Recent trends have been for Government departments and statutory authorities to set up subsidiary companies. I am concerned about this trend and also the perception that the formation of a company by a public sector entity is necessarily a desirable thing. The main reasons given by public sector entities for the establishment of subsidiaries are:

• it provides a means of clearly segregating an activity not forming part of an entity's mainstream operations;
• it allows for concentration of related activities;
• it enables the subsidiary to project an independent and commercial image with customers and suppliers;
• it facilitates private sector equity participation through the placement of share capital;
• it allows the negotiation of industrial awards that are competitive with the private sector;
• it facilitates participation in business opportunities with other investors e.g. joint ventures.

I wish to emphasise that, whilst some of these reasons for establishing subsidiaries may be valid, they are not the only factors to be taken into account when establishing a subsidiary company.

The Auditor General has indicated in recent reports that the main problem with the formation of subsidiaries is that public sector activities may become removed from the usual Parliamentary scrutiny and the accountability process.

In order to address the problem raised by the Auditor General the following guidelines are to apply to the establishment of subsidiary companies by all public sector entities (including Departments and Ministers) regardless of whether or not those entities are subject to Ministerial control. The guidelines are to apply, as far as possible, to existing subsidiaries. However, the guidelines are not to apply to the subsidiaries of State Owned Corporations.

The guidelines are administrative requirements which should be met in addition to any requirements spelt out in relevant legislation. For the purpose of the guidelines "subsidiary" is to mean a company which, if the public entity were a corporation, would be a subsidiary of the public entity within the meaning of the Corporations Law. It should be noted that the definition in the Corporations Law is expansive and includes subsidiaries of subsidiaries.

The Government's guidelines are as follows:

1. A public sector entity (including a subsidiary of such an entity) is not to acquire an interest in a company which would result in that company becoming a subsidiary, or dispose of such an interest, without the written approval of both the responsible Minister and the Treasurer. Such approval may be conditional upon limitations specified by the Minister or the Treasurer on the scope of the subsidiary’s operations or on the adoption of specified controls.

2. It is anticipated that it will not be necessary for inner budget sector agencies (ie. those agencies which depend for more than half their operating income on the Consolidated Fund or other tax based sources) to establish subsidiaries. Such agencies will need to demonstrate particularly good reasons if they wish to establish a subsidiary company. Such agencies should consider all available options, including the system of net appropriations, and demonstrate to the responsible Minister and the Treasurer that the establishment of a subsidiary company will create benefits which cannot be achieved in any other way. In some cases it may be necessary for such agencies to consider establishing a subsidiary company as a vehicle for entering into a joint venture arrangement. However, it should be emphasised that it will still be necessary for the agency to demonstrate to the responsible Minister and the Treasurer that the establishment of a subsidiary company will create benefits which cannot be achieved in any other way.

3. If it is considered appropriate for a public sector entity to establish subsidiaries, then the legislation governing the entity should provide explicitly the power for that entity to form or acquire subsidiaries. However, the power of the Crown itself to form or acquire subsidiaries (through its agents, namely Ministers and senior departmental officers) is not limited to those occasions on which it, or its agents, have explicit legislative authority.

4. The approval of the Minister and the Treasurer for the establishment of a subsidiary company will not normally be given unless the following are demonstrated:

• the subsidiary will operate on a commercial basis;
• the subsidiary will operate on a level playing field and will not enjoy the benefit of cross-subsidisation from other operations of the parent body;
• the establishment of the subsidiary will result in clearly identified efficiencies and/or other benefitswhich cannot be obtained without recourse to such a structure; and
• the subsidiary will not pursue social objectives, except as an adjunct to its commercial objectives.

5. Subsidiary companies are not to take the form of exempt proprietary companies, companies limited by guarantee or incorporated associations. These types of entities have limited reporting requirements and, accordingly, are unsuitable for the public sector.

6. Subsidiary companies are not to enjoy the benefit of an implied government guarantee. The memorandum and articles of association of a subsidiary company should stipulate that the subsidiary does not enjoy the benefit of an implied government guarantee. The articles should provide that any guarantee is to be agreed in writing between the board, the shareholders and the Treasurer, subject to the subsidiary company paying to the Treasurer a fee for the benefit of the agreed guarantee.

7. At the time of establishing a subsidiary company, consideration should be given to whether the subsidiary will ever act as an agent of the Crown. If it is proposed that the subsidiary will act as an agent of the Crown, then the circumstances of the subsidiary so acting should be clearly spelt out in the articles. Otherwise, the articles should contain a clear statement that the subsidiary is not an agent of the Crown.

8. It should be noted that, by virtue of the Corporations Law, a subsidiary of a public sector entity would have unlimited powers, including the power to operate outside the State of New South Wales. Accordingly, a subsidiary company is to clearly state its objects in its memorandum of association. The articles of a subsidiary company should include express restrictions on the powers of the subsidiary so that its powers do not exceed the powers of the parent body unless expressly permitted by the legislation governing the parent body.

9. A subsidiary company should not have power to amend its memorandum and articles of association to extend its powers beyond the powers of the parent body. In cases where the parent body is subject to the direction and control of the Minister, the memorandum and articles should provide that all amendments to the memorandum and articles of association of a subsidiary are to be approved by the Minister. In all other cases the memorandum and articles should provide that amendments to the memorandum and articles of association of a subsidiary are to be approved in writing by the parent body.

10. Industrial relations issues are to be addressed prior to the establishment of a subsidiary company. The Minister for Industrial Relations should be consulted and any proposal to establish a subsidiary should detail the industrial relations issues together with a strategy for dealing with such issues.

11. At the time of establishing a subsidiary company, consideration should be given to the taxation status of the subsidiary. Section 23 (d) of the Income Tax Assessment Act provides an exemption for a public authority constituted under a State Act. The Commissioner of Taxation has indicated, in relation to State Owned Corporations, that an incorporated body operated on a commercial basis and with the intention of operating at a profit is not fatal to the exemption afforded by section 23 (d). However, the Commissioner is of the view that it is probable that the privatisation of a State Owned Corporation by the sale of all or some of its shares to private individuals or private entities would preclude the State Owned Corporation being characterised as a public authority. It is possible that a wholly-owned subsidiary of a public sector entity would be treated by the Taxation Commissioner in the same way as a State Owned Corporation. However, a subsidiary which is not wholly-owned by a public sector entity may not be characterised as a public authority. Rulings should be sought from the Taxation Commissioner prior to the establishment of a subsidiary Company.

12. In the case of those subsidiaries which are not required to pay Commonwealth income tax, the articles of association of the subsidiary should provide that the subsidiary is to pay to the Treasurer, for payment into the Consolidated Fund, the equivalent of the amounts that would be payable by the subsidiary if it were liable to pay Commonwealth income tax. The articles of a subsidiary should provide that the amount of the payment to the Consolidated Fund, in lieu of Commonwealth income tax, will be calculated by a person nominated by The Treasury.

13. At the time of establishing a subsidiary, the parent body should be aware that the subsidiary will be liable to pay all State and local taxes, duties and charges.

14. The shareholders of a subsidiary company will need to be nominated by the parent body. In the case of parent bodies which are legal entities e.g. statutory authorities, the shareholders should be the parent body itself and the holders of senior management positions within the parent body as nominees for the parent body. In other cases the shareholders should be the holders of senior management positions within the parent body as nominees for the Crown. The articles of association of a subsidiary company should provide:

• no person may become a shareholder without the approval of the Minister;
• that the shareholders hold their shares in trust for the parent body or, where appropriate, the Crown;
• that a shareholder who ceases to hold the senior management position in the parent body, and at any other time when directed by the parent body, should transfer the shares to any successor to that position, or such other person as nominated by the Minister and, pending such a transfer, the shareholder continues to hold the shares in trust for the parent body or the Crown;
• that a shareholder may not sell or dispose of shares in the subsidiary to anyone other than the parent body or another officer of the parent body approved by the Minister.

In cases where the parent body is not subject to the direction and control of the Minister, the parent body shall perform the functions of the Minister outlined in this guideline.

15. The articles of association of a subsidiary company should set out the procedure for determination and payment of dividends. In relation to wholly-owned subsidiaries the procedure for payment of dividends should be similar to that applying to State Owned Corporations. The articles of association of a State Owned Corporation are to include an article requiring every dividend to be of such amount and paid at such times and in such instalments as may be agreed between the shareholders and the board. If no agreement is reached, the shareholders may by written notice to the board determine the matter and the board must act in conformity with the determination. The articles of a wholly-owned subsidiary should contain a similar article to that for State Owned Corporations. However, in cases where the parent body is subject to the direction and control of the Minister the articles should require the agreement of the Minister rather than the shareholders. In relation to subsidiaries which are not wholly-owned, the articles should set out a procedure, which has been approved by the Treasurer, for determination and payment of dividends.

16. The articles of association of a subsidiary company should provide that the subsidiary may not sell or otherwise dispose of its main undertaking without the prior written approval of the parent body. Again, in cases where the parent body is subject to the direction and control of the Minister the articles should require the approval of the Minister rather than the parent body. The articles of a subsidiary should also include an article restricting the acquisition and disposal by the subsidiary of fixed assets which exceed 10% of the total value of assets without the prior approval of the parent body or, in cases where the parent body is subject to the direction and control of the Minister, the Minister. There may be cases where it would be appropriate for the Minister to waive this requirement such as a joint venture company.

17. The Minister responsible for the parent body is to table before each House of Parliament the following:

• a copy of the memorandum and articles of association of each subsidiary within 14 sitting days of the formation or acquisition of the subsidiary;
• a copy of any change to the memorandum or articles of association of a subsidiary within 14 sitting days after the date of the change.

18. Each parent body is to keep a register of its interests in subsidiaries and associated companies. The register should also list interests in joint ventures, partnerships, associations etc. For the purposes of these guidelines associated company means a company in which the public sector entity holds 10% or more of any class of shares.

19. Each parent body is to provide a copy of its register of subsidiaries, associated companies and other interests to the Treasury so that a central register of all subsidiaries may be maintained by the Treasury.

20. A parent body is to produce group accounts in the form of consolidated financial statements (where possible) in addition to separate accounts for each entity in the group. In addition to all other statutory requirements, the accounts should include key figures for each subsidiary (turnover, profit etc.) and their proportion to group totals. These group accounts and separate accounts are all to be included in the parent body's annual report.

21. The annual reports of parent bodies are to include a detailed statement of the objectives, activities and operations of each subsidiary company, the performance targets and measures for each subsidiary company and the accounts referred to above. The annual report should also contain a description of the nature and extent of any involvement in companies, joint ventures, partnerships, trusts or other such associations.

22. All subsidiaries are to be subject to audit by the Auditor General, or his nominated agent, for the purposes of the Public Finance and Audit Act and the Auditor General, or his nominated agent, must also be the auditor of the subsidiary for the purposes of the Corporations Law.

Nick Greiner, M.P.,
Premier and Treasurer.