Bills Digest no. 161 2006–07
Financial Framework Legislation Amendment
Bill (No. 1)
2007
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Financial implications
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Financial Framework Legislation
Amendment Bill (No. 1)
2007
Date introduced:
10 May 2007
House: House of Representatives
Portfolio: Finance and
Administration
Commencement:
In most cases, on Royal
Assent. Otherwise, within six months if not proclaimed
earlier.
The main purpose of the Financial Framework
Legislation Amendment Bill (No. 1) 2007 (the Bill) is to amend the
Financial Management and Accountability Act 1997 (FMA
Act) to clarify aspects of its administration. In particular, the Bill would amend section 31 of the
FMA Act to make it possible to amend appropriations by regulation,
rather than by determination, as is now the case.
The FMA Act is the main Act governing the
financial activities of agencies including the collection of public
money, the maintenance of accounting records, control and
management of public property, the responsibilities of chief
executives of agencies in regard to the control and management of
public money and property, and the power of the Finance Minister to
make regulations and delegate powers. The Financial Management
Legislation Amendment Act 1999 amended the FMA Act to
facilitate the adoption of accrual budgeting by all Commonwealth
budget-funded agencies.
The Bill is the third in a series designed to
improve administration and financial management in agencies to
which the FMA Act applies. The first Act the
Financial Framework Legislation Amendment Act 2005 amongst
other things, amended the wording in a number of Acts to replace
deeming provisions in the FMA Act and align their wording with the
FMA Act. The Bills Digest for this Act can be found here.
The second Act the
Financial Framework Legislation Amendment Act (No. 1) 2006
amended several Acts in several respects including in respect of
Special Accounts. The Bills Digest for the second Act can be found
here.
Section 31 agreements were previously called
annotated appropriations , which were authorised under section 35
of the Audit Act 1901. The use of section 35 receipts led
to concerns about accountability. The 1989 90 Budget provided, for
the first time, details of annotated appropriations.
The Bill contains provisions that deal with
so-called section 31 (of the FMA Act) agreements. These agreements
have come under scrutiny, including by the Australian National
Audit Office (ANAO).(1)
Appropriations items in annual appropriation
Acts may be marked net appropriation . Where an appropriation
is marked net appropriation , section 31 of the FMA Act
allows an agreement (known as a net appropriation agreement or a
section 31 agreement ) to be made with the Finance Minister,
for the purposes of that appropriation. The net appropriation
provisions of the annual appropriation Acts provide that, if a net
appropriation agreement applies to an appropriation item, then the
amount of that appropriation is taken to be increased, in
accordance with the agreement, and on the conditions set out in the
agreement. The increase cannot be more than the relevant receipts
covered by the agreement. In short, the effect on a net
appropriation is to increase the agency s budget.
The effect of these provisions is that, where
an agency has both an appropriation marked net appropriation in an
annual appropriation Act and a net appropriation agreement, then
the amount of the appropriation will be increased by an amount
equivalent to amounts the agency receives, where those amounts are
relevant receipts covered by the agency s net appropriation
agreement. As a result, the agency will have the legal
authority to retain and spend those additional amounts that it
receives.
As noted, the ANAO has investigated the
administration of section 31 agreements. The following summarises
the ANAO s findings:
The objective of this performance audit was to
assess agencies management of net appropriation agreements to
increase available appropriations. Net appropriation arrangements
are a feature of the Australian Government s financial framework
under Section 31 of the Financial Management and Accountability
Act 1997 (FMA Act). They provide a means by which an agency s
appropriation item in the annual Appropriation Acts can be
increased by amounts received from non-appropriation sources,
thereby enabling the agency to retain and spend those amounts.
The ANAO conducted a detailed examination of six
FMA Act agencies, including Finance. Finance was also included in
the audit in its capacity as the central agency with broad
responsibility for the management of the financial framework, and
the co-signatory to all agreements. The ANAO also examined 231
agreements made in respect of FMA Act agencies between 1 January
1998 and 30 June 2005, and agencies financial reporting of the use
of Section 31 of the FMA Act to increase their appropriations.
The audit concluded there were widespread
shortcomings in the administration of net appropriation
arrangements. The ANAO was of the view a number of agencies had
failed in their responsibility to have in place demonstrably
effective Section 31 arrangements that support additions made to
annual appropriations and the subsequent expenditure of those
amounts. The audit also concluded the current presentation of
budget estimates does not assist in providing users of Portfolio
Budget Statements with a clear understanding of the extent to which
the relevant agency expects to increase its annual appropriation
for amounts collected under the authority of Section 31 agreements.
Further, the ANAO found that agency financial statements have not
accurately reflected the use of Section 31 arrangements.
The audit acknowledged that two Finance Circulars
issued by Finance prior to the tabling of the audit report will
assist with the proper management of net appropriation agreements
in the future. Consistent with the recommendations of the report,
Finance is currently examining mechanisms to simplify the financial
framework and anticipates that any steps taken towards
simplification will have a positive effect in terms of the broader
framework issues raised by the audit. All five recommendations in
the ANAO report that were directed towards Finance have been, or
are currently being, implemented.(2)
The Senate Standing
Committee on Finance and Public Administration drew on the ANAO s
report when it examined section 31 agreements in its report
titled
Transparency and accountability of Commonwealth public funding
and expenditure. The Committee s conclusions and findings
follow:
3.58 The Committee
accepts that the government attempts to achieve a measure of
transparency before the event by mandating the disclosure of
estimated receipts in the PBSs and PAES, but notes that ANAO
reported that the presentation of those estimates may not assist
users of the documents to understand the extent to which an agency
expects to increase its annual appropriations through the mechanism
of Section 31 Agreements. The Committee notes that agencies are
required to disclose in their annual financial statements the
increase in annual appropriations resulting from Section 31
receipts but also notes that ANAO found that a number of agencies
had overstated or misstated their receipts.
3.59
Given the significant role played by Section 31
Agreements in the transfer of funds between different categories of
appropriations, the administrative shortcomings discovered by ANAO
and the apparent confusion among the government's legal advisors
about the uses to which the funds in Special Accounts may be
applied, the Committee is concerned about Section 31 Agreements.
The evidence leads it to question whether Section 31 Agreements are
the most appropriate vehicles for authorising increases in
agencies' annual appropriations by the amounts they receive from
non-appropriations sources.
3.60 In that
context, Finance, in answer to a question from the Committee,
stated that since the publication of the audit report it had been
considering whether the central role in net appropriations should
be returned from agency agreements to the Appropriation Acts. It
identified the issues involved as follows:
... there are a variety of agencies and therefore
a variety of receipts under the individual agreements. By
implication, the impact of taking it back into the appropriation
acts would mean that a generic set of issues or types of receipts
would need to be agreed on. So we would be looking at the variety
of the different types of receipts and the effect that would create
upon agencies. We would look at whether it is viable to do it that
way or whether there are alternative mechanisms to doing it as part
of the annual acts.
3.61 The Committee
appreciates the complexity of the issues involved in any change to
the system for managing net appropriations. However, the Committee
emphasises the point that the concerns it has outlined above in
relation to Section 31 Agreements make it crucial that Finance, in
consultation with ANAO and other relevant bodies, address this
matter with a view to removing the ambiguity and looseness of the
current system and improving the transparency and compliance of net
appropriation transfers.
Recommendation 4
3.62 The
Committee recommends that the central role in the management of net
appropriations should be returned to the Appropriation Acts so as
to ensure that these significant transfers of funds are fully
transparent to the Parliament. In making this recommendation the
Committee is aware that the management of net appropriations is
complicated and that the Department of Finance and Administration
is investigating other options. If a procedure other than returning
the central role to the Appropriations Acts is proposed, the
Committee would expect that the Parliament and its committees would
be consulted. In particular, the Committee would expect Finance to
report on any proposed alternative approach this calendar
year.
There are no financial implications because
the changes the Bill proposes are essentially administrative.
Item 4 of Schedule
1 deals with repayments by the Commonwealth. Item 4
retitles the heading to section 28 which is now Appropriations for
repayments required or permitted by law to read Repayments by the
Commonwealth . Item 4 also repeals subsection 28(1) and substitutes
a new subsection 28(1). In effect, the new
subsection authorises an appropriation where the Commonwealth has
received money, some or all of which has to be repaid, but the
repayment is not authorised elsewhere. Item 14
explains that the new subsection applies to amounts the
Commonwealth has received both before and after the new subsection
commences.
Item 6 repeals section 30 and
substitutes a new section 30. Item 6 retitles the
heading to section 30 which is now Appropriation to be reinstated
for amounts repaid to read Repayments to the Commonwealth .
Section 30 deals with the reinstatement of
appropriations. It provides that when an appropriation has been
made but an agency subsequently receives a repayment of all or part
of the amount appropriated, the amount repaid is again available
for appropriation. New section 30 makes a similar provision that
where the Commonwealth pays an amount but some or all of the amount
is repaid, the appropriation is increased by an amount equal to the
amount repaid .
The Explanatory Memorandum states:
The amendment makes clear that the section applies
to notional transactions.
Further:
The amendment will also clarify that the section
also applies to payments within and between agencies.
(3)(emphasis added)
The latter indicates that the intent of
new section 30 is that it applies not just to
payments within and between agencies where no cash is actually
transferred, but also to situations where, for example, a member of
the public receives a payment but subsequently repays some or all
of the amount. In the former case, payment involves agencies
raising entries in their books to account for the transaction. In
the latter case, where cash is actually transferred, a book entry
is also required. (In accounting terms, this could presumably be
achieved by crediting the repayment against the account to which
the original payment was debited). In both cases, the effect is to
reduce the appropriation by the amount of the repayment and the
appropriation has to be reinstated, notionally, to its original
amount. Item 15 explains that new section
30 applies to amounts the Commonwealth has received both
before and after new section 30 commences.
The Note in new
section 30 refers to new section 32A.
New subsection 32A(2) deals with the timing of
repayments and appropriations referred to in new section 30. New
subsection 32A(2) provides that appropriations are increased when
they are recorded in agencies books.
Section 30A deals with appropriations to take
account of recoverable GST . When agencies pay GST on their
purchases of goods and services, their appropriations are reduced
by the amount of the GST. The purpose of section 30A is to increase
appropriations by the amount of GST. The logic is that the GST on
agency purchases is a tax the Commonwealth pays to itself; not
increasing appropriations by the amount of the GST reduces the
value of the appropriation. Under section 30A, the increase in the
appropriation can take place at different times. New
section 30A repeals subsections 31A(1) (6) and substitutes
new subsections 30A(1) and (2).
Like subsections 31A(1) (5), new subsections 30A(1) and (2) provide
for appropriations to be increased by the amount of the GST.
However, new subsection 32A(3) standardises the
timing of appropriation increases by providing that the increases
occur when the GST is entered into the agency s books.
Item 8 repeals section 31
which is titled Agreements for net appropriations and substitutes
new section 31, Relevant agency
receipts .
New section 31 does not
mention the term net appropriations . Rather, new
subsection 31(1) states that the section applies if an
agency receives an amount of a kind prescribed by the regulations
for the purpose of this section. According to the Explanatory
Memorandum, this will increase parliamentary scrutiny:
Whereas the instruments currently made under
section 31 are exempt from disallowance, the regulations proposed
to be made under the amended arrangements would be disallowable.
Parliamentary scrutiny would therefore be
enhanced.(4)
New subsection 31(2) states
that the amount specified in the most recent departmental item for
the agency is taken to be increased by an amount equal to the
amount received by the agency. New subsection
31(3) provides that a departmental item means a
departmental item in an Appropriation Act. In Appropriation Acts,
the definition of a departmental item is the total amount set out
in a Schedule under the heading Departmental Outputs . In short,
the effect of new section 31, like existing section 31, is to
increase the agency s budget for departmental expenses.
New subsection 32A(1)
specifies when appropriations that operate through Special Accounts
take effect, by providing that debits and credits to Special
Accounts take effect at the time when they are entered into an
agency s books.
The Bill repeals section 32 titled Adjustment
of appropriations on change of Agency functions and substitutes
new section 32, Transfer of Agency functions . The
main changes are in new subsections 32(2) and
32(3), which fall under the sub-heading
Adjustments to appropriations . New subsection 32(2) provides that
the Finance Minister may issue a determination to amend Schedules
to Appropriations Acts in a specified way, and that the amendment
must relate to the transfer of functions. New subsection 32(3)
provides that each relevant Appropriation Act has effect as if its
Schedule were amended in accordance with the determination.
New subsection 32(7) provides
that while the Finance Minister s determination is a legislative
instrument, neither the disallowance nor the sunsetting provisions
of the Legislative Instruments Act 2003 apply to the
determination. This does not represent a change directions under
the current section 32 are not subject to the disallowance and
sunsetting provisions.
The FMA Act contains provision for the
delegation of powers. Section 62A gives power to the Treasurer to
delegate functions to officials, section 62 provides certain
delegation powers to the Finance Minister, while section 53 bestows
on Chief Executives of agencies powers to delegate to officials.
Item 11 inserts new subsection
53(1AA), which distinguishes between functions delegated
to the Chief Executive under section 62 or 62A, and those that have
not been so delegated. In the latter case, the Chief Executive may
give directions to the person to whom powers are delegated, and
that person must comply with those directions.
Item 12 repeals subsection
53(2) and inserts a new subsection 53(2). The
latter provides that where the Chief Executive is acting under
directions given under section 62 or 62A, and the Chief Executive
in turn delegates those powers to another person, the Chief
Executive must give to that person directions that correspond with
those given under section 62 or 62A, and may also give to that
person additional directions that are consistent with the
already-existing directions.
The Bill proposes amendments to the
Legislative Instruments Act 2003 that are consequential to
the proposed changes to the FMA Act. Section 44 of the Legislative
Instruments Act deals with legislative instruments not subject to
disallowance, and contains a list of these instruments. Section 54
of the Legislative Instruments Act deals with legislative
instruments not subject to sunsetting, and contains a list of these
instruments.
Items 19 and
21 delete references to section 31 agreements in
subsections 44(2) and 54(2) respectively, since section 31
agreements will no longer exist. Items 20 and
22 delete references to section 32 in subsections
44(2) and 54(2) respectively, since directions given under section
32 will no longer exist.
Concluding comments
In the case of section 31 agreements, the
changes the Bill proposes do not seem to return the management of
net appropriations to the Appropriation Acts as the Finance and
Public Administration Committee recommended.
One might also ask whether the proposed
determinations under section 32 of the FMA Act should be listed in
sections 44 (disallowance) and 54 (sunsetting) of the Legislative
Instruments Act, where many other such instruments are listed. It
would simplify matters if there was a consistent approach to
placing these matters either in the Legislative Instruments Act or
in the enabling legislation.
-
Australian National Audit Office, Performance Audit
Management of Net Appropriations Agreements, Audit Report No.
28 2005 06.
-
Department of Finance and Administration,
Annual Report 2005 2006, Department of Finance and
Administration, Canberra, 2006, p. 110.
-
Explanatory Memorandum, paragraph 17, p. 3.
-
Explanatory Memorandum, paragraph 19, p. 4.
Richard Webb
30 May 2007
Bills Digest Service
Parliamentary Library
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ISSN 1328-8091
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