Appropriations in Australia

Historical development

1.1 Appropriations ‘segregate’ or ‘earmark’ money in a central fund for government utilisation.³ They do not create duties or obligations⁴, but instead allow the Parliament to exercise a level of control over government by attaching conditions to which funds must be used.⁵ The most fundamental condition is purpose.⁶ An appropriation’s purpose may involve elements such as a specific policy objective, function, or a section of the population satisfying a particular criterion in order to receive monies. The breadth of the purpose is for Parliament to determine.⁷

1.2 The specific ability to establish appropriations, and the requirements associated with this, were inserted into State constitutions such as Victoria and NSW in the 19^th century. Variants were also inserted into the laws of the United Kingdom that governed the colonies at the time. The Australian Courts Act 1828 introduced a requirement that any law which levied a tax must expressly state the purpose for which the revenue would be appropriated and applied.⁸

1.3 The Australian Constitution includes two key appropriation provisions. Section 81 creates a central fund and requires that all government receipts be paid into it:

All revenues or moneys raised or received by the Executive Government of the Commonwealth shall form one Consolidated Revenue Fund (CRF), to be appropriated for the purposes of the Commonwealth in the manner and subject to the charges and liabilities imposed by this Constitution.

1.4 Section 83 requires that any utilisation of the monies from this central fund be supported by an Act of Parliament. It states in part, ‘No money shall be drawn from the Treasury of the Commonwealth except under appropriation made by law’.

Types of appropriations

1.5 Annual appropriation bills are introduced to the Australian Parliament two to three times per year. They outline the amounts allocated to each entity to support the achievement of their designated outcome(s). Most of entities’ running costs (departmental amounts) are funded through annual appropriations. Entities also receive significant funding for grants and subsidies (administered amounts) through annual appropriations.⁹

1.6 Funding allocations outside of the annual appropriation Acts are referred to as special appropriations. These funding allocations are generally for administered purposes. Once the Parliament passes the relevant legislation, these appropriations do not require further annual scrutiny from the Parliament in order to continue to be valid. The purpose is usually described in the same Act as the appropriation, but can be found in other Acts or regulations.¹⁰

1.7 Purposes can be specific—for example if the appropriation is based on precise payment criteria—or can be more general. An example of a general purpose is section 41 of the Northern Australia Infrastructure Facility Act 2016, which appropriates the CRF ‘for the purposes of providing grants of financial assistance to the States and Territories for the construction of Northern Australia economic infrastructure.’ This section limits the appropriation to $5 billion.

1.8 An example of a special appropriation with more specific criteria is the Newstart Allowance. Part 2.12 of the Social Security Act 1991 sets out detailed criteria for eligibility to the allowance. Section 242 of the Social Security (Administration) Act 1999 appropriates the CRF for the purposes of the social security law, which includes the legislated criteria. In this case, the size of the appropriation adjusts to meet demand. The power to spend and the authority to appropriate correspond closely to each other.

1.9 A distinct type of special appropriation is a special account, which occurs when part of the CRF is allocated to a particular purpose. Legislation sets out the specific circumstances under which the special account can be credited, and sections 78 and 80 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) appropriate the CRF for the purposes in each special account. Special accounts are most frequently used to hold funds levied by groups outside the Commonwealth, such as community and industry bodies.

Use of special appropriations over time

1.10 The use of special appropriations increased significantly during the twentieth century. A 2005 report by the Senate Standing Committee on the Scrutiny of Bills provided the following data.

Table 1.1: Percentage of Commonwealth payments using a special appropriation, selected years

Source: Senate Standing Committee for the Scrutiny of Bills, Accountability and Standing Appropriations, Fourteenth Report, 2005, p. 270.

1.11 The Senate Committee report shows steady growth in the use of special appropriations from 1909–10 to 2002–03. To obtain greater detail, annual data was generated for the period 1970–71 through to 2016–17. The results are in Figure 1.1.

Figure 1.1: Percentage of total Commonwealth payments funded from a special appropriation, 1970–71 to 2016–17

Source: ANAO analysis. Special appropriation data sourced from Budget Papers. For 1998–99 to 2006–07, special appropriations data obtained from Portfolio Budget Statements and annual reports because there was no consolidated table of special appropriations in the Budget Papers. Payments data obtained from Australian Government, Budget Paper No. 1, 2017–18, 2017.¹¹¹²

1.12 The figure shows a steady increase in the use of special appropriations until the 1990s. Since then, use has plateaued at between 70 per cent and 80 per cent. Special appropriations have for some time been the main method of appropriating the CRF.

1.13 It is possible to match events against movements in the time series. Up until 1992–93, Medicare Agreements were funded through annual appropriations. From 1993–94 onwards they were funded by a special appropriation. This of itself increased the percentage of Commonwealth payments funded by a special appropriation by 4 per cent. Also in that year, greater debt charges increased the ratio by another 1 per cent.¹³ The dip in the percentage to 70 per cent in 2009–10 was caused by reforms to payments to the States and Territories and discontinuing fiscal stimulus payments from 2008–09 that were part of the response to the Global Financial Crisis.¹⁴

1.14 The growth in the use of special appropriations may be related to increased spending on health and social security entitlements programs, which in Australia have typically used special appropriations. In 1970–71, spending on these programs supported by special appropriations was 4 per cent of Gross Domestic Product and 20 per cent of Commonwealth payments. In 1990–91 this increased to 8 per cent and 35 per cent respectively. The values for 2010–11 were 11 per cent and 45 per cent.

Overseas comparisons

1.15 There are substantial differences in the methods used to appropriate from central public funds. Data for five countries is shown in Table 1.2.

Table 1.2: Use of special appropriations in selected countries

Source: ANAO analysis of various international and Australian references. See Appendix 2.

1.16 The use of special appropriations in the United States and Canada is similar to that in Australia. They comprise the majority of government payments, and are especially used for social security. New Zealand and the United Kingdom have a much lower use of special appropriations. Contrary to the other jurisdictions, New Zealand appropriates social security pensions annually rather than through a permanent arrangement.¹⁵

Payments

The payments framework

1.17 The authority to make payments on behalf of the Commonwealth operates separately to appropriations. The Administrative Arrangements Orders (AAOs) allocate accountability for legislation to ministers, and allocate responsibility for the implementation of such legislation to the relevant portfolio departments. Portfolio legislation provides entities with the legal authority to make payments. The High Court case of Williams recognised that the Constitution provides the Executive with authority to make payments for the day to day operations of government.¹⁶

1.18 Section 23 of the PGPA Act gives the Accountable Authorities of non-corporate Commonwealth entities the power to make commitments on behalf of the Commonwealth.¹⁷

1.19 Corporate Commonwealth entities are created by Acts, which bestow them powers to do all things necessary or convenient to carry out their functions. Such powers may include making payments on behalf of the Commonwealth.

Decentralised payments

1.20 Prior to June 1999, Australian government payments were made by the relevant central agency – which was the Department of the Treasury until 1976, and then subsequently the Department of Finance (Finance). As part of broader reforms in the late 1990s, including the introduction of accrual accounting, responsibility for the management of banking and payment processes was devolved to individual entities.¹⁸ Entities now access cash from the Cash Management component of the Central Budget Management System (CBMS), which Finance manages.

1.21 This reflects more broadly the relationship between Finance and Commonwealth entities. Finance is responsible for the Commonwealth financial management framework and guidance, and entities are responsible for complying with these requirements. Division 2 of the PGPA Act places a range of responsibilities on accountable authorities to properly manage their entities. Accountable authorities are usually the entity’s chief executive officer or governing board.

Past reviews of special appropriations

1.22 Recent reviews considering special appropriations are listed on Table 1.3. The ANAO completed a report in 2004, which had all six recommendations accepted by government. This was followed by reports by three parliamentary committees, all of which either had recommendations accepted by government, or commenced a new practice of their own.

Table 1.3: Recent reviews considering special appropriations

Note a: The States and Territories cannot constitutionally apply taxes to places owned by the Commonwealth. Section 6 of the Commonwealth Places (Mirror Taxes) Act 1998 applies State taxes as Commonwealth law, which the States then collect on behalf of the Commonwealth. The collected taxes form part of the CRF and the appropriation in section 23 permits the Commonwealth to supply these funds to the States; Joint Committee of Public Accounts and Audit, Parliament of Australia, Report 404: Review of Auditor-General’s Reports 2003–2004 Third & Fourth Quarters, and First and Second Quarters of 2004–2005, 2005, pp. 181–82.

Source: See Appendix 2.

1.23 The three most recent of these reports noted that special appropriations are not subject to regular parliamentary scrutiny and can have permanent effect without needing further parliamentary approval.¹⁹ To address this, the Senate Standing Committee on Public Finance and Administration recommended that government arrange for special appropriations to be subject to regular parliamentary and government review. The Government noted the recommendation and stated it was considering inserting review clauses into new special appropriations.²⁰ Senator Murray recommended that special appropriations be subject to regular review within government and by the Parliament, including annual reviews by Finance. The Government noted the recommendation, but disagreed with the need to conduct annual reviews due to cost.²¹

1.24 Noting these concerns, the ANAO examined the accuracy of new special appropriations costings over the forward estimates.²² The most instructive analysis related to the Paid Parental Leave Bill 2010 (later Act), which found that this bill’s original costings proved to be largely accurate. This included an additional payment type being added to the Act (Dad and Partner Pay) following an amendment by the Parliament.²³ A summary of this analysis is below in Figure 1.2.

Figure 1.2: Comparison of estimates and actuals for paid parental leave ($ billions)

Source: ANAO analysis of financial statements and Portfolio Budget Statements for the Department of Families, Housing, Community Services and Indigenous Affairs, the Department’s costing data, and the Explanatory Memorandum for the Paid Parental Leave and Other Legislation Amendment (Dad and Partner Pay and Other Measures) Bill 2012.

Audit approach

Criteria

1.25 The audit objective was to examine entity compliance with regulatory requirements for the establishment and ongoing management of special appropriations.

1.26 To form a conclusion against this objective, the ANAO adopted two high-level criteria:

• Criterion 1: Have appropriate processes and guidance been established, in line with regulatory requirements, for agencies in giving advice to government when a special appropriation is being recommended?
• Criterion 2: Do entities have effective arrangements in place for the ongoing management and monitoring of special appropriations in line with regulatory requirements?

Scope

1.27 Four entities were selected for the audit:

• Finance is responsible for the financial framework, as well as being responsible for a number of special appropriations;
• the Department of Social Services (Social Services) has responsibility for the largest volume of special appropriations, measured by dollar;
• the Department of Human Services (Human Services) pays almost all of Social Services’ special appropriations on its behalf; and
• the Department of Industry, Innovation and Science (Industry) was selected in order to provide coverage outside the human services sector.

1.28 Criterion 1 focused on the creation of new special appropriations, which are presented to the Parliament in bills and typically arise as the result of government developing new policy. In order to obtain sufficient coverage, the time period of 2010 to 2016 was selected. This produced 13 bills with special appropriations introduced by Finance (six), Industry (two) and Social Services (five). Some bills with the same special appropriation were introduced more than once. Where this occurred, the first bill was used.

1.29 The time period for criterion 2 was 2012–13 to 2015–16. A four-year period was selected to provide reasonable assurance in relation to the criterion.

1.30 Special accounts were excluded from the audit. Although they are a type of special appropriation, they operate differently and have their own requirements.

1.31 The audit was conducted in accordance with ANAO Auditing Standards at a cost to the ANAO of approximately $436,931.02.

1.32 The team members for this audit were David Monk, Nathaniel Loorham, Annum Babar, Julia Lu, Ashish Bajpai, Steven Favell, Hannah S. Climas and Paul Bryant.

Has Finance established and communicated suitable guidance for the creation of appropriations?

2.1 Finance is responsible for ‘financial accountability, efficiency, governance and financial management frameworks’²⁴ within the Australian Government. As part of this role it produces guidance to help Commonwealth entities²⁵ comply with the Australian Government Financial Framework (the Framework)—an established set of rules for the use and management of public resources, underpinned by the Public Governance, Performance and Accountability Act 2013.²⁶ Examples of guidance are the Resource Management Guide (RMG) series, Estimates Memoranda²⁷ and other standalone materials (e.g. Charter of Budget Honesty – Policy Costing Guidelines).²⁸

2.2 Various elements of special appropriations are covered in existing Finance and other central agency guidance. Table 2.1 contains examples of guidance applicable to special appropriations.

Table 2.1: Guidance documents applicable to special appropriations

Source: ANAO analysis of Finance documentation.

2.3 Finance’s guidance in RMG 100: Guide to Appropriations provides a list of general categories when a special appropriation may be used. These are:

• where it is desirable to create a legal entitlement to pay everyone that satisfies specific criteria (for example, the age pension);
• if it is necessary to pay a specific amount to a state, territory or local government under an inter-governmental agreement;
• where it is important to demonstrate the independence of an entity from parliament and the executive by providing for automatic payment of the remuneration of its officeholders (for example, the salaries of judges, statutory officeholders, and the Auditor-General);
• if it is considered necessary to demonstrate Australia’s ability to meet its financial obligations independently of parliamentary approval of funds (for example, the repayment of loans); or
• other circumstances which arise where funding via an annual appropriation is not appropriate.²⁹

2.4 The language of RMG 100 indicates that the first four circumstances were not intended to be an exhaustive list of instances where special appropriations could be used. Some special appropriations fit within ‘other circumstances’, including:

• funding departmental running costs for a non-corporate Commonwealth entity—in this case one-off costs to manage the sale of Medibank Private (Finance used item 8 of Schedule 2 of the Medibank Private Sale Act 2006 for this purpose);
• funding the departmental running costs of a corporate Commonwealth entity (sections 64 to 66 of the Australian Renewable Energy Agency Act 2011 were used to fund the Australian Renewable Energy Agency);
• to establish an infrastructure fund (section 41 of the Northern Australia Infrastructure Facility Act 2016);
• to establish a mechanism so that a corporate Commonwealth entity could receive industry levies on behalf of the Commonwealth, pay them to a Commonwealth Department, and then receive them back again as its operational budget (arrangements for the National Offshore Petroleum Safety and Environmental Management Authority under the Public Governance, Performance and Accountability (Consequential and Transitional Provisions) Act 2014); and
• for a payment scheme (following a court decision against the Commonwealth)³⁰ to support eligible intellectually impaired workers employed by an Australian Disability Enterprise, who had their pro-rate wage determined using the Business Services Wage Assessment Tool (section 99 of the Business Services Wage Assessment Tool Payment Scheme Act 2015).

2.5 Given the range of purposes for which special appropriations are being created, an opportunity exists for Finance to improve its guidance. In particular, it could elaborate on what ‘other circumstances’ will result in an annual appropriation being less suitable, and hence indicating where a special appropriation might be used instead. There is currently a broad ‘catch-all’ circumstance for which entities have limited assistance. Reference to the characteristics of each appropriation type, as outlined in Table 2.2 below, may assist.

Table 2.2: Characteristics of appropriation types

Note a: See Appropriation Act (No. 1) 2016–2017.

Note b: Social Security (Administration) Act 1999, sections 123ZN and 242.

Note c: Established by the PGPA Act (Reef Trust Special Account 2014) Determination 01, which sets out what amounts may be credited and debited; available from <https://www.legislation.gov.au/Details/F2014L01218>.

Source: ANAO analysis.

2.6 The guidance could also be enhanced by consolidating the various relevant guidance documents (see Table 2.1) in a central location. Providing references and hyperlinks in specific guidance, such as RMG 100, to other special appropriations guidance, for example PMC’s Legislation Handbook (which primarily focuses on developing legislation but nonetheless contains specific considerations for special appropriations), would reduce the risk that relevant materials are overlooked when considering appropriation type.

2.7 A variance analysis was conducted to determine if there was a material difference in the predictability of annual versus special appropriations, and whether this may have influenced choice of appropriation type for programs in the past. The Acts considered were those containing special appropriations and Appropriations Acts 1 and 2 for annual appropriations. The results are presented in Figure 2.1. It shows that successful predictions, where spending was within +/- 10 per cent of the prediction, occurred approximately 60 per cent of the time for both annual appropriations and special appropriations. Prediction success has generally been the same for special and annual appropriations.

Figure 2.1: Distribution of prediction error for special and annual appropriations by Acta, four entities, 2011–12 to 2014–15

Note a: To ensure accuracy, where an entities’ outcome substantially changed (making the data incomparable) that year’s annual appropriation data was omitted from the analysis. Further, to fully capture spending under annual appropriations, a Budget year required financial statements for the following three years. Therefore, the time period was set to 2011–12 to 2014–15.

Source: Special Appropriations Table in Australian Government, Agency Resourcing: Budget Paper No. 4, and financial statements in entities’ annual reports, various years.

2.8 In November/December 2017, Finance updated RMG 100 to provide further guidance around creating a special appropriation. New content is:

• that a special appropriation may be suitable for emergency payments where an Advance to the Finance Minister will not assist, for example because of the large amounts involved in natural disaster relief or financial crises³¹;
• the principle that a special appropriation is unlikely to be suitable where the amounts are not material or the need is unlikely to be ongoing;
• the principle that a special appropriation may be suitable when it provides additional transparency by placing authority for a program and the appropriation in the same Act; and
• the principle that ‘annual appropriations are the default appropriation type for all proposed Government spending’.³²

Have entities effectively aligned policy development and appropriation?

Selecting an appropriation type

2.9 To inform the development of legislation entities must, as part of the new policy proposal process, stipulate how a policy is to be appropriated. Finance has advised that government takes a risk-based approach to this, using less resources determining appropriation type when it is readily apparent, and more when it is less clear. Use of a special appropriation will be most obvious when the circumstances align with one of those listed in Finance’s guidance RMG 100 (see 2.3). In other cases entities can consult and collaborate with Finance, who has specialist appropriations knowledge.

2.10 Entities effectively applied the risk-based approach to new special appropriations. For the 13 special appropriations bills examined in the audit, Finance had high-level consultation and collaboration regarding appropriation type for four of them. The policy parameters for these were generally more complex, with greater effort needed to determine if a special appropriation was appropriate in the circumstances. For the remaining nine, less work was completed to determine appropriation type, and there was not substantive documentary evidence of consultation and collaboration with Finance. Specifically, five of the nine were continuing special appropriations amidst policy and/or legislative change, while the remaining four clearly aligned with one or more of the five categories listed in the Finance guidance.

Table 2.3: Risk-based approach to new special appropriations

Source: ANAO analysis.

2.11 A good demonstration of the development of a more complex special appropriation was identified in the Northern Australia Infrastructure Facility Bill 2016 (the NAIF). The NAIF Act establishes a special appropriation ‘for the purposes of providing grants of financial assistance to the States and Territories for the construction of Northern Australia economic infrastructure’.³³ The special appropriation is capped at $5 billion and can be used to make commitments of funding until 30 June 2021.³⁴ NAIF departmental costs are expected to be funded via annual appropriations.

2.12 A special appropriation was selected as the best appropriation mechanism following extensive work by Industry, in consultation with Finance. This included:

• developing an internal position paper regarding appropriation types, which assessed the benefits and risks of potential models;
• gaining legal advice on potential appropriation models;
• developing policy proposals that clearly selected and justified a preferred appropriation type;
• conducting consultation meetings with Finance and other central agencies;
• gaining written and other feedback from Finance regarding the preferred position;
• modifying and revising policy proposals in light of Finance’s advice, including removing a proposed special account provision; and
• presenting the final position to government for decision.

2.13 In this example the contemporaneous development of policy and appropriation allowed Industry to provide decision-makers with up-to-date and thorough advice on the best appropriation to support the proposal. The consideration of appropriation requirements throughout the policy development process meant that emerging issues were addressed in real time and the government met its policy deadline of 1 July 2016.

Do entities maintain accounts and records that link payments to a specific, valid appropriation?

3.1 Entities must match payments against a valid appropriation to ensure the payments are constitutional. Six payment types were tested to ensure that they sufficiently identified the appropriation. Entities met this test, but did so in ways that reflected different payment volumes.

3.2 The Automotive Transformation Scheme Act 2009 has one special appropriation, in section 10, for capped assistance.³⁵ Industry prepared payment advice for each transaction, which identified the payment coming under ‘Capped Assistance: Special Appropriation’.

3.3 The Medibank Private Sale Act 2006 has two unlimited special appropriations, the first of which is for payments to discharge ‘other obligations incurred by the Commonwealth’.³⁶ The sale of Medibank Private was over-subscribed by $3.25 billion and Finance paid the refunds by cheque and direct debit through a bank account dedicated to the share offer. Given that the special appropriations in the Act were unlimited, this was sufficient to identify the appropriation.

3.4 The Social Security (Administration) Act 1999 has two unlimited special appropriations; section 123ZN applies to income management regimes within that Act, and section 242 applies to the ‘social security law’. This second appropriation supports Social Services’ programs under the Social Security Act 1991. Human Services makes social security payments on behalf of Social Services and three of these payment types were tested: the Bereavement Allowance; the Seniors Supplement; and the Utilities Allowance. Human Services’s systems identified these benefits correctly at payment. A similar finding was made in relation to Dad and Partner Pay under the Paid Parental Leave Act 2010, which is supported by the unlimited special appropriation in section 307 of that legislation. Since the special appropriations in these Acts were unlimited, Human Services had sufficiently identified the appropriation at payment.

Do owning entities effectively manage shared special appropriations?

Agreements between entities

3.5 The audit examined Finance’s agreements with entities that use its special appropriations, and examined the delegation from Social Services to Human Services for the management of a range of special appropriations, including those under the Social Security (Administration) Act 1999. This arrangement is governed by the Bilateral Management Arrangement (BMA). Industry did not have any entities drawing down on its appropriations in the period under examination.

3.6 The relationships between entities vary in scale, which was reflected in the length, depth and scope of the agreements between them. The delegations from Finance to other entities were several pages in length and typically involve spending of up to $30 million, whilst the Superannuation Acts involve several billion dollars. Accordingly, the delegations from Finance to ComSuper were supplemented by a Memorandum of Understanding. The BMA between Social Services and Human Services is supplemented by a number of sub-agreements, and supports annual spending of over $100 billion. These agreements include protocols on Social Services accessing data from Human Services’s systems, which Social Services uses to monitor various parameters, including debt levels, payment integrity and timeliness of claims processing.

3.7 After receiving a request from Human Services, Social Services draws down its appropriated funds from the Official Public Account (OPA) and transfers them to Human Services. The two BMAs applicable between 2012–13 and 2015–16 (dated July 2012 and October 2014) and associated delegations were reviewed to determine whether they placed appropriate reporting obligations on the third party, and were no more than four years old.³⁷ The BMAs met these criteria.

3.8 Finance takes a different approach by giving other entities (third parties) rights to draw down cash from the OPA. The ANAO assessed 28 delegation agreements between Finance and third parties made between 2008 and 2017. All met the same high-level criteria of placing appropriate reporting obligations on the third party and being less than four years old.

Corporate Commonwealth entities

3.9 A Corporate Commonwealth entity (CCE) is a body corporate that has a separate legal personality from the Commonwealth, and therefore can act in its own right exercising certain legal abilities such as entering into contracts and owning property.³⁸

3.10 Standard practice in the Commonwealth is that CCEs are not funded directly via appropriation, but instead should be funded by a non-corporate Commonwealth entity (usually the CCE’s portfolio department) that draws down from the CRF. Finance’s Model Accountable Authority Instructions (guidance to entities) state that:

Non-corporate Commonwealth entities should not enter into an agreement with a corporate Commonwealth entity that allows the corporate Commonwealth entity to access an appropriation, including a special account, administered by a non-corporate Commonwealth entity.³⁹

3.11 The Accountable Authority Instructions adopted by Finance in relation to its own operations are to similar effect.⁴⁰

3.12 Parliament has legislated an exception for the Commonwealth Superannuation Corporation (CSC). Prior to 2015, ComSuper, as a non-corporate Commonwealth entity, drew down on the superannuation appropriations and paid the funds to CSC. In 2015 the Parliament provided CSC with the legal power to directly access appropriations in the superannuation legislation under section 29A of the Governance of Australian Government Superannuation Schemes Act 2011. This provision states that CSC may make payments on behalf of the Commonwealth. ComSuper was merged into CSC in 2015 to reduce the number of entities and achieve efficiencies.⁴¹

Do entities have suitable arrangements for managing unused or exhausted special appropriations?

3.13 Currently, there is a number of current Acts with exhausted/unused special appropriations. The following three examples contain special appropriations that have been unused for a considerable period, yet have differing policy relevance:

• the Science and Industry Endowment Act 1926, which created a fund to provide grants for scientific research. The appropriation of £100,000 is most likely extinguished, but the fund is technically ongoing (it is within current policy)⁴²;
• Coal Research Assistance Act 1977, which creates a system to collect industry levies to fund coal research through a trust account under the now-defunct Audit Act 1901. In 1992, amendments to the Act transferred this activity to the private sector and the appropriation became dormant afterwards⁴³; and
• the Transferred Officers’ Allowances Act 1948, which provides for top-up pensions for public servants who transferred from a State to the Commonwealth. Use of this appropriation was last reported in 1977–78 (inactive).⁴⁴

3.14 Exhausted/unused appropriations do not represent a risk to the Commonwealth. Finance controls access to cash; it transfers funds from the OPA to the entity based on set limits in the CBMS system (this is what occurs when entities ‘draw down’). These limits are either based on published Budget documents or, where the appropriation is for an unlimited entitlement, agreed between the entity and Finance.⁴⁵

3.15 There have been recent repeals of Acts with unused appropriations. In 2012, Finance conducted a survey of Acts with special appropriations and found that 211 had not been used for the past two and a half years. Analysis of a random sample of 53 of these Acts conducted by the ANAO during the current audit showed that 45 per cent have been repealed. Various methods of repeal were used, such as statute law revision or statute stocktake acts, Repeal Day Acts, and financial framework Acts.⁴⁶ Throughout this process Finance conducted consultations with entities and also requested in 2012 guidance that entities put forward Acts for repeal.

3.16 In November/December 2017, Finance updated its guidance on unused special appropriations. Entities should now satisfy themselves, on an ongoing basis, that their special appropriations are still required. The guidance states:

Entities need to periodically review the need to retain individual special appropriations and special accounts. Entities are encouraged to abolish special appropriations and special accounts that are no longer used or which can be replaced by annual appropriations.⁴⁷

Are special appropriations accurately reported?

Entity financial statements

3.17 For 2012–13 and 2013–14, the legal reporting requirements for special appropriations and associated guidance were laid out in the Finance Minister’s Orders. Thereafter, the legal requirements were articulated in the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 and the guidance was published in the Commonwealth Entities Financial Statements Guide – Resource Management Guide No. 125.

3.18 Between 2012–13 and 2015–16, each entity’s audited financial statements included a specific table for special appropriations applied.

Reporting unused appropriations

3.19 The legal reporting requirements have stated that appropriations must be reported ‘regardless of whether the relevant amounts are considered to be material’. Further, entities are required to make disclosures ‘for each special appropriation’.⁴⁸ These legal requirements are supported by guidance, which has consistently stated, ‘Disclosures are required for all special appropriations irrespective of whether the appropriation has been drawn on’.⁴⁹

3.20 Reporting unused appropriations provides meaningful information. A zero figure for a special appropriation could indicate that a planned government activity (which had a special appropriation) did not occur, or that the appropriation is no longer required and can be repealed. Reporting all special appropriations can also provide transparency on whether the entity was using the correct appropriations during the year.

3.21 Between 2012–13 and 2014–15, the four scope entities had differing practices for reporting special appropriations that were unused in both the reporting year and the comparative (previous) year:

Table 3.1: Financial statement reporting of special appropriations with a zero spend

Note a: Human Services did not have any zero-spend special appropriations during the scope period of the audit.

Source: ANAO analysis of entities’ annual financial statements.

3.22 Finance was the only entity to comply with the reporting requirements, however in 2015–16 stopped reporting appropriations that were not used. Finance explained its approach as follows:

As part of the reduced disclosure and simplification program, Finance undertook a review of disclosures including special appropriations. The review looked at ensuring the disclosures were:

• Material
• Add value to user
• Understandable.

With applying these criteria, and noting that the RMG is guidance only, Finance assessed … the disclosure of the NIL appropriations and deemed it would not add value and as such was removed.

This approach was agreed with the ANAO financial statement auditors.⁵⁰

3.23 Outside of this audit, the Department of Agriculture and Water Resources is a case study of an entity that has reported unused special appropriations for which it is responsible consistently throughout the relevant period.⁵¹ Discussions with key finance staff from across the entities subject to audit indicated confusion as to the specific requirements for reporting unused special appropriations. In order to ensure consistency in this key aspect of financial reporting, it is recommended that Finance clarify the requirements and guidance to entities on this matter.

Special Appropriations Table in Budget Paper No.4

3.26 This table in the Commonwealth Budget documents lists Acts with special appropriations under each relevant entity. It includes an estimate of expenditure for the coming year and an estimated actual amount for the year about to end.

3.27 The data for the Special Appropriations Table is sourced through CBMS. Entities are responsible for ensuring this data is accurate, and conduct their own quality assurance on CBMS data and Budget Paper No. 4. Finance advised it checks drafts of the Special Appropriations Table to ensure they are consistent with entity advice.

Acts with dormant appropriations

3.28 The special appropriations table in the 2008 Budget did not include any special appropriations with zero amounts. Since then, successive tables have included more zero-spend special appropriations. The table in the 2017 Budget includes eight such Acts for Finance, one for Industry, one for Social Services, and none for Human Services (excluding refunds under section 77 of the PGPA Act, Human Services did not have any zero spend appropriations).⁵²

3.29 Review identified that some Acts with unused special appropriations are not reported in the Special Appropriations Table. Within the scope period, there were 22 such Acts: three for Finance⁵³; seven for Industry; and 12 for Social Services.⁵⁴

3.30 Finance advised that Acts with unused special appropriations did not need to be reported in the Special Appropriations Table if their inclusion would not provide useful information in the Budget context. Finance advised that each of the 22 Acts were appropriately reported on this basis. Finance provided examples of where this might occur:

• where the special appropriation has lapsed or been exhausted, the applicable date has passed, or it has fulfilled its purpose (12 Acts);
• where the special appropriation has been reported under the principal Act in the Special Appropriations Table (six Acts)⁵⁵;
• where the special appropriation is yet to be used and no expenditure is expected in the medium to long term (four Acts).

3.31 Entities’ approach to the Special Appropriations Table is inconsistent; some unused special appropriations are reported and some are not. The scope of the Table is unclear as well. The 2012–13 Budget stated that the Table’s scope covered ‘each active special appropriation Act’.⁵⁶ For the 2017–18 Budget, two purposes were listed: to report ‘Acts that contain one or more special appropriation(s)’ and to present ‘resourcing for each agency by Act that is supported by special appropriations’.⁵⁷ It is therefore unclear whether the focus of the table is on special appropriations – which would encourage the publishing of zero-spend Acts – or agency resources, where the focus would be on spending Acts. Finance’s guidance to entities does not resolve the matter.

3.32 Finance may wish to clarify the Table’s purpose and how it treats zero-spend appropriations.

Are potential breaches of section 83 of the Constitution identified, reported and addressed?

Constitutional position

4.1 Section 83 of the Constitution provides that no money shall be drawn from the Treasury of the Commonwealth except under appropriation made by law. Additionally, all spending from the CRF needs to be in accordance with an authority given by Parliament.⁵⁸

4.2 Section 81 refers to the ‘appropriation of money for the purposes of the Commonwealth’. If spending does not align with the purpose (and any other criteria) in the relevant appropriation, it may breach section 83 of the Constitution. Whether there is a breach of section 83 will depend in each case on questions of fact and the construction of the relevant legislation. In general terms, a breach of section 83 may be more likely to occur where payments are only authorised under an Act if detailed criteria are met, because in such cases it may be more likely for a payment to be made in error that does not fulfil all of the criteria.

4.3 Once a breach of section 83 has occurred, it cannot be reversed by legislation or through recovering an erroneous payment. However, relevant provisions in legislation could, for example, authorise payments even on the basis of incorrect or incomplete information submitted by recipients, so that overpayments will not be a breach of section 83. This depends on the individual Act. Having good internal systems to identify and recover such overpayments will otherwise ensure that they remain a low financial risk.

Finance’s guidance on complying with section 83

4.4 From 2008–09 onwards, the ANAO had included in its financial statements audit reports a reference to the Australian Taxation Office’s historic breach of section 83 of the Constitution. This had occurred through errors in the processing of tax returns. Some taxpayers had received amounts higher than to which they were entitled, resulting in the breach.⁵⁹

4.5 Following consultation with entities and the ANAO in the second half of 2011, Finance developed guidance for entities on complying with section 83 and issued it to them in April 2012. Finance re-issued the advice to entities in July 2013 with legal advice on generic payments. The guidance states that the ANAO and Finance are jointly seeking to help entities comply with the Constitution and recommends that entities conduct a risk-based assessment of payments against section 83. As part of an ongoing project to consolidate its advice to entities, Finance published an edited version of the section 83 guidance in November/December 2017.⁶⁰ The risk assessment process is summarised in Table 4.1.

Table 4.1: Summary of Finance’s guidance for complying with section 83

Source: Department of Finance, Section 83 Guidance Paper, 2012, p. 8.

4.6 The first main test in the guidance is for entities to assess whether the legislation has specific requirements for making or assessing payments. More specific and objective requirements increase the risk of breaching the Constitution. The second main test is whether the entity’s processes align with the legislation’s requirements.

Reporting

4.7 Entities are required to report on breaches of section 83 in their financial statements. As it will often be unclear whether an actual breach has occurred, Finance recommends that entities conduct a risk assessment to identify the likelihood that a breach has actually occurred.⁶¹

4.8 Social Services, Finance and Industry each reported potential breaches between 2012–13 and 2015–16. The three entities’ reporting is summarised in the table below.

Table 4.2: Reported potential breaches of section 83, by Act, entity, and year

Note a: ‘NA’ indicates that the entity was not responsible for the Act in that year.

Note b: At this time, the then Department of Industry, Innovation, Science, Research and Tertiary Education was responsible for Austudy, Fares Allowance and Youth Allowance.⁶²

Source: Financial statements in entities’ annual reports, 2012–13 to 2015–16.

4.9 The highest potential breaches occurred in relation to Social Services and Industry’s social security legislation, with reported amounts for Social Services increasing substantially over the period.

4.10 The Acts with the highest potential breaches as a percentage of total payments for 2015–16 were for A New Tax System (Family Assistance) (Administration) Act 1999 (5.6 per cent), the Student Assistance Act 1973 (3.7 per cent), and the Social Security (Administration) Act 1999 (1.5 per cent). Finance provided data for the three entities showing that, between 2013–14 and 2016–17, amounts recovered or waived at the end of each relevant financial year ranged between 19 per cent and 100 per cent of potential breaches.

4.11 The Judges’ Pensions Act 1968 had recoverable payment provisions operating from 28 May 2013. Recoverable payment provisions are designed to ensure that the relevant appropriation applies under a wider set of circumstances; and therefore the payment does not have to fit within objective, specific criteria. Section 20A of the Judges’ Pensions Act 1968 states:

1. If, apart from this subsection, the Commonwealth does not have power under this Act to pay an amount (the relevant amount) to a person (the recipient) purportedly as a benefit, then the Commonwealth may pay the relevant amount to the recipient.
2. If a payment is made under subsection (1) to the recipient, the relevant amount:
   
   1. is a debt due to the Commonwealth by the recipient; and
   2. may be recovered by the Secretary of the Department, on behalf of the Commonwealth, in a court of competent jurisdiction.
3. For the purposes of subsection 12A(5) [an appropriation], if a payment under subsection (1) of this section relates to a benefit under subsection 12A(2), the payment is taken to be a benefit under subsection 12A(2).

4.12 Recoverable payments provisions have been inserted in some of the Acts in the Finance portfolio that have special appropriations. As a transparency measure, Finance was required to report its use of these provisions for two of the Acts from 2012–13 onwards and a third Act from 2013–14 onwards. Finance has not issued this reporting to date – it issued its first report on recoverable payments in October 2017, which related to the 2016–17 financial year.⁶³

Have entities made reasonable efforts to achieve section 83 compliance?

Risk assessments

4.13 In line with Finance’s guidance, three of the entities conducted risk assessments for special appropriations in relation to section 83 compliance. Their approach to implementing this guidance is discussed below.

Social Services

4.14 Social Services conducted section 83 risk assessments for all four scope years. In these assessments, the Department notes that current controls around payments administered by Human Services on its behalf are appropriate. Social Services conducted a Random Sample Survey each trimester to monitor payment assurance. Social Services concluded that conducting further work would provide no additional benefit.

4.15 Each year, Social Services listed a number of Acts that it assessed as high risk. This list always included A New Tax System (Family Assistance) (Administration) Act 1999, the Paid Parental Leave Act 2010 (excluding Family Tax Benefits and the Baby Bonus); and the Social Security Act (Administration) 1999. Social Services took this approach because of the complexity of these items of legislation. However, Social Services did not attempt treatments for the Acts which it assessed as high risk, beyond concluding that further work would provide no additional benefit.

Industry

4.16 Industry conducted section 83 risk assessments annually from 2012–13 to 2015–16 for all its special appropriations and complied with Finance’s guidance.

Finance

4.17 Finance conducted section 83 risk assessments for all of its special appropriations in 2011–12, except for the Medibank Private Sale Act 2006, which at that time was not in use.⁶⁴ Finance advised that appropriations rated medium or high risk were amended to reduce the risk of breaching section 83, where possible. Finance did not conduct repeat risk assessments in later years—the guidance is silent on whether the assessments are required regularly. The treatment for low risk appropriations (‘ensure future process changes are consistent with legislation’) suggests that Finance envisaged an as-needed approach over time.

Internal audit

4.18 Between 2012–13 and 2015–16, the relevant entities commissioned six internal audit reports that covered payments supported by a special appropriation.⁶⁵ One of the reports referred to appropriations; this was the Industry internal audit into the Automotive Transformation Scheme. The internal audit tested compliance against the appropriations budgets.

Appendix 1 Entity responses

Appendix 2 References

Table 1.2

• Australian Government, Agency Resourcing: Budget Paper No. 4: 2017–18, 2017, pp. 89–100;
• HM Treasury (UK), Central Government Supply Estimates 2017–18: Main Supply Estimates, 2017, p. 14. Data includes the National Health Services but excludes local government and public corporations;
• L Angres and M Costantino, The Federal Budget in 2016 [Internet], Congressional Budget Office (United States), 2017, <2017–2018/graphic/52408-budgetoverall.pdf">https://www.cbo.gov/sites/default/files/115th-congress-2017–2018/graphic/52408-budgetoverall.pdf> [accessed 26 October 2017];
• A Malinovskaya and L Sheiner, The Hutchins Center Explains: Federal Budget Basics [Internet], Brookings, 2017, available from <https://www.brookings.edu/blog/up-front/2016/06/01/the-hutchins-center-explains-federal-budget-basics/> [accessed 26 October 2017];
• Government of Canada, 2017–18 Estimates Parts I and II: The Government Expenditure Plan and Main Estimates, 2017, pp. I–1 to I–6;
• The Treasury (New Zealand), Putting It Together: An Explanatory Guide to New Zealand’s State Sector Financial Management System, Version 1.1, 2011, p. 35; and
• M Harris and D Wilson (eds), Chapter 31 Appropriation and Authorisations [Internet], 4^th edition, New Zealand Parliament, 2017, available from <https://www.parliament.nz/en/ visit-and-learn/how-parliament-works/parliamentary-practice-in-new-zealand/chapter-31-appropriation-and-authorisations/> [accessed 2 January 2018].

Paragraph 1.14

• Appropriation (2017/18 Estimates) Bill, New Zealand Parliament, 2017, available from <https://www.parliament.nz/en/pb/bills-and-laws/bills-proposed-laws/document/ BILL_74170/appropriation-201718-estimates-bill> [accessed 23 October 2017];
• G Freeguard, E Andrews, D Devine, R Munro and J Randall, Whitehall Monitor 2015: The Coalition in 163 charts, Institute for Government, London, 2015, pp. 41–42; and
• HM Treasury (United Kingdom), How to Understand Public Sector Spending [Internet], GOV.UK, 2013, available from <https://www.gov.uk/government/publications/how-to-understand-public-sector-spending/how-to-understand-public-sector-spending> [accessed 26 October 2017].

Table 1.3

• ANAO Audit Report No. 15 2004–05 Financial Management of Special Appropriations, 2004;
• Joint Committee of Public Accounts and Audit, Parliament of Australia, Report 404: Review of Auditor-General’s Reports 2003–2004 Third & Fourth Quarters, and First and Second Quarters of 2004–2005, 2005, pp. 167–91;
• The Hon. Phillip Ruddock MP, Attorney-General, Correspondence enclosing Executive Minutes in response to the Joint Committee of Public Accounts and Audit, 19 May 2006; and Senator the Hon. Richard Colbeck, Parliamentary Secretary to the Minister for Finance and Administration, Correspondence enclosing Executive Minutes in response to the Joint Committee of Public Accounts and Audit, 30 May 2006;
• Senate Standing Committee for the Scrutiny of Bills, Parliament of Australia, Fourteenth Report of 2005: Accountability and Standing Appropriations, 2005;
• Examples of follow-ups by the Senate Standing Committee for the Scrutiny of Bills in relation to the inclusion of a special appropriation are: Senate Standing Committee for the Scrutiny of Bills, Parliament of Australia, Fourteenth Report of 2014, 2014, p. 832; and Senate Standing Committee for the Scrutiny of Bills, Parliament of Australia, Tenth Report of 2014, 2014, p. 486;
• Senate Standing Committee on Finance and Public Administration, Parliament of Australia, Transparency and Accountability of Commonwealth Public Funding and Expenditure, 2007, pp. 15–19; and Australian Government, Commonwealth Government Response to Senate Report, Transparency and Accountability of Commonwealth Public Funding and Expenditure, 2009;
• Senator Andrew Murray, Review of Operation Sunlight: Overhauling Budgetary Transparency, 2008; and Australian Government, Government response to Review of Budget Transparency, 2008; and
• Department of the Prime Minister and Cabinet, Legislation Handbook, 2017, p. 32.

Appendix 3 The Special Appropriations Table

Table A.1: Unused special appropriations not reported in the Special Appropriations Table in Budget Paper No. 4, four entities, 2012–13 to 2015–16a

Note a: Human Services did not have any unreported Acts during the scope period.

Note b: Following the sale of Medibank Private in 2014 and 2015, the special appropriations in this Act would now fit in the category of ‘lapsed, exhausted or fulfilled its purpose’.

Source: Finance and ANAO analysis of the Special Appropriations Table and the Administrative Arrangements Orders valid between 2012–13 and 2015–16.