Bills Digest no. 130 2009–10
Tax Laws Amendment (2010 Measures No. 1) Bill
2010
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Contact officer & copyright details
Passage history
Tax Laws Amendment (2010 Measures No. 1)
Bill 2010
Date introduced: 10 February 2010
House: House
of Representatives
Portfolio: Treasury
Commencement: The formal provisions commence on Royal Assent, as
do Schedules 3, 4, 5 (Parts 1–5; Part 6, Division 1; Parts
7–18; Part 19, Division 1; and Part 20) and 6 (Parts
1–5; items 106–111; and Parts 10 and 11). Other
Schedules, Parts and items commence on a variety of dates.
Schedule 6 (Parts 7 and 8, and items 112 and 113) commences
retrospectively.
Links: The
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
The purpose of the Bill is to
amend a range of tax and tax-related legislation to give effect to
a range of 2007 election commitments and subsequent
initiatives.
As each of the six Schedules to the Bill deals with a discrete
issue, it may assist to discuss the background to, and main
provisions of, each Schedule in turn.
In the 2008–09 Budget, the Rudd Government announced that
the Treasury would, among other things, provide advice in
2008–09 on the implementation of the Government’s
election commitments, including the establishment of an optional
superannuation clearing house facility.[1] Further details about the
facility were provided in Budget Paper No. 2, where the
Government said:
The Government will provide $16.1 million over
three years to the Australian Taxation Office to fund a
Superannuation Clearing House Facility from 2009-10, to assist in
managing employers’ obligations to provide superannuation
choice to employees.
This facility will be offered free of charge by
the Australian Government to small businesses with fewer than 20
employees and on a fee-for-service basis to larger businesses. The
facility will be contracted to the private sector.[2]
On 14 November 2008, the Government issued a two-part
consultation paper.[3] Thirty-six submissions addressed Part A of the
paper, which discussed implementation issues associated with the
clearing house proposal, including:
- the division of responsibilities between employers and the
clearing house in relation to superannuation guarantee and choice
of fund
- the regulatory framework for the clearing house, and
- whether the clearing house should be delivered through a single
or multiple providers.[4]
Treasury reports that while a number of submissions noted the
difficulties ‘in improving efficiency in the industry given
the variability in employers’ and funds’ administration
systems’, there was also widespread support ‘for
efforts to encourage greater standardisation of transaction flows
and adoption of electronic payment methods’.[5] Treasury also reports that
while some submissions ‘noted the potential cost savings to
the Government of a single provider model’, the multiple
provider approach could ‘reduce the impact of the measure on
existing clearance house arrangements [in other
arenas]’.[6]
On 6 November 2009, Chris Bowen MP (the Minister) and Dr Craig
Emerson MP announced that Medicare Australia (Medicare) will
deliver the superannuation clearing house service, saying that
Medicare is ‘well placed as one of the Commonwealth
Government’s key service delivery agencies—with
significant electronic and payment processing capacity whilst
ensuring the privacy of information and the security of
funds’.[7] No explanation was given as to why a private
clearing house or indeed a different government
department/authority (such as the Australian Taxation Office) was
not chosen.[8]
However, Mr Bowen and Dr Emerson provided some details about how
the clearing house is intended to operate, including:
- Medicare will develop an online system for registration and
ongoing payments, with payments initially being made via electronic
funds transfer (EFT)
- eligible small businesses (those with fewer than 20 employees)
will need to register online for the service, which will be offered
free of charge
- the businesses will then pay their superannuation contributions
to the clearing house (regardless of the number of separate
superannuation funds for which the payments are ultimately
intended) and the clearing house will forward the funds to the
nominated superannuation fund(s)
- employers can also forward ‘choice of fund’
nominations to the clearing house for processing, and
- the legal obligation of small businesses to make superannuation
contributions is discharged when they make payment of the correct
amount to the clearing house.[9]
The clearing house will be available to eligible small
businesses from 1 July 2010—one year after the originally
intended start date. Businesses will be able to register from
May 2010. The Government estimates that 1.6 million
small businesses will use the facility.[10]
On 26 November 2009, the Minister released draft legislation for
public comment.[11] Treasury received 10 submissions on the exposure
draft.[12]
Some submissions noted that the legislation should specify that the
approved clearing house service will only be available to
‘eligible small businesses’ and that this term should
be defined in the legislation.[13] However, Treasury is of the view that
restricting eligibility in this way is unnecessary and ‘would
create additional complexity’.[14]
On 10 February 2010, the current Bill was introduced. The
provisions in Part 1 of Schedule 1 to the Bill are in substantially
the same terms as the exposure draft, although some provisions
(such as proposed section 23B of the
Superannuation Guarantee (Administration) Act 1992) have
been redrafted with greater particularity.
The media reports a mixed response to the clearing house
facility proposal within the superannuation industry. For
example, major provider, Mercer (Australia) Pty Ltd, was apparently
seeking government action in December 2009 on ‘a central
clearing house and greater use of tax file numbers’, and
Pauline Vamos, Chief Executive of the Association of Superannuation
Funds of Australia (ASFA), was also quoted in the Australian
Financial Review at that time as saying that the
superannuation industry needs the Government’s support
(through avenues such as the current Cooper Review of
Australia’s superannuation system)[15] ‘to become more technologically
adept, achieve greater scale through mergers and through shared
services’.[16] (The clearing house facility could be seen as
part of the solution to these problems, particularly given the
indication that the transfer of funds will happen by EFT, at least
initially.) However, leading actuarial firm Rice Warner
suggested there would be no need for a clearing house if employers
were required to make contribution payments electronically.[17]
The clearing house proposal seems more generally to be regarded
as an improvement on the current, somewhat
‘antiquated’, way in which up to 80 per cent of
employers remit superannuation contributions by cheque in the
ordinary mail.[18] Apparently superannuation contributions can take
up to 81 days after payday to reach an employee’s
superannuation account, including an average delay of 21 days from
the time employers make the contributions to the time the
contributions are invested by the superannuation fund.[19] The fact there
is more than $13 billion of lost superannuation could be attributed
to this non-technological way of doing business and bureaucratic
red tape.[20]
The proposal to offer the services of the clearing house to
small business free-of-charge offers considerable cost and time
savings to small businesses too. Journalist Fleur Anderson
stated: ‘Many businesses face hours of paperwork if they
distribute workers’ super by themselves, while others pay up
to $3.50 a transaction to use private sector clearing houses to
distribute employee super’.[21]
Nonetheless, journalist Adele Ferguson reported that the
announcement of the Government’s decision to use Medicare as
the superannuation clearing house ‘stopped the $1.1 trillion
[superannuation] industry in its tracks’, saying:
This left-field decision to let Medicare become
the new super clearing house was seen by some as a knee-jerk
reaction to a multibillion-dollar problem screaming out to be
fixed, and by others as a more sinister plot to one day revive the
unpalatable access card/national ID card.[22]
In this regard, Pauline Vamos (ASFA) was quoted as saying that
the choice of Medicare ‘was a surprise to the industry that
usually dealt with the Tax Office on transaction
issues’.[23]
Item 1 amends the Retirement Savings
Accounts Act 1997 (RSA Act) to insert proposed
subsection 183(2A). Section 183 is found in Part 16
of that Act (which sets out miscellaneous provisions) and is an
offence provision.[24] It applies if an employer is authorised (by an
employee or law or otherwise) to:
- deduct an amount from salary or wages payable by the employer
to the employee, and
- contribute the amount to a retirement savings account (RSA)
held by the employee
and the employer makes such a contribution.[25]
The employer must contribute the deducted amount to the RSA
within 28 days of the end of the month when the deduction was
made.[26]
Intentional or reckless failure to remit the deduction within this
time frame is an offence punishable on conviction by a fine not
exceeding 100 penalty units (that is, $11 000).[27]
Proposed subsection 183(2A) amends section 183
to provide that the employer is not required to remit the deducted
amount to the RSA within the stipulated time frame if:
(a) the employer pays
the deducted amount to an ‘approved clearing house’
before the end of the period mentioned in existing subsection
183(2A) (being within 28 days of the end of the month when the
deduction was made), and
(b) the approved
clearing house accepts the payment.
The term ‘approved clearing house’ is defined in
proposed subsection 79A(3) of the
Superannuation Guarantee (Administration) Act 1992 (SGA
Act) to mean ‘a body specified in the regulations for the
purposes of this subsection’.[28] As mentioned earlier in this
Digest, the Government intends to specify Medicare for the purposes
of subsection 79A(3).
Note that there is a minor typographical drafting error in
proposed paragraph 183(2A)(a). The word
‘the’ should appear after the words ‘before the
end of’ and before the word ‘period’.
Items 2–5 amend the SGA Act.[29] Item
2 inserts the term ‘approved clearing
house’ in existing section 6 (being the general
interpretation section for the Act) and defines it by reference to
proposed subsection 79A(3) of the Act (which is
inserted by item 5).
Item 3 inserts proposed section
23B into the SGA Act dealing with the situation where
contributions to a superannuation fund or RSA are made through an
approved clearing house. It provides that for the purposes of
sections 23 and 23A of the Act:
- treat an employer that, at a particular time pays an amount to
an approved clearing house for the benefit of an employee, as
having made a contribution of the same amount to a complying
superannuation fund or RSA for the employee’s benefit, if the
clearing house accepts the payment, and
- disregard any contribution that the clearing house makes to a
complying superannuation fund or RSA as a result of the
payment.[30]
Item 4 inserts proposed subsection
32C(2B) into section 32C, which sets out the contributions
that satisfy the choice of fund requirements.[31]
Proposed subsection 32C(2B) makes it
clear that a contribution made through an approved clearing house
complies with the choice of fund requirements if:
- proposed section 79A applies to the
contribution[32]
- the employee gives the employer written notice to the effect
that the employee wants a particular fund to be the
employee’s ‘chosen fund’
- the employer passes to the approved clearing house the
information contained in the employee’s written notice (and
any other prescribed information) within 21 days of the employee
giving the notice and before (or at the time) the contribution is
made, and
- the approved clearing house accepts the information.
Item 5 inserts proposed section
79A, which deals solely with the approved clearing house
facility. The section will apply if:
- an employer pays an amount to an approved clearing house for
the benefit of an employee, and
- as a result, the approved clearing house makes a contribution
to an RSA, superannuation fund or superannuation scheme for the
employee’s benefit.
Where the approved clearing house makes the contribution to the
RSA or superannuation fund/scheme, the contribution is made as the
employer’s agent.[33] Proposed subsection 79A(3)
defines the term ‘approved clearing house’ to
mean ‘a body specified in the regulations for the purposes of
this subsection’.
Item 6 amends the Superannuation Industry
(Supervision) Act 1993 (SIS Act) to insert proposed
subsection 64(2A). It is in the same terms as
proposed subsection 183(2A) of the RSA Act discussed in item 1
above (without the typographical error). Section 64 of the
SIS Act provides that employers are to remit deductions from salary
or wages of superannuation contributions promptly.
There are two amendments contained in Part 2 of Schedule 1 to
the Bill (items 7 and 8). The purpose of
both items 7 and 8 is to facilitate the flow of
information from the Australian Taxation Office (ATO) to the
clearing house. The heading to Part 2 states that the
amendments are ‘conditional on the Tax Laws Amendment
(Confidentiality of Taxpayer Information) Act 2010’ (the
Taxpayer Confidentiality Act)—but the heading can be regarded
as somewhat misleading in the case of item
7. This is because the amendment in item
7 is only required if the Taxpayer Confidentiality Act is
not enacted.[34] If item 7 commences,
item 8 will not commence. Item
8 is only required (and will only commence) if the
Taxpayer Confidentiality Act is enacted.[35]
Item 7 inserts proposed paragraph
16(4)(hbb) into the Income Tax Assessment Act
1936 (ITAA 1936). However, item 32 of Schedule 2 to
the Bill for the Taxpayer Confidentiality Act repeals section 16 of
the ITAA 1936 in its entirety. Currently, section 16 of
the ITAA 1936 makes it an offence for an officer of the
Commonwealth (or a state) to make a record of, or divulge or
communicate to any person, any information respecting the affairs
of another person acquired by the officer (or disclosed by the
person) under the provisions of the ITAA 1936 or any previous
Commonwealth law relating to income tax.[36] However, if the Taxpayer
Confidentiality Act is successfully enacted, section 16 will be
repealed, because it will effectively be made redundant by the
insertion of proposed (revised) Division 355 into Schedule 1 to the
Taxation Administration Act 1953 (TAA 1953), dealing at
length with confidentiality of taxpayer information.
Particularly, proposed section 355–25 of Schedule 1 to the
TAA 1953 provides that is an offence for taxation officers to
disclose tax information that identifies an entity, or is
reasonably capable of being used to identify an entity, except in
certain specified circumstances. Both the repeal of section
16 of the ITAA 1936 and the insertion of proposed Division 355 into
the TAA 1953 commence the day after the Taxpayer Confidentiality
Act receives Royal Assent.
Item 8 of Schedule 1 to the Bill inserts new
item 9 into the table (known as ‘Table 2’) in
proposed section 355–65(3) of
Schedule 1 to the TAA 1953.[37] Proposed section
355–65 sets out the exceptions to the general
offence in proposed section 355–25 (mentioned in the
discussion immediately above). Proposed subsection
355–65(3) provides that a taxation officer does not
commit an offence if he or she makes a record (or makes a
disclosure) relating to superannuation or finance.
Specifically the amendment in item 8 provides that
no offence is committed if:
- a taxation officer makes a record for (or a disclosure to) an
approved clearing house (as defined in the SGA Act), and
- the record (or disclosure) is for the purposes of the clearing
house performing its functions in relation to superannuation
contributions.
Schedule 2 revises provisions of the ITAA 1936,
the Income Tax Assessment Act 1997 (ITAA 1997) and the TAA
1953 to protect the right of a taxpayer to claim and retain a
deduction for investment in forestry managed investment schemes
(MIS) where the ‘four-year holding rule’ is breached
for reasons outside the taxpayer’s control.[38]
Under the four-year holding rule, a taxpayer cannot claim and
retain a deduction for certain forestry expenditure if a capital
gains tax event (CGT event) happens within four years after the end
of the income year in which the investment is first made. The
rule was introduced by Schedule 8 to the Tax Laws Amendment
(2007 Measures No. 3) Act 2007 and applies to CGT events that
occur on or after 1 July 2007.[39] As the Minister explained in his second
reading speech for the current Bill, the four-year holding rule is
‘an integrity measure designed to prevent taxpayers from
disposing of their interest shortly after claiming their upfront
tax deduction’.[40]
However, sometimes a CGT event happens within the four-year
holding period for reasons outside the taxpayer’s control,
such as where the MIS is cancelled (as occurred in the case of a
number of schemes following the financial collapse of two
agribusiness investment managers, Timbercorp Limited and Great
Southern, in 2009).[41] Under the current law, this can result in some
investors being unfairly penalised because the Commissioner of
Taxation has no discretion to allow a deduction if the four-year
holding rule is breached for any reason.
On 21 October 2009, the Rudd Government announced that it would
amend the four-year holding rule so that it is not breached by
events outside the taxpayer’s control.[42] The deduction will stand ‘where
the four-year holding rule is failed due to events beyond the
control of the investor’.[43]
On 18 December 2009, the Assistant Treasurer released draft
legislation for public comment by 15 January 2010.[44] Treasury received four
submissions, the effect of which it summarised as follows:
Submissions in response to the draft
legislation were supportive of the approach taken in the draft
legislation. Submissions suggested only minor changes to the draft
legislation and explanatory material.
As a result of consultation, minor changes were
made to the explanatory memorandum to improve its clarity and
readability. No changes were made to the legislation.[45]
There has been very little media coverage of the proposed
amendments in Schedule 2 to the Bill. The
National Farmers Federation’s manager of economics and trade,
Charlie McElhone, was reported in October 2009 as saying that the
new rules ‘offered some assurance for taxpayers caught up in
the collapse of Timbercorp and Great Southern’ while at the
same time asking whether the upfront tax deductions should be
available at all.[46] Particularly, McElhone was reported as saying:
‘The NFF acknowledges that not all, but a large proportion,
of investors buying into investments for tax purposes [instead of
normal investment purposes]’.[47] Tax Counsel at the Institute of
Chartered Accountants, Yasser El-Ansary, was reported as agreeing
with the tenor of these remarks, saying that ‘the Henry [tax]
review and the federal government should consider abolishing the
upfront tax deduction in favour of a different approach whereby
losses were quarantined and could only be claimed against future
income’.[48]
Item 1 of Schedule 2 inserts
proposed subsection 82KZMGA(1A) into the ITAA 1936
to provide that the four-year holding rule (in existing paragraph
82KZMGA(1)(b)) does not apply to a CGT event if:
- the event happens because of circumstances outside the
taxpayer’s control, and
- when the taxpayer acquired the interest, ‘the taxpayer
could not reasonably have foreseen the CGT event
happening’.
Item 2 inserts proposed subsection
394–10(5A) into the ITAA 1997 to provide that the
four-year holding rule (in existing paragraph 394–10(5)(b))
does not apply to a CGT event if:
- the event happens because of circumstances outside the
taxpayer’s control, and
- when the taxpayer acquired the interest, ‘the taxpayer
could not reasonably have foreseen the CGT event
happening’.
Item 3 inserts proposed subsection
290–50(2A) into Schedule 1 to the TAA 1953 to
provide that proposed subsection 82KZMGA(1A) of the ITAA 1936 and
proposed subsection 394–10(5A) of the ITAA 1997 (see
items 1 and 2 above) are to be disregarded for the
purposes of subsection 290–50(2) of the TAA 1953. That
provision contains a civil penalty offence which is committed by an
entity that engages in conduct ‘that results in a scheme that
has been promoted on the basis of conformity with a product ruling
[issued by the ATO] being implemented in a way that is materially
different from that described in the product ruling’.[49] As Note 1 to
proposed subsection 290–50(2A) states
(emphasis added):
The effect of this subsection is that a scheme
will have been implemented in a way that is materially different
from that described in the product ruling if the tax
outcome for participants in the scheme is the same as that
described in the ruling only because of the operation of the
subsections mentioned in paragraphs (a) and (b).
In other words, where the forestry MIS is implemented in a way
that is materially different from that described in the product
ruling due to circumstances outside the taxpayer’s control
(which the taxpayer could not have reasonably foreseen and which
result in the occurrence of a CGT event within the four-year
holding period), the entity that initially promoted the scheme
remains liable for the civil penalty contained in section
290–50 of the TAA 1953 notwithstanding the fact the
four-year holding rule does not apply to the taxpayer.
Schedule 3 amends the ITAA 1936, ITAA 1997 and
TAA 1953 to allow managed investment trusts (MITs) to make an
irrevocable election to apply the CGT regime to gains and losses on
disposals of certain assets (primarily shares, units and real
property). [50] If a MIT makes the election, then income from the
sale of assets will be taxed at a concessional rate as a capital
gain. However, if a MIT does not make the election, gains
(and losses) on the disposal of shares and units will usually be
treated on revenue account (as opposed to capital account) and the
gain will be taxed as ordinary income (at a higher rate of tax than
CGT).
The tax arrangements applying to managed investment trusts were
the subject of a review by the Board of Taxation (the Board) in
2008.[51]
Ordinarily, the beneficiary of a trust is taxed on his or her share
of the net income of the trust, and the trustee is ‘only
taxed on income that is not taxable in the hands of
beneficiaries’.[52] However, following public consultation on reform
options, the then Assistant Treasurer (Chris Bowen MP) announced in
May 2009 that the Government would implement the Board’s
recommendation ‘to provide deemed capital account treatment
for gains and losses made on disposal of investment assets by
managed investment trusts (MITs), subject to appropriate integrity
rules’.[53]
The measure provides greater certainty for MITs than at present
because it means that:
… where an Australian MIT makes an
irrevocable election to apply the capital gains tax (CGT) regime to
disposals of eligible assets, resident investors will be entitled
to the CGT discount on eligible taxable gains distributed by MITs
and non-resident investors will be exempt from Australian tax on
distributions of gains on disposal of eligible MIT assets unless
the assets are taxed Australian property.[54]
The measure will apply to Australian MITs (and to unit trusts
that are 100 per cent owned and controlled by MITs that meet the
eligible investment business rules in Division 6C of Part III of
the ITAA 1936).[55] It will not apply to public unit trusts or
corporate unit trusts that are taxed like companies.[56]
If a MIT elects to apply the CGT regime to the disposal of
eligible assets, the election is irrevocable and applies to all
disposals of eligible investments in (and from) the 2008–09
income year. As the then Assistant Treasurer noted when
announcing the measure as part of the 2009–10 Budget, the
retrospective operation of the amendment ‘will reduce the
incentive for MITs to dispose of existing assets and claim
deductions for losses on revenue account against other income
before the measure is implemented or an election
made’.[57]
On 1 June 2009, Treasury released a discussion paper on the
capital account treatment of MITs.[58] It received 24 submissions,
including three which are confidential.[59] On 10 December 2009, the
Assistant Treasurer, Senator Nick Sherry, released an exposure
draft of the proposed, revised tax treatment of MITs.[60] It received 17
submissions, of which only one is confidential.[61] While the submissions
broadly supported the amendments contained in the exposure draft,
Treasury noted that the three main issues raised during
consultation were:[62]
- extending the capital account treatment of MITs to other
collective investment entities (including Listed Investment
Companies)[63]
- expanding the scope of the definition of ‘managed
investment trust’ in
Subdivision 12-H in Schedule 1 to the TAA 1953,[64] and
- expanding the types of assets covered by the capital account
election.
In response, Treasury stated that:
- the definition of ‘managed investment
trust’ has been expanded to include ‘Australian
regulated wholesale investment trusts, widely held investment
trusts operated or managed under the Corporations Act 2001
by state owned entities and trusts wholly owned by MITs’
- the list of eligible assets has been expanded to include
‘rights or options in respect of shares, units or real
property and non-share equity (including put and call options and
convertible notes over shares and units) that are equity
interests’, and
- other minor legislative amendments were made to ensure that the
legislation correctly reflects the Government’s policy
intention behind the measure.[65]
Treasury also noted that:
The alignment of the definition of MIT in
Subdivision 12-H in Schedule 1 to the Taxation Administration
Act 1953 with the definition used for this measure is being
examined by Treasury.
The inclusion of Listed Investment Companies is
outside the policy parameters of the measure. This issue will be
examined, more broadly, as part of the response to the Board of
Taxation’s review of the tax arrangements applying to
MITs.
Certain proposals made in submissions were also
not adopted as they were not consistent with the policy intent of
the measure.[66]
The media reported a generally positive reaction by the MIT
industry to the draft legislation in late 2009—although some
commented negatively on the limited scope of the amendments (such
as the fact the revised definition of ‘managed investment
trust’ for the purpose of the capital tax treatment
rules differs from that which applies in the context of MITs
withholding payments to investors) and the shortness on the
consultation period.[67]
For example, Malleson Stephen Jacques tax partner, Richard
Snowden, is reported as welcoming the changes in the interests of
certainty but also noting that the amendments could
‘adversely affect some funds’, saying:
Funds that don’t make an election will be
deemed to treat their eligible assets such as shares on revenue
account, meaning the prospect of funds not electing and arguing
capital treatment has been removed … Further those funds
will not get the protection from tax audit for their prior year
treatment, leaving them exposed to the uncertainty that existed
before the changes.[68]
Katherine Woodthorpe, Chief Executive of the Australian Private
Equity and Venture Capital Association, was also quoted as drawing
attention to the ‘gap’ in the definition of
‘managed investment trust’ (which requires
trusts to have more than 50 direct members) and the fact that while
the legislation will apply only to Australian trusts, ‘some
overseas funds could set up an Australian trust to overcome
this’.[69]
However, generally the tax treatment of investment gains on
revenue account rather than capital account can be seen to support
the ‘clear direction of bipartisan government policy, which
is to narrow the scope of Australia’s tax laws to the extent
they affect non-residents and so encourage foreign
investment’.[70]
Item 4 of Schedule 3 to the
Bill inserts proposed Part 3–25 into the
ITAA 1997 dealing with particular kinds of trusts. It will
appear in Chapter 3 of the Act, which sets out specialist liability
rules. At this stage, proposed Part 3–25
will comprise only one division: proposed Division
275, which deals solely with Australian MITs.
Proposed section 275–1 is the guide to
proposed Division 275. It states that:
- the trustee of certain Australian MITs may choose for certain
assets of the trust to be dealt with under CGT rules
- if no choice is made, the assets will be treated as revenue
assets[71]
- gains and profits from ‘carried interests’ held in
entities that are or were Australian MITs are included in the
assessable income of the holder of the interests,[72] and
- the holder is entitled to a deduction from losses for such
interests.[73]
Proposed Subdivision 275–A extends the
concept of ‘managed investment trust’ (in Subdivision
12–H of Schedule 1 to the TAA 1953) to certain widely-held
trusts (especially wholesale trusts) that do not otherwise meet the
definition of ‘managed investment trust’ in
Subdivision 12–H.[74] As a result, these trusts will be eligible to be
treated in the same way as MITs for the purposes of the new capital
account treatment in proposed Division 275.
Different requirements apply depending on whether the trust is
operated or managed by a financial services licensee
(proposed section 275–5) or not
(proposed section 275–10).[75]
Proposed section 275–15 states that every
member of a trust is a ‘managed investment
trust’. This means, for example, that where a unit
trust is an Australian resident trust and the individual unit
holders/beneficiaries are also trusts, every member of the trust
will be treated as MITs under proposed Division
275, regardless of whether each individual trust currently
meets the definition of ‘managed investment trust’ in
Subdivision 12–H of Schedule 1 to the TAA 1953.
If the trust makes no payment during an income year, then it
will not meet the definition of ‘managed investment
trust’ in section 12–400 of Schedule 1 to the TAA
1953. However, under proposed section
275–20 the trust will be treated as a MIT if the
trust would otherwise be a MIT if it had made a payment on the
first or last day of the income year.
If the trust is held by a small group (that is, 20 or fewer
individuals), the ‘closely held’ trust is not to
be treated as a MIS despite proposed sections 275–5
to 275–20 if at any time in the income year the
small group directly or indirectly:
- holds or has the right to acquire interests representing 75 per
cent or more of the value of the interests in the trust
- controls, or has the ability to control, 75 per cent or more of
the rights attaching to membership interests in the trust, or
- has the right to receive 75 per cent or more of any
distribution of income that the trustee may make.[76]
Even if a trust does not meet the requirements in
proposed Subdivision 275–A to be treated as
a MIT, proposed section 275–30 states that
the trust can still be treated as a trust if:
- the reason for failing to meet the requirements is a
particular, temporary circumstance that arose outside the
trustee’s control, and
- it is fair and reasonable to treat the trust as a MIT having
regard to:
- the nature of the circumstance
- any action taken by the trustee to address or remove the
circumstance (and the speed with which the action is taken)
- the extent to which treating the trust as a MIT will increase
or reduce the amount of tax otherwise payable by the trustee, the
beneficiaries of the trust or any other entity, and
- - any other
relevant matter.
Proposed Subdivision 275–B deals with the
ability of a MIT to choose CGT/capital treatment of gains and
losses made by the MIT. As a consequence of making a CGT
choice under proposed section 275–115, CGT
becomes the primary code for calculating MIT gains or losses under
proposed section 275–100.[77] The choice must be made in
the approved form and once made, is irrevocable.[78] If the trust is eligible
to make a choice but does not do so, any gain or loss made on the
disposal of eligible assets (excluding land, interests in land or
an option to acquire or dispose of such an asset) is taxed on
revenue account.[79] This means that certain ordinary and statutory
income and deduction provisions in the income tax law will continue
to apply to the gains or losses.[80]
Only the types of assets listed in proposed section
275–105 are ‘covered’ assets that are
eligible for CGT tax treatment:
- shares in a company (including shares in a foreign hybrid
company)
- a non-share equity interest in a company
- a unit in a unit trust
- land (including an interest in land), or
- a right or option to acquire or dispose of an asset mentioned
earlier in this list.
Neither a financial arrangement under Division 230 of the ITAA
1997 nor a debt interest is a covered asset.[81] As mentioned earlier in this
Digest, corporate unit trusts and trading trusts are not eligible
to elect to be treated as MITs.[82]
Proposed Subdivision 275–C deals with
‘carried interests’ in MITs.[83] Distributions to carried
interest holders (and proceeds from CGT events of a carried
interest held in an entity that is (or was) an eligible MIT) in the
relevant income year will be included in the holder’s
assessable income.[84] The taxpayer must have acquired the asset because
of services he or she (or an associate) provided or will provide to
the MIT as either:
- manager of the MIT
- associate of the manager
- employee of the manager, or
- associate of an employee of the manager.[85]
The amount of the distribution is not included in the
taxpayer’s assessable income in the relevant income year to
the extent that:
- it represents a return of capital that the taxpayer (or an
associate) contributed in order to acquire the asset[86]
- the amount of gain or profit on the CGT event is already
included in the taxpayer’s assessable income as ordinary
income (section 6–5) or statutory income under another
section of the ITAA 1997 (other than Parts 1–3 or
3–3)[87]
- the source of the amount of distribution (or gain or profit) on
the CGT event is outside Australia,[88] or
- the taxpayer is entitled to deduct the amount of any loss on
the CGT under another provision of the ITAA 1997.[89]
Item 9 of Schedule 3 to the
Bill inserts proposed section 45–286 into
Schedule 1 to the TAA 1953. It provides that
‘instalment income’ for a period includes
distributions by certain MITs (where the trust either meets the
definition of ‘managed investment trust’ in
Subdivision 12–H of Schedule 1 to the TAA 1953 or it is
treated as a MIT for the purposes of proposed Division
275 of the ITAA 1997). This amendment applies to CGT
events that happen on or after the start of the 2008–09
income year.[90]
Schedule 4 introduces an income test into the
eligibility requirements for the entrepreneurs’ tax offset in
Subdivision 61–J of the ITAA 1997.
The entrepreneurs’ tax offset was introduced into the ITAA
1997 by the Tax Laws Amendment (2004 Measures No. 7) Act
2005 to honour a Howard Government election commitment to
promote entrepreneurial spirit in Australia, as the Revised
Explanatory Memorandum for the relevant Bill explains:
1.3 In the 2004 election policy statement
Promoting an Enterprise Culture, the Government announced
a number of measures designed to foster the entrepreneurial spirit
of small businesses. The Government stated that it would provide
further incentive and encouragement to small businesses –
particularly those that set up and operate from home –
through the introduction of a tax offset for entrepreneurs. This
proposal is targeted at very small, micro and home-based businesses
that are in the [Simplified Tax System (STS)].[91]
The offset applies to business income for small businesses in
the simplified tax system (STS) that have an annual turnover of
$75 000 or less. Where the business’ turnover is
greater than $50 000, the offset is phased out and ceases once
STS turnover reaches $75 000.[92] The maximum tax offset that may
be claimed is 25 per cent of a taxpayer’s income tax
liability that is attributable to his or her net small business
income for the relevant income year. Any income that the
taxpayer might earn from sources other than the small business is
currently irrelevant for the purposes of the tax offset.
However, as part of the 2008–09 Budget, the Rudd
Government announced that the tax offset would be made subject to
an income test, commencing on 1 July 2008:
The Government will introduce an income test
for the entrepreneurs’ tax offset (ETO), with effect from 1
July 2008. The measure reduces the existing concession and tax
expenditure through better targeting. This measure has an ongoing
gain to revenue which is estimated to be $90.0 million over the
forward estimates period.
The ETO provides a 25 per cent tax offset for
small businesses with annual turnover of less than $75,000, which
begins to phase out for turnover greater than $50,000.
The income test will focus the benefit of the
ETO towards genuine small businesses, by restricting eligibility
for singles from $75,000 and families from $120,000 adjusted
taxable income per year.
This delivers on the Government’s
commitment to responsible economic management.[93]
In the event, the commencement date was later deferred to
1 July 2009,[94] and the adjusted income threshold level contained in
the current Bill has been set at a slightly lower threshold for
individuals than that announced in the 2008–09 Budget
($70 000 instead of $75 000). The threshold for
families ($120 000) remains unchanged. The reduction in
the individual threshold level (albeit only $5000) seems a little
odd, given events such as CPI increases since that time, but no
explanation is given in the current Explanatory Memorandum.
Under the aggregated turnover test, the entrepreneurs’ tax
offset will phase out at the rate of 20 cents for every dollar a
taxpayer’s adjusted income exceeds the threshold.
While the proposed income test may fairly limit the availability
of the tax offset in some circumstances, it may also unfairly (and
perhaps inadvertently) target some individuals (and families) who
are engaged in employment outside their own small business in order
to fund the ongoing liabilities of the business and make ends meet
in the family’s household budget. This may occur, for
example, where the business is in the start-up phase (or has
suffered a downturn in the current economic climate) and is not
producing sufficient income to meet its own liabilities, let alone
providing sufficient return to enable the family to focus solely on
the business without resorting to outside employment in order to
fund ongoing liabilities such as loan or rent payments (on the
business premises, plant and equipment or the family home),
childcare fees or indeed even tax payments.
There has been little recent commentary in the media about the
proposed changes to the entrepreneurs’ tax offset.
However, several articles mentioned the proposed changes as part of
wider commentary about the 2008–09 and 2009–10
Budgets. For example, in May 2008, Ali Noroozi (then tax
counsel for the Institute of Chartered Accountants) was reported as
saying that ‘the decision to means test various benefits
[including the entrepreneurs’ tax offset] could be costly and
become a disincentive to join the workforce’. More
specifically, Noroozi said that while some means-testing ‘may
be justified on equity grounds’, such tests ‘have
administrative costs and may also result in disincentives to
workforce participation as income increases and benefits
decline’.[95]
Similarly, Helen Meredith, reporting on the negative effects of
the 2008–09 Budget on Australia’s IT industry, quoted
the chairman of Software Queensland, Grant Cause, as saying:
‘For small business and innovation in this country the budget
represented death by a thousand cuts’.[96]
More specifically, in May 2009, financial journalist, Mark
Fenton-Jones, suggested that introducing an income test into the
eligibility criteria for the entrepreneurs’ tax offset means
that ‘the rebate will focus more on individuals who are
trying to get a business off the ground, rather than running it
alongside existing employment’.[97]
In an article highlighting ways that taxpayers could reduce
their tax bills for the 2008–09 income year, financial
journalist John Kehoe suggested that the tax offset may be
beneficial ‘for people running part-time businesses, even if
they earn income from mainstream employment’. [98] However, Kehoe also
noted that the offset would be means-tested from the 2009–10
financial year and stated that the tax offset ‘can only
reduce tax payable and cannot be claimed as a tax
refund’.[99]
Items 1–7 of Schedule 4
make consequential amendments to existing sections 61–500,
61–505, 61–510 and 61–520 of the ITAA 1997 to
include reference in those provisions to proposed section
61–523(see item 8) and the
reduction of the entrepreneurs’ tax offset (ETO) for income
from sources other than the taxpayer’s small business.
Item 8 inserts proposed section
61–523 into the ITAA 1997. It sets out the
formula used to calculate the taxpayer’s ‘non-ETO small
business income’, being:
Non-ETO small
business income for the income year – threshold
amount
5
where ‘non-ETO small business income’
includes the taxpayer’s taxable income, reportable fringe
befits total, reportable superannuation contributions, and total
net investment loss. It does not include certain amounts of
net small business income, but does include the taxpayer’s
spouse’s taxable income, reportable fringe befits total,
reportable superannuation contributions, and total net investment
loss.
The term ‘threshold amount’ means
$120 000 if either the taxpayer has a dependant (other than a
spouse) on any day during the income year, or the taxpayer has a
spouse on the last day of the relevant income year.[100] Otherwise it
means $70 000.
The amendments in Schedule 4 apply in relation
to assessments for income years that commenced on or after 1 July
2009.[101]
Schedule 5 to the Bill amends provisions of the
ITAA 1997 dealing with (or affecting) the consolidation regime.
The consolidation regime was introduced in 2002 and
‘applies primarily to a group of Australian resident entities
wholly-owned by an Australian resident company that choose to form
a consolidated group’.[102] Specific rules provide for the membership
of certain resident wholly owned subsidiaries of a foreign holding
company which can choose to form a multiple entry consolidated
group (MEC group).[103] Members of a consolidated group are treated as a
single entity for income tax purposes, and subsidiary entities are
treated as part of the head company.[104]
The amendments in Schedule 5 mainly clarify the
operation of the existing law, and so it is probably unnecessary to
discuss the amendments in detail here.[105]
The amendments were first announced by the Howard Government as
part of various measures designed to clarify and improve the
operation of the consolidation regime, but they were not given
effect prior to the proroguing of the 41st Parliament on
15 October 2007.[106]
On 28 April 2009, the then Assistant Treasurer, Chris Bowen MP,
released exposure draft legislation aimed at improving the income
tax consolidation regime.[107] Public comment on the draft closed on 25
May 2009. There were two main issues in the draft:
- proposed amendments to the income tax law ‘to clarify the
operation of certain aspects of the consolidation regime and
improve interactions between the consolidation regime and other
parts of the law’, and
- the ‘application of losses with nil available
fraction’.
Treasury dealt with the second issue separately—by
Schedule 4 to the Tax Laws Amendment (2009 Measures No 4)
Bill 2009 which was introduced into the House of
Representatives on 25 June 2009. That measure was designed
‘to ensure losses transferred to the head company of a
consolidated group or a multiple entry consolidated group by a
joining entity that is insolvent at the joining time can be used by
the head company in certain circumstances’.[108]
Treasury received 16 key submissions on the twin issues of the
clarification of the operation of the consolidation regime and the
interaction between the consolidation regime and other parts of the
law. Four of the key submissions were made
in-confidence. The submissions dealt mainly with application
dates for the various provisions, and technical aspects of the
provisions, and resulted in modifications to the draft legislation
(as now found in Schedule 5 to the current
Bill).[109]
Notably, on 3 June 2009, the then Assistant Treasurer announced
that the Board of Taxation would conduct a post-implementation
review into certain aspects of the consolidation regime, including
the interaction between the consolidation provisions and other
parts of the income tax law (which, as just mentioned, is the main
subject of Schedule 5 to the current
Bill).[110]
On 9 December 2009, the Board released a discussion paper on the
post-implementation review into certain aspects of the
consolidation regime for public comment by 26 February
2010.[111]
It is yet to release a report.
Given that the Board’s review deals directly with issues
that are the subject of amendments contained in Schedule 5 and
related issues, it is not clear why the introduction of Schedule 5
was not delayed pending the delivery and consideration of the
Board’s report.
There seems to be bipartisan and industry support for any
amendments to the consolidation regime which have the effect of
reducing confusion and compliance/administrative costs,
particularly for small business.[112]
In September 2009, taxation lawyer John Storey drew attention to
the inequities of the consolidation regime for small business:
… the ‘consolidation
regime’, contained in 200 pages of legislation introduced in
2002 and accompanied by thousands of pages of explanatory
memoranda, rulings and other Tax Office guidance. It was
meant to allow all companies in a corporate group to be treated as
one company to simplify the tax affairs of big businesses.
They can now choose to lodge only one tax return (instead of one
per company) and intra-group transactions within the group can be
ignored for tax purposes (greatly assisting in corporate
restructuring).
The catch is there are extremely complex rules
that apply in forming a consolidated group, or when a subsidiary
company exists a consolidated group. The high administrative
cost associated with these rules is worth it for big business as
they benefit most from only having to lodge one return and the
flexibility that the consolidation regime allows.
Such costs are prohibitive for a small
business. Despite this, many small businesses or family
groups are effectively forced to bear the costs. This is
because when the consolidation rules were introduced, former simple
rules allowing companies to restructure or move assets between
company groups without triggering tax were removed. So small
businesses that also need the benefits of tax-neutral restructuring
must undertake the costly process of consolidating. This may
be for things as simple as paying profits to a holding company or
moving assets between subsidiaries.[113]
Schedule 6 to the Bill contains a raft of
miscellaneous amendments to the tax laws which primarily
involve:
- the correction of technical or typographical errors
- the removal of ambiguities, and
- ensuring provisions are consistent with their original policy
intent.[114]
Some of the amendments are the product of input from members of
the public and tax professionals via the Tax Issues Entry System
(TIES).[115]
The provisions are detailed in the Explanatory Memorandum at pp.
195–213.
On 24 February 2010, the Selection of Bills Committee resolved
to refer the Bill to the Senate Economics Legislation Committee for
inquiry and report by 15 March 2010.[116] There are three main reasons
for the referral:
- Whether the legislation will have unintended consequences for
the superannuation market;
- Whether the legislation is anti-competitive in relation to
privately operating Clearing Houses;
- Whether Medicare is an appropriate agency to operate the
Clearing House under the legislation.[117]
According to the Explanatory Memorandum for the Bill, the Bill
has the following financial implications:
- Schedule 1—Approved superannuation clearing house:
nil (noting that the Government allocated funding
of $16.1 million over the forward estimates period in the
2008–09 Budget)[118]
- Schedule 2—Forestry managed investment schemes:
negligible[119]
- Schedule 3—Managed investment trusts:
unquantifiable revenue implications from the 2009–10
income year[120]
- Schedule 4—25% entrepreneurs’ tax offset: a saving
of $66 million over the forward estimates period
(being exactly $22 million a year for three years starting
2010–11)[121]
- Schedule 5—Consolidation: generally
unquantifiable, with the exception of Part 20, which is
expected to result in a revenue gain of $150 million over the
forward estimates period[122]
- Schedule 6—Miscellaneous amendments: generally
nil to minimal, with the exception of items 7–11
(amendments to the small business retirement exemption) which are
expected to have an unquantifiable but small cost to revenue and
items 58–105 (amendments to the administrative penalties for
false or misleading statements) which are expected to result in an
unquantifiable but small gain to revenue.[123]
Members, Senators and Parliamentary staff can obtain further
information from the Parliamentary Library on (02) 6277 2795.
[75].
See footnote 64. The term
‘financial services licensee’ is defined in
section 761A of the Corporations Act 2001 to mean a person who
holds an ‘Australian financial services
licence’ (which is defined in section 761A to mean
‘a licence under section 913B that authorises a person
who carries on a financial services business to provide financial
services’). Section 913B sets out when the Australian
Securities and Investments Commission (ASIC) must (and must not)
grant an Australian financial services licence: see
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s913b.html,
viewed 2 March 2010.
Morag Donaldson
15 March 2010
Bills Digest Service
Parliamentary Library
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