Departmental Primary Statements

Administered Schedules

Objectives of the Department of Education, Skills and Employment

The Department of Education, Skills and Employment (the department) is an Australian Government controlled not-for-profit entity.

The department’s purpose is to help to create an inclusive and prosperous Australia by maximising opportunity through national leadership on education, training and employment policy. The department works to ensure Australians can experience the social wellbeing and economic benefits that quality education, training and employment provide by actively supporting our Ministers to deliver Government policies and priorities.

The department’s strategic priorities are:

• Improving learning outcomes by enabling quality, affordable and accessible early education and care for families and making it easier for families who want to work or have other responsibilities.
• Improving schooling outcomes for our children.
• Equipping the workforce of the future through globally competitive tertiary education, training and research sectors.
• Helping people find and keep a job, create their own job, change jobs, reskill and enjoy fulfilling careers.
• Developing a strong evidence base for effective policy that reflects and understands the varied needs of the Australian population, business and industry.

For the financial period ended 30 June 2020, the department was structured to meet the following outcomes:

Outcome 1: Improved early learning, schooling, student educational outcomes and transitions to and from school through access to quality child care, support, parent engagement, quality teaching and learning environments.

Outcome 2: Promote growth in economic productivity and social wellbeing through access to quality higher education, international education and international quality research.

Outcome 3: Promote growth in economic productivity and social wellbeing through access to quality skills and training.

Outcome 4: Foster a productive and competitive labour market through policies and programs that assist job seekers into work and meet employer needs.

Outcomes 3 and 4 were transferred to the department from the Department of Employment, Skills, Small and Family Business (Employment) to reflect the Administrative Arrangement Orders (AAO) of 5 December 2019.

The continued existence of the department in its present form and with its present programs is dependent on Government policy and on continued funding by the Parliament for the department’s administration and programs.

The department’s activities contributing toward these outcomes are classified as either departmental or administered. Departmental activities involve the use of assets, liabilities, income and expenses controlled or incurred by the department in its own right. Administered activities involve the management or oversight by the department, on behalf of the Government, of items controlled or incurred by the Government.

A number of Machinery of Government changes through AAOs resulted in a realignment of the department’s responsibilities:

• Skills and vocational education functions and the Australian Skills Quality Authority transferred to the Employment, Skills, Small and Family Business portfolio on 29 May 2019.
• Adult migration education functions were transferred to the Home Affairs Portfolio and Industrial relations functions were relinquished to the Attorney-General’s Department (AGD) effective 1 July 2019.
• Higher Education Support Act 2003, relating to VET FEE-HELP (VFH) assistance functions were relinquished to Employment, Skills, Small and Family Business portfolio as a result of an amendment on 8 August 2019.
• Skills, vocational education and the Australian Skills Quality Authority transferred back to the department, employment functions became part of the Education, Skills and Employment portfolio, and small business functions were relinquished to the Department of Industry, Science, Energy and Resources (DISER) effective from 1 February 2020.

The impact of the restructures on the financial statements have been disclosed at note K2 as at the date of effect. In accordance with section 17J of the PGPA Act Rule 2014 where the functions have been transferred to another entity and the old entity was abolished, the department, being the new entity must report on these functions. As a consequence of the abolishment of the Department of Employment, Skills, Small and Family Business under section 64 of the Commonwealth of Australia Constitution Act (the Constitution), the department has prepared a single set of financial statements for the entire reporting period. The financial statements include financial results attributable to Employment from 1 July 2019 to 31 January 2020, with 2018-19 comparatives reported separately. The appropriation notes have been prepared separately in accordance with the legal authority of the affected entities.

The Basis of Preparation

The financial statements are general purpose financial statements and are required by section 42 of the Public Governance, Performance and Accountability (PGPA) Act 2013. The financial statements have been prepared in accordance with Division 4 of Part 2-3 of the PGPA Act Rule 2014, PGPA (Financial Reporting) Rule 2015 (FRR) and the Australian Accounting Standards and Interpretations.

In accordance with the FRR and AASB 1053 Application of Tiers of Australian Accounting Standards and other reporting requirements, the department has applied tier 2 reporting requirements (as a minimum).

The financial statements have been prepared on an accrual basis and in accordance with the historical cost convention, except for certain assets and liabilities at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position.

The financial statements are presented in Australian dollars and values are rounded to the nearest thousand dollars unless otherwise specified.

Reporting of Administered activities

Administered revenues, expenses, assets, liabilities and cash flows are disclosed in the administered schedules and related notes.

Unless otherwise stated, administered items are accounted for on the same basis and using the same policies as for departmental items, including the application of Australian Accounting Standards and Interpretations.

Tier 1 reporting requirements have been applied to administered disclosures in respect of AASB 7 Financial Instrument: Disclosure and AASB 13 Fair Value Measurement.

Significant Accounting Judgements and Estimates

During the 2019-20 financial year, the department made a number of judgements and applied estimates that had an impact on the amounts recorded in the financial statements. Judgements and estimates that are material to the financial statements are found in the following notes:

- Employee Provisions (I1)

- Non-financial Assets (F2)

- Jobactive and Transition to Work accruals (E1.2)

- Personal benefits – Child Care Subsidy program (G1.2)

- Higher Education Loan Program (HELP) (E1.6)

- Higher Education Superannuation Program (HESP) (E1.6)

- VET Student Loans (VSL) (G1.2)

- VET FEE-HELP (VFH), noting that vocational student loans includes both VSL and VFH (G1.2)

- Trade Support Loans (TSL) (G1.2).

New Australian Accounting Standards

Adoption of new Australian Accounting Standard requirements

All new, revised, amending standards and interpretations that were issued prior to the sign-off date and are applicable to the current reporting period, unless otherwise stated, are not expected to have a material effect on the department’s financial statements in 2019-20 or future years.

AASB 16 Leases

AASB 16 Leases became effective on 1 July 2019, replacing AASB 117 Leases.

AASB 16 provides a single lessee accounting model, requiring recognition of assets and liabilities for all leases, together with options to exclude leases where the lease is short-term (12 months or less), or where the underlying asset is of low value (less than or equal to $10,000). AASB 16 carries forward the lessor accounting in AASB 117, with the distinction between operating leases and finance leases being retained. The details of the changes in accounting policies, transitional provisions and adjustments are in the relevant notes D1.2, F2.1, and F4 to the financial statements.

AASB 15 Revenue from Contracts with Customers and AASB 1058 Income of Not-for-Profit Entities

AASB 15 Revenue from Contracts with Customers and AASB 1058 Income for Not-for Profit Entities became effective 1 July 2019.

AASB 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including AASB 118 Revenue, AASB 111 Construction Contracts and Interpretation 13 Customer Loyalty Programmes. The core principle of AASB 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

AASB 1058 is relevant in circumstances where AASB 15 does not apply. AASB 1058 replaces most of the not-for-profit provisions of AASB 1004 Contributions and applies to transactions where the consideration to acquire an asset is significantly less than fair value principally to enable the entity to further its objectives, and where volunteer services are received.

The details of the changes in accounting policies, transitional provisions and adjustments are disclosed below and in the relevant notes to the financial statements.

The department adopted AASB 15 and AASB 1058 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 July 2019. Comparatives have been reclassified where necessary for consistency.

Under the new income recognition model the department first determines whether an enforceable agreement exists and whether the promises to transfer goods or services to the customer are ‘sufficiently specific’. If an enforceable agreement exists and the promises are ‘sufficiently specific’ (to a transaction or part of a transaction), the department applies the general AASB 15 principles to determine the appropriate revenue recognition. If these criteria are not met, the department considers whether AASB 1058 applies.

In terms of AASB 1058, the department is required to recognise volunteer services at fair value if those services would have been purchased if not provided voluntarily, and the fair value of those services can be measured reliably.

The impact on transition for the department has been identified to be immaterial and therefore the impact on transition tables have not been included. Refer Note D2.1 and E2.1 for details.

Taxation

The department is exempt from all forms of taxation except Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST).

Changes in Accounting Policy

There have been no changes to accounting policies that impact on the 2019-20 financial results or position.

Shared Service Arrangements

The department has established a memorandum of understanding with the Department of Finance, Service Delivery Office, for the provision of shared services arrangements. The department receives core transactional services from the Department of Finance. The department also receives grant hub support from the Department of Social Services (DSS), child care debt management and payment support from Services Australia, and various application services from DISER.

Section 83 of the Constitution

Section 83 of the Constitution provides that no amount may be paid out of the Consolidated Revenue Fund (CRF) except under appropriation made by law.

The department has primary responsibility for administering legislation related to Education, Skills and Employment. The department made payments totalling $49.1 billion against Special Appropriations during 2019-20. Payments are administered by both the department through the Service Delivery Office for the Australian Education Act 2013, Higher Education Support Act 2003, VET Students Loans Act 2016, and Trade Support Loans Act 2014, and via
Services Australia for payments under A New Tax System (Family Assistance) Administration Act 1999.

If an overpayment occurs, a breach of section 83 could result despite future payments being adjusted to recover the overpayment. In addition, simple administrative errors can lead to breaches of section 83. Due to the number of payments made, the reliance that must be placed on other control frameworks outside the department, and the complexities of the legislation governing these payments, the risk of a section 83 breach cannot be fully mitigated.

Certain legislation administered by the department contains specific or objective criteria that rely on information from recipients and provides for the recovery of overpayments which are actively managed.

The department is committed to implementing measures to ensure that the possibility of unintentional breaches of
section 83 has as low a financial risk and impact as possible.

The department has developed an approach for assessing the alignment of payment processes with legislation.

During 2019-20, the department has:

• utilised the assessment process identified in the Department of Finance guidance paper to determine the risk of potential section 83 breaches and undertaken an initial self-assessment of the legislation it administers and its payment processes;
• included consideration of processes to minimise the risk of section 83 breaches as part of any review of legislation or administrative processes; and
• developed an approach for the Internal Audit area, to review the appropriateness of the department’s payment processes and the presence of residual risks of section 83 breaches as part of its internal audit program.

Special Appropriations

The department administers six pieces of legislation, as disclosed in Note H1.9, with Special Appropriations involving statutory requirements for payments. Of this legislation, some payments have been identified as having actual breaches of section 83 and the department will continue to review these.

The legislation where actual breaches occurred in the 2019-20 year was:

Australian Education Act 2013

In 2019-20 payments to non-government schools from special appropriation following a determination by the Delegate under the Australian Education Act 2013 (AE Act) were made inclusive of GST for recipients.

The department has worked closely with the Department of the Treasury, the Australian Taxation Office and Australian Government Solicitor to determine the correct treatment of GST, and subsequently the department received a private ruling from the Australian Taxation Office that confirmed that the provision of funds to non-government schools was a taxable supply and should include funding to cover the GST that recipients are to remit through the GST process.

Following this, the department received advice from the Australian Government Solicitor that the AE Act did not provide legislative authority to draw down funds for the GST component of these payments. As a consequence, all payments of GST made to non-government schools since 2000-2001 are technically in breach of section 83, notwithstanding that the recipients received the correct amount of funds, properly remitted GST to the ATO and that there has been no loss of GST from the Commonwealth. The department worked with the Department of Finance to determine the correct appropriation source to support the payment of GST amounts.

The Parliament resolved this legislative deficiency by passing the Australian Education Amendment (Direct Measure of Income) Act 2020, which received Royal Assent on 26 March 2020.

As any breach of section 83 results in a technical debt to the Commonwealth, the Finance Minister exercised his power under s63 of the PGPA Act to waive these debts. The waiver was for $14.6 billion and covers all technical debt under the AE Act and previous legislation (States Grants (Primary and Secondary Education Assistance) Act 1996, Schools Assistance (Learning Together – Achievement through Choice and Opportunity) Act 2004, States Grants (Primary and Secondary Education Assistance) Act 2000, Schools Assistance Act 2008) concerning payments to non-government schools back to 1 July 2000 when GST inclusive payments commenced.

Continued Focus

The department will continue to review legislation and New Policy Proposals that create or modify payment eligibility and to ensure that business rules and processes are in place to minimise the risk of breaches of section 83 of the Constitution.

Events impacting the Australian Government in 2019-20

Australia has faced unexpected and significant events in 2019-20 resulting in impacts on the financial statements of the department.

The summer bushfires had a devastating impact on areas across Australia. In response to this the department delivered a range of government measures to support children attending child care, assist students, and the unemployed in bushfire-affected communities and their mental wellbeing.

The department also delivered drought assistance in the form of special circumstances grant payments of $14.6 million to drought affected non-government schools. Refer to grant expenses in the Statement of Comprehensive Income.

In early 2020, the worldwide COVID-19 pandemic commenced. The growing impact on the department was experienced more in the final quarter of 2019-20, leading to a decline in some activities, changes in expectations of stakeholders and estimation uncertainty for some financial balances. The Australian Government announced a number of measures in response to COVID-19, providing additional funding to programs such as Employment Services,
Non-government Schools National Support and Building Skills and Capability.

Further details of impacts on the financial statements are disclosed in the relevant notes (Refer to Notes C1, C2, E1.6, E2.1 and G1.2) including:

• change in costs for service delivery, and / or changes in demand and economic activity;
• change in composition of material payments, for example, from personal benefits to other expense from the Early Childhood Education and Care Relief package;
• change in fair value of assets, asset impairment and valuation of investments; and
• financial components which are subject to actuarial assessment or judgements.

The valuation advice provided to the department for the asset materiality review has acknowledged that the impact of COVID-19 has introduced “significant valuation uncertainty” due to the economic situation and lack of current transactional evidence. However, as consistent with the view of the department, this is not expected to have material impact on the fair values of the leasehold improvements, property, plant and equipment of the department, as at
30 June 2020.

Actuarial advice has considered the COVID-19 impacts on the actuarial assessments conducted for the department. The department acknowledges, the advice confirms that making assumptions about the impact of COVID-19 on the economy and future income levels is highly uncertain and will evolve over time. While there is expected to be a significant impact on future income levels and the expected level of repayments for administered programs like HELP, these impacts will become more evident in the course of 2020-21, and over the ensuing years as additional income data becomes available.

Events after the Reporting Period

There have been no events after balance date that have the potential to significantly affect the ongoing structure and financial activities of the department.

B1: Net Cash Appropriation Arrangements

C1: Departmental Variance Reporting

Departmental Financial Result

In 2019-20, the department reported an operating deficit on continuing operations of $84.4 million, against a budgeted deficit of $78.3 million as reported in the 2019-20 Portfolio Budget Statements (original budget). After adjusting for unfunded depreciation and amortisation expenses of $131.8 million, and principal repayments of leased assets of $43.1 million, the department reported a net surplus of $4.3 million (refer to note B1).

The department’s total expenses of $825.3 million are $70 million less than the original budget of $895.3 million. The transition to the new leasing accounting standard has resulted in an increase of $53.2 million in depreciation and amortisation expenses. The increase in depreciation and amortisation expenses partially offsets a
$16.6 million decrease in employee expenses and a $142.1 million decrease in supplier expenses.

The decrease in employee expenses of $16.6 million is due to an overall reduction in the Average Staffing Level (ASL) compared to the original budget arising from lower recruitment due to COVID-19, resulting in reduced salary and superannuation expenses. The increase to employee provisions is driven by the application of the probability and discount factors resulting from the Australian Government Actuary review of the department’s employment entitlements (refer to note I1.1). The actuarial adjustments partially offset the decrease in salary expenses and reduced leave due to COVID-19 restrictions.

Unbudgeted act of grace payments of $10.9 million, which are discretionary in nature, were part of the Government’s COVID-19 response package.

Supplier expenses were $142.1 million less than original budget reflecting the impact of the transition to the new leasing accounting standard and the Machinery of Government changes that took effect during 2019-20 impacting on cost recovery arrangements for the provision of IT and other corporate services. The emergence of COVID-19 and its impact on the economy has contributed to some delays in project expenditure and program implementation and restrictions in travel expenditure.

The department reported own source income of $68 million, $17.9 million less than the original budget of $85.8 million. This variance is mainly due the Machinery of Government change that transferred Employment and skills programs to the department as at 1 February 2020 resulting in the former cost recovery arrangements ceasing for the provision of IT and other corporate services between the departments.

Revenue from Government for 2019-20 was $673 million, which was $58.2 million less than originally budgeted. The decrease predominantly relates to funding transferred to other departments following the Administrative Arrangements Orders (AAOs) of 29 May and 5 December 2019 issued after publication of the original budget. Additionally, the Student Identifiers Special Account reported $6.2 million in revenue that was not included in the original budget.

Departmental financial position

The original budget was prepared based on 30 June 2018 data being the latest available at that time and prior to the 29 May and 5 December 2019 AAOs.

As at 30 June 2020, the department’s total equity was $307.1 million compared to the original budget of $273.3 million. The variance to original budget is a result of the transition to the new leasing accounting standard, and additional funding received after budget.

The department reported cash and equivalents of $9 million with $4.3 million attributable to the Student Identifiers Special Account. $217.4 million in trade and other receivables has been reported by the department, an increase of $16.1 million over the original budget of $201.3 million. This mainly relates to an increase in goods and services receivable resulting from new Memorandum of Understanding arrangements for the provision of IT and corporate services arising from Machinery of Government changes.

As at 30 June 2020, the department holds $671.4 million of non-financial assets, $380.2 million more than the original budget of $291.2 million. The increase of $366.2 million against budget reflects the change in recognition of 63 leases as Right of Use (ROU) assets following the adoption of the new leasing accounting standard,
AASB 16 Leases.

The adoption of the new leasing standard has resulted in the recognition of $381.2 million in interest bearing liabilities for the first time.

Payables totalling $55.9 million is $33.6 million lower than the original budget of $89.5 million, noting this budget was developed from 30 June 2018 actuals. Following the transition to the new leasing standard in 2019-20, $28.4 million in operating leases and lease incentives was removed from payables. The residual variance is consistent with prior years and primarily relates to amounts owed to suppliers and employees that fluctuate month to month, depending on timing of payroll processing, and provision of invoices from suppliers.

Employee provisions at 30 June 2020 were $155.4 million against an original budget of $139.9 million. The variance of $15.5 million is predominantly due to actuarial adjustments, offset by a lower level of ASL, as noted under employee expenses.

The variances noted above are reflected in the cash flow statement, as applicable.

C2: Administered Variance Reporting