Bills Digest no. 22 2015–16
PDF version [657KB]
WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Leslie Nielson and Kai Swoboda
Economics Section
11 September 2015
Contents
Purpose and structure of
the Bill
Background
Committee
consideration
Policy
position of non-government parties/independents
Position
of major interest groups
Financial
implications
Statement
of Compatibility with Human Rights
Key
issues and provisions
Date introduced: 20
August 2015
House: House of
Representatives
Portfolio: Treasury
Commencement:
Schedules 1 and 2 commence on Royal Assent. Schedule 3 item 1 commences on 31
December 2015 and item 2 commences on 31 December 2016.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent, they
become Acts, which can be found at the ComLaw
website.
The purpose of the Bill is to amend both tax and
superannuation legislation, to:
- improving
the integrity of the scrip for scrip roll-over relief rules in the Income
Tax Assessment Act 1997 (ITAA 1997) following a 2009 decision of the
Federal Court (Schedule 1)
- end
the personal income tax exemption of wages, under the provisions Income Tax
Assessment Act 1936 (ITAA 1936), earned by some Australian
government employees who work overseas for more than 91 days delivering
official development assistance (Schedule 2) and
- increase
the superannuation account balance below which small lost superannuation
accounts will be required to be transferred to the Commissioner of Taxation
under the provision of the Superannuation (Unclaimed Money and Lost Members)
Act 1999 (Lost Members Act) (Schedule 3).
This is an omnibus Bill of unrelated tax and
superannuation measures with separate backgrounds to each measure.
Scrip for Scrip Roll-over
What is a scrip for scrip roll-over?
It is normal practice for a company, acquiring or merging
with another company, to offer its own shares as payment for the acquired
company. Normally such an event, which in effect amounts to disposal of shares,
would create a capital gains tax (CGT) liability. However, in certain
circumstances the entity may be able to defer paying CGT until a later CGT
event. This is where a scrip for scrip roll-over becomes a possibility. A scrip
for scrip roll-over is the deferral of that liability where:
- the
owner of the asset chooses to take advantage of these provisions
- the
owner acquired its interest in the company being sold on or after 20 September
1985[1]
- the
exchange of shares which results in a capital gain occurs on or after 10
December 1999
- the
exchange of shares results in the purchasing company gaining at least 80
percent of the equity of the target company or trust
- holders
of voting interests in the acquired entity can participate in the merger or
takeover on substantially the same terms and
- the
purchase bid does not contravene key provisions in Chapter 6 of the Corporations
Act 2001 or
- if
the target entity is a company—it includes a scheme of arrangement approved by
a court under Part 5.1 of the Corporations Act.[2]
Similar provisions apply to allow the deferral of CGT,
when one trust acquires units in another trust. However, scrip for scrip roll-over
CGT relief is not available if a share is exchanged for a unit or other
interest in a fixed trust, or if a unit or other interest in a fixed trust is
exchanged for a share.[3]
Generally, foreign residents for tax purposes cannot take advantage of these
provisions.[4]
The AXA case
The origin of the proposed changes in Schedule 1 arise
from the decision of the Federal Court in AXA Asia
Pacific Holdings Ltd v Commissioner of Taxation in 2009 (AXA). [5]
Briefly, this case examined whether two parties were dealing with one another
on an ‘arms-length’ basis and whether their arrangements invoked the general
anti-avoidance provisions of Part IVA of the ITAA 1936. Neither issue is
being addressed by the proposed amendments in Schedule 1, but the
decision in this case left open opportunities to unduly avoid capital gains
tax.
The revealed mischief
The proposed amendments involve Subdivision 124-M of the ITAA
1997. This Subdivision contains provisions to deny scrip for scrip
roll-over relief in circumstances where the same person or company group has
influence over both the selling company and the purchasing company.[6]
According to the Explanatory Memorandum:
Subdivision 124-M treated the AXA arrangement as a genuine
takeover involving a substantial change in ownership rather than as a corporate
restructure. As a result, AXA was able to obtain the benefit of a CGT cost base
uplift when eventually disposing of one of its subsidiaries. [7]
Establishing the ‘cost base’ of an asset:
...is a fundamental step in determining whether a taxpayer has
derived a capital gain or incurred a capital loss following the disposal of an
asset. In its simplest form a taxable gain is calculated as the difference
between the amount received upon disposal (‘disposal consideration’) and the
cost of the asset (‘cost base’), indexed for inflation.[8]
A restructure of an entity that involves a sale of the
business into a different entity, such as a sale of a business from a trust to
a company, will inevitably result in an uplift to the cost base to the
acquiring entity for that asset. For example, Possum Family Trust conducts a
successful retail business with goodwill worth around $1.5 million but due
to problems with distributions to a corporate beneficiary it decides to dispose
of the business to a new company which it establishes. The trust vendor
finances the purchase price. Thus the newly created company now has goodwill
and a cost base of $1.5 million. The revenue earned by the company can be used
for the loan payable to the trust. When the company sells the business it can
use a cost base of $1.5 million. However because the parties to the transaction
are not at arms-length, an independent valuation of the business asset should
be undertaken.[9]
The Explanatory Memorandum notes:
Inappropriate [CGT] deferral could otherwise occur where an
acquiring company receives shares in the original company (that is the company
being purchased) in exchange for shares in itself and on–sells the original
company.[10]
The Explanatory Memorandum notes that the AXA case
demonstrates that these integrity provisions can be circumvented. This can
occur by ‘temporarily suppressing the ownership rights of a party in a scrip
for scrip exchange through the use of [financial] instruments including
convertible shares, options and rights.’[11]
Later these transactions can be reversed so that a transfer of ownership is
accomplished without raising a CGT liability that might otherwise occur. The
proposed amendments seek to alter these integrity provisions so that this
inappropriate tax relief would not occur.
Policy development
This measure was first announced as part of the 2012–13
Budget.[12]
Treasury released a consultation paper on this matter on 13 July 2012 and
received one submission in response.[13]
The current Government announced that it was proceeding with this measure in a
press release of 14 December 2013.[14]
On 29 April 2015 Treasury released an Exposure Draft of legislation containing
the proposed provisions. Submissions closed on 20 May 2015.[15]
Treasury has not released submissions received in response to this Exposure Draft.
Date from which proposed changes
apply
Item 15 of Schedule 1 applies these
particular changes from 8 May 2012 at 7:30 pm in the Australian Capital
Territory. It is thus retrospective in its application. This is not unusual for
tax legislation and the original announcement in the 2012–13 Budget applied the
then proposed change from that time and date.
Removing the exemption of income
earned from overseas employment
A double exemption from personal
income tax?
Since 1964, under Article 34 of the Vienna Convention
on Diplomatic Relations, a ‘diplomatic agent’ is exempt from personal
income tax of the host country on income sourced from that agent’s home
country.[16]
For the purposes of this Convention a diplomatic agent is the head of the
mission or a member of the diplomatic staff of the mission.[17]
Thus Australian government staff, attached to an Australian diplomatic mission,
are exempt from the host country personal income tax where that host country
has signed this Convention (and the overwhelming majority of host countries have
now signed).
Under section 23AG of the ITAA 1936, the foreign
earnings of Australian residents for tax purposes, who have been engaged in
foreign service for a continuous period of not less than 91 days, are also
exempt from Australian personal income tax.[18]
This applies to periods of foreign service arising from:
- the
delivery of Australian official development assistance by the person’s employer
- the
activities of the person’s employer in operating a public fund that is a
deductable gift recipient operating internationally
- the
person’s employment by a prescribed institution which is located outside
Australia and is exempt from income tax in the country in which it is resident;
or is a prescribed institution that has a physical presence in Australia but
which incurs its expenditure and pursues its objectives principally outside
Australia[19]
or
- the
person’s deployment outside Australia as a member of a disciplined force (armed
forces or police).[20]
Therefore, those persons attached to Australian diplomatic
missions, who are Australian residents for taxation purposes, meeting the
requirements of section 23AG of the ITAA 1936, engaged in foreign
services for not less than 91 days are exempt from both Australian and host
country personal income tax regimes on their foreign income.
Those Australian residents engaged in foreign services,
that do not meet the requirements of section 23AG of the ITAA 1936, are
subject to Australian personal income tax; for example ordinary Australian
diplomatic staff on foreign postings.
The Explanatory Memorandum notes that this exemption under
section 23AG was originally provided to avoid double taxation of those engaged
in government service.[21]
Statistical background
The overall value of tax exempt foreign employment income
has been declining since the 2009–10 tax year (Table 1).
Table 1: Total Value of Exempt Foreign Employment Income
Year
|
Value ($m)
|
2009–10
|
425.1
|
2010–11
|
362.4
|
2011–12
|
323.6
|
2012–13
|
293.7
|
Source: ATO, Taxation statistics 2012–13, Individuals
- Table 1: Selected items for income years 1978–79 to 2012–13, ATO, accessed
25 August 2015.
The number of persons claiming this exempt income has
declined over the same period from 8,155 in 2009–10 to 4,730 in 2012–13 (table
2). Interestingly, the average size of the claimant’s exempt income from this
source has risen over the same period.
Table 2: Total Value of Exempt Foreign Employment Income
Year
|
Average value
($)
|
2009–10
|
52,124
|
2010–11
|
58,785
|
2011–12
|
59,589
|
2012–13
|
62,093
|
Source: ATO, Taxation statistics 2012–13, Individuals
- Table 1: Selected items for income years 1978–79 to 2012–13, ATO, accessed
25 August 2015.
Lost member small account threshold
As individuals move between jobs it is possible that
superannuation payments made on their behalf are paid to different funds.
Sometimes this is a deliberate choice made by the individual or is the result
of restrictions on moving balances between funds (such as for certain defined
benefit schemes). If an individual does not make a choice about their
superannuation fund upon commencing employment, it is likely that they will be
a member of multiple funds.
The holding of multiple superannuation accounts may
disadvantage individuals through the imposition of fixed administration fees.
Multiple accounts can also impose additional costs on the superannuation
system. However, it is important not to assume that each individual should only
have a single account. Multiple accounts may be an active choice that a member
makes to obtain certain insurance benefits, to facilitate investment choice or
as a transition to retirement arrangement.
Certain ‘lost’ accounts are required to be identified and
transferred biannually from superannuation funds and retirement savings account
providers to the Commissioner of Taxation.[22]
While the identification of lost superannuation has been
part of superannuation industry arrangements since 1996, requirements for the
transfer of these funds to the Commissioner of Taxation first applied from
1 July 2010, after being announced in the 2009–10 Budget.[23]
Prior to this, these funds remained with the relevant superannuation fund or
were transferred to eligible roll-over funds. At that time, the transfer to the
Commissioner of Taxation of these funds was expected to increase net revenue by
almost $230 million over the period 2010–11 to 2012–13.[24]
At the time, the Coalition supported the transfer of these
funds to the Commissioner of Taxation, noting that this was ‘basically a
housekeeping measure which requires superannuation funds to transfer lost
member’s superannuation to the Australian Taxation Office’.[25]
The justification for the transfer of such funds—which was
already in place for unclaimed bank account and life insurance fund moneys—was
that it would improve the efficiency of the superannuation system overall by removing
the need for superannuation funds to administer or apply member protection to
small accounts that are transferred and improve the equity for other members of
the fund that were cross-subsidising the member protection arrangements.[26]
The requirements to be a ‘lost member’ are set out in the
Retirement Savings Accounts Regulations 1997 and Superannuation Industry
(Supervision) Regulations 1994. These require the account holder to be
‘uncontactable’ or ‘inactive’:
- the
account holder is ‘uncontactable’ if:
- the
provider has never had an address for the account holder or
- at
least one written communication has been sent to the account holder’s last
known address and has been returned unclaimed
and
the provider has not received a contribution or roll-over in respect of the
account holder within the last 12 months
- the
account holder is ‘inactive’ if the account has been held for more than two
years and the provider has not received a contribution or roll-over in respect
of the account within the last five years.[27]
The regulations provide for account holders to be permanently
excluded from being ‘lost’ if they have indicated by some positive act or
another contact that they wish to continue with the provider.[28]
There are two strands to a superannuation account being
classified as a ‘lost member account’ under the Superannuation (Unclaimed
Money and Lost Members) Act 1999:
- the
first relates to ‘small accounts’, which are taken to be the accounts of lost
members (as defined by the Regulations above) with an account balance that is
less than the specified threshold in paragraph 24B(1)(b) of the
Act—currently $2,000
- the
second relates to ‘inactive accounts of unidentifiable members’, which are
taken to be the accounts of lost members (as defined by the Regulations above)
where:
-
the
superannuation provider has not received an amount in respect of the member
within the last 12 months and
-
the
superannuation provider is satisfied that it will never be possible for the
provider, having regard to the information reasonably available to the
provider, to pay an amount to the member.[29]
Schedule 3 of this Bill proposes to change the account
balance threshold relating to ‘small accounts’ from $2,000 to $4,000 from 31 December
2015 and then to $6,000 from 31 December 2016.
Policy development
When the requirements relating to the payment of small
accounts to the Commissioner of Taxation were first established in July 2010, a
threshold of $200 applied.[30]
The choice of a $200 threshold appears to be related to the threshold that
applied—and currently still applies—to the maximum account balance that can be
withdrawn under the preservation rules.[31]
The Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.
2) Bill 2009 noted:
Accounts of less than $200 for lost members who are
subsequently found can be cashed tax free from the superannuation system.
However, claiming these accounts can be a cumbersome and time consuming
process. Many superannuation fund members therefore do not make the effort to
claim these accounts.[32]
The Gillard Government increased the threshold from $200 to
$2,000 in late 2012 (to be applied from 30 December 2012) as part of a
broader package of measures relating to unclaimed and lost money in banking,
life insurance and superannuation. Also included as part of these changes was a
reduction in the period of inactivity for the accounts of unidentifiable
members the before funds are transferred to the Commissioner of Taxation from
five years to 12 months.[33]
In April 2013, the Gillard Government announced (as part of
a broader superannuation package), that it would further increase the account
balance threshold to $2,500 from 31 December 2015, and to $3,000 from
31 December 2016.[34]
The financial impact of this policy decision was subsequently included in the
forward estimates in the 2013–14 Budget.[35]
On 7 June 2013, the Gillard Government released a
discussion paper following its decisions in late 2012 and early 2013 to
increase the threshold below which lost superannuation accounts are transferred
to the Commissioner of Taxation. The discussion paper set out current
initiatives taken to reunite members with their lost superannuation accounts
and sought responses on further changes to both reduce the number of lost and
unnecessary accounts and prevent the proliferation of these accounts into the
future.[36]
In August 2013, the Rudd Government announced that the
threshold for small lost accounts would be increased from $2,000 to $4,000 from
31 December 2015, and then to $6,000 from 31 December 2016.[37]
At the time, the shadow assistant treasurer stated that the measure was a ‘cash
grab’, noting:
These latest cash grabs targeting superannuation come on top
of almost $9 billion in increased taxes and charges on superannuation in
Labor’s first six budgets ... This government cannot be trusted to keep their
hands out of the superannuation accounts and the bank accounts of ordinary
Australians. Australians simply can’t afford three more years of Labor’s
reckless spending and cash grabs.[38]
Following the election, the Coalition Government announced
on 6 November 2013 (as part of a broader announcement on outstanding tax
and superannuation measures) that it would proceed with implementing the
increase in thresholds as announced by the former Government from $2,000 to
$4,000 from 31 December 2015, and then to $6,000 from 31 December 2016.[39]
On 16 December 2013, the Treasury released draft
legislation relating to the proposal, with submissions due by 3 February
2014.[40]
The most recent report of the Senate Selection of Bills
Committee mentions this particular Bill, but has deferred considering it until
its next meeting.[41]
At the time of writing no other parliamentary committee has undertaken
to examine this Bill.
At the time of writing the ALP, minor parties and independent
Members or Senators have not expressed a view on the changes in this Bill.
However, the policy development process and previous legislative history may suggest
the ALP’s position on the current proposals as discussed below.
Scrip for Scrip roll-over
As noted above, the then ALP Government announced this
particular measure in the 2012–13 Budget, so the current ALP opposition may
support these particular measures.
Removing the exemption of income
earned from overseas employment
In May 2009, the Rudd Government introduced the Tax Laws
Amendment (2009 Budget Measures No. 1) Bill 2009 into Parliament.[42]
Item 1 of Schedule 1 of that Bill specifically provided for the foreign income
of those delivering official development assistance, where they were doing so
overseas for not less than 91 days, to be exempt from Australian personal
income tax. This Bill received Royal Assent on 29 June 2009. This may indicate
that the current ALP opposition may oppose this particular measure.
Lost member small account threshold
At the time of writing, the ALP has not publicly commented
on whether it supports Schedule 3 of the Bill relating to increasing the lost
member small account threshold. However, given the measure implements a policy
announced by the Rudd Government in August 2013, it could be expected that the
ALP will support this part of the Bill.
As at the time of writing there has been little comment from
major interest groups on the measures included in Schedules 1 and 2 of the Bill.
However, various superannuation industry groups have
expressed views about the measure proposed in Schedule 3 to increase the lost
member small account threshold. When the proposed increase in the threshold to
$4,000 from 31 December 2015 and $6,000 from 31 December 2016 was first
announced in August 2013, the Financial Services Council (FSC) opposed the
measure, with the FSC chief executive officer noting that ‘[g]overnments should
be consolidating peoples’ [sic] superannuation, not putting it into
consolidated revenue’.[43]
Several superannuation industry groups commented on the Gillard
Government’s June 2013 discussion paper but there was no specific comment on
the proposed threshold changes.
- The
FSC did not did not specifically address the threshold changes but instead argued
for policy stability to implement recent changes:
[U]pcoming initiatives to reunite individuals with their lost
superannuation should be given sufficient opportunity to have a measure impact
on the pool of lost money held by the ATO and superannuation funds.
The FSC also notes that superannuation funds are currently
subject to significant and costly reforms that have severely diminished the
capacity to consider or implement new initiatives to reunite members with lost
superannuation monies. The FSC would oppose policies that require additional
compliance or reporting by funds.[44]
- The
need for policy stability was also supported by the Association of
Superannuation Funds, which noted that ‘the current proposed suite of reforms
should be implemented, allowed to settle in and then their effectiveness
reviewed prior to any further changes being contemplated or implemented’.[45]
- The
Australian Institute of Superannuation Trustees considered that a range of
additional strategies should be considered including awareness campaigns of
current tools to enable people to locate lost superannuation as well as a tax
file number declaration ‘app’ which could send the employee’s essential
information to their new employer without their having to complete hard copy
forms.[46]
The Explanatory Memorandum notes the financial implications
associated with each schedule of the Bill:
- scrip
for Scrip roll-over (Schedule 1)—‘an unquantifiable but potentially large
revenue protection associated with these amendments’
- removing
the tax exemption of income earned from overseas employment (Schedule 2)—a saving
of about $6.7 million over the period 2015–16 to 2018–19 and
- small
lost member accounts threshold (Schedule 3)—the total estimated net impact from
this measure is a revenue gain of $483.9 million over the period between
2014–15 and 2018–19.[47]
This total includes funding for the Australian Taxation Office of
$4.6 million to administer the changes as announced in the 2013–14 Budget
and an amount relating to interest payments on the additional transferred
funds.[48]
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Bill’s compatibility with the human rights and freedoms recognised or declared
in the international instruments listed in section 3 of that Act. The
Government considers that all three schedules of the Bill are compatible.[49]
The Parliamentary Joint Committee on Human Rights
considers that the Bill does not raise human rights concerns.[50]
Schedule 1—Scrip for Scrip Rollover
The proposed methods for dealing with the potential tax
loopholes in Subdivision 124M of the ITAA 1997 are:
- to
include any interests involved in a scrip for scrip rollover that are
convertible shares, options, rights or similar interests in the calculations of
equity interests involved in a scrip for scrip roll-over between the parties in
these arrangements
- where
debt is involved the proposed solution is to remove the debt sheltering
opportunity arising from the current disregarding of a capital gain arising on
the settlement of a debt owed, as part of a scrip for scrip acquisition, by an
acquiring company to its ultimate holding company and
- where
trusts are involved in a scrip for scrip roll-over, the proposed solution is to
extend the operation of the new provisions so that they apply to trusts as well
as to companies.
The following shows how the proposed changes achieve the
above ends.
Equity provisions
Item 4 of Schedule 1 amends section 127-780
of the ITAA 1997 to add a new condition for a scrip for scrip roll‑over
to apply.[51]
This new condition is that where a purchasing entity is part of a wholly owned
group, no member of that group may issue equity (other than the necessary
replacement equity), or owe new debt:
- to
an entity that is not a member of that wholly owned group and
- in
relation to the issue of a replacement interest as part of that purchasing
arrangement. This prevents other members of a wholly owned group from issuing
unnecessary debt or equity to third parties that can be used to avoid CGT
obligations.
Under section 124-780 only an original interest holder can
obtain a roll-over of share interests. Under section 124-781 only an
original interest holder can obtain a roll-over of trust interests. The
transfer of a cost base for the purposes of a scrip for scrip roll-over can,
under section 124-782, only be applied to the holder of an ‘original interest’
in an entity who is either a significant stake holder or a common stake holder.
This makes the definitions of the terms ‘significant stake’ and ‘common stake’
critical for the functioning of the scrip for scrip roll-over provisions. Both
terms are defined at section 124-783 and apply where the entities involved are
not ‘widely-held’—that is they have less than 300 shareholders (if they are a
company) or beneficiaries (if they are a trust).[52]
An entity has a ‘significant stake’ in a company if it and
its associates own shares with 30 per cent or more of the voting rights, or the
right to receive 30 per cent or more of any dividends or capital distributions
(subsection 124-783(6)).
An entity has, or two or more entities have, a ‘common
stake’ if they and their associates own shares with 80 per cent or more of the voting
rights, or the right to receive 80 per cent or more of any dividends or capital
distributions (subsection 124-783(9)).
Equivalent tests are applied to trusts (subsections 124-783(7)
and (10)).
Item 8 repeals section 124-784 and inserts proposed
sections 124-783A and 124-784 into the ITAA 1997. The first
proposed section provides:
- an
entity has a ‘significant stake’ in another entity if that first entity has one
or more ‘stake options’ in the second entity and if it exercised those options
it would have a ‘significant stake’ according to the definition in section
124-783 (that is, it would have at least 30 per cent of the voting rights or
entitlements to dividends or capital distributions)
- an
entity, or two or more entities have a ‘common stake’ in the original entity or
the replacement entity if they have one or more ‘stake options’ in that entity
and if they exercised those options they would have a ‘common stake’ according
to the definition in section 124‑783 (that is, they would have at
least 80 per cent of the voting rights or entitlements to dividends or capital
distributions).
The importance of these proposed provisions lies in the
definition of the various terms used. Item 14 alters subsection 955-1(1)
of the ITAA 1997 to insert new definitions of the terms ‘stake interest’
and ‘stake option’ into the Dictionary to the Act. The substance of the
definitions is set out at proposed subsection 124-783A(3). A ‘stake
option’ an entity has in another entity is a right to acquire the following
‘stake interests’:
- voting
rights in a company
- right
to receive any part of any dividends
- right
to receive any part of any capital distributions and
- if
the other entity is a trust - the right to receive any part of any distribution
to beneficiaries of the trust income or capital distributions of that trust.
The use of the term ‘rights’ to acquire these stake
interests goes beyond acquiring shares in a company or units in a trust. Under
the proposed changes an original interest holder is one who has either a
significant stake or a common stake in the company being acquired. The
definition of their interest is expanded to include not only shares or units in
a trust they may hold, but also includes any of the above rights they may have,
irrespective of the financial instrument used to provide those rights. The
Explanatory Memorandum adds that these rights are assessed as if they had been
realised.[53]
These proposed changes apply to an arrangement where the relevant interest could
be realised before the end of a five year period after that arrangement was
completed.
The Explanatory Memorandum provides the following example:
An original interest holder owns all of the ordinary shares
and voting rights in a company (the target company). The original interest
holder enters into a scrip for scrip arrangement with an acquiring entity.
Under the arrangement, the acquiring entity acquires all of the shares in the
target company. In return, the acquiring entity issues convertible preference shares
in itself to the original interest holder.
The replacement shares currently carry 15 per cent of the
voting rights in the acquiring entity. The shares are capable of converting
after 12 months. Following the conversion of the shares, the shares will carry
40 per cent of the voting rights in the acquiring entity.
Under the current law, the original interest holder does not
have a significant stake (30 per cent) in the acquiring entity after the
arrangement. Under the amendments, the original interest holder is treated as
having converted its shares and it will have a significant stake.[54]
Debt provisions
As noted above, item 4 restricts the issuance of
debt in relation to a scrip for scrip roll-over. In order for an arrangement to
qualify for roll-over relief, all debt and equity interests issued in relation
to a scrip for scrip roll‑over arrangement would, under the proposed
amendments, be required to be contained within members of a wholly owned group.
This is important for the functioning of the proposed rules governing the
apportionment of debt and equity interests issued as part of such arrangements
(see further comments on items 8 and 11 below).
Also as noted above, item 8 repeals section 124-784
and replaces it with new text. Existing subsection 124‑784(3) of the
ITAA 1997 states:
Any capital gain of the ultimate holding company from the
repayment of new debt owed by an acquiring entity under the arrangement is
disregarded to the extent that it relates to the difference between the part of
the cost base transferred or allocated under section 124-782 and the market
value of the debt just after the arrangement was completed.
Where there is no difference between the value of the debt
repaid and the cost base transferred, CGT is not payable on the repayment of
that debt. The repeal of existing section 124-784 removes this potential
problem. Item 11 repeals section 124-784C and replaces it with new text
and achieves a similar outcome. Thus debt owed within a wholly owned group
will, under the proposed changes, be unable to be used to eliminate a CGT
liability.
A second effect of the repeal of sections 124-784 and
124-784C is to ensure that the debt and equity interests issued as part of the
arrangements by the purchasing company are allocated across all members of a
wholly owned group, and not just to the parent company of that group, as is
currently the case (see comments on item 4 above).
Trust provisions
In addition to the inclusion of trust interests in the
provisions already mentioned, the proposed amendments will assess trusts in the
same way as companies for the purposes of the scrip for scrip roll-over
provisions.
The Explanatory Memorandum notes that the amendments in items
5 and 7, inserting the term ‘replacement entity’ into subparagraphs
124-781(1)(a)(i) and(ii) and subsections 124-783(9) and (10) ensure that trusts
are assessed in the same way as companies for the purposes of the scrip for
scrip roll-over rules. However, there is no separate definition of the term
‘replacement entity’ in either the Explanatory Memorandum or the definitions
subsection of the ITAA 1997 (subsection 995-1). The Explanatory
Memorandum argues that the placement of this term in these parts of subdivision
124M standardises the use of this term across companies and trusts.[55]
The definition of the term ‘entity’ at section 960-100 ITAA 1997
includes trusts in its ambit.
Section 124-784A of the ITAA 1997 sets out the rules
for determining when an arrangement is regarded as a restructure. The section
currently applies where (amongst other requirements) roll-over relief has been
or will be obtained under section 124-780. As set out above, section 124-780 relates
to a roll-over of share interests. Item 9 amends section 124-784A so
that it will also refer to section 124-781, which relates to a roll-over
of trust interests. This effectively ensures that restructuring of trusts is
treated in the same way as the restructuring of companies for these purposes.
Another aspect of the test contained in section 124-784A for
determining when an arrangement is regarded as a restructure, is a calculation
that relies on the market value of shares (and rights to acquire those shares).
Item 10 amends this calculation (which is in subsection 124-784A(2)) to
include references to units in trusts and options and right to acquire those
units. As with item 9, this amendment will treat restructuring of trusts
in the same way as restructuring of companies.
Comment
These are preventative measures, and an undesirable tax
practice forestalled means additional revenue kept in the government’s hands.
Schedule 2—Removing the exemption
of income earned from overseas employment
As set out above, under section 23AG of the ITAA 1936,
the foreign earnings of Australian residents for tax purposes, who have been
engaged in specified foreign service for a continuous period of not less than
91 days, are also exempt from Australian personal income tax.[56]
The particular types of foreign service covered by the exemption are set out in
subsection 23AG(1AA). One of the specified types of service is ‘the
delivery of Australian official development assistance by the person’s employer’
(paragraph 23AG(1AA)(a)). Item 1 of Schedule 2 amends paragraph
23AG(1AA)(a) of the ITAA 1936 so that it will provide that foreign
earnings are exempt from Australian tax if they are directly attributable to:
(a) the delivery of Australian official development
assistance by the person’s employer (except if that employer is an Australian
government agency (within the meaning of the Income Tax Assessment Act 1997)).
To avoid situations where income is not subject to tax in
either the foreign country or Australia, subsection 23AG(2) of the ITAA
1936 makes it clear that Australian personal income taxes will still apply
where the income earnt overseas is tax free due to:
- a
law of the foreign country giving effect to a double tax agreement
- a
double tax agreement
- provisions
of a law of the foreign country under which income covered by any of the
following categories is generally exempt from income tax:
-
income
derived in the capacity of an employee
- income
from personal services or
- similar
income
- a
law of the foreign country corresponding to the International Organisations
(Privileges and Immunities) Act 1963 or to the regulations under that Act
or
- an
international agreement to which Australia is a party that deals with
- diplomatic
or consular privileges and immunities and
- privileges
and immunities in relation to persons connected with international
organisations.
Thus, although the amendment only applies to Australian
government employees, if an employee of another organisation providing official
aid assistance, or assistance as part of a non‑government program, should
receive tax free income under a particular host country’s personal income tax
rules, they are assessable under Australian personal income tax rules, as are other
Australian tax residents otherwise receiving tax free income overseas.
Comment
This proposed change will put employees delivering official
aid assistance, working out of Australian government missions overseas, on the
same tax basis with other embassy staff, with whom they often closely work.
Schedule 3—Lost member small account
threshold
As discussed above, certain superannuation an retirement
savings accounts that are considered to be ‘lost’ to their holders are required
to be transferred to the ATO on a biannual basis. Currently lost member
accounts with a balance of less than $2,000 are required to be transferred. Item
1 of Schedule 3 amends paragraph 24B(1)(b) of the Superannuation
(Unclaimed Money and Lost Members) Act 1999 to replace the value
$2,000 with the value $4,000 with effect from 31 December 2015.[57]
Item 2 amends the same paragraph with effect from 31 December 2016
to lift the value of the threshold to $6,000.
The key rationale for the transfer of lost superannuation
to the ATO is that it better facilitates the consolidation of lost
superannuation accounts by individuals and funds and, with the payment of
interest at the rate of the consumer price index (CPI), it can protect the
erosion of account balances through the imposition of fees.
The value of the threshold is important as it can affect
whether an individual who is eventually reunited with their superannuation is
better or worse off in having their small lost account transferred to the ATO.
- On
the one hand, accounts transferred to the ATO have no fees deducted and are to receive
interest paid at the rate of the CPI, with this interest being tax-free.[58]
However, any insurance cover provided by the account would likely be
discontinued.
- On
the other hand, accounts retained by the fund may continue to provide insurance
cover and earn interest at the relevant rate (less 15 per cent tax), less any
relevant administration and investment fees.
Leaving the issue of insurance cover aside, in general the
smaller the account balance, the more likely that accounts transferred to the
ATO will be better preserved, as annual administration fees will likely offset
the usually higher than CPI investment earnings. However, for larger account
balances, the reverse is likely to be the case, as the annual fees offset a
higher level of investment earnings.
In evidence to the Senate Economics Committee in late 2012
in relation to the changes to the threshold from $200 to $2,000, the Treasury
noted:
On accounts up to $2,000—possibly beyond but certainly up to
$2,000—we typically would expect that the fees and charges that are being taken
out of that account would exceed the likely earnings for that account. An
account up to an amount like $2,000, if it is an account that is not having
contributions made to it, would typically be going backwards. Part of the
rationale for the measure is to protect small accounts, in particular small,
inactive accounts, from that erosion and to instead put them with the tax
office and with the CPI interest.[59]
In early 2014, the Association of Superannuation Funds of
Australia considered that the breakeven point is also likely to be around
$2,000, noting:
While the aim of protecting account balances may be
appropriate for account balances under $2,000, there is far less certainty
about the need for such protection of the members’ accounts under the proposed
higher thresholds.
While acknowledging that interest will be paid at the CPI
rate on amounts held by the ATO, for a member invested in a fund’s default
investment option, based on long term average investment returns, it is
probable that for account balances greater than $2,000 the member would be
significantly better off financially were the account balance to remain
invested with the fund.[60]
Members, Senators and Parliamentary staff can obtain
further information from the Parliamentary Library on (02) 6277 2500.
[1]. This
is the date after which assets acquired became liable to capital gains tax.
[2]. Australian
Taxation Office (ATO), ‘Takeovers
and mergers, scrip for scrip rollover’, ATO website, 29 June 2015, accessed
24 August 2015.
[3]. Ibid.
[4]. Income Tax Assessment
Act 1997, section 124-795, accessed 2 September 2015.
[5]. AXA
Asia Pacific Holdings Ltd v Commissioner of Taxation (2009) 77 ATR 829; [2009] FCA
1427, accessed 9 September 2015.
[6]. These
provisions are sections 124–782 and 124–784 of the Income Tax Assessment Act
1997.
[7]. Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 4)
Bill 2015, p. 11 accessed 4 September 2015.
[8]. G
Thring, ‘How
to maximise CGT cost bases’, Television Education Network,
transcript, March 1998, accessed 8 September 2015.
[9]. ATO,
‘What
‘market value’ means’, ATO website, 1 July 2015, accessed 8 September 2015.
[10]. Explanatory
Memorandum, op. cit., p. 9.
[11]. Ibid.,
p. 11.
[12]. Australian
Government, Budget
measures: budget paper no. 2: 2012–13, p. 21, accessed 2 September
2015.
[13]. Treasury,
‘Strengthening
certain integrity provisions in the scrip for scrip roll-over’, Treasury
website, accessed 24 August 2015.
[14]. A
Sinodinos (Assistant Treasurer), Integrity
restored to Australia’s taxation system, media release, 14 December 2013,
accessed 2 September 2015.
[15]. Treasury,
‘Reforms
to the scrip for scrip roll-over—Exposure Draft’,
Treasury website, accessed 24 August 2015.
[16]. Vienna
Convention on Diplomatic Relations, done at New York 18 April 1961,
[1968] ATS 3 (entered into force for Australia 25 February 1968), accessed 9
September 2015. Diplomats are not exempt from all of a host country’s taxes and
rates. For example they are not, under this treaty, exempt from host country
indirect taxes.
[17]. Article
1 of the Convention and Diplomatic
Privileges and Immunities Act 1967, section 4, accessed
2 September 2015.
[18]. Income Tax Assessment
Act 1936, accessed 2 September 2015.
[19]. Refers
to a prescribed charitable or religious institution operating outside
Australia.
[20]. Income Tax Assessment
Act 1936, subsection 23AG(1AA), accessed 2 September 2015.
[22]. Superannuation
(Unclaimed Money and Lost Members) Act 1999, sections 16 and 17,
accessed 2 September 2015.
[23]. Tax Laws Amendment (2009
Budget Measures No. 2) Act 2009, Schedule 3, accessed 2 September
2015.
[24]. Explanatory
Memorandum, Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009,
p. 9, accessed 2 September 2015.
[25]. H
Coonan, ‘Second
reading speech: Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009’,
Senate, Debates, 30 November 2009, p. 9612, accessed
2 September 2015.
[26]. Explanatory
Memorandum, Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009, op.
cit., p. 114.
[27]. Retirement Savings
Accounts Regulations 1997, regulation 1.06; Superannuation Industry
(Supervision) Regulations 1994, regulation 1.03A, accessed 2 September
2015.
[28]. Ibid.
[29]. Accounts
that support a defined benefit interest are excluded from the definition of
small accounts and inactive accounts of unidentifiable members.
[30]. Tax Laws Amendment (2009
Budget Measures No. 2) Act 2009, Schedule 3, accessed 2 September
2015.
[31]. Superannuation
Industry (Supervision) Regulations 1994, Part 1, accessed 8 September 2015.
[32]. Explanatory
Memorandum, Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009, op.
cit., p. 114.
[33]. These
changes included reducing the time period for the transfer of unclaimed bank
account and life insurance policy moneys to the Commonwealth from seven years
to three years and the transfer of superannuation accounts of unidentifiable
members after five years of inactivity to the Commonwealth to 12 months of
inactivity. In addition, balances transferred to the Commonwealth would be
credited with interest at the rate of the consumer price index from 1 July
2013. These changes were implemented by the Treasury Legislation
Amendment (Unclaimed Money and Other Measures) Act 2012, accessed 9
September 2015. The Government recently reversed the period for the transfer of
unclaimed money for bank accounts and life insurance policy moneys through the Banking
Laws Amendment (Unclaimed Money) Bill 2015, which passed the Parliament on
9 September 2015.
[34]. W
Swan (Treasurer) and B Shorten (Minister for Financial Services and
Superannuation), Reforms
to make the superannuation system fairer, joint media release,
5 April 2013, accessed 7 September 2015.
[35]. Australian
Government, Budget
measures: budget paper no. 2: 2013–14, p. 42, accessed 8 September
2015.
[36]. Treasury,
Lost
and unclaimed superannuation money, Discussion paper, The Treasury,
Canberra, 7 June 2013, accessed 31 August 2015.
[37]. C
Bowen (Treasurer) and P Wong (Minister for Finance and Deregulation), Economic
statement, August 2013, p. 34, accessed 3 September 2015.
[38]. M
Cormann (Shadow Minister for Financial Services and Superannuation), Labor
breaks super pledge with $582m cash grab, media release, 2 August
2013, accessed 31 August 2015.
[39]. J
Hockey (Treasurer) and A Sinodinos (Assistant Treasurer), Restoring
integrity in the Australian tax system, joint media release,
6 November 2013, accessed 7 September 2015.
[40]. Treasury,
‘Tax
and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014: lost member
small account threshold’, Treasury website, accessed 7 September 2015.
[41]. Senate
Standing Committee for the Selection of Bills, Report,
10, 2015, The Senate, 20 August 2015, p. 3, accessed 3 September 2015.
[42]. Parliament
of Australia, ‘Tax
Laws Amendment (2009 Budget Measures No. 1) Bill 2009 homepage’, Australian
Parliament website, accessed 25 August 2015.
[43]. Financial
Services Council (FSC), FSC
says governments should be consolidating superannuation not taking it,
media release, 2 August 2013, accessed 1 September 2015.
[44]. FSC,
Submission
to Treasury, Lost and unclaimed superannuation money—Discussion paper, 2
July 2013, p. 2, accessed 1 September 2015.
[45]. Association
of Superannuation Funds of Australia (ASFA), Submission
to Treasury, Lost and unclaimed superannuation money—Discussion paper,
3 July 2013, p. 2, accessed 1 September 2015.
[46]. Australian
Institute of Superannuation Trustees (AIST), Submission
to Treasury, Lost and unclaimed superannuation money—Discussion paper, June
2013, pp. 4–5, accessed 1 September 2015.
[47]. Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill
2015, op. cit., pp. 7–8.
[48]. Australian
Government, Budget measures: budget paper no. 2: 2013–14, op. cit.,
p. 42.
[49]. The
Statement of Compatibility with Human Rights for each measure can be found at
pages 23 (Scrip for Scrip Roll-over), 27 (Removing exemption for foreign
employment income) and 33 (lost member small account threshold) respectively of
the Explanatory Memorandum to the Bill.
[50]. Parliamentary
Joint Committee on Human Rights, Twenty-seventh
report of the 44th Parliament, The Senate, Canberra, 8 September 2015,
accessed 9 September 2015.
[51]. Income Tax Assessment
Act 1997 (ITAA 1997), accessed 2 September 2015.
[52]. Subsections
127-783(4) and (8) and definition of member of an entity at section 960-130 of
the ITAA 1997.
[53]. Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill
2015, op. cit., p. 15.
[54]. Ibid.,
p. 16.
[55]. Ibid.,
p. 21.
[56]. Income Tax Assessment
Act 1936, accessed 2 September 2015.
[57]. Superannuation
(Unclaimed Money and Lost Members) Act 1999, accessed 2 September
2015.
[58]. These
changes were implemented by Tax and Superannuation
Laws Amendment (2013 Measures No. 1) Act 2013 (Schedule 1), accessed
3 September 2015.
[59]. P
Tilley (Treasury), Evidence
to Senate Economics Legislation Committee, Inquiry into the Treasury
Legislation Amendment (Unclaimed Money and Other Measures) Bill 2012, 12 November
2012, p. 13, accessed 4 February 2014.
[60]. Association
of Superannuation Funds of Australia (ASFA), Submission
to Treasury, Tax and Superannuation Laws Amendment (2014 Measures No. 2)
Bill 2014: lost member small account threshold—Discussion paper,
3 February 2014, p. 3, accessed 1 September 2015.
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