Chapter 1 Introduction
Referral of the Bill
On 24 May 2012 the Selection Committee referred the following Bills to the
committee for inquiry and report:
n the Tax Laws
Amendment (2012 Measures No. 2) Bill 2012;
n the Pay As You Go
Withholding Non-compliance Tax Bill 2012;
n the Income Tax
(Managed Investment Trust Withholding Tax) Amendment Bill 2012; and
n the Passenger
Movement Charge Amendment Bill 2012.
The first Bill has four schedules. The second and third Bills complement
the first Bill and relate to its first and fourth schedules. These Bills are
separate from it because of the constitutional requirements in relation to
imposing tax. Overall, the Bills represent five issues, each of which the
committee examined during the inquiry:
n making company
directors personally liable for unpaid superannuation guarantee amounts of
their company’s employees (Schedule 1 and the Pay as You Go Withholding
Non-compliance Tax Bill 2012);
n amending the taxation
of financial arrangement (TOFA) provisions to ensure that the tax treatment of
financial arrangements that are part of a joining/consolidation event is
consistent with the TOFA tax timing rules (Schedule 2);
n modifying the
consolidation tax cost setting and rights to future income rules so that the
tax outcomes for consolidated groups are more consistent with the tax outcomes
are more consistent with the tax outcomes that arise when assets are acquired
outside the consolidation regime (Schedule 3);
n increasing the
Managed Investment Trust (MIT) final withholding tax from 7.5 per cent to 15
per cent (Schedule 4 and the Income Tax (Managed Investment Trust Withholding
Tax) Amendment Bill 2012); and
n increasing the
Passenger Movement Charge (PMC) from $47 to $55 and indexing it through the
consumer price index (the Passenger Movement Charge Amendment Bill 2012).
Pay as You Go withholding non-compliance tax
Contrived corporate insolvency
There are cases where company directors or management who have
deliberately sought to avoid paying liabilities, including taxation liabilities,
wages, superannuation and leave entitlements and a variety of other
responsibilities, such as supplier accounts, through the use of contrived
In cases where such activity involves the evasion of superannuation
liabilities, it deprives workers of their financial security in old age,
potentially contributes towards the creation of otherwise unnecessary welfare
dependence and frustrates the efforts of successive governments to ensure the
highest possible standard of living for Australians in their retirement.
The failure of companies to pay employees’ entitlements or tax
liabilities enables them to offer lower prices for goods and services. They can
either reinvest money that compliant businesses would have to allocate to tax
and superannuation payments or simply disburse this as profit or wages to the
principals behind the phoenix scheme.
In some cases, companies that have liquidated in order to avoid
liabilities literally rise from the ashes and resume trading through a new
company structure controlled by the same person or group of individuals. Such
action is known as phoenix activity and may be described as the use of the
process of sequential company registration, liquidation and re-registration as
a means of corporate fraud or tax evasion. A phoenix company may even be used
to intentionally accumulate debts that the directors never intended to repay.
On occasion, phoenix operators may use family members or other
associates to gain further benefits, such as inflated incomes or credit claims.
There are cases where a family member or associate of a phoenix company
director may be the commanding or controlling agent behind the company.
Contrived insolvency, including repeat phoenix activity, is conducted
for personal enrichment or gaining an unfair competitive advantage. It
invariably constitutes a gross and unprincipled abuse of the corporate form and
the long established privilege of limited liability which is of essential
importance to our economic system. It undermines the integrity of corporate
regulation. It deprives the Commonwealth of revenue. It reduces public trust in
the economic system, lowers the reputation of business and potentially deters
investors. It also confers an unlawful benefit on those who evade the law and a
disadvantage to those who comply with it.
Reports and reviews
Almost a decade ago, the Royal Commission into the Building and
Construction Industry (The Cole Commission) was concerned about the frequency
of phoenix activity in the building industry. The Commission made a number of
recommendations addressing this issue, including that:
The Commonwealth, after consultation with the Australian
Securities and Investments Commission, consider the need for an increase in the
maximum penalties provided in the Corporations Act 2001(C’wth) for
offences that may be associated with fraudulent phoenix company activity.
The Commission also called on the Commonwealth to consider the need to
amend existing legislation in order to disqualify company directors guilty of
fraudulent phoenix activity.
Several years ago, Treasury estimated that phoenix activity cost the
federal revenue approximately $600 million per annum.
The subject of phoenix activity has been pursued by Parliament on a
number of occasions in recent years. For example, the Joint Committee on Public
Accounts and Audit were advised in 2009 by the ATO that the incidence of
phoenix activity was increasing. Since 2008 the ATO employer obligations
program had identified 6 013 companies as being a high-risk of defaulting on
their obligations; of these over 4 600 had not complied with their PAYG
withholding obligations and almost 3 000 had not met their super guarantee
At that time the ATO explained the difficulty of prosecution because:
...in the early-2000s we obtained a number of high profile
successful prosecutions, but after a few years we found that the penalties that
were imposed on people who were successfully prosecuted became ineffective. We
went from people getting custodial sentences to people getting home detention,
which included a provision that allowed them out during daylight hours to
conduct business, so there was essentially no penalty. I think that led to a
loss of confidence and a loss of interest, to some extent. When you are dealing
with the court system and the Director of Public Prosecutions, they have an
enormous caseload of very serious cases. It is hard to get cases up when their
assessment is that the penalty is likely to be a slap on the wrist.
In March 2010 the Inspector-General of Taxation (IGT) published a
report, The Review into the ATO’s administration of the Superannuation
Guarantee Charge. In this report he found that insolvent employers were
responsible for approximately $600.8 million owed to the ATO under the
superannuation guarantee charge (SGC) and that most of this debt had been
written-off as lost employee retirement savings.
The report also found that the groups most affected by the problem were employees
of micro businesses, contracted and casual employees, younger employees; and
employees in particular sectors — the arts and recreation services; the
transport, postal and warehousing sectors; accommodation and food services; and
the agriculture, forestry and fishing sector. The mean salary and wages across
each of these high risk segments is less than $30,000 a year, which indicated
that those most at risk of having insufficient superannuation contributed on
their behalf by employers were low-income employees.
There was also anecdotal evidence to suggest that many employees are
concerned that, if they query their employer about their superannuation
guarantee entitlement or lodge a complaint with the ATO, then they could either
lose their job or no longer be given work. Finally, the IGT noted
A delay in triggering ATO audit activity significantly
increases the likelihood of non-payment of SGC debt (requiring more costly debt
recovery action) and irrecoverability through insolvency. It also hampers the
ATO’s and government’s efforts to maintain a level playing field amongst
employers and ensure that compliant employers do not face a financial
disadvantage against non-compliant competitors.
The IGT recommended that the Government consider making company
directors personally liable for the unpaid superannuation guarantee charge
liabilities of their companies.
The Government’s 2009 proposals paper
On 14 November 2009 the Government released a proposals paper containing
options to address contrived company liquidations.
The paper outlined a number of possible amendments to address the problem.
These included the following actions in relation to taxation law:
n amending the
director penalty regime to remove the ability of directors engaged in
fraudulent phoenix activity to avoid personal liability for Pay As You Go
(Withholding) (PAYG(W)) liabilities by placing the company into voluntary
administration or liquidating the company;
n expanding the
director penalty regime to apply to superannuation guarantee (SG) liabilities
and other taxation liabilities such as indirect tax liabilities and a company’s
own income tax liability;
n amending the promoter
penalty regime to ensure that the promoter penalty regime is able to target
those individuals promoting fraudulent phoenix activity;
anti-avoidance provisions in the taxation law (either through an expansion of
the existing general anti-avoidance rule (GAAR) or through the creation of a
specific provision) to effectively negate any taxation benefit derived from
fraudulent phoenix activity;
n reinstating the
‘failure to remit’ offence that would make it an offence for an entity not to
remit the required PAYG(W) amounts;
n denying directors of
companies (and potentially close relatives) from being able to access PAYG(W)
credits in relation to their own income where amounts withheld have not been
remitted (to the ATO) by the company;
n introducing an
offence for claiming non-remitted PAYG(W) credits by making it an offence for
directors to claim credits in relation to their own income for PAYG(W) amounts
that have not been remitted by the company of which they are a director; and
n providing the
Commissioner of Taxation with the discretion to require a company to provide an
appropriate bond (supported by sufficient penalties) where it is reasonable to
expect that the company would be unable to meet its tax obligations and/or
engage in fraudulent phoenix activity.
The paper also identified the following options in the corporations law:
n expanding the scope
for disqualification of directors by giving a Court or the Australian
Securities and Investment Commission (ASIC) a discretion to disqualify a person
from being a director if the relevant company has been wound up and the conduct
of the person, as a director of that company, makes them unfit to be concerned
in the management of a company;
n restricting the use
of a similar name or trading style by successor company and making directors
personally liable for the debts of a liquidated company in circumstances where
a ‘new’ company adopts the same or similar name as its previous incarnation;
n adopting the doctrine
of inadequate capitalisation by allowing the corporate veil to be lifted where
a company sets up a subsidiary with insufficient capital to meet the debts that
could reasonably be expected.
The Government’s 2011 Bills
Schedule 3 of the Tax Laws Amendment (2011 Measures No. 8) Bill 2011
sought to amend the Taxation Administration Act 1953 (TAA 1953) by:
n extending the
director penalty regime to make directors personally liable for their company’s
unpaid superannuation guarantee amounts;
n allowing the
Commissioner of Taxation (Commissioner) to commence proceedings to recover
director penalties three months after the company’s due day where the company
debt remains unpaid and unreported after the three months passes, without first
issuing a director penalty notice; and
n in some instances
making directors and their associates liable to pay as you go (PAYG)
withholding non‑compliance tax where the company has failed to pay
amounts withheld to the Commissioner.
The tax on directors and their associates to deny their credits was
sought to be imposed by the Pay As You Go Withholding Non‑compliance Tax Bill
The proposed amendments were designed to provide disincentives for
directors to allow their companies to fail to meet their existing obligations,
particularly obligations to employees. They did not introduce new obligations
on the company but, rather, penalised company directors who fail to ensure that
their companies meet their obligations under the existing director penalty
The tax laws require companies to withhold amounts from certain payments
they make, such as wages to employees and fees to directors. The withheld
funds must be paid to the Commissioner or, where applicable, to pay estimates
of those funds.
The director penalty regime has always made directors of non-compliant
companies personally liable for the amount that the company should have paid, through
imposition of a penalty. While the existing director penalty regime makes
directors liable to a penalty, at the end of the day the company is left with
the responsibility to meet its obligation.
Furthermore, as the existing regime allows directors 21 days notice of
the penalty before the Commissioner is able to commence proceedings to recover
the liability, directors inclined to do so are free to extinguish their
personal liability by placing the company into voluntary administration or
liquidation within that notice period and before the Commissioner can sue to
recover their personal liability. The 21 days notice is, in effect, an
invitation to liquidate. This often means that the full amount of
PAYG withholding liabilities is never recovered.
To compound matters further, company directors are currently able to
claim PAYG withholding credits (for amounts withheld from payments to them
by the company) in their individual tax returns, even when the company has
failed to pay some or all of its PAYG withholding liability to the
It is also critical to note that while the director penalty regime
addresses non-payment of PAYG withholding amounts to the Commissioner,
non-payment of employee entitlements such as superannuation cannot be addressed
through the regime. Thus, the Commonwealth has effectively established one
standard for its debtors, while leaving other lawful creditors with less effective
means of redress.
The committee’s report on the 2011 Bills
The committee reported on the Bills in November 2011. An
objection to the Bills raised by industry was that they reversed the onus of
proof and assumed the guilt of company directors, rather than extend the
presumption of innocence.
The committee did not find this argument compelling and was not
convinced that the Bills reversed the onus of proof or undermined established
principles of natural justice. They simply extended the penalty provisions that
already apply to PAYG to superannuation.
The ATO also pointed out that the existing regime has defences
for directors so that they are not inadvertently swept up. These defences would
have remained available to directors under the Bills. For example, the defences
for director penalties include illness or some other reason such that it would
be unreasonable to expect a director to take part in the management of a
company at the relevant time, or if the director took all reasonable steps to
ensure that a company complied with its obligations.
However, given the concerns expressed by industry at the hearings in relation
to how the defences would operate in practice, the committee took the view that
it would be worthwhile for the Government to investigate this matter further
and determine whether it would be possible to expand and strengthen the
defences for company directors.
Another concern raised by industry was that the Bills potentially applied
to the broad range of directors whether engaged in phoenix activity or not. The
committee concluded that the Government should investigate whether it is possible
to tighten the provisions of the Bills to better target phoenix activity.
The committee stated that these provisions should be held pending while
the Government re-assessed the issues raised in the inquiry. The committee’s
The Government explore whether to expand and strengthen the defences
for company directors available in the Bills.
The Government investigate whether it is possible to amend
the Bills to better target phoenix activity.
The current Bills
The current Bills are similar to the previous proposals in that they
extend the director penalty regime to make directors personally liable for
their company’s unpaid superannuation amounts. They also make directors and
their associates liable, in some circumstances, to PAYG withholding
non-compliance tax where the company has failed to pay amounts withheld to the
The three main differences are that:
n the current Bills do
not allow the Commissioner of Taxation to commence proceedings to recover
director penalties without first issuing a director penalty notice. Instead,
the Bills provide that directors cannot discharge their director penalties by
placing a company into administration or liquidation when the super guarantee
remains unpaid and unreported three months after the due date;
n the ATO may issue a
director penalty notice with a director’s tax agent, instead of personally on
the director; and
n there are additional
defences for company directors and the timing rules also offer them some
protection. For example:
Þ a new
director is not liable for a director penalty for company debts until 30 days
after they become a director;
limitation on directors not being able to discharge their director penalties by
placing a company into administration or liquidation where the super guarantee
remains unpaid and unreported three months after the due date only applies after
they have been a director for three months; and
director is not liable for a director penalty if they took reasonable care in
the matter and applied the superannuation legislation in a reasonable way.
The defences in the previous Bills also remain, such as where a director
was ill or had some other good reason for not being involved in the management
of the company. Another defence is where a director took all reasonable steps
to ensure the directors caused the company to meet its super obligations or for
an administrator to be appointed or for the company to be wound up.
In summary, the Government has largely responded to concerns raised
about the initial proposals. This is confirmed by the response paper to
stakeholder concerns that the Government recently released. It lists five
concerns, of which the Government states that four have been addressed and
these are discussed above. The one outstanding matter relates to the proposal
to target the amendments to phoenix activity, which the Government has declined
The provisions are expected to generate additional revenue, shown in the
table below. These amounts would be used to pay employees their superannuation
Table 1.1 Revenue impact of proposed legislation
Memorandum, p. 3.
Consolidation and TOFA
On 1 July 2002 a consolidated income tax regime was introduced, which allows
wholly-owned corporate groups to choose to consolidate and operate as a single
entity for tax purposes. The objective was to reduce compliance costs for
business and improve the integrity of the tax system. The head company lodges a
single tax return for the group, and the subsidiaries lose their individual
income tax identities. The consolidation regime affects large businesses. Most
small businesses and sole trader activities do not come under the regime.
Taxation of financial arrangements (TOFA) reforms were first announced
in 1992 and have involved the implementation of various stages of arrangements
in the ensuing years. The TOFA arrangements aim to reduce the influence of tax
considerations on how financial arrangements are structured, emphasising other
factors, such as risk, when making financing decisions.
The TOFA rules provide for the tax treatment of gains and losses on
financial arrangements. The rules are contained in Division 230 of the Income
Tax Assessment Act 1997 (ITAA), and apply to those with large tax payment
obligations. Division 230, representing stages three and four of the TOFA
reforms, was introduced by the Tax Laws Amendment (Taxation
of Financial Arrangements) Act 2009. The rules include methods for
calculating gains and losses from financial arrangements, and the time at which
these gains and losses will be brought to account.
The TOFA rules generally apply to financial arrangements for financial
years commencing on or after 1 July 2010, unless the taxpayer elected to apply
the TOFA provisions from the previous financial year. TOFA transitional
provisions allow a tax payer to elect to apply TOFA provisions to existing
financial arrangements that started before the taxpayer’s first TOFA year
(referred to as ‘ungrandfathering’). A transitional balancing adjustment is
then made for these financial arrangements, based on calculations using the
‘primary’ or ‘alternative’ method. If the transitional balance is positive a
quarter of the amount is included in the taxpayer’s assessable income for the
first year that Division 230 applies and for each of the next three years. If
it is negative, then a deduction for a quarter of the amount is allowed over
that four year period.
TOFA consolidated interaction provisions are designed to ensure
appropriate interaction between the consolidated and TOFA regimes.
When introduced, the Government foreshadowed that monitoring and further
legislative refinements would be required. Following the enactment of Divisions
230, consultation with the industry and Australian Tax Office revealed
technical deficiencies in the consolidation interaction provisions and how they
interact with the TOFA transitional provisions.
On 25 November 2011 the then Assistant Treasurer, the Hon Bill Shorten
MP, announced that the Government would amend the TOFA consolidated interaction
and transitional provisions to ensure that the tax treatment of financial
arrangements that are part of the assets and liabilities in a consolidation
(joining) event, are consistent with the TOFA tax timing rules and takes into
account changes in value of financial arrangements that are liabilities.
Treasury consulted on exposure draft legislation and related explanatory
material in April 2012. Stakeholders expressed concern that the amendments
would apply retrospectively from the commencement of the TOFA provisions, and
that they may not be able to amend prior income tax assessments affected by the
amendments. Concerns were also raised about the application of the amendments
to financial arrangements that are part of a tax consolidation of a wholly
owned group and of chosen transitional entities.
In response to these concerns raised during the consultation, Treasury
indicated that the following changes had been made to the proposed legislation:
n tax payers will be
able to amend prior assessment within two years of the commencement of the
arrangements of a chosen transitional entity will be carved out of the application
of the amendments; and
n a head company’s
deemed assumption value for liabilities that are part of a pre-TOFA formation
will be changed from the liability’s accounting value to its tax carrying
However, the retrospective application of these changes was retained.
Treasury observed that it ‘is consistent with prior Government announcements
regarding amendments to the TOFA provisions and the retrospective application
of all other amendments to the TOFA provisions.’
The Tax Laws Amendment (2012 Measures No. 2) Bill 2012 was introduced in
the House of Representatives on 24 May 2012, to address the problems raised by
the 2010 amendments, and make improvements to consolidation and TOFA
arrangements and interaction.
Schedule 2—Consolidaton and TOFA
Schedule 2 of the Tax Laws Amendment (2012 Measures No. 2) Bill 2012
amends the Income Tax Assessment Act 1997 and the Tax Laws Amendment
(Taxation of Financial Arrangements) Act 2009. It deals with the
interaction between the consolidation regime and the TOFA rules. The Government
anticipates that these amendments will ‘clarify the operation of the TOFA consolidation
interaction and TOFA transitional provisions’, providing ‘more certainty for
The provisions in this schedule are to provide consistency in the tax
treatment of financial arrangements that are part of a consolidation or joint
event, and the TOFA tax timing rules. The amendments to the ITAA 1997 are to:
...ensure that, for consolidated groups applying Division 230
of the ITAA 1997 in relation to their financial arrangements, the head company
is deemed to have received an amount for assuming an accounting liability that
is, or is part of, a financial arrangement as part of a joining/consolidation
event. This amount is deemed to be the accounting liability’s accounting value
at the joining time.
The amendments to the TOFA transition provisions ensure that the TOFA
consolidation interaction will apply in the following circumstances:
joining/consolidation event occurred prior to a consolidated group starting to
apply the TOFA provisions in relation to its financial arrangements; and
head company has made an election to apply the TOFA provisions to its existing
The Assistant Treasurer, the Hon David Bradbury MP, stated that:
...this bill ensures the tax treatment of the financial
arrangement is consistent with the TOFA tax timing rules, which recognise gains
and losses from financial arrangements on an accruals basis as opposed to a
The changes also recognise the fact that, like financial
assets, the value of a financial liability can change other than from the
repayment of the liability.
The provisions are expected to protect a significant amount of revenue
over the forward estimates and generate a revenue gain of $253 million over
Table 1.2 Revenue impact of proposed changes to TOFA
consolidation interaction arrangements
Memorandum, p. 5.
The amendments will have effect from the commencement of stages three
and four of the TOFA reform, which was 26 March 2009. TOFA consolidation
interaction provisions will apply to the consolidated group from their first
TOFA applicable income year. The TOFA transitional provision amendments will also
The consolidation regime allows the head company of a consolidated group
to lodge tax returns on behalf of all the entities in the group. It was
introduced to reduce tax compliance costs. However, deficiencies in the
consolidation regime were identified in the years following its introduction.
One area identified for improvement was in how the cost of an asset is
recognised when acquired by a company. When a consolidated group acquires a
company, the joining company’s shares cease to be recognised for tax purposes
and become assets of the head company. The tax costs of these assets are reset
at an amount that reflects their respective share of the group’s cost of
acquiring the joining company. This amount is based on the relative market
values of those assets. Some assets, such as cash, retain their original tax
This led to amendments in 2010 enacted by the Tax Laws Amendment
(2010 Measures No. 1) Act 2010. The Act broadened the scope of the residual
tax cost setting rule and introduced the rights to future income rule. These
changes had retrospective effect from the commencement of the consolidation
regime in 2002. Consolidated groups were able to make claims for tax deductions
based on the rights to future income and residual tax cost setting rules from
the 2002-2003 financial year.
The objectives of the 2010 changes were to reinstate the original
intention of the consolidation regime and ‘remove uncertainty in the law by
clarifying that, for some assets, the reset tax cost of the asset (rather than
its original tax cost) is used when a taxing point later arises for the asset.’
However, there were unintended consequences and a negative impact on revenue.
When the measures in the 2010 amendments were introduced they were
expected to have an ‘unquantifiable but significant’ revenue impact. However,
the Government did not anticipate that by 2011 there would be in excess of $30
billion dollars in claims, with further claims likely to be made.
The Assistant Treasurer, the Hon David Bradbury MP, stated that:
Shortly after passage of those amendments, it became clear
that the new rules could result in the recognition of the tax costs of some
assets being brought forward in an unanticipated way.
On 30 March 2011 the Government asked the Board to Taxation to:
n examine the operation
of the rights to future income and residual tax cost setting rules with a view
to clarifying their scope; and
n propose changes to limit
the scope of the rules, if necessary, and advise on the date of effect of those
proposed changes (including whether they should apply retrospectively).
The Board of Taxation reported in May 2011, concluding:
...the scope of the rights to future income and residual tax
cost setting rules, as enacted, is broader than what was intended at the time
of their original announcement in 2005. The Board considers that, as a general
principle, consolidated groups should not be able to claim types of deductions that
are not available to taxpayers outside of consolidation. However the rights to
future income and residual tax cost setting rules allow consolidated groups to
access potential deductions which are not available under the general tax law
outside of the consolidation regime. The Board has concluded that the rules
could be improved so that they do not advantage consolidated groups over
taxpayers outside consolidation.
On 25 November 2011 the then Assistant Treasurer, the Hon Bill Shorten MP,
announced that the Government would implement the Board of Taxation’s
recommendations for future consolidations. The Government indicated its
intention to change the way consolidated groups can deduct the costs allocated
to some assets following a corporate acquisition. It was anticipated that the
changes would ‘help protect potential threats to revenue by putting a limit on
the scope of [the 2010] amendments’, and ensure that consolidated groups could
not continue to claim tax deductions that are not available to non-consolidated
Schedule 3 of the Tax Laws Amendment (2012 Measures No. 2) Bill 2012
amends the ITAA 1997 to modify the consolidating tax cost setting and rights to
future income rules so that the tax outcomes for consolidated groups are more
consistent with the tax outcomes that arise when assets are acquired outside
the consolidated regime.
The Assistant Treasurer, the Hon David Bradbury MP, stated that:
The changes in this bill take away the unintended
retrospective benefits arising from the 2010 amendments and are necessary to
protect a significant amount of revenue that would otherwise be at risk. These
changes demonstrate the government’s commitment to maintaining the equity,
fairness and integrity of the tax system.
In referring the Bill to the committee, the Selection Committee noted
the ‘retrospective application of tax charges’ in the changes to the
consolidation measures as an issue for consideration.
The EM outlined that as the 2010 amendments had retrospective application,
the amendments in Schedule 3 would need to have effect back to 2002. Provision
is made in the Bill for a range of different circumstances. How the proposed
changes will affect specific consolidated groups will depend on the time at
which acquisitions were made in relation to the announcement of the changes on
12 May 2010 and the announcement on 30 March 2011 that the rules would be
subject to review. Schedule 3 proposes three distinct categories of rules:
n Pre-rules (prior to
the announcement of the changes on 12 May 2010);
n Interim rules
(between 12 May 2010 and 30 March 2011); and
n Prospective rules
(after 30 March 2011).
The key changes affecting corporate acquisitions under the consolidation
arrangements are outlined below:
The pre-rules, which apply broadly to the
period before 12 May 2010, will restore the original tax cost setting rules
that operated prior to the 2010 amendments, with modifications to:
deductions for rights to future income to unbilled income assets;
that a deduction is allowed for the reset tax costs for consumable stores; and
certain assets as goodwill.
The interim rules, which apply broadly to
the period between 12 May 2010 and 30 March 2011, will restore
the current 2010 residual tax cost setting and rights to future income rules,
with modifications to:
certain assets as goodwill;
that no value is attributed to certain contractual rights to future income; and
that the reset tax costs for consumable stores are deductible.
The prospective rules, which apply broadly
to the period after 30 March 2011, will:
the operation of the tax cost setting rules to CGT assets, revenue assets, depreciating assets,
trading stock and Division 230 financial arrangements;
a business acquisition approach to the residual tax cost setting rule;
that the reset tax costs for rights to future income that are WIP amount assets
and consumable stores are deductible; and
rights to future income, other than WIP amount assets, as retained cost base
Provision is also made for groups that have private rulings from the
ATO, including written advice under advance compliance agreements. Actions
taken in these situations will stand.
While these provisions are not expected to generate revenue, it is
anticipated that they will protect a ‘significant amount of revenue’ by
restricting the scope of tax deductions by consolidated groups.
Managed investment trusts
The Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill
2012 amends the Income Tax (Managed Investment Trust Withholding Tax) Act
2008 to increase the managed investment trust (MIT) final withholding tax
from 7.5 per cent to 15 per cent on fund payments made in relation to income
years that commence on or after 1 July 2012.
This applies to distributions from managed investments to residents of a
country with which Australia has a tax information exchange agreement.
Managed investment trusts are typically used to invest in infrastructure
and property projects. Trustees of Australian managed investment trusts may be
required to withhold an amount from a fund payment where they are authorised to
make a payment to a place outside Australia or where the recipient has an
address outside Australia.
This measure is estimated to have a gain to revenue of $260 million over
the forward estimates period, as shown below.
Table 1.3 Revenue impact of the amendments to MIT final
Memorandum, p. 7.
Background to the managed investment final withholding tax
During the 2007 election campaign, the Australian Labor Party committed
to lower the rate of MIT withholding tax from 30 to 15 per cent on
distributions to foreign residents.
The Income Tax (Managed Investment Trust Withholding Tax) Act 2008
was enacted following an announcement by the Government as part of the 2008-09
Budget that the rate would eventually be lowered from 30 to 7.5 per cent.
Prior to the introduction of this Act, trustees of Australian managed
investment trusts were required to withhold at a rate of 30 per cent on the
fund payment part of managed fund distributions to foreign resident investors.
Those investors were then subject to the normal Australian income tax rules on
their distributions. As the amount withheld was of a non-final nature, the
foreign resident recipients of the payments were still required to lodge
Australian tax returns.
The 2008 Act replaced the non-final withholding regime with a new final
withholding tax regime which relieved foreign investors of the compliance
burden of filing Australian tax returns on those distributions.
These previous recent changes also incorporated an undertaking by the
Government to cut the rate of the withholding tax from 30 per cent to
7.5 per cent in three stages:
n 22.5 per cent for the
2008-09 income year
n 15 per cent for the
2009-10 income year
n 7.5 per cent for the
2010-11 and subsequent income years.
Because of this staged approach to the lowering of the MIT Withholding
Tax, the 7.5 per cent rate has only been in place for distributions made since
the 2010-11 financial year.
The Bill will return the withholding tax for managed investment trusts
to the level of the original 2007 election commitment of 15 per cent.
In his second reading speech, the Hon David Bradbury MP, stated that the
increase to the final withholding tax ensures that ‘Australia receives a fair
return on profits generated in Australia’ and that the 15 per cent rate remains
‘competitive with rates in other countries.’
Withholding Tax regimes on foreign investors are common within the
Organisation for Economic Cooperation and Development (OECD). With an increase
in the withholding rate to 15 per cent, Australia would be similar to the rates
in like countries in the OECD.
Industry reacted with concern to the announcement of an increase in the
MIT withholding tax rate. Managed investment trusts expressed surprise at the
announcement and warned that the sudden reversal of recent policy to lower the
rate would cause concern among foreign investors about stability of Australia’s
investment environment. Mr Christian Holle, tax partner of
PricewaterhouseCoopers has criticised the lack of warning from the Government
on its intention to increase the tax rate arguing that people have made
investments in Australia based on an expectation of an ongoing 7.5 per cent
rate and that there should be a transition period.
Reported reactions from other industry representatives have warned that
the tax rate rise could potentially jeopardise investment in crucial
infrastructure and undermine efforts to develop asset management in Australia.
However, others in the industry admitted the withholding tax rate is not
the sole consideration for investors. While the existing 7.5 per cent rate was
welcomed by the industry as making Australia more competitive in the region,
other factors such as Australia’s stable government and application of the rule
of law, proximity to Asia and strength of the economy were also recognised as
making Australia an attractive investment destination.
Passenger Movement Charge
The Passenger Movement Charge Amendment Bill 2012 (the Bill) will
increase the Passenger Movement Charge (PMC) from $47 to $55 per person from
1 July 2012 and enable automatic indexation, based on the Consumer Price
Index (CPI), from 1 July 2013.
Over the forward estimates the measure will deliver an additional $610
The Government has allocated $61 million of this over four years to the Asia
Marketing Fund. This fund will promote Australian tourism and business
opportunities in Asia. The tourist industry has been critical of the proposed
increase to the PMC, and argues it will discourage international visitors. 
However, previous modelling by the Sustainable Tourism Cooperative Research
Centre (STCRC) has indicated that an increase to the PMC could increase gross
national income and would have a small negative effect on the tourism sector. 
In contrast to the current proposal, an assumption in the modelling was that
none of the funds collected would be directed back to the tourism sector.
Background to the Passenger Movement Charge
The Passenger Movement Charge was introduced in July 1995 (replacing departure
tax) and is imposed on a person departing from Australia, whether or not the
person intends to return. The PMC is levied under
the Passenger Movement Charge Act 1978 and collected under the Passenger
Movement Charge Collection Act 1978. It is administered by the Australian
Customs and Border Protection Service (Customs and Border Protection).
Commonly, carriers moving passengers through Australian customs enter into
formal remittance arrangements with Customs and Border Protection. The carrier
then levies the PMC at the time a ticket is sold and remits the PMC to Customs
and Boarder Protection within an agreed timeframe.
Where a person departs without a ticket, or equivalent authority, the
PMC is collected by Customs and Border Protection officers directly from the
passenger, captain or agent at the point of departure. This generally applies
to people on private flights and sea craft. There are a number of exemptions to
the PMC, including:
n passengers under 12
years of age;
inhabitants’ travelling to the Torres Strait or Papua New Guinea;
n on-duty foreign
defence personnel, and their spouse and children;
n crew members, and
their spouse and children;
n transit passengers;
n emergency passengers;
n certain consular and
n protective service
n passengers travelling
to the External and Indian Ocean Territories.
The PMC has been set at $47 per passenger since 1 July 2008. The Government
announced the $8 increase, and subsequent indexation, to the PMC in the 2012-13
budget. The measure is estimated
to increase revenue by $610 million over the forward estimates period.
Table 1.4 Revenue impact of the Passenger Movement
Paper 2012-13, Part 1: Revenue Measures, p. 11.
The Government has flagged the Asia Marketing Fund as the recipient of
$61 million over four years of the funds raised by the PMC. According to
The fund will support the promotion of Australia to growing
markets in Asia and is intended to encourage investment by the private sector,
and State and Territory governments.
The Minister for Home Affairs, the Hon Jason Clare MP, stated in his
second reading speech that the Asia Marketing Fund will promote Australia ‘as a
premium holiday and business travel destination.’
Industry groups have expressed the concern that the increase to the PMC
will act as a barrier to entry for international passengers and reduce
international visitor numbers. Indeed, during a press
conference, Mr John Lee, the CEO of Tourism and Transport Forum Australia
(TTF), apologised to New Zealand visitors for the imposition of this cost. Mr Lee
went on to argue:
The PMC was introduced to cover the cost of passenger
processing at Australia’s international gateways and massively over-collects on
that task. Delivering the Australian government around $300 million more each
year than it spends on passenger processing.
The rise – and the future indexation of the PMC to inflation
– will give the government an extra $610 million over the next four year – all
coming out of the pockets of tourists.
In 2011 the STCRC undertook modelling to predict the impact of a
20 per cent rise in the PMC ($9.40 in current terms) on ‘tourism
output’ and the economy more broadly. The researchers looked
at a range of economic indicators and reviewed the impost on foreign and
domestic travellers. It was postulated that ‘contrary to conventional wisdom’
increasing the PMC would increase the gross national income by $49 million but
decrease tourism output by $7 million. It was conceded that the
tourism industry could be negatively impacted particularly where it relied on
international tourism. The study concluded that:
...the PMC works, in effect, as a transfer payment from
tourism to non-tourism industries, as most of the total economic positive
effects accrue to the non-tourism industries. This effect magnified as there is
no tourism-specific use of the extra Government revenue benefit...
The modelling assumed that no funds would be put back into promoting
Australia’s tourism sector. However, as discussed, the Government has committed
to putting $61 million into promoting Australian tourism in Asia.
Key features of the Passenger Movement Charge Bill
Section 6 of the Bill repeals the PMC from $47 and substitutes $55
beginning 1 July 2012. Subsection 6(1) states
that a person pays the rate of PMC based on when they purchase a ticket, not
when they actually travel. Subsections 6(2)(3) set out the formula to calculate
the rate of PMC after 1 July 2013, rounded down to two decimal places (i.e.
former rate of charge x indexation factor).
Section 7 ensures that the measures outlined above are consistently
implemented for passengers not using a commercial ticket or equivalent
Section 8 sets out the formula for determining the indexation factor.
Section 8(1) provides that the indexation factor is based on a comparison of the
March indexation number for the year indexation occurs and the previous March
quarter. The index number is the CPI number published by the Australian
Statistician for the March quarter. If the indexation factor is less than or
equal to 1, the rate of PMC will not change (Subsection 8(3)). The indexation
factor is calculated in a method similar to other taxes and levies subject to
An application provision provides that amendments outlined above can be
applied after 1 July 2012, and it also ensure that persons who purchase tickets
prior to this date do not pay the increase.
Objectives and scope of the inquiry
The objective of the inquiry is to investigate the adequacy of the Bills
in achieving their policy objectives and, where possible, identify any
In referring the Tax Laws Amendment (2012 Measures No. 2) Bill 2012,
Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2012, and
Pay As You Go Withholding Non-compliance Tax Bill 2012, the Selection Committee
REASONS FOR REFERRAL/PRINCIPAL ISSUES FOR CONSIDERATION: In
relation to the managed investment trust withholding tax—doubling of tax,
impact on investment in Australia, sovereign risk issues and impact on long
term infrastructure investment. In relation to consolidation
measures—retrospective application of tax charges.
In relation to the Passenger Movement Charge Amendment Bill 2012, the
Selection Committee stated:
REASONS FOR REFERRAL/PRINCIPAL ISSUES FOR CONSIDERATION: The
government told the industry that they were not going to increase the passenger
movement charge—the industry did not have an adequate consultation process
prior to it being flagged. It will likely have an adverse effect on the tourism
sector and would be worthwhile allowing stakeholders to have input.
Conduct of the inquiry
Details of the inquiry were placed on the committee’s website. On
25 May 2012 the Committee Chair issued a media release announcing the
inquiry and seeking submissions.
Thirty submissions were received on the various bills being considered.
Submissions are listed in Appendix A.
A public hearing was held in Canberra on Monday 4 June 2012. A list
of the witnesses who appeared at the hearing are available at Appendix B. The
submissions and transcript of evidence are available on the committee’s website