Senator NASH (New South Wales—Deputy Leader of The Nationals in the Senate) (10:01): I rise to make some comments on the Higher Education Support Amendment (Student Contribution Amounts and Other Measures) Bill 2012. There are two main parts to this bill. Obviously, as many of my colleagues have spoken to already, the first is to reinstate the student contribution amounts for mathematics, statistics and science units of study to their pre-2009 levels for domestic students. It also removes the eligibility for Commonwealth supported places and the Higher Education Loan Program schemes for Australian citizens who commence study after 1 January 2013 but do not intend to live in Australia during their courses of study.

Following the MYEFO in 2011-12 Labor announced a reversal of the then-existing policy, and the reason given was that there had not been a noticeable difference as a result in the number of the country's maths and science graduates. Certainly, from this side of the chamber, there is an acknowledgement that indeed there was not the intended result from the lower contribution that had been required. The contribution will increase from $4,691 to $8,353, but it has to be noted that there seems to be a cost-saving measure attached to this particular piece of legislation that is going to create about $1 billion in savings over four years. That is a significant saving and, given the current nature of the government's fiscal situation, it is not a surprise to see this. The assumption that it is a cost-saving measure has to be taken into account.

There is a need for action in this area—there is no doubt. There is a real lack of science and maths graduates and a dearth of students who are moving to study in that area. There is agreement with the government from this side that we need to address this shortage in maths, science and statistics. On this side we acknowledge that we need to address that. Interestingly, just nine per cent of Australian university students enrol in physics, chemistry and maths compared with an OECD average of 13 per cent and a South-East Asian average of 26 per cent. University maths majors fell by 15 per cent between 2001 and 2008. University enrolments are just one area we need to look at.

To me, it simply does not make sense to try to target students as they are entering university if we want the levels of those students doing maths and science to increase. In my view, it is simply far too late. We need to be encouraging these students way earlier—right back in primary and secondary school—and showing them the great opportunities that are available if they follow a path into maths and science. My good colleague Senator Mason made some excellent comments in his contribution about his thoughts as a young child wanting to be an astronaut. We have moved away as a culture from the aspirational ethos that Senator Mason referred to, after being focused on these types of areas. I noted that Senator Mason spoke almost derogatorily about himself becoming a senator rather than taking on those paths, but I am very glad that he did. He made the very good point that we have changed in our aspirations as young people to where we are headed, and I think it is important that that is addressed.

It is not going to be fixed, and the government tends to put forward simplistic responses. Again, with the lowering of the HECS fee, we have a simplistic response from government: 'We'll lower the costs so therefore we'll get more students.' In fact, there was a good deal of commentary at the time warning that the HECS discount policy would not actually work. Professor Bruce Chapman, from the ANU, said:

I would expect these changes in prices to have very little effect on enrolment behaviour … People don't respond much to changes in HECS prices.

In 2007 Vice-Chancellor Steven Schwartz from Macquarie University predicted a HECS discount 'would have little effect because it was seen as too far away in the future and abstract'.

Indeed, most of these students make their decision on the course rather than a cost reduction. I would say it was a very simplistic response from the government that is not taking into account the bigger picture that Senator Mason talked so eloquently about in his contribution last week on this piece of legislation.

It is also very interesting to note that this is a combination. It is not just about the students that we need to encourage—and we do need to encourage them from a very early age. It is also the difficulty in attracting and retaining maths and science teachers. In 2006, quite some time ago, a survey was done that pointed out quite alarmingly that 75 per cent of schools were finding it difficult to recruit qualified maths teachers. Things have not really improved since then. We need to focus on this area—there are no two ways about that. The government have approached this far too simplistically. They are not thinking of the bigger picture. They are not thinking holistically about how to attract these young people and provide some incentives for them. We need to look at how to open these students' eyes to the great future in maths and science, because the current figures show that the policies in place at the moment simply are not working.

This is another example of the government's inability to properly formulate and implement policy. The Prime Minister likes to pride herself on being the 'education prime minister'. Indeed, for some time she has been talking about the education revolution:

We’ve started the journey for the Education Revolution. We need to complete that journey for every child, in every school.

That is what the Prime Minister said at the ALP campaign launch way back in August 2010. What we are seeing again from this government, as we have seen so often, is words and not actions that actually back up those words. They throw out all the words, throw out all the trite sayings about having an education revolution and yet we look at a policy misdirection, at best, with something like this HECS reduction to try and encourage these students into maths and science. But this policy simply did not work. When we look at the inability of this government to properly formulate and deliver policy, the list is endless.

What is astonishing is that the government was trying to encourage more students to do maths and science yet, at the same time, the government cut the funding for PrimaryConnections. This is extraordinary because on the one hand the government is saying, 'We're trying to encourage students to do maths and science,' and on the other hand the government is cutting funding to one of the very programs that are instilling and inspiring a love of maths and science in young students. That is simply stupid, yet another stupid piece of policy from this Labor government. The PrimaryConnections program was initiated by the Australian Academy of Science. It established a professional learning program supported by a very strong curriculum to improve the quality and quantity of primary science teaching. In the middle of 2011, the Gillard government moved to cut funding to the program. At that time, 55 per cent of all Australian primary schools had adopted at least one of the PrimaryConnections teaching modules in their teaching programs. At the time the Australian Academy of Science said:

At a time when Australian students’ interest in science is declining and achievement standards are slipping, it makes no sense for the Government to cut funding for primary and high school science education programs that are proven to improve teacher quality and increase students’ science knowledge and skills.

How stupid was that? Here is a government with a perfectly good program currently in place, that is shown to work and is supported across the sector, and yet the government cuts funding to it. People quite rightly get extremely frustrated and annoyed when they look at the waste and mismanagement in so many areas by this government. Yet the government cuts funding to a program for young students that was shown to work and that was trying to deliver exactly what the government was trying to do by reducing HECS debt: instilling students' interest in and aspiration to move towards maths and science. It is breathtakingly stupid! We know that Professor Brian Schmidt, from the Australian Academy of Science and the 2011 Nobel laureate in physics, saw that the worth of the program was so great that he donated $100,000 from his Nobel prize to the program. And yet we have the Labor government under the so-called 'education prime minister' with the 'education revolution' cutting funding to the program. It simply does not make sense and reflects the inability of the Labor government to properly think things through and properly come up with a process and a policy that is going to work, can be implemented and is going to be substantive. There was also a lot of concern at the time about the initial lack of commitment by the government to fund the maths and science Olympiads. Finally, thankfully, after all this period of confusion and extreme concern across the sector the government reinstated the program. All of that confusion and uncertainty was completely avoidable and completely unnecessary. The government simply made a very bad decision in moving to cut that funding when it did not have to. It was a piece of ill-thought-through policy from this Labor government.

When it comes to maths and science, these are particular concerns for me for rural and regional areas. There is no doubt there is a real disparity in the struggle that rural and regional areas, particularly the more remote areas, have to maintain the same education standards as we see in the metropolitan areas. This is particularly so in the science and maths sector. Now we have seen, from the NAPLAN results and answers to some questions on notice that I asked earlier, that regional and remote students are consistently and markedly outperformed by their metropolitan counterparts. We know it is a lot more difficult in the regions to access equity in education across a whole range of areas.

One particular inequity that still exists is for students who are trying to get independent youth allowance. The government have a $150 parental income test cap on that. Again, how stupid is that? These young students have proven themselves independent of their parents, but the government have a parental income test cap in place which precludes those students from even applying for independent youth allowance. This is one of the most stupid, inequitable pieces of policy I have seen in some time. I will continue to raise this issue until the government realise the incredibly bad impact that this is having on so many regional families.

When it comes to science and maths in the regions not only do we have to address this issue of inequity that we see in the results that are coming through; it is particularly difficult to attract and retain teachers in science and maths. In regard to filling vacant teaching positions in secondary science, ICT and maths, studies have found that schools in regional areas find it twice as likely, and remote areas four times as likely, that they will be unable to fill those vacancies compared to schools in metropolitan areas. Often this means in regional areas we are getting teachers—and I am sure they are very capable—who are not necessarily trained in maths and science to deliver those subjects. There is a whole range of areas we need to address when it comes to increasing the number of students going through the maths and science pathway. It is not as simple as just saying, 'We'll reduce the HECS fee.' That has been shown to have not been the appropriate decision to make.

The lack of attention by this government to education and university outcomes across a whole range of areas has become more and more obvious. It is not just maths and science; there is a significant lack of numbers studying agriculture and agribusiness. While the government obviously have a focus in this legislation on maths and science, I ask the government to put a similar amount of effort and focus on agriculture and agribusiness. At the moment, there are around 700 graduates in agriculture and related courses, but there are about 4,000 places in that sector that need to be filled. So the government need to start focusing on this area and making sure that this shortage is addressed. The fact that the government have not had a focus on this area just shows their complete disconnect from regional communities, whether it is what the government are doing when it comes to the Murray-Darling Basin plan or what the government are doing when it comes to the inequity for regional students trying to access university. We have seen a lack of focus from this government when it comes to education in agriculture and in agribusiness and related skills.

The government will argue they have things in place, and I do take the point that Senator Evans has made on occasion that the government have a range of things in place. But it is not good enough. The government need to do more and to recognise it is not just the skill side of things; we need to clearly encourage more students to go to university and do those courses, to take up agriculture and take up agribusiness so that we can ensure the sustainability of the sector into the future and ensure food security into the future. One of the greatest issues for us in the future is going to be the sustainability of rural Australia, the sustainability of agriculture and making sure that we have the future food security that we are going to need. While the government are looking at maths and science, and the need to ensure that young people looking for that pathway through school and university to take on a profession in fields of maths and science, we need to be equally as focused on agriculture, agribusiness and the skills needed for that sector to thrive.

Rural and regional students are already doing it tough. While we do not oppose this legislation, we note that these students currently doing maths and science are going to face an increase from the beginning of 2013. That is particularly difficult for regional students and I make no apologies for being parochial about regional students, regional communities and regional Australia in general. But it is going to make it that bit harder for those students currently doing those courses having to face this increase because they already have to face the huge cost of relocation. It costs around $15,000 to $20,000 a year for regional students to relocate compared to city students, who do not have that financial impost. This is the point I make and have made in the past—probably to the annoyance of some because I do not stop talking about this. Regional students face this inequity because they have the cost of relocation that city students do not have to bear. For some of those students who have struggled to do that who will now face this increase in fees from early next year if they are doing those courses, we acknowledge that that is going to be difficult for them. That was unforeseen and it is something that they are now going to have to factor in.

Having said that, we do not oppose this legislation, but we do point out the very real difficulty it is going to create for those students who are currently doing those courses. While we agree with the government that more needs to be done in this area, we ask that the Labor government focus more strongly in a broader policy sense rather than just making simplistic policy responses and take into account the very good point Senator Mason made in his speech on Friday: it is about aspiration, it is about the whole picture and changing the mindset of our young people to understand the very real opportunities that are on offer if they take the maths and science pathway.

Senator XENOPHON (South Australia) (10:21): I rise to reluctantly support the Higher Education Support Amendment (Student Contribution Amounts and Other Measures) Bill 2012. I say 'reluctantly' because clearly there is a problem concerning the number of maths and science students. There is a problem but the solution that was advanced by the government several years ago, of rebates and HECS fees, has not worked. So the solution has not worked and we need to find an alternative solution, but it does not appear that there is a plan B with this bill. I make it clear at the outset, out of an abundance of caution, that my own son has been a beneficiary of the government's policy, which came into effect in January 2009, of a reduced unit of contributions for maths and science subjects.

It is a rare moment in politics when all sides of the political fence agree and we all agree that Australia needs more mathematics and science graduates. The government's policy, which this bill seeks to reverse, sought to address that shortage. Unfortunately, the policy proved ineffective and the government itself admits the program is not delivering value for money. My son, for example, had already planned on studying maths and science subjects as part of his double degree before the measure was introduced. The bottom line is that the policy has not seen a significant increase in enrolments in the maths and sciences.

For Australia to be able to compete in the global market, we need more mathematicians and scientists. Our skill sets in these areas are under threat if we do not find a way to attract more students to these disciplines. It is a complex issue which I believe needs a multifaceted approach, including better education at primary and secondary levels, incentives for tertiary students for tertiary studies and investment in research and development to ensure we not only have jobs for graduates in these fields but also put ourselves at the forefront of maths and science on the global stage.

A 2010 Group of Eight universities review—the Review of education in mathematics, data science and quantitative disciplines—found maths and quantitative sciences in Australia were at a 'dangerous level'. In May this year, Australian Chief Scientist Professor Ian Chubb told the National Press Club:

The future prosperity of Australia is dependent on having a strong supply of graduates in the right areas coming through the education system.

In launching the Health of Australian science report, he said:

There are some areas of expertise that are crucial to our national interest which are lacking what they need to prosper.

The report identified mathematics and chemistry as in this group, along with agricultural sciences and physics. I note that Senator Nash in her contribution did make mention of agricultural sciences.

As well as addressing funding systems, the report said the relationships between science and industry must be strengthened. How do we achieve this? I believe we need to start at the beginning—to crawl before we can walk—and that means getting young students—primary and secondary school students—excited about maths and science. We not only need to get them excited about maths and science; we also need to give them the skills they need to go on and be confident studying maths and science at a tertiary level. This means changing the way we approach education in relation to maths and science. Even if cash bonuses were involved, which I will get to later, we are unlikely to attract more maths and science university students unless we teach them the beauty of maths and science in their formative years. Committing to a three- or four-year university course can be a daunting prospect for a young person fresh out of secondary school and it is human nature that one would only invest such time and effort in a subject that interested them. If we do not invest now in preparing our young people for careers in maths and science, Australia will be the one to suffer.

We must look to our Asian neighbours in how to go about this. We know that Asian countries continue to forge ahead of us in maths and science, so how do they do it? According to a report released by the Grattan Institute in February this year, it is not about spending more money, nor about class size or whether the school is public or private. What it comes down to, the report said, is better teaching skills that improve how students learn. When the report was released, Grattan Institute program director of school education Ben Jensen said that the results of teacher bonuses and school funding touted by the Gonski review were negligible compared to a focus on improving teaching demonstrated in Asia. According to the Asian way of educating, there should be more focus on teaching skills during university training rather than subjects like philosophy—but I am not knocking philosophy; I think it is a question of emphasis. Mentoring of teachers is also critical and teacher training should continue after university study ends. We have to wonder if this focus on teaching is at all linked to the high rates of maths and science graduates in Asia compared to Australia. In Australia in 2010, just 18 per cent of graduates came from the sciences, technologies, engineering and mathematics areas. Compare this with 64 per cent for Japan, 52 per cent in China and 41 per cent in South Korea.

Just a moment ago I mentioned the Gonski review. I reiterate that I believe the review is an important piece of work that is a critical piece of the puzzle to improve education in Australia. In its executive summary, the review says:

In 2000, only one country outperformed Australia in reading and scientific literacy and only two outperformed Australia in mathematical literacy. By 2009, six countries outperformed Australia in reading and scientific literacy and 12 outperformed Australia in mathematical literacy.

The picture is very clear. In international terms we are going downhill, particularly when it comes to maths. Especially significant in the Gonski review findings is the gap between low- and high-performance students and the link to socioeconomic status. It is imperative that all our young people get a fair go at education and access to teaching that gives them the opportunity to develop. This applies to all areas of education, including maths and science. I urge the government not to delay its special response to the review.

While preparing our young people for possible university study is critical, we must continue to think laterally about we can attract them to professions in mathematics and the sciences. Professor Ian Chubb this year suggested $10,000 cash incentives to maths and science graduates who commit to a few years of teaching at the end of their course. That could be the answer. I would be interested to hear whether the government has a view on what Professor Ian Chubb has said about cash incentives. There is nothing quite like cold hard cash to motivate people. The trick is motivating the right people. We want people who will contribute to the maths and sciences areas in Australia for years to come—people who will share their expertise to benefit Australia in an increasingly competitive global market.

The University of Canberra just last month revealed it was considering an Australian first: a multidisciplinary faculty which would bring education, applied science, mathematics and statistics under the one roof. According to the Canberra Times, the faculty would aim to produce more maths and science skilled teachers and graduates who have the communication skills to share their enthusiasm about maths and science with others.

Dr Louise Ryan is a professor of mathematical sciences at the University of Technology Sydney and was previously chief of the CSIRO's division of mathematics, information and statistics. I am very grateful for the information and advice she has given to my office on this issue. According to Professor Ryan, we need to look at modern ways of training students. She said maths and science courses should teach students the art and importance of communication so that they learn how to engage with the real world in their chosen field. Professor Ryan spoke very highly of the Australian Technology Network's industry doctoral training centre in mathematics and statistics, Australia's first industry-collaborative doctoral-training centre, which took its first students this year. Professor Ryan was previously on the program's advisory board and says it is industry based rather than academia based doctoral training—perfect for students to learn how to apply their skills in the workplace.

I note the work that my colleague Senator Madigan has done on the parliamentary manufacturing and farming program and the importance of tying in these young people with expertise in the maths and sciences in terms of innovation for manufacturing, which is so desperately needed for our manufacturing to be able to compete on the global stage—particularly in the context of a ridiculously high Australian dollar. We need that expertise. We need to be able to harness that knowledge and expertise and those skills into our manufacturing sector, and this is one particular way of doing it.

Professor Ryan believes that if there were more training like this we could attract more people to the maths and science disciplines. Professor Ryan said that a CSIRO graduate fellows program that has been running for three years is proving hugely successful with students. This program sees honours graduates in maths and statistics get a taste for researching before they decide whether to go on to study for a PhD or go into the workforce. It is aimed at tackling the low numbers of students studying maths in Australia. Professor Ryan said it was inspiring to hear the students in the program talking about how excited they were about their work.

It is programs just like these that we must continue to support. Research and development is critical to ensuring we continue to advance in these fields, which are essential to Australia being prosperous and competitive on the global stage into the future. As the Health of Australian science report of this year says:

Basic research adds to the bank of intellectual capital on which society draws in order to progress and transform. Applied research develops this intellectual capital into new technologies and innovative processes that directly improve the health, productivity and prosperity of Australia.

I do not think you could sum up the importance of research and development any better than that.

We must continue to invest in research and development of maths and sciences through the Australian Research Council, the National Health and Medical Research Council and the Cooperative Research Centres program. We should also remember the importance of international collaboration. We have great talent here in Australia and, where possible, we should see that talent work with international minds to see us at the forefront of maths and science knowledge instead of slipping further and further behind on the global stage. And let us not forget that investment in research and development will also help ensure that there are jobs waiting for graduates.

We must also consider, as I indicated, our high Australian dollar and the impact it is having on our manufacturing industry. If we had a thriving manufacturing industry it would create much-needed jobs for maths and science graduates. The issue of closing the ever-increasing gap in our mathematical and scientific expertise is complex, and I have only scratched the surface today.

The intent of the policy of this bill was good, but the outcome is not as we had hoped. The government quite rightly identified a problem. The solution it came up with has not worked. The government needs to come up with an alternative solution. There must be a plan B, and I am not so sure that there is. I would be very grateful if, in its response to contributions in the second reading debate on this bill, the government could indicate what practical, viable measures it is proposing as an alternative to this to try to get an increase in maths and science students and graduates.

I reluctantly support this bill, but I am adamant that the issue must stay on the agenda and that we must consider other ways to redress the shortfall which, if ignored, will only get worse. Australia has many bright minds and, in the words of Professor Ian Chubb:

It is antithetical to our national interest to waste talent.

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (10:34): I begin by thanking those senators who spoke on the Higher Education Support Amendment (Student Contribution Amounts and Other Measures) Bill 2012. The bill before the Senate amends the Higher Education Support Act 2003 to increase the maximum student contribution amount for units of study in mathematics, statistics and science. The bill removes eligibility for Commonwealth-supported places and the Higher Education Loan Program schemes for Australian citizens who will not undertake any of their course study in Australia. From 1 January 2013, all students will pay the increased maximum student contribution amount for units of study in maths and science, regardless of when they commenced their course of study.

The government believes the reduction in student contributions for maths and science that commenced for students starting a course of study from 1 January 2009 was not delivering value for money. The majority of students undertaking maths and science units in 2009 and 2010 were not enrolled in a maths or science course of study. Nor were they studying an education course. It is clear the policy was not substantially increasing the number of maths and science graduates in the workforce as intended, or improving the supply of quality maths and science teachers. Improving the supply of quality maths and science teachers is a priority for the government, which is why it announced a $54 million package in the 2012-13 budget to enhance student engagement in maths and science from primary to tertiary.

The government is removing eligibility for Commonwealth-supported places and the HELP schemes for Australian citizens who will not undertake any of their course of study in Australia. The amendment applies to Australian citizens who are living overseas on an ongoing basis. The government believes its funding priority should be to support those students who are most likely to pursue careers in Australia, repay their HELP debts and use their education to benefit Australia's workforce and economic needs. The small number of students who are not resident in Australia and who are currently enrolled in Commonwealth-supported places or who are accessing HELP will continue to be eligible for the schemes for the duration of their current course. This amendment complements last year's changes to the act, clarifying that Australian citizens are not entitled to Commonwealth support or to access HELP when they are undertaking courses of study primarily at an overseas campus.

Question agreed to.

Bill read a second time.

The DEPUTY PRESIDENT (10:37): As there have been no amendments circulated in relation to this bill, it is my intention to call the minister to move the third reading, unless any senator wishes to move into the Committee of the Whole. There being no such request, I call the parliamentary secretary.

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (10:37): I move:

That this bill be now read a third time.

Question agreed to.

Bill read a third time.

Senator CORMANN (Western Australia) (10:37): The coalition will not oppose the Consumer Credit Legislation Amendment (Enhancements) Bill 2012, but this bill is yet another example and a clear demonstration of the government's incompetence and complete dysfunction in dealing with the most basic parliamentary processes. When Senator Feeney only a few days ago introduced this legislation in the Senate, he tabled a second reading speech that was outdated by just a year. He tabled a speech that was completely unrelated to the legislation that is before the Senate. He tabled a second reading speech which assumed that all of the corrections that were imposed on the government by the Parliamentary Joint Committee on Corporations and Financial Services had not happened.

This piece of legislation, like so many pieces of legislation in the portfolio of the Minister for Financial Services and Superannuation, Bill Shorten, was not properly thought through. It did not strike the right balance between consumer protection by making sure that relevant services for which there is strong public demand remain available, accessible and affordable. So the Parliamentary Joint Committee on Corporations and Financial Services made a unanimous report making strong recommendations on how Labor's original piece of legislation should and must be improved. When I say it was a unanimous recommendation, it was a recommendation that was made by government members of the committee alongside coalition members of the committee. The Parliamentary Joint Committee on Corporations and Financial Services came to the view that Minister Shorten did not get this right and introduced a piece of legislation that was going to have detrimental consequences for consumers of these sorts of services right across Australia. But Senator Feeney, either because he was unaware of what had happened over the last 12 months or because somebody in Minister Shorten's office had not quite caught up with what was happening, was tabling a second reading speech here in the Senate which was to make us believe that in fact the government had not taken any of the recommendations on board, even though the bill itself reflected all of those changes. It is just another example of the complete chaos and the complete dysfunction and incompetence of this bad Labor government that we are subjected to at this point in time.

Senator Feeney's speech as incorporated talked about an up-front fee of 10 per cent of the loan and a cap of two per cent interest each month. In fact, the government's bill allows for an up-front fee of 20 per cent of the loan, and four per cent interest each month. It is absolutely extraordinary that the government cannot even get these sorts of basic processes right. As I have said before, the government with its amendments to the legislation has already acknowledged the flaws in the bill as originally presented to parliament. The government was forced back to the drawing board by the unanimous recommendations of the PJC inquiry. Under pressure from that inquiry, the government has agreed to very specifically increase the caps for small amount credit contracts, shorten the term for small amount credit contracts from 24 months to 12 months, and increase the establishment fees from 10 per cent to 20 per cent and interest rates per month from 2 per cent to 4 per cent as well as allowing an additional $400 fee to be charged for mid-tier loans between $2,000 and $5,000, remove the multiple contract prohibition on lenders under certain circumstances and introduce a commitment to prohibit loans with a term of 15 days or less by regulation.

These changes represent a significant concession to the arguments put forward by the industry in the context of the inquiry by the Parliamentary Joint Committee on Corporations and Financial Services and expressed in relation to the original bill. The government's original proposals clearly did not strike the right balance between appropriate consumer protection and making sure that short-term lending remains available and accessible and is as affordable and competitive as possible. Yet again Minister Shorten, in his enthusiasm to increase the levels of red tape and increase levels of regulation, had not really thought things through. He had not gone through proper process. He had not listened carefully enough to the legitimate representations by people across the industry who actually know what they are talking about.

The proposed government amendments address many of the concerns raised by stakeholders during the parliamentary committee process—specifically the concerns that the proposed caps on fees and interest charged on payday and small amount of loans would be uneconomic and would lead to many current participants withdrawing from the market, that many of the businesses that could close down are small family owned and operated businesses, that the reduction in the availability of payday and small amount loans would result in many people not having access to existing finance they rely on to meet unexpected expenses, and that the banks, having not participated in payday and small amount lending for some time because it is uneconomic for them to do so, would not re-enter the market to fill the gap if existing providers went out of business. Also, the reduction in legitimate licensed payday and small amount lenders may encourage unlicensed and illegal operators to enter this market, which would have reduced consumer protection instead of increasing it.

The amendments address these issues in that they ensure that the new caps on fees and interest charges will ensure that the vast majority of short-term lenders will remain commercially viable, that small family owned and operated businesses will not be adversely impacted, and that people who rely on these types of loans, which are not provided by banks, will continue to be able to access the finance they rely on to meet unexpected expenses. The ongoing viability of legitimate, regulated providers will discourage the growth of unlicensed and illegal operators, whose entry into the market would have reduced consumer protection.

While some of the provisions may not have been implemented by the coalition in government in the form that they have been proffered by this government, the significant concessions obtained by the coalition have achieved a much better balance between the twin aims of providing appropriate consumer protection and ensuring that short-term lending remains available than was the case in the original version of the bill. That is why, with these amendments, the coalition will not oppose this bill. The bill also introduces statutory protections in the provision of reverse mortgages, including a statutory protection against negative equity, and more detailed and prescriptive disclosure requirements. These measures were in the original bill and are not opposed by the coalition, and they are supported by the industry.

I draw the attention of the Senate, in this context, to the additional comments that were made by coalition members and senators as part of the parliamentary joint committee inquiry into the Consumer Credit and Corporations Legislation Amendment (Enhancement) Bill 2011. This is a pretty sizeable industry. Senators may be surprised to learn that this short-term lending industry provides cash advances of $800 million a year to about 500,000 customers. Half a million Australians access this service to the tune of $800 million a year. That was part of a submission that was made to our inquiry. This suggests that this industry, providing short term, small-amount loans, responds to and is meeting a substantial consumer need for those types of loans. Whenever we make regulatory changes, whenever we seek to impose additional regulatory restrictions, we must take account of the consumer impact and the potential consumer detriment which comes from reducing the availability of a product or the competitiveness in the industry that provides those sorts of services.

When Minister Shorten first announced the measures in the original version of this bill he asserted that this was all about protecting vulnerable consumers. In other words, this bill was based on an assumption that all short-term, small-amount loans are inherently harmful, and all those who take them out are inherently vulnerable. That is not correct, if you consider the evidence which ultimately was accepted by all Labor and coalition members of the committee. There was an acknowledgement there that the service goes much further.

I draw the attention of the Senate to some hard evidence. Rather than being used only by those who are vulnerable and desperate, many short-term, small-amount loans are provided to people in employment who have made a rational decision that the product meets their needs better than the alternatives. We heard evidence that many providers specifically require customers to be employed, or have a rule that they do not lend to those whose only income is government benefits. These providers included businesses like Money Plus, Money Centre, DollarsDirect, Cash Doctors and First Stop Money. Providers which do lend to welfare recipients, such as Cash Converters, gave evidence about their responsible lending practices in doing so. I quote a particular piece of evidence which was provided by Mr Day:

We at Cash Converters indicated that over 40 per cent of our customers are on welfare payments. We have a responsible lending structure in place that will lend a new customer a maximum of 10 per cent of net income and, out of that, we have a 97 per cent repayment rate. It does not necessarily happen at the end of the month. Some 30 per cent of them take longer, but there are no punitive penalties or additional costs involved in that.

That evidence is not consistent with an assumption that short-term, small-amount lending inherently and necessarily involves vulnerable and disadvantaged customers who are being forced to agree to terms which make it impossible for them to repay the loans.

This is a policy area which raises difficult issues. Clearly, there are people who are incapable of making sensible financial decisions, be that due to addiction, substance abuse, limited decision-making capacity or a range of other factors. But the suggestion that, somehow, this industry exclusively focuses on preying on and taking advantage of the weak and vulnerable was not borne out by the evidence. That was part of the political argument that Minister Shorten was pursuing at the outset when this legislation was introduced, and he had to backpedal on that to a pretty large degree.

The evidence that we considered also highlighted several serious concerns about the approach taken in the original bill, which led coalition senators to conclude that this was a hastily cobbled-together attempt to grab a headline rather than any meaningful attempt to come to terms with the difficult policy issues that arise from short-term, small-amount loans. We recognise that since then the government has sensibly come to the same conclusion as we have, and has responded to those concerns.

As I said at the outset, the coalition will not be opposing this bill. We welcome the fact that, on reflection, Minister Shorten has reconsidered his approach to this legislation, and that he has been prepared to consider the evidence which had been accepted by government members of the Parliamentary Joint Committee on Corporations and Financial Services as well. This bill started in a pretty unreasonable position but it has come a fair way. Given that the government has made significant concessions on all the issues that I have raised, the coalition will not be opposing this bill.

Senator HANSON-YOUNG (South Australia) (10:52): I rise to speak to the Consumer Credit Legislation Amendment (Enhancements) Bill 2012. Thankfully, Senator Cormann has outlined most of the reasons for the Greens' major concerns about this piece of legislation. It is clear that—despite the original intent to try and regulate what has become an industry that sucks the life out of very vulnerable, very poor, very disadvantaged people and exploits them by allowing them to be trapped in cycles of debt—rather than going to the heart of those problems and overcoming them, this bill has been watered down so much because of the government's agreement with the coalition that the bill basically now does nothing to offer the real protections that consumers desperately need.

A moment ago Senator Cormann said he does not believe that the short-term loans run by loan sharks that are designed to capture those who are less fortunate in our communities are as bad as people, particularly in the consumer rights sector, would argue. Let me go to a couple of statistics in the report Caught short that was released by the NAB only last week. More than 80 per cent of payday borrowers were receiving a Centrelink payment or the pension; 80 per cent of those who apply for these loans and are given them are on Centrelink payments or the pension. Borrowers are taking out more than 10 loans in a two-year period, with some taking out even more than 20 loans in that same period. Rather than being able to deal with a one-off loan, these people get caught in a cycle of debt and are trapped there—that is what the statistics continue to show. Borrowers have reported living with significant psychological, physical and emotional health problems that have been linked to their ongoing poor health over the periods of owing extensive debts as a result of being trapped by these short-term loan or payday loan schemes.

Many of those who engage in these types of lending practices are caught in periods of excessive gambling, alcohol consumption or illegal drug taking. These people are already considerably disadvantaged and the loan sharks are out there waiting to snap them up. The majority of borrowers are borrowing less than $300 at a time. You have to be in a pretty desperate situation to borrow less than $300 because you desperately need to pay your essentials day in, day out. The reasons for taking up payday loans, according to the NAB report, were to pay rent and basic essential bills: electricity, gas, petrol, car registration, school fees for kids and putting food on the table for themselves and their families. People are taking a $300 loan just to be able to go to the supermarket and buy the groceries for that week. These are the vulnerable people that we are talking about and that this bill is meant to be helping by addressing that cycle of poverty, that cycle of debt. Yet, unfortunately, the government has lined up side-by-side with the coalition and watered down this legislation in line with what the loan sharks wanted.

Cash Converters was one of the most prolific voices in relation to this bill, and yet since the legislation was first announced the Cash Converters share price has risen, despite the fact that the company went to the government and cried poor. Somehow, putting some proper regulation around these loan practices and making sure we can protect consumers was said to mean that its business practices were under threat. If loan sharks like Cash Converters and others are relying on the misfortune of people who have to borrow $100 or $200 to buy the groceries to feed their families, I do not think that is a very good business model for anyone to be relying on. I suggest that Cash Converters and other loan sharks consider what type of business they are in and stop preying on the very desperate needs of some of our country's most vulnerable people.

We know that borrowers continue to say the loans they take out are used to meet their daily living expenses. These are not one-off loans. The problem is that once they have taken out one of these loans they get caught in a cycle of debt and have to take out another loan in order to pay back the enormous interest, fees and charges that these loans incur. The loan sharks are able to tap straight into their bank accounts. They get paid, but all of a sudden people have no money left and they have to apply for a brand-new loan. That is how they get into this situation, where some people are taking out 10 or 20 loans in two-year period—that is, almost monthly for some people—just to keep up with the debt that they owe and put aside money for the rent, the bills and the groceries to feed themselves and their families.

People caught in this situation continue to say that they feel trapped in a vicious cycle and are continuously indebted to one or more of the short-term lending companies. Borrowers do not like needing to take out these loans in the first place. But we know that, when Centrelink payments are so low and the minimum wage continues to be far less than it should be, very vulnerable people continue to be exploited. Let us not even consider casual workers who, if they do not get shifts in a particular week, do not know what to do to pay their rent. Chances are that a lot of these people have to go to loan sharks, Cash Converters and others, to get the money to pay their rent. That is where the problem is in the beginning.

I want to take us back to when the legislation was first tabled. There was a lot of goodwill across the country from the consumer rights sector. There were a lot of people who thought that Bill Shorten and this government were going to do the right thing and that they were going to tackle this issue, take it with both hands and make sure we looked after the country's most disadvantaged people—those who are being taken for a ride because of the lack of regulation in place. We saw the coalition jump up and say that they would not support that. We saw lobbying campaigns—very well-paid lobbying campaigns from organisations, loan sharks, Cash Converters and others who paid thousands of dollars to organisations like Hawker Britton and others to directly lobby the government to get them to water down these reforms. As a result, this legislation does not have the teeth to really make a difference to Australia's most vulnerable people, who continue to be taken advantage of by these nasty schemes and who do not have the advocacy, the strength and support that this Labor government should be providing.

We have heard Treasurer Swan going on and on about how he wants to tackle this gap between the rich and the poor. This legislation proves that he is all words and no action. The Treasurer has no standing when you consider that, rather than doing the right thing and putting a hard cap on the number of loans that people can take out and putting in place regulation to ensure that people cannot have that money taken straight out of their bank accounts and cannot have their homes secured against loans as little as $5,000, he only talks about tackling the rich and looking after the poor. You have to wonder how serious Mr Wayne Swan is. This would have been the perfect legislation to prove that, yet the government have gone weak at the knees and fallen for the big lobby groups engaged by those who are making hundreds of thousands and millions of dollars of profits off the back of very, very poor, hardworking Australians, who just want to cover their living costs, make sure their kids can go on school camp and put food on the table.

I want to tell you one story about a young fellow from Melbourne who took out his first payday loan to pay for repairs on his car. It was intended to be a one-off loan, but quickly it turned into a pattern of repeat borrowing because one cannot keep up with the excessive interest charged. Somewhere in the vicinity of 200 and 400 per cent is put onto these loans, including the fees and charges. He got caught after just wanting to fix his car so he could continue to get to work to earn some money to pay his bills. He ended up finding himself in a cycle of debt and a cycle of poverty. Initial payments left this young man without enough money to live on. It forced him to choose between taking out another loan or going without food until his next pension day. In order to obtain some quick cash to eat, to feed his dog and to put fuel in his car, this young guy continued to take out loans. These are the stories of people who get caught and get taken advantage of by loan sharks.

I want to tell you another story of a woman with two kids who desperately wanted to make sure her children could attend the school camp. She took out a loan of $170 because that is what she needed. She did not have the money. She was on a pension. She did not have secure work. She is a mum trying to run a household and put her kids through school. In the end, it cost her over $14,000 just because she wanted her two daughters to attend school camp.

I suggest that this bill has become so weak and so far from its purpose that, rather than delivering the security and the protections that the most disadvantaged and vulnerable Australians need, instead we are seeing legislation that could have been written by the loan sharks themselves, helped along of course by the opposition, who have no desire to tackle this issue. For them, it is all about looking after big business; it is not about the vulnerable people who struggle to pay their rent and put food on the table, or send their kids to school camp.

The point here is that the government continue to talk about wanting reform, yet when the hard decision needs to be made, when they need to stand up and take the big lobby groups head-on, they fail. That is what has happened under this legislation. This is the legislation the coalition want. We saw Senator Cormann say he did not like the first bill but he is more than happy to back this one. That is because this bill does nothing for those people who are caught in a cycle of poverty.

The Greens will be moving several amendments to this legislation to try to redeem some aspects. What is the point of saying we know that people get caught in this cycle of debt with payday loan after payday loan if we do not put a hard cap on how many they can take out in a year? What is the purpose of it unless you are going to do that? We will move an amendment to ensure that we cap at four the maximum amount of payday loans that one person can receive in a 12-month period. In addition, we will make sure that there is a proper registration list so that you cannot be forced to go to the next lender down the road because the other lender has already given you four loans—because you are still struggling so you will move on to the next one.

In addition to all of this, the government really need to look at how we can support people so they do not fall into these traps in the first place. Where is the proper support for those who cannot pay their bills at the end of the month because they simply do not earn enough? We know that, for those on Centrelink payments, Newstart is far, far too low. Where is the commitment from this government to increase the levels of Newstart rather than condemning our country's most disadvantaged people, who just want a fair go and to pay for the petrol for the car to drive them to the next job interview or to buy that new jacket because looking good at a job interview is important if you really want it?

Where is the support for those parents on the pension, those single mothers who are about to be cut off, to make sure they can send their kids to school camp rather than having to be sucked in by the empty promises and hollow support from the loan sharks. Many consumer rights organisations across the country have said that the best way to support people is to give them non-interest loans to pay for these essentials, and proper financial support and counselling. You have to teach people ways to get out of cycles of debt, not find ways to get the loan sharks out of their responsibilities of preventing people who are in cycles of debt.

The Greens will move three key amendments: putting a cap on the amount of loans that people can lend; ensuring that loans up to $5,000 cannot be secured against items such as the family home or the family car or others, because we know what happens: those people end up having those items taken from them. And we need a proper way of regulating just how many loans people have. These are all reforms, regulations and workable solutions to this issue that have been taken up in places such as the United States. They have worked well. It obviously took a bit of courage by the government of the day to ensure that they were implemented properly but they have worked.

That is the type of solution-finding, reform-enacting leadership that we should expect from the government here in Australia when it says it cares about Australia's poor. Frankly, you would have to wonder what type of hollow rhetoric that is when, rather than doing what the consumer needs, rather than looking after the rights of the consumer, this government has stood up for the loan sharks and handed them everything they want on a platter.

The loan sharks cried poor when this legislation was announced, when it was actually still intended to tackle these issues. It was a good piece of legislation. They cried poor, despite the fact that some of them had increased their share price in the vicinity of 10 per cent since this legislation was first put on the table. They are not poor. They say, 'We can't put in proper protection for consumers because that will mess with our business model.' Stop preying on those who are most vulnerable, those who are the most desperate, those who are there waiting for the picking, as the loan sharks know, and get a business model that is sustainable, ethical and is one that does not prey on the most disadvantaged and poorest in our community. This legislation is not the legislation that this government should be acting on if it is their will to tackle the gap between the rich and the poor.

Wayne Swan's words are hollow when you look at the details of this legislation. It is all very well and good to bang on about Gina Rinehart. What about the poor young fellow or the mother with two kids who cannot send her children to school camp without getting sucked into a cycle of debt? Where is the government's commitment to increase the Newstart allowance to ensure that essential service providers have to give proper grace periods for people and for those who are seen to be caught in cycles of debt can have proper supportive and empowering financial counselling? They are the things that, if Wayne Swan is serious about tackling the gap between the rich and the poor, he needs to do. He has failed dismally on this piece of legislation.

Senator SINGH (Tasmania) (11:12): I rise to speak to the Consumer Credit Legislation Amendment (Enhancements) Bill 2012. This bill is the next step in the government's important agenda of reform of consumer law across this country to enhance protections from predatory trading practices. This is a journey that I was happy to see commence at the national level during my time when, back in 2008, I was a minister for consumer protection in the state parliament in my home state of Tasmania. It is good to see that it has now come to the Senate and that I am now here to be able to contribute to its fruition at this point in time.

When it comes to finance and lending, predatory trading practices do not just rip people off, they also can fundamentally change the economic security and the situation of an individual's life, especially those who are already in a challenging financial circumstance. The lending practices to which I refer are those which offer small to medium amounts of money for a short term at a very high rate of interest, or a set fee—a market which I understand is worth some $500 million annually in Australia. These loans are typically designed for people who need to cover off on, maybe, bills at home or immediate debts to pay day-to-day expenses, or those coming up in the days to weeks ahead. They are then taken out on a security of anticipated income, hence the name 'payday loans'.

These debts are most typically unexpected expenses—things like car repairs or replacement of white goods and household essentials. In some cases, they are utilities expenses or rent costs, but in almost all cases they are taken out by people who live very much hand-to-mouth with as little capacity to absorb unexpected financial shocks down the line as they are at the time they take out the loan.

While payday loans help customers to deal with immediate financial issues, according to the Caught short report from the RMIT and the University of Queensland, only 20 per cent of borrowers considered themselves better off after using such short-term credit. Half actually considered themselves worse off, with a number caught in a vicious cycle of the extra expenses incurred in repaying the loan then requiring new finance to be sought. Worse, these loans have historically been marketed as cheap and easy access to money; we have all seen the signs. They either minimise or fail to mention the high level of interest, fees or other costs associated with taking out such a short-term loan. Lending assessment usually does not involve the kind of rigorous credit and means checking that one might expect from a robust finance sector.

In too many examples payday lending operations leave consumers with the impression that such loans are the best and the easiest option for them at that point in time. Rarely is this the case, and we are all aware of that. Indeed, about 80 per cent of payday loan customers are receiving Centrelink payments or pensions and would have access to alternative low- or no-cost options in the form of things like no-interest loans, applying for an advance payment on a regular payment from Centrelink, or something of that nature. The prevalence of consumer credit suppliers and the relative simplicity of the process, though, has meant that payday lending has very much become a first option rather than a last resort.

There is no doubt that the demand for consumer credit is high and that there are a number of legitimate and genuine purposes behind consumer credit operations. So long as they are informed about the market and their options, consumers should be entitled to choose the credit option that best suits their situation. But the main point of that, of course, is that it is so long as they are informed. There is an undeniable need to protect the most vulnerable in our community—those in vulnerable circumstances—from extraordinary costs and to provide information on alternatives to those who would turn to those types of payday lenders in the first place.

The bill before the Senate goes a long way to providing those people who have run into cash-flow difficulties and have the need for some form of short-term credit with access to a safe and fair industry. It will also help to ensure that consumers are fully informed of their options and the ramifications of taking out a short-term loan from a payday lender. This bill includes a national interest rate cap, which will limit the cost of credit for consumers. For loans of less than $2,000 and 12 months duration, which constitute the majority of short-term loans—I know that in my home state of Tasmania that is certainly the case—the cap will be costs of 20 per cent of the credit amount plus four per cent of the credit for each month of the loan contract. For mid-tier loans of $2,000 to $5,000 and of two years duration or less, a cap of $400 on establishment fee and 48 per cent per annum interest will also apply.

These caps fall in the mix of comparable international models, which range from Canada's 17 per cent cap to some US states which cap rates at 35 per cent. Therefore, lenders will no longer be able to charge exorbitant fees of one-third or one-half of the total amount of credit that is provided. No longer will people who borrow $300 for a week be hit with $100 in charges for a seven-day loan. Indeed, loans with terms of 15 days or fewer will be prohibited under this bill, and responsible lending requirements will be extended to brokers in this industry. Those obligations include a presumption that a credit contract would be unsuitable where it would be the borrower's third loan in the last three months, pushing the burden of proof for suitability to the contract parties. Lenders and borrowers will both have to demonstrate that lending is responsible. There is a presumption that the loan has to be suitable and responsible. Not only will lenders no longer be able to charge these exorbitant fees; they will have to demonstrate responsible lending requirements. These obligations include the presumption, as I mentioned, that a credit contract would be unsuitable where it would be the borrower's third loan in the last three months.

The reform package also introduces a regulation-making power to allow use of direct debit to be suspended, avoiding the risk of fees accruing to a debtor's account should repeated direct debits for loan recovery be unsuccessful. Direct debit fees have very much contributed to consumer credit charges compounding and eventually spiralling out of control. We know how direct debit works. If the funds are not there in the bank account, on top of the continuing direct debit set-up that has been formed to pay out these exorbitant loans and fees, the consumer is then also whacked by their bank, who also then puts a fee on the fact that they did not have enough funds in the bank to cover those outgoing direct debit expenses.

Direct debit fees have very much contributed to consumer credit charges compound and eventually, as I said, spiralling. One example that was published in Anglicare Tasmania's Pay day lending in Tasmania report says:

A 54 year old man recently separated and on a carer’s pension had taken out two unsecured loans for $100 each in separate instances to help with food and fuel, as his rent of $320 did not leave enough to live on. With the first loan he was charged an extra $11 for a card with his photo. His repayments were $74 a fortnight for two fortnights. The repayments for the second loan were $64 a fortnight over two fortnights. Unfortunately he did not leave enough money in his account for the second payment on his second loan and was charged a $16 fee by the company and a $30 default fee by the bank. He has now found himself overdrawn by $125 and is having difficulty in repaying the loan. He needed to access an emergency relief agency for food and fuel.

That is a very real example of how the direct debit system under these payday loan arrangements can spiral out of control at both the payday loan end but also at the financial institution end. That is why this bill addresses that issue, as I referred to.

Some lenders will be more affected than others by this bill, depending on the extent to which their current practices and costs comply with this national law. Those who approach their task responsibly and do so with due diligence will continue to be able to offer the services at a reasonable cost to consumers and with a reasonable return for their business. But those lenders who tend in my view towards predatory practice will need to change their approach. Those are the types of lenders whose business model depends on repeat custom with borrowers taking out multiple or consecutive loans in order to pay off interest and fees from previous loans.

These reforms need to be coupled with ways to inform consumers that they have other low-cost options to assist them to meet their day-to-day expenses, and it is incumbent not only on government but also on the industry to make people aware of the fantastic work of schemes like the no-interest loan scheme in my state of Tasmania, which I might add have an extremely low default or non-payment rate. We must do better in promoting the electricity and telecommunications hardship programs, which are already a mandated part of the utilities markets. That is why under this legislation small amount lenders will be obliged to disclose alternative options to their customers, not just hide the fact that they are not the only option out there. We must do better to promote the notion of financial literacy, especially in response to the precarious and uncertain employment conditions of a casualised labour market. Strong and consistent budgeting must be a feature of people's lives. Managing money and anticipating costs is part of that challenge, very much so. Again, I know that there are a number of community organisations providing that assistance to assist people with budgeting their finances in their lives. But requiring small amount lenders to make customers aware of the ASIC financial literacy website is one way that they can support these customers. That is moneysmart.com.au. Again, that is an important step towards these goals, among other alternatives that they can provide.

I am proud to be part of a Labor government that is tackling this issue and protecting people from lending practices that are reckless or exploit people's financial hardships. I am proud to be part of a Labor government that took up the challenge to balance access to finance and protection for customers. When the opposition in government identified this issue as early as 2001, it still did nothing for the next seven years of government to assist those in this low-income predatory environment. It is only a Labor government which has been willing to do more than pay lip-service to this issue and actually address those difficult policy areas which lead to issues of inequity and unfairness. I think this is one of those policy areas that very much demonstrate inequity and unfairness involving some of the most vulnerable people in our community, those on low incomes trying to get by day to day and pay their bills and budget their finances, their finances being of a very low income, but at the same time facing the glitz of the payday lenders trying to entice them with a very easy, quick fix option which then ends up being a spiralling downwards once they enter the situation of having to pay the high fees and the high costs in repaying the loan. On top of that there is the setting up of a direct debit system which, as I demonstrated in the example from Anglicare Tasmania, can end up leaving them in a much worse position than when they started in the first place.

I commend this bill to the Senate and, as I said, I am very proud to be part of a Gillard Labor government that is tackling the payday lenders and addressing the needs of low-income consumers in Australia.

Senator XENOPHON (South Australia) (11:27): I will follow on from the considered comments of Senator Singh in relation to this matter. We need to look at the causes of why so many people are seeking payday lending. We need to look at why there has been an explosion in the payday lending market in recent years, particularly in my home state of South Australia. There is no doubt whatsoever that the introduction of poker machines in pubs and clubs has led to an increase in financial hardship and an increase in financial damage for individuals and families, and that is why I believe that poker machine reform, one-dollar bets in particular with a $120 an hour maximum loss, would make a real difference in the sort of business that these payday lenders generate. So I indicate my support for the Consumer Credit Legislation Amendment (Enhancements) Bill 2012. I have been discussing this issue, pushing for tighter restrictions on small credit loans and in particular payday lending for many years. There are significant concerns that these types of loans when offered by unscrupulous lenders can take advantage of people who are already in financial hardship. I think we need to look at the causes of poverty and the reason why so many people are now seeking to avail themselves of payday lending.

The debt cycle of using credit to pay off debts and therefore accumulating even greater debts is a vicious one. I believe the amendments proposed in this bill will go some way towards controlling unscrupulous providers and limiting harm. However, I am concerned about the enforcement of these provisions. The current bill relies on complaint reports to ASIC, which will then investigate breaches of the law. I see that Senator John Williams is in the chamber. I think he is a person who has had considerable experience in dealing with ASIC over the whole issue of liquidators and unscrupulous lenders, as noted in his contribution to the recent Senate inquiry into this. Relying on ASIC is not the be-all and end-all, as I think Senator Williams has established.

Instead, I believe we should be focusing on a more proactive approach to enforcement. Last week I had discussions with Veritec Solutions, the company that developed an electronic database currently operating in Florida. I am very grateful for the time that I spent with the representatives from Veritec. The information that Veritec provided to the Senate committee that looked into this is worth reflecting on. In their submission, Veritec said that they were:

… specifically commenting how effective enforcement at little to no cost to Government can be achieved in order to produce the desired policy positions taken by the Amendment.

That is, these amendments to the consumer credit act. Veritec recommended:

… that the Committee consider a real-time verification system to efficiently and effectively ensure compliance before a covered transaction is entered into with an Australian consumer.

Veritec has gone into great detail on this. I believe that what Veritec has put forward has a lot of merit. That does not necessarily mean that we go down the path of getting Veritec to do this, but something of that nature—in other words, if not Veritec then another company that can provide the same sort of outcome or, if it can be provided, within government. But it seems that Veritec has a proven track record on this.

It is important to note that Florida has a tightly regulated and booming payday loans industry, with an average of 4.7 million transactions a year between 2004 and 2009. According to a paper by researchers Michael H. Anderson and Raymond Jackson at the University of Massachusetts, Dartmouth, headed 'Perspectives on payday loans: the evidence from Florida', this database real-time reporting solution was very effective. The paper focused on:

… the payday loan experience in Florida where the statute regulates the interest rate, fees, loan size and the protocol for resolving a loan that cannot be repaid at maturity.

According to this paper:

The Florida statute prohibits a consumer from having more than one payday loan at a time. Under state supervision, a real-time database is maintained of all outstanding transactions. When an application is submitted, the lender enters the database to verify that the borrower has no current open loan, is not in arrears on any past loan and is therefore eligible to be approved at this time. Once verification is successful, the borrower is still required to sign a statement confirming that no payday loan is outstanding and, in addition, give assurance that no loan was successfully terminated within the past 24 hours. The amount of the new loan, excluding all fees, is limited to $500.

That is what they do in Florida. That is something that Veritec has been involved in, and it seems that this independent analysis from Anderson and Jackson at the University of Massachusetts indicates that it has worked. It has been effective. My concern with this legislation from the government, though a well-intentioned, useful piece of legislation, regards its efficacy in the absence of ensuring some real-time reporting and having a database.

Only about two per cent of the value of these loans—some $2 billion—is considered lost or not repaid each year. That is pretty good. The aim of an online database is to allow small credit providers to access real-time credit information to ensure that applicants satisfy the requirements for a small credit loan. It can also be used to ensure that the credit contract in question is in line with the regulations. There are clearly benefits to both sides under such a system. First, it allows providers to be certain that they are lending responsibly. The database provides information not only on the applicant's credit history but also on whether the applicant currently has any outstanding loans, as Florida statute prohibits applicants holding more than one payday loan at a time, as set out in the paper.

Secondly, the system provides security for the applicant. They know that the terms they are receiving are in line with regulations, and they have the comfort of knowing that the sector is appropriately managed and controlled to cut down on illegal or immoral lenders. It is likely that a combination of good regulations and good enforcement has led to the strength of payday loans in Florida. These factors make them a much safer and more robust product overall, consistent with the intention of the legislation before us today.

A House of Commons report from February this year specifically recommended that the British government introduce legislation to establish an online database to monitor payday lending. That report was the House of Commons Business, Innovation and Skills Committee's Debt management: fourteenth report of session 2010-12, and it was ordered by the House of Commons to be printed on 21 February 2012. That report is very useful, and it says:

It is clear that credit checking is a key factor in ensuring appropriate lending to consumers. We are therefore deeply concerned with the evidence that payday providers are not recording all of their transactions. Examples of credit databases that do capture payday lending are available in other countries and we recommend that the Government require industry to introduce similar models in the UK as a matter of urgency.

That is what the House of Commons said. They looked at what Florida is doing.

I understand that this legislation has been a long time coming and that it has been the subject of much discussion and consultation. However, I believe the aspect of enforcement cannot be ignored, and I believe it has been ignored with this legislation. It was my intention to move a second reading amendment calling on the government to request ASIC undertake a study into the appropriateness of introducing such a database in Australia. After receiving an undertaking from the government to approach ASIC and request this report I will no longer be moving the second reading amendment that I have circulated. However, I seek to table a letter that I have received from the Minister for Employment and Workplace Relations, the Minister for Financial Services and Superannuation, the Hon. Bill Shorten. It is undated, but I received it last week, and it is in relation to this piece of legislation. I seek leave to table this document.

Leave granted.

Senator XENOPHON: The document from Minister Shorten refers to the proposed second reading amendment, which says that while the government does not support a second reading amendment to the bill the minister is prepared to write to ASIC requesting a report on similar terms. That is very pleasing, and I am very grateful for the engagement with the minister's office in relation to this. The minister proposes that paragraph A of what I have requested be limited to the enforcement provisions in relation to small-amount credit contracts in the bill, and that is fair enough. He will also direct ASIC to consider in its response whether or not there are any limitations in the amendments that would prevent ASIC from taking court action or severely restrict its capacity to do so, including the inability to obtain evidence in order to establish the requirements necessary to prove an offence. This would focus attention on particular concerns raised by stakeholders, says the minister. He also undertakes to make this request within three months of the commencement of the provisions to the bill.

I will be asking the government to set out what time line it would like for the reporting of this bill, because I think it is important. This bill, although it is well-intentioned, will not do the work it is meant to do unless there is enforcement. That is why the House of Commons debt management report was very clear on this matter. If I go back to the House of Commons report, on page 17 it says the consumer credit counselling service informed the committee that data coming into its social policy team raised questions 'about the level of credit checking that goes on' and why individuals who are struggling to repay their debts were still able to get payday loans. That is a very key issue. The House of Commons committee actually recommended that payday lenders be required by law to record all loan transactions on such a database, so that consumer credit histories can be accurately monitored. The House of Commons has got it right, the state of Florida has got it right, and academics at the University of Massachusetts have got it right; but this legislation has not quite got it right in terms of insisting on this. I am concerned that this will be a piece of feelgood legislation that sounds good, is well-intentioned, but will not do what it is meant to do without having that technological solution.

There is no doubt that, for many, payday loans or small-credit loans are not a good option. But the factors in this bill, if strongly enforced through an online database or similar system, will make them a viable financial option for many people. I look forward to seeing the report from ASIC. I hope it will make a valuable contribution to this debate and will give us another opportunity not only to discuss these issues but to seek to amend the legislation to ensure that the online database, that sort of reporting, becomes a key aspect of the enforcement of this legislation. One of the questions I will ask the government is whether, if there is a recommendation, this aspect of enforcement can be dealt with now without any further amendments to the legislation. That is a real issue that I want to explore in the committee stage.

Senator THISTLETHWAITE (New South Wales) (11:40): I am pleased to speak in support of the Consumer Credit Legislation Amendment (Enhancements) Bill 2012. In doing so, I think it outlines a fine example of the COAG process working well to offer better regulation for Australian consumers and businesses as well as, importantly, protection for the most vulnerable consumers in our society. The Consumer Credit Legislation Amendment (Enhancements) Bill is part of a second tranche of legislation that is being introduced by the government to reform our consumer credit laws to make them fairer and more accessible while protecting the most vulnerable in our society.

The background to the bill is that in July 2008 the Council of Australian Governments agreed that the Commonwealth would take over responsibility for the regulation of trustee companies, mortgage broking, margin lending and non-deposit-lending institutions, as well as certain areas of consumer credit laws. From the COAG meeting, the rationale for the decision was the need to ensure 'consumers were better protected in their dealings with credit products and credit providers'. In response to that COAG meeting and the agreement that was reached there was a phased approach to the introduction of legislation by the government. The first phase was the National Consumer Credit Protection Act that was passed by this parliament and agreed to by the various states. The second phase is this legislation that is before the Senate at the moment. This legislation deals in particular with payday lending, credit cards, business lending and other forms of credit. These reforms were agreed to by COAG on 19 April 2010 and legislation containing the new requirements was brought before the parliament last year. That legislation was referred to a committee, and I was fortunate to be a member of the committee, the Corporations and Financial Services Joint Committee, that had a detailed look at the provisions of the original legislation and issued a report in December 2011.

I want to point out the position of the coalition in the lead-up to the action that the government has taken on this very important area of reform. In 2001, the now shadow Treasurer, Joe Hockey, said:

Payday lending is an insidious practice that targets the less prosperous men and women of our society, the less financially savvy and the people who can least handle spiralling debt.

It is not often that I agree with Joe Hockey, but on this occasion in respect of that quote he was spot on. He summarised some of the issues associated with the provision of payday lending credit in our country. The question remains, given that that quote was made in 2001, why for the remaining six years of the Howard government Mr Hockey and his colleagues did nothing about this issue. They did nothing at all when in government to protect the most vulnerable in our society and reform this area of consumer credit. Once again, it took a Labor government to take this issue up through the COAG process, get agreement of the states and introduce this legislation.

In respect of the Corporation and Financial Services Committee's deliberations regarding the original bill, it was a difficult task that the committee had. The task was to look at the legislation and to ensure that it struck the right balance and that it was appropriate legislation and regulation allowing people who were providing consumer credit to run a profitable business into the future. And, importantly, it was about allowing those who are in a position to access and repay such consumer credit to gain that access without an unreasonable burden on their right to access such credit and, also importantly—and this is where regulation in the past has not kept up with what has been occurring in society—protecting those who are most vulnerable, those who in some circumstances are not in a position to repay the payday loans that they take out and ensuring, given those circumstances, there is appropriate regulation and protection into the future.

We believe this legislation strikes the right balance. It does that by ensuring fairness in the protection of the most vulnerable accessing this credit; also by allowing those who are running businesses in this area to do so in a profitable manner and ensuring those who are in a position to repay these loans can access such credit.

This bill has four or five main aims: to enhance access to hardship provisions in the credit code; to introduce a protection against negative equity for holders of reverse mortgages; to introduce caps on costs for small-amount credit contracts, particularly in relation to upfront fees and ongoing interest charges; and to ensure greater consistency between the treatment of consumer leases and credit contracts.

With respect to short-term lending, or payday loans, a comprehensive amount of evidence and research data was presented to the committee during its inquiry. I would like to quote from what is probably the most comprehensive study conducted in recent years—that is, the joint study by RMIT and the University of Queensland, which was released in August 2011. That report provides probably the most up-to-date analysis of the circumstances of consumers accessing short-term loan credit. As part of the study, 160 interviews were conducted with consumers across Queensland, Victoria and New South Wales who had borrowed between $50 and $1,500 from non-bank lenders for short periods of time. The data that was produced by this study is instructive of the characteristics of those people accessing this credit, the amount of credit that they are accessing and the terms and conditions under which they access that credit. It highlights why the government have taken this action in protecting the most vulnerable consumers with greater regulation in this area. The researchers concluded that:

… poverty pervades the lives of most borrowers interviewed.

The study indicated that the users of short-term loans are commonly unemployed, receive government assistance, have lower rates of home ownership and are likely to be in their 30s or 40s. Of the 112 interviewed, 78 per cent received Centrelink benefits, less than 25 per cent were in paid employment and 75 per cent lived in rental accommodation. Only nine of the people interviewed owned their own homes and, unfortunately, eight of them were homeless. Of the 112 borrowers interviewed, only seven had credit cards and 68 had a poor credit history. I think that really underlines and highlights the need for regulation in this area and why the government have taken the steps that they have.

Some of the evidence of the welfare organisations who appeared before the committee was instructive. St Luke's Anglicare summarised the situation of payday lending in this country at the time and said:

Payday lending is undoubtedly the most expensive form of credit. There is a real question mark over whether these loans alleviate financial hardship or in fact exacerbate it.

Balancing that there was also evidence from a number of corporations and companies that provide credit in this space, particularly about the original provisions of the bill that were before the committee and the parliament. I am not going to go into the details of the evidence presented by a number of payday lenders—the corporations that provide this sort of credit—but I draw the Senate's attention to pages 97 to 98 of the report where the financial figures associated with payday lending on behalf of Cash Converters, one of the biggest suppliers of payday loans in the country, were presented to the committee. They highlighted the fact that these loans make up on average 50 per cent of the income of an ordinary business operating in this space. Their evidence was that provisions were too harsh, they did not strike the right balance and, importantly, that evidence was not challenged. That evidence of the financial position of many of those corporations and the effects that the original bill would have on their financial position was not challenged. I think that undermines the position taken by Senator Hanson-Young and the Greens in relation to this debate. They did not present any alternative evidence to the committee to dispute the figures that were produced by a number of corporations regarding the effects that the original bill would have on their business.

In the wake of that, the government have considered the recommendations of the committee in its report—quite sensible, balanced recommendations, I believe, which did have the overwhelming majority support of committee members—and we have reformed the bill. The bill now strikes the right balance. In respect of payday loans, there are a number of elements in this legislation which deal not only with protecting the most vulnerable but also with ensuring that those who operate in this space can operate a profitable business.

The elements of the bill are to: increase the cap on short-term small amount contracts to a 20 per cent establishment fee and a four per cent monthly fee; shorten the term for small amount credit contracts from 24 months to 12 months; remove the prohibition on refinancing of small amount credit contracts; introduce a mid-tier cap of 48 per cent plus $400 for loans of between $2,000 and $5,000 with a term of two years or less; place a prohibition on loans with terms of more than 15 days; place a maximum of 200 per cent total cap on charges for all lending; require consumers accessing small amount credit contracts to provide three months of bank statements and assist ASIC in their investigation; enhance the responsible lending requirements for brokers in this industry, particularly those who operate payday lending facilities through websites, and link them to ASIC's MoneySmart website; as well as address the risks of fees associated with debtors' accounts through repeated unsuccessful use of direct debit to seek payments incurred under small amount contracts. These are a suite of provisions that give greater protection for the most vulnerable consumers.

I draw the Senate's attention to evidence that was presented to the committee by some of the welfare agencies that operate in this area, particularly the Redfern Legal Centre. It acknowledged in its submission to the inquiry that there was a requirement for caps on fees and administrative costs associated with this. The centre said:

We acknowledge that the payday lending market is characterised by certain features that make small amount loans more expensive, including the high risk of default, and the high fees and the administrative costs of short term loans. There should be a limit on the amount of fees and costs that can be charged under small amount credit contracts to protect vulnerable consumers. It is important to recognise the role that payday lending plays in indebtedness amongst socioeconomically disadvantaged individuals.

That perfectly summarises the position of the need for reform and the government's reasons for its action in this area.

The bill also introduces new protections for seniors in respect of reverse mortgages. Seniors often can be particularly vulnerable when the value of the mortgage is greater than the value of their home. This is known, of course, as negative equity and to address this issue the bill will implement Australia's first statutory protection against negative equity. Reverse mortgage lenders and brokers will be required to discuss with the borrower the different scenarios and show them how the equity in the home will reduce according to the amount borrowed and different movements in house prices. This will ensure that when seniors access reverse mortgages they have the necessary knowledge to make decisions that protect their best interests and ensure that they do not end up in a vulnerable position.

The bill further introduces several important enhancements to the national consumer credit laws, which are aimed at protecting borrowers from severe enforcement action that is often taken by lenders, including the confiscation of property. These changes mean that the borrower is given the best chance to reach an agreeable arrangement with a lender in circumstances that are balanced and fair without being subject to costly court action. The bill also provides for regulatory balance between credit contracts and consumer leases, which are largely regulated consistently with credit contracts, to reduce the incentive for some providers to provide leases in a way that can disadvantage consumers.

All in all, this is a balanced set of reforms that takes into consideration the recommendations of the Joint Standing Committee on Corporations and Financial Services. It is a bill that will ensure the protection of the most vulnerable citizens accessing consumer credit in our country while also allowing those who have a requirement to access such credit to do so and for those running businesses in this important area to be able to do so in an ongoing profitable manner.

In respect of the foreshadowed amendments by the Greens, proposed by Senator Hanson-Young, I point out that to date in all of the deliberations that have occurred on this bill, through the committee process and through the debate in the House of Representatives, the Greens have not sought to move amendments to the legislation. The position put by Senator Hanson-Young this morning is the first that the parliament is aware of. I point out that the committee process, undertaken by the corporations and financial services committee, was a balanced approach. Senator Hanson-Young was involved in the hearings of that committee; she saw the evidence. None of the contrary evidence was presented in respect of the financial position of many of the corporations acting in this industry. For her to come in here now and say that the government has failed, when the government has taken a reasonable, balanced approach, assessing all of the evidence, ensuring that there is greater regulation in the industry, but at the same time allowing people to run profitable businesses in consumer credit, is simply misleading. It is another example, unfortunately, of the Greens dealing themselves out of the consideration of this important issue.

Their intransigence and inability to negotiate and compromise on this will mean that they have dealt themselves out of the debate on this issue. That is unfortunate because it is an area of regulation that requires a commitment from all sides to ensure that it works into the future.

This bill will enhance Australia's consumer credit regime. It will ensure the protection of the most vulnerable citizens and it is with a great deal of pride that I commend the bill to the Senate.

Senator WILLIAMS (New South Wales—Nationals Whip in the Senate) (11:59): I rise to contribute to the debate on Consumer Credit Legislation Amendment (Enhancements) Bill 2012. Short-term lending is necessary when people are in serious financial trouble and it is there to help them out. But sadly, in some cases people dig themselves into a deeper hole. As Senator Xenophon asked: why are people desperate for short-term loans or, as we know them, payday loans? Sadly, some have a gambling addiction. Others simply cannot get through with the cost of living. Mr Acting Deputy President, I want to bring that point to your attention—that is, the cost of living.

We heard the Greens' Senator Hanson-Young state her case today, but the cost of living is one of the biggest complaints I hear when I talk to people. It is mainly around rural and regional areas of New South Wales, but it is also right across the state and the country. Amazingly, the carbon tax is adding to that cost of living! This will mean more people will be in a desperate situation, seeking payday loans, short-term loans, to pay their bills, whether they be electricity accounts or the registration on their car. Those monthly bills come forward all the time and are never ending. That is where we see the most need for payday loans.

We need control over credit lending. The Senate Economics References Committee is currently inquiring into post-GFC banking practices, and my colleague Senator Bushby, who is here, is the capable chair of that committee. We have been getting information about low-doc loans and how they have been approved. We have had witnesses saying that information was falsely put on application forms—whether by the brokers, the bank or whoever—and that they have been putting in cash flows of people applying for the loans as $75,000 or $80,000 a year in income when in fact they were pensioners. This is of concern, and no doubt when the committee, very capably chaired by Senator Bushby, hands down its recommendations on 31 October those lending practices will attract a lot of attention.

As I said, people become desperate. I remember a couple of months ago talking to my colleague Senator Cormann about the cost of these payday loans. Senator Cormann gave an example. He said, 'If I lent you $100 today and you paid me $101 back tomorrow, would that be fair?' I said, 'Yes, that sounds fair enough.' But, of course, if you paid $101 back tomorrow on a $100 loan, that is a 365 per cent interest rate, which we would all think is a very high interest rate.

The point I make about this legislation is that the committee has done its job and done its job well. Minister Shorten simply had it all wrong, hence the big backflip by the government to get it right. The government has acknowledged the flaws in the original bill it presented to parliament last year by amending the legislation from its original form. The government was forced back to the drawing board by the unanimous recommendations of the Parliamentary Joint Committee on Corporations and Financial Services. The committee, including government members, recommended that the government revisit the payday lending changes and undertake further consultation with industry. This is most important and I commend that committee for its cross-party recommendations. Obviously the government had it very wrong before with what it was proposing. We are pleased that, under pressure, the government has agreed to increase the caps for small amount credit contracts, shorten the terms for small amount credit contracts from 24 months to 12 months so as to restrict the time that interest is being paid, and increase establishment fees from 10 per cent to 20 per cent and interest rates per month from two per cent to four per cent for small amount credit contracts. Those are important changes.

There will also be allowed an additional $400 fee to be charged for mid-tier loans between $2,000 and $5,000, the removal of the multicontract prohibition on lenders under certain circumstances and a commitment to prohibit loans with a term of 15 days or fewer. In other words, all short-term loans must be more than 15 days. These changes represent a significant concession to both industry and opposition concerns with the original bill, and strikes a much better balance between the bill's two key objectives—namely, to provide appropriate consumer protection so that consumers are not simply being blatantly ripped off, whilst making sure that short-term lending remains available, accessible and as affordable and competitive as possible.

I see so many people get in so much trouble with credit cards. I have had credit card debts myself during my life, and when you get your statement you think, 'How much can I afford to pay this month?' Of course, 20 to 22 per cent interest is charged for late payments and for the full amount not being paid. You ask yourself the question: 'Why is the interest rate so high?' I think the answer to that would be because of the level of bad debts that those who issue credit cards have to make up for. Sadly, we do not live in a country or a world where people are perfect managers of credit. That is simply not the case. Many are vulnerable.

Sadly, many have gambling problems. They will get access to money and think, 'I can double this money down at the club'—or at the racetrack, the TAB, online or wherever they choose to gamble. Everyone in the nation can now gamble online. It is an addiction, a disease. That is why we need credit control to protect those who are vulnerable and who cannot manage money. We see it all the time.

A lot of bank issues come to my office, and we say to people: 'You are in trouble now. You have mortgaged your home. You have borrowed this to invest in that. Why did you borrow the money in the first place? Can't you see that you didn't have the cash flow to pay for it?' They say that they trusted some clever adviser who said to invest in it and get a great return. Sadly, that ends up in misery in many cases. People can be irresponsible when it comes to borrowing money, especially the younger generation. I lecture my children. I always say, 'There are two ways you can learn in this life: listen to me, because I have made all the mistakes, or go and make the mistakes yourself, but the latter is a very expensive way to learn.'

I refer to those credit cards where hopefully the credit given out to people has tightened up a bit. I saw for years the willy-nilly lending, people having a credit card and maxing out with debt, late paying their payments, 20 to 22 per cent interest compounding month to month. Then I have seen people actually go and get another credit card and borrow on that credit card to make the payments on the previous credit card, and on it compounds. People are vulnerable, and that is why we need credit controls.

Back to this bill. I think the committee has done an excellent job. Obviously the government has made a monumental mess of its original plan. It is good to see that the government has rolled over on the original plan and has now gone with the committee's recommendations. We see that people do need money quickly. Many are desperate. As I said, when it comes to those bills to be paid, essential ones like electricity, even the Taxation Office in some cases, motor vehicle repairs, maintenance, registration, insurance—we know how the bills continue to come into the household all the time. I think this is a fair piece of legislation that will not be opposed by the opposition.

I come back to the cost of living. We are going to see more and more of this lending because the cost of living is going up so much. Electricity prices rose 18 per cent at 1 July in New South Wales, half of that attributed to the carbon tax. We are now seeing the flow-on to small business. Households have not got their electricity bills yet, they are a three-monthly bill. You wait until early October when they receive their first bill and we will see more of this payday lending where people are in financial trouble. The cost of living is escalating. I had a friend based in Uralla in the New England area who came back from overseas and he was amazed at the cost of living in Australia, the cost of food. He said, 'Why can I buy a T-bone steak from Australia in Europe cheaper than I can buy it in Australia?' A very good question. We know what the farmers and the primary producers are being paid. I have never been to Europe or America or anywhere like that. People tell me they go to America and they say you fill a shopping trolley in America and it might cost you $80 or $100. The same trolley in Australia costs $200. Why is this when many of these products, vegetables and other food, are produced here? So the cost of living will continue to go up. It will get even worse if the Gillard Labor government is elected at the next election and come 1 July 2014 we will see another half a billion dollars fuel tax imposed on our truckies some reason. It simply will not reduce our CO2 emissions. Are we going to just shut the trucks down and not transport our exports to the waterfront or bring the food and clothing et cetera into the country towns that do not have rail? This will be another cost and we will see more of this short-term payday lending being demanded and accessed.

In summary, I say congratulations to the committee for righting the wrongs of the previous legislation put forward by Minister Shorten. It is obviously a far better result—not perfect but far better. I come back to the point that we should be thinking why people are demanding payday loans. It is because they are desperate because of the cost of living. We know who we can look at around this chamber when it comes to increasing the cost of living over the last year or two.

Senator CAROL BROWN (Tasmania—Deputy Government Whip in the Senate) (12:11): I rise to make a brief contribution today and add my support to the Consumer Credit Legislation Amendment (Enhancements) Bill 2011. I would like to start by saying that I absolutely agree with Senator Williams when he talks about why people access payday lending. That is because they are desperate and vulnerable. And that is exactly why we need to put in safeguards to ensure that those people that are accessing these loans are not taken advantage of. The bill we have before us seeks to do that.

This bill continues the government's commitment to support the most vulnerable in our community, by protecting consumers who seek credit. It will also deliver part 1 of phase 2 of the COAG national credit reforms. The credit industry needs reform; for too long exorbitant costs have spiralled out of control. We must stop these uncontrolled costs and support those in our community who are most vulnerable. In supporting those who need it most we are moving to stop borrowers suffering from uncontrolled costs, help them reduce debt spirals and combat the current failure to utilise alternatives.

Short-term small amount lending, sometimes called payday lending, is an area that is long overdue for regulatory reform. People who take out short-term loans are generally low-income earners or are financially disadvantaged. They may require a small amount of money to pay a utility bill or to get a household appliance fixed. Thinking they have nowhere else to go, people often turn to payday lenders, who offer credit on a short-term basis, usually charging extremely exorbitant costs for the service. Under the stress of having to find some credit to meet a financial obligation, people do turn to payday lenders. However, there are other options already in the market that are available such as schemes through Centrelink or the highly successful No Interest Loan Scheme, the NILS scheme, that operates in my home state of Tasmania. I understand that all other states offer similar schemes.

The bill introduced by the Gillard Labor government will go some way to addressing this issue of payday lending to provide more protection for consumers who may need to engage in short-term credit. The high and largely uncontrolled costs associated with accessing short-term loans can exacerbate current financial problems that borrowers may already find themselves in. This means that people who access these payday lending services are more likely to suffer from uncontrolled costs and get caught up in debt spirals which are very difficult to get out of. So this bill will protect consumers and deliver in the area of credit reform. In making enhancements to protect consumers can I say that the government has engaged in significant consultations to deliver the best package of reforms possible. We have conducted significant consultations of the issues under phase 2. Consultation began in July 2012 with the release of the green paper National Credit Reform: enhancing confidence and fairness in Australia's credit law. The bill builds upon the national consumer credit reform, which was introduced as part of the national partnership agreement to deliver a seamless national economy. The National Consumer Credit Protection Reform package is dependent on the states referring their powers to the Commonwealth under the COAG agreement. Tasmania was the first state to introduce the required legislation into parliament, where it was passed in 2009. This shows Tasmania's commitment to national consumer credit reform.

The government has also consulted directly with payday lenders and consumer groups, and coming out of these consultations we have changed provisions within the enhancements bill in response to issues raised by both. We have also made amendments as to the issues that have arisen out of inquiries into the bill conducted by the Parliamentary Joint Committee on Corporations and Financial Services and the Senate Economics Legislation Committee.

This bill may not be 100 per cent perfect or achieve everything that the Consumer Action Law Centre wanted, but it is a start and it provides significant protection for consumers. The bill will introduce a national interest rate cap that will limit the costs of credit for consumers so that they will no longer be charged relatively high rates and high costs for these types of credit. This is Australia's first ever national interest rate cap and will apply to loans of less than $2,000 and 12 months duration. For these short-term small loans a cap on costs of 20 per cent of the credit provided, plus four per cent of the credit provided for each month of the credit contract, will apply.

In payday lending situations there have been cases where people borrowing $300 can be charged over $100 for a seven-day loan, and then can meet repayments on this loan only by not paying other bills, such as rent or power, relegating them to the cycle of debt that I touched on earlier. The bill also introduces other protections, including tailored response lending obligations that help support the position of borrowers who have already defaulted on payday lending services or who make repeated use of small, short-term lending. The bill will implement the government's election commitment on reverse mortgages, meaning that new laws will introduce appropriate protections against negative equity and will also provide better information for those seniors who are considering taking out a reverse mortgage.

Another element of the bill amends the National Consumer Credit Protection Act 2009 to deliver greater regulatory consistency between consumer leases and credit contracts. It will also deliver specific improvements to consumer law, including opportunities for borrowers to obtain variations to their repayments when they experience financial hardship.

I turn now to talk in more detail about the excellent service offered in Tasmania and its no-interest loans scheme which I mentioned earlier. The NILS Network in Tasmania provides interest-free loans for household essentials, car maintenance, education essentials and medical and dental services for individuals or families on low incomes. There are no interest charges or fees: borrowers pay back only the cost of the item or service. As the NILS Network says on its website:

NILS loans have the capacity to turn people’s lives around. Loan recipients often find that for the first time in their lives they are able to own something new and reliable. There is also a sense of pride and achievement associated with the completion of a loan.

The NILS Network also has many testimonials from users of the scheme, and I quote from one of those:

I was left with absolutely nothing but a suitcase full of clothes and care of my teenage daughter. I was residing in a women’s shelter. My husband had a bad gambling problem. He gambled away years of battling virtually in two years. I finally moved into a Housing home and of course, had nothing. I heard about NILS and applied for a washing machine as I have arthritis and am recovering from an illness. I washed by hand and could not afford to get credit or be accepted as a customer. I am so very grateful that NILS exists.

This story highlights very well the reason the government has taken this action. Many low-income consumers take out payday lending loans as a first point of call rather than using them as a last resort. Part of this reform is to make consumers think about other options, such as NILS, when they are faced with temporary financial shortages. Sometimes it may appear easy to take out a short-term loan but, for many, due to the costs involved, they are just delaying the inevitable and making their situation worse down the track.

I am pleased today to be supporting this bill that introduces a number of measures to protect consumers from the exorbitant costs associated with payday lending, and I commend the bill to the Senate.

Senator FARRELL (South Australia—Parliamentary Secretary for Sustainability and Urban Water) (12:20): I thank all of those senators who made a contribution to this debate. The Consumer Credit Legislation Amendment (Enhancements) Bill 2012 continues the government's commitment to ensuring that all Australians get a fair deal when they use credit. In particular, this bill is aimed at ensuring that vulnerable consumers, such as some seniors or those on low incomes or people who find themselves in financial hardship, are adequately protected when they borrow money. I commend the bill to the Senate.

Question agreed to.

Bill read a second time.

Senator HANSON-YOUNG (South Australia) (12:21): I have, as indicated in my speech earlier, circulated amendments to this legislation that go to the heart of the problems that this legislation now has after being watered down and curtailed by the government to the wishes of the coalition and the loan sharks alike. For the purpose of the chamber's time I propose that the amendments be dealt with together.

The TEMPORARY CHAIRMAN ( Senator Furner ): Senator Hanson-Young, you can seek leave. However, your amendment to schedule 1, amendment (2), will need to be put separately.

Senator HANSON-YOUNG: Must it be put separately?

The TEMPORARY CHAIRMAN: The proposed amendment (2) must be put separately to the other amendments.

Senator HANSON-YOUNG: The Greens oppose item 25, division 4, in schedule 1 in the following terms:

(1)   Schedule 1, item 25, page 16 (lines 1 to 5), omit all the words from and including "Division 4" to the end of section 160A.

(3)   Schedule 3, item 7, page 51 (after line 5), after section 124A, insert:

124AA Prohibition on providing credit assistance in relation to small amount credit contracts

Prohibition

(1)   A licensee must not provide credit assistance to a consumer by suggesting that the consumer apply, or assisting the consumer to apply, for a small amount credit contract if the licensee knows, or is reckless as to whether, in the 12 month period before the time the assistance would be provided, the consumer has been a debtor under 4 or more small amount credit contracts.

Civil penalty:    2,000 penalty units.

Offence

(2)   A person commits an offence if:

   (a)   the person is subject to a requirement under subsection (1); and

   (b)   the person engages in conduct; and

   (c)   the conduct contravenes the requirement.

Criminal penalty:    50 penalty units.

(4)   Schedule 3, item 13, page 54 (after line 17), after section 133CA, insert:

133CAA Prohibition on entering small amount credit contracts

Prohibition

(1)   A licensee must not enter a small amount credit contract with a consumer who will be the debtor under the contract if the licensee knows, or is reckless as to whether, in the 12 month period before the time the contract would be entered, the consumer has been a debtor under 4 or more small amount credit contracts.

Civil penalty:    2,000 penalty units.

Offence

(2)   A person commits an offence if:

   (a)   the person is subject to a requirement under subsection (1); and

   (b)   the person engages in conduct; and

   (c)   the conduct contravenes the requirement.

Criminal penalty:    50 penalty units.

(5)   Schedule 3, item 14, page 56 (after line 4), after subparagraph 180(1)(b)(ii), insert:

      (iia)   section 124AA (which prohibits the provision of credit assistance in relation to small amount credit contracts);

(6)   Schedule 3, item 14, page 56 (after line 6), after subparagraph 180(1)(b)(iii), insert:

      (iv)   section 133CAA (which prohibits credit providers from entering into small amount credit contracts);

(7)   Schedule 4, item 22A, page 69 (after line 19), after paragraph (d) of the definition of medium amount credit contract, insert:

   (da)   the debtor's obligations under the contract are not secured; and

Let us work our way through them. I will speak to them and then we can move to deal with each as you see fit. I am more than happy for that to happen. They deal with the issues I outlined in my second reading speech—

The TEMPORARY CHAIRMAN: Before you proceed, is leave granted?

Leave granted.

Senator HANSON-YOUNG: The first amendment, amendment (3), is in relation to making sure we can put a cap on the number of loans people take. The big problem is that, despite the fanfare, there is no hard cap on how many loans people can take. This amendment to schedule 3 suggests there would be a cap of four on the number of loans that people can take in a 12-month period. If we do not want people to get sucked into a cycle of poverty then we need to ensure that we have a hard limit on the number of loans that any individual can take out in one period. That is what consumer organisations have recommended. It is more in line with what the original legislation intended. It will go a long way to helping those who are the most disadvantaged in our community not to be caught out by these nasty practices of the loan sharks. It is the best way of protecting them. It has been proven internationally and it is what this bill should be aiming to do, rather than simply saying we do not want people to take too many loans. We need to put a hard limit on that. It would be four loans within the period of 12 months.

The second amendment is in relation to the issue of garnishing income and employer authorities. This is where people have the right to ensure that when they get sucked into these awful, nasty schemes, they do not have the loan sharks dipping straight into their bank accounts and leaving them with absolutely nothing. The repayment method should be direct debit. That differs from people working all week only to then realise they have nothing in their bank account because everything has gone to repaying the debt. We suggest that that area needs to be strengthened as well, which would be in relation to omitting section 160E item (14) of the government's original amendments.

The third amendment deals with the issue of security over loans. I spoke about this briefly in my second reading speech. The bill has put some caveats and safeguards around loans up to $2,000—you cannot have a loan up to $2,000 secured against something else. We are suggesting, in line with what consumer action organisations have asked for and what the experts say must be in place if we are to have true reform in this area, allowing security to be taken for loans up to $5,000. This would mean that you could not have somebody taking a $5,000 loan and having it held against their house or their car, effectively leaving those people with nothing if that loan is called in. That is the point of that amendment, lifting the $2,000 non-security cap to $5,000, which is what the experts argue is needed.

The last point in our amendments deals with the issue of enforcement. There is no point in embarking on reforms in this area unless we are serious about enforcement: whether we have a hard cap on the number of loans at four per year, whether we have issues in relation to security or loan sharks just dipping into people's bank accounts as they like or getting employers to pay them directly. These big businesses, Cash Converters and others, are making windfall gains such as increases in profits as high as 10 per cent over the last 12 months on the back of very desperate, very poor, very disadvantaged Australians. If we are to tackle all those things we need to have proper enforcement mechanisms as well. That is what our final amendment goes to. I will leave it there and I am in the hands of the chair as to which amendments will be put to the committee at which time.

Senator FARRELL (South Australia—Parliamentary Secretary for Sustainability and Urban Water) (12:28): I indicate that the government does not support the seven amendments as proposed by the Australian Greens. We believe that the legislation that the minister has brought forward to the Senate gets the balance right amongst all the competing interests of people in this industry, including the consumers. Roughly 15 per cent of the population is unable to get credit, so regrettably those people are required to use payday lenders. We believe that the legislation that we have brought forward gets the balance right between protecting those people who find themselves in a position where they cannot do anything other than use payday lenders but does not go so far as to abolish the industry. We think the balance in legislation, after significant consultation, gets it right. It is worth bearing in mind that none of these amendments were introduced in the House of Representatives by the Greens.

To the best of my knowledge, the first time that the government has seen these amendments has been today. It is very late in the process to bring up these issues. We think that the balance is right. The minister has taken into account all of the issues that all of the stakeholders have raised. We are protecting those people who through no fault of their own are required to use payday lenders, but we are not abolishing the industry.

Senator CORMANN (Western Australia) (12:30): On behalf of the coalition, I indicate that we also will not be supporting the Greens amendments. Those Greens amendments are broadly in line, if not entirely in line, with some suggested amendments that were circulated by various consumer action groups about 10 days ago. If I could, I will make some brief comments in relation to each of the three issues that Senator Hanson-Young raised.

In relation to the limits on repeat borrowing, this bill does impose statutory limits on repeat borrowing. The government's legislation does make some exceptions in the case of refinancing of another loan with the same provider. However, the bill also provides that the burden is on the lender with an assumption of hardship if the borrower has two or more short-term loans. In effect, this means that the lender would breach their responsible lending obligations with associated penalties if they did not take this into account. The use of presumptions rather than prohibitions, in our view, allows for greater flexibility and offers significant new protections for vulnerable borrowers.

In relation to garnisheeing income that Senator Hanson-Young has raised, the bill does provide protection for Centrelink dependent consumers with repayments capped at 20 per cent of their income. The complete removal of the ability of the lender to gain repayment via employer authorities when a borrower is employed would be counterproductive, offering a moral hazard where there would be an incentive for loans to be left unpaid.

Finally, in relation to the security over loans from $2,000 to $5,000, we believe it is reasonable that a loan of between $2,000 and $5,000 involves security. If security were prohibited, this segment of the lending market could well disappear or move into the black market. Both outcomes would be detrimental to potential borrowers and industry.

The TEMPORARY CHAIRMAN ( Senator Furner ): The question is that item 25, division 4, of schedule 1 stand as printed.

Question agreed to.

The TEMPORARY CHAIRMAN: The next question is that Greens amendments (1) and (3) to (7) on sheet 7260 be agreed to.

Senator FARRELL (South Australia—Parliamentary Secretary for Sustainability and Urban Water) (12:40): I move:

That this bill be now read a third time.

Question agreed to.

Bill read a third time.

Senator CORMANN (Western Australia) (12:41): This Labor government is a high-spending, high-taxing, high debt and deficit government which, over less than five short years in government, has lost complete control of our public finances, having inherited a position of no government net debt, a $22 billion surplus and $70 billion of net Commonwealth assets. This fiscally reckless, irresponsible and very wasteful government has turned that situation around very quickly. We find ourselves in a circumstance now where we have $174 billion worth of accumulated deficits over the last four budgets. We are heading again for $145 billion worth of government net debt and this government is planning to spend nearly $30 billion just to pay the interest on the debts that it has accumulated so far over the last 4½ years.

You have to contrast this with the situation in the final year of the Howard government when it received more than $1 billion in interest payments, given that there was no government net debt and that there were $70 billion worth of Commonwealth net assets which had been invested prudently by the former coalition government through the Future Fund.

People across Australia know that whenever Labor are in government for a period of time they stuff things up when it comes to the budget. Labor do not know how to handle money and after a period of Labor in government it always comes down to the coalition to come back and fix up Labor's fiscal mess. The reason we end up with bills like the one before us—the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012—is that Labor are always casting around for more cash. They do not care how reckless and how bad it is for our reputation as an investment destination when they come up with, for example, legislation like this, which imposes a tax burden retrospectively.

That is exactly what this bill seeks to do. This bill seeks to make changes retrospectively to cross-border transfer pricing arrangements. The reason it is bad for governments to make changes to tax laws retrospectively is, firstly, that it is fundamentally unfair. Retrospective changes to tax legislation also significantly damage our reputation as a safe destination for investment. I put this question: how can anyone be expected to have complied with tax laws back in 2004, 2005, 2006 or 2007 that did not exist at the time? How can anyone across Australia have been expected to comply with tax laws back to 2004 that we are only just debating in the parliament now? This is very bad practice and the only reason we are having these sorts of debates in this parliament now is because this government are so desperate to put their hands on some more cash to plug the hole that they have created in less than five years of bad and irresponsible government.

The coalition cannot support this bill in its current form. It is a large retrospective tax change which the coalition is opposed to in principle. The coalition will seek to amend the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 in order to give prospective effect to this bill. If this amendment is unsuccessful, the bill will be opposed by the coalition as the government has not made a strong enough public justification for the retrospective application of these changes. Transfer pricing rules exist to ensure that taxation is collected on the contribution of profits from Australian operations to multinational companies and to ensure that profits are not shifted between related parties across borders without appropriate taxation. Transfer pricing rules are contained within division 13 of the Income Tax Assessment Act 1936 and Australia has also incorporated various international tax treaties into Australian law.

The Commissioner of Taxation has historically considered these treaty transfer pricing rules contained in treaties as an alternative basis for transfer pricing adjustment in parallel with the relevant provisions of the Income Tax Assessment 1936. However, in 2011 the Full Federal Court cast doubt on the second basis for transfer pricing adjustments in Commissioner for Taxation v SNF Australia Pty Ltd. Whilst this case was argued only on the basis of division 13, the government now believes that as a result of this case division 13 does not always adequately reflect the contributions of profits from Australian operations to multinational groups and, as such, in some cases treaty transfer pricing rules may produce a higher level of taxation. This government essentially want to be able to pick and choose whether they are going to use Australian law or whether they are going to use the relevant treaty provisions, depending on what delivers a higher taxation outcome.

At the end of the day, if the law is as the taxation commissioner may have thought in past then there is no need to change it. If it is not the way the tax commissioner thought it was and has interpreted it to be then of course this is a massive change to tax laws retrospectively. The tax commissioner does not write laws. The tax commissioner implements, administers and executes the laws passed by this parliament. If the tax commissioner's interpretation of those tax laws is found to be inconsistent with the laws passed by this parliament, it is not right to then change the legislation retrospectively in order to bring the legislation in line with the tax commissioner's interpretation. What would be right is for the tax commissioner to change his interpretation to make it consistent with the laws passed by this parliament until such time as the parliament has decided to change those laws, and of course those changes ought to apply prospectively only.

On 1 November 2011 the government announced a review into the relevant division of the Income Tax Assessment Act 1936 and said it would legislate to clarify the transfer pricing rules in tax treaties and valid transfer pricing adjustments independent of the ITAA 1936. This change is to be retrospective from 1 July 2004. I have made the point, and I hope that the chamber is very clear on the fact, that the coalition has been opposing and continues to oppose retrospective tax changes which provide adverse consequences for taxpayers as a matter of principle. Retrospective changes that are beneficial to taxpayers are one thing, but retrospective tax changes which impose an adverse consequence on taxpayers and a beneficial outcome for government are not an appropriate way to legislate in the tax area.

The reasons the coalition is opposed to retrospective tax changes that are detrimental to the taxpayer as a matter of principle are that they can change the substance of bargains struck between taxpayers who have made every effort to comply with the prevailing law as at the time the agreement was entered into; they can expose taxpayers to penalties in circumstances where taxpayers could not possibly have taken steps at the earlier time to mitigate the potential for penalties to be imposed; they may change a taxpayer's tax profile, which in turn can materially impact the financial viability of investment decisions and the pricing of those decisions, which were made in the context of the tax laws as they existed at the time; and they can increase Australia's level of perceived sovereign risk. In fact, that has already happened.

It is impossible for somebody in 2004 to have complied with a law that is yet to be passed by the parliament in 2012. That seems to be pretty obvious. How can anyone be expected to have complied with a law back in 2004 that the Senate is here now discussing on 20 August 2012? It is completely unreasonable and it exposes taxpayers to a completely unreasonable level of sovereign risk when tax laws and tax arrangements can be changed going back by eight years. Of course, a lot of investment and other decisions would have been made on what the understanding of the laws was at the time, and just because the tax commissioner takes one view and participants out in the economy take another view, it does not mean necessarily that the tax commissioner always gets it right. Of course, the proof is in the pudding; he does not always get it right.

On occasion, taxpayers contest the tax commissioner's views and interpretations before the courts because they believe that the law says something different from what the tax commissioner says. Here there is a very bad trend where this government, whenever it comes to the tax commissioner having been found to have applied the tax laws in an inappropriate way, rather than ensuring that the tax commissioner applies the law the way it was intended to be applied, turns around and says, 'Well, let's make sure that for all of the years that the tax commissioner has interpreted the law in a way that is inconsistent with the way the law was passed we will just change the law to make it retrospectively consistent with the tax commissioner's interpretation.' It will do this rather than force the tax commissioner to apply and comply with the laws passed by this parliament. It is the wrong way round. The reason the government are going the wrong way round on these things is because they are always so desperate for more cash given their absolute incapacity to handle money.

If the relevant treaty article, the associated enterprises article contained in Australia's existing double taxation agreements, operates to provide a separate taxing power, the question then becomes why the bill needs to have retrospective application. That is the proposition that has been put for the last however many years. However, if the associated enterprises article does not operate to provide a separate taxing power, can it be said that the proposed amendment is merely clarifying the law? If not, then it is surely the case that taxpayers who have complied in the past with the law as enacted are now retrospectively exposed to a new tax. In evidence to the Economics Legislation Committee on 26 July 2012, Mr Peter Collins, partner in PricewaterhouseCoopers, made a very concise exposition on this point in these terms:

… if the law is as clear as has been suggested in a lot of the debate today when we have been hearing about the tax office's point of view on this, then there is no case for change. Why do we need to change the law if it is so clear?

That is a completely appropriate question. The reason we are having this debate is because the tax commissioner's interpretation of the law went beyond what the law actually said. The reason we are here clarifying things is because this government wants to lock in significant additional cash. The retrospectivity of this bill will remove a taxpayer's accrued right to dispute an amended assessment for income years as far back as 2004-05 where the Australian tax office has raised the amendment in reliance on the treaty transfer pricing powers. That is surely unfair. The opposition does not accept that the government has made its case that the retrospective legislation is appropriate or required. No detail of the size of the retrospective tax impost is currently available. The government claims that this has no impact on the budget at all as it is a revenue protection measure. In fact, despite repeated requests, the Assistant Treasurer's office has been unable to fully quantify the cost of not passing this bill.

The coalition, as I mentioned at the outset, will be moving an amendment making the bill prospective rather than retrospective. This will ensure that the taxpayers are not forced to retrospectively comply with a tax regime they did not know existed at the time when they made business and investment decisions. This latest change comes on top of previous retrospective tax changes to the consolidation regime. It comes on top of the mining tax, the carbon tax and more than 20 other new or increased ad hoc Labor Party tax grabs. They have all got one thing in common: that they are driven by a desperate need for more cash in order to try to fill the holes. So far this government has been particularly unsuccessful in filling those holes. This government has been so unsuccessful in filling those holes but we were told initially that last year the deficit was going to be about $10 billion by the Treasurer when he was trying to make us believe that the government was on a return path to a fiscal surplus. Back in August 2010 the Treasurer, just before the last election, told us the deficit in the last financial year was expected to be $10 billion. When the budget came out a few months ago, we found that the deficit was $44.4 billion, a blowout in the deficit under this government of $34.4 billion in just one year. In the last financial year the government's deficit more than quadrupled compared to what the Australian people had been told before the last election. The government is running around and casting around for more cash because they cannot live within their means. Because they cannot live within the confines of the record revenues that the government has been collecting in recent years, the government is not able to live within its means so they are out there casting around for more cash by increased borrowings and increased levels of debt, and they are also casting around by coming up with new or increased taxes. They are even casting around by making retrospective changes to existing tax laws to force people to pay more tax than they were required to pay under the laws as they existed all the way back to 2004. This is a government that clearly has lost control of its finances. That is why they have to go ahead with these sorts of bills which have a very bad impact on our reputation internationally and a very bad impact on our economy domestically.

There is a better way. What we need is a government that is more prudent with taxpayers' money. We need a government that spends less. We need a government that is able to live within its means. We need a government that, because they live within their means, can tax less. We need a government that is focused on international competitiveness, a government that is focused on implications bills like this have on the preparedness of investors from around the world to invest their money here in Australia so that we can continue to grow our economy more strongly. If we had a government which spent less, which was less reckless with taxpayers' money so we could tax less, so we could focus on our international competitiveness moving forward, a government that was focused on driving productivity improvements, a government that was focused on growing our economy more strongly, what would happen in that circumstance is that by growing our economy more strongly not only would we improve and enhance our economic prosperity as a nation but we would actually deliver increased revenue to government without the need for all these new and increased Labor Party taxes. If you are a government that encourages stronger economic growth on the back of being more predictable, on the back of delivering lower taxes, productivity improvement and so on, as the economy grows then the revenue to government will also grow without having to impose all these new taxes.

Over the last four or so budgets, billions and billions in additional tax revenue have been collected on the back of all these new and increased Labor Party taxes. But despite all these billions in additional revenue the government is still not able to balance the books. Despite having benefited in recent years from the best terms of trade in 140 years—terms of trade which are now coming off and look as if they might continue to moderate—this government has imposed more than 20 new or increased taxes over the last four or so years. They have borrowed about $145 billion—they have taken net debt to about $145 billion on the back of $174 billion of accumulated deficits. In these sorts of circumstances, it is not surprising that this government is recklessly exposing our international reputation as a safe destination to invest with bills like this. Unless this bill is amended in the terms I have indicated, the coalition will not be in a position to support it.

Senator JOYCE (Queensland—Leader of The Nationals in the Senate) (13:01): I rise to speak on the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012. Transfer pricing is an issue that I have a lot of interest in, being an accountant and also from regional Australia.

I think the coalition is being extremely fair on this arrangement. We do not, as a principle, believe in retrospective changes because they make life impossible. How do you plan for a government that is making plans for you before you even know that the changes they would make would come about? So it is a very fair proposition to say that we will make changes on the prospective level—that is, from this point forward.

That does not diminish the requirement that we have to do something on transfer pricing. We must realise that nowadays 60 per cent of international trade—that is, trade that goes on between countries—is within companies. Transfer pricing is becoming a massive mechanism for the avoidance of tax in transactions between countries. The tax that companies avoid by transfer pricing has to be paid for by somebody, and that somebody is the individual—that is, the Australian taxpayer. The Australian taxpayer has to pick it up. If we believe the standard of social services we have should be maintained, then we must maintain the tax base to do it. It is interesting. It is something you probably do not want to try looking up on Google, because Google has been notorious for trying to get out of tax by transfer pricing. They use one of the mechanisms called the Double Irish agreement where they create a quasi-operation in the Bermudas and use that as a mechanism for the taxable entity, and the concessional tax rate means they miss tax.

The whole world seems to be going along this path where it is somehow believed that it is morally right for organisations to avoid tax within their operations between countries, but we will come down like a ton of bricks on individuals inside a nation who try to avoid tax. So more and more of the taxation burden is falling on individuals.

Each country seems to be playing this game. They all have their way of doing it. On the demise of the British Empire, they managed to keep their fingers on the financial empire well and truly operating. We know that a vast number of the hedge funds in the world are domiciled on Jersey Island. I do not think they are actually there, but that is where you will find their operations. Jersey Island, the Cayman Islands, Bermuda—we even see the Chinese making sure they keep Hong Kong and Macau going so that organisations within China have the capacity to get a differential tax rate and keep things opaque by moving away from transparency or closing up altogether.

You say, 'What has this got to do with Australia?' I quote to you from an inquiry that was held by this parliament in the last week that revolved around transfer pricing. A Mr Hamilton said:

If they were acting as a not-for-profit they would not necessarily be within the income tax system …

But in going on to a transfer-pricing issue, Senator Fawcett brought to their attention:

The end point that the chair is probably coming to is that if country X has a sovereign holding in Australia, grows wheat—and let us assume they do not claim anything; they just self-fund the whole operation and they grow however many tonnes of wheat—

Mr Hamilton, representing the tax office, said:

And they export it. Would they be taxable? No.

So who does pay the tax? If those companies in transfer pricing are not paying the tax, then it is the person out in the street from here that pays the tax.

We now have a major issue because we demand our services are maintained at the same level and our capacity to finance them is lost. How are we making it up? We are just borrowing the money, so the debt is escalating.

It is an issue in the prospective form that we need to go forward and start closing these loopholes. I do not think we are ever going to win the battle. It will be a continual movement of funds away. The unfortunate thing is that, as international companies avoid tax believing that they are somehow omnipotent bodies which do not have to pay the tax that individuals or anybody else has to pay, the government borrows money. When they run out of money to borrow, they start printing money. If where you are storing your wealth is ink on paper and a government starts borrowing money, then it is a self-defeating proposition. In the end, you have done yourself in because all the money you have managed to divest and hold in certain accounts throughout the globe becomes worthless. As countries go into programs of quantitative easing, it diminishes the value or worth of whatever funds you have in the book denominated in that currency.

One country that has had the most dramatic forms of quantitative easing in the past, and which will continue to do so, is the United States of America. If you have wealth denominated in US dollars that you have managed to squirrel way, stuck up a log somewhere, and the US starts printing currency, you have not really done yourself any favours whatsoever. I do not know what you would do next—probably you would go back to hiding gold or something. So in relation to transfer pricing we have to make sure that, in the future, we are part of the global process to make sure that the advantages international corporations will always have are not so overwhelming that the tax burden falls unnecessarily on the shoulders of the individuals who are left here.

It has become even more opaque now with the advent of sovereign entities, sovereign wealth funds, state owned enterprises. If it is opaque for corporations trying to get transparency on transactions that run between countries, it is virtually impossible to get it when the entity making those transactions between countries is one of the countries themselves. If it is, we end up in a very awkward position if we ask that country to bring its books to our court to display to us what they are earning. It obviously works on the undeniable premise, the implied belief, that we think they are lying. If we drag another nation's government into a courtroom in the belief that they are lying, they may well read that as an insult and a loss of face for their country. So we would get ourselves into an awfully convoluted position which, undoubtedly, people would balance up: 'What are the ramifications of a bad outcome diplomatically with this country if we proceed with this case? They are far and away worse than the tax revenue we are trying to get back so we will just let them get away with it.'

Once that happens, the Australian people will say, 'If you are creating one law which somebody who does not even live here can get away with but I have to deal with it, that is inherently, completely and utterly unfair.' We will lose the respect and confidence of our own people because of our inability to deal with them in a manner equivalent to that with which we deal with other people or the government of another nation. It is not a case of getting an unfair advantage; it is making sure that there is some sort of parity.

As I said, 60 per cent of international trade is within companies. To try to find out exactly what an organisation has earned relies on the internal documents, which relies on the internal valuation. We always think it is easy, but it is not. For instance, take a large cotton farm, how are you going to know how much they are going to grow? How do you dig down? It is the internal dynamics of another country, another corporation. I suppose you work on the premise that you probably are not going to get everything that you want but, if you can get a fair share, then that is what you will take. There are instances with transfer pricing now where you basically get nothing at all.

The basic concept of how it can work is that a product is said to be removed from Australia at a certain price—a bale of cotton, for instance. They will say that the bale of cotton is only worth $300 or $400 a bale. It has been transferred to a mill in another country, where they mill it. Surprisingly enough they make a lot of money at the mill where they mill it but they make no money in the country where the cotton came from, and if the country where it came from is our country we do not collect the tax revenue. However, it requires and demands the utilisation of road resources and police resources and the laws and health standards that we expect, but we do not get the capacity to get our fair return from that entity to support that infrastructure, which is ours.

The coalition supports prospective change to these laws, and Senator Cormann clearly spelled that out. To try to make sure that we get somewhere with this I hope that is truly considered. The reason retrospectivity is not appropriate is that it becomes a very bad rule to work by. Once we start talking about retrospectivity, we do not know where on earth it changes. It draws into question the plans of basically any organisation that is operating at the moment. To be prudent and astute, manage to get the changes in straightaway. But retrospectivity, especially in tax law, creates massive uncertainty because people just do not know where you will strike next. But I think it is absolutely fair that, prospectively, these issues that have become clouded, that will always be running second to astute accountants working in St James Square in London or working in Manhattan, devising ways with the utilisation of the Cayman Islands, Bermuda, Singapore, Hong Kong, Macau and the Jersey Islands to move money around so as to minimise or, if possible, avoid tax—if people believe that they do not have to pay any tax at all, then that is the tax they want to pay: none.

There are ways, and there have been mechanisms even in this parliament—I have been present when laws have been passed—to basically allow people to get out of tax altogether. Tax exemptions for non-rural property assets is one that comes to mind in recent times. I remember quite clearly crossing the floor on that and found that the Labor Party got up and crossed the floor in the other direction to make sure it went through. I wonder who they got the phone call from? These are the issues. To keep integrity in the tax base we must make sure that we manage the country so that people have to pay as little as possible and to make sure that those who should pay do pay. I think that is only fair. If we do not manage these things, if we leave it open for the movement of funds away from our taxation net, then, quite obviously, anybody who is prudent will do precisely that.

So, in closing, it is well worth the read to find out the sort of money that currently is being lost through transfer prices globally, which people believe is in the vicinity of about $3 trillion. When we say it is 'lost', it is not actually lost; it just means somebody else somewhere else has to pay it. Generally, it is an individual, but if it is not an individual it becomes an overloading on debt, so prudent management means prudent collection. Underlining that we have no belief in retrospectivity, it is fair warning to say that, prospectively, it is the role of any government to make sure that people do not pay excessively, that they pay their fair share, and that mechanisms that are built deliberately not for minimisation but just complete and utter avoidance are removed. You cannot live with the benefaction that is before a nation if you are not willing to kick the tin in some way to pay for it.

Nor should you be allowed the right, the privilege of operating in the country if you have no interest whatsoever in supporting the mechanisms that are vital to that country and supporting the people who underpin that country. It goes without saying that, in this continual torrent of moving funds to different corners of the world, even in the corners where they move it to and through, there is no real benefaction there. It is not as if you go to the Bahamas or Bermuda and these people are opulent; it is just the avoidance of tax. Where the funds ultimately flow to, the benefaction—you always find it—is to some individual at the end who has decided to make it their purpose in life to rip off other people.

Senator BUSHBY (Tasmania—Deputy Opposition Whip in the Senate) (13:17): I rise today to also contribute to the debate on the government's Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, which is a bill that coalition senators do not support in its current form for a number of very good reasons.

Transfer pricing occurs when two parties, related or unrelated, supply goods and services to each other and transfer profits from one to the other. The parties to the transaction may be domestic entities or resident or non-resident entities. For taxation purposes, the main issue occurs when the transaction is between related parties and where one of those parties is a nonresident. For Australian taxation purposes, when one party is a nonresident, Australian tax can be minimised to apply in deductions to the Australian entity through the purchase of goods by the resident entity at an inflated price, or through allocating income to the Australian resident through the sale of goods from the resident entity at a discounted price.

This government bill seeks to ensure the transfer pricing articles contained in Australia's tax treaties are able to be applied and provide assessment authority independently of division 13 of the 1936 tax act. They are seeking to do this by creating express provisions within the Income Tax Assessment Act 1997. Of primary concern to the coalition is the retrospective implementation of this bill, with the bill currently proposed to commence retrospectively from 1 July 2004. So we are not talking here commencing 1 July 2012, two months retrospective, or 1 July 2011, or even 2010; we are talking 1 July 2004.

The argument for justifying this retrospective implementation is outlined in confusing terms within the explanatory memorandum to the bill as:

The 2004 income year commenced immediately after the Parliament’s most recent amendment to the income tax laws in 2003 which again evidenced the Parliament’s understanding that tax treaties could be used as a separate basis for making transfer pricing adjustments.

The minister has stated in the other place that a decision to change the law from a date before announcement is not taken lightly. However, the coalition knows that this is not true, because this government is a government that constantly moves the goalposts in terms of dates. It has consistently sought to introduce retrospective legislation into the parliament since first coming into office. In fact, as recently as last year, this government legislated a retrospective tax change which dated back as far as 1990.

The coalition is generally opposed to retrospective tax changes, particularly in instances such as this, where the retrospective implementation of the legislation will impose a significant and detrimental burden upon taxpayers. Retrospective tax changes not only impact the relationship between a taxpayer and the government but can also change the substance of bargains struck between taxpayers who have made every effort to comply with the prevailing law at the time the agreement was entered into. They can expose taxpayers to penalties in circumstances where they could not possibly have taken steps at an earlier time to mitigate the potential for penalties being imposed. And retrospective tax changes can alter a taxpayer's profile.

The Senate Economics Legislation Committee held an inquiry into this bill, and through that inquiry process the Senate Economics Legislation Committee heard from a number of stakeholders who all raised valid, serious and concerning issues in relation to the unjust nature of this bill and the impracticalities that will arise as a result of its retrospective implementation—and not surprisingly so. Many stakeholders expressed concern over the burden of proof for assessments that will arise as a result of the retrospective implementation of the bill. The Law Council of Australia submitted the following:

The amendment provided for in the Bill gives the Commissioner an independent and additional taxing power and increases the scope for application of profit based analysis using information more readily available to the Commissioner than taxpayers. As already observed, the burden of compliance with the proposed new laws, as well as the existing domestic transfer pricing regime which will continue to apply, will be significant for taxpayers. Accordingly, the Committee considers that the burden of proof in relation to the new measures should properly lie with the Commissioner. In the alternative, either the taxpayer should bear no legal or evidential onus to prove that the assessment is excessive or, upon leading evidence in support of positions taken, it should be expressly incumbent on the Commissioner to demonstrate that the taxpayer’s position is manifestly wrong.

A number of submitters to the inquiry also expressed concern that no time limit had been specified for when retrospective adjustments can be made by the commissioner. The Law Council of Australia has stated that the absence of a time limit for retrospective changes is likely to cause significant issues for taxpayers. Mr Chris Peadon, a member of the Law Council of Australia, told the inquiry:

Taxpayers should be given certainty in relation to previous year's income so they can draw a line underneath it. There are also the issues about how long people keep records and keep all the relevant people around. If you go back further and further, it disadvantages taxpayers who have probably had a turnover of personnel and have probably moved their warehouses several times. How long do they need to keep the documentation? These are issues that crop up. It seems to us to be a very sensible reform just to insert a time limit, perhaps on the usual basis.

The Institute of Chartered Accountants submitted in relation to the retrospective nature of the bill:

A signal of the importance of freedom from retrospective laws has been held to be so critical to the basic rights of individuals and corporations that the constitutions of both the United States and Sweden have explicitly prohibited such a practice. Whilst Australia's constitution does not expressly prohibit the making of retrospective laws, the generally accepted practice of parliament has been to only exercise those powers sparingly, often only in extreme and exceptional circumstances …

The coalition is not convinced that the government have provided suitable justification for the retrospective implementation of this bill. And, as is the norm with this government, they have not adequately consulted with stakeholders or addressed stakeholder concerns. Also of concern is that the government have not officially or publicly provided any detail on the size of the retrospective tax impost.

At the last round of Senate estimates, the Commissioner of Taxation said that 'they involve substantial sums, but not greatly substantial in the context of the broader picture'. So why then does this government feel the need to go back eight years to fix an issue that the commissioner deems 'not greatly substantial in the context of the broader picture'? As yet, the government has not released specific figures, despite asking the parliament to pass legislation that will have a retrospective commencement date causing significant burden for taxpayers although Treasury have indicated the dollar figure is likely to be in the vicinity of $1.9 billion.

Also of significant concern to the coalition is the threat retrospective legislation poses to Australia's sovereign risk profile. This bill will confirm that the transfer pricing rules contained in Australia's tax treaties provide a power through express incorporation into Australia's domestic law, to make transfer pricing adjustments independently of Division 13. Deloitte submitted to the inquiry:

… this is not the approach to international tax law expected from a sophisticated trading nation and does considerable damage to Australia's reputation for fair dealing in international trade and taxation …

Moore Stephens submitted to the inquiry that they are exceptionally concerned at the likely adverse impact and the reputational damage to the Australian Taxation Office and Australia as an investment destination that can be expected to follow in the event that the legislation is backdated as planned.

The coalition is also concerned that the government has not consulted with any partner countries to tax treaties with Australia, and we would like to know whether or not any partner countries have raised concerns as to the perceived impacts this bill will have on the negotiated agreements in such tax treaties.

The American Chamber of Commerce in Australia, which is the peak organisation for representing the interests of American companies undertaking business in Australia, noted in its submission to the inquiry that 'the most significant source of foreign investment in Australia is the United States' and further, that the retrospective nature of the bill will create 'unnecessary uncertainty and business risk, which in tum will negatively affect foreign investment in Australia.' And such comments were not isolated.

The committee also received submissions outlining similar concerns from large and reputable organisations such as the Australian Private Equity and Venture Capital Association, RSM Bird Cameron and the Business and Industry Advisory Committee to the OECD. I note that the passage of the bill was of sufficient interest that the embassy trade adviser of at least one of our major trading nations was present at the hearing, with a view to identifying issues for his nation's businesses operating in Australia.

But, as we on this side of the chamber know, this government is not a government concerned with protecting Australia's sovereign-risk profile or fostering a stable and attractive investment environment to encourage investment within Australia. We are seeing more international investment leave our shores with every bad policy decision it makes.

Another anomaly arising from this bill is that its changes apply only to countries that Australia has a tax treaty with, ignoring entities who are transacting with parties in tax havens such as the Cayman Islands. Taxpayers from countries without such a treaty will be subject to transfer pricing under Division 13—that is, a lower standard—while taxpayers transacting with an associated enterprise in a treaty country, those we should be closest to, will be subject to potential adjustments under this bill and its wider powers—that is, a higher standard. It defies belief, and is hugely concerning that the government would seek to penalise Australia's treaty-partner countries in such a fashion. This bill will impact a range of industries at a time when they least need it. It is not enough for this government to impose on industry a great big mining tax and a carbon tax we were never going to have; no, Labor needs to compound that with the implementation of retrospective, very complex tax legislation.

The coalition strongly believes that the Gillard Labor government have failed to adequately justify the need for the retrospective implementation of this legislation. As Senator Cormann referred to earlier, there is only one possible reason they would be doing it—and that is that they need to chase every rabbit down every hole looking for every last cent they can possibly get, to be able to deliver the so-called elusive 'surplus' they have promised for this financial year to offset the extravagant and wasteful spending that they have undertaken over the last four years, most of which has been ongoing spending which means that we need to have ongoing revenue to offset it.

If the government genuinely thought it needed the money to meet its ever-expanding spending base then it should look to taxes that are prospective and that can allow businesses and individuals to make appropriate plans, put in place appropriate arrangements to make sure that they do meet the tax laws as set up and as proposed and put into law. I think that Senator Cormann has made it clear that we would be more inclined to support this bill if it contained only prospective changes rather than retrospective changes. I agree with him on that, and say that that is what this place should look at, and make sure that we deal fairly with businesses and individuals who are subjected to tax laws in Australia. Stakeholder concerns in this case have not been sufficiently addressed, nor have concerns about the impact that this legislation will have in heightening Australia's perceived level of sovereign risk. This bill will create further uncertainty for our largest taxpayers at a time when they least need it. We on this side of the chamber believe that taxpayers have the right to rely on the law as it has been consistently interpreted by the courts for many years and, as such, we do not support this bill as it currently stands.

Senator IAN MACDONALD (Queensland) (13:29): I will make some small contribution to the debate on the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, but before I do I note in passing how fortunate the parliament is, and indeed Australians are, to have people of the calibre of Senator Bushby and Senator Cormann speaking on such rather technical bills that require a professional understanding of what they are about. I could not help but be impressed by the knowledge of both Senator Cormann and Senator Bushby on these very technical issues. I have to say that, as a small town country lawyer of the past, I profess no expertise at all in taxation matters, particularly in relation to transfer pricing and, unlike Senator Joyce, who was a practising accountant, I do not have that intimate knowledge. But I join my colleagues in opposing legislation which is retrospective in a taxation and financial way. As Senator Cormann and Senator Bushby have clearly pointed out, were these proposals prospective then I suspect the coalition would have supported them. I certainly support the amendments that Senator Cormann will be moving to make them prospective. If they are adopted by the parliament or the Senate then I expect that we will be supporting the legislation. If they are refused, as has been indicated by the Labor Party however, then I would join my colleagues in opposing this legislation.

My principal reason for contributing to the debate on this bill relates to the broad position of foreign ownership, particularly of farming land in Australia. I do not want to go into that in any depth except to say that there is a very good discussion paper out which raises a lot of those issues and which I encourage people to contribute to. I recognise the need to be very cautious about who owns Australia's land and who owns Australia's farming enterprises. I am very conscious of a thought that is gaining precedence around the world. Whilst the last couple of decades have been the decades of the mining boom, there is this belief around parts of the world, which I share, that the next decade could be the decade of the food boom and indeed I think the work being done by some Asian countries in securing their food supplies into the future supports the proposition that the world will more closely look in the years and decades ahead at how we are going to feed ourselves. Many Asian countries and other countries as well are looking to secure sources of food from countries beyond their borders and many are looking at Australia and that has engendered a debate.

Foreign ownership of Australia's farming assets is not new. In fact, in my area up in the north of Queensland, particularly in the sugar areas, I often remind people that the sugar industry was nurtured on foreign money, albeit British and Scottish money, back at the turn of the previous century. There have been big investments by those foreign countries in the sugar industry ever since. We remember the Rum Jungle and Lakelands Downs proposals of the fifties and sixties whereby a lot of foreign money was invested in Australia in agricultural pursuits and we know that many feedlots are owned by Japanese or Indonesian investors and Australia generally welcomes any investment in our agricultural output, be it foreign or local. But I agree with concerns that we have to be careful about just who owns our food and our means of producing food.

The first step, of course, is to find out who owns various pieces of land around Australia, a bit of data that, shamefully, has been missing from our public records for many years and I hope that something will be done at some time to ensure that at least we do know who owns Australia's land. But, generally speaking, I welcome investment in our food production from whatever source but, in some arguments with my very good and learned friend Senator Heffernan, he has alerted me to issues of transfer pricing. I know little about this, I confess, but if there were not some element of transfer pricing relief in the wind then I would also become very concerned about foreign investment in our land which then produces crops which are then taken, in situ almost, from Australia to the investors' homeland and not sold, so there is no price on the way through, meaning that out of the whole exercise Australia benefits little. I will put it the other way: if foreign investors come in and produce any sort of goods here, be they manufacturing or agricultural, and then they sell them in Australia at a price, they will—like everyone else—pay Australian income tax or company tax or payroll tax or any of all the other taxes that every other investor in Australia pays. If that is the case, I do not have a great deal of concern. I do not care whose money is helping to build Australia and build our food production as long as they pay their fair share of tax and as long as they abide by Australia's industrial relations laws and other laws that apply—but there is a suggestion which has been put to me.

I have no capacity to follow through and work out whether what has been suggested to me is accurate or not, but I accept what is said to me and understand that it has been the subject of evidence given at a Senate committee which my friend and colleague Senator Heffernan chaired just recently. If there is nothing in the Australian taxation system at the present time which allows for a transfer pricing component on food and agricultural products grown in Australia but sent overseas, then I think there should be. I think the Australian taxation system should be carefully looked at for that purpose.

I do not speak with a great deal of technical knowledge. My understanding of transfer pricing is confirmed from Wikipedia, a source I often go to. Wikipedia tells me that nearly all countries permit related parties to set prices in any manner with goods produced in the country but permit tax authorities to adjust those prices where prices charged are outside an arms-length range. Rules are normally provided for determining what constitutes such arms-length prices and how any analysis should proceed. Prices actually charged are compared to prices or measures of profitability for unrelated transactions, and parties and the rules generally require that market level functions, risks and terms of sale of unrelated party transactions or activities be reasonably comparable to such items with respect to related party transactions or profitability being tested.

My very untechnical understanding is that in the 1940s and 1950s international carmakers used to make parts in Australia. Rather than sell them at a market price in Australia and pay Australian tax on them, they would ship them to their overseas parent at no cost at all. So the Australian company was making no profits, therefore paying no tax in Australia, but was sending the parts at a next-to-nothing price to the parent company overseas who would then assemble the motor vehicle, sell it and pay tax on the sale price in a country which had a much lower taxation regime than occurred in Australia. The Australian Taxation Office came in and said, 'Right, you can sell to your parent overseas at whatever price you like, but we are going to assume that you sold it at the market price and we are going to tax you accordingly.' So Australia got its fair share of tax on work and products produced in this country. That is what I understood transfer pricing to be.

I am surprised to hear that we do not have a similar regime for food. I am told if, as a foreign company you grow a bushel of wheat in Australia and then you ship it overseas without having a sale price in Australia, you do not pay any taxation in Australia. You do not pay any income tax or company tax in Australia because you have not sold at a profit. I would have thought that the Australian Taxation Office would have had a similar arrangement in place as I understand it does in car manufacturing and other manufacturing industries—that is an assumed price is fixed so that Australia can get a fair share of tax. If that does not apply in agriculture, I want to know why it does not. I suspect that if Senator Heffernan is encouraged to enter this debate he might be able to explain why. I hear from talking to Senator Heffernan in the corridors that there is a bit of discussion about this and so there should be.

My contribution to this debate on transfer pricing—in addition to agreeing with Senator Cormann on the bill before us—was to say to the Australian Taxation Office and to the government, if we do not have rules that apply transfer pricing principles to agriculture, then we should have. I hope that someone in the Australian Taxation Office may be listening to this or may read it in Hansard sometime later and write to me: 'You are completely wrong, Senator Macdonald. What you say is not accurate. We can do that.' I would be delighted if they did because, if they did, that then addresses one element of a very much broader question of foreign investment in Australia's land and farming production activities.

I repeat that, if there is no such transfer pricing arrangement in place, then there should be. The government should be giving that very close attention. I hope the taxation department or someone might say to me, 'Mate, you are wrong and we have got that covered.' If that is the case, then it fractionally confines the debate on investment in Australia's agricultural production. It is still a debate that has to be had. It is still a very interesting issue and one that a very good discussion paper is canvassing. But this element of taxation is one that concerns me and, if it has not been addressed, it certainly does need to be addressed. I support the amendments to be moved by Senator Cormann. If they are not accepted by the government, I will be voting against this legislation.

Senator XENOPHON (South Australia) (13:44): I too have significant concerns about the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 in its current form. It seems that the nub of the argument here is in relation to the whole issue of retrospectivity. I note that Senator Macdonald has carefully canvassed that, as has Senator Bushby.

I understand and support the government's intention in relation to this bill in broad terms but I am very concerned about the retrospectivity clause. I acknowledge the government's explanation that the intention of the bill is merely to clarify what has been the parliament's and the ATO's position since 2004. But the government's argument seems to be quite circuitous, because if this has always been the acknowledged interpretation of these laws then why is there a need for this bill, unless the laws have not been enforced in the way that the government intended? If this is the case, if there is any room at all for misunderstanding or inconsistencies, then backdating these changes to 2004 is unfair. Businesses who acted in good faith and obeyed the law as it seemed to be then and who were not told differently by parliament or by the ATO do not deserve to be hit with what could be an excessive tax bill now. However, if there are corporations who have deliberately exploited loopholes or taken advantage of miscommunications then they need to be brought to account.

It is worth noting that it was the Fraser government who brought in retrospective legislation in relation to the bottom-of-the-harbour tax schemes. But that was a case where it was obvious from a public policy point of view that what was being done was an abuse of the tax system. It was clearly a rort. It was clearly a contrived mechanism to try to avoid tax, and so that retrospective legislation was justified. In this case, if the government is aware of any examples of deliberate exploitation or loopholes, it would go some way towards explaining the need for retrospectivity. But without any evidence to indicate that this is the case, it is hard to see how retrospectivity is either fair or in accordance with the spirit of the law.

I would like to put on the record that I have met with the Federal Chamber of Automotive Industries. They have made submissions to the inquiries into this bill and have approached Treasury with their concerns, and I think they have been quite well articulated by the chamber. The FCAI is concerned that the retrospectivity in this bill will provide uncertainty for the tax years since 2004 and will potentially not only land their member organisations with larger tax bills but also lead to issues with foreign taxation offices. So it will have a cascading effect in terms of its impact on other tax offices.

FCAI represents the automotive industry in Australia, which we all know is facing significant challenges—the high Australian dollar being one of them. The government has spoken many times about the importance of this industry to Australia, and I support those comments. But now the government is potentially placing that industry at risk with these amendments. In the FCAI's submission to the exposure draft of this bill, Chief Executive Ian Chalmers wrote:

FCAI members do not believe it is good tax policy to empower the Commissioner of Taxation to apply the new rules retrospectively to 2004, as advised in the Assistant Treasurer's Press Release. FCAI members have complied with tax legislation in accordance with the tax laws as enacted at the time. Applying the proposed changes retrospectively may result in some members being placed in unfavourable tax positions through no fault of their own. In practice, revenue officials in the foreign jurisdiction may not agree to amend prior year assessments or those assessments may be out of time for amendment. This will result in double taxation without treaty relief.

These are legitimate concerns, and if the government has reasons to believe that businesses, particularly in manufacturing, will not be negatively affected by this legislation then it needs to be open and transparent about that and to share those reasons during this debate; otherwise, I cannot support the retrospective aspect of this bill without safeguards in place.

While I support in general terms what the bill is trying to achieve, the retrospectivity part of it is, for me, a deal breaker. I think it is something that needs to be taken into account. The government has not made a case for retrospectivity. If it is going to pass retrospective legislation then there needs to be a much heavier onus on that, and I do not think that onus has been discharged by the government to date.

Senator HEFFERNAN (New South Wales) (13:48): Following directly on from Senator Xenophon's remarks, the retrospectivity elements of the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 is an admission of fault by the legislators, not the taxpayers. If the thing is flawed then it means there are umpteen holes throughout the tax legislation. We have taken evidence on that in the Senate inquiry into foreign investment and the national interest test to the point where it is now patently obvious that a super fund or whatever has a serious profit advantage in taking capital out of Australia and then bringing it back. When we have got to that stage we have got serious problems. But why go back eight years because the people who drew up the legislation—and it does not matter who the government of the day was—got it wrong? So you punish the people who have obeyed the law, and the people who drew up the faulty legislation probably got a bonus. What sort of ratbaggery is that?

Senator XENOPHON: Or a promotion.

Senator HEFFERNAN: Yes, or a promotion. It is well documented—and you can read the transcript of the various hearings we have had on this, with one as late as last Thursday—that the resources required to audit transfer pricing are not there. It is simply mission impossible. Hence, the article the other day where, globally, there are companies—and these characters are all likeable rogues; as Kerry Packer said, 'You're a mug if you don't try and minimise your tax; God bless him—avoid paying trillions of dollars in tax annually as a result of the mismanagement of transfer pricing.

We saw the Foreign Investment Review Board approve the sale of Myer. We asked FIRB, 'Would you have approved it if you knew that that Myer sale was going to avoid $700 million in tax that was due to Australian taxpayers?' They did not answer it. That is because they are simply not resourced. That sale went through Luxembourg. We missed out on $700 million. There is no end to this. What Senator Macdonald said was not quite correct; I can correct him now: there is tax on food sent out of the country by corporations if it is packaged for business. If it is packaged with the tax exemption for charities, it is not.

As the ABS have pointed out to us many times, what we have got to come to terms with, as much as this legislation is probably designed to try and end some of the leakage, is that there is a serious leakage of Australian revenue, which I have been banging on about for quite a while, through the generosity that we provide to foreign capital. Foreign capital is obviously very much an essential part of the working engine of Australia and has been for many years. It is well recorded over the years that a lot of foreign capital that comes into Australia does a good job and finances a lot of infrastructure. But in agriculture the people that bring it in usually do the investment, spend a lot on infrastructure, which is great for the area and the district it is in, and eventually go out with their tail between the legs because they did not allow for droughts or they did not understand that farmers do not pay themselves overtime and do not pay the board bonuses, and most of these companies have gone broke. But what we are talking about here is serious revenue leakage. The bit that Senator Macdonald spoke about can be captured by transfer pricing. The pieces that cannot be captured are the sovereign investors.

I note that over the weekend Mr Brian Wilson, the new Chairman of the Foreign Investment Review Board, referred to the fact that FIRB may have to reposition itself on the national interest test with regard to operations by sovereignties that are not commercial. If it is not commercial, you are not looking for a return on your money, you can distort the capital market, you can distort the commodity market if you bypass the commodity market, and you also avoid the tax system.

It has been confirmed by the tax office to the committee that passive investment by a foreign sovereign entity is not taxable. They talked about—and it took us an hour on Thursday night to get them to the point—the fact that they would first assess whether there is a business. They said you can be a sovereign business but when it comes to the tax you can get an exemption, even though you are in the business system. Then you can declare your production is for a humanitarian purpose—and we all realise that the coming food challenge barring a human catastrophe, unless we do not arrive at nine billion people by 2050 and 12 billion people by 2070, means we have got a huge problem. Some foreign countries are a wake-up to that and they are going to other countries, and in a lot of countries they are going to they pay as much for bribing government officials, which is the normal way of doing business in Asia, as they do for acquiring the asset. These people have told me that: 'What's wrong with you Australians? Don't you accept bribes the way the others do? Wake up!' We do not, and thank God this parliament does not have endemic corruption like a lot of other parliaments.

When AA Company, Australia's largest agriculturist, comes to the hearing—Senator Back was there at the time—and says, 'We are seriously disadvantaged with onshore financing of super funds into agriculture because we don't get the advantage of going around the loop and going out through some tax haven,' we have got a serious problem because I do not think legislation, however good it is, for transfer pricing is going to fix. If you set your book right and you declare your production in Australia from agriculture is for a humanitarian purpose, and if we know that a place like China, for instance—and you are supposed to be xenophobic to mention that—has to produce half its food by 2070 with 1.8 billion to two billion people from someone else's agricultural resource, and if you declare that is not a business transaction but a humanitarian task, then you can avoid the tax system. What sort of brain-dead proposition for Australia's revenue base is that?

My point is that it is all very well to try and play catch-up back eight or 10 years with retrospective legislation. It does not matter how much legislation you have and how much you amend it, Senator Conroy, if you do not audit it and allow the resources to audit the transfer pricing then the likeable rogues out there are still going to get away with it. You would have to read the transcript of the hearing, and there obviously is not time here to go through the details of what it is all about, but I, like the rest of the opposition, say that retrospectivity is a confirmation of failure. But why would you punish the people that have obeyed the law when you should punish the legislators that legislated shonky legislation that requires us to go back eight or 10 years on transfer pricing?

As I said at the hearing about the guys that are buying the wool, God bless them all, down in the wool country and transferring it direct to a woollen mill overseas, we do not have the resources to know whether it is dags or crutchings or 3A combing. They did not give an answer but they said, 'Well, we'd have to find some average sort of thing.' An average sort of thing? We bought 34 containers of dirt in from China that was supposed to be fertiliser and it got through AQIS and Biosecurity and ended up on a farm at Condobolin. It was supposed to be fertiliser and it was dirt. It was bought on the approved Chinese government site and it took us six months to negotiate with China to get them to agree to take their dirt back home because we did not want it, it was full of rubbish—weeds and bloody seeds and all sorts of things. If you have not got the resources—I will not use the language I would use in the bush—you are kidding yourself if you think you can audit transfer pricing.

The United States have estimated they miss out on $700 billion to $900 million in tax through transfer pricing lack of auditing. It is estimated to amount to $3 trillion on the planet. Where is this to go? I think that we really need to rethink this. I accept there is a serious problem with Australia's leakage of revenue. I guess you employ a smart accountant every time they change the tax law if you are in the business of minimising your tax on the edge of the skating rink, unlike most Australian wage earners who have just simply got to cough up. But do not think that you can tick it off in a bureaucratic way with retrospective legislation on transfer pricing when it is well recorded that it is impossible to do the auditing. If we send out wheat and a foreign entity says that it is feed wheat or AUH2 or something when it is actually AGP1 or APW1, the tax office does not know what it is. It does not have the resources to go and look if they could not look in the containers that were supposed to be fertiliser. To their credit, the reason the Customs and AQIS people did not look was because the bookwork was written in such a way that they did not have to open the containers; in that case the bag sizes in the containers were such that they got a green light corridor through Customs. When the poor cocky up at Condobolin opened the thing and thought, 'Gee, I've saved $200 a tonne on this fertiliser'—

Debate interrupted.

Senator KROGER (Victoria—Chief Opposition Whip in the Senate) (15:34): by leave—At the request of Senator Eggleston, I move:

That the Foreign Affairs, Defence and Trade References Committee be authorised to hold a private meeting otherwise than in accordance with standing order 33(1) during the sitting of the Senate today, from 8 pm.

Question agreed to.

Senator McEWEN (South Australia—Government Whip in the Senate) (15:35): by leave—At the request of Senator Crossin, I move:

That the time for the presentation of the report of the Legal and Constitutional Affairs Legislation Committee on the provisions of the Maritime Powers Bill 2012 and a related bill be extended to 12 September 2012.

Question agreed to.

Senator McEWEN (South Australia—Government Whip in the Senate) (15:37): At the request of Senator Carol Brown, I move:

That the order of the Senate of 15 August 2012 authorising the Joint Standing Committee on Electoral Matters to hold public meetings, be varied by omitting "Electoral and Referendum Amendment (Improving Electoral Procedure) Bill 2012" and substituting "Australian Electoral Commission analysis of the Fair Work Australia report on the Health Services Union".

Question agreed to.

The ACTING DEPUTY PRESIDENT ( Senator Furner ) (17:09): I table responses to resolutions of the Senate listed on today’s Order of Business:

Clerk of the Senate (Dr Rosemary Laing) to a resolution of the Senate of 25 June 2012 concerning women's suffrage in Australia.

The ACTING DEPUTY PRESIDENT ( Senator Furner ) (17:09): I have received a letter from a party leader seeking variations to the membership of a committee.

Senator LUNDY (Australian Capital Territory—Minister Assisting for Industry and Innovation, Minister for Multicultural Affairs and Minister for Sport) (17:10): by leave—I move:

That Senator Edwards be discharged from and Senator Smith be appointed to the Parliamentary Joint Committee on Human Rights.

Question agreed to.

Senator LUNDY (Australian Capital Territory—Minister Assisting for Industry and Innovation, Minister for Multicultural Affairs and Minister for Sport) (17:11): I move:

That these bills may proceed without formalities, may be taken together and be now read a first time.

Question agreed to.

Bills read a first time.

Senator LUNDY (Australian Capital Territory—Minister Assisting for Industry and Innovation, Minister for Multicultural Affairs and Minister for Sport) (17:11): I move:

That these bills be now read a second time.

I seek leave to have the second reading speeches incorporated in Hansard.

Leave granted.

The speeches read as follows—

FISHERIES LEGISLATION AMENDMENT BILL (NO.1) 2012

The Fisheries Legislation Amendment Bill (No.1) 2012 will amend the Fisheries Management Act 1991 and the Fisheries Administration Act 1991.

The main amendments will introduce electronic monitoring (e-monitoring) to Australian boats that are authorised to fish under concessions and scientific permits granted by the Commonwealth. E-monitoring can include cameras, global positioning systems and sensors and can generate a range of visual and non-visual information for monitoring fishing and related activities.

Australian fisheries are a valuable natural resource and must be carefully managed to ensure sustainability. Commercial fish catch contributes more than $2 billion per year to the Australian economy. Processors, marketers, retailers, consumers and many allied small businesses benefit directly or indirectly from the industry and increase its contribution to the economy.

As well as protecting the economic value of commercial fish stocks, Australians expect species that are valuable to the economy will not be over-exploited. Accurate scientific data is essential to set catch limits on species to protect their status and maximise the economic returns to Australia. Furthermore, Australians expect that threatened, endangered and protected species, such as sea-lions, dolphins and albatrosses, as well as the marine environment, will be protected from damage. E-monitoring of fishing activities is a cost effective way to check that fishing activities are not damaging these species and habitats.

The Australian Fisheries Management Authority (AFMA) is responsible for managing Commonwealth fisheries, which, in general terms, are waters more than three nautical miles from the Australian coastline. The Commonwealth also manages some fisheries within three nautical miles, under agreements with the states and the Northern Territory.

It is vital that AFMA has access to accurate, comprehensive and timely data on the state of fish stocks, and on the impacts of fishing on both fish stocks and the marine environment, to manage fisheries. AFMA also needs to have accurate data to monitor whether fishing activities meet legal requirements.

E-monitoring will provide better, cheaper data. This has been proven by trials of e-monitoring in several Australian fisheries and overseas, and by implementing e-monitoring on some boats in waters off South Australia. Trials and cost-benefit analyses have shown that the more data that is required for a fishery, the cheaper it will become to use e-monitoring systems, rather than observers. E-monitoring also has the benefit of generating more comprehensive data, which complements the information we get from observers, vessel monitoring systems and logbook reporting.

The bill formalises e-monitoring and its use as a fisheries management tool. Specifically, the bill gives AFMA an express power to impose e-monitoring obligations on Commonwealth fishing concession and scientific permit holders. In line with AFMA's legislative objectives, AFMA will be able to require concession and scientific permit holders to monitor not only fishing, but also related activities, such as the impact of fishing on protected species and the broader marine environment.

The bill makes it an offence to hinder the operation of e-monitoring equipment, or to modify, damage, or destroy e-monitoring data. These offences reflect the need to protect the integrity of the e-monitoring scheme and ensure that the data is accurate and complete.

Further to this, the bill adds to the list of matters about which AFMA can issue an evidentiary certificate. The certificates act as prima facie evidence and therefore reduce the time and costs that might otherwise be spent in proving straightforward procedural or administrative matters in court.

Other amendments in the bill will make it clear that fishing concession holders are responsible for the actions of the masters and crew of their boats; will enable the AFMA to waive levies payable for statutory fishing rights that are surrendered; and will make provisions in the legislation about implementing fisheries closures clearer, more consistent and simpler to administer.

The bill will help to hold fishing concession or permit holders responsible for the actions of the masters or crew employed on their boats. Currently, it is too easy for corporations or other persons, such as those that hold concessions or permits for fishing, to claim they are not responsible for the actions of their directors, employees or agents. The amendments will place more responsibility on concession or permit holders to take reasonable precautions and exercise due diligence to ensure that the master and crew comply with their legal obligations.

The bill will allow AFMA to waive a levy payable in respect of a statutory fishing right if the right is surrendered without any fishing having taken place under it. This is already allowed in respect of fishing permits. In this situation, the holder has not and will not benefit from the statutory fishing right in the period to which the levy applies and should therefore be able to surrender it without payment.

The bill will also ensure that fishers are always notified in writing of decisions to close a fishery or part of a fishery to fishing, or to change or revoke such decisions. It will also clarify how a 'part of a fishery' can be defined; for example, by reference to a place, a time or a type or quantity of fishing gear. It will also allow AFMA to make emergency fishery closures without prior consultation, although, because they are legislative instruments, emergency closure directions will still be subject to parliamentary scrutiny.

The amendments in this bill will help ensure the sustainably of Australia's fisheries and will provide greater certainty for fishers and the community that Australia's fisheries are being very well managed.

I commend this bill to the Senate.

HEALTH INSURANCE AMENDMENT (EXTENDED MEDICARE SAFETY NET) BILL 2012

More than ever before, we are making the most of every precious health dollar.

We are being guided by the evidence and investing wisely.

We are finding efficiencies and returning the benefits to patients.

Where the evidence said things weren't working, the Government's done things differently. And the bill before the house is part of this. We've looked at the evidence on how the Extended Medicare Safety Net works, and it says we need to close a loophole to protect the integrity of the system.

This bill amends the Health Insurance Act 1973 to allow the application of Extended Medicare Safety Net benefit caps to apply where more than one Medicare service is performed on the same patient on the same occasion and is deemed to be 'one professional service'.

This bill makes an amendment to the Extended Medicare Safety Net program that was introduced through the Health Legislation Amendment (Medicare) Act 2004.

The Extended Medicare Safety Net provides individuals and families with an additional rebate for their out-of-hospital Medicare services once an annual threshold of out-of-pocket costs for out-of-hospital services is reached.

Out-of-hospital services include GP and specialist attendances and services provided in private clinics and private emergency departments.

Once the relevant annual threshold has been met, Medicare will pay for 80 per cent of any future out-of-pocket costs for Medicare eligible out-of-hospital services for the remainder of the calendar year, except for a number of services where there is an upper limit on the benefit payable through the Extended Medicare Safety Net, known as the 'EMSN benefit cap'.

The Extended Medicare Safety Net program was amended through the Health Legislation Amendment (Extended Medicare Safety Net) Bill 2009, which amended the Health Insurance Act 1973 to enable the Minister to determine, by legislative instrument, the maximum benefit payable under the Extended Medicare Safety Net for a specified Medicare Benefits Schedule (MBS) item.

The items that carry an EMSN benefit cap and the cap amount for each item is set out in the Health Insurance (Extended Medicare Safety Net) Determination 2009. The Health Insurance Act 1973 specifies that a determination made by the Minister to place or amend an existing EMSN benefit cap must be approved by the resolution of each House of Parliament before it can become effective.

Since 1 January 2010, EMSN benefit caps have applied to selected MBS items. These include assisted reproductive technology services, obstetrics services, pregnancy related ultrasounds, cataract surgery, hair transplantation and varicose vein surgery. A further 16 items have since been introduced into the MBS with EMSN benefit caps. Caps were placed on these items to maintain consistency with the existing capped items, or based on recommendations made by the Medicare Services Advisory Committee regarding cost-effectiveness.

The current provisions of the Health Insurance Act 1973 do not allow EMSN benefit caps to apply where more than one item is claimed by the same patient on the same occasion and the items are deemed to constitute one professional service. An example of this occurs under Section 15 of the Health Insurance Act 1973 which describes the Multiple Operations Rule.

There are, of course, many instances where claiming for multiple operations on the same occasion is appropriate. For instance, patients can benefit from having more than one operation at the same time because they do not need to have second anaesthetic. An example is where a patient is having several skin cancers removed by surgical excision. Another is where varicose vein surgery is performed on both legs.

Under the Multiple Operations Rule there is a reduction in the amount of Medicare benefit payable where two or more operations are performed on the same patient on the same occasion, to recognise the efficiencies gained when several procedures are provided on the one occasion. Under legislation, where the Multiple Operations Rule applies, the operations are deemed to be one professional service, rather than a collection of MBS items. However, EMSN benefit caps can only apply to an MBS item and not a professional service.

This means that under the current legislation, where doctors perform multiple procedures on the same patient on the same occasion, any EMSN benefit caps that apply to the individual MBS items that are performed within the operation do not apply, and there is no limit to the Extended Medicare Safety Net benefits that are payable for that professional service. This is not what was originally intended when Parliament approved selected MBS items to have an EMSN benefit cap.

As announced in the 2012-13 Budget, it is proposed that EMSN benefit caps be applied to a further 39 selected MBS items and all consultation services from 1 November 2012. These items have been selected to reduce the Government's exposure to subsidising excessive fee inflation by some doctors, or where there is a risk that practitioners may shift fees on to uncapped items. Thirty five of the items selected to be capped on 1 November 2012 fall under the definition of an operation for the purposes of the Multiple Operations Rule and therefore may be deemed to constitute 'one professional service'.

Currently a doctor can avoid EMSN benefit caps by performing other operations at the same time. If the Government cannot be certain that EMSN benefit caps will apply to selected items, it may not be in a position to introduce funding for important new high cost technologies.

This bill will ensure that where items are deemed to constitute 'one professional service' and all of the original MBS items that are part of that service are capped, the EMSN benefit caps will apply. This will ensure that the full savings announced in the Budget are realised.

Other provisions – family registration for the EMSN

This bill also includes the provision to reduce the administrative burden on patients by removing the requirement for families to confirm the members of their family for Extended Medicare Safety Net purposes in writing. Currently, when families are nearing the Extended Medicare Safety Net threshold, the Department of Human Services – Medicare, contacts the person who registered the family and asks them to confirm in writing the members of their family to ensure that the correct out-of-pocket costs have been attributed to the family Extended Medicare Safety Net threshold. Providing confirmation in writing increases the time families must wait to receive their Extended Medicare Safety Net benefits.

This amendment allows the Chief Executive of Medicare to determine the appropriate manner in which this information is provided and will allow families to confirm their family composition more quickly and easily. Patients will still be required to confirm their identity before this confirmation can take place to ensure the information provided is accurate.

This bill will allow Government to responsibly manage expenditure on Extended Medicare Safety Net and reduce the administrative burden on families. This is important for supporting the sustainability of the Extended Medicare Safety Net so singles and families can continue to receive additional assistance with their out-of-pocket costs.

I commend this bill to the Senate.

Debate adjourned.

Ordered that the bills be listed on the Notice Paper as separate orders of the day.

Senator LUNDY (Australian Capital Territory—Minister Assisting for Industry and Innovation, Minister for Multicultural Affairs and Minister for Sport) (17:12): I move:

That these bills may proceed without formalities, may be taken together and be now read a first time.

Question agreed to.

Bills read a first time.

Senator LUNDY (Australian Capital Territory—Minister Assisting for Industry and Innovation, Minister for Multicultural Affairs and Minister for Sport) (17:12): I move:

That this bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard.

Leave granted.

The speech read as follows—

MARITIME POWERS BILL 2012

The maritime domain poses particular challenges to the effective enforcement of laws. Enforcement operations in maritime areas frequently occur in remote locations, isolated from the support normally available to land-based operations and constrained by the practicalities involved in sea-based work.

Commonwealth Officers across a range of portfolios work tirelessly on the community's behalf to enforce Australia's maritime laws. This work often takes place in treacherous conditions. We owe it to these hard working Australians to provide a legal framework that fully supports their commitment by being tailored to the conditions and recognising the inherent difficulties of the environment.

Under the current legislative structure, operational agencies use powers contained in at least 35 separate Commonwealth Acts. This structure is inefficient and can lead to operational difficulties for the primary on-water enforcement agencies.

The Government has undertaken an extensive review of existing arrangements. The product of that review is the Maritime Powers Bill. The Bill provides smarter and simpler approach to maritime enforcement through a single maritime enforcement law. This single law consolidates and harmonises the Commonwealth's existing maritime enforcement regime. The powers contained in the Bill are modelled on powers currently available to operational agencies.

Outline of Bill

The Bill contains a comprehensive framework for enforcing Australia's laws at sea.

The Bill establishes a system of authorisations under which a maritime officer may exercise enforcement powers in the maritime domain.

In addition to providing the necessary operational flexibility, this system of authorisations puts in place a range of safeguards to make sure maritime enforcement powers are authorised and exercised appropriately and for a proper purpose.

A key safeguard is the requirement for the exercise of powers to be authorised on specific grounds by a senior maritime officer or member of the Australian Federal Police.

This provides clarity around who must make decisions to take enforcement action and ensures appropriate oversight in relation to the exercise of powers.

The types of authorisations available under the Bill will cover the full variety of situations which arise in the maritime environment, including fishing, customs and migration matters.

Once an authorisation is in force, a maritime officer generally has access to the full suite of powers set out in the Bill.

The powers contained in the Bill are based on powers currently available to operational agencies and under the Bill the role and functions of these agencies will not change.

The powers include searching things and people, seizing and retaining things, boarding of vessels and requiring persons to cease conduct that contravenes Australian law.

Enforcement powers under the Bill will be exercised by officers of the Australian Defence Force, Customs, the Australian Federal Police, and other persons appointed to conduct enforcement and monitoring activities in the maritime environment.

Conclusion

The Australian Government is committed to ensuring that Australia's laws are monitored and enforced in the maritime domain. The unique aspects of the maritime environment merit a tailored approach to maritime powers, helping to ensure flexibility in their exercise and to assist maritime officers to deal with quickly changing circumstances and often difficult and dangerous situations.

As the Leader of the House noted recently, we are getting on with the business of government. These reforms are just one aspect of the Government's work to provide Australia with a modern legal framework.

This Bill will streamline and modernise Australia's legal framework for maritime enforcement and thereby support the hard working Australians who work on our behalf to uphold Australia's maritime laws.

MARITIME POWERS (CONSEQUENTIAL AMENDMENTS) BILL 2012

The Maritime Powers Bill 2012 and the Maritime Powers (Consequential Amendments) Bill 2012 provides a smarter and simpler approach to maritime enforcement through streamlining the framework for use by our on-water enforcement agencies.

Where existing maritime enforcement powers overlap with powers in the Maritime Powers Bill, this Bill will reduce duplication.

The Bill has been the subject of an extensive consultation process with agencies to ensure that the consolidation exercise maintains current operational power for agencies.

Debate adjourned.

Senator MADIGAN (Victoria) (17:13): Since 1989 the ATO has obtained many billions of dollars of additional revenue for Australia as a consequence of legislation designed to make multinational companies pay their fair share of tax for the revenue and profits they earn in the Australian economy.

This retrospective amendment is intended to ensure that companies are not able to avoid their taxation obligations. In particular, transfer pricing between affiliates makes a joke out of our company tax rate of 30 per cent, which has been the subject of various promises by the major parties. The fact is that company tax falls heavily upon small- and medium-size Australian business and can be avoided through double tax treaties by major multinational companies.

The Age and the ABC reported some years ago about the Japanese strategy in the purchase of cattle feedlots. Basically, once they had purchased the feed lots they sold cattle from them at a loss to Japanese trading companies, who then resold to associated companies in Japan for sale to retailers. The profit was taken in Japan instead of Australia. This meant that Australian meat producers could not compete in export markets to Japan. Then there is the example of the closure of a major Japanese store in Melbourne, Daimaru, after 10 years of operation in Australia where they sourced all of their goods from their parent company. They made a loss every year and never paid tax, I believe. The closure of Nissan occurred with very significant tax losses, which again enabled Nissan to import motor vehicles and components and offset any profits against the losses that had occurred during the manufacturing period.

Whenever any company that is owned by a multinational parent shifts from local manufacture to imports, it creates an opportunity to manipulate transfer prices to maximise the taxation position of the corporation or another affiliate with a favourable taxation position. Multinational affiliates always have the opportunity to use double tax treaty rates of 10 per cent and 15 per cent instead of paying tax on profits of 30 per cent. This is done by simply characterising profits as payments for the purchase of intellectual property or payment of interest on loans rather than the remittance of profits to the parent company. This was a major reason for Ireland's manufacturing resurgence, which has now utterly collapsed. Multinational companies, particularly American companies, sold intellectual property such as manufacturing know-how, brand names and marketing systems to the Irish affiliate and then paid tax to Ireland at 12 per cent. I could go on and on. No matter what others might suggest, the world of taxation is not a level playing field and what we should remember is that Australia is home to 10,000-odd multinational affiliates.

Is the legislation detrimental to Australian manufacturing? I know some suggest it is, but I believe it is more detrimental to our manufacturers not to introduce these changes. After all, Australian manufacturers do not have the privilege of avoiding tax all over the world. That is what price transfer means. Retrospective legislation is normally a very bad idea. However, when there are significant threats to the national revenue and budgets, such legislation is justifiable. The best example is the 'bottom of the harbour' legislation, which basically involved getting rid of accounting information, often thrown into the bottom of Sydney Harbour, and then giving the ATO insufficient information to mount a case. That event resulted in massive retrospective claims for taxation and the jailing of some accountants. Transfer pricing, if allowed to proceed without challenge from the ATO, would actually involve a much greater sum of revenue loss than occurred in the case of the 'bottom of the harbour' tax schemes. The attitude at that time was that retrospective legislation is bad in general except when it prevents the development of a major hole in the national revenue that was completely unintended.

This legislation follows a substantial legal case which the ATO lost and which requires the government to introduce legislation designed to ensure that the ATO follows traditional transfer pricing methodologies introduced after some 30 years of discussion and debate by the member countries of the OECD. It is good that we are establishing legal precedents for transfer pricing that create certainty for companies, for the ATO and for the Australian taxation revenue base. The legislation is an important element in Australia's armoury of taxation measures designed to ensure that our taxation system is competitive, fair and equitable.

This legislation is valuable because it ensures Australian businesses that are subsidiaries and affiliates of multinational companies know where they stand. We need this certainty if we are to be a major player in the world economy that does not disadvantage its own manufacturers and their service providers in what is probably the most important area of commercial taxation law. All around the world multinational companies gain a competitive advantage against local manufacture through transfer pricing. That is why the OECD and all the other major manufacturing countries have common rules against it. All the government is trying to do is to fix up a hole in the legislation that has been exposed by a Victorian Supreme Court decision. For this reason I will be supporting the legislation.

Senator FARRELL (South Australia—Parliamentary Secretary for Sustainability and Urban Water) (17:19): I thank Senator Madigan for his contribution and support, and I thank all of those other senators who have spoken in respect of the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012. This bill ensures that Australia has an effective and internationally consistent transfer pricing rule. It confirms that transfer pricing rules contained in Australia's tax treaties and incorporated into our domestic law provide assessment and authority in treaty cases. These changes apply to income years commencing on or after 1 July 2004, that being the first income year following the parliament's last statement demonstrating the longstanding legislative intent that the law operate in this way. We have discussed the considerable evidence across the decades that parliament intended the treaty transfer pricing rules to operate in addition to our unilateral transfer pricing rules since at least 1982.

The amendments contained in this bill are also entirely consistent with the Commissioner of Taxation's long-held and public expressed view of the law. I want to emphasise that the potential impact on taxpayers has been very carefully considered. Importantly, these provisions can only apply where a tax treaty is applicable and therefore a party affected by these measures will be able to access the treaty mechanisms designed to relieve any double taxation that could arise. Settled cases will not be opened as a result of these amendments, and the transitional rules will ensure that the penalty provisions of the income tax law apply as though this bill were never enacted. The government has engaged extensively with the business community in relation to this measure, and the measure is not wholly supported by multinationals and their advisers. Given that this is a robust integrity measure, this is not altogether unexpected.

That said, however, the bill has greatly benefited from the inclusion of some important features following the consultation by the minister. In particular, the bill clarifies the interaction between the transfer pricing and thin capitalisation rules. The bill also provides direct access to OECD guidance material in interpreting the rules, avoiding the need to get costly expert advice on whether such guidance may be used. This reflects the best international thinking on transfer pricing.

Other provisions of the bill support these key features and ensure the provisions work and interact appropriately with the rest of the income tax law. I therefore commend the bill to the Senate.

Question agreed to.

Bill read second time.

Senator CORMANN (Western Australia) (17:23): The opposition opposes item 12 in schedule 1 in the following terms:

(2) Schedule 1, item 12, page 13 (line 16) to page 14 (line 29), TO BE OPPOSED.

This goes to the whole issue of the retrospectivity of this legislation. There is one reason that the government is moving this legislation here in the Senate today, and that is it is concerned that the Australian Tax Office has acted contrary to the legislation passed by this parliament. The government is concerned that the Australian Tax Office has collected revenue which it was not entitled to collect according to the legislation passed by this parliament in years gone by.

The government's solution to this is to change tax laws retrospectively, going back all the way to 1 July 2004. That is very bad practice for the range of reasons I outlined in my speech in the second reading debate. Fundamentally, taxpayers cannot be expected to have complied with tax laws that did not exist at the time certain decisions were made that are relevant to the tax liabilities those taxpayers are exposed to. It is very important for there to be certainty and predictability in the way our tax laws are administered on a day-to-day basis. Taxpayers have to be able to expect that they are only required to comply with the laws as they stand at the time they make certain decisions that will have a tax consequence for them. If we can make changes eight years after a particular investment decision has been made, if a government can make a decision in 2012 which will essentially increase the tax liability in relation to decisions made in 2004, 2005 and 2006, where will it end?

At the end of the day, what we are saying is that it does not matter how wrong the tax commissioner gets it; the tax commissioner can have whatever extensive interpretation of the tax laws that he likes and he can manifestly stretch as far as he wants. But instead of saying, 'No, the tax commissioner should actually administer the law the way it was passed by this parliament,' and instead of saying, 'The administration of the laws passed by this parliament should be consistent with the intent of what was passed through this parliament,' all we are going to do here in this parliament every time the tax commissioner—or any other public servant for that matter—decides to go beyond what the legislation passed by this parliament intended is to fix these things retrospectively. We are going to make sure that the legislation plays catch-up with whatever decisions a particular public servant has decided to make on a particular day.

That is not the way for our legislative processes to operate. That is why we have said, very constructively, that if the government's intention is for the tax laws in relation to transfer pricing to operate consistent with what is in this legislation and what should happen appropriately, then that change should be a prospective change. It should not be a change that is applied going back eight years. Now, the discussion has been had. We have had the debate here in the Senate and, if it is the view of the parliament as a whole that the tax laws in relation to transfer pricing should be changed to reflect what is in this legislation, then everybody now understands what the circumstances are going to be moving forward from here. But people back in 2004 and back in 2005 could not possibly know that the Senate on 20 August 2012 would be having a debate where it wanted to change the tax laws all the way back to 2004 in relation to these sorts of matters. It is, quite frankly, a very bad way of progressing tax laws in this country.

Of course there is only one reason this is happening and that is the government are short of cash. They are desperately casting around for more cash wherever they can get hold of it. Of course, they do not want to lose out on any cash even if they are not entitled to it, consistent with the laws as they existed at the time. This is why we are having tax grab after tax grab, and we are now having retrospective tax grab after retrospective tax grab.

As I said in my second reading remarks, the retrospective tax changes are bad, as a matter of principle, because they have significant implications for bargains that were struck between taxpayers who made every effort to comply with the prevailing law as it existed at the time a particular agreement was entered into. They can expose taxpayers to penalties in circumstances where taxpayers could not possibly have taken steps at the earlier time to mitigate the potential for penalties to be imposed, and they may change a taxpayer's tax profile, which in turn can materially impact the financial viability of investment decisions and the pricing of those decisions. And, of course, they do increase Australia's level of perceived sovereign risk.

Every government and every parliament has the prerogative of changing tax laws. We can have political debates about the merits or otherwise. This is a very high-taxing government. We know that. We know that the Labor Party cannot manage money. We know that they are always short of cash. We know that they will always come up with one new ad hoc tax after the other. But, ultimately, these are matters for the democratic process to sort out. We have elections, and hopefully at the next election people will vote for a low-taxing, low-spending, fiscally responsible government. We hope that is going turn out for the betterment of all Australians. But that is to legislate for tax changes moving forward. When you have a government that retrospectively wants to put its hand into people's pockets—

Senator Farrell interjecting—

Senator CORMANN: Senator Farrell is interjecting and has mentioned the GST. There could not have been more warning in relation to the GST. Whatever your views on the merits or otherwise, the GST was fundamental tax reform. Not only was it there for all to see before it was implemented but it was also announced before the then government went to an election. That was a government that felt so strongly about the merits of tax reform that it put it to the Australian people before the election—which reminds me of recent events in which the current Prime Minister, who makes a habit of this, went to the last election explicitly ruling out that there would be a carbon tax. 'There will be no carbon tax under the government I lead,' she said, only to turn around after the election and impose one on the unsuspecting Australian families and small businesses of Australia who will be facing increasing cost-of-living pressures and an increasing cost of doing business as a result.

But I am getting distracted by the interjections of Senator Farrell on behalf of the government. The fundamental point is this: Senator Farrell talks about the GST. The GST, whatever your views on the merits or otherwise of this substantial policy, was a best practice model of how to progress a piece of legislation in an accountable and democratically transparent way.

On behalf of the coalition I fundamentally object to this particular part of the legislation. The government is telling us: 'The tax office got it wrong in the way it has interpreted the tax laws in our land. The tax office, we believe, has erred in the way it has interpreted tax laws, and so we have, we believe, collected more revenue than we should have. The tax office has collected more revenue from Australian and other businesses than it should have, but rather than change the practice of the tax office we're going to say the legislation has got to be changed retrospectively.' That is not an appropriate way for government to act. If you want to encourage free enterprise, and if you want to encourage people to take risks, make investment decisions, invest in Australia, create jobs, create business opportunities and, essentially, help us grow our economy and create economic prosperity around Australia, then this is exactly the wrong way to go about it. Not only does this government put its hands into people's pockets via multibillion dollar new tax grabs moving forward, like the carbon tax, but it also puts its hands into people's pockets for events going back as far as 1 July 2004.

The vote will be very interesting. I and the coalition will be voting against the printing of schedule 1, item 12, page 13, line 16 to page 14, line 29, because we do not want that particular part of the bill to stand as printed. I flag that, should coalition amendment (2) be unsuccessful, amendment (1) will become redundant and I will seek to proceed with amendment (3). With those few words—unless Senator Farrell wants to provide further provocations on behalf of the government—I conclude my remarks.

Senator FARRELL (South Australia—Parliamentary Secretary for Sustainability and Urban Water) (17:33): I cannot resist that invitation. Very briefly, from what I understand, Senator Cormann's position is that the opposition does not disagree with the cross-border transfer pricing position that existed as it went back to 1982, and so for the vast bulk of the period of the Howard government. Nor does the opposition disagree with it going forward into the future. The dispute here is really about the question of the retrospectivity of this particular piece of legislation.

Senator Cormann is right: I did intervene to mention the GST. This was not to talk about the GST generally but to talk about the fact that in the Tax Laws Amendment (2006 Measures No. 3) Act 2006 the previous Howard government did, in fact, make six years of retrospectivity with respect to a particular aspect of the introduction of the GST. So this is not the first time a government—Liberal or Labor—has introduced retrospective legislation. It is done very much in the exception, but the government believes that this is one of those rare cases where it is appropriate in these circumstances to apply a retrospective approach.

Senator Cormann: Two in two months.

Senator FARRELL: That is still rare, Senator Cormann. Given the vast number of bills that this government has introduced and passed since it came to power in 2007, that continues to be a very rare event. I indicate that the government does not support the amendment and will be voting in favour of the resolution.

The TEMPORARY CHAIRMAN ( Senator Furner ): The question is that item 12 in schedule 1 stand as printed.

Question agreed to.

Senator CORMANN (Western Australia) (17:36): I move:

(3) Schedule 1, item 14, page 15 (lines 6 to 8), omit the item, substitute:

14 Application

The amendments made by this Schedule apply to income years starting on or after the say this Act commences.

I refer to the same argument that I put in talking to amendment (2), which is that the change to the taxation arrangements in relation to cross-border transfer pricing should be prospective only. Of course this amendment—which would amend schedule 1, item 14, page 15 (lines 6 to 8)—seeks to omit that particular item and substitute an application arrangement where the amendments made by this schedule apply to income years starting on or after the date this act commences. We think it is good and appropriate practice for governments and parliaments to make changes to tax laws that are prospective and not retrospective, in particular in these sorts of areas that are sensitive to Australia's capacity to attract overseas investment. Attracting overseas investment is very important for us to continue to develop our economy to ensure we reach our full potential moving forward. With those few words, I commend this particular amendment to the Senate.

The TEMPORARY CHAIRMAN ( Senator Mark Bishop ): The question is that amendment (3) on sheet 7261 be agreed to.

Question negatived.

Senator CORMANN (Western Australia) (17:38): In order to assist the Senate, I have not been calling for divisions and I will not be calling for a division on the substantive bill either. I place on the record, given that those very sensible and constructive amendments that the coalition has moved in relation to this bill were unsuccessful, the coalition will be voting against this bill. But to assist the Senate, I will not be calling a division.

The TEMPORARY CHAIRMAN: Thank you for that advice, Senator Cormann.

Bill agreed to.

Bill reported without amendment; report adopted.

Senator FARRELL (South Australia—Parliamentary Secretary for Sustainability and Urban Water) (17:39): I move:

That this bill be now read a third time.

Question agreed to.

Bill read a third time.

Senator BRANDIS (Queensland—Deputy Leader of the Opposition in the Senate) (17:42): The coalition supports the Criminal Code Amendment (Cluster Munitions Prohibition) Bill 2010 as another positive step in encouraging the action initiated by the Howard government. Australia was one of the original signatories to the Convention on the Prohibition of the Use, Stockpiling, Production and Transfer of Anti-Personnel Mines and on Their Destruction. In 1998, the Australian parliament gave effect to the mine ban convention which required the Australian Defence Force to destroy Australia's stockpile of antipersonnel landmines, and the Howard government took this step several years before the necessary deadline. The Howard government also supported these initiatives with funding of $100 million over 10 years. This was backed up in 2005 with a further $75 million over five years.

The coalition believes that the Criminal Code Amendment (Cluster Munitions Prohibition) Bill 2010 is another positive step in continuing the action initiated by the Howard government. We welcome the fact that the Australian government was among the initial signatories to the convention on cluster munitions in Oslo in 2008. On 18 November 2009, the member for Curtin, the Hon. Julie Bishop, stated the coalition's support for the prompt ratification of the convention. The convention, she said:

… will expand international efforts to reduce the harmful impacts of explosives on civilians. It will also help promote the development of those countries worst affected, many of which are in our region. … It is a sad reality that the region in which Australia finds itself has fallen victim to the scourge of landmines and unexploded ordnance. Areas that could be used for agricultural or commercial activity, for example, continue to lie unused.

The coalition is pleased to note that the current bill addresses the concerns raised by the Department of Defence and the recommendations of the Senate Standing Committee on Foreign Affairs, Defence and Trade in its inquiry into the prohibition of cluster munitions. That inquiry took place in 2006.

It is crucial to our long-term national security interests and to the safety of Australian Defence Force personnel that we maintain the right to retain or acquire a limited number of munitions for the development of and training in cluster munition detection, clearance or destruction techniques, or the development of cluster munition countermeasures. Importantly, the bill also protects Australia's right to engage in joint military operations with non-state parties.

The coalition supported this bill in the House of Representatives. We do not plan to seek amendments in the Senate. The Senate Foreign Affairs, Defence and Trade Legislation Committee recommended that the bill be passed. The government's submission to the inquiry stated that the bill was consistent with the earlier recommendations of the Joint Standing Committee on Treaties.

I note that the Greens propose amendments to the bill in the belief that the bill does not reflect the spirit of the convention. In 2006, the Greens and Democrats co-sponsored the Cluster Munitions (Prohibition) Bill 2006 to prevent ADF members from deploying cluster munitions. It was referred to the Senate Standing Committee on Foreign Affairs, Defence and Trade, which recommended that the bill not be passed—that is, the Greens-Democrat bill. In its submission to the committee concerning that bill, the Department of Defence noted, 'If enacted, the Greens bill will put Australia at a serious military disadvantage in future conflicts which would be detrimental to our national interest.'

It is the coalition's view that the bill now before the Senate addresses these concerns and that the purpose of the present bill would be substantially thwarted were the Greens amendments to be passed. For these reasons, the coalition support the bill and will oppose the proposed amendments.

Senator LUDLAM (Western Australia) (17:46): The Greens do not support this deceptive, misguided and outright offensive bill—the Criminal Code Amendment (Cluster Munitions Prohibition) Bill 2010. I will address some of the comments that Senator Brandis has just made. It is interesting that, by way of supporting his argument about why the Senate should not look at the Greens amendments, he spoke of a bill that is not even before the parliament. When we get to the committee stage, I will address the detailed arguments and the reasons I believe this bill should pass this chamber if it is amended. But, in its present form, we are better off without the bill. Considering the role that the Australian government has played, or the role it said it has played, in supporting the outlawing of these hideous weapons, that is a sad thing to have to come in here and say—that not just Australia but the global community and those who have worked for a decade to bring this convention into force are now saying that they would rather Australia did not ratify it because of the example this sets. This is not a point of view that the Greens have arrived at alone.

As an Australian Greens senator and as a member of the crossbench, sometimes I feel I come in here to try to explain in detail my point of view on a bill I strongly oppose, so that senators from other parties will understand why it is that we oppose the bill. In this instance, that is not why I am going to bother. I know very well that senators from both the old parties also deeply oppose this bill. One of the reasons that it has taken so long to bring this bill to the chamber is that there was substantial dissent both from the coalition and from the Labor caucus about what they had been hearing about the bill and its inherent flaws. So I do not feel as though I need to explain to other senators why we should not be voting for this bill in its present form. Nonetheless, I am going to do so to place it on the record so that others looking back at the Hansard in years to come will understand that this chamber voted for this bill in the full knowledge that it is badly flawed. Human Rights Watch and the Harvard Law School said:

The Bill creates a defense for many acts during such operations that on their face violate the convention.

Not only does the drafting of this bill violate the spirit of the convention; it violates its letter. In fact, the Australian government is attempting to pass legislation that would bring us into accord with the convention—and no doubt there will be a press release from the minister either very late tonight or sometime tomorrow morning, depending on when this bill passes, cheerleading the government's accession to the convention. The government should not be too surprised at the total absence of applause from the arms control community and those who have been shepherding and watch-dogging this convention from the day it was conceived to these sorry events. Former Prime Minister Fraser says:

… the government has drafted legislation scattered with alarming loopholes that, to my mind, directly undermine the spirit and intention of the convention.

General Peter Gration, former Chief of the Defence Force, said:

… the wording used in our legislation goes well beyond [that required for interoperability with US] and in fact it doesn't follow a couple of the key things that the convention is about …

That is a former CDF—someone who cares deeply about Australia's military capabilities. Paul Barratt, former secretary of the defence department, said:

Legislation in these terms is clearly at odds with a convention whose central purpose is to prevent the use of cluster munitions …

Mr Acting Deputy President Bishop, you guided the Senate Foreign Affairs, Defence and Trade Legislation Committee, if I am not wrong, in its examination of this bill, which I guess was more than a year ago now. It was referred to that committee because the Scrutiny of Bills Committee said the legislation in its present form is actually strikingly at odds with what the Joint Standing Committee on Treaties had to come up with. Although we will be alone, I suspect, later tonight or tomorrow when this bill is put to the vote in terms of numbers in the chamber—I have not consulted with the crossbench—we are not alone in terms of the numbers of people whose hopes have been violated by the government choosing to bring this bill back in this unamended form.

Why is this important? I believe many senators, apart from me and some of my Greens colleagues, had the good fortune to meet Soraj Ghulam Habib, an Afghan boy who lost both his legs and part of one of his hands as a child and was left for dead. His cousin was killed in the same blast. These weapons are indiscriminate. If you wanted to design a weapon that targeted civilian children, I am not sure you could come up with something better than these devices. When senators stand up and address this bill, they will claim a horror equal to mine in the fact that these weapons are deployed, and I suspect they will claim that they want to see the elimination of these weapons. Indeed that is why Australia is signing up to the convention.

The fact is that we are signing up to a convention in a way that fundamentally sabotages its objectives. It is not just me saying that. There are voices from here in Australia and around the world who have followed this convention from its initial drafting to today and they are saying, 'This is the wrong way. We must go back.' Soraj was left for dead. His cousin was dead. He was taken to the morgue where an uncle realised he was alive and pulled him out of there. He is now one of the world's foremost advocates for this convention, for the elimination of these horrific weapons from the arsenals of countries around the world.

Australia has a good record on this account in that it experimented with the use of cluster weapons quite some time ago. I believe it was not even a documented decision that originated from a policy level but, in fact, that the ADF did not want them. They had no use for weapons of this kind—indiscriminate weapons—that lie on the battlefield long after the conflict or the front has passed and continue to maim and kill people. So the ADF gave them up. We have never deployed them in our arsenal to any great degree. On the other hand, our great and powerful ally, the United States, takes the opposite view and has refused to become a party to the convention. That is where one of the great and most problematic issues around this legislation as currently drafted arises.

The bill, as it is drafted, allows Australian forces to store, transport and assist in the use of cluster weapons. It does not allow outlaw direct and indirect investment in companies producing these weapons. These are not accidental loopholes or accidental flaws. Of course they are not.

We are one of 108 countries that signed the 2008 convention on cluster munitions. A large number of other countries also signed on the same day. We know the idea is going to sound, perhaps, a little extreme that Australia would simply adopt the negotiating tactics of a party that not only deployed cluster weapons but was refusing to sign onto the convention and was insisting that it will continue to deploy these weapons because, in its view, they still had some residual utility. Of course, I am referring to the United States.

Heaven forbid that Australia, as a party to the convention, would simply do the United States government's bidding on its way through the negotiations. I particularly refer to the drafting of article 21. We know that this is not some outlandish conspiracy theory. We know word for word exactly what the Australian government was up to and we know this because of the cable releases that were put into the public domain by the Wikileaks organisation. It is ironic that today—18 hours after its editor-in-chief, Julian Assange, has been granted political asylum and is speaking from the window of an embassy in London about his desire to call the dogs off on whistleblowers around the world—we are reminded of exactly why this organisation and those like it are so important, not just the Wikileaks organisation, of course, but also those mainstream media organisations that took those releases, understood their importance and ran them on the front pages of the world's newspapers.

We know, for example, through cable traffic between our US embassy in Washington and here in Canberra that Australia was doing just that. We were simply running sock-puppet arguments on behalf of the United States government, seeking to undermine the very objectives of the treaty. It was not just us alone; we worked with a number of other like-minded countries seeking to do the bidding of the United States government to effectively allow a number of key flaws in the bill. As far as these concern Australia, the two major ones are interoperability—that is, how do we participate and collaborate with United States military operations when we are a party to the convention and they are not?—and what the boundaries are.

The Australian Greens support the notion that, while we may in the future, and certainly have on many occasions in the past, seek to conduct joint operations with the US government, it should not in itself preclude us from joining the treaty. It should be possible to come up with a form of language that says we can participate in joint operations, as we are in Afghanistan, but we will have nothing to do with the deployment or use of cluster weapons. Therefore, the principle of interoperability is sound. It is drafted into the treaty in language that is reasonably sound and was tortuously negotiated and now it has been dramatically undermined and turned 180 degrees in the wrong direction by the drafting in this bill.

In this case, Wikileaks again showed why we need organisations like this. This kind of sick behaviour does not go on behind closed doors but is exposed to public scrutiny so that we know that, while government spokespeople on the one hand are saying, 'We are all for it; let's get signed up; let's make sure that these weapons are banned', on the other hand we are negotiating as though we deployed these things ourselves.

We were not successful in undermining the language in the treaty. In fact, that is not how the negotiations turned out at all. The convention is a ban, and the language is universal—it is a ban. We have positive obligations as a signatory to the convention to encourage others to forgo the use of these horrific weapons as well. So Australia in that instance was unsuccessful in watering down the terms of the convention that it is now seeking to ratify. The fallback position, obviously, is to embed in domestic legislation precisely the grotesque loopholes that we were trying to write into the convention itself. We did not succeed in undermining the convention on behalf of all the states' parties that wanted to sign up the vast majority of the world's people. Instead, we have this rather grubby little attempt acting at drafting it into the domestic legislation. It is the job of this chamber to fix those flaws.

I had hoped, certainly in response to what I knew, that I would hear Senator Birmingham speak on the final passage of this bill, because I would have been very, very interested to hear his views. However, I understand he will not be present for the debate tonight, which is a great shame. From the Labor Party's point of view, there are many people I know who have grave concerns about this bill and that is one of the reasons it has been delayed for so long. Perhaps Senator Marshall can enlighten us when he is able to speak. Perhaps not. Perhaps everybody is happy. Perhaps you were persuaded by your briefings and the bill is fine and all of our concerns are overblown.

However, in my view the bill needs to be redrafted and we have amendments that will give this effect, to reflect the continued application of the convention's prohibitions, including the prohibition of assistance during situations of interoperability. The version of the thumbnail sketch that was put to me is that the way this bill is drafted—and I will take these issues up in detail when we get to the committee stage—is that we can carry the weapon onto the field, we can load it and we can help aim it as long as somebody else's finger is on the trigger when it is fired. That is in direct violation of the explicit drafting in the convention.

If that is the case, by all means back away and we can get a statement from the Minister for Defence tomorrow saying: 'As objectionable and horrific as these devices are, we still support their use by other parties.' Alternatively, come clean and say that this bill has been drafted with intentional loopholes to enable our ally to use them during joint operations which would directly implicate Australian forces. Also—and our second tranche of amendments will cover these issues—the bill needs to be amended in relation to jurisdiction issues which explicitly allow foreign forces to use Australian territory to stockpile and transit cluster bombs.

Perhaps two years ago, when this legislation was first conceived of, that all seemed to be somewhat academic. Now we have a US Marine Corps base gradually being assembled quite close to Darwin. We have a US Air Force base being established at Tyndall. No doubt government spokespeople will jump up later and have a go at me for using the word 'base'. But, to be honest, this looks like a duck and quacks like a duck: US Air Force bombers and fighter jets are being based at Tyndall in the Northern Territory. Persistent rumours blew out into the open a couple of weeks ago about a US naval facility in Cockburn Sound. That is my home port as well.

So the idea of US forces transiting themselves and these weapons through Australian ports, through Australian facilities, and stockpiling them is not academic at all. This bill explicitly allows the United States or other foreign military forces to stockpile these weapons about which the Australian government will later tonight or tomorrow put out a press statement saying, 'Oh, we oppose their existence at all. We hope they are banned.' Yet we are okay with them being stockpiled here in Australia. If my reading of the drafting of the bill is incorrect, then I look forward to having that pointed out. Otherwise, I look forward to the support of senators on both sides when we put the amendments to the vote.

The third major area of amendment is something that I would have thought would have been the easiest to fix. It is the one that the Wikileaks revelations are silent upon and that I thought might be a genuine drafting error rather than a deliberate attempt to sabotage the objectives of the convention. This refers to investment. We have obligations under the treaty to ban all forms, both direct and indirect, of investment in cluster munitions. This echoes calls most persuasively put during the inquiry by the Australian Council of Super Investors on behalf of the Australian financial industry, who came to us and said, 'You have to tighten the provisions in this bill.'

To its great credit, the Future Fund was divested not just of companies that were directly implicated in making these weapons but of companies that were indirectly implicated—and the Future Fund is very well aware that the drafting of this legislation, which obviously was not in force at the time that it made its decision, would not have required it to do that. So there is another gigantic loophole. This one I hope is an error; this one may not have been intentional. There is no strategic reason for it. There is nothing about enabling investment in these weapons necessarily that involves sucking up to the United States, so if that is not what it is about then I very much look forward to hearing the reasons it has been drafted as it is.

The inquiry of the Joint Standing Committee on Foreign Affairs, Defence and Trade, which our Acting Deputy President, Senator Bishop, chaired, heard from witnesses right across from the spectrum, such as the financial industry and the Cluster Munition Coalition, who have spent such a long period of time representing a very large number of civil society groups here in Australia and around the world. They gave compelling evidence on behalf of their membership. At that stage I do not believe we had seen those Wikileaks revelations, and it appeared to the committee that the evidence as presented was that this must have been a giant mistake—that they must have been drafting errors. So, as drafting errors, they could be fixed, and we came up with propositions for doing that.

Then, a short while after that, we were informed that in fact they were not errors at all. These loopholes were there for a reason. They have been drafted that way to make sure that the bill is essentially in violation of the objectives of the convention itself. We agreed with and shared the concerns of the Cluster Munition Coalition, who pointed to the fact that the Convention on Cluster Munitions states that parties should never, under any circumstances, engage in prohibited activities related to cluster weapons. That includes joint operations in which we are complicit in using these weapons—as we were during Operation Desert Storm on the way into Baghdad.

The convention also insists that you will not be stockpiling stores of these weapons for deployment by a non-state party. What possible rationale could there be for leaving that possibility wide open? What New Zealand has done in this regard in its implementation of legislation which went into force in 2009 allows for joint military operations while preserving the convention's prohibitions. There are ways of doing this. Of course there are. New Zealand's law criminalises all activities prohibited by the convention's article 1. On the issue of foreign forces stockpiling these weapons on Australian soil, we need to take a look at the way Austria, Colombia, Guatemala and Slovenia brought the convention into domestic law and found ways of not undermining the basis objectives of the treaty.

In terms of investment, we have an amendment that would solve the investment issue—that would simply make it illegal to inadvertently perhaps, or intentionally, invest. As the country's financial community spoke about so compellingly at the committee hearing, this bill should not pass in its current form. I look forward to contributions from other senators explaining why they think the bill should pass in its current form, when it has been so dramatically critiqued by people who know a great deal more about the way that this convention was designed to operate. The convention is designed to be universal and it is designed for the eradication of these horrific weapons. There are no ifs or buts. Other countries have shown that there are ways of preserving interoperability without damaging the way that this convention was intended to come into force. Surely it is not beyond the wisdom of this legislature and this Senate—and people are watching this chamber tonight—to fix the flaws in this dramatically unfortunate bill that simply should never have seen the light of day. If it is the government's intention to sabotage the cluster weapons convention then at least have the guts to come out and say so. I thank the chamber.

Senator SINGH (Tasmania) (18:06): I rise to speak to the Criminal Code Amendment (Cluster Munitions Prohibition) Bill 2010. This bill ratifies the Convention on Cluster Munitions, which Australia signed on 3 December 2008. Such a convention, and its implementation across the globe, are well overdue. Under the convention, a cluster munition is defined as a conventional munition that is designed to disperse or release explosive submunitions. In reality, cluster munitions are canisters dropped by aircraft and open in midair, scattering numerous small explosive devices over huge distances. Their use in areas inhabited by civilians usually results in large numbers of civilian injuries and deaths, and hinders development by making areas of agricultural land inaccessible and generally limiting movement.

I strongly believe that the use of cluster munitions is reprehensible. Their military utility in preventing the movement of troops pales in comparison to the devastating effect they have on civilian populations. The casualties of cluster munitions are indiscriminate, and the victims are disproportionately innocent people caught up in and around conflict zones. Cluster munitions continue to cause untold pain and tragedy in theatres of war in which open conflict has long since ended. The persistence of bomblets and munition remnants long after deployment has ended makes the effects and legacy of war almost impossible to leave behind.

The effects are seen in our own neighbourhood. Between 1964 and 1973, over 260 million munitions were dropped on Laos, comprising over two million tonnes of ordnance. Of those, around 80 million munitions failed to explode, resulting in approximately 300 new casualties from unexploded ordnance each year. Despite constant efforts by a number of government and non-government organisations in Laos, the vast majority of those munitions remain; many undocumented, many undiscovered. They are often discovered too late, when children dig them up, lured by the shiny, toy-like appearance of the small bomblets, or when they are unearthed in land clearing or ploughing on farmland. This is something I discussed last week with a delegation of parliamentarians from Laos who joined us here in our parliament. It is one of the main issues that are still in discussion: how to have that ongoing use of agricultural land in Laos but at the same time ensure the safety of their people when so many cluster munitions remain under the ground. The story of one young Laotian man speaks very much to the circumstances of thousands of families across Laos. He said:

We were walking down the road on the way to the school when my friend saw a small bulb. He didn't know what it was. He picked it up and passed it to me. I didn't know that it was a bomblet. I took it from him and tried to open it to see what it was. It detonated immediately. My friends ran back to our village to get help, and left me where I was, unconscious.

After I don't know how long, my family arrived. They put me in a car and took me to the Vientiane Province hospital in Louksambouk. I woke there, fourteen hours later.

Eventually, the doctors amputated both my hands, because they had been so severely injured in the accident. My eyes were injured also. At first I could not see at all, but within time, fifty per cent of my eyesight returned, only to deteriorate again. Now I am blind.

I spent one and a half months at the hospital. My family had to sell two buffalo for 120,000 kip, borrow 6,000,000 kip and use their entire life savings (about 16,000,000 kip) to pay for my medical care.

Phongsavath Manithong is now a Ban Advocate for Handicap International, where his story is recorded. Phongsavath's accident occurred on his 16th birthday, robbing him of the life he had expected. This young man has turned his tragedy to advocacy, though, becoming a champion for the abolition of cluster munitions. But many victims do not survive their encounters with bomblets; still others do not have the capacity or support to rebuild their lives after the carnage that has been brought upon them.

Further afield, cluster munitions were used by the Russian Federation in their 2008 conflict with Georgia over South Ossetia. That conflict lasted just a single week, but of course munitions cannot heed the call to stand down. Those weapons ensure that war continues to be waged well into peacetime. In 2006, the month-long conflict between Israel and Lebanon saw no less than four million cluster munitions dropped into southern Lebanon, resulting in 654 casualties up to December 2011; one in five of which have been children. And, most recently, in only the past few weeks, Human Rights Watch has been able to confirm that the Assad regime has employed cluster munitions against Syrian civilians in Jabal Shahshabu. There should be no doubting that, more than any other conventional armament, these are weapons of ill-conscience. That is why the cluster munitions convention is so important: to prevent future tragedies and future casualties of these terrible weapons.

This bill is designed to give effect to the convention under Australian law, introducing criminal offences relating to the use, development, production, acquisition, stockpiling, retention and transfer of cluster munitions, as specified in the convention. I regard the bill as a starting point for Australia's support for the goal of ending the use of cluster munitions, complemented by diplomatic efforts and our international aid program.

I do want to recognise the role of civil society in pushing for both the convention and the strongest form of legislation to prevent the use of cluster munitions. I have received representations from individuals and groups from across the country, all of whom are driven to their advocacy in order to prevent damage to the most vulnerable people caught up in war zones. I especially want to recognise the Cluster Munition Coalition of Australia and their members, including the Medical Association for the Prevention of War, Soroptimist International UK programme Action Committee and the Women's International League for Peace and Freedom, who have all endeavoured to make me aware of the complexities of the cluster munitions and disarmament issues.

As a number of those non-government organisations have noted, this bill also includes defences for a range of conduct permitted under the convention to allow Australia to continue to work with our allies, and to train in the detection and disarmament of cluster munitions. These defences are designed to protect Australian soldiers from prosecution for inadvertent assistance with cluster munitions when deployed with the forces of nonparties to the convention. These defences are not designed to enable Australian forces to actively participate or assist with the use of cluster munitions, and the legal prohibition on Australian forces making the decision to use cluster munitions will definitely remain.

Moreover, Australian Defence Force doctrine, procedures, rules and directives, which are properly not included in this legislative process, will reflect the notion that Australian forces should not be involved in operations involving cluster munitions. Indeed, this notion must be, and is, reflected across the government's priorities in ways that are not restricted to the ratification of this convention in law. The Australian government's investment fund, the Future Fund, has divested itself of holdings in 10 companies related to the production of cluster munitions. As a matter of foreign policy the Australian government will continue to urge foreign governments, especially our partners in the United States, not to use cluster munitions and to accede to this convention. As part of our effort towards cluster munitions disarmament, Australia has already committed $100 million of support to countries affected by landmines, cluster munitions and other explosive remnants of war under the Mine action strategy for the Australian aid program 2010-2014.

As well as working with partners across the world, including institutions across the UN system, Australia has been a committee donor to partner governments in 16 affected countries in the Asia-Pacific, Middle East and Africa. These include places like the Kingdom of Cambodia, where Australia is also helping to implement the National plan of action for persons with disabilities, including landmine/ERW survivors, and Afghanistan, where the number of people falling victim to landmines thankfully continues to fall.

It also includes supporting organisations like the MiVAC Trust, an organisation started by Australian veterans of the Vietnam War which trains locals, especially women, to safely clear mines from fields and helps to repair some of the damage to infrastructure brought about by war and weaponry. MiVAC receives AusAID funding but equally it receives donations of time, money and energy from the Tasmanian community, and the rest of the Australian community, for its work. Once again, it is this contribution from civil society that has kept this issue on the agenda. I am grateful that my work in the past with MiVAC, the United Nations Association of Australia, the Women's International League for Peace and Freedom and other organisations involved in the peace movement have brought me into contact with some of the people working closely in this area.

This bill is an important part of implementing the cluster munitions convention and bringing pressure to bear on those states which are not yet party to it. I understand the reservations of some of the community on this bill but I believe it is an important piece of legislation. I want to thank my colleagues who so vigorously pursued the non-legislative assurances the government has put in place and which I understand Senator Ludwig will outline in his second reading speech. Ultimately it is my hope that both the international and domestic framework against cluster munitions and other reckless armaments can be strengthened, and that all nations will share our view that cluster munitions should not form part of the arsenal of any defence force that is conscious of its impact on civilians and international law. I commend the bill to the Senate.

Senator MARSHALL (Victoria) (18:18): I rise to speak on the Criminal Code Amendment (Cluster Munitions Prohibition) Bill 2010. As weapons go, cluster bombs are particularly obnoxious. It is unfortunate that they were ever invented in the first place and it is even more unfortunate that they have ever been used.

Cluster bombs are a large weapon system containing multiple smaller bomblets—often hundreds of them. They can be dropped from the air or fired from the ground. Cluster bombs are wide-effect weapons. This means that their impact is not limited to one precise target such as a tank. They are housed like peas in a pod. The container opens in the air and scatters the bomblets over a wide area, sometimes the size of several football fields, and this impact is referred to as the footprint. A cluster bomb has an outer bomb casing which breaks open in midair, raining down hundreds of smaller bombs over a large area—as I have said this can be several football fields in size and as far as a kilometre away. According to Handicap International's 2006 study, approximately 98 per cent of all victims of unexploded cluster munitions are civilians; and of that 98 per cent almost one-third are children.

It is unfortunate that there is still armed conflict in many parts of the world. It is unfortunate that there has been armed conflict in many parts of the world. But inevitably whenever there is armed conflict there will be a resolution—often at the cost of many millions of lives, and that is an enormous human tragedy. It is unfortunate that human beings tend to do these things to each other. Once the conflict is over the people involved need to get on with rebuilding their lives, rebuilding their countries and, sometimes, rebuilding their nations.

The legacy of cluster bombs, landmines and other obnoxious weapons place a significant handicap on the country's ability to rebuild after armed conflict. As an example, between 1964 and 1973—I was a young child at that time—the United States dropped 260 million cluster submunitions on Laos in a covert mission to destroy North Vietnamese supply lines. Not only did that mission ultimately fail in its strategic aim, bringing into question the need for cluster munitions at all; it also left a deadly legacy. It is estimated that there are 80 million unexploded bombs scattered across the Laos countryside today. The United States bombing campaign on Laos involved 580,000 missions and two million tons of bombs—an average of one bomb every eight minutes for nine years. Those bombs have killed or maimed more than 20,000 people since the war ended and they are a major obstacle to the economic development of one of Asia's poorest nations. Not only was this country not directly involved in that particular armed conflict but now, many decades later, it is still suffering the enormous consequences—with huge tracts of land unusable because of the amount of cluster munitions still unexploded. It is children in particular who are attracted to these munitions. Often munitions of that age are brightly coloured. They look like toys and are attractive to people from rural and poor communities, who touch them.

In Laos today there are still 200 people wounded or killed by unexploded cluster munitions every year—again, 40 years after they were dropped. Given this deadly heritage, it is not surprising that Laos recently added the ninth millennium development goal, which is to clear its land of unexploded ordnances. It is something with which Australia assists many countries in our region. Australia works with the international community to remediate regions and communities affected by explosive remnants of war, including cluster munitions. The government has allocated $100 million over five years to undertake that work. It is painstaking and dangerous work, and it has left an enormous legacy.

The Convention on Cluster Munitions is a wonderful and important thing for Australia to be involved in, and Australia was key to getting the convention up in the first place. A lot has been made of the disappointment of some the advocates for this convention, and I have met with many of them on numerous occasions. I have taken their concerns very seriously and, as a consequence, I have met with the Attorney-General on a number of occasions, the Minister for Foreign Affairs on many occasions and the Minister for Defence on many occasions about the issue; there have been numerous meetings and discussions. Senator Ludlam said that we might be convinced by the briefings and he would be interested to know that, yes, I have been.

There are a number of concerns about why the nature of the legislation differs from the nature of the legislation in New Zealand and in Great Britain. Clearly, in every country there are different frameworks that underpin different forms of legislation. Legislation needs to be looked at purely in an Australian context to meet the needs of faithfully implementing the convention in the Australian context. Much was made of proposed section 72.42 in the bill. I want to make my assessment very clear. After the multiple briefings I have had—I understand the minister will clarify all these matters and put them into the second reading speech to put it beyond doubt—it is my view that this bill is an essential step to becoming a state party to the Convention on Cluster Munitions and that the bill faithfully implements that convention.

Notwithstanding proposed section 72.42, visiting forces would not be excused from prosecution if they use, develop, produce or acquire cluster munitions in Australia. Proposed section 72.42 is, in my view, consistent with the provisions of the convention and does not amount to the government's authorisation to engage in the specified conduct. The bill does not require Australia to accept stockpiles of cluster munitions on its territory from countries that are not party to the convention. I am advised that, currently, there are no foreign stockpiles of cluster munitions in Australia and, as a matter of policy, I am advised that the government has not and will not authorise such stockpiling. I am further advised that the government will confirm this commitment in a public statement at the time of Australia's ratification of the convention and in Australia's annual transparency report under the convention. I am advised that both those public statements will be very clear.

It is also important to understand that ADF personnel will not be permitted to use, develop, produce or otherwise acquire cluster munitions, or make the decision to use, develop, produce or otherwise acquire cluster munitions, including while serving on combined operations with defence forces of other countries, in combined headquarters or on exchange with a foreign force. So I understand and advise that there is nothing in this bill that permits Australians to engage in any breach of the convention, and the bill delivers on those commitments. ADF personnel serving alongside defence forces of other countries remain subject to Australian domestic and international legal obligations and national policy requirements. The national policy requirements are applied through ADF doctrine, procedures, rules and directives. As a consequence of the convention, all of those doctrines, procedures, rules and directives will faithfully implement the legislation, which faithfully implements the convention.

It is important to retain proposed section 72.41 and 72.42 to ensure the continuation of Australia's military cooperation and engagement with countries that are not party to the convention. This is permitted by article 21 of the convention. The ability to maintain interoperability is central to the protection of Australia's national security. I would be as happy as everyone else if all countries were prepared to sign on to the convention and ban cluster munitions, but one of our key allies, the United States, at this point has not banned cluster munitions. They are integral to our national defence. We are in alliance with them and our defence forces work all the time with the forces of the United States but, let me just repeat: ADF personnel serving alongside defence forces of other countries still remain subject to Australian domestic and international legal obligations and national policy requirements. So nothing in the legislation permits an Australian who is working with other forces who have not signed the convention to breach this legislation or the convention.

In line with our positive obligations under the convention Australia will continue to discourage the use of cluster munitions by countries that are not party to the convention. So, if we are in the position, which we will be when we are working alongside forces from the US, it is our positive obligation to discourage the use of cluster munitions by that country, and I am advised that we will be active in doing so on an ongoing basis. So, I am happy to support this bill. Initially I did have some concerns with it but, as I have outlined, I am satisfied that the bill has faithfully met our convention obligations.

Proceedings suspended from 18 : 30 to 19 : 30

Senator MARSHALL: Before the dinner suspension I had virtually finished what I needed to say about this bill. However, I am looking forward to the minister explaining Australia's policy on interoperability and stockpiling and putting some of those issues to rest.

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (19:30): I thank the various senators who have made contributions to this debate. In fact, I had the good fortune to hear all of them. The Criminal Code Amendment (Cluster Munitions Prohibition) Bill 2010 is a significant step towards Australia meeting its obligations under this important convention and will strengthen Australia's legal framework regarding weapons that cause significant and indiscriminate harm to civilians.

I wish to respond to some comments made by Senator Ludlam. The senator alleged that while the convention is sound, the bill does not faithfully reflect the convention. In fact, the bill uses the same language as the convention in order to ensure that all conduct that is prohibited by that convention is the subject of a criminal offence under Australian law, unlike the amendments proposed by the Greens party. In particular, section 72.41 of the bill on the interoperability defence uses the language of article 21 of the convention. Senator Ludlam has also raised the notion that Australia sought to undermine the negotiations on the convention. Australia's position both during the negotiations and today is that the ability to maintain interoperability with countries not party to the convention is central to the protection of Australia's national security as well as international security.

This bill includes the legislative measures necessary to give effect to the convention on cluster munitions, a convention which the Australian government strongly supports. Australia is committed to ensuring the strongest possible ban on cluster munitions. As set out in the government's policy statement, this bill is an essential step in Australia becoming a state party to the convention on cluster munitions and faithfully implements the convention. As a state party, Australia will be prohibited from stockpiling cluster munitions. Section 72.42 of the bill provides that certain acts by foreign military personnel of countries that are not party to the convention are not offences under section 72.38 of the bill when the act is done in connection with the use of a base, foreign aircraft or foreign ship in Australian territory. These acts include stockpiling or retaining a cluster munition or transferring a cluster munition.

Notwithstanding section 72.42, visiting forces would not be excused from prosecution if they use, develop, produce or acquire cluster munitions in Australia. Section 72.42 is consistent with the provisions of the convention and does not amount to the government's authorisation to engage in the specified conduct. The bill does not require Australia to accept stockpiles of cluster munitions on its territory from countries that are not party to the convention.

There are currently no foreign stockpiles of cluster munitions in Australia. As a matter of policy, the government has not and will not authorise such stockpiling. The government will confirm this commitment in a public statement at the time of Australia's ratification of the convention and in Australia's annual transparency report under the convention.

Section 72.41 of the bill provides that certain acts by Australian citizens, Australian Defence Force members or Commonwealth contractors are not offences against section 72.38 of the bill if the act is done in the course of military cooperation or operations with a country that is not a party to the convention. ADF personnel will not be permitted to use, develop, produce or otherwise acquire cluster munitions or make the decision to use, develop, produce or otherwise acquire cluster munitions, including while serving on combined operations with defence forces of other countries, in combined headquarters or on exchange with a foreign force. ADF personnel serving alongside defence forces of other countries remain subject to Australian domestic and international legal obligations and national policy requirements, which are applied through ADF doctrine, procedures, rules and directives.

It is important to retain sections 72.41 and 72.42 to ensure the continuation of Australia's military cooperation and engagement with the countries that are not party to the convention, as permitted by article 21 of that convention. The ability to maintain interoperability is central to the protection of Australia's national security. In line with our positive obligations under the convention, Australia will continue to discourage the use of cluster munitions by countries that are not a party to the convention. Australia will continue to work with the international community to remediate regions and communities affected by explosive remnants of war, including cluster munitions. The government has allocated $100 million over five years to undertake that very important work.

The bill creates a new range of offences to reflect the conduct that is prohibited by the convention. These offences include using, developing, producing, acquiring, stockpiling, retaining or transferring a cluster munition. These offences ensure that using a cluster munition is a crime both in Australia and for Australians overseas. The bill does not provide any defence for a person who uses a cluster munition. This reflects the convention's primary objective of prohibiting states' parties from using cluster munitions in all circumstances.

The offences in the bill carry a maximum penalty of 10 years imprisonment for individuals, or $330,000 for bodies corporate. This tough penalty reflects the serious nature of the offences created by the bill. The bill also creates defences to the offences, reflecting the range of conduct that is permitted by the convention. The convention permits continued military cooperation and operations between states parties and countries not party to the convention, subject to some restrictions. Continued cooperation between states parties and countries not party to the convention is central to the protection of Australia's national security as well as international security. For example, maintaining such interoperability is essential for Australia to be able to participate in United Nations mandated missions involving countries not party to the convention. This was a view shared by many countries during the negotiation of the convention. Therefore, consistent with the convention, the bill allows Australia to continue to maintain cooperative military relationships with countries that are not parties to the convention.

The bill is one of the measures necessary to give effect to the convention. In line with the convention, Australia will continue to urge countries not party to the convention not to use cluster munitions and encourage them to sign the convention. Australia will also continue to work with non-government organisations, which make a significant contribution to the universalisation of the convention. Once Australia ratifies the convention, the government will comply with the reporting obligations under the convention, which will ensure transparency in how Australia is implementing it. Consistent with Australian treaty practice, Australia's reporting obligations under the convention will be implemented through administrative means. Australia has a strong record in disarmament and international action to ban weapons that are excessively injurious or that have indiscriminate effects. Although Australia has not yet ratified the convention, it is already playing a constructive role to support the convention's humanitarian objectives. The convention is a remarkable humanitarian achievement, and this bill is a significant step towards Australia meeting its obligations under this important convention. I commend the bill to the Senate.

The ACTING DEPUTY PRESIDENT ( Senator Boyce ): The question is that the bill be now read a second time.

Question agreed to.

Bill read a second time.

Senator LUDLAM (Western Australia) (19:39): I would like to note the fact that I did not seek to call a division or a vote on the second reading, as is customary in this place, because I support the objectives of the bill, I support the reasons why the government has brought it forward and I support everything that has been said in here tonight in terms of why we would want to take these weapons out of the arsenals of the world's militaries. And I believe that I have circulated amendments that would allow me, in good conscience, to advise my colleagues to vote for the bill. I will not be, however, voting for the bill on the third reading if none of the amendments pass, for reasons that I made reasonably clear.

Before I put some general questions on the bill to the minister—and I suspect this is going to end up feeling somewhat like deja vu before we are done—I would like to make two acknowledgements. Firstly, I acknowledge the funding commitments that the minister announced. I ran out of time during my second reading contribution to acknowledge the funding commitment that the government has announced for mine-clearing activities and so on. That is extremely welcome, and I am sure that it is welcome in the places where those funds are to be expended. I note also that Australia does have a good record in the areas of mine clearance and so on. Even in some of the work that I have done in this area, it is obvious that Australia has played a very constructive role. Obviously, the reason we will be bringing these amendments forward—and, you could say, the primary reason for developing this convention and then enacting it in domestic legislation—is that prevention is a lot better than mine clearing. Preventing these appalling weapons from being dropped and discarded in the first place is vastly better than spending tens and then hundreds of millions of dollars to dispose of the bomblets.

The second acknowledgement—and I hope the debate can continue tonight as it has begun—is that I believe that everybody who has spoken in this debate so far genuinely wants to rid the world of these weapons. So the comments that I make in critique of the government's approach do not go to the general motivations behind senators in this place tonight, none of whom, I presume, have been directly involved in the negotiations. I did not hear anybody suggesting hesitancy or doubt, I suppose is the point that I am trying to make. There is cross-party consensus in this chamber, and in the House of Representatives, that these weapons should be eradicated.

To briefly mention something that I was going to mention in my second reading contribution, I want to ground the remainder of this debate in an understanding of what it is that we are seeking to abolish, and the reasons why we would do so. This is from a US columnist, writing in 2004, by the name of Paul Rockwell, who provided one of the more concise definitions of these weapons:

A cluster bomb is a 14-foot weapon that weighs about 1,000 pounds—

or 455 kilograms—

When it explodes it sprays hundreds of smaller bomblets over an area the size of two or three football fields. The bomblets are bright yellow and look like beer cans. And because they look like playthings, thousands of children have been killed by dormant bomblets in Afghanistan, Kuwait and Iraq. Each bomblet sprays flying shards of metal that can tear through a quarter inch of steel.

The failure rate, the unexploded rate, is very high, often around 15 to 20 percent. When bomblets fail to detonate on the first round, they become land mines that explode on simple touch at any time.

So, these are the things, these hideous and indiscriminate legacy weapons that lie on battlefields long after the front has moved on, that are the reason we are here tonight.

I would like to put a couple of questions to the minister at the outset. I will put these ones on notice unless, in a flash of brilliance, your advisers have this material on hand. But I would like to bank these questions for—oh yes, nods from the advisors' box! We will see. I am interested to know, quite specifically: firstly, the military forces with whom we have cooperative agreements who are, or have in the last period of time—and I don't mind how we define that—transited through Australian ports or airfields. For example, the United States Navy, probably the French Navy and the Singaporean Air Force.

So it is the number of parties, being foreign military forces, who would potentially be caught by this bill and who also deploy cluster munitions in their armouries. So, if I may, I would like to put that question on notice, through you, Minister, to the department so that we can get a sense of whom we are talking about. Obviously, my remarks this evening will focus on the United States military. We have the closest defence ties with the US government. They have the largest amount of hardware transiting through Australian facilities. That is where I will focus my remarks, but I am interested at the outset to know who else these provisions might impact upon.

The second question that I will put on notice, and I can take some advice as to how complex this will be, is this: which weapons systems and on which platforms does the United States military deploy cluster weapons? The minister is shrugging. I do not know whether this is a 'piece of string' question. If we could take this from 2002, from the invasion of Iraq, which I will come back to and refer to again in a moment, which US platforms deploy cluster weapons—army, navy, air force and marine corps? That is extremely important and the agenda moved on so rapidly, beginning with President Obama's visit late last year that actually outlined a deployment timetable for the US Marine Corps and then for the US Air Force and now it is potentially for the US Navy in the south-west. So the debate becomes not abstract at all and the debate becomes profoundly concrete. To get the facts on the table, which military forces transit through our ports and may be caught by, for example, the provisions relating or not relating to stockpiling and which platforms actually deploy these weapons and which can we disregard for the purposes of the bill? I will give the minister the opportunity to respond as to whether those are seen as being reasonable requests.

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (19:46): I think we will take both of those on notice. Let me provide an interim preliminary answer that will be subject, I am sure, to further deliberations. As I comprehend it off the cuff, those militaries that are not a party to the convention and that might have cause to be in Australia or Australia's territorial waters would be confined to the United States of America and France. Obviously, I would not expect to see other major holders or manufacturers and deployers of these sorts of munitions who are not party to the agreement, such as China, Russia, Iran and Brazil, transiting through Australia. So, Senator, I ask if you would be so good as to take that as a preliminary view and we will confirm that.

With respect to your second question, please afford this the same status as obviously there will be professionals inside the Department of Defence who will be able to provide a more forensic answer. As I understand it, cluster munitions in terms of US practice would typically be deployed by either aircraft—and aircraft of course are found across the United States Air Force, the US Navy and the US Marine Corps, as I comprehend it—or artillery. Artillery are found across at least the United States Marine Corps and the United States Army. Please take that as a preliminary view and I will see if we can provide a more refined answer.

Senator LUDLAM (Western Australia) (19:48): That was more or less exactly the sort of answer I was expecting, so that is appreciated. I can let the chamber know now that before I move the amendments I do intend to dwell at some length and go through some reasonably detailed questions on why the government has chosen to draft the bill in the way that it has. So I indicate that potentially, depending on the way the debate flows, we may have to go until tomorrow morning and I will understand if the officers from the department are unable to provide that information tonight. I am seeking more fine-grained information than that it is simply deployed by the US Air Force or the US Marine Corps because we are now getting to the point where information is becoming available as to the kinds of aircraft that would be temporarily posted to Tindal, for example, and I would like to know whether they are the sorts of aircraft that could potentially be capable of deploying these weapons.

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (19:49): This is to assist the senator in order to provide a more detailed answer. Senator, it sounds like you want to get into the specifics of which platforms, which types of munitions and so forth. That is information I assume we would have to procure from the US, and that is a question we would have to ask of them. So I guess I am just foreshadowing that that might be a challenge in meeting your expectations about when an answer would be provided.

Senator LUDLAM (Western Australia) (19:50): The United States, to give it its due, does publish a large amount of this sort of information even in the Jane's series of reviews into different kinds of hardware, so I would be surprised if somebody needs to ring the US Department of Defense to find out that information, but I will leave it to you as you have taken that on notice and I was not expecting an answer tonight. Minister, both you and, I think, Senator Marshall—I am not sure whether Senator Singh did or not—referred to the passage of this legislation as 'a first step', which I think is the phrase that you both used, to uphold our obligations under the convention, which to me suggests that it is in fact partial. I wonder what other steps the government is proposing in order to fully uphold our obligations under the convention if indeed this is only seen as a step.

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (19:51): I am advised that there are non-legislative steps that we will be taking to make sure that the convention is understood and enforced. Those sorts of non-legislative steps would include, for instance and as I alluded to in my second reading speech, appropriate adjustments to ADF doctrine and teaching, regulations, directions and rules of engagement—those kinds of non-legislative steps that are required so that we can be confident that the convention is being upheld in every respect.

Senator LUDLAM (Western Australia) (19:51): I thank the minister. Minister, I think you indicated in your closing remarks that Defence Minister Smith will make some kind of statement to the parliament or to the general public when—is this it?—we lodge instruments of ratification or something of that sort. Firstly, could you please describe for me if that is the sort of non-legislative measure that you mean. Secondly, why is that not being provided to the parliament as we are debating the bill?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (19:52): As is custom and practice for us under other international legal instruments, Australia will comply with its reporting obligations under the Convention on Cluster Munitions without the need for these obligations to be set out in legislation. The obligations contained in paragraph 8 of articles 3 and 7 of the convention do not require legislative implementation and will be implemented through administrative means.

The bill contains the legislative measures necessary to ensure consistency between Australian law and the convention and is a necessary step before Australia can ratify the convention, but the bill forms one part of the measures necessary for Australia to implement its obligations under this convention. These provisions contain requirements aimed at promoting transparency on states parties implementation of the convention. Paragraph 8 of article 3 requires states parties to submit annual reports regarding cluster munitions that they have acquired or retained for the permitted purposes set out in paragraph 6 of that article—namely, the development of and training in detection, clearance or destruction techniques for the destruction of cluster munitions or for the development of cluster munitions countermeasures. This paragraph also requires states parties to report annually on any cluster munitions that have been transferred to another state party for the permitted purposes under paragraph 6 or for the purpose of destruction. Article 7 of the convention contains further reporting requirements. This article requires states parties to submit annual reports on their implementation of the convention. And, in addition to complying with the reported obligations under the convention, the government will in each annual transparency report reaffirm its commitment to not allow foreign stockpiles of cluster munitions in Australia.

Senator LUDLAM (Western Australia) (19:54): Minister, could you describe for us why the government has taken the approach of embedding that as a policy decision rather than embedding it in the bill? You will be aware that some of the very strong criticism that has been made of this bill is that it is effectively a 'trust us' approach, in that the bill allows behaviour to which the government then says, 'No, our policy is not for that to be allowed.' That is the fundamental problem that I have with the drafting of the bill. I will go to those when we go through it clause by clause, because my amendments are explicitly around closing these loopholes. Minister, you have just stood up and said: 'But of course that is not our intention. Of course, we will not do that.' I am not seeking to verbal you, but that would be inconsistent with the operation of the convention.

I should put Senator Nash on notice that I will be seeking her view on whether this is also coalition policy or whether this policy might change subsequent, for example, to a change of government. That is why we embed these things in law: so we do not have to worry about arbitrary policy decisions that could change according to contingency. So, Minister, I will return to this at length unless your answer is profound and brilliant. Why don't we just enshrine this in law instead of trusting ministerial statement that may come at some future time?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (19:56): The government's intention, and the purpose of the bill, is to give effect to the provisions of the Convention on Cluster Munitions which reflect international agreement on the prohibition of those munitions. The convention was negotiated by approximately 49 countries and adopted by 107 countries, including Australia, and it was developed in close consultation with representatives of civil society. The primary purpose of the bill is to create criminal offences in Australian law for the conduct that the international community has agreed should be permitted. The bill uses the language of the convention wherever possible in order to ensure that all conduct that is prohibited by the convention is the subject of a criminal offence under Australian law. In conclusion, the government's view is that the bill is accomplishing the task set out for it, and it could be described as the centrepiece of a number of measures which keep faith with Australia's support for the convention.

Senator NASH (New South Wales—Deputy Leader of The Nationals in the Senate) (19:57): The opposition is obviously broadly supportive of the government in this. I think the shadow minister clearly outlined the position on this in his speech earlier, and that would indicate our intent.

Senator LUDLAM (Western Australia) (19:57): Senator Nash, I will forgive you because this bill is not within your portfolio responsibilities and you probably had no part in it. However, Senator Brandis spoke for a grand total of about four minutes and simply lined the coalition up with the government and then sat down—

Senator Feeney: That was a profound contribution.

Senator LUDLAM: It was a concise but profoundly disappointing contribution from the coalition and it gave us no comfort whatsoever. Senator Marshall and Senator Singh also mentioned the civil society groups that I listed in my second reading contribution. They all paid respect to the huge amount of work that has gone into getting this convention off the ground and getting parties to sign up to it but are now advising this chamber against voting for the bill. Is it the government's view that those groups are wrong, when they say—and I can provide more detailed quotations if that would be helpful—this bill is not at all consistent with the language of the convention which has a universal obligation not to have anything to do with these weapons at all within certain carve outs that we have all described thus far around interoperability and so on? Is it your view in fact that those groups are simply wrong? Are they misled?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (19:59): I suppose, Senator, I would say we have a difference of opinion. I think, as you have said in your remarks, there is broad consensus about the convention, its aims and Australia's support for those aims. There is then a difference of opinion about how we have set about the task of enacting them.

You did warn, as we went into committee stage, that parts of tonight might seem like a re-enactment of estimates and, of course, we have had the discussion there about the interoperability provisions, which I am sure we will revisit shortly. There are obviously points of difference. The government has listened to those points of difference, as of course we have listened to the points made by the Greens. There is simply a difference of opinion about the efficacy of what you are proposing. But it is the government's firm view that these provisions, together with the other measures I have described, ensure that Australia will be upholding that convention in every material respect.

Senator LUDLAM (Western Australia) (20:00): Let us go to a specific case study around interoperability, and perhaps we will dwell here for a while and then come back to the issue of stockpiling and transiting through Australian airspace, waters and territory at a later time. I want to start with the question of interoperability, because I suspect it is the key sticking point. Would the minister care to comment on the very serious allegations, which were documented in a startling amount of detail in cables released through the Fairfax press by the Wikileaks publishing organisation, that Australia worked behind the scenes to undermine the objectives of the convention. When it was unable to do that on behalf of the United States, it resorted to implementing this bill in a way that is essentially structurally flawed. The allegations which I refer to were reported on 2 May 2011, so I guess the government has had plenty of time to contemplate those allegations. I will quote very briefly from a piece by Philip Dorling that ran in the Age on that day:

Diplomatic cables … reveal that, in 2007, Kevin Rudd's newly elected government immediately told the US it was prepared to withdraw from the negotiations if key 'red line' issues were not addressed - especially the inclusion of a loophole to allow signatories to the convention to co-operate with military forces still using cluster bombs.

Minister, the reason that this is significant is that Australia—and I deeply believe this—has no intention of kitting out the ADF with cluster weapons. This is not to do with us at all. I had an exchange with Defence, probably during that session that you were representing the government at the estimates table, about the ADF retaining a small quantity of these weapons—just a sample of live weapons—to train our troops. I have actually seen this happen at al-Minhad in the UAE. I have seen the kind of training that they undergo on how to recognise these things, particularly when they find their way into IEDs and so on. I completely understand and support the retention of a small representative sample of these sorts of things so that the ADF can train and know how to disarm them and so on. I do not propose to dwell there. My question is: if we have no further use for these weapons ourselves, apart from training, why would we be prepared to withdraw from the treaty if these red line issues were not addressed?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:02): The first point I would make is that I do not accept the proposition that Australia sought to weaken or undermine the convention. Secondly, I would not think it reasonable to describe the interoperability provisions as a loophole. The view of the Australian government regarding the interoperability provisions in the convention is a matter of public knowledge. It is well understood. It is something that, indeed, you and I have discussed at estimates, I think, on several occasions.

Australia's position during the negotiations, and it remains so today, is that the ability to maintain interoperability with countries not party to the convention—and obviously the United States is a signal one of those—is central to the protection of Australia's national security as well as international security. Australia drafted the draft provision underpinning the current text of article 21, and the government is confident of the interpretation of the text which it was closely involved in formulating. The Australian government co-authored a discussion paper that was circulated at the Wellington negotiating conference in 2008, and that paper advocated for an interoperability provision in order to address the concerns of countries who, in the short-to-medium term, intended to continue to cooperate with countries who had no intention of becoming a party to the convention—and of course that includes the United States.

I suppose, in summary, Senator, we differ about your use of language in terms of 'undermining' the treaty or in 'developing loopholes'. We do not believe that is what we have done, and that is not reflected in either our utterances or our accomplishment to date. It is plain and, I think, generally understood that Australia continues to have an alliance relationship with the United States, and the interoperability provision is a key part of ensuring that we can keep faith with the convention and that alliance.

Senator LUDLAM (Western Australia) (20:05): Minister, can you confirm for us—and I will quote directly from one of the US embassy cables dated 27 February 2008—whether or not:

Australia would welcome U.S. assistance in identifying African countries with potential interoperability issues who can be recruited to vote with the Like-minded and in reviewing the proposed interoperability text.

Unless this is being mistranslated or misreported by the US embassy here in Canberra—is Australia seeking US advice on which African countries we should lobby in order to find countries that we might be able to line up to weaken the treaty. Is it true? And what advice was provided by the US, if that is the case?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:06): Firstly, let me say, I am familiar with the Wikileaks cable which you are referring to, so bear that in mind in my answer. But it seems to me that what you are essentially describing is a perfectly mundane process, and that mundane process is, firstly, the Australian government forms a view about the importance of an interoperability provision. Obviously, the United States would share our view insofar as it affects our alliance and the work our militaries do together.

Having formed an Australian government view about the worth of an interoperability provision—and there is no secret in that; we have argued for it long and hard—we then set about the task of building international support for our view. I do not see that as a revelation. I think really you are referring to the mundane conduct of diplomacy and the political task in international forums of Australia, once it has formed a view, then explaining it and building support for it.

Senator LUDLAM (Western Australia) (20:07): Minister, if it would help—I know it will take a little while and we can come back to this—I am more than happy to table the document that I am reading from that contains verbatim quotes from the cables, because I do propose to refer to them from time to time. Would that assist?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:07): I have no objection.

Senator LUDLAM (Western Australia) (20:07): I seek leave to table the document.

Leave granted.

Senator LUDLAM: Just to be clear, what I sought leave to table is an article by NAJ Taylor. There is a certain amount of editorialising at the top that you will just have to forgive and you will probably profoundly disagree with it. The remainder of the four-page document is simply verbatim transcripts of the State Department cables. I will table that now, Minister, and then I might come back to this topic once you have had a chance to look at it.

I want to come to another matter that we have had a brief engagement with. I am not sure whether or not you were at the table, Minister. It is around Australian air support during the Iraq conflict. One of our most important contributions to the shock and awe campaign that took us into Baghdad in that year were FA18 Hornet aircraft on air combat patrol and strike missions. We also flew Orion surveillance aircraft, C130 Hercules and B707 lift operations, but it is the FA18 missions that I want to refer to specifically. My understanding is that our FA18 aircraft did not use cluster munitions in Iraq but that we did fly close support for US ground forces who were firing these weapons indiscriminately into urban areas. Could you please confirm whether or not that is the case?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:09): If I need to correct anything I say in this answer I will obviously do that on notice, but my strong understanding and recollection is that our air forces and, indeed, all of our forces did not use, deploy or engage in operations with cluster munitions. My recollection is that you were given that undertaking at estimates by the Chief of Air Force, but I stand corrected if—

Senator Ludlam: That is right.

Senator FEENEY: And I guess I would take issue with your proposition that the United States has used these weapons indiscriminately. That is not the language; that is not my view. But, to the extent that US forces did deploy these weapons in 2003 in the Iraq campaign, my firm understanding is that Australian forces were not engaged in or working with that work and those deployments of cluster munitions.

Senator XENOPHON (South Australia) (20:10): With Senator Ludlam's indulgence, I would like the Parliamentary Secretary for Defence to clarify. When you say you reject the characterisation that those weapons were used indiscriminately by the United States but they were used, isn't there an argument that the very use of cluster munitions is itself an indiscriminate act?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:10): Senator, I guess we now run the risk of you and I having an 'enthusiastic amateurs' conversation about the military deployment of these—

Senator Xenophon: You're not an amateur; you're the representative of the government.

Senator FEENEY: Is the deployment of a cluster munition indiscriminate by definition? I guess the United States would characterise the deployment of munitions when they are deployed against enemy armoured formations or in a counterartillery role—but I am not here to debate the US deployment of these weapons and I am not here to debate the effect of those weapons, and not for a moment am I going to put myself forward as an expert in how these things are deployed. I guess I am taking issue with the use of inflammatory language that I think does not do justice to the longstanding commitment of the United States to using minimal force and precision weapons wherever possible. I think their record in trying to avoid collateral damage is a worthy one and stands in contrast to many other nations and, indeed, many other nations who deploy cluster munitions.

Senator LUDLAM (Western Australia) (20:12): At the risk of changing the subject, because I fully intend to come directly back to this, I am interested to know, because I am going to refer to this document a fair bit, whether or not the minister or the officers have a copy of the supplementary information that the Department of Defence provided to the Foreign Affairs, Defence and Trade Committee? We banked a number of questions on notice to the department during the course of our inquiry. Do you have those at the table?

Senator Feeney: Yes.

Senator LUDLAM: That is fine; it saves me from tabling them, although I can do that if the opposition or Senator Xenophon would appreciate a copy.

Minister, to come back to the shock and awe aerial bombing campaign, like Senator Xenophon I thought the reason we were staying up late to debate this bill is because these weapons, like chemical weapons, biological weapons and nuclear weapons, are indiscriminate by nature. Perhaps it was just careless language on your part, Minister, to use that word but I found it unfortunate. These weapons are indiscriminate. That is why we are here; that is why we are seeking to ban them. The reason I take you up on the instance of the shock and awe campaign and the close support missions that our RAAF pilots flew as we were invading Iraq is that this is precisely a use case for interoperability that is not in the abstract—this is a real one.

I am drawing on an article by Chris Doran dated 3 March last year in which he makes the case, quoting Human Rights Watch work, that United States ground forces on their way into Baghdad in the shock and awe campaign were used 'in direct support' of forces that were firing 'extensive cluster bomb munitions on defenceless civilian populations'. He said:

An extensive Human Rights Watch investigation conducted in Iraq found that 'Unlike Coalition air forces, American and British ground forces used cluster munitions extensively in populated areas … use of these weapons … was widespread along the battle route to Baghdad … with significant numbers of civilian casualties in southern Iraq including al Hilla, Najaf, Kerbala, Nasiriyah, and Baghdad.

Human Rights Watch found that the 'targeting of residential neighbourhoods with these area effect weapons … represented one of the leading causes of civilian casualties in the war'. A USA Today four-month study conducted in Iraq found that the US dropped or fired nearly 11,000 cluster bombs or cluster weapons during the invasion—

the 14-foot monsters that we were talking about before—

containing between 1.7 and 2 million bomblets. Britain used 2,000 more.

This is the article I was quoting from before, the Paul Rockwell piece, where I describe what these things are. Minister, would you describe this as an instance of interoperability?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:15): I guess the first thought I have is that weapons used indiscriminately are automatically in breach of humanitarian law as it presently exists. I am saying that weapons used indiscriminately in any circumstance is a breach of humanitarian law.

Senator Ludlam interjecting—

The TEMPORARY CHAIRMAN: Order, Senator Ludlam! Just listen to the answer perhaps.

Senator FEENEY: I guess my second point is that Australia and Australian forces would never cooperate with military forces that are using weapons indiscriminately.

Senator LUDLAM (Western Australia) (20:16): Is the minister familiar with the Human Rights Watch Report that I was citing a moment ago?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:16): No, I am not.

Senator LUDLAM (Western Australia) (20:16): Does the minister believe that that report, which he has obviously not had time to review—not being aware of it, which is fair enough—is in error? If not, what is the basis for his confidence? Can the minister confirm one way or the other whether the RAAF flew close support missions for US ground forces that deployed cluster weapons on the way into Baghdad?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:16): The answer is no, I do not know what arrangements were made. We are talking about the air campaign of 2003 and no, I do not know.

Senator LUDLAM (Western Australia) (20:17): Minister, will you take that question on notice? I would have thought that it is of central importance to the debate tonight. Just to be clear, so that you know, and the officers know, what the question is that I am putting to you: during the 'shock and awe' campaign in 2003, did the RAAF provide air support for US ground forces that used cluster weapons on the way into Iraq?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:17): Yes, I am very happy to take that on notice. Senator Ludlam, I have a dim recollection that you asked that question of the Royal Australian Air Force in estimates and they provided you with a definitive answer. But it is a dim recollection, so with no more greater confidence than that I will take the question on notice.

Senator LUDLAM (Western Australia) (20:17): I thank the minister. I have got the transcript here and the department at the time did take the question on notice. I have the answer in front of me, but in no way would I describe it as definitive. So I look forward to the minister's provision of an answer. No doubt you will be aware of why I am pursuing this line of questioning. The US does not treat these weapons as exotic or extraordinary; they are standard part of kit a little bit like depleted uranium, and I guess the ADF use that in the same way. We tried it and we decided that we wanted nothing to do with it, but we still work very closely with military forces that do, and I guess we agree to disagree as to the indiscriminate nature of weapons of that kind. But here for me is a very, very important case of what we mean when we flip the word 'interoperability' around. What it means is that the Australian government can collaborate closely with forces using these weapons that we are seeking to ban. I guess the threshold question that we are here to debate tonight is: how close or how distant does the ADF have to be before it meets the objective of the treaty?

To take a slightly different tack, one of our positive obligations under the text of the treaty is that we are meant to be out now advocating that the military forces around the world, including our allies who use these weapons, stand them down. I think the minister gave me the example of the United States and France as those that will transit Australia, so let us start with them. Can the minister provide us with any evidence of what the Australian government has done to persuade the US to cease deployment of cluster weapons?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:19): Firstly, I suppose, I should set out that this legislation and the principles underpinning it are obviously before us and the government has articulated those. It is not open to me nor is it conducive, in my opinion, for us to then embark on an analysis of hypotheticals.

Senator Ludlam: No, it's a real case.

Senator FEENEY: It is a hypothetical.

The TEMPORARY CHAIRMAN: Just ignore the interjections, Senator Feeney.

Senator FEENEY: I am such a helpful person, Chair.

Senator Ludlam: And I'm trying to be a helpful interjector.

Senator FEENEY: A helpful interjector, that is right, Senator. I guess I should say at the outset that the government will confine itself to dealing with these issues in terms of the principles and their intent, and then, looking forward, the government would be assisted by the detail of what is transpiring case by case and obviously legal advice to inform it.

Having said that, let me then turn to how Australia will promote the principles established by the convention and work to discourage countries not party to the convention from using cluster munitions. I suppose it is fair to say that in this matter, as in so many others, Australia sees itself as promoting and seeking to promote international norms that move all of us, the whole of the international community, towards a better state. Obviously there are a number of major powers—indeed, one might say most of the major powers—that are not signatories to this convention, but not for a moment does that deter the government from its resolve to abide by the convention and to promote the international norms that it seeks to internationalise and normalise.

In dealing with our obligations under the treaty, we may discharge them in either bilateral or multilateral forums, through oral or written communications, in the conduct of the government and its work across the whole gamut of international fora aimed at dissuading or advising countries not party to the convention against using cluster munitions.

Senator LUDLAM (Western Australia) (20:22): I thank the minister for responding with the general principles around the way in which the government sees that it could exercise its positive obligations. I just draw you back to what my actual question was. What have we done in the instance of the United States government? Can the minister provide the chamber with any tangible evidence of any action that it has taken in order to attempt to persuade—in any matter, great or small—the United States government to stand these weapons down?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:23): To date, what has transpired is that the Australian government has formally and officially advised the United States government that it has signed the convention. Australian officials have met with the US embassy to advise them of our support for the convention. To the best of my knowledge, that is as far as the matter has advanced to date.

Senator LUDLAM (Western Australia) (20:23): Is the minister able to provide us on notice with a copy of the advice that was posted or delivered to the United States?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:23): Let me take that on notice. We need to find out whether it was correspondence. I am certainly advised that the matter was discussed between officials. I will ascertain what documentation there is around that meeting.

Senator LUDLAM (Western Australia) (20:24): I thank the minister. Australia and the United States are at odds in this matter, you would have to say, if you were going to put it diplomatically. We believe these weapons should be abolished and we do not believe they should be used or stockpiled by the ADF. The United States government believes—not in the abstract—that these weapons should be deployed, that they have military utility and that they intend to continue to use them and not sign up. The evidence—and I wonder whether by now, Minister, you have had a chance to take a quick look at the cables that I put on the table a short while ago—makes it abundantly evident that the Australian government is running the agenda of the United States in the negotiations. How exactly does Australia reconcile the fact that we are coming from two vastly different positions—if that is to be believed, and let us naively assume just for the moment that it is? How does the government run the agenda of the US in those negotiations when in fact our intentions are diametrically opposed?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:25): I just do not accept the foundations of your question. I do not accept that there is anything going on here other than the Australian government having formed the view that the convention is appropriate for us and an appropriate instrument for us to support, with us conveying to our United States friends that our commitment to the military alliance remains undiminished. I have not read through those WikiLeaks documents you have given me, but you are right to say the United States is not intending to desist from using these weapons, as I comprehend it. You might very well say the same about a range of other powers, and I note you do not speak of those, but I think they are worthy of attention too.

The United States policy on cluster munitions—as we understand it—is that the United States are likely to continue to retain cluster munitions in their military inventory and reserve the right to use those in future conflicts. They have articulated the notion that cluster munitions would most likely be used in high-intensity conventional warfare, particularly against armoured forces, and, of course, that is typical of state-on-state conflict. Notwithstanding this, the United States have adopted a cluster munitions policy which aims to minimise the potential unintended harm to civilians and civilian infrastructure. That is the sort of move that the Australian government welcomes as a good beginning. The US policy includes a commitment to cease use by 2018 of cluster munitions that, after arming, result in more than one per cent unexploded ordinance across the range of intended operational environments.

We have made our views plain. We have made them plain to our United States friends. The United States obviously has its policy, as, of course, so too do China, Russia, Iran and others. We will continue to advocate in international fora that this convention represents an international norm that the whole community of nations should observe.

Senator XENOPHON (South Australia) (20:27): I would like to follow up on what Senator Feeney, representing the government, said in his response to Senator Ludlam. He makes reference to the United States policy that by 2018 less than one per cent of these cluster munitions will have that failure. We know that one of the reasons why cluster munitions are so vile, not just in their operation, is in the cases when they do not work. We know they often fail to detonate on impact and they contaminate large areas of land with highly dangerous, unexploded submunitions—and I am relying on information provided to us in the Bills Digest—and that this contamination has both immediate and longer term impacts on civilian populations and on the rehabilitation of vital infrastructure including roads, schools, markets and farms. We also know that incredibly expensive and arduous clearance activities are taking place—again, I am referring to material provided in the Bills Digest. Can Senator Feeney indicate what his understanding is of the current failure rate of cluster munitions overall, given that the United States is aiming for one per cent by 2018? That is my first question.

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:29): Senator, I agree with how you have characterised this issue in the framing of your question. From the literature I have read, I think the current failure rate for the United States munitions is something in the order of five per cent. One per cent is their target by 2018. Of course, it goes without saying that any failure rate is a grievous thing. I understand that cluster munitions deployed by other countries, manufactured from other places, can have failure rates of up to 30 per cent.

Senator XENOPHON (South Australia) (20:29): I am grateful to Senator Feeney for his response. Even a five per cent figure—even a one per cent figure—is very concerning, because the very nature of cluster munitions is that one cluster munition can spread to hundreds of submunitions, with the damage that that can inflict. Given that the failure rate can be up to 30 per cent, which is quite staggering and quite frightening when you consider the terrifying impact that it has, can Senator Feeney advise to what extent he is satisfied, or the government is satisfied, that the United States position that the failure rate will go from five per cent, as referred to by the United States, to one per cent will be achieved. How will that be achieved? It is only six years away. Is that something that the Australian government has been briefed on? If so, is the Australian government satisfied that that one per cent target, which many would find still staggering, will be achieved? How can that be achieved in the six-year period?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:31): The short answer is no. The Australian government view is plain: we are opposed to the use of cluster munitions, the stockpiling of cluster munitions and the deployment of cluster munitions. The view of the Australian government is plainly that these weapons are inappropriate and that there is no acceptable failure rate. I gave you the statistics reflecting the position of the United States. Has the United States explained to Australia how it intends to achieve the one per cent target? Not to my knowledge, but I will take that on notice. But it is obviously a matter for the United States. Our position is not to negotiate with the United States or discuss with the United States its plans to reduce the failure rate. I think the position of the Australian government in international forums very plainly is to call upon all of the significant weapons manufacturers and stockpilers—of course, I speak of the United States as well as Russia, China, Iran and others—to abide by the international norm of not using these weapons and of applying the convention.

Senator XENOPHON (South Australia) (20:32): Further to that, does the parliamentary secretary consider it not unreasonable that Australia, given its pivotal, key strategic relationship with the United States of America—I do not think there is any question that it is our most strategic and important relationship, particularly in relation to defence, with the close cooperation between the two nations and the announcement made in November last year by the Prime Minister and President Obama of marines being stationed or deployed on a rotating basis, if you like, in the Northern Territory—could at least ask the United States, given their continuing heavy reliance on cluster munitions, the five per cent failure rate, our treaty obligations and the fact that this bill itself has been introduced by the government, what they are doing to at least reduce the failure rate of these munitions? I am surprised that that is not something that on a government-to-government level, given our close and pivotal relationship with the United States, we would be asking. Isn't that a reasonable question to ask the United States about how they will get from five per cent to one per cent?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:34): The Australian government is not embarking on a process of trying to normalise or sanitise the production and deployment of these weapons. In supporting the convention, we are not saying that there is a reasonable and an unreasonable extent to which these weapons can be used or deployed. Australia is making its position plain. We support the convention. We support the articles of the convention and the obligations therein. So, no, I do not think it is unusual that we have not negotiated or discussed with the United States its plans in this area. As I say, I will take it on notice. Perhaps that has happened at official level. I am not aware of it. Obviously what we are striving for—what I think all of us are striving for here—is to establish an international norm where the use of these weapons by anyone is unacceptable. Obviously the United States, like the other powers that I have referred to, has to weigh those judgments, and it obviously is doing that. But the Australian position is very plain: we support the convention. We are not going to embark on a process of trying to say there are good cluster munitions and bad cluster munitions. We support the convention.

Senator XENOPHON (South Australia) (20:35): Senator Feeney's answer raises an issue about the effectiveness of this legislation in the absence of the amendments proposed by the Australian Greens. My understanding from material that I have been provided is that, in report No. 103 of the Joint Standing Committee on Treaties in May 2009, JSCOT recommended ratification of the convention. However, it expressed concern 'that some of the terms contained in the convention are not clearly defined and may provide an avenue by which Australia could participate in actions which may contravene the humanitarian aims of the convention'. It went on:

The Committee therefore considers that the Australian Government and the ADF should address these issues when drafting the domestic legislation required to implement the Convention, and when developing policies by which the personnel of the Australian Defence Force operate.

I am relying on the Bills Digest in relation to this. JSCOT recommended that particular regard should be given to 'preventing inadvertent participation in the use, or assistance in the use, of cluster munitions by Australia'. Given what the parliamentary secretary has said in relation to the whole issue of the aims of the convention and the concerns expressed by the Joint Standing Committee on Treaties in May 2009—when there were, I think, some quite heavy caveats given, or perhaps warnings sounded, by the committee about there being a potential avenue by which Australia could participate in actions which could contravene the humanitarian aims of the convention—to what extent does the government say that those matters have been addressed in this legislation so that there is not a potential contravention of the humanitarian aims of the convention?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:37): The government gave careful consideration to JSCOT's recommendation regarding inadvertent participation and assistance in the use of cluster munitions. In its response to JSCOT's report the government noted that the convention does not prohibit inadvertent participation in the use, or assistance in the use, of cluster munitions. Rather, article 1 of the convention prohibits states parties from using cluster munitions and also prohibits assistance in the use of cluster munitions. This prohibition is subject to the exceptions contained in article 21 of the convention. Paragraph 3 of article 21 states:

Notwithstanding the provisions of Article 1 of this Convention and in accordance with international law, States Parties, their military personnel or nationals, may engage in military cooperation and operations with States not party to this Convention that might engage in activities prohibited to a State Party.

Paragraph 4 of article 21 states that states parties are nonetheless prohibited from themselves using, developing, producing or otherwise acquiring, stockpiling or transferring cluster munitions, or expressly requesting the use of cluster munitions in cases where the choice of munitions used is within their exclusive control. In this context the bill does not include an offence of inadvertently participating in the use, or assistance in the use, of cluster munitions.

The bill uses the same language as the convention, and this ensures that the bill accurately reflects the provisions of the convention. Sections 72.38 and 72.41 of the bill give effect to article 1 and paragraphs 3 and 4 of article 21 of the convention. Section 72.38 contains offences that cover the range of conduct prohibited in article 1, including the use and assistance in the use of cluster munitions. The physical elements of the offences found in section 72.38 must be done intentionally.

Section 72.41 provides that a person who is an Australian citizen, ADF member or Commonwealth contractor does not commit an offence under section 72.38 if the act is done in the course of military cooperation or operations with a foreign country that is not a party to the convention, and as long as the act is not connected with Australia using, developing, producing or otherwise acquiring, stockpiling, retaining or transferring a cluster munition or expressly requesting the use of cluster munitions where the choice of munitions used is within Australia's exclusive control.

The limitations contained in this provision, known as the interoperability provision, will ensure that Australia and Australians will continue to act consistently with the objects and the purpose of the convention even when undertaking cooperative activities with countries that are not obliged to comply with the convention. Obviously, the United States is the example of the moment.

Senator LUDLAM (Western Australia) (20:40): I am glad you have started quoting sections of the bill to us. I will continue in kind. We will just step through this, and I will invite the minister now to jump at the point where he hears me misinterpret a section of the act. I just want to step through the sections that the minister just quoted to us: 72.38 of the bill—offences relating to cluster munitions. It appears to me to have been drafted more and less using exactly the same language as the convention. It is comprehensive. There is nothing there that I would consider has been left out. That is what Australia will henceforth be bound to. Is that a correct reading of section 72.38?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:41): Yes. Obviously, it applies to individuals and not to countries.

Senator LUDLAM (Western Australia) (20:41): Thanks, Minister. With that caveat attached, that is fair enough. This is formalising what will in fact be unlawful for a person to undertake henceforth. That is my reading of it.

However, we come to section 72.41—and this is where I think this debate hinges in its entirety, so I am just going to quote what 72.41 does. It says:

A person who is an Australian citizen, is a member of the Australian Defence Force or is performing services under a Commonwealth contract does not commit an offence—

In other words, is exempt from the section that I quoted to you previously—

… against section 72.38 by doing an act if:

(a) the act is done in the course of military cooperation or operations with a foreign country that is not a party to the Convention on Cluster Munitions;—

For the time being, let us let the US government stand in—

… and

(b) the act is not connected with the Commonwealth:

   (i) using a cluster munition; or

   (ii) developing, producing or otherwise acquiring a cluster munition; or

   (iii) stockpiling or retaining a cluster munition; or

   (iv) transferring a cluster munition; and …

My understanding of that is that if I am an FA18 pilot, it is 2003 and I am flying close support on my way into Baghdad; and units of the US Army or Marine Corps below me are firing cluster weapons indiscriminately into urban areas; and I have not called on them to do that but I am flying close support for those units, then I would be protected, even if this bill had been in force in 2003. Minister, is that a correct reading of this bill?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:43): Let me perhaps take you to how the government comprehends this issue. I will resist the invitation to deal with the hypothetical you have—

Senator Ludlam: No, it's a real instance.

Senator FEENEY: You are talking about 2003 and we are talking about a convention here of 2012. Bear with me and then, of course, we will fight to the death to defend your democratic right to keep questioning me.

Senator Ludlam: Thank you.

Senator FEENEY: Very good. So what conduct would be excused by the defence found in section 72.41? The bill includes a defence which corresponds to the range of conduct that is permitted by article 21 of the convention. The defence applies to persons whose conduct is done in the course of military cooperation or operations with countries that are not party to the convention. Of course, in those respects your understanding conforms with our own.

However, notwithstanding this defence, it will be an offence for a person to use, develop, produce, acquire, stockpile or retain cluster munitions, even in the course of combined operations with countries that are not party to the convention. The defence will also not apply if a person expressly requests the use of cluster munitions in a situation where the choice of munitions used is within Australia's exclusive control.

As a consequence of this provision, ADF personnel will be able to continue to participate in a variety of roles when involved in combined operations with countries not party to the convention who may use cluster munitions, as is permitted by article 21 of the convention. For example, ADF personnel will be able to hold senior positions in combined headquarters and participate in mission planning with countries not party to the convention. ADF personnel could still be employed in intelligence, logistics or other combat support roles during combined operations. ADF personnel may also be deployed to operate with countries not party to the convention or to provide logistical support to non-state party forces. Where necessary, deployed ADF combat units would also be able to call for fire support—from air, artillery or naval gunfire—from countries not party to the convention, so long as the ADF personnel do not expressly request the use of cluster munitions in a situation where the choice of munitions to be used is within their exclusive control. The ability to call for fire support is essential to protection of ADF lives in the field. Protective fire support would be called for to ensure the protection and safety of ADF personnel and assets in the field when faced with imminent threat from enemy forces.

The fact that the convention and the bill permit ADF personnel to undertake certain roles in combined operations does not mean that the ADF personnel will necessarily be doing those jobs. The ADF may place additional restrictions on ADF personnel through directives, rules of engagement and some of those other devices we have already discussed. Australia's rules of engagement may place limits upon the kinds of roles and tasks that our personnel carry out in accordance with the government's strategic direction. Agencies are working to ensure that ADF doctrine, procedures, rules and directives will be consistent with the convention. This process will be completed before Australia ratifies the convention and this legislation commences.

It is also important to remember that, consistent with article 21 and the interoperability defence in the bill, when undertaking these roles ADF personnel will be prohibited from using, transferring, stockpiling, developing, producing or acquiring cluster munitions, or expressly requesting the use of cluster munitions where the choice of munitions used is within Australia's exclusive control. Specifically, ADF personnel will not be permitted to use cluster munitions themselves, even when deployed with the forces of countries not party to the convention.

Senator LUDLAM (Western Australia) (20:47): Minister, for once I am finding the committee stage of this bill extremely helpful. It is not every debate that I get to stand up and say that. This is actually highly instructive. In fact, you have confirmed the point that I have taken. If I may make this request just to save time in the debate: can we set aside any further assurances from the minister that Australian forces will be permitted to deploy or use cluster weapons? I completely and fully understand that we have no intention of doing that. I have heard that from you; I have heard that from the department; I have heard that from men and women in uniform who have put it on the record. The case that I am interested in—and the minister referred to this repeatedly on his way through that explanation—is our ability to work with forces who are non-state parties to the convention.

I also understand why article 21 got in there. I might disagree with it but there were arguments made at the time that without some form of words, which eventually landed at article 21, this convention would not have got up at all. I understand. Perhaps from Australia's point of view the government might argue, 'No article 21—then we cannot play because we still feel we may perhaps in the future want to invade more countries at the behest of the United States.' We have some form in that; maybe we will want to continue to do that in future. Who knows? Perhaps we will be called on to invade Iran. But let us not get distracted.

If I could remind you gently, Minister, the reason we go into the committee stage is to establish how these bills will work. I attempted not to use a hypothetical; I attempted to use a very timely real-world case. Minister, with respect to the fact that you have not yet been able to return with some answers as to whether the RAAF flew close support for US ground forces using these weapons, as we obviously have not been going all that long—would that behaviour be prohibited under this bill? My explicit reading of it is that it would not. None of the exceptions in section 72.41 would prevent an Australian RAAF pilot, who had not called in the cluster weapon strike, nonetheless supporting an operation in which they are used. If there is an exception in section 72.41 which would prevent that behaviour—in other words, if it is the government's point of view that, if that conduct occurred in 2003, it would certainly be expressly prohibited in any future military operation—could the minister point me to the exclusion that would cause a material difference?

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:49): Unfortunately I am not really able to assist you, Senator. There are too many hypotheticals in your scenario. But I should think that the detail I just provided would give you adequate comfort, because there we have described the conduct of Australian personnel and the requirements upon them when they operate with non-states parties. That is as much detail as we are in a position to give.

Senator LUDLAM (Western Australia) (20:50): Maybe I could have expressed the question more clearly. I respect the reason we do not like to drift off into hypotheticals because of the way these debates will be interpreted later. Would this bill, should it become an act—and I am still holding out some faint hope that sense will prevail but we will see—prevent the ADF from participating in operations with non-states parties who are using cluster munitions? At the moment you have framed your answers like so: 'Look, maybe they have them in the arsenal but we are assuming they are not actually using them,' but there is nothing in my reading of the parts of the bill that we are referring to tonight—expressly sections 72.41 and 72.38—that would prevent the scenario I am describing. Call it hypothetical if you will. Human Rights Watch, the International Red Cross and a number of other observers believe this occurred in 2003. With respect to the fact that the United States government intends to remain a non-states party to this convention, can you tell us what would preclude a RAAF squadron performing exactly the kind of thing that I have described in 2003—or would that be permitted? It is not really hypothetical. It is about your interpretation of the bill.

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:51): Again, all I can really do is commend the wording of proposed section 72.41 to you. As I said in my answer earlier, notwithstanding the interoperability provisions, it will be an offence for a person to use, develop, produce, acquire, stockpile or retain cluster munitions even in the course of combined operations with countries that are not a party to the convention. That is obviously deeply significant. It is an offence for a person to use, develop, produce, acquire, stockpile or retain cluster munitions even when engaged in combined operations. The interoperability defence will also not apply if a person expressly requests the use of cluster munitions in a situation where the choice of munitions used is within Australia's exclusive control.

Senator LUDLAM (Western Australia) (20:52): Minister, what if the ADF unit is supporting a US military unit that is using cluster weapons, as was the case—you can refer to it if you wish; I do not mind—with the invasion of Iraq, where we were doing none of the things that you have just listed? We were not using, we were not deploying, we were not stockpiling, retaining, developing or producing. We were not doing any of those things. We were flying support for units using cluster munitions. It is a really simple question. The minister is across this stuff. You are in a representational capacity but you do know this bill inside out. You also know the sector very well in your ministerial capacity. This is exactly the kind of case. Would this prevent the ADF from operating in direct support of a unit using cluster weapons? It is just a yes or no.

Senator FEENEY (Victoria—Parliamentary Secretary for Defence) (20:53): Alas, it is never as simple as a yes or no, Senator. I think we would be deeply remiss if we started to go through imaginary and hypothetical military circumstances and a group of civilians like us started to try to define these matters. Senator, let me take you to the convention and say that it is important that the convention is read as a whole and given its ordinary meaning, as it is appropriate to when speaking of international treaties. It is important to note that subarticle 3 of article 21 creates an exception to article 1, but then subarticle 4 limits the scope of the exception. By limiting the scope of the exception it makes it clear that certain things that would be prohibited, but for the fact of the exception created by subarticle 3, are not prohibited because subarticle 4 picks up some of the conduct in article 1 and makes it clear that, notwithstanding the general exception, a country cannot engage in that conduct. So, when the convention is read and taken as a whole, it is the government's view that the convention itself does permit certain conduct and that what is prohibited is more narrow than the general prohibition in article 1. That is faithfully picked up in the bill. So it is the government's view that that means that the conduct found in subarticle 4 of article 21 remains prohibited, notwithstanding the otherwise general exception, but that other conduct is not prohibited.

Senator LUDLAM (Western Australia) (20:55): Minister, I cannot take anything away from this exchange other than, if Australia were again to find itself in the position of supporting US units firing cluster weapons into civilian areas, we would not be prevented and that this accession to the convention would not prohibit or preclude us from doing just that.

Senator XENOPHON (South Australia) (20:56): I do not want the parliamentary secretary to traverse areas that have already been traversed but I do want to pin down this issue, if he would clarify it. I think it is always dangerous for someone of legal training to ask a question about which they have no idea what the answer will be.

Senator Feeney: The first rule of cross-examination.

Senator XENOPHON: The first rule of cross-examination, yes, and I have no idea what the minister will say in relation to this. Just to recap in terms of some first principles so that the premise of this question is not misunderstood. We have the offence in proposed section 72.38 about doing acts with cluster munitions, in particular with respect to subclause (2) that a person commits an offence if the first person 'assists, encourages or induces' another person to do any of the following acts with cluster munition: use it, develop it, stockpile it, transfer it to anyone; the other person does the act and the first person intends that the act be done. The key words there are 'assists, encourages or induces'. You have the defence in proposed section 72.41, where it is a defence if 'the act is done in the course of military cooperation or operations with a foreign country that is not a party to the Convention on Cluster Munitions'. If we then go to the convention we see that the preamble to the convention makes this reference:

Determined to put an end for all time to the suffering and casualties caused by cluster munitions at the time of their use, when they fail to function as intended or when they are abandoned.

So that failure rate is clearly referred to in the preamble. Article 1 makes specific reference to the general obligations. It states:

Each State Party undertakes never under any circumstances to:

   (a) Use cluster munitions;

   (b) Develop, produce, otherwise acquire, stockpile, retain or transfer to anyone, directly or indirectly, cluster munitions;

   (c) Assist, encourage or induce anyone to engage in any activity prohibited to a State Party under this Convention.

From a general drafting principle, and it has been 36 years since I did statutory interpretation at law school—

Senator Ludlam: I was in primary school.

Senator XENOPHON: Senator Ludlam was in primary school. It has been 36 years since I did statutory law interpretation—and not a word from Senator Back on that either—but, in terms of general principles, if this piece of legislation is intended to ratify the terms of this convention, which is quite explicit as to its key obligation, which relates to 'never under any circumstances should a state party assist, encourage or induce anyone to engage in any activity', leaving aside any issues of hypotheticals of Iraq, and I do not think anyone can say that the Iraq war was a hypothetical event—

Senator Feeney: I was not the Parliamentary Secretary for Defence.

Senator XENOPHON: I will not hold Senator Feeney responsible for Australia's involvement in the Iraq war, where we as a nation were joined at the hip with George W Bush. I will give him that.

Isn't there a difficulty here that, by virtue of the defence in 72.41, it is fundamentally inconsistent with part 1(c) of article 1 of the convention? That is the first question. I have a second question, in order to save time and be helpful to the committee. Reference was made to JSCOT, to the Joint Standing Committee on Treaties, and it expressed concern that some of the terms in the convention are not clearly defined and may provide an avenue by which Australia could participate in actions which may contravene the humanitarian aims of the convention. Did the government seek advice from JSCOT once this bill was drafted? I have no idea what the answer is, but was there a subsequent JSCOT inquiry into the provisions of this bill, particularly in relation to the interplay between 72.41, 72.38, part 1(c) of article 1 of the convention, and the preamble to the convention, which says: