MEDICAL RESEARCH FUTURE FUND BILL 2015 Explanatory Memorandum

Commonwealth of Australia Explanatory Memoranda

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MEDICAL RESEARCH FUTURE FUND BILL 2015

2013-2014-2015 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA SENATE MEDICAL RESEARCH FUTURE FUND BILL 2015 REVISED EXPLANATORY MEMORANDUM (Circulated by the authority of the Minister for Finance, Senator the Hon Mathias Cormann) THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED

Table of abbreviations and common terms Abbreviation or Description common term Advisory Board means the Australian Medical Research Advisory Board established by section 32B of the Medical Research Future Fund Bill 2015 Agency means the Future Fund Management Agency established by section 74 of the Future Fund Act 2006 COAG Reform Fund means the Fund established by section 5(1) of the COAG Reform Fund Act 2008 corporate Commonwealth has the meaning set out in subsection 11(a) of the Public entity Governance, Performance and Accountability Act 2013 Corporations Act means the Corporations Act 2001 CRF means the Consolidated Revenue Fund CSIRO means the Commonwealth Scientific and Industrial Research Organisation established by section 8 of the Science and Industry Research Act 1949 Finance Minister has the same meaning as defined in the Public Governance, Performance and Accountability Act 2013 Future Fund means the Future Fund established by section 11 of the Future Fund Act 2006 Future Fund Act means the Future Fund Act 2006 Future Fund Board means the Future Fund Board of Guardians established by section 34 of the Future Fund Act 2006 Future Fund Special Account means the Future Fund Special Account established by section 12 of the Future Fund Act 2006 Health Minister means the Minister who administers the Health Insurance Act 1973 HHF means the Health and Hospitals Fund established by section 214 of the Nation-building Funds Act 2008 HHF Special Account means the Health and Hospitals Fund Special Account established by section 215 of the Nation-building Funds Act 2008 Investment Mandate Means the Medical Research Future Fund Investment Mandate and has the same meaning as defined in the Medical Research Future Fund Bill 2015 ITAA means the Income Tax Assessment Act 1997 Legislative Instruments Act means the Legislative Instruments Act 2003 MRFF means the Medical Research Future Fund MRFF Health Special means the Medical Research Future Fund Health Special Account Account established by section 23 of the Medical Research Future Fund Bill 2015 2

Abbreviation or Description common term MRFF Special Account means the Medical Research Future Fund Special Account established by section 11 of the Medical Research Future Fund Bill 2015 Nation-building Funds means the Nation-building Funds established by section 12, 131 and 214 of the Nation-building Funds Act 2008 NHMRC means the National Health and Medical Research Council established by section 5B of the National Health and Medical Research Council Act 1992 PGPA Act means the Public Governance, Performance and Accountability Act 2013 Priorities means the Australian Medical Research and Innovation Priorities established by section 32E of the Medical Research Future Fund Bill 2015 responsible Ministers means the following: (a) the Treasurer; and (b) the Finance Minister Strategy means the Australian Medical Research and Innovation Strategy established by section 32D of the Medical Research Future Fund Bill 2015 3

Medical Research Future Fund Bill 2015 Context The Medical Research Future Fund Bill 2015 (the Bill) gives effect to the Government's decision (announced as a 2014-15 Budget measure) to establish a dedicated financial asset, the Medical Research Future Fund (MRFF), as an endowment that supports medical research and innovation (including in health disciplines). The Government wishes to accumulate assets that can be invested to create earnings used to fund additional medical research and innovation over the long term. All Australians stand to benefit from additional, well-targeted investments in medical research and innovation and the additional national funding provided through the MRFF is expected to translate into improvements in the health, life expectancy and quality of life of all Australians. Summary The Bill establishes the MRFF on the later of the day after this Act receives the Royal Assent; or the day after the Medical Research Future Fund (Consequential Amendments) Act 2015 receives the Royal Assent. The MRFF will be a dedicated investment vehicle to provide a sustainable and secure source of funding for medical research and innovation. The MRFF will provide the opportunity to fund research strategically and address national priorities in a cohesive and coordinated way, and will complement existing medical research and innovation funding. The Bill provides for the establishment of the MRFF, which will consist of the: MRFF Special Account; and the investments of the MRFF. The Bill also establishes the transparent decision-making and accountability mechanisms that will be used for the effective disbursement of funds from the MRFF, including: the establishment of the independent expert Australian Medical Research Advisory Board (Advisory Board); a requirement to have an Australian Medical Research and Innovation Strategy (Strategy) and Australian Medical Research and Innovation Priorities (Priorities) that are determined by the Advisory Board; a requirement that decision-making mechanisms for the disbursement of funds from the MRFF must take into account the Strategy and Priorities; a requirement for the Health Minister to report on medical research and innovation investment every two years; and an outline of the role of the National Health and Medical Research Council (NHMRC). 4

The Government is committed to boosting health and medical research. This must not just do more of the same, but demonstrate greater value and returns to the Australian people. The MRFF will give particular impetus to the translation of medical research and innovation into health and economic benefits. The MRFF will complement the Medical Research Endowment Account operated by the NHMRC and leverage the existing capabilities of the NHMRC, including research peer review, grants management, and the provision of expert advice. Investment of the Medical Research Future Fund The Future Fund Board of Guardians (Future Fund Board) will be responsible for deciding how to invest the MRFF to enhance the Government's ability to make grants of financial assistance for medical research and innovation. The Bill requires the responsible Ministers to issue an investment mandate to the Future Fund Board regarding the investment of the MRFF. The purpose of the Medical Research Future Fund Investment Mandate (Investment Mandate) is to provide a mechanism for the Government to provide strategic guidance to the Future Fund Board on its expectations for the MRFF. Credits The MRFF will be credited with amounts equal to the: uncommitted balance of the Health and Hospitals Fund (expected to be around $1 billion); and the value of announced health saving measures. Administration and Investment Expenses Expenses associated with the investment and administration of the MRFF incurred by the Future Fund Board will be met from the MRFF. This is consistent with the treatment of administration expenses for other Government investment funds. Reporting by the Future Fund The Finance Minister is responsible for ensuring that the Future Fund Board complies with reporting requirements for the MRFF. This includes preparing financial statements and annual reports. The Finance Minister has the power to request additional information required to satisfy the Government that the Future Fund Board's management of the MRFF complies with legislation and the Investment Mandate. The Finance Minister has the power to publish information received from the Future Fund Board, when the Government deems it appropriate and in the public interest. This includes publishing information about the maximum annual distribution available in a given financial year for the purposes of making grants of financial assistance to support medical research and innovation. 5

Maximum Annual Distributions The Bill places a limit on the amount that can be debited from the MRFF each financial year in order to protect the credited amounts into the future. The limit, which is called the maximum annual distribution, is to be determined by the Future Fund Board who then informs the Government of the amount of funds that can be withdrawn from the MRFF in a given financial year to fund grants for medical research and innovation. The maximum annual distribution amount determined by the Future Fund Board will be based on the previous year's net earnings after management costs from the MRFF and will also take into account the current and future earning capacity of the MRFF. This approach aims to provide greater certainty to the medical research and innovation sector by minimising undue volatility in the amount available for distribution from year to year. The distribution will serve as a secure revenue stream for medical research and innovation. The Advisory Board The Bill establishes the independent expert Advisory Board and sets out the Advisory Board's role, governance and reporting arrangements. The purpose of the Advisory Board is to develop the Strategy and the Priorities. The Advisory Board will also provide advice, as requested, to the Health Minister on other matters which relate to the Strategy, the Priorities, and the use of funding from the MRFF. The Advisory Board members will collectively possess expertise in medical research, policy relating to health systems, management of health services, medical innovation, financing and investment, and commercialisation. The Chief Executive Officer of the NHMRC will be a member of the Advisory Board. The Australian Medical Research and Innovation Strategy and the Australian Medical Research and Innovation Priorities The Bill requires that the independent expert Advisory Board will develop and publish the Strategy. The purpose of the Strategy is to ensure that a coherent and consistent approach is adopted in the funding of medical research and innovation from the MRFF over a five year period. The Advisory Board must refer to the NHMRC's national strategy for medical research and public health research when developing the Strategy and should also refer to other relevant publications such as the Government's Science and Research Priorities. The Strategy will not identify particular projects to receive funding. This requirement ensures that the members of the Advisory Board who are also members of the medical research community are not exposed to potential conflicts of interest. A new Strategy will be determined every five years. A subsequent Strategy must be determined before the current Strategy ceases to be in force. The Strategies are expected to build upon each other over the long term to provide the greatest benefit to medical research and innovation, especially in terms of translation. The Bill also requires the independent Advisory Board to develop and publish the Priorities every two years. The Advisory Board must consider the Strategy when setting 6

the Priorities and the Priorities must be consistent with the Strategy that is in force when they are initially set. The Government must use the Priorities when making decisions regarding programme level funding from the MRFF. The Advisory Board must take into account the following when setting the Priorities: the burden of disease on the Australian community; how to deliver practical benefits to as many Australians as possible from medical research and innovation; how to ensure that financial assistance provided from the MRFF provides the greatest value for all Australians; and how to ensure that financial assistance provided from the MRFF complements and enhances other funding provided for medical research and innovation. The application of the Priorities to inform decision-making is expected to ensure that any expenditure from the MRFF will have a strong business case, underpinned by consideration of how the financial assistance provided from the MRFF delivers the greatest value for all Australians. Programme level funding decisions will be made by Cabinet through the Budget process. The Health Minister will bring forward proposals for Cabinet's consideration consistent with the Strategy and Priorities set by the independent expert Advisory Board. Report on Financial Assistance for Medical Research The Bill sets out a requirement for the Health Minister to provide a report for Parliament every two years on medical research and innovation investment. This will ensure the Government's decisions on MRFF disbursements will be accountable to Parliament. The report to Parliament must detail all funding provided by the Government for medical research and innovation and how MRFF funding decisions align with the Priorities. The report must differentiate funding provided from the MRFF from other medical research and innovation funding. Role of the NHMRC in Disbursements The funding from the MRFF is in addition to funding already provided to the NHMRC. The Government will rely on a range of experts, including the experience and expertise of the NHMRC and other expert bodies when funding medical research in particular for scientific and laboratory-based research. This recognises that other expert funding bodies, including Government entities, might be required to assist with for example, the management of funding for medical research infrastructure or for commercialisation of medical research. The Advisory Board, that includes the CEO of the NHMRC, will take into account the work and priorities of the NHMRC to ensure that funding from the NHMRC and funding from the MRFF are complementary and that there is no duplication. 7

Any allocation of MRFF funding to the NHMRC will be for purposes consistent with the Strategy and Priorities. Decisions of Financial Assistance from the MRFF The Bill requires that the decision-making processes for financial assistance from the MRFF will be transparent. The independent expert Advisory Board will set the Strategy and Priorities for medical research and innovation. The Health Minister and Cabinet, through the Budget process, will take these into account when making decisions on funding at the programme level. The NHMRC and other expert bodies will at times be engaged to allocate funds to specific projects in order to implement the Budget measures. In addition to the two year report by the Health Minister to the Parliament, decisions on funding will be reported in the Budget papers each year and through the grant reporting requirements set out in the Commonwealth Grants Rules and Guidelines. The MRFF Bill establishes a range of appropriation mechanisms for providing funding for medical research and innovation. Recipients can include corporate Commonwealth entities, States and Territories, Australian universities, medical research institutes, not- for-profit organisations and commercial enterprises. The Bill does not bind the Government to make payments to all of these potential recipients but it does allow for allocations of funding consistent with the Priorities over time. For example MRFF funding may be made available, through the Council of Australian Governments (COAG) Reform Fund, to States and Territories in order to support medical research infrastructure development. This may involve supporting infrastructure projects by hospitals, health services, universities or collaborative projects between state and territory governments and medical research institutes. MRFF funding may also be made available to a Corporation. This could involve supporting research into the development of medicines or medical technologies (including personal health technologies) for commercial use. In each case the funding would only be available to the extent that the programmes are consistent with the Strategy and Priorities. Powers to Credit and Debit the MRFF The Treasurer and the Finance Minister are responsible Ministers for the purposes of determining amounts to be credited to the MRFF. In doing so the responsible Ministers are required to take into account the object of the Act, which is to improve the health and wellbeing of Australians by establishing the MRFF to provide grants of financial assistance to support medical research and innovation. The Bill outlines the decision-making framework for the effective disbursement of funds from the MRFF. The framework requires the Finance Minister to give effect to the decisions of the Government, in relation to the debiting of amounts from the MRFF. These amounts will be made available to the NHMRC and other bodies to address the Priorities. The Bill provides that while the Finance Minister has authority to issue directions regarding the debiting of amounts from the MRFF, the Finance Minister can only debit 8

those amounts if required to do so by the Health Minister. The Health Minister must take into account the Priorities in determining whether to require the Finance Minister to debit an amount from the MRFF. When required by the Health Minister, the Finance Minister is required to direct in writing that amounts specified by the Health Minister be debited from the MRFF and credited to: the MRFF Health Special Account for the purpose of making grants of financial assistance to medical research institutes, non-profit organisations, universities and corporations; or the COAG Reform Fund for making payments to the States and Territories for expenditure on medical research and innovation - including application and commercialisation activities that translate discoveries to new treatments and practice; or corporate Commonwealth entities outside the General Government Sector (for example, the CSIRO). The Finance Minister, with the Treasurer, as joint responsible Minister, remains responsible for the administration of the MRFF through the Future Fund Board. 9

MRFF governance and disbursement overview The following diagram illustrates the decision-making process which applies to funding from the MRFF. 10

Financial Impact Statement The initial credit of funds from the Health and Hospitals Fund into the MRFF will not have a direct impact on the underlying cash and fiscal balances, as these are already part of, and remain within, the CRF. The interest earnings of the MRFF have a positive impact on the underlying cash and fiscal balances. Costs incurred by the Future Fund Board have a negative impact on the underlying cash and fiscal balances. The payments from the MRFF will be based on net earnings (interest earnings less management fees) of the MRFF, with payments to commence from when the MRFF is established, and with capital managed to allow for a steady flow of distributions over time. Payments from the MRFF will have a negative impact on the underlying cash and fiscal balances. Statement of Compatibility with Human Rights The provisions in the Bill do not: engage any of the applicable rights or freedoms outlined in the Human Rights (Parliamentary Scrutiny) Act 2011, such as encompassed in the International Covenant on Civil and Political Rights; or limit any human rights, nor propose any offences or penalties. This Bill is therefore compatible with the human rights and freedoms recognised or declared in the international instruments listed in subsection 3(1) of the Human Rights (Parliamentary Scrutiny) Act 2011. 11

MEDICAL RESEARCH FUTURE FUND BILL 2015 NOTES ON CLAUSES Preamble The preamble sets out a number of considerations taken into account by the Parliament in enacting this law. Part 1 - Preliminary Section 1 - Short Title Section 1 provides for the Act to be cited as the Medical Research Future Fund Act 2015. Note: The sections in the Bill will become sections of the Act on Royal Assent. Section 2 - Commencement Section 2 provides that the Bill commences on the later of: the day after this Act receives the Royal Assent; or the day after the Medical Research Future Fund (Consequential Amendments) Act 2015 receives the Royal Assent. Section 3 - Object Section 3 sets out the object of the Bill, namely to improve the health and wellbeing of Australians by providing grants of financial assistance to support medical research and innovation. Section 4- Simplified outline of this Act Section 4 provides a high level introduction to the provisions in the Bill, to aid readability. The outline is not intended to be comprehensive and should not be relied on in place of the substantive provisions in the Bill. Section 5 - Definitions Section 5 provides definitions of the terms and expressions used in the Bill. Section 6 - Crown to be bound Section 6 provides that the Act binds the Crown in each of its capacities but does not make the Crown liable to be prosecuted for an offence. Section 7 - Extension to external Territories Section 7 provides that the Act extends to every external Territory. 12

Section 8 - Extra-territorial application Section 8 provides for the geographical reach of this Act to apply outside of Australia - due to the possibility that the recipients of grants of financial assistance from the MRFF may collaborate with international partners. Section 9 - Alternative constitutional basis Section 9 details the constitutional basis upon which making grants of financial assistance to support medical research and innovation relies. 13

Part 2 - Medical Research Future Fund Division 1 - Introduction Section 10 - Simplified outline of this Part Section 10 is an overview of Part 2 to assist with readability. Division 2 - Establishment of the Medical Research Future Fund and the Medical Research Future Fund Special Account Section 11 - Establishment of the Medical Research Future Fund Section 11 establishes a financial asset fund - the Medical Research Future Fund - consisting of amounts credited to a MRFF Special Account and investments of the MRFF. Section 12 - Determination of amount of Medical Research Future Fund Section 12 establishes procedures for determining the value of assets to be transferred from the Health and Hospitals Fund to the MRFF. A determination made under subsection 12(1) is not disallowable. Such determinations would usually be regarded as administrative, rather than legislative, in character. Directions of this type are administrative in character because they are merely the application of a legal power in a particular case, i.e. they do not determine or alter the content of the law itself. Subsection 12(2) is included to assist the reader. Section 13 - Allocation of investments to the Medical Research Future Fund from the Health and Hospitals Fund Section 13 establishes processes for the transfer to the MRFF of an amount forming part of the Health and Hospitals Fund. The Future Fund Board will have 28 days to effect a transfer of financial assets to the value of the amount determined by the Finance Minister under subsection 12(1). During this period the Future Fund Board will identify the assets to be transferred and make whatever commercial arrangements are required to manage these assets as investments of the MRFF. At the 28th day following the making of the determination under subsection 12(1), the balance of the Health and Hospitals Fund not transferred to the MRFF will stand to the credit of the HHF Special Account. These cash amounts will be used to meet commitments related to previously approved Health and Hospitals Fund projects under an appropriation to be established by the Medical Research Future Fund (Consequential Amendments) Bill 2015. 14

Section 14 - Establishment of the Medical Research Future Fund Special Account Section 14 establishes the MRFF Special Account - a special account for the purposes of the Public Governance, Performance and Accountability Act 2013. A special account is an appropriation mechanism that sets aside an amount within the CRF to be expended for specific purposes. Any amounts credited to the MRFF Special Account are quarantined from the rest of the CRF and can only be debited from the MRFF for the purposes set out in the Bill. The note immediately following this section is included to assist the reader by clarifying that amounts could be credited to the MRFF Special Account by an Appropriation Act. Division 3 - Credits of amounts to the Medical Research Future Fund Special Account Section 15 - Credits of amounts Section 15 establishes a mechanism for amounts - other than the initial transfer of assets from the Health and Hospitals Fund - to be credited to the MRFF Special Account. Amounts are credited by a written determination of the responsible Ministers or their delegates (refer to sections 60 and 61 for delegation powers of the Finance Minister and the Treasurer). Subsection 15(3) provides that a determination to credit a specified amount to the MRFF Special Account is a legislative instrument for the purposes of the Legislative Instruments Act and, as such, will be tabled in the Parliament and published on the Federal Register of Legislative Instruments. However, the determination, as a ministerial direction, is not disallowable. Such determinations would usually be regarded as administrative, rather than legislative, in character. It is not appropriate that they be disallowable as they are a one-off instrument made when funds are about to be credited. The same approach was taken for equivalent provisions in the Future Fund Act 2006. Division 4 - Debits of amounts from the Medical Research Future Fund Subdivision A - Rules relating to debits from the Medical Research Future Fund Special Account Section 15A - Health Minister may require the Finance Minister to debit amounts Section 15A establishes that the Health Minister may require the Finance Minister to debit a specified amount from the MRFF Special Account in accordance with Subdivision C, D or E of the Bill. The section also requires the Health Minister to take into account the Priorities when requiring the Finance Minister to debit a specified amount from the MRFF Special Account. 15

The Health Minister's requirement under section 15A is administrative, rather than legislative, in character and is therefore not a legislative instrument for the purposes of the Legislative Instruments Act. Directions of this type are administrative in character because they are merely the application of a legal power in a particular case; that is, they do not determine or alter the content of the law itself. Section 16 - Limitation on total annual debits from the Medical Research Future Fund Special Account Section 16 establishes that the amount debited for expenditure from the MRFF cannot exceed the maximum annual distributions determined as prescribed under section 34. Subdivision B - Purposes Section 17 - Purposes of the Medical Research Future Fund Special Account - main purposes Section 17 sets out the main purposes of the MRFF Special Account. These purposes are consistent with the object of the Bill, namely to transfer amounts to: the COAG Reform Fund for the purpose of making grants of financial assistance to the States and Territories for expenditure on medical research and innovation; and the MRFF Health Special Account for the purpose of making grants that support medical research and innovation to medical research institutes, universities and corporations; and corporate Commonwealth entities (for example, CSIRO) that are, by definition, outside the General Government Sector. Section 18 - Purposes of the Medical Research Future Fund Special Account - purposes related exclusively to the investments etc. of the Medical Research Future Fund Section 18 relates to the payment of various expenses that may be incurred by the Future Fund Board, which relate exclusively to the investments of the MRFF, and which do not relate to the main purposes of the Fund. It sets out the additional purposes for which the MRFF may be debited. Section 19 - Purposes of the Medical Research Future Fund Special Account - purposes not related exclusively to the Medical Research Future Fund Section 19 relates to the payment of various expenses that may be incurred by the Future Fund Board in respect of its broader functions under this Bill, as well as the Future Fund Act, the Nation-building Funds Act 2008 and the DisabilityCare Australia Fund Act 2013. Section 19 sets out the range of additional purposes for which the MRFF Special Account may be debited in respect of costs that are common to the funds for which the Future Fund Board has responsibility. 16

Section 19 additionally provides for expenses incurred in relation to the management of the Health and Hospitals Fund prior to its abolition to be met from the MRFF Special Account. This provision recognises that these costs (for example investment manager fees) will be primarily related to assets transferred from the Health and Hospitals Fund to the MRFF. Subdivision C - Channelling State/Territory grants through COAG Reform Fund Section 20 - Channelling State/Territory grants through COAG Reform Fund Section 20 provides that where the Health Minister requires the Finance Minister to debit a specified amount, under section 15A, the Finance Minister is to direct that a specified amount be debited from the MRFF Special Account and credited to the COAG Reform Fund to make grants of financial assistance to the States and Territories for medical research and innovation. This would occur following a Government decision. The Finance Minister's direction is administrative, rather than legislative, in character and is therefore not a legislative instrument for the purposes of the Legislative Instruments Act. Directions of this type are administrative in character because they are merely the application of a legal power in a particular case; that is, they do not determine or alter the content of the law itself. Subsection 20(5) requires the Finance Minister to give a copy of the direction to the Health Minister and the Treasurer. Section 21 - Debits from the COAG Reform Fund Section 21 reflects the intention of the Government that the COAG Reform Fund operates as a vehicle through which payments from the MRFF will be distributed to States and Territories. Consistent with this, the Treasurer is required to ensure that, as soon as practicable after an amount is credited to the COAG Reform Fund, that amount is debited for the purposes of making the payment. If the payment cannot be made, subsection 21(2) provides the mechanism for its return to the MRFF Special Account. The intention is that the payment be returned to be invested by the Future Fund Board until such time as the payment can be made. Section 22 - Terms and conditions of grant to a State or Territory Section 22 provides that the terms and conditions upon which a grant is made to the States and Territories are to be set out in a written agreement between the Commonwealth and the State or Territory, that the State or Territory must comply with any such terms and conditions, and that such an agreement may be entered into by any Minister on behalf of the Commonwealth. 17

Subdivision D - Channelling grants through the MRFF Health Special Account Section 23 - Establishment of the MRFF Health Special Account Section 23 establishes the MRFF Health Special Account as a special account for the purposes of the PGPA Act. A special account is an appropriation mechanism that sets aside an amount within the CRF to be expended for specific purposes. Any amounts credited to the MRFF Health Special Account are quarantined from the rest of the CRF and can only be debited for the purpose set out in section 24. The note immediately following this section is included to assist the reader by clarifying amounts that could be credited to the MRFF Health Special Account by an Appropriation Act. Section 24 - Purpose of the MRFF Health Special Account Section 24 provides that the purpose of the MRFF Health Special Account is to enable the making of medical research and innovation payments, which may either be by way of a grant of financial assistance or otherwise. The Bill will allow payments to be made to bodies such as medical research institutes, universities, corporate Commonwealth entities and corporations. Section 25 - Channelling grants through the MRFF Health Special Account Section 25 provides that where the Health Minister requires the Finance Minister to debit a specified amount, under section 15A, the Finance Minister may direct that a specified amount will be debited from the MRFF Special Account and credited to the MRFF Health Special Account for the purposes of making payments to certain bodies. This would occur following a Government decision. The Finance Minister's direction is administrative, rather than legislative, in character and is therefore not a legislative instrument for the purposes of the Legislative Instruments Act. Directions of this type are administrative in character because they are merely the application of a legal power in a particular case; that is, they do not determine or alter the content of the law itself. Subsection 25(5) requires the Finance Minister to give a copy of the direction to the Health Minister and the Treasurer. Section 26 - Debits from the MRFF Health Special Account Section 26 reflects the Government's intention that the MRFF Health Special Account operates as a vehicle through which payments from the MRFF will be distributed to recipients for medical research and innovation initiatives. Consistent with this, the Health Minister is required to ensure that, as soon as practicable after an amount is credited to the MRFF Health Special Account, the amount is debited for the purposes of making the payment. This section also notes that the Health Minister 18

is required to publish on the internet information about these grant payments as per section 58. If for any reason the payment cannot be made, subsection 26(2) provides the mechanism for its return to the MRFF Special Account. The intention is that the payment be returned to be invested by the Future Fund Board until such time as the payment can be made. In providing for debits from the MRFF Health Special Account by the Health Minister, section 26 provides the mechanism through which the Government could ask the NHMRC to manage distributions from the MRFF. The Health Minister may delegate his or her powers under this section to the CEO, an SES employee or acting SES employee of the NHMRC. Section 27 - Terms and conditions of grant to a person other than a State Section 27 is concerned with the conditions for making a grant of financial assistance to a medical research institute; a university; a corporate Commonwealth entity or a corporation by means of a debit from the MRFF Health Special Account. The section provides that the terms and conditions upon which the grant is made are to be set out in a written agreement between the Commonwealth and the person receiving the grant, that the person must comply with any such terms and conditions, and that such an agreement may be entered into by the Health Minister on behalf of the Commonwealth. Subdivision E - Making payments directly to corporate Commonwealth entities Section 29 - Making payments directly to corporate Commonwealth entities Section 29 provides that the Finance Minister may direct that a specified amount be debited from the MRFF Special Account and credited to a corporate Commonwealth entity for the purpose of supporting medical research and innovation. This would occur following a Government decision. Under the definition of a corporate Commonwealth entity provided for by paragraph 11(a) of the PGPA Act, such entities are legally separate from the Commonwealth. Payments made from the MRFF Special Account will therefore be considered to have left the CRF once received by a corporate Commonwealth entity. The Finance Minister's direction is administrative, rather than legislative, in character and is therefore not a legislative instrument for the purposes of the Legislative Instruments Act. Directions of this type are administrative in character because they are merely the application of a legal power in a particular case; that is, they do not determine or alter the content of the law itself. Subsection 29(4) requires the Finance Minister to give a copy of the direction to the Health Minister and the Treasurer. Section 30 - Terms and conditions of grants to corporate Commonwealth entities Section 30 provides that the terms and conditions for a grant entered into under section 29, are to be set out in a written agreement between the Commonwealth and the 19

entity, that the entity must comply with any such terms and conditions, and that such an agreement may be entered into by any Minister on behalf of the Commonwealth. Subdivision F - Obligation to ensure sufficient money Section 31 - Future Fund Board must ensure that there is sufficient money in the Medical Research Future Fund Special Account to cover authorised debits etc. Section 31 requires the Future Fund Board to take all reasonable steps to ensure that the amount standing to the credit of the MRFF Special Account is sufficient to cover amounts to be debited from the MRFF Special Account. The note immediately below this section assists readers to understand the obligations of the Future Fund Board in respect of this requirement. Division 5 - Inter-fund transfers Section 32 - Transfers from the Medical Research Future Fund to the Future Fund Section 32 allows for transfers from the MRFF Special Account to the Future Fund Special Account. This section allows for amounts to be transferred between the MRFF and the Future Fund. The purpose of this is to enable reimbursement to the Future Fund Special Account of expenses incurred in relation to the MRFF that have been debited from the Future Fund Special Account. The section allows the Finance Minister to direct that one fund is to be debited and the other fund credited by a specified amount. The Finance Minister's direction is administrative, rather than legislative, in character and is therefore not a legislative instrument for the purposes of the Legislative Instruments Act. Directions of this type are administrative in character because they are merely the application of a legal power in a particular case, i.e. they do not determine or alter the content of the law itself. Subsection 32(3) has been included to assist readers. 20

Part 2A - Australian Medical Research Advisory Board Division 1 - Simplified outline of this Part Section 32A - Simplified outline of this Part Section 32A is an overview of Part 2A to assist with readability. Division 2 - Establishment of Australian Medical Research Advisory Board and functions Section 32B - Australian Medical Research Advisory Board Section 32B establishes the Advisory Board and allows the Health Minister to provide written directions to the Advisory Board outlining how it should carry out its functions and the procedures for meetings. These directions are administrative rather than legislative in nature and are therefore not a legislative instrument for the purposes of the Legislative Instruments Act. Section 32C - Functions of the Advisory Board Section 32C outlines the Advisory Board's functions, which are to determine the Strategy and Priorities, in accordance with Division 3, and provide advice to the Health Minister on other matters that the Health Minister refers to the Advisory Board. Division 3 - The Australian Medical Research and Innovation Strategy and Australian Medical Research and Innovation Priorities Section 32D - The Australian Medical Research and Innovation Strategy Section 32D requires that the Advisory Board issue a Strategy that sets out a coherent and consistent approach for the provision of financial assistance from the MRFF. The Strategy is high level and must not require financial assistance to be provided to a particular person or project. The Strategy must be issued as soon as practicable after the commencement of the Act and will be in place for five years to provide a longer term focus for medical research and innovation. Future Strategies must be in force as soon as the preceding Strategy ends. The section requires that the Advisory Board take into account the national strategy for medical research and public health research prepared by the NHMRC, along with other relevant matters. The Strategy is a legislative instrument for the purposes of the Legislative Instruments Act 2003 but is not disallowable under section 42 of that Act. The section requires that the Advisory Board publish the Strategy on the internet. 21

Section 32E - The Australian Medical Research and Innovation Priorities Section 32E requires the Advisory Board to determine the medical research and innovation Priorities for providing financial assistance from the MRFF. The Priorities are to be aligned with the Strategy. The section requires that the Advisory Board, in addition to the Strategy, take into account the following: the burden of disease on the Australian community; how to deliver benefits from medical research and innovation to as many Australians as possible; how to ensure that financial assistance provided from the MRFF provides the greatest value for all Australians; how to ensure that financial assistance provided from the MRFF complements and enhances other funding provided for medical research and innovation; and other relevant matters. The Priorities must be issued as soon as practicable after the first Strategy is issued and will be in place for two years to provide a shorter term funding focus for medical research and innovation that can be updated more frequently than the Strategy. Future Priorities must be in force as soon as the preceding Priorities end. The Priorities are a legislative instrument for the purposes of the Legislative Instruments Act 2003 but are not disallowable under section 42 of that Act. The section requires that the Advisory Board publish the Priorities on the internet. Division 4 - Advisory Board members Section 32F - Membership of the Advisory Board Section 32F specifies that the Advisory Board will comprise up to eight members, consisting of the Chief Executive Officer (CEO) of the NHMRC and up to seven other members. Section 32G - Appointment of members Section 32G sets out appointment arrangements for Advisory Board members, with the Health Minister appointing members to the Advisory Board on a part-time basis. The Health Minister must appoint one of the Advisory Board members to be the Chair and appointment to the Advisory Board is limited to a maximum of five years. Members are not eligible for appointment to the Advisory Board unless the Health Minister is satisfied that the appointment of a person to the Advisory Board would result in the Advisory Board collectively possessing an appropriate balance of experience and knowledge in the medical research and innovation fields. The fields are defined as medical research, policy relating to health systems, management of health services, medical innovation, financing and investment, and commercialisation. 22

Section 32H - Remuneration and allowances Section 32H sets out that Advisory Board remuneration is to be determined by the Remuneration Tribunal in the first instance, or otherwise determined by the Health Minister. The Health Minister may set allowances for Advisory Board members. Section 32J - Leave of absence Section 32J provides that the Health Minister may grant a leave of absence to a member of the Advisory Board on the conditions that the Minister considers appropriate. Section 32K - Disclosure of interests Section 32K requires members of the Advisory Board to declare any material personal interest in a matter being considered by the Advisory Board to the Advisory Board and the Health Minister as soon as possible. This section is to avoid any conflicts of interest by the Advisory Board members. The Health Minister is required by this section to terminate any member of the Advisory Board who fails to declare a material personal interest without a reasonable reason. Section 32L - Other terms and conditions Section 32L provides for the Health Minister to be able to determine any other terms and conditions in writing that are not covered by the MRFF Bill. Section 32M - Resignation Section 32M provides the arrangements for Advisory Board members to resign from the Advisory Board, by giving written notice to the Health Minister. Resignation from the Advisory Board is to take effect from the day it is received by the Health Minister, or on a later day where specified in the resignation notice. Section 32N - Termination Section 32N provides the Health Minister the ability to terminate the appointment of an Advisory Board member at any time. 23

Part 3 - Maximum annual distributions Division 1 - Introduction Section 33 - Simplified outline of this Part Section 33 is an overview of Part 4 to assist with readability. Division 2 - Maximum annual distributions Section 34 - Maximum annual distributions Section 34 sets out the obligations of the Future Fund Board - and the principles to be taken into account - in determining the maximum annual distributions available for release from the MRFF in a given financial year. Subsection 34(2) requires the Finance Minister to make a written determination advising of a date when the Future Fund Board must make (and give to the Finance Minister) a determination of the maximum annual distributions available in a given financial year. Subsection 34(3) requires that a written determination issued by the Finance Minister under subsection 34(2) must provide the Future Fund Board with at least 90 days notice of the deadline for making a determination of the maximum annual distribution amount. A written determination issued by the Finance Minister under subsection 34(2) may have effect over multiple years if not superseded by a determination issued by the Finance Minister at a later date. Subsection 34(4) requires the Future Fund Board to take into account the following criteria when making a determination of the maximum annual distribution amount: preservation of the nominal value over the long term of financial assets transferred from the Health and Hospitals Fund to the MRFF at the time a determination was made under subsection 13(1) (that nominal value being the amount determined under subsection 12(1)); and preservation of the nominal value over the long term of the total amount of the credits made under section 15; and moderation of the year-on-year variability of the maximum annual distribution amount; and maintenance of the Future Fund Board's capacity to comply with the Investment Mandate issued under section 39 (including the Future Fund Board's ability to pursue the returns within the level of risk set out in that Investment Mandate). The principle of preserving the nominal value of capital invested in the MRFF by the Government is to be applied over a long term time horizon. 24

Subsection 34(4) also requires that the Future Fund Board make the determination of annual maximum distribution amounts after taking into account costs that are likely to be incurred by the Future Fund Board in making and managing MRFF investments. The reader is reminded that the costs allowed in this regard are prescribed by sections 18 and 19. Subsection 34(5) allows the Finance Minister to provide written advice of additional matters the Government may wish the Future Fund Board to consider in determining the maximum annual distribution in a given year (or over multiple years). Subsection 34(6) requires that any additional matters advised under subsection 34(5) are only to be taken into consideration by the Future Fund Board to the extent that they do not interfere with the principles described at subsection 34(4) or its ability to comply with an Investment Mandate issued under section 39 or any other provision in the Act. Subsection 34(7) requires that any additional matters advised under subsection 34(6) are to be provided in writing to the Future Fund Board at least 90 days before the date specified in a written determination made under section 34. Subsection 34(8) requires the Future Fund Board to provide a copy of the maximum annual distribution determination to the Finance Minister by the date prescribed by a written determination made under section 34. The Future Fund Board is also required to provide a description of the methodology used for determining the amount and any considerations taken into account. Subsection 34(9) allows the Finance Minister to make the maximum annual distribution (and any supporting documentation) available to the public on the internet. Subsection 34(10) has been included to assist readers. The determinations and notices under subsections 34(1) and 34(2) are administrative, rather than legislative, in character and are therefore not a legislative instrument for the purposes of the Legislative Instruments Act. 25

Part 4 - Investment of the Medical Research Future Fund Section 35 - Simplified outline of this Part Section 35 is an overview of Part 4 to assist with readability. Section 36 - Objects of investment of the Medical Research Future Fund Subsection 36(1) is intended to reinforce that amounts are invested by the Future Fund Board for the main object of enhancing the Commonwealth's ability to provide grants for medical research and innovation. Subsection 36(2) sets out that the ancillary objects of the investment of the MRFF are for enhancing the ability of the Commonwealth and the Future Fund Board to discharge costs, expenses, obligations and liabilities and make payments for the ancillary purposes as set out in sections 18 and 19. Section 37 - Investment of the Medical Research Future Fund Section 37 takes account of the investment powers provided for under section 58 of the PGPA Act. However, subsection 37(1) expands on those powers to provide for the investment of the MRFF in a broad range of financial assets. Specific conditions on the acquisition of derivatives are separately covered in section 47. This approach to the investment of the MRFF is consistent with investment arrangements for the Future Fund. Investments of the MRFF will be made in the name of the Future Fund Board (rather than the Commonwealth) to make clear that the Future Fund Board manages the MRFF at arm's length from the Government. However, beneficial ownership of the MRFF assets remains with the Commonwealth at all times. Section 38 - Management of investments of the Medical Research Future Fund Subsections 38(1) and (2) provide that income derived from an investment of the MRFF, including a return of capital or another form of financial distribution, must be credited to the MRFF Special Account. This is consistent with the requirements under sections 81 and 83 of the Constitution (which, in effect, provide that public money forms part of the CRF and can only be spent if authorised by an appropriation made by law). In practice, any money that has not been invested must be held in the MRFF Special Account. Subsections 38(3) to (5) relate to the arrangements that will apply in relation to the realisation of assets, and allow the Future Fund Board to authorise, prior to an investment maturing, that the proceeds of this investment be automatically reinvested with the same entity. This avoids the need for the proceeds of realisation of the investment to be treated as public money and credited to the CRF, only to be then reappropriated and reinvested. Any reinvestment is an investment of the MRFF. 26

Subsection 38(6) provides that section 58 of the PGPA Act does not apply to an investment of the MRFF. Section 58 of the PGPA Act authorises the Finance Minister or the Treasurer to invest public money in only a limited range of investments, such as government bonds and bank deposits. However, section 38(1) provides for the investment of the MRFF in a broader range of financial assets. Section 39 - Medical Research Future Fund Investment Mandate This section provides the Government, as owner of the MRFF, with a mechanism for articulating its expectations for how the MRFF will be invested and managed by the Future Fund Board. Section 39 establishes a framework that enables the Government to give strategic guidance to the Future Fund Board while preserving the Future Fund Board's role in managing the investments of the MRFF at arm's length from the Government. This approach is consistent with the arrangements in place for the Future Fund. Section 39(1) provides the responsible Ministers with the power to give the Future Fund Board written directions in relation to the performance of its investment functions and the exercise of its powers. The responsible Ministers must issue at least one such direction. The directions given by the responsible Ministers will be collectively known as the MRFF Investment Mandate (subsection 39(3) refers). Note that the MRFF investment function is defined in section 5. While the responsible Ministers can issue new directions at any time, the intention is that the Investment Mandate will reflect the Government's policy intent with regard to the investments of the MRFF. Any new directions would therefore be expected to take account of significant policy changes or material changes in the investment environment faced by the MRFF. These requirements will give the Future Fund Board and Parliament assurance that the responsible Ministers must make appropriately considered directions in regard to investment targets, while providing flexibility to take account of broader policy issues and national interest considerations. Section 39(2) provides that in setting the Investment Mandate the responsible Ministers must have regard to maximising the return on the MRFF over the long term consistent with international best practice for institutional investment, and of the need to enhance the Government's ability to provide grants of financial assistance to support medical research and innovation, and any other matters the responsible Ministers consider to be relevant. Subsection 39(4) provides that the Investment Mandate may include, but is not limited to, statements about policies the Future Fund Board must pursue in relation to risk and return and the allocation of the MRFF to particular asset classes. This may include restrictions or thresholds for investing the MRFF in certain jurisdictions or asset classes and statements of the Government's appetite for risk. Subsection 39(5) makes it clear that a Ministerial direction under subsection 39(1) prevails over section 40 to the extent of any inconsistency, and places limitations on 27

responsible Ministers in issuing the Investment Mandate. This means that the Investment Mandate cannot have the effect of requiring the Future Fund Board to do anything that is inconsistent with the Act, including the aim of enhancing the Government's ability to provide grants of financial assistance to support medical research and innovation. Subsection 39(6) provides that the Investment Mandate will not formally commence until at least 15 calendar days after it is issued. This is to allow the Future Fund Board time to adjust to any revised directions issued by the responsible Ministers. Importantly, the Future Fund Board will be able to know with certainty when the new direction will come into force. Subsection 39(7) provides that directions under subsection 39(1), which set out certain rules that the Future Fund Board must comply with, are legislative in character and are therefore legislative instruments for the purposes of section 5 of the Legislative Instruments Act. However, any directions issued by the responsible Ministers as part of the Investment Mandate are exempt from parliamentary disallowance provided for by section 44 of the Legislative Instruments Act, and are exempt from the sun-setting provided for by section 54 of the Legislative Instruments Act. As legislative instruments, any directions given to the Future Fund Board under this section are required to be registered on the Federal Register of Legislative Instruments and tabled in the Parliament. This approach enables the public and the Parliament to hold the Government accountable for the directions it issues to the Future Fund Board without impeding the Government's ability to manage its finances. Section 40 - Obligation on Future Fund Board in performing investment functions Section 40 specifies that in making the investments for the MRFF, the Future Fund Board will seek to maximise the return earned on the MRFF, similar to the requirements for the Future Fund. It is expected that international best practice will be reflected in the investment policies of the MRFF. In making investments for the MRFF the Future Fund Board will aim to enhance the Government's ability to achieve the objects of the Act i.e. to enhance the ability to provide grants of financial assistance to support medical research and innovation. Section 41 - Limitation on Medical Research Future Fund Investment Mandate Section 41 specifies that the responsible Ministers cannot direct the Future Fund Board to use the assets of the MRFF to invest in a particular financial asset, for example shares in a particular company. It also prevents the responsible Ministers from issuing a direction that has the effect of requiring the Future Fund Board to use the assets of the MRFF to support a particular business entity, activity or business. Section 42- Future Fund Board to be consulted on Medical Research Future Fund Investment Mandate Consistent with the Future Fund arrangements, the responsible Ministers are required to consult the Future Fund Board on any changes to the Investment Mandate. 28

Subsection 42(1) requires the responsible Ministers to send a draft of the new direction to the Future Fund Board and invite the Future Fund Board to make a submission within a specified time limit. The specified time limit will be determined on a case by case basis with regard to relevant circumstances and priorities at the time. It may be the case that urgent changes are required in the national interest. In this situation it would be reasonable for the Future Fund Board to be asked to consider a draft direction quickly. However, where there is less urgency, or the change in the Investment Mandate is substantial, it would be reasonable to provide the Future Fund Board with sufficient time to consider a draft direction. Subsection 42(2) provides that any submission received from the Future Fund Board on a draft direction must be tabled in the Parliament, with the direction. In this way, the views of the Future Fund Board on the expected impact of any changes will be publicly known. Section 43 - Compliance with Medical Research Future Fund Investment Mandate Subsection 43(1) requires the Future Fund Board to take all reasonable steps to ensure that all policies and decisions regarding the operation and investment of MRFF are in accordance the Investment Mandate issued by the responsible Ministers. Since the Investment Mandate is intended to provide broad guidance to the Future Fund Board, it may contain directions that require the Future Fund Board to apply its judgment on whether or not MRFF investments comply with the Investment Mandate. Subsection 43(2) requires that if the Future Fund Board becomes aware of a breach of the Investment Mandate, the Future Fund Board must inform the responsible Ministers in writing as soon as practicable, including a proposed strategy to bring the operations of the MRFF into compliance with the Investment Mandate. Similarly, subsections 43(3) and 43(4) provide that if the Government identifies areas where the Future Fund Board is not complying with the Investment Mandate, the responsible Ministers can issue written directions to the Future Fund Board to take action to remedy the situation. The Future Fund Board is required to comply with any such directions, noting that the responsible Ministers are the final arbiters on what is intended by the Investment Mandate. Subsection 43(5) provides that any transactions undertaken by the Future Fund Board and subsequently deemed not to have complied with the Investment Mandate remain valid, and the Future Fund Board is required to honour any commitments made. This protects third parties who enter into transactions with the Future Fund Board or its agents in good faith. Subsection 43(6) makes it clear that a direction under subsection 43(3) is not a legislative instrument. This provision is simply declaratory in nature. Directions of this type are administrative in character because they are merely the application of a legal power in a particular case; i.e. they do not determine or alter the content of the law itself. 29

Section 44 - Future Fund Board must not trigger the takeover provisions of the Corporations Act 2001 Section 44 aims to minimise market distortion and eliminate the potential for conflicts of interest for the Government as a market regulator. It stipulates that the Future Fund Board is prohibited from triggering the takeover provisions under section 606 of the Corporations Act. Section 606 of the Corporations Act essentially prohibits acquisitions of relevant interests in the voting shares of a listed company, or unlisted company with more than 50 share holders, if a person's voting power increases from a figure at or below 20 per cent to a figure above 20 per cent (or from a figure above 20 per cent but below 90 per cent to a higher figure) - unless the shares are acquired in one of the circumstances set out at section 611 of that Act. It is the Government's intention that the takeover threshold be adhered to quite strictly in relation to listed companies and unlisted companies with more than 50 shareholders. Therefore, subsection 44(1) provides that the exceptions provided under section 611 of the Corporations Act (that is, exceptions to the prohibition in section 606) do not apply in relation to acquisitions by the Future Fund Board. Subsection 44(2) provides that if for some reason the Future Fund Board has not complied with section 606 of the Corporations Act (as it is applied to the Future Fund Board under section 39 of the Future Fund Act 2006) the relevant transactions will still be valid. The aim of this provision is to ensure third parties are not adversely affected by any non-compliance of the Future Fund Board. A note at the end of the section assists the reader by referring to section 39 of the Future Fund Act, which sets out the application of the Corporations Act to the Future Fund Board. Section 45 - Borrowing Section 45 prohibits the Future Fund Board from borrowing money, except for short term borrowing associated with the settlement of transactions, or in other circumstances prescribed in the rules. The overall aim of this section is to ensure that the Future Fund Board is able to operate efficiently without exposing the budget to undue risk. Subsection 45(3) provides that rules may be made to specify circumstances in which it is considered appropriate for the Future Fund Board to be able to borrow. The rules may also be used to clarify any uncertainty on whether a particular activity constitutes borrowing. While it is not anticipated that the Future Fund Board will have a need to borrow, this provision allows for unforeseen events or changes in the investment environment without the need to amend the primary legislation. The rules will be disallowable by either House of the Parliament. 30

Section 46 - Medical Research Future Fund investment policies Section 46 provides that the Future Fund Board is required to formulate, publish and comply with a number of policies on its investment activities. The aim of this provision is to ensure rigour and transparency around how the Future Fund Board performs its investment function in relation to the MRFF, including risk management, performance assessment and benchmarks. Subsections 46(1) and 46(7) require the Future Fund Board to formulate and comply with policies and any additional matters specified in the rules. A note at the end of subsection 46(1) reminds the reader that, under subsection 33(3) of the Acts Interpretation Act 1901, the Future Fund Board is able to repeal, rescind, revoke, amend, or vary any such policies. Subsection 46(2) provides that the policies that the Future Fund Board develops must be consistent with the Investment Mandate. Subsections 46(3) and 46(4) provide that the Future Fund Board must publish such policies on the internet. Subsections 46(5) and 46(6) provide that the Future Fund Board must conduct reviews of these policies periodically, and when the responsible Ministers change the Investment Mandate. It is not expected that the results of the reviews would be published. However, if a review resulted in any changes to policies, it is intended that the updated policies would be published on the internet. Subsection 46(8) provides that if the Future Fund Board enters into a transaction which is not consistent with a policy that it has published under this section, the transaction will still be valid. This will ensure that third parties are not affected by any inconsistency with the Future Fund Board's policies. However, subsection 46(7) provides that the Future Fund Board is required to take all reasonable steps to comply with the policies it develops under subsection 46(1). Subsection 46(9) makes it clear that the policies of the Future Fund Board are not legislative instruments, because they are administrative in character and do not determine or alter the content of the law. They are administrative policies that the Future Fund Board is required to formulate and comply with, to ensure rigour and transparency around how the Future Fund Board performs its investment function. Section 47 - Derivatives Derivatives are widely used by financial market participants as a tool for risk management. As the sophistication, size and mobility of capital markets around the world increases, investment managers are looking for ways to maximise the returns on investments while minimising the volatility of results. The types and volumes of derivatives being traded has grown exponentially as the underlying markets have created demand for these types of instruments. 31

Section 47 provides for the Future Fund Board to make use of derivatives for certain purposes. This includes as a risk management tool and to achieve indirect exposure to assets that it could not otherwise achieve. The Future Fund Board may also use derivatives to reduce the transaction cost of achieving required exposures. Section 47 makes it clear that the Future Fund Board cannot acquire or use derivatives for the purposes of speculation or leverage. Subsection 47(2) provides that the acquisition of derivatives under this section cannot be inconsistent with the requirement under section 46 for the Future Fund Board to formulate a policy on its investment strategy and take all reasonable steps to comply with that policy. Subsections 47(3) and 47(4) provide that derivatives must be held in the name of the Future Fund Board and are taken to be an investment of the MRFF. Similar to other investments, derivatives may be realised by the Future Fund Board under subsection 38(3). Section 48 - Additional financial assets Section 48 provides that if the Future Fund Board becomes a holder of another financial asset, for example through a capital distribution, that asset becomes an investment of the MRFF and is therefore subject to all the restrictions and requirements for investments of the MRFF. Section 49 - Securities lending arrangements Section 49 provides that the Future Fund Board is able to enter into securities lending arrangements. Lending of securities is commonplace among institutional investors. It may also take collateral as part of a securities lending arrangement. Any collateral it takes is either credited to the MRFF Special Account or becomes an investment of the MRFF. Section 50 - Investment managers Subsection 50(1) provides that the Future Fund Board is able to hire one or more investment managers. An investment manager is defined broadly to include custodians, transition managers and other investment managers. However, the entity is excluded from this definition as it is generally expected that investment activities, such as acquiring derivatives or investing money, will be outsourced. Unless approved by the responsible Ministers, the Future Fund Board must use investment managers to invest money in financial assets, acquire derivatives, and enter into securities lending arrangements or to realise financial assets. Subsection 50(2) provides that the responsible Ministers may provide approval in writing for certain methods of investment, other than through investment managers, should it be prudent and cost effective to do so. 32

Subsections 50(3) and 50(4) provide that the Future Fund Board is required to ensure that investment managers operate within this Act and must report on the state of investments of the MRFF to the Future Fund Board and the entity. It would be expected that such obligations are set out in the contractual arrangements between the Future Fund Board and the investment manager. Section 51 - Refund of franking credits Under subsection 84B(1) of the Future Fund Act, the Future Fund Board is deemed to be an exempt institution that is eligible for a refund of franking credits under the Income Tax Assessment Act 1997. As the Future Fund Board is exempt from income tax, it may have an investment bias towards assets whose return had not previously been subject to income tax (such as debt instruments or unfranked dividends). Refunding franking credits removes any potential bias against franked dividends. Section 51 deals with the refund of franking credits and provides that if the Future Fund Board receives a refund of a tax offset under the ITAA and the tax offset is attributable to the investment of the MRFF, any refund received is credited to the MRFF Special Account. Section 52 - Realisation of non-financial assets Section 52 requires the Future Fund Board to realise an asset that ceases to be a financial asset or any asset acquired by the Future Fund Board (as an investment of the MRFF) that is not a financial asset. This could include circumstances where the Future Fund Board holds an asset which was mistakenly acquired by the Future Fund Board, or given to the Future Fund Board, or which ceases to be a financial asset due to a revision of the Australian Bureau of Statistics Government Finance Statistics Manual, for example. The section requires that a non-financial asset be treated as a financial asset up to the time it is realised. Section 52(1) ensures that the asset is considered an investment of the MRFF and that relevant provisions relating to investments of the MRFF apply to that asset for the time it is held by the Future Fund Board. Section 53 - Additional function of the Future Fund Board Section 53 provides that the functions of the Future Fund Board include the function of investing amounts in accordance with the Act. 33

Part 5 - Reporting obligations etc. Section 54 - Simplified outline of this Part Section 54 is an overview of Part 5 to assist with readability. Section 55 - Finance Minister may require Future Fund Board to prepare reports or give information Section 55 provides that the Finance Minister may require, in writing, that the Future Fund Board prepare a report or a document on one or more specified matters relating to the performance of the Future Fund Board's functions under Part 3. This report or information must be provided within the timeframe outlined in the Finance Minister's request. The Finance Minister may choose to publish any report or document provided. Section 56 - Keeping the responsible Ministers informed etc. Section 56 requires the Future Fund Board to notify the responsible Ministers of any information that the responsible Ministers should know, including by providing any written information to the Finance Minister. This could include significant investment results, concerns regarding fraud and any non-compliance with the Future Fund Board's policy on conflicts of interest. Section 57 - Finance Minister may give reports to other Ministers etc. Section 57 allows the Finance Minister to give reports, documents and other information to another Minister. This includes reports and documents under sections 55 and 56 and any other information obtained by the Finance Minister under the Act. Section 57A - Health Minister to report to Parliament on financial assistance Section 57A requires the Health Minister to prepare a report on the financial assistance provided from the MRFF against the Priorities every two years, to align with the frequency of the Priorities. The report must include a description of how the financial assistance provided was consistent with the Strategy and Priorities and outline any other financial assistance provided by the Government in relation to medical research and innovation. Section 58 - Health Minister must publish information Section 58 requires the Health Minister to publish information on grants funded from the MRFF Health Special Account on the internet. It is anticipated that, where appropriate, this reporting will make use of existing mechanisms for providing public information on grants provided by the Government (for example, mechanisms to comply with reporting requirements under the Commonwealth Grant Rules and Guidelines). 34

Part 6 - Miscellaneous Section 59 - Simplified outline of this Part Section 59 is an overview of Part 6 to assist with readability. Section 60 - Delegation by the Finance Minister Under subsection 60(1), the Finance Minister may, in writing, delegate his or her powers under sections 15, 20, 25, or 29 to the Secretary of the Finance Department or to an SES employee (or acting SES employee) in that Department. The Finance Minister's powers under sections 15, 20, 25, or 29 relate to the making of crediting determinations to the MRFF and authorising payments from the MRFF. Delegation of these functions to the Secretary of, or SES official in, the Finance Department is consistent with the efficient administration of these matters. Subsection 60(2) allows the Finance Minister to delegate, in writing, his or her powers under Section 32 to the Secretary of the Finance Department; or to an SES employee (or acting SES employee) in that Department; or to the Chair of the Future Fund Board; or an SES employee (or an acting SES employee) of the Agency. Section 32 relates to the transfer of funds from the MRFF Special Account to the Future Fund Special Account for the purpose of apportioning management costs incurred by one fund but paid from the special account related to the other. A note in this section assists the reader by referring to the relevant section of the Acts Interpretation Act 1901 in relation to the expressions 'SES employee' and 'acting SES employee'. It is envisaged that the delegate will be accountable to the Finance Minister for his or her actions under any delegation. Subsection 60(3) reinforces this intention by requiring the delegate to comply with any direction of the Minister in exercising powers under a delegation. Section 61 - Delegation by the Treasurer Under section 61 the Treasurer may, in writing, delegate his or her powers under section 15 or subsection 21(1) to the Secretary of the Treasury or to an SES employee (or acting SES employee) in that Department. A note in this section assists the reader by referring to the relevant section of the Acts Interpretation Act 1901 in relation to the expressions 'SES employee' and 'acting SES employee'. The Treasurer's powers under section 15 and subsection 21(1) relate to the making of crediting determinations to the MRFF and ensuring payments are made from the COAG Reform Fund. Delegation of these functions to the Secretary of, or SES official in, Treasury is consistent with the efficient administration of these matters. 35

Section 61A - Delegation by the Health Minister Section 61A sets out that the Health Minister may delegate his or her powers under section 15A, 26 and 27 to the Secretary of the Health Department or to an SES employee (or acting SES employee) of the Health Department or to the CEO of the NHMRC or to an SES employee (or acting SES employee) of the NHMRC. The Health Minister's powers under sections 26 and 27 relate to the making of debiting determinations to authorise payments from the MRFF Health Special Account, and requiring that the use of such grants comply with the terms and conditions of a written agreement. Delegation of these functions to the Secretary of, or an SES official in, the Health Department or NHMRC is consistent with the efficient administration of these matters. The notes at subsection 61A(1) remind the reader of the definition of an SES employee and indicate the delegations under subsection 61A(1) allow the NHMRC to administer medical research and innovation programmes. This is consistent with the Government's intention to rely on the expertise of the NHMRC to aid the distribution of funds from the MRFF for the purpose of making grants of financial assistance to support medical research and innovation. It is envisaged that the delegate will be accountable to the Health Minister for his or her actions under any delegation. Subsection 61A(2) reinforces this intention by requiring the delegate to comply with any direction of the Health Minister in exercising powers under a delegation. Section 62 - Review of operation of Act Section 62 allows for the responsible Ministers to require that a review of the Act be undertaken by 30 June 2023 or another date the responsible Ministers deem appropriate. This review mechanism is intended to provide the opportunity to consider whether the Act is providing the outcomes envisaged. Section 63 - Rules Section 63 provides that the Finance Minister, by legislative instrument, may make rules covering matters required to be prescribed in this Act, or matters that it would be convenient to prescribe for the purposes of this Act. 36

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