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Budget Paper 1
Budget Statement 4
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The forward estimates of revenue and expenses in the 1999-2000 Budget incorporate
assumptions and judgements based on information available at the time of publication. A
range of factors may influence the actual budget outcome in future years. The Charter
of Budget Honesty Act 1998 requires these to be disclosed in a Statement of Risks in
each Economic and Fiscal Outlook Report. The purpose of this disclosure is to increase the
transparency of the fiscal projections.
Events which could affect fiscal outcomes include:
Some degree of uncertainty is attached to budget time and forward estimates for both
revenues and expenses. For example, past experience indicates that the actual revenue
outcome could vary from the initial estimate by about 2¼ per cent on average for the
budget year.
The major factor influencing expected expenses and revenues in any year is typically
changes in forecasts of economic and non-economic parameters. Over time, differences
between the economic parameter forecasts and outcomes have not caused any clear bias
toward understatement or overstatement of expenses and revenue -- and therefore the budget
balance. The sensitivity of the estimates to major economic parameters (but not other
parameters) is discussed in Appendix B.
Differences in non-economic (programme-specific) parameter forecasts and outcomes have
been biased towards an understatement of expenses in recent years. This year, considerable
effort has been made to reduce the extent of this bias. Programme-specific parameters are
assumptions underpinning some particular programme estimates, eg client numbers and/or
average rates payable on family payments, family tax payments and disability support
pension programmes. The Contingency Reserve contains an allowance for this conservative
bias.
Fiscal risks are general developments or specific events which may have an effect on the fiscal outlook. In some cases, the events will simply raise the possibility of some fiscal impact. In other cases, some fiscal impact will be reasonably certain, but it will not be included in the forward estimates because the timing or magnitude is not known. Fiscal risks may affect expenses and/or revenue and may be positive or negative.
Specific sources of fiscal risk include:
Some fiscal risks are reflected in the Contingency Reserve and are therefore included
in the aggregate expenses figuring. The Contingency Reserve is an allowance included in
aggregate expenses to reflect anticipated events which cannot be assigned to individual
programmes at budget time. These items are also not included in the Statement of Risks.
Fiscal risks in the Contingency Reserve include expected running costs carryovers from
1998-99 to 1999-2000, and allowances for the established tendency for estimates of some
programme expenditure to be overstated in the budget year and understated in the forward
years.
Matters that are not currently under active consideration by Government, or pressure from
interests outside the Government for changes in spending levels, are not treated as fiscal
risks.
Contingent liabilities differ from fiscal risks in that they are generally more readily
quantifiable and clearly defined.
Contingent liabilities are defined as costs the Government will have to face if a
particular event occurs. They include loan guarantees, non-loan guarantees, warranties,
indemnities, uncalled capital and letters of comfort.
The Commonwealth's major exposure to contingent liabilities arises out of legislation
providing guarantees over certain liabilities of Commonwealth controlled financial
institutions (ie the Reserve Bank of Australia (RBA) and the Export Finance and Insurance
Corporation) and the now fully privatised Commonwealth Bank of Australia. Other
substantial non-loan guarantees include guaranteed payments from Telstra Corporation Ltd
to the Telstra Superannuation Scheme.
The strategies for managing these exposures are aimed at ensuring the underlying strength
and viability of the entities, so that the guarantees are not triggered. Similar
strategies apply to entities not subject to explicit guarantees.
Other arrangements are in place to govern the entering into, and monitoring of, contingent
liabilities such as indemnities and uncalled capital. Uncalled capital is primarily
associated with international financial institutions such as the International Bank for
Reconstruction and Development, the Asian Development Bank and the European Bank for
Reconstruction and Development. Arrangements for capital contributions, including
contingent liabilities, are approved by Parliament and reports on the institutions are
provided annually by the Government to Parliament.
Consistent with Australian Bureau of Statistics (ABS) standards, transactions concerned
with the management of international reserves and the monetary system are classified as
financing transactions (and do not impact on the fiscal or operating balance). Therefore,
contingent liabilities (and assets) with the International Monetary Fund (IMF) are not
shown below.
Fiscal risks and contingent liabilities with a possible impact on the forward estimates
greater than $20 million in any one year, or $40 million over the forward
estimates period, are listed below. Information on fiscal risks takes account of decisions
of Parliament and other developments up to the close of parliamentary business on 30 April
1999. In general, information on contingent liabilities is based on information provided
by departments and agencies and is current to 31 March 1999 (or a later date as
indicated where that information is available). However, for the guarantees under the Commonwealth
Bank Sale Act 1995 and the Telstra Corporation Ltd superannuation guarantee, the
latest reliable information available on the balance of guarantees outstanding was at the
end of June 1998.
Information on contingent liabilities is provided in annual financial statements of
departments and non-budget entities.
Revenue forecasts, like all forecasts, are subject to a margin of error. Over the
previous ten years, the average absolute error in the forecast of revenue in the
budget year has been in the order of 2¼ per cent.
The average forecast error, measured relative to the tax base being forecast, is even
higher for some components of the tax base. This is particularly evident for the `Company'
and `Other Individuals' tax bases, partly reflecting the reaction of these payers to tax
changes, and the way capital losses or gains are realised so as to minimise tax payments.
An implication of the degree of uncertainty surrounding the revenue forecasts is that,
while many of the forecasts are reported to the nearest ten million dollars for
budget accounting purposes, they should not be interpreted as implying an equivalent level
of forecast precision.
The various risks influencing the accuracy of the revenue forecasts are outlined below.
On 13 August 1998, the Government announced its taxation reform package, A
New Tax System. The reforms encompass both expense and revenue measures. Key revenue
measures include: lower personal income tax rates; abolition of Wholesale Sales Tax (WST);
abolition of nine State and Territory taxes; introduction of a Goods and Services Tax
(GST); and reform of business taxes.
The forward estimates fully incorporate the revenue effects of the taxation reform
package. To the extent that the implementation of the Government's package varies from
that announced there may be an impact on future revenue collections.
A key element of tax reform is the introduction of a GST which will enable the abolition of WST and a series of State and Territory taxes. Rejection of the legislation or significant amendments would jeorpardise the proposal and could amount to a serious fiscal risk.
The Review of Business Taxation is due to report to the Government no later than 30 June 1999. Its terms of reference require a revenue neutral package. There will be an impact on revenue collections if the package of measures implemented is not revenue neutral either in aggregate or in individual years.
The estimates of revenue make an allowance for changes in taxpayer behaviour in the period before the full implementation of tax reform. It is, however, very difficult to quantify the extent to which taxpayers will manage their affairs to take advantage of opportunities to minimise tax over this period. To the extent that taxpayers are able to reduce tax beyond the forecast allowance, revenue will be reduced.
The forward estimates of revenue are subject to a number of general pressures which can
result in risks to revenue collections. These general pressures include: tax minimisation
and avoidance, including the exploitation of tax expenditures; financial innovation;
internationalisation; developments in communications technology and workplace
arrangements; and court decisions. These pressures may result in a shift in the
composition of revenue collected from the various tax bases and/or a change in the size of
the tax base. The revenue forecasts make what is believed to be an appropriate allowance
for these factors, given the data available.
Tax minimisation and avoidance involves the use of provisions and `loopholes' in
the tax law which were not intended by policymakers. In the absence of closing these off,
the revenue base will shrink relative to that projected in the forward estimates. The
Government is committed to addressing these problems by way of a fundamental tax reform
programme that has, as one of its aims, the formation of a simpler and fairer tax system.
At the same time, the Government will continue to take legislative action to close off
such schemes as they are identified. In addition, the Australian Taxation
Office (ATO) will continue to undertake extensive compliance enforcement work,
including pursuing matters through the courts, to maintain the integrity of the tax
system.
Financial innovation has increased dramatically during the past two decades and the
tax system has generally not kept pace with these innovations. Consequently, uncertainty
has arisen over the application of existing laws to new and often complex financial
arrangements. Also, the scope for tax minimisation and avoidance through the application
of financial engineering has expanded. An Issues Paper on the taxation of financial
arrangements was released by Treasury and the ATO in December 1996. Consultations
have continued between officials and taxpayers as to an appropriate basis for any reforms
in this area. This subject is being considered by the Review of Business Taxation.
The internationalisation of the Australian economy also introduces a general risk
to the forward estimates of revenue. Income tax collections from capital are subject to
increasing downward pressure due to increasing `tax competition' among jurisdictions and
`profit shifting' in the context of the relatively free international flow of capital. The
ATO is undertaking a series of compliance improvement measures to ensure that Australian
companies deal with their international parties at `arms length'. Income tax collections
from labour are also coming under increasing downward pressure as a rising proportion of
labour becomes more internationally mobile and subject to tax competition. The further
integration of economies also means the integrity of each country's tax system will
increasingly rely on international co-operation on tax matters.
Developments in communications technology, such as the Internet, also raise a
general risk to the forward estimates of revenue. Such developments may allow the purchase
or sale of an increasing number of goods and services -- including the provision of labour
services -- in a way which could render traditional tax collection mechanisms unworkable,
posing a major challenge for tax system design. The OECD is developing a taxation
framework to apply to electronic commerce which will include 'place of taxation' rules for
consumption taxes and measures to strengthen international co-operation in tax
administration and collection. Australia is contributing actively to this work. The ATO
has sought to raise awareness of the issue in its publication Tax and the Internet.
Developments in workplace arrangements may also affect taxation collections.
Australia's tax system is characterised by a progressive system of personal income tax
rates, combined with a flat company tax rate. Typically, the top marginal tax rate has
been higher than the company tax rate. The divergence between the rates of personal and
company tax provides an opportunity for some individual taxpayers, who would otherwise be
subject to higher rates of personal income tax, to derive income through a corporate
structure to take advantage of features of the corporate tax regime (for example, the
lower company tax rate). In response to such activity (termed `alienation of personal
services income'), the Commissioner of Taxation is taking appropriate steps to safeguard
the intended operation of the law, including testing the law in the courts.
Court decisions also increase the risk that revenue will be lower or higher than
anticipated. Court decisions can affect the interpretation of tax legislation and, in the
absence of Government action, can significantly change the level of revenue collected
under that legislation.
Tax expenditures are often at risk of being exploited in an unexpected manner,
which can also have a significant effect on the forward estimates of revenue. The
Government receives a steady stream of calls for new tax expenditures to be granted. As a
general proposition, the granting of further tax expenditures will lead to the downward
adjustment of the forward estimates of revenue. Equally, the winding back of existing tax
expenditures will generally require the upward adjustment of the forward estimates of
revenue. As a result of a decision in the 1996-97 Budget, all tax expenditures will be
subject to ongoing monitoring and evaluation to determine whether they remain relevant to
meeting the Government's priorities.
Apart from the abovementioned general risks, which could have a cumulative impact over
time, there are general risks to the forward estimates which could have a significant
effect in any one-year, but not necessarily a cumulative effect over time. In any one
year, revenue will be influenced by a number of factors, including for example, the degree
to which companies and individuals realise losses and capital gains, the valuation of
stocks, the utilisation of specific tax expenditures and taxpayer behavioural responses to
revenue measures. Such factors can have a particularly significant effect on company tax
collections and the revenue forgone through tax expenditures. Generally, such factors are
not, by their nature, able to be forecast with a high degree of certainty.
There are also a number of specific risks to revenue that are currently the subject of
ongoing analysis and evaluation by the Treasury and the ATO. Such risks include, for
example, specific tax minimisation and avoidance schemes. Early detection and government
response to such risks is desirable. It would be inappropriate to explicitly identify such
current specific risks until the Government is in a position to respond to the risks. To
do so may compromise the Government's policy response and magnify the downside risks to
the forward estimates of revenue.
The Government has announced a number of measures to date that have already been factored
into the forward estimates of revenue but are yet to be passed by Parliament. Should the
passage of legislation relating to these measures be delayed, amended or rejected, the
forward estimates would need to be adjusted.
On 24 July 1998 the then Minister for Industry, Science and Tourism announced a review of all tariffs less than five per cent and which raise less than $100,000 in revenue in a year (`nuisance tariffs'). Industry has been consulted on all tariff items that raise little revenue and provide little or no protective benefit to Australian industry. The review has been completed and is currently under government consideration.
Under the 1994 Bogor Declaration, Asia-Pacific Economic Cooperation members committed to 'free and open' trade and investment in the region by 2010 for developed economies and 2020 for industrialising economies. As part of Australia's Individual Action Plan the general tariff rate (currently at five per cent) is scheduled to be reviewed by the end of the year 2000.
The Commonwealth has announced the release of spectrum licenses for sale. The estimates of the proceeds from the sale of spectrum licenses are based on current market information. However, the actual amount realised will also depend on market conditions. Further sales are expected to occur in 1999-2000 and may be deferred if market conditions prove unfavourable.
Additional expenditure on exceptional circumstances relief is subject to climate variability which cannot be predicted with any degree of certainty. The number of Exceptional Circumstances Relief Payment recipients and exceptional circumstances interest rate subsidies approved will vary significantly each year, depending on the severity of drought and other exceptional circumstances.
The Commonwealth has previously offered to assist States and Territories (hereafter
States) in meeting compensation costs associated with their validation of past acts under
legislation complementary to the Native Title Act 1993. Following the High Court's Wik
decision, the Commonwealth's offer has been extended to cover intermediate period acts and
certain specified future acts.
The extent of Commonwealth payments to the States pursuant to this offer will depend on
the terms of the final financial assistance agreements with the States and the level of
compensation liabilities arising from actions by the States to acquire native title
rights. Those liabilities cannot be quantified due to uncertainty about future acts by the
States and the extent and valuation of surviving native title. The Commonwealth has also
offered to assist States and Territories with the costs of bodies established under State
alternative provisions approved by the Commonwealth Minister to deal with native title
claims, and to hear and determine objections to proposed future acts. The extent of this
assistance will depend on decisions to establish such bodies, the timing of their
recognition and the extent of their use.
The Government has agreed to cover, at the end of the five-year conversion period (i.e. until 2002-03), outstanding debt in relation to Phase 1 of the Australian Broadcasting Corporation's plans for the conversion to digital broadcasting. That debt is currently estimated to be $31 million.
The Telstra (Transition to Full Private Ownership) Bill 1998 includes provision for a social bonus totalling $351 million over five years for improved communications, particularly in rural and regional areas. This funding could be placed at risk if the Bill does not pass Parliament.
The Department of Defence is involved in several cases covering a wide range of litigation where either the cases have not been heard, or damages and costs have yet to be awarded. The litigation involves Common Law liability and claims before the Human Rights and Equal Opportunity Commission, claims relating to HMAS Stalwart, HMAS Voyager, HMAS Melbourne, asbestos litigation, and alleged defective administration by the Department. In total there are some 513 claims with a value of $92 million.
The NSW Government has passed amendments to legislation which offer current contributing members of the State Superannuation Scheme the opportunity to transfer from an emerging cost pension scheme to a fully funded one which provides lump sum benefits in 2000-01. Some employees of universities are members of the State Superannuation Scheme. If the offer is extended to these employees and some accept the offer, it may bring forward into 2000-01 superannuation commitments which would not otherwise have fallen due until future years. It is not possible, at this stage, to quantify the level of take-up of the offer nor its financial impact, but it is expected to be minimal.
The 1998-99 Budget contained the social security measure `Applying the Newly Arrived Resident's Waiting Period to Agreement Countries', which required New Zealand citizens to wait two years before claiming Australian income support payments. Savings of about $42 million over four years were estimated. Relevant legislation was introduced in the Autumn Sittings 1999. Even assuming passage of the legislation, the postponement of implementation (and therefore savings) could mean that the forward estimates require variation.
This 1998-99 Budget measure sought to include lump-sum non-economic loss compensation
payments in the income test for determining income support payments. This would remove the
existing incentive for income support recipients of non-economic loss compensation
payments to take lump sums in preference to on-going income support.
Legislation for this measure was introduced in the Autumn Sittings 1999, with a
commencement date to be fixed by proclamation. If this measure does not pass the Senate,
estimated expenditure would increase by some $50 million over the budget and forward
estimates period.
The Government is continuing negotiations with a number of countries regarding possible revisions to, or new, social security agreements which would cover those people who have lived part of their working lives in both countries. Depending on their terms, individual agreements could have financial implications ranging from net savings to costs of up to $25 million a year.
The major asset sale provided for in the 1999-2000 Budget figuring was the sale of a
further 16 per cent of the Commonwealth's remaining equity in Telstra
Corporation.
The revised estimates include the effect of the sale of the remainder of Telstra, noting
that the level of proceeds will depend, inter alia, on the prevailing levels of
world equity markets at the time of the sale. The first stage of the sale will leave
majority control in Government hands. Revenue from the sale could be placed at risk if the
Telstra (Transition to Full Private Ownership) Bill 1998 does not pass Parliament.
While the sale of Telstra does not impact on the operating result, any profit on the sale
of Telstra would be classified as an abnormal item and impact on the adjusted operating
result.
The employer payments made by Australia Post for its past and present employees who are
members of the Commonwealth Superannuation Scheme (CSS) are in excess of the payments
required to fund past and future liabilities for these members. The adequacy of these
payments is tracked through an actuarial assessment of Australia Post's notional account.
Every three years an actuarial review of the notional account is undertaken. The review
revalues the notional account taking into consideration demographic and financial changes
since the previous review. A review of Australia Post's notional account is currently
being undertaken based on data as at 30 June 1998. It is expected that the
surplus will increase, however, it is not possible at this time to quantify the amount.
New superannuation arrangements for Commonwealth employees have been provided for in the budget and forward estimates although the arrangements are subject to the passage of legislation currently before the Parliament. These new arrangements involve the closure to new entrants of the Public Sector Superannuation Scheme (PSS) from 1 July 1999 and the choice for new employees of either a complying superannuation fund or a Retirement Savings Account offered by their employer. Existing employees will have a similar choice from 1 July 2000 if they wish to cease their membership of the PSS or the Commonwealth Superannuation Scheme. Incorporation of the new superannuation arrangements in the Budget has increased expected superannuation payments by $12 million in 1999-2000, $265 million in 2000-01, and $295 million in 2001-02 without increasing the superannuation costs to employers. These amounts are a bringing forward of future cash payments (ie. discharge of liability) and therefore represent no additional expense to the Budget.
The Commonwealth and all States and Territories, except Western Australia and Tasmania,
signed five-year Australian Health Care Agreements (AHCA), commencing
1 July 1998. Western Australia accepted the AHCA proposal in-principle on
3 August 1998, and Tasmania did likewise on 1 April 1999. The
Agreements incorporate a risk sharing arrangement for changes in the private health
insurance participation rate. Under this formula, a nationally consistent rise of one
percentage point in the participation rate above a point midway between the
March 1998 and June 1995 levels will reduce Commonwealth grants to the States
and Territories by approximately $82 million a year from 1999-2000. Commonwealth
grants will be increased by a similar amount from 1999-2000 if the participation rate
falls by one percentage point below the December 1998 level (based on current
estimates of movements in population, the hospital output cost index, and assuming those
leaving private health insurance have the same age/sex profile as those remaining).
The AHCA funding formula applies the hospital output cost index to total funding. However
discussions with the States on specification of the index in 1999-2000 and beyond have not
been completed. For every one percentage point change in hospital output costs (relative
to the budget assumption of a 0.5 per cent increase), grants to the States and Territories
will change in aggregate by approximately $60 million a year.
Future vaccine technology will result in new vaccines substituting for ones already in use (eg multivalent vaccines which combine several vaccines into one) and, as a consequence, could result in higher unit costs of vaccine within the routine schedule. Given the nature of current vaccine technology, and the possible introduction of new vaccines, specific vaccine costs cannot be precisely quantified at this stage. The inclusion of new essential vaccines within the routine schedule has the potential to increase Commonwealth outlays by up to $120 million in total over the next four years.
The Department is presently involved in 61 cases which could result in some financial liability for the Commonwealth. These cases cover a wide range of litigation, where either the cases have not been heard or damages and costs have yet to be awarded. The litigation now involves Creutsfeldt-Jacob disease, Acquired Immune Deficiency Syndrome, Hepatitis C, defective products, personal injuries, the Department as an employer, and a variety of other claims against the Commonwealth. It is not possible to quantify the liability arising from these cases.
From time to time new items are added to the Medicare Benefits Scheme and Pharmaceutical Benefits Scheme schedules. To a certain extent the existing forward estimates take account of these additions. However, major new developments in medicines or medical procedures could result in increases in expenses which exceed the provision in the forward estimates. It is not possible to quantify the fiscal risk arising from such potential developments.
The Government's decision on 1 May 1999 to activate plans to provide temporary safe haven in Australia for 4,000 displaced Kosovars will result in some financial impact in both 1998-99 and in 1999-2000. Whilst extensive preparations were under way in Australia, the uncertainty at the time of finalising the 1999-2000 Budget was such that the resource implications were not included in the budget estimates.
The expected corporatisation of the Scheme in 1999-2000 will involve the refinancing and early repayment of debt to the Commonwealth. The estimated market value of the debt is in the order of $900 million. Detailed arrangements are to be finalised between the Commonwealth and NSW and Victorian Governments, as shareholders in the new company. The exact timing and level of payments may be influenced by electricity and financial markets at the time of corporatisation.
Developers of a marina associated with the proposed Hindmarsh Island bridge have brought a substantial damages claim against the Commonwealth and other parties involved in the decision by the previous Minister for Aboriginal and Torres Strait Islander Affairs, pursuant to the Aboriginal and Torres Strait Islander Heritage Protection Act 1984, to ban construction of the bridge. The plaintiffs are claiming damages of $20 million.
Earlier laws, policies and practices led to the separation of many Aboriginal and Torres Strait Islander children from their families. Some 2,200 claims for damages are underway against the Commonwealth in relation to alleged forced separations. If the applicants in the two test cases proceeding in 1999 are successful, the Commonwealth may be liable for substantial payments in relation to these and other claims, which could amount to hundreds of millions of dollars.
In the December 1997 Investing for Growth industry statement, the Government announced its willingness to consider the provision of incentives, in limited and special circumstances, for major strategic investment projects. Such incentives could be in the form of expense (grants) or revenue (taxation concession) measures.
Compensation claims under the Lands Acquisitions Act 1989 relating to the compulsory acquisition of properties for the proposed Second Sydney Airport at Badgerys Creek, give rise to an estimated risk of $30 million.
On 18 August 1998 the Commonwealth provided a guarantee to cover borrowings made by the Maritime Industry Finance Company (MIFCo) to finance redundancy related payments in the stevedoring and maritime industries. MIFCo's borrowing facility, negotiated with its bankers, is presently $155 million. This facility is expected to be increased to meet the larger than originally anticipated redundancy costs in the stevedoring industry. Amendments will be introduced as part of the 1999-2000 Budget to increase the expenditure cap in the Stevedoring Levy (Collection) Act 1998 from $250 million to $350 million.
In response to instability in regional financial markets and economies, Australia
offered to provide bilateral financing in support of IMF programmes in Thailand, Indonesia
and the Republic of Korea. In the case of Thailand, this has taken the form of a currency
swap between the Reserve Bank of Australia (RBA) and the Bank of Thailand for
$US1 billion which is being drawn down over a three-year period. In the event of
default, the ability of the RBA to maintain the dividend stream projected in the forward
estimates may be affected.
Australia has offered to provide supplementary financing or `second tier' financing of up
to $US1 billion for each of Indonesia and Korea. This financing would be provided via
a loan on a non-concessional basis. With subsequent improvement in economic conditions in
Korea, no payment is now expected to be required. Negotiations for the provision of up to
$US300 million to Indonesia are proceeding.
Under the Wheat Marketing Act 1989, the Commonwealth underwrites borrowings by the AWB and AWB Ltd that fund advance and related payments from open wheat pools up to a maximum of $3,018 million as at 22 March 1999. Borrowings are repaid as the wheat is sold. The Commonwealth's responsibility for the underwriting of borrowings will cease after the 1998-99 season and previous season's pools are finalised by AWB Ltd.
The Commonwealth guaranteed a loan of up to a maximum of $40.9 million to encourage the restructuring of the Northern Prawn Fishery. As at 31 March 1999, the amount outstanding on the loan was $3.5 million, which is to be paid off within one year. The loan was taken out by the Queensland Fisheries Management Authority on behalf of the Commonwealth to buy back surplus boat units from the fishery with repayment to be made by the industry through levies.
Under Section 53(7) of the Wool International Act 1993, the Commonwealth underwrites borrowings of Wool International for the management of the wool stockpile. The contingent liability for borrowings by Wool International totalled $235 million as at 31 March 1999.
The Commonwealth has guaranteed loans by the Australian Broadcasting Corporation. The principal amount covered by the guarantee as at 31 March 1999 was $155 million. These loans were largely used to meet costs relating to the construction of premises for the Corporation at Southbank (Melbourne) and Ultimo (Sydney).
The Commonwealth has guaranteed loans taken out by the Special Broadcasting Service. The principal amount covered by the guarantee as at 31 March 1999 was $39 million. These loans were used to pay for the refurbishment and enhancement of the Service's premises at Artarmon in Sydney.
The Commonwealth has guaranteed loans taken out by Telstra Corporation Ltd. The principal amount covered by the guarantee as at 31 March 1999 was $41.25 million. The loan was originally issued prior to July 1989 when most of Telstra's borrowings were guaranteed by the Commonwealth. The loan will be fully repaid on 15 November 1999.
Telstra Corporation Ltd has agreed to make additional employer contributions to the Telstra Superannuation Scheme. The Commonwealth has guaranteed that it will cover any outstanding additional employer contributions in the event that Telstra becomes insolvent. The net present value of the contingent liability in respect of the guaranteed stream of payments for the Telstra Superannuation Scheme as at 30 June 1998 was $1.1 billion.
The amount indemnified for artworks on loan to galleries participating in exhibitions under the Scheme has decreased to $19.4 million as at 31 March 1999. The decrease is due to only one exhibition being covered by the program at that date.
Private sector borrowing by the Defence Housing Authority is explicitly guaranteed by the Commonwealth under section 38 of the Defence Housing Authority Act 1987. The value of loans guaranteed at 30 April 1999 was $40 million.
Contingent liabilities exist in relation to military compensation claims to the value of some $27.9 million. This amount relates to outstanding claims for non-economic loss as a consequence of the Federal Court decision in Schlenert v the Australian and Overseas Telephone Corporation 1995.
The Minister for Education, Training and Youth Affairs is authorised to issue Commonwealth guarantees on a limited number of loans made to Commonwealth endorsed Group Training companies by commercial lenders in the period 18 February 1999 to 30 June 2001. These guarantees assist Group Training Companies to gain access to additional working capital required to expand the number of apprentices and trainees that may be employed through Group Training companies. The maximum guarantee of each loan is $175,000 with the total value of all guarantees capped at $30 million.
The ABSTUDY Financial Supplement Loan Scheme provides tertiary students with the option
of obtaining additional living and educational expenses while studying. Loans are made to
students through an arrangement with the Commonwealth Bank of Australia (CBA) and the
Commonwealth purchases the loans on 31 May in the fifth year after the loan was taken
out. The Commonwealth commences recovery action when a student's income reaches the
pre-determined threshold.
In the 1998-99 Budget there was an ABSTUDY Loan Supplement contingent liability
of $146 million, relating to loans which had not been purchased back from the
CBA. As at 16 April 1999, the value of loan guarantees outstanding for
ABSTUDY Supplement recipients was in the order of $175 million.
The employer payments made by Telstra for its past and present employees who are
members of the Commonwealth Superannuation Scheme (CSS) are in excess of the payments
required to fund past and future liabilities for these members. The adequacy of these
payments is tracked through an actuarial assessment of Telstra's notional account.
A review of Telstra's notional account was completed earlier this financial year. The
total surplus was determined at $1,428 million as at the valuation date of 30 June
1997. This surplus will be paid to Telstra Superannuation Scheme either by way of a
schedule of instalments or by way of a lump sum.
The Commonwealth guarantees the due payment by EFIC of money that is, or may at any time become, payable by EFIC to any person other than the Commonwealth. As at March 1999, the contingent liability totals $7,681.3 million, comprising contracts of insurance and guarantees ($3,606.1 million), liabilities ($965.7 million) and national interest provisions ($3,109.5 million).
The Government has made clear that Australia will provide substantial assistance to an autonomous or independent East Timor. Assistance during and after the transition process will be crucial to peace and stability, and the longer-term development of East Timor. Australia has already pledged $20 million in 1998-99 to assist the UN consultation process that will allow the East Timorese people determine their future. This is in addition to the $7 million provided in 1998-99 through our aid program to Indonesia. An expansion of the aid program to East Timor is planned for 1999-2000. Decisions on the level and nature of this assistance will be taken once the outcome is clearer. Some financial provision for support for East Timor has been allowed for in the Contingency Reserve for the 1999-2000 Budget.
As at 1 November 1998, the Corporation's contingent liabilities were $206.5 million in respect of guarantees and credit risk facilities. The Corporation's other guaranteed borrowings, which totalled $1,793 million as at 1 November 1998, have been offset by holdings in Commonwealth Government securities and certain hedging instruments guaranteed by Warburg Dillon Read (formerly known as UBS Australia Ltd).
On 16 December 1998, the Department of Defence (Defence) accepted a Commonwealth
guarantee for $26.6 million in relation to the Commonwealth's interest in the
Australian Submarine Corporation (ASC). The Commonwealth through the Australian Industry
Development Corporation (AIDC) holds a substantial but minority interest in the ASC.
The Commonwealth provided the guarantee to cover the AIDC's obligations under an agreement
with the Westpac Banking Corporation in which the bank provides an extended performance
guarantee to Defence in respect to the Collins class submarines. The termination date of
the guarantee is 31 December 2001.
The Commonwealth has also agreed to indemnify the AIDC in relation to its obligations
under the performance guarantee agreement.
The Snowy Mountains Hydro-electric Power Act 1949 provides that borrowings by SMHEA may be guaranteed by the Commonwealth. The Authority has issued inscribed stock at a discount to finance capital works of the Scheme. The borrowings are subject to explicit Commonwealth guarantees. The face value of guaranteed borrowings is $181.5 million with the net amount guaranteed (excluding the unamortised discount on the issue of inscribed stock) being $98.2 million.
On 24 September 1998 the Commonwealth assumed responsibility for all remaining assets, liabilities and contracts of the FAC on the wind-up of the Corporation. Unpresented cheques of $2 million have been identified and provided for. There is no basis for quantifying any potential claims beyond this amount.
Under the terms of the Commonwealth Bank Sale Act 1995, the Commonwealth has
guaranteed various liabilities of the Commonwealth Bank of Australia, the Commonwealth
Bank Officers' Superannuation Corporation (CBOSC) and the Commonwealth Development Bank.
The guarantee for the Commonwealth Bank of Australia relates to both on and off-balance
sheet liabilities. Of the existing contingent liability, 34 per cent involves off-balance
sheet liabilities. As at 30 June 1998, the balance of the guarantee
was $99,745.9 million, a reduction of $4,428.2 million on the previous
year.
The guarantee for CBOSC covers the due payments of any amount that is payable to or from
the Fund, by CBOSC or by the Bank, in respect of a person who was a member, retired member
or beneficiary of the Fund immediately before 19 July 1996. Total accrued
benefits at 30 June 1998 have been valued at $3,743 million following an
actuarial review. The outstanding value subject to the guarantee is estimated to be
$3,737 million.
As of 1 July 1996, the Commonwealth Development Bank ceased to write new business and no
additional liabilities are being incurred. The existing contingent liability will
gradually decline with the retirement of existing loans and exposures. The revised
estimate for the balance of this guarantee was $472.5 million as at June 1998.
This contingent liability relates to the Commonwealth's guarantee of the liabilities of
the RBA. The major component of RBA liabilities relates to Notes (ie currency) on Issue.
This treatment of Notes largely relates to the historical convention of the convertibility
of Notes to gold -- coins are not treated as a liability in the Commonwealth's
accounts. At 7 April 1999, Notes on Issue totalled $23,697 million.
The other major liability consists of deposits with the RBA by the banking sector. At
7 April 1999, these deposits amounted to $5,928 million. In total, the
guarantee for the Reserve Bank was $37,916 million as at 7 April 1999.
The liability relates to the value of the uncalled portion of the Commonwealth's shares in the International Bank for Reconstruction and Development ($US2,769.5 million -- estimated value $A4,496.7 million at 31 December 1998), the Asian Development Bank ($US2,477.5 million -- estimated value $A4,022.6 million), and the European Bank for Reconstruction and Development ($US71,220 million -- estimated value $A115,635.7 million).
Under section 30(2) of the Australian Federal Police Act 1979, all Australian Federal Police (AFP) appointees who complete a fixed term appointment are entitled to a payment upon separation from the organisation. Funding has been provided for the costs expected to be incurred over the next two years, but actual expenditure is subject to the number of staff separations. In 1999, the Government will consider proposals to extinguish the Australian Federal Police Adjustment Scheme liabilities.
The Commonwealth provided $120 million to agencies to upgrade their systems during 1998-99 for redeveloping or replacing non-compliant software and hardware, and developing contingency plans to permit business operations to continue should systems fail on 1 January 2000. Progress by agencies in ensuring that their systems are Year 2000 compliant is monitored by quarterly reporting to Government, with the results of these reports being published. The exact costs of the Year 2000 compliance program will not become apparent until some time after 1 January 2000.
The decision in the Mewett v Commonwealth case may be used as a precedent by up to 900 crewmen of HMAS Melbourne, in relation to the Voyager incident, to lodge claims against the Commonwealth. Some 95 claims have been lodged to date (noted in Fiscal Risks-Expenses) however there is no basis for quantifying further claims.
The decision in Australian Postal Corporation v Burch handed down by the Full Federal Court on 5 August 1998 may increase workers' compensation costs for the Commonwealth.
Notice of potential claims under the Commonwealth Funds Management (CFM) share sale agreement has been received from the Commonwealth Bank in relation to an action brought against CFM (among others) as successor to the former Superannuation Fund Investment Trust by certain employees of the Australian Law Reform Commission in respect of their superannuation entitlements. The Commonwealth has exercised its right to take over the defence of the action. The financial effect of this claim cannot be quantified at this stage.
Every three years an actuarial review of the Commonwealth's unfunded liability in respect of the Public Sector Superannuation Scheme (PSS) and the Commonwealth Superannuation Scheme (CSS) is undertaken. The next review, due by 30 June 2000, will be based on data as at 30 June 1999. The review revalues the unfunded liability to take account of demographic and financial changes since the previous review. It is not possible at this time to quantify the net change in the unfunded liabilities.
An indemnity was issued to Barry AC Hilson and BACH Pty Limited in relation to liabilities arising from assistance provided to the Commonwealth during the conduct of a review of the Commonwealth's shareholding in the Australian Submarine Corporation. This indemnity is ongoing.
Macquarie Fleet Leasing Pty Ltd, as purchaser of DASFLEET, have disputed the valuation
methodology adopted by the Commonwealth in the Completion Asset and Liability Statement in
relation to the vehicle fleet. This matter is subject to arbitration.
The Commonwealth is also in dispute with Macquarie Fleet Leasing on matters associated
with the Tied Contract.
From 1 July 1998, the Government has progressively replaced the previous
non-insurance policy with one of self-insurance via a managed fund (Comcover). The managed
fund will produce better risk management and therefore reduce costs over time.
Comcover is also progressively covering the insurable risks of bodies under the Commonwealth
Authorities and Companies (CAC) Act 1997 within the general government sector.
Premiums are being charged by the fund to cover the long-term cost of risk and associated
administrative costs.
A reinsurance programme has been put in place to reduce the likelihood of significant
impacts on the Budget from CAC body and FMA agency exposures.
Under the Superannuation Act 1976 (for the Commonwealth Superannuation Scheme
(CSS)) and the PSS Trust Deed and Rules and determinations made under them, the
Commonwealth guarantees payment of the amounts of members' contributions and productivity
contributions with interest allocated to those amounts by respective Boards of Trustees.
The CSS and the PSS guarantee the accrued contributions and interest so there cannot be a
negative credit rating on invested funds. The Commonwealth has not had to make a payment
in relation to this guarantee.
The Commonwealth has indemnified the RBA against loss and damage arising from the acceptance of certain Commonwealth cheques bearing a facsimile signature having been impressed thereon without the authority of the Commonwealth and other aspects of banking services provided by the Bank.
The sale of Australian River Co.'s businesses has been completed. The sale terms provide for certain contingent liabilities related to warranties, indemnities and employee matters. The limit on warranty claims is purchase price with a minimum and aggregate claim and a time period of 21 months from December 1998. In relation to employee matters, the Sale Deed provides for the Commonwealth to reimburse redundancy payments that are capped at a maximum of $11 million.
The National Transmission Company Pty Ltd was established by the Commonwealth to effect
the sale of the National Transmission Network. An indemnity was provided to the person
appointed as the sole director, secretary and public officer of the Company pending the
sale of the shares. The indemnity covers all costs, losses, expenses or liabilities
incurred as an officer of the Company, and was issued on 16 February 1999.
Privatisation of Wool International
Indemnities were issued to the Members of Wool International indemnifying them against all
actions, suits, claims demands or proceedings and costs, arising from, or as a consequence
of providing information and assistance for the purposes of the privatisation. The
indemnities cover assistance given in accordance with a Ministerial Direction and the
Memorandum of Understanding (between the Commonwealth and the Members of Wool
International). The indemnity is a continuing indemnity in respect of any liability that
arises from assistance prior to completion of the project.
Indemnities have been given in respect of a range of other asset sales. Details of these indemnities have been provided in previous Budget and MYEFO papers, for example see pages 100-103 in the 1998-99 MYEFO.
CSL Ltd is indemnified against claims made by persons who contract specified infections from specified products and against employees contracting asbestos related injuries. CSL Ltd has unlimited cover for most events that occurred before the sale of CSL Ltd on 1 January 1994, but has more limited cover for a specified range of events that might occur during the period of the current contract. Given the open-ended nature of some of the indemnities, damages and risk cannot be quantified.
An indemnity has been given to those officers of CASA who administer the carrier's liability insurance requirements under Part IVA of the Civil Aviation (Carrier's Liability) Act 1959 and complementary state legislation. This indemnity was revoked with effect from 29 August 1998 as CASA has obtained commercial insurance covering the risks specified in the indemnity. The indemnity will still apply in relation to liabilities associated with acts or omissions that occurred before the date of revocation.
As part of the wind-up of the FAC, the Commonwealth assumed responsibility on 1 July 1998 for a contingent liability of the Corporation which relates to debtors of the FAC who are challenging the validity of network charges made under the Federal Airports Corporation Act 1986. If the network charging approach is found to be invalid, this raises the prospect of further claims from other airport users who have previously paid network based charges to the Corporation. There is no basis for quantifying potential claims.
Tripartite Deeds apply to the 12 Core Regulated Airports (Sydney, Melbourne, Brisbane, Perth, Canberra, Coolangatta, Townsville, Adelaide, Hobart, Launceston, Darwin and Alice Springs). The Tripartite Deeds between the Commonwealth of Australia, airport lessees and lessees' financiers provide for the Commonwealth to `step-in' as airport operator in defined circumstances. The potential liability of the Commonwealth would vary considerably with the specific factors leading to such an action. If the Commonwealth entered into possession of an airport site it could seek to recover its costs from a number of sources, including airport revenues.
Indemnities for MIFCo board members have been provided to protect against civil claims relating to employment and conduct as directors of MIFCo. These indemnities are unquantifiable and no expiry date has been set.
The Stevedoring Industry Finance Committee (SIFC) has 18 claims for asbestos related damage awaiting High Court decision. These claims were inherited from the Australian Stevedoring Industry Authority. Costs that may arise from these claims can not be determined and are therefore unquantifiable. Any future claims made resulting from the High Court's decision are also unquantifiable.
Significant net foreign exchange gains or losses may be recorded in the operating statement if there is a significant change in the nominal exchange rate. This is because a change in the nominal exchange rate results in a change in the net principal value of cross currency swaps and foreign currency denominated debt. The direction of movement in the exchange rate will determine whether there is a net foreign exchange gain or a loss. A gain is a positive risk to the operating result, while a loss is a negative risk. Net foreign exchange gains or losses do not have any impact on the fiscal balance.
A clear commitment on the part of the Government has been made to fund the results of the Vietnam Veterans Health Study. Finalisation will occur as soon as the results are validated. This is expected in the latter part of 1999.
