House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Frank Crean, M.P.)

INTRODUCTION

The main purposes of the Banking Bill are to :

(A)

take full advantage of the constitutional powers of the Australian Government in relation to exchange control regulation of the financial aspects of overseas transactions;

(B)

provide for the extra-territorial application of the Banking (Foreign Exchange) Regulations;

(C)

provide a more comprehensive legislative basis for tax screening arrangements enabling exchange control approval to be withheld from proposed transactions with overseas tax havens that involve evasion or avoidance of Australian tax; (see also the Bill to amend the Taxation Administration Act 1953-1973); and

(D)

validate, for the purpose of any civil proceedings, acts or transactions already entered into, or which might be entered into in future, without the proper exchange control authority. The right of the Government to prosecute persons for breaches of the Banking (Foreign Exchange) Regulations will not be affected.

(A) Constitutional Powers

The present section 39 has been on the statute books for about thirty years and only minor amendments have been made to it during that time. Since the section was drafted, it has been recognised that, in order to be able to give full effect to economic and financial management policies which it may be desirable to pursue in the national interest, Governments need to have full legal powers to control financial aspects of all the various types of transactions which may be entered into between residents of Australia and residents of overseas countries. Under the present section 39 exchange control regulations may be made for the purposes of the protection of the currency or of the public credit of Australia or to conserve, in the national interest, Australia's foreign exchange resources. The wording of this section, and the way it is drafted, has given rise to some uncertainty as to whether the section gives power to make regulations with respect to all types of overseas transactions. The proposed amendments to section 39 should ensure that regulations may be made to control the financial aspects of all overseas transactions entered into in modern economies.

(B) Extra-territoriality

The proposed new section 39A specifically provides for financial acts and transactions of Australian residents which take place overseas to be brought within the ambit of exchange control regulations. The absence of a specific power over extra-territorial transactions could enable avoidance of the requirement to seek exchange control approval in respect of contracts, etc. with non-residents entered into outside Australia. Such contracts could be concluded contrary to Government policies.

(C) Tax Avoidance

Under existing section 39(3) and (4) the Reserve Bank has the power to reject applications for exchange control approval on the ground that the transaction involves, assists in, or is associated with the avoidance or evasion of Australian tax. The Bank is, however, not authorised to refuse exchange control approval on tax grounds if the applicant produces to the Bank a statement by the Commissioner of Taxation to the effect that, in the opinion of the Commissioner, no tax avoidance or evasion is involved.

The proposed new section 39B in the Banking Bill allows or, in certain cases, requires the Bank to refuse applications for exchange control approval unless the applicant produces a tax clearance certificate from the Commissioner of Taxation to the effect that the transaction is not associated with tax avoidance or evasion. This ensures that any decision by the Reserve Bank to refuse exchange control approval on tax avoidance/evasion grounds cannot be challenged; the relevant discretion on this point will rest with the Commissioner of Taxation. The Taxation Administration Bill provides rules associated with the giving of these tax clearance certificates.

(D) Validation

Under present legislation, in the absence of the proper exchange control authority, not only could a transaction between a resident of Australia and an overseas resident be illegal and subject to penalty under the Banking Act, it could also be null and void. In most cases where proper exchange control authority is not obtained the persons involved would be unaware of the need to obtain approval and, in many cases, the absence of exchange control approval would not present a problem to the parties concerned. However the fact that such contracts could be invalid could lead to people using the alleged invalidity of such transactions to renege on their debts or other obligations. This would clearly be undesirable.

Clause 5 of the Bill contains provisions which will validate - for civil purposes only - acts or transactions which have already been entered into without exchange control approval. Section 39(6) makes provision for regulations to be made to validate transactions, etc. which will be entered into in future without the appropriate approval. Validation would, however, in no way prevent a person being convicted of an offence against the Banking (Foreign Exchange) Regulations for having failed to obtain exchange control approval.

BANKING BILL 1974 - EXPLANATORY NOTES ON CLAUSES

Clause 1: Short title and citation

This clause formally provides for the short title of this Act and the Principal Act.

Clause 2: Commencement

The Act will come into operation on a date to be fixed by proclamation.

Clause 3: Repeal of Part III of Banking Act 1959-1973 and Insertion of new Part III

The clause provides for the deletion of section 39 (Part III) of the Banking Act 1959-1973 and the substitution of new sections 39, 39A and 39B under a broader heading "Foreign Exchange, Foreign Investment, etc." as follows :

Section 39(1)

outlines the general purposes for which the Governor-General may make regulations. The purposes include those previously included but the opportunity has been taken to make it clear that such purposes include foreign investment, both inwards and outwards.

Section 39(2)

specifies the various types of overseas transactions for which regulations may be made. Paragraphs (a) to (r) of the sub-clause provide for the making of regulations in connection with, inter alia, the dealing in, and movement across the exchanges, of foreign and Australian currency and securities in specified circumstances; dealing in property in Australia by non-residents and dealings in property overseas by Australian residents; exchange rates; payments for imports and exports and the making of certain other payments to foreigners; the disposal of holdings of foreign currency; the obtaining of information by the Reserve Bank relevant to its administration of exchange control; and the fixing of penalties for offences against the regulations.

Section 39(3)

enables the regulations to prohibit the doing of the various acts and things outlined in section 39(2) either absolutely, or except with the authority of the Reserve Bank or relevant licence, and then on such terms and conditions as may be specified. The sub-section also provides for the granting of exemptions from all, or certain of the provisions of the Banking (Foreign Exchange) Regulations.

Section 39(4).

Exchange control applies to transactions between "residents" and "non-residents" and the term "resident" is defined in section 39(8). In order to cover the possibility that certain types of "person", e.g. unincorporated enterprises, could be both "resident" and "non-resident" in terms of section 39(8), this section provides for the making of regulations the effect of which would be to have the exchange control regulations apply to a "resident" (as defined in 39(8)) as if the person were a "non-resident" and vice versa.

Section 39(5)(a)

relates to overseas-incorporated companies (which are, by definition, "non-residents") who conduct their business in Australia on a branch/office basis, rather than through a local subsidiary which would have a separate Australian identity in law. It would enable regulations to be made which would ensure that such branches/offices could be treated as residents for exchange control purposes. This would ensure that overseas companies were able to conduct their Australian branch/office operations without being subject to exchange control in their dealings with Australian residents.

Section 39(5)(b)

is intended to cover the reverse situation where a company incorporated in Australia operates a branch/office overseas. Regulations could be made to provide that exchange control would apply to that company's dealings with its foreign branch as if the branch were a "non-resident".

Section 39(6)

provides for the making of regulations so that the validity of acts or transactions entered into in future without exchange control approval would not be called in question in any civil proceedings. This would not, however, affect the Treasurer's ability to bring criminal proceedings under the regulations against such persons for not having obtained the proper exchange control authority or to prosecute for any other exchange control offences. (The validation of past transactions, acts, etc. is covered by Clause 5.)

Section 39(7)

provides for regulations to be made for the giving of directions by the Treasurer to the Reserve Bank in connection with the latter's administration of the exchange control regulations.

Sections 39(8) and (10)

contain definitions of various terms used in the Bill.

Section 39(9).

Part IV of the Banking Act, which contains certain provisions relating to holding of gold by Australian residents, will not be affected by the proposed amendments. This section is a technical provision designed to ensure that the existence of Part IV is not construed to prevent the making of regulations in respect of transactions in gold. The existing section 39 contains regulation making powers relating to gold.

Section 39(11)

is designed to ensure that the regulations based on section 39(2) powers are not limited in their interpretation by the purposes in section 39(1) - that is, they may take full advantage of constitutional powers.

Section 39A

specifically provides for financial acts and transactions undertaken by Australian residents outside Australia to be subject to exchange control regulations.

Section 39B,

together with the detailed administrative provisions in the Taxation Administration Bill, provides a more comprehensive legal backing for the screening of exchange control applications with tax minimisation implications. The provision makes it clear that the Reserve Bank shall refuse to grant its authority to a transaction, falling within a class of transactions specified by the Treasurer in the Gazette in the absence of a clearance certificate from the Commissioner of Taxation and, in any other case, may refuse approval unless such a certificate is produced. The discretion for the Bank to decline an application, on exchange control policy grounds, remains.

Clause 4: Saving of Banking (Foreign Exchange) Regulations

This is a technical provision which provides for the continuation in force of the Banking (Foreign Exchange) Regulations and any orders and instruments made under these Regulations.

Clause 5: Validation

This clause provides for the automatic validation, for the purposes of any civil proceedings, of any act or transaction done in the past without the proper exchange control authority. The position with regard to future transactions has been outlined above. Neither provision prevents the undertaking of criminal proceedings for breaches of exchange control regulations.

The clause also deals with applications made prior to the commencement of the proposed taxation screening provisions and specifies that if the Reserve Bank had not disposed of an application it is dealt with under the existing tax screening rules contained in section 39(3) and (4) of the Banking Act 1959-1973. The new rules will only apply to exchange control applications made after the commencement of the Banking and Taxation Administration Acts 1974.

Clause 6: Making of Regulations before Proclaimed Date

This clause provides for the making of exchange control regulations under the Banking Act 1974 any time after the latter receives Royal Assent but prior to it being proclaimed. It is proposed to make a number of amendments to the Banking (Foreign Exchange) Regulations prior to promulgation of the Act.