Coalition Members’ Dissenting Report
Recommendation: That the Bill not be passed.
Liberal Members of the House Standing Committee on Economics
were not afforded the opportunity to have a public hearing into this
legislation. This was a Committee decision that Coalition committee members
15 submissions were received by the inquiry into this
legislation, with many critical of the content of this Bill. Most notably
absent from these was that of Treasury.
However, we note that today (12 March 2013), an undated
electronic submission had been uploaded from Treasury and has subsequently been
published on the Committee’s website, apparently in response to enquiries from
Coalition members of the Committee view this to be highly
Coalition Members of the Committee find it difficult to
support the passage of this Bill without having been afforded the opportunity
to question the assumptions underlying the Government’s policy intent and to
address many of the issues raised from submissions to the Committee. These
issues include but are not limited to:
- Questions around the financial impact of this Bill and
specifically how it applies to Schedule 1, Part IVA of the Income Tax
Assessment Act 1936. The Explanatory Memorandum to the Bill states that
schedule 1 is expected “to prevent the loss of over a $1 billion a year” but
little detail has been provided as to how this amount has been quantified.
Also, it would have been prudent to confirm whether there was any financial
impact from the changes put forward in Schedule 2 of the Bill relating to the
modernisation of the transfer pricing rules , despite the EM stating that the
impact would be nil.
Schedule 1 Part IVA:
- There are legitimate concerns that the drafting of the schedule
may have been an over-reaction and would have greatly benefited from a public
- In responding to a number of court cases the Commissioner of
Taxation has lost when applying Part IVA in recent times, there is a real risk
that the Government, via these amendments, has over-reacted and given the
Commissioner too much power to raise tax and penalties in the context of
alleged income tax avoidance. This is a position held by several submissions
including from The Tax Institute, the Corporate Tax Association (CTA), and the
Law Council of Australia (LCA) – that the failures of the current GAAR or Part
IVA may have been more to do with the ATO’s poor case selection or management,
or extending it to situations where the rule was not intended to apply.
- It is important to be certain that an over- reach has not
occurred and that these proposed amendments do not have give the ATO Part IVA
unintended powers that could cause unintended consequences such as excessive
compliance costs and uncertainty which would be damaging to investor
- The amendments as introduced risk tipping the balance the other
way. They are worthy of further consultation and testing, in order to avoid
circumstances where either:
- Part IVA should not apply and it does as a result of the
- when it does apply, that the ATO reconstruction (of a reasonable
alternative postulate) may not be fair and realistic, leading to excessive
additional tax and penalties.
- If the ATO’s reconstructed alternative is not what a taxpayer
focused after tax return would ever have undertaken or even contemplated – as
it lacks common sense or commercial reality/judgment – then the tax difference
which arises is arguably excessive and unfair.
- The amendments apply to schemes entered into, or commenced to be
carried out, on or after 16 November 2012, the day on which draft legislation
was released for public comment. Given that the legislative amendments as
introduced are significantly different to those proposed by the Minister at the
time, it is reasonable to argue that this Bill will have a retrospective effect
from 16 November 2012, as taxpayers could not have known the proposed
legislative landscape at the time.
Modernisation of Transfer
Australia’s transfer pricing
legislation has rarely been amended, and largely stood the test of time.
Given the Government’s moves to block hearings by the House
Standing Committee on Economics into this Bill, we are concerned that the
design and drafting of the schedule may have been rushed and requires further
testing (ie consultation and scrutiny) before it is passed to ensure that it is
both robust and workable, and will stand the test of time. This is a position
held by many submissions including from the Corporate Tax Association (CTA),
PricewaterhouseCoopers (PwC), KPMG and The Tax Institute of Australia (TIA).
For example, on page 7 of its submission to the House
Standing Committee on Economics’s inquiry into the Bill, the TIA said that:
“… we are concerned that the
Bill as currently drafted will not yield many of the lauded simplicity and
certainty benefits and will increase the compliance burden especially and
disproportionately on small to medium enterprises.”
The schedule could benefit from further consultation and
scrutiny in the following key areas:
- The de minimis or threshold at which entities need not apply
these complex and compliance-costly rules, nor suffer penalties where tax
errors exceed the threshold, appears to be too low relative to the revenue at
risk – as submissions argue, the tax-error de minimis/threshold could be raised
significantly without much of an increase in revenue risk, but with a likely
large saving in complexity and compliance costs, especially at the smaller end
- The documentation requirements for penalty leniency appear
onerous in terms of timeframes and extent, especially for SMEs – with a greater
de minimis/threshold, these concerns could be significantly and acceptably
- Retaining the time limit of 7 years (from notice of initial
assessment) that the Commissioner of Taxation has to make a transfer pricing
adjustment appears excessive – the Inspector General of Taxation recently
recommended 4 years (see further details below), which would also align with
the standard amendment period.
- The OECD guidelines/provisions have been reworded a little,
rather than simply referred to, in the new legislation – as submissions argue,
this rewording or use of new language could give rise to unnecessary risks,
confusion and possible inconsistencies at law.
- The scope of the ATO’s power to reconstruct (or annihilate)
unlikely, uncommercial, transactions to arrive at the right level of tax may be
excessive – it may be broader, and more commonly used, than appropriate and
intended, and not used “only in exceptional circumstances” (as the OCED
- Financial impact – it is difficult to fathom how the impact of
this schedule is estimated at zero extra tax dollars per year whereas the
impact of Schedule 1 is expected to prevent the loss of over $1 billion per
year – discussed further in Schedule 1.
Mr Steven Ciobo MP
Ms Kelly O’Dwyer MP Mr
Scott Buchholz MP