Administration of Three Key Components of the Agriculture - Advancing Australia (AAA) Package
The audit objective was to assess the adequacy of the Commonwealth's administration of three key components of the Agriculture - Advancing Australia package: the FarmBis II program, the Farm Help program and the Farm Management Deposits scheme. Broadly, the audit examined the areas of strategic management, managing compliance, program promotion, performance monitoring and evaluation, and performance results.
The Agriculture - Advancing Australia package
The Agriculture—Advancing Australia (AAA) package aims to help the rural sector to be more competitive, sustainable and profitable. There are four key objectives, to:
help farmers profit from change;
encourage social and economic development in rural areas;
provide incentives for ongoing farm adjustment; and
give farmers access to an effective welfare safety net.
The AAA package was launched in 1997, with individual components progressively implemented over several years.
The objective of the audit was to assess the adequacy of the Commonwealth's administration of three key components of the AAA package.
Agreements between the Commonwealth and each State and the Northern Territory define the roles of the Commonwealth and the States1 in administering FarmBis II, which commenced in July 2001.2 They also establish the role of State Planning Groups (SPGs) in providing strategic direction and broad oversight of the program in each State. The SPGs comprise industry, Commonwealth and State representatives.
The ANAO found that: Commonwealth, State agencies and SPG members had a clear and consistent understanding of the roles and responsibilities of each party; there were sound arrangements for effective communication between the parties; and there was also regular consultation with primary industry representatives through industry participation on SPGs. AFFA has implemented a risk management strategy for FarmBis II, supported by a range of monitoring, reporting and feedback mechanisms. However, AFFA has not updated its assessment of risks since June 2001. It is now planning to do so.
The ANAO found that AFFA had appropriately monitored acquittal by the States of quarterly advance payments to them. All Commonwealth payments for 2001–02 had been acquitted in accordance with required procedures.
A clause in the Commonwealth–State agreement states that any interest earned on Commonwealth monies paid to the State be used or applied for the purposes of the program. However, the ANAO found that, unlike other States, FarmBis II funds advanced to Western Australia had been placed in a non-interest bearing trust account. Thus, the Commonwealth funds advanced were not used to generate interest to the benefit of the program.
The ANAO considered that, to improve value for money from Commonwealth advances, AFFA should consult with relevant Western Australian State departments to encourage the placement of FarmBis II funds into an interest bearing account. It would also be appropriate for AFFA to consider, for advice to its Minister, means of preventing such an occurrence in any future extension or modification of FarmBis.
In response to the draft audit report, the Department of Agriculture, WA, advised that that ‘...an [interest bearing] account has been set up and any Commonwealth FarmBis funds received after 1 July 2003 will placed into that account'.
State administrative costs
Each Commonwealth–State agreement provides for a cap on the percentage of total expenditure that can be allocated to program administration, co-ordination and communication. This is set at 22 or 25 per cent of total expenditure over the three year life of the program.3 Most States were exceeding 22 or 25 per cent of expenditure on administrative, co-ordination and communication activities at the halfway point of the program. This was largely due to two factors. Firstly, there were ‘start up' and other fixed costs incurred in establishing and maintaining co-ordination networks. Secondly, there was lower than expected expenditure on non-administrative activities due to low take up rates at the start of the program.
There is a risk that the caps will be exceeded in some States over the full three year life of the program, which would constitute a breach of the agreements. AFFA has acted to address this risk by advising SPGs to take appropriate remedial action, and by indicating that the Commonwealth will not pay above the agreed caps. However, the ANAO notes that the Commonwealth–State agreements do not have an express provision for the repayment by States of Commonwealth funds in circumstances where caps have been breached.
The ANAO found that there had been a wide and effective range of promotional activities undertaken. These are largely conducted by States, and include advertisements, printed and electronic information and direct presentations at field days. AFFA also has a range of promotional material, such as brochures, which is also included on its website. A recent AFFA survey of primary producers indicates that promotion has been successful, with an estimated 81 per cent of primary producers aware of FarmBis II. This is a higher level of awareness than for any other AAA program.
Performance monitoring and evaluation
The Commonwealth–State agreements establish a program monitoring and evaluation framework for FarmBis II that sets out performance indicators and data sources. The agreements also provide for annual review and evaluation by the Commonwealth of States' performance. The ANAO found that AFFA has monitored and evaluated State performance information in accordance with its responsibilities. However, there are no targets associated with the national performance indicators. There are separate State specific targets which could be a basis for the national targets. Inclusion of national targets would assist in assessing whether the program is achieving the intended level of results, for better accountability and transparency in the interest of all concerned.
Expenditure for the first 18 months of the program amounted to some $40 million. This represents 28 per cent of the agreed three year FarmBis II funding. AFFA advised that, in part, the low level of program expenditure reflects the impact of the drought on farmers' demand for training. Nevertheless, this pattern suggests that program expenditure on FarmBis II training over the life of the program may not reach the levels anticipated.
Feedback from participants in FarmBis II training indicates a generally positive view of the quality of service of FarmBis II co-ordinators, who advise and assist participants to identify learning priorities. A majority (some 58 per cent) of participants were satisfied with the quality of this service; less than one per cent indicated dissatisfaction (the rest were neither satisfied nor dissatisfied). Course feedback also indicates that the program has been successful to date in addressing the education and training needs of participants. For example, 88 per cent of participants indicated that the training was of medium to high relevance to their business. A recent AAA survey also estimated that 95 per cent of FarmBis II participants had incorporated (or planned to incorporate) the skills and knowledge learnt into their business and natural resource management practices.
A separate AFFA survey of primary industry and regional representative groups found that the stakeholders considered that FarmBis II training provides benefit to business profitability and productivity. Some 79 per cent considered that training provides significant benefit in this regard. Training was also considered to provide benefit to sustainability of the rural sector, but to a lesser degree.
Farm Help (Chapter 3)
Administrative arrangements with Centrelink
Farm Help commenced in July 2000. The administrative arrangements between AFFA and Centrelink, which delivers the program for AFFA, are set out in a Memorandum of Understanding (MOU). The ANAO found that the MOU is, on the whole, well specified. It includes key performance indicators addressing Centrelink's service delivery with respect to timeliness of processing, customer satisfaction, and correctness of payment.
The first two of these indicators are measured and include targets. However, the third indicator, for correctness of payment, is not yet measured and does not have a target. Centrelink intends to address this through development of its Business Assurance Framework (BAF); it will commence work to include Farm Help in the BAF in March 2004. AFFA has advised it considers that, in the meantime, Centrelink's controls provide adequate assurance on payment correctness.4 However, this approach means that AFFA will not have had performance information on the correctness of customer payments for most of the current funding cycle for the program (to June 2004). 5
Under the terms of the MOU, AFFA pays Centrelink for administration of Farm Help, based on a fixed payment schedule. There is no provision to vary the amount paid to reflect the number of customers who apply for payments and services. To date, these numbers have been below the levels anticipated when the payment amounts were determined.
In March 2001, AFFA commenced discussions with Centrelink to establish a more flexible funding model. The broad parameters of the model were agreed in August 2002. At the time of the audit, negotiations were still continuing, having regard to the results of a recent cost data collection exercise by Centrelink.
Thus this matter had been under discussion for some two years without resolution. Accountability for value for money in delivering Commonwealth services warranted early implementation of a more appropriate funding model, including consideration of any over payments in the past.
In response to the draft audit report, AFFA and Centrelink advised that they have agreed and implemented a new funding arrangement with effect from 2002–03. With respect to any overpayment in the past, the agencies do not believe that it is practical to attempt to apply the new funding model to previous years' service delivery payments.
AFFA and Centrelink have developed risk management plans that cover their respective roles and responsibilities in administering Farm Help. Each has established controls to manage identified risks. The effectiveness of these controls has been monitored by the agencies through program performance information and regular consultation between them.
The ANAO considers that the agencies have developed a common understanding of the main risks surrounding the delivery of Farm Help.
Relationship with the Rural Financial Counselling Service program
Farm Help provides grants to eligible farmers to purchase an assessment of the viability of their farm enterprise from a professional advisor, to assist them to make decisions about their future. The ANAO found that about half of these assessments are purchased from community groups supported by another AAA program—the Rural Financial Counselling Service (RFCS).
The RFCS program provides grants to groups that provide financial counselling services. The RFCS grants match funds raised by the groups. There is, therefore, a risk that the Commonwealth matches Commonwealth funds raised by a community group through Farm Help grants.
It was not possible to test the extent to which double payment occurs because data has not been collected that enables such an assessment. However, the ANAO found anecdotal evidence that this is occurring. AFFA acknowledges that this is the case.
The ANAO found, by examining a stratified random sample of Farm Help case files, that there was generally a high level of compliance by Centrelink with most legislative requirements. However, there was systematic non-compliance with one requirement relating to the processing of the Certificate of Inability to Obtain Finance (CIOF).
CIOFs are a statement from a financial institution that the applicant has applied to the institution for a loan, and the institution does not propose to make any loan to the applicant because of the applicant's financial situation. A CIOF has a maximum period of six months during which it can be used to qualify for income support.
AFFA has advised that the intent is for customers to provide two CIOFs to receive payments for the maximum allowable 12 month period. Centrelink has administered provision of CIOFs on this basis. However, the starting date for the CIOF qualification period is strictly defined in the legislation. The consequence is that, in practice, most customers who receive payments for 12 months are paid for a period when they do not have a current CIOF.
The ANAO recognises that if Centrelink were to administer the program in full compliance with the legislation, most farmers would have to obtain a third CIOF to qualify for a full 12 month period of payment. This would impose a significantly greater administrative compliance burden on farmers. Moreover, some farmers could be faced with a loss of payments as a result of delays in obtaining CIOFs from financial institutions.
Nevertheless, agencies are required to comply with relevant legislation. If, as AFFA advised, administrative arrangements cannot be established that comply with the legislation, it would be necessary to consider advice to the Government about appropriate technical amendments to the legislation.
A wide range of approaches has been used to promote the program, from the distribution of printed information to direct promotion by Centrelink staff in local communities. Survey results indicate that the proportion of primary producers aware of the Farm Help program increased from 23 per cent in 2001 to 37 per cent in 2002. This is on the way to achieving AFFA's performance target of having 50 per cent of all primary producers aware of Farm Help by June 2004.
Potential users of Farm Help are more likely to come from loss-making enterprises. However, the survey indicated that awareness of Farm Help tends to be lower for primary producers making a loss (32 per cent compared with 39 per cent for those making a profit). Some means of increasing awareness by loss-makers warrants consideration by AFFA in developing its promotion strategies.
Performance monitoring and evaluation
AFFA has a performance monitoring and evaluation strategy for Farm Help. Key Performance Indicators (KPIs) address the effectiveness of the program, as well as output quality, and have associated standards and targets. The ANAO found that AFFA has monitored and assessed performance, and taken corrective action where considered necessary. However, as previously noted, AFFA does not yet receive performance information from Centrelink on correctness of payment.
Performance against Centrelink's service timeliness indicators has improved markedly recently. For example, for the period July 2002 to the end of February 2003, 86 per cent of income support claims achieved the required timeframe for assessing and paying claims, against a service standard of 80 per cent. This compares with 78 per cent for 2001–02.
Centrelink has also achieved a client satisfaction rating of 89 per cent for 2002–03, exceeding the standard of 70 per cent.
Farm Help is also performing well in terms of the benefits of professional advice funded by the program. Ninety-four per cent of respondents to a survey in March 2002, who received professional advice, indicated that the advice was at least moderately effective, compared with a target of 80 per cent (68 per cent considered advice to be highly effective). The ANAO also estimated6 that some 92 per cent of customers who commenced income support in 2001–02 had received such advice, exceeding AFFA's target of 90 per cent.
However, the ANAO considers that Farm Help is less effective in assisting customers whose enterprises have been assessed as ‘non-viable'. In these cases the aim is to develop an activity plan to assist decision making about the future of the farm enterprise by providing farm families with a structure for recording details about their current situation, their future, and the strategies they plan to use to achieve that future.
AFFA's framework for evaluation specifies a target that 85 per cent of non-viable Farm Help customers complete an activity plan. However, a July 2002 exit survey by AFFA of Farm Help customers indicated that only 55 per cent had done so. AFFA and Centrelink are examining options for improving performance in this area. Centrelink advised that the 85 per cent target is not a formal measure that has been negotiated between AFFA and Centrelink.
AFFA has not yet collected performance information on the extent to which Farm Help supports participants to undertake some form of adjustment to their business. The program is intended to assist such adjustment, either through leaving the industry, or by making adjustments to business operations, such as diversification, or the implementation of new management or production systems.
Farm Management Deposits (Chapter 4)
Unlike the situation in relation to the FarmBis II and Farm Help programs, AFFA has not formalised its relationship with the ATO, which also has administrative responsibility for the scheme. Establishing an MOU between AFFA and the ATO would strengthen administrative arrangements by providing an agreed basis for cooperation and improve accountability.
The ANAO considers that such an agreement would have contributed to addressing a number of issues identified in this audit, such as shortcomings in communication. For example, the Tax Expenditure Statements for 2001 contained an estimate of $25 million tax expenditure for 2001–02 arising from the FMD tax concession. In preparing the estimate, the Treasury and the ATO were not aware that AFFA had more up-to-date data on FMD holdings than were being used in the estimate. Utilisation of the full information held by AFFA at the time would have increased the estimated tax expenditure for 2001–02 to around $115 million.
When the FMD scheme was launched, it was recognised by AFFA that risks to program integrity would need to be managed well.7 While AFFA has acted to address key risks as they have emerged, there has not been a well articulated and systematic approach to managing program integrity. AFFA has not identified the key risks to outcomes of the scheme; established an appropriate and documented risk management strategy; nor had a structured approach to considering, with the ATO, risk management from a whole-of-government perspective.
AFFA understood that the ATO was using data collected from financial institutions to conduct data matching checks of taxpayer compliance, consistent with legislative provisions. However, the ANAO found that this data was not being used for FMD compliance assessment, and that the ATO was not undertaking any specific FMD compliance checking. This was because the ATO had, until recently, assigned the FMD scheme a risk consequence rating of low, consistent with its agency¬wide risk management approach. Its ability to conduct data matching has also been limited due to current system capabilities. The ATO advised that the system's capability is being enhanced, and is expected to be available in the next 18 months.
The ANAO also found that there has been a high level of non-compliance with the ATO's reporting requirements by financial institutions, and that there were anomalies in data submitted for all of the financial institutions that provided reports to the ATO for 2000–01.
A more consistent approach to risk management is required to appropriately address program integrity.
Compliance by primary producers
As previously mentioned, the ATO took a risk management decision to apply a low level of resources to addressing the risk of non-compliance by primary producers with the FMD provisions of the Income Tax Assessment Act 1936.8 There was no estimate of the potential level of such non-compliance.
The ANAO estimates that in 2001–02 there was a cost to revenue of a little in excess of $5 million (some four per cent of total cost to revenue) as a result of non-compliance with two FMD deductibility provisions. These relate to requirements that a claim for a deduction may not exceed certain taxable primary production income constraints.
The ANAO was unable to estimate the incidence of other non-compliance, due to the unavailability of relevant data. Implementation of the data-matching program with financial institutions, envisaged in the design of the FMD scheme, would enable quantification of the extent of non¬compliance from these sources.
Compliance by financial institutions
AFFA advised the ANAO that the policy intention was for only Authorised Deposit-Taking Institutions (ADIs) to offer FMDs.9 However, some other finance companies have sought to provide FMD accounts, as they considered that the legislation permits this. The companies sought advice on this matter, which AFFA referred to the ATO. The ANAO found that guidance had not been provided to these companies, some two years after the initial enquiries. The lack of clarity on which institutions are eligible to offer FMDs has created some uncertainty for primary producers and financial institutions, which AFFA had identified as a risk to the integrity of the scheme.
On 17 June 2003, the Minister for Revenue and Assistant Treasurer detailed in a media release that deposits made with an ineligible financial institution before 1 July 2003 will be deemed an FMD, provided they are transferred to an FMD with an ADI, or institution with a State or Territory guarantee within a transfer period. The legislation will also be amended to state that FMDs may only be made with ADIs or with financial institutions that have a State or Territory guarantee.
The ATO advised that it intends to issue a Taxation Ruling, which would clarify the interpretation and application of the law following this announcement. The ATO has not indicated when the ruling will be issued.
The ANAO also found that the delays, combined with limitations in communication on the matter, have led to inconsistencies in advice provided to finance companies.
Information on the FMD scheme is available to primary producers through a number of sources, including AFFA and the ATO telephone information services and websites; information products from financial institutions; and advice from tax agents.
AFFA survey data indicates that promotion activities have contributed to raised awareness of the scheme. Awareness amongst primary producers is estimated to have increased from 32 per cent in July 2001 to 72 per cent in October 2002.
The survey also indicated that the main reasons for primary producers using FMDs were for ‘taxation arrangements' and to ‘put money away in case of bad years'. AFFA advised that these findings were consistent with the purpose of the scheme.
Performance monitoring and evaluation
AFFA has developed a monitoring and evaluation framework for the FMD scheme, including key performance indicators and targets. The framework provides a good basis for performance management, but there are also aspects of the framework that warrant improvement.
The ANAO considers that performance targets for the scheme were too low to provide a useful point of comparison for assessing performance. For example, there was only a one per cent annual growth rate target for the number of participants in the scheme. This was a very modest target in that the scheme was expected to result in high growth rates in holdings. Actual growth rates, therefore, greatly exceeded the targets.
In addition, the performance indicator of management effectiveness is of limited value as it does not cover services of the ATO, which are an important factor influencing outcomes of the scheme.
AFFA has collected performance information through a range of mechanisms. However, there have been problems with the collection and processing of data from financial institutions. Much of the data had not been used by AFFA. Some returns had not been fully processed, reducing accuracy. Some financial institutions consulted by the ANAO considered that AFFA's reporting specifications were difficult to comply with. As a result, incomplete data was supplied. AFFA has yet to address the perceived difficulties in reporting requirements.
Costs of FMD scheme
As an income tax concession, the FMD scheme results in the Commonwealth forgoing tax revenue that it would have collected in the absence of the scheme. The ‘tax expenditure' for the scheme is estimated by the Treasury to be $470 million in 2002–03. This is an estimate of the increase in revenue that would be obtained if primary producers' income deposited in FMD accounts was taxed without the possibility of using other tax concessions.10
The number of primary producers participating in the scheme rose from 7500 in June 1999 to 39 537 in December 2002. Over the same period, the value of FMD holdings has increased from $280 million to some $2 billion.
The ANAO found, from analysing income tax data, that the average taxable primary production income of users of the FMD scheme was more than three times that of those who did not use the scheme.
The ANAO estimates that some 14 per cent of eligible primary producers had used the FMD scheme by June 2002. Usage has increased strongly since the scheme's introduction and exceeds that for the schemes it replaced (which had a combined usage rate of under four per cent). Usage is likely to rise further in coming years, as 33 per cent of primary producers surveyed indicated that they planned to use FMDs in the future.
Representatives of primary producers and tax accountants interviewed advised the ANAO that the FMD scheme was popular and regarded as a useful risk management tool by primary producers. This is consistent with the findings of the recent survey that the main reasons for using FMDs were for ‘taxation arrangements' and to ‘put money away in case of bad years'.
Many aspects of administration of the AAA programs examined are well managed. The programs have been well promoted. There is a performance management framework, although better use could be made of targets and data collected to assist in assessing performance. There are some weaknesses in administration, most notably relating to strategic management and compliance arrangements, which require strengthening for more effective outcomes. The issues are relevant for these programs as well as for any extension to them.
The administrative framework for Farm Help requires strengthening to enable AFFA to adequately assess the quality of Centrelink's service delivery and to obtain adequate assurance that payments for Centrelink's administration represent value for money. The overlap of Farm Help with the Rural Financial Counselling Services program also requires attention, as it reduces value for money from expenditure on the programs.
The absence of a documented agreement on the administrative arrangements between AFFA and the ATO for the FMD scheme has contributed to communication shortcomings impacting on scheme administration. A more systematic approach to risk management is also required to appropriately address program integrity, as foreshadowed when the scheme was launched. This would include an agreed approach to compliance. To date there have been no compliance activities specifically targeting primary producer compliance with relevant FMD requirements.
Performance information indicates that the programs have been successful in addressing desired outcomes. For example, the FMD scheme has been successful in attracting an increased take up of income equalisation products by primary producers. Most service delivery standards are being met.
Recommendations and AFFA response
The ANAO makes nine recommendations aimed at strengthening the overall administration of the AAA package in the areas of: strategic management, compliance and performance management. AFFA, Centrelink and the ATO have agreed to all recommendations and their responses are detailed in the report.
The Department welcomes the overall conclusions of the audit. While the audit has found that the AAA programs are well managed, it has identified areas in the management of the AAA programs where improvement can be made, in particular the approach to systematic risk management and the analysis of data in assessing the performance of the programs. The Government has foreshadowed the development of a successor to the current AAA package and the outcomes of this audit will be a valuable resource in that process. The development of a Memorandum of Understanding (MOU) between the Department and the Australian Taxation Office relating to the administration of the Farm Management Deposits Scheme is well advanced. The MOU will provide the basis for a more coordinated approach to the administration of the program particularly relating to communication, risk management and performance management.
1 References to States include the Northern Territory unless otherwise specified.
2 There was an earlier version of the FarmBis— Skilling Farmers for the Future program prior to July 2001. The first year of the funding package for AAA included funding for this program to June 2001. 3 The differences in the caps reflect differences in farming populations, geographical spread and administrative arrangements.
4 These controls include the use of specialist processing staff for claim assessment, guidance material and helpdesks to assist staff resolve policy and procedural queries, and six monthly reviews of all Farm Help income support payments.
5 The Minister for Agriculture, Fisheries and Forestry announced on 13 May 2003, in the Budgetary context, that the closing date for Farm Help applications would be extended to 30 June 2004. This is to facilitate transition to any new arrangements to be considered in the context of the 2004 Budget.
6 The ANAO based its estimates on the number of grants of income support and professional advice over a 12 month period. It was not possible to measure the outcome on a case-by-case basis.
7 For example, as indicated in the second reading speech for the Taxation Laws Amendment (Farm Management Deposits) Bill 1998. Accordingly, legislative provisions require financial institutions to report quarterly to AFFA on FMD deposits, withdrawals and balances, and to the ATO annually with disaggregated data on FMD withdrawals.
8 Tax returns that have involved FMD tax deduction claims will, however, have been subject to the ATO's standard suite of income tax compliance controls, including audits.
9 Authorised Deposit-Taking Institutions are regulated by the Australian Prudential Regulation Authority.
10 Revenue foregone in 2002–03 will be partially recovered in future years when producers make FMD withdrawals.