Bills Digest No. 97, 2017–18
PDF version [653KB]
Phillip Hawkins
Economics Section
5 April 2018
Contents
Glossary
Purpose of the Bill
Structure of the Bill
Structure of this Bills Digest
Committee consideration
Senate Standing Committee on
Economics
Senate Standing Committee for the
Scrutiny of Bills
Statement of Compatibility with Human
Rights
Parliamentary Joint Committee on
Human Rights
Schedule 1—FinTech Sandbox Regulatory
Licensing Exemptions
What is Fintech?
What is the regulatory sandbox?
Use of the regulatory sandbox
Policy Commitment
Policy position of non-government
parties/independents
Position of major interest groups
Consumer advocates
Industry stakeholders
Financial implications
Key issues and provisions
General rule
Regulation making power
Scrutiny of Bills Committee comments
Draft regulations
Schedule 2—Innovation measures
Stakeholder comments
Financial implications
Key issues and provisions
Part 1—Venture capital investments
Part 2—Early stage investor tax
offset
Parts 3 and 4—Managed investment
trusts and public trading trusts
Scrutiny of Bills Committee comments
Date
introduced: 8 February 2018
House: House of
Representatives
Portfolio: Treasury
Commencement: Schedule
1 commences the day after Royal Assent
Schedule 2 commences on the first 1 January, 1
April, 1 July or 1 October to occur after Royal Assent
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent, they
become Acts, which can be found at the Federal
Register of Legislation website.
All hyperlinks in this Bills Digest are correct as at
April 2018.
Glossary
ACL |
Australian Credit Licence |
AFOF |
Australian venture capital fund of funds |
AFSL |
Australian Financial Services Licence |
ASIC |
Australian Securities and Investments Commission |
AVCAL |
Australian Private Equity and Venture Capital Association
Limited |
Corporations Act |
Corporations
Act 2001 |
EITO |
Early-stage investor tax offset |
ESIC |
Early-stage innovation company |
ESVCLP |
Early stage venture capital limited partnerships |
ITAA36 |
Income
Tax Assessment Act 1936 |
ITAA97 |
Income
Tax Assessment Act 1997 |
MIT |
Managed investment trust |
NCCP Act |
National
Consumer Credit Protection Act 2009 |
PTT |
Public trading trust |
VCLP |
Venture capital limited partnerships |
Purpose of
the Bill
The Treasury
Laws Amendment (2018 Measures No. 2) Bill (the Bill) comprises two Schedules
which have different purposes:
Structure
of the Bill
Schedule 1 of the Bill is divided into two parts:
- Part
1 amends provisions of the Corporations Act to change the regulatory
sandbox arrangements for providers of financial services and
- Part
2 amends provisions of the NCCP Act to change the regulatory sandbox
arrangements for providers of credit products.
- Schedule 2 of the Bill is divided into three parts:
- Part
1 amends provisions in the ITAA97 relating to capital gains tax
concessions for Venture Capital Limited Partnerships (VCLPs) and Early Stage
Venture Capital Limited Partnerships (ESVCLPs)
- Part
2 amends provisions in the ITAA97 relating to the early-stage
investor tax offset (EITO)
- Part
3 amends provisions in the ITAA97 relating to managed investment trusts
(MITs) and
- Part
4 amends provisions in the ITAA36 relating to public trading trusts
(PTTs).
Structure of this
Bills Digest
As the matters covered by each of the Schedules are
independent of each other the relevant background, stakeholder comments (where
available) and analysis of the provisions are set out under each Schedule
number.
Committee
consideration
Senate
Standing Committee on Economics
The Bill was referred to the Senate Standing Committees on
Economics (the Economics Committee) for inquiry and report.[1]
The Economics Committee released its report on 15 March 2018.[2]
Industry stakeholders and consumer advocates made submissions to the inquiry
which are discussed below.
The Economics Committee recommended that the Bill be passed.[3]
The Australian Labor Party (Labor) Senators made additional comments to the
report, which are canvassed below.[4]
Senate
Standing Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills (the
Scrutiny of Bills Committee) considered the Bill its Scrutiny
Digest of 14 February 2018.[5]
These comments are canvassed below.
Statement
of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility
with the human rights and freedoms recognised or declared in the international
instruments listed in section 3 of that Act. The Government considers that the
Bill is compatible.[6]
Parliamentary
Joint Committee on Human Rights
The Parliamentary Joint Committee on Human Rights considered
the Bill in its Scrutiny
Report of 13 February 2018 and determined that the Bill does not
raise human rights concerns.[7]
Schedule 1—FinTech
Sandbox Regulatory Licensing Exemptions
What is
Fintech?
Fintech (an abbreviation of financial technology) refers to
the use of innovative technology in providing financial products and services
to consumers. Fintech has applications across lending, financial advice,
investment management and payment services.[8]
Some examples of Fintech companies operating in Australia are available from
the Australian FinTech
website.[9]
According to research by KPMG, investment in Fintech in
Australia has grown from around $US53 million in 2012 to $US675 million in
2016.[10]
What is the
regulatory sandbox?
In order to facilitate the development of new Fintech products,
ASIC’s ‘regulatory sandbox’ allows new products to be tested in the Australian
market for 12 months without requiring financial advisers or dealers of the
product to first obtain an Australian Financial Services Licence (AFSL)[11]
or Australian Credit Licence (ACL).[12]
The licensing exemption is limited to those providing
financial advice on the relevant products or those dealing in the products. It
is not available to issuers of the product.[13]
The purpose of providing an exemption is to reduce
barriers to new product development by reducing the time and the costs
associated with bringing new financial products to the market and allowing for
the viability of a new financial product to be tested in the market. Further it
may assist advisers and dealers to satisfy the conditions for obtaining an AFSL
or ACL following the 12 month testing period.[14]
To balance the testing regime with the need to protect
consumers, strict conditions apply to licensing exemptions provided under the
sandbox arrangements:
- the
exemption is limited to certain financial products and credit contracts
- a
full list of financial products to which a licensing exemption can apply is
available from ASIC’s
regulatory guidance document.[15]
They include listed or quoted Australian securities, securities issued by the
Australian Government, simple managed investment schemes, deposit products,
some general and life insurance products, payment products and some credit
contracts
- consumers
must be informed that the product sold to them is being tested in the
regulatory sandbox, that the provider of the product is not licensed and that some
of the normal protections associated with receiving services from a licensed
provider will not apply[16]
- the
services and products that can be issued under a licence exemption are subject
to limits in order to minimise the risk of losses to consumers. These include:
- businesses
relying on an exemption can only provide services to up to 100 ‘retail’ clients[17]
- the
maximum exposure to a financial product for each retail client is $10,000
- the
maximum credit contract that can be provided is $25,000
- the
amount insured under a general insurance contract is limited to $50,000
- there
are no individual exposure limits for wholesale or sophisticated clients, but
the total exposure of all clients must be limited to $5 million. [18]
Use of the
regulatory sandbox
ASIC’s regulatory sandbox has been in place since 15
December 2016.[19]
According to ASIC, as at December 2017 four Fintech businesses had utilised the
licensing exemption and another 12 have contacted ASIC about utilising the
exemption.[20]
According to a survey of Australia Fintech companies conducted by Ernst and
Young, one percent of surveyed Australian Fintechs currently use the regulatory
sandbox and a further nine per cent intend to do so in the next 12 months.[21]
Policy
Commitment
The Government announced reforms to extend the sandbox
rules in the 2017–18
Budget.[22]
The intention is to enhance Australia’s capabilities as a leading Fintech Hub
in the Asia-Pacific.[23]
The Bill would extend the sandbox framework to a broader
selection of financial products than it currently applies to, including financial
advice in relation to superannuation, life insurance and domestic and
international securities, issuing and facilitating consumer credit, issuing
non-cash payment products and providing a crowd-funding service.[24]
It also proposes to extend the maximum licence exemption period from the
current 12 months to 24 months.
The proposed framework is being implemented through
changes to the Corporations Act and the NCCP Act as well as
regulations made under these Acts. Treasury conducted a consultation in
relation to the draft regulations.[25]
Policy
position of non-government parties/independents
In their additional comments in the Economics Committee’s
report, the Labor Senators indicated broad support for the Bill but agreed with
submissions from Choice and Fintech Australia that there should be a test on
entry into the regulatory sandbox. Labor supported Choice’s view that this test
should evaluate whether the products to be tested are genuinely innovative and
provide a consumer benefit.[26]
The Labor Senators recommended that the Bill should include a mandatory review
mechanism for the enhanced FinTech sandbox starting no later than 12 months
after Royal Assent of the Bill.[27]
Position of
major interest groups
Stakeholders have made submissions to the Economics
Committee and to Treasury’s consultation on the draft regulations. Generally
speaking, submissions were supportive of the intent of the legislation but a
number of submissions, particularly from consumer advocacy groups, raised
specific concerns about the perceived inadequacy of consumer protections.
Consumer
advocates
Choice, the Consumer Action Law Centre and the Financial Rights Legal Centre made
joint submissions to the Economics Committee and to the Treasury consultation
process. Both of these submissions raised concerns that the proposed reforms
could expose consumers to greater financial risks and cautioned that not all
innovations have benefits to consumers:
While we support the intent of encouraging competition to
create new services for consumers we are extremely concerned about the risks
that this approach involves. The legislation would allow, for example,
unlicensed financial advice on superannuation products, insurance and long-term
investments. These services are too complex and too important to the long-term
well-being of consumers to be offered without the adequate protections that the
sandbox removes. Rather than watering down consumer protections, the financial
industry needs much higher standards to prevent the scandals that have drained
consumer savings and investments ...[28]
... Innovation can produce significant benefits for consumers.
However, not every product innovation is necessarily in consumers’ best
interests. This is particularly the case in complex markets such as financial
services, where the risks of bad product design and misselling can have
catastrophic consequences. For example, we have recently seen “innovation” from
payday lenders which has led to more online targeting and quick loan
applications for high-cost debt.[29]
The consumer advocacy groups noted that other jurisdictions,
including the United Kingdom and Singapore require an assessment of whether a
financial service is both innovative and beneficial to consumers before
licensing exemptions are granted.[30]
They argue that ASIC’s powers to cancel a licence exemption are inadequate, and
that Australia should similarly assess products before an exemption is granted.
The consumer advocacy groups argue that without pre-assessment:
We believe it is likely that the sandbox regulatory exemption
will be used by some unscrupulous parties to sell products that are harmful to
consumers. This is a risk to consumers and the fintech industry’s reputation.[31]
While their preferred option is to require ASIC
pre-approval, the consumer advocacy groups suggested that, as an alternative, ASIC
could be provided with greater intervention powers to act against any products
or services which are misleading or detrimental to consumers.[32]
Industry
stakeholders
Industry stakeholders generally support the reforms, but
have raised concerns that if conditions on the use of the regulatory sandbox
are too strict it could continue to limit its usefulness to the industry. Australian Private Equity and Venture Capital
Association Limited (AVCAL) made a submission to both the Economics
Committee and to the Treasury consultation. In its response to the Treasury
consultation on the draft regulations it stated:
Overall, while we strongly support the principle underpinning
the proposed enhanced regulatory sandbox, we have concerns that the conditions
that will be imposed on FinTechs are unnecessarily restrictive, meaning that
there will be limited take-up by industry.[33]
AVCAL advocates lifting the regulatory limits on
transactions for retail clients from $10,000 to $25,000, lifting the aggregate
transaction limit from $5 million to $10 million and raising the limits on the
number of retail clients from 100 to 500.[34]
It also argues that the limitations on the scope of products that can be tested
in the regulatory sandbox are too narrow and that the proposed license
exemption period of 24 months could be extended in some circumstances.[35]
They also disagree with proposals that ASIC’s pre-approval be required before a
product can be tested in the regulatory sand-box environment:
As a result of the amendments proposed in the Bill, eligible
entities will be able to test services in relation to certain financial
products without an Australian Financial Services License (AFSL) or Australian
Credit Licence (ACL) under certain conditions set out in the Regulations. This
is a well-considered approach, rather than requiring firms to proactively seek
ASIC approval (instead mere notification of their reliance on the exemption).[36]
Similarly the Australian Bankers’ Association raised
concerns about limitations on the scope of the Fintech sandbox arguing that
access should be available to existing AFSL licence holders as well as new
entrants. The ABA argues that denying access to existing licensees is at odds
with other countries regimes.[37]
Financial
implications
The Explanatory
Memorandum states that the amendments made by Schedule 1 of the Bill are
estimated to have nil financial impact.[38]
Key issues
and provisions
The Bill proposes to amend the Corporations Act and
the NCCP Act to allow ASIC to apply conditions on AFSL or ACL exemptions
which are provided under the regulatory sandbox arrangements. The detail of the
new regulatory sandbox arrangements would be implemented through proposed Corporations
Regulations and NCCP Regulations.
General
rule
Currently subsection 911A(1) of the Corporations Act
requires that a person who carries on a financial services business must hold
an Australian Financial Services Licence (AFSL). Subsection 911A(2) sets out
exemptions from that general rule. Section 911B sets out the conditions that
must be fulfilled in order for a person (the provider) to provide financial
services on behalf of a principal. In most circumstances the principal or the
provider will be required to hold an AFSL. However, paragraph 911B(1)(e) allows
a provider to provide financial services on behalf of a provider in cases
where, if the service was provided by the principal directly, the principal
would not need an AFSL because the service would be exempt under subsection
911A(2).
Item 1 of Part 1 in Schedule 1 to the Bill expands paragraph
911B(1)(e) of the Corporations Act so that it will also cover
circumstances where the principal would not need an AFSL because the service
would be exempt under regulations made in accordance with subsection 926B(1).
Regulation
making power
Subsection 926B(1) of the Corporations Act provides
that the regulations may:
(a) exempt
a person or class of persons from all or specified provisions of Part 7.6
(about licensing of providers of financial services)
(b) exempt
a financial product or a class of financial products from all or specified
provisions of Part 7.6 or
(c) provide
that Part 7.6 applies as if specified provisions were omitted, modified or
varied as specified in the regulations.
Item 2 of Part 1 in Schedule 1 to the Bill inserts proposed
subsections 926B(3)–(5) into the Corporations Act so:
- ASIC
may apply conditions to an AFSL exemption provided to a person or class of
persons to enable testing of particular financial services: proposed
subsection 926B(3)
- a
person who receives an AFSL exemption subject to conditions must comply with
those conditions. In addition, ASIC may apply for a Court order requiring the
person to comply with those conditions: proposed subsection 926B(4) and
- ASIC
is empowered to determine how an AFSL exemption to enable testing of particular
financial services starts or ceases to apply to a person or class of person: proposed
subsection 926B(5).
Item 5 of Part 2 in Schedule 1 to the Bill makes
analogous amendments to the NCCP Act in relation to ACL exemptions by
inserting proposed subsections 110(2)–(4) into that Act.
Scrutiny of
Bills Committee comments
The Scrutiny of Bills Committee raised concerns that the
amendments in Schedule 1 of the Bill confer overly broad powers on ASIC to
apply exemptions from requirements to hold an AFSL or an ACL. Although the
Explanatory Memorandum contains guidance about how ASIC’s exemption powers
would be applied, the Scrutiny of Bills Committee was concerned that this
guidance is not sufficiently reflected in the Bill:
... the committee remains concerned that the Bill would permit
the regulations to confer a broad power on ASIC to determine when particular
exemptions apply. The committee is also concerned that, while the explanatory
memorandum provides some guidance around when ASIC's powers would be exercised,
this guidance is not reflected on the face of the bill.[39]
Further, the Scrutiny of Bills Committee raised concern that
decisions made by ASIC may not be subject to sufficient Parliamentary scrutiny:
The committee acknowledges that the relevant regulations
would be disallowable legislative instruments. However, it is not apparent that
decisions made under those regulations, as to when exemptions would start and
cease to apply, would also be legislative instruments. The committee is
therefore concerned that proposed paragraphs 926B(5) and 110(4) would permit ASIC
to make relatively significant decisions relating to the application of
exemptions without subjecting those decisions to appropriate levels of
parliamentary scrutiny.[40]
That being the case, the Scrutiny of Bills Committee asked
the Treasurer to provide further justification for conferring broad powers on
ASIC to determine when exemptions from licensing conditions start and cease to
apply, and advice on whether a decision by ASIC, of this nature, is a
legislative instrument subject to Parliamentary scrutiny.[41]
In his response, the Treasurer stated that the changes amend existing powers to
enable ASIC to impose or vary conditions on licensing exemptions, and that this
flexibility is necessary to allow ASIC to respond flexibly to changing market
circumstances. The Treasurer also confirmed that decisions made by ASIC under
the regulations would not be legislative instruments and would therefore not be
subject to Parliamentary scrutiny.[42]
Draft
regulations
As stated above, the detail of the Fintech regulatory
sandbox will be contained in regulations. Without discussion of these draft
regulations, this Bills Digest would not provide a complete picture of the
legislation’s potential impact. Importantly the final details of the regulations
are not known. This means that this discussion is based on the form of the
regulations which was available at the time of publication of this Bills Digest
and which may be different from the final form.
The draft Corporations
(FinTech Sandbox Australian Financial Services Licence Exemption) Regulations
2017 (draft AFSL Regulations) apply regulatory requirements to the
provision of an AFSL licence exemption for providers of financial products and
the draft National
Consumer Credit Protection (FinTech Sandbox Australian Credit Licence
Exemption) Regulations 2017 (draft Credit Licence Regulations) apply
equivalent requirements for ACLs and providers of credit products.
The provision of an AFSL exemption is subject to certain
limitations under the proposed Regulations being:
- an
AFSL exemption is for a period of 24 months (called the testing period):
proposed section 7
- an
exemption ceases if the exempt entity fails to meet certain conditions of the
exemption: proposed section 8[43]
- providing
financial services in relation to particular types of financial products such
as derivatives and margin lending facilities is prohibited: proposed section
9 of the draft AFSL Regulations
- the
list of eligible financial products that can be provided to retail clients
under an AFSL exemption is set out in proposed section 10 of the draft
AFSL Regulations. The proposed Regulations would extend the scope of exemptions
to superannuation products, life insurance products and certain listed domestic
and international securities.[44]
- there
are individual product exposure limits for individual retail clients:
- the
exposure limit for financial products would be retained at $10,000: proposed
subsection 11(2) of the draft AFSL Regulation
- the
exposure limit for general insurance products would be raised from $50,000 to
$85,000: proposed subsection 11(4)
- the
exposure limit for life insurance products is $300,000: proposed subsection
11(5)
- the
exposure limit for superannuation products is $40,000: proposed subsection
11(6)
- the
regulation continues to limit the provider to 100 retail clients: proposed subsection 11(7).
- the
current maximum exposure limit for all financial services is retained at $5
million: proposed section 12 of the draft AFSL Regulations and proposed
section 10 of the draft Credit Licence Regulations.
The regulations allow for an AFSL licence exemption to be
cancelled. Proposed section 13 provides the power to ASIC to cancel an
exemption if, for example, it believes that the conditions for the exemption
have not been met, or if ASIC believes the provider is not of good fame or character
or has failed to act fairly, efficiently or honestly in providing financial or
credit services.
The conditions for an exemption are outlined in proposed
Part 5 of the regulations. The conditions include:
- a
provider of a financial service must notify a client that they have an AFSL
exemption and that some of the normal consumer protections that would apply
under an AFSL or ACL will not apply: proposed section 16 of the draft
AFSL Regulations and proposed section 14 of the draft Credit Licence
Regulations
- a
client is to be notified of certain information about the provider of the
financial service or product including the remuneration arrangements of the
provider, any relationships they have with issuers of the financial products,
and the available dispute mechanisms: proposed section 17 of the draft
AFSL Regulations
- a
client is to be notified of certain events, including if the provider ceases to
carry on a financial services business, is placed into administration or
becomes bankrupt. They are also required to notify a client if they obtain an
AFSL or cease to rely on the AFSL exemption, or if the financial product or
services they provided to the client have changed or are no longer being
offered to clients: proposed section 18 of the draft AFSL Regulations
and proposed section 15 of the draft Credit Licence Regulations
- the
provider must maintain an internal dispute resolution service and be a member
of an external dispute resolution regime: proposed section 19 of the
draft AFSL Regulations and proposed section 16 of the draft Credit
Licence Regulations
- the
provider must act in the best interests of the client: proposed regulation
20 of the draft AFSL Regulations.
Schedule 2—Innovation
measures
The amendments in Schedule 2 to the Bill make technical
amendments to a number of existing regimes which provide tax incentives to
venture capital investors who invest in early-stage innovation companies. To be
eligible for the tax incentives, a venture capital fund must be registered and
remained registered as a VCLP. Innovation Australia’s Innovation Investment
Committee (the Committee), which is managed by AusIndustry, registers VCLPs
under the Venture
Capital Act 2002.[45]
The tax concessions include:
- Venture
capital limited partnerships (VCLP) which provide specific tax concessions
to foreign investors who make equity investments in unlisted Australian venture
capital companies.[46]
Australian resident investors can invest in VCLPs
but may not be entitled to the available tax concessions:
- these
tax concessions include exemptions from Capital Gains Tax (CGT), flow-through
tax treatment of returns from the partnership[47]
and an option for partners to recognise their carried interest on the capital
account, rather than revenue account[48]
- a
VCLP must have at least $10 million in committed capital from partners to be
registered as a VCLP[49]
- limits
apply to the investments that a VCLP can make, including that any investee
company must have total assets of less than $250 million, must be primarily
operating in Australia and cannot be a company primarily operating in property,
land development, finance, insurance, construction or infrastructure.[50]
- Early
stage venture capital limited partnerships (ESVCLP) which provide
incentives to earlier stage Australian venture capital companies. Unlike VCLPs
Australian domestic investors are entitled to the tax concessions from
investing in an ESVCLP:
- ESVCLPs
receive the tax benefits of a VCLP but investors are also entitled to a
non-refundable carry-forward tax offset, generally equal to ten per cent of the
value of their eligible contributions to the partnership[51]
- an
ESVCLP must have committed capital of at least $10 million but no more than $200 million
from its partners[52]
- additional
limits apply to ESCVLPs over VCLPs. Because an ESVCLP is intended to invest in
early-stage companies, investments are limited to new shares issued by the
company and the company must have assets of no more than $50 million. The
ESVCLP’s investment cannot exceed 30 per cent of the company’s total issued
capital.[53]
- Investors
in newly issued shares of a qualifying Early Stage Innovation Company (ESIC)
are entitled to specific tax incentives, namely:
- the
early-stage investor tax offset—a non-refundable carry-forward tax
offset equal to 20 per cent of the amount paid for their investment.
This is capped at a maximum $200,000 per income year for the investor and their
affiliates
- modified
capital gains tax treatment meaning that capital gains on shares held for
at least one year and no more than 10 years is not taxable.[54]
Stakeholder
comments
Only AVCAL addressed the proposed amendments in Schedule 2
in its submission to the Economics Committee inquiry. AVCAL indicated its strong
support for the changes but noted that the Bill does not address all the
concerns it has raised with Treasury and the Government, notably that the
proposed $200,000 limit on the EITO for partnerships in their entirety should
apply at the individual tax-payer level.[55]
Financial
implications
The Explanatory
Memorandum states that the amendments made by Schedule 2 of the Bill are
estimated to result in a negligible impact to revenue over the forward
estimates period.[56]
Key issues
and provisions
Schedule 2 to the Bill makes a number of technical
amendments.
Part 1—Venture
capital investments
A cap applies to the available capital gains tax
concessions on an investment made by an ESVLCP where the value of the start-up
business’s assets grows to over $250 million (at the end of a financial year). If
the ESVLP does not dispose of their investment within six months of the income
year then the capital gain relating to that investment will only be partially
exempt:[57]
- item
1 amends subsection 118-408(2) of the ITAA97 relating to the
disposal of investments made by the ESVCLP to clarify how the partial capital
gains tax exemption is calculated in the event that the ESCVLP did not dispose
of the investment within this six month period
- item
2 amends subparagraph 118-428(1)(c) of the ITAA97 to clarify an
existing requirement on ESCVLPs which limits the amount of pre-owned
investments that an ESVCLP can make to 20 per cent of its total invested
capital.
Part 2—Early
stage investor tax offset
Division 360 in Part 3-45 of the ITAA97 deals with
early stage investors in innovation companies. Items 5–13 of Part 2 in
Schedule 2 to the Bill amend that Division. Notably:
- item
5 inserts proposed subparagraph 360-15(1)(a)(ia) into the ITAA97 and
item 7 amends subsection 360-15(2) of that Act to provide that investors
in an ESCVLP are not also entitled to the EITO for those investments
- item
8 repeals and replaces subsection 360-25(1) to amend the amount of the EITO
from 20 per cent of the amount paid by the investor for their initial
share investment to 20 per cent of the sum of any cash or non-cash benefits
that the company received from the investor in return for the issue of shares
- currently
the amount of EITO that an investor can receive is capped at $200,000 per
income year.[58]
However, there is no limit applied if the investment is made through a partnership
or trust. Item 9 inserts proposed subsection 360-30(1A) to limit
the amount of EITO that can be claimed through by all members of a partnership
or a trust to $200,000.
- item
13 amends the definition of early-stage innovation company under subsection
360-40 of the ITAA97 so that they can no longer be foreign companies. This
would have the effect of removing eligibility for the EITO for investors in
foreign companies.
Parts 3 and
4—Managed investment trusts and public trading trusts
Parts 3 and 4 of Schedule 2 to the Bill make minor
amendments to the ITAA97 relating to managed investment trusts and
public trading trusts.
Items 15 and 16 in Part 3 of Schedule 2 to the Bill
amend existing subsection 275-10(4A) and paragraph 275-10(4A)(a) respectively to
allow Managed Investment Trusts (MITs) to invest in Australian venture capital
fund of funds (AFOFs). AFOFs are a type of limited partnership that makes
investments in VCLPs or ESVCLPs.[59]
Item 18 in Part 4 of Schedule 2 to the Bill inserts
proposed subsection 102R(5) into the ITAA36 to specify that investments
in VCLPs, ESVCLPs and AFOFs are disregarded in determining whether an MIT is a
public trading trust (PTT). The effect of current legislation is that if a
trust is a PTT it cannot be an MIT.[60]
Without the amendment, investments made by an MIT in an VCLP, ESVCLP or an AFOF
could result in it inadvertently satisfying the criteria for being a PTT.[61]
Scrutiny of
Bills Committee comments
As stated above, the changes proposed in Schedule 2 of the
Bill seek to address unintended consequences of the existing legislation. However,
the Scrutiny of Bills Committee raised concerns that some of these changes
apply on a retrospective basis, with potential adverse consequences for
individuals.[62]
Accordingly, the Scrutiny of Bills Committee sought a
response from the Treasurer as to why the changes should apply retrospectively
and whether this retrospective application will cause detriment to any
individual.[63]
In his response the Treasurer clarified that the proposed amendments are ‘wholly
beneficial to affected entities’[64]
and are ‘necessary to avoid potentially significant adverse consequences for
any affected trusts’.[65]
Members, Senators and Parliamentary staff can obtain
further information from the Parliamentary Library on (02) 6277 2500.
[1]. The
terms of reference, submissions to the Economics Committee and the final report
are available on the inquiry
homepage.
[2]. Senate
Economics Legislation Committee, Report
on the Treasury Laws Amendment (2018 Measures No. 2) Bill 2018 [provisions],
The Senate, Canberra, March 2018.
[3]. Ibid.,
p. 13.
[4]. Australian
Labor Party, Additional
comments to Senate Economics Committee, Inquiry into the provisions of
the Treasury Laws Amendment (2018 Measures No. 2) Bill 2018, The Senate,
Canberra, 2018, p. 15.
[5]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 2, 2018, The Senate, Canberra, 14 February 2018, p. 51.
[6]. The
Statement of Compatibility with Human Rights can be found at pages 10–11 and
page 23 of the Explanatory
Memorandum to the Bill.
[7]. Parliamentary
Joint Committee on Human Rights, Scrutiny
report, 2, 2018, The Senate, Canberra, p. 42.
[8]. M
Blake, P Vanham and D Hughes, ‘Five
things you need to know about Fintech’, World Economic Forum, 20
April 2016.
[9]. Australian
FinTech, ‘Directory
of Australian FinTech companies’, Australian FinTech website.
[10]. I
Pollari and J Mabbott, ‘Australian
Fintech Landscape’, KPMG website, 1 August 2017.
[11]. ASIC Corporations
(Concept Validation Licensing Exemption) Instrument 2016/1175.
[12]. ASIC Credit (Concept
Validation Licensing Exemption) Instrument 2016/1176.
[13]. Australian
Securities and Investments Commission (ASIC), Testing
fintech products and services without holding an AFS or credit licence,
Regulatory Guide 257,Regulatory guide
257 ASIC, Canberra, August 2017, pp. 18–19.
[14]. Ibid.,
pp. 15–16.
[15]. Ibid.,
pp. 18–19.
[16]. Ibid.,
p. 23.
[17]. Retail
clients are defined under section 761G of the Corporations Act. The
general rule, as specified in subregulation 7.1.19(2) of the Corporations
Regulations 2001, is that a retail client is an individual
who purchases a financial product with a value of less than $500,000.
[18]. ASIC,
Regulatory
guide 257, op. cit., p. 27.
[19]. S
Morrison (Treasurer), Launch
of innovative regulatory sandbox for fintech, media release, 15
December 2016; R Gluyas, ‘ASIC
to launch fintech "sandbox"’, The Australian, 16 December
2016, p. 23.
[20]. Australian
Securities and Investments Commission, Retaining ASIC’s fintech licensing
exemption, Consultation
Paper 297, December 2017, p. 9.
[21]. FinTech
Australia, ‘EY
Fintech Australia Census 2017’, Ernst & Young, 2017, p. 19.
[22]. S
Morrison (Treasurer), Building
an accountable and competitive banking system, media release, 9 May
2017, p. 3.
[23]. S
Morrison (Treasurer), Draft legislation and regulations – enhanced FinTech regulatory
sandbox, media
release, 24 October 2017.
[24]. Ibid.
[25]. The
Treasury, ‘Enhanced regulatory
sandbox’, Consultation, The Treasury website, 1 December 2017.
[26]. Australian
Labor Party, Additional
comments, Senate Economics Committee, Inquiry into the provisions of the
Treasury Laws Amendment (2018 Measures No. 2) Bill 2018, op. cit., pp.
15–17.
[27]. Ibid.,
16–17.
[28]. E
Turner (Choice), K Temple (Consumer Action Law Centre) and K Cox (Financial
Rights Legal Centre), Submission to
the Treasury consultation, Treasury Laws Amendment (2018 Measures No. 2)
Bill 2018, 3 November 2017, p. 1.
[29]. Ibid.
[30]. Ibid.,
p. 2.
[31]. Ibid.,
p. 3.
[32]. E
Turner (Choice), K Temple (Consumer Action Law Centre) and K Cox (Financial
Rights Legal Centre), Submission
to the Senate Economics Legislation Committee, Inquiry into the Treasury
Laws Amendment (2018 Measures No. 2) Bill 2018 [provisions],
28 February 2018, pp. 3–4.
[33]. Y
El-Ansary (Australian Private Equity & Venture Capital Association), ‘FinTech-enhanced
regulatory sandbox’, Submission to the
Treasury consultation, Treasury Laws Amendment (2018 Measures No. 2) Bill
2018, 1 December 2017, p. 1.
[34]. Ibid.,
p. 2.
[35]. Ibid.
[36]. Y
El-Ansary (AVCAL), Submission
to the Senate Economics Legislation Committee, Inquiry into the Treasury
Laws Amendment (2018 Measures No. 2) Bill 2018 [provisions], 7 March 2018,
p. 2.
[37]. Pip
Freebairn (Australian Bankers’ Association) Submission to
the Treasury consultation, Treasury Laws Amendment (2018 Measures No.
2) Bill 2018, 6 November 2017, p. 1.
[38]. Explanatory
Memorandum, Treasury Laws Amendment (2018 Measures No. 2) Bill 2018, pp.
5–6.
[39]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 2, 2018, op. cit., p. 52.
[40]. Ibid.,
p. 53.
[41]. Ibid.,
p. 53.
[42]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 3, 2018, The Senate, 21 March 2018, pp. 295–8.
[43]. The
relevant conditions are those set out in Division 1 of Part 3 of the Corporations
(FinTech Sandbox Australian Financial Services Licence Exemption) Regulations
2017 and Division 1 of Part 3 of the National
Consumer Credit Protection (FinTech Sandbox Australian Credit Licence
Exemption) Regulations 2017.
[44]. Compared
to the type of products that can be provided under the ASIC Corporations
(Concept Validation Licensing Exemption) Instrument 2016/1175.
[45]. Australian
Taxation Office (ATO), ‘Venture
capital limited partnerships’,
ATO website, last modified 1 December 2016.
[46]. Venture
Capital Act, section 9-1.
[47]. R
Deutsch, M Freizer, I Fullerton, P Hanley and T Snape, The Australian
Tax Handbook 2018, p. 615. Flow through treatment provides that the
individual partners are taxed on their share of profits from the partnership,
rather than the partnership itself being taxable.
[48]. ATO,
‘Shareholding
as investor or share trading as business?’, ATO website, last modified 17
July 2017. The taxation treatment of investment income would generally depend
on whether the partnership is carrying on a business. This depends on factors
such as the volume and regularity of share-trading and the amount of capital
invested. The proceeds from the sale of shares from a share trading business
would be treated as assessable income (on revenue account) rather than being
subject to capital gains tax (on capital account); with access to relevant
capital gains tax concessions.
[49]. Venture
Capital Act, paragraph 9-1(1)(d).
[50]. Department
of Industry, Innovation and Science, Venture
Capital Limited Partnerships, Business investment factsheet,
July 2016, p. 1.
[51]. Income
Tax Assessment Act 1997, section 61-765
[52]. Venture
Capital Act, paragraph 9-3(1)(d).
[53]. Department
of Industry, Innovation and Science, Comparison
of Venture Capital Limited Partnerships (VCLPs) and Early Stage Venture Capital
Limited Partnerships (ESVCLPs), July 2016, pp. 1–2.
[54]. Australian
Taxation Office, ‘Tax
incentives for early stage investors’, ATO website, last modified 2 August
2017.
[55]. El-Ansary
(AVCAL), Submission
to the Senate Economics Legislation Committee, op. cit., p. 2.
[56]. Explanatory
Memorandum, Treasury Laws Amendment (2018 Measures No. 2) Bill 2018, pp.
3–4.
[57]. Ibid.,
p. 15.
[58]. ITAA97,
subsection 360-25(2).
[59]. Venture
Capital Act, section 9-5. Explanatory
Memorandum, Treasury Laws Amendment (2018 Measures No. 2) Bill 2018,
p. 17.
[60]. Ibid.
[61]. Ibid.
[62]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 2, 2018, op. cit., p. 53.
[63]. Ibid.,
p. 54.
[64]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 3, 2018, op. cit., p. 299.
[65]. Ibid.
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