House of Representatives

Explanatory Memorandum

(Circulated by authority of the acting Minister for Industry, Tourism and Resources, the Honourable Joe Hockey MP)

Outline, financial impact statement and regulation impact statement

Outline

The ACIS Administration Amendment Bill 2003 (the Bill) makes a series of substantial amendments to:

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the ACIS Administration Act 1999.

The Customs Tariff Amendment (ACIS) Bill 2003, which makes changes to the tariff schedule, is complementary to the Bill, indeed, the tariff changes and the measures in the Bill form one integrated package.

Automotive Competitiveness and Investment Scheme (ACIS)

Overview of the Extended ACIS

This Bill implements the Government's post-2005 assistance package for the Australian automotive industry. This package will deliver an estimated $4.2 billion to the industry via ACIS, a Scheme that will be extended from its initial finishing date in 2005, to the end of 2015.

Participants in ACIS earn incentives for eligible production and investment in plant and equipment, and research and development. Incentives are paid in the form of duty credits which can either be used to offset customs duty liability on eligible automotive imports, or alternatively the duty credits may be sold or transferred to another person or company.

The post-2005 ACIS, like the pre-2005 Scheme, will be a transitional assistance scheme that will encourage competitive investment and innovation by firms in the automotive industry in order to achieve sustainable growth as tariffs are reduced in line with trade liberalisation.

The passage of this Bill will give Australian car and component manufacturers long-term security to continue building on their current record production and export levels. In effect, this Bill will give the Australian automotive industry a decade of certainty allowing firms to plan for the cessation of all taxpayer funded, industry specific support on 31 December 2015.

Funding Split

On 13 December 2002, the Government publicly announced details of the extension of ACIS until 2015. Included in this announcement was an undertaking to split ACIS funding into two separate funding pools in a ratio of 55:45 from the first quarter of 2003, the 55 being for motor vehicle producers and the 45 for other ACIS participants. This split was proposed to the Government by industry.

Given that the extended ACIS runs until 2015, and that the automotive industry is continually restructuring, there is merit in having flexibility to quickly adapt to new situations as they arise. Locking a 55:45 split into primary legislation strongly reduces such flexibility. Consequently, although the split has been incorporated into this Bill, the details of the split, including the 55:45 ratio, will be set out in subordinate legislation.

Productivity Commission Review

The announcement of 13 December 2003 also included a reference to an inquiry that would be conducted by the Productivity Commission in 2008, for the purpose of determining if changes are warranted to the legislated tariff reductions in 2010, taking account of conditions then existing in the international trade environment. There is no provision for this review in the Bill, because such a review is a matter for the Government of the time, and it would be inappropriate for the current Parliament to attempt to bind its successors. The Government, however, does not resile from its commitment to the review.

Research and Development Fund

The extended ACIS will also provide stronger incentives for industry research and development. To this end the Bill establishes a research and development fund within the motor vehicle producers' pool of funding. This fund will encourage vehicle producers to invest in high-end research and development activities.

Disclosure

In line with good public policy, which allows for transparency in the expenditure of public monies, the Bill provides for the Minister, in relation to the extended ACIS, that is from 2006 onwards, to disclose the identity of a participant in ACIS and the amount of ACIS assistance that a participant received.

Tariff Reduction

The rate of customs duty imposed on passenger motor vehicles and certain parts for passenger motor vehicles, is 15 per cent. Under existing legislation this rate of customs duty will fall to 10 per cent from 1 January 2005. A bill complementary to this Bill, namely the Customs Tariff Amendment (ACIS) Bill 2003, provides for the tariff rate to fall to 5 per cent from 1 January 2010.

Fuller details of the tariff reductions are set out in the explanatory memorandum relating to the Customs Tariff Amendment (ACIS) Bill 2003.

Financial impact statement

ACIS

The post-2005 extension of ACIS is a ten year program of budgetary assistance during which an estimated $4.2 billion will be provided to the Australian automotive industry in the form of duty credits which can be used to offset import duty. This $4.2 billion consists of: assistance capped at $2 billion for the period 2006-10 inclusive: a further amount capped at $1 billion for the period 2011-15 inclusive; and uncapped assistance estimated at $1.2 billion.

It should be noted that underlying the estimate of uncapped assistance are assumptions about the growth of the automotive market in Australasia, the effect of free trade agreements and exchange rate fluctuations. The estimate is based on projected sales value data provided primarily by MVPs in relation to sales volumes extrapolated to 2010.

The Department will incur additional running costs as a result of the extension of ACIS for a further ten years. These costs are estimated at $0.1 million in 2002-03 increasing to $2.4 million in 2015-16.

Tariff reduction

The cost of revenue forgone by cutting the tariff from 10 per cent to 5 per cent with effect from 1 January 2010, is $290 million in 2009-10, with a full year effect of $640 million in 2010-11.

It should be noted that it is difficult to predict the actual impact on revenue of the proposed tariff cuts on motor vehicles and related components in 2010 and after. A number of variables impact on the automotive industry, such as the rate of growth in the motor vehicle market, consumer preferences, and exchange rate fluctuations. These variables influence the price and amount of duty payable on imported vehicles; thus these variables can alter the amount of the actual tariff revenue foregone by the Commonwealth.

Regulation impact statement

Introduction

The purpose of this Regulation Impact Statement is to explore the merits of ceasing, continuing or changing the current form of assistance to the automotive sector.

The automotive sector enjoys a higher level of assistance than the bulk of Australian industries. In order to facilitate a transition from a high tariff environment, the Government developed the Automotive Competitiveness and Investment Scheme (ACIS). The objective of ACIS is set out in S3 of the ACIS Administration Act 1999 as:

...to provide transitional assistance to encourage competitive investment and innovation in the Australian automotive industry in order to achieve sustainable growth, both in the Australian market and internationally, in the context of trade liberalisation.

Briefly, ACIS provides about $2.8 billion in assistance to the industry over five years from 2001-05. This is expected to prepare the industry for the fall of automotive tariffs to 10% in 2005. Assistance is provided for production and for investment (motor vehicle producers) and for research and development and investment (supply chain).

The long lead times in the automotive sector mean that investment decisions are taken many years ahead. Recognising that uncertainty may adversely impact future investment, the Government initiated early consideration of future automotive assistance arrangements, including the rate of further tariff falls needed to attain Australia's free trade commitments.

The Government referred the matter of future automotive assistance arrangements to the Productivity Commission (PC). By a parallel process, the Government also commissioned the Automotive Council, comprising key industry participants, to report to it on industry issues and perspectives.

The Productivity Commission Report provides a balanced consideration of the merit of several forms of assistance. It provides the bulk of the assessment of the options put forward in this Statement. Quotations set out in the Statement are from the Productivity Commission Report unless otherwise noted.

1.0 Current Automotive Assistance Arrangements

ACIS is a bundle of legislation encapsulating the assistance provided to the automotive industry. There are two major elements to ACIS:

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an uncapped element provided to motor vehicle producers for vehicles produced for sale in Australia and New Zealand; and

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a capped element of $2 billion over 2001-05 to motor vehicle producers and their supply chain.

Under the uncapped element of ACIS, motor vehicle producers (MVPs) are eligible to claim 15% of the value of vehicles produced for sale in Australia and New Zealand. This element represents a continuation of the former duty-free allowance, which was included in the ACIS legislation for convenience. At the time ACIS was passed into law in 1999, expenditure on the uncapped element was estimated to be $825 million. Current projections suggest expenditure over 2001-05 of $841 million; a figure closely aligned to that projected.

Under the capped portion of ACIS, MVPs may claim production credits of 10% of the value of production of vehicles produced for sale in Australia and New Zealand and 25% of the value of vehicles and engines produced other than for sale in Australia and New Zealand. In addition, vehicle producers may claim 10% of the value of investments in plant and equipment and 45% of the value of research and development that is not for vehicle producers own use. MVPs requested that they primarily receive production credits in lieu of increased investment and own use research and development because of the five-year duration of ACIS and because investment expenditure may not align with this period.

The supply chain, comprising component producers, machine tool producers and service providers receive assistance of 25% of investments in plant and equipment and 45% of investment in research and development. Criteria for what is and is not allowable investment are set out the ACIS Act and Regulations. There are approximately 200 registered participants in ACIS ranging in size from large MVPs (4 in total) down to small and medium sized firms. There is a minimum threshold for firms entering the Scheme equating to a turnover of activity in the automotive sector of $500,000 per year. This figure was set to ensure that participants represented a sizeable exposure to the industry. There is an upper cap limit of 5% per participant based on the previous 12 months sales.

Underlying demand for ACIS is about one-third above the $2 billion cap. Accordingly, claims for the capped element need to be modulated to ensure expenditure remains within the cap. The current modulation rate is set at 71%.

2.0 The Productivity Commission Inquiry

On 21 December 2001, the Government announced an inquiry into future automotive assistance arrangements. The PC was to examine the operation of current arrangements and to make findings about the appropriate form of any future tariff and assistance arrangements. The inquiry formally commenced on 21 March 2002, with the Commission being given six months to provide its findings.

The PC conducted its inquiry through discussions with parties, release of a Position Paper and holding of a workshop to develop modelling. It then invited submissions and held public hearings, before reporting to the Government on 30 August 2002.

Briefly, the Commission found that

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a settled path of future automotive assistance policy would reduce uncertainty;

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tariff reduction to 5% could be achieved by several means, but it preferred a reduction of 5% in 2010 as a means of achieving this;

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continuation of ACIS after 2005 would facilitate the reduction in the tariff rate;

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several options existed for extension and level of funding of ACIS, with its preference for continuation of the uncapped element of ACIS to 2015 and continuation of the capped element at $2 billion for a further five years.

3.0 Issue Identification

The issue to be examined is not whether or by how much automotive tariffs should be reduced. Industry specific tariffs are distortionary and there would be benefits in resource allocation and lower prices from a reduction in such tariffs. However, the issue of tariff reform is not irrelevant to consideration of the form and duration of assistance arrangements in the automotive sector, as past assistance has been tied to or closely associated with reductions in the tariff rate of vehicles and automotive components.

The Government's decisions in 1997 and 1998 provided a tariff pause for five years, ending with a 5% drop in the tariff to 10% in 2005. To facilitate the adjustment, existing assistance provided through the then Duty Free Allowance was continued and a new scheme, the Automotive Competitiveness and Investment Scheme (ACIS), was initiated. The form of ACIS was also influenced by the tariff rate, as incentives for production of motor vehicles are tied to the level of tariff on passenger motor vehicles.

ACIS is a transitional measure designed to take the industry into a lower tariff environment. There is, however, a need for the industry to make a further transition from a tariff rate of 10% to 5%. The issue is whether and how a further assistance package should be provided to facilitate this transition to a tariff level equal to that prevailing for industry generally.

While the Automotive Council recommended a continuation of tariffs at 10 percent and the extension of ACIS to at least 2010, the Productivity Commission favours a drop in the tariff to 5% in 2010, with the industry given a decade of policy certainty to 2015, at the end of which industry specific assistance would cease.

The industry has emphasised the need for the post 2005 assistance regime to establish a clear policy path for at least five years and preferably for 10 years. Given the long planning and investment horizons in the industry, the Commission considers this to be a reasonable expectation. The range of broader pressures and uncertainties facing the industry - particularly in relation to technological change and future environmental policies - are already very considerable. Providing a clear and extended path for assistance policy would serve to reduce one source of uncertainty. Without clear policy directions, desirable investment that would help to secure the industry's future could be put at risk (Productivity Commission Report, pXXVII).

This Statement assumes that the Government is disposed towards a further reform of tariff levels and that it is disposed towards reducing the level of assistance provided to the automotive sector. The issue then is to develop a mechanism to enable the automotive sector to transition to a low tariff environment free of ongoing industry specific subsidies.

4.0 Specification of the desired objective

The objective of the proposed regulation is to provide an apparatus for delivering a final round of transitional assistance to the automotive sector to ensure its future sustainability.

Regulation is currently provided through ACIS legislation and is administered by the AusIndustry arm of the Department of Industry, Tourism and Resources.

5.0 Identification of options

The options considered in this Statement are:

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Ending ACIS at its current expiry date of end 2005

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An unlegislated scheme more in line with the predecessors to ACIS

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A reformed ACIS with differing elements or emphases

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A broad continuation of ACIS into the future

a. End ACIS at end 2005

This option could be considered to be in line with the stated transitional nature of the original ACIS legislation. It is the extent of the Government's current commitments made in 1997 and 1998. In support of this option, one could point to the considerable assistance industry received through tariff protection, the former Export Facilitation Scheme and the former Duty Free Allowance. Against this is the Productivity Commission's observation that too sudden closure of ACIS accompanied by tariff reduction may have the effect of eliminating firms that might be viable if the removal of assistance was more gradual. Because exposure to ACIS can be no more than 5% of the previous year's sales, it is considered that there would be no differential exposure by businesses under ACIS. In effect this would serve to somewhat limit the impact of the Scheme finishing in 2005.

b. An unlegislated scheme

The predecessors to ACIS were not legislative; rather they were largely administrative schemes (albeit operating within customs and tariff legislation). The advantage of administrative schemes is flexibility in changing to meet evolving circumstances. Against this is a lack of transparency, a probable lack of precision in terminology and reduced certainty to participants. The fact of the current legislated scheme is also a factor against reverting to an unlegislated arrangement.

c. Reformed legislated scheme

It would be possible to formulate a successor scheme utilising a different methodology or architecture to achieve the scheme's stated objectives. One option raised with the Productivity Commission is to provide vehicle producers with access to incentives for research and development, in lieu of current incentives for production of motor vehicles. It would also be possible to change the mix of incentives to the supply chain. An example could be to seek that research and development assistance only go to higher level research, rather than principally to engineering development, as at present. While this may change the emphasis of incentives, the PC focuses on the primary purpose of ACIS:

...given its transitional role, extension of ACIS to a range of new activities could be counterproductive. In the Commission's view, the role of ACIS is not to introduce new firms or activities to additional industry assistance, but rather to facilitate the transition to lower assistance for currently assisted firms (Productivity Commission Report, p175).

The PC was also not persuaded that giving incentives for differing activities necessarily encouraged or discouraged other desired activities:

In the Commission's view...it does not follow that vehicle producers' own use R&D is deterred because it is an ineligible activity. Given the fungibility of duty credits, it may not matter a great deal whether the basis for earning credits is related to production, R&D or investments in plant and equipment." ... "...the primary rationale for ACIS is to provide transitional support. It is not a long term plan to underpin automotive R&D - although it does eventually reward successful R&D by vehicle producers." ... "Perhaps most significantly, by compelling a redirection of resources towards new R&D, such a change could distort the capacity of some firms to use ACIS funds in a manner which best supported their transition to lower assistance (Productivity Commission Report, p177).

There would be substantial uncertainty and cost to industry and government in a significant overhaul of ACIS. Data collection regimes have been developed for ACIS and a substantial change may impose costs without necessarily producing a major change in behaviour.

d. Broad continuation

The current ACIS legislation expires at end 2005. An option would be broadly to continue ACIS in its current form and to defer its expiry to a later date or else to replicate its provisions in new legislation. The advantage of this option is the familiarity of the form of ACIS to participants and to regulators, a position likely to be strengthened by the fact that ACIS has three more years to run. Against this is that the chance to start with a fresh approach is foregone. Such a fresh approach might come to different conclusions on form of assistance, levels of incentives, entry thresholds and payment mechanisms.

A settled path for future automotive assistance policy would serve to reduce one source of uncertainty impacting on investment and production decisions in the industry. To this end, specification of clearly defined assistance regime for the industry for the decade after 2005 is appropriate (Productivity Commission Report, p180).

Within the concept of a broad continuation, there is still some flexibility for considering changes that might improve ACIS's performance. For example, the PC saw merit in creating separate sub-schemes within a future ACIS to ensure types of participants received assistance roughly in line with what they currently receive. Otherwise, the MVP entitlements under ACIS would decline from 2005 in line with the tariff reduction that year, while the supply chain would suffer no such decline. The major industry associations have suggested that ACIS and its successor contain separate pools for MVPs and the supply chain in the ratio of 55:45. This broadly reflects current activity and prospective increases in MVP activity through domestic sales and particularly exports.

Further, broad continuation could encompass some adjustment to levels and types of incentives, provided such adjustments did not impact on incentives provided to other types of participant. For example, if separate pools for MVPs and supply chain were created, it would then be possible to excise some funds from the MVP pool and use these funds to produce a fund for MVPs to encourage introduction of particular technologies or research that may enhance the competitiveness of the industry.

The PC put forward three options for continuing ACIS. All options included continuation of the uncapped element of ACIS to 2015. The three options for the capped element of ACIS were:

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$2 billion over the years 2006-10, so providing a seamless continuation of ACIS;

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$2 billion in net present value terms over the years 2006-15, so providing certainty over a longer period;

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$2 billion in net present value terms over the years 2006-15, but with funding in the first five year tranche set at a level twice that of the second five year tranche.

While favouring the first option, the PC stressed that the other options would fall for consideration if there was significant concern about the ability of the industry to adapt to a 5% reduction in the tariff at 2010. The PC did not specify discount rates or start or end dates for calculating the net present value of $2 billion. The PC was clear that the duration of funding would be limited to 2006-2015 and not exceed $2 billion however calculated. This suggests there is no correct amount of assistance, rather the level is the minimum thought necessary to achieve the tariff reduction objective within a specified timeframe.

6.0 Assessment of impacts of options

a) The option of ending ACIS from 2005 would have the effect of removing subsidies of approximately $560 million per year for the automotive sector. In looking at this option, the PC considered that the adverse impact on the industry would be too severe to be sustained without causing significant damage to many individual participants. It did not recommend this course.

While parts of the Australian automotive industry are performing strongly in global markets, there are still significant changes required if the industry as a whole is to become competitive without substantial government support. Some of these will involve changes to the composition and structure of production, some will require a rebalancing of output between domestic and export markets, and some will require changes in the industry's operating practices (Productivity Commission Report, pXXV).

... the assistance regime should provide the industry with sufficient time to make the further changes necessary to secure its longer-term future. Notwithstanding the already long period of support for the industry, reducing remaining assistance too quickly after 2005 could put at risk production that would have become internationally competitive in the longer term under a more gradual transition process. Given the industry's size and linkages with the rest of the economy, the costs to the community from 'over-shooting' could be substantial (Productivity Commission Report, pXXVI).

Withdrawal of ACIS support when the current scheme expires at the end of 2005 would carry downside risks. It is clear that many parts of the industry are still some way from being truly internationally competitive. Hence, an immediate withdrawal of ACIS, in combination with further tariff reductions, could be sufficient to precipitate the exit of firms from the industry that would have become internationally competitive under more accommodating transitional arrangements. Consistent with the current assistance package, the Commission sees a continuation of ACIS after 2005 as a means of facilitating a reduction in the tariff to 5 per cent (Productivity Commission Report, pXXIX).

In the short term, the effect of this proposal would likely be some exit from the industry by some participants, with consequently higher welfare payments. In the longer term, however, the resultant effects of this option on consumers, non-automotive firms and the broader community would be minimal. However, firms exiting the industry could result in a contraction in the industry and economic growth. This option would result in a substantial cost and administration saving to Government. However, the exit of a substantial number of firms from the industry in certain states could result in calls for regional assistance.

The PC estimates that, in 2001, the consumer tax equivalent of the tariff was around $1.9 billion, with around $1 billion appropriated by the Government in the form of tariff revenue (before ACIS). Ending ACIS in 2005 would accordingly free up substantial funding which could then be made available to the broader community (including tax reductions).

b) The fact that ACIS will have been in legislation for five years by 2006 suggests that the option of continuing with an assistance scheme, but not having it legislated is not a serious option. In any event, the definitions and the rules embodied in the current ACIS legislation would have to be replicated in administrative schemes, for no net saving. Decisions made whether through legislation or administratively would remain appealable to the Administrative Appeals Tribunal. There seems little to commend this option. The costs and benefits to consumers, non-automotive businesses and community would be minimal.

c) A change in the fundamental architecture of ACIS would involve costs and benefits, but not necessarily differing impacts. The cost would be in developing and drafting new approaches to delivering assistance to the industry. A cost to participants would be in developing an understanding of new rules and procedures. There is already a healthy consultancy sector servicing the industry in claiming ACIS credits. It is likely that changes to the architecture of ACIS would continue to benefit this externality on the scheme. The benefit would be in potentially encouraging more productive investment or research and development, or in reducing assistance to less productive activities.

The PC takes the view that, on balance, it would not be desirable to introduce new uncertainties into ACIS. It said:

The Commission remains of the view that foreshadowing changes to a scheme that has been in operation for less than two years would introduce undesirable uncertainty about firms' future entitlements. There is already widespread concern about uncertainty arising from the modulation arrangements used to adjust firms' entitlements. Moreover, some of the proposed changes would add to the complexity of the scheme and could be difficult and expensive to administer.

The Commission considers that considerable weight should be placed on avoiding uncertainty associated with significant changes in scheme design-particularly, changes which could have major distribution consequences. Thus, apart from seeing merit in the creation of separate capped funding pools for vehicle and component producers - which would reduce uncertainty - it does not consider another changes to the desired ACIS would be beneficial (Productivity Commission Report, p178).

The impacts of this option on consumers, non-automotive firms and the community would be minimal.

d) The impact of broad continuation of ACIS involves some short term cost, but longer term benefit. As ACIS and its successor are funded from revenue gained by imposing tariffs, the continuation of the tariff at 10% from 2005 imposes a cost on consumers of imported vehicles. As against this, the assistance provided by ACIS enables domestic producers to be more competitive with imports, so presumably lowering the price of domestically produced vehicles. In the longer term, if ACIS and its successor contribute to the domestic producers becoming sustainably competitive, the consumer would benefit from a reduction in the tariff to 5%.

The PC favours the broad continuation of ACIS, but besides indicating against any increase in the rate of assistance, substantially leaves open the quantum and duration of funding. Accordingly, any one of a range of funding and duration options would suffice, provided the assistance remained transitional and so provided only to achieve the desired tariff reduction.

In looking at the allocation of the funding, the PC noted industry submissions seeking the creation of separate pools splitting funding between MVPs and the supply chain. The PC found that a 50:50 allocation of capped assistance would be appropriate. This allocation was based on information provided by the Department of Industry, Tourism and Resources regarding the current demand for assistance under ACIS. However, as the PC acknowledged in its position paper, there is no science to such an allocation. More recent figures supplied by industry to the Department suggest that other allocations are possible. Industry has now agreed to a 55:45 allocation which is only a minor deviation from the PC's preferred position.

The impacts on non-automotive firms would be minimal, given that ACIS assistance is limited to passenger motor vehicles (and utilities). However, similar to consumers, there may be some benefits derived from reduced domestic car prices, but balanced by higher imported vehicle prices.

For motor vehicle producers and firms in the automotive supply chain, ACIS assistance would provide significant leverage for the competitiveness of the industry and be a major factor in determining its long-term sustainability.

The continuation of ACIS broadly in its current form would enable the streamlining of Government regulatory processes and requirements, given that administrative arrangements for ACIS are already established and operational.

The proposed regulation would be designed to be WTO compliant with an indirect bearing on export performance.

The continuation of ACIS would not result in any clear losers. Costs to consumers, non-automotive businesses and the community would be minimal given that the overall cost of continuing ACIS broadly in its current form would be fairly neutral. For firms in the automotive industry, there would be some ongoing compliance costs in respect to the legislation. However, this would not impose an unnecessary burden, especially given that they would be receiving substantial assistance through the Scheme.

The Government would incur ongoing costs for administering the Scheme but given that administrative mechanisms are established and operational, costs would be unchanged from the existing Scheme. The exact funding profile for a 'preferred option' is subject to decision by Cabinet.

7.0 Consultation

There has been no formal consultation on the proposed regulation, as a decision on the regulation is Cabinet-in-confidence. However the PC process and the work by the Automotive Council cover the same ground and in considerably more depth than would be possible in a Regulation Impact Statement. Attachment A to the PC's Report sets out the names of the parties with which it consulted and from whom it received submissions.

8.0 Conclusion and recommended option

Options included in this analysis have included:

1.

Ending ACIS at its current expiry date of end 2005 - similar to the PC's views, this option is not recommended as it may eliminate firms that might be viable if the removal of assistance was more gradual.

2.

An unlegislated scheme - this option is not recommended given the lack of transparency and precision in terminology coupled with a reduced certainty to participants.

3.

Reformed legislated scheme - similar to the PC's views, this option is not recommended due to the potential to distort the capacity of some firms to use ACIS assistance in a manner which best supported their transition to lower assistance.

4.

Broad continuation - similar to the PC's views, it is recommended that ACIS should be continued in its current form (whether by extension of existing legislation or renewed legislation).

Given assistance is to continue and it is desirable to tie as much as possible to the tariff, it makes sense to continue the current scheme as per option 4.

There are not sufficiently strong grounds to warrant modifying the design of ACIS with respect to its eligibility criteria or the basis for earning duty credits (including any linking of payments to the achievement particular outcomes, such as environmental and industrial relations objectives). (Productivity Commission Report, p.180)

It is recommended that the structure provided by ACIS be continued for a quantum and duration set by the Government, with substantially the same architecture as currently operating. The quantum and duration should be the minimum that enables the industry to achieve successfully the transition to a lower tariff environment.

9.0 Implementation and review

Implementation of the recommended option will be through legislated amendments to the existing ACIS framework or new legislation replicating the provisions of ACIS. In addition to changing the expiry dates in ACIS to achieve the duration the Government decides on, there will be decisions on transitional issues mentioned above.

It is proposed that review of the operation of the ACIS successor would occur in 2008 and again about two years before its expiry. The Government would specify that from the time of expiry, there would be no further assistance to this industry beyond that made available to industries in general.

Compliance costs for business would be fairly minimal given that the Scheme would be continuing in broadly the same form. Firms would already have sufficient knowledge of the Scheme in order to meet their regulatory obligations.

Notes on clauses

ACIS Administration Amendment Bill 2003

Clause 1 Short Title

1. Clause 1 provides for the Act to be cited as the ACIS Administration Amendment Act 2003.

Clause 2 Commencement

2. Clause 2 provides for the commencement of the ACIS Administration Amendment Act 2003.

Clause 3 Schedule(s)

3. Clause 3 provides for the Schedule to the Act, in particular it provides that the Act specified in the Schedule, in this case the ACIS Administration Act 1999 (the Act) is amended or repealed as set out in the Schedule.

Schedule 1 Amendment of the ACIS Administration Act 1999

Item 1 Subsection 4(1) - (Overview of the Act)

4. A very minor amendment necessitated by the renumbering of a section in the Act for the purpose of improving clarity.

Item 2 After subsection 4(1) - (Overview of the Act)

5. This change inserts into the Act a statement that the ACIS assistance program is being extended from its current five year term to include an additional two five year stages.

Item 3 Subsections 4(2) and 4(3) - (Overview of the Act)

6. These subsections, which set out the amount of ACIS assistance to be given to the Australian automotive industry, and the limits on that assistance, are repealed. They are replaced with subsections detailing the new amounts of assistance, the limits on that assistance, and the fact that a new type of assistance will be available, namely assistance for motor vehicle producers undertaking research and development (referred to as type J investment credit). Also included in this item is a minor technical amendment clarifying the terminology regarding the limit, set out in section 54 of the Act, concerning the maximum assistance available to an ACIS participant.

Item 4 Subsection 4(6) - (Overview of the Act)

7. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 5 Subsection 4(7) - (Overview of the Act)

8. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 6 Subsection 4(8) - (Overview of the Act)

9. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 7 Subsection 6(1) - (Definitions)

10. This amendment makes reference to the fact that ACIS will no longer be a single five year program, but rather will consist of three five year stages.

Item 8 Subsection 6(1) - (Definitions)

11. This amendment defines the time period of ACIS Stage 1.

Item 9 Subsection 6(1) - (Definitions)

12. This amendment defines the time period of ACIS Stage 2.

Item 10 Subsection 6(1) - (Definitions)

13. This amendment defines the time period of ACIS Stage 3.

Item 11 Subsection 6(1) (definition of ACIS year ) - (Definitions)

14. This amendment notes that the extended ACIS will cease in 2016.

Item 12 Subsection 6(1) (definition of duty credit ) - (Definitions)

15. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 13 Subsection 6(1) - (Definitions)

16. This amendment results from the fact that, because ACIS will no longer be a single five year program, but rather will consist of three five year stages, the duty credits (the form in which assistance is provided under ACIS) associated with each stage of ACIS will expire one year after the end of each ACIS stage.

Item 14 Subsection 6(1) (definition of final quarter ) - (Definitions)

17. This amendment makes reference to the fact that ACIS will no longer be a single five year program, but rather will consist of three five year stages.

Item 15 Subsection 6(1) (paragraph (b) of the definition of modulated credit ) - (Definitions)

18. In the existing Act the term "modulation" means both: a pro-rata reduction in the value of claims for assistance to ensure that ACIS funding cap is not exceeded; and limiting total ACIS assistance so that no participant receives an amount greater than 5 per cent of total sales in any one year. This amendment repeals a definition of "modulated credit". This amendment is part of a process to reduce confusion by clarifying terminology.

Item 16 Subsection 6(1) (definition of modulated uncapped production credit) - (Definitions)

19. This amendment repeals a definition of "modulated credit". This amendment is part of a process to reduce confusion by clarifying terminology (see note under item 15).

Item 17 Subsection 6(1) - (Definitions)

20. This amendment adds a reference to the Research and Development scheme which will, in ACIS Stage 2, provide a new form of assistance to motor vehicle producers undertaking research and development (referred to as type J investment credit).

Item 18 Subsection 6(1) - (Definitions)

21. A minor amendment adding a reference to the additional type of assistance available in ACIS Stage 2, namely type J investment credit.

Item 19 Subsection 6(1) - (Definitions)

22. A minor amendment adding a reference to the additional type of assistance available in ACIS Stage 2, namely type J investment credit.

Item 20 Subsection 10(1) - (Determination of entitlement to modulated credit between participants)

23. This amendment alters references to "modulated credit". This amendment is part of a process to reduce confusion by clarifying terminology (see note under item 15).

Item 21 Subsection 10(2) - (Determination of entitlement to modulated credit between participants)

24. This amendment alters references to "modulated credit". This amendment is part of a process to reduce confusion by clarifying terminology (see note under item 15).

Item 22 Subsection 40(1) - (Rules concerning returns)

25. This amendment takes account of the fact that ACIS will no longer be a single five year program, but rather will consist of three five year stages.

Item 23 Subsection 40(1) - (Rules concerning returns)

26. This amendment takes account of the fact that ACIS will no longer be a single five year program, but rather will consist of three five year stages.

Item 24 Subsection 40(4) - (Rules concerning returns)

27. This amendment takes account of the fact that ACIS will no longer be a single five year program, but rather will consist of three five year stages.

Item 25 Subsection 41 - (Working out unmodulated credit - Overview)

28. This amendment alters references to "modulated credit". This amendment is part of a process to reduce confusion by clarifying terminology (see note under item 15).

Item 26 Subsection 42(1) - (Secretary to work out unmodulated production credit for each MVP)

29. A minor change clarifying that the Secretary works out the unmodulated uncapped production credit, a form of ACIS assistance, that is to be issued to motor vehicle producers that are participants in ACIS. Also included in this item is an amendment clarifying the terminology regarding the limit, set out in section 54 of the Act, concerning the maximum assistance available to an ACIS participant.

Item 27 Subsection 52(1) - (Overview of Part - Modulation of unmodulated credit)

30. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit. Also included in this item is an amendment clarifying the terminology regarding the limit, set out in section 54 of the Act, concerning the maximum assistance available to an ACIS participant.

Item 28 Subsection 53 - (Stage caps on ACIS)

31. The existing section 53 of the Act, which referred only to the five year ACIS program 2001-05, is repealed because ACIS is being extended to two further five year stages.

32. A new section 53 of the Act, setting out the funding in each of the now three stages of ACIS is inserted into the Act. This new section 53 states that ACIS assistance will be split into separate funding pools in Stages 2 and 3, with one of these pools reserved for motor vehicle producers, and the other reserved for participants in ACIS who are not motor vehicle producers (this division into funding pools is a direct response to representations of industry). The new section 53 also sets out that there will be a Research and Development Scheme available for motor vehicle producers, the funding for which will come from the funding pool reserved for motor vehicle producers. This Research and Development Scheme is the origin of the new type of assistance that will be available in the extended ACIS, namely the type J investment credit referred to earlier.

33. This item also inserts an entirely new provision, section 53A, into the Act. This section is necessitated by the change of ACIS from a single five year scheme, with a single corresponding ledger, into three five year schemes, each with its own corresponding ledger.

Item 29 Subsection 54(1) - (5% of sales limit on participants)

34. These are minor changes clarifying the use of the word "modulated", and inserting a reference to the additional form of assistance that will be available under ACIS (type J investment credit). These changes make it clear that ACIS assistance is provided in respect of a particular year, but not necessarily in that particular year. Also included in this item is a minor technical amendment clarifying the terminology regarding the limit, set out in section 54 of the Act, concerning the maximum assistance available to an ACIS participant.

Item 30 Subsection 54(2) - (5% of sales limit on participants)

35. These are minor changes clarifying the use of the word "modulated", and inserting a reference to the additional form of assistance that will be available under ACIS (type J investment credit). These changes make it clear that ACIS assistance is provided in respect of a particular year, but not necessarily in that particular year. Also included in this item is a minor technical amendment clarifying the terminology regarding the limit, set out in section 54 of the Act, concerning the maximum assistance available to an ACIS participant.

Item 31 Subsections 54(4) - (5% of sales limit on participants)

36. A minor technical adjustment to make the definition of "sales value" given in this subsection accord with the definition given in subsection 6(1) of the Act.

Item 32 Subsections 55(1) - (Minister must make modulation guidelines)

37. This amendment takes account of the fact that ACIS will consist of three stages, and that assistance given under ACIS is adjusted (a process referred to as modulation) with respect to each stage of ACIS.

Item 33 Paragraph 55(1)(a) - (Minister must make modulation guidelines)

38. This amendment alters repeals a reference to unmodulated credit (a form of ACIS assistance). This amendment is part of a process to reduce confusion by clarifying terminology (see note under item 15).

39. The repealed paragraph is replaced with two separate paragraphs; one referring to unmodulated credit for motor vehicle producers in ACIS, and the other referring to unmodulated credit for ACIS participants who are not motor vehicle producers. These two new paragraphs will allow the Minister to modulate (that is adjust) assistance for ACIS participants who are motor vehicle producers differently from assistance for participants who are not motor vehicle producers. This gives the Minister the flexibility to give different sectors of the Australian automotive industry different levels of assistance. This amendment arose from requests from industry.

Item 34 Paragraph 55(1)(c) - (Minister must make modulation guidelines)

40. This amendment repeals a paragraph made superfluous by the amendment in the preceding item.

Item 35 After subsection 55(1) - (Minister must make modulation guidelines)

41. This amendment is necessitated by the amendment under item 33, which allows the Minister to give different sectors of the Australian automotive industry different levels of assistance. This amendment requires the Minister to make guidelines regarding the different levels of assistance, and for the treatment of liabilities that arise as a result of incorrect claims for assistance.

Item 36 Subsection 55(2) - (Minister must make modulation guidelines)

42. This amendment, necessitated by the preceding amendment, requires the funding limits of ACIS to be taken into account in the making of guidelines.

Item 37 Paragraph 55(2)(b) - (Minister must make modulation guidelines)

43. This amendment takes account of the fact that ACIS will no longer be a single five year program, but rather will consist of three five year stages, each with its own funding.

Item 38 Subsection 55(3) - (Minister must make modulation guidelines)

44. A purely mechanical change to make reference to the fact that there now will be guidelines issued under two subsections, not just one.

Item 39 Section 56 - (Secretary to modulate capped production credit for each MVP)

45. A technical change repealing the existing section 56 and replacing it with one in which the use of the term "modulated" is clarified.

Item 40 Sections 57 - (Motor vehicle producers credit)

46. This amendment takes account of the fact that ACIS will no longer be a single five year program, but rather will consist of three five year stages, each with its own funding.

Item 41 At the end of section 57 - (Secretary to modulate investment credit for each motor vehicle producer)

47. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 42 Section 59 - (Secretary to modulate investment credit for each participant in ACIS that is not a motor vehicle producer)

48. This amendment takes account of the fact that ACIS will no longer be a single five year program, but rather will consist of three five year stages.

Item 43 After Part 5 - (Research and Development Scheme)

49. This amendment inserts a new part into the existing Act which sets out that in ACIS Stage 2 a new type of assistance will be available to motor vehicle producers who are participants in ACIS, namely assistance for undertaking research and development (that is, type J investment credit). The assistance will take the form of a competitive grants Research and Development scheme, the operation of which may be varied over time.

Item 44 Subsection 61(1) - (The ACIS ledger and it maintenance - Overview)

50. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 45 At the end of section 62 - (Establishment and maintenance of ACIS ledger)

51. This amendment takes account of the fact because ACIS will no longer be a single five year program, but rather will consist of three five year stages, there will be three ACIS ledgers - one for each ACIS stage.

Item 46 Section 63 - (Information to be kept in ledger)

52. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 47 Subsection 64(1) - (Entry of credit in the ledger)

53. This amendment is necessitated by the fact that ACIS will no longer be a single five year program, but rather will consist of three five year stages, and a new type of assistance will be available in ACIS Stage 2, namely type J investment credit.

Item 48 Subsection 64(2) - (Entry of credit in the ledger)

54. A technical amendment clarifying the process of modulation (see note under item 15).

Item 49 At the end of subsection 64(2) - (Entry of credit in the ledger)

55. This amendment is necessitated by the fact that ACIS will no longer be a single five year program, but rather will consist of three five year stages.

Item 50 Subsection 64(3) - (Entry of credit in the ledger)

56. A technical amendment clarifying the process of modulation (see note under item 15).

Item 51 At the end of subsection 64(3) - (Entry of credit in the ledger)

57. Technical changes necessitated by the fact that ACIS will no longer be a single five year program, but rather will consist of three five year stages, and the need to clarify the process of modulation (see note under item 15).

Item 52 At the end of section 64 - (Entry of credit in the ledger)

58. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 53 Section 65 - (Effect of entering modulated credit in the ledger)

59. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 54 Paragraph 66(aa) - (Circumstances in which the Secretary must amend the ledger)

60. A very minor amendment necessitated by the renumbering of a section in the Act for the purpose of improving clarity.

Item 55 Paragraph 66(e) - (Circumstances in which the Secretary must amend the ledger)

61. This amendment repeals a paragraph for the purpose of replacing it with two new subsections (see next item). This will make it clearer how errors are to be fixed in the ACIS ledger, now that ACIS will no longer be a single five year program, but rather will consist of three five year stages, each with its own ledger.

Item 56 At the end of section 66 - (Circumstances in which the Secretary must amend the ledger)

62. This amendment inserts two additional subsections into the existing Act to make it clear how errors are to be fixed in the ACIS ledger, now that ACIS will no longer be a single five year program, but rather will consist of three five year stages, each with its own ledger. Also included in this item is an amendment clarifying the terminology regarding the limit, set out in section 54 of the Act, concerning the maximum assistance available to an ACIS participant.

Item 57 Subsection 68(1) - (Person may apply to Secretary to fix an error in ledger)

63. This amendment takes account of the fact as ACIS will no longer be a single five year program, but rather will consist of three five year stages.

Item 58 At the end of subsection 68(2) - (Person may apply to Secretary to fix an error in ledger)

64. This amendment takes account of the fact as ACIS will no longer be a single five year program, but rather will consist of three five year stages.

Item 59 At the end of section 68 - (Person may apply to Secretary to fix an error in ledger)

65. This amendment takes account of the fact as ACIS will no longer be a single five year program, but rather will consist of three five year stages.

Item 60 Subsection 69(1) - (Electronic access to ledger)

66. This amendment takes account of the fact that, because ACIS will no longer be a single five year program, but rather will consist of three five year stages, the duty credits (the form in which assistance is provided under ACIS) associated with each stage of ACIS will expire one year after the end of each ACIS stage.

Item 61 After subsection 69(1) - (Electronic access to ledger)

67. This amendment takes account of the fact that, because ACIS will no longer be a single five year program, but rather will consist of three five year stages, there will be a ledger associated with each ACIS stage.

Item 62 Subsection 70(2) - (Secretary to notify owner of credit quarterly of changes to ledger)

68. A minor technical alteration to correct a reference in the Act to other sections of the Act.

Item 63 Sections 71 and 72 - (Period in which entries in ledger to be made)

69. This amendment clarifies when the Secretary may amend the ACIS ledger, now that ACIS will no longer be a single five year program, but rather will consist of three five year stages, each with its own ledger. Note that section 72, which stated the self-evident fact that the Secretary was not required to amend the ACIS ledger after ACIS had finished, is redundant and is being repealed and not replaced.

Item 64 Section 74 - (Dealing in and use of duty credit - Overview)

70. This amendment, necessitated by the next item, inserts into the overview of Part 7 a reference to the use of duty credits (the form of assistance provided under ACIS) in the extended ACIS.

Item 65 After Division 1 of Part 7 - (Dealing in and use of duty credit - Overview)

71. The extended ACIS will consist of three stages, not a single five year scheme. To avoid a situation where duty credits (the form of assistance provided under ACIS) which were issued in the first year of ACIS Stage 1 are used to offset import duty paid in the last year of ACIS Stage 3, a situation which would present considerable administrative difficulties, ACIS duty credits will be deemed to expire one calendar year after the ACIS stage in which they are issued.

72. It also should be noted that, for the sake of clarity, section 75A, which deals with when duty credits may be used, is now to be renumbered so that it forms part of section 74A, a section which sets out other details relating to the use of duty credits.

Item 66 Division 2A of Part 7

73. A very minor amendment necessitated by the renumbering of the former section 75A in the Act for the purpose of improving clarity (see note under Item 65).

Item 67 Subsection 76(1) - (Minister may limit use of modulated investment credit)

74. This minor amendment makes it clear that a notice issued to limit the use of modulated investment credit remains in force for the period specified in the notice.

Item 68 Paragraph 76(1)(ca) - (Minister may limit use of modulated investment credit)

75. A very minor amendment necessitated by the renumbering of a section in the Act for the purpose of improving clarity.

Item 69 Subsection 77(1) - (Minister may limit use of certain production credit)

76. This minor amendment makes it clear that a notice issued to limit the use of certain production credit remains in force for the period specified in the notice.

Item 70 Paragraph 77(1)(ca) - (Minister may limit use of certain production credit)

77. A very minor amendment necessitated by the renumbering of a section in the Act for the purpose of improving clarity.

Item 71 Paragraph 100(d) - (Order in which credit to be offset)

78. This amendment alters a reference to "modulated" credit. This amendment is part of a process to reduce confusion by clarifying terminology (see note under item 15).

Item 72 At the end of section 100 - (Order in which credit to be offset)

79. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 73 Subsection 109(4) - (Update of business plan)

80. This amendment extends the requirement by ACIS participants to provide business plans. The extended ACIS will consist of three stages, not a single five year scheme, and as assistance is provided under ACIS based on the business plans provided by participants, there is a need to extend the requirement for business plans.

Item 74 Subsection 109(5) - (Update of business plan)

81. This amendment stipulates that the business plans, required by the preceding item, are 5 year plans.

Item 75 Subsection 109(5) - (Update of business plan)

82. The extended ACIS will consist of three stages, not a single five year scheme and this amendment removes the original finishing date for ACIS.

Item 76 After paragraph 111(f) - (Review of decisions affecting duty credit)

83. This amendment adds references to "unmodulated" credit. This amendment is part of a process to reduce confusion by clarifying terminology (see note under item 15).

Item 77 Subparagraph 111(g)(i) - (Review of decisions affecting duty credit)

84. This amendment repeals a reference to "modulated" credit. This amendment is part of a process to reduce confusion by clarifying terminology (see note under item 15).

Item 78 At the end of section 111 - (Review of decisions affecting duty credit)

85. Technical changes to add references to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 79 Paragraph 112(3)(b) - (Limitations on implementation of court decisions concerning duty credit decisions)

86. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 80 Subsection 112(3) - (Limitations on implementation of court decisions concerning duty credit decisions)

87. The current Act states that a court decision awarding additional ACIS funding to a plaintiff cannot be given effect to if all the ACIS funding already has been allocated. The extended ACIS will consist of three stages, not a single five year scheme, consequently the Act will be amended to provide that a court decision awarding additional ACIS funding to a plaintiff cannot be given effect to if all the ACIS funding, in the ACIS stage the court's decision relates to, already has been allocated. Moreover, since duty credits (the form of assistance provided under ACIS) will be deemed to expire one calendar year after the ACIS stage in which they are issued (see note under item 65), a court decision must be made within one calendar year after the ACIS stage it relates to, otherwise the extra assistance the court's decision purports to award to a plaintiff would be in the form of expired duty credits.

Item 81 Paragraph 112(4)(a) - (Limitations on implementation of court decisions concerning duty credit decisions)

88. A minor change clarifying terminology.

Item 82 Paragraphs 112(4)(a) and (b) - (Limitations on implementation of court decisions concerning duty credit decisions)

89. A minor change clarifying terminology.

Item 83 Paragraph 113(3)(b) - (Limitations on implementation of AAT decisions concerning duty credit decisions)

90. A minor amendment adding a reference to the additional type of assistance that is to be available in the extended ACIS, namely type J investment credit.

Item 84 Subsection 113(3) - (Limitations on implementation of Administrative Appeal Tribunal (AAT) decisions concerning duty credit decisions)

91. The current Act states that an AAT decision awarding additional ACIS funding to a plaintiff cannot be given effect to if all the ACIS funding already has been allocated. The extended ACIS will consist of three stages, not a single five year scheme, consequently the Act will be amended to provide that an AAT decision awarding additional ACIS funding to a plaintiff cannot be given effect to if all the ACIS funding, in the ACIS stage the AAT's decision relates to, already has been allocated. Moreover, since duty credits (the form of assistance provided under ACIS) will be deemed to expire one calendar year after the ACIS stage in which they are issued (see note under item 65), an AAT decision must be made within one calendar year after the ACIS stage it relates to, otherwise the extra assistance the AAT's decision purports to award to a plaintiff would be in the form of expired duty credits.

Item 85 Paragraph 113(4)(a) - (Limitations on implementation of AAT decisions concerning duty credit decisions)

92. A minor change clarifying terminology.

Item 86 Paragraphs 113(4)(a) and (b) - (Limitations on implementation of AAT decisions concerning duty credit decisions)

93. A minor change clarifying terminology.

Item 87 After section 115 (Minister may publish information relating to participants)

94. Disclosing how public monies are expended is good public policy. Accordingly this amendment allows the identity of an ACIS participant, and the amount of ACIS assistance they received, to be disclosed by the Minister. These new disclosure requirements apply prospectively only.

Item 88 Participants in ACIS

95. The extended ACIS will consist of three stages, not a single five year scheme. To avoid placing an administrative burden on participants in ACIS, current participants remain in extended ACIS, unless of course they notify the Secretary that they no longer wish to be part of ACIS, or alternatively they cease to meet the qualifications of an ACIS participant.

Item 89 Modulations made under section 56 of the ACIS Administration Act 1999

96. A savings provision that ensures that the changes made by this amending Act, to the way in which assistance is provided under ACIS, do not invalidate actions taken to provide assistance under the original Act before it was amended.

Item 90 Application of amendments in items 80-85

97. This amendment provides that any plaintiff already seeking redress from a court or the AAT regarding ACIS, may proceed under the legislation as it currently stands. The rationale behind this, is that the original legislation is the legislation they commenced their action under (it should be noted that we are unaware of any ACIS cases currently before the any court or the AAT).

Item 91 Application of amendment in item 86

98. This amendment makes it clear to ACIS participants that from the commencement of ACIS Stage 2 in 2006, the benefits they receive under ACIS may be disclosed by the Minister. This gives ACIS participants sufficient time to adjust to the disclosure requirements.