House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP)

Chapter 2 Company Reporting Obligations

Outline of chapter

2.1 This Bill contains seven refinements to the existing company reporting obligations in the Corporations Act that are aimed at reducing compliance costs for companies in relation to their reporting obligations:

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amendments to incorporate in the Corporations Act the accounting standards requirements for executive and director remuneration disclosure;

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increases in the thresholds used to define a large proprietary company and allow for future changes to the thresholds to be prescribed by regulations;

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amendments to the notification requirements for changes in office holders and company addresses, payment of annual fees and to the company deregistration procedure; and

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amendments to allow companies to make annual reports available on the internet and only require hard copies to be sent to members who request them.

2.2 The amendments simplify company reporting obligations to reduce the regulatory burden on business, maintain investor protections and reduce compliance costs.

Context of amendments

2.3 The measures in this Bill are aimed at reducing the burden of red tape to allow Australian corporations to do business more efficiently.

2.4 Accurate and prompt information is fundamental to the operation of an efficient market. The disclosure obligations in the Corporations Act are an important regulatory tool providing the market with relevant information on which interested parties can make commercial decisions.

2.5 However, the disclosure requirements should be framed in a way so that they do not unnecessarily, or excessively, interfere with companies devoting resources to productive outputs.

2.6 The refinements to the company reporting obligations will deliver a simpler regulatory framework that reduces the regulatory burden on business, continues to protect investors, and reduces compliance costs. The amendments have their origins in the Rethinking Regulation report of the Taskforce on Reducing Regulatory Burdens on Business and the Corporate and Financial Services Regulation Review Proposals Paper of November 2006.

Summary of new law

2.7 The Bill will make a number of refinements to the company reporting obligations in the Corporations Act to:

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establish a disclosure framework that will allow the accounting standards requirements for executive and director remuneration to be incorporated into Corporations Act. The Bill also introduces a new disclosure requirement in relation to executives and directors hedging their incentive remuneration and several other minor and technical amendments to further refine the framework;

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increase the thresholds used to define a large proprietary company. A proprietary company will be defined as being large if it satisfies two of the following tests: revenue of $25 million; assets of $12.5 million; and 50 employees. The amendments also allow for future changes to the thresholds to be prescribed by regulations.

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remove the requirement for companies to notify ASIC of the retirement or resignation of office holders where the office holders themselves have lodged notifications with ASIC;

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provide for ASIC to use a company's contact address where that address is more convenient for the company;

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remove the requirement to pay an annual review fee where the annual review date falls two months before or after the Gazette notice that the company is to be deregistered;

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allow companies to pay their annual review fees for a period of 10 years by way of a single lump sum payment; and

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enable companies, registered schemes and disclosing entities to make annual reports available on a web site and provide hard copies only to those members who elect to receive them in that form.

Comparison of key features of new law and current law

Detailed explanation of new law

Executive remuneration

2.1 The remuneration disclosure requirements for executives and directors of listed companies are currently contained in both the accounting standards and the Corporations Act (and the Corporations Regulations). There is considerable duplication between the requirements in the accounting standards and the Corporations Act as well as some minor inconsistencies.

2.2 The objective of the amendments is to consolidate the remuneration disclosure requirements currently contained in the accounting standards into the Corporations Act and Corporations Regulations. Following on from the amendments to the Corporations Act in this Bill, the remaining remuneration disclosure requirements in the accounting standards will be incorporated into the Corporations Regulations. This will simplify the requirements as companies will no longer be required to refer to both the accounting standards and the Corporations Act to determine their remuneration disclosure requirements.

2.3 The amendments also make other minor refinements to the requirements to strengthen the existing framework.

2.4 The range of directors and executives whose remuneration must be disclosed under the accounting standards is determined by whether the individual meets the definition of 'key management personnel'. The Corporations Act requires the remuneration of all directors and the five most highly remunerated executives from the company and the consolidated group to be disclosed.

2.5 The amendments ensure that the range of individuals whose remuneration must be disclosed remains the same after the accounting standard requirements are moved into the Corporations Act. To achieve this, the amendments require remuneration disclosures to be made for any individual that falls within the definition of 'key management personnel', in addition to the existing directors and executives required to be disclosed under section 300A of the Corporations Act. [Schedule 1, Part 1, items 24 to 27, 31 and 32]

2.6 The term key management personnel for the purposes of the Corporations Act will be defined in the accounting standards. This is to ensure consistency between the Corporations Act and the accounting standards. If a definition was included in the Corporations Act, the definition would need to be amended whenever changes were made to the accounting standards. [Schedule 1, Part 1, item 32]

2.7 One of the consequences of moving the remuneration disclosure requirements out of the accounting standards and into the Corporations Act is that the disclosures will be made in a company's directors' report instead of the financial report. The amendments introduce a requirement for a company's auditor to express an opinion on the remuneration information that has been moved from the audited financial reports into the directors' report. This ensures that the remuneration disclosures continue to be subject to assurance by an external auditor. [Schedule 1, Part 1, item 36]

2.8 The amendments impose a strict liability offence in relation to the audit of the information in the directors' report. This is consistent with the liability imposed on auditors in relation to auditing the company's financial report. The overall scope of the auditor's exposure to criminal liability has not changed as a result of these amendments. [Schedule 1, Part 1, item 37 and item 168]

2.9 The amendments also modify the scope of the remuneration disclosure requirements from listed companies to disclosing entities that are companies. This is necessary to bring the application of the Corporations Act disclosures into line with the application of the accounting standards disclosures. [Schedule 1, Part 1, item 33]

2.10 The amendments also make a number of minor refinements to strengthen the disclosure framework. The amendments require companies to disclose board policy in relation to directors and executives hedging their incentive remuneration and the mechanism that the company uses to enforce this policy [Schedule 1, Part 1, item 28] . This will ensure that shareholders are informed about the company's policy on this issue.

2.11 In addition, the amendments clarify the disclosure requirement in section 300A(1)(e)(iv) to ensure that the policy intention of the requirement is achieved [Schedule 1, Part 1, item 29] , and remove the requirement under subparagraph 300A(1)(e)(v) for companies to disclose the aggregate of options granted, exercised and that have lapsed during the year on the ground that is not being used by shareholders [Schedule 1, Part 1, item 30] .

Thresholds for reporting for large proprietary companies

2.12 Large proprietary companies are required to prepare a financial report and a directors' report for each financial year under subsection 292(1) of the Corporations Act.

2.13 Under the current requirements (subsection 45A(3) of the Corporations Act), a proprietary company is defined as a large proprietary company for a financial year if it satisfies at least two of the following tests:

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the consolidated gross operating revenue for the financial year of the company and the entities it controls is $10 million or more;

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the value of the consolidated gross assets for the financial year of the company and the entities it controls is $5 million or more; and

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the company and the entities it controls have 50 or more employees at the end of the financial year.

2.14 These thresholds have not been reviewed since their introduction in 1995. As a result, the current monetary thresholds are set at too low a level to determine economic significance and have led to an increasing number of non-economically significant entities being subject to the reporting requirements.

2.15 In order to reduce the regulatory burden on non-economically significant proprietary companies and ensure that users still receive the financial information of economically significant proprietary companies, the monetary thresholds will be increased by 150 per cent. The employee thresholds will remain unchanged at 50 employees.

2.16 Under the new arrangements, a proprietary company will be defined as a large proprietary company for a financial year if it satisfies at least two of the following tests:

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the consolidated operating revenue for the financial year of the company and the entities it controls is $25 million or more;

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the value of the consolidated gross assets for the financial year of the company and the entities it controls is $12.5 million or more; and

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the company and the entities it controls have 50 or more employees at the end of the financial year.

[Schedule 1, Part 1, items 16 to 18]

2.17 A corresponding increase in the revenue and asset thresholds used to define a small proprietary company under subsection 45A(2) will mirror the changes in the thresholds of large proprietary companies. [Schedule 1, Part 1, items 12 to 14]

2.18 A mechanism will also be included to regularly assess the thresholds through the Corporations Regulations to ensure that the thresholds continue to accurately reflect genuine economic significance during periods of long and sustained economic growth. The amendments will enable changes to the thresholds to be prescribed by regulation. [Schedule 1, Part 1, items 12 to 14 and 16 to 18]

2.19 Currently, section 45A of the Corporations Act uses the term 'consolidated gross operating revenue' to guide entities when calculating the group's total revenue to determine whether they meet the threshold tests. The accounting standards no longer refer to this term. Consequentially, this term will be replaced with 'consolidated operating revenue' to reflect changes to the accounting standards. [Schedule 1, Part 1, items 11, 15 and 19]

Notifications - change in office holders

2.20 The Bill will amend the Corporations Act to remove the requirement for companies to inform ASIC when office holders have resigned or retired where the office holders themselves have informed ASIC. The amendment is intended to reduce the compliance burden on companies in the sense that the current arrangements require companies to provide ASIC with information that ASIC may already have.

2.21 Currently, section 205A of the Corporations Act allows a ceasing office holder to notify ASIC that they no longer hold office, while section 205B requires a company to notify ASIC of any change in its office holders. The corporate register is updated by ASIC once it receives notification that a company office holder has resigned, regardless of whether it is the ceasing office holder or the company itself that has notified ASIC.

2.22 The Bill amends section 205B of the Corporations Act so that a company is no longer obliged to notify ASIC of the cessation of an officeholder where ASIC has already been notified by the departing office holder under section 205A. [Schedule 1, Part 3, items 204 and 205]

2.23 The Bill will also introduce a new exception to the current offence of a company failing to notify ASIC in section 205B of the Corporations Act. A company will not be liable for an offence where the departing officeholder gives ASIC a written notice of the person's retirement or resignation as an office holder of the company under section 205A.

2.24 This exception is aligned with the existing exception for alternate directors currently found in subsection 205B(6). Like the existing exemption, the evidentiary burden of proof is reversed, that is, it is placed on the defendant (the company) and not the prosecution. The reversal has been maintained for consistency with the current exception and to facilitate efficient business compliance and regulatory outcomes. [Schedule 1, Part 3, item 206]

2.25 The Bill also amends the Small Business Guide in Part 1.5 of the Corporations Act to make reference to the new arrangements. [Schedule 1, Part 3, items 198, 199 and 200]

Notifications - company addresses

2.26 The Bill will amend the Corporations Act to provide for a company notifying ASIC of a contact address. This will allow companies to nominate an address, separate from the registered office address, at which they prefer to receive documents from ASIC. Under existing arrangements, ASIC allows companies to provide it with a contact address, but that address is not recognised in the Corporations Act. Recognition of the contact address in the Corporations Act will provide greater transparency, as the contact address will be included on the register maintained by ASIC. After commencement of the new provisions, the contact address will be able to be updated on the same form as other company details.

2.27 The Bill inserts a new subsection 146A(1) into the Corporations Act to provide that a company may have a contact address and ASIC may send communications and notices to the company's contact address. The Bill also inserts a new subsection 146A(2) into the Corporations Act to provide that a company must lodge a change to its contact address in the prescribed form. [Schedule 1, Part 3, item 203]

2.28 The Bill also inserts a note at the end of subsection 142(1) of the Corporations Act to alert the reader to the fact that ASIC may send communications and notices to the company's contact address. [Schedule 1, Part 3, items 201 and 202]

Simplifying voluntary deregistration

2.29 A person (including the company) may apply to ASIC under section 601AA of the Corporations Act to deregister the company if, among other things, the company has paid all fees and penalties payable under the Corporations Act and has no outstanding liabilities.

2.30 Currently, companies that have applied for voluntary deregistration are still subject to annual review obligations (including the requirement to pay the annual review fee) up until the point of deregistration. This means that annual review fees may be incurred or become payable in the two-month period between approval of the deregistration application and the actual deregistration of the company. Annual review fees may also be payable in the period from application for deregistration to the time when ASIC has given notice of the proposed deregistration.

2.31 The Bill amends section 1351 of the Corporations Act to provide that review fees are not payable under the Corporations (Review Fees) Act 2003 if ASIC has given notice of the proposed deregistration of the company and the review date for that year falls two months before or after the publication of the notice. The amendment is intended to remove the obligation to pay annual review fees where a decision is made to deregister a company in close temporal proximity to an annual review date. [Schedule 1, Part 3, item 221]

Upfront payment of annual review fees for companies

2.32 The existing Corporations (Review Fees) Act 2003 , in conjunction with the Corporations (Review Fees) Regulations 2003 , requires an annual payment to ASIC of $212 by a proprietary company, $1000 by a public company or a registered scheme and $40 by a special purpose company. Transaction costs could be reduced by allowing for less frequent payment.

2.33 The Bill amends section 1351 of the Corporations Act to provide for a company making payment for a review date other than the current review date. [Schedule 1, Part 3, item 221]

2.34 The amendment to the Corporations Act allows regulations to be made under the Corporations (Review Fees) Act 2003 to provide for a payment of annual review fees for an extended period by way of a single lump sum payment.

Distribution of annual reports

2.35 Companies, registered schemes and disclosing entities are required to report to members either by:

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using a web site as the default method of distributing the reports, in accordance with subclause 314(1AA); or

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by sending hard copies as the default method of distributing the reports, in accordance with subclause 314(1AE). [Schedule 1, Part 1, item 38]

2.36 It is not mandatory for entities to use a web site as the default method of distributing the reports. An entity can continue to send a hard copy of the reports as the default method of distribution if it so chooses [Schedule 1, Part 1, item 38] .

2.37 Subclauses 314(1AA) to (1AD) apply if a company, registered scheme or disclosing entity uses a web site as the default method of distributing the reports.

2.38 A company, registered scheme or disclosing entity that reports in accordance with subclause 314(1AA) must:

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send a hard copy of the reports to those members who have made an election under paragraph 314(1AB)(a) to receive a hard copy under subparagraph 314(1AA)(a)(i) [Schedule 1, Part 1, item 38] . Alternatively, the entity can send an electronic copy (such as a copy provided by e-mail or fax) of the reports where the entity offers to send the reports as an electronic copy and the member elects to receive an electronic copy under paragraph 314(1AB)(c) [Schedule 1, Part 1, item 38] ;

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make a copy of the reports readily accessible on a web site under paragraph 314(1AA)(b) [Schedule 1, Part 1, item 38] . Placing a copy of the reports on a restricted area of a web site, for example, would not satisfy this requirement; and

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under paragraph 314(1AA)(c) directly notify those members who did not receive a hard copy that the reports are accessible on the web site, and specify the direct address of the web site [Schedule 1, Part 1, item 38] . The direct address may be specified, for example, by providing the Uniform Resource Locator (URL) of the reports. The direct address is intended to enable the member to directly access the reports on the web site. This notification can be made in hard copy, or by electronic means (for example, e-mail or fax) in accordance with subclause 314(1AD) [Schedule 1, Part 1, item 38] . In addition, this notification could be included with other correspondence sent to members, for example, with the notice of the annual general meeting. This notification must also be sent directly to the member. A company announcement on the Australian Securities Exchange, for example, would not satisfy this requirement.

2.39 A company, registered scheme or disclosing entity that reports in accordance with subclause 314(1AA), must satisfy the requirements of that subclause by the deadline set out in section 315 of the Act. A company, registered scheme or disclosing entity that uses subclause 314(1AA) is taken to report at the time the company, registered scheme or disclosing entity has fully complied with the requirements of that subclause. [Schedule 1, Part 1, item 41]

2.40 A company, registered scheme or disclosing entity that reports in accordance with subclause 314(1AA) must directly notify each member that:

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under paragraph 314(1AB)(a) the member has a right to elect to receive a hard copy of the reports free of charge [Schedule 1, Part 1, item 38] ;

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if the member does not elect to receive a hard copy, the member may access the reports on a specified web site under paragraph 314(1AB)(b) [Schedule 1, Part 1, item 38] ; and

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under paragraph 314(1AB)(c) the member can elect to receive the reports as a hard copy or an electronic copy (such as e-mail or fax) - if the entity offers its members an additional option to receive an electronic copy of the reports [Schedule 1, Part 1, item 38] .

2.41 The notification required by subclause 314(1AB) only needs to be sent to each member once. This one-off notification is intended to inform members of this amendment and the effect it will have on the default method of distributing reports. The notification is also intended to provide entities with an opportunity to collect members' preferences for distributing the reports.

2.42 Under subclause 314(1AC), the member's election to receive a copy of the reports under subclause 314(1AB) is a standing election for each subsequent financial year until the member changes his or her election [Schedule 1, Part 1, item 38] . The standing election ensures that members do not have to repeat their request for a hard copy each year. The existing law continues to allow members to change their election at any time using subsection 316(1).

2.43 The notification required by subclause 314(1AB) must be made to all members after the Act commences [Schedule 1, Part 6, item 233(2 )]. Notifications made in the past will not satisfy this requirement. However, an exception to this requirement provides that a company, registered scheme or disclosing entity is not required to provide the notification under subclause 314(1AB) to those members who have already notified the entity, under paragraph 316(1)(a), that they do not wish to receive the reports [Schedule 1, Part 6, item 233(3 )].

2.44 For an existing member, the notification required by subclause 314(1AB) can be made in hard copy, or by electronic means (for example, e-mail or fax) in accordance with subclause 314(1AD) [Schedule 1, Part 1, item 38] . For a new member, this notification could be sent, for example, as part of their initial registration pack.

2.45 Subclause 314(1AE) applies if a company, registered scheme or disclosing entity sends a hard copy of the reports as the default method of distribution to members. This maintains the status quo by allowing companies, registered schemes and disclosing entities to continue to provide, by default, a hard copy of the reports to members.

Application and transitional provisions

Executive remuneration

2.46 The amendments will apply to financial years that begin on or after the commencement of the legislation. [Schedule 1, Part 6, item 232]

Thresholds for reporting for large proprietary companies

2.47 The amendments will take effect in the financial year that ends on or after the day on which those items commence. [Schedule 1, Part 6, item 231]

Notifications - change in office holders

2.48 The amendments to remove the requirement for companies to inform ASIC when office holders have resigned or retired where the office holders themselves have informed ASIC will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent.

Notifications - company addresses

2.49 The amendments to provide for a company using a contact address will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent.

Simplifying voluntary deregistration

2.50 The amendments to remove the obligation to pay annual review fees two months before or after ASIC giving notice of a proposed deregistration of a company will apply to a review date that occurs on or after the day on which that item commences. The item will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent. [Schedule 1, Part 6, item 244]

Upfront payment of annual review fees for companies

2.51 The amendments to provide for regulations being made to allow a single lump sum payment of annual review fees to cover an extended period will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent.

Distribution of annual reports

2.52 The amendments apply to reports for a financial year that ends on or after the day on which those items commence. [Schedule 1, Part 6, item 233(1 )]

2.53 Companies, registered schemes and disclosing entities will be required to provide the notification under subclause 314(1AB) after that subclause commences [Schedule 1, Part 6, item 233(2 )]. However, an exception to this notification requirement exists where a member has already notified the entity under paragraph 316(1)(a) that the member does not wish to receive the reports [Schedule 1, Part 6, item 233(3 )].

Consequential amendments

Thresholds for reporting for large proprietary companies

2.54 A number of consequential amendments will need to replace the thresholds used to define a designated private company in the Social Security Act 1991 and the Veterans' Entitlement Act 1986 . [Schedule 1, Part 1, items 176 to 179 and items 182 to 185]

2.55 In addition, the term consolidated gross operating revenue will be replaced with consolidated operating revenue in the Social Security Act 1991 and the Veterans' Entitlement Act 1986 . [Schedule 1, Part 1, items 180 and 181, and items 186 and 187]

Notifications - change in office holders

2.56 Section 222AOF of the Income Tax Assessment Act 1936 (ITAA 1936) allows the Commissioner of Taxation to rely on certain documents lodged with ASIC to indicate the address to which a penalty notice under section 222AOE of the ITAA 1936 may be sent to a current or former director.

2.57 Currently, the documents referred to are those lodged pursuant to sections 205B and 345 of the Corporations Act.

2.58 As a consequence of the notification of change in office holder amendments, companies may no longer have to lodge documents under section 205B where the office holder has lodged a document under section 205A.

2.59 The Bill will amend section 222AOF of the ITAA 1936 to refer to documents lodged with ASIC under both sections 205A and 205B of the Corporations Act. The Bill also corrects the incorrect reference to section 345 of the Corporations Act, with the correct reference to section 346C. [Schedule 1, Part 3, item 222]

Distribution of annual reports

2.60 The Bill repeals provisions relating to the use of electronic means to send reports to members under subsections 314(4), (5) and (6), as the ability to use electronic means has been incorporated into item 38 of Schedule 1. [Schedule 1, Part 1, item 40]

2.61 Subsection 314(1A) currently establishes a strict liability offence in relation to breaches of subsection 314(1). The Bill makes a consequential amendment to subsection 314(1A) to provide that a breach of subclause 314(1AB) is also a strict liability offence [Schedule 1, Part 1, item 39] . The notification provided under subclause 314(1AB) is required by paragraph 314(1AA)(a). The strict liability offence in subsection 314(1A) indirectly covers a breach of paragraph 314(1AA)(a), but does not cover a breach of subclause 314(1AB). Therefore, to ensure paragraph 314(1AA)(a) operates effectively, subclause 314(1AB) has been amended to provide a consistent criminal liability provision [Schedule 1, Part 1, item 169] .

2.62 The Bill amends paragraph 318(2)(a) and subsection 319(1) to replace a reference to 'sent' with a reference to 'provided'. [Schedule 1, Part 1, items 42 and 43]

Supporting Bill

Upfront payment of annual review fees for companies

2.63 The Corporations (Review Fees) Amendment Bill 2007 (the Review Fees Bill) will amend the Corporations (Review Fees) Act 2003 (the Review Fees Act) to insert a note after subsection 5(1) to alert the reader to the fact that the Corporations (Review Fees) Regulations 2003 may prescribe a fee to be paid upfront to cover review fees for a future year. [Schedule 1, item 1, Corporations (Review Fees) Amendment Bill 2007]

2.64 The Review Fees Bill will amend section 8 of the Review Fees Act to provide for regulations to be made under the Review Fees Act for the purposes of both section 1351 of the Corporations Act and for the purposes of the Review Fees Act. [Schedule 1, item 2, Corporations (Review Fees) Amendment Bill 2007]

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