BILLS DIGEST NO. 123, 2017–18
PDF version [535KB]
Joseph Ayoub and Liz Wakerly
Economics Section
19
June 2018
Contents
Structure and purpose of the Bill
Committee
consideration
Statement of
Compatibility with Human Rights
Schedule
1—Multinational Anti-Avoidance Law (MAAL)
Schedule
2—Small business CGT concessions
Schedule
3—FinTech and venture capital amendments
Schedule
4—Reparation payment tax exemption
Appendix A:
changes made by the proposed amendments to Basic Condition 5
Date introduced: 28
March 2018
House: House of
Representatives
Portfolio: Treasury
Commencement: The
first 1 January, 1 April, 1 July or 1 October to occur after the day of
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
June 2018.
Structure
and purpose of the Bill
The Treasury Laws Amendment (Tax Integrity and Other
Measures) Bill 2018 (the Bill) is divided into four schedules:
- Schedule
1 amends the Income
Tax Assessment Act 1936 (ITAA36) to ensure that the
Multinational anti-avoidance law (MAAL) applies where an Australian trust or
partnership is interposed between a foreign entity and its Australian customers
- Schedule
2 amends the Income
Tax Assessment Act 1997 (ITAA97) to include additional
conditions that must be satisfied in order to access the small business capital
gains tax (CGT), but only in relation to shares in a company or interests in a
trust
- Schedule
3 amends the ITAA97 and the Venture Capital Act
2002 (VCA) to extend the venture capital tax concessions for
investments in financial technology (FinTech) businesses and
- Schedule
4 amends the ITAA97 to exempt from income tax, payments made by the
Commonwealth on recommendation of the Defence Force Ombudsman, as reparation
for abuse by Australian Defence Force personnel.
Structure of this Bills Digest
As the matters covered by each of the Schedules are
independent of each other, the relevant background, stakeholder comments,
committee consideration and analysis of the provisions are set out under each
Schedule number.
Committee
consideration
Senate Standing Committee for the Selection
of Bills
The Senate Standing Committee for the Selection of Bills
recommended that the Bill not be referred to any committee.[1]
Senate Standing Committee for the
Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills
(Scrutiny of Bills Committee) is concerned with the retrospective application
of Schedule 2 to the Bill and the no-invalidity clause in Schedule 3
to the Bill.[2]
The Scrutiny of Bills Committee’s concerns are discussed further under each
schedule number.
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 because it does not raise any
Human Rights issues.[3]
Parliamentary
Joint Committee on Human Rights
The Parliamentary Joint Committee on Human Rights
considers that the Bill does not raise human rights concerns.[4]
Schedule 1—Multinational Anti-Avoidance Law (MAAL)
Background
The MAAL is a general anti-avoidance mechanism contained
in Part IVA of the ITAA36.[5]
It was introduced by the Tax
Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015 which came
into effect on 11 December 2015 and applies to tax benefits obtained on or
before 1 January 2016.
The purpose of the MAAL is to encourage entities to
restructure and prevent entities from adopting future structures that are artificial
or contrived so that business profits are not attributable to a permanent
establishment (PE) and therefore taxed in Australia.[6]
Broadly, a PE is a place of business through which an enterprise wholly or
partly carries on its business—for example, a branch, office or factory.[7]
If an enterprise has a PE in Australia then the income attributable to it is
generally taxed in Australia.[8]
A foreign enterprise can avoid taxation of business
profits by implementing arrangements that circumvent existing treaty-based or
domestic law-based definitions of a PE. Examples of the most common
PE-avoidance strategies include:
- using
commissionaire arrangements—for example, where an entity sells products
in a jurisdiction in its own name, but on behalf of a foreign enterprise that
owns the products[9]
- fragmenting
a cohesive business operation into a number of small operations (for example,
having warehousing, transport and marketing operations conducted by associated
entities) in order to argue that small operation is merely engaged in
‘preparatory or auxiliary activities’ and therefore exempt from the definition
of a PE[10]
and
- plitting-up
construction projects into a number of smaller, short-duration contracts
between closely related enterprises to avoid the definition of a PE.[11]
The MAAL only applies to foreign entities that are
significant global entities (discussed below) and which undertake significant
activity in Australia.[12]
Figure 1 is a very basic example of a structure that might be used to avoid the
existence of a PE in Australia.
Figure 1: Basic structure that may avoid the existence of
a permanent establishment
Source: Explanatory
Memorandum, Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill
2015, based on examples 3.9 and 3.8 at pp. 40–3.
It should not be concluded that the MAAL necessarily
applies to the example in Figure 1 — this must be determined in accordance with
the provisions of the MAAL under section 177DA of the ITAA36. However,
Figure 1 does show how a foreign company may employ a basic structure to
attempt to avoid the existence of a PE, where in practice the foreign company
merely acts as an administrative hub while the Australian entity undertakes
extensive activities to generate sales in Australia.
While the MAAL encourages entities to restructure, it is a
general anti-avoidance measure and is only used as a measure of last resort —
for example, when the substantive provisions of the tax laws do not apply
because of the use of artificial or contrived structures.[13]
From April 2016, the Australian Taxation Office (ATO) expressed
concern that some taxpayers were restructuring in ways that undermined the
policy intent of the MAAL and may have avoided its application.[14]
In September 2016 the ATO released Taxpayer Alert 2016/11
Restructures in response to the Multinational Anti Avoidance Law (MAAL)
involving foreign partnerships in which it identified a particular structure
that it considered attempted to avoid the application on the MAAL, stating:
The scheme that has come to our attention involves interposing
an entity described as a partnership between the foreign entity originally
making supplies to Australian customers and the Australian customers.
The partnership has one resident corporate partner with a minority interest in
the partnership, therefore purporting to characterise the partnership as an
‘Australian entity’ for the purposes of the MAAL. Agreements entered into
purport to make the partnership the distributor of the products or services and
the foreign entity its agent. The arrangements have little, if any, commercial
basis and no changes are made to the underlying functions.[15]
(Emphasis added).
The ATO considered that such arrangements were
inconsistent with the policy intent of the MAAL.[16]
The ATO was also concerned that the arrangements may not have been legally
effective at avoiding the application of the MAAL and may also have enlivened other
general anti-avoidance rules.[17]
In the 2017–18 Budget the Government announced that the
MAAL would be amended so that it applies to:
... corporate structures that involve the interposition of
partnerships that have any foreign resident partners; trusts that have any
foreign resident trustees; and foreign trusts that temporarily have their
central management and control in Australia.[18]
The Government also announced that the measure would operate
retrospectively from 1 July 2016—being the date that the MAAL came
into effect.[19]
On 12 February 2018 the Government released the Treasury
Laws Amendment (Measures for a later sitting) Bill 2018: MAAL as an Exposure
Draft (the MAAL Exposure Draft) for public consultation.[20]
According to the ATO the MAAL has resulted in $7 billion
worth of sales being ‘booked’ in Australia where previously they would have
been moved offshore. It is important to note that this figure is not the
revenue which is received by the Commonwealth as this is pre-tax figure which
estimates the value of sales that are now ‘booked’ in Australia.[21]
Policy position of non-government
parties/independents
At the second reading of the Bill the proposed amendments
in Schedule 1 received support from members of the ALP.[22]
Other non-government parties and independents do not appear
to have expressed a view on Schedule 1of the Bill.
Position of major interest groups
Only three submissions appear to have been received during
the short consultation period which closed on 23 February 2018.[23]
The Tax Justice Network Australia (TJN-Aus) supported the
proposed amendments in the MAAL Exposure Draft as well as the retrospective application
date of 1 January 2016.[24]
Similarly, the Australian Retailers Association (ARA) and the Australians to
Stop Counterfeiting and Piracy (AUSCAP), which is convened by the ARA, broadly
supported the MAAL Exposure Draft.[25]
Deloitte’s submission commented on the technical operation
of the proposed amendments in the MAAL Exposure Draft, some of which have been
incorporated into the proposed amendments.[26]
Details on the views of major interest groups in relation
to the MAAL generally are contained in the Tax Laws Amendment (Combating
Multinational Tax Avoidance) Bill 2015 Bills
Digest.[27]
Financial implications
The Explanatory Memorandum to the Bill states that the
measure is estimated to have an unquantifiable gain to revenue over the forward
estimates period.[28]
Key issues and provisions
Current law
Under section 177DA of the ITAA36, the Commissioner
of Taxation (the Commissioner) has the power to ‘look through’ arrangements
that seek to prevent the attribution of income to a PE. Section 177DA of the ITAA36
(the MAAL) generally applies to a scheme if:
- a
foreign entity supplies goods or services to Australian customers
- activities
are undertaken by an Australian entity that is an associate of, or commercially
dependant on, the foreign entity
- the
foreign entity derives income from the supplies of the goods or services
- some
or all of the income is attributable to the Australian PE and
- the
principal purpose or one of the principal purposes of the scheme is to obtain
an Australian tax benefit or to obtain both an Australian and foreign tax
benefit.[29]
In order for the MAAL to apply, the foreign resident must
be a significant global entity (SGE).[30]
An entity is an SGE for a particular income year if it is:
- a
global parent entity with annual global income of AUD$1 billion or more or
- a
member of a group of entities consolidated (for accounting purposes) where the
global parent entity has an annual global income of AUD$1 billion or more.[31]
It should be noted that the Government has subsequently announced
that it will introduce a Bill to expand the definition of SGE effective from 1
July 2018, to include members of a group headed by trust, partnerships or an
investment entity.[32]
The amendments made by Schedule 1 of the Bill only
deem the supplies made by the interposed trust or partnership as being made by
and therefore attributable to the foreign entity. However, the other
requirements of the MAAL must still be satisfied in order for it to be applied
by the Commissioner.
Interposed trust or partnership
Schedule 1 to the Bill extends the circumstances in
which the MAAL under section 177DA of the ITAA36 results in the general
anti-avoidance rules applying in Part IVA of that Act, by attributing
supplies made by an Australian trust or partnership to a foreign entity. As
noted above, the ATO and the Government expressed concern that, while such
arrangements may have technically avoided the application of the MAAL,
they nevertheless contravened the intent of the MAAL.
In order for the extension to apply the following
conditions must be satisfied:
- the
trust estate or partnership makes a supply[33]
to an Australian customer which results in it deriving income[34]
- the
trust estate or partnership has a foreign entity participant at
any time in an income year in which income is derived from the supply[35]
and
- the
trust estate or partnership has a relationship with the foreign entity that
means that it is not independent to it at the time the supply is made—that is,
they are connected with, would be an affiliate of,
or are members of the same global group as a foreign entity.[36]
Lack of Independence
In general terms, under proposed subparagraph 177DA(7)(d)
the trust estate or partnership must lack independence from a foreign entity at
the time that the supply is made. The Explanatory Memorandum explains the three
ways in which this can occur:
One such circumstance is that the trust or partnership is ‘connected
with’ the foreign entity within the meaning of section 328-125 of the ITAA
1997. Two entities are connected with each other if one entity controls the
other or both entities are controlled by a third party. In this context,
controlling an entity generally means being entitled to at least 40 per cent of
any income distribution, capital distribution or voting rights of the entity.
Another such circumstance is where the trust or partnership
would be an affiliate of the foreign entity within the meaning of section
328-130 of the ITAA 1997 if the trust or partnership were an individual or a
company. This means that the trust or partnership would be expected to act at
the direction of or in concert with the foreign entity when carrying on its
business.
The final circumstance is that the trust or partnership and
the foreign entity are both members of a global group within the meaning
of Part IVA (i.e. a group of entities consolidated for accounting purposes).[37]
Foreign entity participant
Item 1 of Schedule 1 to the Bill inserts a
definition of foreign entity participant into subsection 177A(1)
of the ITAA36 which contains defined terms that are used in Part IVA
including those terms used in section 177DA (MAAL).
Under proposed subparagraph (a) of the definition
of foreign entity participant, a partnership or trust estate will have a
foreign entity participant if a beneficiary of the trust or a partner in the
partnership is a foreign entity. A foreign entity is an entity that is not an
Australian entity.[38]
Further, if a trust estate or partnership has a foreign
entity participant then:
- a
trust of which the trust estate or partnership is a beneficiary also has a
foreign entity participant and
- a
partnership in which the trust estate or partnership is a partner also has a
foreign entity participant.[39]
As explained in the Explanatory Memorandum, ‘if Trust A is
a member of Partnership B, which is a member of Trust C, then if Trust A has a
foreign entity participant this results in Partnership B and Trust C also
having a foreign entity participant.’[40]
Commencement
While Schedule 1 of the Bill commences on the first
day of the first quarter to start after the day of Royal Assent, the amendments
apply retrospectively on or after 1 January 2016 (the original application date
of the MAAL) in connection with a scheme, whether or not the scheme was entered
into, or was commenced to be carried out, before that day.[41]
Schedule 2—Small
business CGT concessions
Background
Schedule 2 of the Bill amends the eligibility
requirements a taxpayer must satisfy in order to access the small business
capital gains tax (CGT) concessions when disposing of a share in a company
or an interest in a trust.
This implements an integrity measure that was announced by
the Government in the 2017–18 Budget.[42]
According to the Government announcement:
... some taxpayers are able to access these concessions [CGT
small business concessions] for assets which are unrelated to their small
business, for instance through arranging their affairs so that their ownership
interests in larger businesses do not count towards the tests for determining
eligibility for the concessions.[43]
The Government announced that the measure would have
effect from 1 July 2017, meaning that subject to timing rules in the tax laws,
CGT events that occur from 1 July 2017 would be subject to the new rules.
On 8 February 2018 the Government released the Treasury
Laws Amendment (Measures for a later sitting) Bill 2018: improving the small
business CGT concessions as an Exposure Draft (the CGT Exposure Draft) for
public consultation.[44]
At the time of writing, Treasury had not publicly released the submissions.
However, some stakeholders have made their submission publicly available.
Stakeholders raised a number of concerns about the CGT Exposure
Draft. While Schedule 3 to the Bill differs from the CGT Exposure Draft, the
following key stakeholder concerns remain:
- that
the proposed amendments increase the complexity of an already complex regime[45]
- that
the proposed amendments—the full extent of which could not have been anticipated
from the 2017–18 budget announcement—apply retrospectively from 1 July 2017[46]
and
- that
the requirement that the Object Entity meet the maximum net asset value test or
CGT small business entity test is complex and will likely exclude some
taxpayers on the basis of issues that do not reflect integrity concerns.[47]
Relevant stakeholder concerns are discussed in further
detail under key issues and provisions.
Board of Taxation review
The Board of Taxation (BOT) has since announced that it will
conduct an independent,
self-initiated review of Australia’s small business tax concessions.[48]
According to the consultation guide released by the BOT the ‘review will
involve assessing the effectiveness of existing concessions and, where
appropriate, recommending new concessionary approaches to the Government.’[49]
While the review of the small business tax concessions is
in its early stages, the BOT has developed a set of principles to evaluate the
current and future tax concessions, namely:
- concessions
should be designed having regard to the small business life cycle
- concessions
can assist with small business cash flow
- oncessions
should relieve the compliance burden for small business
- concessions
should promote growth and innovation
- concessions
should be targeted and affordable and
- concessions
should not incentivise complex structuring.[50]
The BOT expects to have its final report to Government by
October 2018.[51]
Small business tax concessions
There are a range of tax concessions that are available to
small business entities, such as simplified depreciation rules, simplified
record keeping obligations, concessions relating to income tax, GST, FBT and
excise and CGT concessions.[52]
The proposed measure contained in Schedule 2 to the Bill relates to the CGT
concessions available to small business entities, namely:
- 15-year
exemption: a capital gain from disposing an active asset can be disregarded
if held continuously for 15 years and the taxpayer is aged over 55 and is
retiring or permanently incapacitated
- 50
per cent reduction: capital gain from disposing an active asset is reduced
by 50 per cent (in addition to the general capital gains discount available for
assets that are held for 12 months or more)
- retirement
exemption: capital gains from disposing active assets are exempt up to a
lifetime limit of $500,000 if the proceeds are used in connection with
retirement and
- rollover
relief: deferring all or part of a capital gain made from disposing an
active asset.[53]
Small business CGT concessions—Basic
Conditions
A taxpayer must meet basic eligibility requirements (Basic
Conditions) in order to access the small business CGT concessions. A summary of
the Basic Conditions are set out in Figure 2.
Figure 2: Basic Conditions for CGT concessions.
-
a GCT event happens in relation to the asset for example, the asset
is sold
-
the event would have resulted in a capital gain if it weren’t for the
concessions
-
the taxpayer satisfies one of the following:
-
be a CGT small business entity that is, a small business entity with
an aggregated turnover of less than $2 million
-
the total net value of CGT assets owned by taxpayer, entities
connected with it and its affiliates does not exceed $6 million (i.e.
satisfy the maximum net value asset test)
-
is a partner in a partnership that is a small business entity and the
CGT asset is an interest in a partnership or an asset used in business of
the partnership
-
the taxpayer doesn’t carry on business but the CGT asset is used in a
business carried on by a small business entity that is the taxpayer’s affiliate
or an entity connected with it (passively held assets)
-
the GCT asset satisfies the active asset test
-
if the CGT asset is a share in a company or an interest in a trust,
then either of the following additional requirements must be satisfied:
-
the taxpayer is a CGT concession stakeholder in the
company or trust or
- CGT concession stakeholders in the company or trust together have a small
business participation percentage in the taxpayer of at least 90%.
|
Source: ITAA97, section 152-10.
The proposed amendments under Schedule 2 of the Bill
only apply to Basic Condition 5 above—that is, when the CGT asset is a share
in a company or an interest in a trust. The company or trust in which the
taxpayer holds the share or asset is referred to as the Object Entity. If the
Object Entity holds a share or interest in a company or trust, that company or
trust is referred to as the Later Entity.
Policy position of non-government
parties/independents
While members of the ALP supported the Bill in the House
of Representatives, Matt Thistlethwaite (Deputy Chair of Standing Committee on
Economics) considered that they should not apply until 8 February 2018,
stating:
They [tax professionals] argue that, to help prevent adverse
consequences for taxpayers who have been acting in good faith but couldn't
reasonably be expected to foresee the detailed amendments finally unveiled in
the exposure draft, the implementation date should be changed from 1 July 2017,
as per the original budget announcement, to 8 February 2018. That's the
exposure draft release date. In light of those stakeholder concerns, Labor
supports the start date being 8 February 2018, as proposed by the tax
professionals community.[54]
At the second reading stage, Matt Keogh MP also stated:
There are other parts of what I referred to as the
euphemistic use of 'other measures' in this bill. We see the improvement of tax
integrity not only by looking at tax havens and other areas of multinational
taxation but by looking at improving the integrity of the small-business CGT
concessions. There are some amendments Labor thinks should be made in this
area.[55]
Other non-government parties and independents do not appear
to have expressed a view on Schedule 2 of the Bill.
Position of major interest groups
As noted above, stakeholders were broadly concerned with
the complexity and narrowing of the small business CGT concessions under the
CGT Exposure Draft. While there has not been significant commentary since the
Bill was introduced into Parliament, in its article titled Failing to see
the forest from the trees – changes to small business CGT Concessions, Hall
& Wilcox, a tax advisory firm stated:
While the measures in the Bill are an improvement to those
announced in the Exposure Draft, some major issues still remain. For example,
the requirement for the Object Entity to meet the MNAVT [maximum net asset
value test] or small business entity test will exclude taxpayers who are
presumably outside the integrity concern. Further, under the shield of its
original announcement on 9 May 2017, the Government has retained a
retrospective application date of 1 July 2017.
... a question arises as to whether the Bill will result in an
integrity improvement or a broader shift away from the policy intentions which
have underpinned the SBCGT Concessions since their introduction in 1999.
It is also interesting to note that while the Government has
focused on improving integrity measures in relation to the SBCGT Concessions,
it hasn’t addressed the apparent complexity inherent in the rules which many in
the industry have lamented for some time. Finally, one could question whether
the Government appreciates that the measuring stick for a small business may
change over 17 years; given that the MNAVT has only increased by $1 million in
that amount of time.[56]
Financial implications
The Explanatory Memorandum to the Bill states that the
measure is estimated to have an unquantifiable gain to revenue over the forward
estimates period.[57]
Key issues and provisions
Item 2 of Schedule 2 repeals the current
Basic Conditions that must be satisfied when the CGT asset is a share in a
company or an interest in a trust and replaces it with the conditions outlined
below.
The current additional Basic Conditions that apply in
relation to a share in a company or an interest in a trust are given effect by proposed
paragraph 152-10(2)(d), namely:
- the
taxpayer is a CGT concession stakeholder in the company or trust or
- CGT
concession stakeholders in the company or trust together have a small business
participation percentage in the taxpayer of at least 90%.
Proposed paragraphs 152-10(2)(a) to (c)
broadly impose three additional requirements that must be satisfied:
- the
taxpayer satisfies the maximum net asset value test or the taxpayer must have
carried on a business just prior to the CGT event[58]
- the
Object Entity must be a CGT small business entity for the income year or
satisfy the maximum net asset value test[59]
and
- the
shares or interests in the Object Entity must satisfy a modified active asset
test that looks through shares in companies and interests in trusts to the
activities and assets of the underlying entities.[60]
Appendix A illustrates the changes made by the
proposed amendments to Basic Condition 5.
Requirement 1: about the taxpayer
Proposed paragraph 152-10(2)(b) requires that the taxpayer
either satisfy the maximum net asset value test or the taxpayer ‘carries
on business’ just prior to the CGT event happening. According to the
Explanatory Memorandum ‘[t]his ensures that entities do not benefit from this
concession where the relevant business activities are too remote to justify the
entity receiving a concession for business activities.’[61]
Maximum net asset value test (MNAVT)
The maximum net asset value test is an existing feature of
the small business capital gains tax concessions.[62]
Broadly, the test requires that that just prior to the CGT event, subject to
specific exclusions,[63]
the CGT assets of the taxpayer, any entities connected with the
taxpayer and any affiliates of the taxpayer or entities connected
with the taxpayer’s affiliates do not exceed $6 million.[64]
Generally an entity is ‘connected with’ another entity if
either one controls the other, or both are controlled by the same
entity.[65]
The control tests are designed to look through business structures that include
interposed entities. If an entity (the first entity) directly controls a second
entity, and the second entity controls (whether directly or indirectly) a third
entity, the first entity is also taken to control the third entity.[66]
‘Control’ is explained in Figure 3.
Figure3: control
Partnership, company or trust (other than a
discretionary trust)
Generally an entity controls another entity if it or its
affiliates or all of them together:
- own,
or has the right to acquire ownership of, interests in the other entity that
give the right to receive at least 40% of:
- – any distribution
of income or capital by the other entity or
-
– if the other
entity is a partnership, the net income of the partnership or
- if the
other entity is a company, owns, or has the right to acquire ownership of,
equity interests (for example, a share) in the company that give at
least 40% of the voting power in the company.[67]
If an entity’s control percentage in another entity is at
least 40% but less than 50%, the Commissioner may determine that the first
entity does not control the other entity if they are satisfied that a third
entity (not including any affiliates of the first entity) controls the other
entity.[68]
Discretionary trust
An entity controls a discretionary trust if the trustee
either acts, or might reasonably be expected to act, in accordance with the
directions or wishes of the entity and/or the entity’s affiliates.[69]
|
Source: ATO, Basic conditions for the small business CGT
concessions—‘Connected
entities’, ATO
website, last updated 17 July 2017.
An ‘affiliate’ is an individual or company that in
relation to their business affairs, acts or could reasonably be expected to act
according to the entity’s directions or wishes or in concert with the entity.
Trusts, partnerships, and superannuation funds are not affiliates.[70]
Carries on business
If the taxpayer does not satisfy the maximum net
asset value test then the taxpayer must have ‘carried on business’ just
prior to the CGT event happening under proposed paragraph
152-10(2)(b).
The ‘carries on a business’ test gained attention in March
2017 when a footnote in Draft Taxation Ruling TR
2017/D2 Income tax: Foreign Incorporated Companies: Central Management and
Control test of residency indicated that company will likely be
carrying on business even if it merely holds passive investments where it is
established or maintained to make profit or gain for its shareholders.[71]
The tax profession considered that this view departed from the then ATO’s
existing position and ultimately resulted in the removal of the ‘carries on
business’ test from the eligibility criteria for the reduced corporate tax rate
under the Government’s Enterprise Tax Plan.[72]
The ATO has since issued Draft Taxation Ruling TR
2017/D7 Income tax: when does a company carry on a business within the meaning
of section 23AA of the Income Tax Rates Act 1986?, which provides guidance
on the meaning of ‘carries on business’ in relation to companies.[73]
However, as Chartered Accountant’s Australia and New Zealand (CAANZ) noted in
its submission on the CGT Exposure Draft:
These requirements will perpetuate the confusion over the
meaning of “carrying on a business”. This issue has already gained
significant attention in relation to access to the reduced corporate tax rate
for small businesses. While the Australian Taxation Office (ATO) has issued
some guidance in relation to companies, it does not extend to individuals or
trusts where different considerations may apply.[74]
(Emphasis added).
While confusion may remain about when a taxpayer is taken
to be carrying on a business, it should be noted that the concept is still
relevant to the CGT small business entity test, which in
any event requires that the entity carries on a business in the income year.[75]
Requirement 2: modified active
asset test
The second requirement relates to the CGT asset, that is the
share in the company or the interest in the trust. Proposed paragraph
152-10(2)(a) requires that the share in the company or interest in the
trust satisfies a modified active asset test. To give context the
proposed amendments, the existing active asset test is summarised
below.
Active asset test
The requirement that an asset be an active asset to be
eligible for the CGT small business conditions is one of the Basic Conditions.[76]
The active asset test is satisfied if the asset was an active asset of the
taxpayers:
- if
the taxpayer owned it for more than 15 years—at least seven and a half years
during the test period or
- if
the taxpayer has owned it for 15 years or less—for at least half of the test
period.
The test period begins when the taxpayer acquired the
asset and generally ends when the CGT event occurs.[77]
Figure 4 sets out when a CGT asset will be an active asset.
Figure 4: active asset
A CGT asset is an active asset if the taxpayer owns the
asset and it is used, or held ready for use, in carrying on a business by
the taxpayer, their affiliate or an entity connected with them. If the asset
is intangible then it must be inherently connected with a business carried
on by the taxpayer, their affiliate or an entity connected with them.[78]
A share in a resident company or an interest in a
resident trust will be an active asset if the taxpayer owns it and the total
of the following is 80% or more of the market value of all of the
assets of the company or trust:
-
the market values of the active assets of the company or trust
-
the market value of any financial instruments of the company or trust
that are inherently connected with a business that the company or trust
carries on and
-
any cash of the company or trust that is inherently connected with
such a business.[79]
That is, ‘a share in a company or an interest in a trust
is an active asset if the company or trust itself has active assets (and inherently
connected financial instruments and cash) with a market value of at least
80% of the market value of all its assets.’[80]
|
Source: ITAA97,
section 152-40.
Modified
active asset test
The active asset test is modified by proposed paragraph
152-10(2)(a) and proposed subsection 152-10(2A) where the CGT event
relates to a share in a company or an interest in a trust. As stated in the
Explanatory Memorandum, a taxpayer satisfies proposed paragraph 152-10(2)(a)
if:
for the lesser of seven and a half years or at least half the
period a taxpayer has held the share or interest at least 80 per cent of the
sum of the:
- total market
value of the assets of the object entity (disregarding any shares in companies
or interests in trusts); and
- total market
value of the assets of any entity (a later entity) in which the object entity
had a small business participation percentage of greater than zero, multiplied
by that percenta
must have related to assets that are:
- active assets;
or
- cash or
financial instruments that are inherently connected with a business carried on
by the object entity or a later entity.[81]
For the purposes of determining whether the assets held by
a Later Entity are active assets, proposed paragraphs 152-10(2A)(c)
modifies the active asset test so the assets will only be active at a time if
the Later Entity is an entity:
- that is, at
the relevant time, either:
- a
CGT small business entity; or
- satisfies that maximum net asset value test in relation to the capital
gain; and
- in which the
taxpayer has a small business participation percentage of at least 20 per cent
or is a CGT concession stakeholder at the relevant time.[82]
In determining whether the Object Entity or a Later Entity
is a CGT small business entity or satisfies the maximum net asset value test, proposed
paragraph 152-10(2)(c) and proposed paragraph 152-10(2B)(b) modifies
the ordinary rules (discussed below).
Broadly, the modifications made to the active asset test
by proposed paragraph 152-10(2)(a) and proposed subsection 152-10(2A)
can be summarised as follows:
- firstly,
proposed paragraph 152-10(2A)(b) excludes from the active asset test, a
share in a company or an interest in trust that the Object Entity holds in a
Later Entity (whether directly or indirectly). This is also the case for a
Later Entity under proposed paragraph 152-10(2A)(c)
- secondly,
proposed paragraph 152-10(2A)(a) and proposed subparagraph 152-10(2A)(c)(ii)
excludes financial instruments and cash (point 2 and 3 in Figure 4) from the
active asset calculation of both the Object Entity and any Later Entity if
the company or trust acquired those assets for a purpose that included
assisting an entity to otherwise satisfy the modified test.[83]
This is an integrity rule that is designed to discourage taxpayers from
engaging in artificial arrangements which attempt to negate the modified active
asset test[84]
- thirdly,
under proposed paragraph 152-10(2A)(e) the value of assets held by a
Later Entity are multiplied by the Object Entity’s small business participation
percentage in the Later Entity—this effectively means that the value of the
assets of a Later Entity is proportionate to the Object Entity’s interest in
that entity and
- fourthly,
assets held by a Later Entity will only be active assets if:
- the
taxpayer has a small business participation percentage of 20% or more or the
taxpayer is a CGT concession stakeholder[85]
and
- the
Later Entity is a CGT small business entity or it satisfies the maximum net
asset value test (subject to modification under proposed subparagraphs 152-10(2B)(b)(iii)
or (iv)).[86]
CGT concession stakeholder
An individual (that is, a natural person) is a CGT
concession stakeholder of a company or trust if the individual is a significant
individual.[87]
Generally, an individual is a significant individual in a company or trust if at
that time, the individual has a small business participation percentage
in the company or trust of at least 20%.[88]
This is made up of the taxpayer’s direct and indirect interests.[89]
Figure 5 explains how the small business participation percentage is
determined.
Ultimately, however the purpose of the test and, more
broadly, the purpose of the modification under proposed paragraph
152-10(2B)(a) is to ensure that assets are only considered to be active if
they are part of a businesses in which the taxpayer has some meaningful
interest (that is, 20% or more). This is explained in the Explanatory
Memorandum:
This condition prevents the concession from being available
for interests in entities if most of the value of the assets of the entity is
unrelated to its business activities. In such cases, while the entity carries
on a small business, most of the value of the interest held by the taxpayer
is not attributable to the small business and it is not appropriate for the
small business concessions to apply to the disposal of the interest. The
condition also recognises that an investment is effectively passive in nature
if an entity has an interest of less than 20 per cent in another entity.[90]
(Emphasis added).
Figure 5: small business participation percentage
Small business participation interest
A taxpayer’s small business participation interest
in a company or a trust is the total of the taxpayers direct and indirect
participation percentages in the company or trust.[91]
Calculating the direct and indirect participation
percentages differs for a company and a trust.[92]
If the entity is a company, the direct participation percentage is the smallest
of the following percentage the taxpayer holds in the company:
- the
voting power in the company
- entitlement
to a dividend that the company may pay or
- entitlement
to a distribution of capital that the company may make.[93]
For example, if the taxpayer holds 30% of the voting
power and is entitled to 25% of dividends paid or capital distributions
made, then their direct small business participation interest is 25%.
The test differs for a trust, but broadly it is the
smallest of taxpayer’s entitlement to the income or capital of the trust.[94]
A taxpayer’s indirect small business participation
percentage requires tracing an entity’s direct and indirect participation
interest through a chain of interposed entities.[95]
|
Source: Subdivision 152-A, ITAA97.
As noted above the Later Entity must be also be a CGT
small business entity or satisfy the maximum net asset value test, however,
these ordinary tests are subject to modification under proposed
subparagraphs 152-10(2B)(b)(iii) to (v).[96]
The Later Entity will not be a CGT small business entity if its aggregated
turnover exceeds $2 million or its CGT assets exceeds $6 million.[97]
Figure 6 explains what an entity’s aggregated turnover includes.
Figure 6: aggregated turnover
Aggregated turnover is defined under section 328-115 of
the ITAA 1997 and includes:
- an
entity’s annual turnover and
- the
annual turnover of all entities that are affiliated or connected with the
entity.[98]
An entity’s annual turnover is the total ordinary income
that the entity derived in the ordinary course of ‘carrying on a business’
in the income year, subject to specific exclusions.[99]
An entity’s annual turnover differs from its assessable
income because it does not include statutory income, being income that is
deemed assessable because of a specific tax law.[100]
|
Source: J Ayoub, Treasury
Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017,
Bills digest, 71, 2017–18, Parliamentary Library, Canberra, 6 February 2018, p.
11.
Proposed subparagraphs 152-10(2B)(b)(iii) limits the
annual turnovers and GCT assets to be taken into account to those of the Later
Entity, the Object Entity, each affiliate of the Object Entity, and each entity
controlled by the Object Entity.[101]
But it does not include the assets or annual turnovers of those entities that can
control the Object Entity.[102]
However, proposed subparagraphs 152-10(2B)(b)(iv)
expands the number of entities considered to be connected with
each other because the control percentage is reduced from 40% to 20%.[103]
Where entities are considered to be connected with each other:
- their
annual turnover will count towards the Later Entity’s $2 million aggregate
turnover threshold and
- their
CGT assets will counts toward the $6 million maximum net asset value test.
This means that a Later Entity is more likely to exceed
the thresholds and fail proposed paragraphs 152-10(2B)(a).
Also under proposed subparagraphs 152-10(2B)(b)(v),
any determination made by the Commissioner under subsection 328-125(6) of the ITAA97
is disregarded, again potentially expanding the number of entities considered
to be connected with each other.[104]
The Explanatory
Memorandum sets out a number of examples which assist in understanding the
practical application of the proposed amendments.[105]
The following example shows the effect of the modified active asset test as a
result of connected entities:
Example 2.2: Connected entities and the modified active
asset
Charlotte owns 35 per cent of the shares in Colour Co. Colour Co carries on a
business of wholesaling paint and related products and is a CGT small business
entity (according to the general rules) in the 2019 20 income year.
Colour Co owns 20 per cent of the shares in three pigment
suppliers Red Co, Green Co and Blue Co. Red Co and Blue Co are both CGT small
business entities for the 2019-20 income year (and have been since Colour Co
acquired its interest) according to the general rules. Green Co is not and has
never been a CGT small business entity as it exceeds the turnover threshold.
On 3 March 2020, Charlotte sells her shares in Colour Co.
In working out if this interest satisfies the modified active
asset test, when working out the total value of the assets of Colour Co,
Charlotte must disregard the value of the shares Colour Co holds in Red Co,
Blue Co and Green Co and include 20 per cent of the value of the assets of
these companies.
Further, for the purposes of the modified active asset test,
assets of later entities are only active if the entity is a CGT small business
entity or satisfies the maximum net asset value test.
Green Co is not a CGT small business entity as its turnover
is too high.
Additionally, Charlotte must treat Red Co, Blue Co and Green
Co as being connected with Colour Co and with each other for the purposes of
the test, because Colour Co holds 20 per cent of the shares of each entity.
Because they are treated as being connected with Green Co,
Red Co and Blue Co are also treated as not being CGT small business entities
for these purposes.
As a result, Charlotte is not able to treat the assets of Red
Co, Blue Co or Green Co as active assets for the purposes of this test unless
the entities satisfy the maximum net asset value test.[106]
Stakeholder concerns
Although the proposed amendments have been modified from
the CGT Exposure Draft, stakeholders nevertheless considered that the
provisions are overly complex. In this respect The Tax Institute noted that
‘[t]he provisions are complex and self-referential. In our opinion, the proposed
legislation will not be easy to understand or apply’.[107]
Similarly BDO stated:
While the draft legislation can be lauded for addressing the
integrity issues head-on, it struggles to adhere to the underpinning
policy of the SBCGT concessions of reducing the tax cost and compliance burden
for small business. That is, the draft legislation adds a further degree of
complexity to existing provisions which are already perceived as complex. Of
great concern, and something which afflicts tax law amendments from time to
time, is that the proposed changes will exclude many genuine small taxpayers
from obtaining the SBCGT concessions in an effort to prevent the troublesome
few from accessing them. That is, it penalises the many for the sins of the
few.[108]
(Emphasis added).
The Institute of Public Accountants echoed similar
sentiments, while CAANZ called for a review of the small business CGT
concessions stating:
They are extremely complex provisions for tax agents to
navigate, let alone a segment of the taxpayer community for whom tax compliance
burdens are already relatively high. As drafted, the proposed amendments
add to that complexity ... our members advise us that this complexity has meant
that some genuine small businesses miss out on the concessions. A fundamental
review of the policy rationale for these provisions is needed. This is not a
new issue. The Henry Review stated that”[sic]:
... Despite attempts to simplify the
concessions, taxpayers are required to navigate a legislative maze of gateway
and threshold conditions and then additional conditions that relate to each of
the specific concessions.[109]
(Emphasis added).
Requirement 3: the Object Entity
The final condition that Schedule 2 of the Bill
proposes is that the company or trust in which the taxpayer holds the share or
interest (the Object Entity) either:
- be
a CGT small business entity for the income year (that is, less than $2 million
aggregated turnover)[110]
or
- satisfy
the maximum net asset value test (that is, net CGT assets do not exceed $6
million).[111]
However, similarly to the modifications that apply to a Later
Entity, the aggregated turnover and maximum net asset value tests are subject
to modifications under proposed subparagraphs
152-10(2)(c)(iii) to (v), which include:
- only
the CGT assets and annual turnovers considered are those of the later entity,
the object entity, each affiliate of the object entity, and each entity
controlled by the object entity[112]
- an
entity is treated as controlling another entity if it has an interest of 20% or
more rather than 40% under section 328-125 of the ITAA97[113]
and
- any
determination made by the Commissioner under subsection 328-125(6) of the ITAA97
is disregarded.[114]
As noted in Requirement 2: modified active asset test
above, the effect of these modifications is that because more entities are
considered to be ‘connected with’ each other, their annual turnover and CGT
assets must be included for the purposes of determining whether the Object Entity
is a CGT small business entity for the income year or satisfies the maximum net
asset value test.[115]
This is illustrated by Example 2.5 in the Explanatory Memorandum:
Example 2.5: Indirect investment in large business
Tien owns 20 per cent of the shares in Investment Co, a company that
carries on an investment business. Investment Co is a CGT small business entity
(according to the general rules) for the 2020-21 income year.
Investment Co holds 20 per cent of Van Co, a transport
company. Van Co’s turnover and assets mean that it is not a CGT small
business entity in the 2020-21 income year and does not satisfy the maximum net
asset value test at any point during the income year.
On 15 May 2021, Tien sells his shares in Investment Co. He is
not eligible to access the Division 152 CGT concessions for any resulting
capital gain.
Even if Tien satisfies the other conditions, he cannot
satisfy the new condition requiring the object entity be a CGT small business
entity or satisfy the maximum net asset value test due to the modifications
that apply when determining this matter for the purposes of this condition.
For the purposes of this condition, Investment Co is
considered to be connected with Van Co, as Investment Co holds 20 per cent of Van Co’s
shares. As a result, for this purpose, Investment Co’s turnover and assets
include the turnover and assets of Van Co. As Van Co is not a CGT small
business entity and does not satisfy the maximum net asset value test,
Investment Co is also treated as not satisfying these requirements (despite its
status under the general rules in the tax law).[116]
Stakeholders raised a number of concerns in relation to
the equivalent of proposed paragraph 152-10(2)(c) of the CGT Exposure
Draft. For example, CAANZ noted that the requirement that the Object Entity be
a CGT small business entity or satisfy the modified active asset test
discourages collaborative business:
A person who owns 100% of a business worth $5.9m can claim
the small business concession but two independent people who equally own a
business worth $8m (that is $4m each) cannot.[117]
BDO considered that this requirement will also exclude
taxpayers who are ‘presumably outside the integrity concern’, stating:
For example, a taxpayer owns 30% of a company with a MNAVT
[maximum net asset value test] of $10 million, such that their interest is only
worth $3 million. The taxpayer otherwise meets the MNAVT or small business
entity test. They will be precluded from applying the SBCGT concessions as the
Object Entity (i.e. the company) doesn’t meet the MNAVT or small business
entity test. This would seem to be collateral damage.[118]
Paragraph 152-10(2)(c) of the CGT Exposure Draft additionally
required that the Object Entity carry on business just prior to the relevant
CGT event. While Schedule 2 of the Bill does not contain the requirement, the
Object Entity must still be a CGT small business entity if it doesn’t satisfy
the maximum net asset test.[119]
As noted above, a CGT small business entity must ‘carry on business’ in the
income year.[120]
This provision may exclude entities that may be interposed for asset protection
purposes, such as passively held assets in a trust if it fails the maximum net
asset value test.[121]
Commencement
While Schedule 2 of the Bill commences on the first
day of the first quarter to start after the day of Royal Assent, the proposed
amendments apply retrospectively to CGT events that occurred on after 1 July
2017.[122]
While the Government announced in the 2017–18 Budget that
the amendments would apply from 1 July 2017, the CGT Exposure Draft was not
released until 8 February 2018.[123]
In addition to the delay, stakeholders have taken issue with the retrospective
commencement date on the basis that the proposed amendments go beyond the scope
of the budget announcement.[124]
For example, CAANZ stated:
We have reviewed the commentary that was issued by various
accounting and information distribution organisations at the time of the Budget
announcement and none of them contained analysis that was additional to that
contained in pages 38-39 of Budget Paper 2. Some noted that they could not
provide more information and suggested delaying transactions until legislation
was released.
However, draft legislation was not released until 10 months
later. Whilst some small businesses may have been able to delay their
transactions, not all could. Numerous members have advised us that given the
delay between the announcement and legislation many business transactions had
to proceed. These transactions proceeded in good faith on the basis of the
existing legislation and conservatively given the vagueness of the Budget
announcement. Despite this, members have advised us that the draft legislation
exceeds the expected scope of the Budget announcement and that many business
transactions will now be adversely affected.[125]
Similarly, in its submission on the CGT Exposure Draft,
BDO stated:
The drastic increase in scope, which was not flagged in the
2017/18 Federal Budget announcements, means that the proposed retrospective
provisions will adversely affect taxpayers who have sold shares in companies or
interests in trusts since 1 July 2017 in reliance on the existing law and the
plain meaning of the budget announcement.[126]
As CAANZ raised in its submission, the retrospective
operation will have flow on consequences for taxpayers who, for example have transferred
amounts into superannuation that are non-taxable under the existing provisions
but will no longer be treated as such.[127]
The Explanatory
Memorandum has attempted to address the retrospective application of the
provisions and states:
This retrospective application is consistent with the Budget
announcement by the Government on 9 May 2017 to ensure the small business CGT
concessions are only available in relation to assets used in a small business
and ownership interests in small businesses.
Taxpayers that sought to access the concessions in relation
to the disposal of assets on or after 1 July 2017 where this is not consistent
with the amended law do not receive the benefit of these concessions. This
includes taxpayers that have sought to access the small business retirement
exemption to reduce their CGT liability by contributing amounts to
superannuation (in this case the amount contributed is not exempt from CGT and
is a non-concessional contribution to superannuation for the relevant financial
year).
This measure is an integrity measure. While its retrospective
application may disadvantage some taxpayers that have sought to access the
concessions after announcement, this application is necessary to minimise the
scope for entities to inappropriately access the small business CGT concessions
in the period after the measure was announced but before legislation is
enacted. [128]
Senate Standing Committee for the
Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills
(Scrutiny Committee) also raised concerns about the retrospective application
of Schedule 2 of the Bill. In particular, the Scrutiny Committee
considered that the retrospective provisions back-dated to an announcement:
... challenges a basic value of the rule of law that, in
general, laws should only operate prospectively (not retrospectively) ... reliance
on ministerial announcements and the implicit requirement that persons arrange
their affairs in accordance with such announcements, rather than in accordance
with the law, tends to undermine the principle that the law is made by
Parliament, not by the executive.[129]
While Schedule 2 of the Bill applies to a CGT event
that occurs on after 1 July 2017 rather than the budget announcement,[130]
the Scrutiny Committee considers that some amendments may apply retrospectively
if legislation is introduced within six months after the date of the announcement.[131]
The Scrutiny Committee requested advice from the Treasurer about how many
individuals will be detrimentally affected and the extent of any such
detriment.[132]
While a response was received by the Scrutiny Committee on 30 May 2018, at the
time of writing it was not yet publicly available.[133]
The Scrutiny Committee also drew the attention to the fact
that the Senate may decide not to pass the Bill without the commencement date
being amended in accordance with Senate Resolution No. 44, which states:
Where the government has announced, by press release, its
intention to introduce a bill to amend taxation law, and that bill has not been
introduced into the Parliament or made available by way of publication of a
draft bill within 6 calendar months after the date of that announcement, the
Senate shall, subject to any further resolution, amend the bill to provide
that the commencement date of the bill shall be a date that is no earlier than
either the date of introduction of the bill into the Parliament or the date of
publication of the draft bill.[134]
(Emphasis added).
As noted above, the CGT Exposure Draft legislation was not
released until 8 February 2018 being ten months after the date of the
announcement.[135]
Other provisions
Item 1 of Schedule 2 to the Bill amends the guidance
material in section 152-5 of the ITAA97 which sets out the major conditions
that must be satisfied for the small business CGT concessions to apply.
Schedule 3—FinTech and venture capital amendments
Schedule 3 to the Bill amends the ITAA97 and
the Venture
Capital Act 2002 (VCA) to extend venture capital tax concessions
to investments in financial technology (FinTech) businesses.
Background
Venture capital is a mechanism for financing new,
innovative enterprises at the start-up and early-expansion phases. Venture
capitalists invest funds in such enterprises in return for an equity share. The
funds are used to develop an enterprise’s ideas to the stage where their
commercial potential is sufficient for the venture capitalist to sell its
equity to another party.
FinTech refers to the use of innovative technology in the
design and delivery of financial products and services to consumers. It has applications
across lending, financial advice, investment management and payments services.[136]
On 21 March 2016, the Government published
its FinTech statement which, among other things,
committed to:
- ensuring that start-ups involved in FinTech, including in insurance and
finance related activities, can be eligible investments for the purposes of the
venture capital tax concession and
- introducing a mechanism by which Innovation Australia (now Innovation and Science Australia (ISA)) could
issue binding advice in relation to the definition of activities ineligible for
venture capital tax concessions.[137]
Schedule 3 to the Bill partially implements the
measure ‘National Innovation and Science Agenda – expanding the new
arrangements for venture capital limited partnerships’ from the 2016–17 Budget
to ‘ensure that venture capital tax concessions are available for FinTech,
banking and insurance related activities’.[138]
The Commonwealth provides various tax concessions to
support Australian venture capital investments. Venture Capital Limited
Partnerships (VCLPs) and Early State Venture Capital Limited Partnerships
(ESVCLPs) aim to increase foreign investment in the Australian venture capital
sector, providing certain foreign investors with tax exemptions on the profits
on their investments:[139]
- the
VCLP program provides for:
- flow-through
tax treatment[140]
- an
exemption from income tax on capital and revenue profits arising from the disposal
of eligible investments
- fund
managers to be taxed on their carried interest in the partnership on capital
account, rather than as income
- the
ESVCLP program provides tax concessions for high-risk start-up entities:
- flow-through tax treatment
- an exemption for Australian and foreign venture capital partners from
income tax on capital and revenue profits from the disposal of eligible venture
capital investments made by the ESVCLP and any other income earned on these
investments
- taxing fund managers on their carried interest in the partnership on
capital account, rather than as income.[141]
To be eligible for the tax incentives:
- a
venture capital fund must be registered and remain registered as a VCLP or an
ESVCLP. ISA’s Innovation
Investment Committee registers VCLPs and ESVCLPs under the Venture Capital Act
2002
- VCLPs
and ESVCLPs must only invest in entities that are predominantly engaged in
activities that are not ineligible activities. Ineligible activities
include: property development or land ownership; finance relating to banking,
providing capital to others, leasing, factoring and securitisation; insurance;
construction or acquisition of infrastructure facilities; and making investments
(that are directed to deriving income in the form of interest, rents,
dividends, royalties or lease payments).[142]
Eligible venture capital investments are defined in subdivision 118–F of the ITAA97.[143]
The close relationship between ineligible activities and
FinTech has raised questions as to whether investment in companies and unit
trusts engaged in the development of FinTech are eligible venture capital
investments. Schedule 3 to the Bill amends the ITAA97 to provide
that, despite existing rules concerning ineligible activities, an activity is
not an ineligible activity for the purpose of the venture capital tax
concessions if it is:
- developing
technology in relation to finance, insurance or making investments
- ancillary
or incidental to developing technology in relation to finance, insurance or
making investments or
- covered
by a finding from Innovation and Science Australia that it is a substantially
novel application of technology.[144]
In his second reading speech, the Assistant Minister to
the Treasurer, Michael Sukkar, stated that Schedule 3:
... demonstrates the government's continuing commitment to
promoting a culture of entrepreneurship and risk taking in Australia and will
help ensure innovative Australian businesses have access to the capital and,
importantly, the expertise that they need to grow and succeed in this very
competitive area.[145]
Senate Standing Committee for the
Scrutiny of Bills
Proposed subsection 118-432(2) provides that ISA
may, on application from a company or unit trust, make a finding that a
specified activity is a substantially novel application of technology. This is
known as a ‘private finding’. Schedule 3 makes an amendment to the VCA
to provide that such a private decision is subject to internal and
Administrative Appeals Tribunal (AAT) review in the same way as other
administrative decisions relating to venture capital tax concessions.
Proposed subsection 118-432(5) provides that ISA
must notify the applicant in writing of any decision about an application for a
private finding, or refuse to make such a finding. Proposed subsection
118-432(6) provides that failure to notify an applicant does not affect the
validity of the finding. This is a ‘no-invalidity’ clause. The Senate Standing
Committee for the Scrutiny of Bills (the Committee) has ‘significant scrutiny
concerns’ with no-invalidity clauses, as they ‘may limit the practical efficacy
of administrative review to provide a remedy for administrative errors’.[146]
The Committee has sought justification for the use of a
no-invalidity clause; and advice about how an applicant can appeal a refusal
under proposed section 118-432(2) in circumstances where ISA does not
notify the applicant of that refusal.
Policy position of non-government
parties/independents
At the second reading of the Bill, several concerns were
raised by the ALP, specific to Schedule 3. Matt Keogh MP expressed ‘overall
support’ for the legislation, but noted that ‘there are things in schedules 3
and 4 in particular that we say need to be improved or fixed up’.[147]
Matt Thistlethwaite MP, noted that there was still ‘some uncertainty about the
long-term eligibility for concessions in the commercialisation process’,
leading to ‘some uncertainty about whether investment decisions will actually
be improved’.[148]
He argued that the Government should investigate the impact of venture capital
concessions as a whole to ensure that they are operating as intended.[149]
The Shadow Minister for Employment Services, Workforce
Participation and Future of Work, and Shadow Minister for the Digital Economy,
Ed Husic MP, pointed out an apparent ambiguity in the legislation:
For example—and I had highlighted to me—in 3.26 of the
explanatory memorandum it states that a FinTech may be eligible for the tax
concession when developing its technology. However—and this is what has been
raised with me—it then goes on to say that when a business is commercialising
the technology it would no longer be eligible. As has been raised with me:
'This hardly seems like a certain, longer term platform for a venture capital
firm to make an investment in a FinTech, given that the VC is only making the
investment because it's hoping the FinTech will be able to commercialise and
profit from the technology.’[150]
Position of major interest groups
FinTech Australia is a not-for-profit national association
for the Australian FinTech start-up community. In February 2016, FinTech
Australia published Priorities
for reform of the Australian financial services industry in which it
called for the removal of ‘finance, insurance and investment’ from section
118-425 (Meaning of eligible venture capital investment – investment in
companies) of the ITAA97 as heads of ‘ineligibility’ for ESVCLP investments.[151]
It argued that this would enable FinTech ventures to receive funding from
ESVCLP funds.
As an alternative, it is recommended that they be qualified
with the proviso: ‘Except where such activities are delivered in a
significantly more automated fashion than is customary within the industry or
by way of a substantially new business model’.[152]
In its submission to the Treasury consultation process ‘Encouraging
venture capital investment in FinTech’, FinTech Australia recommended (as
above):
In the short term, prior to legislative reform, [the
Government should] issue a Ministerial Directive instructing Innovation and
Science Australia to disregard those provisions of the [Venture Capital] Act
where a fintech applies for a binding advice on eligibility.[153]
In November 2017, FinTech Australia made a submission to
Treasury on proposed venture capital and early stage investor tax concession
amendments, calling for an amendment to the definition of ‘ineligible
activities that an eligible investee company can undertake so as to further
qualify which activities relating to finance may be considered eligible for the
regime.’[154]
Financial implications
The measure is expected to have an unquantifiable cost to
revenue over the forward estimates period.[155]
The measure is expected to result in a small overall
compliance cost impact, comprising a small implementation impact and a small
increase in ongoing costs.[156]
Key issues and provisions
Schedule 3 makes two changes to the activities that
are ineligible activities for the purposes of the concessions. The amendments
relate solely to reduce the scope of which activities are ineligible
activities. Specifically, item 1 amends section 118-425 of the ITAA97
(Meaning of eligible venture capital investment – investment in
companies) to specify that an activity is not an ineligible activity if it is:
- developing
technology for use in relation to activities in finance, insurance or making
investments[157]
- an
activity that is ancillary or incidental to the activity of developing
technology referred to above[158]
- an
activity referred to above that is the subject of a finding in force under
proposed section 118-432 which concerns findings by ISA of substantially novel
applications of technology.[159]
The Explanatory Memorandum notes that the term ‘developing
technology’ is deliberately broad:
- technology
is defined as ‘the practical application of science and engineering’ and
- developing
technology is designed to cover things done to create, understand and apply
technological innovation including adapting existing technology for a novel
use.[160]
Regulations can be made to prescribe activities to which
the exclusion does not apply – this allows ‘a quick response to emerging issues
that result in unintended outcomes without qualifying the broad operation of
the provisions’.[161]
Item 2 contains identical amendments to section
118-427 of the ITAA97 (Meaning of eligible venture capital investment
– investments in unit trusts).[162]
Item 3 inserts proposed section 118-432
(Findings of substantially novel applications of technology):
- ISA
may, by legislative instrument, find that each activity within a specified
class is a substantially novel application of one or more technologies (a
public finding)[163]
- ISA
may, on application from a company or unit trust, make a written decision
finding that a specified activity is a substantially novel application of one
or more technologies, or refusing to make such a finding about a specified
activity (a private finding)[164]
- ISA
findings are in force for the period specified in the finding[165]
- an
application for a private finding must be in an approved form[166]
- ISA
must notify the applicant in writing of any decision relating to a private
finding and[167]
- failure
to provide a written decision does not affect the validity of the finding.[168]
Substantially novel activities in relation to FinTech
could include activities that have moved from the development of technology to
its application, but this application must be new or uncommon and must involve
some degree of innovation.[169]
The Explanatory Memorandum notes that ‘novel’ does not have the specialised
meaning it holds in the Patents
Act 1990.[170]
It is expected that ISA will consult with the Commissioner of Taxation when
making a finding.[171]
Several examples of eligible and ineligible activities are
provided in the Explanatory Memorandum.[172]
However, and given the provision for regulations, it is apparent that there
will be circumstances which have not yet been foreseen and which will require
ISA to make a finding. It is not clear if the consequent resource impact for
ISA has been included in the financial implications.
Item 5 makes an amendment to the VCA to
provide that the decision by ISA to make (or not to make) a private finding is
subject to internal and AAT review.[173]
As noted earlier in this Bills Digest, the Committee has raised ‘significant
scrutiny concerns’ over this amendment and has sought justification for its
use.
Consequential amendments
Item 4 of Schedule 3 makes a consequential
amendment to Division 362 (Rulings by Innovation and Science Australia that
activities are not ineligible activities) in Schedule 1 to the Taxation
Administration Act 1953 to insert a note to confirm that the power of
ISA to make rulings (public and private) about ineligible activities extends to
cover the changes made to eligibility as a result of these amendments.[174]
Application of amendments
The amendments apply in relation to investments made on or after 1 July
2018 (item 6).
Schedule 4—Reparation
payment tax exemption
Background
Defence Abuse Response Taskforce
The Defence
Abuse Response Taskforce (the Taskforce) was established on 26 November
2012 to assist complainants that had suffered abuse in the Defence Force such
as workplace discrimination, harassment, bullying, physical and sexual abuse
that occurred prior to 11 April 2011.[175]
The Taskforce administered payments of up to $50,000 to
persons who had suffered abuse in the Australian Defence Force.[176]
A payment under the scheme was not for compensation or damages and payments did
not affect a person’s statutory, common law or other legal rights.[177]
Payments made under the scheme are exempt from income tax.[178]
The Taskforce made 1,723 reparation payments totalling $66.63 million, the
breakdown of which is set out at Figure 7.[179]
Figure7: breakdown of reparation payments
Source: Taskforce, Defence
Abuse Response Taskforce: final report, p. 15.
The Taskforce’s terms of reference included finalising
reparation payments under the scheme by 30 September 2015.[180]
The Taskforce recommended that the Defence Force
Ombudsman should be responsible for the Taskforce’s legacy work including
an expanded complaints mechanism for victims of abuse in Defence.[181]
In December 2017, Senator Marise Payne, the Minister for
Defence, announced the establishment of the Defence Reparation Scheme, stating:
The DFO [Defence Force Ombudsman] will now commence assessing
complaints already received since their role was expanded. The Ombudsman may
recommend a payment in relation to a complaint of abuse if satisfied that:
-
the abuse is reasonably likely to have occurred, and occurred on or
before 30 June 2014; and
-
the complaint relates to the most serious forms of abuse or sexual
assault.[182]
The Defence Force Ombudsman is established under the Ombudsman Act 1976
to investigate complaints made to them under the Act.[183]
The Defence Force Ombudsman has the power to make reparation payments for abuse
under the Ombudsman
Regulations 2017.[184]
The Ombudsman may recommend a payment of up to $45,000 to acknowledge the most
serious forms of abuse and a payment of up to $20,000 to acknowledge other
abuse involving unlawful interference accompanied by some element of indecency.
An additional payment of $5,000 may also be recommended where the Ombudsman is
satisfied that Defence did not respond appropriately to the incident of abuse.[185]
In the 2017–18 Budget it was announced that the Government
would expand the scope of the Defence Force Ombudsman to make orders for
reparation payments.[186]
According to the Explanatory
Memorandum, Schedule 4 to the Bill ‘implements the tax consequences
from the 2017–18 Budget of the Defence Force.’[187]
Policy position of non-government
parties/independents
At the second reading of the Bill, Matt Keogh MP (ALP)
expressed ‘overall support’ for the legislation, but noted that ‘there are
things in schedules 3 and 4 in particular that we say need to be improved or
fixed up’ although he did not elaborate on specific matters.[188]
Position of major interest groups
There do not appear to be any particular views expressed
on making such payments tax exempt.
Financial implications
The Explanatory
Memorandum to the Bill states that the measure’s financial impact will be
‘Nil’.[189]
According to the 2017–18 Budget the cost of the overall measure ‘will be met
from within the existing resources of the Department of Defence.’[190]
Key issues and provisions
Item 3 of Schedule 4 to the Bill repeals
item 1.7 in the table contained in section 51-5 of the ITAA97 (the
Defence Abuse Reparation Scheme payments) and exempts from income tax reparation
payments or additional payments from the Commonwealth made under the new scheme—that
is, payments made on the recommendation by the Defence Force Ombudsman
performing a function conferred by section 14 or 14B of the Ombudsman
Regulations 2017.[191]
The exemption is necessary because as stated in the Explanatory
Memorandum the payment is likely to be treated as income for the purposes
of the tax laws:
One-off payments will generally have the character of
ordinary income if they are received as a product of, or in relation to,
employment, services rendered or the carrying on of a business.
As payments made by the Defence Abuse Response Taskforce
arose out of an employment relationship with the Department of Defence or the
Australian Defence Force, they could also be characterised as statutory income
under section 15-2 of the ITAA 1997, which applies to allowances and other
things provided in respect of employment.[192]
In his second reading speech, the Assistant Minister to
the Treasurer, Michael Sukkar considered that ‘Schedule 4 ensures the recipient
of a reparation payment receives the full benefit of the payment and,
importantly, is free from the obligation to pay income tax on it.[193]
Similarly, Jason Falinski MP stated:
Unlike compensation, a reparation payment represents an
acknowledgement by Defence that the abuse suffered by the complainant was
wrong, that it can have a lasting and serious impact and also that in the past
Defence was not positioned appropriately to respond to abuse in many cases. The
recipient of a reparation payment should receive the full benefit of that
payment and, as such, the payment should be exempt from income tax. [194]
(Emphasis added).
The existing exemption under item 1.7 of the table in
section 51-5 of the ITAA97 for a payment by the Commonwealth under the
Defence Abuse Reparation Scheme is repealed because no new payments are being
made under that scheme.[195]
Commencement
While Schedule 4 of the Bill commences on the first
day of the first quarter to start after the day of Royal Assent, the amendments
made by Schedule 4 apply from the 2017–18 income year onwards—that is,
payments made from 1 July 2017 onwards.[196]
Other provisions
Payments that are exempt from income tax are listed in
section 11-15 of the ITAA97. This section is not operative but rather it
is for ease of reference. Item 1 of Schedule 4 removes the
Defence Abuse Reparation Scheme payments reference from the list. Item 2
of Schedule 4 to the Bill inserts the new exemption as outlined above.
Appendix A: changes made by the proposed
amendments to Basic Condition 5
Members, Senators and Parliamentary staff can obtain
further information from the Parliamentary Library on (02) 6277 2500.
[1]. Senate
Standing Committee for the Selection of Bills, Report,
5, 2018, The Senate, Canberra, 10 May 2018, p. 4.
[2]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny digest,
5, 2018, The Senate, 9 May 2018, pp. 70–2.
[3]. The
Statement of Compatibility with Human Rights can be found at pages 39–41 of the
Explanatory
Memorandum to the Bill.
[4]. Parliamentary
Joint Committee on Human Rights, Human
rights scrutiny report, 4, 8 May 2018, p. 97.
[5]. Income
Tax Assessment Act 1936 (ITAA36), section 177DA.
[6]. Explanatory
Memorandum, Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill
2015, p. 24.
[7]. Australian
Taxation Office (ATO), ‘International tax for business—Tax
on income and capital gains’, ATO website, last updated 16 February 2016.
[8]. Ibid.
[9]. Organisation
for Economic Co-operation and Development (OECD), ‘Preventing
the artificial avoidance of permanent establishment status, action 7 – 2015
final report’, OECD/G20 Base Erosion
and Profit Sharing Project, OECD publishing, Paris, 5 October 2015, p. 9.
[10]. Ibid.,
p. 10.
[11]. Ibid.,
p. 11.
[12]. ITAA36,
section 177DA.
[13]. Senate
Standing Committee on Economics, Corporate
tax avoidance: part III: much heat, little light so far, The Senate,
Canberra, May 2018, p. 9.
[14]. ATO,
TA
2016/2 Interim arrangements in response to the Multinational Anti Avoidance Law
(MAAL), ATO website, Taxpayer Alert, 2016; ATO, TA
2016/8 GST implications of arrangements entered into in response to the
Multinational Anti-Avoidance Law (MAAL), ATO website, Taxpayer Alert,
2016.
[15]. ATO,
TA
2016/11 Restructures in response to the Multinational Anti Avoidance Law (MAAL)
involving foreign partnerships, ATO website, Taxpayer Alert,
2016, p. 1.
[16]. Ibid.,
p. 2.
[17]. Ibid.,
pp. 1–3.
[18]. Australian
Government, Budget
measures: budget paper no. 2: 2017–18, p. 39.
[19]. Ibid.
[20]. The
Treasury, ‘Toughening
the Multinational Anti Avoidance Law’, the Treasury website, 12 February
2018; K O’Dwyer, (Minister for Revenue and Financial Services), Public
consultation to toughen the multinational anti-avoidance law, media
release, 12 February 2018.
[21]. ATO,
‘ATO
clarifies impact of the MAAL’, ATO website, last updated 25 October 2017.
[22]. M Thistlethwaite,
‘Second
reading speech: Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018’, House of Representatives, Debates, 10 May 2018, p. 3739; M
Keogh, ‘Second
reading speech: Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018’, House of Representatives, Debates, 10 May 2018, p. 3748;
Australia, House of Representatives, ‘Treasury
Laws Amendment (Tax Integrity and Other Measures) Bill 2018’, Votes and
proceedings, HVP 109, 10 May 2018.
[23]. The
Treasury, ‘Toughening
the Multinational Anti Avoidance Law’, The Treasury website, op. cit.
[24]. Tax
Justice Network Australia (TJN-Aus), Submission to
Treasury, Toughening the Multinational Anti-Avoidance Law,
23 February 2018, p. 1.
[25]. Australian
Retailers Association (ARA), Submission to
Treasury, Toughening the Multinational Anti-Avoidance Law,
February 2018, p. 1.
[26]. Deloitte,
Submission to
Treasury, Toughening the Multinational Anti-Avoidance Law, 22 February
2018, p. 1.
[27]. J
Olender and L Nielson, Tax
Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015, Bills
digest, 45, 2015–16, Parliamentary Library, Canberra, 2015, pp. 20–2.
[28]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 3.
[29]. ITAA36,
section 177DA; ATO, ‘Combating
multinational tax avoidance – a targeted anti-avoidance law’, ATO website,
last updated 10 August 2017.
[30]. Income
Tax Assessment Act 1997 (ITAA97), paragraph 177DA(1)(c).
[31]. ITAA97,
section 960-555; ATO, ‘Combating
multinational tax avoidance - a targeted anti-avoidance law’, op. cit.
[32]. Australian
Government, Budget
measures: budget paper no. 2: 2018–19, 8 May 2018, p. 26.
[33]. Under
ITAA36, section 177A(1) supply is given its meaning in
section 9-10 of the GST Act, however it excludes certain supplies such as a
supply of a debt or equity interest. Supply within the meaning of section 9-10
of the GST Act is very broad and includes any form of supply whatsoever.
[34]. Proposed
paragraphs 177DA(7)(a) and (b) of the ITAA36.
[35]. Proposed
paragraph 177DA(7)(c) of the ITAA36.
[36]. Proposed
subparagraphs 177DA(7)(d)(i) to (iii) of the ITAA36.
[37]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, pp. 10–11.
[38]. ITAA36,
subsection 177A(1), ‘foreign entity’ is defined by reference to subsection
995-1(1) ITAA97.
[39]. Proposed
subparagraphs (i) and (ii) of the proposed definition of foreign
entity participant in section 177A(1) of the ITAA36.
[40]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, pp. 11.
[41]. Item
2 of the Bill and item 3 of Schedule 1 to the Bill.
[42]. Australian
Government, Budget
measures: budget paper no. 2: 2017–18, op. cit., pp. 38–9.
[43]. Ibid.,
p. 39.
[44]. The
Treasury, ‘Improving
the integrity of the small business CGT concessions’, The Treasury website,
8 February 2018; S Morrison, (Treasurer), Improving
the integrity of the small business CGT concessions: exposure draft released,
media release, 8 February 2018.
[45]. Chartered
Accountants Australia and New Zealand (CAANZ), Submission
to Treasury, Improving the small business CGT concessions, 28 February
2018, p. 5; Institute of Public Accountants, Submission
to Treasury, Improving the integrity of the small business CGT concessions,
February 2018, pp. 3–4; BDO, Submission
to Treasury, Improving the integrity of the small business CGT concessions,
28 February 2018, p. 4; The Tax Institute, Submission
to Treasury, Improving the integrity of the small business CGT concessions,
1 March 2018, p. 2.
[46]. CAANZ,
Submission,
op. cit., p. 3; BDO, Submission
op. cit., p. 3; The Tax Institute, Submission
op. cit., p. 1.
[47]. BDO,
Submission
op. cit., p. 4; CAANZ, Submission,
op. cit., p. 5.
[48]. Board
of Taxation (BOT), Review
of small business tax concessions: consultation guide, Australian
Government, Canberra, May 2018.
[49]. Ibid.,
p. 3.
[50]. Ibid.,
pp. 9–12.
[51]. Ibid.,
p. 13.
[52]. ATO,
‘Small business entity concessions— Concessions
at a glance’, ATO website, last updated 1 September 2017. For a full list
of concessions see: BOT, Review
of small business tax concessions: consultation guide, op. cit., pp.
5–8.
[53]. ITAA97,
Subdivisions 152-B to 152-E.
[54]. M
Thistlethwaite, ‘Second
reading speech: Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018’,op. cit., p. 3741; Australia, House of Representatives, ‘Treasury
Laws Amendment (Tax Integrity and Other Measures) Bill 2018’, Votes and
proceedings, op. cit.
[55]. M Keogh, ‘Second
reading speech: Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018’, op. cit., p. 3748.
[56]. Hall
& Wilcox, ‘Failing
to see the forest from the trees – changes to small business CGT Concessions’,
Hall and Wilcox website, 1 May 2018, the article was published by Thomson
Reuters in Weekly Tax Bulletin.
[57]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 3.
[58]. Proposed
paragraph 152-10(2)(b) of the ITAA97.
[59]. Proposed
paragraph 152-10(2)(c) of the ITAA97.
[60]. Proposed
sections 152-10(2)(a), 152-10(2A), 152-10(2B) of the ITAA97.
[61]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 20.
[62]. ITAA97,
section 152-10(1)(a)(i).
[63]. Ibid.,
sections 152-20(2), (3), (4).
[64]. Ibid.,
sections 152-15, 152-20(3)-(4).
[65]. Ibid.,
section 328-125.
[66]. Ibid.
[67]. Ibid.,
section 328-125(1)-(2).
[68]. Ibid.,
section 328-125(6).
[69]. Ibid.,
section 328-125(1), (3).
[70]. Ibid.,
section 328-130.
[71]. J
Ayoub, Treasury
Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017,
Bills digest, 71, 2017–18, Parliamentary Library, Canberra, 6 February 2018, p.
6.
[72]. Ibid.
[73]. ATO,
TR
2017/D7 Income tax: when does a company carry on a business within the meaning
of section 23AA of the Income Tax Rates Act 1986?, ATO website, Draft
taxation ruling, 2017.
[74]. CAANZ,
Submission,
op. cit., p. 5.
[75]. ITAA97,
sections 152-10(1)(c)(i), 328-110(1)(a).
[76]. Ibid.,
section 152-10(1)(d).
[77]. Ibid.,
section 152-35.
[78]. Ibid.,
section 152-40(1)(a), (b).
[79]. Ibid.,
section 152-40(3)-(3B).
[80]. ATO,
‘When
shares and trust interests are active assets’, ATO website, last updated 17
July 2017.
[81]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 17.
[82]. Ibid.
[83]. Proposed
paragraph 52-10(2A)(a) of the ITAA97.
[84]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 18.
[85]. Proposed
paragraph 152-10(2A)(c) and proposed paragraph 152-10(2B)(a) of the ITAA97.
[86]. Proposed
paragraph 152-10(2A)(c) and proposed paragraph 152-10(2B)(b) of the ITAA97.
[87]. ITAA97,
section 152-60. Note that a spouse of a significant individual in the company
or trust will be significant individual if the spouse has a small business
participation interest in the company or trust at the time that is greater than
zero.
[88]. Ibid.,
section 152-55.
[89]. Ibid.,
section 152-65.
[90]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 18.
[91]. ITAA97,
section 152-65.
[92]. Ibid.,
sections 152-70, 152-75.
[93]. Ibid.,
item 1 of the table in section 152-70(1).
[94]. Ibid.,
items 2-3 of the table in section 152-70(1).
[95]. Ibid.,
section 152-75.
[96]. Proposed
paragraph 152-10(2A)(c) and proposed paragraph 152-10(2B)(b) of the ITAA97.
[97]. ITAA97,
subsection 152-10(1AA) imposes the $2 million aggregated turnover limit by
modifying section 328-110 of the ITAA97.
[98]. Ibid.,
section 328-115.
[99]. Ibid.,
section 328-120.
[100]. Ibid.,
sections 6-5 and 6-10.
[101]. Proposed
subparagraph 152-10(2B)(b)(iii) of the ITAA97.
[102]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 17.
[103]. Proposed
subparagraph 152-10(2B)(b)(iv) of the ITAA97.
[104]. Under
subsection 328-125(6) of the ITAA97, the Commissioner may make a determination
that an entity does not control another entity, if broadly, the control
percentage is at least 40%, but less than 50% and the Commissioner thinks that
the entity is controlled by another entity.
[105]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, pp. 19–20.
[106]. Ibid.,
p. 19.
[107]. The
Tax Institute, Submission
op. cit., p. 2.
[108]. BDO,
Submission
op. cit., p. 4.
[109]. IPA,
Submission
op. cit., pp. 3–4; CAANZ, Submission,
op. cit., p. 5.
[110]. Proposed
subparagraph 152-10(2)(c)(i) of the ITAA97.
[111]. Proposed
subparagraph 152-10(2)(c)(ii) of the ITAA97.
[112]. Proposed
subparagraph 152-10(2)(c)(iii) of the ITAA97.
[113]. Proposed
subparagraph 152-10(2)(c)(iv) of the ITAA97.
[114]. Proposed
subparagraph 152-10(2)(c)(v) of the ITAA97.
[115]. Proposed
subparagraph 152-10(2)(c)(iv) of the ITAA97.
[116]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 22.
[117]. CAANZ,
Submission,
op. cit., p. 5.
[118]. BDO,
Submission
op. cit., p. 4.
[119]. Proposed
subparagraph 152-10(2)(c)(i) of the ITAA97.
[120]. ITAA97,
sections 328-110(1)(a) and 152-10(1AA).
[121]. BDO,
Submission
op. cit., p. 2. Although pertaining to the now amended CGT Exposure Draft, the
principle remains the same if Zed Unit Trust’s fails the modified active assets
test because its assets exceeds $6 million.
[122]. Item
2 of the Bill and item 3 of Schedule 2 to the Bill.
[123]. Treasury,
‘Improving the integrity
of the small business CGT concessions’, op. cit.; S Morrison, Improving
the integrity of the small business CGT concessions: exposure draft released,
op. cit.
[124]. CAANZ,
Submission,
op. cit., p. 3; BDO, Submission
op. cit., p. 3; The Tax Institute, Submission
op. cit., p. 1.
[125]. CAANZ,
Submission,
op. cit., p. 3.
[126]. BDO,
Submission
op. cit., p. 3.
[127]. CAANZ,
Submission,
op. cit., pp. 5–6.
[128]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 23.
[129]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny digest,
5, op. cit., pp. 71.
[130]. Item
2 of the Bill and item 3 of Schedule 2 of the Bill.
[131]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny digest,
5, op. cit., pp. 71.
[132]. Ibid.,
pp. 70–1.
[133]. Senate
Standing Committee for the Scrutiny of Bills, ‘Ministerial
Responses’, Australian Parliament House website.
[134]. The
Senate, Procedural orders of the Senate of continuing effect: resolutions expressing opinions of the Senate: no. 44 taxation Bills –
retrospectivity, Australian Parliament
House website.
[135]. Treasury,
‘Improving the
integrity of the small business CGT concessions’, op. cit.; S Morrison, Improving
the integrity of the small business CGT concessions: exposure draft released,
op. cit.
[136]. M
Blake, P Vanham and D Hughes, ‘Five
things you need to know about FinTech’, World Economic Forum, 20
April 2016.
[137]. Australian
Government, Backing
Australian FinTech, 18 March 2016. ISA is an independent board,
responsible for providing strategic whole-of-government advice on all science,
research and innovation matters. Under subsections 118-425(14) and (14B) and
118-427(15) and (15A) of the ITAA97 and Division 362 in Schedule 1 to
the Taxation Administration Act 1953, ISA has the power to issue binding
public and private rulings.
[138]. Australian
Government, Budget
measures: budget paper no. 2: 2016–17, op. cit., p. 22.
[139]. Department
of Industry, Innovation and Science, Venture
Capital Limited Partnerships, Business investment fact sheet,
July 2016, p. 1. The program is also open to domestic investors. See also
P Hawkins, Treasury
Laws Amendment (2018 Measures No. 2) Bill 2018, Bills digest, 97,
2017–18, Parliamentary Library, Canberra, 5 April 2018.
[140]. 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.
[141]. Australian
Taxation Office (ATO), ‘Venture
capital and early stage venture capital limited partnerships’, ATO website,
last modified 1 December 2016.
[142]. ITAA97,
subsection 118–425(13).
[143]. ITAA97,
section 118–425.
[144]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 27.
[145]. M
Sukkar, ‘Second
reading speech: Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018’, House of Representatives, Debates, 10 May 2018,
p. 3752.
[146]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny digest,
5, op. cit., p. 72.
[147]. M
Keogh, ‘Second
reading speech: Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018’, op. cit., p. 3748.
[148]. M
Thistlethwaite, ‘Second
reading speech: Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018’, op. cit., p. 3742.
[149]. Ibid.
[150]. E
Husic, ‘Second
reading speech: Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018’, House of Representatives, Debates, 10 May
2018, p. 3750.
[151]. FinTech
Australia, Priorities
for reform of the Australian financial services sector, op. cit.
[152]. Ibid.,
p. 24.
[153]. FinTech
Australia, Submission
to Treasury, Encouraging venture capital investment in FinTech, 3 June
2016.
[154]. FinTech
Australia, Submission to
Treasury, FinTech venture capital and early stage investor tax
concession amendments, 14 November 2017.
[155]. Australian
Government, Budget
measures: budget paper no. 2: 2016–17, op. cit., p. 22.
[156]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 5.
[157]. Proposed
paragraph 118-425(13A)(a) of the ITAA97.
[158]. Proposed
paragraph 118-425(13A)(b) of the ITAA97.
[159]. Proposed
paragraph 118-425(13A)(c) of the ITAA97.
[160]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 29.
[161]. Proposed
subsection 118-425(13B) of the ITAA97; Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 30.
[162]. Proposed
subsections 118-427(14A) and (14B) of the ITAA97.
[163]. Proposed
subsection 118-432(1) of the ITAA97.
[164]. Proposed
subsection 118-432(2) of the ITAA97.
[165]. Proposed
subsection 118-432(3) of the ITAA97. ISA is expected to balance the
need for the status of particular activities to be reconsidered periodically
with the need of stakeholders for certainty.
[166]. Proposed
subsection 118-432(4) of the ITAA97.
[167]. Proposed
subsection 118-432(5) of the ITAA97.
[168]. Proposed
subsection 118-432(6) of the ITAA97.
[169]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 30.
[170]. ibid.,
p. 30.
[171]. Ibid.,
p. 32.
[172]. See
for example: Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, pp. 29, 31–2.
[173]. Proposed
paragraph 29-1(m) of the VCA.
[174]. Proposed
notes at the end of subsections 362-5(1) and 362-25(1) of the Taxation
Administration Act 1953.
[175]. Defence
Abuse Response Taskforce (Taskforce), Defence
Abuse Response Taskforce: final report, Australian Government, March
2016, p. 11.
[176]. Defence
Abuse Response Taskforce , ‘Reparation
Scheme’, Taskforce website, last updated 15 April 2016.
[177]. Ibid.
[178]. ITAA97,
item 1.7 of the table in section 51-5.
[179]. Taskforce,
Defence
Abuse Response Taskforce: final report, op. cit., p. 15.
[180]. Ibid.,
p. 8.
[181]. Taskforce,
Defence
Abuse Response Taskforce: final report, op. cit., p. 5.
[182]. M
Payne, (Minister for Defence), Reparation
for survivors of Defence abuse, media release, n.d., received by
Parliamentary Library on 15 December 2017.
[183]. Ombudsman Act 1976,
section 19B.
[184]. Ombudsman Regulations
2017, regulations 14, 14B.
[185]. Commonwealth
Ombudsman, ‘Reporting
abuse in Defence’, Commonwealth Ombudsman website.
[186]. Australian
Government, Budget
measures: budget paper no. 2: 2017–18, op. cit., p. 79.
[187]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 5.
[188]. M
Keogh, ‘Second
reading speech: Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018’, op. cit., p. 3748.
[189]. Ibid.,
p. 5.
[190]. Australian
Government, Budget
measures: budget paper no. 2: 2017–18, op. cit., p. 79.
[191]. ITAA97,
section 6-20.
[192]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, pp. 35–6.
[193]. M
Sukkar, ‘Second
reading speech: Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018’, op. cit., p. 3752.
[194]. J
Falinski, ‘Second
reading speech: Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018’, House of Representatives, Debates, 10 May 2018,
p. 3745.
[195]. Explanatory
Memorandum, Treasury Laws Amendment (Tax Integrity and Other Measures) Bill
2018, p. 38.
[196]. Item
2 of the Bill and item 5 of Schedule 4 to the Bill.
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