Bills Digest no. 67 2014–15
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WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Leslie Nielson and Kai Swoboda
4 February 2015
The Bills Digest at a glance
Purpose and Structure of the Bill
Policy position of non-government parties/independents
Statement of Compatibility with Human Rights
Schedule 1—Repeal of Superannuation Industry (Supervision) Act 1993 provisions requiring employers to report superannuation contributions on payslips
Schedule 2—Key issues and provisions
Schedule 3—Amendments to the Financial Sector (Shareholdings) Act 1998 - Key issues and provisions
Schedule 4—Definition of Australia - Key issues and provisions
Date introduced: 22 October 2014
House: House of Representatives
Commencement: Schedules 1, 3 and 4 commence on Royal Assent. Schedule 2 Part 1, Division 1 and Parts 2 to 4 commence on Royal Assent. Schedule 2, Part 1 Division 2 commences on 1 July 2015 (or 90 days after Royal Assent if this date is after 1 July 2015).
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 ComLaw website.
The purpose of this Bill is to repeal redundant provisions and to rewrite existing provisions into more accessible and easily used forms and location. However there are some key issues that arise from these changes:
- changes to the payslip reporting provision in Schedule 1 will mean that an employer has the choice of reporting the superannuation contributions they are liable to make or have actually made. If they choose to do the latter, an employee may not have the opportunity to easily find out whether his or her employer has actually made the required superannuation contributions on their behalf
- changes to the rules governing the amount of a financial institution’s share capital that an individual can control in Schedule 3 may have the unintended consequence of enabling an individual to gain control of such an entity, contrary to the intent of the Financial Sector (Shareholdings) Act 1998, despite not themselves holding any of the share capital in question. That said, the Treasurer can still deal with this situation under section 23 of this Act and
- changes to the Income Tax Assessment Act 1997 in Schedule 4 give the Minister the regulatory power to make the income of a foreign resident, working in Australia’s offshore waters, tax exempt, where necessary to ensure Australia’s compliance with the Law of the Sea Convention.
Purpose and Structure of the Bill
This Bill is divided into four Schedules, which deal with the following purposes:
- Schedule 1 amends the Superannuation Industry (Supervision) Act 1993 to repeal its payslip reporting provisions
- Schedule 2 amendments are designed to simplify taxation laws by amending the Taxation Administration Act 1953 (TAA 1953) and a number of other Acts, so that requirements for the provision of information for the administration of taxation and superannuation laws are centrally located in Schedule 1 of TAA 1953
- Schedule 3 amends the Financial Sector (Shareholdings) Act 1998 (FSS 1998) to remove the deemed shareholding applied to an associate where the associate has no actual shareholding in the company and
- Schedule 4 rewrites provisions from the Income Tax Assessment Act 1936 into the Income Tax Assessment Act 1997 (ITAA 1997) and the TAA 1953 that define the term ‘Australia’ for taxation purposes. The income tax concept applies across other taxes, with amendments as required in order to retain intended policy differences.
One of the major themes of the current Government is a reduction in business regulation and the repeal of redundant legislation and regulations. The Bill is the latest in a series that aims to achieve these objectives as well as tidy up various minor legislative problems. Other deregulatory Bills introduced on the same day are:
This package of Bills follows a similar package introduced in March 2014.
Senate Standing Committee for the Scrutiny of Bills
The Senate Selection of Bills Committee resolved not to refer this Bill to another Senate Committee for further consideration.
Parliamentary Joint Committee on Human Rights
The Parliamentary Joint Committee on Human Rights has examined the Bill and considers that the Bill is compatible with human rights.
As readers would be aware, this Bill has already passed the House of Representatives on 3 December 2014. During the second reading speeches the Australian Labor Party indicated its support for this Bill.
The Explanatory Memorandum states that there are no financial implications from any measures in this Bill for the Commonwealth Budget.
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 all schedules in the Bill are compatible.
Treasury undertook consultation on the draft legislation and draft explanatory material between 27 August and 17 September 2014. Most of the submissions received during that process supported the proposed changes, particularly for changes in Schedule 1 of the Bill. However, one submission recommended that the changes proposed in Schedule 1 not go ahead (see below for further discussion).
The purpose of Schedule 1 of the Bill is to amend the Superannuation Industry (Supervision) Act 1993 (SIS Act) to repeal provisions requiring employers to report actual superannuation contributions paid on payslips.
Under the current provisions of the SIS Act, employers are required to include on an employee’s payslip information about superannuation contributions as prescribed by the relevant regulation. This provision was intended to commence from 1 July 2013 and require employers to disclose when superannuation payments were actually made in a pay period (as distinct from superannuation contributions accrued).
When announcing payslip reporting in September 2011 Bill Shorten, the then Minister for Financial Services and Superannuation, said:
The Government will ensure workers get better information about when their superannuation is being paid. Employers will disclose on payslips when contributions are due to be paid. This will provide an early warning if superannuation entitlements aren’t being paid.
As set out in the Explanatory Memorandum ‘[t]he payslip reporting requirement in the [SIS Act] was intended to provide protection for employees whose employers do not pay their superannuation.’ However, this has never applied in practice as the required regulations were never made.
The provisions in the SIS Act (Part 29B) were inserted in 2012 as part of the Tax and Superannuation Laws Amendment (2012 Measures No. 1) Act 2012. The policy underpinning this legislative change had its origins in the Cooper Review of superannuation (undertaken between 2009 and 2010) and was part of an Australian Labor Party 2010 election policy to protect superannuation entitlements. It was part of broader changes to superannuation reporting arrangements, including a proposal for reporting by superannuation funds to members if regular superannuation contributions ceased.
Broadly similar requirements about superannuation payslip reporting apply under the regulations to the Fair Work Act 2009. These provisions require employers to include on an employee’s payslip:
- the amount of each superannuation contribution that the employer made during the period to which the payslip relates, and the name of any fund to which the contribution was made or
- the amount of contributions that the employer is liable to make and the name of the fund to which the contributions will be made.
The Government’s argument to repeal the SIS Act superannuation contribution payslip reporting arrangements is that the repeal would remove ‘unnecessary’ duplication and provide certainty to employers about the need for ‘costly’ changes to payslip reporting software. In late 2013, the Government announced that the related policy proposed by the former Government of requiring superannuation funds to report to members if regular superannuation contributions ceased would not proceed.
The Government did not have a specific policy in relation to the SIS Act superannuation contribution payslip reporting arrangements in the lead up to the 2013 federal election but did have a broader policy agenda to reduce ‘red tape’ for business. When the measures were debated in the parliament in mid-2012 the Coalition did not oppose the introduction of the measure. That said, the Coalition’s then shadow minister for financial services and superannuation, Senator Cormann, flagged that some issues may be re-examined in the future, noting that:
[T]he coalition will not oppose this Bill, although we would revisit some of these issues in government if successful at the next election.
Draft legislation (titled Treasury Legislative Amendment – Deregulation) to repeal the SIS Act superannuation contribution payslip reporting requirements was released for comment by the Treasury on 27 August 2014. No changes were made to Schedule 1 of this Bill compared to the provisions of the draft legislation.
The explanatory material to the exposure draft stated that the superannuation payslip reporting regulations ‘proved to be more complex and expensive to implement than originally expected’.
There has been little specific public comment by the non-Government parties and independents of the 44th Parliament about the repeal of the SIS Act superannuation contribution payslip reporting arrangements.
When the measure was inserted into the SIS Act in mid-2012, there was no contribution to the debate on the Bill by minor parties or independents in either the House of Representatives or in the Senate. There were also no divisions in either house.
In general, superannuation industry and accounting groups supported the payslip reporting requirements when they were being considered for introduction. The Association of Superannuation Funds of Australia has argued that it has the potential to improve both employer compliance with superannuation obligations and employee engagement with the superannuation system.
The Australian Institute of Superannuation Trustees (AIST) supports the retention and implementation of the SIS Act superannuation contributions payslip arrangements, arguing that they provide important information about overall remuneration entitlements, noting that:
AIST supports measures which provide working Australians with information about all their remuneration entitlements, including when, how and where they are paid. AIST also supports measures that remove unnecessary red tape; however we do not believe that this is one of them. ‘Red tape’ by its very definition covers those processes which hinder or prevent action or decision-making. In the case of people receiving information about when, how and where 9.5% of their [ordinary time earnings] is paid, AIST contends that such information assists Australians make decisions – and, at a bare minimum, provides awareness as to where their superannuation money is.
The Australian Chamber of Commerce and Industry (ACCI) supported the SIS Act superannuation contributions payslip reporting requirements when they were considered for introduction in mid-2012, noting that:
While employers will need to adapt some payslip systems to the new arrangements, the transitions proposed have been thoughtfully designed and are generally sensitive to the circumstances of industry. Particular care will need to be taken with the small business sector, where systems and resources are less elaborate, yet compliance required. The Minister’s willingness to consult further on those impacts is a positive signal that this is not designed to impose excessive burdens on business.
However, ACCI has changed its position, supporting the repeal of these requirements as proposed by Schedule 1 of the Bill. This changed position is largely based on removing legislative requirements that are not in operation so as to not confuse businesses and employees, with ACCI noting that:
Standing redundant (or superseded) legislation makes it more difficult to understand the content of the regulation of the relevant subject matter. It makes it more likely that a citizen must seek help to understand or undertakes unnecessary compliance activity.
It is clear from some of the public comment that Part 29B is not well understood and that the fact that Part 29B has no effect, imposes no obligations, and gives effect to no right to information (and provides no protection) is clearly not universally known. The fact that Part 29B is seen to be operating legislation obscures the actual requirements which do apply to these obligations and their source. This serves to confuse employers about their compliance obligations and employees about their informational rights.
Some other business groups and businesses making submissions on the draft legislation support the repeal of the SIS Act superannuation contribution payslip requirements on the basis of removing duplication or that they would involve significant compliance costs.
The Explanatory Memorandum notes that the financial impact of the measure proposed by Schedule 1 of the Bill is ‘nil’.
The provisions of Schedule 1 of the Bill are relatively straightforward, removing the relevant requirement from the SIS Act and making consequential changes to reflect its removal.
Part 29B of the SIS Act contains the relevant provisions relating to the reporting of superannuation contributions on payslips by employers. Item 6 of Schedule 1 of the Bill repeals this Part in its entirety.
The remaining items are consequential to the repeal of Part 29B, removing references to this part throughout various parts of the SIS Act:
- item 1 repeals the reference to the relevant section of the SIS Act (Part 29B) from the summary list of provisions included in section 4
- items 2 and 3 repeal the reference in section 6 to the Fair Work Ombudsman having general administration of Part 29B
- items 4 and 5 repeal the definitions of ‘Fair Work Inspector’ and ‘industrial instrument’, which were only used in the SIS Act in Part 29B.
It is partly the case that the superannuation payslip requirements that were proposed to apply under the SIS Act overlap with those under the Fair Work Act.
There are differences in the breadth of application and the detail that may actually be provided to employees. The SIS Act provisions would cover a greater number of employers, with the Fair Work Act provisions not covering public sector employers in a number of states (NSW, Qld, WA, Tas and SA) and some (unincorporated) private sector employers in WA.
In terms of what reporting is actually provided to employees, the Fair Work Act provisions give employers the choice of including contributions actually made (which would be identical to the policy intended to be facilitated by the SIS Act provisions) or the amount of contributions the employer is liable to make (Table 1).
Table 1 Comparison of Fair Work Act and SIS Act superannuation contribution payslip reporting requirements
|Fair Work Act superannuation contribution payslip reporting requirement
||SIS Act superannuation contribution payslip reporting final policy position (as set out in corrected explanatory memorandum)
|If the employer is required to make superannuation contributions for the benefit of the employee, the pay slip must also include:
(a) the amount of each contribution that the employer made during the period to which the pay slip relates, and the name, or the name and number, of any fund to which the contribution was made; or
(b) the amounts of contributions that the employer is liable to make in relation to the period to which the pay slip relates, and the name, or the name and number, of any fund to which the contributions will be made.
|Employer required to report contributions actually made during payslip period.
The corrected Explanatory Memorandum notes that for employers paying contributions under the super guarantee (due 28 days after the end of the quarter to which they relate), the regulations will ‘probably’ require employers to report a $0 amount in periods when they do not make superannuation payments but include a general statement like ‘your superannuation contributions will be paid to your fund on or by the 28th day after the end of the quarter’.
Source: Fair Work Regulations 2009, Regulation 3.46, accessed 29 October 2014; Corrected Explanatory Memorandum, Tax and Superannuation Laws Amendments (2012 Measures No. 1) Bill 2012, p. 2, accessed 29 October 2014.
For those employers already reporting contributions that they had made on the payslip, the proposed SIS Act arrangements would essentially match the reporting they currently provide. For those employers that choose to report the contributions that they were liable to make, the proposed SIS Act arrangements would have required a change to the way they currently report superannuation contribution information on payslips.
As legislated, the Fair Work Act arrangements and the SIS Act arrangements would provide for a duplicated arrangement in relation to employers who currently report superannuation contributions actually made on payslips. For those employers who are currently reporting superannuation contributions that they are liable to make on payslips, the SIS Act provisions make the Fair Work Act provisions redundant.
The final policy position of the former Government recognised the overlap between the arrangements and noted that the Fair Work Act superannuation payslip reporting arrangements would be repealed once the SIS Act came into force.
The implementation of the former Government’s changed superannuation contribution payslip arrangements was acknowledged to have some compliance cost impact for employers who would be required to change payroll systems to be able to report when superannuation payments were made. Indeed, the corrected Explanatory Memorandum to the Bill that inserted the superannuation contribution payslip reporting requirements into the SIS Act noted that ‘this schedule may require extensive modification of payroll software’.
In a mid-2011 report by a consultation panel appointed by the Minister for Financial Services and Superannuation to consider the detail of some aspects of the Government’s response to the Cooper Review, the issue of additional costs in modifying payroll systems was noted and a staged implementation approach suggested:
There was, however, considerable concern expressed by employers and payroll providers in relation to the ability of payroll systems to be appropriately configured to meet the requirement to report actual payments made and that, at the very least, an appropriate transitional period may be needed to allow employers time to adjust. Payroll providers advised that this option may not be cost effective. It is recommended that further detailed consultation regarding the implementation of these initiatives be undertaken.
The implementation costs of the proposal were considered in the Regulation Impact Statement (RIS) prepared as part of the broader response to the Cooper Review, which noted the reporting of both accrued entitlements and actual contributions ‘would be the most costly for employers’ but that costs ‘have not been quantified at this time’. Treasury therefore concluded in the RIS that a two-stage implementation process should be pursued:
[I]nitially employers should report on payslips a single ‘expected payment on or before’ date ... This would be comparatively easy and quick to implement while still meeting the underlying objectives of better informed employees and greater understanding of the information that is reported on payslips.
Given the complexity associated with reporting ‘actual’ payments on the payslip, we recommend that further consultation is conducted with industry and payroll providers to determine whether the reporting of ‘actual’ payments is practical and cost effective. From 1 July 2013, subject to there being no significant payroll system costs, payslip reporting of actual contributions will commence.
The Explanatory Memorandum for the Bill does not provide an estimate of the avoided compliance costs associated with the repeal of the SIS Act superannuation contribution payslip reporting arrangements, instead noting that ‘they would need to invest in major upgrades in their software’. The Minister’s media release announcing the Treasury portfolio initiatives that reduce compliance burdens for business noted that the repeal ‘will save employers from investing in major upgrades in their payment system software’. Some indication of the compliance costs avoided can be gained by a Treasury estimate that measures included in this Bill as a package will lead to annual savings of $0.07 million in compliance costs.
One of the objectives of the SIS Act superannuation contribution payslip reporting policy was to improve compliance by employers in meeting their superannuation obligations by giving employees more and regular information about their superannuation payments.
Employer compliance in meeting mandatory superannuation contribution requirements under the superannuation guarantee is the responsibility of the Commissioner of Taxation through the Australian Taxation Office (ATO). Over recent years, several thousand employees have had their superannuation entitlements raised through complaints, voluntary disclosures and ATO compliance activities (Table 2).
Table 2 Australian Taxation Office superannuation guarantee payment compliance activities and outcomes, 2010–11 to 2013–14
|Complaints leading to a liability being raised
|Complaints leading to no result
|Employees who had entitlements raised through compliance activities
|Employees who had entitlements raised through voluntary disclosures
|Number of employers whose records were checked
Sources: Australian Taxation Office annual reports, 2013–14, p. 87; 2012–13, p. 69; 2011–12, pp. 63–64, accessed 17 November 2014.
One of the Government’s rationales in repealing the SIS Act superannuation contribution payslip reporting arrangements relates to the likely ineffectiveness of better informing employees about their actual superannuation payments because 70 per cent of complaints about non-payment come from employees after they have left their employer ‘possibly because they don’t want to jeopardise their jobs (and payslip reporting is unlikely to change that)’.
Support for this position is drawn from a 2006 superannuation guarantee compliance survey, the results of which were reported by an Inspector-General of Taxation (IGT) review of the ATO’s administration of the superannuation guarantee charge. In its analysis of the ATO’s compliance approach, the IGT noted the ATO’s dependence on employee complaints as a source of risk identification in the superannuation guarantee system and the limited effect of such an approach in driving systemic improvement in compliance. While most of the IGT’s recommendations in improving compliance related to ATO processes (notably undertaking earlier investigation and follow up on complaints) the IGT nevertheless recommended that the Government:
[C]onsider providing employees with more timely information regarding whether their employer has paid [superannuation guarantee] SG by the due date, by having employers, on a quarterly basis, include on each employee’s payslip their ordinary time earnings for SG purposes and the amount of SG actually paid to the employee’s superannuation fund or the ATO.
In making this recommendation, the IGT did not appear to consider that greater employee awareness would improve compliance but that the reduction in the time between an employee being aware of any underpayment and the resulting complaint and ATO investigation would improve the likelihood of recovering any underpayment.
The Australian National Audit Office (ANAO) last reviewed the ATO’s administration of the superannuation guarantee in the late 1990s. The ANAO is currently undertaking a performance audit on the ATO’s effectiveness in promoting compliance with the superannuation guarantee obligations. Tabling of this report is due in mid-2015. Accordingly, the AIST contends that any repeal of the SIS Act superannuation contribution payslip reporting requirements should not proceed until the findings of this audit are finalised and made public.
The repeal of the SIS Act superannuation contributions reporting arrangements, which have yet to be implemented due to enabling regulations not having been made, will lead to the existing arrangements under the Fair Work Act continuing to operate. This will leave the decision on how to report superannuation contributions on payslips in the hands of employers, who may choose to report on superannuation contributions accrued or superannuation contributions actually paid.
The repeal of the SIS Act superannuation contributions reporting arrangements removes employer uncertainty about the timing of the implementation of this measure. It also removes the need to modify payroll systems that may have been required for some employers to meet the proposed requirements, although the cost of these changes was never fully quantified during the passage of the legislation in 2012 to change the SIS Act, nor in any assessment for this Bill.
An earlier decision by this Government not to proceed with a complementary policy that would have seen superannuation funds report to members more regularly about superannuation contributions received, reduces the potential impact that the SIS Act superannuation contributions reporting arrangements may have had on employee awareness of superannuation payments actually made by their employer and engagement with the superannuation system more generally.
Part 1 of Schedule 2 amends the TAA 1953, and a number of other Acts. The outcome of these amendments is that the legislative requirements for the Commissioner of Taxation to gather information for the administration of both taxation and superannuation laws are placed altogether in Schedule 1 of the TAA 1953. That is, they are all in one place. This will make it far easier for those required to provide information to the Commissioner to precisely locate the legal authority for these requirements. The other important change is the consolidation and central location of rules relating to how documents issued by the Commissioner or by taxpayers are to be treated as evidence in judicial proceedings in Division 350 in Schedule 1 of the TAA 1953. This means that the rules will cover all taxation laws, not just a number of specified tax regimes with duplicated rules covering the other tax regimes.
Item 72 in Part 2 of Schedule 2 inserts new Division 393 into the TAA 1953 after existing Division 392. There appears to be a small drafting error at this point. The Bill specifies that the TAA 1953 is to be amended. However the main body of the TAA 1953 does not contain Division 392—it is in Schedule 1 of that Act. The Bill does not specifically state that Schedule 1 of the TAA 1953 is to be amended, although the Explanatory Memorandum clarifies that this is the case. It may be appropriate for a small amendment to be made to the Bill to clarify this point.
That point aside, this amendment rewrites the requirements of existing Part 6 of the Income Tax Regulations 1936 and relocates them in Schedule 1 of the TAA 1953. Briefly, investment bodies, such as fund management companies, must give the Commissioner for taxation quarterly reports, by tax file number, on the investments they manage. The Explanatory Memorandum notes that this rewrite and relocation is intended to provide the Commissioner for Taxation with more flexibility in respect of both the content of, and the way in which, the required investment reports are provided.
The other amendments in Schedule 2 are administrative in nature; the Explanatory Memorandum provides an adequate commentary on these amendments.
The overall effect of the FSS 1998 is to limit the proportion of a financial company’s share capital that can be controlled by one individual. The general limit is 15 per cent. This proportion can be higher with specific permission of the Commonwealth Treasurer. Further, the Treasurer may declare that an individual has effective control of a financial company, irrespective of the proportion of a company’s capital that an individual, either separately or in combination with associates, controls. Should an individual or company be assessed to have effective control of a financial company the Federal Court, on application of the Treasurer, may make orders to compel that individual to reduce their overall controlling stake, amongst other remedies.
When the FSS 1998 was first introduced the relevant Explanatory Memorandum noted that:
... the regulation of ownership and acquisitions of prudentially regulated financial institutions fulfils a prudential purpose by creating a diversity of ownership within institutions thus ensuring that no nexus exists between the financial health of a prudentially regulated financial institution and the fortunes of an individual person and/or their associates.
The FSS 1998 streamlined the legislative backing for the long standing policy of controlling the ownership of financial institutions.
Item 16 of Schedule 3 inserts new subclause 10(1A) into existing Schedule 1 of the FSS 1998. The effect of this amendment, in combination with the other amendments in this Schedule, is that an individual is taken for the purposes of FSS 1998 to hold a stake in a company only if they personally hold a ‘direct control interest’ in that company. If a person does not hold a stake in a company, the control interests that his or her associate(s) hold in the same company would not be taken into account in calculating whether an ‘unacceptable shareholding situation’ exists in relation to that individual and the relevant financial sector entity.
A direct control interest is defined in existing clause 11 of Schedule 1 FSS 1998 to refer to the percentage of voting power in relation to that company.
Thus, if the individual concerned does not hold a stake in a financial institution, but his associates are seeking to increase their stakes, that individual will not be subject to the provisions of the FSS 1998.
Under the proposed amendment it may be possible for an individual to not hold any of a financial company’s share capital and still exercise effective control of that entity; if the individual’s associates also hold sufficient amounts of the same company’s share capital; and are otherwise themselves not associated with each other.
This possible unintended consequence noted, under existing section 23 of the FSS 1998 the Treasurer may still, after the proposed amendments are inserted, declare that an individual has an unacceptable shareholding in a financial sector entity, even though they do not own a stake in that company, but their associates do. The point here is that such an outcome is not automatic, it is at the Treasurer’s option.
Why has the government proposed this change?
In his second reading speech for this Bill the Parliamentary Secretary to the Minister for Finance stated:
Currently the law requires the associates of a person, such as a person's relatives, partner or related companies, who is seeking a shareholding in excess of 15 per cent to also seek approval from the Treasurer for the shareholding.
This is required irrespective of whether an associate has any actual shareholding or financial interest in the company in which the new shareholding is sought.
These associates are caught by the wide definition of associate under the Financial Sector (Shareholdings) Act 1998 which requires them to undertake this action for no policy benefit.
The changes in this Bill remove an unnecessary burden for associates with no direct interest in the company without compromising the examination of a shareholder's controlling interest. Associates will no longer be caught in a technical trap that requires them to hold approval from the Treasurer under the Financial Sector (Shareholdings) Act 1998.
Removing the requirement for a person to be subject to the provisions of the FSS 1998, where they do not have a stake in financial sector company, and their associates may be seeking to increase their own stakes in that company above 15 per cent, is a worthy aim. However, it is possible that this particular change may lead to the unintended consequence of a person having no stake in a financial sector company gaining control of that company through their associate’s stakes. Such a situation could be dealt with under section 23 FSS 1998, but it would have to be brought to the Treasurer’s attention before action was taken.
The main purpose of the amendments in Schedule 4 is to rewrite the definition of Australia for tax purposes, particularly in respect of external territories and offshore waters; and to make other legislative changes consequent on this rewritten definition. The Explanatory Memorandum notes that no new policy is implemented by the proposed changes.
However, there is a new power to make regulations in these amendments. Item 5 inserts new section 768-110 into the ITAA 1997. Under this new provision a foreign resident’s income, derived from operations in Australia’s exclusive economic zone (EEZ) or in an area that is part of, or above, Australia’s continental shelf, is non‑assessable non-exempt income for taxation purposes if the relevant project is declared by regulation to be one to which this new section applies. This section was inserted to enable Australian tax law to be brought into line with the provisions of the United Nations Convention on the Law of the Sea (LOSC). Australia is a party to this Convention.
Very basically, under LOSC, Australia does not have sovereignty over the EEZ or continental shelf, but instead has sovereign rights to undertake certain activities. Attempts by Australia to legislate over the EEZ or continental shelf in relation to matters that fall outside the scope of its sovereign rights would not be supported by the LOSC. New section 768-110 will allow regulations to be made that will ensure that Australia does not seek to tax the income of foreign residents derived from activities undertaken in the EEZ or continental shelf, over which Australia does not have jurisdiction. An example of such activities would be the transit of merchant shipping through the EEZ.
However, in situations where Australia does have the right to control the relevant activity under LOSC (for example, the offshore resources industry), it could be argued that exemption of the income from Australian taxation of foreign residents participating in that activity would not be necessary to ensure Australia’s compliance with LOSC, and therefore (having regard to the terms of new subsection 768-110(1), which specifies that the object of the section is to ‘ensure Australia’s compliance with certain provisions of the United Nations Convention on the Law of the Sea’) would not be supported by the regulation‑making power in new section 768‑110 of the ITAA 1997.
The other amendments in this Schedule are administrative in nature for which the Explanatory Memorandum provides an adequate commentary.
Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.
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