Chris Bowen (Prospect, Australian Labor Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

One of Australia’s great strengths is the robustness of its financial sector. We need to do more to take advantage of that strength, to remove impediments to that sector’s growth and to put that sector on an even footing with its competitors overseas. The Financial Sector Legislation Amendment (Restructures) Bill 2007 proposes to make amendments to facilitate the adoption of non-operating holding companies as the ultimate holding company of a financial group in Australia by removing the regulatory impediments to the adoption of a non-operating holding company structure that arise under particular requirements of the Corporations Act and by removing the impediments that arise under the income tax laws. Labor supports this bill. Labor supports efforts to increase the competitiveness of the Australian financial services sector. It was always Labor’s intention to support this bill, but I understand that there has been some minor speculation from government sources in the industry over the last week that Labor might not support this bill or that Labor might seek to refer it to committee. But the shadow cabinet approved Labor supporting this bill without amendment and without referral to committee shortly after it was first introduced because it makes sensible changes.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

Hear, hear!

Chris Bowen (Prospect, Australian Labor Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

I am glad for the support from the member for Moncrieff and for his recognition of Labor’s approach to this sensible piece of legislation. This legislation is needed because the reforms that the government made previously to facilitate non-operating holding companies have not worked. In March 1997 the Wallis review recommended that, subject to a financial group meeting prudential requirements, the prudential regulator should permit the adoption of a non-operating holding company structure. The review concluded that, to protect against creditors of one entity seeking to pursue the other entities of a group, legal separation structured around a non-operating holding company was the best method of quarantining the assets and liabilities of the various entities in the group.

In September 1997 the Australian government announced its response to the Wallis review. As part of that response the Australian government agreed to facilitate the establishment of non-operating holding companies. To implement the government’s decision the government made amendments to the Banking Act to allow financial groups containing authorised deposit-taking institutions to be established with a non-operating holding company as the parent entity. However, to date no major Australian financial group containing a deposit-taking institution has chosen to adopt the NOHC structure. This has been the result of regulatory requirements and tax provisions which have impeded Australian financial groups moving to this structure, and this bill seeks to remedy that problem. The bill seeks to overcome these impediments as identified under the Corporations Act and the income tax law.

I believe the introduction of non-operating holding companies is important because it better reflects the financial reality of today’s world. In previous years banks, insurance companies, fund managers and superannuation institutions were all separate organisations—separately owned and operating in different spheres. That is not the way the world operates anymore. Financial conglomerates are a fact of life and they are here to stay. Authorised deposit-taking institutions, or banks, now almost universally have superannuation arms, funds management arms and insurance arms. It is a silly requirement that the authorised deposit-taking institution be the holding company of all those others, and it is not the requirement that is the norm throughout the world. Most countries in the world have an NOHC structure. It is an obstacle for our industry to compete that we have a structure which militates against banks operating under a non-operating holding company structure.

It also provides better protection for depositors. If the deposit taking institution is the owner of the other financial bodies, and if one of those financial bodies runs into difficulty—if a funds manager or a superannuation company or an insurance company makes bad decisions and is in financial jeopardy—under the current structure the bank is at risk and therefore the depositors in that bank are at risk. Under the non-operating holding company structure, they are separate entities which happen to be owned by the same company. So if one arm of that financial conglomerate, whatever it may be—say, for example, the insurance company—gets itself into financial difficulty, it is at that point no threat to the viability of the deposits, as opposed to under the current arrangements. Labor supports this bill for those two reasons.

Schedule 1 will remove the regulatory impediments to the adoption of a non-operating holding company structure identified under particular requirements of the Corporations Act. The amendments provide the minister with the power to grant relief from these specific requirements of the Corporations Act. This bill will facilitate the adoption of a non-operating holding company structure by providing the minister with the power to grant financial entities relief from specific statutory requirements under the Corporations Act that currently impede such restructures. To grant relief, the minister will issue a restructure instrument that specifies the statutory provisions and the entities of a company group and any persons involved in complying with a requirement for which the relief applies. The relief provided by the minister will only relate to the specific provisions of the Corporations Act as set out in the restructure instrument. It will not relieve an entity from having to meet its obligations under the Corporations Act more generally.

The minister will approve an application if he is satisfied that the restructure would improve the operating body’s ability to meet its prudential requirements as administered by APRA. It must be demonstrated to the minister that, as a result of the restructure, the operating body would be in a better position to meet the relevant prudential requirements. In examining the application the minister will also consider the interests of depositors/policy owners of the operating body, the interests of the financial sector more generally and any other matters appropriate, in the minister’s view, in reaching a decision. The minister can impose conditions on the operating body, the non-operating holding company, or any body which will be related to the non-operating holding company after the restructure, which must be satisfied prior to the restructure instrument coming into force.

The arrangement would transfer existing ordinary shareholders in the operating company to become ordinary shareholders in the non-operating holding company. This would occur through a cancellation or transfer of shares in the operating body and an issue of identical shares in the non-operating holding company. A scheme of arrangement will ensure that shareholders of the operating body heading a financial group are given the right to vote on any proposal to adopt a non-operating holding company structure. Any relief provided through the restructure instrument is specific and is considered transitional and consequential in nature to facilitate the restructure. It will not relieve the non-operating holding company, the operating body or any body related to those bodies from the need to meet their other obligations under the Corporations Act or any other relevant legislation.

Schedule 2 to this bill amends the consolidation membership rules and the capital gains tax provisions in the Income Tax Assessment Act 1997 to remove tax impediments that prevent financial groups containing authorised deposit taking institutions from restructuring. The tax consolidation rules treat wholly owned groups as a single entity for tax purposes. A consolidated group consists of a head company and all of its wholly owned subsidiaries. Currently, if a consolidated group contains an ADI, the head company tends to be that ADI. To ensure that an ADI can be a wholly owned subsidiary of a non-operating holding company for tax consolidation purposes following an ADI restructure and continue to issue certain preference shares to meet its capital adequacy requirements, those shares will be disregarded for consolidation membership purposes. This needs to occur because currently an ADI that issues preference shares to a non-group member cannot be a subsidiary member of a consolidated group under the consolidation rules. The amendment ensures that certain dividends paid by the non-operating holding company are frankable if those dividends would have been frankable had they been paid by the ADI prior to the restructure. Amendments will also ensure that shareholders who exchange their shares in the authorised deposit taking institution for shares in the non-operating holding company can obtain a capital gains tax rollover. A CGT rollover means that no capital gain or loss is incurred for tax purposes at the time of the restructure.

Labor are pleased to support this bill, as I said, because it does put Australia’s financial institutions on a level playing field with more of our competitors overseas. It also provides better protection for depositors. In the consultation that I have undertaken on this bill there has been a suggestion to me from people in the industry that it could have been very slightly improved through amendments. I do not propose tonight to press those amendments. It is the case that the people seeking those amendments will be able to get a similar result by having a private ruling through the Australian tax office. I understand they have put the need for those amendments to the government but the government has indicated at this stage it will not be prepared to proceed with legislative amendments. I am not particularly critical of that. I simply flag that, should the Labor Party take office later this year and this issue has not been resolved—if the matter of the amendments has not been addressed through either a private tax ruling or other mechanism—then I would look sympathetically on those amendments and would be prepared to introduce them in the House to meet those concerns. I would hope that by later in the year the matter has been resolved to the satisfaction of everybody in the industry. I simply flag, for the purpose of transparency, that we would view those amendments sympathetically and would be happy to move them should we form the government late in the year.

As I have said, it is important that Australia is on an even footing with our competitors overseas in the financial services sector. This bill is an important but small step in that direction. It would be welcome if the government took this approach more generally to the financial services sector, and it has been a very interesting week in relation to that matter. We have had, for example, the Senate inquiry into withholding tax. The government’s attitude to withholding tax has been exposed as nothing less than short-sighted and as putting the financial services industry, and the funds management industry in particular, on a very uneven playing field with our competitors. The Senate inquiry heard some pretty strong evidence. Even though the Senate inquiry process was emasculated and very little time was allowed for people to put in submissions, I think 11 submissions were received. Most of those submissions related to withholding tax, and every single one of those submissions—

Ian Causley (Page, Deputy-Speaker) Share this | Link to this | Hansard source

The member for Prospect would realise that there is no withholding tax in this bill. He needs to speak to the bill.

Chris Bowen (Prospect, Australian Labor Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

With respect, Mr Deputy Speaker, this is about the financial services industry.

Ian Causley (Page, Deputy-Speaker) Share this | Link to this | Hansard source

You were mentioning withholding tax, which is nothing to do with the bill.

Chris Bowen (Prospect, Australian Labor Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

Mr Deputy Speaker, I will confine my comments to the financial services industry. As I said at the outset, I am talking about the competitiveness of the financial services industry, and the funds management industry is part of that.

We have seen a complete lack of ability from the government to put our funds management industry and the financial services industry on an even footing with our competitors and a complete short-sightedness in giving our financial services sector an even break. This legislation is a small step, which we support wholeheartedly, but the government should be doing much more to put Australia’s financial services industry on an even break. This is not about picking winners or supporting the financial services industry at the expense of others; it is about removing impediments and getting out of the way. One of those impediments is an uncompetitive tax regime. This bill goes a small way to fixing that, but there is still so much more to do.

We have had a short-sighted approach from this government in relation to the tax regime that applies to the funds management industry and the financial services industry in particular. We heard that the government’s costings for these changes have completely blown out of the water. We heard Treasury tell the parliament through the Senate that the cost of changes would be $100 million—completely blown out of the water by the evidence presented to the Senate committee.

Ian Causley (Page, Deputy-Speaker) Share this | Link to this | Hansard source

The member for Prospect is again straying. I cannot see that this bill has anything to do with that particular argument. The member for Prospect will come back to the bill.

Chris Bowen (Prospect, Australian Labor Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

Mr Deputy Speaker, with the greatest respect, I said at the outset that I would talk about the competitiveness of the funds management industry and the financial management sector. I recognise that the elements I am talking about are separate to the matters I spoke about before, but they are very germane to the future of the funds management industry and the financial services industry in this country. Mr Deputy Speaker, I would respectfully suggest that I am more within the debate than is often the case in this House.

Ian Causley (Page, Deputy-Speaker) Share this | Link to this | Hansard source

That will be my decision as the chair.

Chris Bowen (Prospect, Australian Labor Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

Mr Deputy Speaker, I respect that and will not press the point. This government has been completely neglectful of the funds management industry and the financial services industry in this country. This bill, which we support, is less than one-tenth of what is needed in this country to remove the impediments to enable the financial sector to compete overseas. With growth of funds under management around the world Australia, with, I think, the 53rd highest population in the world, has the fourth highest level of funds under management. We are trying to attract more funds from overseas to be managed in Australia, but we have an uncompetitive tax regime and the government is refusing to do anything more about it.

I could speak for a long time on the bill, Mr Deputy Speaker, but I know that you have certain views and, out of respect for you, I am not going to press those views. The government has completely failed in this area. The short-sightedness it has shown over the last few weeks has earned it no friends in the financial services industry for a very good reason. Some of the arguments we have heard have verged on the Hansonesque—I use that word advisedly—by saying that there is no need to provide tax relief to foreigners when we should first be providing tax relief to Australians. That shows a great lack of foresight from the government and a very disappointing approach. I support this bill. It is a small but necessary step. The Labor Party is happy to support the expeditious passage of this legislation through both houses of this parliament.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

I am pleased to rise to speak on the Financial Sector Legislation Amendment (Restructures) Bill 2007. This bill, whilst broadly technical in its application, is important in that it goes in many respects to the core of the financial services industry in Australia. In particular, it has most resonance with the operations of life insurers and banks, et cetera.

This is an important bill because it puts in place a number of recommendations that were derived as a result of the Wallace inquiry, an initiative instigated by the former Labor government and supported by us in opposition. Our support for the instigation of the Wallace inquiry, which was the precursor to the bill before the House today, underscores this government’s responsible policy approach to supporting decisions taken by the then government because we felt it was in the best interests of the Australian people.

Whilst I welcome the shadow Assistant Treasurer’s support of this bill, I remain perplexed that the opposition tends to cherry pick the bills that it decides are in the national interest. We know that, if the opposition truly supported all the bills that are in the national interest and in the best interests of the Australian people, they would support all the government’s legislation. I can understand why from time to time the shadow Assistant Treasurer finds that there is a requirement to provide some point of differentiation.

I now turn to some aspects to which the legislation is seeking to make changes. This bill seeks to facilitate the adoption of a non-operating holding company as the ultimate holding company of a financial group in Australia. It is an important change because it demonstrates the opportunity to ensure that financial companies and operations in Australia can adopt a non-operating holding company structure to delineate between the different types of facilities that they may undertake and the different kinds of services that they might provide.

I intend to speak until the Assistant Treasurer arrives in the chamber and in that respect I need to touch upon a few more issues in the bill. This bill will also seek to ensure that a non-operating holding company that is at the very top of a financial group is able to allow the group to officially and effectively split the various services that they undertake. It will do this through the appropriate allocation of risk being facilitated between prudentially and non-prudentially regulated businesses of a financial group by organising the various activities that these groups undertake into separate business lines. This can aid basically in ensuring that consumers are benefited. It can also aid in ensuring that quarantining of risks can take place because the various business services that that particular business is undertaking is able to be delineated between the different aspects of the business.

In this respect I think Australian consumers can be safeguarded because this bill will ensure that by having at the very top of a structure a non-operating holding company it is able to quarantine and ensure that those various investors that might be investing in different aspects of the business can actually be quarantined from some of the riskier elements of the business. In this day and age when many Australians are perhaps more risk averse than they have been in the past, I am sure that the opportunity to ensure that there is not going to be a spread of risk, and the opportunity for a company to delineate between those safer investment vehicles and operations of the company and those other riskier elements and more entrepreneurial aspects of a company, would be welcome by those that are investing in the market through the various operating entities taking place in the financial services market. Whilst broadly technical, this bill is an important bill. I certainly welcome its introduction to the House and I commend it to the House.

Peter Dutton (Dickson, Liberal Party, Minister for Revenue and Assistant Treasurer) Share this | Link to this | Hansard source

in reply—I start by thanking all of those members who have taken part in this very important debate on the Financial Sector Legislation Amendment (Restructures) Bill 2007. The measures contained in this bill will facilitate the adoption of a non-operating holding company as the ultimate holding company of a financial group in Australia. This bill will provide greater flexibility for financial groups in choosing a corporate structure to manage their risk exposures and comply with prudential requirements. The bill will also provide financial groups with the opportunity to improve their business efficiency and international competitiveness. As a result the bill further enhances prudential regulation of the financial sector in Australia to the benefit of both consumers and business.

An authorised deposit-taking institution, general insurer or life insurance company will be able to apply to the minister for approval to restructure a group headed by one of these prudentially regulated entities. The bill will provide the minister with the power to approve and grant subsequent relief from specific statutory restrictions in the Corporations Act 2001, which currently impede the adoption of a non-operating holding company structure. Any relief allowed by the bill will be limited to nominated specific provisions and does not in any way relieve an entity from meeting its general obligations under the Corporations Act or any other relevant legislation. The bill also makes consequential amendments to the income tax law to remove tax impediments that would otherwise discourage restructuring. I close by thanking those who have participated in this debate and I commend the bill to the House.

Question agreed to.

Bill read a second time.