Bills Digest no. 95 2015–16
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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.
Jaan Murphy
Law and Bills Digest Section
1 March 2016
Contents
Purpose
of the Bill
Background
Committee consideration
Policy position of non-government parties/independents
Position of major interest groups
Financial implications
Statement of Compatibility with Human Rights
Key issues and provisions
Concluding comments
Date introduced: 11 February
2016
House: House of
Representatives
Portfolio: Treasury
Commencement: Sections
1 to 3 commence the day the Bill receives the Royal Assent. Schedule 1 will
commence on 1 July 2016 immediately after the commencement of the Tax and Superannuation
Law Amendment (Norfolk Island Reforms) Act 2015
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent, they
become Acts, which can be found at the ComLaw
website.
The purpose of the Tax Laws Amendment (Norfolk Island CGT
Exemption) Bill 2016 (the Bill) is to amend the Income Tax Assessment Act
1997 (the ITAA 1997) and the Income Tax (Transitional Provisions)
Act 1997 (the ITTPA 1997) to exempt assets acquired before 24
October 2015 by Norfolk Island resident taxpayers from Capital Gains Tax (CGT).[1]
Norfolk Island was accepted as an Australian external
territory in 1913. Under arrangements introduced in 1979 Norfolk Island has had
partial self-government in which the Norfolk Island Government is required to
deliver many federal, state and local services. Historically, Australian
taxation, migration, health and welfare services did not extend (or only
partially extended) to Norfolk Island.[2]
As noted in the Minister’s second reading speech, various
‘longstanding issues’ faced by the residents of Norfolk Island have been
explored in various reports and parliamentary inquiries over a 35-year period.[3]
The most recent of such reports was the report by the Joint Standing Committee
on the National Capital and External Territories (the Committee) titled ‘Same
Country: Different World’ tabled in October 2014 (the Report).[4]
The Report’s recommendations were made on a bipartisan basis.
Background information to the recommendations made by the
Committee and the first tranche of reforms designed to give effect to them is
discussed in the Bills Digests to the Norfolk Island Legislation Amendment Bill
2015 and the Tax and Superannuation Laws Amendment (Norfolk Island Reforms)
Bill 2015.[5]
Importantly, a previously proposed reform of integrating Norfolk Island into the
Australian tax and social security systems was accepted by both the Norfolk
Island Government and the Committee.[6]
In addition, during the 2013 election campaign the Coalition made an election
commitment to integrate Norfolk Island into Australia’s taxation, social security
and health arrangements.[7]
Senate Standing Committee for the
Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills had
no comment on the Bill.[8]
The Labor Opposition has previously indicated support for integrating
Norfolk Island into the Australian taxation system. The Shadow Parliamentary
Secretary for External Territories has previously stated:
You have rightly pointed out that the Australian government will
not be introducing welfare benefits without the obligation of the Australian
taxation system, and we concur with your position. We also concur with your
observation that Australians should be treated the same, no matter where they
live.[9]
The policy position of other non-government
parties/independents was not known at the time of writing.
In relation to the Bill, no public statements by major
interest groups have been found. However, the Norfolk Island Government, members
of the Legislative Assembly and Norfolk Island residents and business people previously
provided their views on the Report. Most agreed in principle on the need for
reform, particularly in the areas of the economy, infrastructure and the
extension of Australian taxation, social security and health benefits to
Norfolk Island.[10]
The Government notes that the financial impact of the Bill
will be ‘negligible cost to revenue over the forward estimates period’.[11]
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s
compatibility with the human rights and freedoms recognised or declared in the
international instruments listed in section 3 of that Act. The Government
considers that the Bill is compatible.[12]
Previous exemptions for Norfolk
Island residents from income and capital gains tax
In simple terms, under the existing CGT regime any net capital
gain:
- arising
from a CGT event and
- related
to a CGT asset acquired (generally) after 20 September 1985
is included in a taxpayer’s assessable income for the
income year, and taxed at the prevailing rate set by the Income Tax Rates
Act 1986.[13]
Currently Division 1A of Part III of the Income Tax
Assessment Act 1936 (ITAA 1936), exempts certain Norfolk Island residents
from income tax for their income sourced from Norfolk Island and from outside
Australia.[14]
As a result of being exempted from income tax, Norfolk
Island residents are also currently exempted from CGT (at least in relation to
capital gains sourced from the sale of CGT assets from Norfolk Island or from
outside Australia).
Recent reforms
The Tax and Superannuation Laws Amendment (Norfolk Island
Reforms) Act 2015 (the 2015 Act) will repeal Division 1A of Part III of the
ITAA 1936 on 1 July 2016.[15]
The 2015 Act also amended the ITTPA 1997 and ITAA 1997 to provide
that the Australian CGT regime will fully apply to capital gains or losses on
CGT assets made by Norfolk Island residents. However, implementing a CGT for
Norfolk Island residents required a nominated start date, so that capital gains
or losses can be calculated from that date. The 2015 Act provides that that
date is 1 July 2016.[16]
As a result, all CGT assets held by Norfolk Island residents
at the end of 30 June 2016 were to be taken on 1 July 2016 to have been
acquired for their market value on that day.[17]
Concerns raised by the recent
reforms
The Government notes in the Explanatory Memorandum that concerns
about the CGT reforms were raised by the Norfolk Island community.[18]
As a result, the Government ‘announced that it would exempt assets held by
Norfolk Island resident taxpayers from CGT if they were acquired before 24
October 2015’.[19]
The new CGT exemption from capital
gain tax
Under the current Australian CGT regime, capital gains or
losses made on assets acquired before 20 September 1985 (commonly referred to
as ‘pre-CGT assets’) are usually disregarded in determining a taxpayer’s net
capital gain or loss for an income year. In other words, pre-CGT assets are
generally exempt from CGT.[20]
The Bill continues to impose CGT on Norfolk Island residents
from 1 July 2016, but modifies the circumstances in which it will apply from
those proposed by the 2015 Act.
Items 3 to 5 of Schedule 1 of the Bill
provide that any capital gains or losses on CGT assets acquired by Norfolk
Island residents before 24 October 2015 will be disregarded in determining their
income tax liability. In other words, the proposed amendments will mean that,
as is the case with pre-CGT assets on the Australian mainland, generally any
such capital gain or loss will not be included in a taxpayer’s assessable
income.
In addition however, the Bill will provide another exemption
to Norfolk Island residents not available to Australian taxpayers, in relation
to recording keeping requirements (discussed below).
Exemption from recording keeping
requirements
Subject to certain limited exceptions, Division 121 of the ITAA
1997 imposes a requirement on every taxpayer to ‘keep records of every act,
transaction, event or circumstance’ that could ‘reasonably be expected to be
relevant’ to working out whether a capital gain or loss was made from a CGT
event.[21]
Put simply, in order to prove that an asset is a pre-CGT
asset (and therefore exempt from CGT) a taxpayer must be able to produce
relevant records or documentation that prove when that asset was acquired.[22]
As noted by the Australian Tax Office:
You need to establish exactly when you acquired your CGT
asset because:
•CGT doesn't apply if you owned it before CGT started on
20 September 1985 (though major improvements to a property since may be
subject to CGT)
•the rules about how you work out the cost base have changed
over time
•how long you have had it may affect how you work out your
capital gain.
Generally, the time you acquire a CGT asset (your acquisition
date) is when you become its owner, most commonly because you have bought it or
received it as a gift or it was transferred to you.[23]
(emphasis added)
The Bill proposes to exempt Norfolk Island residents from
the requirement to keep records of when an asset was acquired that applies to
Australian mainland taxpayers. Proposed subsection 102-25(3) of the ITTPA
1997 provides that despite Division 121 of the ITAA 1997 (discussed
above), a Norfolk Island resident is not required to keep records of when a CGT
asset was acquired. Proposed subsection 102-25(4) then provides that
Norfolk Island residents may not choose whether or not to apply the record
keeping rule. The Explanatory Memorandum notes that:
This is intended to prevent any tax avoidance that may arise
by claiming capital losses but disregarding capital gains.[24]
Importantly however, the exemption from the record keeping
requirement noted above is not open-ended. This is because proposed
paragraphs 102-25(2)(a) and (d) and proposed subsection 102-35(3)
of the ITTP 1997 provide that the exemption will only be available to an
entity that was a resident of Norfolk Island on or before 23 October 2015 that
acquired a CGT asset on or before 23 October 2015 and had a CGT event happen in
relation to that asset immediately before 24 October 2015.
As a result, the record keeping requirements imposed by
Division 121 of the ITAA 1997 will apply to Norfolk Island residents in
relation to CGT assets acquired on or after 24 October 2015.
Is such an exemption justified?
‘Horizontal equity’ is an important concept in designing
tax laws. Horizontal equity is the notion that taxpayers in the same position
should pay the same amount of tax, or, put another way, ‘horizontal equity
demands equal treatment for people in similar circumstances’.[25]
The South Australian Department of Treasury and Finance usefully noted that:
Horizontal equity refers to the equal treatment of ‘equals’.
It can apply to natural and non-natural persons. The principle can also be
expressed the other way around – as the avoidance of arbitrarily different
treatment of persons considered ‘equals’. That is, differential treatment of
individuals and firms needs to be justified by different circumstances which
are compelling on public policy grounds.[26]
(emphasis added)
In this regard, the Bill breaches the concept of
horizontal equity because an Australian mainland taxpayer seeking to gain the
benefits conferred on pre-CGT assets in Australia must be able to prove (via
appropriate records) when the relevant asset was acquired whilst a Norfolk
Island taxpayer seeking to gain the equivalent benefit in relation to assets on
Norfolk Island does not. This leads to the inevitable question: is this
differential treatment of individuals justified by different, compelling
circumstances?
The Government appears to be of the view that there are
such different, compelling circumstances: the ‘historical lack of formal
documentation for asset sales, as well as cultural practices relating to
inheritance assets’ that the Government considers ‘are likely to inhibit the
legislated application of CGT in some instances’.[27]
It is debatable whether a historical tendency to not
formally document asset sales and certain cultural practices relating to the
inheritance of assets amount to compelling circumstances justifying the
differential treatment proposed by the Bill. However, on the assumption that it
is, then it is difficult to see why an exemption from the record keeping
requirements imposed by Division 121 of the ITAA 1997 should not be made
available to other persons, areas or cultures on the Australian mainland that
historically did not ‘formally’ document asset sales or have cultural practices
relating to the inheritance of types of assets that result in difficulty
pinpointing the date an asset was acquired.
That said, perhaps the best explanation as to why a
measure that breaches the concept of horizontal equity may be acceptable in
this instance is the relatively low number of taxpayers it is likely to impact.
The Bill will exempt CGT assets acquired by Norfolk Island
residents before 24 October 2015 from CGT in the same manner as assets acquired
by Australian mainland resident taxpayers before 20 September 1985. However,
unlike Australian mainland taxpayers, Norfolk Island residents will not be
required to provide records or documentation proving an asset was acquired
before 24 October 2015 in order to gain the benefit of the CGT exemption.
Members, Senators and Parliamentary staff can obtain
further information from the Parliamentary Library on (02) 6277 2500.
[1]. Explanatory
Memorandum, Tax Laws Amendment (Norfolk Island CGT Exemption) Bill 2016, p.
10, accessed 25 February 2016.
[2]. C
Madden, Norfolk
Island Legislation Amendment Bill 2015, Bills digest, 102, 2014–15,
Parliamentary Library, Canberra, p. 3, accessed 26 February 2016.
[3]. K
O’Dwyer, ‘Second
reading speech: the Tax Laws Amendment (Norfolk Island CGT Exemption)
Bill 2016’, House of Representatives, Debates, (proof), 11 February
2016, p. 12, accessed 25 February 2016.
[4]. Joint
Standing Committee on the National Capital and External Territories (JSCNCET), Same
country: different world: the future of Norfolk Island, Canberra,
October 2014, accessed 16 April 2015.
[5]. B
Pulle and K Swoboda,
Tax and Superannuation Laws Amendment (Norfolk Island Reforms) Bill 2015 [and]
A New Tax System (Medicare Levy Surcharge—Fringe Benefits) Amendment Bill 2015,
Bills digest, 99, 2014–15 Parliamentary Library, Canberra; C Madden, Norfolk
Island Legislation Amendment Bill 2015, Bills digest, op. cit., both accessed
25 February 2016.
[6]. JSCNCET,
Same
country: different world: the future of Norfolk Island, op. cit., pp.
36–42.
[7]. M
Keenan, A
better way for Norfolk Island, media release, 5 September 2013,
accessed 25 February 2016.
[8]. Senate
Standing Committee for the Scrutiny of Bills, Alert
digest, 2, 2016, The Senate, 24 February 2016, p. 83, accessed 25
February 2016.
[9]. W
Snowdon, ‘Ministerial
statements: Australian National Audit Office: Norfolk Island Financial
Statements’, House of Representatives, Debates, 27 March 2014, p.
3359, accessed 25 February 2016.
[10]. L
Snell (Chief Minister and Minister for Tourism), Self-government
of Norfolk Island, media release, 10 April 2015, accessed 25 February
2016.
[11]. Explanatory
Memorandum, op. cit., p. 7.
[12]. The
Statement of Compatibility with Human Rights can be found at page 13 of the
Explanatory Memorandum to the Bill.
[13]. Income Tax Assessment
Act 1997, subsection 102-5 ‘Your assessable income includes your net
capital gain (if any) for the income year’, accessed 25 February 2016; R
Woellner, S Barkoczy, S Murphy, C Evans and D Pinto, Australian
taxation law, 26th ed., Oxford University Press, 2016, pp.
273–274.
[14]. Income Tax Assessment
Act 1936, Part III Division 1A (Provisions relating to certain external
territories), accessed 29 April 2015.
[15]. Tax and Superannuation
Laws Amendment (Norfolk Island Reforms) Act 2015, Schedule 1, clause 1,
accessed 25 February 2016.
[16]. Ibid.,
section 2.
[17]. Explanatory
Memorandum, op. cit., p. 9.
[18]. Ibid.,
p. 9.
[19]. Ibid.
[20]. See
for example Income Tax Assessment Act 1997, subsection 104-10(5),
104-20(4), and 104-95(2). See also: Wolters Kluwer, Australian Master Tax
Guide, 58th ed., CCH Australia, 2016, p. 554.
[21]. Income
Tax Assessment Act 1997, subsection 121-20(1).
[22]. Australian
Tax Office (ATO), ‘Capital
gains tax’, ATO
website, 17 February 2016, accessed 25 February 2016.
[23]. Ibid.
[24]. Explanatory
Memorandum, op. cit., p. 12.
[25]. P
Kenny, ‘Australia’s
capital gains tax discount: more certain, equitable and durable?’, Journal
of the Australasian Tax Teachers Association, 1(2), 2005, p. 39; A Morgan,
‘The
institutional framework of taxation in Australia’, Tax Institute, ConTax
Newsletter May 2013, p. 4; Treasury, ‘Australia’s
future tax system: what does equitable distribution mean?’, Treasury, May
2010; Prof. C Evans, J Minas and Y Lim, ‘Taxing
personal capital gains in Australia: An alternative way forward’, submission
to the 2015 Tax White Paper, 2015, p. 7;
all accessed 25 February 2016.
[26]. South
Australian Department of Treasury and Finance, ‘Horizontal
fiscal equalisation and equity’, February 2012, p. 1, accessed 25 February 2016.
[27]. K
O’Dwyer, ‘Second
reading speech: Tax Laws Amendment (Norfolk Island CGT Exemption) Bill 2016’,
op. cit.
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