Chapter 2

Treasury portfolio

2.1 This chapter summarises certain key areas of interest raised during the committee's consideration of budget estimates for the 2018–19 financial year for the Treasury portfolio. The chapter follows the order of the committee's estimates proceedings and is an indicative, though not exhaustive, account of issues examined.

2.2 On 29 and 30 May and 5 June 2018, the committee heard evidence from Senator the Hon. Mathias Cormann, Minister for Finance, Senator the
Hon. James McGrath, Assistant Minister to the Prime Minister, along with officers from the Department of the Treasury (Treasury) and agencies of the Treasury portfolio, including:

Department of the Treasury—Secretary, Macroeconomic Group and Corporate Group;
Department of the Treasury—Fiscal Group;
Department of the Treasury—Markets Group;
Department of the Treasury––Structural Reform Group;
Royal Australian Mint;
Department of the Treasury—Revenue Group;
Australian Taxation Office;
Australian Prudential Regulation Authority;
Australian Competition and Consumer Commission with the Australian Energy Regulator;
Australian Office of Financial Management;
Australian Securities and Investments Commission;
Productivity Commission;
Australian Bureau of Statistics;
Commonwealth Grants Commission; and
Inspector-General of Taxation.

2.3 Senators present over the course of the three days of hearings included Senator Hume (Chair), Senator Ketter (Deputy Chair), Senators Abetz, Bernardi, Bushby, Cameron, Colbeck, Georgiou, Hanson, Keneally, Leyonhjelm, Lines, Ian Macdonald, McAllister, O'Neill, Patrick, Pratt, Rice, Siewert, Steele-John, Stoker, Storer, Whish-Wilson and Williams.

Macroeconomic Group and Corporate Group

Treasury Secretary

2.4 The Treasury Secretary, Mr John Fraser, made a comprehensive opening statement which touched on a range of global and domestic economic issues. In particular, Mr Fraser noted that the global economy is estimated to have grown by
3.8 per cent in 2017, a pace not seen since 2011.[1]

2.5 Alongside this growth, Mr Fraser noted an 'upswing in global trade volumes', particularly in the Asian region; as well as an increase in business investment and industrial production.[2]

2.6 Mr Fraser also commented on Australia's corporate tax rate, noting that when compared with the 34 other members of the Organisation for Economic Cooperation and Development (OECD), only Portugal and France have higher rates than Australia. Further, Mr Fraser noted that France recently legislated the reduction of its corporate tax rate.[3]

2.7 Mr Fraser also noted the current geopolitical uncertainty and the economic risks that this carries, highlighting the situations in the Middle East and on the Korean peninsula.

2.8 Mr Fraser commented that the Australian economy was performing well:

...our strong economic performance is being supported by this resilient global economy, as well as our population growth, technological developments and recent gains in national income following renewed strength in the terms of trade.[4]

2.9 Mr Fraser discussed Australia's fiscal outlook, noting that the 2018–19 Budget would see improvement in the country's fiscal position and noted the forecast of the Budget returning to balance by 2019–20:

In this year's budget, estimates of the underlying cash balance improved across every year of the forward estimates, with the estimates for 2017–18 and 2018–19 expected to be the strongest since the global financial crisis. The underlying cash balance is now forecast to return to balance in
2019–20 before increasing to projected surpluses of $11 billion in 2020–21 and $16.6 billion in 2021–22. Beyond the forward estimates the underlying cash balance is projected to remain in surplus, reaching a projected surplus exceeding one per cent of GDP by 2026-27.[5]

2.10 Finally, Mr Fraser noted that this strong economic outlook, combined with Australia's AAA credit rating put Australia in a good position, should any economic volatility arise.[6]

2.11 The committee then discussed a range of topics with Mr Fraser and officers from Treasury's Macroeconomic and Corporate Groups.

Personal income tax plan

2.12 The committee discussed the government's personal income tax plan which was announced in the 2018–19 Budget. In response to a request from the committee, Mr Fraser tabled a document containing information on the breakdown of the costings. The committee sought further information on the costing of the plan's three stages over the medium term. Officers from the Treasury confirmed the forecasted revenue from the plan in the Budget; however, Treasury also noted that there is inherent uncertainty when forecasting further out.[7]

2.13 Officers from Treasury explained that the projections provided are based on existing taxpayer data, and are then informed by population growth projections and wage growth projections.[8]

2.14 The personal income tax plan is addressed in more detail in the section about the Australian Taxation Office and Revenue Group.

Employment growth

2.15 The committee sought information from the Treasury about the number of jobs created in 2017. Officers confirmed that the figure was 415,000 and that approximately 75 per cent of these jobs were full time and a majority of the total number were created in the private sector.[9]

2.16 Officers also advised the committee of the jobs growth percentages by state:

This is the 12 months to April this year. New South Wales is 4.1 per cent, Victoria is 1.7 per cent, Queensland is 2.8 per cent, South Australia is 3.2 per cent, Western Australia is two per cent, Tasmania is 1.2 per cent, the Northern Territory is minus-two per cent and the Australian Capital Territory is 2.7 per cent. So there has been relatively strong jobs growth in New South Wales.[10]

2.17 The committee asked Treasury officials about the transition from mining to service industry employment. Officers advised that:

It is the case that services sectors are relatively, on average, more labour-intensive than mining. A transition from mining to services, other things being equal, would increase the job intensity of output.[11]

Fiscal Group

Tax-to-GDP cap

2.18 The committee sought information from officers of the Treasury about why a Tax-to-GDP cap was being introduced. Officers explained:

The rationale, as a projection assumption, was essentially the view that an observation about history that governments in the past have tended not to allow the tax-to-GDP ratio to rise indefinitely. So, to an extent, some bracket creep which would manifest in an increase in the tax-to-GDP ratio has been handed back in the form of discretionary tax cuts.

[...]

This year, the government has taken the step of enshrining that 23.9 per cent tax cap in the fiscal strategy more explicitly to make it clear that that's a key element of the fiscal strategy, and the remainder of the fiscal strategy needs to be read subject to that. The 23.9 per cent itself is essentially the average tax-to-GDP ratio from the commencement of the GST in 2000 through to the beginning of the GFC—from memory, about 2007 or 2008. So that's the level. In essence, the main change in this budget is its more formal status as an element of the fiscal strategy.[12]

2.19 Officers of the Treasury also confirmed that the tax-to-GDP cap is not legislated; it is only set out in Budget Paper No. 1.[13] The committee noted that given that the cap is not legislated, it was unclear how it could be ensured that the cap was not exceeded.

2.20 Further, the committee asked Treasury officers what the implications were of having a tax-to-GDP cap but not a payment-to-GDP ratio. Officers explained:

I'd say the main implication is that it has a kind of implicit constraint on the extent to which payments to GDP can rise. To the extent the government meets its other fiscal targets, including reaching a sustainable surplus, you've got a tax-to-GDP cap around 23.9 per cent, so non-tax revenue will make up 1.6 or 1.7 per cent of GDP, roughly. That's going to define a receipts-to-GDP amount, pretty much. And then that thereby defines almost an implicit payments-to GDP constraint to the extent that the government wishes to run a surplus.[14]

Australian Taxation Office (ATO) and Revenue Group

Commissioner's opening statement

2.21 Mr Chris Jordan, Commissioner of Taxation, made a detailed opening statement to the committee which touched on a number of issues including the implementation of the single-touch payroll, the superannuation guarantee amnesty for employers, the upcoming tax time, and the work the ATO has been doing to ensure compliance. Mr Jordan's opening statement also addressed the criticism it had received through the joint ABC-Fairfax investigation which was aired on the ABC's Four Corners program.[15]

2.22 Mr Jordan stated that the Four Corners program 'came as quite a surprise' because the ATO's recent work with the small business community had been 'constructive and positive'.[16]

2.23 Mr Jordan noted the work that the ATO had been doing to improve the experience of small businesses within the taxation system:

...we've introduced an after-hours call-back service, the small business newsroom, small business roadshows, community conversations and simplified BAS reporting requirements.[17]

2.24 In closing, Mr Jordan reiterated the ATO's continuing commitment to transforming tax and superannuation administration in Australia, commenting that 'it has been going well and has been recognised as such by many in the community, stakeholders and scrutineers, which include very favourable worldwide comparisons'.[18]

Corporate tax rate

2.25 The committee sought information relating to the amount of revenue that is generated in Australia through company tax. Mr Jordan confirmed that in the 2017–18 financial year revenue would be in the order of $70 billion, and noted that this figure represents the 'second-highest proportion of total tax in the world'.[19]

2.26 The committee asked about the impact on Australia of other countries reducing their corporate tax rates. Officers from the Treasury explained that analysis done by the International Monetary Fund (IMF) showed that a reduction of the corporate tax rates in the United States, France and Germany could 'lead to a one per cent reduction in GDP in other countries'.[20]

2.27 Officers from the Treasury also advised the committee that modelling they had done around a reduction of the corporate tax rate in Australia showed it would create an increase of one per cent in GDP, associated with a strong pick up in business investment.[21]

2.28 The committee asked officers from the ATO about other modelling they had done in relation to the reduction of the corporate tax rate in Australia. Officers commented that the most important aspect of tax modelling is the underlying assumptions that are built into the modelling:

Models essentially try to simplify reality, but you have to basically assume a number of things. That's part and parcel of any modelling exercise. When you look at some of assumptions that have been incorporated into some of the models, as Mr Davis has said, we have found that we certainly have question marks around some of those assumptions.[22]

Four Corners program

2.29 The committee asked Mr Jordan a number of questions about his response to the joint ABC-Fairfax investigation. Mr Jordan told the committee that he thought the program was 'highly offensive', pointing out to the committee that the program relied heavily on the 'regurgitation'[23] of an old dossier:

It appeared to be an outcome, and everything that led up to that was filtered to support the outcome. I don't think that meets the ABC's code of practice and editorial policies.[24]

2.30 Mr Jordan advised the committee that he had not made any official complaint about the program to the ABC or any other regulatory body.[25]

2.31 In addressing some of the claims the program made about the ATO's use of garnishee notices, Mr Jordan noted that garnishee notices were reserved for the end of the tax debt recovery process, after multiple attempts had been made to engage with the individual:

A garnishee is only used if they have refused to engage in any way with us. Most people, if they've got a problem, will, in good faith, enter a payment plan, stick to the payment plan, get the debt done—all finished, move on. It's only if they won't enter the payment plan or if they do multiple payment plans and never meet their requirements that we give them notice that we are going to issue a garnishee order, and we do. We can't let the debt pile just keep growing and growing, because that would be irresponsible of us.[26]

2.32 Officers from the ATO confirmed that where there is a dispute about whether tax is owed, the amount 'remains in abeyance until the dispute is resolved'.[27]

Panama papers

2.33 The committee sought an update on the ATO's progress with the Panama Papers. Officers from the ATO advised the committee that they had completed 315 reviews or audits based on information from the papers, with another 81 reviews still ongoing. Officers also indicated that this work should be completed around the end of the 2017–18 financial year.[28]

2.34 Officers provided the committee with more detailed information on the outcome of the reviews and audits that had so far been conducted:

We've raised about $65 million in liabilities in relation to those cases that we've completed. Collections are around $10 million worth of cash at this stage. We've got three individuals who are under criminal investigations at the moment, resulting from the work we've done, not yet at the stage where we've referred anything to the [Commonwealth Director of Public Prosecutions].[29]

2.35 Officers from the ATO told the committee that they were conducting similar processes in relation to the Paradise Papers, and that they were at an earlier stage in the process. The ATO confirmed that it was working with other agencies that are part of the Serious Financial Crimes Taskforce including the Australian Transaction Reports and Analysis Centre (AUSTRAC), the Australian Securities and Investments Commission (ASIC) and the Australian Criminal Intelligence Commission (ACIC).[30]

Personal income tax plan

2.36 The committee discussed the government's proposed personal income tax plan, and whether the Treasury had costed the outcomes of multiple taxation scenarios. Officers from the Treasury confirmed that they regularly cost multiple options as requested by the government.[31]

2.37 Officers from the Treasury outlined the key points of the plan:

Step 1, known as the low- and middle-income tax offset, provides a tax offset of various rates for various incomes. The benefit provides up to $200 for taxpayers with taxable income of up to $37,000. It phases in between $37,000 and $48,000, up to a maximum benefit of $530. Taxpayers between taxable incomes of $48,000 and $90,000 are eligible for the maximum tax offset of $530. It then phases out over the incomes of $90,001 and just over $125,000. That starts for the income year 2018–19 and continues for the income years 2019–20, 2020–21 and 2021–22.[32]

2.38 Officers noted that the offset is paid at the time an individual's tax return is assessed.

2.39 The next step is the increase of the 32.5 per cent personal income tax bracket from $87,000 to $90,000 on 1 July 2018. The third step was outlined by officers from the Treasury as follows:

Then from 1 July 2022, a range of things happen. The low-income tax offset increases from $445 to $645, and the 19 per cent personal income tax bracket increases from $37,000 to $41,000. That combination locks in and provides a similar amount of tax relief to that provided from the low- and middle-income tax offset. At the same time—from 1 July 2022—the $90,000 bracket will be increased to $120,000.[33]

2.40 The committee discussed the possible implications of bracket creep with officers from the Treasury noting that 'taxpayers will face higher average and marginal tax rates over time, even if their income has only been increasing by inflation'.[34] Officers explained that the government's proposed personal income tax plan would address the issue of bracket creep.[35]

Australian Competition and Consumer Commission (ACCC)

2.41 The committee discussed the ACCC's upcoming work program with officers from the agency, particularly in relation to petrol prices in Australia. Mr Rod Sims, Chairman of the ACCC, advised the committee that their next report relating to petrol prices would specifically relate to price cycles. Mr Sims explained:

...trying to understand what's happened to them, how regular they are, why they occur, that perennial question, and all under the heading of how we can provide advice to consumers—we've got two tracks with our petrol reports. One is a quarterly report, which comes out quarterly, and the other is special reports that we do alternately, in between the quarterly reports. I suspect that the next one will be the report on the fuel cycles, which I think we talked about last time.[36]

2.42 Mr Sims confirmed that this exercise would look at petrol stations across the country, with a focus on the capital cities, looking at determining what is driving prices up and down in different locations.[37]

2.43 The committee also sought information about the Infinity Cables product recall, noting that a large amount of cable had been supplied in Australia, and that the ACCC are part way through the recall process. Officers from the ACCC noted that:

The commission is responsible for overseeing the voluntary recalls of 4,700 kilometres of cable. Our recent audit has identified that over 6,500 kilometres of Infinity cable was supplied in Australia. The New South Wales electrical safety regulatory authority, is responsible for a compulsory recall of around 1,400 kilometres of cable as well. In terms of the ACCC's leadership of the voluntary recalls, we have now got to the point of 52 per cent of the Infinity cable being either remediated or scheduled for remediation.[38]

2.44 ACCC officers advised the committee that the recall process now was being handed over to the New South Wales Office of Fair Trading, because they have decided that 'state based strategies are now required to try and advance the remainder of the recalls'.[39]

Australian Prudential Regulation Authority (APRA)

2.45 Mr Wayne Byres, Chair of APRA, made a brief opening statement to the committee, which reflected on the agency's mandate as a prudential regulator. Mr Byres noted some of the recent revelations emerging from the Royal Commission, describing them as disturbing.[40] Mr Byres emphasised that 'Australians can be reassured that the industry is financially sound and the financial system is stable'.[41]

2.46 Mr Byres also gave the committee an overview of its recent work in a number of areas including the final report of the prudential inquiry into the Commonwealth Bank, residential mortgage lending, two thematic reviews of superannuation licensees—on board governance and on the management of related party arrangements––and preparations for the implementation of the banking executive accountability regime.[42]

Inquiry into the Commonwealth Bank of Australia (CBA)

2.47 The committee asked APRA about its recent report on the CBA, in particular about CBA's response to the report. The committee noted a media release was published with the final report by APRA which stated:

CBA has acknowledged APRA's concerns and has offered an Enforceable Undertaking (EU) under which CBA's remedial action in response to the report will be monitored. APRA has also applied a $1 billion add-on to CBA's minimum capital requirement.[43]

2.48 Mr Byres noted that there are four components to the undertaking:

The first is that CBA needs to provide to us by the end of June this year a remedial action plan that deals with each of the recommendations in the report [...] The second one is that they have to appoint an independent reviewer [...] who will do some independent validation of progress against the remedial action plan every three months and report that to APRA. Also by 30 June this year the board needs to give us a report on how the findings of the report have impacted on executive remuneration, both of current and past executives, and also to make sure that the delivery of the remedial action plan is given material weight in the performance scorecards of the executives going forward, so there is skin in the game. And then the fourth component is the capital adjustment you talked about, which will be removed as and when CBA shows that it has completed the remedial action.[44]

2.49 Officers from APRA explained that enforceable undertakings are entered into when an entity has admitted that 'APRA's concerns were valid and that they needed to make changes'.[45]

Superannuation

2.50 The committee asked APRA about its work on the returns that superannuation funds provide to their members, in particular, in relation to the BT Business Super Fund. APRA noted that it is currently looking at cash investment options across the sector, and has discovered a number of issues:

One is that some cash options seem to be returning much higher than we would expect from what you might call a pure cash option and there are others that are returning much less. Our initial work seems to suggest that part of it goes to the types of instruments, if you like, which are in those. They are not just term deposits; they may be enhanced cash, RMBSs or other types of securities that are cash-like but not cash. And in other cases it does come down to the level of expenses that are being charged for the management of those cash options.[46]

2.51 Mrs Helen Rowell, Deputy Chair of APRA commented that:

The superannuation framework relies on trustees to set the investment strategy and to set the fees and charges that they apply for those investments and the management of those investments. The focus of our member outcomes work and the proposals that the government has considered around enhancing member outcomes is really about pushing trustees to think a lot harder about some of those decisions.[47]

Australian Securities and Investments Commission (ASIC)

2.52 Mr James Shipton, Chairman of ASIC, made an opening statement which highlighted the work of the Royal Commission, and acknowledged that there is currently a 'trust deficit between the financial industry and the broader community'. Mr Shipton also outlined ASIC's approach in light of this situation, and explained that the approach had three prongs: enforcement, supervision, and encouraging the adoption of regulator technology solutions.[48]

2.53 The committee discussed the recently introduced legislation that would remove ASIC from the Public Service Act. In particular the committee sought information on how this move might 'promote greater operational flexibility'.[49]

2.54 Officers from ASIC noted that the Wallis inquiry had recommended that both ASIC and APRA should be able to employ outside the Public Service, allowing the agencies to compete with private companies in securing the best staff:

We'll be able to be more agile with our hiring of staff for particular projects, and be able to employ people on contracts which are tailored to the expertise that's required for the type of project and the length of the project.[50]

2.55 Officers from ASIC also remarked that the legislation had already been put in place for APRA.[51]

2.56 The committee asked ASIC about its knowledge of CBA's Dollarmites program and the misconduct of CBA staff in setting up accounts because of pressure to meet performance targets. ASIC advised the committee that CBA had become aware of the misconduct in 2013, however, it was unclear when the practice ceased. ASIC also advised that it is currently investigating this issue.[52]

2.57 The committee discussed a range of other issues with ASIC including the agency's funding and staffing levels, its range of penalties, issues relating to the Royal Commission, Australian financial services (AFS) licensees, and compliance and culture in the financial services industry.[53]

Productivity Commission

2.58 The committee asked officers from the Productivity Commission about the draft report on the superannuation industry entitled Superannuation: Assessing Efficiency and Competitiveness, which was released on 29 May 2018.[54]

2.59 The committee asked Ms Karen Chester, Deputy Chair of the Productivity Commission, about the identified performance gap between retail and industry superannuation funds, noting that the gap cannot be explained by asset allocation. Ms Chester confirmed that this gap would be the subject of further analysis:

We did some further analysis, including some econometric analysis, about whether we could attribute it to disparity in fees and scale. With fees it was really around admin costs. There are other characteristics we'd like to look at, and that's why several of the questions in our funds survey were so important. For example, once we get net investment returns by asset class, fees and costs by asset class, and fees and costs for related-party transactions, we'll have a much better handle on understanding what are the drivers behind that systemic difference.[55]

2.60 The committee also asked officers from the Productivity Commission about the impacts of fees, duplicate accounts, insurance and other charges on an individual's superannuation account.

2.61 Ms Chester explained the impact through a cameo scenario of a 21-year-old new job entrant—a typical worker with average weekly earnings throughout their lifetime:

...if you have fees and costs that are 0.5 percentage points greater, or 50 basis points greater, during your working life in an accumulation fund, you would be $100,000 worse off in retirement. In terms of unintended multiple accounts, we did analysis through our fund member survey and using ATO and APRA data to establish that one in three, or 10 million of the 30 million member accounts, are unintended duplicates. That means that those members are paying admin costs and insurance premiums that they don't need. The annual cost of that is about $2.6 billion across the system. When you look at it as a cameo analysis for an individual fund member, that would see them worse off by $50,000 when they retire. In terms of the performance side of the equation, taking a fund member from a bottom performing quartile fund and popping them in a top performing quartile fund throughout their work life, a new job entrant today would be $365,000 worse off when they retire in 2064.

2.62 Ms Chester advised the committee that the inquiry is due to have further public hearings and that the final report would be released later this year and that this timing would depend on the time lines of the Royal Commission.[56]

Commonwealth Grants Commission (CGC)

2.63 The committee discussed the possible exclusion of lithium royalties from GST distribution, noting that the treatment of mineral revenues may have a distorting impact on economic development.[57]

2.64 Officers from the CGC advised that they had not done any work on excluding lithium royalties from assessment of GST distribution and explained:

The commission currently doesn't separately identify or assess royalties associated with lithium mining. It groups those royalties in with a range of other mineral royalties for zinc, tin et cetera and puts them into a category called 'other minerals'. There is only a very small amount of money that's raised through lithium royalties. I understand that WA expects only $89 million in lithium royalty revenues to be raised this financial year.[58]

2.65 The committee noted that the amount of revenue received lithium royalties was likely to increase of the next few years.[59]

Inspector–General of Taxation

2.66 Mr Ali Noroozi, Inspector-General of Taxation (IGT) made a brief opening statement to the committee, outlining some of the recent work that the IGT has been undertaking. In particular, the Mr Noroozi noted the recently commenced review into the ATO's use of garnishee notices, following the joint ABC-Fairfax investigation. Mr Noroozi explained that the IGT's role in this situation is to investigate the allegations made, and seek to 'restore public confidence by either dispelling them or making recommendations for improvements'.[60]

2.67 Mr Noroozi also noted that the joint ABC-Fairfax investigation had raised other issues, commenting:

These are areas that previous IGT reviews, as well as an inquiry by the House of Representatives Standing Committee on Tax and Revenue, have considered. Last week the ATO also announced, in this very venue, a number of measures it plans to implement in response to the ABC-Fairfax investigation. Some of these are consistent with previous IGT recommendations, including extending pre-assessment reviews to all taxpayers. A Treasury investigation has also been recently conducted, with input from my office, and we await the government's response.[61]

2.68 The committee discussed the number of complaints the IGT receives, noting that in the last financial year, the agency handled 2251 complaints. Mr Noroozi confirmed that the number of complaints would be higher in the 2017–18 financial year, in part, due to the complaints received following the joint ABC-Fairfax investigation.[62]

2.69 The committee also discussed the relationship between the IGT and the ATO, noting that the IGT's role of oversight of the ATO promotes a 'healthy tension' between the two organisations.[63]

Chapter 2

Chapter 2

Treasury portfolio

Macroeconomic Group and Corporate Group

Treasury Secretary

Personal income tax plan

Employment growth

Fiscal Group

Tax-to-GDP cap

Australian Taxation Office (ATO) and Revenue Group

Commissioner's opening statement

Corporate tax rate

Four Corners program

Panama papers

Personal income tax plan

Australian Competition and Consumer Commission (ACCC)

Australian Prudential Regulation Authority (APRA)

Inquiry into the Commonwealth Bank of Australia (CBA)

Superannuation

Australian Securities and Investments Commission (ASIC)

Productivity Commission

Commonwealth Grants Commission (CGC)

Inspector–General of Taxation

Other topics raised