Scrutiny of Bills First Report of 1998

SENATE STANDING COMMITTEE FOR THE SCRUTINY OF BILLS

FIRST REPORT OF 1998

4 March 1998

ISSN 0729-6258

MEMBERS OF THE COMMITTEE

Senator B Cooney (Chairman)

Senator W Crane (Deputy Chairman)

Senator J Ferris

Senator S Macdonald

Senator A Murray

Senator J Quirke

TERMS OF REFERENCE

Extract from Standing Order 24

(1) (a) At the commencement of each Parliament, a Standing Committee for the Scrutiny of Bills shall be appointed to report, in respect of the clauses of bills introduced into the Senate, and in respect of Acts of the Parliament, whether such bills or Acts, by express words or otherwise:

(i) trespass unduly on personal rights and liberties;

(ii) make rights, liberties or obligations unduly dependent upon insufficiently defined administrative powers;

(iii) make rights, liberties or obligations unduly dependent upon non-reviewable decisions;

(iv) inappropriately delegate legislative powers; or

(v) insufficiently subject the exercise of legislative power to parliamentary scrutiny.

(b) The Committee, for the purpose of reporting upon the clauses of a bill when the bill has been introduced into the Senate, may consider any proposed law or other document or information available to it, notwithstanding that such proposed law, document or information has not been presented to the Senate.

SENATE STANDING COMMITTEE FOR THE SCRUTINY OF BILLS

FIRST REPORT OF 1998

The committee presents its First Report of 1998 to the Senate.

The committee draws the attention of the Senate to clauses of the following bills which contain provisions that the committee considers may fall within principles 1(a)(i) to 1(a)(v) of Standing Order 24:

Judiciary Amendment Bill 1997

Taxation Laws Amendment Bill (No. 6) 1997

Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997

Judiciary Amendment Bill 1997

This bill was introduced into the House of Representatives on 20 November 1997 by the Attorney-General. [Portfolio responsibility: Attorney-General]

The bill proposes to amend the Judiciary Act 1903 to:

establish the Australian Government Solicitor (AGS) as a separate statutory authority to provide legal and related services for government purposes;
set out the rights, duties and obligations of lawyers in the Attorney-General's Department and the AGS;
provide for the appointment and terms and conditions of a CEO and staff for the AGS;
provide for the position regarding taxation and corporate governance of the AGS;
confer on the Attorney-General the power to issue Legal Services Directions relating to the performance of Commonwealth legal work;

and amends 10 portfolio Acts to make consequential and transitional amendments.

The committee dealt with this bill in Alert Digest No. 17 of 1997, in which it made various comments. The Attorney-General has responded to those comments in a letter received on 3 March 1998. A copy of that letter is attached to this report, and relevant parts of the response are discussed below.

Insufficient Parliamentary scrutiny
Proposed new Part VIIIC

In Alert Digest No. 17 of 1997, the committee noted that under proposed new Part VIIIC, the Attorney-General may issue Legal Services Directions which must be complied with by a variety of persons or bodies, not all of whom are otherwise under the control of the Commonwealth.

It appeared that these Directions may be legislative in character but there is no provision for them to be disallowable instruments for the purposes of the Acts Interpretation Act 1901. The committee, therefore, sought the advice of the Attorney-General on whether these Directions should be subject to review by Parliament.

Pending the Attorney-General's advice, the committee drew Senators' attention to the provisions, as they may be considered insufficiently to subject the exercise of legislative power to parliamentary scrutiny, in breach of principle 1(a)(v) of the committee's terms of reference.

On this issue, the Attorney-General has responded as follows:

Parliamentary scrutiny of Legal Services Directions

Legal Services Directions will be capable of applying either generally to Commonwealth legal work, or to specific legal work being performed in relation to a particular matter (Bill clause 55ZF(1)).

The Government considers it appropriate for Legal Services Directions that are legislative in character (these are most likely to be the Directions of general application) to be subject to Parliamentary scrutiny. When the Bill was drafted it was expected that Directions of a legislative character would be subject to Parliamentary scrutiny under the Legislative Instruments Bill. The Government remains of the view that this would be the most effective process for subjecting Directions of a legislative character to effective Parliamentary scrutiny.

The committee thanks the Attorney-General for this response. However, the committee is concerned that the process favoured by the Government for effective scrutiny of Legal Service Directions is dependent on a bill, the Legislative Instruments Bill, which has been in existence in one form or another since 1994 but has not yet passed into law. Until the Legislative Instruments Bill is passed into law, the committee favours, at least as an interim measure, provision for parliamentary scrutiny of these Directions in the Judiciary Amendment Bill 1997.

The committee, therefore, continues to draw Senators' attention to the provisions, as they may be considered insufficiently to subject the exercise of legislative power to parliamentary scrutiny, in breach of principle 1(a)(v) of the committee's terms of reference.

Legal professional privilege
Clause 55ZH

In Alert Digest No. 17 of 1997, the committee noted that clause 55ZH of this bill, if enacted, would enable a Legal Services Direction to require a person to give information or documents to another person in circumstances that, apart from that clause, would be in breach of legal professional privilege.

The committee was concerned that this may prejudice the operation of the legal system and result in unfairness to clients.

Clause 55ZF enables the Attorney-General to issue Legal Services Directions that are to apply, inter alia, to Commonwealth legal work being performed in relation to a particular matter. That clause has a definition of Commonwealth legal work which, in part, includes 'any legal work performed by a person for ... a company in which the Commonwealth has a controlling interest'.

It seemed to the committee that unfairness could result for, say, a group of private shareholders in Telstra where they have given confidential information to the solicitor acting for Telstra (either AGS or a private solicitor) and clause 55ZH is used to force the disclosure of that otherwise privileged information to the Commonwealth where there is litigation, either then or later, in which the Commonwealth and Telstra (or those private shareholders) are opposed.

The committee noted that subclauses (3) and (4) deem that no breach of legal professional privilege has occurred nor the privilege waived. The question arose as to what use the information obtained may be put.

The committee, accordingly, sought further clarification from the Attorney-General on the purpose of clause 55ZH and on whether there may be implications which may trespass unduly on the rights and liberties of individuals.

On this issue, the Attorney-General has responded as follows:

Legal Professional Privilege

The Committee was also concerned that the proposed compulsory disclosure power could prejudice the operation of the legal system and result in unfairness to clients. The Committee gave the hypothetical example of a group of private shareholders in Telstra who gave confidential information to the solicitor acting for Telstra and clause 55ZH being used to force disclosure of that information to the Commonwealth in circumstances where there could be litigation, either then or later, in which the Commonwealth is opposed to Telstra (or those private shareholders). The Committee has also asked a related question as to what use the information obtained may be put.

Statutory displacement of legal professional privilege is not unique to the Bill, and examples of a legislature displacing legal professional privilege in favour of an overriding public interest can be found both in Commonwealth legislation (for example, sections 70 and 85 of the Seafarers Rehabilitation and Compensation Act 1992 and section 9(4) of the Ombudsman Act 1976) as well as in State legislation (for example, sections 83, 189 and 194 of the Legal Practice Act 1996 (Victoria) and section 29 of the Legal Aid Act 1997 (Queensland)).

The proposed power to issue Legal Services Directions requiring disclosure of information is necessary to maintain and protect the public interest in relation to the legal work undertaken for the Commonwealth, its Ministers, officers, authorities and companies (see the Explanatory Memorandum and Second Reading Speech for the Bill). This need arises from the Government's decision to open the conduct of Commonwealth litigation to private lawyers in competition with the AGS and to create the AGS as a separate statutory authority. Specifically, the proposed compulsory disclosure power is designed to enable the Attorney-General to discharge his First Law Officer functions. Examples of public interest factors that Legal Services Directions are intended to protect include:

the requirement to observe the model litigant principle,
the need to take account of whole-of-government factors,
the need to ensure proper coordination of litigation involving common issues across government,
the need to maintain consistency in the conduct of litigation by the Commonwealth, especially in relation to the observance of proper criteria for settling claims,
the need to keep Commonwealth litigation costs to a minimum (for example, by ensuring compliance with controls over counsel's fees), and
the need to maintain consistency in the observance of proper criteria for financial assistance to officials who are the subject of litigation arising out of their employment.

It is necessary for the Attorney-General (or his authorised officer) to have relevant information in order to ensure that:

Directions are issued when needed and are amended as appropriate,
Directions are observed, and
the Attorney-General is able to intervene in particular cases to ensure that the public interest is protected in those cases,

The purpose of clause 55ZH is to ensure that the Attorney-General is able to obtain all relevant information.

While it is envisaged that Legal Services Directions will provide a framework for the conduct of Commonwealth litigation, the prime responsibility for conducting this litigation will rest with Departments and agencies. It is therefore expected that the need for the Attorney-General to intervene in the conduct of litigation would only occur where sensitive or strategically important matters arose.

In addition, a purported use of the power to obtain information for an ulterior purpose (for example, to obtain an advantage in particular proceedings) would be invalid and could be successfully challenged in court. This is because of the well-established legal principle that statutory powers can only be used bona fide for the purposes for which they are conferred by the statute (see, for example, the High Court of Australia's decision in O'Reilly v State Bank of Victoria Commissioners (1982-83) 153 CLR 1, at 48). As noted above, the power in clause 55ZH is linked to the need to maintain and protect the public interest in relation to the legal work undertaken for the Commonwealth, its Ministers, officers, authorities and companies.

Further, if information has been obtained pursuant to the compulsory power, its use or disclosure for an ulterior purpose would be unlawful and could be restrained or be the subject of a damages award. It is an established legal principle that information obtained pursuant to a statutory power is subject to a legal obligation of confidence, in that the information can only be used or disclosed for the purpose for which the statutory power is conferred (Johns v Australian Securities Commission (1992-93) 178 CLR 408, at 424 and 436).

In relation to the specific Telstra example given by the Committee, it should be noted that no decision has been made regarding the appropriateness or otherwise of issuing Legal Service Directions in relation to Telstra. However, the main purpose of the power to issue Directions is to facilitate regulation of legal services to the Commonwealth, and not to regulate Commonwealth-controlled corporations.

In relation to Commonwealth litigation generally, clause 55ZH is part of a scheme designed to ensure that Commonwealth Departments and agencies conduct their litigation in accordance with the public interest. Accordingly, clause 55ZH contains the following safeguards:

any information supplied to Departments or agencies or their solicitors could be obtained and used under clause 55ZH only for legitimate purposes, and
disclosure and use of information under, and for the purposes of, clause 55ZH would not result in the loss of any legal professional privilege that exists in relation to the information, thus constituting an additional bar to the information being disclosed in legal proceedings (clause 55ZH(4)).

The committee thanks the Minister for this very full response.

Taxation Laws Amendment Bill (No. 6) 1997

This bill was introduced into the House of Representatives on 29 October 1997 by the Parliamentary Secretary (Cabinet) to the Prime Minister. [Portfolio responsibility: Treasury]

The bill proposes to amend the following Acts:

Income Tax Assessment Act 1936 to:
- deny the ability to offset against capital gains certain capital losses created by an arrangement entered into before 3pm on 29 April 1997 and to prevent companies using capital losses artificially created through an arrangement entered into after that time;
- allow instalment taxpayers classified as small to pay their likely tax on 15 December following their income year and the balance, if any, of their tax liability on the following 15 March, and make consequential amendments;
- prevent franking credits or debits arising from the payment or refund of tax where those amounts are attributable to the retirement savings account business of a life assurance company;
- ensure that taxpayers must reduce the cost base or indexed cost base of an asset to the extent of any net deductions allowable for expenditures included in the cost base;
- replace the formulae used to determine the passive income of the controlled foreign companies of life and general insurance companies;
- require life companies to use average calculated liabilities, rather than calculated liabilities at the end of the year of income as the basis for determining exempt income that relates to immediate annuity business and apportioning income and capital gains; and
- clarify the operation of the depreciation provisions in circumstances when an entity the income of which is exempt becomes, for any reason, subject to tax on any part of its income under the provisions of the Act;
Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 to extend to companies two concessional tracing rules which are available to trusts under trust loss measures;
Fringe Benefits Tax Assessment Act 1986, Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 to extend the existing exemption for taxi travel beginning or ending at an employee's place of work and to introduce a new exemption from FBT for car parking benefits for certain small business owners; and
Sales Tax Assessment Act 1992 to ensure that goods imported into Australia under a temporary importation exemption, used in Australia, exported and then re-imported are subject to sales tax at the time of the later importation.

The committee dealt with this bill in Alert Digest No. 16 of 1997, in which it made various comments. The Assistant Treasurer has responded to those comments in a letter dated 3 December 1997. A copy of that letter is attached to this report and relevant parts of the response are discussed below.

Retrospective application
Item 3 of Schedule 10

In Alert Digest No. 16 of 1997, the committee noted that item 3 of Schedule 10 to this bill, if enacted, would provide that the amendments made by this Schedule would apply to entities which became taxable earlier than 3 July 1995 but not earlier than the start of the year of income in which 1 July 1998 occurs.

The committee noted that paragraph 10.9 of the explanatory memorandum suggests that the Commissioner's interpretation and administration of section 61 has been subject to challenge and that the purpose of these amendments is to retrospectively change the law to avert further challenge.

Accordingly, the committee sought the Treasurer's advice on whether personal rights may be adversely affected by this change.

Pending the Treasurer's advice, the committee drew Senators' attention to the provisions, as they may be considered to trespass unduly on personal rights and liberties, in breach of principle 1(a)(i) of the committee's terms of reference.

The Assistant Treasurer has responded as follows:

Schedule 10 introduces a new section 61A into the Income Tax Assessment Act 1936 (ITAA). The measure was announced in the 1997-98 Budget to ensure that the depreciable assets of tax exempt entities which became taxable prior to 3 July 1995 are brought into the tax system at their notional written down values using the "NWDV including section 57AG loadings basis", as explained at paragraph 10.7 of the Explanatory Memorandum.

The new section 61A accords with the Commissioner of Taxation's long standing view of the way the depreciation provisions of the ITAA operate in such circumstances. As there was general acceptance of this view, usual practice was not to include specific provisions requiring the use of the NWDV including section 57AG loadings basis into the transitional legislation of particular transition taxpayers. See, for example, the explanation contained in the Explanatory Memorandum to the transitional legislation (Act No. 105 of 1989) for complying superannuation funds which became taxable at the start of their year of income in which 1 July 1988 occurred.

In recent years a limited number of opportunistic challenges to the Commissioner's view have emerged. Schedule 2D, Division 57 of the ITAA was enacted by the Government to ensure that entities which become taxable on or after 3 July 1995 are required to use the NWDV including section 57AG loadings basis. Schedule 10 is intended to provide this same clarity and certainty for entities which became taxable prior to 3 July 1995. Schedule 10 is, therefore, an entirely retrospective measure - it does not have any prospective application. Its earliest application date is designed to correspond with the transition time of complying superannuation funds.

The direct risk to the revenue presented by these challenges to the Commissioner's view is substantial. The potential flow on effect to other taxpayers who have complied with the Commissioner's interpretation increases that already considerable revenue risk. For example, in one particular challenge [which has now progressed to the stage of an appeal to the Administrative Appeals Tribunal under Part IVC of the Taxation Administration Act 1953 (TAA)] the transition taxpayer is contending for an interpretation of section 61 of the ITAA which produces the anomalous result that its depreciable assets would be brought into the tax system at their original acquisition costs. This interpretation totally ignores the taxpayer's prior use of those assets for the purposes of producing exempt income. The Commissioner has repeatedly advised this taxpayer, commencing well before its transition time, of his view that it is required to sue the NWDV including section 57AG loadings basis.

Following the introduction of Schedule 10 into Parliament, the commissioner became aware of an isolated instance of a taxpayer that had received a private binding ruling under Pt IVAA of the TAA which is, to some extent, different from the new section 61A. In the interests of fairness and equity, the Government amended TLAB 6 in the House of Representatives to insert a savings clause to protect any such taxpayers who may have previously received a private binding ruling.

The Government believes that the risk to the revenue warrants the retrospective measure contained in Schedule 10. The Government does not believe that the measure will trespass unduly on personal rights having regard to the widespread acceptance and compliance with the Commissioner's interpretation of section 61 of the ITAA, the opportunistic nature of the limited challenges to his view, and the protection that the savings clause will afford to any taxpayer who may have previously received a private binding ruling.

In addition, during debate in the House of Representatives the Opposition has indicated that it will support this amendment.

I trust that the above has been of assistance.

The committee thanks the Assistant Treasurer for this response, noting the amendment with regard to private binding rulings which has been introduced into the bill.

Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997

This bill was introduced into the House of Representatives on 1 October 1997 by the Parliamentary Secretary (Cabinet) to the Prime Minister. [Portfolio responsibility: Treasury]

The bill proposes to amend the Income Tax Assessment Act 1936 and three other Acts to set out rules that have to be satisfied by trusts before a deduction is allowed for prior year and current year losses and certain debt deductions.

The committee dealt with this bill in Alert Digest No. 14 of 1997, in which it made various comments. The Treasurer has responded to those comments in a letter dated 27 February 1997. A copy of that letter is attached to this report, and relevant parts of the response are discussed below.

Retrospectivity- legislation by public announcement

In Alert Digest No. 14 of 1997, the committee noted that the measures contained in this bill will generally take effect from 9 May 1995 the date they were announced in the 1995 budget.

The committee noted that the present Government announced in the 1996 budget that it intended to proceed with the previous Government's 1995 budget announcement that trust loss rules would be introduced into income tax law. At the same time, the Government made it clear that several significant changes would be made to the previous Government's draft legislation. Further modifications of the proposals were contained in the 1997 Budget.

With respect to measures stemming from budget announcements the committee is usually prepared to accept some retrospectivity. The committee has previously indicated that, in relation to retrospectivity, budget measures are something of a special case. In a paper titled The Operation of the Senate Standing Committee for the Scrutiny of Bills, 1981-85, the then Chairman of the Committee, Senator Tate, said:

It is customary ... for budgetary measures to be made retrospective to the date of their announcement on Budget night and for changes to taxes, levies, fees to be given effect from the date of their introduction into Parliament.

On the other hand, the present bill has been introduced more than twelve months after its original announcement. As it relates to the imposition of a tax, the committee bears in mind the resolution of the Senate of 8 November 1989. That resolution states:

That, where the Government has announced, by press release, its intention to introduce a Bill to amend taxation law, and that Bill has not been introduced into the Parliament or made available by way of publication of a draft Bill within 6 calendar months after the date of that announcement, the Senate shall, subject to any further resolution, amend the Bill to provide that the commencement date of the Bill shall be a date that is no earlier than either the date of introduction of the Bill into the Parliament or the date of publication of the draft Bill.

While a distinction may be able to be drawn between a budget announcement and a press release, the principle behind the resolution remains: that legislation amending taxation law retrospectively from a date so announced should be introduced quickly after it is announced.

The committee has consistently opposed legislation by press release. In its 1986-87 Annual Report the committee stated:

...the practice of 'legislation by press release' carries with it the assumption that citizens should arrange their affairs in accordance with announcements made by the Executive rather than in accordance with the laws made by Parliament. It treats the passage of the necessary retrospective legislation 'ratifying' the announcement as a pure formality. It places the Parliament in the invidious position of either agreeing to the legislation without significant amendment or bearing the odium of overturning the arrangements which many people may have made in reliance on the Ministerial announcement.

The committee went on to say:

Moreover, quite apart from the debilitating effect of the practice on the Parliament, it leaves the law in a state of uncertainty. Persons such as lawyers and accountants who must advise their clients on the law are compelled to study the terms of the press release in an attempt to ascertain what the law is. As the Committee has noted on two occasions, one press release may be modified by subsequent press releases before the Minister's announcement is translated into law. The legislation when introduced may differ in significant details from the terms of the announcement. The Government may be unable to command a majority in the Senate to pass the legislation giving effect to the announcement or it may lose office before it has introduced the relevant legislation, leaving the new Government to decide whether to proceed with the proposed change to the law.

The history of the present bill demonstrates what the committee warned about as long ago as 1987.

Given the delay, the committee sought the advice of the Treasurer whether the provisions of the bill should apply only from the current financial year.

Pending the advice of the Treasurer, the committee drew Senators' attention to the provisions, as they may be considered to trespass unduly on personal rights and liberties, in breach of principle 1(a)(i) of the committee's terms of reference.

The Treasurer has responded as follows:

The Committee has sought my advice whether the provisions of the Bill should apply only from the current financial year.

In its comments, the Committee noted that the trust losses Bill, which was introduced into the Parliament on 1 October 1997, may not comply with the principle behind the resolution of the Senate of 8 November 1989. This resolution broadly states that if tax legislation is not introduced into the Parliament (or made available by way of publication of a draft Bill) within six months of its announcement, then the commencement date should be no earlier than the date of introduction of the Bill into the Parliament or the date of publication of the draft Bill.

The trust loss measures were announced by the previous Government on 9 May 1995. Legislation was introduced into the Parliament in September 1995 as part of the Taxation Laws Amendment Bill (No. 4) 1995 (within six months of the announcement). However, the measures were excised from that Bill by the Senate and were referred to the Senate Economics Legislation Committee. Because of the 1996 Federal election, the Senate committee did not complete its inquiry and did not conduct hearings.

In the 1996-97 Budget, the Government announced that it would proceed with the trust loss measures, with a number of changes, with general effect from 9 May 1995. An exposure draft of the proposed trust loss measures was released on 10 February 1997 for public consultation (within six months of the Government's Budget announcement on 20 August 1996). As a result of the consultative process, the Government announced further changes in the 1997-98 Budget, and the legislation was introduced into the parliament on 1 October 1997 (within six months of the Government's Budget announcement on 13 May 1997).

In the circumstances, I do not believe that the trust losses Bill breaches the principle behind the Senate resolution of 8 November 1989. Taxpayers have had the benefit of draft legislation since September 1995. Even though the detail of the legislation introduced into the Parliament by this Government on 1 October 1997 differs some respects to the previous Government's legislation, the changes are generally beneficial to taxpayers. Any changes that are disadvantageous to taxpayers do not commence prior to the date they were announced by this Government.

I trust that this advice will be assistance to the Committee.

The committee thanks the Treasurer for this response. The committee, however, is not persuaded that the proposed date of effect of 9 May 1995 for the measures contained in this bill is within the spirit of its previously expressed views on when retrospectivity might be acceptable. The committee is concerned at the great uncertainty that the delay in implementing these measures has created.

The committee continues to draw Senators' attention to the provisions, as they may be considered to trespass unduly on personal rights and liberties, in breach of principle 1(a)(i) of the committee's terms of reference.

Barney Cooney

Chairman

Scrutiny of Bills First Report of 1998