House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, Minister for Housing and Minister for Homelessness, Social and Community Housing, the Hon Michael Sukkar MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Schedule 1 - Refund of large-scale generation shortfall charge

Schedule 1 to the Bill amends the ITAA 1997 to make refunds of large-scale generation shortfall charges NANE income for income tax purposes.

Date of effect: Schedule 1 will apply to refunds of large-scale generation shortfall charges made on or after 1 January 2019.

Proposal announced: Schedule 1 fully implements the measure 'Corporate Taxation - removing the tax on refunds of large-scale generation shortfall charges' from 2019-20 Mid-Year Economic and Fiscal Outlook.

Financial impact: Schedule 1 was estimated to have a cost to revenue of $70.0 million over the forward estimates period at the time of the 2019-20 MYEFO comprising ($m):

Human rights implications: Schedule 1 does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 7.

Compliance cost impact: Nil.

Schedule 2 - Industry code penalties under Part IVB of the Competition and Consumer Act 2010

Schedule 2 to the Bill amends the CCA by increasing the maximum amount of penalty units that can be included in regulations that prescribe an industry code, with specific amendments for industry codes relating to the industry of franchising.

Date of effect: Schedule 2 will commence on the day after the Bill receives Royal Assent.

Proposal announced: This Schedule was partially announced in the Government's response to the Parliamentary Joint Committee on Corporations and Financial Services inquiry into the operation and effectiveness of the Franchising Code of Conduct report: Fairness in Franchising.

Financial impact: Nil.

Human rights implications: Schedule 2 engages human rights but does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 7.

Compliance cost impact: Nil.

A Regulation Impact Statement was prepared and certified by the Department of Industry, Science, Energy and Resources. It has been included at Chapter 3.

Schedule 2 - Summary of regulation impact statement

Regulation impact on business

Impact: Nil.

Main point:

•

The increase in penalty units will not impose any additional regulatory burdens on businesses that comply with the law.

Schedule 3 - Requirement for actuarial certificates for certain superannuation funds

Schedule 3 to the Bill amends the ITAA 1997 to remove the requirement for superannuation trustees to provide an actuarial certificate when calculating exempt current pension income using the proportionate method, where all members of the fund are fully in retirement phase for all of the income year.

Date of effect: The amendment commences on the first 1 January, 1 April, 1 July or 1 October to occur after this Bill receives Royal Assent.

Proposal announced: This Schedule partially implements the measure Superannuation - reducing red tape for superannuation funds that was announced in the 2019-20 Budget.

Financial impact: The 2019-20 Budget estimated the measure Superannuation - reducing red tape for superannuation funds would have no revenue impact over the forward estimates period.

Human rights implications: Schedule 3 does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 7.

Compliance cost impact: There will be a minor saving for affected funds as these funds will not be required to obtain actuarial certificates.

Schedule 4 - Strengthening industry codes under Part IVB of the Competition and Consumer Act 2010

Schedule 4 to the Bill amends the Competition and Consumer Act 2010 to provide regulatory certainty for industry participants that are governed by industry codes prescribed by regulations made under Part IVB of the Act. These amendments are to address unintended ambiguity and to ensure Part IVB industry codes apply across various markets as intended.

Date of effect: Schedule 4 commences immediately after Schedule 2 to the Bill commences.

Proposal announced: Not applicable.

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 7.

Compliance cost impact: The amendments in Schedule 4 to the Bill are technical in nature and as such will have no impact on compliance costs.

Schedule 5 - Superannuation information for family law proceedings

Schedule 5 to the Bill amends the Taxation Administration Act and the Family Law Act to create a new mechanism for sharing superannuation information for family law proceedings.

The Registries of the Federal Circuit and Family Court of Australia and the Family Court of Western Australia will serve as an intermediary in the information sharing process. The Registries may request superannuation information of a party to permitted family law proceedings from the Commissioner on application of the other party to the proceedings. The Commissioner may disclose superannuation information to the requesting Registry to provide to the parties and their lawyers. All disclosures and on-disclosures of the superannuation information must be for the purpose of permitted family law proceedings.

The amendments will make it harder for parties to hide or under-disclose their superannuation assets in family law proceedings by reducing the time, cost and complexity for parties seeking information about their current or former spouse/de facto partner's superannuation. A party will be able to use information from the Commissioner to seek up-to-date superannuation information from the other party's superannuation fund, limiting the need to rely on subpoenas or court orders to obtain this information.

Date of effect: Part 1 of Schedule 5 to the Bill commences on 1 April 2022.

Part 2 of Schedule 5 to the Bill commences on the later of:

•

immediately after the commencement of Part 1 of Schedule 5; and

•

immediately after the commencement of the Family Law Amendment (Western Australia De Facto Superannuation Splitting and Bankruptcy) Act 2020.

However, Part 2 of Schedule 5 does not commence if that Act does not commence.

Proposal announced: Schedule 5 to the Bill fully implements the 'Improving the Visibility of Superannuation Assets in Family Law Proceedings' measure announced in the Women's Economic Security Statement and included in the 2018-19 MYEFO.

Financial impact: The measure was costed as part of the Women's Economic Security Package announced at the 2018-19 MYEFO, which at the time was estimated to have a fiscal cost of $119.2 million over the forward estimates period.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 7.

Compliance cost impact: Nil.

Chapter 1 - Refund of large-scale generation shortfall charge

Outline of chapter

1.1 Schedule 1 to the Bill amends the ITAA 1997 to make refunds of large-scale generation shortfall charges NANE income for income tax purposes.

1.2 All legislative references in this chapter are to the ITAA 1997, unless otherwise stated.

Context of amendments

1.3 The REE Act operates to:

•

encourage the additional generation of electricity from renewable sources;

•

reduce emissions of greenhouse gases in the electricity sector; and

•

ensure that renewable energy sources are ecologically sustainable.

1.4 This is done through the issuing of large-scale generation certificates for the generation of electricity using eligible renewable energy sources and requiring certain electricity purchasers (called liable entities) to surrender a specified number of certificates for the electricity that they acquire during a year (section 3 of the REE Act).

1.5 Liable entities are generally electricity retailers and large industrial users of electricity.

1.6 Where a liable entity does not surrender sufficient certificates, the liable entity must pay a renewable energy shortfall charge.

1.7 A charge that is payable under the REE Act is not deductible for income tax purposes (section 7A of the REE Act). Liable entities which pay the large-scale generation shortfall charge can apply to have the shortfall charge refunded if they surrender outstanding large-scale generation certificates within, broadly, three years of paying the charge (section 95 of the REE Act). Currently, there is some uncertainty as to whether a refund of shortfall charges is assessable income for income tax purposes.

1.8 As part of the 2019-20 Mid-Year Economic and Fiscal Outlook, the Government announced that it will amend the income tax law to ensure that no tax is payable on refunds of large-scale generation shortfall charges. This will enable the market for renewable energy certificates to work as intended, meeting targets for clean energy while ensuring affordable electricity for consumers.

Summary of new law

1.9 Schedule 1 to the Bill makes refunds of large-scale generation shortfall charges NANE income for income tax purposes.

1.10 As a result, no income tax is payable on refunds of large-scale generation shortfall charges. However, deductions for expenses incurred in relation to large-scale generation certificates are not affected by making refunds of shortfall charges NANE income.

Comparison of key features of new law and current law

Detailed explanation of new law

1.11 Schedule 1 to the Bill amends the ITAA 1997 to make refunds of large-scale generation shortfall charges NANE income for income tax purposes. [Schedule 1, item 2, subsection 59-100(1)]

1.12 As a result, no income tax will be payable on refunds of large-scale generation shortfall charges made to electricity retailers and large industrial users of electricity.

1.13 Under the general deduction provision in the income tax law (section 8-1), a taxpayer cannot deduct a loss or an outgoing incurred in relation to gaining NANE income. However, the fact that refunds of large-scale generation shortfall charges are NANE income is disregarded for the purposes of determining whether an entity can deduct expenditure incurred in relation to large-scale generation certificates. [Schedule 1, item 2, subsection 59-100(2)]

1.14 Therefore, deductions for expenses incurred in relation to large-scale generation certificates are not affected by making refunds of large-scale generation shortfall charges NANE income. This will ensure that taxpayers are not inadvertently disadvantaged by the amendment to make refunds of shortfall charges NANE income.

Consequential amendments

1.15 A consequential amendment is made to the list of NANE income provisions to add a reference to refunds of large-scale generation shortfall charges. [Schedule 1, item 1, section 11-55]

Application and transitional provisions

1.16 Schedule 1 to the Bill commences on the first day of the first quarterly period following the day the Bill receives Royal Assent.

1.17 The amendments apply to refunds of large-scale generation shortfall charges made on or after 1 January 2019. [Schedule 1, item 3]

1.18 In this regard, the amendments are beneficial to taxpayers and were sought by affected stakeholders to clarify the operation of the law. No taxpayers receiving a shortfall charge refund will be disadvantaged by the amendments.

Chapter 2 - Industry code penalties under Part IVB of the Competition and Consumer Act 2010

Outline of chapter

2.1 Schedule 2 to the Bill amends the CCA by increasing the maximum amount of penalty units that can be included in regulations that prescribe an industry code, with specific amendments for industry codes relating to the industry of franchising.

Context of amendments

2.2 Part IVB of the CCA allows for industry codes to be prescribed in regulations. Industry codes may prescribe pecuniary penalties for breaches of civil penalty provisions of the industry code. The existing law allows for civil penalties up to 300 penalty units.

2.3 On 22 March 2018 the Senate referred an inquiry to the Parliamentary Joint Committee on Corporations and Financial Services into the operation and effectiveness of the Franchising Code.

2.4 The Committee's report noted that where penalties are insufficient, franchisors are likely to factor the risk of a penalty into the cost of doing business. The Committee's report recommended the quantum of penalties available for a breach of the Franchising Code be significantly increased to ensure the penalties are a meaningful deterrent from non-compliance.

2.5 The Committee recommended the civil penalties should be increased to at least reflect the penalties in the Australian Consumer Law which, for a corporation, are the greater of:

•

$10 million; or

•

three times the value of the benefit obtained from the offence (if the court can determine this value); or

•

10 per cent of the annual turnover of the body corporate during the 12-month period in which the act or omission occurred or started to occur.

2.6 As per the Attorney General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, serious pecuniary penalties are most appropriately placed in primary Acts of Parliament rather than subordinate legislation. The penalties in industry codes are prescribed in regulations, however, the maximum penalty that can be given as a penalty to a breach of the code of conduct has been placed in primary law. As such, the increase of penalty units balances the recommendations in the Committee's report to significantly increase penalties in industry codes to ensure they are a meaningful deterrent, with the principles set out in the Attorney General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers.

2.7 The Regulatory Impact Statement found that the consequences of poor franchisor conduct have been devastating for some franchisees and has undermined confidence in the franchising business model. Increasing the maximum penalty amount is intended to provide a balanced deterrent from such conduct.

2.8 The courts will continue to have discretion to apply an appropriate penalty up to the maximum amount. The court would consider the relevant facts of any given case, and impose a penalty that is proportionate to that conduct, making it unlikely that the maximum penalty would be imposed in every instance. In practice, the maximum amount would only be applied in the most egregious instances of non-compliance.

Detailed explanation of new law

2.9 Schedule 2 to the Bill amends section 51AE(2) of the CCA to increase the maximum amount of penalty units that can be included in regulations that prescribe an industry code (other than a code relating to the industry of franchising) from 300 penalty units to 600 penalty units. [Schedule 2, item 1, subsection 51AE(2) of the CCA]

2.10 Schedule 2 also amends section 51AE(2) to provide that a code of conduct relating to the industry of franchising, a breach of a civil penalty provision may prescribe a pecuniary penalty for a body corporate to be the greatest of:

•

$10 million; or

•

if the Court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, has obtained directly or indirectly and that is reasonably attributable to the contravention-multiplied by three; or

•

if the Court cannot determine the value of that benefit- 10 per cent of the annual turnover of the body corporate during the period of 12 months ending at the end of the month in which the contravention occurred. [Schedule 2, item 1, subsection 51AE(2A)(a) of the CCA]

2.11 This carries the same meaning as section 76(1A)(b) of the CCA. [Schedule 2, item 1, subsection 51AE(2B) of the CCA]

2.12 Schedule 2 also provides that for a person (other than a body corporate), a penalty of $500,000 may be prescribed in an industry code of conduct relating to franchising. [Schedule 2, item 1, subsection 51AE(2A)(b) of the CCA]

2.13 Otherwise, a penalty of up to 600 penalty units may be prescribed. This is consistent with other industry codes of conduct made under the CCA. [Schedule 2, item 1, subsection 51AE(2A)(c) of the CCA]

2.14 Current section 76(1A)(ca) of the CCA makes clear that a pecuniary penalty payable by a body corporate must not exceed the amount prescribed in an industry code. Likewise, current section 76(1B)(aaa) of the CCA makes clear that a pecuniary penalty payable by a person other than a body corporate must not exceed the amount prescribed in an industry code. As such, the prescribed amounts in an industry code are maximum penalty amounts.

2.15 The penalties in Schedule 2 act as a deterrent for businesses who are subject to a code of conduct relating to the franchising industry, instead of merely being seen as a cost of doing business. This encourages compliance with the code of conduct which is crucial to achieve its objectives of a fair and competitive market.

2.16 The Regulatory Impact Statement in Chapter 3 highlights the devastating impacts of poor franchisor conduct, including undermining the confidence in the franchising business model.

2.17 In addition, a pecuniary penalty that deters conduct is an important sanction as a breach of the code of conduct could result in commercial gains. Therefore, where a participant in the franchising industry has made a monetary gain by breaching a code, it is in the public interest that the gain not be retained. It also serves as an effective deterrent to eliminate the gain or benefit resulting from non-compliance.

2.18 Additionally, civil courts are experienced in making civil penalty orders at levels within the maximum amount specified in legislation to reflect the individual circumstances of a case.

2.19 In a proceeding under section 76 of the CCA, a court will consider all relevant matters, including:

•

the nature and extent of the conduct (either the act or omission) which led to the contraventions;

•

the nature and extent of any loss or damage suffered;

•

the relevant circumstances in which the act or omission took place; and

•

whether the person in the proceedings been found by a court to have engaged in any similar conduct prohibited under the CCA.

2.20 Therefore, while the penalties have increased, the maximum penalty will not be applied in every case. Instead, the penalty amount applied will be proportionate to the conduct. This leaves the maximum penalty for the most egregious conduct.

Application and transitional provisions

2.21 Schedule 2 to the Bill contains necessary application provisions ensuring the amendments apply to regulations, including regulations that amend regulations, made on or after commencement of the Schedule. The application provisions also make clear that the amendments do not affect the validity of regulations made under the CCA before the commencement of Schedule 2. [Schedule 2, item 2]

Chapter 3 - Regulation impact statement - Industry code penalties under Part IVB of the Competition and Consumer Act 2010

Executive Summary

3.1 The franchising sector is an important contributor to the Australian economy. Franchising is underpinned by the relationship between franchisor and franchisee. This relationship is directly regulated by the Franchising Code and the broad protections available in the Australian Consumer Law.

3.2 Despite existing interventions, there is widespread evidence that problems in the relationship between franchisees and franchisors continue. The PJC heard evidence that franchisees are not always sufficiently informed prior to entering into a franchise agreement, franchisors continue to engage in poor conduct, and existing mechanisms to support enforcement, exit and dispute resolution do not go far enough to address power imbalance and problematic conduct of franchisors.

3.3 A range of options for regulatory improvements is identified in this Regulation Impact Statement (RIS) to inform the future direction of the regulation of franchising. This RIS concludes that a package of regulatory and non-regulatory reforms, while imposing low to moderate additional regulatory burden on franchisors, would result in an overall net benefit.

Background

The franchising sector

3.4 Franchising is a popular business model, and makes a significant contribution to the Australian economy. There are approximately 1,240 franchise brands in Australia with 95,600 franchise establishments, providing employment for approximately 580,000 people. The sector's estimated revenue is $170.5 billion in 2019-2020.^[1]

3.5 The franchising business structure is used in a diverse range of industries - ranging from large accommodation providers to garden maintenance businesses and everything in between. There is also a diversity in the approach to the franchisor-franchisee relationship in individual systems. In addition, the changing economic environment - such as the generally tough retail environment, the emergence of the gig economy and the growth of alternative models for self-employment, and more recently the Coronavirus - have created challenges for the sector.

3.6 In Australia, around 90 per cent of franchisors, and almost all franchisees are small businesses.^[2] Franchise systems involve a franchisor with experience in operating the brand, an understanding of the market and access to resources. Franchisees by comparison are likely to be smaller operators, without the same business knowledge or experience, and are often from a culturally and linguistically diverse background. Sources suggest many franchisees enter into franchising from wage-dependent employment.^[3]

Current regulatory framework

3.7 In Australia, the relationship between franchisor and franchisee is regulated primarily by the Franchising Code. The Franchising Code is a mandatory industry code prescribed by regulation under Part IVB of the Competition and Consumer Act 2010 (CCA).

3.8 The mandatory Franchising Code was first introduced in 1998 to promote positive relationships in the franchising sector. Since 1998 the Franchising Code has undergone a number of policy reviews and legislative changes.^[4] The Franchising Code was most recently revised with effect from 2015. Key changes include a requirement for franchisees and franchisors to act in good faith and the introduction of financial penalties for breaches of key provisions of the Franchising Code.

3.9 In addition to the Franchising Code, participants in the sector are also subject to the general laws governing business relationships and fair trading in Australia. These laws include prohibitions on unconscionable conduct, false or misleading representations, and the regulation of unfair contract terms in standard form contracts under the Australian Consumer Law. Some of the issues faced by the franchising sector are unique to the sector while others are faced by small businesses in general.

3.10 Changes to broader economic policy settings and laws are relevant to the franchising sector. For example, since the Franchising Code was amended in 2015:

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There have been amendments to the Fair Work Act 2009 (FWA) to extend liability to franchisors, in certain circumstances, for franchisee breaches of the FWA.

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The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) was established in 2016 to advocate for, and provide assistance to, small business including franchisees and franchisors.

3.11 Industry compliance with the Franchising Code is overseen by the ACCC, which has a range of enforcement options. These options include issuing infringement notices and taking court action seeking pecuniary penalties.

3.12 The ACCC's enforcement activity focuses on the most systemic and egregious breaches of the Franchising Code, the CCA or the ACL. Many stakeholders have identified that this can lead to a gap in enforcement for cases that may not be systemic or egregious, but are nonetheless clear breaches. Stakeholders submitted that private action in the courts to remedy breaches is expensive and time consuming for franchisees and franchisors.

3.13 Parties to a dispute are able to approach ASBFEO for assistance with the Franchising Code mediation process. The parties to a franchise agreement are also able to take action through the courts to resolve disputes or pursue breaches of the Franchising Code.

The Parliamentary Joint Committee on Corporations and Financial Services' inquiry into the franchising sector, and the Fairness in Franchising report

3.14 On 14 March 2019, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) handed down its Fairness in Franchising report, making 71 recommendations to improve the operation and effectiveness of the franchising sector. This included a recommendation that the Government form a Franchising Taskforce to consider a number of the recommendations made in the report.

3.15 On 21 June 2019, the Government announced it had agreed to establish the Franchising Taskforce.^[5] The Franchising Taskforce was comprised of senior officials within the Department of the Treasury, the Department of Industry, Science, Energy and Resources, and the Department of the Prime Minister and Cabinet and was tasked with providing advice to Government on the recommendations in the PJC's Fairness in Franchising report.

3.16 The Franchising Taskforce consulted on the PJC's recommendations, and principles underpinning franchising regulation and that consultation is reflected in this RIS.

What is the problem?

3.17 There are widespread problems in the franchising sector. These have been documented in the PJC's comprehensive Fairness in Franchising report, which was informed by a 12-month inquiry and over 400 submissions. Consultation undertaken by the Franchising Taskforce built on the work of the PJC.

3.18 The ACCC oversees enforcement of the Franchising Code and the Australian Consumer Law, and confirms that there are widespread problems in the sector, warranting robust regulatory reform. ASBFEO has a role in helping franchising parties in dispute and also supports regulatory reform.

3.19 The social impacts of problems in this sector include significant mental health impacts and relationship breakdowns. The economic impacts include significant direct financial losses incurred by franchisees^[6], and secondary impacts in relation to employee entitlements and competition.

3.20 Underlying these problems are franchisees entering into franchise agreements without adequate information, evidence of poor franchisor conduct, and insufficient enforcement and dispute resolution mechanisms. These issues are discussed below.

Prospective franchisees are not always well informed before buying a franchise

3.21 Evidence shows many franchisees are not well informed before making the decision to buy a franchise. Disclosure documents are difficult to comprehend, and do not contain all critical information relevant to entering into a franchise agreement. The reliability of information provided may also be difficult for a potential franchisee to assess and they might be unaware what is crucial for their decision making. Reliable information, particularly financial information (capital expenditure, supplier rebates, financial performance and leasing), assists prospective franchisees to conduct due diligence and compare different franchise offerings. ^[7] A lack of transparency in the use of marketing funds has also been highlighted as a problem, which has been shown to lead to reduced trust and disputes.

3.22 Franchisees can also be affected by 'optimism bias', where they are reluctant to face the downside of an investment to which they have become emotionally attached. For poorly informed or overly optimistic franchisees, the cooling off period available to exit the franchise agreement is important. The current seven-day cooling off period is insufficient, and in some cases (for example transfers, extensions and renewals) franchisees receive no cooling off period at all.

3.23 Issues relating to inadequate disclosure, transparency and reliability of information are further compounded when franchisees do not seek professional advice. The ACCC found that 40 per cent of prospective franchisees did not seek any independent professional advice before entering a franchise agreement.^[8] Concerns have also been raised about the adequacy of educational material to inform and assist prospective franchisees.

Some franchisors behave poorly

3.24 The franchising sector is very diverse. Across the estimated 1,240 franchise systems operating in Australia, the ACCC receives more than 450 reports a year.^[9] Particular concerns have been raised in relation to retail food franchising, with evidence of systemic poor disclosure practices.^[10] However problems are widespread, with the ACCC taking action against franchisors in a range of other sectors alleging beaches of the Franchising Code and the Australian Consumer Law.^[11] This confirms evidence provided to the PJC and the Franchising Taskforce highlighting instances of egregious conduct by franchisors. It also confirms the outcomes of reviews into automotive franchising which highlighted problematic conduct by automotive franchisors in relation to dispute resolution, capital expenditure and end of term arrangements.^[12]

Current regulation and penalties have not deterred poor conduct

3.25 The current penalties for breaches of the Franchising Code have not prevented poor conduct from franchisors. This is despite the ACCC making small business, and compliance with the Franchising Code of Conduct, a Compliance and Enforcement Policy and Priority in recent years.^[13]

3.26 Evidence has been submitted that the scope and quantum of current penalties is insufficient to encourage compliance and some franchisors may factor the cost of penalties into their cost of doing business.^[14] There have also been allegations of franchisors not mediating in good faith, which would be considered a breach of the Franchising Code. This evidence around non-compliance supports the ACCC's findings of systemic poor disclosure practices in food franchising.^[15]

3.27 Non-compliance undermines the intent of industry codes to raise standards of business conduct by guarding against misconduct and opportunistic behaviour. In order for broader improvements in disclosure and the Franchising Code to be effective, there needs to be a culture of compliance across the sector.

Exit and dispute resolution processes for franchisees are insufficient

3.28 Small business franchisees, unlike independent small businesses, are entirely dependent on a functional relationship with their franchisor to continue in business. Accessible, affordable and effective dispute resolution processes are important to resolve disagreements between franchisors and franchisees.

3.29 Many franchisees are not aware of available dispute resolution processes and the PJC noted that the Franchising Code does not provide for conciliation or arbitration to facilitate dispute resolution outside of court in cases where mediation fails.

3.30 It is also unclear whether existing provisions in the Franchising Code enable multi-party mediations, particularly where the franchisor seeks to avoid multi-franchisee mediation.

3.31 Franchisees wishing to exit the system due to hardship or faced with poor conduct from the franchisor are not well supported by the current Franchising Code which only supports a process for franchisor-initiated exits. The treatment of goodwill at the point of exiting a franchise agreement and the restraint of trade clauses prohibiting franchisees pursuing legitimate business ventures after exiting a franchise have also been identified as concerns for franchisees.

Limitations to franchising data

3.32 The availability of statistics on the franchising sector is limited. For example, aggregate data on the financial losses incurred by franchisees and complaints data by industry within the franchising sector are not available. However, consistent evidence in submissions to the PJC and the Franchising Taskforce, and the problems illustrated in the Fairness in Franchising report, provide insight into the level of financial loss and the spread of issues in the sector.

3.33 For example, the PJC heard from a franchisee whose family lost in excess of $800,000 due to their involvement with their franchisor. The Franchising Taskforce heard similar stories, including from a former franchisee who stated that her and her husband 'lost everything [they] ever worked for' due to their franchisor and were left with a $500,000 debt.

3.34 Although the ACCC does not report on the industry breakdowns of franchising complaints, problems in the franchising sector appear to be widespread. Submissions to the PJC and Franchising Taskforce indicate evidence of poor behaviour from a variety of sectors including food and non-food retailing, transportation, automotive and fuel retailing.

Why is government intervention necessary?

3.35 The Government introduced the mandatory Franchising Code in 1998. Since then it has been revised a number of times to address issues in the sector. The fair trading provisions of the Australian Consumer Law are also relevant to franchisees and franchisors. The PJC report and work of the Franchising Taskforce have confirmed that further reform is needed to deter systemic non-compliance, improve transparency and prevent poor franchisor conduct.

The impact of poor behaviour can be severe

3.36 While the most egregious behaviour is not widespread, the consequences of poor franchisor conduct have been devastating for some franchisees and undermined confidence in the franchising business model.

3.37 The PJC and Franchising Taskforce heard directly from current and former franchisees about the significant personal and financial impacts arising from poor practices in the sector. This included bankruptcies, mental health issues and marriage breakdowns, noting that many franchisees businesses are run as family businesses.

At the end ... my life no longer resembled anything I had previously known before my involvement with franchising. I am separated from my husband and have lost in excess of $280 000. It is almost impossible to recover from this amount of financial loss with the time I have left before I retire. I will then become a burden on the tax paying public.^[16]

3.38 The impact of poor franchisor behaviour has also extended beyond franchisees. One example is the underpayment of employees. Since 2016-17, the Fair Work Ombudsman (FWO) has received more than 4,500 anonymous reports of underpayment of staff that relate to franchises (or just over 11 per cent of all anonymous reports received during that period), with more than half of these reports related to the hospitality industry. In March 2019 the Migrant Workers Taskforce found that some franchising models lead to the underpayment of wages by franchisees.^[17]

3.39 Problems in the franchising sector can also undermine fair competition with other businesses. Independent businesses may be unable to compete with lower wages, or unviable prices set by the franchisor. In the case of the latter, franchisees may continue to trade because they are unable to exit their franchise agreements. This may in turn have broader economic and consumer impacts.

Franchisees face unique challenges

3.40 In addition to the general issues faced by small businesses, franchisees face unique challenges.

3.41 In addition to usual business overheads, franchisees pay fees to the franchisor. The Coronavirus economic downturn has further exacerbated cost pressures, with some franchisors continuing to charge franchise fees despite their businesses being forced to close, such as gym operators, or suffering significant losses in trade, such as in the food and personal services sectors.

3.42 Other financial controls include the franchisor having control over the prices that the franchisee charges customers, mandating capital investments, mandating suppliers used and the cost of supplies.

3.43 Franchisees can be limited in responding to market conditions, when compared to independent small businesses. The Coronavirus has seen many examples of small businesses pivoting to take up new opportunities, but franchisees are often constrained in this regard.

3.44 Franchisors can often make unilateral changes to the franchise agreement and business model. While there are may be legitimate reasons to do this, it can change the basis on which the franchisee made their investment decision. For example, some franchisees described how their franchisor changed food products being sold from 'fresh' to 'frozen' products.

3.45 Compared to independent small businesses, franchisees often face additional challenges winding down or exiting an unsuccessful business venture. They are more likely to continue as an unprofitable business than independent businesses. Allocative efficiency in the economy is harmed when a franchisee is unable to operate a viable business but also unable to exit. Resources that could operate more productively elsewhere are 'tied up' in an unviable operation. One franchisee in submitted to the PJC Inquiry on her experiences exiting the franchise system:

"I was nearly five years locked into a business I couldn't sell, couldn't walk away from and that no one wanted. Three years later I had seven failed attempts at selling my business".^[18]

3.46 Another submission commented on the difficulties in selling their food retail business.

...we wanted to sell the business but there were no buyers due the high exit and entry costs... In the end, we had to make the hard decision of walking away from the business and losing everything. Worked extra-long hours and felt trapped in the system, impacting our health and family life... We personally have never encountered the stress and strain as we felt by joining this franchise. We have lost almost $800,000 plus our health ... ".^[19]

3.47 While the interests of a franchisor and franchisee can be aligned, this is not always the case. An example is where the franchisee may be required to acquire supplies from a third party that provides a rebate or incentive to the franchisor. The franchisee may be incentivised to choose a supplier who offers the best rebate to the franchisor, instead of providing the best value goods. In other cases, the franchisor's business model may be premised on 'churning and burning', where the franchisee's success is irrelevant to (or even opposed to) the franchisor's success.

"Franchise sellers foment unwarranted franchise churn which can cost franchisees their life's savings, their homes, sometimes their marriages and even their lives through suicide."^[20]

3.48 Finally, there is often a disparity in resources between franchisor and franchisee which is acutely felt in the context of dispute resolution (including access to legal remedies for franchisees).

Reform is required to level the playing field

3.49 The problems observed by the PJC, ACCC and ASBFEO have established that there is a case for reform. Submissions to the PJC Inquiry, as well as consultations by the Franchising Taskforce, indicate that there is broad stakeholder support for further Government action in this sector.

3.50 Noting that the Franchising Code has been subject to successive reviews, some stakeholders have argued for fundamental changes to the franchising relationship. The ACCC has argued that the Franchising Code, even in an amended form, will never be adequate to address the systemic issues in the sector, and that serious consideration should be given to an ex-ante regulatory model, such as a licensing regime. In its submission to the Taskforce's consultation process, the Australian Association of Franchisees suggested that franchisees should be considered co-investors, with protections similar to those provided to shareholders.

3.51 The following section describes policy options being considered to address problems in franchising.

What policy options are being considered?

Option 1: Status Quo

What does this option involve?

3.52 Under this option, there would be no changes to the Franchising Code or the enforcement framework in the CCA. No other action would be taken in response to the PJC report recommendations or following the work of the Franchising Taskforce. Franchising participants would continue to be subject to the existing provisions in the Franchising Code as well as the general provisions of the CCA and ACL. The need for change could be re-examined at a future point.

What are the costs and benefits of this option?

3.53 The major benefit of this option is that there would be no additional regulatory impact on the franchise sector. Noting that the sector has been adversely affected by the economic downturn caused by the Coronavirus, franchisors in particular would likely benefit from not incurring transitional and ongoing compliance costs.

3.54 This option also provides a longer timeframe to evaluate the effectiveness of the changes to the Franchising Code that took effect in 2015. Noting that the average term of a franchise agreement is around five years, and the PJC inquiry took place across 2018-19, it is possible that the full effect of those changes was not reflected in evidence considered by the PJC.

3.55 However, not addressing known problems in the sector is likely to result in continuation of the significant negative social and economic impacts. Ongoing disputes and dissatisfaction will draw resources away from more productive economic pursuits, with continuing low confidence in the franchising business model. Poorly informed franchisees may continue to over value franchise opportunities. Non-compliance is expected to continue. Dispute resolution will continue to be difficult and expensive, with resources devoted to dispute resolution not available for more productive outcomes.

3.56 On balance, noting that the regulatory impacts associated with reform are low-moderate, the costs associated with this option outweigh the benefits.

Option 2: Regulatory reforms to the franchising sector

What does this option involve?

3.57 Under this option, the Government would implement the following regulatory measures to address the problems outlined in section 3 of this document.

Reforms to better inform franchisees and improve transparency

A public register of franchisors

3.58 Under this option, a public register of franchisors would be established by the Government. All franchisors would be required to provide information to the register. In addition to improving transparency for franchisees, the register would assist the ACCC in its enforcement role, and improve the information available to government about the franchising sector. Consultation will inform the design and implementation of the register.

Stakeholder views

3.59 A register may address a range of issues in the franchising sector. For example, a register could increase transparency by allowing prospective franchisees to compare different franchise systems and make a more informed decision before committing to a particular system or brand. The AAF proposed that franchisors, franchisees and franchisee associations should be registered, and that franchise agreements and disclosure documents should be lodged. The FCA also supported registration with updated documentation being provided as it felt this would assist the ACCC in its enforcement role, build a culture of transparency and improve confidence in the sector.

3.60 Industry associations such as MTA Queensland suggested a public register could also lift standards across the sector by incentivising franchisors to ensure their conditions are competitive, as well as increasing the Government, regulators' and academics' knowledge of the franchising sector. A more robust model was also supported, including registration of all franchisors and all individual franchising arrangements.

3.61 Some stakeholders raised concerns that a register may require the disclosure of commercial-in-confidence information to the detriment of the franchising business model. Franchisors have highlighted concerns that a public register would impose an additional compliance burden.

3.62 Most significantly, some stakeholders (including the ACCC) have raised concerns that a register could lead some prospective franchisees to believe that the franchise system and any documents or statements on the register have been vetted and can be relied upon. This may, in turn, result in reduced due diligence by prospective franchisees.

3.63 Submissions in response to the Taskforce's earlier issues paper showed that there was general support for a registry function amongst stakeholders, with a number of options suggested about who should host it, what information should be available on it and in what form. Under this option, the Government would consult further on the final design of the Register.

A Key Disclosure Information Fact Sheet containing information that is taken from disclosure documents

3.64 Under this option, the Government would design a new mandatory Key Disclosure Information Fact Sheet in consultation with the franchising sector to improve and simplify upfront disclosure, highlight key information, and assist franchisees to understand obligations and the risks associated with entering a particular franchise agreement. Further consultation would be conducted on the design of the Fact Sheet.

Stakeholder views

3.65 Submissions to the consultation paper showed there was a general consensus amongst stakeholders that the provision of more information was not necessarily desirable. Rather, the focus should be on appropriate information being provided in a concise form, including relevant leasing information. Many stakeholders stated that current disclosure is too complex and needs to be made simpler and more relevant.

Electronic and hard copy disclosure documents

3.66 Under this option franchisors would be required to provide disclosure documentation in electronic form. Having access to an electronic copy would allow prospective franchisees to more easily share disclosure documentation with relevant professional advisors and more easily search for information.

Stakeholder views

3.67 Submissions to the consultation paper process showed that there was general support for electronic disclosure.

Separate information statement

3.68 Under this option it would be made clear the information statement (Annexure 2 of the Franchising Code) should be provided as a separate document to the rest of the disclosure material. This change is intended to make it more likely the information statement will be read before the prospective franchisee commits to entering the agreement.

Stakeholder views

3.69 Stakeholders have not raised any significant objections to this recommendation.

Provision of the ACCC's Franchisee Manual to prospective franchisees

3.70 A franchisor would be required to provide a prospective franchisee with the ACCC's Franchisee Manual when it first provides the disclosure document.

Stakeholder views

3.71 Concerns were not raised by stakeholders in relation to this recommendation by the PJC and is expected to have only a most minimal regulatory burden on franchisors.

Financial disclosure in disclosure document

3.72 Under this option, the Government would amend the Franchising Code so that any financial information must be part of the disclosure document (and not provided separately).

Stakeholder views

3.73 No significant concerns were raised about the inclusion of financial information, where provided, in the disclosure document.

Increase transparency around retail leasing

3.74 Under this option, the Government would implement technical changes to clause 13 of the Franchising Code, to increase transparency surrounding retail leases, subject to consultation with the sector to ensure there are no unintended consequences. Franchisors will not need to provide documents they do not possess.

Stakeholder views

3.75 Franchisors have indicated that site negotiation can take a significant period of time, such that providing franchisees with a right to 'cool off' until a site is formally agreed (including the cost) would see the franchisor faced with an extended period of uncertainty. Further, where a franchisor signs a head lessee and then the franchisee utilises their cooling off right, this may leave the franchisor with a premises, but no franchisee to run the business. However, franchisees raised concerns that they cannot make reasonable assessments of the value (including costs, obligations, benefits and risks) of a franchise business without knowing the terms of the lease.

Improved disclosure around supplier rebates

3.76 Under this option, the Government would amend the Franchising Code to require franchisors to disclose information on supplier rebates, commissions and other payments and to disclose whether a master franchisor controls and/or receives rebates from suppliers.

Stakeholder views

3.77 Submissions to the consultation paper process showed that stakeholders did not agree about the extent of disclosure of supplier rebates and whether third line forcing could be used to exploit franchisees. There was considerable support however for the amount of rebates received to be included as a line in franchisors' profit-and-loss statement. A number of franchisors argued that the unintended consequences of regulating rebates could be standardised pricing and reduced incentives to negotiate better deals.

Extend cooling off and parameters to trigger start of cooling off period

3.78 Under this option, the Government would amend the Franchising Code to allow a franchisee to terminate any and all arrangements between the franchisor and franchisee at any time up to 14 days after the last of the following have occurred:

•

a franchise agreement has been signed;

•

a payment has been made by the franchisee to the franchisor;

•

the required disclosure documents set out in the recommendations in Chapter 6 of the report have been received by the franchisee, within the required disclosure period; and

•

where the franchisor is the lessor or an associate of the lessor, the franchisee has received a document setting out the terms of the lease provided that the final lease is substantially similar to the terms provided.

Stakeholder views

3.79 Stakeholders have stated that the cooling off period is only beneficial if there is adequate and transparent disclosure of the costs involved. Stakeholders did not support mandating the provision of a signed lease as a condition of triggering the cooling off period due to the significant risk and difficulties put on the franchisor in doing so. Instead, there was considerable support to replace that condition with the requirement to provide of the terms of the lease.

Cooling off rights extended to transfers

3.80 Under this option, cooling off rights would be extended to the transfer of an agreement to a new franchisee and where the franchisee enters a substantially new agreement with the franchisor (a deemed transfer) but not to renewals or extensions.

Stakeholder views

3.81 There was general support for the view that a new franchisee should not be disadvantaged because they are purchasing from another franchisee, as opposed to the franchisor.

Amend the relevant clauses of the Franchising Code to apply recent automotive franchising changes relating to capital expenditure

3.82 The Government recently amended the Franchising Code to strengthen the right of franchisees in the automotive sector when a franchisor requires a franchisee to make a significant capital expenditure. Those amendments will be expanded to apply to the broader franchising sector.

3.83 This means that before agreements are signed, there will be increased transparency and communication about when capital expenditure will be required, including the circumstances under which the franchisee is likely to recoup the expenditure.

3.84 Franchisors and franchisees will be obligated to discuss significant capital expenditure requirements prior to entering an agreement. The franchisor must include as much information as practicable about the expenditure in the disclosure document, including:

•

the rationale for the expenditure;

•

the amount, timing and nature of the expenditure;

•

the anticipated outcomes and benefits of the expenditure;

•

the expected risks associated with the expenditure.

3.85 Franchisors will not be able to impose significant capital expenditure just because they unilaterally consider there to be a business case. However, franchisors will still be able to require expenditure when:

•

it is disclosed to the franchisee before they enter the agreement

•

is legally required

•

it applies to all franchisees and has been approved by a majority of them or

•

if it applies to a minority of franchisees, has been agreed to by the franchisee.

Stakeholder views

3.86 There was no clear agreement amongst stakeholders although many agreed that capital expenditure associated with leasing arrangements in shopping centres complicated the issue. Some stakeholders suggested that capital expenditure should be commensurate with the timeframe of the franchising agreement so that costs could be recuperated by the franchisee.

Require disclosure of end-of-term arrangements for franchisee goodwill

3.87 Under this option, the Government would require franchisors to disclose end-of-term arrangements for franchisee goodwill (if any) in the disclosure document.

Stakeholder views

3.88 Stakeholders have indicated this measure would help align franchisees' and franchisors' expectations at disclosure, and assist franchisees in making a more informed decision before entering into the franchise agreement. Stakeholders have further indicated this could help minimise disputes at the end of, or at a later point, in the agreement.

Require master franchisors to meet requirements of marketing funds

3.89 Under this option the Government would amend clause 12 of the Franchising Code of Conduct to provide that a master franchisor must comply with clauses 15 and 31 where the sub-franchisee is directly or indirectly required to contribute to a marketing or cooperative fund controlled or administered by the master franchisor.

Stakeholder views

3.90 Franchisees and the FCA are generally supportive of this change.

Franchisors would be required to include a statement about the accuracy of financial statements

3.91 Under this option the franchisor would be required to make a statement confirming that, 'to the best of the franchisor's knowledge', financial statements provided in the disclosure document are 'accurate, correct and compliant' with the Franchising Code and accounting standards.

3.92 Some stakeholders have suggested that this statement is not required, as franchisors are already banned from making false or misleading representations by the ACL. Others suggested it would remind franchisors of their obligations and promote confidence in disclosure amongst prospective franchisees.

3.93 Franchisors have indicated that they may not have access to the financial information of their franchisees. Several franchisors raised concerns that they feel they open themselves to liability if they provide franchisees with financial information that may be misleading, even if it is done so inadvertently.

Stakeholder views

3.94 Franchisors were concerned about a requirement to actively verify financial information provided by an exiting franchisee to prospective franchisees unless they are able to state without liability that the information is 'unverified'.

3.95 Many stakeholders, including franchisees, advisers and Small Business Commissioners, were of the view that the provision of accurate financial information at disclosure was important. Accurate financial information is needed for franchisees to make an informed business decision about the franchise.

Additional requirements where the franchisor is terminating in special circumstances

3.96 Under this option the Government would amend the Franchising Code to require the franchisor to provide the franchisee with seven days' notice of a proposed termination in special circumstances (clause 29), so that a mediator or arbitrator can assist the parties to negotiate.

Stakeholder views

3.97 Submissions to the consultation paper process showed that a number of stakeholders, including the FCA, thought it important that franchisors maintain the ability to terminate an agreement where there was the possibility of reputational risk, fraud or a health and safety risk.

3.98 Franchisees have stated that there should be some ability to challenge termination through the Code, and to ensure that special termination rights are not used opportunistically. For example, the Caltex National Franchise Council submitted to the PJC that many franchisees experienced the termination of their Franchise Agreements for what they considered were non-material breaches or alternatively minor breaches capable of remediation.

What are the costs and benefits of this option?

Quantitative costs

3.99 See Appendix A for the assumptions made in order to complete the costings below.

3.100 See Appendix B for the full costings of this option.

Table 3.1 Regulatory Burden estimate

The regulatory burden estimate (RBE) is calculated as the average annual equivalent cost over the first 10 years of the policy. For a breakdown of this estimate see Appendix B

Qualitative costs and benefits

Public Franchisor Register

3.101 The costs and benefits of a public franchisor register is currently not quantifiable due to the need to consult on the final design of the register. An impact analysis of the register will be conducted separately following consultation with the sector. Depending on the design, some possible costs and benefits are identified under 'stakeholder views' in the discussion above relating to the register. These will be explored further through consultation.

Key Disclosure Information Fact Sheet

3.102 The Fact Sheet would benefit franchisees by providing them with a simple summary of financial and other critical information that is important for making an initial assessment about the franchise offer. Although it is not intended to be a substitute for the full disclosure document, it will help franchisees, and their professional advisers, prioritize the consideration of critical information.

3.103 A summary disclosure document will impose only a minor compliance burden on franchisors because it will be a summary of information already prepared, at least annually, for the disclosure document update. Franchisors would also benefit from franchisees being better informed at the point of disclosure, as this will likely reduce disputation caused by misunderstandings between the n

3.104 It is expected that the introduction of the Fact Sheet will provide the sector with a net benefit to the sector over all.

Changes in disclosure practices

3.105 Better disclosure practices will benefit both franchisees and franchisors - as discussed above in relation to the Key Disclosure Information Fact Sheet, franchisees being better informed at the point of disclosure will likely reduce disputation caused by misunderstandings between the franchisor and franchisee during the agreement term.

3.106 There is a small possibility that overly burdensome disclosure requirements could deter businesses from utilizing the franchising business model, or deterring international franchises from entering the Australian market. On the other hand, a well-regulated sector with a high standard of pre-entry due diligence may be beneficial for attracting international investment.

3.107 The regulatory costs associated with improved disclosure are outweighed by the benefits associated with better informed prospective franchisees.

Cooling off measures

3.108 Under existing provisions in the Franchising Code, the franchisor can recoup costs associated with a franchisee exercising their right to cool-off. This will have the effect of negating the costs associated with an extended cooling off period for franchisees.

3.109 As was discussed in the problem section above, franchisees can be affected by 'optimism bias', where they are reluctant to face the downside of an investment to which they have become emotionally attached. The proposed cooling off measures will be beneficial to franchisees who have been motivated to sign on due to an initial emotional impetus - these measures are a chance for poorly informed or overly optimistic franchisees to get out when 'reality hits'.

3.110 Additional benefits to franchisees of these measures would include the ability to examine important documents (including the terms of the lease in certain circumstances) over an additional seven days before being locked into the franchise agreement. Proper due diligence, especially on financial disclosure, is needed in order for the franchisee to make an optimal business decision.

3.111 Further, these measures would extend cooling off provisions to the transfer of agreements. This will ensure that all prospective franchisees will have the opportunity to contemplate their decision more thoroughly, not just those signing on to a new franchise agreement.

3.112 Given the above, the benefits are expected to outweigh the costs of this measure.

Amending the relevant clauses of the Franchising Code to apply recent automotive franchising changes relating to capital expenditure

3.113 While this measure will impose a regulatory burden on franchisors (see discussion in Appendix B), the cost to franchisors would be outweighed by the benefit to franchisees from the increased transparency and the protections against capital expenditure requirements that they are not able to recoup. Benefits include reduction in disputes and improved financial security for franchisees. The qualitative costs and benefits outlined in changes in disclosure practices above would also apply to this measure.

Requiring master franchisors to meet requirements of marketing funds

3.114 Improved understanding will likely arise from making the requirements under clauses 15 and 31, relating to disclosure on marketing and other cooperative funds consistent, and ensuring disclosure provisions apply to master franchisors. There is likely to minimal regulatory burden on franchisors arising from these proposals. Indeed, they may reduce the burden of compliance with the current inconsistent provisions.

3.115 The qualitative costs and benefits outlined in changes in disclosure practices above would also apply to this measure.

Additional requirements where the franchisor is terminating in special circumstances

3.116 Currently, franchisors are able to terminate in special circumstances (as defined by the Franchising Code) without notice to the franchisee if the franchise agreement provides for them to do so.

3.117 Amending the Franchising Code to require the franchisor to provide the franchisee with seven days' notice of the proposed termination, so that a mediator or arbitrator can assist the parties to negotiate in the context of termination of the franchise agreement, will benefit franchisees by ensuring that franchisees have an opportunity to challenge the termination, or initiate dispute resolution.

3.118 In circumstances where immediate termination is warranted, this delay may be costly to the franchisor or even the public - for example, if a franchisee business has somehow endangered public health and safety, further people could be at risk, as well as the reputation of the whole franchise brand. However, it is expected that if conduct of a franchisee has been severe enough to warrant immediate termination, there will be mechanisms to ensure swift termination where necessary.

3.119 While this measure will impose a slight regulatory burden on franchisors, it will decrease the franchisor's ability to quickly stem the effects of the likely serious nature of the circumstances in which the franchisee is to be terminated. For example, if a franchisee's business has somehow endangered public health and safety, the wider community could be at risk, as well as the possibility of reputational damage to the franchise brand.

3.120 However, it is important terminations arising from breaches are justifiable. This measure will protect the rights of franchisees to have recourse to alternative dispute resolution processes.

Option 3: Non-regulatory reforms to the franchising sector

What does this option involve?

3.121 Under this option, the Government would take non-regulatory action to address problems identified such as initiatives to improve the education levels of franchisees prior to entering into franchising, and other measures which do not have an associated compliance burden.

3.122 Improving prospective franchisees' understanding of the importance of due diligence and other key information regarding operating a franchise would assist in avoiding many of the problems identified by PJC and Franchising Taskforce consultation process.

Reforms to better inform franchisees and improve transparency

A new government online educational resource for the franchising sector

3.123 The Government would develop a website, consistent with Recommendation 18.2 of the PJC's Fairness in Franchising report. The proposed website would contain a range of information relevant to all stages of the franchise relationship such as information on due diligence when entering into a franchise agreement to information on options to exit the franchise system. Further consultation will be conducted to ensure the design of the website promotes the objectives of better informed franchisees.

Stakeholder views

3.124 Submissions to the Franchising Taskforce's Issues Paper showed that most stakeholders considered that a franchising website would be helpful.

Amend Information Statement with existing franchisee obligations

3.125 Under this option, the Government would amend the Information Statement to advise prospective franchisees that their obligations include obtaining information about employment matters and compliance with relevant laws.

Stakeholder views

3.126 Franchisees and FCA were generally supportive of this measure.

Raise awareness of the use of 'no agent' and 'entire agreement' clauses

3.127 Under this option, the Government would amend the Information Statement to address the use of 'no agent' and 'entire agreement' clauses, and ask the ACCC to refer to these terms in its educational material.

Stakeholder views

3.128 The FCA supported these measures, but notes that it is not clear whether 'no agent' and 'entire agreement' clauses protect franchisors. The FCA argues mandating legal and business advice will have a far greater impact.

3.129 The ACCC was supportive of include a warning about these terms as part of its general educational material.

Clarification of cooling off period

3.130 Clarification would be provided in the Franchising Code that the cooling off and disclosure periods are measured in calendar days and that the 14 day disclosure period must begin at least 14 days before the signing of a franchise agreement.

Stakeholder views

3.131 Submissions to the consultation paper process showed that there was general support for the clarification of franchise cooling off periods.

Improve consistency within the Franchising Code about the treatment of marketing funds, particularly clauses 15 and 31

3.132 The Franchising Code would be changed to clarify obligations with respect to marketing funds. This may include clarifying what would be 'meaningful information' for the purposes of clause 15 of the Franchising Code. This could assist parties in understanding their obligations.

Stakeholder views

3.133 Franchisees and the FCA were generally supportive of this option.

Education on best practice financial statements for marketing funds

3.134 Under this option, the Government would work with the sector to emphasise the importance of developing best practice financial statements for marketing funds, and additional efforts would be made to educate the franchising sector on the preparation of financial statements.

Stakeholder views

3.135 Stakeholders have suggested that improved interpretation of the existing provisions may reduce the incidence of disputes over the use of marketing funds.

Education on distribution of unused marketing funds

3.136 Under this option, the Government would amend the Information Statement and use educational materials to improve franchisees' understanding that, if the franchisor becomes insolvent, they may lose the benefit of shared funds such as marketing funds.

Stakeholder views

3.137 Some stakeholders advocated for the Code to expressly clarify the distribution of unused marketing funds in the event of the franchisor going into liquidation. Other stakeholders argued that should the costs and risks of administration become too onerous, franchisors may choose not to operate shared marketing funds and instead recoup marketing costs through other means (such as franchise system fees).

Improve awareness of wastage and shrinkage payments

3.138 Under this option, the Government would improve awareness of the issue of wastage and shrinkage payments by franchisees. The government will draw on existing channels designed for education and guidance, in addition to the proposed website.

Stakeholder views

3.139 There was no significant feedback on the issue of wastage and shrinkage.

Measures to address poor conduct and improve compliance and enforcement

Introduce civil pecuniary penalties for a breach of clause 31

3.140 Creating a civil pecuniary penalty for marketing fund provisions in clause 31 will deter breaches of the Franchising Code. Penalties for non-compliance may boost confidence in the operation of marketing funds.

Stakeholder views

3.141 Franchisees and the FCA were generally supportive of this measure.

Double the civil pecuniary penalties for breaches of the code

3.142 Under this option the Government would double the civil pecuniary penalty for breaches of the Franchising Code from 300 penalty units to 600 penalty units.

3.143 There is compelling evidence that existing penalties do not deter poor conduct. This is a significant increase in penalties and will further deter parties from breaching the Franchising Code. The power to seek financial penalties is a fundamental part of the ACCC's enforcement toolkit.

Stakeholder views

3.144 Submissions to the consultation paper process showed that many stakeholders supported increasing penalties to deter non-compliance and prevent misrepresentations and abuse of the franchising relationship. FCA thought any increase should be accompanied by greater clarity for franchisors about what was expected of them.

Prohibition of franchisors passing on the legal costs to the franchisee

3.145 Under this option, the Government would prohibit (and have pecuniary penalties for) franchisors passing on the legal costs of preparing, negotiating and executing documents to the franchisee (except where it is already incorporated into a joining fee).

Stakeholder views

3.146 The FCA made the point that franchisors would probably raise entry fees if a prohibition is introduced, though it would support a prohibition on charging above the standard fixed fee for costs of negotiations.

3.147 The AAF did not comment on this recommendation.

Government to develop best practice models for unilateral variations

3.148 Under this option, the Government would work with stakeholders to develop best practice models in relation to the process by which a franchisor makes unilateral variations to contracts and subsidiary documents.

3.149 The PJC and the Taskforce received evidence that the practice of unilateral variation of franchise agreements (and associated documents such as operations manuals) is widespread in the franchise sector.

Stakeholder views

3.150 Stakeholders, including the FCA and franchisors considered that there are good reasons for making unilateral decisions, including for health and safety requirements, to implement new legislation, to innovate or grow the business and maintain market relevance. Franchisees on the other hand felt that franchisors were insulated from the risk of business failure and that they were forced by franchisors at times to opt into deals they did not want.

Improvements to exit and dispute resolution

Incorporate the functions of the Franchising Mediation Adviser into ASBFEO

3.151 The FMA role under the Franchising Code would be incorporated into the functions of ASBFEO. This would formalise existing administrative arrangements.

Stakeholder views

3.152 Many stakeholders such as 7-Eleven convenience store had no objection to OFMA merging with ASBFEO. Submissions to the consultation paper process showed that stakeholders are generally happy with the mediation process and thought ASBFEO was doing a good job and was well-placed to deliver the mediation adviser services. The rationalisation of OFMA and ASBFEO was broadly supported by franchisors and franchisees, including peak industry associations like FCA, and by ASBFEO.

Introduce conciliation and voluntary arbitration

3.153 Under this option, the Government would introduce conciliation to complement existing dispute resolution provisions and implement a voluntary arbitration model by appointing a Franchising Arbitration Adviser, utilising a model similar to that in the Dairy Code of Conduct.

Stakeholder views

3.154 Access to justice, including costs and timeliness, was raised by a number of stakeholders in submissions to the consultation paper. Some franchisees considered that mediation outcomes were limited by the power imbalance between the parties entering into mediation. Others considered a fear of retribution meant mediation was underutilised. Advisers thought many disputes were brought to mediation too late to save the relationship between the parties. There was support for a three-stage approach to dispute resolution: mediation, conciliation and arbitration.

Clarify the availability of multi-party mediation

3.155 Under this option, the Government would amend the Franchising Code to clarify that, if the person conducting the dispute resolution process determines it is appropriate to conduct a multi-party process, the franchisor cannot refuse to take part in that process.

3.156 If implemented, the Government would increase awareness of these measures to ensure the franchising sector is informed of their obligations and rights in relation to multi-party mediation.

Stakeholder views

3.157 The Government has heard from the Office of the ASBFEO that under the current Code, franchisors are able to refuse multi-party mediation, and this can lead to franchisees being 'picked-off' by the franchisor through separate mediation processes. ASBFEO has stated that multi-party mediation is not common, despite that it is a process that works well.

3.158 Furthermore, many stakeholders indicated that they were unaware of their ability to engage in multi-party mediation.

3.159 Submissions to the consultation paper process showed that there was considerable support for clarifying multi-party dispute resolution.

Develop amendments to the Franchising Code to facilitate negotiated early exit

3.160 Under this option, the Government would consult with the franchising sector to develop amendments to the Franchising Code to facilitate negotiated early exit that balances the rights and interests of franchisors and franchisees.

Stakeholder views

3.161 Some stakeholders, primarily franchisors and professional advisors, claim that introducing franchisee termination rights may affect the franchisor's ability to make long-term investment decisions due to the reduced certainty of the contract, and may also lead to a higher turnover in franchise systems.

3.162 Furthermore, some stakeholders claim that not all franchisees exit their franchise in good faith, arguing that franchisees should not be permitted an easy exit from their contract for reasons outside the franchisor's control, such as unfavourable economic conditions.

3.163 Submissions to the consultation paper process showed that there was no clear agreement amongst stakeholders on this measure. A number were happy with the current provisions of the Code but thought the terms of the agreement should outline the exit arrangements so the parties are clear about them at the outset. Academics, lawyers and other advisors noted the current existence of legal options to deal with 'unreasonable impositions', such as unconscionable conduct and UCT laws.

3.164 Some franchisees considered that franchisors should be obliged to specify their deliverables and only change them with the agreement of the franchisee. If franchisees are not able to meet their deliverables, franchisees should be able to exit the agreement.

Clarify and educate regarding restraint of trade clauses in franchising

3.165 Under this option, the Government would increase prospective franchisees' awareness of the effect of restraint of trade clauses, clarify what constitutes a breach of clause 23 of the Franchising Code, and amend the Information Statement to warn prospective franchisees of the need to obtain legal advice on restraint of trade before entering the agreement.

Stakeholder views

3.166 Submissions to the consultation paper process showed that stakeholders did not agree on the operation of restraint of trade clauses. Some franchisors noted that dilution of restraint of trade clauses could lead to hardship to small franchisor business. Others supported greater awareness raising amongst franchisees of restraint of trade provisions within franchise agreements.

What are the costs and benefits of this option?

Quantitative benefits

3.167 See Appendix A for the assumptions made in order to complete the cost offsets below.

3.168 See Appendix C for the full costings of this option.

3.169 Note that the cost offsets in the table below are only associated with the multi-party mediation component of this option.

Table 3.2 Cost offset estimate

The cost offset estimate is calculated as the average annual equivalent cost offset over the first 10 years of the policy. For a breakdown of this estimate see Appendix C.

Qualitative costs and benefits

Education and awareness measures^[21]

3.170 Education and awareness will benefit both franchisees and franchisors. The proposed measures will assist prospective franchisees with conducting proper due-diligence prior to entering a franchise agreement by simplifying and streamlining the process, and filling information gaps that were identified by the PJC.

3.171 The online resource would be a central point where prospective franchisees, and industry stakeholders in general, would be able to access crucial, reliable and current information. Although the final design of the website is pending consultation, it would likely bring existing information produced by the ACCC, ASBFEO, the Fair Work Ombudsman (FWO), business.gov.au, and the Australian Taxation Office (ATO) together, in addition to further guidance material. It would act as a comprehensive online resource for the franchising sector, and save on search costs and create efficiencies in the process of information gathering for franchisees.

3.172 Franchisees who have conducted proper due-diligence would be in a better position to make reasonable assessments of the value (including costs, obligations, benefits and risks) of a franchise before entering into a contract with a franchisor. This could also reduce the risk of falling into a dispute with the franchisor due to unforeseen issues arising from a lack of understanding of the franchise agreement, thus reducing the number of incidences of parties entering into dispute resolution.

3.173 There will be no cost to industry. As such, the aforementioned measures will result in a net benefit to the sector as a whole.

Improvements to access to justice in the franchising sector

3.174 This section considers costs and benefits associated with incorporating the functions of the Franchising Mediation Advisor (FMA) into ASBFEO, and introducing conciliation and voluntary arbitration to the franchising dispute resolution process.

3.175 Incorporating the FMA role into ASBFEO would make it clearer to franchisees and franchisors where they should seek assistance from. This is also consistent with the broader dispute resolution assistance that ASBFEO provides to small business.

3.176 Arbitration is generally more expensive than mediation, however it can deliver a binding outcome. It is likely to be cheaper and more flexible than pursuing court action. Conciliation is a variation on mediation which gives the party facilitating dispute resolution more flexibility to assist the parties to reach an outcome where needed.

3.177 The combination of these two measures would simplify the franchising dispute resolution process and provide multiple avenues for industry parties to accessible, affordable and effective dispute resolution. Exact costs and benefits cannot be estimated as this would depend on the number of instances of dispute and the nature of the disputes themselves, however these reforms would have a beneficial impact on the sector as a whole.

Best practice models and amendments to facilitate negotiated early exit

3.178 Under this option, there are a number of measures that the Government would need to consult on with the sector to ensure changes to the Franchising Code are fit for purpose.

3.179 Working with the sector on the design of reforms would involve costs for both Government and sector participants, which includes time taken to organize and respond to consultation.

3.180 However, involving end-users in the reform process is important - it ensures that the utility of the Code is maximised for sector participants and reduces unintended consequences. The industry codes framework administered by the Department of the Treasury confirms the importance of public consultation as an element of the policy making process, particularly in determining whether a code can provide the right regulatory support without imposing unnecessary red tape on businesses.

3.181 Exact costs and benefits of the specific changes cannot be estimated at this time as they are subject to the final design of the measures, which would be settled through consultation.

Extending and increasing penalties

3.182 The maximum penalty for a breach of the Code is set by the CCA. Under this option, the Government would amend the CCA to increase the maximum civil pecuniary penalty available for a breach of an industry code from 300 to 600 penalty units, and increase the civil pecuniary penalties for breaches of the Franchising Code accordingly. The Government would also extend penalties to a breach of clause 31 of the Franchising Code which relate to the management of marketing and advertising fees.

3.183 The PJC found franchisors do not face sufficient deterrents for non-compliance with the Franchising Code. Penalties are an important part of the ACCC's enforcement toolkit and raising penalties would benefit the franchising sector by deterring breaches of the Franchising Code, lifting standards of behaviour in the sector and restoring confidence in the franchise business model. There would be no additional cost to franchisors who do not breach the Code.

3.184 Doubling penalties available under the Code may impose significant costs for small franchisors who breach the Code and do not have the financial means to pay for it. This would have further ramifications for the affected franchisor's franchisees who would be at risk if the franchisor were to wind-up its operations as a result of the imposed penalty. However, the prescribed penalties would be a maximum and a court could impose a lesser amount if in the judgment of the court that is warranted.

3.185 The doubling of financial penalties available under the Franchising Code, coupled with existing protections provided by the CCA and ACL, would improve deterrence, enhance compliance and increase standards of franchisor behaviour. This would provide a net benefit to the sector as a whole.

Option 4: Reform and refine the franchising sector with regulatory and non-regulatory measures (preferred)

What does this option involve?

3.186 Under this option, Options 2 and 3 would be implemented as a comprehensive franchising reform package.

What are the costs and benefits of this option?

Quantitative costs and benefits

3.187 See Appendix A for the assumptions made in order to complete the costings below.

3.188 See Appendix B and C for the full cost benefit analysis of this option.

Table 3.3 Regulatory Burden and Cost Offset (RBCO) Estimate Table

The RBCO is calculated as the average annual equivalent cost/cost offset over the first 10 years of the policy. For a breakdown of this estimate see Appendix B and C.

Qualitative costs and benefits

3.189 This option will have the qualitative costs and benefits of options 2 and 3. See above.

Consultation

3.190 Extensive consultation across the breadth of the franchising industry has identified a range of views about the degree and direction of regulatory reform needed to address issues in the sector. Additional consultation by the Taskforce has reaffirmed the issues identified by the PJC and further built the evidence base for government intervention.

Franchising Taskforce

3.191 The Franchising Taskforce consulted with relevant stakeholders to ensure that multiple perspectives were considered. A number of consultation channels were established in order to inform the options put forward in this Regulation Impact Statement (RIS), including an Issues paper, a consultation paper and stakeholder meetings and roundtables.

Issues paper

3.192 The Franchising Taskforce released an Issues Paper on 23 August 2019 to inform the consultation paper options and its advice to Ministers. The Issues Paper invited feedback to the Franchising Taskforce on the PJC's recommendations. The Issues Paper grouped the 71 PJC recommendations report under seven draft policy principles. These seven principles followed the life cycle of a franchise business from a prospective franchisee considering a franchise agreement to their exiting the agreement, with one principle discussing the regulatory framework across all phases. In recognition of the large proportion of culturally and linguistically diverse franchising stakeholders, the Issues Paper was translated into simplified Chinese, Arabic and Korean.

3.193 Submissions to the Issues Paper could be made via a number of channels including email, phone, and through an online Issues Paper consultation form which allowed for anonymous responses.

3.194 Responses to the Issues Paper were received from 75 stakeholders.

Consultation paper

3.195 Submissions to the Taskforce's Issues Paper informed the development of a consultation paper. The Taskforce's consultation paper was released on 11 November 2019 and sought feedback on possible problems and options for government action in the franchising sector.

3.196 Responses to the consultation paper were received from 73 stakeholders.

Stakeholder meetings and roundtables

3.197 The Franchising Taskforce and its support officers conducted 74 separate meetings prior to the Taskforce being established. These meetings were with a range of stakeholders from across the franchising sector and in government, including franchisees, franchisors, professional advisors, peak bodies and other government agencies. These meetings were held both face-to-face and via teleconference.

3.198 The Franchising Taskforce held two roundtables in Canberra in September 2019, one for franchisees and the other for franchisors.

Future consultation

3.199 It is anticipated that industry to be involved in the final design of key reforms, in order to minimise the likelihood of unintended consequences and build the sector's awareness on the intent and purpose of the proposed measures.

Conclusion and recommended option

3.200 This thorough review and consultation process resulted in the Franchising Taskforce advising the Government on improvements to the Franchising Code, and relevant provisions of the CCA. These suggestions have been tested against their respective costs and benefits throughout a comprehensive consultation process.

3.201 The package of changes put forward in Option 4, responds to problems in a manner that ensures the costs of taking action are outweighed by the benefits. The proposal presents an opportunity to ensure the Franchising Code remains fit for purpose, and addresses the problems identified by the PJC while limiting red tape and complexity for the sector.

3.202 It is recommended that the Government reform and refine franchising regulation in accordance with Option 4.

3.203 To summarise, if Option 4 is accepted, the Government would take the following actions to address the identified problems in section 3.

3.204 The Government would:

•

Increase the information available to prospective franchisees before they enter the franchise agreement

•

Improve prospective franchisees' access to financial and non-financial information, including supply arrangements, rebates and marketing and other cooperative funds, supporting their ability to conduct due diligence

•

Educate franchisees on the use of 'no agent' and 'entire agreement' clauses, the issues of wastage and shrinkage payments and rights in relation to cooling off and disclosure periods through the Information Statement, ACCC educational material, the franchising website and other avenues

•

Strengthen franchisees' rights in relation to significant capital expenditure

•

Enhance the management of the dispute resolution services and organisations, including providing for multi-party dispute resolution under the Franchising Code, conciliation and arbitration

•

Balance the rights of franchisors and franchisees to facilitate and negotiate an early exit from a franchise agreement, including by increasing disclosure on of end-of-term arrangements for goodwill and improving awareness of restraint of trade clauses

•

Establish a more effective enforcement regime to encourage greater compliance with the Franchising Code by doubling pecuniary penalties for a breach, monitoring the effectiveness of regulatory reforms, collaborating across all relevant agencies and with the franchising sector

•

Work with stakeholders to develop best practice models in relation to unilateral variation of contracts

•

Prohibit franchisors passing on the legal costs of preparing, negotiating and executing documents to the franchisee (except where it is already incorporated into a joining fee)

3.205 These proposals are a balanced reform package that maintains the basic regulatory framework of the Franchising Code while introducing new measures to strengthen the industry and protect franchisees.

3.206 While the Government recognises that some preferred options will impose a regulatory burden across all franchisors, including compliant businesses, the reforms as a whole will result in an overall net benefit to the franchising industry and the Australian economy and society.

3.207 Other measures, such as doubling the maximum civil pecuniary penalties for breaches of the Franchising Code that carry a penalty and the introduction of conciliation and arbitration, will encourage greater compliance and deter misconduct in the sector, but have little or no regulatory impact.

Implementation and evaluation

Implementation and transition

3.208 Implementation of the recommended reform would require careful planning to keep transition costs low and ensure that compliance remains high.

3.209 The proposed form of legislative changes to the Franchising Code would be exposed for a period of public comment ('exposure draft'). This will be intended primarily to capture any unintended consequences arising from implementation and provide the sector with an opportunity to comment in a way that ensures that policy objectives of government are met.

3.210 Legislative reform will then follow the usual government process. Consideration will be given to the appropriateness of staging reform.

3.211 Following passage of legislative reform and finalisation of non-regulatory measures, awareness-raising activities and guidance material will be developed to assist businesses to understand and comply with the new requirements.

3.212 The ACCC would then maintain its educative work and be prepared to undertake enforcement where appropriate to ensure compliance with the Franchising Code.

Evaluation

3.213 The Franchising Code is prescribed by regulation. The regulation is a sunsetting instrument, meaning it will be examined in accordance with the review provisions of the Legislation Act 2003 (Cth).

Appendix A

General assumptions and parameters

3.214 In quantifying the costs and savings associated with changes to the Franchising Code, the following general assumptions have been applied:

•

The cost of legal advice is $500 per hour.^[22]

•

The average cost of an owner-manager's time is $39 per hour.^[23]

•

The average cost of an employee's time is $32 per hour.^[24]

•

The average cost of a manager's time is $64 per hour.^[25]

•

Changes to the Franchising Code will only apply prospectively.

•

There are approximately 1,240 franchisors operating under the Franchising Code.

•

There are approximately 95,600 franchisees operating under the Franchising Code.

•

For 2009 - 2019, there was an average of 2,236 new franchisees per year.

•

Franchisor takes on an average of 1.8 new franchisees per year.^[26]

•

32 per cent of systems in Australia use a master/foreign franchisor structure. This equates to 397 franchisors.^[27]

3.215 Costings have been prepared as the average annual equivalent over a 10 year period from when the changes take effect.

Appendix B

Qualitative costs

Table 3.4 Regulatory burden estimate table

The regulatory burden estimate (RBE) is calculated as the average annual equivalent cost over the first 10 years of the policy. For a breakdown of this estimate see Appendix B

Total costs associated with a minor change in practice

3.216 It is expected that implementing the following minor changes to franchisor's business practices:

•

Electronic and hard copy disclosure documents

•

Separate information statement

•

Provision of the ACCC's Franchisee Manual to prospective franchisees

•

Financial disclosure in disclosure document

•

Franchisors would be required to include a statement about the accuracy of financial statements.

Will take franchisors 2 additional hours in document preparation time. Franchisors are obliged to update their disclosure documents annually.

3.217 Therefore the total RBE over 10 years of these measures will approximately be:

2 hours annually x $39 per hour x 1,240 franchisors x 10 years = $967,200


3.218 The annual average cost of these measures equates to $96,720

Total costs associated with updating the disclosure document

3.219 It is expected that updating the disclosure document in order to provide:

•

Increased transparency around retail leasing

•

Improved disclosure around supplier rebates;

•

Amend disclosure requirements to ensure end-of-term arrangements for franchisee goodwill

•

Additional requirements where the franchisor is terminating in special circumstances

Will take a franchisor approximately 5 hours. Franchisors are obliged to update their disclosure documents annually.

3.220 Therefore the total RBE over 10 years of these measures will approximately be:

5 hours annually x $39 per hour x 1,240 franchisors x 10 years = $2,418,000.


3.221 The annual average cost of these measures equates to $241,800.

Amend the relevant clauses of the Franchising Code to apply recent automotive franchising changes

3.222 The Government introduced significant reforms to automotive franchising regulations which commenced on 1 June 2020. Under the reforms, all new dealership agreements have to take into account additional considerations regarding end of term arrangements, capital expenditure and multi-party dispute resolution. The costings below are in line with costings undertaken in the 2020 Franchise relationships between car manufacturers and new car dealers RIS.

3.223 This costing assumes that:

•

the average term of franchise agreements in Australia is five years, with an option usually available for a similar term on renewal^[33];

•

it would take a lawyer two hours to draft the capital expenditure disclosure part of an agreement which would be updated upon renewal (twice over 10 year period) at a cost of $500 per hour. It is assumed that franchisors would have a standard form contract and that capital expenditure requirements across systems would be consistent in order to maintain brand consistency within the franchise; and

•

the franchisee would attend a one hour meeting with a representative of the franchisor to discuss the capital expenditure requirements (which would occur twice over a 10 year period).

3.224 Therefore the total RBE for this measure over 10 years would approximately be:

[($500 x 2) x 2 x 1,240] + [($39 + $32) x 2 x 95,600] = $16,055,200


3.225 The annual average cost of these measures equates to $1,605,520

Total transitional costs associated with obtaining legal advice on regulatory changes

3.226 There will be transitional costs associated with franchisors obtaining legal advice on changes to the Code that are introduced through these reforms. It is expected that it would take a lawyer 3 hours to review and advise on the additional regulatory requirements discussed in this appendix and section 5.2.2.

3.227 Therefore the total RBE for this one-time transitional costs would be:

($500 x 3) x 1,240 = $1,860,000.


Appendix C

The cost offset estimate is calculated as the average annual equivalent cost offset over the first 10 years of the policy. For a breakdown of this estimate see Appendix C.

Cost offsets developed from clarifying and improving the Franchising Code

3.228 The non-regulatory reforms include the following measures which aim to clarify and improve the Franchising Code:

•

Clarification of cooling off period;

•

Improve consistency within the Franchising Code about the treatment of marketing funds, particularly clauses 15 and 31;

•

Clarify the availability of multi-party mediation; and

•

Clarify restraint of trade clause in the Franchising Code.

3.229 It is difficult to estimate the savings created by a majority of these measures - it is expected that the clarifications and improvements to the Code will save franchisees and franchisors time and money they may have spent researching or seeking legal advice on these clauses.

3.230 However, the clarification of multi-party mediation is expected to produce $3,123,250 in savings for the sector per year. Analysis of this saving is provided below.

•

According to the Franchising Australia 2016 report, disputes with franchisees involving an external advisor were reported by 25 percent of franchisors with a median of two of their franchisees over a 12 month period.

•

Typically, commercial lawyers will charge between $5,000 and $7,500 for preparation and attendance at a full day mediation.

•

Mediation offered through the Office of the Franchise Mediation Adviser is charged at a price of $300/hr + GST, which is split by the parties involved. The Office of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) estimates that due to the complex nature of many franchise disputes, mediation can span 10 and 20 hours. ASBFEO estimates that on average, mediations cost $3000 in total (or $1500 each if split between two parties).

•

Assuming 310^[34] franchisors are in dispute with two franchisees per year, this would equate to an average of $6250 in legal fees and $1500 in mediation fees for both the franchisee and franchisor, per dispute.

•

This equates to (310 x 2 x$6250 x 2) + (310 x 2 x $1500 x 2) = $7,750,000 + $1,860,000 = $9,610,000

•

However, with multi-party mediation, if the average two franchisees per system per year resolved dispute through one mediation as opposed to two, this would halve costs and save the sector a total of $4,805,000 per year.

•

Although the exact take up rate of multi-party mediation is difficult to calculate, if at least 50 to 80 per cent of mediations in the sector are progressed as multi-party mediations, there would be a saving of between $2,402,500 and $3,844,000 per year to the sector. The average of these two figures is $3,123,250 per year.

•

A saving of $3,123,250 per year would appear to be a reasonable estimate.

-

A recent automotive franchising dispute involving approximately 185 franchisees provides an example of the type of mediation that would be well suited to multi party mediation.

-

Another example of such a dispute occurred in 2016, where 190 Pizza Hut franchisees took class action against franchisor Yum! for the introduction of a 'value strategy' that was impacting their businesses' viability.

-

If the Franchising Code was amended to explicitly allow multi-party mediation, many more multi-party mediations may occur under the Code.

Chapter 4 - Requirement for actuarial certificates for certain superannuation funds

Outline of chapter

4.1 Schedule 3 to the Bill amends the ITAA 1997 to remove the requirement for superannuation trustees to obtain an actuarial certificate when calculating exempt current pension income, where all members of the fund are fully in retirement phase for all of the income year. This is achieved by permitting such funds to use the segregated method to calculate exempt current pension income.

4.2 The amendment removes a redundant requirement which will reduce costs and remove unnecessary red tape for affected funds.

4.3 All legislative references in this chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

Existing law

4.4 Income that a superannuation fund derives from assets held to support retirement phase income streams is exempt from income tax (see sections 295-385 and 295-390). This type of income is known as exempt current pension income. There are two methods for calculating exempt current pension income - the segregated method and the proportionate method.

4.5 Superannuation funds are required to obtain an actuarial certificate to claim certain forms of exempt current pension income. The actuarial certificate is required to ensure that the amount of exempt current pension income that can be claimed is calculated correctly. However, there are some limited circumstances where an actuarial certificate does not provide an integrity benefit for calculating exempt current pension income.

4.6 If a fund has segregated current pension assets, then the exempt current pension income for income derived from those assets must be calculated by the segregated method under section 295-385.

4.7 If a fund does not have segregated current pension assets, then the fund's exempt current pension income must be calculated by the proportionate method under section 295-390.

4.8 Funds using the proportionate method must engage an actuary to determine the 'exempt proportion' of income based on the proportion of the fund's superannuation liabilities that are current pension liabilities (see subsections 294-390(3) and (4)). The exempt proportion is then applied to the fund's assessable income for the period to determine the amount that is exempt current pension income.

4.9 The 'disregarded small fund asset rules' under section 295-387 provides that disregarded small fund assets cannot be segregated current pension assets. If a fund does not have segregated current pension assets, then the fund's exempt current pension income must be calculated by the proportionate method. Subsection 295-385(7) operates to require certain funds that have disregarded small fund assets (that is, SMSFs and small Australian Prudential Regulation Authority-regulated funds) to only use the proportionate method even when the fund is in full retirement phase.

4.10 Section 295-387 was introduced as an integrity measure so that funds were required to use the proportionate method to mitigate the risk of asset-cycling between the earnings-tax-free retirement phase and the accumulation phase where earnings tax applies. It required certain funds to use the proportionate method and provide the relevant actuarial certificate.

4.11 However, this means that funds with disregarded small fund assets that have all members fully in retirement phase for all of the income year are nonetheless required to use the proportionate method and obtain actuarial certificates. As such funds do not hold any accumulation phase assets, it is not possible for the fund to asset-cycle between the accumulation and retirement phases, and the actuarial certificate adds no integrity value.

4.12 For a superannuation fund to have all members fully in retirement phase it must have no assets supporting superannuation interests that are in accumulation phase or that support income streams that are not in retirement phase. All of the fund's assets support retirement phase income streams, and therefore are not subject to income tax. As the taxation treatment of all the fund's assets is the same, there is no compliance benefit gained by requiring these funds to obtain actuarial certificates.

4.13 The amendment will reduce costs and remove unnecessary red tape for affected funds.

Summary of new law

4.14 Schedule 3 amends the ITAA 1997 to remove the requirement for superannuation trustees to obtain an actuarial certificate when calculating exempt current pension income, where all members of the fund are fully in retirement phase for all of the income year. This is achieved by permitting such funds to use the segregated method to calculate exempt current pension income.

Detailed explanation of new law

4.15 A fund is not covered by the disregarded small fund assets rule for an income year if at all times during the income year, all of the assets of the superannuation fund would, apart from subsection 295-385(7), be segregated current pension assets. Subsection 295-385(7) provides that disregarded small fund assets are not segregated current pension assets. [Schedule 3, item 1, subsection 295-387(3)]

4.16 This means that funds who would only be prevented from using the segregated method for calculating exempt current pension income by the disregarded small fund assets rule, can now use the segregated method.

4.17 Superannuation income stream benefits prescribed by regulation 295-385.01 of the ITAR 2021 are not required to obtain an actuarial certificate when using the segregated method to calculate exempt current pension income.

4.18 An actuarial certificate is still required for funds where it is possible that at any time during the income year, assets and earnings are greater than the estimated liabilities, even if all members are fully in retirement phase. In such circumstances, because the assets and earnings are greater than the amount required to discharge the estimated pension liabilities, the income stream is generating taxable income and therefore the excess amount is liable for income tax. As the exempt proportion is no longer 100 percent, not all the fund's assets will be segregated current pension assets and an actuarial certificate would provide necessary rather than redundant information.

Example 6.1

On 30 June 2021, James has a total superannuation balance of $1.5 million. His sole superannuation interest in the fund for the year supports a complying lifetime pension (under 1.06(2) of the SISR) in SMSF J&L. Lisa has a total super balance of $1.0 million. Her sole superannuation interest in the fund on 30 June 2021 supports a complying lifetime pension in SMSF J&L. Lisa had an accumulation account in the fund on 1 July 2020 but withdrew her account in full on 31 July 2020. SMSF J&L maintains a pension reserve account, in accordance with fund rules. The total assets of the fund exceed the amount required to guarantee the payment of the lifetime pensions when worked out on a 'best estimates' basis as required by the Institute of Actuaries Professional Standard 406.

Subsection 295-387(3) does not apply to SMSF J&L as not all of the assets of the fund would be segregated current pension assets apart from subsection 295-385(7). SMSF J&L must obtain an actuarial certificate and must use the proportionate method to calculate the exempt current pension income.

4.19 In other words, if an amount of income was not exempt current pension income under the existing law solely because of section 295-385(7), then it is not exempt current pension income under the new law.

Application and transitional provisions

4.20 The amendment made by Schedule 3 to the Bill applies to assessments for the 2021-22 income year and later income years. [Schedule 3, item 2]

Chapter 5 - Strengthening industry codes under Part IVB of the Competition and Consumer Act 2010

Outline of chapter and summary of new law

5.1 Schedule 4 to the Bill amends the Competition and Consumer Act 2010 to provide regulatory certainty for industry participants that are governed by industry codes prescribed by regulations made under Part IVB. These amendments are to address any unintended ambiguity and to ensure Part IVB industry codes apply across various markets as intended.

5.2 References in this chapter are references to the Competition and Consumer Act 2010 unless specified otherwise.

Context of amendments

5.3 Part IVB provides the industry codes framework. Industry codes of conduct are an important way to achieve the objectives of a fair and competitive market. Codes set out a framework for compliance by prescribing standards of appropriate industry practices and providing dispute resolution mechanisms.

5.4 Codes currently support the operation of a range of important markets, including the dairy, electricity, oil, franchising and horticulture industries.

5.5 Section 51AE provides that the regulations may prescribe an industry code. Regulations may declare an industry code to be either mandatory or voluntary. For a voluntary industry code, the regulations must specify the method by which a corporation agrees to be bound by the code and the method by which it ceases to be bound.

5.6 The ACCC enforces industry codes that are prescribed under the industry codes framework. In addition, the Act provides the Australian Energy Regulator with certain functions and powers which may be applicable in relation to the regulation of prescribed industry codes in the energy sector.

5.7 Regulations that prescribe industry codes are frequently reviewed and are often updated. To ensure a consistent approach to codes across industries, amendments to the industry codes framework are required to clarify the range of powers and functions that can be conferred on the regulators, Minister(s), and other relevant third parties.

Detailed explanation of new law

Definition of industry code

5.8 The existing definition of 'industry code' in section 51ACA means a code that regulates the conduct of participants in an industry towards other participants in the industry or towards consumers in the industry.

5.9 The definition is amended to clarify that an industry code may contain provisions of a kind prescribed by regulations (made for the purposes of Part IVB), whether or not the provisions regulate such conduct. [Schedule 4, items 1 and 2, sections 51ACA(1)-(2)]

Conferring functions and powers in relation to the code

Functions and powers

5.10 Schedule 4 to the Bill amends subsection 51AE(1) to confirm that if regulations prescribe an industry code, the industry code may confer on a person or body functions and powers in relation to the code, including the following:

•

monitoring compliance with the code;

•

dealing with disputes or complaints arising under, or in relation to, the code;

•

dealing with matters relating to a prospective agreement (including disputes or complaints relating to the agreement), that would, if entered into, have the effect that one or more parties to the agreement is a participant in the industry to which the code relates;

•

conducting investigations under, or in relation to, the code;

•

providing exemptions from the code or specified provisions of the code;

•

reviewing the operation of the code;

•

any other matter relating to the operation, application or administration of the code. [Schedule 4, item 4, section 51AE(1A)]

5.11 Under section 51AE(1E) an industry code may require a person or body to give another person or body information or documents relevant to the operation, application or administration of the code (whether or not any of those persons or bodies are participants in the industry to which the code relates).

5.12 An industry code may also confer on a person or body (whether or not a participant in the industry to which a code relates) a function or a power to impose such a requirement.

5.13 Section 51AE(1E) does not override the common law privilege against self-incrimination. The common law privilege against self-incrimination continues to apply so that an individual cannot be compelled to provide information that would incriminate themselves. [Schedule 4, item 4, sections 51AE(1E) and (1F)]

Persons or bodies on whom an industry code may confer functions and powers

5.14 For the purposes of subsection 51AE(1A), the persons or bodies on whom an industry code may confer functions and powers are:

•

the ACCC;

•

the Australian Energy Regulator;

•

the Minister administering the code (who is not necessarily a Treasury Minister); and

•

any other person or body (whether or not a participant in the industry to which the code relates).

5.15 However, only the ACCC, the Australian Energy Regulator or the relevant Minister can provide exemptions from the code or specified provisions of the code. [Schedule 4, item 4, section 51AE(1B)]

Requirements as to form of conferral of function or power

5.16 Functions or powers conferred under a code may be exercised by legislative instrument or other kind of written instrument. [Schedule 4, item 4, section 51AE(1C)]

5.17 However, exemption decisions must be made by notifiable instrument (when applying to an entity) or otherwise by legislative instrument (for example, when applying to a class), despite anything to the contrary in the code. This approach provides legal certainty as to which entities are subject to the code and ensures an appropriate level of transparency. [Schedule 4, item 4, section 51AE(1D)]

5.18 The exemption instrument must be registered on the Federal Register of Legislation. An explanatory statement must also be registered for a legislative instrument. Legislative instruments are subject to parliamentary disallowance and sunsetting.

5.19 The exemption power is expected to be exercised reasonably and in accordance with criteria set out in existing industry codes (see, for example, criteria specified in Clause 5 of the Wheat Code). [Schedule 4, item 4, sections 51AE(1D)]

Interactions with the regulation making power under section 44AH(1)(b)

5.20 The amendments are not intended to limit section 44AH(1)(b) which provides that the Australian Energy Regulator's functions include any functions prescribed in regulations made under that power. Functions and powers of ACCC under industry codes

5.21 To avoid doubt, the functions and powers of the ACCC include any function or power conferred on the ACCC by an industry code prescribed for the purposes of Part IVB. [Schedule 4, item 7, section 51AEAA] Acquisition of property

5.22 Section 51(xxxi) of the Constitution provides that the Commonwealth Parliament may only legislate with respect to the acquisition of property by the Commonwealth on just terms.

5.23 Section 51AF(1) provides that that provision applies to sections 51AE(1A)(b) and (ba), a provision of an industry code prescribed for the purposes of Part IVB that is authorised by sections 51AE(1A)(b) and (ba), and any other provision of the Act or the relevant regulations, to the extent to which the provision relates to one of the aforementioned provisions.

5.24 Section 51AF(2) provides that the provisions - have no effect to the extent (if any) to which they would result in an acquisition of property (within the meaning of paragraph 51(xxxi) of the Constitution) from one person to another other than on just terms (within the meaning of that paragraph). [Schedule 4, item 8, section 51AF]

Application and validation provisions

Requirements for exemption instruments

5.25 The requirements relating to exemption instruments in section 51AE(1D) apply in relation to the exercise of a function or power that occurs on or after commencement of the amendments. [Schedule 4, item 9]

Validation of regulations made, and acts and things done, before commencement

5.26 To avoid ambiguity, the amendments validate any earlier regulations prescribing an industry code under Part IVB as well as any actions and decisions made under those codes (for instance by the ACCC), prior to these amendments being made. This ensures that pre-existing regulations, and decisions or actions taken under them before these amendments apply, continue to be valid and effective. [Schedule 4, item 10]

5.27 However, the validation provisions have no effect to the extent (if any) to which they would result in an acquisition of property (within the meaning of paragraph 51(xxxi) of the Constitution) from a person otherwise than on just terms (within the meaning of that paragraph). [Schedule 4, item 11]

Effect of retrospective validation

5.28 No persons are adversely affected by the retrospective validation of determinations or exemptions purportedly made under section 51AE nor should their interests be affected given that the amendments are aimed at clarifying the current state of the law as it was intended and has been understood.

5.29 Schedule 4 does not retrospectively change the intention of the law. Rather, the Schedule ensures continuity of the legal rights and obligations which arose which were understood to arise from determinations and exemptions under existing codes.

5.30 The Schedule does not create new consequences or obligations under existing determinations or exemptions. Any persons who were not affected by such decisions remain unaffected upon commencement of these amendments. Likewise, persons who were affected continue to be affected in the same way. This approach ensures that determinations and exemptions under Part IVB continue to operate as they have always been intended and understood to operate.

5.31 Any persons who were affected by such determinations made under section 51AE at the time the original determinations or exemptions were made will continue to be persons who were affected by such determinations after the commencement of the Bill. The Bill therefore confirms that the determinations will continue to operate as they have always been intended and understood to operate.

Minor and technical amendments

5.32 Subheadings have been added throughout section 51AE to assist with readability. [Schedule 4, items 3, 5 and 6, sections 51AE(1), (2) and (3)]

Chapter 6 - Superannuation information for family law proceedings

Outline of chapter

6.1 Schedule 5 to the Bill amends the Taxation Administration Act and the Family Law Act to create a new mechanism for sharing superannuation information for family law proceedings.

6.2 The Registries of the Federal Circuit and Family Court of Australia and the Family Court of Western Australia will serve as an intermediary in the information sharing process. The Registries may request superannuation information of a party to permitted family law proceedings from the Commissioner on application of the other party to the proceedings. The Commissioner may disclose superannuation information to the requesting Registry to provide to the parties and their lawyers. All disclosures and on-disclosures of the superannuation information must be for the purpose of permitted family law proceedings.

6.3 The amendments will make it harder for parties to hide or under-disclose their superannuation assets in family law proceedings by reducing the time, cost and complexity for parties seeking information about their current or former spouse/ de facto partner's superannuation. A party will be able to use information from the Commissioner to seek up-to-date superannuation information from the other party's superannuation fund, limiting the need to rely on subpoenas or court orders to obtain this information.

Context of amendments

6.4 On 20 November 2018, the then Minister for Women announced the 'Improving the visibility of superannuation assets in family law proceedings' measure as part of the inaugural Women's Economic Security Statement.

6.5 The Australian Government provided $5.4 million to the ATO to develop and implement a secure electronic information sharing system that would allow superannuation information to be safely shared with the family law courts for the purpose of this information being disclosed to parties to permitted family law proceedings.

6.6 The amendments in Schedule 5 to the Bill will permit the Commissioner to disclose superannuation information to the Registries for the purpose of the proceedings. Without these amendments, disclosure of superannuation information by the Commissioner for this purpose will continue not to be permitted, and significant penalties may apply to such disclosures.

6.7 The new information sharing mechanism will make it harder for parties to hide or under-disclose their superannuation assets in family law proceedings, and will reduce the time, cost and complexity for parties seeking the most up-to-date superannuation information from one or more superannuation funds, or by subpoenaing employment records.

6.8 The amendments will support more separated couples to divide their property, including superannuation, on a just and equitable basis, and help to alleviate the financial hardship and unequal retirement income outcomes that people, particularly women, can experience after separation.

6.9 This measure responds directly to recommendations made by the House of Representatives' Standing Committee on Social Policy and Legal Affairs in its inquiry into 'A better family law system to support and protect those affected by family violence' and the Women's Legal Service Victoria's 'Small Claims, Large Battles' report.

Summary of new law

6.10 Schedule 5 to the Bill creates an information sharing mechanism to allow the family law courts to access certain superannuation information held by the Commissioner for the purpose of permitted family law proceedings.

Diagram 6.2 Simplified overview of information sharing mechanism

Comparison of key features of new law and current law

Detailed explanation of new law

Party to proceedings may apply to the Registries for information

What proceedings

6.11 A party to permitted family law proceedings in the family law courts may apply, in the approved form, to the Registries for the Registries to request the superannuation information of the other party to the proceedings from the Commissioner.

6.12 For separating married couples and separating de facto couples everywhere in Australia except Western Australia, permitted family law proceedings are those that relate to the division of property of a marital or de facto relationship, including the distribution of superannuation interests. [Schedule 5, item 1, subsection 90XZJ(1) of the Family Law Act]

6.13 For separating de facto couples in Western Australia, permitted family law proceedings mean:

•

superannuation splitting proceedings under Part VIIIC of the Family Law Act; or

•

proceedings under the Family Court Act 1997 (WA) with respect to the property of the parties to the de facto relationship or either of them, if the requesting party is seeking, or is considering seeking, orders under Part VIIIC.

[Schedule 5, item 4, subsection 90YZY(1) of the Family Law Act]

6.14 In the latter circumstance:

-

the superannuation information provided by the Commissioner would assist the party to make a decision about the distribution of superannuation interests; and

-

the requesting party may be required to declare within their application for this information that they are considering seeking orders under Part VIIIC, or words to that effect. [Schedule 5, item 4, subsection 90YZY(3) of the Family Law Act]

6.15 Permitted family law proceedings capture those proceedings that relate to the division of property of a de facto or marital relationship, including the distribution of superannuation interests, between the parties to that relationship. [Schedule 5, items 1 and 4, subsections 90XZJ(1) and 90YZY(1) of the Family Law Act]

Parties who may apply through the Registry

6.16 Only a current or former spouse/de facto partner of the other party to permitted family law proceedings may apply for the Registries to request superannuation information from the Commissioner. It is expected that the approved form will require the person to declare this relationship when applying for this information. [Schedule 5, items 1 and 4, subsections 90XZJ(1) and (3) and subsections 90YZY(1) and (3) of the Family Law Act]

6.17 Registries may only request superannuation information on application of a party if it is to be used for permitted family law proceedings. [Schedule 5, items 1 and 4, subsections 90XZJ(2) and 90YZY(2) of the Family Law Act]

6.18 Parties to permitted family law proceedings and their lawyers may not make information requests directly to the Commissioner. Requests must be made by the Registries only, on application of a party to permitted family law proceedings.

Information that may be requested by the Registries

6.19 The Registries may request superannuation information from the Commissioner about a party to permitted family law proceedings on application of the other party to those proceedings. [Schedule 5, items 1 and 4, subsections 90XZJ(2) and 90YZY(2) of the Family Law Act]

6.20 Registries may only request the following superannuation information about the person for the purpose of the proceedings:

•

the identity and value of:

-

each superannuation interest held by the person most recently reported to the Commissioner;

-

any account in the person's name containing small amounts of ATO-held superannuation;

•

any amounts of:

-

unclaimed superannuation (such as amounts in lost member and inactive low-balance accounts),

-

shortfall components; and

-

Government co-contributions for low-income earners;

payable to the person, or for the benefit of the person.

[Schedule 5, items 1 and 4, subsections 90XZJ(5) and 90YZY(5) of the Family Law Act]

Superannuation interests

6.21 Superannuation interest is defined in subsection 995-1(1) of the ITAA 1997 and covers the following interests:

•

an interest in a superannuation fund;

•

an interest in an approved deposit fund;

•

a retirement savings account; and

•

an interest in a superannuation annuity.

[Schedule 5, item 1, paragraph 90XZJ(5)(a) of the Family Law Act]

6.22 Information about the 'identity and value' of these interests is likely to include the fund name and the last-reported account balance of each superannuation interest held by the person.

6.23 The information is the 'most recently reported' as the Commissioner only has access to information about a person's superannuation interest as it was last reported to the Commissioner in accordance with a taxation law. Division 390 of Schedule 1 to the Taxation Administration Act provides for the reporting of superannuation interests to the Commissioner by superannuation funds and life insurance companies. [Schedule 5, item 1, paragraph 90XZJ(5)(a) of the Family Law Act]

6.24 Information disclosed by the Commissioner should therefore not be exclusively relied upon by the parties as it may be out-of-date. Instead, a party should apply directly to the superannuation trustee under section 90XZB or 90YZR of the Family Law Act for the most up-to-date information about the other party's superannuation interest. Information supplied by the Commissioner may help parties to identify the appropriate trustee to approach.

Small superannuation accounts

6.25 Superannuation information includes information about the identity and value of a person's interest in a small superannuation account in their name under the Small Superannuation Accounts Act 1995. [Schedule 5, item 1, paragraph 90XZJ(5)(b) of the Family Law Act]

6.26 Small superannuation accounts are notional accounts kept within the Superannuation Holding Accounts Special Account in the names of particular individuals. The Superannuation Holding Accounts Special Account was established under the Small Superannuation Accounts Act 1995 to protect small superannuation balances from being eroded by fees and charges.

6.27 Before 1 July 2006, employers could make a deposit to the Commissioner in respect of a person and it would be treated as a superannuation contribution under the Superannuation Guarantee (Administration) Act 1992. Government co-contributions and shortfall components (see Table 6.1) can still be paid into a person's small superannuation account by the Commissioner.

6.28 Small superannuation accounts are not covered by the ITAA 1997 definition of superannuation interest. The definition of 'superannuation information' extends to a person's interest in these accounts to maximise the visibility of parties' superannuation.

6.29 In practice, information about a person's interest in any small superannuation account will be disclosed by the Commissioner as an aggregate figure. This figure will also comprise amounts of unclaimed and lost member superannuation held by the Commissioner, superannuation guarantee shortfall amounts, and government co-contributions for low-income earners (see Table 6.1).

Amounts payable by the Commissioner

6.30 Superannuation information also covers information about a range of amounts payable by the Commissioner to the person or for their benefit (see Table 6.1).

Table 6.1 Amounts payable by the Commissioner

[Schedule 5, item 1, paragraphs 90XZJ(5)(c)-(e) and 90YZY(5) of the Family Law Act]

6.31 Amounts described in Table 6.1 are not types of superannuation interests covered by the ITAA 1997. The Commissioner may hold these amounts where, at the relevant time, they could not be credited to a person's superannuation account or paid out directly to the person.

6.32 The amounts are 'payable' to the person (or for their benefit) to make clear the person must have an interest in the amount held by the Commissioner. In practice, information about these amounts will be disclosed by the Commissioner as an aggregate figure. This figure will also comprise information about a person's interest in any small superannuation account (see paras 6.25-6.29).

6.33 The word 'payable' is intended to exclude amounts that have already been paid by the Commissioner to the person or for their benefit (for example, to the trustee of the person's superannuation fund).

6.34 Amounts payable to the person or for their benefit under the Superannuation (Unclaimed Money and Lost Members) Act 1999 do not include any potential amounts of interest to be paid to the person under that Act. The interest only arises and becomes payable when the underlying base amount is paid to the person, their legal representative, or a superannuation provider on their behalf. Any information the Commissioner provides about amounts payable under the Superannuation (Unclaimed Money and Lost Members) Act 1999 are therefore amounts exclusive of interest.

How will information from the Commissioner assist the parties

6.35 Under the Court Rules, parties are already required to disclose information about their superannuation to each other to help them reach agreement, and to the family law courts to allow the family law courts to reach a decision, about a just and equitable division of their property.

6.36 Using the superannuation information from the Commissioner, parties should seek more up-to-date information about the value of their current or former spouse's/de facto partner's superannuation directly from the trustee under section 90XZB or 90YZR of the Family Law Act. This will allow them to make an informed decision about whether to seek to split their superannuation under Part VIIIB or Part VIIIC of the Family Law Act.

6.37 The definition of superannuation information in Schedule 5 to the Bill is section specific, and distinct from information a trustee might provide (or be required to provide) under Part VIIIB or Part VIIIC of the Family Law Act about a superannuation interest. [Schedule 5, items 1 and 4, subsections 90XZJ(5) and 90YZY(5) of the Family Law Act]

6.38 The valuation of superannuation has been codified in the Family Law (Superannuation Regulations) 2001 and there are specific actuarial formulae that must be applied to obtain the value for the purposes of superannuation splitting. The requirements for valuation vary depending on the type of interest.

6.39 The information provided by the Commissioner in response to a request from the Registries is not sufficient, nor does it substitute, the valuation methods set out in the Family Law (Superannuation) Regulations 2001 and subordinate instruments, which allow the Court to determine what would be a just and equitable distribution of superannuation.

Application to be made in the approved form

6.40 A party may apply to the Registry by submitting an application in the approved form and may do so at any stage of permitted family law proceedings. [Schedule 5, items 1 and 4, subsections 90XZJ(1) and 90YZY(1) of the Family Law Act]

6.41 The application must be in the form approved in writing by the Chief Executive Officer of the Federal Circuit and Family Court of Australia (for applications in that Court), or the Principal Registrar of the Family Court of Western Australia (for applications in that Court). [Schedule 5, items 1 and 4, subsections 90XZJ(3) and 90YZY(3) of the Family Law Act]

6.42 The approved form may require a person to make certain declarations in their application. For example, a party may be required to declare that:

•

the requesting party believes the other party to proceedings has not fully disclosed all relevant information about their superannuation;

•

the requesting party is a current or former spouse/de facto partner of the person whose superannuation information is being sought;

•

the superannuation information is required for the purposes of permitted family law proceedings; and

•

the requesting party will only use the information for the purpose of permitted family law proceedings.

6.43 The approved form is expected to require the requesting party to provide specific identity information about their current or former spouse/de facto partner. For example, the requesting party may be required to provide their current or former spouse's/de facto partner's name, date of birth, and a current or previous residential address as part of the application, so that the Commissioner is able to identify the superannuation information of the requesting party's current or former spouse/de facto partner.

6.44 If the Commissioner cannot conclusively identify the person based on the information provided in the application, the Commissioner will not be able to provide the requested superannuation information.

6.45 If the identity of the person in the request can be matched with ATO records, then the Commissioner will be able to retrieve the superannuation information of the current or former spouse/de facto partner based on the information in the application. The Commissioner will then provide that superannuation information to the Registry that made the request.

6.46 The Commissioner will not include current residential address details about a person in response to a request for that person's superannuation information. Addresses are protected information under section 355-30 of Schedule 1 to the Taxation Administration Act. The exception for disclosure of superannuation information created by Schedule 5 to the Bill does not extend to residential address information. The Commissioner is therefore prohibited from disclosing this information to the Registries. [Schedule 5, items 2 and 5, table items 8A and 8B in subsection 355-65(3) in Schedule 1 to the Taxation Administration Act]

Secure channel for information sharing

6.47 The ATO is working with the family law courts to build a secure channel, which is expected to facilitate requests for, and disclosures of, superannuation information for the purpose of permitted family law proceedings.

6.48 It is expected that the Registries will use the secure channel to lodge applications with the Commissioner. The Commissioner will share the superannuation information with the Registries via the same secure channel.

6.49 The secure channel will enable the Commissioner to ensure appropriate protections apply to any protected superannuation information disclosed to the Registries. Once the Registries receive the superannuation information, they are responsible for securely providing it to the parties and their legal representatives.

Registries may process applications and request information from Commissioner

6.50 The Registry of the relevant family law court may accept an application from a party to permitted family law proceedings where the application is given in the approved form and is complete. They will send the request to the Commissioner through the secure channel. [Schedule 5, items 1 and 4, subsections 90XZJ(2) and 90YZY(2) of the Family Law Act]

6.51 The Registries may request that the Commissioner disclose the superannuation information. However, in practice, the Registries will not exercise a discretion as to whether to make the request or not, and will only send a request for the purpose of permitted family law proceedings. The Registries would not send a request to the Commissioner if the applicant has not made the request in the approved form, or if the applicant has not provided sufficient identifying information about the other party in their application.

6.52 The action of sending the request is a procedural measure that may be a preliminary step in the process of a family law court resolving a later, more substantive matter (for example, making a decision about the distribution of superannuation or other property). On this basis, it would not be appropriate to provide for merits review of this procedural action to send the request to the Commissioner or not.

6.53 It is important to note in this context that the request for superannuation information from the Commissioner involves seeking information that, where known, should have been provided to the family law court by the other party in compliance with their existing disclosure obligations under the Family Law Act.

Delegation of Registry Manager or Principal Registrar's powers

6.54 The Registry Manager or Principal Registrar of the relevant family law court may delegate their functions.

6.55 The Registry Manager may delegate functions to an officer or staff member of the Federal Circuit and Family Court under sections 105 and 267 of the Federal Circuit and Family Court of Australia Act 2021. Officers are defined in subsection 103(1) of that Act. Staff members are 'staff of the Registries' as contemplated in subsections 103(6) and (7) and subsections 265(1) and (2) of that Act.

6.56 The Principal Registrar of the Family Court of Western Australia may, in writing, delegate any of their functions or powers to any other appropriate officer or staff member of that Court. [Schedule 5, items 1 and 4, subsections 90XZJ(4) and 90YZY(4) of the Family Law Act]

6.57 A Registry Manager and Principal Registrar are intended to be able to delegate their functions under Schedule 5 to the Bill to Registry staff. The Registry Manager or Principal Registrar would determine the appropriate officers in the Registry, at the appropriate level of seniority, to perform a specific function under Schedule 5 to the Bill and would delegate each specific function in a written instrument.

6.58 It would be appropriate for a Registry Manager or Principal Registrar to delegate these functions because:

•

this is purely an administrative mechanism that does not involve a finding of fact;

•

the extent of an assessment by court officers would be to confirm that the application is in the approved form (including any declarations) and contains sufficient identity information; and

•

it may not be practicable for the Registry Manager or Principal Registrar to solely manage superannuation information requests and disclosures, particularly if there is a significant volume of requests.

Commissioner may disclose superannuation information

6.59 Once a Registry receives an application for superannuation information that satisfies the necessary requirements and has made a request to the Commissioner, the Commissioner may disclose any available superannuation information about the person specified in the application for the purpose of permitted family law proceedings. [Schedule 5, items 2 and 5, table items 8A and 8B in subsection 355-65(3) in Schedule 1 to the Taxation Administration Act]

6.60 The Commissioner is able to provide the most recently reported information from superannuation funds about a person's superannuation interests. This information may be out-of-date as information is reported on a periodic, not ongoing, basis (see paras 6.23-6.24). [Schedule 5, item 1, paragraph 90XZJ(5)(a) of the Family Law Act]

6.61 The Commissioner is also able to provide information about certain superannuation amounts held by the Commissioner. These amounts include unclaimed superannuation, amounts in small superannuation and inactive low-balance accounts, superannuation guarantee shortfall components, and government co-contributions for low-income earners. [Schedule 5, item 1, paragraphs 90XZJ(5)(b)-(e) of the Family Law Act]

6.62 Schedule 5 to the Bill is intended to support parties to use sections 90XZB and 90YZR of the Family Law Act by helping them to identify which superannuation trustees to approach for more up-to-date information. A party can use information from the Commissioner to apply to the trustee under section 90XZB or 90YZR of the Family Law Act for the most up-to-date information about the superannuation interests of their current or former spouse/de facto partner as this use is for the purpose of permitted family law proceedings. [Schedule 5, items 1 and 4, note 2 to subsections 90XZJ(2) and 90YZY(2) of the Family Law Act]

6.63 All taxpayer information held by the Commissioner is subject to secrecy provisions and must not be disclosed unless an exception applies. Schedule 5 to the Bill creates two new exceptions for disclosures of superannuation information to the Registries for the purpose of permitted family law proceedings. A taxation officer supplying this information in these circumstances does not commit the offence of disclosing protected information under section 355-25 of Schedule 1 to the Taxation Administration Act.

6.64 Only information that is superannuation information may be disclosed. The address of any person may not be disclosed as it is not superannuation information. This is important in the context of family law proceedings where family violence may be involved.

What happens if the Commissioner cannot match the request with ATO records

6.65 The exceptions to tax secrecy provisions created by Schedule 5 to the Bill do not extend to situations where a taxation officer is unable to identify with certainty the relevant superannuation information. This could occur, for example, if a name is common or has changed, or if the information provided to the Commissioner does not match the ATO's records.

6.66 If the Commissioner is unable to provide the requested information, a taxation officer will provide a response to the Registry to this effect. If further identifying information is available, the applicant can provide this information to the Commissioner via the Registry.

Who must information be provided to

The Commissioner will provide information to the Registry Manager or Principal Registrar

6.67 The Commissioner is only authorised to provide the requested information to the Registry of the relevant family law court in response to a request from that Registry. [Schedule 5, items 2 and 5, table items 8A and 8B in subsection 355-65(3) in Schedule 1 to the Taxation Administration Act]

6.68 The information will be provided to that Registry through the secure channel.

Registry Manager or Principal Registrar will provide information to parties

6.69 The Registry of the relevant family law court is authorised to disclose the information to the parties and their lawyers. [Schedule 5, items 1 and 4, paragraphs 90XZJ(2)(b) and 90YZY(2)(b) of the Family Law Act]

Purpose for disclosure of superannuation information / Permitted use of superannuation information

6.70 The Commissioner is authorised to disclose superannuation information for the purpose of permitted family law proceedings. [Schedule 5, items 2 and 5, table items 8A and 8B in subsection 355-65(3) in Schedule 1 to the Taxation Administration Act]

6.71 The Commissioner may rely on the information submitted by the Registries via the secure channel, including any declarations made by the applicant.

6.72 The Commissioner does not need to undertake any further checks that the information is to be used for permitted family law proceedings because of the secure channel, declarations to be made by the applicant, and the strict on-disclosure offence provisions that apply.

How parties can use the superannuation information

6.73 Subsections 355-175(1) and (2) of Schedule 1 to the Taxation Administration Act permit on-disclosure of protected information for (or in connection with) the purpose for which the information was disclosed.

6.74 A party to permitted family law proceedings may only on-disclose or make a record of superannuation information for, or in connection with, the following purposes:

•

for requests made under section 90XZJ - for the purpose of property settlement proceedings (within the meaning of the Family Law Act); and

•

for requests made under section 90YZY - for the purpose of all relevant property settlement and superannuation splitting proceedings (within the meaning of that section).

[Schedule 5, items 2 and 4, paragraphs 90XZJ(2)(b) and 90YZY(2)(b) of the Family Law Act]

6.75 Parties and their lawyers may use the information to satisfy themselves that they have the necessary information about the identity and value of the superannuation interests of their current or former spouse/de facto partner.

6.76 This superannuation information may not be sufficient for a court to make relevant orders, in which case the parties should use the information from the Commissioner to make further inquiries about their current or former spouse/de facto partner's superannuation information. Specifically, this would involve using superannuation information from the Commissioner to request further information from a superannuation trustee under section 90XZB or 90YZR of the Family Law Act.

6.77 Parties should be aware that section 121 of the Family Law Act prohibits the publication or dissemination of an account of family law proceedings that may identify a party, witness or other person associated with the proceedings.

Consequences of on-disclosure for an unrelated purpose

6.78 The superannuation information of a person is protected information under Schedule 1 to the Taxation Administration Act. Generally, a taxation officer cannot disclose protected information (maximum penalty: imprisonment for two years).

6.79 Schedule 5 to the Bill provides that a taxation officer may disclose superannuation information to the Registries for the purposes of permitted family law proceedings. [Schedule 5, items 2 and 5, table items 8A and 8B in subsection 355-65(3) in Schedule 1 to the Taxation Administration Act]

6.80 Protected information may not be on-disclosed by the Registries or a party to permitted family law proceedings unless an exception applies (see section 355-155 of Schedule 1 to the Taxation Administration Act). Relevantly, on-disclosure is permitted for the purpose of court proceedings, or if the on-disclosure is for the original purpose or in connection with that purpose (subsections 355-175(1) and (2) of Schedule 1 to the Taxation Administration Act).

6.81 The Registries may therefore only on-disclose the information to the applicant, the other party, and both parties' lawyers for the purpose of permitted family law proceedings. For applicants, on-disclosure for the purpose of permitted family law proceedings includes on-disclosure to the trustee of an eligible superannuation plan as part of an application under section 90XZB or 90YZR of the Family Law Act.

6.82 If the Registry Manager, Principal Registrar, or one of the parties or their lawyer uses the information for a purpose other than permitted family law proceedings, they may commit an offence (see section 355-155 of Schedule 1 to the Taxation Administration Act).

6.83 Section 121 of the Family Law Act prohibits the publication or dissemination of an account of family law proceedings that may identify a party, witness or other person associated with the proceedings. A contravention of this section is punishable by imprisonment for a period not exceeding one year.

6.84 Parties and their lawyers should be made aware of potential penalties for using or on-disclosing the information for unrelated purposes when they apply to the Registry for superannuation information and when they receive the information back. For example, the approved form may state which penalties may apply, and is likely to require the applicant to acknowledge the penalties for misuse of the information.

Consequential amendments analysis

6.85 Amendments to the Privacy Act 1988 are not required due to the operation of Australian Privacy Principle 6.2(b), which allows for the use and disclosure of personal information if authorised by or under an Australian law such as Schedule 5 to the Bill.

6.86 Superannuation information will be disclosed to the Registries via the secure channel developed by the ATO.

6.87 Under the Electronic Transactions Act 1999, information may be sent between agencies using electronic means. This is already enabled by section 9 (a requirement to give information in writing may be done by way of electronic communication) and section 11 (requirement to produce a document may be done by way of electronic communication) of that Act.

6.88 The person who approves the form may require the form to be given by a party to the Registries in a particular manner, including electronically. [Schedule 5, items 1 and 4, subsections 90XZJ(3) and 90YZY(3) of the Family Law Act]

Application and transitional provisions

6.89 Part 1 of Schedule 5 commences on 1 April 2022. [Table item 6]

6.90 The amendments of the Family Law Act made by Part 1 of Schedule 5 apply in relation to:

•

property settlement proceedings in the Federal Circuit and Family Court of Australia; or

•

property settlement proceedings in relation to the parties to a marriage in the Family Court of Western Australia;

at or after the commencement of that Part, whether the proceedings commenced before, at or after the commencement of that Part. [Schedule 5, subitem 3(1)]

6.91 The amendments of the Taxation Administration Act made by Part 1 of Schedule 5 apply in relation to records or disclosures of information made at or after the commencement of that Part, whether the information was obtained before, at or after the commencement of that Part. [Schedule 5, subitem 3(2)]

6.92 Part 2 of Schedule 5 commences on the later of:

•

immediately after the commencement of Part 1 of Schedule 5; and

•

immediately after the commencement of the Family Law Amendment (Western Australia De Facto Superannuation Splitting and Bankruptcy) Act 2020.

6.93 However, if the Family Law Amendment (Western Australia De Facto Superannuation Splitting and Bankruptcy) Act 2020 does not commence, Part 2 of Schedule 5 does not commence. [Table item 7]

6.94 The amendments of the Family Law Act made by Part 2 of Schedule 5 apply in relation to proceedings referred to in that Part that are in the Family Court of Western Australia at or after the commencement of that Part, whether the proceedings commenced before, at or after the commencement of that Part. [Schedule 5, subitem 6(1)]

6.95 The amendments of the Taxation Administration Act made by Part 2 of Schedule 5 apply in relation to records or disclosures of information made at or after the commencement of that Part, whether the information was obtained before, at or after the commencement of that Part. [Schedule 5, subitem 6(2)]

Chapter 7 - Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Schedule 1 - Refund of large-scale generation shortfall charge

7.1 Schedule 1 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

7.2 Schedule 1 to the Billl amends the ITAA 1997 to make refunds of large-scale generation shortfall charges NANE income for income tax purposes.

Human rights implications

7.3 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

7.4 This Schedule is compatible with human rights as it does not raise any human rights issues.

Schedule 2 - Industry Code Penalties under Part IVB of the Competition and Consumer Act 2010

7.5 Schedule 2 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

7.6 Schedule 2 to the Bill amends the CCA by increasing the maximum amount of penalty units that can be included in regulations that prescribe an industry code, with specific amendments for industry codes relating to the industry of franchising.

Human rights implications

7.7 Schedule 2 to the Bill may, or may not, engage Article 14 of the ICCPR.

7.8 Consideration has been specifically given to the guidance in the Parliamentary Joint Committee on Human Rights' Guidance Note 2: Offence provisions, civil penalties and human rights (Guidance Note 2) and to the Attorney General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011 edition.

7.9 Schedule 2 to the Bill provides an industry code of conduct to prescribe a penalty of up to 600 penalty units for body corporates and other persons.

7.10 This Schedule provides that for a person (other than a body corporate), a penalty of $500,000 may be prescribed in an industry code of conduct relating to the industry of franchising. Otherwise, a penalty of up to 600 penalty units may be prescribed.

7.11 Given the civil nature of these penalty provisions, applications to the court for civil penalty orders will be dealt with in accordance with the rules and procedures that apply in relation to civil matters. The penalties in Schedule 2 do not impose a criminal penalty, nor carry a penalty of imprisonment.

7.12 Guidance Note 2 observes that civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the ICCPR, regardless of the distinction between criminal and civil penalties in domestic law.

7.13 The increased penalties contained in Schedule 2 are intended to encourage industry to comply with the code of conduct schemes. In particular, the $500,000 penalty amount is to encourage compliance with the Franchising Code.

7.14 On 22 March 2018 the Senate referred an inquiry to the Parliamentary Joint Committee on Corporations and Financial Services into the operation and effectiveness of the Franchising Code.

7.15 The Committee's report noted that where penalties are insufficient, franchisors are likely to factor the risk of a penalty into the cost of doing business. The Committee's report recommended that the quantum of penalties available for a breach of the Franchising Code be significantly increased to ensure the penalties are a meaningful deterrent from non-compliance.

7.16 Having regard to the specific regulatory context and the nature of the industry being regulated, the severity of the civil penalties that may be imposed on individuals is not sufficiently severe to be considered 'criminal'. The franchising industry which is generally comprised of small businesses as the franchisee, and larger, multinational companies as the franchisor. The Franchising Code aims to improve transparency and fairness within the franchising industry.

7.17 The Committee's report indicated that the current penalties were not strong enough to deter poor conduct as some franchisors incorporated the penalty into the cost of doing business. Therefore, the Committee concluded that increased penalties may further deter parties form breaching the Franchising Code.

7.18 Therefore, the imposition of higher civil penalties on industry participants-who should reasonably be aware of their obligations under the code-will enable an effective disciplinary response to non-compliance.

7.19 For enforcement and compliance, the ACCC is the most common litigant for enforcing breaches under the code. In doing so, the ACCC retains the flexibility to take the most appropriate, and likely to be most effective, administrative action in each individual case.

7.20 Where the ACCC applies for a civil penalty in relation to a breach, the operation of section 76 of the CCA means that the court will continue to have discretion to apply an appropriate penalty up to the maximum amount.

7.21 In ascertaining this amount, the court would consideration of the relevant facts of any given case, and impose a penalty that is proportionate to that conduct, making it unlikely that the maximum penalty would be imposed in every instance. In practice, the maximum amount would only be applied in the most egregious instances of non-compliance.

7.22 Based on the above factors, including the cumulative effect of the nature and severity of the civil penalties in Schedule 2, these penalties are not 'criminal' for the purposes of human rights.

7.23 For the reasons given above, Schedule 2 to the Bill is consistent with the right to a fair trial.

Conclusion

7.24 To the extent that these amendments limit the rights under Article 14 of the ICCPR, they are compatible with human rights as:

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the increased penalty amounts are aimed at deterring non-compliance with the code, and not punitive in nature;

•

the maximum penalty amount will only be used in the most egregious instances; and

•

the imposition of high civil penalties are on industry participants who should be reasonably aware of their obligations under the code of conduct.

Schedule 3 - Requirement for actuarial certificates for certain superannuation funds

7.25 Schedule 3 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

7.26 Schedule 3 to the Bill amends the ITAA 1997 to remove the requirement for superannuation trustees to obtain an actuarial certificate when calculating exempt current pension income, where all members of the fund are fully in retirement phase for all of the income year. This is achieved by permitting such funds to use the segregated method to calculate exempt current pension income.

7.27 The amendment removes a redundant requirement which will reduce costs and remove unnecessary red tape for affected funds.

Human rights implications

7.28 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

7.29 This Schedule is compatible with human rights as it does not raise any human rights issues.

Schedule 4 - Strengthening industry codes under Part IVB of the Competition and Consumer Act 2010

7.30 Schedule 4 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

7.31 Schedule 4 to the Bill amends the Competition and Consumer Act 2010 to provide regulatory certainty for industry participants that are governed by industry codes that apply across various markets prescribed by regulations made under Part IVB of the Act. These amendments are to address unintended ambiguity and to ensure Part IVB industry codes apply across various markets as intended.

Human rights implications

7.32 Schedule 4 does not engage any of the applicable rights or freedoms. Schedule 4 makes amendments to the industry codes framework, which governs the conduct of corporations and does not affect the rights of natural persons.

Conclusion

7.33 Schedule 4 is compatible with human rights as it does not raise any human rights issues.

Schedule 5 - Improving the visibility of superannuation in family law proceedings

7.34 Schedule 5 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

7.35 Schedule 5 to the Bill amends the Taxation Administration Act and the Family Law Act to create a new mechanism for sharing superannuation information. The new information sharing mechanism will allow superannuation information to be safely shared with the Registries of the family law courts for the purpose of this information being disclosed to parties to family law proceedings.

7.36 A party to permitted family law proceedings in the Federal Circuit and Family Court of Australia or the Family Court of Western Australia may apply, in the approved form, to the Court Registry, for Registry staff to request the superannuation information of the other party from the Commissioner.

7.37 The amendments will make it harder for parties to hide or under-disclose their superannuation assets in family law proceedings, reducing the time, cost and complexity for parties seeking accurate superannuation information from one or more superannuation funds, and alleviating the need to rely on subpoenas or court orders to obtain the details of their partner's superannuation.

Human rights implications

7.38 Schedule 5 to the Bill engages the following rights:

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the equality of rights and responsibilities of spouses at the dissolution of a marriage of de facto relationship in Article 23(4) of the ICCPR;

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the obligation to ensure the same rights for both spouses in respect of the ownership, acquisition, management, administration, enjoyment and disposition of property in Article 16 of the CEDAW;

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the right to freedom from interference with privacy in Article 17 of the ICCPR; and

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the right to be presumed innocent until proved guilty in Article 14(2) of the ICCPR.

Equality of rights and responsibilities of spouses at the dissolution of a marriage of de facto relationship

7.39 Article 23(4) of the ICCPR states that 'States Parties to the present Covenant shall take appropriate steps to ensure equality of rights and responsibilities of spouses as to marriage, during marriage and at its dissolution.'

7.40 Article 16 of CEDAW asserts the same rights should exist for both spouses in respect of the ownership, acquisition, management, administration, enjoyment and disposition of property, whether free of charge or for a valuable consideration.

7.41 Schedule 5 to the Bill promotes these rights by creating an information sharing mechanism that will facilitate parties' compliance with their existing legal obligation to make full and frank disclosure of financial information in family law proceedings.

7.42 The obligation to make full and frank disclosure of relevant financial information extends to both the applicant and respondent to a family law matter. This duty applies to parties to property matters arising from the breakdown of a marriage or a de facto relationship. Parties are made aware of their obligations with respect to the duty of disclosure when commencing family law proceedings, and they undertake to the Court that they understand their duty of disclosure and they have complied and will continue to comply with that duty.

7.43 Non-disclosure or under-disclosure of superannuation information by one party to proceedings negatively impacts the rights of the other party and can impede resolution of proceedings in a just and timely manner. Enforcing disclosure or attempting to identify the other party's superannuation interests can be time consuming and expensive and can delay settlement of the matter. Existing mechanisms for accessing the other party's superannuation information may be ineffective without, at a minimum, the name of the other party's superannuation fund/s.

7.44 Without information about the identity or value of the other party's superannuation assets, it is more difficult for parties and the Court to make an informed decision about a just and equitable division of property. Individuals may ultimately decide to leave superannuation out of the property pool, or abandon proceedings, which can result in less equitable outcomes.

7.45 The new information sharing mechanism will support more separated couples to divide their property, including superannuation, on a just and equitable basis, and help to alleviate the financial hardship and unequal retirement income outcomes that people, particularly women, can experience after separation.

7.46 Where one party believes the other has not fully disclosed their superannuation information, the amendments will enable that party to make an application to the Court to request the last-reported superannuation information from the Commissioner. The amendments will help minimise the cost, time and difficulty parties currently face in trying to identify that information.

7.47 Schedule 5 to the Bill therefore promotes the right to protection of the family and equality of rights and responsibilities of individuals at the dissolution of a marriage or de facto relationship. It also promotes the same rights for both parties to that relationship in respect of the ownership, acquisition, management, administration, enjoyment and disposition of property.

Right to freedom from interference with privacy

7.48 Schedule 5 to the Bill engages with the right to protection from arbitrary or unlawful interference with privacy in Article 17 of the ICCPR by creating a limited exception to the tax secrecy laws in the Taxation Administration Act.

7.49 The Registries of the Federal Circuit and Family Court of Australia and the Family Court of Western Australia may request superannuation information from the Commissioner on application of a party to family law proceedings. The Commissioner may disclose superannuation information to the requesting Registry to provide to the parties and their lawyers. All disclosures and on-disclosures of the superannuation information must be for the purpose of permitted family law proceedings.

7.50 To be permissible, an interference with privacy must be authorised by law, be for a reason consistent with the ICCPR and be reasonable in the particular circumstances. The United Nations Human Rights Committee has interpreted the requirement of 'reasonableness' to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case.

7.51 The amendments in Schedule 5 to the Bill pursue the legitimate objective of making superannuation assets more visible to parties in family law proceedings. This will support the just and equitable division of property (including superannuation) between couples, helping to alleviate the financial hardship and unequal retirement income outcomes that people, particularly women, can experience after separation.

7.52 The superannuation information disclosed by the Commissioner is information about a person that the person was obligated to disclose to the other party to property proceedings, in line with their duty to make full and frank disclosure of relevant financial information.

7.53 Superannuation information from the Commissioner will enable the Court and the parties to have a more complete understanding of the size of the property pool, and seek accurate valuation information from the trustee/s. This will support a more just and equitable division of property and distribution of superannuation entitlements. There is therefore a rational connection between the information sharing mechanism and the ends sought.

7.54 The limitation on the right to privacy is proportionate as the information sharing mechanism is limited to specific recipients for specific purposes.

7.55 Before a person can apply to the Court Registry to request superannuation information, certain conditions must be met, including that the person:

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is party to permitted proceedings in the Federal Circuit and Family Court of Australia or the Family Court of Western Australia; and

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is requesting the information for the purpose of those proceedings.

7.56 The information can only be requested from the Commissioner by a Registry Manager of the Federal Circuit and Family Court of Australia or the Principal Registrar of the Family Court of Western Australia on application of a party to the proceedings. The Commissioner will disclose the information to the Registry Manager or Principal Registrar through a secure information sharing channel developed by the ATO.

7.57 The Commissioner is prohibited from disclosing a person's address in response to a request for superannuation information from the Registry. Addresses are protected information under section 355-25 of Schedule 1 to the Taxation Administration Act and fall outside the scope of the limited exceptions in Schedule 5 to the Bill (see items 2 and 5). This limitation is particularly important in the context of family law proceedings where family violence may be involved.

7.58 A Registry Manager or Principal Registrar can only on-disclose the superannuation information from the Commissioner to the parties to the proceedings and their lawyers. Use of the information by these recipients is strictly limited to the purpose for which it was disclosed.

7.59 If a Registry official or an applicant uses or discloses the information for a purpose other than permitted family law proceedings, penalties under section 355-155 of Schedule 1 to the Taxation Administration Act may apply.

7.60 Penalties may also apply under section 121 of the Family Law Act, which prohibits the publication or dissemination of an account of family law proceedings that may identify a party, witness or other person associated with the proceedings. An 'account of family law proceedings' includes particulars of any real or personal property in which the person has an interest or with which the person is otherwise associated, that are sufficient to identify that person.

7.61 To the extent that Schedule 5 to the Bill limits the right to freedom from interference with privacy, this limitation is a reasonable, necessary and proportionate means of overcoming non-disclosure of information a party is already obligated to disclose, to ensure more equitable outcomes in family law property settlement proceedings.

Right to be presumed innocent until proved guilty

7.62 Schedule 5 to the Bill engages the right to be presumed innocent until proved guilty in Article 14(2) of the ICCPR.

7.63 Section 355-25 of Schedule 1 to the Taxation Administration Act makes it an offence for taxation officers to disclose protected information such as superannuation information. Schedule 5 to the Bill (see items 2 and 5) creates two new exceptions for taxation officers who disclose superannuation information to:

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a Registry Manager of the Federal Circuit and Family Court of Australia or a Principal Registrar of the Family Court of Western Australia for the purpose of property settlement proceedings relating to separating married and de facto couples across Australia (except for de facto couples in Western Australia); or

•

the Principal Registrar of the Family Court of Western Australia for the purpose of certain superannuation splitting and property proceedings involving separating de facto couples in Western Australia.

7.64 These new exceptions engage the right to the presumption of innocence because a defendant who wishes to rely on them bears an evidential burden in relation to that matter (see section 355-65(1) of Schedule 1 to the Taxation Administration Act and subsection 13.3(3) of the Criminal Code Act 1995). If the defendant discharges the evidential burden, the prosecution bears the legal burden of disproving the matter beyond a reasonable doubt (section 13.1 of the Criminal Code Act 1995).

7.65 It is appropriate in these circumstances to place the evidential burden on the defendant. Consistent with the Attorney-General's Department's Guide to Framing Commonwealth Offences, information about the Court Registry's request will be peculiarly within the knowledge of the defendant (the taxation officer), as a person with access to the ATO's systems at the time the information was disclosed. In this case, it would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter.

7.66 Schedule 5 to the Bill (see items 1 and 4) also engages the right to the presumption of innocence where superannuation information is on-disclosed:

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by Court Registry staff to the parties to the proceedings and their lawyers for the purpose of those proceedings;

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by a party to the proceedings for the purpose of those proceedings - for example, on-disclosure to the trustee of the other party's superannuation fund under sections 90XZB or 90YZR of the Family Law Act.

7.67 On-disclosure of superannuation information is an offence under section 355-155 of Schedule 1 to Taxation Administration Act, unless an exception applies. Relevantly, a person does not commit an offence if the on-disclosure is for the purpose of court proceedings, or the on-disclosure is for the original purpose or in connection with that purpose (see subsections 355-175(1) and (2) of Schedule 1 to the Taxation Administration Act).

7.68 A defendant who wishes to on-disclose superannuation information in reliance on these exceptions bears the evidential burden of proving the exception (see subsection 355-175 of Schedule 1 to the Taxation Administration Act and subsection 13(3) of the Criminal Code Act 1995).

7.69 The reversal of the evidential burden is appropriate in this instance as it is limited to reliance on codified exceptions in the Taxation Administration Act, and not the proving of innocence in and of itself. The defendant must only adduce or point to evidence that suggests a reasonable possibility that the matter exists or does not exist. This evidence will normally be peculiarly within the defendant's knowledge and means to produce, for example, an application to the superannuation trustee under the Family Law Act.

7.70 To the extent that Schedule 5 to the Bill limits the right to the presumption of innocence, these limitations are appropriate and consistent with the Attorney-General Department's Guide to Framing Commonwealth Offences.

Conclusion

7.71 Schedule 5 to the Bill is compatible with human rights because it promotes the protection of human rights, and to the extent that it may limit human rights, those limitations are reasonable, necessary and proportionate.