Chapter 1 Introduction
Referral of the Bill
On 24 November 2011 the Selection Committee requested the Committee to
inquire into and report on the Tax
Laws Amendment (2011 Measures No. 9) Bill 2011.
Given that only two schedules of the Bill have been of concern to
stakeholders, while others have attracted support, the committee has focussed
on these schedules. The schedules of interest are Schedule 3(3) and Schedule 4.
Schedule 3(3) allows ‘taxpayers who account on a cash basis to treat an
acquisition made under a hire purchase agreement as though they do not account
on a cash basis’. The aim is to equalise
the GST treatment of hire purchase and chattel mortgage and thus remove a
tax-induced market distortion.
Schedule 4 is aimed ‘to ensure that sales or long-term leases of new
residential premises by a registered entity are taxable supplies and that sales
or long‑term leases of residential premises (other than new residential
premises) are input taxed supplies’. The aim is to reverse the
decision in the Gloxinia Investments court case in May 2010 and restore
the original policy intent of the legislation.
Contents and structure of the Bill
Schedule 1 of the Bill amends the Retirement Savings Accounts Act
1997 and the Superannuation Industry (Supervision) Act 1993 to
enable certain superannuation fund members to electronically request the
consolidation of their superannuation benefits through the Australian Taxation
Office. This will assist ‘lost’
superannuation members once they are reunited with their superannuation
Part 1 of Schedule 2 amends the Income Tax Assessment Act 1997 to
ensure entities in a restructure can use a share or interest sale facility to
deal with foreign held interests without Australian tax residents automatically
failing a key requirement of certain capital gains tax (CGT) roll‑overs.
The amendments are either of no disadvantage to taxpayers or are beneficial to
Part 2 of Schedule 2 excludes an entity from being a member of a
demerger group if the entity is a corporation sole or a complying
superannuation entity. The amendments are
beneficial to taxpayers.
Part 3 of Schedule 2 amends the Income Tax Assessment Act 1997
(ITAA 1997) to expand the existing CGT roll‑over for the change of a body
to an incorporated company. The expanded roll‑over applies to entities
that change incorporation to become a Corporations (Aboriginal and Torres
Strait Islander) Act 2006 corporation. The expanded roll‑over also
covers a taxpayer’s rights associated with a body, as well as their ownership
interests, and situations where a body is wound up and replaced by a new
company incorporated under a different law.
Part 3 also amends the ITAA 1997 to allow for tax neutral consequences for
depreciating, revenue and trading stock assets of a body that is
wound up and replaced by a new company incorporated under a different law, and
these assets are transferred to the new company.
Schedule 3 amends the A New Tax System (Goods and Services Tax) Act
1999 to implement three of the seven recommendations agreed to by the
Government in Treasury’s Review of the GST financial supply provisions. The
measures requiring legislative change and included in this Bill are:
n increasing the first
limb of the financial acquisitions threshold from $50,000 to $150,000, to allow
more small businesses to come under the threshhold and decrease compliance
n excluding financial
supplies consisting of a borrowing made through the provision of a deposit
account by an Australian authorised deposit-taking institution from the current
concession for borrowings; and
n allowing taxpayers
who account on a cash basis to treat an acquisition made under a hire purchase agreement
as though they do not account on a cash basis, to remove the market distortion
between hire purchase and chattel mortgage.
The other four recommendations in Treasury’s review are expected to be
implemented through changes to the A New Tax System (Goods and Services Tax)
Regulations 1999. On 13 January 2012, the Assistant Treasurer released an
exposure draft of A New Tax System (Goods and Services Tax) Amendment
Regulations 2012 to this effect. Submissions are due by 24 February 2012.
The draft regulations:
n deem hire purchase
not to be a financial supply, and therefore simplify its tax treatment by
making it fully taxable;
n extend the
availability of reduced input tax credits (RITCs) relating to life insurance,
lenders mortgage reinsurance and transactional fraud monitoring services;
n limit access to a
RITC for bundled trustee and responsible entity services to reduce
opportunities to inappropriately take advantage of the RITC concessions; and
n clarify the language
used in relation to guarantees and indemnities.
Schedule 4 amends the A New Tax System (Goods and Services Tax) Act
1999 to ensure that sales or long-term leases of new residential premises
by a registered entity are taxable supplies and that sales or long‑term
leases of residential premises (other than new residential premises) are input
taxed supplies. This will reverse the
decision in Gloxinia Investments and restore the original policy intent
of the legislation.
Schedule 5 to this Bill amends the Income Tax Assessment Act 1997 to
update the list of deductible gift recipients (DGRs) by adding one entity as a
DGR, and changing the name of another listed entity.
Schedule 6 to the Bill makes technical corrections and other minor and
miscellaneous amendments to the taxation laws. These amendments are part of the
Government’s ongoing commitment to the care and maintenance of the tax system.
GST on financial supply
Board of Taxation
In 2009 the Board of Taxation reported to the Treasurer on its review of
the Legal Framework for the Administration of the GST. The Board had held
public consultations in Sydney, Brisbane, Melbourne, Darwin and Perth. It had
also met with representatives of the States and Territories and sought the
views of small businesses through small business forums convened by the
Commissioner of Taxation.
The Board found that the GST system was operating effectively and
achieving its policy objectives. Businesses generally have a good level of
awareness of their obligations under the GST law.
The Board also identified a number of opportunities to reduce compliance
costs and to streamline and improve the operation of the legal framework for
the administration of the GST and remove anomalies in its operation.
Most importantly, in its Review of the Legal Framework for the
Administration of the Goods and Services Tax the Board recommended that:
The Government should undertake a review of the financial
supplies provisions with a view to reducing their complexity and introducing
more principled rules, while maintaining the existing policy.
In response to this recommendation, Treasury undertook its Review of
the GST financial supply provisions. The Treasury review looked
at existing financial supply provisions under the GST law and related
n reduce their
complexity and inconsistencies;
n introduce more
principled rules to ensure the law better reflects underlying policy; and
n improve the operation
of the reduced credit acquisition system in a manner consistent with
maintaining the existing policy.
One of the messages from the review was that industry favoured
refinement of the current system, rather than fundamental reform because the
current system is working reasonably well and is reasonably certain. The
Government’s summary of the review stated:
Submissions suggested that, after almost ten years of
operation, the current legislation and its general application is generally
well understood and compliance with the law is being maintained at an
acceptable cost. It was thought that significant changes to the legislative
framework could lead to uncertainty, confusion, distortions and an increase in
compliance costs, particularly associated with any transition to a new
The options identified in the consultation process informed the drafting
of the present Bill, which is ultimately designed to reduce compliance costs
and rationalise the administration of the GST.
Market distortion between hire purchase and chattel mortgage
Hire purchase and chattel mortgage are similar credit arrangements, but
they have an important difference which carries into their tax treatment. In
both cases, the purchaser obtains use of an asset up front in return for a
series of instalment payments. In hire purchase, ownership does not transfer
until the final instalment is paid. In chattel mortgage, ownership instead transfers
Treasury advised that, all else being equal, hire purchase is preferred
over chattel mortgage. The latter represents an increased risk for the lender
because title has already passed and follow-up action in the case of default,
such as repossession, is either not available or more difficult. Further, hire
purchase is more straightforward and less costly to implement in terms of legal
fees and stamp duty.
However, chattel mortgage has largely replaced the use of hire purchase for
small business since the GST was introduced. This is because GST operates
differently for the two systems. Small businesses with an annual GST turnover
of less than $2 million annually can account for GST on a cash basis, compared
with larger businesses, which must account for GST on an accrual basis.
Generally, cash accounting is simpler and reduces compliance costs for small
business. The tax effect is that larger firms account for their GST liability
and input tax credits for hire purchase agreements up front, whereas businesses
that account for GST with cash account for it and access their input tax
credits when each payment is made.
Under chattel mortgage, title passes up front and, importantly, so do
the GST input tax credits for both cash and accrual taxpayers. The Australian
Finance Conference and the Australian Equipment Lessors Association advised the
committee that, ‘Chattel mortgage was largely unused prior to GST, but as a
direct consequence of this distortion now accounts for almost half of equipment
finance’. The total equipment finance market in Australia is $90 billion.
This means that the GST has made chattel mortgage more financially
attractive to small business, despite its increased risk and greater
Gloxinia Investments case
In May 2010, the Federal Court handed down its decision in the case of Commissioner
of Taxation v Gloxinia Investments (Trustee). The facts in the case were
that Gloxinia had a long term lease over a site from the Woolhara Municipal
Council in Sydney. The terms of the lease included payments to the Council from
Gloxinia. Gloxinia had rights and obligations to carry out some works and
subdivisions on the site, including constructing apartments. After these were
completed, the Council granted strata lot leases over the residential premises.
The question before the court was whether Gloxinia was liable for GST when it
sold these leases.
The general policy intent for GST on residential properties is that the
sale of existing homes is not subject to GST, but that newly constructed homes
are liable. As a matter of policy, Gloxinia should have paid GST on the sales.
In legal terms, however, the case revolved around the definition of new
residential premises. Section 40-75(1) defines new residential premises as
(a) have not previously
been sold as residential premises and have not previously been the subject of a
long term lease; or
(b) have been created
through substantial renovations of a building; or
(c) have been built,
or contain a building that has been built, to replace demolished premises on
the same land.
The Court had to decide whether the apartments were subject to a long
term lease. If they were, they would be exempt from GST. The ATO sought to
argue that the economic reality of the arrangements was that Gloxinia was
bearing the risk and would obtain the benefits of the development, rather than
the Council. Further, under the leases, Gloxinia was under the same
responsibilities as if it were the owner of the premises. However, the Court
found that the strata lot leases from the Council to Gloxinia were a supply and
that the premises were legally subject to a long term lease from the Council to
Gloxinia as per section 40-75(1). The ATO lost the case.
This decision has implications for land that is tenured via long-term
lease: the process of building, ‘strata titling’ and selling new residential
premises on such land activities might result in those sales being treated as
input taxed and not therefore not capable of attracting GST. 
This outcome is contrary to the policy intent of the GST legislation to tax the
sale of newly constructed residential premises by GST registered entities who
are in the business of selling these premises.
The decision also has implications for situations where there is an
alteration to property title arrangements for existing residential premises
(other than new residential premises) held by way of freehold title. The
subdivision of an existing block of flats into strata title units, or the
excising of a vacant lot from land comprising existing residential premises,
may result in the premises becoming new residential premises and their
subsequent supply being subject to GST, rather being than input taxed.
The Government announced on 27 January 2011 that it would amend the GST
law to ensure that it achieves the intended policy outcome for the GST
treatment of residential premises and released a discussion paper outlining the
proposed design of the measure. The Treasury undertook public consultation on the
discussion paper up to 25 February 2011. Ten submissions were received.
The Government later announced some changes to the measure on
23 September 2011 when it released exposure draft legislation for comment.
The Treasury undertook consultations on the exposure draft up to 21 October
2011. Seven submissions were received.
Support for the passage of the Bill
The committee received four submissions for the inquiry. They are listed
in Appendix A. Three of the submissions supported individual parts of the Bill
unreservedly. These are discussed below. The fourth submission, from the
Institute of Chartered Accountants in Australia, focussed on Schedules 3(3) and
4. The Institute supported the policy intent of these parts of the Bill but expressed
concerns about implementation. These issues are discussed
in Chapter 2.
Schedule 1 – electronic portability of superannuation
The Association of Superannuation Funds of Australia (ASFA) is a
non-profit, non-political national organisation that seeks to advance the
interests of members of superannuation funds. In relation to the electronic
portability form, ASFA stated:
ASFA is a strong supporter of the scheme as it will provide a
quick, efficient and low cost process with which fund members and RSA holders
can consolidate these lost accounts. ASFA considers that consolidation of these
lost and inactive accounts into an account that is receiving contributions is
in the best interests of the fund member ...
We believe that no unintended consequences will flow from the
amendments as drafted.
We strongly support the passage of Schedule 1 of the bill.
The Australian Institute of Superannuation Trustees (AIST) is an
independent, not-for-profit professional body that represents the trustee
directors and staff of industry, corporate and public-sector superannuation
funds. The Institute made a submission in which they focussed solely on the electronic
portability form. The Institute supported:
n the ‘one touch’
approach by means of which members might alert the trustees of their lost
accounts of a potential destination and that these trustees then may act
without the need for additional requirements;
n a taxpayer’s right to
decline to provide their Tax File Number (TFN), though they acknowledged that
such an electronic tool may require a TFN to operate; and
n the idea of providing
a manual solution where validation cannot be provided.
For these reasons, both ASFA and AIST supported the passage of Schedule
1 of the Bill.
Schedule 3 – GST and financial supply
The Australian Finance Conference (AFC) and the Australian Equipment
Lessors Association (AELA) made a joint submission. The members of these
organisations comprise the major providers of equipment finance in Australia,
and include major and regional banks, international banks, independent
financiers, manufacturer financiers, rental companies and fleet leasing
companies. In their submission, the AFC and AELA focussed on Schedule 3, which
they supported. The AFC and AELA state that:
The equipment finance industry was delighted when in the
2010-11 Budget the Government announced its intention to amend the financial
supply provisions of the GST law, allowing full input tax credits upfront for
businesses accounting on a cash basis when they enter into hire purchase
The amendment will rectify a significant tax incongruity; the
GST treatment of cash basis taxpayers under hire purchase arrangements has been
distorting the equipment finance market, causing a major shift to chattel
mortgage that would not otherwise occur. GST cash basis taxpayers under hire
purchase arrangements cannot presently claim input tax credits upfront, but can
only claim them over the life of the agreement. Not surprisingly, these
customers have opted for chattel mortgage, enabling them to claim the input tax
They also note that whilst chattel mortgage was largely unknown in
Australia prior to the introduction of the GST, it now accounts for almost half
of equipment hire finance. They report that in comparable countries (such as
the UK, New Zealand and South Africa), ‘a cash basis taxpayer is entitled to an
input tax credit for the whole of the VAT/GST payable under the hire purchase
Committee objectives and scope
The objective of the inquiry is to investigate the adequacy of the Bill
in achieving its various policy objectives and, where possible, identify any
Conduct of the inquiry
Details of the inquiry were placed on the committee’s website. A media
release announcing the inquiry and seeking submissions was issued on Monday, 28
Four submissions were received. These are listed at Appendix A.
A public hearing was held in Canberra on Friday, 16 December 2011. A
list of the witnesses who appeared at the hearing is available at
Appendix B. The submissions and transcript of evidence were placed on the
committee’s website at http://www.aph.gov.au/house/committee/economics/index.htm.