Chapter 2 Issues in the Bills
Company directors and the superannuation guarantee
2.1
At the hearing, the Australian Institute of Company Directors (AICD)
outlined its concerns with the provisions. The key issues are discussed below.
Restricting scope to phoenixing
Background
2.2
Currently, the Tax Laws Amendment (2012 Measures No. 2) Bill 2012 and
the Pay As You Go Withholding Non-compliance Tax Bill 2012 extend the existing
penalty provisions of the PAYG Withholding Tax to the Super Guarantee, and strengthen
the defense provisions for both. Director penalties were introduced in 1993 as
a trade-off to removing the Australian Taxation Office (ATO) as a preferred
creditor.[1]
2.3
The amendments do not distinguish between whether a company director is
engaged in phoenixing or not. Broadly, a general liability is to be imposed on
directors where the company involved fails to notify the ATO if it does not pay
its employees’ super in full.
2.4
The Tax Laws Amendment (2011 Measures No. 8) Bill 2011 and the Pay As
You Go Withholding Non-compliance Tax Bill 2011 aimed to prevent directors from
escaping their superannuation obligations. They worked the same way as the
current Bills and in the previous inquiry industry expressed concern that they
would affect ‘all directors of all companies throughout Australia – over two
million, in fact.’[2] In its 2011 advisory
report, the committee noted that the Bills did not add to existing
requirements, but instead applied a more effective penalty regime. However,
given industry concerns, the committee recommended that the Government
investigate whether it was possible to amend the Bills to better target phoenix
activity.[3] Following further
consultations, the Government did not amend the Bills in this regard.
2.5
Industry reiterated its preference for targeting phoenix operators in
this inquiry. The Institute stated:
...the problem with this bill is it is not confined to
fraudulent phoenix operators. By failing to define fraudulent phoenix activity,
it instead targets all of Australia's 2.2 million directors including those who
volunteer their time to work for charities and community organisations.
Following submissions to this committee last year, it recommended the
government investigate whether it was possible to amend the bills to better
target phoenix activity. Yet the government has made virtually no attempt to
target phoenix activity in revising the bill. We strongly recommend this bill
not be passed until a definition of fraudulent phoenix activity is inserted and
until it is amended so that the measures only apply when fraudulent phoenix
activity is suspected.[4]
2.6
The Institute accepted that company directors should be responsible and
accountable for the payment of their employees’ superannuation. However, it did
not accept that directors should be liable for it.[5]
Analysis
2.7
The committee notes that, in order for a company director to be subject
to these provisions, there would need to be an ongoing period of
non-compliance. The superannuation guarantee operates on a quarterly basis. If
a company does not pay any superannuation during a January to March quarter,
then this raises a superannuation guarantee shortfall. The company would be
required to report this shortfall to the ATO by 28 May. If the shortfall is not
reported by then the directors will be liable for director penalties for this
amount from this date.[6]
2.8
Further, as Treasury advised the committee, the act of not reporting a
shortfall is a key requirement for a director penalty:
The aspect of the measure that does not allow a company to
remit a penalty by liquidating or going into administration if a debt is three
months old is targeting people who are trying to avoid detection, because those
provisions only have application if the debt is unreported. The bill was never
intended only to apply to phoenix operators; it could not, because it builds on
existing law. It was intended to protect workers' entitlements and it does
that.[7]
2.9
In other words, there must be an extended period of non-compliance for a
director to be liable, not just in terms of not paying super, but also in terms
of not communicating this fact to the ATO. The former may be restricted by a
company’s cash flow, but the latter only requires correspondence.
2.10
Witnesses at the hearing discussed how these provisions might operate in
different sized companies. In larger companies, as the Institute stated, the
directors would be less involved in the day to day running of the company and
they would not have direct knowledge of whether super had been correctly paid.
One effect of the provisions would be to push more superannuation-related
information up to boards.[8] Treasury also noted that
larger companies tend to have strong systems covering salaries and employee
benefits. The real difference will occur in more closely held entities.[9]
Conclusion
2.11
The committee accepts that company directors have a large number of
obligations and that this potentially adds to them. However, extended and
consistent non-compliance is required before personal liability applies. Not
only must super be unpaid, but the company must omit the simple step of
reporting it to the ATO. This compares with the position of sole traders who
are already personally liable for non-payment of superannuation.[10]
2.12
The Committee questions whether it is practical to limit the Bills to
cases where pheonixing is suspected, as requested by industry. Since pheonixing
happens after the fact, it would place an unreasonable expection on the ATO to
identify possible future breaches. It could be argued that it would add a layer
of unfairness and considerable room for error. These amendments only apply
where a company has consistently not met its obligations and failed to notify
the ATO of this for several months and provides strengthened defence provisions
for directors. The committee has come to the view that no amendments are
required.
New directors
Background
2.13
Sections 269-15 and 269-20 of the Taxation Administration Act 1953
provide that directors must cause a company to comply with an ‘obligation’ and
that they are liable to pay a penalty ‘at the end of the due day’. Someone who
becomes a director after the due day adopts this obligation 14 days after they
become a director.
2.14
The Bills extend this 14-day period for new directors to 30 days. This
is a key difference from the package of Bills last year. It recognises that new
company directors will have extra obligations in that they must turn their
minds to the company’s superannuation affairs, in addition to its tax affairs.[11]
Importantly, this extension applies both to directors’ tax and super obligations.
2.15
Despite accommodating the interests of directors, the Institute argued
at the hearing that making a director liable for something that occurred before
they were appointed was inherently unfair:
No person in Australia in any occupation should commence a
new job or a new position only to find that within 30 days they become
personally liable for a breach that occurred before they commenced work in the
role, which involve acts which they, by definition, cannot have taken part in
and cannot be held culpable for. We are of the view that applying automatic
liability on new directors for acts of the company which occurred before they
were a director is particularly offensive to the rule of law. We recommend that
a penalty regime not apply to directors unless they were a director at the time
of the company's original breach and had some level of culpability in relation
to the company's offence when it is confined to phoenix activity.[12]
Analysis
2.16
At first glance, there may be a question mark about making someone
liable for something that they did not do, or did not omit to do. However, it
is important to also ask the counterfactual question: ‘What would happen if new
directors were not made personally liable?’ Treasury responded that
unscrupulous operators could use a new director defence as a loophole against
liability:
That is already a characteristic of some phoenix operators.
They will appoint a spouse or someone. In fact the ATO will point to instances
where people have basically gone through the phone book and picked out names
and listed those people as directors. Yes, if there were no penalty against new
directors then that is exactly what could happen. You could just cycle through
directors.[13]
2.17
In other words, allowing a new director to avoid liability for the
superannuation guarantee charge simply because they are new would provide the
sort of loophole that phoenix operators are adept at exploiting. What is
important is that there must be some balance between the interests of new
directors and employees’ rights to their superannuation. The mechanism in the
Bill to achieve this balance is extending the period of grace for new directors
from 14 to 30 days.
Conclusion
2.18
It is appropriate to make new directors liable for the superannuation
guarantee charge of a company where the super liability arose before they
became a director. There are three reasons for this. Firstly, if they were not
liable in some way, this would be an easily exploitable loophole for phoenix
operators. Secondly, directors will have a longer, 30-day period of grace to
ensure that either the super and tax affairs of a company are in order, or advise
the ATO of the liability, which would in practice lead to the ATO and the
entity agreeing on a payment arrangement.
2.19
Finally, the position of a director of a company is different to that of
an ordinary individual. A company is a legal device created to facilitate
commerce through protecting investors with limited liability. In order to achieve
this, directors must have high standards of ethics, skills and leadership. The
committee fully supports legislation that requires these standards of directors
when they join a company in relation to its employees’ superannuation.
Not-for-profit organisations
Background
2.20
At the hearing, the Institute noted that not-for-profit organisations
incorporated under the Corporations Act 2001 would be affected by the
provisions and that this would be very onerous on organisations that are run by
volunteers.
... 11,700 companies limited by guarantee are in operation at
the moment. I assume many of those would be charities, like the one I was
on, for example, and that directors per this legislation—because it refers to
Companies Act directors—would be picked up in that area...
These guys are volunteers: would some of them have the
capacity to sit down and work out all the problems they need to do? Would
company directors have done a company directors course to work all this out?
The answer is it would be a hard ask for these people.[14]
Analysis
2.21
The committee analysed this issue in its report last year. In
particular, Treasury provided the committee with evidence that most
not-for-profit organisations do not come under the Corporations Act 2001:
Clubs and associations are commonly incorporated under the
incorporated associations legislation in the various states and territories. As
clubs, sporting associations and not-for-profits are generally not run as
companies under the Corporations Act 2001, the director penalty provisions
and proposed changes will not alter their status, obligations or potential
implications.[15]
2.22
This is confirmed by data published by the Australian Bureau of
Statistics. In June 2007, there were 41,008 not-for-profit organisations in
Australia.[16] According to the
Institute’s figures, up to approximately one quarter of these are companies
limited by guarantee.
2.23
Further, it is well known that the compliance obligations for
corporations under national law are more onerous than for state or
territory-based associations. An example is the website advice given by the
Queensland Council of Social Service:
Generally speaking, the regime for incorporated associations
under the Queensland Associations Incorporation Act is simpler and more
straightforward than the regime for companies under the Commonwealth
Corporations Act.
Queensland’s Associations Incorporation Act was specifically
designed to provide a simple and inexpensive means of incorporating
not-for-profit groups. It is likely that, with help from resources that explain
the Associations Incorporation Act (ideally supported by a good operations
manual), most people would be able to assist in the running of an effective
association without specialist skills or training.
In contrast, the Corporations Act is a much more complex,
lengthy piece of legislation that governs both for-profit companies, as well as
not-for-profit companies limited by guarantee.[17]
2.24
Therefore, it is reasonable to expect that the more volunteer-driven
community groups would be incorporated under simpler state or territory
legislation. Groups incorporated under the Corporations Act 2001 would
be used to a higher level of compliance and those incorporating under it have
fair notice of the higher compliance costs involved.
Conclusion
2.25
The committee reiterates the comments that it made on this issue in its
report on the 2011 phoenixing measures. It is concerned that there is
significant confusion about the status and responsibility of directors and
office holders in the voluntary and not-for-profit sectors, most of whom are
governed by the less onerous requirements of state and territory associations
legislation. Based on evidence to the committee and publicly available
statistics, there is no reason to believe that the Bills have any negative implications
for the sector.
Disputing an estimate
Background
2.26
The Bills apply the current estimates system to any unpaid
superannuation guarantee amounts. The estimates system is designed to allow the
ATO to take prompt action to recover amounts so that non-compliant entities do
not escape their liabilities.
2.27
Under Division 268 of the Taxation Administration Act 1953, the
Commissioner may estimate an unpaid and overdue amount of a liability. The
Commissioner must estimate what is reasonable based on all relevant information
and must give the taxpayer written notice of the estimate. A taxpayer can have
an estimate reduced or revoked through information within an affidavit or
statutory declaration provided to the Commissioner, within seven days, or
longer if the Commissioner agrees to an extension. If the amount is not paid
within seven days of the notice, then the general interest charge will apply to
any remaining liability, dated from when the original liability arose.
2.28
At the hearing, the Institute expressed concern about how the estimates
system would translate to the superannuation guarantee charge in practice, in
particular that the seven day period may not be sufficient to collect the
required information:
My concern remains with this, essentially, around the whole
estimates procedure and the capacity to issue an estimate. It may be that a
particular former employee feels that the super obligations were not met and has
a chat to the ATO, and the ATO issues an estimate. The estimate may be wrong.
The employee's knowledge may be imperfect. There is not a lot of detail around
the whole estimate procedure. I guess that is a concern. Once you kick off that
estimate, it all rolls on...[18]
If it is some years down the track, it is a question of
assembling the information. Seven days is tight, it really is. People might
have moved on and you do not have their latest address. I have certainly been
involved in that. I know it is difficult, and seven days is just
extraordinarily tight.[19]
Analysis
2.29
At the hearing, Treasury made two responses to this criticism. Firstly,
it stated that the seven day period for estimates has applied to tax matters
generally and that it has operated satisfactorily in a field more complex than
superannuation:
I would also like to say that it has been said that the
estimates regime for pay-as-you-go withholding has been seven days since it has
been in existence. I do not see what is more difficult about working out a
superannuation guarantee obligation which is simply known—if you look at how
much salary and wages have been paid, it is nine per cent. With pay-as-you-go
withholding you have got marginal tax rates that differ from the level of
salary paid to the employee. I think it would be harder to work out your
pay-as-you-go withholding obligations. It has been seven days all along and it
seems to be working.[20]
2.30
Treasury also suggested that, if a company is communicating and
cooperating with the ATO, it would have the option of extending the seven day
period for the taxpayer to provide the affidavit to the ATO. In fact, one of
the key purposes of the director penalty regime is to encourage directors ‘to
enter into a conversation with the ATO.’[21]
2.31
The Institute made its own counter-arguments. In relation to Treasury’s
first point, it stated that although calculating a superannuation entitlement
was simple, the question in many superannuation disputes was whether an
individual was an employee or contractor.[22] Treasury responded that
directors were protected in this instance by the reasonable care and reasonably
arguable defence.[23]
2.32
In relation to Treasury’s second point, the Institute queried whether a
taxpayer could or should rely on the goodwill of the Commissioner.[24]
However, the Institute did not provide evidence to the committee that the ATO
does not apply its discretion appropriately when considering whether to extend
the seven day period for estimates. Rather, the committee is of the view that
effective administration in agencies often depends on officials exercising
their judgement. The committee also notes that the current ATO practice
statement on enforcement measures for collecting liabilities requires ATO staff
to cooperate with compliant taxpayers. Clause 26 states:
The Commissioner will make an estimate and issue a notice in
circumstances where there is reason to suspect that there is a liability to
withhold and remit and where:
n there is difficulty
in establishing that liability expeditiously
n there is reason to
suspect that the debtor has reported less than the total amount of withholdings
in a period
n there is a history of
a failure to notify liabilities as required by the law or a history of late
payment and there is no reason or evidence to believe that a liability has not
been incurred
n attempts to establish
debts are met with a lack of cooperation - for example, phone calls are not
returned, or there is a refusal to provide details of amounts withheld when
requested, or there are continuing delays or excuses for not making details
available
n the debtor refuses
access to, or cooperation with, field officers
n the debtor
continually breaks appointments or refuses to meet with tax officers
n the debtor claims
that no amounts have been withheld but there is evidence to suggest that
amounts have, in fact, been withheld...[25]
2.33
Clause 29 requires ATO staff to consider extensions of the seven day
period when this will assist in determining the correct liability amount:
The Commissioner only seeks to recover an amount equivalent
to the underlying liability...Accordingly, in the interests of ascertaining the
correct amount of the liability, the Commissioner will consider a request to
extend the time for lodgment of the statutory declaration where the debtor can
satisfy the Commissioner that it cannot be completed or lodged within the
required time.[26]
Conclusion
2.34
The estimate process is designed to allow the ATO to quickly recover
liabilities where there is evidence that monies are at risk through
non-compliance. It has been working effectively to date and the committee sees
no additional risk in extending it to the superannuation guarantee charge. This
is especially so, given ATO practice of cooperating with compliant taxpayers.
Consolidation and TOFA
2.35
The taxation of financial arrangements (TOFA) provides an overarching
framework in relation to the taxation of financial arrangements. The emphasis
of the arrangements is on economic considerations, rather than the prior tax
law emphasis on legal form. The previous approach led to inconsistencies and
layers of complexity.[27]
2.36
TOFA was introduced to reduce the influence of tax considerations on how
financial arrangements are structured, emphasising other factors, such as risk,
when making financing decisions.
2.37
Division 230 rules covering the tax treatment of gains and losses on
financial arrangements were introduced in 2009, to apply generally from
1 July 2010. Taxpayers had the option to elect to ‘ungrandfather’ their
existing financial arrangements, which involved bringing their existing
financial arrangements into the new TOFA regime.
2.38
Taxpayers were required to elect to ungrandfather their financial
arrangements on, or before, their first income tax return was due under the
Division 230 rules. The option to ungrandfather was intended as a compliance
mechanism to enable taxpayers to apply a single set of rules.
2.39
At the time tax payers had to make a judgement about whether to
ungrandfather their existing arrangements, taking into consideration how the
adjustment arrangement under TOFA might affect them, in contrast to the ongoing
administrative demands of separately assessing some arrangements that were
subject to Division 230 and the prior financial arrangements that would have
different requirements.
2.40
A number of submitters raised concerns about Schedule 2 of the Tax Laws
Amendment (2012 Measures No. 2) Bill 2012.[28] The main issue
considered during the inquiry was the retrospective application of the proposed
provisions.
Retrospectivity
Background
2.41
The amendments proposed in Schedule 2 are to ensure that the tax
treatment of the financial arrangements is consistent with the TOFA tax timing
rules. This involves recognising gains and losses from financial arrangements
on an accruals rather than realisation basis. These changes are intended to
have retrospective effect from the commencement of the TOFA (Division 230) rules
on 1 July 2010.
2.42
The Tax Institute acknowledged the logic of the amendments on a
‘go-forward’ basis,[29] but objected to the
retrospective element of Schedules 2 and 3 of the Bill. It expressed concern
that the retrospective application of some of the measures in Schedules 2 and 3
would be detrimental to certain taxpayers, and stated:
...while the circumstances for some parts of the legislation
before us have been justified in terms of retrospective change and there are
some minor elements, it is certainly not the case for the vast majority of the
measures in this bill. It appears that the government has taken the opportunity
to go far beyond those small measures where retrospective application is
appropriate. As I have discussed, the outcome will be the cause of
significant commercial detriment for a large number of taxpayers.[30]
2.43
In evidence to the committee, the Tax Institute outlined what the
proposed changes in Schedule 2 involved and how they could affect certain
groups, stating:
The issue really arises in relation to financial arrangements
where you have a consolidated group...
The announcement was made on 25 November 2011 and, in
essence, it operates to effectively deem A Co. to have received an amount equal
to the accounting value of that swap at the time when B Co. joined the group.
So, in essence, it says, 'You're treated as effectively having received $100,'
which means that if A Co. then closes out of that swap the next day and pays
$100, A Co. will no longer get a deduction in relation to that.[31]
2.44
In particular, submitters expressed concern about the impact on groups
who had chosen to ungrandfather their financial arrangements when they moved
under the TOFA rules. The Tax Institute argued that:
...we are in a situation where if a taxpayer has made this compliance
ungrandfathering election (1) they are in a worse position than taxpayers who are
not subject to TOFA, because they still get the deduction, (2) they are in a
worse position than taxpayers who are subject to TOFA but did not make this
compliance ungrandfathering election, because they would still get the
deduction because these provisions would not apply to their historic
arrangements and (3) they are in a worse position than the other class of
taxpayers who have been granted this further exception under the provisions.[32]
2.45
Certain classes of taxpayers, such as those who had received Australian
Taxation Office (ATO) rulings would not be affected by the retrospective
application of this schedule.
Analysis
2.46
At the public hearing on 4 June 2012, the committee and witnesses
discussed the merits and drawbacks of retrospective legislation, generally, and
specifically in relation to Schedule 2.
2.47
Treasury indicated that when the TOFA regime was introduced, the
Government foreshadowed that ‘as we identify unidentified issues or the law
does not achieve its original policy intention, further refinements through
retrospective legislation, might be necessary.’[33]
2.48
In relation to the effect of the Schedule 2 changes on particular
taxpayers, Treasury clarified that:
...there could be assessable income and allowable deductions
with respect to a liability. Normally people think about liability as only
deductions. When it is related to an out-of-the-money swap, the market value
can move in a positive direction, which gives you an assessable income, or it
can move in a negative direction, which gives you an allowable deduction. So
there could be gains and losses associated with a particular liability. I think
Mr Hirst is talking about a deduction in relation to a liability. That is only
true if, in the period that we are talking about, the market moved against this
particular derivative. If the market moved for this derivative in the same
period, you could have unrealised gains.[34]
2.49
Treasury noted that the ungrandfathering election was required to be
made early in a taxpayer’s move to the TOFA regime, to prevent taxpayers making
a decision in hindsight as to which choice would provide a tax advantage.
2.50
Treasury indicated that the Schedule 2 measures were restoring the
original intent of the TOFA rules, stating:
...in relation to the vast majority of TOFA taxpayers which
have made the [ungrandfathering] election to match their tax with
accounting—that is what we call the fair-value taxpayer, financial report
taxpayer or foreign currency retranslation taxpayers—what is in schedule 2 was
the original policy intention. So there was no policy shift with respect to
those taxpayers, and that was clearly spelt out in the EM and in the following
consultations. In one of the consultations, with the banking industry, we
actually said at the consultation that making this transitional election could
potentially wipe out your permanent differences between tax and accounting.
Therefore it is a purely technical amendment for those taxpayers.[35]
Conclusion
2.51
When the TOFA regime was introduced, the Government foreshadowed that
retrospective changes to the law were possible to ensure that the TOFA regime
achieves its policy intent.
2.52
The committee’s view is that groups who chose to ungrandfather their financial
arrangements will not be unfairly disadvantaged by the provisions in
Schedule 2 of the Tax Laws Amendment (2012 Measures No. 2) Bill 2012.
The decision for a group to ungrandfather its financial arrangements when
moving into the TOFA regime in 2010 was never intended to be based on what
would provide the taxpayer with a greater tax advantage. It was designed to
simplify compliance.
2.53
The provisions in Schedule 2 restore the original policy intention for
the interaction of consolidated groups and the TOFA rules in relation to the
treatment of financial assets.
Consolidation
Retrospectivity
Background
2.54
Consolidation arrangements commenced in 2002. 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.
2.55
Legislative changes in 2010 broadened the scope of the residual tax cost
setting rule and introduced the rights to future income rule. This enabled
consolidated groups to claim tax deductions in relation to these rules,
effective from 2002.
2.56
The changes had a significant negative impact on revenue, which the Tax
Laws Amendment (2012 Measures No. 2) Bill 2012 seeks to address. Treasury
explained to the committee that:
...[problems] started to emerge towards the end of 2010 when
the tax office brought to our attention that significant claims were coming in.
Early in 2011 the Board of Taxation raised concerns directly with the
government that it thought that some activity that was happening was undesirable.
That is what led the government to undertake the review and see if it could
establish the concerns being raised.[36]
2.57
Schedule 3 of the Bill proposes 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 for
non-consolidated groups when acquiring assets.
2.58
How the changes will affect consolidated groups will depend on when the
asset was acquired. Schedule 3 proposes three distinct categories: pre-rules
(prior to the announcement of the changes on 12 May 2010); interim rules
(between 12 May 2010 and 30 March 2011); and prospective rules (after
30 March 2011).
2.59
The pre-rules are to restore the original tax
cost setting rules that operated prior to the 2010 amendments. The rules will
apply to acquisitions prior to 12 May 2010 (when Parliament passed the 2010
amendments). Schedule 3 also modifies the rules to:
n limit
deductions for rights to future income to unbilled income assets;
n ensure
that a deduction is allowed for the reset tax costs for consumable stores; and
n treat
certain assets as goodwill.[37]
2.60
The interim rules restore the current 2010 residual tax setting and
rights to future income rules and modifies the rules to:
n treat
certain assets as goodwill;
n ensure
that no value is attributed to certain contractual rights to future income; and
n ensure
that the reset tax costs for consumable stores are deductible.[38]
2.61
The rules will apply broadly to the period between 12 May 2010 and
30 March 2011. These rules are designed to ‘protect taxpayers who acted on
the basis of the current law before the Board of Taxation review was
announced.’[39]
2.62
The prospective rules will apply generally after 30 March 2011, when the
Government announced that it had asked the Board of Taxation to examine the rights
to future income rules and the residual tax cost setting rules.
2.63
In evidence to the committee, Treasury explained the reason for the
changes and how the different rules would apply:
One of the issues that the Board of Taxation raised and was
concerned about was that the 2010 amendments did bring in a specific deduction
that was available only for consolidated groups. The board emphasised that, in
its view, consolidated groups should only get deductions that are available for
all other taxpayers. So, under both the pre rules and the interim rules, there
still is a specific deduction that is available only for consolidated groups;
but under the prospective rules that has been removed, so you revert to
deductions that are available for other taxpayers.[40]
2.64
Submitters opposed the retrospective application of certain amendments
contained in Schedule 3.[41] In evidence to the
committee, the Tax Institute commented that:
...part of the proposed amendments in schedule 3 are quite
appropriate in clarifying that certain items such as customer relationships
would constitute goodwill and there would be no deduction in respect of those
types of assets. Where I think it is not appropriate is going back some 10 or
12 years and denying deductions that taxpayers would have thought, or did
think, were available given the combined effect of the December press release
through to the amending law in 2010.[42]
2.65
Treasury noted that in a recent speech the Assistant Treasurer covered
the issue of retrospectivity in tax law, stating:
One of the things [the Assistant Treasurer] said was that
beneficial retrospective tax changes that go too far carry with it the risk
that the government will need to subsequently introduce adverse retrospective
tax changes. The consolidation measures are a good example of this. The key
reason why the amendments announced in 2011 needed to be retrospective was that
the beneficial 2010 amendments were also retrospective to 2002.[43]
2.66
Treasury maintained that the pre-rules and interims rules in
Schedule 3 must be retrospective, as they are ‘taking away the unexpected
and unintended retrospective benefits of the 2010 changes to law and is
necessary to protect a very significant amount of revenue that is otherwise at
risk.’[44] Treasury estimate the
revenue risk to be in the order of $6 billion, based on claims from around 60
large consolidated groups.
Analysis
2.67
At the public hearing participants acknowledged that the 2010 changes
had significant revenue impact that had not been anticipated by the Government
or industry, with the nature of certain claims not envisaged in 2010.[45]
2.68
In discussion with the committee, Treasury advised that the
retrospective nature of the pre-rules was necessary to address the significant
impact on revenue. Treasury stated:
...the primary reason for introducing the pre-rules...is to
protect the significant amount of revenue that would otherwise be at risk
because people are able to take advantage of the retrospective changes that
were made in 2010 in an unexpected way. We are talking about revenue in the
order of $6 billion, so it is very significant.[46]
2.69
The Tax Institute argued that the interim rules in Schedule 3 go beyond
protecting taxpayers and have ‘taken away deductions in respect of customer contracts.’[47]
2.70
However, Treasury maintained that the modifications are ‘largely
consistent with recommendations that were made by the Board of Taxation to
clarify those rules for that period.’[48]
2.71
The Tax Institute expressed concern about the date from which the
prospective rules will apply. It proposed that a more appropriate date for the
prospective rules to take effect was 25 November 2011, when the intended
changes were announced. It argued that, although from 30 March 2011 it was
known that the Board of Taxation was investigating these matters, the resulting
prospective changes were not known.[49]
2.72
Treasury indicated that the prospective rules apply ‘from the date that
the government said it would review the operation of the rules.’ Treasury also
noted that the modifications are ‘to a large degree’ consistent with some of
the Board of Taxation recommendations, with refinements made when developing
the proposed changes.[50]
2.73
Treasury acknowledged that some of the changes in the Bill go beyond
what was contemplated in 2010. The prospective rules propose ‘fundamental
changes’ to address the problems that emerged following the 2010 amendments.
Treasury stated:
One of the key problems from the 2010 amendments is that,
with this consolidation tax costing process, some taxpayers revisited the
assets that they were identifying for consolidation purposes. They started in
particular to identify a range of intangible type assets, which are not
generally recognised under the tax system. The difficulty with that is that,
where such assets are not recognised under the tax system, they get allocated a
cost. Taxpayers reasonably seek to find a way to deduct that cost. Under the
prospective changes a key change is that under consolidation you only recognise
assets are those that are ordinarily seen by the tax system and therefore there
will be a way to deal with them. That is where they differ.[51]
2.74
Consolidated groups that have already made a claim and received a tax
refund, or have an ATO ruling, will generally be protected from the
retrospective changes in the pre-rules and interim rules. Treasury confirmed at
the hearing that taxpayers who ‘have received money from the ATO...will
essentially be protected from the changes, except in a very unusual
circumstance.’ [52]
2.75
The retrospective changes are to address the $6 billion revenue risk. No
significant revenue impact is expected for the prospective changes. Treasury
stated that:
...under consolidation you go through an exercise of
resetting the tax costs of assets. To do that you work out the allocable cost
amount. In the basic case, the allocable cost amount is the cost of buying a
joining entity's shares plus the value of the joining entity's liabilities...The
amount that is allocated is not changing. Certainly the assets which it gets
allocated to is changing, but the amount that is being allocated is not
changing, so the view is that there is not going to be a significant revenue
impact as a result of that.[53]
Conclusion
2.76
The amendments in 2010 were intended to clarify the reset tax costs of
certain assets and tax outcomes for rights to future income assets. However,
they provided a windfall through tax deductions for some consolidated groups.
These deductions were not available to non-consolidated groups. It was not the
intention of the Bills to introduce inconsistency in tax treatment.
2.77
The 2010 changes were retrospective to the 2002 commencement of the
consolidation regime, as they were thought to give effect to the original
policy intent. Once implemented it became clear that the changes went beyond what
had been foreshadowed and had significant negative revenue implications. The
nature of claims for tax deductions subsequently made by consolidated groups
had not been anticipated by the Government or industry.
2.78
Schedule 3 of the Tax Laws Amendment (2010 Measures No. 2) Bill 2012
will clarify the arrangements in relation to the tax cost setting and rights to
future incomes rules.
2.79
The three categories of rules (pre, interim and prospective) provide a
measured application of the changes to take into account what taxpayers could
reasonably have known or expected the rules to be at the relevant time. There
are protections for groups who have already received tax refunds or ATO
rulings.
2.80
These changes are necessary to address the $6 billion revenue risk,
clarify these arrangements and provide greater certainty for consolidated
groups. The retrospective application of the pre-rules and interim rules are
appropriate to counteract effects of the 2010 changes, which were also
retrospective. Schedule 3 will restore the policy intent of consolidation and
clarify future arrangements.
Managed investment trust final withholding tax
2.81
The Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill
2012 increases the managed investment trust (MIT) final withholding tax on
foreign investors from 7.5 per cent to 15 per cent. The tax will apply on fund
payments made in relation to income years that commence on or after 1 July
2012. Over the forward estimates this measure is estimated to have a gain to
revenue of $260 million.[54]
Grandfathering
Background
2.82
Industry has questioned both the substance of the Bill as well as the
manner of its introduction. Industry and investors argue that they were taken
by surprise, particularly given that recent government policy has seen a lowering
of the tax rate since 2008.
2.83
Several MIT bodies have criticised the move to double the tax rate
without clear price signalling. Infrastructure Partnerships Australia (IPA)
argued:
The 7.5 per cent rate was an incentive to attract investment
into Australia, and protection must now be given to investors who, in good
faith, relied on the expectation of that reduced rate going forward over the
term of their investment.[55]
2.84
Industry groups broadly oppose the measure outright. However, if the tax
increase is to proceed, they have suggested several measures the most prominent
being the proposed grandfathering of the 7.5 per cent rate for investments made
on the expectation that this rate would continue.[56]
Analysis
2.85
At the hearing, participants discussed the recommendation presented by
industry groups that the current 7.5 per cent tax rate be grandfathered for
investments made on the assumption that this rate would continue. This rate has
been applied to distributions to foreign investors since the 2010-11 income
year. However, Treasury responded by noting the complexity and impractical
nature of such a move:
Who are you effectively giving
that grandfathering to and why? That becomes quite an interesting and complex
question. Are you looking at just people who have invested since 1 July 2010 or
are you looking more broadly than that? Are you looking at assets that came
into existence after that time or at all assets? Those are some of the sorts of
questions that would need to be considered.[57]
Conclusion
2.86
Creating grandfathering arrangements for investors at the 7.5 per cent
tax rate is likely to be unwieldy in its implementation. It would also leave a
difficult precedent that individuals and business should expect to get grandfathered
rates on changes made to other kinds of tax rates in the future.
Investor confidence
Background
2.87
Industry warned that the unexpected increase in the withholding tax rate
has the potential to damage foreign investor confidence and Australia’s reputation
as a secure and stable investment destination. AMP in their submission argued:
The suddenness of the announcement without consultation or
discussion with industry created unease within the international investment
community as to whether further changes could arise that would fundamentally
change the nature of investment in Australia.[58]
2.88
Testimony was given at the hearing that the proposed tax increase has
already resulted in capital flight by foreign investors and will significantly
decrease the incentive for foreign capital investments in Australia in the
future. For this reason both the Property Council of Australia (PCA) and the
Financial Services Council (FSA) questioned the accuracy of the assumed revenue
flows from the increase as they predict reduced foreign investment.[59]
Analysis
2.89
Treasury responded that the potential for reputational damage to
Australia as a safe investment destination must be seen in the broader context
of the Australian economy. The Government has prioritised fiscal consolidation
in the context of reduced revenue in order to improve budget sustainability.
In the course of doing that, the government has reached the
view that that 7½ per cent rate for managed investment trusts for non-residents
was something that was not consistent with that broader sustainability in
achieving the medium-term fiscal strategy, which...is a very important part of
our AAA credit rating.[60]
2.90
Treasury argue that given these circumstances:
By setting out a clear path for a sustainable medium-term
fiscal strategy, my proposition would be that that would enhance, rather than
reduce, foreign investors' confidence in the policy framework in Australia.[61]
2.91
Furthermore, prior to the measures announced in the 2008-09 budget, the
MIT withholding tax was at the company tax baseline of 30 per cent. This is
because investments made through MITs are in equity and taxes are paid on
income comparable to the company tax paid on profits. The MIT withholding tax
is not comparable to taxes paid on interest earned from ‘debt’ investments.
Treasury pointed out that the 15 per cent rate is still concessional when
compared to the company tax rate of 30 per cent.[62]
Conclusion
2.92
The increase to the MIT withholding tax to 15 per cent maintains the
original policy intent of the promise to lower the withholding tax. It
maintains a concessional rate to attract investors when compared to the company
tax rate of 30 per cent, while balancing this with the need to create and
maintain budget sustainability.
Revenue forward estimates
Background
2.93
At the hearing, industry groups queried the method used by Treasury to
determine the expected gain to revenue of $260 million over the forward
estimates. They argued that the increase in the tax rate would lead to capital
flight and a decrease to potential revenue.[63]
Analysis
2.94
Treasury explained that the approach used to calculate the effect of
this budget measure was the same ‘adopted by successive governments and set out
in relation to the Charter of Budget Honesty’.[64] This approach takes into
account the immediate ‘first-round’ implications of the policy but not
potential ‘second-round’ flow on effects. These are not straightforward to
predict and need to take into account effects across the economy rather than
just those immediate to the industry. To constitute a meaningful analysis one
would also need to model the effect on the economy of alternative savings in
the budget if the cuts were not made in this sector.[65]
2.95
In general Treasury has found that while there may be implications of
‘second-round’ effects to an individual sector, these tend to balance out
through the economy as a whole.[66]
2.96
While it was recognised that the impact of the tax increase may make
some investments less attractive to some investors and negatively affect some
MITs, Treasury stated that movement by investors will not necessarily result in
a reduction of capital in the economy overall:
...if we are looking at financial flows there would be a
greater reduction in the flows that occur through managed investment trusts but
what we are interested in is what happens to the aggregate base and that is a
different thing.[67]
2.97
Treasury also argued that tax revenue gives benefits to all Australians
through government spending:
GDP does not necessarily directly relate to the wellbeing of
Australians. It relates closely but not perfectly. One of the things we do
think about is, 'How does that increase production and benefit the Australian
economy as a whole?' One of the important ways in which that is done is through
an appropriate sharing in the proceeds and the profits from those ventures
through the tax system.[68]
Conclusion
2.98
Treasury have calculated the expected revenue from this measure through
the forward estimates using the accepted approach adopted by previous
governments and set out in the Charter of Budget Honesty.
2.99
While the Committee recognises that the increase to the tax rate has the
potential to make certain other investment opportunities more attractive to
some investors, concessions to support any one industry has to be balanced with
ensuring that the wider Australian population also benefits by obtaining a fare
share through the tax system. This measure does this by providing an increase
that is still concessional and well below the previous 30 per cent rate.
Effective tax rate
Background
2.100
Finally, some stakeholders are concerned that the MIT Withholding tax as
a final withholding tax does not allow investors to make deductions or
allowances for their outgoings. The issue is that the final nature of the tax
means that some investors’ Australian tax will be higher than before the MIT
final withholding tax was introduced in 2008.[69] While the headline tax
rate puts us in the middle of like nations, industry is concerned that the
effective tax rate, particularly in light of the tax’s final nature, is
actually much higher when compared with other effective tax rates around the
globe.
Analysis
2.101
Treasury pointed out that, as recently as 2007, the FSC supported a
final withholding tax, even at a rate of 15 per cent, because it relieves
foreign investors of the burden of lodging a tax return.[70]
Treasury also noted that ‘in many cases, the tax that is paid in Australia is
able to be credited in the other country.’[71] This means that it is
difficult to do a meaningful comparison of effective tax rates around the world
as the tax laws within the investor’s home jurisdiction must also be taken into
account.
2.102
Treasury reiterated that the headline tax rate at 15 per cent is
‘broadly in line with other advanced economies’ and ‘somewhat lower than other
rates in the region.’[72]
Conclusion
2.103
Stakeholders have been supportive of having a final withholding tax at a
15 per cent rate in the past. While it is understandable that industry would
prefer to keep the tax rate as low as possible, the final nature of the tax was
specifically sought by them to provide a simpler tax system for foreign
investors. Australia will remain competitive in the region and with like
countries around the world at the increased tax rate of 15 per cent.
Passenger Movement Charge Amendment Bill 2012
Background
2.104
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, from 1 July 2013.[73] Over the forward
estimates the measure will deliver an additional $610 million. [74]
2.105
The Committee heard from a range of industry bodies about the
difficulties currently faced by the tourism sector. These included global
economic instability, the high Australian dollar and high fuel costs. It was
posited that the Government was over-collecting on the PMC for consolidated
revenue and not sufficiently supporting the needs of the tourism industry.
Industry witnesses did not support the $8 increase to the PMC nor its
indexation.[75] The Australian Airport
Association told the Committee:
If nothing else, we beg that the indexation be removed. If
you look at the past budgeted amounts for the passenger movement charge versus
what has come in, it is quite cyclical; it goes up and down. Let us not lock
ourselves into indexation. Let us see how the tourism industry goes. We are
struggling in regional areas in particular.[76]
2.106
The Government has allocated $61 million of the monies raised by the PMC
to the Asia Marketing Fund.[77] This initiative will
further the Government’s 2020 Tourism strategy. In addition, the Government
will continue to support a range of initiatives which underpin and promote the
visitor economy, including $40 million over four years to the T-QUAL Grants
project, infrastructure upgrades, rolling out the NBN which will improve the
industry’s digital capabilities, and funding national cultural and natural
heritage attractions.[78]
Analysis
2.107
The Committee was presented with a range of impacts associated with
increasing the PMC, and its indexation. These included:
n decreasing
Australia’s competitiveness in the global tourism market;[79]
n the PMC being a
poorly designed ‘tourism tax’;[80]
n the PMC over-collects
from the tourism sector for general consolidated revenue without sufficient
monies being returned to passenger facilitation or border agencies such as
customs and border protection, quarantine and immigration;[81]
n further
disadvantaging a sector that is struggling in Australia’s ‘two-speed’ economy,
particularly in regional areas;[82] and
n being a particular
disincentive for the short-haul market from Asia and New Zealand.[83]
2.108
The global financial crisis has resulted in a $150 billion write-down in
government revenue since the 2008-09 budget.[84] However, the Government
has taken measures to ensure Australia retains its AAA credit rating, while
meeting its policy priorities. Despite this difficult fiscal backdrop the
Government has remained committed to the Tourism 2020 initiative.[85]
Tourism 2020 is a whole-of-government and industry strategy which will grow
tourism in Australia. Its six key areas are:
n grow demand from
Asia;
n build competitive
digital capability;
n encourage investment
and implement regulatory reform agenda;
n ensure tourism
transport environment supports growth;
n increase supply of
labour, skills and indigenous participation; and
n build industry
resilience, productivity and quality. [86]
2.109
The proposed Asia Marketing Fund will directly contribute to realising
the Tourism 2020 strategy. In addition the Government will continue to assist
the tourism sector both directly, by funding projects like T-QUAL, and
indirectly, by funding infrastructure upgrades to roads, public transport and
the NBN.[87] It will also continue to
fund Australia’s world class cultural institutions and national parks.
2.110
As discussed in chapter one, the Sustainable Tourism Cooperative
Research Centre modelled the impact of a 20 per cent rise in the PMC
($9.40 in current terms) on ‘tourism output’ and the economy more broadly.[88] 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.[89]
2.111
It is acknowledged by the committee that the tourism sector is
experiencing difficult economic times. The high Australian dollar, fuel prices
and global instability have all impacted on the industry. Recent, data from
Tourism Australia contained some positive news for the tourism sector:
n There were 5.9
million visitor arrivals for year ending March 2012, an increase of 1.0 per
cent relative to the previous year.
n There were 1.6
million visitor arrivals to Australia during the three months to March 2012, an
increase of 4.1 per cent relative to the same period of the previous year.
n There were 544,200
visitor arrivals during March 2012, an increase of 8.6 per cent relative to the
same month of the previous year.[90]
Conclusion
2.112
The PMC has not been increased since 2008 and an $8 increase to the PMC
is considered a small amount in the context of international travel. The
Government remains committed to supporting and growing the tourism sector in
Australia. Ten per cent of the additional revenue raised as a result of the
increase will be dedicated to the Asia Marketing Fund on an ongoing basis. More
generally, it will support the operations of Customs and Border Security and continue
to invest in other Government priorities including upgrading infrastructure and
supporting public institutions. It is the Committee’s recommendation that the
Passenger Movement Charge Amendment Bill 2012 be passed by the House unamended.
Overall conclusion
2.113
The Bills make a number of significant improvements to the tax laws.
Schedule 1 of the Tax Laws Amendment (2012 Measures No. 2) Bill 2012 and the
Pay As You Go Withholding Non-compliance Tax Bill 2012 seek to make directors
personally liable for the superannuation guarantee charge of their company.
This will prevent unscrupulous directors from phoenixing their businesses to
avoid their super responsibilities. This practice has cost Australian employees
hundreds of millions of dollars in lost superannuation and the committee
commends both the intent and the operation of the Bills in this regard.
2.114
Last year, the committee inquired into a package of Bills in similar
terms. The committee recommended that the Government should investigate whether
additional defences for directors should be inserted in the Bills. This has
occurred. If passed, the legislation will give new directors 30 days, up
from the current 14 days, to conduct due diligence before adopting a company’s
pre-existing obligations. Directors will also not be liable for a director
penalty where they took reasonable care in a matter and applied the super
legislation in a reasonable way.
2.115
The committee also recommended that the Government should investigate
whether the provisions should only apply if an individual has been engaged in
phoenixing. The Bills do not have this feature and industry argued that they
should be amended along these lines. Ultimately, the committee has come to the
view that such a change is not warranted because the provisions will only apply
when a company has not only failed to pay a super amount, but that it has
failed to notify the ATO of this two months after the event. The high level of
non-compliance required to trigger the provisions will protect directors and
companies who do the right thing.
2.116
Schedule 2 of the main Bill is designed to ensure that the tax treatment
of financial arrangements is consistent with the TOFA tax timing rules. The
provisions are to be retrospective from the commencement of other TOFA
amendments on 1 July 2010 and this retrospectivity was the key issue in the
inquiry. Stakeholders expressed concern that taxpayers who had chosen to adopt
the new TOFA rules (rather than elect to keep prior arrangements) would be
disadvantaged. However, the committee did not accept this because the measures
restore the original policy intent and the Government had previously flagged
that retrospectivity will be necessary with TOFA to restore the policy intent
from time to time.
2.117
Schedule 3 aims to protect a $6 billion revenue risk that has arisen as
a result of retrospective amendments in 2010 in relation to consolidation
rules. These changes allowed consolidated groups to claim deductions back to
2002 in relation to the residual tax cost setting rule and the rights to future
income rule. In 2011, revenue problems with the 2010 changes became apparent
and the Board of Taxation conducted an inquiry into the matter. The Bill
largely reflects the Board’s report. Groups that have already received a refund
or have an ATO ruling will generally be protected from the retrospective
changes. Given the transparency of the process and the amount of revenue at
stake, the committee again agrees that retrospective legislation is
appropriate.
2.118
The Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill
2012 and Schedule 4 of the main Bill increase the tax rate on managed investment
trusts for foreign investors from 7.5 per cent to 15 per cent. This is a
partial reversal of the recent decreases on this tax rate from 30 per cent a
few years ago. The committee is mindful that, as equity investments, the
correct comparative rate is the company tax rate, currently set at 30 per cent.
Although the industry sector was concerned about how the change would affect
it, the committee supports the provisions because of the wider macroeconomic
importance of Australia having a sound fiscal strategy, which an important
driver for the whole economy.
2.119
The Passenger Movement Charge Amendment Bill 2012 increases the charge
from $47 to $55 from 1 July 2012 and indexes it to the CPI. Similar to the MIT
provisions, the issues revolved around an industry sector being concerned about
how it would be affected by a revenue increase. Once again, however, the
committee supports the provisions on a national basis because of the
Government’s overall fiscal strategy. The committee notes that the Government remains
committed to the Tourism 2020 initiative and continues to support the industry
through programs such as T-QUAL, infrastructure upgrades and maintaining and
expanding tourism attractions.
2.120
The Bills represent a responsible package aimed at securing a sustainable
revenue base for Australia, as well as protecting the superannuation
entitlements of Australian workers. The Bills should pass.
Recommendation 1 |
| 2.121 |
That the House of Representatives pass the Tax Laws
Amendment (2012 Measures No. 2) Bill 2012, Pay As You Go Withholding
Non-compliance Tax Bill 2012, Income Tax (Managed Investment Trust
Withholding Tax) Amendment Bill 2012, and the Passenger Movement Charge
Amendment Bill 2012, as proposed. |
Julie Owens MP
Chair
15 June 2012