Chris Bowen (Prospect, Australian Labor Party, Shadow Assistant Treasurer) Share 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—

See this speech in context