House of Representatives

Explanatory Memorandum

(Circulated with authority of the Minister for Finance and Administration, Senator the Hon Nick Minchin)

Financial Framework Legislation Amendment Bill (No.1) 2007

OUTLINE

1. The Financial Framework Legislation Amendment Bill (No.1) 2007 (FFLA Bill) proposes amendments to the Financial Management and Accountability Act 1997 (FMA Act) with consequential amendments to two other Acts.

2. The purpose of the proposed amendments to the FMA Act is to reduce red tape in internal Australian Government administration, simplify the financial management framework, and address issues relating to the management of appropriations. In particular, the FFLA Bill would:

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amend section 32 of the FMA Act to improve efficiencies for implementing machinery of government changes;

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amend section 31 to remove the requirement for over 80 bilateral net appropriation agreements to allow, instead, for the making of a regulation, achieving the same effect;

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clarify how sections 28 and 30 apply to repayments by or to the Commonwealth, including their application to transactions between FMA Act agencies;

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insert a new section 32A clarifying the timing of adjustments to appropriations;

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simplify the application of Goods and Services Tax (GST) to Commonwealth transactions, currently addressed in section 30A; and

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amend section 53 to clarify a Chief Executive's power to issue directions to officials.

3. Section 52 of the Auditor-General Act 1997 is proposed for repeal because, due to the changes to section 31 of the FMA Act, it will no longer have scope to operate.

4. Sections 44 and 54 of the Legislative Instruments Act 2003 are proposed to be amended as a result of the proposed amendments to sections 31 and 32 of the FMA Act.

5. The amendments of Acts are contained in a single Schedule.

6. Passage of the FFLA Bill would facilitate the adoption of improved administrative practices through clearer legislative provisions generally.

FINANCIAL IMPACT STATEMENT

7. The proposed amendments have no financial impact. The amendments are aimed at improving the efficiency of agency operations by reducing red tape in internal Australian Government administration and simplifying the financial management framework, and may result in more effective use of agency resources.

NOTES ON CLAUSES

8. The structure of the FFLA Bill comprises three clauses that then refer to one schedule containing the substantive amendments to other Acts. These notes explain the three clauses.

Clause 1: Short Title

9. This clause provides that when the FFLA Bill is passed it may be cited as the Financial Framework Legislation Amendment Act (No. 1) 2007.

Clause 2: Commencement

10. This clause provides that the amendments relating to sections 32 (transfer of agency functions) and 53 (Chief Executives' power to issue directions) of the FMA Act would commence on Royal Assent, with the remainder of the amendments commencing on a day to be fixed by proclamation. This is to ensure that, in relation to section 32, the amendment takes effect as soon as possible as it relates to machinery of government changes. Section 53 of the FMA Act relates to day-to-day agency management and therefore should also commence as soon as possible.

Clause 3: Schedules

11. This clause provides that the amendments and repeals of Acts are contained in one schedule. Schedule 1 comprises amendments relating to the Auditor-General Act 1997, the FMA Act and the Legislative Instruments Act 2003 to update, clarify, align or integrate financial management provisions. There is one part to the Schedule.

SCHEDULE 1 - AMENDMENTS

Consequential amendments to the Auditor-General Act 1997

12. Item 1 amends the Auditor-General Act 1997 by repealing section 52 of the Auditor-General Act 1997 as a result of the amendment to section 31 of the FMA Act.

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Section 52 of the Auditor-General Act 1997 currently provides for the Finance Minister to enter into a net appropriation agreement with the Auditor-General.

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The amendments made by this Bill to section 31 of the FMA Act mean that section 52 of the Auditor-General Act 1997 would be redundant, as net appropriation arrangements would no longer be conducted by way of agreements. The amendment would greatly simplify the arrangements across the Commonwealth by which departmental items may be increased by relevant receipts.

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As set out in paragraph 19 below, item 8 of the Bill would do away with net appropriation agreements, and allow instead for a regulation to be made. Parliamentary scrutiny under the proposed amended arrangements would not be lesser than the current arrangements. Indeed, it would be enhanced, as the current agreements under section 31 are exempt from disallowance. A regulation made under the proposed amended arrangements, on the other hand, would not be exempt from disallowance, as with any other regulation. There would therefore no longer be a need for a special safeguard for the unique, independent status of the Auditor-General.

Special Accounts: sections 20 and 21

13. Item 2 amends section 20(1) of the FMA Act by adding a note at the end of the section. The note makes clear that new section 32A of the FMA Act, inserted by item 10 of the Bill, applies to Special Accounts established under section 20(1). New section 32A clarifies the timing of the operation of the section, in that it provides that the appropriation is adjusted when the agency records the adjustment in its accounts and records - see Item 10.

14. Item 3 amends section 21(1) of the FMA Act in a similar way: by adding a note at the end of the section, it is made clear that new section 32A of the FMA Act inserted by item 10 of this Bill applies to Special Accounts established under section 21(1) of the FMA Act.

Repayments by the Commonwealth: section 28

15. Item 4 repeals the existing subsection 28(1) of the Financial Management and Accountability Act 1997 (not including the note), and inserts a new subsection 28(1). The heading of the section is also amended to read "Repayments by the Commonwealth".

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The amendment is aimed at clarifying the distinction between sections 28 and 30 of the FMA Act, by specifying in the headings that the former relates to repayments by the Commonwealth, while the latter relates to repayments to the Commonwealth.

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The timing of the adjustment to the appropriation is also clarified as the point at which an agency records the adjustment in the relevant accounts and records - see also Item10.

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The revised section also uses a clearer description of the sequence of events resulting in the ability to rely on the special appropriation in subsection 28(2).

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The amendment will also clarify that the section also applies to payments within and between agencies.

16. Item 5 repeals subsection 28(3) of the FMA Act. In conjunction with the amendments at Item 4 and Item 6 of this Bill, the repeal of subsection 28(3) would give greater clarity for agencies in how to re-credit amounts.

Repayments to the Commonwealth: section 30

17. Item 6 repeals section 30 of the FMA Act and substitutes a redrafted section 30. The heading of the section is also renamed "Repayments to the Commonwealth".

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Section 30 currently provides for an appropriation to be reinstated where an amount is paid back to an agency. The amendment makes clear that the section applies to notional transactions.

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The timing of the adjustment to the appropriation is also clarified through the note, as the point at which an agency records this in their accounts and records - see also Item10.

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The revised section also uses a clearer description of the sequence of events resulting from a repayment to the Commonwealth.

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The amendment will also clarify that the section also applies to payments within and between agencies.

Goods and Services Tax (GST): section 30A

18. Item 7 repeals subsections 30A(1) to (6) of the FMA Act and substitutes them with the redrafted subsection 30A(1) and (2). The objective is to simplify and clarify when the GST liability in that section arises, and when the adjustment to the appropriation takes place. The new section also removes duplication of words and streamlines the description of when the GST liability arises in Commonwealth transactions. Item 10 also specifies the timing of the operation of the section.

Relevant Agency receipts (formerly: Agreements for "net appropriations"): section 31

19. Item 8 repeals section 31 of the FMA Act and proposes its replacement with a redrafted section.

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Section 31 currently provides for bilateral net appropriation agreements between the Finance Minister and other Ministers (or Chief Executives under the Finance portfolio), which, in conjunction with the annual Appropriation Acts, gives agencies authority to spend amounts equivalent to certain receipts that they collect.

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It is proposed that the arrangements currently covered by net appropriation agreements be covered instead by a single instrument made in subsidiary legislation that will allow for the same effect.

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Whereas the instruments currently made under section 31 are exempt from disallowance, the regulations proposed to be made under the amended arrangements would be disallowable. Parliamentary scrutiny would therefore be enhanced.

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Consequential amendments to section 44(2) and 54(2) of the Legislative Instruments Act 2003 are also required as a result of the changes to sections 31 and 32 - see paragraphs 32 to 35 below.

Transfer of agency functions: section 32

20. Item 9 repeals section 32 of the FMA Act and substitutes it with a redrafted section 32. The amendment would improve clarity over its intended operation and improve administration associated with machinery of government changes.

21. The redrafting of section 32 is intended to clarify that section 32 directions issued by the Finance Minister determine that the schedule to an Annual Appropriation Act is amended. This occurs where the amendments relate to a transfer of agency function, and transfer the actual appropriation from the losing agency to the gaining agency, and not to simply provide the gaining agency with access to the losing agency's appropriations.

Timing of adjustments to appropriations: section 32A

22. Item 10 inserts a new section 32A to the FMA Act. The new section describes the point at which adjustments to the appropriations subject of sections 20, 21, 30, 30A and 31 of the FMA Act take place. Specifically, it makes clear that the adjustments to the appropriations subject of those sections would only take effect when the adjustment was recorded in the agency's accounts and records.

23. This means that changes to appropriations cannot occur without an agency taking active steps recognising the change. It also clarifies that an agency can, and should, determine the proper characterisation of a receipt to determine the best appropriation that ought to be increased (eg, a Special Account, a prescribed departmental item or a repayment increasing the relevant appropriation).

24. This clarification does not affect accounting rules regarding the recognition of potential revenue or assets and nor will it affect accrual accounting or accrual budgeting requirements. Its purpose is to clarify when, as a matter of law, an agency can treat the relevant appropriation as having been increased.

Chief Executive's power to issue directions: section 53

25. Item 11 inserts a new subsection 53(1AA) and Item 12 repeals the existing subsection 53(2) of the FMA Act and replaces it with a redrafted subsection. The purpose of these alterations are to clarify the power of Chief Executives, under the FMA Act, to issue directions relating to powers delegated or sub delegated by the Chief Executive to officials under the Act. This clarifies that a Chief Executive may issue binding directions to any official in relation to a power delegated to that official by the Chief Executive.

Savings and transitional provisions

26. Item 13 specifies that a net appropriation agreement entered into under section 31of the FMA Act before the commencement of the amendment remains in effect even after the commencement of Item 1. Accordingly, the current arrangements will continue until ended by the Finance Minister (or, in the case of the Auditor-General, by agreement with the Auditor-General).

27. Item 14 specifies that the amendment made by Item 4 to section 28 applies to amounts of money received by the Commonwealth before or after the commencement date of Item 4. This ensures the smooth transition to the new arrangements, in that the special appropriation under section 28(2) can still have effect on an amount received immediately before the commencement.

28. Item 15 specifies that the amendment made by Item 6 to section 30 applies to amounts of money paid by the Commonwealth before or after the commencement date of Item 6. As with the description of Item 14 above, this ensures the smooth transition to the new arrangements. In this situation, an amount repaid immediately before commencement can be captured by the new arrangements.

29. Item 16 specifies that the amendment made by Item 7 to the GST provisions of section 30A applies to payments that occur after the commencement date of Item 7.

30. Item 17 specifies that section 32 of the FMA Act, as in force immediately prior to the commencement of Item 9, continues in force in relation to a change of function that occurred before the commencement date of the amendment in Item 9.

31. Item 18 specifies that a direction in force under subsection 53(2) of the FMA Act, as in force immediately prior to the commencement of Item 12, remains in force after the commencement date of Item 12 as if it were a direction given under Item 12 after commencement of the item.

Consequential amendments to Legislative Instruments Act 2003

32. Item 19 is an amendment to section 44(2) of the Legislative Instruments Act 2003 that is required as a result of the amendments in Item 9 to section 31 of the FMA Act, which provides for the making of agreements. The reference in the Legislative Instruments Act 2003 to agreements made under section 31 is therefore, now, redundant. The proposed changes under Item 9 to section 31 would allow for the treatment of instruments made under the section to be dealt with as a standard regulation under the Legislative Instruments Act 2003.

33. Item 20 is an amendment to section 44(2) of the Legislative Instruments Act 2003 that is required as a result of the amendments in Item 8 to section 32 of the FMA Act which provides for the giving of directions. The current references in the Legislative Instruments Act 2003 to directions given under section 32 would therefore be redundant. The proposed changes under Item 8 to section 32 would allow for the treatment of instruments made under the section, to be dealt with, for the purposes of the Legislative Instruments Act 2003, in the amended section 32 of the FMA Act.

34. Item 21 is an amendment to section 54(2) of the Legislative Instruments Act 2003 that is consequential to the amendments in Item 9 to section 31 of the FMA Act which provides for the making of agreements. The current references in the Legislative Instruments Act 2003 to agreements made under section 31 would therefore be redundant. The proposed changes under Item 9 to section 31 would allow for the treatment of instruments made under the section to be dealt with, for the purposes of the Legislative Instruments Act 2003, as a regulation under the Legislative Instruments Act 2003.

35. Item 22 is an amendment to section 54(2) of the Legislative Instruments Act 2003 that is consequential to the amendments made by Item 8 to section 32 of the FMA Act which provides for the giving of directions. The current references in the Legislative Instruments Act 2003 to directions given under section 32 will therefore become redundant. The proposed changes under Item 8 to section 32 would allow for the treatment of instruments made under the section to be dealt with, for the purposes of the Legislative Instruments Act 2003, in the new subsections 32(7), 32(8) and 32(9) of the FMA Act.