Guidelines for the formation and operation of subsidiary companies by departments and statutory authorities were previously issued in 1991 (Premier's Memorandum No. 91-02).

Those guidelines were issued at a time when it was becoming increasingly common for Government departments and statutory authorities to set up subsidiary companies, and amid concerns that the formation of these subsidiaries might result in some public sector activities being removed from Parliamentary scrutiny and usual accountability measures.

Although subsidiary companies have continued since that time to be used as a vehicle for conducting some government activities, it is important to reiterate the need to be circumspect when establishing and operating subsidiary companies, given their status as separate legal entities.

It is timely then, that these guidelines now be issued in an updated form.

The attached guidelines apply to the establishment of subsidiaries by all public sector entities (including Departments and Ministers). The guidelines apply, as far as possible, to existing subsidiaries. The guidelines do not, however, apply to State Owned Corporations.

The guidelines are administrative requirements which should be met in addition to any legislative requirements.

Morris Iemma MP
Premier

Issued: Legal Branch, The Cabinet Office
Contact Officer: Anthony Lean, Policy Manager, 9228 5543
Email: [email protected]
Web Address: www.dpc.nsw.gov.au
Date: 14 March 2006

This Memorandum supersedes Premier's Memorandum No. 91-02 Guidelines for the Formation and Operation of Subsidiary Companies by Departments and Statutory Authorities

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GUIDELINES FOR THE FORMATION AND OPERATION OF PUBLIC SECTOR SUBSIDIARIES

APPLICATION OF GUIDELINES

Application of guidelines
These guidelines apply to all public sector entities (including Departments).
The guidelines apply, as far as possible, to existing public sector subsidiaries. Where these guidelines require that particular provisions be included in the constitution of a public sector subsidiary, existing public sector subsidiaries should, if necessary, take steps to amend their constitutions to comply with these guidelines.

The guidelines extend to public sector entities which are not otherwise subject to Ministerial control, except that the guidelines do not apply to State Owned Corporations and their subsidiaries.

If an entity is not otherwise subject to Ministerial control, a requirement in these guidelines to obtain the approval or agreement of, or to act in accordance with directions of, the Portfolio Minister should be read as a requirement to obtain the approval or agreement of, or to act in accordance with the directions of, the relevant parent body.

What is a "public sector subsidiary"?
In these guidelines "public sector subsidiary" follows the meaning of "subsidiary" given in the Corporations Act 2001 (Cth), which is based on the concept of control.
A company in which one or more public sector entities holds shares will be a public sector subsidiary if it would be a subsidiary under the Corporations Act if those shares instead were held by a single corporation.

This means that a company will be a public sector subsidiary if one or more public sector entities alone or together:

(i) control the composition of the company's board;
(ii) are in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first company; or
(iii) hold more than one-half of the company's issued share capital.

A company is also a public sector subsidiary if it is a subsidiary of a public sector subsidiary (as defined above).

Where more than one public sector entity holds shares in a public sector subsidiary then a reference in these guidelines to the "parent body" of that public sector subsidiary includes all of those entities.

Ministerial Responsibility
The Minister responsible for the parent body will also be the Minister responsible for the public sector subsidiaries of that parent body. In these guidelines that Minister is referred to as the Portfolio Minister. Note that a public sector subsidiary may have more than one Portfolio Minister, if it is jointly owned by more than one public sector entity.

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GUIDELINES

CONTENTS

PART I - APPROVALS
1. Requirement to obtain approval from the Portfolio Minister and the Treasurer
2. Approval may be conditional
3. Approval of Premier may be required
4. Circumstances in which approval may be granted
5. Disposal of a public sector entity
6. Tabling of documents in Parliament

PART II - RELATIONSHIP TO CROWN
7. Ability to act on behalf of the Crown
8. Government guarantee
9. No powers beyond those of parent body

PART III - CORPORATE STRUCTURE AND CORPORATE GOVERNANCE
10. Type of company
11. Shareholders
12. Entrenchment of constitution

PART IV - COMMERCIAL POLICY FRAMEWORK AND FINANCIAL OVERSIGHT
13. Application of Commercial Policy Framework
14. Dividends
15. Prohibition on disposal of main undertaking
16. Reporting requirements
17. Audits
18. Liability to pay taxes

PART I - APPROVALS

1. Requirement to obtain approval from the Portfolio Minister and the Treasurer

1.1 Before forming a public sector subsidiary or acquiring interests in a company which would result in that company becoming a public sector subsidiary, a public sector entity (including a public sector subsidiary) must obtain written approval from the Treasurer and, if the parent body is subject to Ministerial control, the Portfolio Minister.


1.2 Where two or more public sector entities propose together to establish a public sector subsidiary, they must separately seek the approval of their Portfolio Minister (if subject to Ministerial control) and jointly seek the Treasurer's approval.

2. Approval may be conditional

2.1 Approval for the establishment of a public sector subsidiary may be granted subject to conditions.

3. Approval of Premier may be required

3.1 Before granting approval, the Treasurer must inform The Cabinet Office that approval has been sought.


3.2 If the Treasurer, with the advice of The Cabinet Office, is of the view that the establishment of the public sector subsidiary may raise important public sector management and/or whole-of-government policy issues, the Treasurer will grant approval subject to the relevant parent body also obtaining approval from the Premier.

4. Circumstances in which approval may be granted

4.1 Approval for the establishment of a public sector subsidiary will not ordinarily be granted unless all of the following are demonstrated:

(a) the company will pursue principally commercial objectives, will operate on a commercial basis and will be subject to the Commercial Policy Framework;

(b) the company will operate at least as efficiently as any comparable business, will comply with principles of competitive neutrality and will not enjoy the benefit of cross-subsidisation from other operations of the parent body;

(c) the establishment of the company will result in clearly identified efficiencies and/or other benefits which cannot be obtained without recourse to such a structure;

(d) the company will exhibit a sense of social responsibility by having regard to the interests of the community in which it operates;

(e) the company will, where its activities affect the environment, conduct its operations in compliance with the principles of ecologically sustainable development contained in section 6(2) of the Protection of the Environment Administration Act 1991;

(f) the company will exhibit a sense of responsibility toward regional development and decentralisation in the way in which it operates;

(g) any industrial relations issues have been identified and a strategy formulated for dealing with them (including, where appropriate, following consultation with the Public Employment Office and the Minister for Industrial Relations); and

(h) the company, including its proposed constitution, complies with these guidelines. 

4.2 Approval will not ordinarily be granted to budget-dependent general government sector agencies (ie. those agencies which depend on the Consolidated Fund for their operating income). Approval may only be granted to such agencies if they can demonstrate that, after having considered all available options (including the system of net appropriations), the establishment of a public sector subsidiary will create benefits which cannot be achieved in any other way.

5. Disposal of a public sector entity

5.1 A parent body must not dispose of an interest in a company which would result in that company ceasing to be a public sector subsidiary without the prior written approval of the Treasurer and the Portfolio Minister.

6. Tabling of documents in Parliament

6.1 The Portfolio Minister must table before each House of Parliament the following:

(a) the constitution of a public sector subsidiary within 14 sitting days of its having been established; and

(b) any change to the constitution of a public sector subsidiary within 14 sitting days of the date of the change.

6.2 Where two or more public entities have together established a public sector subsidiary, it is sufficient for the Portfolio Minister for one of the public sector entities to table the relevant documents.

PART II - RELATIONSHIP TO CROWN

7. Ability to act on behalf of the Crown

7.1 The constitution of a public sector subsidiary must specify any circumstances under which the subsidiary will be taken to act as an agent of the Crown. Otherwise, it must state that the company is not an agent of the Crown.

7.2 That provision of the constitution may not be modified without the written approval of the Treasurer and the Portfolio Minister.

8. Government guarantee

8.1 Public sector subsidiaries do not enjoy the benefit of an implied government guarantee.

8.2 Where, however, a public sector subsidiary is an 'authority' under section 3 of the Public Authorities (Financial Arrangements) Act 1987, section 22A of that Act confers an express government guarantee for certain types of financial accommodation.

8.3 The constitution of a public sector subsidiary must contain provisions to the effect that:

(a) the company does not enjoy the benefit of any implied government guarantee; and

(b) other than the guarantee provided under section 22A of the Public Authorities (Financial Arrangements) Act 1987 (if relevant), any guarantee which may be granted by the Government is to be expressly agreed in writing between the board, the shareholders and the Treasurer, and will (unless an exemption is agreed) be subject to the company paying to the Government a fee for the benefit of the agreed guarantee.

8.4 Those provisions of the constitution may not be modified without the written approval of the Treasurer and the Portfolio Minister.

9. No powers beyond those of parent body

9.1 The constitution of a public sector subsidiary must include an express restriction on the power of the company, so that its powers do not exceed the powers of the parent body. In particular, the constitution of a public sector company must prohibit the company from operating outside the State of New South Wales if the parent body does not have power to do so.

9.2 That provision of the constitution may not be modified without the written approval of the Treasurer and the Portfolio Minister.

PART III - CORPORATE STRUCTURE AND CORPORATE GOVERNANCE

10. Type of company

10.1 A public sector subsidiary should take the form of a company limited by shares. It should not take the form of a company limited by guarantee or an incorporated association.

11. Shareholders

11.1 If the parent body is a legal entity (such as a statutory authority) the shareholder of the public sector subsidiary should be the parent body itself. The parent body may nominate a Minister or one or more holders of senior management positions within the parent body also to be shareholders as nominees for the parent body.

11.2 In other cases, the parent body should nominate a Minister or one or more holders of senior management positions within the parent body to be shareholders as nominees for the Crown. The proposed nominee(s) must be approved by the Portfolio Minister.

11.3 The constitution of a public sector subsidiary must include provisions to the following effect:

(a) no person may become a shareholder without the approval of the Portfolio Minister;

(b) shareholders (other than the parent body) hold their shares in trust for the parent body or the Crown (as the case may be);

(c) shareholders (other than the parent body) must deal with their shares (including transferring them) as directed by the parent body;

(d) the Portfolio Minister may execute a transfer of shares on behalf of a shareholder, and a transfer of shares executed on behalf of the transferor by the Portfolio Minister is taken to be an effective transfer of shares by the transferor;

(e) if a shareholder holding a senior management position in the parent body ceases to hold that position they must immediately transfer their shares to the successor to that position (or such other person as the parent body may, with the approval of the Portfolio Minister, nominate) and, pending such a transfer, the shareholder continues to hold the shares in trust for the parent body or the Crown but may not exercise any voting or other rights attaching to the shares; and

(f) a shareholder may not sell or dispose of any shares (or interests in shares) to any person other than the parent body or a person approved by the Portfolio Minister.

12. Entrenchment of constitution

12.1 In addition to any other requirement imposed by these guidelines, the constitution of a public sector subsidiary whose parent body is subject to Ministerial control may not be modified except with the approval of the Portfolio Minister.

PART IV - COMMERCIAL POLICY FRAMEWORK AND FINANCIAL OVERSIGHT

13. Application of Commercial Policy Framework

13.1 Public sector subsidiaries formed to operate on a commercial basis will be subject to the Government's Commercial Policy Framework.

13.2 If the parent body of a public sector subsidiary is already subject to the Commercial Policy Framework, then the subsidiary will also be covered by the Framework. This means that the public sector subsidiary, its objectives, activities and performance targets must be separately identified and included in the parent body's Statement of Business Intent.

13.3 If the parent body is not itself subject to the Commercial Policy Framework, but the public sector subsidiary has been formed to operate on a commercial basis, then the parent body and the public sector subsidiary must seek Treasury's advice as to the specific policies and disciplines of the Framework which will apply.

14. Dividends

14.1 If a public sector subsidiary is wholly-owned, its constitution must include provisions:

(a) requiring it to declare and pay such dividends as may be directed by the Treasurer from time to time, and to submit accounting statements to the Treasurer for the purpose of determining the dividend payable; and

(b) requiring that all dividends be paid to the Treasurer on behalf of the State for payment into the Consolidated Fund.

14.2 If a public sector subsidiary is not wholly-owned, its constitution should set out a procedure, which has been approved by the Treasurer, for the determination and payment of dividends.

14.3 Generally, the procedure will require that dividends be of such amount and paid at such times and in such instalments as may be agreed between the shareholders and the board, after consultation with the Treasurer. If no agreement is reached, then the parent body may, with the concurrence of the Treasurer and by written notice to the board, determine the matter and the board must act in conformity with the determination.

14.4 Provisions of the constitution relating to dividends may not be modified without the Treasurer's approval.

15. Prohibition on disposal of main undertaking

15.1 The constitution of a public sector subsidiary must provide that the company may not dispose of its main undertaking without the approval of the Portfolio Minister.

15.2 Unless the Portfolio Minister agrees otherwise, the constitution of a public sector subsidiary company must also provide that the company may not acquire or dispose of fixed assets or investments which exceed ten percent of the total value of its assets or investments (as the case may be) without the prior approval of the Portfolio Minister.

16. Reporting requirements

16.1 In addition to all other statutory requirements, the annual reports of parent bodies must:

(a) identify each public sector subsidiary in which shares are held, and the number and percentage of shares held;

(b) include key figures for each public sector subsidiary (turnover, profit, assets) and their proportion to group totals;

(c) include a detailed statement of the objectives, activities and operations of each public sector subsidiary, the performance targets and measures for each public sector subsidiary and the accounts referred to above; and

(d) include a description of the nature and extent of any involvement in any other companies, joint ventures, partnerships, trusts or other such associations (whether incorporated or not).

17. Audits

17.1 All public sector subsidiaries are subject to audit by the Auditor General. Audits will be required to be undertaken irrespective of whether the company is a controlled entity of a department or statutory body required to be audited under the Public Finance and Audit Act 1983.

17.2 When an audit of a public sector subsidiary is required for any purpose (including for the purposes of the Corporations Act 2001 (Cth)) the company should arrange for the Auditor General to undertake the audit.

18. Liability to pay taxes

18.1 Public sector subsidiaries will be subject to all applicable State and local taxes, duties and charges.

18.2 Division 1AB of the Income Tax Assessment Act 1997 (Cth) provides that a State and Territory Body (STB) is exempt from Commonwealth income tax. A STB is a company wholly-owned by a State or Territory Government or their authorities. As wholly-owned public sector subsidiaries are thus exempt from income tax, they should not register with the Australian Tax Office for income tax purposes. However, STBs are not exempt from the Goods and Services Tax (GST). Care must be taken when registering for GST that these companies do not also register for income tax.

18.3 Those public sector subsidiaries which are not required to pay Commonwealth income tax must have included in their constitution a provision to the effect that:

(i) the company is to pay to the Treasurer, for payment into the Consolidated Fund, the equivalent of the amounts that would otherwise be payable for Commonwealth income tax ("tax-equivalent payments");

(ii) the amount of tax-equivalent payments will be calculated by persons nominated by Treasury; and

(iii) the Treasurer may grant an exemption from liability of tax-equivalent payments for specified periods or under specified conditions.

18.4 Where a parent body is currently under the national Tax Equivalent Regime or the NSW-based Tax Equivalent Regime, the public sector subsidiary will generally be covered by the same regime as its parent body under consolidation rules.