunity to table the speech from former

secretary to Treasury, Ken Henry, delivered at the Crawford School of Public Policy, on Tuesday, 16 September.

Senator Canavan has already read it.

CHAIR: Thank you. And, thank you, Broadcasting and Hansard.

Committee adjourned at 23:00

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