Comments on the Review of Business Taxation’sDiscussion Paper

A Strong Foundation – Establishing Objectives,Principles and Processes

31 December 1998

1

Executive Summary

Accepting the broad objectives of economic growth, equity and simplicity, IBSAhas a number of comments on the Policy Design Principles and taxation processesproposed by the Review of Business Taxation in its paper A Strong Foundation.

The Tax Treatment of Risk

The tax treatment of risk should be rigorously considered by the Review, asseveral recent tax policy initiatives have exposed an inconsistent and misguidedpolicy approach to risk. The Review should then provide guidance for thetaxation of risk in its policy design principles. This would improve the clarity andconsistency tax policy and prevent some past mistakes from being repeated.

Risk generates a reward that stays with it if it is transferred. Drawing on this, theReview should state that, in general, transactions involving the transfer of risk canbe safely ignored from a taxation perspective, as risk management does notautonomously involve a threat to the tax revenue base. There are limitedexceptions that may require special attention – but they should not drive policy.

A subsidiary objective that should be adopted in the policy design principles isthat tax measures should encourage efficient management of risk, as this wouldbenefit the economy through a variety of mechanisms.

Tax Compliance Costs

Excessive tax compliance costs are a dead-weight loss to the economy. A clauseshould be included in the principles to the effect that compliance costs should notexceed a given proportion of the associated tax revenue.

The Commissioner of Taxation should be given a limited discretion to set-asidetax provisions where the cost of complying with those provisions is excessive.

International Competitiveness

The Review correctly cites the need for the tax system to be internationallycompetitive, but this should be given greater emphasis. The proposed entity taxregime has serious deficiencies when measured against this benchmark, which theAssociation will address in a later submission.

The authorities need to take a pragmatic approach to benchmarking and give dueweight to international competitor regimes when assessing issues like taxneutrality. For example, the benchmark tax rate for offshore banking units is thatwhich prevails in competing regimes offshore, not the domestic corporate tax rate.

The Government should continue to support efforts to achieve greater consistencyacross jurisdictions on tax key matters; for example, through ATO participation inOECD working groups.

2

‘Catch All and Consult’ Approach to Tax Change is Wrong

Some tax changes have been developed by casting a wide net, for examplethrough a Government announcement, and then reducing the catch throughindustry consultation. This ‘catch all and consult’ approach to tax policydevelopment and implementation is misguided and particularly harmful forfinancial markets. The Review should recommend that this approach be haltedand that instead, reliance be placed on its proposed integrated business tax designprocess, as it would better focus new taxation measures.

Reforming Business Tax Processes

IBSA supports the approach taken by the Review in its proposals to improve theATO’s structure and operations.

The Government should provide a clear operating charter to the ATO that extendsbeyond the uninhibited collection of tax and requires it to have regard to economicdevelopment, employment and international competitiveness in its operations.

Effective industry consultation at a technical level is important too. The Review’sproposed business tax design process would be of assistance here.

New policy initiatives should be formally assessed against the Review’s designprinciples and departures from them identified and justified. It is important thatconsistency across policy area is maintained, which has not always been the case.

An ATO Advisory Board – A Positive Step

The Review’s proposal to establish an ATO Advisory Board would be a positivecontribution to the development of a better dialogue between the tax authoritiesand industry. The Board should include ATO and Treasury representation buthave a substantial majority of members from the private sector.

Taxation Rulings

It is unfair to charge taxpayers for tax rulings, since under a self-assessmentregime, they should be able to rely on the law for reasonable clarity and certainty.

The plan to provide public information on private rulings, by way of a database ondecisions would be a positive development.

A More Responsive Tax System

In some areas, like offshore banking, greater tax flexibility through the use ofregulation within a well-defined policy set by Parliament would improve theinternational competitiveness and efficiency of the tax system.

3

Part 1Comments on the Framework in A Strong Foundation

This part of the submission addresses the framework for taxation proposed in theReview’s first paper, A Strong Foundation - Establishing Objectives, Principlesand Processes (ASF). The second part of the submission considers the taxtreatment of risk in detail.

1. Policy Design Principles of Taxation

The identification of economic growth as a key national objective for the taxationsystem in ASF is correct. This is the primary objective that encompasses otherobjectives, notably those of creating employment, maintaining an internationallycompetitive environment, generating savings and investing capital efficiently.Each of these objectives is important and they are interrelated.

The other national objectives, equity and simplification, are also important.Simplification, especially clarity in tax law driven off well-defined principles, isvital to the achievement lower compliance costs – a key objective of tax reform.

Accepting these broad objectives, there are several points that IBSA would like tomake in respect of the Policy Design Principles set out by the Review.

1.1 The Tax Treatment of Risk

The Review should address the tax treatment of risk in more detail than it does inASF. Tax policy is being increasingly based on risk concepts (variously defined),as evidenced in the 1997 Budget franking credit measures, amongst other things.Because the tax treatment of risk has not been subject to a systematic andconclusive review, there are inconsistencies in the concept of risk employed indifferent measures and several recent policy initiatives have been misguided andharmful to the financial sector and the wider economy.

To help overcome these problems, the Review’s policy design principles fortaxation should specifically address the tax treatment of risk. In general,transactions involving the transfer of risk can be safely ignored from a taxationperspective, as risk management does not autonomously involve a threat to the taxrevenue base. There are limited exceptions involving tax-exempt entities andnon-residents that may require special attention – but they should be treated asexceptions and not drive policy.

Effective risk management supports the smooth operation of the economy and thetrading and management of risk is a central feature of the services provided by thefinancial sector. Therefore, it is vital for the long-term welfare of the economythat the tax treatment of risk is well defined, consistent, efficient and properlyreflective of the underlying economics of the transaction. These issues arediscussed in more detail in Part 2 of this submission.

4

1.2 Compliance Cost

The principles for policy design should explicitly address the need for taxcompliance costs to be minimised, since elimination of excessive compliancecosts, which are a dead-weight loss to the economy, is a key objective of taxreform. It could be argued that this sentiment is implicit in the proposedprinciples, but it would serve the community well to have it clarified beyonddoubt.

To this end, the principles should contain a clause to the effect that compliancecosts should not exceed a given proportion of the associated tax revenue income(including revenue protected by the measure). The Treasurer should set the actualthreshold test criteria after consultation with the ATO and industry on the issue. Ifcompliance costs with a particular tax stream were found to be excessive and thetest failed, then that stream of revenue should not be collected and more efficienttax alternatives sought. In effect, adoption of this clause would be a means to helpensure that the efficiency of the tax system is secured on an ongoing basis.

IBSA has dealt with cases where members’ cost of complying with a tax measurecame close to or exceeded the tax revenue collected. Clearly, this is in no one’sinterest – it undermines the integrity of the tax system and unfairly penalisesaffected taxpayers. From our experience, there would be a significant advantagein providing the Commissioner of Taxation with discretion to set-aside taxprovisions where the cost of complying with them is excessive. As a controlmechanism, a limit could be placed on the quantum of aggregate revenue that canbe foregone in each case – though it is likely that the Commissioner would err onthe side of caution in any event. This would not be at variance with the operationof current tax law, as the Commissioner already has a wide degree of discretion.

1.3 International Competitiveness

The economy has developed to the point where a large number of companiesparticipate in international markets, or in markets that are contestable by foreigncompanies. In addition, Australia must compete with other countries forinternationally mobile capital, the volume of which has increased markedly inrecent decades. These trends seem likely to accelerate rather than dampen overthe medium term, notwithstanding the region’s ongoing financial crisis.

The tax system has a significant bearing on the competitiveness of the economyfrom the point of view of foreign entities investing in Australia or placing theirproduction units in Australia. Therefore, the Review is correct in citing the needfor the tax system to be internationally competitive as an important principle toguide the design of tax policy. In this regard, the proposed entity tax regimeshould be measured against a benchmark that attaches a high weight to theimprovement of Australia’s international tax competitiveness. IBSA has seriousconcerns about the entity tax regime which, as proposed, would weakeninternational competitiveness. These issues have already been raised by otherbodies, like the Australian Stock Exchange, and will be taken up by theAssociation in more detail in a later submission.

5

The formulation of tax policy typically involves conflict at some levels betweenthe Government’s tax objectives. For example, in the recent past, the authoritieshave considered it necessary to adopt tax measures that discriminate againstforeign owned companies, in order to protect the tax revenue base. Decisions ofthis nature should be subject to greater scrutiny and accountability from a policyperspective and the Review’s policy design principles should be helpful inachieving this.

In general, new policy initiatives should be formally assessed against the designprinciples and departures from them identified and justified. This would be apractical way of helping to clarify the policy development process and improveaccountability within that process.

Overseas tax regimes provide a benchmark against which the internationalcompetitiveness of Australia’s tax system should be judged. For example, a 10%offshore banking unit (OBU) tax regime may seem concessionary against adomestic corporate tax rate of 36%, but it is hardly so when viewed against asimilar tax rate for offshore banking in competing jurisdictions, like Singapore,especially as the overall tax package there is superior. If the OBU tax rate wereset at the normal corporate tax rate, then Australia would not attract offshorebanking business.

Thus, the authorities need to maintain a pragmatic approach to benchmarkingwhen assessing issues like neutrality in the ongoing development of tax policy.1

Also, the costing of tax measures should take account of both the direct andindirect tax revenue benefits.

Companies with significant foreign source income and foreign shareholders mustdeal with tax regimes that differ between the jurisdictions in which they operate.Ultimately, their income stream may be assessed for tax purposes in two or morecountries and there is significant risk of double taxation. Since many of the taxproblems arising from international capital flows related to inconsistentapproaches to revenue sharing, this matter can only be resolved efficiently withina multilateral framework. Therefore, the Association encourages the Governmentto continue supporting efforts to achieve greater consistency across jurisdictionson key matters. Participation by the ATO in international forums that addressthese issues, like the OECD, is a positive contribution that should be supported.

1 The Treasury Tax Expenditure Statement in 1996-97 stated, “As part of a Government policy toencourage multinationals to establish regional-headquarters in Australia, certain foreign sourcedividends paid on or after 1 July 1994 by a resident company to non-resident shareholders will beexempt from withholding tax. As this particular exemption reflects the view that Australia doesnot have a strong claim for taxing that income, on either a residence or source basis, it is notconsidered to be a tax expenditure.”

6

2. Reforming Business Tax Processes

Efficient implementation of tax law is just as important as a good tax structure to agood tax system. The situation in Australia can be improved and IBSA supportsthe approach taken by the Review in its proposals to improve the ATO’s structureand operations. Ultimately, the objective should be to enhance the sensitivity oftax policy to the economy’s development needs.

There is a need to foster a culture within the tax authorities that is better focusedtowards the wider economic implications of tax measures and the economy’sdevelopment. In particular, the ‘big picture’ should be kept in sight whenimplementing tax policy and there should be a natural bias in favour of removingtax impediments to the efficient operation of the economy. The Governmentshould provide a clear operating charter to the ATO that extends beyond theuninhibited collection of tax and requires it to have regard to economic growth,employment and international competitiveness in its operations.

There can often be a conflict between the Government’s need to raise tax revenueand its desire to promote economic development through efficient and fairtaxation. The Government must strike a clear balance between the two objectives.Otherwise, the ATO’s task of administering and interpreting the law would bevery difficult. In addition, industry would face continued inconsistency acrosspolicy areas that, for example, have been harmful to efforts to develop Australiaas a regional financial centre.

2.1 ‘Catch All and Consult’ Approach to Tax Policy is Wrong

On several occasions in the recent past, tax policy change has been developed andimplemented by initially ‘casting a wide net’, usually by way of a Governmentannouncement or draft legislation, and then refining the catch through aconsultation process with industry. The 1997 Budget franking credit measures isan example of this approach and, indeed, the entity taxation proposal in A NewTax System contains an element of this too. In some instances, this ‘catch all andconsult’ has been a deliberate strategy by the authorities, which is misguided, as itis particularly harmful for financial markets when they are affected by measures.

There is no doubt that significant improvement to tax policy and legislationemerges from consultations with industry. However, the intervening uncertaintyinhibits investors, especially non-resident investors, and can cause long-termdamage to the affected markets. Some residual harm persists, even if the rightsolution is found at the end of the process.

Leaving aside the problem of uncertainty, the ‘catch all and consult’ approach isstill sub-optimal because, under it, industry has to participate in consultationsunder the threat of penal provisions and under these conditions the compromiseachieved is not a fair balance. The Review should recommend that this approachbe halted and that instead, reliance be placed on its proposed integrated businesstax design process, as it would better focus new taxation measures.

7

2.2 An ATO Advisory Board – A Positive Step

IBSA supports the Review’s proposal to establish an ATO advisory board, whichwould help establish a better dialogue between the tax authorities and industry.Consequently, IBSA welcomes this proposal. In our experience, there is a strongneed for an advisory board and preferably one that is pro-active in responding topolicy developments. The Board should include ATO and Treasuryrepresentation but have a clear majority of members from the private sector.

The self-assessment regime places an obligation on the ATO to provide taxpayerswith clear guidance on tax provisions, so that they can reliably determine and paytheir tax liability. Self-assessment should not be a gamble for taxpayers, but insome instances it has been and remains so. To overcome this problem, the ATOwill need to develop good commercial acumen and respond quickly and flexiblyto queries and new developments. Guidance from an effective advisory boardwould be of assistance to the ATO in its effort to respond in this manner.

The ATO may require additional resources to fulfil its obligations in a morecommercially sensitive manner, since this requires individuals with specialistskills (apart from tax). The Advisory Board could play a useful role in the vettingprocess for the release of funds to support the ATO’s operations. However, theBoard’s advice should not form part of normal management audits.

Technology and globalisation of markets will have an ongoing impact ontaxpayers and, consequently, the tax base. An important objective of tax reformshould be the creation of mechanisms for ongoing review of the tax system by thetax authorities, so that it is adapted flexibly to changing policy and environmentalconditions. Effective industry consultation is a vital ingredient to their success inthis and the Advisory Board could contribute usefully in this regard. This wouldhelp ensure that the tax system operates in a commercially sensitive manner andcontinually evolves to better meet the Government’s policy objectives.

It is the Association’s experience that effective industry consultation at theimplementation level can assist the design and efficient implementation of taxmeasures. The business tax design process suggested by the Review would makea welcome contribution in this regard. This could improve coordination betweenTreasury and the ATO, which would help avoid practical difficulties that industryhas encountered in the past.

2.3 Taxation Rulings

Public, private or product tax rulings fill a deficiency in the tax law that createsuncertainty, or reflects a gap in the material available to taxpayers to help themcorrectly interpret the tax law. This is not necessarily a criticism of policy makersor law drafters, as innovations that occur after legislation is drafted and passed byParliament can create uncertainty that needs to be addressed by a tax ruling.

Nevertheless, it would be unfair to charge taxpayers for tax rulings under a self-assessment regime, as they should reasonably be able to rely on the law for clear

8

guidance in the determination of their obligations. In addition to this, taxpayersmust already meet substantial compliance costs. When a question ofinterpretation of the tax law arises, it should be incumbent on the Commissionerof Taxation to state his view to enable taxpayers to meet their tax obligations.

Therefore, in principle, the Association would not agree with a proposal to chargefees for tax rulings provided by the ATO. Indeed, the notion of linking the chargefor rulings to their commercial value is unusual, especially since some would havea negative value to those requesting it. Greater detail would need to be given onthe manner in which the charge would be levied and information on theconsequent ruling made public, since the payer could reasonably expect to have apropriety claim on a ruling that it paid for.

Notwithstanding this argument, many banks take the pragmatic view that chargesfor rulings would be preferable to the cost of unnecessary delays in the issue ofrulings. In reality, this is a preference for the lesser of two evils.

The plan to provide public information on private rulings, by way of a database ondecisions would be a positive development.

3. A More Responsive Tax System

A significant impediment to the ongoing efficient taxation of financial institutionsand the maintenance of the international competitiveness of the financial sector isthe slow process of achieving even modest refinement to the tax arrangements.This occurs even if there is consensus between Government and the industry onthe need for the change. This substantially emanates from the requirement forlegislative amendment to back-up most tax changes and this process can take wellover a year.

For example, the Government’s December 1997 Investing for Growth regionalfinancial centre initiatives were well timed but have yet to be legislated for. Thisoutcome is frustrating as the advantage of good timing is being lost and financialinstitutions cannot avail themselves of the opportunities that the measures create.There would be great benefit in avoiding such problems by improving taxflexibility and efficiency through the use of regulation in some areas, such asoffshore banking, within a well-defined policy set by Parliament. In some areas,like offshore banking, greater tax flexibility through the use of regulation within awell-defined policy set by Parliament would improve the internationalcompetitiveness and efficiency of the tax system.

An agile tax system would be a significant competitive advantage to Australia as aregional financial centre. The Government could respond swiftly and flexibly todevelopments that create new regional financial centre business opportunities andto developments that threaten to take existing business (either OBU or domesticbanking business) conducted.

9

Part 2The Tax Treatment of Risk

1. Introduction

The tax treatment of risk is a major concern for financial institutions, as theirprimary business involves the management, trading and transfer of risk.However, the Review of Business Tax’s first discussion paper, A StrongFoundation (ASF), does not comprehensively deal with this issue. It refers to theneed for a ‘risk neutral’ outcome to tax but does not attempt to define risk, nor todoes it establish any principles to guide the treatment of risk in tax policy orwithin the general body of tax law.

Yet, the tax treatment of risk has been a very contentious issue for the financeindustry. For example, as discussed below, the much-criticised 1997 Budgetmeasures to prevent trading in franking credits is in practice a tax on themanagement of equity investment risk. There are other examples too and theindications are the problem will to worsen if the underlying policy deficiency isnot addressed through the tax reform process.

Unless guidance for the tax treatment of risk is given by the Review, a keybuilding block for the design of an efficient tax system will be missing, theReview’s recommendations will be flawed and the community is likely to sufferfurther from inefficient and harmful tax law.

Even if wholesale reform of business taxation were not contemplated, the taxtreatment of risk would need to be considered, as there is not a settled policy onthe taxation of risk at present. Against this backdrop, the Review provides atimely and fortuitous opportunity to establish firm guiding principles for thetaxation of transactions and arrangements that involve risk.

The key principle is that, in general, transactions involving the transfer ofrisk can be safely ignored from a taxation perspective, as risk managementdoes not autonomously involve a threat to the tax revenue base.

There are exceptions to this rule, but they should be treated as such and not drivethe core policy treatment of risk, as they appear to do at present.

A design objective of the tax system should be to encourage efficient risktransfer and management, because it is beneficial to the economy.

The following sections of the submission illustrate these points and outline theneed for a rigorous and systematic high level policy review of the tax treatment ofrisk. They also provide some analysis to help understand the nature of risk, in itsmany forms and provide some insights into the practical difficulty of trying to useit as a concept in taxation. Most importantly, they provide some basic principlesthat should be reflected in the formulation of tax policy and the administration oftax law, that overcome this problem.

10

2. The Problem

It is apparent from a number of recent tax policy decisions that the taxation ofrisk, or products and transactions involving risk transformation, is not based on asound or consistent policy footing. This is evident from the rationale provided forrecent changes to tax policy and the manner in which it has been implemented.Two examples are provided below to illustrate this.

--------------------------------------------------------------------------------------------------Example 1. Division 243 of Lapsed Taxation Laws Amendment Bill (No. 4) 1998

The absence of policy principles to guide the tax treatment of risk has led tothe adoption of a measure of risk exposure in Government proposals to clawback depreciation in certain circumstances that make no economic orcommercial sense and give rise to anomalous and harmful results.

The original Taxation Laws Amendment Bill (No. 4) 1998 (TLAB 4) includedprovisions that claw back depreciation already claimed in respect of limitedrecourse finance arrangements that are deemed to be terminated. The Bill haslapsed but these provisions are still under active consideration by the Government.Industry argues that the provisions are based on faulty policy and will be harmfulto both banks and their customers. Leaving aside the core policy issue of thevalidity of the depreciation claw back, it is instructive for current purposes tofocus on the policy treatment of risk in the provisions.

Box 1 Example – Approaches to Risk

Company purchases an asset at costing of $1,000Financed by $200 Equity & $800 Limited Recourse Debt (LRD)

Equity rate of return 14%LRD interest rate 7%Risk-free debt rate 5%

Division 243 Approach ⇒ Equity risk exposure is 20%

Equity risk = 200/1,000 = 20%

Economic Approach ⇒ Equity risk exposure is 53%

Equity risk component = Equity funding% x Risk premium (14%-5%)Ö = 20% x 9% = 1.8

Debt risk component = Debt funding% x Risk premium (7%-5%)Ö = 80% x 2% = 1.6

In broad terms, the right to depreciation deductions under limited recourse financearrangements (as defined) is dependent on the proportion of risk carried by theborrower. For example, if an asset costs $1,000 and is financed by $200 equity

11

and $800 limited recourse debt, then the borrower can claim depreciation up to20% of the asset cost at termination of the loan (as defined).

As illustrated in the example in Box 1, the approach to risk taken in Division 243provides an outcome that is radically different to that dictated by economiccriteria; in fact, it underestimates equity risk exposure by a factor of over 2.5.This is because it ignores the manner in which risk is priced by the market anddoes not recognise the subtle way in which risk (and its reward) is transferredbetween the borrower and the investor.

The example in Box 1 is simplified but it serves to make a quite fundamentalpoint. In practice, the definition and measurement of risk is quite complex, asdiscussed below.

If an accurate assessment of risk were made and the borrower proportionatelydenied depreciation, then the lender (who shares in the risk of the project) shouldthen be entitled to an equivalent depreciation deduction in respect of the asset.That is, if the lender is deemed under the provisions to take the bulk of the assetrisk, then fairness suggests that the lender should be entitled to the full incomeassociated with that risk, which includes the bulk of the depreciation allowance.The provisions do not provide this entitlement, thus creating something of a taxblack hole for risk.

However, the most relevant point here is that the concept of risk adopted in theprovisions relating to Division 243 is not meaningful from a commercial oreconomic perspective. Notwithstanding this difficulty, it has been used to helpjustify a policy approach that, if adopted in legislation as is proposed, would giverise to an illogical and harmful economic outcome. It would penalise manynormal financing arrangements and create significant inefficiencies in theallocation of capital. It would also be iniquitous by disadvantaging certain typesof borrowers and loan arrangements. In sum, the provisions would be harmful tobanks, borrowers and the wider economy.

There are other important deficiencies in the proposed definitions of limitedrecourse finance and termination, but it is not necessary to consider them for thepurpose at hand. The main point to take away from this is that adoption of a set ofdecent principles to guide the tax treatment of risk would have prevented thedevelopment of the proposal and the market would not now be suffering its effectsthrough delays in new financing and refinancing transactions.

Example 2. 1997 Budget Measures to Prevent Trading in Franking Credits

There is great need for solid policy principles to guide the tax treatment ofrisk. The problems caused by the 1997 Budget franking credit measuresdemonstrate that, in the absence of such principles, tax law can be poorlyfocused resulting in serious inefficiencies, inequity and double taxation.

The measures to curtail trading in franking credits announced in the 1997 Budgetwere intended to combat tax avoidance. In some instances, equity swaps and

12

other products were being used to transfer franking credits from investors whohad limited use for them (especially non-resident investors) to investors whocould fully utilise them. The Budget measures were targeted at thesearrangements and it was generally accepted that some action was necessary,having regard to fiscal constraints. However, there was (and is) great unease inindustry at by-products from the manner in which tax avoidance was attacked.

In practice, the measures had a much wider impact than halting trading in frankingcredits and affected a wide range of transactions that clearly had nothing to dowith tax avoidance. For example, under the measures, an investor who opens afutures contract position could lose the benefit of franking credits on recentlypurchased shares, even though there is clearly no transfer of tax benefits or taxavoidance of any nature in the underlying transaction.

There are two possible explanations for the wider than anticipated impact of themeasures. The first is poor policy design, reflecting a failure to understand riskand to appreciate the economic benefits from risk management. However, thosewith a more sceptical eye view the Budget measures as a ruse to introduce a newpolicy. The probable answer is that the measures contain elements of both.

Some hold the view that a new policy was introduced, which linked the right toreceive franking credits to economic ownership of the underlying shares. Leavingthis matter to one side (though it is relevant to the Review’s analysis of tax policyformulation), the analysis here focuses on significant deficiencies in the treatmentof risk that emerged through the measures.

Perhaps the main problem with the Budget franking credit measures, as evidencedin their design and discussed below, was the failure to define risk and understandit. This wrong-footed the legislative approach to curtail trading in franking creditsand gave rise to an unnecessarily harmful and inefficient outcome.

1. Failure to understand the economic character of risk

There was insufficient consideration given to the attributes of risk. Forexample, there was no explicit or implicit recognition of the fact that whenrisk is transferred the income associated with it transfers to the new risk-holder. Consequently, when the authorities designed the measures and draftedthe legislation to implement them, they failed to build on the fact that risktransfer does not generally reduce the aggregate tax base.

This fact could have been utilised to markedly improve the focus andefficiency of the measures. Because it was not, financial transactions that alterthe market risk profile of an investor’s share investment portfolio, but havenothing to do with tax avoidance, may result in the loss of franking credits.

2. Failure to define risk

The measures are designed around a concept of ‘economic ownership’ that isnot defined, but in application is tied to a share investor’s exposure to market

13

risk, measured by a ‘material diminution of risk’ test. Thus, economicownership relies on the concept of at-risk, which is approximated by a deltatype measure2. Amongst other things, this lack of transparency made itdifficult to conduct a much needed structured policy debate.

3. Policy not based on principles

The policy was formulated by building upward from tax avoidance to derivepolicy principles, rather than using policy principles to ascertain and closeouttax avoidance. For example, the concept of at-risk and its measurement wereonly developed during the course of consultations that followed the Budget.The failure to define economic ownership and risk at the outset gave theimpression that the authorities were making it up as they went along and thisresulted in poorly targeted measures.

4. Narrow focus on risk

Analysis of the concept of ‘at risk’ in the measures is limited to market riskonly; that is, the risk generated by changes in the price of the relevant share orinstrument. Many other dimensions of risk associated with share investmentstrategies (like counterparty risk, hedge failure risk, settlement risk andcorporate control risks) were not considered. This means that the informationset from which the existence of tax avoidance is to be assessed is incomplete.3

Problems that emerged from the approach adopted in the legislation include:� In terms of the Review’s legislative design principles, policy transparency was

weak;� An incorrect nexus between risk management and tax avoidance;� Double taxation in some instances (see appendix 1);� A penalty on some legitimate risk management strategies;� Complexity and inequity; and� High compliance costs.

These problems would not have occurred if the economic and commercial factorsgoverning risk had been understood and principles based on them used to guidethe development of policy and legislation. To limit this problem in the future, theReview should recommend adoption of the principles presented in Section 3below. Their adoption would also help the Review to formulate the proposals tobe put forward in its third discussion paper that deals with entity taxation.

In summary, the authorities identified a tax avoidance problem but did not have asufficient understanding of risk to address it without impeding other aspects of themarket, or were unconcerned about the market implications of their measures. Asa result, the Budget measures attack risk management per se, rather thanspecifically attacking the use of risk management instruments to avoid tax, which 2 At December 1998, the delta measure still had to be defined in regulation.3 For example, it does not take account of an investor who enters an equity swap in order to raisefunds by selling the dividend income stream from shares in a company and, at the same time,retain a strategic ownership stake in that company as it is vulnerable to takeover.

14

is a much narrower target. The experience with the Budget franking creditmeasures suggests that the authorities should focus more on risk management as alegitimate activity that is an integral part of a modern economy and vital to itsinternational competitiveness. The Review can make a positive contribution byhelping to create this focus.

2.1 Pending Future Problems

Looking towards the future, deficiencies in the current tax treatment of risk arelikely to become even more problematic, if they are not corrected now. TheReview presents a unique opportunity to do this, by establishing a set of principlesthat could be used to guide the Government and its policy advisers in theformation of tax policy. It is recognised that the Government has to strike abalance between competing objectives, like equity, simplicity, revenue collectionand efficiency, in setting its policy. However, the existence of these principleswould at least mean that consideration is given to risk issues in a systematic andcognitive manner in determining the balance finally adopted.

The need for reform of this nature is compelling, as problems are alreadyemerging in its absence.

Example 3 Taxation of Financial Arrangements - Issues Paper

The characteristics of risk, and associated principles, can be used in thedesign of the tax system to improve its efficiency. Chapter 15 of the TOFAIssues Paper could be significantly improved by adopting this approach.

The ATO and the Department of Treasury jointly released an issues paper,Taxation of Financial Arrangements, in December 1996, that considered the taxarrangements for financial transactions. Chapter 15 of the Issues Paper wasdevoted to the tax treatment of synthetic replication of economic risk positionsand it illustrates the problems that can emerge when there is a failure to set high-level principles for the taxation of risk.

The paper correctly states that ‘synthetic replication is effectively a form of risktransference’ (Paragraph 15.6). It goes on to propose that there be a deemeddisposition of an asset where a tax payer enters into an arrangement thatsubstantially removes the opportunities of gain and loss from the asset. Thiswould crystallise a capital gains tax liability.

Logic suggests that if there is a deemed disposal for capital gains tax purposes,then, on the other side, there must be a deemed acquisition with a new capitalgains cost base. However, the paper takes an asymmetric view by looking only tothe revenue side. Therefore, it does not propose to create a notional capital gainstax cost base for deemed acquisitions that would naturally compensate for the lossof indexation by the deemed disposer.

The entity that acquires the risk (from the deemed disposer) is compensated by theincome associated with this risk. The Issues Paper proposes that if the risk is

15

acquired through a derivatives transaction, then it would be taxed on a mark-to-market, or revenue basis. Therefore, the tax revenue base associated with that riskis secure, notwithstanding the hedging of the asset. In other words, it is notnecessary to have a deemed disposal of the asset.

However, as in example 2, the Issues Paper fails to acknowledge that when risk istransferred so is the income that is derived from it and there is something of ablack-hole for risk. Recognition of this factor would obviate the need to looktowards deemed disposal of securities to secure the aggregate revenue base, as thefuture income from risk associated with the asset would remain within the tax netand would be taxed on a revenue basis. This would maintain the integrity of thetax base.

There are additional problems with the approach adopted in the Issues Paper. Forexample, market risk may be hedged but not credit risk and the latter can have asignificant impact on realised returns. Also, delineating risk in the mannerrequired within an actively traded portfolio would be very difficult.

This illustrates the need to consider practical limitations in the design andadministration of tax arrangements. For example, the proposal in the Issues Paperrequires the term ‘substantial removal of risk’ to be defined but this is a verydifficult task, as example 2 above demonstrates.

Fortunately, it is possible to build on the characteristics of risk to short-circuit thisproblem. Because income associated with risk transfers with it, risk transfer doesnot automatically compromise tax revenue and, as illustrated above, it is generallynot necessary to seek a deemed disposal to preserve the tax base. In short, byadopting some simple principles to guide the tax treatment of risk, it is possible toimprove the efficiency of tax law and lower compliance costs, while maintainingthe integrity of the tax base.

16

3. Principles to Guide the Tax Treatment of Risk

The examples discussed in Section 2 share some important common themes, ofwhich the principal one is an asymmetric view of risk. In order to avoid incorrectand inconsistent policy, it is necessary to define a set of high level policyprinciples to guide the formulation of tax policy in relation to risk and theadministration of the tax law. Indeed, significant efficiencies in the administrationof the tax law can be secured if an appropriate set of principles is adopted.

These principles would be set independently of any individual tax situation. It isapparent that policy formed around the prejudices of a particular conflict ordifference does not serve well to set a broad framework for the taxation of risk.The principles may not exclusively determine a particular tax policy, but theywould feed into the decision making process and gibe a better balance to policy.

The process of establishing a set of principles for the tax treatment of risk mayseem a little daunting. However, in practice it is not so difficult and can bedistilled into one overriding principle;

In general, risk transfer can be safely ignored as a criteria for determining taxliabilities and offsetting entitlements.

Better identification and pricing of risk have made economic entities moresensitive to the impact of risk on their profitability. Consequently, investorstypically will not accept risk unless they are adequately compensated for holdingit. Because the holders of risk must be compensated, the income associated withany particular risk travels with risk and this feature can be used as a valuable inputto the design of an efficient tax system.

3.1 Why Risk can be Safely Ignored, In General.

Risk transfer is predicated on commercial considerations. It is the exceptionrather than the norm that risk management autonomously influences the taxoutcome of a transaction, or indeed that risk management is undertaken for taxreasons. In other words, risk management has a naturally neutral impact on taxrevenue and should not be directly linked with tax avoidance.

Risk is bought and sold for a price, which means that transfer of risk involves atransfer of income – even though the price may often be embedded in transactioncosts and impossible to separately identify. For example, when an investorhedges their portfolio, they effectively sell their market risk to the hedge provider(while, at the same time, taking on other risks). The hedge provider receives areturn for assuming this risk and must pay tax on its income from these returns. Inother words, risk does not disappear when hedging takes place, but rather is onlytransferred elsewhere in the system, at which point it is subject to tax. Thisattribute of risk is not always recognised in tax policy and law, as illustrated inexamples 1 and 2 in Section 2.

17

The real threat to the tax revenue base is that risk (and the associated income) willbe transferred to an entity that is outside of the tax system with the intention ofavoiding tax or generating tax benefits unintended by the Government. Thisidentifies the potential areas for leakage and the area in which the authoritiesshould concentrate their anti-avoidance effort, though in doing so they should notdisrupt normal trade in financial services.

This provides a policy basis for measures to restrict the transfer of tax benefits totax exempt entities. Thus, there is sound policy rationale for many revenueprotection measures that are already in place. In these instances, the realchallenge is to improve the design and administration of the measures.

In this context, it is important to note that care should be taken not to impedeinternational trade in financial services, even though it frequently involves thecross-border transfer of financial risk and its associated income. This trade isentirely legitimate from a taxation perspective and should not be impeded bytaxation measures. Imported financial services involve the transfer of incomeoffshore, while financial service exports increase the income (and tax revenue)base in Australia. Measures that interfere with international trade would conflictwith the Government’s policy objective of liberalising trade in services andconflict with our international obligations arising from GATS, APEC and doubletaxation agreements.

3.2 Why Using Risk as a Tax Criterion is Fraught with Difficulty

To use risk as a tax criterion, it would need to be precisely defined – a verydifficult task.

Before basing tax policy on a concept of risk, it would be necessary to define witha fair degree of precision what is meant by risk. Such a definition has provedelusive to the tax authorities to date and is likely to remain so.

Defining risk is not a simple matter as entities within and outside the financialsector have markedly different perceptions of risk. For example, financial systemregulators take a much wider view of risk than do the tax authorities.4 Further,entities will modify their behaviour to reflect their perception of risk, so measures(including tax) that alter the risk balance can have secondary consequences thatshould be taken into account to the extent that it is reasonably possible.

There are many dimensions to risk, apart from market risk that has been the focusof some recent tax developments. The following list is not exhaustive and theexplanations are rather cursory, but it serves to illustrate the point.

� Market risk – profit or loss generated by a change in asset prices (differentsubcategories exist here, for example, basis risk and volatility risk)

� Operational/control risk – for example, computer systems failure

4 Unfortunately, this limits the value of regulatory information for tax purposes, which couldotherwise reduce banks’ tax compliance costs .

18

� Legal risk – potential for change to the accepted legal character of atransaction; for example, by a new court ruling or legal opinion

� Liquidity risk – risk that contracts cannot be readily unwound� Counterpary/credit risk – risk of default, or delayed payment� Pricing risk – risk that product is systematically mis-priced� Reputation risk – risk that good commercial or regulatory standing of entity

may be compromised� Systematic risk – risk associated with factors affecting the whole market� Asset/specific risk – idiosyncratic risk associated with a single asset.

There is also a question as to whether risk is objective or subjective risk. Thelatter can be particularly difficult to take account of in measuring risk againstbenchmarks. Which dimension of risk is most significant usually depends on thecharacteristic of the asset or transaction being assessed, though in general marketrisk is important. Typically, banks’ business encompasses each of these riskfacets to some degree.

Risk is probabilistic and typically forward-looking, which means that ex postanalysis of transactions must carefully conducted. For example, because thedepreciation claw back provisions in the TLAB 4 Division 243 provisions,discussed in Section 1, are based on an ex post analysis of the underlyingtransaction, they produce an outcome that is at odds with the commercial realityof the situation.

The tax authorities do not appear to have rigorously considered the definition ofrisk and do not seem to have a clear view of what constitutes risk for taxationpurposes. However, it is reasonable to expect that firm guidance would be givenby the authorities on the factors that they will consider to be pertinent in theirassessment of risk, if it were to be used as a criteria in the taxation of commercialarrangements.

In practice, the multifaceted character of risk means that its key attributes willvary from situation to situation and it will be difficult to pin down for taxpurposes, leading to considerable complexity. Certainly, the standardisationsough in the Review’s legislative design principles would be hard to achieve (asthe examples in Section 2 illustrate). Because of this, the ability to generallyignore risk for taxation purposes can be used to greatly improve the efficiency ofthe tax system.

Risk, as defined, would need to be measurable

If tax assessments were to be predicated on risk then the risk concept adoptedwould need to be measurable to enable taxpayers to determine tax liabilities andfor the ATO to assess taxpayer compliance. In practice, this is a demandingstandard that would rarely be reached with universal agreement. Riskmeasurement is complex science and forms a very difficult base from which to tryand implement and administer tax provisions with an acceptable degree ofintegrity.

19

Banks and other entities must be able to assess and manage risk as part of theirnormal business. However, the methods they employ are not uniform and formpart of their competitive armoury. They use measures for certain aspects of risk intransactions (for example, duration and price volatility), rather than for risk intotal because its various components (market risk, operational risk, legal risk etc)are not all reliably measurable nor are they additive. Similarly, the ‘economicrisk’ factor that is being drawn into tax policy is a composite measure of thevarious types of risk and, as such, is not reliably measurable.

Perhaps one of the more difficult facets of risk to get to grips with is itssubjectivity – given the same set of information, different entities may drawdifferent conclusions regarding risk. For example, a 1995 Bank of Englandsurvey of OTC options and swaps pricing by 40 banks and securities houses usingthe same input data uncovered substantial differences in the prices quoted. Thishighlights the need to look beyond the basic building blocks of financialengineering, like the simple but oft-quoted put-call parity relationship for options,in assessing the risk attributes of any particular transaction.

Even apparently straightforward hedging relationships can be become quitecomplicated. For example, hedging tends to address market risk only, leavingother risks unchanged and creating new risks, like hedge counterparty credit risk.It can even be difficult to determine if a hedge is in place; for example, a hedgeusually depends on a defined correlation with an asset, but the correlation factorcould systematically change over time.5 Further, hedges themselves are risky andsometimes fail – that is the ex ante assumed relationship between the underlyingasset and the hedge instrument is found not to exist ex post. This problem couldplague the ongoing implementation of risk based tests for the receipt or denial offranking credits, discussed above.

3.3 Why Taxing Risk Management should be Avoided

Recent Treasury analysis of the tax and regulatory implications of derivative riskmanagement products emphasise their role in replicating transactions in theunderlying asset.6 This approach is valid but only to a point; it is important torealise that derivatives also provide significant benefits that are unique to them.For example, interest rate swaps effectively overcome debtor-creditor relationshipdifficulties in the corporate bond market in a manner that cannot be replicated bycorporate bond transactions alone7 and futures provide substantial transaction costsavings for portfolios.8

5 This is an important issue for providers and users of derivatives too; for example, in one highprofile case, a large German company, Metallgesellschaft, was uncertain if it was hedged or not,and the management of this uncertain situation eventually lead to losses of US$1.5 billion.6 See CLERP paper number 6, on financial markets regulation, and the December 1996 TOFAdiscussion paper.7 For example, a company that issues short term debt and swaps it for long term fixed rate financereduces its exposure to interest rate changes, without having to pay the standard long term debtpremium. This is because it is kept on a financial discipline ‘leash’ by its short-term debt holder.Thus, derivatives have an inherent value for companies and their creditors.8 For a discussion of the functions of derivatives see David Lynch, Chapter 1 of Derivatives – TheRisks that Remain, Allen and Unwin, Sydney, 1997.

20

For policy design to be effective, its formulation and implementation mustembody a keen understanding of the role of risk management and appreciation ofthe economic benefits that it provides. The following broad points, amongstothers, should be considered:� Risk management and trading helps to identify and evaluate risk – this results

in a superior capital allocation;� It stimulates better distribution of risk between provider of funds and risk

taker – better capital allocation;� It encourages risk sharing, which supports greater innovation and economic

growth.

Examples of benefits to business from risk management include:• Allows companies to concentrate on their core business activity;• Reduced cost of funds (the value of this is often overstated);• Hedging also helps preserve smooth dividend payments, which companies and

investors seem to prefer;• Hedging smooths income flows.

Consider the simple example of an importer with future foreign exchangeexpenses, who buys foreign exchange on the forward market from an exporterwho has future foreign exchange receipts. In doing so, both eliminate theirexposure to unfavourable exchange rate movements and benefit from greatercertainty, at the cost of foregoing potential benefits from favourable movements.In short, risk is transferred to those entities most willing to hold it at a pricedetermined in the market.

Table 1.Trading of OTC Derivative Products in Australia by Counterparty

Year to mid-1996Interest RateProducts

Turnover$ billion

In-house%

Banks%

Government%

Corporate& other %

FRAs 664 29 49 10 12Interest rate swaps 46 36 6 12Cross currency swaps 83 54 29 5 12Interest rate options 28 -------11-------- --------89------------Caps/floors 25 48 9 4 39Swaptions 5 19 14 0 67

Foreign Exchange ProductsOptions 175 13 58 2 27

Domestic Dealers % Overseas Banks %

Corporate & other

%Outright forwards 551 17 33 50Swaps 8,597 35 46 19

Source: Figures are derived from the 1996 Australian Financial Markets Report, AFMA, Sydney(1996). Foreign exchange figures therein are derived from Reserve Bank of Australia data.

21

Risk management cannot permanently eliminate risk. However, the optimal timeprofile of hedging minimises adjustment costs to transitory shocks and, at thesame time, facilitates adjustment to long term changes. This minimises capitalwrite-off and increases the effective life of the economy’s aggregate capital stock.

Derivatives are widely used by participants in the financial sector, the corporatesector and government (see table 1), reflecting the benefits that they provide.Resources placed into the management of risk have increased significantly inAustralia over the last ten to fifteen years. This partly reflects the effects offinancial deregulation and the internationalisation of the economy, whichincreased the exposure base for financial risk and significantly increased marketrisk.

Australian manufacturers and service companies have a distinct advantage overtheir counterparts in most countries in the Asia-Pacific region, who do not haveaccess to the range of low cost, efficient financial hedging facilities of the typeavailable here.

3.4 A Subsidiary Principle - Taxation Should Favour Risk Management

It follows from the above discussion that efficient markets that facilitate thetrading and management of risk are of significant benefit to participants in thefinancial sector and the wider economy. Therefore, it should be a tax policydesign objective to encourage efficient transfer or risk, not merely be neutral.

Currently, the main risk is that there will be an undue focus on risk transfer basedon a false premise, as there has been in recent tax measures. For instance, somehave expressed the view that tax benefits (loosely defined) to a transaction shouldonly be available to an entity directly at risk in the transaction.9 For example, if atax payer ‘shelters’ behind a limited liability company, the tax benefit should onlybe available to the company and should be clawed back when it is passed throughto the underlying owner.

The reasoning that underpins this assertion is faulty and it fails to appreciate thenature of risk. Suppose a limited liability company structure is adopted for abusiness activity. If the company has 100% equity funding, then the companycarries the full business risk and the shareholders should be entitled to all taxbenefits generated by the company. If the company has some debt, which is thenormal situation, then its lenders take part of the business risk because of itslimited liability attribute. In this case, the company’s lenders will seekcompensation for taking that risk through the terms charged for their credit.

In other words, there is no proverbial ‘free lunch’ and any tax benefits associatedwith the company’s activity are earned. Failure to allow the benefits to passthrough to the company’s shareholders would penalise them for, as companyowners, the market has already charged them for its higher risk status (that is,

9 For example, R. Krever, Taxing Trusts as Companies: The Case For, ASX Perspective 2nd

Quarter 1998.

22

their ‘shelter’). This would be consistent with an integration of ownershipinterests, where entities are considered as extensions of their ultimate owners – aconcept endorsed by the Review. The proposed full imputation system wouldconflict with this, it embraced a full symmetrical integration of income and capitalgains tax.

It follows that if a tax benefit is attached to a certain activity then, so long as thatactivity actually takes place, it should not matter who receives the benefit for taxpurposes. Indeed, if the tax benefit is not tradeable, it may limit the attractivenessof the underlying tax measure and possibly conflict with its policy objective.

As in the examples discussed in Section 2, the view that depreciation and other tax‘benefits’ should be quarantined to the entity itself derives from a misguided andasymmetric view of risk, that sees the income associated disappear down a blackhole when it is transferred. It is not clear why the Government would want tofollow this approach and inhibit the distribution of company earnings in acommercial manner, or in other words, why it would want to deny the pass-through benefits to the underlying shareholders.

Limited liability companies and other forms of communal investment are vitalinstruments for economic development and growth and it would be foolish todiscriminate against them through the tax system. Similarly, it would bedamaging to formulate tax policy without due consideration to the character ofrisk, given its central place in all economic activity.

23

4. Concluding Comments on Risk

The intention of the analysis here is to demonstrate the need to attach a highpriority to the correct treatment of risk, when formulating tax policy. Recent taxdevelopments indicate that there are weaknesses in the current tax system in thisregard. The Review can play an important role in rectifying this situation andprovide a better basis for future tax development by including amongst itsprinciples for taxation, guidance for the correct tax treatment of risk.

Fortunately, the characteristics of risk are such that it is not necessary tocomplicate the tax system to take proper account of it. Because income associatedwith risk travels with it, in general, it is unnecessary to track the transfer of riskwithin the economy for tax purposes. The exceptions should be treated as suchand tax measures to address them should not interfere with normal risk transferand management activities.

The treatment of tax-exempt entities and non-residents may need specialconsideration in the unusual circumstances where tax benefits can be traded in amanner unintended by the Government. By the same token, care must beexercised not to interfere with legitimate domestic and international trade infinancial services that involve risk transfer.

Misunderstanding of risk and a misguided tax response has greatly increased thecomplexity of the tax system in some areas, like the franking credit system. Therewas a revenue benefit for the Government from the 1997 Budget measures,however, this was at the cost of a less efficient tax system and the imposition of aflawed policy. Unless a more informed approach to risk is taken, there is likely tobe additional unnecessary complexities, such the proposed claw back ofdepreciation on limited recourse loans.

24

Appendix

Risk Management and Tax Neutrality – 1997 Franking Credit Measures

The example in the box below is constructed around a simplified model in which equityprovides a relatively higher average return than debt, because it entails higher risk.

On average debt is assumed to return 7% and equity 10%. Therefore, the equity riskpremium is 3%. When the shareholder hedges, they sell their equity risk to the hedgeprovider and receive a debt equivalent return averaging 7%. Meanwhile, the hedgeprovider will receive an average return of 3% on the risk that they have assumed.

Under the pre-Budget regime, total tax returns are 47% of the underlying companyincome stream, whether the share investment is hedged or not. Therefore, hedging has noinherent impact on tax revenue.

Under the Budget measures, the effective rate of tax on the underlying income stream is66%, reflecting double taxation. The shareholder loses their franking credit because theirshare portfolio is hedged within 45 days and the hedge provider does not receive thefranking credits.

Revenue under Pre and Post-Budget Conditions

Assume Shareholders have a 47% marginal tax rate, 100% franking creditsand a Dividend of 100.100% Hedge is taken within 45 days.

Average Returns Equity 10%Debt 7%Implied EquityRisk Premium

3%

Corporate tax Personal income tax Total tax paidNo hedge 47.0Company (Co) 36 -Shareholder tax - 11 on Co’s dividend

Hedge Pre-Budget 47.0Company 36 -Shareholder tax - 11 on Co’s dividend

less 14.1 loss on hedgeHedge provider (HP) 10.8 -Hedge provider shareholder - 3.3 on HP’s dividend

Hedge Post-Budget 66.1Company 36 -Shareholder tax - 30.1 on Co’s dividend

less 14.1 loss on hedgeHedge provider 10.8 -Hedge provider shareholder - 3.3 on HP’s dividend

25

The International Banks and Securities Association of Australia

IBSA represents and promotes the interests of investment banks engaged inwholesale banking, securities and financial markets business.

List of members:24 November 1998 - 45 Members

ABN AMRO Australia LimitedANZ Investment BankBanca Commerciale Italiana SPABank of America NT & SA - AustraliaBank of ChinaBank of Tokyo-Mitsubishi Australia LtdBankers Trust Australia LimitedBBL Australia LimitedBNP Pacific (Australia) LimitedBOS International (Australia) LimitedCitibank LimitedCredit Agricole Indosuez Australia LimitedCredit Lyonnais Australia LimitedCredit Suisse First Boston Australia Securities LimitedDeutsche Bank Group - AustraliaDresdner Bank AGFuji International Finance (Australia) LimitedIBJ Australia Bank LimitedING Bank N.V - Sydney BranchKBC Financial Services LimitedMacquarie Bank LimitedMerrill Lynch AustralasiaMorgan Guaranty Trust Company of New YorkMorgan Stanley Australia LimitedN M Rothschild & Sons (Australia) LimitedOCBC BankOrd Minnett Group LimitedOverseas Union Bank LimitedRabo Australia LimitedRMB Australia LimitedRoyal Bank of CanadaSalomon Smith BarneySanwa Australia LimitedSchroders AustraliaSociete Generale Australia LimitedStandard Chartered Bank Australia LimitedState Street Bank and Trust Company - Sydney BranchSumitomo International Finance Australia LimitedThe Chase Manhattan BankThe Dai-Ichi Kangyo Bank Limited - Sydney BranchThe First National Bank of ChicagoTokai Australia Finance Corporation LimitedUnited Overseas Bank Limited - Sydney BranchWarburg Dillon Read Australia LimitedWestLB - Sydney Branch

..oOo..