Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon Peter Costello, MP)Outline
2.1 The Financial Sector Legislation Amendment (Restructures) Bill 2007 (the Bill) seeks to facilitate the adoption of a non-operating holding company (NOHC) as the ultimate holding company of a financial group in Australia (NOHC structure). It will provide financial groups with greater flexibility in choosing a corporate structure to manage their risk exposures and comply with prudential requirements, without unnecessarily constraining their business efficiency and competitiveness.
2.2 In March 1997, the Financial System Inquiry (Wallis Review) recommended that subject to a financial group meeting prudential requirements, the prudential regulator should permit the adoption of a NOHC structure. The Review concluded that to protect against creditors of one entity seeking to pursue the other entities of a group, legal separation structured around a NOHC is the best method of quarantining the assets and liabilities of the various entities in the group. Such a structure also relieves other entities of a group of any formal obligation to support a distressed affiliate.
2.3 A NOHC structure can offer a financial group greater operational flexibility while, at the same time, provide for more efficient and effective means of meeting prudential requirements by allowing the appropriate allocation of risk between prudentially and non-prudentially regulated businesses of a group. This can be achieved by organising different types of activities into separate business lines. This type of structure can assist efforts aimed at quarantining risks in the various parts of a financial group by, for example, separating the risks of a group's entrepreneurial private investment activities from its insurance and banking operations.
2.4 In September 1997, the Australian Government announced its response to the Wallis Review. As part of the response, the Australian Government agreed to facilitate the establishment of non-operating holding companies to encourage new entry and greater competition in the financial sector. The Government's decision to facilitate the establishment of non-operating holding companies was subject to prudential requirements being met.
2.5 To implement the Government's decision, the Banking Act 1959 was amended and provisions were included in the Financial Sector (Shareholdings) Act 1998 to allow financial groups containing authorised deposit-taking institutions (ADIs) to be established with a NOHC as the parent entity.
2.6 To date, no major Australian financial group containing an ADI has chosen to adopt a NOHC structure. This has been the result of a number of other regulatory and tax provisions that have impeded Australian financial groups from moving to a NOHC structure.
2.7 Consistent with the Government's decision to facilitate the establishment of NOHCs, this Bill will remove the regulatory impediments to the adoption of a NOHC structure. The impediments identified arise under particular requirements of the Corporations Act 2001 (Corporations Act) and income tax law.
2.8 The Bill will provide the Minister with the power to grant relief from these specific requirements of the Corporations Act. To grant relief, the Minister will issue a restructure instrument that specifies the statutory provisions and the entities of a company group (and any persons involved in complying with a requirement) for which the relief applies.
2.9 The relief provided by the Minister will only relate to the specific provisions of the Corporations Act as set out in the restructure instrument. It will not relieve an entity from having to meet its other obligations under the Corporations Act, associated regulations and other relevant legislation.
2.10 The Bill will also provide the Minister with the power to approve the issue of associated internal transfer certificates by the Australian Prudential Regulatory Authority (APRA). An internal transfer certificate will provide for the transfer of assets and liabilities between two entities of the company group being restructured and, thereby, facilitate the rearrangement of different types of activities into separate business lines. This will allow a group containing ADIs to separate its banking and non-banking businesses.
Taxation aspects
2.11 Schedule 2 to this Bill amends the consolidation membership rules and the capital gains tax provisions in the Income Tax Assessment Act 1997 to remove tax impediments that prevent financial groups containing ADIs from restructuring.
Date of effect : The measure applies from 1 July 2007.
Proposal announced : The measure was announced on 8 May 2007 in the 2007-08 Budget.
Financial Impact
2.12 Minimal.
Compliance Cost Impact
2.13 Negligible.