Introductory Info
Date introduced: 12 February 2020
House: House of Representatives
Portfolio: Treasury
Commencement: The first 1 January, 1 April, 1 July or 1 October after Royal Assent.
Purpose of
the Bill
The purpose of the Treasury Laws Amendment (2020 Measures
No. 1) Bill 2020 (the Bill) is to amend the Income Tax
Assessment Act 1997 (the ITAA 1997), the Taxation
Administration Act 1953 (the TAA 1953) and related legislation
to:
- broaden
the definition of a significant global entity (SGE) in Australia’s
tax laws by capturing groups of entities headed by an entity other than a
listed company in certain circumstances and thereby expand the type and number
of entities that are potentially subject to Australia’s multinational anti-avoidance
law (MAAL),[1]
diverted profits tax (DPT)[2]
and SGE penalty provisions[3]
- change
the rules pertaining to which entities must undertake country-by-country
reporting under Australia’s tax law to ensure these rules are aligned with
Australia’s international commitments[4]
and
- remove
impediments to mergers between complying superannuation funds by permitting the
roll-over of both revenue gains or losses and capital gains or losses.[5]
The Bill will ensure that the broadened definition of a
SGE continues to underpin the application of the MAAL, DPT and SGE penalty
provisions whilst the new definition of a Country-by-Country reporting
entity (rather than the new definition of a SGE) will underpin
Australia’s country-by-country reporting regime.[6]
Structure of
the Bill
The Bill has two Schedules. Schedule 1 deals with SGEs and
Country-by-Country reporting. Schedule 2 deals with merging superannuation
funds.
Structure of this Bills Digest
As the matters covered by each of the Schedules are
independent of each other, the relevant background and analysis of the
provisions are set out under the relevant Schedule heading.
Committee
consideration
At the time of writing the Bill had not been referred to
any Committee for inquiry and report.
Senate
Standing Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills
noted the retrospective operation of the amendments in Schedule 1 of the Bill
dealing with SGEs and left to ‘the Senate as a whole the appropriateness of
applying the amendments in Schedule 1 to the bill on a retrospective basis’.[7]
Policy
position of non-government parties/independents
The Australian Labor Party (Labor) has indicated it
supports the Bill.[8]
At the time of writing none of the non-government parties or independents
appear to have expressed a view on the precise measures contained in the Bill.
Position of
major interest groups
At the time of writing, the position of major interest
groups in relation to the specific measures proposed by the Bill was not clear.
The measures in Schedule 1 of the Bill were the subject of
a two-stage consultation process carried out by Treasury. The first
consultation ran from July to August 2018.[9]
The subsequent consultation ran from November to December 2019.[10]
Some stakeholders who made submissions in relation to the latter consultation
raised concerns about the treatment of investment entities under the proposed
amendments. Those concerns are noted below. In brief however, the concerns
predominately relate to:
- the
appropriateness of extending the definition of a SGE (and therefore the MAAL,
DPT and SGE penalty provisions) to investment entities and
- the
potential for the proposed definitions of a Country-by-Country reporting parent
or group to, in some circumstances, capture certain investment entities.[11]
In relation to Country-by-Country reporting, particular
concern was expressed that the amendments would impose those obligations on a
broader range of investment entities than under the Organisation for Economic
Co-operation and Development’s (OECD) revised recommendations in this regard.[12]
These concerns are examined later in the digest.
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.[13]
The Government notes that neither schedule engages any of the applicable rights
or freedoms.[14]
Parliamentary
Joint Committee on Human Rights
The Parliamentary Joint Committee on Human Rights
considers that the Bill does not raise human rights concerns.[15]
Schedule
1—significant global entities
Schedule 1 of the Bill and its Explanatory Memorandum
contain a number of defined terms and acronyms. To aid readers, some of those
terms have been further contracted when used in this Bills Digest, as set out
in Table 1 below.
Table 1: Term
used in the Bill and/or its Explanatory Memorandum
Term used in the Bill and/or its Explanatory
Memorandum
|
Term used in this Digest
|
Diverted Profits Tax
|
DPT
|
Global Parent Entity
|
GPE
|
Group of Twenty
|
G20
|
Multinational Anti-Avoidance Law
|
MAAL
|
Multi-National Enterprises
|
MNEs
|
Notional Listed Company Group
|
NLGC
|
Significant Global Entity
|
SGE
|
Source: Explanatory
Memorandum, Treasury Laws Amendment (2020 Measures No. 1) Bill 2020.
Base
Erosion, profit shift and the OECD BEPS Action Plan
The OECD defines Base Erosion and Profit Shifting (BEPS) as
‘tax planning strategies that exploit gaps and mismatches in tax rules to
artificially shift profits to low or no-tax locations where there is little or
no economic activity, resulting in little or no overall corporate tax being
paid’. [16] This is
sometimes referred to as transfer pricing.[17]
The OECD and the Group of Twenty (G20) have been working
since 2013 to develop domestic and international instruments that aim to
address BEPS and other forms of corporate tax avoidance, in particular by
multi-national enterprises (MNEs).[18]
At the request of the G20, the OECD and G20 published the Action Plan on
Base Erosion and Profit Shifting (BEPS Action Plan) in July 2013.[19]
The BEPS Action Plan concluded that there was a serious risk of erosion of
corporate tax bases internationally, noting that ‘current international tax
standards may not have kept pace with changes in global business practices’ and
‘the tax practices of some multinational companies’.[20]
The BEPS Action Plan includes 15 ‘action items’ and sets
deadlines to develop guidance on each, which the former Labor Government agreed
to in 2013.[21]
Subsequently, at the G20 Summit in Brisbane in November 2014, the Coalition
Government committed Australia, as part of the G20, to finalising the G20 and
OECD’s work on BEPS, designed to ‘modernise international tax rules’ and
address multinational corporate tax evasion.[22]
The OECD subsequently developed a series of final reports for each action item
(Action Items).
Action Item 13 deals with, amongst other things, Country-by-Country
reporting , the core of which includes a requirement that:
MNEs provide all relevant governments with needed information
on their global allocation of the income, economic activity and taxes paid
among countries according to a common template.[23]
[emphasis added]
The purpose of Country-by-Country reporting is to require certain
taxpayers (mainly large MNEs and related entities) to provide tax authorities
with useful and consistent information regarding transfer pricing positions and
risks. In turn, that information enables tax authorities to determine where
audit resources can most effectively be deployed and, in the event audits are
called for, provide information to commence and target audit enquiries. In
simple terms, the information gathered by Country-by-Country reporting:
should make it easier for tax administrations to identify
whether companies have engaged in transfer pricing and other practices that
have the effect of artificially shifting substantial amounts of income into
tax-advantaged environments.[24]
The primary goal of the Action Item 13 recommendations is
to render ‘BEPS planning strategies that rely on outdated rules or on poorly
co-ordinated domestic measures ... ineffective’[25]
and thereby align profits (and therefore tax revenues) with value creation and
substance.
Significant global entities and multinational tax avoidance
laws
Consistent with Action Item 13, the OECD developed new
standards for transfer pricing documentation and Country-by-Country reporting. Australia’s
Country-by-Country reporting rules implement in domestic law the
recommendations in Action Item 13 of the BEPS Action Plan.[26]
As noted by the OECD, Australia’s legislation uses different terminology and
definitions to those in the OECD model legislation such as the concept of SGE and
of a ‘Global Parent Entity’ (GPE).[27]
The definition of a SGE in the ITAA 1997 used in
Australia’s Country-by-Country reporting regime not only deals with Country-by-Country
reporting, it also links to and underpins aspects of Australia’s MAAL and DPT
regimes. Importantly, Australia’s definition of a SGE means that the Country-by-Country
reporting rules in Subdivision 815-E of the ITAA 1997 may not result in
the same outcomes as under the OECD’s model legislation in Action Item 13.[28]
This has flow-on repercussions for Australia’s MAAL and DPT regimes.[29]
Action Item
13: documentation to increase transparency
The OECD noted that a lack of quality data on corporate
taxation made it difficult for tax authorities to carry out enforcement action,
including transfer pricing assessments on transactions between linked companies
and the carrying out of audits.[30]
Action Item 13 of the BEPS Action Plan required the development of:
rules regarding transfer pricing documentation to
enhance transparency for tax administration, taking into consideration the
compliance costs for business. The rules to be developed will include a
requirement that MNEs provide all relevant governments with needed information
on their global allocation of the income, economic activity and taxes paid
among countries according to a common template.[31] [emphasis added]
Accordingly, Action Item 13 provides revised standards for
transfer pricing documentation and a template for Country-by-Country reporting of
income, taxes paid and certain measures of economic activity.[32]
It also includes model legislation pertaining to Country-by-Country reporting.[33]
The goal of the Action Item 13 recommendations is to require MNEs to provide
certain information in a standardised format to tax authorities not only about
their domestic tax affairs, but also those of related entities operating in
other jurisdictions—that is, Country-by-Country reporting information.
To achieve that goal, Action Item 13 provides that MNEs
will have to provide the following documents annually to tax authorities:
- a
‘master file’: that provides high-level information regarding their
global business operations and transfer pricing policies to all relevant tax
administrations
- a
‘local file’: containing detailed transactional transfer pricing documentation
specific to each country, identifying material related party transactions, the
amounts involved in those transactions and the company’s analysis of the
transfer pricing determinations they have made with regard to those
transactions and
- a
‘Country-by-Country Report’: which provides, annually and for each tax
jurisdiction in which they do business:
– the
amount of revenue, profit before income tax and income tax paid and accrued
– the
number of employees, stated capital, retained earnings and tangible assets and
– the
identity of each entity within the group doing business in a particular tax
jurisdiction and an indication of the business activities each entity engages
in.[34]
In relation to the Country-by-Country reporting, the OECD
model legislation and other OECD guidance material sets out which entities are
required to provide those reports. The OECD notes that taken together, these
three documents (master file, local file and Country-by-Country report) will
require taxpayers to:
articulate consistent transfer pricing positions and will
provide tax administrations with useful information to assess transfer pricing
risks, make determinations about where audit resources can most effectively be
deployed, and, in the event audits are called for, provide information to
commence and target audit enquiries.[35]
The OECD notes that such Country-by-Country information
will:
make it easier for tax administrations to identify whether
companies have engaged in transfer pricing and other practices that have the
effect of artificially shifting substantial amounts of income into
tax-advantaged environments.[36]
A key issue dealt with by Action Item 13 and related work
by the OECD—and by the Bill—is to identify what types of entities are captured
by the above requirements.
Action Item 13: application to MNE groups
In Action Item 13, the OECD recommended, at a broad level,
that all ‘Multi-National Enterprise groups’ (MNE groups) with annual
consolidated revenue of more than EUR 750 million (or equivalent local
currency) be required to file a Country-by-Country reporting.[37]
This included a requirement that ‘ultimate parent entities’ (UPEs) of MNE
groups ‘file the Country-by-Country Report in their jurisdiction of residence’.[38]
More specifically, the OECD recommended:
- no
special industry exemptions should be provided (other than MNE groups with
income derived from international transportation or transportation in inland
waterways covered by treaty provisions in certain circumstances)
- no
general exemption for investment funds should be provided and
- no
exemption for non-corporate entities or non-public corporate entities should be
provided.[39]
The OECD model legislation builds on the above
recommendations. Under the OECD model legislation, the Country-by-Country
reporting obligations are to be imposed on not only the UPE in the jurisdiction
of its tax residence, but in some circumstances also on its ‘constituent
entities’ (CEs), defined as:
- any
separate business unit of an MNE group that is included in the Consolidated
Financial Statements of the MNE group for financial reporting purposes
- any
separate business unit of an MNE group that would be included in the
Consolidated Financial Statements of the MNE group for financial reporting
purposes if equity interests in it were traded on a public securities exchange
- any
separate business units excluded from the MNE group’s Consolidated Financial
Statements solely on size or materiality grounds[40]
and
- any
permanent establishment (PE) of any separate business unit of the MNE group
captured by the above provided the business unit prepares a separate financial
statement for such PE for:
– financial
reporting, regulatory, tax reporting, or
– internal
management control purposes.[41]
In essence, under the OECD model legislation, a CE may be
required to file a Country-by-Country report with the tax authority of the
jurisdiction it is a tax resident of where the UPE of that CE has not filed a Country-by-Country
report in the jurisdiction of its tax residence. In addition, the OECD has
clarified that a jurisdiction may require local filing of a Country-by-Country
report by a CE if:
- the
UPE of the MNE Group is not obligated to file a Country-by-Country report in
its jurisdiction of tax residence or
- where
the relevant jurisdiction (for example, Australia) does not have an
International Agreement in effect to exchange information with the jurisdiction
of tax residence of the UPE.[42]
Australia’s current regime
For the purposes of the ITAA 1997, the term entity
is very broad. It means any of the following:
- an
individual
- a
body corporate
- a
body politic
- a
partnership
- any
other unincorporated association or body of persons
- a
trust
- a
superannuation fund
- an
approved deposit fund.[43]
Australia’s current Country-by-Country reporting regime is
built around three key concepts: SGEs, GPEs and the annual global income of the
entities involved. To give context to the proposed amendments, these are
briefly outlined below.
Currently section 960-555 of the ITAA 1997 defines
a SGE as an ‘entity’:
- that
is a global parent entity that has annual global income of $1 billion or more
in that income year or
- that
is a member of a group of entities that:
– are
consolidated for accounting purposes as a single group, and
– one
of the other members of the group is a GPE whose annual global income is $1
billion or more or
- in
relation to which the Commissioner has made a determination that a GPE is a
SGE.
A GPE is defined in section 960-560 of the ITAA 1997
as an entity that is not controlled by another entity according to accounting
principles, or if these principles do not apply, commercially accepted
principles relating to accounting (CAPRAs).
When applying the above definitions of a SGE the ‘annual
global income’ of an entity in question is defined as:
- if
it is a member of a group of entities consolidated for accounting purposes: the
total annual income of the GPE of that group as shown in its latest global
financial statements for that period or
- otherwise:
the total annual income of that entity shown in its latest global financial
statements for that period.[44]
The definition of a SGE links to a number of aspects of
Australia’s tax laws. For example, a SGE may, if it also satisfies other
requirements be subject to Australia’s:
- Country-by-Country
reporting rules (contained in Subdivision 815-E of the ITAA 1997)
- the
MAAL
- the
DPT and
- may
also face increased administrative penalties under the taxation law and face
additional reporting requirements.[45]
Differences between Australia’s current model and OECD
recommendations
Other than differences in terminology, there are
differences between Australia’s current definition of SGE and GPE and the OECD
equivalents. As a consequence, differences also exist between the application
of Australia’s Country-by-Country reporting obligations and the OECD model
recommendations.
The first is that the Australian model only treats an
entity as being part of a group of entities if the head entity of the global
group actually prepares consolidated accounts covering that entity under
the applicable accounting principles. In contrast, the OECD model legislation
captures:
- entities
actually included in the Consolidated Financial Statements of the MNE Group for
financial reporting purposes and
- entities
that would be so included if equity interests in the business unit were traded
on a public securities exchange.[46]
That is, the OECD model also requires reporting by
entities that would have had to prepare consolidated accounts if
either it or the parent entity in the MNE Group had been a listed company. The
OECD model also requires Country-by-Country reporting by entities that are not
included in consolidated accounts due to materiality rules—something which is not
reflected in the existing Australian requirements.[47]
Financial implications
In relation to the reforms to the definition of a SGE in
Schedule 1 to the Bill, the Explanatory Memorandum notes that as ‘this is a
revenue protection measure’ the ‘revenue impact is estimated to be nil’.[48]
In addition, the Explanatory Memorandum indicates that the compliance cost for
business will be ‘minimal’.[49]
Key issues
and provisions: significant global entities
Summary of
proposed amendments
Schedule 1 of the Bill amends the definition of SGE and
alters the existing Country-by-Country reporting regime contained in the ITAA
1997 as follows:
- the
amended definition of a SGE will capture a broader range of entities and will apply
despite exceptions to accounting rules regarding when a group of entities must
consolidate for accounting purposes (including materiality rules)[50]
and
- the
amended Country-by-Country reporting rules will apply to CbC reporting
entities (a sub-set of entities captured by the expanded definition of
a SGE).[51]
These changes are examined below in detail.
Expanded
definition of significant global entity
Item 7 of Schedule 1 of the Bill inserts proposed
subsection 960-555(2A) into the ITAA 1997. The effect of this
amendment is that the term SGE will capture an entity which is:
- a
global parent entity with an annual global income of at least $1 billion, or which
is the subject of a determination made by the Commissioner under subsection
960-555(3) of the ITAA 1997
- a
member of a group of entities consolidated for accounting purposes, where one
of the other members of the group is a global parent entity with an annual
global income of at least $1 billion, or which is the subject of a
determination made by the Commissioner under subsection 960-555(3) of the ITAA
1997, or
- a
member of a notional listed company group (NLCG) that includes a
GPE that either has annual global income of at least $1 billion
or is the subject of a determination made by the Commissioner referred to
above.
What is a
notional listed company group?
The expanded definition of a SGE largely rests upon the
new concept of a NLCG defined in proposed subsection 960-575(1) as a:
- group
of entities that would be required to consolidate for accounting
purposes as a single group if
- an
entity (the test entity—usually the GPE[52])
were a listed company (that is, if it had shares listed on a public securities
exchange).[53]
Proposed subsection 960-555(2A) of the ITAA 1997
then provides that where the above is satisfied and one of the other members
of the group is a GPE with annual global income of $1 billion
or more (or the Commissioner makes a determination) the entity is a SGE.[54]
For the purposes of determining whether a group of
entities would be required to consolidate for accounting purposes, proposed
subsection 960-575(3) states that the relevant accounting principles are
applied or, if accounting principles do not apply, the commercially
accepted principles related to accounting that apply to that entity are
applied.
Proposed subsection 960-575(4) of the ITAA
1997 provides that when applying the relevant accounting principles or CAPRAs
to an entity, any exceptions that would otherwise permit an entity not to
consolidate with other entities in the group are disregarded. By way of
example, the Explanatory Memorandum states:
an investment entity that controls other entities but
is not required to consolidate with those entities under relevant accounting
principles would still be part of a notional listed company group with those
entities.[55]
[emphasis added]
What
accounting rules apply?
As noted above, for the purpose of determining whether a
group of entities would be required to consolidate for accounting
purposes and the annual global income of the entity either the
relevant:
- accounting
principles are applied or
- if
accounting principles do not apply, the commercially accepted principles
related to accounting that apply to that entity are applied.[56]
In effect, accounting principles are defined
in the ITAA 1997 as being the Australian Accounting Standards (as
defined by the Corporations
Act 2001), or authoritative pronouncements of the Australian Accounting
Standards Board (AASB).[57]
In contrast, what constitutes commercially accepted
principles related to accounting is not defined in the Bill or the ITAA
1997. However, guidance as to its meaning can be found in existing
paragraph 432(1)(c) of the Income Tax
Assessment Act 1936 (ITAA 1936) which provides that for
the purposes of applying the active income test to a controlled foreign
company, that test can only be passed where among other things:
(c) the company has kept accounts for the statutory
accounting period and:
(i) the accounts are prepared in accordance with
commercially accepted accounting principles; and
(ii) the accounts give a true and fair view of the
financial position of the company.
Paragraph 960-570(a)(ii) of the ITAA 1997 applies a
similar test in relation to the meaning of global financial statements.
It is not clear from the drafting of either provision whether the accounting
standards must give a fair and true view of the financial position of the
entity in order to be considered commercially accepted principles related
to accounting, or whether this is an additional requirement imposed by
the provisions. In that regard the Explanatory Memorandum to the Tax
Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015—which
introduced many of the provisions being amended by the Bill—notes:
The concept of ‘commercially accepted’ principles is based on
paragraph 432(1)(c) of the ITAA 1936. Commercially accepted auditing and
accounting principles would usually be the standards in use in the country in
which an entity is resident or carries on its principal business activities.
These standards are typically developed and enforced by the relevant accounting
and auditing authorities in each country. In addition, the standards must
ensure that the statements provide a true and fair view of the entity’s
financial position.[58]
[emphasis added]
This extract and some expert commentary appear to suggest
that the ‘fair and true view’ requirement is a necessary element for accounting
standards to be considered commercially accepted principles related to
accounting.[59]
However, other commentary suggests it is not.[60]
OECD guidance materials do not provide clarity as to which is the case.[61]
Determining
the annual global income of entities
Existing section 960-565 of the ITAA 1997 defines
the annual global income of a GPE:
- if
the entity is a member of a group of entities that are consolidated for
accounting purposes, then the annual global income of the GPE is the total
annual income of all the members of the group or
- if
the entity is not a member of a group of entities that are consolidated
for accounting purposes, then the annual global income of the GPE is the total
annual income of the GPE itself.
Importantly however, in both of the above cases the annual
global income will be what is shown in the relevant global financial
statements for the GPE for the relevant period. This led to a loophole,
namely:
if an entity did not have global financial statements, it
could not have annual global income and would not have been a significant
global entity unless it was the subject of a determination by the Commissioner
under subsection 960-555(3).[62]
Accordingly where an entity did not have global financial
statements and was considered to have no annual global income it could not be a
SGE. This potentially put the entity outside many of Australia’s multi-national
taxation avoidance regimes which link to, and operate off, the definition of a
SGE.
Expanding
methods for determining the annual global income of entities
The Bill seeks to close that loophole by making a number
of amendments.
First, item 10 in Schedule 1 of the Bill inserts proposed
paragraph 960-565(1)(aa) into the ITAA 1997 to provide that the annual
global income of an entity (not just a GPE) that is a member of a NLCG
is the total income of all members of the group, worked out on the assumption
that all members of the group were consolidated for accounting purposes
(even if they are not actually consolidated).
As previously stated, a NLCG is defined as a group of entities
that would be required to consolidate for accounting purposes as a
single group if the test entity (usually the GPE) were a
listed company, and exceptions that permit an entity not to consolidate with
other entities in the group are disregarded. This means that a NLCG will
sometimes be larger than a group of entities that are actually consolidated
for accounting purposes.
Second, item 11 amends paragraph 960-565(a) of the ITAA
1997 so that if an entity is a member of a group of entities that are
consolidated for accounting purposes and is also a member of a NLCG
(which will be the larger group) it is the income of the NLCG that is used to
determine the annual global income of the entity.[63]
This means that entities that are part of a NLCG are treated
in the same way as entities that are members of a group that are required
to be consolidated for accounting purposes when determining the annual global
income of the group.[64]
It also effectively removes the ability of an entity to choose to apply accounting
rules or standards that permit it:
- not
to consolidate with other related entities for accounting purposes or
- to
only consolidate with some, but not all, related entities for accounting
purposes
as a way of avoiding various reporting and other
obligations linked to the definition of a SGE.
What are
global financial statements?
Existing section 960-570 of the ITAA 1997 defines global
financial statements for a GPE as the financial statements that have
been prepared and audited in relation to that entity, or that entity and other
entities, in accordance with:
- accounting
principles and auditing principles or
- if
such principles do not apply—commercially accepted principles, relating to
accounting and auditing
that ensure the statements give a true and fair view of
the financial position and performance of that entity (or that entity and the
other entities on a consolidated basis). Item 13 of Schedule 1 amends
section 960-570 to replace the existing reference to a GPE with a reference to
‘an entity’. This expands the application of the definition of global financial
statements.
Expanding meaning
of global financial statements capture more annual global income
As noted above:
- a
GPE that does not have global financial statements does not have any annual
global income
- it
is, therefore, not a SGE and
- consequently,
sits outside the ambit of a number of key anti-avoidance laws (such as the MAAL).
The Bill seeks to close this loophole by amending both the
meaning of global financial statements and its interaction with determining the
annual global income of an entity.
Item 12 of Schedule 1 of the Bill inserts proposed
subsections 960-565(2) and (3) into the ITAA 1997.
Proposed subsection 960-565(2) provides that where global
financial statements have not been prepared for the entity (not just a GPE), or
they have been prepared but do not show the total annual income captured by
section 960-565 (as amended) then proposed subsection 960-565(3) applies.
Proposed subsection 960-565(3) provides that in the
absence of global financial statements that show the total annual income of the
entities captured by section 960-565 (as amended) then the annual global income
of the entity is the amount that would have been shown if such global
financial statements had been prepared. In explaining the operation of these
changes, the Explanatory Memorandum notes:
This is an objective test based on what would be expected to
be the amount of such income if adequate statements were prepared. This
amendment ensures that the absence of adequate global financial statements does
not prevent the total annual income of all of the members of the group from
being taken into account in determining if members are significant global
entities. This is particularly important for notional listed company groups, as
there is no requirement for the preparation of consolidated accounts for the
entirety of such groups. It also avoids any need for such groups to prepare
consolidated accounts or seek a determination by the Commissioner to provide
clarity about its status as a significant global entity.[65]
The changed meaning of what constitute global
financial statements and how that interacts with the meaning of annual
global income means that where an entity (not just a GPE) does not have
global financial statements at all, or only has financial statements that do
not accurately represent the annual global income of the entity and:
- the
group of entities it is consolidated with or
- the
NLCG it is a member of
then the global annual income of the entity is deemed to
be the amount that would be the annual global income if such global financial
statements were prepared for the relevant period.[66]
Key issue: capturing
investment entities
As noted earlier in the digest, the Bill will apply the
broadened definition of a SGE to underpin the application of the MAAL, DPT and
SGE penalty provisions. During the exposure draft consultation conducted by
Treasury, a number of stakeholders expressed concern about the expanded
definition of an SGE capturing investment entities.[67]
What are
investment entities?
An ‘investment entity’ is defined in the relevant
Australian accounting standards as an entity that:
- obtains
funds from one or more investors for the purpose of providing those investor(s)
with investment management services
- commits
to its investor(s) that its business purpose is to invest funds solely for
returns from capital appreciation, investment income, or both and
- measures
and evaluates the performance of substantially all of its investments on a fair
value basis.[68]
Can an
investment entity be a significant global entity?
As noted earlier in the digest, the definitions of a SGE and
NLCG include entities excluded from consolidation under the accounting rules
(such as the investment entity exception to consolidation and the materiality
exception). As noted by Deloitte this means the new definition of a SGE:
will bring in a wider range of large business groups,
regardless of how, or if, they consolidate, including potentially, entities
owned by investment entities, a term that could include some private equity
vehicles.[69]
This reflects the intention that the expanded definition
of a SGE captures a broader range of groups including those headed by individuals,
partnerships, trusts, private companies and investment entities, and hence
subjects those groups to the MAAL, DPT and SGE penalty provisions.[70]
Some stakeholders expressed concern about the potential
application of the expanded definition of a SGE to investment entities. The
Financial Services Council argued:
The proposal will mean the Multinational Anti-Avoidance Law
(MAAL) and Diverted Profits Tax (DPT) will apply retrospectively to entities
newly classified as SGEs (although we understand penalties will not apply
retrospectively)... In some cases... investment entities brought into the SGE net
could be small to medium sized entities (SMEs). This would be imposing a tax
regime designed for large multinational businesses on SMEs, [a] result that
would not be consistent with the Government’s broader economic agenda.[71]
The Australian Investment Council also expressed similar
concerns, arguing that:
- expanding
the SGE definition would have detrimental outcomes for businesses that are
backed by Private Equity (PE) investments as it would discourage investment in
Australian companies by PE funds and other investment entities due to the
increased reporting and regulatory compliance burden that such entities and
underlying portfolio companies would have to bear
- the
proposed change to the SGE definition is likely to result in small-to-medium
sized Australian businesses, which operate solely within Australia, becoming
SGEs and, therefore, subject to a penalty regime designed for large
multi-national groups and
- bringing
in investment entities such as PE funds (including the fund manager entity and
all underlying portfolio companies) under the same anti-avoidance rules that
have been put in place for multinationals would see no material benefit to
government revenue or the Australian tax base. [72]
Key issues
and provisions: new country-by-country reporting regime
Currently Australia’s definition of a SGE is used for a
number of different areas of tax law, including the Country-by-Country
reporting regime. The Bill amends the Country-by-Country reporting rules
contained in Subdivision 815-E of the ITAA 1997 so that they will apply
to CbC reporting entities (a sub-set of entities captured by the
expanded definition of a SGE) rather than to SGEs generally.[73]
These changes are examined below in detail.
Summary of
proposed amendments
The Bill will apply the CbC reporting obligations to a
narrower set of entities—referred to as ‘country by country reporting entities’
(CbC reporting entities)—rather than all SGEs.[74]
In summary the Bill:
- defines
a CbC reporting entity, CbC reporting parent and CbC reporting group and
- imposes
CbC reporting obligations on CbC reporting entities including the provision of
information on other members of the CbC reporting group and
- imposes
an obligation to provide general purpose financial statements on CbC reporting
entities, rather than on SGEs.
The Government argues that the changes will ‘better align
with international standards’.[75]
Reporting obligations
of SGEs
Item 5 in Schedule 1 of the Bill inserts proposed
sections 815-370 to 815-380 into Subdivision 815-E of the ITAA
1997. That Subdivision requires SGEs to give the Commissioner certain
statements, including, but not limited to, statements relating to their global
operations and activities, and the pricing policies relevant to transfer
pricing.[76]
These are discussed under the heading ‘Country-by-country reporting
obligations’ below.
Meaning of
country-by-country reporting entity
Proposed section 815-370 defines a CbC reporting
entity as an entity that is:
- a
CbC reporting parent for the period or
- a
member of a CbC reporting group and another member of that group is a CbC
reporting parent.
As CbC reporting obligations are only imposed on CbC
reporting entities, the definitions of a CbC reporting parent and CbC reporting
group underpin the proposed CbC reporting regime. These are examined below.
Meaning of
country-by-country reporting parent
Proposed section 815-375 defines a CBC
reporting parent as an entity that:
- is
not an individual and
- if
it is a member of a CBC reporting group, it is not controlled by any other
entity in the same CBC reporting group and
- either
the:
- annual
global income of the CBC reporting group that it is a member of is $1 billion or
more, or
- if
it is not a member of a CBC reporting group, the annual global income of the
entity itself is $1 billion or more.[77]
Whether an entity is controlled by any other member
of the CBC reporting group is determined by either applying the relevant
accounting principles or if such principles do not apply, commercially
accepted principles related to accounting applicable to the entity.[78]
One common form of control is ownership of the entity.[79]
This is of relevance to investment entities, as explained below. For the
purposes of determining the annual global income of an entity, proposed
subsection 815-375(2) provides that proposed paragraph 960-565(1)(aa)
which deals with the meaning of annual global income is read as referring to a
CBCR group, instead of a NLCG.
The effect of this definition is that a CBC reporting
parent is an entity (other than an individual) that would be a GPE entity and a
SGE if all the entities outside of the CBC reporting group of which it is a
part were disregarded. In this context, it does not matter if that entity is
controlled by another entity outside the CBC reporting group.[80]
This must be considered in light of the definition of a CBC reporting group,
which operates to exclude certain entities from the definition of a CBC
reporting parent. By way of example, the application of accounting principles
and commercially accepted principles related to accounting will
mean that that investment entities will not normally form part of a CBC
reporting group – and hence will not be a CBC reporting parent –even if they
own (and could therefore control) another entity that is part of the CBC
reporting group. According to the Explanatory Memorandum:
investment entities can form part of a group of significant
global entities but, subject to the relevant accounting principles, may not be
included in a country by country reporting group.... as an exception to
consolidation applies in the relevant accounting principles.[81]
(emphasis added)
The Explanatory Memorandum also notes that the definition
of a CBC reporting parent operates to allow an alternative controlling entity
to be identified in circumstances where an entity is controlled by another
entity that does not form part of the country by country reporting group.[82]
An example would be where an investment entity owns another entity which is a
member of a group of entities (other than the investment entity) which would be
required to consolidate for accounting purposes if the entity owned by the
investment entity was a listed company. In such circumstances it would be the
entity that is owned by the investment entity that may be a CBC reporting
parent, rather than the investment entity.[83]
Meaning of
country-by-country reporting group
Proposed section 815-380 of the ITAA 1997 defines
when a group of entities is a CBC reporting group. It operates to exclude
entities that would otherwise be considered a GPE or SGE, including individuals
and certain investment entities.
Proposed subsection 815-380 provides that a group of
entities is a CBC reporting group if none of the entities is an individual and:
- the
group is consolidated for accounting purposes as a single group or
- the
group is a NLCG.
As stated above, the new definition of a NLCG captures
entities that would be required to consolidate for accounting
purposes as a single group if the test entity (usually the
GPE) were a listed company, and exceptions that permit an entity not to
consolidate with other entities in the group are disregarded.[84]
This means that a NLCG may include ‘an investment entity that controls other
entities but is not required to consolidate with those entities’ under exceptions
in the relevant accounting principles (as those exceptions are disregarded).[85]
In this regard, proposed subsection 815-380(6)
provides that when determining whether entities form a CBC reporting group certain
exceptions to consolidation in accounting principles or commercially
accepted principles related to accounting are applied. As accounting
principles often contain exceptions to consolidation where any entity is owned
by an investment entity, this means that such investment entities:
can form part of a group of significant global entities but,
subject to the relevant accounting principles, may not be included in a country
by country reporting group... as an exception to consolidation applies in the
relevant accounting principles.[86]
[emphasis added]
Whilst this appears at odds with the original OECD
recommendation that investment entities not be exempted from Country-by-Country
reporting obligations,[87]
it is consistent with the current OECD position.[88]
Country-by-country
reporting obligations
Country-by-Country reporting obligations are only imposed
on entities that are a CBC reporting parent for the period or are a member of a
CBC reporting group where another member of that group is a CBC reporting
parent.
The current Country-by-Country reporting obligations are
set out in section 815-355 of the ITAA 1997. In brief, they require a
range of information to be provided by a SGE (and certain other entities) to
the Commissioner including:
- a
statement relating to the global operations and activities of the entity
- the
pricing policies relevant to transfer pricing of the entity and certain other
members of the group of entities to which the entity belongs
- a
statement relating to the operations, activities, dealings and transactions of
the entity
- a
statement relating to the allocation between countries of the income and
activities of, and taxes paid by the entity and certain other members of the
group of entities to which the entity belongs.[89]
Items 1–4 in Schedule 1 of the Bill provide that Country-by-Country
reporting obligations are imposed on CbCR entities, and remove references to
SGEs. Items 3 and 4 provide that a CBC reporting entity (rather
than a SGE) must provide information on the other members of a CBCR group of
which it is a member. The Explanatory Memorandum states:
consistent with the treatment of members of groups of
entities that are consolidated for accounting purposes, such entities must
provide statements dealing with the global operations and activities and the
allocation between countries of the tax paid by the group members of any
country by country reporting group of which they are a member.[90]
The Explanatory Memorandum also notes that ‘this ensures
that the statements that must be provided are consistent with international
practice and the OECD model legislation’.[91]
Application
of the OECD country-by-country reporting model to individuals
The Bill proposes to exclude individuals from Country-by-Country
reporting obligations. Whilst this is consistent with the current OECD
position, in February 2020 the OECD issued a consultation paper regarding
various transfer pricing and CBCR issues. In that paper the OECD noted:
Tax administrations and some stakeholders are however
concerned that the current definition of an MNE Group does not cover all
combinations of enterprises, that pose a transfer pricing or other BEPS risk to
jurisdictions in which they operate. For example, transfer pricing rules in
many jurisdictions cover controlled transactions between enterprises that are
under the common control of one or more individuals, but these arrangements are
not covered by the current BEPS Action 13 minimum standard. This has been
identified as a particular concern by tax administrations in some jurisdiction
where, for legal, historic or cultural reasons, it is common for wealthy
individuals and families to hold business interests directly, through a
non-corporate vehicle that is not required or able to prepare consolidated
financial statements, or through an investment entity that is not required to
consolidate its holdings. Where this involves holdings in several groups, which
separately are required to prepare consolidated financial statements (or would
be if any enterprise in the group was listed on a public securities exchange),
but which do not meet the current consolidated group revenue threshold, no CbC
report is required. This is despite the fact that taken together these groups
may exceed the consolidated group revenue threshold and do pose a potential
transfer pricing risk.[92]
In the consultation paper, the OECD proposed potential
reforms to the Action Item 13 model legislation and noted:
This approach balances increased neutrality between the
treatment of related businesses that are held through corporate structures and
those that are held directly by individuals, through non-corporate vehicles or
through investment entities, with the need to ensure a manageable burden on
groups brought within scope.[93]
Whilst it is not clear if the OECD will ultimately
recommend that individuals be subject to Country-by-Country reporting
obligations, should this occur then proposed subsections 815-375 and 815-380—which
operate to exclude individuals from Country-by-Country reporting obligations—would
need to be amended to ensure compliance with any amended OECD model
legislation.
Key issue:
providing general purpose financial statements
Currently section 3CA of the Taxation
Administration Act 1953 (the TAA 1953) provides that certain
SGEs have to provide the Commissioner with a general purpose financial
statement each financial year.
Items 18 and 19 in Schedule 1 of the Bill
amend section 3CA to provide that only CbRC entities will have this obligation.
Item 20 inserts proposed subsections 3CA(1A) and (1B) into the TAA 1953
to ensure that Australian government-related entitles can be exempted from Country-by-Country
reporting obligations by the Commissioner.[94]
The Explanatory Memorandum notes:
While the requirement to provide general purpose financial
statements remains limited to corporate tax entities... these amendments will
result in a wider range of entities being country by country reporting
entities. This means that more entities are likely to be subject to the
requirement to provide general purpose financial statements to the
Commissioner. The types of entities that are most likely to be affected are
entities that are members of notional listed company groups that are not
actually consolidated as a single entity with some or all of the members of
that notional listed company group.[95]
Key issue: retrospective
application of amendments in Schedule 1
Item 21 of Schedule 1 deals with what tax years the
amendments apply to—generally they will apply to income years or periods
starting on or after 1 July 2019.
In relation to Country-by-Country reporting obligations, subitem
21(2) provides that the amendments related to determining if any entity is
a CBC reporting entity for a period will apply to periods that started before 1 July 2019.
In explaining why this is necessary the Explanatory Memorandum notes:
When determining if an entity has country by country
reporting obligations for a period, it is necessary to determine if the entity
was a country by country reporting entity for the previous period. For the
avoidance of doubt, the amendments specify that if the amendments apply to a
period, they also apply for the purpose of determining if an entity was a
country by country entity for a previous period when this is relevant to the
country by country reporting obligations of the entity in a period after 1 July
2018, even if the previous period began before 1 July 2019.
The measure generally applies retrospectively from 1 July
2019. When this measure was announced in the Budget on 8 May 2018, it applied from
1 July 2018. While the application of the measure has subsequently been
deferred by one year recognising the delays in the implementation of the
measure, the retrospective application of the measure is consistent with the
Government’s intention to broaden the scope of the significant global entity
definition to ensure that Australia’s multinational tax integrity rules apply
as intended. Retrospectivity is necessary to minimise, to the extent that is
reasonable in the circumstances, the period between the announcement of the
measure and the application of the improved integrity rules.[96]
The Explanatory Memorandum goes on to note that subitems
21(3) and (4) operate to ensure that penalty obligations imposed
under the law do not apply retrospectively by providing that where an entity is
a SGE due to the amendments made by Schedule 1 for the period on or after 1
July 2019 and before 1 July 2020, the entity is not treated as a SGE for that transitional
period for the purpose of penalty provisions in Divisions 284 and 286 in
Schedule 1 to the TAA 1953.[97]
Key issue:
investment entities and country-by-country reporting obligations
A number of stakeholders raised concerns that the Bill may
result in some investment entities being captured by the country-by-country
reporting regime.
What is an
investment entity?
An ‘investment entity’ is defined in the relevant
Australian accounting standards as an entity that:
- obtains
funds from one or more investors for the purpose of providing those investor(s)
with investment management services
- commits
to its investor(s) that its business purpose is to invest funds solely for
returns from capital appreciation, investment income, or both and
- measures
and evaluates the performance of substantially all of its investments on a fair
value basis.[98]
At first instance, the OECD specifically recommended that
investment entities should not be excluded from Country-by-Country reporting
obligations.[99]
That recommendation was not subject to any qualification. However, in June 2016
the OECD issued updated guidance on the implementation of Country-by-Country
reporting under Action Item 13 which appears to have altered the position:
1.1 How should the CbC reporting rules be applied to
investment funds?
As stated in paragraph 55 of the Action 13 Report, there is
no general exemption for investment funds. Therefore the governing principle to
determine an MNE Group is to follow the accounting consolidation rules. For
example, if the accounting rules instruct investment entities to not
consolidate with investee companies (e.g. because the consolidated accounts for
the investment entity should instead report fair value of the investment
through profit and loss), then the investee companies should not form part of a
Group or MNE Group (as defined in the model legislation) or be considered as
Constituent Entities of an MNE Group. This principle applies even where the
investment entity has a controlling interest in the investee company. On the
other hand, if the accounting rules require an investment entity to consolidate
with a subsidiary, such as where that subsidiary provides services that relate
to the investment entity’s investment activities, then the subsidiary should be
part of a Group and should be considered as a Constituent Entity of the MNE Group
(if one exists). It is still possible for a company, which is owned by an
investment fund, to control other entities such that, in combination with these
other entities, it forms an MNE Group. In this case, and if the MNE Group
exceeds the revenue threshold, it would need to comply with the requirement to
file a CbC report.[100]
[emphasis added].
Are
investment entities captured by the country-by-country reporting obligations?
As noted earlier in the digest, the Bill will apply the
broadened definition of a SGE to underpin the application of the MAAL, DPT and
SGE penalty provisions. In relation to Country-by-Country reporting, the new
definition of a Country-by-Country reporting entity (rather than
the new definition of a SGE) will underpin Australia’s country-by-country
reporting regime.[101]
The definition of a CBC reporting parent in proposed
section 815-375 (discussed above) could potentially capture an investment
entity which heads up a NLCG if its own annual global income is $1 billion or
more. As noted above, the OECD recommended that in relation to the application
of country-by-country reporting rules to investment entities ‘the governing
principle to determine an MNE Group is to follow the accounting consolidation
rules’.[102]
As stated above, the new operation of the definition of a
NLCG means that a NLCG may include ‘an investment entity that controls other
entities but is not required to consolidate with those entities’ under exceptions
in the relevant accounting principles (as those exceptions are disregarded).[103]
In this regard, the Bill differs from the revised OECD guidance, which provides
that exceptions under accounting rules should not be disregarded. As noted by
Deloitte this means that:
Often there will be alignment between SGEs and CbCREs, but
there will be differences and complexities, depending on the facts... An
investment entity which heads up a NLCG for SGE purposes may be a CbC reporting
parent and a CbCRE in its own right if its own total annual global income is $1
billion or more.[104]
The Financial Services Council expressed concern about
this outcome, noting:
The Australian proposal is not consistent with the OECD model
legislation for entities that are within the scope of Country by Country (CbC)
reporting... the current Australian proposal could apply CbC reporting to many
more investment entities [than] under the OECD model approach.[105]
Schedule 2: CGT relief for merging superannuation funds
Background
In 2018, the Productivity Commission (PC) inquired into
the efficiency and competitiveness of Australia's superannuation system. In its
final report, the PC found that there were a variety of barriers to mergers and
that regulators could do more to facilitate mergers between underperforming or
subscale funds.[106]
One of the recommendations of the PC was that legislation
be introduced to make permanent the existing temporary loss relief and asset
rollover provisions introduced in response to the Global Financial Crisis
(GFC). Those provisions provide relief to merging superannuation funds from
certain capital gains tax (CGT) liabilities and permit the transfer of revenue
and capital between merging funds in some circumstances.[107]
It is argued that providing permanent CGT relief to superannuation funds would
remove an impediment to future fund mergers.[108]
In Australia, the terms ‘takeover’ and ‘merger’ are used
somewhat interchangeably to refer to the acquisition of control of one company
or entity by another (including superannuation funds). As such, the use of the
word ‘merger’ is somewhat of a misnomer—one entity acquires the other entity
itself (and hence control of it) and therefore acquires its assets, liabilities
and business.
Whilst usually the ‘transferring’ entity may cease to
exist as a separate legal entity after a takeover or ‘merger’ this is not a
requirement for the ‘merger’ to succeed.[109]
In the context of the measures proposed by the Bill, it is the disposal or
‘transfer’ of assets from one entity to another as part of the ‘merger’ that
raises CGT issues.[110]
For the purposes of this Bills Digest the terms:
- ‘transferring’
entity refers to the entity that is being acquired (and that usually ceases to
exist after the ‘takeover’) and
- ‘receiving’
entity refers to the entity that is acquiring the assets of the transferring
entity or otherwise ‘taking over’ that entity.
Financial
implications
In relation to the tax relief measures extended to merging
superannuation funds the Explanatory Memorandum notes that the measure will
have ‘an unquantifiable reduction in revenue over the forward estimates
period’.[111]
In addition, the proposal is expect to result in ‘a low
overall compliance cost impact, comprising low implementation impact and a low
decrease in ongoing compliance costs’.[112]
Key issues
and provisions
How does the CGT regime operate?
The Australian CGT regime operates on the principle that a
capital gain is taxed once it is realised, such as on the disposal of an asset.
This means unless an exception applies any capital gains derived by a taxpayer
on the happening of a CGT event to a CGT asset acquired after 19
September 1985 (for example, the sale of shares to another entity) are included
in the assessable income of the taxpayer and subject to income tax.[113]
When CGT is payable by superannuation funds
The above general outline applies to superannuation funds—although
there are some exceptions. This means that absent an exception, the capital
gains derived by a superannuation fund will be included in the fund’s
assessable income and subject to tax. This has implications for superannuation
fund ‘mergers’.
Benefits from superannuation fund mergers
The PC’s inquiry report entitled Superannuation:
Assessing Efficiency and Competitiveness (PC Report) was released
publically on 10 January 2019.[114]
Amongst other issues examined, the PC Report examined the arguments for
removing barriers to superannuation fund mergers. Briefly, the PC noted that
economies of scale realised at a system level can have positive benefits for
members of superannuation funds.[115]
For example, the PC noted smaller funds typically have
higher average administration and investment expenses than larger funds, and
that larger funds generally have higher returns than smaller funds.[116]
The PC examined the financial benefits that would flow from high-cost or
underperforming funds merging with lower-cost funds and noted:
We have (conservatively) estimated that cost savings of at
least $1.8 billion a year could be realised if the 50 highest-cost funds merged
with 10 of the lowest-cost funds — benefitting an average member in the system
by $22 000 at retirement.[117]
The PC also noted that the failure of mergers can be:
very costly for members, especially for subscale and
underperforming funds — a typical full-time worker who spends their working
life earning bottom-quartile investment returns, for example, is projected to
retire with a balance 54 per cent (or $665 000) lower than if they earned
top-quartile returns.[118]
Whilst the PC noted that organic growth in Australia’s
superannuation system ‘will deliver further gains from economies of scale in
the future’ it also noted that ‘gains can and should also come from
consolidation—particularly the exit of higher cost funds’.[119]
In essence, the PC suggests that superannuation fund
‘mergers’ can allow sub-scale, expensive or underperforming funds to ‘merge’
with larger, cheaper and better performing funds to the benefit of not only
members but also the system as a whole. In other words, superannuation fund
mergers can both stimulate increased competition and arise from increased
competition between superannuation funds.
Barriers to superannuation fund mergers
Whilst the PC identified the benefits that can potentially
flow from increased merger activity in the superannuation system (in particular
the removal of sub-scale, expensive and underperforming funds) it also
identified a number of barriers to the consolidation or ‘merger’ of
superannuation funds. Those barriers include:
- poor
fund governance (manifested by a failure to approve a merger that would benefit
members)[120]
- board
and/or trustee self-interest[121]
- a
lack of regulatory settings that encouraged mergers and examines the reasons
for failed mergers[122]
and
- the
temporary nature of provisions to provide funds with relief from capital gains
tax.[123]
The Bill only deals with the extension of existing CGT
relief to merging superannuation funds as recommended by the PC and not the
other matters listed above.[124]
CGT impact on superannuation fund mergers
The disposal or ‘transfer’ of assets from one entity to
another as part of a ‘merger’ raises CGT issues for superannuation funds.[125]
For example, where a superannuation fund disposes of
assets by selling or transferring them to another superannuation fund as part
of a ‘merger’ this will trigger a CGT event. Absent an applicable relief
provision those capital gains would be assessable income in the hands of the transferring
superannuation fund which will (usually) be wound up after the ‘merger’ is
complete.[126]
The same applies to any capital losses arising from the sale or transfer of
assets to another superannuation fund. As noted in the Explanatory Memorandum:
The transfer of assets from one superannuation fund to
another, under a merger between the two funds, will typically trigger a CGT
event. Therefore, the asset transfer will lead to the realisation of capital
gains and/or capital losses for the transferring fund. Following this asset
transfer and the transfer of members’ accounts to the receiving fund, the
transferring fund will typically be wound up.[127]
In essence, the effect of a superannuation fund ‘merger’ is
that the capital gains and losses remain with the transferring fund. They are
not transferred to the receiving fund.
This is important because capital losses have value. They
can be used to offset present and future capital gains potentially up to the
value of the tax liability that would otherwise be payable. This value is
extinguished on the winding up of the transferring superannuation fund. Similarly,
revenue losses, such as foreign exchange losses, are also extinguished when the
transferring fund is wound up.[128]
Where the tax benefits of unrealised net capital losses or
revenue losses have been included in the valuation of members’ superannuation
interests, then the merger of their superannuation fund with another fund will
lead to a reduction in the value of their superannuation interests.[129]
This is because members’ superannuation interests may include the tax benefits
of unrealised net capital losses or revenue losses.[130]
It is for this reason that the PC noted that the
extinguishment of capital losses can operate as a barrier to the ‘merging’ of
superannuation funds.[131]
According to the Explanatory Memorandum:
In the absence of optional loss relief and asset roll-over a
merger may lead to a reduction in the value of members’ superannuation
interests. This can act as an obstacle to the superannuation fund merging with
another fund because the trustee has to take this reduction into account when
considering such a merger. The trustee may decide to abandon any merger
plans where there is a significant negative impact on members’ benefits.
The optional loss relief and asset roll-over removes the impediment to eligible
funds merging that would otherwise arise from the extinguishment of the losses.
[132]
Relevant types of CGT relief
This Bills Digest does not examine all of the CGT relief
mechanisms available to superannuation funds generally, or to merging
superannuation funds—only those relevant to the Bill.
One common type of exception to CGT is ‘rollover relief’. An
asset rollover is a mechanism to defer the levying of CGT on a capital gain or
loss to a later point in time, either on the same entity or a different entity.[133]
It is available in a range of circumstances.
Relevant to the measures proposed in Schedule 2 of the
Bill, various forms of asset rollover relief allow a business to
dispose of CGT assets to (usually) related entities without having to pay CGT
‘twice’ (that is, the disposing business paying CGT and then the receiving
business paying CGT again at some future point).[134]
That is, asset rollover relief can, in some circumstances, allow
an entity to ‘transfer’ CGT assets to another related entity without triggering
a CGT liability in relation to that asset.
Another form of relief is allowing previously realised
capital or revenue losses to be transferred from the transferring entity to the
receiving entity.[135]
This allows the preservation of the tax value of such losses, which can be used
to offset against future assessable income of the receiving entity.[136]
This would allow the receiving entity to potentially use any transferred
capital losses to offset any of its existing capital gains, thus preserving the
tax value of the CGT assets it acquires from the ‘merging’ entity.
Existing CGT exceptions for merging superannuation funds
In response to the global financial crisis, the former Labor
Government introduced the Tax
Laws Amendment (2009 Measures No. 6) Bill 2009 which was enacted as the Tax Laws Amendment
(2009 Measures No. 6) Act 2010 (the 2010 TLA Act).
The 2010 TLA Act inserted Division 310 into the ITAA
1997. Division 310 provided for asset-rollover relief for merging
superannuation funds.[137]
In simple terms, in relation to asset roll-over relief the reforms provided
that:
- for
the transferring fund the CGT assets are treated as having been disposed of at
their cost base, thus ensuring no capital gain or loss is realised on their
disposal and
- for
the receiving fund, the cost base of the CGT assets is taken to be equal to the
cost base of the CGT asset just before its transfer.[138]
The reforms also provided that a transferring fund could,
in some circumstances, transfer certain capital and revenue losses to the
transferring fund.[139]
In the context of concerns regarding the GFC, the 2010 TLA Act
originally provided that the above CGT relief for merging superannuation funds would
be available for mergers that occur on or after 24 December 2008 and before 1
July 2011.[140]
The Tax Laws
Amendment (2011 Measures No. 7) Act 2011, the Superannuation Laws
Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Act 2012
(the 2012 SLA Act) and subsequent amendments to that Act, and the Treasury Laws
Amendment (2018 Measures No. 1) Act 2018 ultimately provided that the
merger relief provisions in the ITAA 1997 introduced by the 2009 TLA
Act would also apply to mergers that occurred up to 1 July 2020.[141]
What the Bill does
The amendments in Schedule 2 of the Bill make the above superannuation
merger loss relief and asset rollover relief provisions—due to expire on 1 July
2020—permanent.[142]
It does this by amending the 2010 TLA Act, 2012 SLA Act and ITAA
1997 to provide that the relief provisions apply to mergers happening on or
after 1 October 2011.[143]
Item 6 in Schedule 2 of the Bill repeals Parts 4
and 5 of the 2010 TLA Act, which would have operated to repeal the
temporary loss relief provisions on 1 July 2022 and provided various
transitional arrangements. By doing so, the amendment ensures that the loss
relief provisions become permanent.
Item 7 in Schedule 2 of the Bill deals with the
application of the amendments. It provides that the amendments apply in
relation to transfer events that happen on or after 1 October 2011. It also
provides that:
- all
of the members of the transferring entity must become members of the receiving
entity on or after 1 October 2011 and
- the
transferring entity needs to cease to hold all relevant assets on or after 1
October 2011.
This means that the amendments operate retrospectively.
However, the Explanatory Memorandum notes:
While the application of the amendments is retrospective, the
amendments operate only to make permanent the concessional taxation treatment
that has been afforded to merging entities in the period 1 October 2011 to 1
July 2020. In this way, the retrospectivity is not disadvantageous to affected
entities.[144]
Will it work?
The PC noted that whilst impediments to superannuation
fund mergers exist they are ‘often overstated’.[145]
However it also noted that CGT issues ‘will be an impediment in the absence of
permanent relief’.[146]
It remains to be seen if this reform will have a substantial impact on merger
activity in the superannuation sector. However, it would appear that the
removal of adverse tax impacts on members’ accounts will make it easier for
trustees of superannuation funds to agree to merger proposals when discharging
their legal duties to act in the best interests of their members. This is
because by making the CGT relief provisions permanent it allows trustees to
focus on the potential long-term benefits to members from a proposed merger,
and not only the short-term effect on members’ account valuations.[147]