When Bills have been passed and have received Royal Assent, they
become Acts, which can be found at the ComLaw
website.
Schedule 2 abolishes the
Dependent spouse tax offset (DSTO), and makes complex adjustments so that:
Though these changes are generally supported by the
Industry, it is unlikely that they will be sufficient to increase the amount of
business that Australian OBUs undertake, given the level of competition
(including tax competition) from other OB hubs in the Asia-Pacific (such as
Singapore and Hong Kong). Further, industry is seeking additional changes to
the current OBU regime.
The purpose of the Tax and Superannuation Laws Amendment
(2015 Measures No. 1) Bill 2015 (the Bill) is to:
The Bill has seven schedules, which deal respectively with
the purposes of the Bill set out above. Each is dealt with in a separate
section in this Digest.
The Senate Economics Legislation Committee, in its report
on the Bill, noted that some people would be adversely affected by the measures
in Schedule 2, but that the improvement in the tax laws was necessary and those
who most needed assistance were still supported by other offsets in the
taxation system such as the DICTO.[1]
The Committee recommended that the Bill be passed, but
advised that the Government should consider amending the Explanatory Memorandum
to the Bill, to clarify concepts relevant to Schedule 7 of the Bill (which
deals with the Investment Manager Regime (IMR)).[2]
At time of writing the Senate Standing Committee for the
Scrutiny of Bills had not considered the Bill.
At time of writing
the Parliamentary Joint Committee on Human Rights had not considered the Bill.
First Home Saver Accounts (FHSAs) are a mechanism designed
to assist individuals saving for their first home. They were first announced by
the Labor opposition in the 2007 election campaign, with a consultation paper
released in February 2008 and legislation introduced in May 2008.[3]
FHSAs offer a combination of a government contribution and
tax concessions, which can be accessed subject to a number of constraints. Under
the FHSA Act, FHSA holders benefit from:
However FHSAs are also subject to a number of
restrictions. FHSAs are only available to individuals aged 18 to 65, who have
not previously opened a home.[7]
Additionally, to make withdrawals, FHSA holders must:
However other criteria for withdrawal are available,
including transferring the balance to a superannuation account.[9]
The take-up of FHSAs has been substantially lower than
forecast. As discussed in a previous Parliamentary Library publication:
The chart below shows the number of FHSAs and average
account balance.
Source: Parliamentary Library
estimates based on Australian Prudential Regulation Authority (APRA), ‘First Home
Saver Accounts’, APRA website, accessed 1 June 2015, and supplied.
The Coalition Government announced that it would repeal the
FHSA scheme in the 2014–15 Budget. The Treasurer’s press release stated that:
There was a gap of over a year between the announcement
date (13 May 2014) and the subsequent introduction of the Bill (27 May 2015)
and this has caused some uncertainty for account-holders.[12]
This section sets out relevant dates between the announcement and introduction
of legislation:
The Government has not announced an intention to replace FHSAs,
on the grounds that they ‘have not helped address rising housing costs in
Australia.’ The Government argues that any problems in the housing market are
problems of supply, and in particular of regulatory barriers to supply.[17]
While the Treasurer has previously discussed the possibility
of allowing superannuation accounts to be used to fund deposits on a first-home
(a policy approach which shares key features with the current FHSA regime),[18]
this measure was not adopted as a formal policy position by the Government, and
the Prime Minister has been reported as stating ‘at this stage we don’t have
any plans to introduce it‘.[19]
The Explanatory Memorandum states that the cessation of the
FHSA scheme will result in a revenue increase of $113.3 million over the forward
estimates, as set out in Table 1 below.
- FHSA‘in respect of circumstances that arose
on or after 1 June 2015’
- the
Tax Commissioner do not apply from 1 July 2015, ‘even in relation to
circumstances that arose before 1 July 2015’
-
FHSA ‘in relation to trigger days that occur
on or after 17 June 2015’.
Under proposed section 204, the government
co-contribution ‘is not payable for the 2014–15 financial year or a later
financial year’. This matches the Government’s budget announcement. Where a government
co‑contribution is owed for the ‘2013–14 financial year or an earlier
financial year’, the Tax Commissioner must still make the payment for any
applications lodged ‘on or before 30 June 2017’.[23]
Proposed section 205 ensures that where individuals
have provided a tax-file number in relation to a FHSA, they are not required to
provide it again once the FHSA ceases to be a FHSA.
Schedule 2 of the Bill amends the ITAA 1936
and the ITAA 1997. The purpose of Schedule 2 is to:
- bring
an end to the dependent spouse tax offset (DSTO)
- expand
the range of spouses that the dependant (invalid and carer) tax offset
(DICTO) applies to
- withdraw
an entitlement to DSTO where it is made available as a component of another tax
offset, and replace that component with a component made up of DICTO and
- rephrase
the notional tax offsets covering children, students and sole parents that are
available as components of other tax offsets.[24]
Importantly, item 38 in Part 4 of Schedule
2 provides that the proposed amendments will have retrospective effect,
having been deemed to apply from 1 July 2014.
Human rights implications
According to the Explanatory Memorandum, this Schedule
does not raise any human rights issue. See Statement of Compatibility with
Human Rights—Chapter 2, paragraphs 2.43 to 2.60 of the Explanatory
Memorandum (EM).[25]
However, it is worth noting that the previous amendments
to the ITAA 1936 through the Tax and Superannuation Laws Amendment (2013
Measures No. 2) Bill 2013 regarding consolidation of dependants’ offsets
drew some criticism from the Parliamentary Joint Committee on Human Rights. At
the time, the Committee made the following remarks:
The amendments, however, appear to reduce the amount of tax
offsets available to assist individuals with dependents and it is unclear what
effect this reduction might have on the right to social security and the right
to an adequate standard of living under articles 9 and 11 of the ICESCR [International
Covenant on Economic, Social and Cultural Rights] respectively, as well as
family and children’s rights more generally. ... It is also unclear why taxpayers
eligible for the zone, overseas forces and overseas civilian tax offsets will
be quarantined from these changes.
The statement of compatibility does not explain the potential
impact of the changes on families and children; nor does it provide any
justification for the amendments...[26]
The Committee was satisfied with the Minister’s response
and had no further comment on that aspect of the Bill.[27]
Background
Dependent spouse tax offset (DSTO)
Under sections 159J and 159H of the ITAA 1936
taxpayers who maintain certain classes of dependants can claim tax offsets.[28]
With certain qualifications, the dependants are generally spouses, invalid
spouses, spouses who care for an invalid, housekeepers, child-housekeepers,
invalid relatives and parents/parents-in-law.[29]
The DSTO is a tax offset available to taxpayers who
maintain a dependent spouse. The maximum DSTO available to taxpayers was $2,535
(indexed) in 2014–15.[30]
Where the spouse derives adjusted taxable income, the offset otherwise
allowable is reduced by $1 for every complete $4 by which the spouse’s adjusted
taxable income exceeds $282.[31]
In general, eligibility for the DSTO is currently limited to taxpayers who have
a spouse born before 1 July 1952.
Under section 159J of the ITAA 1936, a resident
individual taxpayer is entitled to the DSTO if the following conditions are
satisfied, as set out in the Australian Tax Handbook 2015:
-
the taxpayer contributes to the maintenance of her or his spouse:
subsection 159J(1)
-
the spouse is a resident of Australia... [a proportionate offset is
allowed if the dependant is a resident for part of the income year only]: subsection
159J(1)
-
the taxpayer’s adjusted taxable income for rebates (ATI) does not
exceed $150,000 (the income test): subsections 159J(1AB) and (1AC)...[32]
-
the taxpayer is not a member of a family tax benefit (FTB) Part B
family with shared care: subsections 159J (1AB) and 159JA(1) [33]
... and
-
the spouse was born before 1 July 1952: subsection 159J(1C).[34]
For purposes of other dependency offsets, an eligible
dependant may be:
- a
taxpayer‘s spouse, parent, child (aged 16 years or over), or brother or sister
(aged 16 years or over) who is genuinely unable to work due to invalidity
- the
taxpayer‘s spouse‘s parent, brother or sister (aged 16 years or over), who is
genuinely unable to work due to invalidity or
- a
taxpayer‘s spouse or parent/parent-in-law, who is genuinely unable to work due
to carer obligations.[35]
Persons receiving a disability support pension or a
special needs disability support pension under the Social Security Act 1991,
or an invalidity service pension under the Veterans’ Entitlements Act 1986,
are considered to be genuinely unable to work due to invalidity.[36]
A dependant is also considered to be genuinely unable to work due to carer
obligations if they are:
- receiving
a carer payment or carer allowance under the Social Security Act 1991 or
- wholly
engaged in providing care to a relative who receives a disability support
pension or a special needs disability support pension under the Social
Security Act 1991 or an invalidity service pension under the Veterans’
Entitlements Act 1986. [37]
Paragraphs 61-10 (1)(d) and (e) of the ITAA 1997
preclude a taxpayer from receiving an offset due to invalidity or caring
responsibilities for a spouse when he or she is receiving a rebate of tax in
relation to that spouse as a dependant under the ITAA 1936.[38]
Recent reform measures
For a long period of time, the dependency tax offsets have
been available to Australian resident tax payers. The initial idea was mainly
to help single income families in the absence of a mature welfare system.[39]
In recent times, however, with a view to containing the over-claiming of tax
offsets, reducing overlapping provisions and encouraging workforce
participation, there have been a number of legislative amendments to limit the
number of people who could receive a tax concession in respect of their
dependants, as outlined below.
2008–09 Budget
In the 2008–09 Budget, the previous Labor Government
announced the introduction of an income test for the dependency offsets,
linking the income limit to that for FTB Part B. This was estimated to raise
$125 million over the forward estimates at the time.[40]
2011–12 Budget
In the 2011–12 Budget, it was announced that DSTO would be
restricted to taxpayers with a spouse born before 1 July 1971, with an
estimated revenue gain at the time of $755 million over the forward estimates.
The reform measure was to address a barrier to workforce participation by
progressively removing the tax concession for taxpayers with a non-working
spouse and no children. Taxpayers with an invalid or permanently disabled
spouse, supporting a carer, or people who were eligible for the zone, overseas
forces and overseas civilian tax offsets would not be affected by the measure.[41]
2011–12 Mid-Year Economic and
Fiscal Outlook
In the 2011–12 Mid-Year Economic and Fiscal Outlook
(MYEFO), the Government announced that eligibility for DSTO would be further
restricted to taxpayers with a spouse born before 1 July 1952, with an
estimated revenue gain at the time of $370 million over the forward estimates.
At the time, the Government announced the measure with a view to persuading non-working
spouses to work (on the premise that people without children should not receive
a tax benefit for choosing to stay at home).[42]
2012–13 Budget
In the 2012–13 Budget, the Government undertook a measure
to consolidate eight dependency tax offsets into a single, streamlined and
non-refundable offset, now called the dependant (invalid and carer) tax offset
or DICTO, that was only available to taxpayers who maintained a dependant who
was genuinely unable to work due to carer obligation or disability. The offsets
to be consolidated were the invalid spouse, carer spouse, housekeeper,
housekeeper (with child), child-housekeeper, child-housekeeper (with child),
invalid relative and parent/parent-in-law tax offsets. The new consolidated
offset was to be based on the highest rate of the existing offsets it replaced,
resulting in an increased entitlement for many of those eligible for this
measure. At the time, taxpayers who were eligible to claim more than one offset
amount in respect of multiple dependants would still have been able to do so.
The measure was estimated to generate a revenue gain of $70 million over the forward
estimates. However, despite this consolidation, these eight other dependency
tax offsets still remained available to taxpayers eligible to receive zone tax
offset (ZTO), overseas civilians tax offset (OCTO) or overseas forces tax
offset (OFTO).[43]
These taxpayers were also eligible for the DSTO, regardless of the age of their
spouse.[44]
Current measure
In the 2014–15 Budget, the Government announced that the
DSTO for all taxpayers would be removed from 1 July 2014. This means that
an offset can be claimed only for a dependant (including a spouse) who is
genuinely unable to work because of a disability or caring responsibilities.[45]
For taxpayers who were eligible to receive the ZTO, OCTO
or OFTO, the offsets would be consolidated into the DICTO as they had already
been for other taxpayers.[46]
As now, taxpayers eligible for these offsets could still receive a further
entitlement of 50 per cent or 20 per cent of their DICTO entitlement as a
component of ZTO, OCTO or OFTO, depending on where they reside.[47]
Although the measure was announced in last year’s budget,
the legislation to amend the provisions has been introduced only recently.
Policy position of non-government
parties/independents
Given that the proposed reforms are similar to the
measures proposed by the former Government, or a continuation of those, the
Labor party has agreed to support the proposed changes in Schedule 2 of this
Bill.[48]
As at the date of writing, no independents have taken a
position on the proposed measures in Schedule 2 of the Bill.
Position of major interest groups
There was no reaction to Schedule 2.
Financial implications
The Explanatory Memorandum states that the proposed
measures are expected to have a positive impact on the Commonwealth Budget, as
follows:
Table 2: Financial impact of DSTO reforms, $m
Year
|
2015–16
|
2016–17
|
2017–18
|
Amount
|
$130
|
$100
|
$90
|
Source: Explanatory Memorandum, Tax
Laws and Superannuation Amendment (2015 Measures No. 1) Bill 2015, p. 4.
Key issues and provisions
Section 23AB of the ITAA 1936 deals with overseas
civilian tax offset (OCTO); section 79A deals with the zone tax offset (ZTO);
and section 79B deals with the overseas forces tax offset (OFTO). Items 1,
3, 4, 6, 7, 9, 11, 13, 14
and 15 remove references to the DSTO from those sections, thus abolishing
a ‘secondary form of access to the DSTO’ currently available to recipients of a
ZTO, OCTO or OFTO.[49]
Items 3, 7 and 14 incorporate the dependant (invalid and
carer) tax offset (DICTO) into those sections so that the additional 20 or 50
per cent of the DSTO that used to be available is now available as an addition
to the DICTO.[50]
Item 16 abolishes the DSTO by repealing sections
159J and 159JA of the ITAA 1936. It also repeals sections 159K, 159L,
159LA and 159M. These sections refer to other offsets which have not been paid
for many years: they were ‘notional tax offsets’ which have been used only to
calculate entitlements under other tax provisions.
Item 17 inserts proposed Division 961 into
the ITAA 1997. This rewrites the notional dependant (non-student child
under 21 or student) tax offset contained in section 159J, and the notional
sole parent tax offset in section 159K, of the ITAA 1936 into the ITAA
1997 without any changes to the operation of those notional offsets.[51]
Consequential amendments
Items 18 to 20, items 24 to 26
and item 33 repeal provisions that are redundant as a result of
the repeal of the dependent spouse tax offset.[52]
Items 21 to 23 and items 30 to
32 replace cross references to the old notional tax offsets with
references to the new notional tax offsets.[53]
The definition of ‘dependant‘ for the purposes of the net medical expenses tax
offset[54]
has been updated to remove all references to dependants for which a rebate
under section 159J may be available and instead refers only to dependants who
are the taxpayer‘s spouse or child (under 21) or who are covered by the
notional tax offsets or DICTO.[55]
Technical amendments
A number of technical amendments are made to the DICTO to
ensure it operates as intended. Details of the intended operation of DICTO are set
out at pages 63 to 69 of the Explanatory Memorandum to the Tax and
Superannuation Laws Amendment (2013 Measures No. 2) Bill 2013.[56]
The Government states that the technical amendments ‘are beneficial to
taxpayers’.[57]
Application and transitional provisions
Item 38 proposes the amendments generally to apply
to the 2014–15 income year and to all later income years.[58]
Item 39 proposes that the technical amendments to be applicable starting
from 2012–13 income year and to all later income years which align with the
introduction of the DICTO.[59]
The Government states that ‘the amendments are all beneficial to taxpayers’.[60]
Finding tables
The Explanatory Memorandum includes two tables to locate
which provisions in this Bill correspond to provisions in the current law that
has been rewritten, and vice versa.[61]
The ‘old law’ provisions refer to sections of the ITAA 1936 whilst the ‘new
law’ provisions refer to sections of the ITAA 1997.
Schedule 3 of the Bill is divided into six parts. Parts
1 to 5 contain amendments to the ITAA 1936 in respect of Offshore
Banking Units (OBUs). A summary of the purpose of these parts of Schedule 3
is as follows:
- Part
1 makes amendments that limit the use of certain tax concessions[62]
- Part
2 inserts the so called ‘choice principle’ governing the operation of
certain tax concessions into the ITAA 1936 (previously it had been
governed by a taxation determination)[63]
- Part
3 creates a new framework governing the methods by which expenses can be allocated
between a Domestic Banking Unit (DBU) and a related OBU[64]
- Part
4 expands the list of eligible Offshore Banking (OB) activities and
- Part
5 aims to ensure that the internal financial dealings of an OBU and its
domestic parent are carried out on an ‘arm’s length basis’.[65]
Parts one, three and five are tax integrity measures.
Parts two and four improve the operation of OBUs, and seek to make them more
competitive with similar entities in other countries, especially those in the
Asia-Pacific region. Part six sets out when the amendments start to apply.
What are OBUs and DBUs?
Generally, an OBU is ‘a notional division or business unit
of an Australian entity that conducts offshore banking activities. To be
considered an OBU an entity must be declared by the Treasurer to be an OBU’.[66]
For taxation purposes, technically an OBU is, under subsection 128AE(2) of the ITAA
1936, a company declared to be such by the Treasurer, provided that it is
either:
(i) a
body corporate that is an ADI (authorised deposit-taking institution) for the
purposes of the Banking Act 1959
(ii) a public
authority constituted by a law of a State, being a public authority that
carries on the business of state banking
(iii) a company in
which all of the equity interests are beneficially owned by an offshore banking
unit (other than one that is covered by (iv), below)
(iv) a person who the
Minister is satisfied is appropriately authorised to carry on business as a
dealer in foreign exchange
(v) a life
insurance company registered under section 21 of the Life Insurance Act 1995
(vi) a company
incorporated under the Corporations Act 2001 that provides funds
management services on a commercial basis (other than solely to related
persons) or
(vii) a company that the Minister
determines, in writing, to be an OBU.[67]
Given the precision of the examples of OB activity given
in section 121D and 121DA (which deals with types of ‘investment activity’) of
the ITAA 1936, it would appear that, at the very least an OBU is an
entity that:
- borrows
or lends money to an offshore person that is not Australian currency[68]
- underwrites
a risk for an offshore person in respect of property outside Australia or an
event that can only happen outside Australia[69]
- syndicating
a loan for an offshore person[70]
- issuing
a performance bond to an offshore person in relation to activities that are, or
will be, conducted wholly outside Australia[71]
- trading
with an offshore person in:
-
securities
issued by non-residents
-
eligible
contracts under which any amounts payable are payable by non-residents
-
shares
in non-resident companies
-
units
in non-resident trusts or
-
currency,
or options or rights in respect of currency[72]
- certain
types of investment activity (as defined in subsection 121D(6) and section
121DA)
- portfolio
investment activities made by non-residents[73]
and
- certain
advisory or hedging activities provided to offshore persons.[74]
Hence the range of entities that can be considered an OBU
are potentially very diverse.
What a domestic banking unit may be is not further defined
in tax legislation. Rather, the Explanatory Memorandum states that such a unit
is ‘another notional division of the entity’.[75]
That is, it is another division of the entity that contains an OBU, but is
itself not an OBU. Other sources of the precise meaning of this term are even
less helpful than the above.
Why are these provisions included in the ITAA 1936?
Between 1981 and 1986 a series of reports had considered
the establishment of an OBU regime in Australia.[76]
In 1986 various tax concessions were established, but they proved insufficient
to attract offshore banking business to Australia. In his ‘One Nation’ statement
of 26 February 1992 the then Prime Minister, Paul Keating, foreshadowed
significant changes to the OBU rules to attract business to Australia.[77]
Schedule 3 of this Bill amends Division 9A of the ITAA
1936. This Division was inserted by section 15 of the Taxation
Laws Amendment (No. 4) Act 1992.[78]
The second reading speech to the Bill for that Act, in relation to OBUs, noted
that:
The Government is confident that this measure will promote
the development of a viable offshore banking centre in Australia at a time when
such activities are likely to be shifted from Hong Kong to elsewhere in the Asia-Pacific
region. Development of offshore banking in Australia will also help to
integrate Australia more closely with the Asian-Pacific growth economies by
becoming an expanded financial centre of the region.[79]
Are these units worth promoting?
Promoting the growth of Australia as regional financial
centre could potentially generate significant benefits. Increasing the use of
Australian OBUs is part of that process.[80]
A recent paper enumerated the economic and financial advantages of OBUs:
The foundation of the OBU not only brings profits to the
domestic economy but also improves the integration of the capital market,
increases capital circulation, and promotes the operating performances of
related industries. As the OBU diminishes the limits of overseas capital
borrowers, the capital circulation is more convenient and attracts a large
number of overseas borrowers, bringing positive effects to the domestic
economy. All of these advantages will increase government tax income.[81]
(emphasis added, citations omitted)
How did these changes come about?
The most recent set of changes were initiated by the
report of the Australian Financial Centre Forum entitled ‘Australian as a
Financial Centre – Building on our Strengths’ (Johnson Report).[82]
This report observed that:
Australia’s financial sector ranks highly in international
surveys on many of the key requirements for a successful financial centre.
These include a highly skilled workforce and a first class regulatory framework
that has served us well through the global financial crisis. Yet our exports
and imports of financial services are low by international standards. Our funds
management sector, one of the largest and most sophisticated in the world,
manages only a small volume of funds sourced from offshore.[83]
Clearly, the original policy intent prompting the
insertion of Division 9A into the ITAA 1936 has not been realised, given
that the Johnson Report recommendations were aimed at promoting ‘Australia as a
regional financial services hub’ – a goal also articulated in 1992. In relation
to OBUs the Johnson Report recommended that:
- in
its response to the report the Government state its support for, and commitment
to, the OBU regime
- the
tax uncertainty about the choice of activities (whether they be an OBU activity
or not) be addressed by legislation (see discussion below)
- the
list of eligible OBU activities in Division 9A of the ITAA 1936
be regularly reviewed and updated and
- a
streamlined process for vetting new OBU applications be put in place.[84]
Additional policy development
The then Government welcomed the report and its
recommendations.[85]
Since that time additional policy development has taken place:
- the
previous Government’s 2013–14 Budget announced changes to the OBU regime that
were aimed at improving the tax integrity of that regime (as much as increasing
the use of these entities), specifically:
- treating
dealings with related parties, including the transfer of transactions between
an OBU and a related domestic bank, as ineligible for OBU treatment[86]
- treat
transactions between OBUs, including between unrelated OBUs, as ineligible for
OBU treatment
- ensure
that other provisions of the income tax law interact appropriately with the OBU
provisions and
- tighten
the current list of eligible OBU activity[87]
- on
28 June 2013 the previous Government released a consultation paper on reforms
to the Offshore Banking Unit regime. All of the changes proposed by the Bill were
discussed in this paper[88]
- while
deferring the start date, the current Government announced that it would be proceeding
with some of the previously announced changes[89]
and
- on
12 March 2015 Treasury released draft legislation and explanatory material for
comment. Submissions closed on 8 April 2015.[90]
The proposed changes go beyond those recommended by the
Johnson Report, and have been developed by both the current and previous
governments. For example, tax integrity concerns have prompted several of the
proposed changes in this Bill, an issue not touched on by the Johnson Report’s
recommendations.
How many Australian OBUs are there and how active are
they?
The following table shows the number of offshore banking
unit adjustments for entities completing a company tax return:
Table 3: Number of OBU tax return adjustments
Year
|
2009–10
|
2010–11
|
2011–12
|
2012–13
|
Number
|
45
|
55
|
50
|
40
|
Source: Australian Taxation Office (ATO), ‘Taxation statistics 2012–13,
companies: selected items, for income years 1979–80 to 2012–13’,
ATO website, accessed 1 June 2015.
A recent paper noted that fewer than half the currently
registered OBUs actually appeared to be active (as evidenced by a reference in
a company tax return). This paper’s latest figure was 146 OBUs currently registered
with the Australian Tax Office. The above figures appear to confirm this
activity pattern.[91]
Under tax law, an OBU unit’s income is then separately taxed
(discussed below under the heading ‘Current tax treatment of OBUs’).[92]
An indication of OBU activity can therefore be gauged by the overall amount of
income deducted from company tax returns in respect of OBU activity. The
following table shows some recent overall amounts deducted from company tax
returns arising from OBUs:
Table 4: Amounts deducted from company assessable income
arising from OBU activity, $m
Year
|
2006–07
|
2007–08
|
2008–09
|
2009–10
|
2010–11
|
2011–12
|
2012–13
|
Amount
|
1,071.8
|
1,009.6
|
894.7
|
374.0
|
386.4
|
617.0
|
630.6
|
Source: Australian Taxation Office (ATO), ‘Taxation statistics 2012–13, companies: selected
items, for income years 1979–80 to 2012–13’, ATO website, accessed 1 June 2015.
While some of the apparent decline in activity since 2006–07
(a high point in terms of OBU income deducted from company assessable income)
may be due to the effects of the global financial crisis, a real decline in
overall OBU activity can be observed.
This is not to suggest that the apparent low level of OBU
activity in Australia is terminal. Indeed, one commentator notes that a great
deal of use is being made of Australian OBUs.[93]
Rather, the activity is not as extensive as it could be.
Why is Australian OBU activity so low?
Some reasons for the lack of Australian OBU activity have
been advanced, specifically:
- a
lack of a clearly defined ownership of the OBU within an organisation
- a
lack of properly structured remuneration arrangements to reward deal
originators for using OBUs
- the
additional and complex internal controls and systems to aid compliance with the
myriad of rules relating to the operations of an OBU
- accounting
systems that do not distinguish between offshore and domestic transactions
- complexity
of the OBU rules
- the
lack of certainty surrounding the choice principle (see discussion below under
the heading ‘Schedule 3, Part 2: codifying the choice principle’)
- a
lack of awareness amongst many financial market participants of the potential
benefits of the OBU regime
- language
in the legislation that is now out of date with the modern banking and
financial services industry and
- many
organisations, especially foreign owned ones, appear to have concluded that the
Singaporean Financial Services Incentive Scheme (see below), is considerably
more attractive and user-friendly than Australia’s OBU regime.[94]
It is important to note that not all these issues can be
addressed by the Government. Many items on the above list are matters for
potential users, and operators, of Australian OBUs.
Current tax treatment of OBUs
Briefly, Australian OBUs enjoy the following tax
concessions:
- income
(other than capital gains) derived by an OBU from eligible offshore banking
activities is taxed at an effective rate of ten per cent, whilst other income
and capital gains flowing to the OBU are taxed at normal company tax rate (30
per cent)[95]
- interest
paid by an OBU on qualifying offshore borrowings and gold fees on certain
offshore gold borrowings are exempt from withholding tax[96]income
and capital gains from an overseas investment trust, that only benefits
non-residents or foreign charities, is tax exempt[97]
- investment
income and capital gains derived by an overseas charitable institution, managed
by an OBU or that is an outgoing from an OBU, is also tax exempt[98]
and
- capital
gains produced by a trust that is managed or controlled by an OBU, where the
only beneficiaries are non-residents, and where the average Australian asset
percentage of the portfolio is 10 per cent or less, are disregarded for tax
purposes.[99]
OBU income is concessionally taxed if it arises from OBU
activities listed in sections 121D to 121EF of the ITAA 1936. This
specified list does not prevent OBUs from undertaking other financial activity,
but income arising from non-OBU activities is not concessionally taxed.
Regional competition to Australian OBUs
Australia is not alone in implementing an offshore banking
regime. In the Asia-Pacific region Taiwan, Hong Kong, Singapore, Thailand,
Malaysia, and Japan all have established OBUs.[100]
Briefly, some advantages enjoyed by Singapore’s OBUs, in comparison to the Australian
regime, are:
- income
taxed at 5, 10 or 12 per cent, depending on the circumstances
- a
broader range of qualifying OBU activities
- the
relevant OBU rules are regularly updated
- less
onerous rules for separation of OBU and non-OBU monies and
- no
dividend withholding tax.[101]
Are these changes part of the
Government’s policy on corporate tax avoidance?
In the 2015–16 Budget the Government announced a number of
measures aimed at dealing with corporate tax avoidance and released exposure
draft tax legislation.[102]
The Government’s announcements on corporate tax avoidance are mainly
implementing actions arising from the Organisation for Economic Cooperation and
Development (OECD)’s Base Erosion and Profit Shifting Project (BEPS). This
project formally commenced in July 2013,[103]
while the policy development process for the tax integrity measures contained
in the Bill has been in train since the release of the Johnson Report in 2009.
That said, the focus on tax system integrity of the proposed OBU measures in the
Bill is consistent with the Government’s corporate tax avoidance announcements.
As at the date of writing, neither the non-government
parties, nor the independents, have taken a position on the proposed measures
in Schedule 3 of the Bill.
The Shadow Assistant Treasurer, Dr Andrew Leigh, had
criticised the Government for backing away from the previous Government’s
proposed changes to OBU rules.[104]
Given that the proposed reforms are similar to those proposed by the former Government,
it may be the case that the Labor Party will support the proposed changes in
Schedule 3 of this Bill.
The Australian Financial Markets Association (AFMA)
supports the measures in Schedule 3, but believes that additional reforms are
needed:
AFMA maintains that further reform is necessary to place the
OBU regime on a competitive footing with comparable regimes in other
jurisdictions. In particular, we have continued to advocate for a more
principles-based regime that can respond nimbly to financial market
developments and the adoption of a holistic approach to eligibility that
ensures that all aspects of a transaction lifecycle can be offered from
Australia ...
Today’s initiatives are a solid foundation for future
improvement of the regime and we encourage the government to continue the
dialogue with industry to optimise the regime in a manner that both protects
revenue integrity and supports the growth of our financial services exports.[105]
The Explanatory Memorandum states that the proposed
measures are expected to have a positive impact on the Commonwealth Budget, as
follows:
Table 5: Financial impact of OBU reforms, $m
Year
|
2016–17
|
2017–18
|
2018–19
|
Amount
|
12.4
|
13.6
|
15.8
|
Source: Explanatory Memorandum, Tax Laws and Superannuation Amendment (2015 Measures
No. 1) Bill 2015, p. 5.
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Schedule’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 this Schedule is compatible.[106]
Schedule 3, Part 1: trading activity
Part 1 of Schedule 3 deals with the trading
activity of an OBU.
Item 2 inserts proposed subsection 121D(4A) into
the ITAA 1936. The effect is to slightly narrow the range of permissible
OBU activities, by placing restrictions on trading in subsidiaries. Increasing
or reducing an OBUs’ participation interest in another offshore entity, above
or below ten per cent (as the case may be), will not give rise to
concessionally taxed OBU income. Of course the OBU may undertake this activity,
but any resulting income will be taxed at the normal company tax rate.
This is an integrity measure. The mischief targeted is the
use of an offshore subsidiary of an OBU to undertake ineligible activities,
which is an activity that gives rise to income that does not qualify for
concessional tax treatment. These profits are generated by the purchase of
shares in the subsidiary undertaking the non OBU activity, and later reselling
these shares when that non-OBU activity has concluded.
However, this measure also catches profits earned by a
subsidiary that also undertakes approved OBU activities, so it could be seen as
a restriction on how an OBU chooses to undertake its business (assuming that
there is a good reason for the OBU not to undertake the OBU activity in question
itself). Further, this measure does not apply to buying or selling shares in an
offshore subsidiary where the OBU’s interest remains below ten per cent. This
may provide a significant way around the intent of this proposed amendment.[107]
Part 2 of Schedule 3 deals with the ‘choice
principle’. Briefly, this principle states that an OBU may choose to classify
an action as a non-OBU activity. Division 9A of the ITAA 1936 contains
no provisions in respect of the ‘choice principle’. The Johnson Report recommended
that certainty be provided by legislating this principle (currently contained
in a Tax Determination (TD)).[108]
This recommendation is understandable, since whilst a Tax Office discussion
paper in 2007 foreshadowed the withdrawal of this TD, it remains in force, thus
creating a level of uncertainty as to the future application or availability of
this principle to OB activities.[109]
The choice principle is important to the operation of
OBUs, as a recent paper has observed:
[Section] 121EH [of the] ITAA 1936 contains the so
called ‘purity test’ which, briefly stated, is triggered when more than 10% of
an OBU’s assessable income for an income year is attributable to activities
that used non-OB money. The DBU [domestic banking unit] of an OBU taxpayer is
likely (often, and indeed generally, on an inadvertent basis) to undertake a
variety of activities that would constitute eligible OB activities. Absent
being able to choose to book a transaction to its DBU, an OBU taxpayer is
likely to inadvertently fail the purity test.
...
[Section] 128GB [of the] ITAA 1936 provides an
exemption from interest withholding tax that would otherwise be imposed under
s.128B on “offshore borrowings”. However, this exemption is effectively clawed
back with penalties where the funds are used in the OBU taxpayer’s DBU (i.e.
the funds are not used for eligible OB activities). Accordingly, being able to
choose not to claim the s.128GB exemption is critical where an OBU taxpayer
raises funds overseas for its DBU operations.[110]
Item 6 of Part 2 inserts proposed section
121EAA into the ITAA 1936, and legislates the choice principle. The
proposed amendment will increase the level of certainty on the operation of tax
law. For example, proposed subsections 121EAA(4) to (6) clarify
how making the ‘choice’ in relation to one transaction will impact on the
treatment of ‘grouped’ transactions that are part of the same scheme. In short,
as noted in the Explanatory Memorandum:
If a taxpayer choses to treat a particular transaction that
is an eligible OB activity as if it were ineligible, all other transactions
within the same scheme are treated as if they are ineligible.[111]
However, some uncertainties remain as the Tax Commissioner
may change his or her opinion on how exactly the law operates.[112]
Schedule 3, Part 3: allocating
expenses
Part 3 of Schedule 3 seeks to address
problems in the allocation of expenses (deductions) between OBUs and DBUs.
Subsection 121EF(2) of the ITAA 1936 classifies allowable OB deductions
into three types:
- an
exclusive offshore banking (OB) deduction
- a
general OB deduction and
- an
apportionable OB deduction.
The June 2013 ‘Improving the Offshore Banking Unit regime’
Treasury Discussion noted that ‘exclusive deductions are allocated exclusively
to OB or non-OB income based upon the relevant facts. General and apportionable
deductions are allocated according to the relevant legislative formulae. Concerns
have not been raised regarding the treatment of exclusive deductions.[113]
However, industry has argued that the general OB deductions rule is complex and
cumbersome and delivers distorted and arbitrary expense allocations.’[114]
The Bill’s proposed approach (in item 15) is to
repeal the existing general OB deduction subsection (121EF(4)) and replace it
with proposed subsection 121EF(4), which defines a general OB
deduction as:
A deduction that:
(a) is none of the following:
(i) a loss deduction;
(ii) an apportionable deduction;
(iii) an exclusive OB deduction;
(iv) an exclusive non-OB deduction; and
(b) is allowable from the OBU’s assessable income of
the year of income;
is a general OB deduction to the extent that:
(c) it is incurred in gaining or producing the OB
income of the OBU; or
(d) it is necessarily incurred in carrying
on a business for the purpose of gaining or producing the OB income of the OB
Item 15 will repeal the formula in existing
subsection 121EF(4). The new approach is consistent with the general approach
to determining tax deductions in subsection 8-1 of the ITAA 1997.
It is arguable that the treatment of issues in dealing
with the allocation of expenses between DBUs and OBUs is incomplete, as
concerns have also been raised about the workability of both the exclusive and
apportionable OB deductions provisions.[115]
Indeed, the formula for the latter deduction appears to be more complex than
the existing formula for the general OB deduction.[116]
Schedule 3, Part 4: eligible
offshore banking activities
As noted above, the Johnson Report recommended that the
list of eligible OB activities be regularly reviewed and updated.[117]
Part 4 of Schedule 3 expands the range of activities that an OBU
may undertake to generate concessionally taxed OB income. A wider range of
activities means that OBUs can offer a wider range of services to non-resident
clients and thus potentially expand the demand for their services. The proposed
amendments aim to ‘modernise’ the list of eligible OB activities by, for
example, encompassing:
- the
creation of lending facilities (that is, making commitments to lend money such
as a credit facility that is not fully drawn on)[118]
- trading
in commodities and commodity derivative contracts[119]
- guarantee
activities and connections with Australia[120]
- portfolio
investment and funds management activities[121]
and
- leasing
activities.[122]
Schedule 3, Part 5: internal
financial dealing and transfer pricing
The proposed amendments in Part 5 of Schedule 3
seek to ensure that financing of an OBU’s activities by a related party (including
fees and interest rates charged) is priced on an arm’s length basis. The
Explanatory Memorandum notes that this will address the ‘gaps in the
application of Australia‘s transfer pricing rules (Division 815 of the ITAA
1997) to an OBU‘s internal dealings’.[123]
Proposed subsection 121EB(4) provides that an OBU‘s OB income or
allowable OB deductions are to be treated as the amounts that would be included
or allowed, were the internal parties dealing with each other ‘at arm’s length’.[124]
Further, proposed subsection 121EB(5) provides that in determining
the ‘arm’s length’ conditions, reference must be made to the guidance materials
related to the transfer pricing rules found in Division 815 of the ITAA 1997.
The amendments appear to be aimed at the ‘mischief’ of
using transfer pricing mechanisms to transfer an undue amount of profits away
from the Australian company tax system.[125]
Schedule 3, Part 6: commencement
Item 34 provides that the amendments made by Schedule
3 (other than Part 2) apply in relation to all income years after 1
July 2015. The amendments made by Part 2 will apply to a thing done by
an OBU from 1 July 2015.
The finance industry has suggested that a wide range of
additional amendments to the OBU rules should be pursued.[126]
While many of the changes that have been proposed may be worthwhile, it is not
clear that, of themselves, they would increase the use of Australian OBUs,
given the other reasons noted above for the low level of activity in this area.
However, the proposed amendments nonetheless would appear to go some way
towards making Australia more competitive in this area.
Schedule 4 to this Bill amends the ITAA 1997 to
provide the Global Infrastructure Hub Ltd (the Hub) exemption from income tax
liability. The proposed changes are designed to ensure that payments made to
the Hub, including from the Australian and foreign governments, are not subject
to income taxation.[127]
Background
In November 2014, as part of Australia’s initiative to
implement the G20’s infrastructure agenda, Australia secured the agreement of
all G20 members to establish the Hub in Sydney.[128]
In April 2015, China, Mexico, New Zealand, Republic of
Korea, Saudi Arabia, Singapore and the United Kingdom committed to offer
financial contributions to the Global Infrastructure Hub. The other G20 member
countries are expected to support the Hub through specific commitments over
coming months.[129]
The objectives of the project are to:
- address
data gaps
- lower
barriers to investment
- increase
the availability of investment-ready projects
- help
match potential investors with projects and
- improve
policy delivery.[130]
The current financial contributions of $50 million,
including a $30 million contribution from Australia, will be used for the establishment
and ongoing operation of the Hub until 2018. More financial contributions are
expected from various other G20 members and the private sector. The World Bank
and the Organisation for Economic Co-operation and Development (OECD) will
collaborate with the Hub.[131]
The Hub has been registered as a company under Australian
law. Directors on the Board will consist of members from Australia, China, the
Republic of Korea, Turkey and the United Kingdom to represent the G20. The inaugural
meeting of the Hub’s permanent Board was held in Washington on 15 April 2015,
with Treasury Secretary John Fraser in the Chair.[132]
This measure applies from 24 December 2014 to 30 June
2019.[133]
Human rights implications
According to the Explanatory Memorandum, this Schedule
does not raise any human rights issues.[134]
Financial implications
According to the Explanatory Memorandum, there will be no
financial impact nor any compliance cost.[135]
Key issues and provisions
Item 1 of Part 1 amends the table in section
11–5 of the ITAA 1997, listing the Hub as an income tax exempt entity,
meaning that all payments made to it, by the Australian and other governments,
non-government organisations and other contributors, will not be subject to
income tax.
Item 2 of Part 1 amends section 50-40 of
the ITAA 1997 to provide that the Hub’s exemption from
income tax applies from 24 December 2014 to 30 June 2019, so that for
operations to 2018 when the Hub’s mandate expires (including any in the
financial year 2018–19) all contributions and other income of the Hub will be
exempt.
Items 3 and 4 of Part 2 provide that
the exemptions discussed above will sunset (that is, self-repeal) on 1 July
2021.
Schedule 5 to this Bill amends the ITAA 1997
to update the list of specifically listed deductible gift recipients (DGRs). It
extends the listing of two entities to the list of deductible gift recipients
(DGRs), thereby allowing for donations of $2 or more to these entities to be
tax deductible for the donor until 31 December 2017.
Background
A DGR is an organisation that is entitled to receive
income tax deductible gifts and deductible contributions. There are two methods
of gaining DGR status:
- by
applying to the Commissioner for Taxation for endorsement as a DGR or
- by
having the organisation listed by name in Division 30 of the ITAA 1997 or
in the Income Tax Regulations 1997.[136]
Under Division 30 of the ITAA 1997 (sections 30–1
to 30–320), taxpayers who make gifts of $2 or more to an organisation which is
a DGR are able to deduct those amounts from their taxable income.[137]
Treasury estimates the annual cost to the budget of tax deductibility for gifts
to DGRs at around $1.09 billion in 2013–14, and $1.10 billion in 2014–15.[138]
As at 31 October 2014, there were in total 28,100 entities
listed as deductible gift recipients, including 190 entities specifically named
in the ITAA 1997, and 10,827 DGR funds.[139]
In 2012–13 income year individual claims for deductions were made in respect of
a total of 4.6 million gifts valued at just under $2.3 billion.[140]
Recent reforms to DGR status
In 2012, the former Government announced the formation of
the Not-For-Profit Tax Concession Working Group to ‘consider ideas for better
delivering the support ... provided through tax concessions to the not-for-profit
(NFP) sector’.[141]
The terms of reference stated that the ‘Working Group will identify whether
there are fairer, simpler and more effective ways of delivering the current
envelope of support provided through tax concessions to the NFP sector’.[142]
The Working Group released a consultation paper in November 2012, which
included a history of DGR concessions as well as discussion of the DGR
framework. It also discussed options for reform, including extending DGR status
to all charities, changes in the threshold, and a number of other options.[143]
The Working Group’s final report was made public by the
Treasury in response to a request for access under the Freedom of Information
Act 1982[144]
on 21 February 2014.[145]
The report is dated May 2013, but had not been previously released. The Working
Group recommended that:
-
DGR status should be extended to all charities, but restricted to
activities that are not for the advancement of religion, charitable child care
and primary and secondary education, except where this is sufficiently related
to another charitable purpose.
-
Except in the most exceptional circumstances, DGR status should
be limited to charities and charitable‑like government entities. ...
-
The current minimum of $2 for deductible gifts is an anachronism
and could be removed with few consequences.[146]
The Working Group also rejected other options to modify
the DGR system such as a replacing deductibility with a tax offset for
donations.[147]
Proposed changes to the list of deductible gift recipients
In the 2015–16 Budget, the Government announced that the
following organisations, which are currently listed as DGRs, would have their
listings extended, to expire on 31 December 2017:
- the
Australian Peacekeeping Memorial Project and
- the
National Boer War Memorial Association.[148]
Information about the activities of each of the entities
is set out in the Explanatory Memorandum.[149]
This material is summarised in Table 6, with links to each of the entities’
website.
Briefly, the Australian Peacekeeping Memorial Project
Incorporated is seeking donations to build a memorial on Anzac Parade in
Canberra, ACT. The National Boer War Memorial Association Incorporated is
seeking donations to commemorate Australian service in the Boer War (1899 to
1902) by constructing a memorial on Anzac Parade in Canberra, ACT.[150]
Taxpayers will be entitled to claim back an income tax
deduction for gifts of money or property to these DGRs before 1 January 2018.[151]
Table 6: Deductible Gift Recipients (DGRs) in Schedule 5
of the Bill
DGR type
|
DGR name
|
Conditions
|
Summary of activities as outlined in the Explanatory
Memorandum
|
Link to website
|
Other recipients
|
Australian Peacekeeping Memorial Project Incorporated
|
The extension of the listing of the Australian
Peacekeeping Memorial Project Incorporated applies to gifts made to this organisation
before 1 January 2018.
|
The Australian Peacekeeping Memorial Project Incorporated
is a charitable entity to erect a memorial in Canberra by the Peacekeepers
Day on the 14th September 2017 that appropriately recognises the sacrifice
and continuing contribution of Australians to international peacekeeping.
|
Australian
Peacekeeping Memorial Project Incorporated
|
Other recipients
|
National Boer War Memorial Association Incorporated
|
The extension of the listing of the National Boer War
Memorial Association Incorporated applies to gifts made to this organisation
before 1 January 2018.
|
The National Boer War Memorial Association (NBWMA) is a
charitable entity that has secured the support of the Canberra National
Memorials Committee and the National Capital Authority to construct a
memorial on the site along the ANZAC Parade in honour of those who lost their
lives in the Boer War in South Africa during 1899-1902.
|
National
Boer War Memorial Association Incorporated
|
Source: Explanatory Memorandum, Tax and Superannuation Laws
Amendment (2015 Measures No. 1) Bill 2015, pp. 59– 60.
Date of effect
The extension of the listing of
the Australian Peacekeeping Memorial Project Incorporated and the extension of
the listing of the National Boer War Memorial Association Incorporated applies
to gifts made to each organisation before 1 January 2018.
Financial implications
The revenue implication of this measure is an estimated tax
expenditure of $1.4 million over the forward estimates period.
Table 7: Financial impact of extending DGR status, $m
Organisation
|
2015–16
|
2016–17
|
2017–18
|
2018–19
|
2019–20
|
Australian Peacekeeping Memorial Project Incorporated
|
‒ $0.1
|
‒ $0.2
|
‒ $0.2
|
‒ $0.1
|
–
|
National Boer War Memorial Association Incorporated
|
‒ $0.1
|
‒ $0.3
|
‒ $0.3
|
‒ $0.1
|
–
|
Total
|
‒ $0.2
|
‒ $0.5
|
‒ $0.5
|
‒ $0.2
|
–
|
Source: Explanatory Memorandum, Tax and Superannuation Laws Amendment
(2015 Measures No. 1) Bill 2015, p. 6.
Key issues and provisions
Division 30 of the ITAA 1997 sets out the rules for
working out deductions for certain gifts or contributions. In particular, Subdivision
30-B contains tables of recipients of deductible gifts, divided into a number
of categories.
Item 1 of Schedule 5 amends the entry in the
table in subsection 30‑50(2) of the ITAA 1997, which relates to the
claim of a tax deduction for gifts made to the Australian Peacekeeping Memorial
Project Incorporated after 31 December 2012 and before 1 January 2018,[152]
and the claim of a tax deduction for gifts made to the National Boer War
Memorial Association Incorporated after 31 December 2012 and before 1 January
2018.[153]
Items 2 and 3 of Schedule 5
provide that the DGR listings discussed above will sunset (that is, will be
automatically repealed) on 1 July 2022.[154]
Human rights implications
According to the Statement of Compatibility with Human
Rights—paragraphs 5.10 to 5.14 of the Explanatory Memorandum to the Bill—this
Schedule does not raise any human rights issues.
Schedule 6 makes a number of minor amendments to tax,
superannuation and other laws. They appear all to be routine updates and
corrections.
However, in an apparent reaction to recent High Court
decisions in Williams v Commonwealth (Williams No. 1)[155] and Williams
v Commonwealth of Australia [2014] HCA 23 (Williams No. 2),[156]
Schedule 6 also contains amendments that clarify the constitutional
basis of the Product Stewardship (Oil) Act 2000.[157]
Further, in response to the Federal Court decision in Commissioner
of Taxation v Cancer and Bowel Research Association Inc,[158]
amendments to the Taxation Administration Act 1953 are also proposed
that will provide new powers to the Tax Commissioner to revoke various tax
concessions in situations in which he or she identifies (through an audit) that
the entity is no longer entitled to be endorsed.[159]
Purpose of Schedule 7
Schedule 7 of the Bill amends the ITAA 1997
by repealing existing Subdivision 842-I of that Act and replacing it with new
text. This subdivision deals with the Investment Manager Regime (IMR) and
contains tax rules applying to certain foreign investment funds investing either
in, or through, Australia.
The amendments implement the third phase of the IMR
reforms. The first two phases were implemented by the Tax Laws Amendment
(Investment Manager Regime) Act 2012.[160]
The purpose of the third phase reforms is to ‘attract foreign investment to
Australia and promote the use of Australian fund managers’[161]
by:
- extending
the concession to cover direct investments in Australian assets that are of a
portfolio nature
- remove
restrictions on portfolio investments in foreign assets made through Australia
- significantly
change the criteria that determine when a foreign fund is ‘widely held’ and
- simplify
the legislative mechanisms that provide the IMR concession.[162]
In summary, the above changes are aimed at removing tax
impediments to investing in or through Australia, and thus making such
investments more competitive internationally.[163]
Structure of the Schedule
Schedule 7 is divided into two parts, both of which
amend the ITAA 1997:
- Part
1 contains the main amendments and
- Part
2 contains other amendments.
Background
What is an Investment Manager
Regime?
There is no one definition of an IMR. Rather, the Johnson
Report, which dealt with developing Australia as a financial centre, stated
that most IMRs implemented in other countries were designed to allow for
greater ‘internationalisation’ of the domestic funds management business. This
is to be achieved by providing clarity and certainty regarding the tax
treatment of the funds management sector with respect to assets sourced
offshore. A common feature of all IMRs is that they provide concessional tax
treatment of profits generated for the non‑resident investor from these
funds.[164]
Why is this worth doing?
As noted in the commentary on Offshore Banking Units above (Schedule
3 of the Bill), promoting the growth of Australia as regional financial
centre has the potential to generate significant benefits.[165]
Australia’s funds management sector is much larger and more diverse than its
offshore banking industry and is in a better position to increase the total funds
under management (and hence taxable income) through managing foreign sourced
assets. When the potential of the Asian investment market is taken into account,
the opportunities for increasing Australian based funds management activity are
potentially quite large.[166]
The first two phases of the IMR
To date, legislation dealing with the first phase of the
IMR (the so called ‘FIN 48 issues’) and the second phase of the IMR (the
conduit income concession) have been legislated.[167]
Briefly:
- phase
one addressed the 'FIN 48' issue by amending the law to effectively restrict
the Commissioner of Taxation's ability to raise assessments in respect of
income of a widely held foreign managed fund for the 2010–11 and prior income
years and
- phase
two (conduit income) addressed the tax uncertainty where a widely held foreign
managed fund engaged an Australian-based financial services intermediary with
respect to foreign investments and Australian assets that were only subject to
capital gains tax.
Policy Development—Third Phase
The Explanatory Memorandum provides a comprehensive summary
of the policy development of the IMR regime.[168]
Four separate versions of draft legislation for phase three amendments have
been issued since 2010.[169]
The amendments in the first three versions were generally considered
‘unworkable’ by the financial industry.[170]
In comparison with previous drafts of Phase three IMR
amendments the latest draft:
... adopts a UK style ‘bright-line simplified test’ to determine
whether an entity is widely held and abandons the reporting requirements as a
condition of application of the IMR. It also liberalises some aspects of Phase
2, for example, the limitation to portfolio investment only applies to
investments into Australia, and not to investment elsewhere. Finally it removes
the requirement that the foreign investor be a resident of an
exchange-of-information (EOI) country which it had inherited from the [Managed
Investment Trusts] MIT withholding tax.[171]
These appear to be significant changes in comparison with
earlier drafts of these proposed amendments.
The Government announced that it was proceeding with phase
three amendments on 6 November 2013.[172]
Influence of the UK Model
More than one commentator has noted that the proposed
amendments are heavily influenced by the United Kingdom’s Investor Manager
Exemption.[173]
There are five conditions, all of which must be met before the UK investment
manager exemption can apply, as follows:
- the
investment manager must be carrying on the business of providing investment
management services
- the
transaction must be carried out by the investment manager in the ordinary
course of the investment management business
- the
investment manager must act in relation to the transaction on behalf of the
non-resident in an independent capacity. This is called the ‘independence test’
and is considered by reference to the legal, financial and commercial
characteristics of the investment manager’s relationship with the non-resident
- the
investment manager, together with any persons connected with the investment
manager must not be beneficially entitled to more than 20 per cent of the
taxable profits of the non-resident from transactions carried out through the
investment manager. This is called the ‘20% rule’ and
- the
remuneration that the investment manager receives in respect of the transaction
is not less than the customary amount for that class of business.[174]
The effect of these conditions is to exempt only those
investment managers who are acting in the ordinary course of their business on
arm's length terms and are independent of the non[UK]-resident.[175]
The tax position of assets managed
under the current IMR
Where the conditions in current Subdivision 842-I of the ITAA
1997 are satisfied:
- returns
or gains relating to financial arrangements (known as IMR income) are
non-assessable non-exempt income (that is, not assessed for tax purposes) or
disregarded
- deductions
and losses relating to financial arrangements (known as IMR deductions) are
disregarded
- capital
gains relating to financial arrangements (known as IMR capital gains) are
disregarded and
- capital
losses relating to financial arrangements (known as IMR capital losses) are
disregarded.
These amounts are also disregarded if a foreign resident
beneficiary of a trust, or a foreign resident partner in a partnership,
receives them (or amounts attributable to them) through one or more interposed
trusts or partnerships.[176]
The proposed changes do not alter this overall tax position.
Policy position of non-government
parties/independents
To date neither the non-government parties nor independents
have expressed a view on the amendments proposed by Schedule 7. Given
that the proposed amendments are quite different to the exposure drafts
circulated by the previous Government, it would appear that Labor’s support for
this schedule of the Bill cannot be assumed.
Position of major interest groups
Generally, Industry has welcomed the proposed amendments in Schedule
7.[177]
One commentator noted that:
... initial reaction to the proposed new provisions has been
positive. Indeed, it is very likely that the provisions will be widely used—which
surely must be a good thing.[178]
Financial implications
The Explanatory Memorandum states that this measure is
estimated to have an unquantifiable cost to revenue over the forward estimates
period.[179]
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
Schedule’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 this Schedule is compatible.[180]
Key issues and provisions
Item 1 of Part 1 of Schedule 7
repeals current Subdivision 842-I of the ITAA 1997 and replaces it with
new text. The following outlines some key features of the proposed Subdivision
842-I.
Definition of an investment manager entity
The tax concession provided by the proposed amendments can
(depending on a number of factors discussed below) only be accessed by foreign
resident IMR entities, IMR widely held entities and independent
Australian fund managers in relation to IMR financial arrangements.[181]
How these concepts are defined is discussed below.
IMR entities
Proposed section 842-220 defines an IMR entity
as one that is not an Australian resident and is not a resident trust for
capital gains tax purposes, for all of the income year.
IMR widely held entities
Proposed section 842-230 defines an IMR widely
held entity as:
- an
entity specified in regulations
- a
foreign life insurance company or
- a
wide range of superannuation, insurance, pension or foreign government
controlled entities.[182]
Further, a widely held IMR entity can be one where no
other entity has a total participation interest in the IMR entity of 20 per
cent or more; or there are not five or fewer members who have combined
participation interest of at least 50 per cent or more.[183]
Proposed sections 842-235 and 842-240 contain rules for
determining total participation interests in a widely held IMR entity and for
dealing with temporary circumstances that result in a widely held IMR entity
failing to meet the relevant criteria. The operation of these provisions is
explained in detail on pages 88 to 96 of the Explanatory Memorandum.
Independent Australian fund
managers
Proposed section 842-245 defines an Independent
Australian Fund Manager as one that is an Australian resident for tax purposes,
carries out investment management activities for the IMR entity during the
ordinary course of its business and receives remuneration for undertaking the
relevant investment activities that is what the remuneration would be between
the parties dealing at arm’s length. Further, one of the following must also
apply:
- the
IMR entity is a widely held entity (see above)
- 70
per cent or less of the Australian managing entity’s income comes from the IMR
entity in question or
- if
the Australian managing entity has been in operation less than 18 months it
takes all reasonable steps to ensure that its IMR entity income will be less
than 70 per cent of its total income by the end of that 18 month period.
IMR financial arrangements
The definition of an IMR financial arrangement
proposed by the Bill is linked to the existing (and expansive) definition of a
‘financial arrangement’ and ‘derivative financial arrangement’ in the ITAA
1997.[184]
Proposed section 842-225 defines an IMR financial arrangement as
a financial arrangement other than one that relates to taxable
Australian real property or an indirect Australian real property interest.[185]
As a result, the definition of IMR financial arrangement
precludes an IMR entity undertaking concessionally taxed financial arrangements
in relation to (for example) real estate or mining interests. This is also a
feature of the current legislation and the IMR entity may undertake Australian
property related transactions, and have them assessed under domestic tax law.[186]
The IMR tax concessions
The proposed amendments will create two types of tax
concession: the direct investment concession and the indirect
investment concession.[187]
Direct investment concession
criteria
An IMR widely held entity qualifies for the direct
investment concession if it satisfies the conditions in proposed
subsection 842-215(3). First, the IMR entity must be an IMR widely held
entity for the whole of the year. Second, during the whole year the interest of
the entity in the issuer of (or counter party to) the IMR financial arrangement
fails the non-portfolio test contained in section 960-195 of the ITAA 1997.
(The non-portfolio test means that the other entity (and its associates) does
not have a combined direct participation interest greater than ten per cent in
the IMR entity.)
Third, none of the returns, gains or losses for the year
from the financial arrangement are attributable to a permanent establishment in
Australia. Finally, the IMR entity did not, during the year, engage in trading
business within the meaning of section 102M of the ITAA 1936 that
relates (either directly or indirectly) to the financial arrangement in
question.[188]
Indirect investment concession
criteria
An IMR widely held entity qualifies for the indirect
investment concession if it satisfies the conditions in proposed
subsection 842-215(5). First, the IMR financial arrangement was made on the
IMR entity’s behalf, by an independent Australian Fund Manager. Second, if the
issuer of, or the counterparty to, the IMR financial arrangement is an
Australian resident or a resident trust for CGT purposes, the interest of the
entity in that issuer or counterparty does not pass the non-portfolio test (see
above). Finally, the IMR entity does not carry on a trading business that
relates (directly or indirectly) to the IMR financial arrangement (see above).
The reference to the ‘entity’ who may or may not have an
interest in the issuer of, or the counterparty to, the IMR financial
arrangement in proposed paragraph 842-215(5)(b) must be read in the
context of sections 2-15 and 960-100 of the ITAA 1997. In simple terms,
‘entity’ is defined as including an individual, body corporate, body politic,
partnership, unincorporated association or body of persons, a trust,
superannuation fund or an approved deposit fund.
As a result, the indirect investment concession will be a
flexible concession that will be widely available to a range of different types
of corporate and non-corporate entities as well as individuals.
Operation of the tax concessions
Both the direct and indirect investment concessions operate
by:
- treating
certain amounts of income that would otherwise be ‘assessable income‘ as
‘non-assessable non‑exempt income (and therefore not assessable for tax
purposes)‘
- denying
certain ‘deductions‘ (losses and outgoings arising are not deductible for tax
purposes) and
- disregarding
certain ‘capital gains‘ and ‘capital losses‘.[189]
Under proposed section 842-250 the above IMR
concessions are reduced if an independent Australian fund manager is entitled
to a share of an IMR entity’s income exceeding 20 per cent of that income.
Certain exemptions are provided in selected circumstances.[190]
Importantly however, because the concessions are restricted to foreign
entities:
... the IMR concession does not affect the tax treatment of
Australian residents that have interests in the IMR entity. Australian
residents continue to be subject to Australian income tax on such investments.[191]
An interesting problem
One commentator has observed that:
The revised exposure draft does not require the entity to be
resident in an ‘Information Exchange Country.’ The absence of this requirement
suggests that foreign funds resident in jurisdictions that are not Information
Exchange Countries, such as Luxembourg and Hong Kong, now may be able to use
the IMR concession.[192]
Recently the tax practices of Luxembourg in particular
have been the subject of considerable adverse comment.[193]
Comment
Given that the overall tax outcomes of the current and
proposed IMR provisions are similar a reader might ask what are the differences
between the two and are they important?
The first and most obvious difference is that the proposed
amendments split the tax concession into two types, direct and indirect. The
use of Australian fund managers for IMR concessionally taxed direct investment
is explicitly recognised in the proposed changes, and is a significant
difference between the proposed and current regimes. This clarifies the current
arrangements and makes the tax free status of most of the IMR regime more
certain.
Another particular difference is that the proposed
definition of IMR financial arrangement is deliberately broader than the
current one, potentially including all possible financial transactions (save those
involving Australian real property). Currently, section 842-245 of the ITAA
1997 places some restrictions on the types of financial transactions that
can be undertaken by current IMR participants. So, the proposed regime is deliberately
broader in its scope of investment activities, so as to attract more investment.[194]
The Explanatory Memorandum states that the tax free status
of IMR transactions and investment under the current legislation is not assured.[195]
The amendments undertaken by Schedule 7, Part 1 appear to put
this matter beyond doubt: provided the qualifying conditions are met IMR financial
arrangements will not be subject to Australian tax. That said, one industry
commentator has observed:
While investing in eligible Australian financial arrangements
through the use of an independent Australian broker/agent should expect to
qualify for the Direct Concession, where the Australian broker/agent does not
give rise to a PE [permanent establishment] for the foreign fund, it is not
clear whether investing in qualifying IMR financial arrangements using the
services of a resident broker would fall within the ordinary meaning of
‘investment management activities’ of an independent Australian fund manager
for the purposes of the Indirect Concession. Further guidance on this point is
required to confirm eligibility of independent Australian brokerage
arrangements for the Indirect Concession.[196]
It is still possible that non-resident investors will find
these qualifying conditions too onerous, although they do not appear to be so.
Members, Senators and Parliamentary staff can obtain
further information from the Parliamentary Library on (02) 6277 2500.
[1]. Senate
Economics Legislation Committee, Tax and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015 [Provisions], Report, 15 June 2015, accessed 16 June 2015.
[2]. Ibid.,
pp. 14–15.
[3]. T
Plibersek, K Rudd and W Swan, Federal
Labor’s low tax First Home Saver Accounts: larger deposits and higher national
savings, media release, 4 November 2007; Australian Government, First
Home Saver Accounts: outline of proposed arrangements, Canberra,
February 2008; Parliament of Australia, ‘First
Home Saver Accounts Bill 2008 homepage’, Australian Parliament website, all
accessed 1 June 2015.
[4]. First Home Saver Account
Act 2008 (Cth) (FHSA Act), section 38; Australian
Taxation Office (ATO), ‘First
home saver account: caps and thresholds’, ATO website, 3 July 2014, both
accessed 1 June 2015.
[5]. Income Tax Assessment
Act 1997 (Cth) (ITAA 1997), division 345; Income Tax Rates Act
1986 (Cth), sections 23 and 30; ATO, ‘First
home saver accounts: benefits’, ATO website, 3 July 2014, accessed 1 June
2015.
[6]. Social Security Act 1991
(Cth), subsections (8)(8)(ba) and (9)(1); ATO, ‘First
home saver accounts: benefits’, op. cit.
[7]. FHSA Act,
subsection 15(1); Explanatory Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, p. 9,
accessed 10 June 2015.
[8]. Explanatory
Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, op.
cit., pp. 9–10.
[9]. FHSA Act, section
34.
[10]. T
Dale, ‘First
Home Saver Accounts scheme closure’, FlagPost weblog, 18 June 2014,
accessed 1 June 2015.
[11]. J
Hockey (Treasurer), Abolishing
the First Home Saver Accounts Scheme, media release, 13 May 2014,
accessed 10 June 2015.
[12]. J
Hockey (Treasurer), Abolishing
the First Home Saver Accounts Scheme, op. cit.; Australian Parliament,
‘Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015 homepage’,
Australian Parliament website, accessed 3 June 2015.
[13]. J
Hockey (Treasurer), Abolishing
the First Home Saver Accounts Scheme, op. cit.
[14]. First Home Saver Accounts
Amendment (Notice of Changes) Regulation 2014; First Home Saver Accounts
Regulations 2008, regulations 13AA and 13AB, accessed 10 June 2015.
[15]. J
Hockey (Treasurer), Abolishing
the First Home Saver Accounts Scheme, op. cit.
[16]. Ibid.
[17]. J
Frydenberg, ‘Second
reading speech: Tax and Superannuation Laws Amendment (2015 Measures No. 1)
Bill 2015’, House of Representatives, Debates, 27 May 2015, p. 17,
accessed 14 June 2015.
[18]. J
Hockey (Treasurer), Interview
with David Koch, Sunrise, transcript, 6 March 2015; for a more detailed
discussion of superannuation for housing see T Dale and K Swoboda, ‘Superannuation
for housing deposits and the “deposit gap"’, FlagPost weblog, 9 April
2015, both accessed 3 June 2015.
[19]. J
Kelly, ‘Labor
won’t support pension changes says Chris Bowen’, The Australian,
(online edition), 9 March 2015, accessed 14 June 2015.
[20]. Parliament
of Australia, ‘Omnibus
Repeal Day (Spring 2014) Bill 2014 homepage’, Australian Parliament
website, accessed 3 June 2015.
[21]. Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 1) Bill
2015, op. cit., p. 16.
[22]. Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, Schedule 1, items
129 to 144 and 175 to 187.
[23]. See
proposed subsection 204(3).
[24]. Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 1) Bill
2015, op. cit., p. 21 (para 2.1).
[25]. Ibid.,
p. 30.
[26]. Parliamentary
Joint Committee on Human Rights, Sixth
report of 2013, The Senate, Canberra, 15 May 2013, p. 81, accessed 16
June 2015.
[27]. Parliamentary
Joint Committee on Human Rights, Tenth
report of 2013, The Senate, Canberra, 27 June 2013, p. 109, accessed 16
June 2015.
[28]. CCH,
Australian Master Tax Guide 2013, 52nd edn, [15–020], p. 811. Income Tax Assessment
Act 1936, accessed 16 June 2015.
[29]. Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 1) Bill
2015, op. cit., p. 21 (para 2.2).
[30]. R
Deutsch, M Friezer, I Fullerton, P Hanley and T Snape, Australian Tax
Handbook 2015, Thomson Reuters, [100 110], pp. 2074; Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 1) Bill
2015, op. cit., p. 25.
[31]. Income Tax Assessment
Act 1997 (ITAA 1997), section 61-45; ITAA 1936,
subsection 159J(4); R Deutsch, M Friezer, I Fullerton, P Hanley and T Snape, Australian
Tax Handbook 2015, Thomson Reuters, p. 729.
[32]. Adjustable
taxable income (ATI) includes taxable income, total net investment loss,
adjusted fringe benefits, income from certain tax fee pensions and benefits,
and foreign sourced income that is tax exempt (see CCH, Australian Master
Tax Guide 2015, 56th edn, [15–060], p. 817).
[33]. ITAA
1997 section 61-20; Australian Tax Handbook 2015, Thomson Reuters,
op. cit. [19 160], p. 729.
[34]. Australian
Tax Handbook 2015, Thomson Reuters, op. cit. [19 160], pp. 734–5.
[35]. ITAA
1997, section 61–10.
[36]. ITAA
1936, subsection 159J(6).
[37]. Explanatory
Memorandum, op. cit., p. 23.
[38]. ITAA
1997, paragraph 61-10(1)(d).
[39]. Explanatory
Memorandum, op. cit., p. 23 (para 2.13).
[40]. Ibid.,
p. 23 (para 2.14); Australian Government, Budget
measures: budget paper no. 2: 2008–09, p. 34, accessed 9 June
2015.
[41]. Explanatory
Memorandum, op. cit., p. 24 (para 2.16); Australian Government, Budget
measures: budget paper no. 2: 2011–12, p. 14, accessed 9 June 2015.
[42]. Explanatory
Memorandum, op. cit., p. 24 (para 2.17); Australian Government, Mid-year
economic and fiscal outlook: 2011–12, p. 169, accessed 9 June 2015.
[43]. Explanatory
Memorandum, op. cit., p. 24 (para 2.18); Australian Government, Budget
measures: budget paper no. 2: 2012–13, p. 35, accessed 9 June
2015.
[44]. Australian
Government, Budget
measures: budget paper no. 2: 2014–15, p. 13, accessed 9 June
2015.
[45]. Ibid.
[46]. Explanatory
Memorandum, op. cit., p. 24.
[47]. Ibid.,
p. 25.
[48]. P
Coorey, ‘Spouses
and doctors lose tax break’, The Australian Financial Review,
9 June 2015, p. 1, accessed 10 June 2015.
[49]. Explanatory
Memorandum, op. cit., p. 26 (para 2.23).
[50]. Ibid.,
(para 2.25).
[51]. Ibid.,
p. 27 (para 2.32).
[52]. Ibid.,
p. 28.
[53]. Ibid.,
p. 27 (para 2.33).
[54]. A
net medical expense rebate is available to a taxpayer whose net medical
expenses in the year of income exceed certain thresholds. Single taxpayers with
adjustable taxable income (ATI) of $88,000 or less and families with ATI below
$176,000 will be able to claim 20% of net medical expenses over the Level 1
threshold of $2,218 for 2014–15. Single taxpayers with ATI above $88,000 and
families with ATI above $176,000 will be able to claim 10% of net medical
expenses over the Level 2 threshold of $5,233 for 2014–15.(see CCH, Australian
Master Tax Guide 2015, 56th edn, p. 841). The adjustable taxable
income includes taxable income, reportable superannuation contributions, total
net investment loss, adjusted fringe benefits, income from certain tax free
pensions and benefits from Department of Human Services or Veterans Affairs,
target foreign income minus any child support payment the taxpayers pays. (see
CCH Australian Master Tax Guide 2015, 56th edn, p. 31.)
[55]. Explanatory
Memorandum, op. cit., p. 27 (para 2.34).
[56]. Explanatory
Memorandum, Tax
and Superannuation Laws Amendment (2013 Measures No. 2) Bill 2013, accessed
10 June 2015.
[57]. Explanatory
Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, p. 28
(para 2.37).
[58]. Ibid.,
para 2.38.
[59]. Ibid.,
para 2.39.
[60]. Ibid.
[61]. Explanatory
Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, op.
cit., p. 29.
[62]. Ibid.,
p. 39 (para 3.27).
[63]. Ibid.,
p. 43, paras 3.39 and 3.40.
[64]. Ibid.,
p. 47, para 3.51-3.53.
[65]. Ibid.,
p. 53, paras 3.97-3.100.
[66]. Ibid.,
p. 36.
[67]. Section
995-1, Income
Tax Assessment Act 1997 notes that the term ‘Offshore Banking Unit ‘has
the meaning given by section 128AE of the Income Tax Assessment
Act 1936’. The above definition is taken from section 128AE ITAA
1936, as this is the only place where the Treasurer is empowered to declare
certain organisations to be OBUs.
[68]. ITAA
1936, subsection 121D(2) and paragraph 121E(b).
[69]. Ibid.,
subsection 121D(3).
[70]. Ibid.
[71]. Ibid.
[72]. Ibid.,
subsection 121D(4).
[73]. Ibid.,
subsections 121D(6A) and (6B).
[74]. Ibid.,
subsections 121D(7) and (8).
[75]. Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 1) Bill
2015, op. cit., p. 36.
[76]. A
full chronology on the development of OBU policy in Australia is given in T
Frost, U Mac Donald and C Marston, ‘Offshore
banking units’, appendix A, paper presented to
presented to the Tax Institute 2014 Financial Services Taxation Conference,
Gold Coast, 19–21 February 2014, accessed 14 June 2015.
[77]. K
Sadiq, ‘Bringing
OBUs onshore: assessing the concessions’, Journal of Australian Taxation,
1(2), September/October 1998, pp. 123–126, accessed 1 June 2015. This paper
gives additional details of the development of the OBU regime in Australia to
1998. A full chronology on the development of OBU policy in Australia is given
in T Frost, U Mac Donald and C Marston, ‘Offshore
banking units’, appendix A, paper presented to
presented to the Tax Institute 2014 Financial Services Taxation Conference,
Gold Coast, 19–21 February 2014, both papers accessed 1 June 2015.
[78]. Taxation Laws
Amendment (No. 4) Act 1992, accessed 14 June 2015.
[79]. P
Baldwin, ‘Second
reading speech: Taxation Laws Amendment Bill (No. 4) 1992’,
House of Representatives, Debates, 25 June 1992, p. 3999, accessed 1
June 2015.
[80]. M
Johnson et al, Australia as a
financial centre – building on our strengths, report by the Australian
Financial Centre Forum, November 2009, p. 5, accessed 10 June 2015.
[81]. Chen
Jo-Huia et al, ‘The
influence of macroeconomic factors and banking fragility on Offshore Banking
Unit (OBU)’, Asia Pacific Management Review, 18(4) (2013), p. 409.
[82]. M
Johnson et al, Australia as a financial centre – building on our strengths,
op. cit.
[83]. Ibid.,
p. 1.
[84]. Ibid.,
pp. 61–62.
[85]. C
Bowen (Minister for Financial Services, Superannuation and Corporate Law) and N
Sherry (Assistant Treasurer), Government
welcomes Johnson Report on Australia as a financial services centre,
joint media release, 15 January 2010, accessed 1 June 2015. This report was
initiated by the former Government, see C Bowen (Assistant Treasurer), Appointment
of chair and panel of experts to lead Government’s initiative to position
Australia as a leading financial services centre in the Asia-Pacific region,
media release, 26 September 2008, accessed 16 June 2015.
[86]. There
is some suggestion that this particular focus was prompted by the Commissioner
of Taxation changing his view on the operation of the relevant provisions in
Division 9A ITAA 1936, as the result of intensive audits of Macquarie
Bank between 2006 and 2008, and the resulting tax dispute with that Bank. See N
Khadem, ‘Macquarie
Group hit by tax office “U-turn”’, The Sydney Morning Herald,
(online edition), 18 November 2014 and R Gluyas, ‘Macquarie
brawl prompted change’, The Australian, 17 May 2013, p.
17, both accessed 2 June 2015. This particular matter ended up in the Federal
Court, see Macquarie Bank Limited v Commissioner of Taxation [2013]
FCA 887. This case, and the subsequent appeal, was decided in favour of the
Commissioner of Taxation.
[87]. Australian
Government, Budget
measures: budget paper no. 2: 2013–14, pp. 34–35, accessed 1 June 2015.
D Bradbury (Assistant Treasurer), Protecting
the corporate tax base from erosion and loopholes – measures and consultation arrangements, media release, 14
May 2013, attachment C, accessed 11 June 2015.
[88]. D
Bradbury (Assistant Treasurer), Government
continues consultation on Offshore Banking Unit reforms, media release,
28 June 2013; Treasury, Improving
the Offshore Banking Unit regime, Discussion paper, Treasury website,
28 June 2013, both accessed 1 June 2015.
[89]. A
Sinodinos (Assistant Treasurer), Offshore
banking unit: deferral of start date, media release, 29 September 2013
and J Hocky (Treasurer) and A Sinodinos (Assistant Treasurer), Restoring
integrity in the Australian tax system, joint media release, 6 November
2013, both accessed 11 June 2015.
[90]. Treasury,
‘Reforms
to offshore banking units’, Draft legislation, Treasury website, 12
March 2015, accessed 1 June 2015.
[91]. T
Frost et al., ‘Offshore Banking Units’, op. cit., pp. 20–21.
[92]. See
ITAA 1939, Division 9A, Subdivision C generally.
[93]. T
Frost et al, ‘Offshore Banking Units’, op. cit., pp. 24–25.
[94]. Ibid.,
pp. 21–22.
[95]. ITAA
1939, sections 121EE, 121EF and 121EG. For an overview of these provisions
see: R Deutsch, M Friezer, I Fullerton, P Hanley and T Snape, Australian Tax
Handbook 2015, Thomson Reuters, [100 110], p. 1341.
[96]. CCH,
Australian Master Tax Guide 2015, 56th edn, p. 1155. See section 128NB ITAA
1936.
[97]. Subsection
121ELB(2), ITAA 1936.
[98]. Section
121ELA, ITAA 1936.
[99]. Section
121 ELB, ITAA 1936.
[100]. Chen
Jo-Huia et al., ‘The influence of macroeconomic factors and banking fragility
on Offshore Banking Unit (OBU)’, op. cit., p. 408.
[101]. T
Frost, et al, ‘Offshore Banking Units’, op. cit., p. 30 and following.
[102]. L
Nielson, ‘Tightening
anti-avoidance provisions for multinational companies’,
Budget review 2015–16, Parliamentary Library, Canberra, accessed 2 June
2015.
[103]. OECD,
‘About BEPS’,
OECD website, accessed 2 June 2015.
[104]. A
Leigh, (Shadow Assistant Treasurer), Transcript
of radio interview, ABC Radio National Drive, media release, 6 November 2014, accessed
2 June 2015.
[105]. R
Christie, ‘Offshore
banking reforms to boost financial services exports’,
INFINANCE News, 29 May 2015, accessed 2 June 2015.
[106]. The
Statement of Compatibility with Human Rights can be found at page 54 of the, Explanatory
Memorandum to the Bill.
[107]. For
example, there is nothing to stop an OBU buying and selling interests in an
off-shore subsidiary on multiple occasions provided that at no time does its
total interest in that subsidiary exceed ten per cent. In this way profits from
non-OBU activities undertaken by an offshore subsidiary could be turned into
concessionally taxed OBU income.
[108]. M
Johnson et al, Australia as a
financial centre – building on our strengths, report by the Australian
Financial Centre Forum, November 2009, p. 61, accessed 10 June 2015; Australian
Taxation Office (ATO), ‘Income
tax: Offshore Banking Units - what is the effect of a transaction which falls
within the definition of offshore banking activity, which is entered into by
the part of an OBU which handles the domestic (as opposed to offshore)
activities of the bank and which is accounted for in the domestic books?’,
Tax Determination 93/135, ATO website, 8 July 1993, accessed 3 June 2015.
[109]. Treasury,
Improving
the Offshore Banking Unit regime, Discussion paper, June 2013, p. 9,
accessed 3 June 2015; Explanatory Memorandum, Tax
Laws and Superannuation Amendment (2015 Measures No. 1) Bill 2015, p. 37
(para 3.14).
[110]. T
Frost et al., ‘Offshore Banking Units’, op. cit., p. 64.
[111]. Explanatory
Memorandum, Tax Laws and Superannuation Amendment (2015 Measures No. 1) Bill
2015, op. cit., p. 44 (para 3.46).
[112]. The
Inspector General of Taxation has published a table of instances where the
Commissioner for Taxation has been considered to have changed his view of how
tax law applies. See: Inspector General of Taxation, Follow-up Review into
Delayed or Changed Australian Taxation Office Views on Significant Issues,
‘Appendix
1: stakeholder examples of potential “U Turns"’,
Inspector General of Taxation website, July 2014, accessed 3 July 2015. This is
not to argue that the Commissioner should never change his or her view, far
from it. Rather, there are limits on the provision of certainty in the
application of tax law by way of legislative action.
[113]. Treasury,
Improving
the Offshore Banking Unit regime, op. cit., p. 10; This
was no doubt true in 2013 when this paper was written, but T Frost et al have
expressed serious concerns about the exclusive deductions sections of the ITAA
1936 OBU provisions. See T Frost et al., ‘Offshore Banking Units’, op.
cit., p.70 and following.
[114]. Treasury,
‘Improving the Offshore Banking Unit regime’, op. cit., p. 10. Concerns have
also been raised about the apportionable deductions formula. However, changes
to this particular provision are not part of this Bill’s amendments.
[115]. See
T Frost, et al, ‘Offshore Banking Units’, op. cit., p. 71 and following and
Treasury, ‘Improving the Offshore Banking Unit regime’, op. cit., p. 10.
[116]. See
subsection 121EF(5), ITAA 1936.
[117]. M
Johnson et al, Australia as a
financial centre – building on our strengths, op. cit., p. 61.
[118]. Proposed
section 121C and paragraph 121D(2)(b).
[119]. Proposed
paragraph 121D(4)(i).
[120]. Proposed
section 121C and subsection 121D(3).
[121]. Proposed
paragraphs 121D(6A)(e).
[122]. Proposed
sections 121C, 121DD and paragraph 121D(1)(ga).
[123]. Explanatory
Memorandum, Tax Laws and Superannuation Amendment (2015 Measures No. 1) Bill
2015, op. cit., p. 53 (para 3.98).
[124]. Ibid.,
para 3.99.
[125]. For
a very brief overview of transfer pricing see: J Murphy and D Cockeril’, 'Senate
inquiry into corporate tax avoidance’, Flag Post weblog, 19 December
2014, accessed 14 June 2015.
[126]. See
T Frost, et al, ‘Offshore Banking Units’, op. cit., pp. 40–46 and R Christie, ‘Offshore
banking reforms to boost financial services exports’, op. cit.
[127]. Explanatory
Memorandum, Tax Laws and Superannuation Amendment (2015 Measures No. 1) Bill
2015, op. cit., p. 55.
[128]. Ibid.
[129]. J
Hockey (Treasurer), Support
builds for the Global Infrastructure Hub, media release, 17 April 2015, accessed 5
June 2015.
[130]. Global
Infrastructure Hub, Fact
sheet, Global Infrastructure Hub website, accessed 16 June 2015.
[131]. J
Hockey (Treasurer), Support
builds for the Global Infrastructure Hub, media release, op, cit.
[132]. Ibid.
[133]. Schedule
4, Part 1, item 2; Explanatory Memorandum, Tax Laws and Superannuation
Amendment (2015 Measures No. 1) Bill 2015, op. cit., p. 56 (para 4.9).
[134]. Explanatory
Memorandum, op. cit., p. 57.
[135]. Ibid.,
p. 5.
[136]. Sections
30–17 and 30–120, Income
Tax Assessment Act 1997, accessed 4 June 2015.
[137]. CCH,
Australian Master Tax Guide 2015, 56th edn, p. 992.
[138]. Treasury,
Tax
expenditure statement 2014, ‘chapter 2: tax expenditures’, Canberra,
January 2015, p. 28, accessed 4 June 2015.
[139]. ATO,
‘Deductible
gift recipients’, ATO website, and Taxation
statistics 2012–13, Table 3: Deductible Gift Recipients, Number of
Deductible Gift Recipients as at 31 October 2014, accessed 4 June 2015.
[140]. ATO,
‘Taxation
statistics 2012–13 income year: charities–Table 5’, data,gov.au, accessed 4
June 2015.
[141]. M
Butler (Minister for Social Inclusion) and M Arbib (Assistant Treasurer), Not-for-profit
sector tax concession working group, media release, 12 February
2012, accessed 4 June 2015.
[142]. Ibid.
[143]. Not-For-Profit
Sector Tax Concession Working Group (NFPSTCWG), Fairer,
simpler and more effective tax concessions for the not-for-profit sector,
NFPSTCWG, Discussion paper, November 2012, pp. 18–34, accessed 4 June 2015.
[144]. Freedom of Information
Act 1982, accessed 4 June 2015.
[145]. Treasury,
‘FOI
disclosure log’, Treasury website, accessed 4 June 2015.
[146]. Not-For-Profit
Sector Tax Concession Working Group, Fairer,
simpler and more effective: tax concessions for the not-for-profit sector:
final report, NFPSTCWG, May 2013, p. 5, accessed 4 June 2015. The only
rationale advanced for removing DGR status to activities associated for the
advancement of religion was that ‘DGR status for gifts is an additional
concession, over and above the basic tax exemption that recognises the public
benefit provided by charities. In the case of charities for the advancement of
religion, it is the view of the Working Group that given the pluralist nature
of our society, additional support through deductible donations is not warranted’,
p. 24.
[147]. Ibid.,
p. 5.
[148]. Australian
Government, Budget
measures: budget paper no. 2: 2015–16 , p. 28, accessed 4 June
2015.
[149]. Explanatory
Memorandum, op. cit., pp. 59–60.
[150]. Ibid.,
p. 60.
[151]. Australian
Government, Budget
measures: budget paper no. 2: 2015–16 , p. 28, accessed 4 June
2015.
[152]. Explanatory
Memorandum, op. cit., p. 59.
[153]. Ibid.,
p. 60.
[154]. Ibid.
[155]. Williams
v Commonwealth of Australia [2012] HCA 23,
accessed 17 June 2015.
[156]. Williams
v Commonwealth of Australia [2014] HCA 23,
accessed 17 June 2015.
[157]. Product Stewardship
(Oil) Act 2000, accessed 17 June 2015.
[158]. Commissioner
of Taxation v Cancer and Bowel Research Association Inc (includes Corrigenda
dated 10 and 13 December 2013) [2013]
FCAFC 140, accessed 17 June 2015.
[159]. Schedule
6, items 57 to 59; Explanatory Memorandum, op. cit., pp. 73–74,
paras 6.71-6.76; Taxation
Administration Act 1953, accessed 17 June 2015.
[160]. B
Pulle, Tax
Laws Amendment (Investment Manager Regime) Bill 2012, Bills digest, 12, 2012–13,
Parliamentary Library, Canberra, 2012; Parliament of Australia, ‘Tax
Laws Amendment (Investment Manager Regime) Bill 2012 homepage’, Australian
Parliament website, both accessed 4 June 2015.
[161]. Explanatory
Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, op.
cit., p. 78 (para 7.1).
[162]. Ibid.,
p. 79 (para 7.7).
[163]. Ibid.,
p. 80 (para 7.9).
[164]. M
Johnson (Chair), et al., Australia as a financial centre
– building on our strengths, op. cit., p. 7.
[165]. Ibid.,
p. 5.
[166]. Ibid.,
p. 6 on growth potential of the Asian region.
[167]. The
FIN 48 issue arose out of the US accounting standard Financial Interpretation
no. 48 (FIN 48). Amongst other things FIN 48 required investment funds to
report uncertain tax positions going back some years from the end of 2010. This
was dealt with by an amendment in the transitional provisions legislation
preventing the issue of assessments after 17 December 2010 relating to IMR
income for the 2010–2011 and earlier income years.
[168]. Explanatory
Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, op.
cit., pp. 106–111. A history of the IMR concept back to the Asprey Report of
1975 (Taxation Review Committee, Full Report, 31 January 1975) can be found in
P L Dowd, ‘The
investment manager regime . . . so far’, The Tax Specialist, 16(3),
February 2013, pp. 104–123, accessed 11 June 2015.
[169]. B
Shorten (Minister for Financial Services and Superannuation), Government
announces final element of Investment Manager Regime, media release, 16
December 2011; B Shorten (Minister for Financial Services and Superannuation), Government
confirms legislative timetable for Element 3 of the Investment Manager Regime,
media release, 21 December 2012; C Bowen (Treasurer), Investment
Manager Regime legislation out for consultation, media release 31 July
2013; M Cormann (Minister for Finance), Government
committed to implementing the Investment Manager Regime, media release,
18 December 2014; Treasury, ‘Implementing
Element 3 of the Investment Manager Regime’, Draft
legislation, Treasury website, 12 March 2015, all accessed 4 June 2015. Other
versions of the draft legislation are available on the Treasury consultations
and submissions website.
[170]. R
Vann et al, ‘IMR
– fourth time lucky’, Tax Brief, Greenwoods Herbert
Smith Freehills (an accountancy firm), 9 April 2015, accessed 11 June 2015.
[171]. Ibid.
[172]. J
Hockey (Treasurer), A Sinodinos (Assistant Treasurer), Restoring
integrity in the Australian tax system, joint media release, 6 November
2013, accessed 11 June 2015.
[173]. J
McCormack and A Maharaj, ‘Investment
Manager Regime – draft Legislation to implement Element 3 finally released’,
DLA Piper Tax Alert, March 2015, p. 2, accessed 5 June 2015; R Vann, C
Colley, T Eggleston, A Hirst, ‘IMR – fourth time lucky’, op. cit; Explanatory
Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, op.
cit., p. 88 (para 7.42).
[174]. HM
Revenue and Customs (HMRC), ‘INTM269060 -
non-residents trading in the UK: through UK investment managers, brokers or
Lloyd’s agents: investment manager exemption: conditions’,
Guidance note, HMRC website, accessed 5 June 2015.
[175]. HMRC,
‘INTM269060
- non-residents trading in the UK: through UK investment managers, brokers or
Lloyd’s agents: investment manager exemption: conditions’,
op. cit. Further information on the UK Investment Manager Exemption can be
found at HM Revenue and Customs, ‘INTM269000 -
non-residents trading in the UK: through UK investment managers, brokers or
Lloyd’s agents – contents, Index, HMRC website, accessed 5 June 2015.
[176]. Section
842-200, ITAA
1997.
[177]. Financial
Services Council, Investment
Manager Regime legislation is significant for financial services trade,
media release, 12 March 2015, accessed 4 June 2015; Alternative Investment
Management Association (AIMA), AIMA
welcomes proposed IMR legislation, media release, 12 March 2015,
accessed 4 June 2015; R Vann et al, ‘IMR – fourth time lucky’, op. cit.
[178]. R
Vann et al, ‘IMR – fourth time lucky’ op. cit.
[179]. Explanatory
Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, op.
cit., p. 7.
[180]. The
Statement of Compatibility with Human Rights can be found at page 105 of the
Explanatory Memorandum to the Bill.
[181]. Proposed
subsection 842-210(1).
[182]. A
list of such entities is in paragraphs 12-403(3)(a), (b), (c), (d), (f), (g) or
(h) in Schedule 1 to the Taxation Administration Act 1953.
[183]. Proposed
subsection 842-230(2).
[184]. See:
ITAA 1997, sections 230-45 to 230-55 and subsection 230-350(1);
Explanatory Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, op.
cit., p. 84 (para 7.24).
[185]. Property
interests are defined in sections 855-20 and 855-25 ITAA 1997.
[186]. Readers
would be aware that in the current political environment foreign purchase and
control of Australian real property is a sensitive issue. See also: ITAA
1997, subsection 842-245(3), which currently also excludes derivative
financial arrangements dealing with CGT assets that are Australian real
property or an indirect Australian real property interest.
[187]. Explanatory
Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, op.
cit., pp. 80, 86 and 96 (paras 7.10, 7.32 and 7.63).
[188]. Briefly,
in section 102M of the ITAA 1936, a trading business means a
business that does not consist wholly of ‘eligible investment business’. In
turn an ‘eligible investment business’ is defined as one that is ‘investing or
trading in any’ of a wide range of types of loans, securities and investment
contracts listed in that definition.
[189]. Explanatory
Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, op. cit.
p. 83, para 7.22; proposed section 842-215.
[190]. Proposed
subsection 842-250(2).
[191]. Explanatory
Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, op. cit.
p. 82 (para 7.19); proposed subsection 842-210(1), proposed section
842-220.
[192]. PricewaterhouseCoopers
(PwC), ‘Investment
Manager Regime revised exposure draft exempts foreign funds from Australian tax’,
Tax Insights form International Tax Services, PwC website, 19 March
2015, p. 3, accessed 5 June 2015.
[193]. For
an example of recent public comment see N Chenoweth, ‘How
Disney’s tax bill was McDucked’, The Australian Financial Review, 10 December
2014, p. 1, accessed 11 June 2015.
[194]. Explanatory
Memorandum, Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015, op. cit.
p. 78 (para 7.1).
[195]. See
summary table in Explanatory Memorandum, Tax and Superannuation Laws Amendment
(2015 Measures No. 1) Bill 2015, op. cit.,
pp. 80–81.
[196]. PwC,
‘Investment
Manager Regime revised exposure draft exempts foreign funds from Australian tax’,
op. cit.
For copyright reasons some linked items are only available to members of Parliament.
© Commonwealth of Australia
Creative Commons
With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.
In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.
To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.
Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.
Disclaimer: Bills Digests are prepared to support the work of the Australian Parliament. They are produced under time and resource constraints and aim to be available in time for debate in the Chambers. The views expressed in Bills Digests do not reflect an official position of the Australian Parliamentary Library, nor do they constitute professional legal opinion. Bills Digests reflect the relevant legislation as introduced and do not canvass subsequent amendments or developments. Other sources should be consulted to determine the official status of the Bill.
Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Entry Point for referral.