BILLS DIGEST NO. 108, 2019–20              14 September 2020

Treasury Laws Amendment (2020 Measures No. 2) Bill 2020

Andrew Maslaris
Economic Policy Section 

This Bills Digest replaces the preliminary Bills Digest published on 17 June 2020.

Date introduced: 13 May 2020

House:  House of Representatives

Portfolio: Treasury

Commencement: Sections 1 to 3 on Royal Assent; Schedules 1, 2, 3 and 5 on the first day of the first quarter to occur after Royal Assent; and Schedules 4 and 6 the day after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at September 2020.

Purpose and structure of the Bill

The Treasury Laws Amendment (2020 Measures No. 2) Bill 2020 (the Bill) introduces a number of tax related measures and seeks to streamline Australia’s legislative framework for providing funding to the World Bank.[1] The Bill contains six Schedules:

•         Schedule 1 makes a series of technical amendments to the hybrid mismatch rules in the Income Tax Assessment Act 1997 (ITAA 1997). The amendments seek to ensure these rules operate as intended so that multinational entities cannot exploit differences in the treatment of instruments or entities in order to defer or avoid tax

•         Schedule 2 seeks to amend the Taxation Administration Act 1953 (TAA 1953), the Child Support (Assessment) Act 1989 (CSAA 1989) and the Child Support (Registration and Collection) Act 1988 (CSRCA 1988) to allow employers to report through Single Touch Payroll amounts of child support deductions and garnishments that have been withheld from an employee’s salary and wages

•         Schedule 3 amends the ITAA 1997 to create a new deductible gift recipient (DGR) category for ‘community sheds’ (as well as creating a legislative definition of a community shed)—this will enable taxpayers to claim a tax deduction for donations of $2 or more made to community sheds that have applied for and been approved by the Commissioner of Taxation as DGRs

•         Schedule 4 streamlines the legislative framework for Australia making contributions to the World Bank (including creating a standing appropriation) and seeks to honour Australia’s obligations to increase funding to the International Bank for Reconstruction and Development and the International Finance Corporation by amending the International Finance Corporation Act 1955 and the International Monetary Agreements Act 1947

•         Schedule 5 amends the ITAA 1997 to include eight new organisations as having DGR status and

•         Schedule 6 amends the tax secrecy provisions in the TAA 1953 to allow the Australian Taxation Office to share JobKeeper related information with the Fair Work Commission and Fair Work Ombudsman for the purposes of administering the Fair Work Act 2009.[2]

Structure of this Bills Digest

As the matters covered by each of the Schedules are generally independent of one another, the relevant background information and analysis of key provisions are set out under each Schedule number, except for Schedules 3 and 5 which are considered together.

Committee consideration

Senate Standing Committee for the Selection of Bills

On 12 June 2020, the Senate Standing Committee for the Selection of Bills decided that the Bill should not be referred to Committee.[3]

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills raised concerns with Schedule 4 of the Bill.[4] These concerns are discussed below under the heading ‘Schedule 4: funding capital increases for the Word Bank Group’.

Joint Standing Committee on Treaties

In relation to Schedule 4 of the Bill, the Joint Standing Committee on Treaties (JSCOT) has commenced examination of the proposed increases of capital to the International Bank for Reconstruction and Development and the International Finance Corporation. Submissions closed on 5 June 2020, and the Treasury and Department of Foreign Affairs both appeared before JSCOT on 22 May 2020.[5] Further details are available at each inquiry homepage: Capital Increase WBG IBRD and Capital Increase WBG IFC.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[6]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights had no comment on the Bill.[7]

Special appropriations

Schedule 4 of the Bill proposes to establish standing appropriations that may be drawn upon for Australia’s commitments to capital shares in the International Bank for Reconstruction and Development and the International Finance Corporation which are a part of the World Bank Group (discussed in further detail below under the heading ‘Schedule 4: funding capital increases for the World Bank Group’).[8]

Schedule 1: Hybrid mismatch rules

Schedule 1 amends the ITAA 1997 to make a number of technical amendments to the hybrid mismatch rules to provide greater certainty about their operation and ensure they operate as intended. In particular, the proposed amendments, seek to:

·    clarify the operation of the rules to trusts, partnerships and multiple entry consolidated groups

·    address a concern that the hybrid mismatch integrity rule can currently be circumvented through careful tax planning and

·    make a number of additional technical amendments.

In order to understand the proposed amendments, it is necessary to first understand how the hybrid mismatch rules currently operate. These rules are highly technical and not easily summarised. To assist in understanding the hybrid mismatch rules, the Digest provides a very high level, plain-English overview, followed by a more detailed discussion of key elements of the rules with reference to the relevant provisions.

What are the hybrid mismatch rules?

The Organisation for Economic Co-operation and Development (OECD) defines hybrid mismatch arrangements as follows:

Hybrid mismatch arrangements exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation, including long-term deferral. These types of arrangements are widespread and result in a substantial erosion of the taxable bases of the countries concerned. They have an overall negative impact on competition, efficiency, transparency and fairness.[9]

As part of its Base Erosion and Profit Shifting (BEPS) Action Plan, the OECD highlighted the ability of taxpayers to avoid tax by entering into hybrid mismatch arrangements.[10] In response to this, the OECD proposed the following course of action be undertaken:

Develop model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g. double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities. This may include: (i) changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly; (ii) domestic law provisions that prevent exemption or non-recognition for payments that are deductible by the payor; (iii) domestic law provisions that deny a deduction for a payment that is not includible in income by the recipient (and is not subject to taxation under controlled foreign company (CFC) or similar rules); (iv) domestic law provisions that deny a deduction for a payment that is also deductible in another jurisdiction; and (v) where necessary, guidance on co-ordination or tie-breaker rules if more than one country seeks to apply such rules to a transaction or structure. Special attention should be given to the interaction between possible changes to domestic law and the provisions of the OECD Model Tax Convention. This work will be co-ordinated with the work on interest expense deduction limitations, the work on CFC rules, and the work on treaty shopping.[11]

In October 2015, the OECD released, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report (the 2015 Final Report), which amongst other things, set out a recommended framework for implementing domestic tax rules to neutralise the effect of hybrid mismatch arrangements.

The Government announced over a number of successive Budgets and the 2017–18 Mid-Year Economic and Fiscal Outlook (MYEFO) that it would implement the OECD’s recommendations,[12] with the Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018 implementing hybrid mismatch rules into Division 832 of the ITAA 1997.

However, in response to concerns about uncertainty with the operation of the new hybrid mismatch rules, the 2019–20 Budget and 2019–20 MYEFO announced the Government’s intention to further clarify the operation of the rules.[13] This Bill seeks to give effect to those announcements.

When do the hybrid mismatch rules apply?

As detailed in Division 832 of the ITAA 1997 the basic preconditions for the hybrid mismatch rules to apply are that:

1.   an entity (known as the payer) makes a payment, or non-cash payment, to another entity (the recipient) and the recipient is entitled to that payment (even if payment is not required to be made at that time)[14]

2.   there is a hybrid mismatch—although there are six legislative categories of hybrid mismatches, generally a hybrid mismatch will arise where there is a payment made in respect of a financial instrument or to a specified class of entity, and as a result of the payer exploiting the different tax laws of two or more countries relating to that financial instrument or entity, either:

–      that payment is deducted in two countries (referred to as a deduction/deduction mismatch)[15] or

–      that payment is deducted in one country and the income or profits of that payment is not included in the other entity’s taxable income (referred to as a deduction/non-inclusion mismatch).[16]

The concepts of a deduction/deduction and a deduction/non-inclusion outcome are discussed in more detail in Table 1. These rules also make reference to a concept known as the ‘deduction component’—broadly, this is the amount of ‘mismatch’ that the hybrid rules will seek to neutralise.

Table 1: Deduction/non-inclusion and deduction/deduction mismatches

Type of mismatch

Description and deduction component amount

Possible categories of mismatch

Australian deduction

(deduction/non-inclusion)

If an Australian entity claims a deduction in respect of payment (other than a deduction solely attributable to a currency exchange effect) and the amount of that deduction exceeds the sum of the amounts of that payment that are:

·    subject to foreign income tax (for a period of no later than 12 months after the end of the foreign tax income year) or

·    subject to Australian income tax in that income year

then the deduction amount is the deduction component.[17]

Hybrid financial instrument, hybrid payer, reverse hybrid, branch hybrid mismatch or imported hybrid mismatch.[18]

Foreign income tax deduction

(deduction/non-inclusion)

If an entity is entitled to a foreign income tax deduction in a foreign jurisdiction in respect of a payment (which is not solely attributable to any currency exchange fluctuations or an expressly or implicitly agreed exchange rate) and the amount of the foreign income tax deduction exceeds the amounts of that payment that are:

·    subject to foreign income tax (for the period no later than 12 months after the end of the foreign tax income year) or

·    subject to Australian income tax (for the period no later than 12 months after the end of the foreign tax income year)

then the deduction is the deduction component.[19]

Hybrid financial instrument, hybrid payer, reverse hybrid, branch hybrid or imported hybrid mismatch.[20]

Deduction/deduction mismatch

Where a payment, or part thereof, gives rise to:

·    a foreign income tax deduction in a foreign country in a foreign tax period and

·    gives rise to a deduction, in Australia or a third country in an income year

then each of the following is a deduction component:

·    the foreign income tax deduction amount in the foreign country and

·    the sum of the deduction amounts in Australia and/or a third country.

The amount of the mismatch will be the lesser of the foreign income tax deduction amount and the Australian/third country deduction amount.[21]

Deducting hybrid or imported hybrid mismatch.[22]

Deduction/deduction mismatch – non-payment deductions

Where a deduction is claimed in respect of decline in value of an asset or share in the net loss of a partnership or similar transparent entity, it can be regarded as giving rise to a foreign income tax deduction provided a taxpayer recognises a tax deduction in another country (that is, the loss is recognised in multiple countries, rather than recognised on a net basis).[23]

The amount of the mismatch will be the lesser of the foreign income tax deduction amount and the Australian/third country deduction amount.[24]

Deducting hybrid or imported hybrid mismatch.[25]

Source: Parliamentary Library and Division 832 of the ITAA 1997.

Sections 832-125 and 832-130 of the ITAA 1997 define what is meant by subject to Australian income tax and subject to foreign income tax. As discussed below, the Bill seeks to amend these definitions to address concerns that the definition of foreign income tax is leading to uncertainty for taxpayers and tax administrators.

Subdivision 832-A of the ITAA 1997 provides that in determining whether an entity makes a payment to another entity and the amount of income or profits of an entity, the following ‘grouping rules’ are disregarded:

•       the single-entity rule in subsection 701(1) of the ITAA 1997

•       Part IIIB of the ITAA 1936 dealing with the taxation of branches of foreign banks and

•       any law of a foreign county that for the purposes of foreign tax treats a different entity as having made the payment, or disregards the payment.[26]

It should also be noted that it is not a precondition that the hybrid arrangement be fully entered into or carried out in Australia—as such, the hybrid mismatch rules can apply regardless of whether the scheme has been entered into or carried out in or outside of Australia or partly in or outside Australia.[27]

What are the six categories of hybrid mismatch arrangements?

There are six legislatively created categories of hybrid mismatch arrangements:

1.      hybrid financial instrument mismatch

2.      hybrid payer mismatch

3.      reverse hybrid mismatch

4.      branch hybrid mismatch

5.      deducting hybrid mismatch and

6.      imported hybrid mismatch.

As an arrangement may satisfy more than one hybrid mismatch category, ordering provisions apply to determine which mismatch applies.

Please note that the relevant legislation is highly technical and mechanical and can be difficult to understand for those unfamiliar with tax legislation. As such, this Bills Digest provides a simplified explanation of each category of mismatch, followed by a more detailed discussion of the key elements with reference to the relevant legislative provisions.

Hybrid financial instrument mismatches

The rules relating to hybrid financial instrument mismatches are contained in Subdivision 832-C of the ITAA 1997. A hybrid financial instrument mismatch can be broadly summarised as a financial instrument or derivative financial arrangement that has been structured in such a way that it results in a payment being made to a related party, in order to achieve a deduction/non-inclusion or deduction/deduction outcome. As noted by the OECD, the rationale for hybrid financial instrument mismatch rules is to:

… prevent a taxpayer from entering into structured arrangements or arrangements with a related party that exploit differences in the tax treatment of a financial instrument to produce a D/NI [deduction/non-inclusion] outcome.[28]

Figure 1 provides a more detailed explanation of the rules relating to hybrid financial instrument mismatches.[29]

Figure 1: High level overview – hybrid financial instrument mismatch

What is a hybrid financial instrument mismatch?

Broadly, a hybrid financial instrument mismatch arises where a payment:

1.      is made under certain financial arrangements or an arrangement to transfer a financial instrument[30] and

2.      the payment might reasonably be expected to give rise to a deduction/non-inclusion mismatch[31] and

3.      the mismatch that might reasonably be expected to arise, or part of that mismatch arises from differences in the treatment of the financial arrangement arising from the terms of the financial arrangement, and the difference is not primarily attributable to a deferral in the recognition of income from the instrument (provided the term of the deferral or arrangement is three years or less)[32] and

4.      the entities making the payment and each entity liable to pay tax on the income or profits of the recipient are related or the payment is made under a structured arrangement.[33]

What is a related entity?

Entities will be deemed to be related where they are:

·    in the same Division 832 control group[34]

·    one entity holds a direct participation interest of 25% or more in the other entity or

·    a third entity holds a direct participation interest of 25% or more in the other entity.[35]

What is structured arrangement?

Generally, a structured arrangement arises where a hybrid mismatch is priced into the terms of the relevant scheme, or it is reasonable to conclude that the hybrid mismatch is a design feature of the scheme.[36]

What is the effect of a hybrid financial instrument mismatch?

Generally, where the above criteria are satisfied, Subdivision 832-C of the ITAA 1997 will seek to neutralise the effect of a hybrid financial instrument mismatch by either:

·    denying a deduction in Australia—referred to as the primary response[37] or

·    requiring an amount relating to the foreign income tax deduction to be included in that entity’s Australian income where equivalent hybrid rules do not exist in the foreign country— referred to as the secondary response.[38]

Off-shore hybrid financial instrument mismatch

Importantly, not all hybrid financial instrument mismatches will be neutralised by Subdivision 832-C of the ITAA 1997. This category of mismatches is referred to as off-shore hybrid mismatches—it arises where there is a hybrid financial instrument mismatch that satisfies the following criteria:[39]

1.      the deduction component of the mismatch is a foreign income tax deduction[40]

2.      no amount of that deduction is subject to tax as a result of the ‘secondary response’ and

3.      foreign hybrid mismatch (or similar) rules do not exist in the country in which the deduction arose or another third country in which the profits or income of the recipient are subject to foreign income tax.[41]

Where an off-shore hybrid mismatch arises it will be deemed to be an imported hybrid mismatch and is dealt with under Subdivision 832-H of the ITAA 1997.

Hybrid payer mismatches

The rules relating to hybrid payer mismatches are contained in Subdivision 832-D of the ITAA 1997. As explained by the OECD, taxpayers may seek to take advantage of differences in the tax laws of countries where an entity is disregarded for tax purposes—meaning that income or profits from a transaction may escape tax in one country, but a related entity recognises a deduction in that, or another, country, giving rise to a deduction/non-inclusion outcome.[42] As noted by the OECD:

… the purpose of the disregarded hybrid payments rule is to prevent a taxpayer from entering into structured arrangements, or arrangements with members of the same control group, that exploit differences in the tax treatment of payer to achieve such outcomes.[43]

As a general proposition, Subdivision 832-D of the ITAA 1997 will apply the hybrid payer mismatch rules to the situation where an entity is able to claim a tax deduction in a country in relation to a hybrid mismatch payment but is not liable for tax on any income or profits it earns in respect of that mismatch.

Figure 2 provides a more detailed explanation of the rules relating to hybrid payer mismatches.

Figure 2: High level overview – hybrid payer mismatch

What is a hybrid payer mismatch?

Broadly, a hybrid payer mismatch arises where:

1.      a payment is made that gives rise to a hybrid mismatch under section 832-310 of the ITAA 1997 —this will occur where a payment:

a.       gives rise to a deduction/non-inclusion mismatch and

b.      satisfies the hybrid requirement in section 832-315 of the ITAA 1997, that is:

–   if the non-including country[44] is Australia: the deduction/non-inclusion amount exceeds the amount that would be a mismatch had the payment been subject to Australian income tax (assuming the payer and recipient were ungrouped entities) or

–   if the non-including country is a foreign country: the deduction/non-inclusion amount exceeds the amount that would be a mismatch had the payment been subject to foreign income tax (assuming the payer and recipient were ungrouped entities)[45] and

2.      the payment is made by a hybrid payer—broadly an entity will be deemed to be a hybrid payer where a payment it makes is disregarded for the purposes of the tax law in one country (resulting in non-inclusion) but is deductible for the purposes of the tax law of another country[46] and

3.      the hybrid entity and any other liable entities in respect of the hybrid payer’s profits or income are in the same Division 832 control group, or the payment is made under a structured arrangement[47] and

4.      the payment is not also a hybrid financial instrument mismatch.[48]

What is the effect of a hybrid payer mismatch?

Generally, where the above criteria are satisfied, Subdivision 832-D of the ITAA 1997 will seek to neutralise the effect of a hybrid payer mismatch by either denying a tax deduction in Australia, or requiring the amount of mismatch to be included in the entity’s Australian income. However, similar to Subdivision 832-C of the ITAA 1997, a ‘secondary response’ is not required where the country in which the deduction has occurred has hybrid mismatch or similar rules.[49]

However, subsection 832-330 recognises that in calculating this amount an adjustment for ‘dual inclusion income’ is necessary (dual inclusion income generally refers to income that is subject to tax in more than one country).[50]

Offshore hybrid payer mismatches

Importantly, not all hybrid payer mismatches can be neutralised by Subdivision 832-D of the ITAA 1997. This category of mismatches is referred to as off-shore hybrid mismatches, and will arise where there is a hybrid payer mismatch that satisfies the following criteria:

1.      the deduction component of the mismatch is a foreign income tax deduction

2.      no amount of that deduction is subject to tax as a result of the ‘secondary response’ and

3.      foreign hybrid mismatch (or similar) rules do not exist in the country where the deduction arose or another third country in which the profits or income of the recipient are subject to foreign income tax.[51]

Where an off-shore hybrid mismatch arises it may be deemed to be an imported hybrid mismatch and is dealt with under Subdivision 832-H of the ITAA 1997.

Reverse hybrid mismatches

The rules relating to reverse hybrid mismatches are contained in Subdivision 832-E of the ITAA 1997.

A reverse hybrid is an entity that is only treated as transparent[52] under the laws of the payer jurisdiction and as such, an incentive may exist to invest through a reverse hybrid so that the resulting income is only brought into account under the laws of the payer jurisdiction.[53] As such, the OECD recommended that where:

… a payment made to a reverse hybrid that results in a hybrid mismatch the payer jurisdiction should apply a rule that will deny a deduction for such payment to the extent it gives rise to a D/NI [deduction/non-inclusion] outcome.[54]

As a general proposition, Subdivision 832-E of the ITAA 1997 will deem a reverse hybrid mismatch to arise where a payment is made to a reverse hybrid entity and the mismatch would not have occurred, or would have been less, had the payment been made directly to an investor in the reverse hybrid entity.[55]

Figure 3 provides a more detailed explanation of the rules relating to reverse hybrid mismatches.

Figure 3: High level overview – reverse hybrid mismatch

What is a reverse hybrid mismatch?

Broadly, a reverse hybrid mismatch arises where:

1.      a payment is made that gives rise to a hybrid mismatch under section 832-400 of the ITAA 1997— this will occur where a payment:[56]

a.       gives rise to a deduction/non-inclusion mismatch and

b.      satisfies the hybrid requirement in section 832-405 of the ITAA 1997—that is, the payment is made directly or indirectly through one or more interposed entities to a reverse hybrid and either:

–        the entity is not transparent and is located in Australia and the amount of the deduction/non-inclusion mismatch exceeds the amount of mismatch if tax was paid in Australia assuming the payment was made directly to the investors in the reverse hybrid entity (or would have given rise to a hybrid financial instrument, hybrid payer or reverse hybrid mismatch)[57] or

–        the entity is not transparent and is located in a foreign country and the amount of the deduction/non-inclusion mismatch exceeds the amount of mismatch if tax was paid in the foreign country assuming the payment was made directly to the investors in the reverse hybrid entity (or would have given rise to a hybrid financial instrument, hybrid payer or reverse hybrid mismatch)[58] and

2.      the entity making the payment, the reverse hybrid and its investors in its formation country are part of the same Division 832 control group or the payment is made under a structured arrangement[59] and

3.      the payment does not give rise to a hybrid financial instrument or a hybrid payer mismatch.[60]

What is the effect of a reverse hybrid mismatch?

Generally, where the above criteria are satisfied, Subdivision 832-E of the ITAA 1997 will seek to neutralise the effect of a hybrid financial instrument mismatch by denying a tax deduction in Australia equal to the amount of the reverse hybrid mismatch amount.[61]

Off-shore reverse hybrid mismatch

Importantly, not all reverse hybrid mismatches can be neutralised by Subdivision 832-E of the ITAA 1997. This category of mismatches is referred to as off-shore reverse hybrid mismatches, and will arise where there is a reverse hybrid mismatch that satisfies the following criteria:

–   the deduction component of the mismatch is a foreign income tax deduction and

–   the foreign country does not have foreign hybrid mismatch rules.[62]

Where an off-shore hybrid mismatch arises it may be deemed to be an imported hybrid mismatch and is dealt with under Subdivision 832-H of the ITAA 1997.

Branch hybrid mismatches

The rules relating to branch hybrid mismatches are contained in Subdivision 832-F of the ITAA 1997.

The OECD’s Final Report noted that a dual resident or a foreign branch may make a cross-border payment that can trigger a hybrid mismatch.[63]

Broadly, Subdivision 832-F of the ITAA 1997 considers a branch hybrid mismatch to arise if, in the payer’s country of residence, the payment is treated as being made to a permanent establishment of another country,[64] but that other country does not recognise that payment as being made to a permanent establishment in their country. In this situation, a deduction/non-inclusion mismatch arises, if the mismatch would not have arisen (or been less) had the residence country not recognised the permanent establishment.[65]

Figure 4 provides a more detailed explanation of the rules relating to branch hybrid mismatches.

Figure 4: High level overview – branch hybrid mismatch

What is a branch hybrid mismatch?

Broadly, a branch hybrid mismatch arises where:

1.      a payment is made that gives rise to a hybrid mismatch under section 832-475 of the ITAA 1997—this will occur where:

a.       a payment gives rise to a deduction/non-inclusion mismatch and

b.      the mismatch satisfies the hybrid requirement in section 832-480 of the ITAA 1997—that is the payment is made directly or indirectly through one or more interposed entities to a branch hybrid[66] and

c.       the entity receiving the payment is an Australian tax resident and the amount of the deduction/non-inclusion mismatch exceeds the amount of mismatch if tax was paid in Australia (assuming the entity was not carrying on a business through a permanent establishment (PE))[67]

d.      the entity receiving payment is a tax resident of another country and the amount of the deduction/non-inclusion mismatch exceeds the amount of mismatch if tax was paid in the foreign country assuming the entity was not carrying on a business through a PE[68] and

2.      the entity making the payment and the branch hybrid are part of the same Division 832 control group or the payment is made under a structured arrangement[69] and

3.      the payment does not give rise to a hybrid financial instrument, hybrid payer or reverse hybrid mismatch.[70]

What is the effect of a branch hybrid mismatch?

Where a branch hybrid mismatch arises, section 832-455 of the ITAA 1997 will operate to deny the deduction.

Off-shore branch hybrid mismatch

Importantly, not all branch hybrid mismatches can be neutralised by Subdivision 832-F of the ITAA 1997. This category of mismatches is referred to as off-shore hybrid mismatches, and will arise where there is a hybrid branch mismatch that satisfies the following criteria:

–   the deduction component of the mismatch is a foreign income tax deduction

–   the foreign country does not have foreign hybrid mismatch rules and

–   subsection 23AH(4A) of the ITAA 1936 (dealing with foreign branch income) does not apply in relation to the hybrid mismatch.[71]

Where an off-shore hybrid mismatch arises it may be deemed to be an imported hybrid mismatch and is dealt with under Subdivision 832-H of the ITAA 1997.

Deducting hybrid mismatches

The rules relating to deducting hybrid mismatches are contained in Subdivision 832-G of the ITAA 1997.

The deducting hybrid mismatch rules are primarily concerned with hybrid mismatch arrangements that result in a payment being deductible in two countries (deduction/deduction outcome). Importantly, in recognition that the payment may be deductible in more than one country, Subdivision 832-G of the ITAA 1997 creates special rules identifying which country is the ‘primary’ response country—the effect of this is that the deduction will be denied in Australia where it is the primary response country, or where the primary response country does not have hybrid mismatch (or similar) rules.[72]

Figure 5 provides a more detailed explanation of the rules relating to deducting hybrid mismatches.

Figure 5: High level overview – deducting hybrid mismatch

What is a deducting hybrid mismatch?

Broadly, a payment or other amount gives rise to a deducting hybrid mismatch if:

1.      there is a deducting hybrid in relation to that payment or other amount—an entity is a deducting hybrid where the relevant payment or other amount gives rise to a deduction/deduction mismatch, and the entity is:

a.       where the deduction is in relation to a payment—the entity that makes that payment

b.      where the deduction is in relation to the decline in value of an asset—the entity that holds that asset or

c.       where the deduction is in relation to a share in the net loss of a partnership or other transparent entity—the entity that has an interest in that partnership or transparent entity[73] and

2.      the relevant entity is a liable entity[74] in a least one deducting country or a member of a consolidated group[75]

3.      the mismatch is not a hybrid financial instrument mismatch, hybrid payer mismatch, reverse hybrid mismatch or a branch hybrid mismatch.[76]

What is the effect of a deducting hybrid mismatch?

As deducting hybrid mismatches involve a deduction/deduction mismatch, Subdivision 832-G of the ITAA 1997 contains a set of complex rules outlining when Australia will have the right to deny a deduction. Broadly, Australia will be able to deny the deduction where:

·    it is the ‘primary response country’[77] or

·    it is the ‘secondary response country’ and:

–   the primary response country does not have hybrid mismatch rules and

–   the relevant entities are in the same Division 832 control group or the mismatch arose under a structured arrangement.[78]

Off-shore deducting hybrid mismatch

Importantly, not all deducting payer mismatches can be neutralised by Subdivision 832-G of the ITAA 1997. This category of mismatches is referred to as off-shore hybrid mismatches, and will arise where there is a deducting hybrid mismatch—broadly defined to arise where the only deduction components of the mismatch are foreign income tax deductions and the foreign country(ies) in which the deduction arose does not have hybrid mismatch (or similar) rules.[79]

Where an off-shore hybrid mismatch arises it may be deemed to be an imported hybrid mismatch and is dealt with under Subdivision 832-H of the ITAA 1997.

Offshore hybrid mismatches and imported hybrid mismatches

The rules relating to imported hybrid mismatches are contained in Subdivision 832-H of the ITAA 1997. As noted above, an offshore hybrid mismatch may give rise to an imported hybrid mismatch.

Imported hybrid mismatches are an integrity rule—they apply to the situation where one or more entities are interposed between a hybrid mismatch and a country with hybrid mismatch rules in order to circumvent the operation of those rules. In its Final Report, the OECD explained:

The policy behind the imported mismatch rule is to prevent taxpayers from entering into structured arrangements or arrangements with group members that shift the effect of an offshore hybrid mismatch into the domestic jurisdiction through the use of a non-hybrid instrument such as an ordinary loan. The imported mismatch rule disallows deductions for a broad range of payments (including interest, royalties, rents and payments for services) if the income from such payments is set-off, directly or indirectly, against a deduction that arises under a hybrid mismatch arrangement in an offshore jurisdiction (including arrangements that give rise to DD [deduction/deduction] outcomes). The key objective of imported mismatch rule is to maintain the integrity of the other hybrid mismatch rules by removing any incentive for multinational groups to enter into hybrid mismatch arrangements.[80] [emphasis added]

Figure 6 provides a more detailed explanation of the imported hybrid mismatch rules.

Figure 6: High level overview – Offshore hybrid mismatches and imported hybrid mismatch

What is an imported hybrid mismatch?

Broadly, a payment will give rise to an imported hybrid mismatch where:

1.      the payment gives rise to a hybrid mismatch—broadly, a hybrid mismatch occurs where there is an importing payment in relation to an offshore hybrid mismatch.[81] A payment will be an importing payment where the payment, or part of the payment:

a.       gives rise to an Australian income tax deduction or a foreign income tax deduction in a foreign country that has hybrid mismatch (or similar) rules

b.      is made directly, or indirectly, through one or more interposed entities and

c.       the other entity is the entity that made the payment giving rise to the offshore hybrid mismatch or if the mismatch is a deducting hybrid mismatch—the deducting hybrid[82] and

2.      an item in the table in subsection 832-615(2) applies to the importing payment:

–   item 1: structured arrangement—an importing payment is covered if:

•        the importing payment is made under a structured arrangement and 

•        the payer of the importing payment, the offshore deducting entity and each interposed entity (if applicable) are all parties to the structured arrangement

–   Item 2: direct payment—an importing payment is covered if:

•        the importing payment is made directly to the relevant offshore deducting entity and

•        the payer of the importing payment and the offshore deducting entity are in the same Division 832 control group

–   Item 3: indirect payment—an importing payment is covered if:

•        the importing payment is made indirectly through one or more interposed entities to the offshore deducting entity and

•        the payer of the importing payment, the offshore deducting entity, and each interposed entity are in the same Division 832 control group and

3.      the payment does not give rise to a hybrid financial instrument, hybrid payer, reverse hybrid, branch hybrid or a deducting hybrid mismatch.[83]

What is the effect of an imported hybrid mismatch?

Where the above elements are satisfied, section 832-610 will deny the imported hybrid mismatch deduction. Sections 832-630 and 832-635 of the ITAA 1997 contain a series of rules used to calculate the imported hybrid mismatch amount.

The hybrid integrity rule

In addition to the above rules, Subdivision 832-J of the ITAA 1997 contains an integrity rule. Section 832-720 summarises the integrity rule as follows:

This Subdivision contains an integrity measure that disallows an Australian deduction of an entity (the paying entity ) for a payment of interest (or a payment of a similar character) under a scheme to a foreign entity (the interposed foreign entity). The deduction will be disallowed if certain conditions are satisfied, including that:

(a)     the paying entity, the interposed foreign entity and another foreign entity (the ultimate parent entity) are in the same Division 832 control group; and

(b)     the payment is not subject to Australian income tax; and

(c)     the highest rate of foreign income tax (the foreign country rate) on the payment is 10% or less; and

(d)     it is reasonable to conclude (having regard to certain matters) that the entity, or one of the entities, that entered into or carried out all part of the scheme did so for a purpose including a purpose of enabling a deduction to be obtained in respect of the payment, or enabling foreign income tax to be imposed on the payment at a rate of 10% or less.

However, the deduction will not be disallowed if, assuming that the payment had been made directly to the ultimate parent entity:

(a)     the rate of foreign income tax on the payment in the country of residence of the ultimate parent entity would be less than or equal to the foreign country rate; and

(b)     the payment would not give rise to a hybrid mismatch of a particular kind.

Position of major interest groups

Treasury completed consultation on the proposed amendments on 24 January 2020. The submissions have not been made publicly available at this time.[84]

Key provisions

As noted above, the Bill contains a number of highly technical amendments to the hybrid mismatch rules contained in Division 832 of the ITAA 1997. Due to the complexity, and highly technical nature of the changes, the below section discusses some of the key proposed changes (with reference to the previous discussion) and the rationale for these amendments.

Additional information can be found in Chapter one of the Explanatory Memorandum to the Bill.

Main amendments: Schedule 1, Part 1

Trusts, partnerships and multiple entry consolidated (MEC) groups

Item 1 in Part 1 of Schedule 1 of the Bill seeks to repeal and substitute section 832-30 of the ITAA 1997. As noted above, section 832-30 of the ITAA 1997 seeks to disregard certain grouping rules in Australian and international tax law. The effect of this section is to create a uniform basis for recognising payments between entities and to ensure that hybrid rules apply consistently between countries where payments may be disregarded due to tax purposes—for example, as noted above, section 832-30 disregards the operation of the single-entity rule (which generally disregards transactions that occur between members of the same consolidated tax group).[85] This principle is proposed to be explained in Note 1 to subsection 832-30(1) of the ITAA 1997.

In replacing section 832-30, new subsection 832-30(2) seeks to clarify the operation of the hybrid mismatch rules to trusts and partnerships. Broadly, proposed subsection 832-30(2) of the ITAA 1997 seeks to deem the trust or partnership (rather than the trustee or partner) as having:

•       made or received a relevant payment

•       held, acquired or disposed of a relevant asset, interest or other property and

•       entered into or carried out a scheme, or part of a scheme.

The reason for this is to clarify and ensure that the trust or partnership (which is an entity under section 960-100 of the ITAA 1997), rather than the trustee or partners can be the relevant test entity under the hybrid mismatch rules.[86]

Proposed subsections 832-30(3) and (4) of the ITAA 1997 are consequentially amended to ensure that any reference to the income and profits, or assessable income and deductions of an entity, is a reference to an entity as defined under new subsections 832-30(1) and (2) of the ITAA 1997 and a reference to a trust or partnerships’ net income.[87] Similarly, proposed subsection 832-205(1A) of the ITAA 1997 provides that if a trust is in a Division 832 control group, then the trustee will also be in the same control group.[88]

Foreign taxes to be disregarded

There is some uncertainty as to whether foreign income tax includes municipal and state taxes—foreign income tax can be relevant for the purposes of determining whether a hybrid mismatch arises because:

•       the hybrid integrity rule broadly applies where a payment is subjected to tax of 10% or less in a foreign country and

•       the hybrid mismatch rules make repeated reference to a payment being subject to foreign tax.[89]

Proposed subsection 832-130(7) of the ITAA 1997 seeks to clarify that municipal and state taxes are to be disregarded for the purposes of applying the hybrid mismatch rules.[90] As explained in the Explanatory Memorandum to the Bill, the Government is concerned that including such taxes may create an unreasonable compliance burden on taxpayers by requiring them to consider the taxation consequences for a payment at multiple levels of government in a foreign jurisdiction.[91]

However, proposed subsection 832-725(1A) of the ITAA 1997, at item 38 of Schedule 1 to the Bill, clarifies that municipal and state taxes are still taken into account for the purpose of applying the hybrid integrity rule – that is, in determining whether the payment in a foreign jurisdiction is taxed at a rate of 10 per cent or more, any state and municipal taxes paid will be counted (in this situation, it appears that the Government does not consider that the additional compliance burden is unjustified).

Liable entity

Item 15 in Part 1 of Schedule 1 of the Bill seeks to repeal and substitute subsection 832-325(1) of the ITAA 1997 which defines ‘liable entity’, which is a core concept of the hybrid rules. Broadly, an entity is a liable entity in Australia or a foreign country if income tax is imposed on the entity:

•       in respect of all or part of its income or profits or

•       in respect of all or part of the income or profits of another entity in Australia or a foreign country—for example, in Australia, each partner in the partnership is a liable entity in respect of the income or profits of the partnership.

An entity may be a liable entity for a country even if it has no actual liability to pay income tax.[92]

New subsection 832-325(1) of the ITAA 1997 modifies the definition of liable entity to specifically include public trading trusts and superannuation entities (rather than their members). As these entities are taxed under the general tax law like companies, this amendment ensures that for the purpose of the hybrid mismatch rules, the public trading trust and superannuation fund will be treated as the relevant test entity—thereby reflecting the company-like tax treatment of these entities.[93]

Dual inclusion income

As discussed above, dual inclusion income is income or profit that is taxed in two countries.[94] The rules relating to dual inclusion income are complex, but generally, dual inclusion income can be applied to reduce the neutralising amount for a hybrid payer mismatch or deducting hybrid mismatch, or give rise to a later year adjustment for such a mismatch.[95]

Proposed subsection 832-680(1A) of the ITAA 1997, at item 30 of Schedule 1 to the Bill, seeks to clarify that in applying the dual inclusion income rule to trusts and partnerships, where an amount of income or profit is subject to Australian tax, it is to be disregarded but only to the extent that it applies in relation to assessable income from a foreign source:

As a result, foreign source income of an Australian trust or partnership which flows through to a foreign resident beneficiary or partner will be taken to be subject to Australian income tax for the purposes of applying the dual inclusion income rule.[96]

Application

The amendments in Part 1 of Schedule 1 of the Bill apply to assessments for income years starting on or after 1 January 2019.[97]

Foreign hybrid mismatch: Schedule 1, Part 2

The hybrid mismatch rules make a number of references to equivalent foreign hybrid mismatch rules. Part 2 of Schedule 1 of the Bill seeks to amend the definition of ‘foreign hybrid mismatch rules’ and also makes a number of consequential amendments. As stated in the Explanatory Memorandum to the Bill:

Concerns have been raised that the definition of foreign hybrid mismatch rules in subsection 995-1(1) requires the foreign law to correspond to, or have substantially the same effect as, Division 832. Therefore, when benchmarking a foreign law, it is uncertain whether the foreign law is benchmarked against Division 832 as a whole or whether there is scope to benchmark the foreign law against, for example, the provisions of a particular hybrid mismatch.[98]

In response to these concerns, the Bill amends the definition of ‘foreign hybrid mismatch rules’ in subsection 995-1(1) of the ITAA 1997 to include a ‘foreign law corresponding to’ a type of hybrid mismatch—that is hybrid financial instrument, hybrid payer, reverse hybrid, branch hybrid, deducting hybrid or imported hybrid mismatch under Division 832 of the ITAA 1997.[99]

Application

The amendments in Part 2 of Schedule 1 of the Bill apply to assessments for income years starting on or after 1 January 2020.[100]

Hybrid entities integrity rule: Schedule 1, Part 3

As discussed above, the hybrid integrity rule broadly operates to disallow an Australian income tax deduction for a payment of interest (or a payment of similar character) or an amount paid under a derivative financial arrangement to a member of the same Division 832 control group (where the payment is not subject to Australian income tax), foreign tax of 10 per cent or less is imposed on the payment and it is reasonable to conclude the scheme was entered into for the purpose of obtaining the tax advantage.[101]

However, the integrity rule will not apply where the payment gives rise to a hybrid mismatch under one of the specific hybrid mismatch rules.[102] As explained in the Explanatory Memorandum this undermines the operation of the integrity rule where the specific hybrid mismatch rules do not neutralise the hybrid mismatch—specific examples of this include where under the deducting hybrid mismatch rule, Australia is the secondary response country, or the deduction is sheltered by dual inclusion income.[103] In response to this concern, the Bill seeks to:

•       remove the pre-condition to the operation of the integrity rule that there not be a deducting hybrid mismatch.[104] However, proposed subsection 832-725(7) of the ITAA 1997 clarifies that the integrity rule cannot apply to the extent that a deduction has been denied under the deducting hybrid mismatch rules[105]

•       insert proposed subsections 832-240(2A) and 832-565(2A) into the ITAA 1997, to ensure that where a deduction is denied under the integrity rule, subsequent deductions in future years (that would otherwise satisfy the deducting hybrid mismatch and integrity rules) will not be allowed—that is, the integrity rule will continue to deny the deduction in future years[106] and

•       make a number of minor technical amendments including clarifying that the entity entitled to the deduction may not be the paying entity.[107]

Application

The amendments in Part 3 of Schedule 1 of the Bill apply to assessments for income years starting on or after 2 April 2019.[108]

Franked distributions and regulatory capital: Schedule 1, Part 4

The amendments in Part 4 of Schedule 1 seek to address a technical issue that applies the hybrid mismatch rules to the distribution of Additional Tier 1 Capital.[109] As stated in the Explanatory Memorandum, this is an unintended outcome that may adversely and significantly impact the pricing of Additional Tier 1 Capital in Australia:

Additional Tier 1 capital can be issued by ADIs and insurance companies and other entities that are grouped for prudential purposes. If an ADI or insurance company (or other grouped entity) that has a foreign branch issues Additional Tier 1 capital, part of the Additional Tier 1 capital may be attributable to the foreign branch (depending on the laws of the particular foreign country) because the relevant entity is carrying on business in the foreign country where the branch is located (whether or not the Additional Tier 1 capital is issued in Australia).

An issue has arisen with the operation of the hybrid mismatch rules because all or part of the distribution on Additional Tier 1 capital issued by an Australian entity that is attributed to a foreign branch located in some foreign jurisdictions may be deductible in one or more of those foreign jurisdictions.

In this regard, currently the hybrid mismatch rules operate to deny imputation benefits on a distribution if all or part of the distribution gives rise to a foreign income tax deduction (paragraph 207-145(db), paragraph 207-150(1)(eb) and section 207-158). An amount that reflects all or part of the distribution will give rise to a foreign income tax deduction if an entity is entitled to deduct the amount in working out the tax base for a foreign tax period under the law of a foreign country dealing with foreign income tax (section 830-120).

The amount of the deduction entitlement in the foreign country for a distribution on the Additional Tier 1 capital instrument issued by an Australian ADI or insurance company may be for a comparatively small part of the distribution. However, regardless of how small the foreign income tax deduction is compared to the amount of the distribution, this will result in the denial of franking benefits on the whole distribution to investors in the Additional Tier 1 capital instrument. This would have a significant impact on the pricing of Additional Tier 1 capital instruments in Australia.[110] [emphasis added]

The Bill seeks to address these concerns by amending section 207-158 of the ITAA 1997 to:

… ensure that franking benefits are not denied on distributions made in respect of an equity interest if the interest forms part of the Additional Tier 1 capital for the purposes of:

•      applicable prudential standards (as defined in subsection 995-1(1)) – the prudential standards are defined to mean the prudential standards determined by the APRA and in force under section 11AF of the Banking Act 1959;

•      applicable prudential standards determined by APRA and in force under section 32 of the Insurance Act 1973; or

•      applicable prudential standards determined by APRA and in force under section 230A of the Life Insurance Act 1995.[111]

The Bill also proposes to insert new section 15-80 of the ITAA 1997 which provides that where all or part of a distribution gives rise to a foreign income tax deduction, and the imputation benefit is not denied (due to the proposed amendments to section 207-158 of the ITAA 1997), then the entity making the distribution must include an amount equal to the foreign income tax deduction in their assessable income.[112]

Application

The amendments in Part 4 of Schedule 1 of the Bill apply to distributions made on or after 1 January 2019.[113]

Schedule 2: Single Touch Payroll—reporting child support information

Schedule 2 amends the Taxation Administration Act 1953 (TAA 1953), the Child Support Assessment Act 1989 (CSAA 1989) and Child Support (Registration and Collection) Act 1988 (CSRCA 1988) to allow employers to voluntarily report to the ATO under the Single Touch Payroll system amounts of child support withheld or garnisheed from an employee’s salary and paid to the Child Support Registrar. This is intended to streamline the reporting of information and reduce the reporting burdens placed on employers.

What is Single Touch Payroll?

Single touch payroll (STP) was first implemented by the Budget Savings (Omnibus) Act 2016. As explained at page 21 of the Revised Explanatory Memorandum to the Budget Savings (Omnibus) Bill 2016, STP was a new reporting framework for employers with twenty or more employees to automatically report payroll and superannuation information to the Commissioner of Taxation.[114] STP generally commenced 1 June 2018 and was extended to employers with less than 20 employees from 1 July 2019. However as explained on the ATO website a number of transitional arrangements currently exist to assist small and micro employers to transition to STP.[115]

One of the more noticeable and practical effects of STP is that employees can access their group certificate (now known as an income statement) from their myGov account.[116]

Current reporting obligations

As explained in the Explanatory Memorandum to the Bill, currently, employers must manually confirm and/or provide information relating to child support withholding payments. This can be highly intensive and involve duplicate reporting requirements.[117]

As such, it is expected that allowing employers to report this information through STP will significantly reduce their administrative burden.[118] Further, as discussed below, once reported through STP, the information does not need to be re-reported to the Child Support Registrar. According to the Explanatory Memorandum:

An automated data-sharing solution will commence from 1 July 2020 which will enable the sharing of data in near real-time between the ATO and other Commonwealth agencies where the law already allows for the sharing of data. This will cover the exchange of child support information reported to the ATO to the Child Support Registrar.[119]

Background to the proposed amendment

In the 2019–20 Budget the Government announced it would extend the information to be reported under STP. The proposed amendment in Schedule 2 formed part of a broader package of changes aimed at simplifying and automating the reporting of employment income for social security purposes.[120]

The Budget also stated that these changes would reduce the compliance burden for employers and individuals reporting information to multiple Government agencies.[121] However, as stated in the Explanatory Memorandum to the Bill, a number of these changes (such as disaggregating gross pay amounts and employee separation information) are being implemented through legislative instruments made by the Commissioner of Taxation and are therefore not part of this Bill.[122]

Treasury commenced consultation on the proposed amendments on 15 January 2020. However, submissions made as part of the consultation process have not been made publicly available on the Treasury webpage.[123]

It should also be noted that the Social Services and Other Legislation Amendment (Simplifying Income Reporting and Other Measures) Act 2020, which has not yet commenced, proposes a number of changes to STP reporting with a view to increasing information sharing between the ATO and Services Australia. Additional information can be accessed in the Bills Digest to the Social Services and Other Legislation Amendment (Simplifying Income Reporting and Other Measures) Bill 2020.[124]

Financial implications

According to the Explanatory Memorandum, the financial impact is ‘Nil’.[125]

Key issues and provisions

Changes to the child support legislation

Items 1 and 2 of Schedule 2 of the Bill propose new subsection 150D(1) of the CSAA 1989 and new subsection 16C(1) of the CSRCA 1988 so as to allow the Child Support Registrar to require the Commissioner of Taxation to provide information about people, including tax file numbers, that the Commissioner is either in possession of, or that comes into the Commissioner’s possession after such a request is made—including requests that are ongoing ones. The proposed amendments are silent as to what is meant by information, however, it should be noted that it adopts the exact same language as current subsection 150D(1) of the CSAA 1989—that is, ‘information about people, including tax file numbers, being information that is in the possession of the Commissioner’. As ‘information’ is not defined, it takes its ordinary meaning.

It should be noted however, that the amendments do not remove the current restrictions that apply to the use of the requested information—for example:

•         subsection 150D(2) of the CSAA 1989 only allows information provided to be used to ascertain whether a person may apply for administrative assessment of child support, to make or amend an administrative assessment of child support, to ascertain the happening of a child support terminating event, and/or to identify a person for one of these purposes and

•         subsection 16C(2) of the CSRCA 1988 only allows information provided to be used to facilitate the recovery of debts due to the Commonwealth under that Act and identify a person for the purposes of facilitating such debt recovery.

Item 4 of Schedule 2 of the Bill seeks to amend the CSRCA 1988 by inserting proposed subsection 47(1B). Presently, section 45 of the CSRCA 1988 allows the Registrar to instruct an employer to withhold child support amounts from an employee’s salary. Section 47 of the CSRCA 1988 creates an obligation on an employer to make payment of these amounts to the Registrar and to notify the Registrar; subsection 47(1A) requires the employer to notify the Registrar if they fail to make the relevant deductions. Proposed subsection 47(1B) removes these reporting requirements where the information has been provided to the Commissioner of Taxation—that is, it has been voluntarily reported under STP.

Proposed subsection 58(2A) of the CSRCA 1988 specifically excludes the reporting of such information to the Commissioner of Taxation through STP from being an offence under the CSRCA 1988. This allows an employer to choose to automatically report the relevant information once under STP.

Changes to the TAA 1953

Items 6 to 8 of Schedule 2 of the Bill amend Schedule 1 of the TAA 1953 so as to extend STP to include voluntary reporting of child support payment amounts withheld by an employer. Item 8 inserts proposed section 389-30 into Schedule 1 of the TAA 1953 and creates a list of child support deductions (referred to as amounts in the Bill) that employers can report to the ATO through STP. The relevant amounts and their reporting obligations are summarised in Table 2.

Table 2: amounts which may be voluntary reported through STP

Amount that may be notified under STP

When notification must occur

An amount deducted from an employee’s wages under Part IV of the CSRCA 1988.

On or before the day on which the deduction is made.

A nil amount if an employer is issued a notice under subsection 45(1) of the CSRCA 1988 and on a day that the notice is in force/payable (the reporting day) the entity has not withheld an amount from the employee’s pay either because they have failed to do so, or no wage is payable.

On or before the reporting day.

An amount an employer paid to the Registrar in accordance with a notice issued to the employer pursuant to section 72A of the CSRCA 1988 (this section allows the Registrar to recover child support payment debts from third persons in a limited range of circumstances).

On or before the day on which payment is made.

Source: proposed subsection 389-30(1) of Schedule 1 to the TAA 1953

Application

Items 1 and 2 apply in relation to a requirement made by the Registrar after the commencement of Schedule 2 of the Bill (being the first day of the first quarter to occur the day after Royal Assent). Items 3 to 8 apply to amounts where the entitlement to notify the Commissioner arises on or after 1 July 2020.[126]

Schedules 3 and 5: deductible gift recipients

Schedule 3 amends the ITAA 1997 to create a new deductible gift recipient (DGR) category for community sheds. Broadly, a community shed is a public institution that has the dominant purpose of advancing mental health or addressing social isolation, which provides a physical location where members of the public can work on projects or undertake activities in the company of others.

The effect of Schedule 3 is therefore to make donations to registered charities operating community sheds tax deductible.

Schedule 5 amends the ITAA 1997 to list eight new entities as having specific DGR status, meaning donations and gifts to these entities of $2 or more are tax deductible.

Background

Schedule 3 implements the Government’s 2019–20 Budget announcement that it would create a new DGR category for men’s and women’s sheds—entities that meet the requirements of the new category will be able to be approved as a DGR by the Commissioner of Taxation.[127]

Schedule 5 partially implements the Government’s 2019–20 Budget announcement that six organisations had been approved as specifically-listed deductible gift recipients from 1 July 2019 to 30 June 2024—five of the six entities announced in the 2019–20 Budget will receive DGR status.[128]

This Bill seeks to confer DGR status on five of those organisations.

•         Australian Academy of Law

•         Foundation Broken Hill Limited

•         Motherless Daughters Australia Limited

•         Superannuation Consumers’ Centre Limited and

•         The Headstone Project (Tasmania) Incorporated.

In the case of these five entities, DGR status has been extended by one year from the original date in the 2019–20 Budget.[129]

Schedule 5 also seeks to add a further three entities to the specific list of DGR entities:

•         the Governor Phillip International Scholarship Trust

•         High Resolves and

•         CEW Bean Foundation—although currently listed as a DGR, its status expired on 14 November 2007.[130]

DGR status for these three entities was announced in by the Government in the 2018–19 Mid-Year Economic and Fiscal Outlook (MYEFO).[131] In the case of these three entities, DGR status has been extended by two years from the original date in the 2018–19 MYEFO.[132]

What is deductible gift recipient status?

A taxpayer will be entitled to a tax deduction in respect of donations (referred to as gifts and contributions) of at least $2 to organisations that have been approved as DGRs.[133]

To be a DGR, an entity must generally either satisfy one of the categories listed in Division 30 of the ITAA 1997 or alternatively, the entity must be specifically listed by name in Division 30 of the ITAA 1997.[134] The first method enables the Commissioner of Taxation to approve an entity as a DGR under Subdivision 30-BA of the ITAA 1997 if it meets the relevant requirements of a DGR category; if the entity does not meet those requirements, the second method enables the Parliament to list it by name in the ITAA 1997 via legislative amendment.

New DGR category: ‘community sheds’

Position of major interest groups

On 20 January 2020, Treasury commenced consultation on a draft Bill and explanatory memorandum to create a new DGR category for community sheds.[135] A total of eleven submissions were received, eleven of which were published (though the Law Council of Australia’s submission appears to have been incorrectly uploaded to the Treasury webpage as it does not relate to DGR sheds). Ten of the published submissions supported the Government’s decision to create a new DGR category. However, some stakeholders considered that the proposed category could be widened to accommodate other organisations. The following specific points were raised:

•         the Australian Men’s Shed Association noted that according to their annual survey, 73 per cent of Sheds intend to apply for DGR status[136]

•         Australian Neighbourhood Houses & Centres Association and the Mount Eliza Neighbourhood House considered that DGR status should also be specifically conferred on Neighbourhood Houses, many of which have established and supported community sheds[137]

•         the Queensland Men’s Shed Association submitted that the definition of Community Shed should include State and National Associations and that the ATO and the Australian Charities and Not-for-profits Commission (ACNC) should develop ‘clearer guidelines’ on ‘appropriate changes to shed constitutions that may be required for ACNC and ATO … DGR endorsement’[138]

•         Justice Connect was critical of the proposed draft legislation which allowed membership to be limited in some instances based on gender and/or indigeneity, arguing there may be other groups which impose necessary restrictions on membership that should be included—for example, groups limited by a particular criteria for cultural reasons[139] and

•         The Men’s Table submitted that the definition of a Community Shed should be expanded and not limited to requiring a project to be undertaken at a physical location.[140]

Financial implications

The Explanatory Memorandum states that the measure is estimated to have the following impact on revenue over the forward estimates period:

2018-19

2019-20

2020-21

2021-22

2022-23

Nil

Nil

Nil

-$3.0m

-$5.0m

Source: Explanatory Memorandum, Treasury Laws Amendment (2020 Measures No. 2) Bill 2020, p. 5.

Key issues and provisions

Item 1 of Schedule 3 of the Bill inserts proposed item 1.1.9 into the table in subsection 30-20(1) of the ITAA 1997, which states that a community shed that is a registered charity is a DGR entity.[141] Item 3 of Schedule 3 of the Bill inserts a new definition of community shed into the Dictionary at subsection 995-1(1) of the ITAA 1997. A community shed is defined as a public institution that satisfies all of the following requirements:

•         its dominant purposes are advancing mental health and preventing or relieving social isolation

•         it seeks to achieve those purposes principally by providing a physical location where it supports individuals to undertake activities, or work on projects, in the company of others and

•         there are no criteria for membership of the institution unless those criteria relate only to gender and/or Indigenous status.

As such, to be a community shed, an important pre-requisite is the existence of a physical location where activities and projects are undertaken in the presence of others and membership is open to all, with exceptions existing for gender specific community sheds and/or community sheds that are only open to Indigenous persons for cultural reasons.

Pages 54 to 57 of the Explanatory Memorandum provide additional explanation of the proposed definition.

Application

The amendments apply to gifts and contributions made on or after 1 July 2020.[142]

New specifically listed DGRs

Summary of the proposed amendments

The following table summarises the proposed amendments. As stated above, the effect of these amendments is that donations of at least $2 to these organisations will generally be tax deductible.[143] Table 3 summarises the purpose of each proposed DGR and the relevant period of time that taxpayers will be able to receive a tax deduction for donations to them.

Table 3: specifically listed DGRs

Name

Purpose

Dates DGR status conferred[144]

Governor Phillip International Scholarship Trust

Registered charity that provides scholarships to master’s degree students. Scholarships cover students’ university and college fees, and student accommodation costs.

1 July 2018 to 30 June 2025.

High Resolves

Registered charity that designs and delivers citizenship and leadership learning experiences for young people.

1 July 2018 to 30 June 2025

C E W Bean Foundation

Registered charity that honours war correspondents, photographers and artists that captured and recorded Australian activities in war.

1 July 2018 to 30 June 2025

Australian Academy of Law

Registered charity that promotes legal scholarship, legal research, legal education, legal practice, and the administration of justice. The Academy provides scholarships and research grants that advance legal education and the discipline of law, and promote ethical conduct and professional responsibility.

1 July 2019 to 30 June 2025

Foundation Broken Hill Limited

Registered charity that provides loans and grants to support employment opportunities and social development in Broken Hill and the surrounding region.

1 July 2019 to 30 June 2025

Motherless Daughters Australia Limited

Registered charity that provides support to girls and women whose mothers have died.

1 July 2019 to 30 June 2025

Superannuation Consumers Centre Limited

Registered charity that supports Australian consumers to access quality superannuation advice and manage their retirement savings.

1 July 2019 to 30 June 2025

The Headstone Project (Tasmania) Incorporated

Registered charity that locates the unmarked graves of Tasmanian veterans of the First World War and installs headstones.

1 July 2019 to 30 June 2025

Source: Items 1 to 5 of Schedule 5 to the Bill and Explanatory Memorandum, op. cit., pp. 67–68.

Additional information can be found at pages 67 to 71 of the Explanatory Memorandum to the Bill.

Financial implications

The Explanatory Memorandum states:

The component of the MYEFO measure being implemented by this Schedule was estimated to have a cost to revenue of $0.6 million over the forward estimates period at the time of the MYEFO. The component of the Budget measure being implemented by this Schedule was estimated to have a cost of revenue of $0.1 million over the forward estimates period at the time of the Budget. The extension of the deductible gift recipient status of these entities to 30 June 2025 (inclusive) has no financial impact over the current forward estimates period.[145]

Schedule 4: funding capital increases for the World Bank Group

Schedule 4 amends the International Finance Corporation Act 1955 (IFCA 1955) and the International Monetary Agreements Act 1947 (IMAA 1947) to:

•       give effect to resolutions voted on by Australia in September 2018 to provide additional funding to the World Bank

•       facilitate Australia making additional capital contributions to the World Bank in the future—specifically to the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC) and

•       streamline and expedite the existing legislative processes for making such contributions, while aiming to ensure sufficient Parliamentary safeguards and scrutiny continue to exist.

The World Bank

Overview

Founded at the 1944 Bretton Woods conference, the World Bank is an international financial institution that provides financial and technical assistance to developing countries.[146] The World Bank comprises of 189 member countries and is focussed on fighting poverty, supporting economic growth and ensuring sustainable gains in the quality of people’s lives in developing countries.[147]

As stated on the World Bank website, it provides:

…low-interest loans, zero to low-interest credits, and grants to developing countries. These support a wide array of investments in such areas as education, health, public administration, infrastructure, financial and private sector development, agriculture, and environmental and natural resource management. Some of our projects are cofinanced with governments, other multilateral institutions, commercial banks, export credit agencies, and private sector investors.

We also provide or facilitate financing through trust fund partnerships with bilateral and multilateral donors. Many partners have asked the Bank to help manage initiatives that address needs across a wide range of sectors and developing regions.[148]

Australia has been a member of the World Bank since 5 August 1947.[149]

Organisational structure

The World Bank Group is comprised of five distinct but complimentary organisations:

•         The International Bank for Reconstruction and Development (IBRD)—the largest development bank in the world, it provides loans, guarantees, risk management products, and advisory services to middle-income and creditworthy low-income countries, as well as coordinating responses to regional and global challenges.[150]

•         The International Finance Corporation (IFC)—specifically focused on increasing private sector- investment in, and development of, developing and less developed countries.[151]

•         The International Development Association (IDA)—one of the largest sources of assistance for the world’s seventy-six poorest countries, it aims to reduce poverty by providing no, or low-interest loans and grants for programs that boost economic growth, reduce inequalities, and improve people’s living conditions.[152]

•         The Multilateral Investment Guarantee Agency (MIGA)—seeks to promote cross-border investment in developing countries by providing guarantees to protect investors and lenders from non-commercial risks, such as political risk or non-payment by a sovereign entity.[153]

•         The International Centre for Settlement of Investment Disputes (ICSID)—an international arbitration institution focussed on resolving disputes amongst international investors.[154]

The proposed amendments in Schedule 4 of the Bill specifically relate to Australia’s obligations and interactions with the IBRD and IFC.

Australia’s commitment to purchase capital shares

In April 2018, the World Bank Group proposed a US$82.6 billion capital increase for the IBRD and IFC. On 27 September 2018 the Treasurer, in his capacity as Australia’s Governor to the World Bank, voted to approve the resolutions.[155]

Subsequently the World Bank Group announced endorsement of the IBRD capital increase on 1 October 2018 and the IFC capital increase on 16 April 2020.[156]

As a result, Australia now has obligations to the IBRD and IFC.

Australia’s IBRD obligations

Australia was allocated an additional 7,462 shares in the IBRD at US$120,635 per share, and is required to pay the World Bank a proportion of the share value over a five year period, with a callable capital component attached to the unpaid amounts (meaning the World Bank may call upon Australia to pay that amount).[157] The Explanatory Memorandum explains Australia’s obligations as follows:

Australia’s subscription comprises 3,243 shares under a ‘general capital increase’, and 4,219 shares under a ‘selective capital increase’ (with different payment arrangements applying to the different increases). Australia’s contribution to the IBRD capital increase results in around A$154 million payable over five years starting 2019-20 and a callable capital component of A$1,016.2 million.[158]

Australia’s IFC obligations

The World Bank resolution relating to the IFC means that Australia may purchase an additional 102,370 shares at a price equivalent to US$1,000 each.[159] According to the Explanatory Memorandum:

Australia’s contribution would be around A$144 million payable over five years. The IFC also proposes to convert its retained earnings into paid-in capital and so Australia will also receive fully paid in shares to the value of US$313.5 million (around A$402.6 million).[160]

Key provisions and issues

Payments to the IBRD are regulated by the IMAA 1947 and payments to the IFC by the IFCA 1955. Schedule 4 to the Bill seeks to modify how these payments are currently authorised.

New framework under the IMAA 1947

The IMAA 1947 approves Australia’s membership of the IBRD and sets out, amongst other things, that the Consolidated Revenue Fund can be appropriated by the Treasurer to buy not more than 7,128 additional shares of capital bank stock.[161] As noted in the Explanatory Memorandum, this authorised the purchase of additional bank stock in 2010.[162]

The IMAA 1947 does not contain a standing appropriation allowing the Treasurer to use funds from the Consolidated Revenue Fund (CRF) to buy additional shares of capital stock in the IBRD. As such, Parliament must specifically approve such a request by amending section 9 of the IMAA 1947 to authorise such an appropriation.[163]

Item 8 of Schedule 4 to the Bill seeks to amend this by repealing section 9 of the IMAA 1947 and replacing it with a new standing appropriation (also known as a special appropriation). It is proposed this will be facilitated by creating a power in section 9 of the IMAA 1947 to allow the relevant Minister (usually the Treasurer) to enter into one or more agreements with the IBRD to buy additional IBRD capital stock, and to draw these funds from the CRF.[164]

This means that the IMAA 1947 will not need to be amended every time Australia seeks to purchase additional stock in the IBRD under the IMAA 1947. The Explanatory Memorandum states this new approach is consistent with all other agreements and their related appropriations covered by the IMAA 1947:

‘[a]ppropriations in these contexts are appropriate because they ensure that Australia is able to comply with any international obligations it has under an agreement to make payments of a particular kind’.[165]

The Explanatory Memorandum contends that the proposed amendment does not provide the Treasurer with an unfettered discretion to enter into such agreements and draw down the Consolidated Revenue Fund. The Explanatory Memorandum states that entering into such an arrangement or agreement constitutes treaty action and is therefore required to be tabled in Parliament with a National Interest Analysis for consideration by the JSCOT and approved by the Governor-General:

These processes will apply to the current share subscription that these amendments are specifically intended to facilitate, as well as any future subscriptions proposed by the IBRD or IFC that Australia chooses to adopt. The processes ensure there is appropriate Parliamentary scrutiny of any decision of the Government to enter into agreements to subscribe to additional shares in the capital stock of the IBRD and IFC. In addition to the standard JSCOT processes, the Minister is required to provide details about any payments to the IBRD through the annual reporting requirements in section 10 of the IMAA 1947.[166]

However, the Scrutiny of Bills Committee had concerns with this aspect of the proposed amendments—those concerns are discussed below. Ultimately, whether such a standing appropriation and the above safeguards are suitable will be a question for Parliament to resolve when considering this Bill.

New framework under the IFCA 1955

The IFCA 1955, amongst other things, approves Australia’s membership in the IFC, sets out the Articles of Agreement giving rise to the IFC and authorises the appropriation of funds to purchase shares in the IFC.[167]

Item 1 of Schedule 4 to the Bill seeks to repeal and substitute a new definition of ‘Agreement’ in section 3 of the IFCA 1955. Presently, section 3 defines ‘Agreement’ as per the full Articles of Agreement and amendments to it, which are replicated as Schedules to the Act. The proposed new definition significantly reduces the length of the IFCA 1955 by incorporating the relevant Articles of Agreement by reference (consistent with modern drafting approaches).[168] Further, this new definition corrects two omissions from the previous list of Agreements. As such, this not only reduces the length of the IFCA 1955 but also corrects errors with the existing definition of ‘Agreement’. Items 4 to 7 repeal Schedules 1 to 4 of the IFCA 1955 as the Agreement will be incorporated by reference.

Item 2 of Schedule 4 to the Bill repeals section 5 of the IFCA 1955 and inserts:

•         new section 5 creating a standing appropriation under which the CRF may be appropriated to meet Australia’s obligations to subscribe to shares in the IFC

•         new subsection 5A(1) enabling the Treasurer to update the list of Agreements through a legislative instrument—that is, if the Articles underpinning the IFC are updated, the Treasurer can incorporate this into the IFCA 1955 through a legislative instrument, rather than through an Act of Parliament (the Scrutiny of Bills Committee expressed concerns (discussed below) about whether a sufficient level of Parliamentary scrutiny will exist with the proposed new framework)

•         new subsection 5A(2) providing that such a legislative instrument cannot commence until after the disallowance period for the instrument has passed.[169] This deferred commencement provides Parliament with the opportunity to consider whether any amendments are needed before the instrument takes effect[170] and

•         new subsections 5B(1) and (2) allowing the relevant Minister (usually the Treasurer) to enter into an arrangement to purchase additional shares of capital in the IFC and creating a new standing appropriation under which the CRF may be appropriated for the purposes of buying the additional shares—this creates a standing appropriation for future purchases of IFC stock.

However, similar to the proposed section 9 of the IMAA 1947, this constitutes a treaty action and will therefore be required to be tabled in Parliament with a National Interest Analysis for consideration by the Joint Standing Committee on Treaties and approved by the Governor-General.[171]

Scrutiny of Bills Committee concerns

The Scrutiny of Bills Committee expressed concern that the proposed amendment would enable future capital increase to the IBRD or the IFC to occur:

•         where the minister enters into an agreement with the IBRD or the IFC that provides for Australia to buy additional shares of the capital stock of the IBRD or the IFC or

•         where the Treasurer has, by legislative instrument, given notice of an amendment of the Articles of Agreement of the IFC that imposes obligations on Australia to subscribe to shares in the IFC and the disallowance period for the instrument has passed.[172]

In particular, the Committee expressed the view that it does not generally consider consistency with existing provisions to be sufficient justification for limiting parliamentary oversight and did not consider possible scrutiny through the JSCOT as an appropriate substitute for the level of scrutiny inherent in the passage of a Bill through both Houses of the Parliament. [173]

Accordingly, the Committee drew its scrutiny concerns to the attention of senators and left it to the Senate as a whole to consider the appropriateness of removing the requirement to amend primary legislation to facilitate Australia making additional capital contributions to the IBRD and the IFC.[174]

Financial implications

The Explanatory Memorandum states: ‘Australia’s capital contributions will have no direct impact on underlying cash as the payment will be classified as an equity investment in financial assets’.[175]

Joint Standing Committee on Treaties

The Joint Standing Committee on Treaties (JSCOT) has commenced examination of the proposed increases of capital to the IBRD and IFC. Submissions closed on 5 June 2020, and the Treasury and Department of Foreign Affairs both appeared before JSCOT on 22 May 2020.[176] Further details are available at each inquiry homepage: Capital Increase WBG IBRD and Capital Increase WBG IFC.

Schedule 6: tax secrecy

Schedule 6 amends the TAA 1953 to ensure that the disclosure of JobKeeper information by the ATO to the Fair Work Commission and Fair Work Ombudsman is not an offence under the tax secrecy provisions of the TAA 1953.

Overview

Presently, section 355-25 of Schedule 1 to the TAA 1953 creates a general offence where a taxation officer discloses protected information to another entity, punishable by up to two years imprisonment. Protected information is broadly defined in section 355-30 of the same Act to be information disclosed or obtained under a taxation law (other than the Tax Agent Services Act 2009) that relates to an entity and identifies, or is reasonably capable of identifying, that entity.

A number of exceptions to the offence exist, including (but not limited to) disclosure of publicly available information,[177] where disclosure was required in performing duties,[178] making certain disclosures to a Minister[179] and for other Government purposes (for example providing taxation information to other government departments, agencies, regulatory bodies or courts and tribunals).[180]

Key change: enabling JobKeeper information to be disclosed

Item 1 of Schedule 6 inserts new item 5AB into the table in subsection 355-65(8) of Schedule 1 to the TAA 1953 which details ‘other Government purposes’ tax secrecy exceptions. This will enable disclosure of information that relates to the JobKeeper scheme (within the meaning of the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020) to the Fair Work Commission and Fair Work Ombudsman which is required for the purpose of administering the Fair Work Act 2009.[181] As stated in the Explanatory Memorandum to the Bill, the proposed amendments allow:

…protected information related to the JobKeeper scheme to be disclosed to the Fair Work Commission and the Fair Work Ombudsman for the purposes of the administration of the Fair Work Act 2009. This allows these entities to receive information from the Commissioner of Taxation relating to the JobKeeper scheme that is required to appropriately address issues concerning compliance with obligations under the Fair Work Act 2009 (including instruments made under that Act).[182]

Importantly, the proposed amendments are not limited to the period that the JobKeeper scheme operates—that is, they are operative until repealed.[183] The reason for this is explained in the Explanatory Memorandum to the Bill:

However, while the JobKeeper scheme only operates for a limited period, information sharing is not restricted to this period. Instead, the amendments allow the sharing of protected information in relation to the JobKeeper scheme with the Fair Work Commission and the Fair Work Ombudsman after the final payments are made under the JobKeeper scheme. This flexibility allows for effective administration in relation to disputes, investigations and other outstanding matters regarding the JobKeeper scheme that may continue after all payments have been made.[184]

Application

The proposed amendments will apply to information disclosed or records made on or after the day of commencement of Schedule 6, whether the information was obtained before, at or after commencement.[185]

Financial implications

The Explanatory Memorandum states that this proposal has ‘nil’ financial impact.[186]

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[1].              M Sukkar, ‘Second reading speech: Treasury Laws Amendment (2020 Measures No. 2) Bill 2020’, House of Representatives, Debates, 13 May 2020, p. 3248.

[2].              Ibid.

[3].              Senate Standing Committee for the Selection of Bills, Report, 5, 2020, The Senate, Canberra, 12 June 2020, p. [3].

[4].              Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 7, 2020, The Senate, Canberra, 10 June 2020, pp. 28–30.

[5].              Joint Standing Committee on Treaties (JSCOT), Inquiry into the International Bank for Reconstruction and Development (IBRD) General Capital Increase and Selective Capital Increase (Washington DC, 1 October 2018 (Capital Increase WBG IBRD), Inquiry website, n.d.; JSCOT, Capital Increase WBG IFC, Parliament of Australia website, 27 May 2020.

[6].              The Statement of Compatibility with Human Rights can be found at pages 77 to 86 of the Explanatory Memorandum to the Bill.

[7].              Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 6, 2020, 20 May 2020, p. 22.

[8].              Items 2 and 8 of Schedule 4 to the Bill.

[9].              Organisation for Economic Co-operation and Development (OECD), Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2: 2015 Final Report, OECD, Paris, October 2015, p. 11.

[10].              OECD, Action Plan on Base Erosion and Profit Shifting, OECD, Paris, July 2013, pp. 15–16.

[11].              Ibid.

[12].              Revised Explanatory Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Bill 2018, p. 3.

[13].              Explanatory Memorandum, Treasury Laws Amendment (2020 Measures No. 2) Bill 2020, p. 4.

[14].              Income Tax Assessment Act 1997 (ITAA 1997), sections 832-10 and 832-15.

[15].              Ibid., section 832-110.

[16].              Ibid., section 832-105.

[17].              Ibid., subsections 832-105(1) and (3).

[18].              Ibid., note to subsection 832-105(1) and sections 832-195, 832-300, 832-390, 832-465 and 832-620.

[19].              Ibid., subsection 832-105(2) and (3).

[20].              Ibid., note to subsection 832-105(1) and sections 832-195, 832-300, 832-390, 832-465 and 832-620.

[21].              Ibid., subsection 832-110(1) to (3).

[22].              Ibid., note to subsection 832-110(1), section 832-540 and section 832-620.

[23].              Ibid., subsection 832-110(4) to (6).

[24].              Ibid., subsection 832-110(3).

[25].              Ibid., note to subsection 832-110(1), and section 832-620.

[26].              Ibid., section 832-30. As discussed in more detail below, this section seeks to create a uniform basis for recognising payments between entities and to ensure that hybrid rules apply consistently between countries where payments may be disregarded due to tax purposes.

[27].              Ibid., section 832-40.

[28].              OECD, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report, op. cit., p. 25.

[29].              Please note that not all elements of Subdivision 832-C of the ITAA 1997 are included in this discussion.

[30].              ITAA 1997, para. 832-200(1)(a) and sections 832-215 and 832-220, which defines relevant financial arrangements to include, debt interest, an equity interest, derivative financial arrangement (the instrument) or a reciprocal purchase agreement, a securities lending arrangement or similar arrangement where an entity acquires a debt interest, equity interest or a derivative financial arrangements.

[31].              Ibid., paragraph 832-215(1)(b).

[32].              Ibid., paras 832-220(1)(b) and (c); paras 832-225(1)(b) and (c); subsections 832-220(2) and 832-225(2).

[33].              Ibid., subsections 832-200(3) and (6).

[34].              Ibid., para. 832-200(4)(a); section 832-205—a Division 832 control group is one where two or more entities are in the same consolidated accounting group; or one of the entities hold a 50% or more participation interest in each of the other entities; or a third entity holds a 50% or more participation interest in each of the other entities.

[35].              Ibid., subsection 832-200(4).

[36].              Ibid., subsection 832-200(6) and section 832-210.

[37].              Ibid., section 832-180—broadly provides that, where an entity would be entitled to a deduction (but for the operation of the hybrid mismatch rules) and the deduction is the deduction component of a hybrid financial instrument mismatch, then a deduction will be denied equal to the hybrid financial instrument mismatch amount (the primary response).

[38].              Ibid., section 832-185—broadly provides that, where an entity is the recipient of a payment that gives rise to a hybrid financial mismatch, and the deduction component of the mismatch is a foreign income tax deduction and the foreign country does not have hybrid mismatch (or similar rules) dealing with the payment, then an amount equal to the amount of hybrid mismatch is included in the recipient’s Australian income for that tax year.

[39].              Ibid., section 832-195.

[40].              Foreign income tax deduction is currently defined in section 832-120 of the ITAA 1997, but the definition is proposed to be amended by the Bill to clarify its meaning.

[41].              ITAA 1997, section 832-195.

[42].              OECD, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report, op. cit., p. 50.

[43].              Ibid.

[44].              ITAA 1997, sections 832-280 and 832-320 broadly characterises the non-including country as the country in which the hybrid payer makes a payment that is disregarded, resulting in non-inclusion.

[45].              ITAA 1997, sections 832-305, 832-310 and 832-20.

[46].              Ibid., section 832-320.

[47].              Ibid., subsections 832-305(1), (3) and (4).

[48].              Ibid., subsection 832-310(3).

[49].              Ibid., sections 832-285 and 832-290.

[50].              Ibid., Subdivision 832-I contains detailed rules defining dual inclusion income and how to calculate it.

[51].              Ibid., section 832-300.

[52].              Transparent entities, also referred to as flow-through, are entities where the income or profits of the entity flow through to another entity, and tax is levied on that entity. Trusts and partnerships are common examples of transparent entities, as the beneficiaries in receipt of trust distributions or partners of a partnership will generally be recognised as being in receipt of that income and subject to tax rather than the trust or partnership itself.

[53].              OECD, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report, op. cit., p. 56.

[54].              Ibid., p. 55.

[55].              ITAA 1997, section 832-375.

[56].              Ibid., subsection 832-395(1).

[57].              Ibid., section 832-400 and subsection 832-405(2).

[58].              Ibid., section 832-400 and subsection 832-405(3).

[59].              Ibid., subparagraphs 832-395(1)(b) and 832-410(2)(c); subsections 832-395(3) and (4).

[60].              Ibid., subsection 832-400(3).

[61].              Ibid., subsection 832-380(2).

[62].              Ibid., section 832-390.

[63].              OECD, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report, op. cit., p. 68.

[64].              A permanent establishment broadly refers to a business operation carried on by a non-resident, or a branch operated by a non-resident, through a fixed place of business in another country—a permanent establishment will be treated as a resident for Australian tax purposes.

[65].              ITAA 1997, section 832-450 and subsection 832-455(2).

[66].              Ibid., subsections 832-470(1), 832-480(1) and section 832-485—a branch hybrid is broadly defined to include an entity that is treated as a permanent establishment or branch in Australia or a foreign country, but the relevant payment is not subject to tax in either Australia or the foreign country. Please note this is a highly simplified summary of a branch hybrid under section 832-485.

[67].              Ibid., subsection 832-480(2).

[68].              Ibid., subsection 832-480(3).

[69].              Ibid., subparagraph 832-470(1)(b).

[70].              Ibid., subsection 832-475(3).

[71].              Ibid., section 832-465.

[72].              Ibid., sections 832-525, 832-535 and 832-555.

[73].              Ibid., section 832-545 and 832-550.

[74].              Ibid., section 832-325.

[75].              Ibid., paragraph 832-550(c) and section 703-5.

[76].              Ibid., subsection 832-545(4).

[77].              Ibid., section 832-555 which broadly provides a country in which the amount gives rise to a deduction is a primary response country, unless they are a secondary response country as outlined in subsections 832-555(4) to (8).

[78].              Ibid., see generally sections 832-535 and 832-555.

[79].              Ibid., section 832-540.

[80].               OECD, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report, op. cit., pp. 83–84.             

[81].              ITAA 1997, section 832-615.

[82].              Ibid., paragraphs 832-625(1)(a)–(c).

[83].              Ibid., subsection 832-620(2).

[84].              The Treasury, ‘Tax Integrity – Clarifying the Operation of the Hybrid Mismatch Rules’, Treasury website, n.d.

[85].              Explanatory Memorandum, op. cit., p. 15; ATO, ‘Consolidation’, ATO website, last modified 25 February 2016: consolidation allows wholly-owned corporate groups to operate as a single entity for income tax purposes. Consolidation aims to reduce compliance costs for business, remove impediments to the most efficient business structures and improve the integrity of the tax system.

[86].              Explanatory Memorandum, op. cit., p. 16.

[87].              A number of consequential amendments to give effect to this (such as referring to ‘net income’ removing ‘trustee’ and referring to a MEC Group) are contained in items 5, 6, 14, 16, 17, 19, 21, 22, 25, 36, 39 and 40 in Part 1 of Schedule 1 of the Bill.

[88].              Item 12 in Part 1 of Schedule 1 of the Bill.

[89].              Explanatory Memorandum, op. cit., p. 32.

[90].              Item 11 in Part 1 of Schedule 1 of the Bill.

[91].              Explanatory Memorandum, op. cit., p. 32.

[92].              ITAA 1997, subsections 832-325(1), (2) and (4); Explanatory Memorandum, op. cit., p. 18.

[93].              Page 21 of the Explanatory Memorandum states that subsection 832-325(2) specifies when an entity is a liable entity in respect of another entity’s (the test entity’s) income or profits. A modification is being made so that an entity is not a liable entity in respect of the income or profits of a test entity as a result of the operation of subparagraph 832-325(1)(a)(ii), (a)(iii) or (b)(ii). This reflects the company-like taxation treatment of the test entity in these circumstances.

[94].              ITAA 1997, section 832-675.

[95].              Explanatory Memorandum, op. cit., p. 22.

[96].              Ibid.

[97].              Item 41 of Part 2 of Schedule 1 of the Bill.

[98].              Explanatory Memorandum, op. cit., p. 28.

[99].              Item 50 in Part 2 of Schedule 1 of the Bill. The Bill also makes a number of consequential amendments to ensure that subsequent references to foreign laws corresponding to hybrid mismatch rules (including when a primary or secondary response is required) are consistent with the updated definition in subsection 995-1(1) of the ITAA 1997— items 42–49 in Part 2 of Schedule 1 to the Bill.

[100].              Item 51 in Part 2 of Schedule 1 of the Bill.

[101].              ITAA 1997, section 832-720.

[102].              Ibid., subsection 832-725(6).

[103].              Explanatory Memorandum, op. cit., pp. 34–35.

[104].              Item 58 in Part 3 of Schedule 1 of the Bill.

[105].              Item 59 in Part 3 of Schedule 1 of the Bill.

[106].              Items 52 and 53 in Part 3 of Schedule 1 of the Bill; for a more detailed explanation see: Explanatory Memorandum, op. cit., pp. 35–39.

[107].              Items 54 to 57 in Part 3 of Schedule 1 of the Bill.

[108].              Item 60 in Part 2 of Schedule 1 of the Bill.

[109].              What comprises Additional Tier 1 Capital is set out in Banking (prudential standard) determination No. 4 of 2017.

[110].              Explanatory Memorandum, op. cit., pp. 39–40.

[111].              Ibid., pp. 40–41.

[112].              Item 62 in Part 2 of Schedule 1 of the Bill.

[113].              Item 64 in Part 2 of Schedule 1 of the Bill.

[114].              Revised Explanatory Memorandum, Budget Savings (Omnibus) Bill 2016, p. 21. See also, Australian Taxation Office (ATO), ‘Single Touch Payroll: For employers’, Fact Sheet, ATO website.

[115].              ATO, ‘Single Touch Payroll employer reporting guidelines – About Single Touch Payroll’, ATO website, last updated 27 March 2020.

[116].              Ibid.

[117].               Explanatory Memorandum, Treasury Laws Amendment (2020 Measures No. 2) Bill 2020, pp. 45–46.

[118].               Ibid., p. 46.

[119].              Ibid.

[120].               Australian Government, ‘Part 2: Expense measures’, Budget measures: budget paper no. 2: 2019–20, pp. 158 and 170.

[121].               Ibid.

[122].               Explanatory Memorandum, op. cit., p. 46.

[123].               Australian Government, ‘Single Touch Payroll Reporting – Child support information’, Treasury webpage.

[124].              M Klapdor, Social Services and Other Legislation Amendment (Simplifying Income Reporting and Other Measures) Bill 2020, Bills digest, 85, 2019–20, Parliamentary Library, Canberra, 2020.

[125].               Explanatory Memorandum, op. cit., p. 4.

[126].              Subitems 9(1) and (2) of Schedule 2 to the Bill.

[127].              Australian Government, ‘Part 1: Revenue measures’, Budget measures: budget paper no. 2: 2019–20, p. 20.

[128].              Ibid., p. 20.

[129].              Ibid; items 1 to 4 of Schedule 5 of the Bill.

[130].              ITAA 1997, table item 5.2.26 in subsection 30-50(2).

[131].              J Frydenberg (Treasurer) and M Cormann (Minister for Finance and the Public Service), Mid-year economic and fiscal outlook—2018–19, p. 127.

[132].              Ibid; items 1 and item 5 of Schedule 5 of the Bill.

[133].              Income Tax Assessment Act 1997 (ITAA 1997), sections 8-5 and 30-15. Section 30-15 imposes specific rules about the deductibility of particular gifts and contributions.

[134].              Ibid., section 30-120.

[135].              Australian Government, ‘New Deductible Gift Recipient (DGR) category for Men’s Sheds and Women’s Sheds’, Treasury webpage.

[136].              Australian Men’s Shed Association, Submission to Treasury, Deductible Gift Recipient Category – Community Sheds, 13 February 2020, p. [2].

[137].              Australian Neighbourhood House and Centres Association (ANHCA), Submission to Treasury, undated, p. [4]; Mount Eliza Neighbourhood House, Submission to Treasury, Submission regarding DGR status for Men’s Sheds and Women’s Sheds, undated; ANHCA, ‘Neighbourhood Houses and Centres’, ANHCA website.

[138].              Queensland Men’s Shed Association, Submission to Treasury, Submission to The Treasury on the draft bill and explanatory memorandum for the new deductible gift recipient (DGR) general category for Men’s Sheds and Women’s Sheds prepared by the Queensland Men’s Shed Association Inc (QMSA), 14 February 2020, p. [1]

[139].              Justice Connect, Submission to Treasury, New Deductible Gift Recipient (DGR) category for Men’s Sheds and Women’s Shed, 13 February 2020, pp [1–2].

[140].              The Men’s Table, Submission to Treasury, Submission: New Deductible Gift Recipient (DGR) category for Men’s Sheds and Women’s Sheds, undated, pp. [3–4].

[141].              Under subsection 995-1(1) of the ITAA 1997 registered charity means an entity that is registered under the Australian Charities and Not-for-profits Commission Act 2012 as the type of entity mentioned in column 1 of item 1 of the table in subsection 25-5(5) of that Act—namely, a charity. ‘Charity’ is defined in section 5 of the Charities Act 2013. For further information see: Australian Charities and Not-for-profits Commission (ACNC), ‘Legal meaning of charity’, ACNC website.

[142].              Item 4 of Schedule 3 of the Bill.

[143].              ITAA 1997, section 8-5, see section 30-15 for specific rules about the deductibility of gifts and contributions.

[144].              That is, donations of at least $2 made to the entity during this period will be tax deductible.

[145].              Explanatory Memorandum, op. cit., p. 7.

[146].              World Bank, ‘What we do’, ‘What is the difference between the World Bank Group and the IMF?’ and ‘Bretton Woods Monetary Conference, July 1-22, 1944’, World Bank webpages.

[147].              World Bank, ‘History’, op. cit, and World Bank, ‘Member Countries’, op. cit.

[148].              World Bank, ‘What we do’, op. cit.

[149].              World Bank, ‘Members’, World Bank website.

[150].              World Bank, ‘International Bank For Reconstruction And Development’, World Bank website.

[151].              International Finance Corporation (IFC), ‘Overview’, IFC website.

[152].              International Development Association (IDA), ‘What is IDA’, IDA website.

[153].              Multilateral Investment Guarantee Agency (MIGA), ‘About us’, MIGA website.

[154].              International Centre for Settlement of Investment Disputes (ICSID), ‘About’, ICSID website.

[155].              Explanatory Memorandum, op. cit., p. 59–60

[156].              Ibid., p. 60

[157].              Ibid.

[158].              Ibid.

[159].              Ibid.

[160].              Ibid.

[161].              International Monetary Agreements Act 1947 (IMAA 1947), section 9.

[162].              Explanatory Memorandum, op. cit., p. 60.

[163].              Ibid, pp. 60–61.

[164].              The Bill also seeks to remove the reference to the previous appropriation issued in 2010. Pursuant to section 19 of the Acts Interpretation Act 1901 , the reference to the ‘Minister’ includes the Treasurer and any other Minister in the Treasury portfolio who administers the IMAA 1947.

[165].              Explanatory Memorandum, op. cit., p. 60–61.

[166].              Explanatory Memorandum, op. cit., p. 64.

[167].              International Finance Corporation Act 1955 (IFCA 1955), sections 3, 4 and 5.

[168].              Explanatory Memorandum, op. cit., p. 65.

[169].              Proposed subsection 5A(2) of the IFCA 1955 proposes that the instrument commences at the later of: the earliest day applicable under subsection 12(1) if the Legislation Act 2003 (dealing with commencement of legislative instruments); or the start of the day immediately after the last day on which a resolution referred to in subsection 42(1) of the Legislation Act (dealing with disallowance) disallowing the instrument could be passed.

[170].              Explanatory Memorandum, op. cit., p. 66.

[171].              Ibid., p. 66.

[172].              Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, op. cit., p. 30.

[173].              Ibid.

[174].              Ibid.

[175].              Explanatory Memorandum, op. cit., p. 6.

[176].              JSCOT, Capital Increase WBG IBRD, op. cit.; JSCOT, Capital Increase WBG IFC, op. cit.

[177].              Section 355-45 of Schedule 1 of the TAA 1953.

[178].              Section 355-50 of Schedule 1 of the TAA 1953.

[179].              Section 355-55 of Schedule 1 of the TAA 1953.

[180].              Section 355-65 of Schedule 1 of the TAA 1953.

[181].              Item 1 of Schedule 6 to the Bill which inserts new item 5AB into the table in subsection 355-65(8) of Schedule 1 to the TAA 1953.

[182].              Explanatory Memorandum, op. cit., p. 74

[183].              Proposed table item 5AB of subsection 355-65(8) of Schedule 1 to the TAA 1953.

[184].              Explanatory Memorandum, op. cit., p. 75

[185].              Item 2 of Schedule 6 to the Bill.

[186].              Explanatory Memorandum, op. cit., p. 7.