Bills Digest No.
108, 2019–20
PDF version [1MB]
Andrew Maslaris
Economic Policy Section
14
September 2020
This Bills Digest replaces the preliminary Bills Digest
published on 17 June 2020.
Contents
Purpose and
structure of the Bill
Structure of
this Bills Digest
Committee
consideration
Statement of
Compatibility with Human Rights
Special
appropriations
Schedule 1:
Hybrid mismatch rules
Schedule 2:
Single Touch Payroll—reporting child support information
Schedules 3
and 5: deductible gift recipients
Schedule 4:
funding capital increases for the World Bank Group
Schedule 6:
tax secrecy
Date introduced: 13
May 2020
House: House
of Representatives
Portfolio: Treasury
Commencement: Sections
1 to 3 on Royal Assent; Schedules 1, 2, 3 and 5 on the first day of the
first quarter to occur after Royal Assent; and Schedules 4 and 6 the day
after Royal Assent.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent,
they become Acts, which can be found at the Federal Register of Legislation
website.
All hyperlinks in this Bills Digest are correct as
at September 2020.
Purpose and structure of the Bill
The
Treasury Laws Amendment (2020 Measures No. 2) Bill 2020 (the Bill) introduces a
number of tax related measures and seeks to streamline Australia’s legislative
framework for providing funding to the World Bank.[1]
The Bill contains six Schedules:
- Schedule 1 makes a series of technical amendments to the
hybrid mismatch rules in the Income Tax
Assessment Act 1997 (ITAA 1997). The amendments seek to ensure
these rules operate as intended so that multinational entities cannot exploit
differences in the treatment of instruments or entities in order to defer or
avoid tax
- Schedule 2 seeks to amend the Taxation
Administration Act 1953 (TAA 1953), the Child Support (Assessment)
Act 1989 (CSAA 1989) and the Child Support
(Registration and Collection) Act 1988 (CSRCA 1988) to allow
employers to report through Single Touch Payroll amounts of child support
deductions and garnishments that have been withheld from an employee’s
salary and wages
- Schedule 3 amends the ITAA 1997 to create a new
deductible gift recipient (DGR) category for ‘community sheds’ (as
well as creating a legislative definition of a community shed)—this will
enable taxpayers to claim a tax deduction for donations of $2 or more made to
community sheds that have applied for and been approved by the Commissioner of
Taxation as DGRs
- Schedule 4 streamlines the legislative framework for
Australia making contributions to the World Bank (including creating a standing
appropriation) and seeks to honour Australia’s obligations to increase
funding to the International Bank for Reconstruction and Development and the International
Finance Corporation by amending the International
Finance Corporation Act 1955 and the International
Monetary Agreements Act 1947
- Schedule 5 amends the ITAA 1997 to include eight
new organisations as having DGR status and
- Schedule 6 amends the tax secrecy provisions in the TAA
1953 to allow the Australian Taxation Office to share JobKeeper related
information with the Fair Work Commission and Fair Work Ombudsman for the
purposes of administering the Fair Work Act 2009.[2]
Structure of
this Bills Digest
As the matters covered by each of the Schedules are generally
independent of one another, the relevant background information and analysis of
key provisions are set out under each Schedule number, except for Schedules 3
and 5 which are considered together.
Committee
consideration
Senate Standing Committee for the Selection
of Bills
On 12 June 2020, the Senate Standing Committee for the
Selection of Bills decided that the Bill should not be referred to Committee.[3]
Senate Standing Committee for the
Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills
raised concerns with Schedule 4 of the Bill.[4]
These concerns are discussed below under the heading ‘Schedule 4: funding
capital increases for the Word Bank Group’.
Joint Standing Committee on
Treaties
In relation to Schedule 4 of the Bill, the Joint
Standing Committee on Treaties (JSCOT) has commenced examination of the
proposed increases of capital to the International Bank for Reconstruction and
Development and the International Finance Corporation. Submissions closed on 5
June 2020, and the Treasury and Department of Foreign Affairs both appeared
before JSCOT on 22 May 2020.[5]
Further details are available at each inquiry homepage: Capital
Increase WBG IBRD and Capital
Increase WBG IFC.
Statement of
Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Bill’s compatibility with the human rights and freedoms recognised or
declared in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[6]
Parliamentary Joint Committee on
Human Rights
The Parliamentary Joint Committee on Human Rights had no
comment on the Bill.[7]
Special
appropriations
Schedule 4 of the Bill proposes to establish
standing appropriations that may be drawn upon for Australia’s
commitments to capital shares in the International Bank for Reconstruction and
Development and the International Finance Corporation which are a part of the
World Bank Group (discussed in further detail below under the heading ‘Schedule
4: funding capital increases for the World Bank Group’).[8]
Schedule
1: Hybrid mismatch rules
|
Schedule 1 amends the ITAA 1997 to make a
number of technical amendments to the hybrid mismatch rules to provide
greater certainty about their operation and ensure they operate as intended.
In particular, the proposed amendments, seek to:
- clarify
the operation of the rules to trusts, partnerships and multiple entry
consolidated groups
- address
a concern that the hybrid mismatch integrity rule can currently be
circumvented through careful tax planning and
- make a
number of additional technical amendments.
In order to understand the proposed amendments, it is
necessary to first understand how the hybrid mismatch rules currently
operate. These rules are highly technical and not easily summarised. To assist
in understanding the hybrid mismatch rules, the Digest provides a very high
level, plain-English overview, followed by a more detailed discussion of key
elements of the rules with reference to the relevant provisions.
|
What are the hybrid mismatch rules?
The Organisation for Economic Co-operation and
Development (OECD) defines hybrid mismatch arrangements as follows:
Hybrid mismatch arrangements exploit differences in the tax
treatment of an entity or instrument under the laws of two or more tax jurisdictions
to achieve double non-taxation, including long-term deferral. These types of
arrangements are widespread and result in a substantial erosion of the taxable
bases of the countries concerned. They have an overall negative impact on
competition, efficiency, transparency and fairness.[9]
As part of its Base Erosion and Profit Shifting (BEPS)
Action Plan, the OECD highlighted the ability of taxpayers to avoid tax by
entering into hybrid mismatch arrangements.[10]
In response to this, the OECD proposed the following course of action be
undertaken:
Develop model treaty provisions and recommendations regarding
the design of domestic rules to neutralise the effect (e.g. double
non-taxation, double deduction, long-term deferral) of hybrid instruments and
entities. This may include: (i) changes to the OECD Model Tax Convention to
ensure that hybrid instruments and entities (as well as dual resident entities)
are not used to obtain the benefits of treaties unduly; (ii) domestic law
provisions that prevent exemption or non-recognition for payments that are
deductible by the payor; (iii) domestic law provisions that deny a deduction
for a payment that is not includible in income by the recipient (and is not
subject to taxation under controlled foreign company (CFC) or similar rules);
(iv) domestic law provisions that deny a deduction for a payment that is also
deductible in another jurisdiction; and (v) where necessary, guidance on
co-ordination or tie-breaker rules if more than one country seeks to apply such
rules to a transaction or structure. Special attention should be given to the
interaction between possible changes to domestic law and the provisions of the
OECD Model Tax Convention. This work will be co-ordinated with the work on
interest expense deduction limitations, the work on CFC rules, and the work on
treaty shopping.[11]
In October 2015, the OECD released, Neutralising
the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final Report
(the 2015 Final Report), which amongst other things, set out a
recommended framework for implementing domestic tax rules to neutralise the
effect of hybrid mismatch arrangements.
The Government announced over a number of successive
Budgets and the 2017–18 Mid-Year Economic and Fiscal Outlook (MYEFO) that
it would implement the OECD’s recommendations,[12]
with the Treasury
Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018
implementing hybrid mismatch rules into Division 832 of the ITAA 1997.
However, in response to concerns about uncertainty with
the operation of the new hybrid mismatch rules, the 2019–20 Budget and
2019–20 MYEFO announced the Government’s intention to further
clarify the operation of the rules.[13]
This Bill seeks to give effect to those announcements.
When do the hybrid mismatch
rules apply?
As detailed in Division 832 of the ITAA 1997 the
basic preconditions for the hybrid mismatch rules to apply are that:
1. an entity (known as
the payer) makes a payment, or non-cash payment, to another entity (the
recipient) and the recipient is entitled to that payment (even if payment is
not required to be made at that time)[14]
2. there is a hybrid
mismatch—although there are six legislative categories of hybrid
mismatches, generally a hybrid mismatch will arise where there is a payment
made in respect of a financial instrument or to a specified class of entity,
and as a result of the payer exploiting the different tax laws of two or more
countries relating to that financial instrument or entity, either:
-
that payment is deducted in two countries (referred to as a
deduction/deduction mismatch)[15]
or
-
that payment is deducted in one country and the income or profits
of that payment is not included in the other entity’s taxable income
(referred to as a deduction/non-inclusion mismatch).[16]
The concepts of a deduction/deduction and a
deduction/non-inclusion outcome are discussed in more detail in Table 1. These
rules also make reference to a concept known as the ‘deduction
component’—broadly, this is the amount of ‘mismatch’
that the hybrid rules will seek to neutralise.
Table 1: Deduction/non-inclusion
and deduction/deduction mismatches
| Type of mismatch |
Description and
deduction component amount |
Possible
categories of mismatch |
|
Australian deduction
(deduction/non-inclusion)
|
If an Australian entity claims a deduction in respect of
payment (other than a deduction solely attributable to a currency exchange
effect) and the amount of that deduction exceeds the sum of the amounts of
that payment that are:
- subject
to foreign income tax (for a period of no later than 12 months after the end
of the foreign tax income year) or
- subject
to Australian income tax in that income year
then the deduction amount is the deduction component.[17]
|
Hybrid financial instrument, hybrid payer, reverse hybrid,
branch hybrid mismatch or imported hybrid mismatch.[18]
|
|
Foreign income tax deduction
(deduction/non-inclusion)
|
If an entity is entitled to a foreign income tax deduction
in a foreign jurisdiction in respect of a payment (which is not solely
attributable to any currency exchange fluctuations or an expressly or
implicitly agreed exchange rate) and the amount of the foreign income tax
deduction exceeds the amounts of that payment that are:
- subject
to foreign income tax (for the period no later than 12 months after the end
of the foreign tax income year) or
- subject
to Australian income tax (for the period no later than 12 months after the
end of the foreign tax income year)
then the deduction is the deduction component.[19]
|
Hybrid financial instrument, hybrid payer, reverse
hybrid, branch hybrid or imported hybrid mismatch.[20]
|
|
Deduction/deduction mismatch
|
Where a payment, or part thereof, gives rise to:
- a
foreign income tax deduction in a foreign country in a foreign tax period and
- gives
rise to a deduction, in Australia or a third country in an income year
then each of the following is a deduction component:
- the
foreign income tax deduction amount in the foreign country and
- the sum
of the deduction amounts in Australia and/or a third country.
The amount of the mismatch will be the lesser of the
foreign income tax deduction amount and the Australian/third country
deduction amount.[21]
|
Deducting hybrid or imported hybrid mismatch.[22]
|
|
Deduction/deduction mismatch – non-payment
deductions
|
Where a deduction is claimed in respect of decline in
value of an asset or share in the net loss of a partnership or similar
transparent entity, it can be regarded as giving rise to a foreign income tax
deduction provided a taxpayer recognises a tax deduction in another country
(that is, the loss is recognised in multiple countries, rather than
recognised on a net basis).[23]
The amount of the mismatch will be the lesser of the
foreign income tax deduction amount and the Australian/third country
deduction amount.[24]
|
Deducting hybrid or imported hybrid mismatch.[25]
|
Source: Parliamentary Library and
Division 832 of the ITAA 1997.
Sections 832-125 and 832-130 of the ITAA 1997 define
what is meant by subject to Australian income tax and subject to
foreign income tax. As discussed below, the Bill seeks to amend these
definitions to address concerns that the definition of foreign income tax is
leading to uncertainty for taxpayers and tax administrators.
Subdivision 832-A of the ITAA 1997 provides that in
determining whether an entity makes a payment to another entity and the amount
of income or profits of an entity, the following ‘grouping rules’
are disregarded:
- the
single-entity rule in subsection 701(1) of the ITAA 1997
- Part
IIIB of the ITAA 1936 dealing with the taxation of branches of foreign
banks and
-
any law of a foreign county that for the purposes of foreign tax
treats a different entity as having made the payment, or disregards the
payment.[26]
It should also be noted that it is not a precondition that
the hybrid arrangement be fully entered into or carried out in
Australia—as such, the hybrid mismatch rules can apply regardless of
whether the scheme has been entered into or carried out in or outside of
Australia or partly in or outside Australia.[27]
What are the six categories of
hybrid mismatch arrangements?
There are six legislatively created categories of hybrid
mismatch arrangements:
1.
hybrid financial instrument mismatch
2.
hybrid payer mismatch
3.
reverse hybrid mismatch
4.
branch hybrid mismatch
5.
deducting hybrid mismatch and
6.
imported hybrid mismatch.
As an arrangement may satisfy more than one hybrid
mismatch category, ordering provisions apply to determine which mismatch
applies.
Please note that the relevant legislation is highly
technical and mechanical and can be difficult to understand for those
unfamiliar with tax legislation. As such, this Bills Digest provides a
simplified explanation of each category of mismatch, followed by a more
detailed discussion of the key elements with reference to the relevant
legislative provisions.
Hybrid
financial instrument mismatches
The rules relating to hybrid financial instrument
mismatches are contained in Subdivision 832-C of the ITAA 1997. A hybrid
financial instrument mismatch can be broadly summarised as a financial
instrument or derivative financial arrangement that has been structured in such
a way that it results in a payment being made to a related party, in order to
achieve a deduction/non-inclusion or deduction/deduction outcome. As noted by
the OECD, the rationale for hybrid financial instrument mismatch rules is to:
… prevent a taxpayer from entering into structured
arrangements or arrangements with a related party that exploit differences in
the tax treatment of a financial instrument to produce a D/NI
[deduction/non-inclusion] outcome.[28]
Figure 1 provides a more detailed explanation of the rules
relating to hybrid financial instrument mismatches.[29]
Figure 1: High level overview –
hybrid financial instrument mismatch
|
What is a hybrid financial instrument mismatch?
Broadly, a hybrid financial instrument mismatch
arises where a payment:
1.
is made under certain financial arrangements or an arrangement to transfer
a financial instrument[30]
and
2.
the payment might reasonably be expected to give rise to a
deduction/non-inclusion mismatch[31]
and
3.
the mismatch that might reasonably be expected to arise, or part of
that mismatch arises from differences in the treatment of the financial
arrangement arising from the terms of the financial arrangement, and the
difference is not primarily attributable to a deferral in the recognition of
income from the instrument (provided the term of the deferral or arrangement
is three years or less)[32]
and
4.
the entities making the payment and each entity liable to pay tax on
the income or profits of the recipient are related or the payment is made
under a structured arrangement.[33]
What is a related entity?
Entities will be deemed to be related where they are:
- in the
same Division 832 control group[34]
- one
entity holds a direct participation interest of 25% or more in the other
entity or
- a third
entity holds a direct participation interest of 25% or more in the other
entity.[35]
What is structured arrangement?
Generally, a structured arrangement arises where a hybrid
mismatch is priced into the terms of the relevant scheme, or it is reasonable
to conclude that the hybrid mismatch is a design feature of the scheme.[36]
What is the effect of a hybrid financial instrument
mismatch?
Generally, where the above criteria are satisfied, Subdivision
832-C of the ITAA 1997 will seek to neutralise the effect of a hybrid financial
instrument mismatch by either:
- denying
a deduction in Australia—referred to as the primary response[37]
or
- requiring
an amount relating to the foreign income tax deduction to be included in that
entity’s Australian income where equivalent hybrid rules do not exist
in the foreign country— referred to as the secondary response.[38]
Off-shore hybrid financial instrument mismatch
Importantly, not all hybrid financial instrument
mismatches will be neutralised by Subdivision 832-C of the ITAA 1997.
This category of mismatches is referred to as off-shore hybrid mismatches—it
arises where there is a hybrid financial instrument mismatch that satisfies
the following criteria:[39]
1.
the deduction component of the mismatch is a foreign income tax
deduction[40]
2.
no amount of that deduction is subject to tax as a result of the
‘secondary response’ and
3.
foreign hybrid mismatch (or similar) rules do not exist in the country
in which the deduction arose or another third country in which the profits or
income of the recipient are subject to foreign income tax.[41]
Where an off-shore
hybrid mismatch arises it will be deemed to be an imported hybrid mismatch
and is dealt with under Subdivision 832-H of the ITAA 1997.
|
Hybrid payer
mismatches
The rules relating to hybrid payer mismatches are
contained in Subdivision 832-D of the ITAA 1997. As explained by the
OECD, taxpayers may seek to take advantage of differences in the tax laws of
countries where an entity is disregarded for tax purposes—meaning that
income or profits from a transaction may escape tax in one country, but a
related entity recognises a deduction in that, or another, country, giving rise
to a deduction/non-inclusion outcome.[42]
As noted by the OECD:
… the purpose of the disregarded hybrid payments rule
is to prevent a taxpayer from entering into structured arrangements, or
arrangements with members of the same control group, that exploit differences
in the tax treatment of payer to achieve such outcomes.[43]
As a general proposition, Subdivision 832-D of the ITAA
1997 will apply the hybrid payer mismatch rules to the situation where an
entity is able to claim a tax deduction in a country in relation to a hybrid
mismatch payment but is not liable for tax on any income or profits it earns in
respect of that mismatch.
Figure 2 provides a more detailed explanation of the rules
relating to hybrid payer mismatches.
Figure 2: High level overview
– hybrid payer mismatch
|
What is a hybrid payer mismatch?
Broadly, a hybrid payer mismatch arises where:
1.
a payment is made that gives rise to a hybrid mismatch under section
832-310 of the ITAA 1997 —this will occur where a payment:
a.
gives rise to a deduction/non-inclusion mismatch and
b.
satisfies the hybrid requirement in section 832-315 of the ITAA
1997, that is:
-
if the non-including country[44]
is Australia: the
deduction/non-inclusion amount exceeds the amount that would be a mismatch
had the payment been subject to Australian income tax (assuming the payer and
recipient were ungrouped entities) or
-
if the non-including country is a foreign country: the
deduction/non-inclusion amount exceeds the amount that would be a mismatch
had the payment been subject to foreign income tax (assuming the payer and
recipient were ungrouped entities)[45]
and
2.
the payment is made by a hybrid payer—broadly an entity will be
deemed to be a hybrid payer where a payment it makes is disregarded for the
purposes of the tax law in one country (resulting in non-inclusion) but is
deductible for the purposes of the tax law of another country[46]
and
3.
the hybrid entity and any other liable entities in respect of the
hybrid payer’s profits or income are in the same Division 832 control
group, or the payment is made under a structured arrangement[47]
and
4.
the payment is not also a hybrid financial instrument mismatch.[48]
What is the effect of a hybrid payer mismatch?
Generally, where the above criteria are satisfied, Subdivision
832-D of the ITAA 1997 will seek to neutralise the effect of a hybrid
payer mismatch by either denying a tax deduction in Australia, or requiring
the amount of mismatch to be included in the entity’s Australian
income. However, similar to Subdivision 832-C of the ITAA 1997, a
‘secondary response’ is not required where the country in which
the deduction has occurred has hybrid mismatch or similar rules.[49]
However, subsection 832-330 recognises that in calculating
this amount an adjustment for ‘dual inclusion income’ is
necessary (dual inclusion income generally refers to income that is subject
to tax in more than one country).[50]
Offshore hybrid payer mismatches
Importantly, not all hybrid payer mismatches can be
neutralised by Subdivision 832-D of the ITAA 1997. This category of
mismatches is referred to as off-shore hybrid mismatches, and will
arise where there is a hybrid payer mismatch that satisfies the following
criteria:
1.
the deduction component of the mismatch is a foreign income tax
deduction
2.
no amount of that deduction is subject to tax as a result of the
‘secondary response’ and
3.
foreign hybrid mismatch (or similar) rules do not exist in the country
where the deduction arose or another third country in which the profits or
income of the recipient are subject to foreign income tax.[51]
Where an off-shore hybrid mismatch arises it may be deemed
to be an imported hybrid mismatch and is dealt with under Subdivision 832-H
of the ITAA 1997.
|
Reverse
hybrid mismatches
The rules relating to reverse hybrid mismatches are
contained in Subdivision 832-E of the ITAA 1997.
A reverse hybrid is an entity that is only treated as
transparent[52]
under the laws of the payer jurisdiction and as such, an incentive may exist to
invest through a reverse hybrid so that the resulting income is only brought
into account under the laws of the payer jurisdiction.[53]
As such, the OECD recommended that where:
… a payment made to a reverse hybrid that results in a
hybrid mismatch the payer jurisdiction should apply a rule that will deny a
deduction for such payment to the extent it gives rise to a D/NI
[deduction/non-inclusion] outcome.[54]
As a general proposition, Subdivision 832-E of the ITAA
1997 will deem a reverse hybrid mismatch to arise where a payment is made
to a reverse hybrid entity and the mismatch would not have occurred, or would
have been less, had the payment been made directly to an investor in the
reverse hybrid entity.[55]
Figure 3 provides a more detailed explanation of the rules
relating to reverse hybrid mismatches.
Figure 3: High level overview
– reverse hybrid mismatch
|
What is a reverse hybrid mismatch?
Broadly, a reverse hybrid mismatch arises where:
1.
a payment is made that gives rise to a hybrid mismatch under section
832-400 of the ITAA 1997— this will occur where a payment:[56]
a.
gives rise to a deduction/non-inclusion mismatch and
b.
satisfies the hybrid requirement in section 832-405 of the ITAA
1997—that is, the payment is made directly or indirectly through
one or more interposed entities to a reverse hybrid and either:
- the entity is not transparent and is located in Australia and
the amount of the deduction/non-inclusion mismatch exceeds the amount of
mismatch if tax was paid in Australia assuming the payment was made directly
to the investors in the reverse hybrid entity (or would have given rise to a
hybrid financial instrument, hybrid payer or reverse hybrid mismatch)[57]
or
- the entity is not transparent and is located in a foreign
country and the amount of the deduction/non-inclusion mismatch exceeds the
amount of mismatch if tax was paid in the foreign country assuming the
payment was made directly to the investors in the reverse hybrid entity (or
would have given rise to a hybrid financial instrument, hybrid payer or
reverse hybrid mismatch)[58]
and
2.
the entity making the payment, the reverse hybrid and its investors in
its formation country are part of the same Division 832 control group or
the payment is made under a structured arrangement[59]
and
3.
the payment does not give rise to a hybrid financial instrument or a
hybrid payer mismatch.[60]
What is the effect of a reverse hybrid mismatch?
Generally, where the above criteria are satisfied, Subdivision
832-E of the ITAA 1997 will seek to neutralise the effect of a hybrid
financial instrument mismatch by denying a tax deduction in Australia equal
to the amount of the reverse hybrid mismatch amount.[61]
Off-shore reverse hybrid mismatch
Importantly, not all reverse hybrid mismatches can be
neutralised by Subdivision 832-E of the ITAA 1997. This category of
mismatches is referred to as off-shore reverse hybrid mismatches, and
will arise where there is a reverse hybrid mismatch that satisfies the
following criteria:
- the deduction
component of the mismatch is a foreign income tax deduction and
- the foreign country
does not have foreign hybrid mismatch rules.[62]
Where an off-shore hybrid mismatch arises it may be deemed
to be an imported hybrid mismatch and is dealt with under Subdivision 832-H
of the ITAA 1997.
|
Branch
hybrid mismatches
The rules relating to branch hybrid mismatches are
contained in Subdivision 832-F of the ITAA 1997.
The OECD’s Final Report noted that a dual resident
or a foreign branch may make a cross-border payment that can trigger a hybrid
mismatch.[63]
Broadly, Subdivision 832-F of the ITAA 1997 considers
a branch hybrid mismatch to arise if, in the payer’s country of
residence, the payment is treated as being made to a permanent establishment of
another country,[64]
but that other country does not recognise that payment as being made to a
permanent establishment in their country. In this situation, a
deduction/non-inclusion mismatch arises, if the mismatch would not have arisen
(or been less) had the residence country not recognised the permanent
establishment.[65]
Figure 4 provides a more detailed explanation of the rules
relating to branch hybrid mismatches.
Figure 4: High level overview
– branch hybrid mismatch
|
What is a branch hybrid mismatch?
Broadly, a branch hybrid mismatch arises where:
1.
a payment is made that gives rise to a hybrid mismatch under section
832-475 of the ITAA 1997—this will occur where:
a.
a payment gives rise to a deduction/non-inclusion mismatch and
b.
the mismatch satisfies the hybrid requirement in section 832-480 of
the ITAA 1997—that is the payment is made directly or indirectly
through one or more interposed entities to a branch hybrid[66]
and
c.
the entity receiving the payment is an Australian tax resident and the
amount of the deduction/non-inclusion mismatch exceeds the amount of mismatch
if tax was paid in Australia (assuming the entity was not carrying on a
business through a permanent establishment (PE))[67]
d.
the entity receiving payment is a tax resident of another country and
the amount of the deduction/non-inclusion mismatch exceeds the amount of
mismatch if tax was paid in the foreign country assuming the entity was not
carrying on a business through a PE[68]
and
2.
the entity making the payment and the branch hybrid are part of the
same Division 832 control group or the payment is made under a
structured arrangement[69]
and
3.
the payment does not give rise to a hybrid financial instrument,
hybrid payer or reverse hybrid mismatch.[70]
What is the effect of a branch hybrid mismatch?
Where a branch hybrid mismatch arises, section 832-455 of
the ITAA 1997 will operate to deny the deduction.
Off-shore branch hybrid mismatch
Importantly, not all branch hybrid mismatches can be
neutralised by Subdivision 832-F of the ITAA 1997. This category of
mismatches is referred to as off-shore hybrid mismatches, and will
arise where there is a hybrid branch mismatch that satisfies the following
criteria:
- the deduction
component of the mismatch is a foreign income tax deduction
- the foreign country
does not have foreign hybrid mismatch rules and
- subsection 23AH(4A)
of the ITAA 1936 (dealing with foreign branch income) does not apply
in relation to the hybrid mismatch.[71]
Where an off-shore hybrid mismatch arises it may be deemed
to be an imported hybrid mismatch and is dealt with under Subdivision 832-H of
the ITAA 1997.
|
Deducting
hybrid mismatches
The rules relating to deducting hybrid mismatches are
contained in Subdivision 832-G of the ITAA 1997.
The deducting hybrid mismatch rules are primarily
concerned with hybrid mismatch arrangements that result in a payment being
deductible in two countries (deduction/deduction outcome). Importantly, in
recognition that the payment may be deductible in more than one country, Subdivision
832-G of the ITAA 1997 creates special rules identifying which country
is the ‘primary’ response country—the effect of this is that
the deduction will be denied in Australia where it is the primary response
country, or where the primary response country does not have hybrid mismatch
(or similar) rules.[72]
Figure 5 provides a more detailed explanation of the rules
relating to deducting hybrid mismatches.
Figure 5: High level overview
– deducting hybrid mismatch
|
What is a deducting hybrid mismatch?
Broadly, a payment or other amount gives rise to a deducting
hybrid mismatch if:
1.
there is a deducting hybrid in relation to that payment or
other amount—an entity is a deducting hybrid where the relevant payment
or other amount gives rise to a deduction/deduction mismatch, and the entity
is:
a.
where the deduction is in relation to a payment—the entity that
makes that payment
b.
where the deduction is in relation to the decline in value of an
asset—the entity that holds that asset or
c.
where the deduction is in relation to a share in the net loss of a
partnership or other transparent entity—the entity that has an interest
in that partnership or transparent entity[73]
and
2.
the relevant entity is a liable entity[74]
in a least one deducting country or a member of a consolidated group[75]
3.
the mismatch is not a hybrid financial instrument mismatch, hybrid
payer mismatch, reverse hybrid mismatch or a branch hybrid mismatch.[76]
What is the effect of a deducting hybrid mismatch?
As deducting hybrid mismatches involve a
deduction/deduction mismatch, Subdivision 832-G of the ITAA 1997
contains a set of complex rules outlining when Australia will have the right
to deny a deduction. Broadly, Australia will be able to deny the deduction
where:
- it is
the ‘primary response country’[77]
or
- it is
the ‘secondary response country’ and:
- the primary
response country does not have hybrid mismatch rules and
- the relevant
entities are in the same Division 832 control group or the mismatch
arose under a structured arrangement.[78]
Off-shore deducting hybrid mismatch
Importantly, not all deducting payer mismatches can be
neutralised by Subdivision 832-G of the ITAA 1997. This category of
mismatches is referred to as off-shore hybrid mismatches, and will
arise where there is a deducting hybrid mismatch—broadly defined to
arise where the only deduction components of the mismatch are foreign income
tax deductions and the foreign country(ies) in which the deduction arose does
not have hybrid mismatch (or similar) rules.[79]
Where an off-shore hybrid mismatch arises it may be deemed
to be an imported hybrid mismatch and is dealt with under Subdivision 832-H
of the ITAA 1997.
|
Offshore
hybrid mismatches and imported hybrid mismatches
The rules relating to imported hybrid mismatches are
contained in Subdivision 832-H of the ITAA 1997. As noted above, an
offshore hybrid mismatch may give rise to an imported hybrid mismatch.
Imported hybrid mismatches are an integrity
rule—they apply to the situation where one or more entities are
interposed between a hybrid mismatch and a country with hybrid mismatch rules
in order to circumvent the operation of those rules. In its Final Report, the
OECD explained:
The policy behind the imported mismatch rule is to prevent
taxpayers from entering into structured arrangements or arrangements with group
members that shift the effect of an offshore hybrid mismatch into the domestic
jurisdiction through the use of a non-hybrid instrument such as an ordinary
loan. The imported mismatch rule disallows deductions for a broad range of
payments (including interest, royalties, rents and payments for services) if
the income from such payments is set-off, directly or indirectly, against a
deduction that arises under a hybrid mismatch arrangement in an offshore
jurisdiction (including arrangements that give rise to DD [deduction/deduction]
outcomes). The key objective of imported mismatch rule is to maintain the
integrity of the other hybrid mismatch rules by removing any incentive for
multinational groups to enter into hybrid mismatch arrangements.[80]
[emphasis added]
Figure 6 provides a more detailed explanation of the
imported hybrid mismatch rules.
Figure 6: High level overview
– Offshore hybrid mismatches and imported hybrid mismatch
|
What is an imported hybrid mismatch?
Broadly, a payment will give rise to an imported hybrid
mismatch where:
1.
the payment gives rise to a hybrid mismatch—broadly, a
hybrid mismatch occurs where there is an importing payment in relation
to an offshore hybrid mismatch.[81]
A payment will be an importing payment where the payment, or part of the
payment:
a.
gives rise to an Australian income tax deduction or a foreign income
tax deduction in a foreign country that has hybrid mismatch (or similar)
rules
b.
is made directly, or indirectly, through one or more interposed
entities and
c.
the other entity is the entity that made the payment giving rise to
the offshore hybrid mismatch or if the mismatch is a deducting hybrid
mismatch—the deducting hybrid[82]
and
2.
an item in the table in subsection 832-615(2) applies to the importing
payment:
- item 1: structured
arrangement—an importing payment is covered if:
- Item 2: direct
payment—an importing payment is covered if:
- Item 3: indirect
payment—an importing payment is covered if:
3.
the payment does not give rise to a hybrid financial instrument,
hybrid payer, reverse hybrid, branch hybrid or a deducting hybrid mismatch.[83]
What is the effect of an imported hybrid mismatch?
Where the above elements are satisfied, section 832-610
will deny the imported hybrid mismatch deduction. Sections 832-630 and
832-635 of the ITAA 1997 contain a series of rules used to calculate
the imported hybrid mismatch amount.
|
The hybrid
integrity rule
In addition to the above rules, Subdivision 832-J of the ITAA
1997 contains an integrity rule. Section 832-720 summarises the integrity
rule as follows:
This Subdivision contains an integrity measure that disallows an Australian deduction of
an entity (the paying entity ) for
a payment of interest (or
a payment of a
similar character) under a scheme to a
foreign entity (the interposed
foreign entity). The deduction will
be disallowed if
certain conditions are satisfied, including that:
(a) the paying entity, the interposed
foreign entity and
another foreign entity (the ultimate parent entity) are in the same
Division 832 control group; and
(b)
the payment is not subject to Australian income tax;
and
(c)
the highest rate of foreign income tax (the foreign
country rate) on the payment is 10% or
less; and
(d)
it is reasonable to conclude (having regard to certain matters) that the entity, or one of the
entities, that entered into or carried out all part of the scheme did so for
a purpose including a purpose of enabling a deduction to be
obtained in respect of the payment, or
enabling foreign income tax to
be imposed on the payment at a rate
of 10% or less.
However, the deduction will
not be disallowed if,
assuming that the payment had been
made directly to the ultimate parent entity:
(a)
the rate of foreign income tax on
the payment in the
country of residence of the ultimate parent entity would be
less than or equal to the foreign country rate; and
(b)
the payment would not
give rise to a hybrid mismatch of
a particular kind.
Position of major interest
groups
Treasury completed consultation on the proposed amendments
on 24 January 2020. The submissions have not been made publicly available at
this time.[84]
Key provisions
As noted above, the Bill contains a number of highly
technical amendments to the hybrid mismatch rules contained in Division 832 of
the ITAA 1997. Due to the complexity, and highly technical nature of the
changes, the below section discusses some of the key proposed changes (with
reference to the previous discussion) and the rationale for these amendments.
Additional information can be found in Chapter one of the
Explanatory Memorandum to the Bill.
Main amendments: Schedule 1,
Part 1
Trusts, partnerships and multiple
entry consolidated (MEC) groups
Item 1 in Part 1 of Schedule 1 of the
Bill seeks to repeal and substitute section 832-30 of the ITAA 1997. As
noted above, section 832-30 of the ITAA 1997 seeks to disregard certain
grouping rules in Australian and international tax law. The effect of this
section is to create a uniform basis for recognising payments between entities
and to ensure that hybrid rules apply consistently between countries where
payments may be disregarded due to tax purposes—for example, as noted
above, section 832-30 disregards the operation of the single-entity rule (which
generally disregards transactions that occur between members of the same consolidated
tax group).[85]
This principle is proposed to be explained in Note 1 to subsection 832-30(1) of
the ITAA 1997.
In replacing section 832-30, new subsection
832-30(2) seeks to clarify the operation of the hybrid mismatch rules to
trusts and partnerships. Broadly, proposed subsection 832-30(2) of the ITAA
1997 seeks to deem the trust or partnership (rather than the trustee
or partner) as having:
- made
or received a relevant payment
- held,
acquired or disposed of a relevant asset, interest or other property and
- entered
into or carried out a scheme, or part of a scheme.
The reason for this is to clarify and ensure that the
trust or partnership (which is an entity under section 960-100 of the ITAA
1997), rather than the trustee or partners can be the relevant test entity
under the hybrid mismatch rules.[86]
Proposed subsections 832-30(3) and (4) of
the ITAA 1997 are consequentially amended to ensure that any
reference to the income and profits, or assessable income and deductions of an
entity, is a reference to an entity as defined under new subsections
832-30(1) and (2) of the ITAA 1997 and a reference to a trust or
partnerships’ net income.[87]
Similarly, proposed subsection 832-205(1A) of the ITAA 1997
provides that if a trust is in a Division 832 control group, then the trustee
will also be in the same control group.[88]
Foreign taxes to be disregarded
There is some uncertainty as to whether foreign income tax
includes municipal and state taxes—foreign income tax can be relevant for
the purposes of determining whether a hybrid mismatch arises because:
-
the hybrid integrity rule broadly applies where a payment is
subjected to tax of 10% or less in a foreign country and
-
the hybrid mismatch rules make repeated reference to a payment
being subject to foreign tax.[89]
Proposed subsection 832-130(7) of the ITAA 1997
seeks to clarify that municipal and state taxes are to be disregarded for
the purposes of applying the hybrid mismatch rules.[90]
As explained in the Explanatory Memorandum to the Bill, the Government is
concerned that including such taxes may create an unreasonable compliance
burden on taxpayers by requiring them to consider the taxation consequences for
a payment at multiple levels of government in a foreign jurisdiction.[91]
However, proposed subsection 832-725(1A) of
the ITAA 1997, at item 38 of Schedule 1 to the Bill, clarifies
that municipal and state taxes are still taken into account for the purpose of
applying the hybrid integrity rule – that is, in determining whether the
payment in a foreign jurisdiction is taxed at a rate of 10 per cent or more,
any state and municipal taxes paid will be counted (in this situation, it
appears that the Government does not consider that the additional compliance
burden is unjustified).
Liable entity
Item 15 in Part 1 of Schedule 1 of
the Bill seeks to repeal and substitute subsection 832-325(1) of the ITAA
1997 which defines ‘liable entity’, which is a core concept of
the hybrid rules. Broadly, an entity is a liable entity in Australia or a
foreign country if income tax is imposed on the entity:
- in
respect of all or part of its income or profits or
-
in respect of all or part of the income or profits of another
entity in Australia or a foreign country—for example, in Australia, each
partner in the partnership is a liable entity in respect of the income or
profits of the partnership.
An entity may be a liable entity for a country even if it
has no actual liability to pay income tax.[92]
New subsection 832-325(1) of the ITAA 1997 modifies
the definition of liable entity to specifically include public trading trusts
and superannuation entities (rather than their members). As these entities are
taxed under the general tax law like companies, this amendment ensures that for
the purpose of the hybrid mismatch rules, the public trading trust and
superannuation fund will be treated as the relevant test entity—thereby
reflecting the company-like tax treatment of these entities.[93]
Dual inclusion income
As discussed above, dual inclusion income is income or
profit that is taxed in two countries.[94]
The rules relating to dual inclusion income are complex, but generally, dual
inclusion income can be applied to reduce the neutralising amount for a hybrid
payer mismatch or deducting hybrid mismatch, or give rise to a later year
adjustment for such a mismatch.[95]
Proposed subsection 832-680(1A) of the ITAA
1997, at item 30 of Schedule 1 to the Bill, seeks to clarify that in
applying the dual inclusion income rule to trusts and partnerships, where an
amount of income or profit is subject to Australian tax, it is to be
disregarded but only to the extent that it applies in relation to assessable
income from a foreign source:
As a result, foreign source income of an Australian trust or
partnership which flows through to a foreign resident beneficiary or partner
will be taken to be subject to Australian income tax for the purposes of
applying the dual inclusion income rule.[96]
Application
The amendments in Part 1 of Schedule 1 of
the Bill apply to assessments for income years starting on or after 1 January
2019.[97]
Foreign hybrid mismatch:
Schedule 1, Part 2
The hybrid mismatch rules make a number of references to
equivalent foreign hybrid mismatch rules. Part 2 of Schedule 1 of
the Bill seeks to amend the definition of ‘foreign hybrid mismatch
rules’ and also makes a number of consequential amendments. As stated in the
Explanatory Memorandum to the Bill:
Concerns have been raised that the definition of foreign
hybrid mismatch rules in subsection 995‑1(1) requires the foreign law
to correspond to, or have substantially the same effect as, Division 832.
Therefore, when benchmarking a foreign law, it is uncertain whether the foreign
law is benchmarked against Division 832 as a whole or whether there is scope to
benchmark the foreign law against, for example, the provisions of a particular
hybrid mismatch.[98]
In response to these concerns, the Bill amends the
definition of ‘foreign hybrid mismatch rules’ in subsection
995-1(1) of the ITAA 1997 to include a ‘foreign law corresponding
to’ a type of hybrid mismatch—that is hybrid financial
instrument, hybrid payer, reverse hybrid, branch hybrid, deducting hybrid or
imported hybrid mismatch under Division 832 of the ITAA 1997.[99]
Application
The amendments in Part 2 of Schedule 1 of
the Bill apply to assessments for income years starting on or after 1 January
2020.[100]
Hybrid entities integrity rule:
Schedule 1, Part 3
As discussed above, the hybrid integrity rule broadly
operates to disallow an Australian income tax deduction for a payment of
interest (or a payment of similar character) or an amount paid under a
derivative financial arrangement to a member of the same Division 832 control
group (where the payment is not subject to Australian income tax), foreign tax
of 10 per cent or less is imposed on the payment and it is reasonable to
conclude the scheme was entered into for the purpose of obtaining the tax
advantage.[101]
However, the integrity rule will not apply where the
payment gives rise to a hybrid mismatch under one of the specific hybrid
mismatch rules.[102]
As explained in the Explanatory Memorandum this undermines the operation of the
integrity rule where the specific hybrid mismatch rules do not neutralise the
hybrid mismatch—specific examples of this include where under the
deducting hybrid mismatch rule, Australia is the secondary response country, or
the deduction is sheltered by dual inclusion income.[103]
In response to this concern, the Bill seeks to:
-
remove the pre-condition to the operation of the integrity rule
that there not be a deducting hybrid mismatch.[104]
However, proposed subsection 832-725(7) of the ITAA 1997
clarifies that the integrity rule cannot apply to the extent that a deduction
has been denied under the deducting hybrid mismatch rules[105]
-
insert proposed subsections 832-240(2A) and 832-565(2A) into
the ITAA 1997, to ensure that where a deduction is denied under the
integrity rule, subsequent deductions in future years (that would otherwise
satisfy the deducting hybrid mismatch and integrity rules) will not be
allowed—that is, the integrity rule will continue to deny the deduction
in future years[106]
and
-
make a number of minor technical amendments including clarifying
that the entity entitled to the deduction may not be the paying entity.[107]
Application
The amendments in Part 3 of Schedule 1 of
the Bill apply to assessments for income years starting on or after 2 April
2019.[108]
Franked distributions and
regulatory capital: Schedule 1, Part 4
The amendments in Part 4 of Schedule 1 seek
to address a technical issue that applies the hybrid mismatch rules to the
distribution of Additional Tier 1 Capital.[109] As stated in the Explanatory Memorandum,
this is an unintended outcome that may adversely and significantly impact the
pricing of Additional Tier 1 Capital in Australia:
Additional Tier 1 capital can be issued by ADIs and insurance
companies and other entities that are grouped for prudential purposes. If an
ADI or insurance company (or other grouped entity) that has a foreign branch
issues Additional Tier 1 capital, part of the Additional Tier 1 capital
may be attributable to the foreign branch (depending on the laws of the
particular foreign country) because the relevant entity is carrying on business
in the foreign country where the branch is located (whether or not the
Additional Tier 1 capital is issued in Australia).
An issue has arisen with the operation of the hybrid mismatch
rules because all or part of the distribution on Additional Tier 1 capital
issued by an Australian entity that is attributed to a foreign branch located
in some foreign jurisdictions may be deductible in one or more of those foreign
jurisdictions.
In this regard, currently the hybrid mismatch rules
operate to deny imputation benefits on a distribution if all or part of the
distribution gives rise to a foreign income tax deduction (paragraph 207‑145(db),
paragraph 207‑150(1)(eb) and section 207‑158). An amount that
reflects all or part of the distribution will give rise to a foreign income tax
deduction if an entity is entitled to deduct the amount in working out the tax
base for a foreign tax period under the law of a foreign country dealing with
foreign income tax (section 830‑120).
The amount of the deduction entitlement in the foreign
country for a distribution on the Additional Tier 1 capital instrument issued
by an Australian ADI or insurance company may be for a comparatively small part
of the distribution. However, regardless of how small the foreign income tax
deduction is compared to the amount of the distribution, this will result in
the denial of franking benefits on the whole distribution to investors in the
Additional Tier 1 capital instrument. This would have a significant impact
on the pricing of Additional Tier 1 capital instruments in Australia.[110]
[emphasis added]
The Bill seeks to address these concerns by amending
section 207-158 of the ITAA 1997 to:
… ensure that franking benefits are not denied on
distributions made in respect of an equity interest if the interest forms part
of the Additional Tier 1 capital for the purposes of:
- applicable prudential standards (as defined in subsection 995‑1(1))
– the prudential standards are defined to mean the prudential
standards determined by the APRA and in force under section 11AF of the Banking
Act 1959;
-
applicable
prudential standards determined by APRA and in force under section 32 of
the Insurance Act 1973; or
- applicable
prudential standards determined by APRA and in force under section 230A of
the Life Insurance Act 1995.[111]
The Bill also proposes to insert new section
15-80 of the ITAA 1997 which provides that where all or part
of a distribution gives rise to a foreign income tax deduction, and the
imputation benefit is not denied (due to the proposed amendments to section
207-158 of the ITAA 1997), then the entity making the distribution must
include an amount equal to the foreign income tax deduction in their assessable
income.[112]
Application
The amendments in Part 4 of Schedule 1 of
the Bill apply to distributions made on or after 1 January 2019.[113]
Schedule 2: Single
Touch Payroll—reporting child support information
What is Single Touch Payroll?
Single touch payroll (STP) was first implemented by the Budget Savings
(Omnibus) Act 2016. As explained at page 21 of the Revised Explanatory
Memorandum to the Budget
Savings (Omnibus) Bill 2016, STP was a new reporting framework for
employers with twenty or more employees to automatically report payroll and
superannuation information to the Commissioner of Taxation.[114]
STP generally commenced 1 June 2018 and was extended to employers with less
than 20 employees from 1 July 2019. However as explained on
the ATO website a number of transitional arrangements currently exist to
assist small and micro employers to transition to STP.[115]
One of the more noticeable and practical effects of STP is
that employees can access their group certificate (now known as an income
statement) from their myGov account.[116]
Current reporting obligations
As explained in the Explanatory Memorandum to the Bill, currently,
employers must manually confirm and/or provide information relating to child
support withholding payments. This can be highly intensive and involve duplicate
reporting requirements.[117]
As such, it is expected that allowing employers to report
this information through STP will significantly reduce their administrative
burden.[118]
Further, as discussed below, once reported through STP, the information does
not need to be re-reported to the Child Support Registrar. According to the
Explanatory Memorandum:
An automated data-sharing solution will commence from 1 July
2020 which will enable the sharing of data in near real-time between the ATO
and other Commonwealth agencies where the law already allows for the sharing of
data. This will cover the exchange of child support information reported to the
ATO to the Child Support Registrar.[119]
Background to the proposed
amendment
In the 2019–20 Budget the Government announced it
would extend the information to be reported under STP. The proposed amendment
in Schedule 2 formed part of a broader package of changes aimed at simplifying
and automating the reporting of employment income for social security purposes.[120]
The Budget also stated that these changes would reduce the
compliance burden for employers and individuals reporting information to
multiple Government agencies.[121]
However, as stated in the Explanatory Memorandum to the Bill, a number of these
changes (such as disaggregating gross pay amounts and employee separation
information) are being implemented through legislative instruments made by the
Commissioner of Taxation and are therefore not part of this Bill.[122]
Treasury commenced consultation on the proposed amendments
on 15 January 2020. However, submissions made as part of the consultation process
have not been made publicly available on the Treasury webpage.[123]
It should also be noted that the Social Services and
Other Legislation Amendment (Simplifying Income Reporting and Other Measures)
Act 2020, which has not yet commenced, proposes a number of changes to
STP reporting with a view to increasing information sharing between the ATO and
Services Australia. Additional information can be accessed in the Bills
Digest to the Social Services and Other Legislation Amendment (Simplifying
Income Reporting and Other Measures) Bill 2020.[124]
Financial implications
According to the Explanatory Memorandum, the financial
impact is ‘Nil’.[125]
Key issues and provisions
Changes to the child support
legislation
Items 1 and 2 of Schedule 2 of the
Bill propose new subsection 150D(1) of the CSAA 1989 and new
subsection 16C(1) of the CSRCA 1988 so as to allow the Child Support
Registrar to require the Commissioner of Taxation to provide information about
people, including tax file numbers, that the Commissioner is either in
possession of, or that comes into the Commissioner’s possession after such
a request is made—including requests that are ongoing ones. The proposed
amendments are silent as to what is meant by information, however, it should be
noted that it adopts the exact same language as current subsection 150D(1) of
the CSAA 1989—that is, ‘information about people, including
tax file numbers, being information that is in the possession of the
Commissioner’. As ‘information’ is not defined, it takes its
ordinary meaning.
It should be noted however, that the amendments do not
remove the current restrictions that apply to the use of the requested information—for
example:
- subsection 150D(2) of the CSAA 1989 only allows
information provided to be used to ascertain whether a person may apply for
administrative assessment of child support, to make or amend an administrative
assessment of child support, to ascertain the happening of a child support
terminating event, and/or to identify a person for one of these purposes and
- subsection 16C(2) of the CSRCA 1988 only allows
information provided to be used to facilitate the recovery of debts due to the
Commonwealth under that Act and identify a person for the purposes of
facilitating such debt recovery.
Item 4 of Schedule 2 of the Bill seeks to amend the
CSRCA 1988 by inserting proposed subsection 47(1B). Presently,
section 45 of the CSRCA 1988 allows the Registrar to instruct an
employer to withhold child support amounts from an employee’s salary.
Section 47 of the CSRCA 1988 creates an obligation on an employer to
make payment of these amounts to the Registrar and to notify the Registrar;
subsection 47(1A) requires the employer to notify the Registrar if they fail to
make the relevant deductions. Proposed subsection 47(1B) removes these reporting
requirements where the information has been provided to the Commissioner of
Taxation—that is, it has been voluntarily reported under STP.
Proposed subsection 58(2A) of the CSRCA 1988
specifically excludes the reporting of such information to the Commissioner
of Taxation through STP from being an offence under the CSRCA 1988. This
allows an employer to choose to automatically report the relevant information once
under STP.
Changes to the TAA 1953
Items 6 to 8 of Schedule 2 of the Bill amend Schedule
1 of the TAA 1953 so as to extend STP to include voluntary reporting of
child support payment amounts withheld by an employer. Item 8 inserts proposed
section 389-30 into Schedule 1 of the TAA 1953 and creates
a list of child support deductions (referred to as amounts in the Bill) that
employers can report to the ATO through STP. The relevant amounts and their
reporting obligations are summarised in Table 2.
Table 2: amounts which may be
voluntary reported through STP
| Amount that may
be notified under STP |
When
notification must occur |
| An amount deducted from an employee’s wages under
Part IV of the CSRCA 1988. |
On or before the day on which the deduction is made. |
| A nil amount if an employer is issued a notice under
subsection 45(1) of the CSRCA 1988 and on a day that the notice is in
force/payable (the reporting day) the entity has not withheld an amount from
the employee’s pay either because they have failed to do so, or no wage
is payable. |
On or before the reporting day. |
| An amount an employer paid to the Registrar in accordance
with a notice issued to the employer pursuant to section 72A of the CSRCA
1988 (this section allows the Registrar to recover child support payment
debts from third persons in a limited range of circumstances). |
On or before the day on which payment is made. |
Source: proposed subsection 389-30(1) of Schedule 1 to
the TAA 1953
Application
Items 1 and 2 apply in relation to a
requirement made by the Registrar after the commencement of Schedule 2 of the
Bill (being the first day of the first quarter to occur the day after Royal
Assent). Items 3 to 8 apply to amounts where the entitlement to
notify the Commissioner arises on or after 1 July 2020.[126]
Schedules 3
and 5: deductible gift recipients
|
Schedule 3 amends the ITAA 1997 to create
a new deductible gift recipient (DGR) category for community sheds. Broadly,
a community shed is a public institution that has the dominant purpose of
advancing mental health or addressing social isolation, which provides a
physical location where members of the public can work on projects or
undertake activities in the company of others.
The effect of Schedule 3 is therefore to make
donations to registered charities operating community sheds tax deductible.
Schedule 5 amends the ITAA 1997 to list
eight new entities as having specific DGR status, meaning donations and gifts
to these entities of $2 or more are tax deductible.
|
Background
Schedule 3 implements the Government’s 2019–20
Budget announcement that it would create a new DGR category for men’s and
women’s sheds—entities that meet the requirements of the new
category will be able to be approved as a DGR by the Commissioner of Taxation.[127]
Schedule 5 partially implements the Government’s
2019–20 Budget announcement that six organisations had been approved as
specifically‑listed deductible gift recipients from 1 July 2019
to 30 June 2024—five of the six entities announced in the
2019–20 Budget will receive DGR status.[128]
This Bill seeks to confer DGR status on five of those
organisations.
- Australian Academy of Law
-
Foundation Broken Hill Limited
-
Motherless Daughters Australia Limited
-
Superannuation Consumers’ Centre Limited and
-
The Headstone Project (Tasmania) Incorporated.
In the case of these five entities, DGR status has been
extended by one year from the original date in the 2019–20 Budget.[129]
Schedule 5 also seeks to add a further three
entities to the specific list of DGR entities:
-
the Governor Phillip International Scholarship Trust
-
High Resolves and
-
CEW Bean Foundation—although currently listed as a DGR, its
status expired on 14 November 2007.[130]
DGR status for these three entities was announced in by
the Government in the 2018–19 Mid-Year Economic and Fiscal Outlook (MYEFO).[131]
In the case of these three entities, DGR status has been extended by two years
from the original date in the 2018–19 MYEFO.[132]
What is deductible gift recipient
status?
A taxpayer will be entitled to a tax deduction in respect
of donations (referred to as gifts and contributions) of at least $2 to
organisations that have been approved as DGRs.[133]
To be a DGR, an entity must generally either satisfy one
of the categories listed in Division 30 of the ITAA 1997 or
alternatively, the entity must be specifically listed by name in Division 30 of
the ITAA 1997.[134]
The first method enables the Commissioner of Taxation to approve an entity as a
DGR under Subdivision 30-BA of the ITAA 1997 if it meets the relevant
requirements of a DGR category; if the entity does not meet those requirements,
the second method enables the Parliament to list it by name in the ITAA 1997
via legislative amendment.
New DGR category: ‘community
sheds’
Position of major interest groups
On 20 January 2020, Treasury commenced consultation on a
draft Bill and explanatory memorandum to create a new DGR category for
community sheds.[135]
A total of eleven submissions were received, eleven of which were published (though
the Law Council of Australia’s submission appears to have been
incorrectly uploaded to the Treasury webpage as it does not relate to DGR
sheds). Ten of the published submissions supported the Government’s
decision to create a new DGR category. However, some stakeholders considered that
the proposed category could be widened to accommodate other organisations. The
following specific points were raised:
-
the Australian Men’s Shed Association noted that according
to their annual survey, 73 per cent of Sheds intend to apply for DGR status[136]
-
Australian Neighbourhood Houses & Centres Association and the
Mount Eliza Neighbourhood House considered that DGR status should also be specifically
conferred on Neighbourhood Houses, many
of which have established and supported community sheds[137]
-
the Queensland Men’s Shed Association submitted that the
definition of Community Shed should include State and National Associations and
that the ATO and the Australian Charities and Not-for-profits Commission (ACNC)
should develop ‘clearer guidelines’ on ‘appropriate changes
to shed constitutions that may be required for ACNC and ATO … DGR
endorsement’[138]
-
Justice Connect was critical of the proposed draft legislation
which allowed membership to be limited in some instances based on gender and/or
indigeneity, arguing there may be other groups which impose necessary
restrictions on membership that should be included—for example, groups
limited by a particular criteria for cultural reasons[139]
and
-
The Men’s Table submitted that the definition of a
Community Shed should be expanded and not limited to requiring a project to be
undertaken at a physical location.[140]
Financial implications
The Explanatory Memorandum states that the measure is
estimated to have the following impact on revenue over the forward estimates
period:
| 2018-19 |
2019-20 |
2020-21 |
2021-22 |
2022-23 |
| Nil |
Nil |
Nil |
-$3.0m |
-$5.0m |
Source: Explanatory
Memorandum, Treasury Laws Amendment (2020 Measures No. 2) Bill 2020, p. 5.
Key issues and provisions
Item 1 of Schedule 3 of the Bill inserts proposed
item 1.1.9 into the table in subsection 30-20(1) of the ITAA 1997,
which states that a community shed that is a registered
charity is a DGR entity.[141]
Item 3 of Schedule 3 of the Bill inserts a new definition of
community shed into the Dictionary at subsection 995‑1(1) of the ITAA
1997. A community shed is defined as a public institution
that satisfies all of the following requirements:
-
its dominant purposes are advancing mental health and preventing
or relieving social isolation
-
it seeks to achieve those purposes principally by providing a
physical location where it supports individuals to undertake activities, or
work on projects, in the company of others and
-
there are no criteria for membership of the institution unless
those criteria relate only to gender and/or Indigenous status.
As such, to be a community shed, an important
pre-requisite is the existence of a physical location where activities and
projects are undertaken in the presence of others and membership is open to
all, with exceptions existing for gender specific community sheds and/or community
sheds that are only open to Indigenous persons for cultural reasons.
Pages 54 to 57 of the Explanatory Memorandum provide
additional explanation of the proposed definition.
Application
The amendments apply to gifts and contributions made on or
after 1 July 2020.[142]
New specifically listed DGRs
Summary of the proposed amendments
The following table summarises the proposed amendments. As
stated above, the effect of these amendments is that donations of at least $2 to
these organisations will generally be tax deductible.[143]
Table 3 summarises the purpose of each proposed DGR and the relevant period of
time that taxpayers will be able to receive a tax deduction for donations to
them.
Table 3: specifically listed DGRs
| Name |
Purpose |
Dates DGR status conferred[144] |
| Governor Phillip International Scholarship Trust |
Registered charity that provides scholarships to
master’s degree students. Scholarships cover students’ university
and college fees, and student accommodation costs. |
1 July 2018 to 30 June 2025. |
| High Resolves |
Registered charity that designs and delivers citizenship
and leadership learning experiences for young people. |
1 July 2018 to 30 June 2025 |
| C E W Bean Foundation |
Registered charity that honours war correspondents,
photographers and artists that captured and recorded Australian activities in
war. |
1 July 2018 to 30 June 2025 |
| Australian Academy of Law
|
Registered charity that promotes legal scholarship, legal
research, legal education, legal practice, and the administration of justice.
The Academy provides scholarships and research grants that advance legal
education and the discipline of law, and promote ethical conduct and
professional responsibility. |
1 July 2019 to 30 June 2025 |
| Foundation Broken Hill Limited
|
Registered charity that provides loans and grants to
support employment opportunities and social development in Broken Hill and
the surrounding region. |
1 July 2019 to 30 June 2025 |
| Motherless Daughters Australia Limited
|
Registered charity that provides support to girls and
women whose mothers have died. |
1 July 2019 to 30 June 2025 |
| Superannuation Consumers Centre Limited |
Registered charity that supports Australian consumers to
access quality superannuation advice and manage their retirement savings. |
1 July 2019 to 30 June 2025 |
| The Headstone Project (Tasmania) Incorporated
|
Registered charity that locates the unmarked graves of
Tasmanian veterans of the First World War and installs headstones. |
1 July 2019 to 30 June 2025 |
Source: Items 1 to 5 of Schedule 5 to the
Bill and Explanatory
Memorandum, op. cit., pp. 67–68.
Additional information can be found at pages 67 to 71 of
the Explanatory Memorandum to the Bill.
Financial implications
The Explanatory Memorandum states:
The component of the MYEFO measure being implemented by this
Schedule was estimated to have a cost to revenue of $0.6 million over the
forward estimates period at the time of the MYEFO. The component of the Budget
measure being implemented by this Schedule was estimated to have a cost of
revenue of $0.1 million over the forward estimates period at the time of the
Budget. The extension of the deductible gift recipient status of these entities
to 30 June 2025 (inclusive) has no financial impact over the current
forward estimates period.[145]
Schedule 4: funding
capital increases for the World Bank Group
|
Schedule 4 amends the International
Finance Corporation Act 1955 (IFCA 1955) and the International
Monetary Agreements Act 1947 (IMAA 1947) to:
- give effect to resolutions voted on by Australia in September
2018 to provide additional funding to the World Bank
- facilitate Australia making additional capital contributions to
the World Bank in the future—specifically to the International Bank for
Reconstruction and Development (IBRD) and the International Finance
Corporation (IFC) and
- streamline and expedite the existing legislative processes for
making such contributions, while aiming to ensure sufficient Parliamentary
safeguards and scrutiny continue to exist.
|
The World Bank
Overview
Founded at the 1944 Bretton Woods conference, the World
Bank is an international financial institution that provides financial and
technical assistance to developing countries.[146]
The World Bank comprises of 189 member countries and is focussed on fighting
poverty, supporting economic growth and ensuring sustainable gains in the
quality of people’s lives in developing countries.[147]
As stated on the World Bank website, it provides:
…low-interest loans, zero to low-interest credits, and
grants to developing countries. These support a wide array of investments in
such areas as education, health, public administration, infrastructure,
financial and private sector development, agriculture, and environmental and
natural resource management. Some of our projects are cofinanced with
governments, other multilateral institutions, commercial banks, export credit
agencies, and private sector investors.
We also provide or facilitate financing through trust fund
partnerships with bilateral and multilateral donors. Many partners have asked
the Bank to help manage initiatives that address needs across a wide range of
sectors and developing regions.[148]
Australia has been a member of the World Bank since 5
August 1947.[149]
Organisational structure
The World Bank Group is comprised of five distinct but
complimentary organisations:
-
The International Bank for Reconstruction and Development (IBRD)—the
largest development bank in the world, it provides
loans, guarantees, risk management products, and advisory services to
middle-income and creditworthy low-income countries, as well as coordinating responses to regional and global challenges.[150]
-
The International Finance Corporation (IFC)—specifically
focused on increasing private sector- investment in, and development of, developing
and less developed countries.[151]
-
The International
Development Association (IDA)—one of the largest sources of
assistance for the world’s seventy-six poorest countries, it aims to
reduce poverty by providing no, or low-interest loans and grants for programs
that boost economic growth, reduce inequalities, and improve people’s living
conditions.[152]
-
The Multilateral
Investment Guarantee Agency (MIGA)—seeks to promote cross-border investment in developing countries by providing guarantees to
protect investors and lenders from non-commercial risks, such as political risk
or non-payment by a sovereign entity.[153]
-
The International
Centre for Settlement of Investment Disputes (ICSID)—an
international arbitration institution focussed on resolving disputes amongst
international investors.[154]
The proposed amendments in Schedule 4 of the Bill specifically
relate to Australia’s obligations and interactions with the IBRD and IFC.
Australia’s commitment to
purchase capital shares
In April 2018, the World Bank Group proposed a US$82.6
billion capital increase for the IBRD and IFC. On 27 September 2018 the
Treasurer, in his capacity as Australia’s Governor to the World Bank,
voted to approve the resolutions.[155]
Subsequently the World Bank Group announced endorsement of
the IBRD capital increase on 1 October 2018 and the IFC capital
increase on 16 April 2020.[156]
As a
result, Australia now has obligations to the IBRD and IFC.
Australia’s IBRD obligations
Australia was allocated an additional 7,462 shares in the
IBRD at US$120,635 per share, and is required to pay the World Bank a
proportion of the share value over a five year period, with a callable capital
component attached to the unpaid amounts (meaning the World Bank may call upon
Australia to pay that amount).[157]
The Explanatory Memorandum explains Australia’s obligations as follows:
Australia’s subscription comprises 3,243 shares under a
‘general capital increase’, and 4,219 shares under a
‘selective capital increase’ (with different payment arrangements
applying to the different increases). Australia’s contribution to the
IBRD capital increase results in around A$154 million payable over five years
starting 2019-20 and a callable capital component of A$1,016.2 million.[158]
Australia’s IFC obligations
The World Bank resolution relating to the IFC means that Australia
may purchase an additional 102,370 shares at a price equivalent to US$1,000
each.[159]
According to the Explanatory Memorandum:
Australia’s contribution would be around A$144 million
payable over five years. The IFC also proposes to convert its retained earnings
into paid-in capital and so Australia will also receive fully paid in shares to
the value of US$313.5 million (around A$402.6 million).[160]
Key provisions and issues
Payments to the IBRD are regulated by the IMAA 1947 and
payments to the IFC by the IFCA 1955. Schedule 4 to the Bill seeks to modify
how these payments are currently authorised.
New framework under the IMAA
1947
The IMAA 1947 approves Australia’s membership
of the IBRD and sets out, amongst other things, that the Consolidated Revenue
Fund can be appropriated by the Treasurer to buy not more than 7,128 additional
shares of capital bank stock.[161]
As noted in the Explanatory Memorandum, this authorised the purchase of
additional bank stock in 2010.[162]
The IMAA 1947 does not contain a standing
appropriation allowing the Treasurer to use funds from the Consolidated Revenue
Fund (CRF) to buy additional shares of capital stock in the IBRD. As such, Parliament
must specifically approve such a request by amending section 9 of the IMAA
1947 to authorise such an appropriation.[163]
Item 8 of Schedule 4 to the Bill seeks to
amend this by repealing section 9 of the IMAA 1947 and replacing it with
a new standing appropriation (also known as a special appropriation). It is
proposed this will be facilitated by creating a power in section 9 of the IMAA
1947 to allow the relevant Minister (usually the Treasurer) to enter into
one or more agreements with the IBRD to buy additional IBRD capital stock, and
to draw these funds from the CRF.[164]
This means that the IMAA 1947 will not need to be
amended every time Australia seeks to purchase additional stock in the IBRD
under the IMAA 1947. The Explanatory Memorandum states this new approach
is consistent with all other agreements and their related appropriations
covered by the IMAA 1947:
‘[a]ppropriations in these contexts are appropriate
because they ensure that Australia is able to comply with any international
obligations it has under an agreement to make payments of a particular
kind’.[165]
The Explanatory Memorandum contends that the proposed amendment
does not provide the Treasurer with an unfettered discretion to enter into such
agreements and draw down the Consolidated Revenue Fund. The Explanatory
Memorandum states that entering into such an arrangement or agreement
constitutes treaty action and is therefore required to be tabled in Parliament
with a National Interest Analysis for consideration by the JSCOT and approved
by the Governor-General:
These processes will apply to the current share subscription
that these amendments are specifically intended to facilitate, as well as any
future subscriptions proposed by the IBRD or IFC that Australia chooses to
adopt. The processes ensure there is appropriate Parliamentary scrutiny of any
decision of the Government to enter into agreements to subscribe to additional
shares in the capital stock of the IBRD and IFC. In addition to the standard
JSCOT processes, the Minister is required to provide details about any payments
to the IBRD through the annual reporting requirements in section 10 of the IMAA
1947.[166]
However, the Scrutiny of Bills Committee had concerns with
this aspect of the proposed amendments—those concerns are discussed below.
Ultimately, whether such a standing appropriation and the above safeguards are suitable
will be a question for Parliament to resolve when considering this Bill.
New framework under the IFCA
1955
The IFCA 1955, amongst other things,
approves Australia’s membership in the IFC, sets out the Articles of
Agreement giving rise to the IFC and authorises the appropriation of funds to
purchase shares in the IFC.[167]
Item 1 of Schedule 4 to the Bill seeks to
repeal and substitute a new definition of ‘Agreement’ in section 3
of the IFCA 1955. Presently, section 3 defines ‘Agreement’
as per the full Articles of Agreement and amendments to it, which are
replicated as Schedules to the Act. The proposed new definition significantly
reduces the length of the IFCA 1955 by incorporating the relevant
Articles of Agreement by reference (consistent with modern drafting
approaches).[168]
Further, this new definition corrects two omissions from the previous list of
Agreements. As such, this not only reduces the length of the IFCA 1955 but
also corrects errors with the existing definition of ‘Agreement’. Items
4 to 7 repeal Schedules 1 to 4 of the IFCA 1955
as the Agreement will be incorporated by reference.
Item 2 of Schedule 4 to the Bill repeals section
5 of the IFCA 1955 and inserts:
- new section 5 creating a standing appropriation under
which the CRF may be appropriated to meet Australia’s obligations to
subscribe to shares in the IFC
- new subsection 5A(1) enabling the Treasurer to update the
list of Agreements through a legislative instrument—that is, if the
Articles underpinning the IFC are updated, the Treasurer can incorporate this
into the IFCA 1955 through a legislative instrument, rather than through
an Act of Parliament (the Scrutiny of Bills Committee expressed concerns (discussed
below) about whether a sufficient level of Parliamentary scrutiny will exist
with the proposed new framework)
- new subsection 5A(2) providing that such a legislative
instrument cannot commence until after the disallowance period for the
instrument has passed.[169]
This deferred commencement provides Parliament with the opportunity to consider
whether any amendments are needed before the instrument takes effect[170]
and
- new subsections 5B(1) and (2) allowing the relevant
Minister (usually the Treasurer) to enter into an arrangement to purchase
additional shares of capital in the IFC and creating a new standing appropriation
under which the CRF may be appropriated for the purposes of buying the
additional shares—this creates a standing appropriation for future
purchases of IFC stock.
However, similar to the proposed section 9 of the IMAA
1947, this constitutes a treaty action and will therefore be
required to be tabled in Parliament with a National Interest Analysis for
consideration by the Joint Standing Committee on Treaties and approved by the
Governor-General.[171]
Scrutiny of Bills Committee
concerns
The Scrutiny of Bills Committee expressed concern that the
proposed amendment would enable future capital increase to the IBRD or the IFC
to occur:
-
where the minister enters into an agreement with the IBRD or the
IFC that provides for Australia to buy additional shares of the capital stock
of the IBRD or the IFC or
-
where the Treasurer has, by legislative instrument, given notice
of an amendment of the Articles of Agreement of the IFC that imposes
obligations on Australia to subscribe to shares in the IFC and the disallowance
period for the instrument has passed.[172]
In particular, the Committee expressed the view that it
does not generally consider consistency with existing provisions to be
sufficient justification for limiting parliamentary oversight and did not
consider possible scrutiny through the JSCOT as an appropriate substitute for
the level of scrutiny inherent in the passage of a Bill through both Houses of
the Parliament. [173]
Accordingly, the Committee drew its scrutiny concerns to
the attention of senators and left it to the Senate as a whole to consider the
appropriateness of removing the requirement to amend primary legislation to
facilitate Australia making additional capital contributions to the IBRD and
the IFC.[174]
Financial implications
The Explanatory Memorandum states:
‘Australia’s capital contributions will have no direct impact on
underlying cash as the payment will be classified as an equity investment in
financial assets’.[175]
Joint Standing Committee on
Treaties
The Joint Standing Committee on Treaties (JSCOT) has
commenced examination of the proposed increases of capital to the IBRD and IFC.
Submissions closed on 5 June 2020, and the Treasury and Department of Foreign
Affairs both appeared before JSCOT on 22 May 2020.[176]
Further details are available at each inquiry homepage: Capital
Increase WBG IBRD and Capital
Increase WBG IFC.
Schedule 6: tax
secrecy
|
Schedule 6 amends the TAA 1953 to ensure
that the disclosure of JobKeeper information by the ATO to the Fair Work
Commission and Fair Work Ombudsman is not an offence under the tax secrecy
provisions of the TAA 1953.
|
Overview
Presently, section 355-25 of Schedule 1 to the TAA 1953
creates a general offence where a taxation officer discloses protected
information to another entity, punishable by up to two years imprisonment. Protected
information is broadly defined in section 355-30 of the same Act to be
information disclosed or obtained under a taxation law (other than the Tax
Agent Services Act 2009) that relates to an entity and identifies, or is
reasonably capable of identifying, that entity.
A number of exceptions to the offence exist, including
(but not limited to) disclosure of publicly available information,[177]
where disclosure was required in performing duties,[178]
making certain disclosures to a Minister[179]
and for other Government purposes (for example providing taxation information
to other government departments, agencies, regulatory bodies or courts and
tribunals).[180]
Key change: enabling JobKeeper
information to be disclosed
Item 1 of Schedule 6 inserts new item
5AB into the table in subsection 355-65(8) of Schedule 1 to the TAA 1953
which details ‘other Government purposes’ tax secrecy
exceptions. This will enable disclosure of information that relates to the JobKeeper
scheme (within the meaning of the Coronavirus Economic
Response Package (Payments and Benefits) Rules 2020) to the Fair Work
Commission and Fair Work Ombudsman which is required for the purpose of
administering the Fair
Work Act 2009.[181]
As stated in the Explanatory Memorandum to the Bill, the proposed amendments
allow:
…protected information related to the JobKeeper scheme
to be disclosed to the Fair Work Commission and the Fair Work Ombudsman for the
purposes of the administration of the Fair Work Act 2009. This allows
these entities to receive information from the Commissioner of Taxation
relating to the JobKeeper scheme that is required to appropriately address
issues concerning compliance with obligations under the Fair Work Act 2009
(including instruments made under that Act).[182]
Importantly, the proposed amendments are not limited to
the period that the JobKeeper scheme operates—that is, they are operative
until repealed.[183]
The reason for this is explained in the Explanatory Memorandum to the Bill:
However, while the JobKeeper scheme only operates for a
limited period, information sharing is not restricted to this period. Instead, the
amendments allow the sharing of protected information in relation to the
JobKeeper scheme with the Fair Work Commission and the Fair Work Ombudsman
after the final payments are made under the JobKeeper scheme. This flexibility
allows for effective administration in relation to disputes, investigations and
other outstanding matters regarding the JobKeeper scheme that may continue
after all payments have been made.[184]
Application
The proposed amendments will apply to information
disclosed or records made on or after the day of commencement of Schedule 6,
whether the information was obtained before, at or after commencement.[185]
Financial
implications
The Explanatory Memorandum states that this proposal has
‘nil’ financial impact.[186]
[1]. M Sukkar, ‘Second reading speech: Treasury Laws Amendment (2020 Measures No. 2)
Bill 2020’, House of
Representatives, Debates, 13 May 2020, p. 3248.
[2]. Ibid.
[3]. Senate
Standing Committee for the Selection of Bills, Report,
5, 2020, The Senate, Canberra, 12 June 2020, p. [3].
[4]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 7, 2020, The Senate, Canberra, 10 June 2020, pp. 28–30.
[5]. Joint
Standing Committee on Treaties (JSCOT), Inquiry
into the International Bank for Reconstruction and Development (IBRD) General
Capital Increase and Selective Capital Increase (Washington DC, 1 October 2018
(Capital Increase WBG IBRD), Inquiry website, n.d.; JSCOT, Capital
Increase WBG IFC, Parliament of Australia website, 27 May 2020.
[6]. The
Statement of Compatibility with Human Rights can be found at pages 77 to 86 of
the Explanatory
Memorandum to the Bill.
[7]. Parliamentary
Joint Committee on Human Rights, Human
rights scrutiny report, 6, 2020, 20 May 2020, p. 22.
[8]. Items
2 and 8 of Schedule 4 to the Bill.
[9]. Organisation
for Economic Co-operation and Development (OECD), Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2:
2015 Final Report, OECD, Paris, October 2015,
p. 11.
[10]. OECD, Action
Plan on Base Erosion and Profit Shifting, OECD, Paris,
July 2013, pp. 15–16.
[11]. Ibid.
[12]. Revised
Explanatory Memorandum, Treasury Laws Amendment (Tax Integrity and Other
Measures No. 2) Bill 2018, p. 3.
[13]. Explanatory
Memorandum, Treasury Laws Amendment (2020 Measures No. 2) Bill 2020, p. 4.
[14]. Income Tax
Assessment Act 1997 (ITAA 1997), sections 832-10 and 832-15.
[15]. Ibid.,
section 832-110.
[16]. Ibid.,
section 832-105.
[17]. Ibid.,
subsections 832-105(1) and (3).
[18]. Ibid.,
note to subsection 832-105(1) and sections 832-195, 832-300, 832-390, 832-465
and 832-620.
[19]. Ibid.,
subsection 832-105(2) and (3).
[20]. Ibid.,
note to subsection 832-105(1) and sections 832-195, 832-300, 832-390, 832-465
and 832-620.
[21]. Ibid.,
subsection 832-110(1) to (3).
[22]. Ibid.,
note to subsection 832-110(1), section 832-540 and section 832-620.
[23]. Ibid.,
subsection 832-110(4) to (6).
[24]. Ibid.,
subsection 832-110(3).
[25]. Ibid.,
note to subsection 832-110(1), and section 832-620.
[26]. Ibid.,
section 832-30. As discussed in more detail below, this section seeks to create
a uniform basis for recognising payments between entities and to ensure that
hybrid rules apply consistently between countries where payments may be
disregarded due to tax purposes.
[27]. Ibid.,
section 832-40.
[28]. OECD,
Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 -
2015 Final Report, op. cit., p. 25.
[29]. Please
note that not all elements of Subdivision 832-C of the ITAA 1997 are
included in this discussion.
[30]. ITAA
1997, para. 832-200(1)(a) and sections 832-215 and 832-220, which defines
relevant financial arrangements to include, debt interest, an equity interest,
derivative financial arrangement (the instrument) or a reciprocal purchase
agreement, a securities lending arrangement or similar arrangement where an
entity acquires a debt interest, equity interest or a derivative financial
arrangements.
[31]. Ibid.,
paragraph 832-215(1)(b).
[32]. Ibid.,
paras 832-220(1)(b) and (c); paras 832-225(1)(b) and (c); subsections
832-220(2) and 832-225(2).
[33]. Ibid.,
subsections 832-200(3) and (6).
[34]. Ibid.,
para. 832-200(4)(a); section 832-205—a Division 832 control group
is one where two or more entities are in the same consolidated accounting
group; or one of the entities hold a 50% or more participation interest in each
of the other entities; or a third entity holds a 50% or more participation
interest in each of the other entities.
[35]. Ibid.,
subsection 832-200(4).
[36]. Ibid.,
subsection 832-200(6) and section 832-210.
[37]. Ibid.,
section 832-180—broadly provides that, where an entity would be entitled
to a deduction (but for the operation of the hybrid mismatch rules) and the
deduction is the deduction component of a hybrid financial instrument mismatch,
then a deduction will be denied equal to the hybrid financial instrument
mismatch amount (the primary response).
[38]. Ibid.,
section 832-185—broadly provides that, where an entity is the
recipient of a payment that gives rise to a hybrid financial mismatch, and the
deduction component of the mismatch is a foreign income tax deduction and the
foreign country does not have hybrid mismatch (or similar rules) dealing with
the payment, then an amount equal to the amount of hybrid mismatch is included
in the recipient’s Australian income for that tax year.
[39]. Ibid.,
section 832-195.
[40]. Foreign
income tax deduction is currently defined in section 832-120 of the ITAA
1997, but the definition is proposed to be amended by the Bill to clarify
its meaning.
[41]. ITAA
1997, section 832-195.
[42]. OECD,
Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 -
2015 Final Report, op. cit., p. 50.
[43]. Ibid.
[44]. ITAA
1997, sections 832-280 and 832-320 broadly characterises the
non-including country as the country in which the hybrid payer makes a payment
that is disregarded, resulting in non-inclusion.
[45]. ITAA
1997, sections 832-305, 832-310 and 832-20.
[46]. Ibid.,
section 832-320.
[47]. Ibid.,
subsections 832-305(1), (3) and (4).
[48]. Ibid.,
subsection 832-310(3).
[49]. Ibid.,
sections 832-285 and 832-290.
[50]. Ibid.,
Subdivision 832-I contains detailed rules defining dual inclusion income and
how to calculate it.
[51]. Ibid.,
section 832-300.
[52]. Transparent
entities, also referred to as flow-through, are entities where the income or
profits of the entity flow through to another entity, and tax is levied on that
entity. Trusts and partnerships are common examples of transparent entities, as
the beneficiaries in receipt of trust distributions or partners of a
partnership will generally be recognised as being in receipt of that income and
subject to tax rather than the trust or partnership itself.
[53]. OECD,
Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 -
2015 Final Report, op. cit., p. 56.
[54]. Ibid.,
p. 55.
[55]. ITAA
1997, section 832-375.
[56]. Ibid.,
subsection 832-395(1).
[57]. Ibid.,
section 832-400 and subsection 832-405(2).
[58]. Ibid.,
section 832-400 and subsection 832-405(3).
[59]. Ibid.,
subparagraphs 832-395(1)(b) and 832-410(2)(c); subsections 832-395(3) and (4).
[60]. Ibid.,
subsection 832-400(3).
[61]. Ibid.,
subsection 832-380(2).
[62]. Ibid.,
section 832-390.
[63]. OECD,
Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 -
2015 Final Report, op. cit., p. 68.
[64]. A
permanent establishment broadly refers to a business operation carried on by a
non-resident, or a branch operated by a non-resident, through a fixed place of
business in another country—a permanent establishment will be treated as
a resident for Australian tax purposes.
[65]. ITAA
1997, section 832-450 and subsection 832-455(2).
[66]. Ibid.,
subsections 832-470(1), 832-480(1) and section 832-485—a branch hybrid
is broadly defined to include an entity that is treated as a permanent
establishment or branch in Australia or a foreign country, but the relevant
payment is not subject to tax in either Australia or the foreign country.
Please note this is a highly simplified summary of a branch hybrid under
section 832-485.
[67]. Ibid.,
subsection 832-480(2).
[68]. Ibid.,
subsection 832-480(3).
[69]. Ibid.,
subparagraph 832-470(1)(b).
[70]. Ibid.,
subsection 832-475(3).
[71]. Ibid.,
section 832-465.
[72]. Ibid.,
sections 832-525, 832-535 and 832-555.
[73]. Ibid.,
section 832-545 and 832-550.
[74]. Ibid.,
section 832-325.
[75]. Ibid.,
paragraph 832-550(c) and section 703-5.
[76]. Ibid.,
subsection 832-545(4).
[77]. Ibid., section 832-555 which broadly provides a
country in which the amount gives rise to a deduction is a primary response
country, unless they are a secondary response country as outlined in
subsections 832-555(4) to (8).
[78]. Ibid., see generally sections 832-535 and
832-555.
[79]. Ibid., section 832-540.
[80]. OECD, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 -
2015 Final Report, op. cit., pp. 83–84.
[81]. ITAA 1997, section 832-615.
[82]. Ibid., paragraphs 832-625(1)(a)–(c).
[83]. Ibid., subsection 832-620(2).
[84]. The Treasury, ‘Tax
Integrity – Clarifying the Operation of the Hybrid Mismatch Rules’, Treasury website, n.d.
[85]. Explanatory Memorandum, op. cit., p. 15;
ATO, ‘Consolidation’, ATO website, last modified
25 February 2016: consolidation allows wholly-owned corporate groups to operate
as a single entity for income tax purposes. Consolidation aims to reduce
compliance costs for business, remove impediments to the most efficient
business structures and improve the integrity of the tax system.
[86]. Explanatory Memorandum, op. cit., p. 16.
[87]. A number of consequential amendments to give
effect to this (such as referring to ‘net income’ removing
‘trustee’ and referring to a MEC Group) are contained in items
5, 6, 14, 16, 17, 19, 21, 22, 25, 36, 39 and 40 in Part 1 of Schedule 1 of
the Bill.
[88]. Item 12 in Part 1 of Schedule 1 of the
Bill.
[89]. Explanatory Memorandum, op. cit., p. 32.
[90]. Item 11 in Part 1 of Schedule 1 of the
Bill.
[91]. Explanatory Memorandum, op. cit., p. 32.
[92]. ITAA 1997, subsections 832-325(1), (2)
and (4); Explanatory Memorandum, op. cit., p. 18.
[93]. Page 21 of the Explanatory Memorandum states that
subsection 832-325(2) specifies when an entity is a liable entity in respect of
another entity’s (the test entity’s) income or profits. A
modification is being made so that an entity is not a liable entity in respect
of the income or profits of a test entity as a result of the operation of
subparagraph 832-325(1)(a)(ii), (a)(iii) or (b)(ii). This reflects the
company-like taxation treatment of the test entity in these circumstances.
[94]. ITAA 1997, section 832-675.
[95]. Explanatory Memorandum, op. cit., p. 22.
[96]. Ibid.
[97]. Item 41 of Part 2 of Schedule 1 of the
Bill.
[98]. Explanatory Memorandum, op. cit., p. 28.
[99]. Item 50 in Part 2 of Schedule 1 of the
Bill. The Bill also makes a number of consequential amendments to ensure that
subsequent references to foreign laws corresponding to hybrid mismatch rules
(including when a primary or secondary response is required) are consistent
with the updated definition in subsection 995-1(1) of the ITAA 1997—
items 42–49 in Part 2 of Schedule 1 to the Bill.
[100]. Item 51 in Part 2 of Schedule 1 of the Bill.
[101]. ITAA 1997, section 832-720.
[102]. Ibid., subsection 832-725(6).
[103]. Explanatory Memorandum, op. cit., pp.
34–35.
[104]. Item 58 in Part 3 of Schedule 1 of the Bill.
[105]. Item 59 in Part 3 of Schedule 1 of the Bill.
[106]. Items 52 and 53 in Part 3 of Schedule 1 of the Bill;
for a more detailed explanation see: Explanatory Memorandum, op. cit., pp.
35–39.
[107]. Items 54 to 57 in Part 3 of Schedule 1 of the Bill.
[108]. Item 60 in Part 2 of Schedule 1 of the Bill.
[109]. What comprises Additional Tier 1 Capital is set out in Banking
(prudential standard) determination No. 4 of 2017.
[110]. Explanatory Memorandum, op. cit., pp. 39–40.
[111]. Ibid., pp. 40–41.
[112]. Item 62 in Part 2 of Schedule 1 of the Bill.
[113]. Item 64 in Part 2 of Schedule 1 of the Bill.
[114]. Revised
Explanatory Memorandum, Budget Savings (Omnibus) Bill 2016, p. 21. See
also, Australian Taxation Office (ATO), ‘Single
Touch Payroll: For employers’, Fact Sheet, ATO website.
[115]. ATO,
‘Single
Touch Payroll employer reporting guidelines – About Single Touch Payroll’,
ATO website, last updated 27 March 2020.
[116]. Ibid.
[117]. Explanatory
Memorandum, Treasury Laws Amendment (2020 Measures No. 2) Bill 2020, pp. 45–46.
[118]. Ibid., p. 46.
[119]. Ibid.
[120]. Australian
Government, ‘Part
2: Expense measures’, Budget measures: budget paper no. 2:
2019–20, pp. 158 and 170.
[121]. Ibid.
[122]. Explanatory
Memorandum, op. cit., p. 46.
[123]. Australian
Government, ‘Single
Touch Payroll Reporting – Child support information’, Treasury
webpage.
[124]. M
Klapdor, Social
Services and Other Legislation Amendment (Simplifying Income Reporting and
Other Measures) Bill 2020, Bills digest, 85, 2019–20,
Parliamentary Library, Canberra, 2020.
[125]. Explanatory
Memorandum, op. cit., p. 4.
[126]. Subitems
9(1) and (2) of Schedule 2 to the Bill.
[127]. Australian
Government, ‘Part
1: Revenue measures’, Budget measures: budget paper no. 2:
2019–20, p. 20.
[128]. Ibid.,
p. 20.
[129]. Ibid;
items 1 to 4 of Schedule 5 of the Bill.
[130]. ITAA
1997, table item 5.2.26 in subsection 30-50(2).
[131]. J
Frydenberg (Treasurer) and M Cormann (Minister for Finance and the Public
Service), Mid-year
economic and fiscal outlook—2018–19, p. 127.
[132]. Ibid;
items 1 and item 5 of Schedule 5 of the Bill.
[133]. Income Tax
Assessment Act 1997 (ITAA 1997), sections 8-5 and 30-15.
Section 30-15 imposes specific rules about the deductibility of particular
gifts and contributions.
[134]. Ibid.,
section 30-120.
[135]. Australian
Government, ‘New
Deductible Gift Recipient (DGR) category for Men’s Sheds and
Women’s Sheds’, Treasury webpage.
[136]. Australian
Men’s Shed Association, Submission to Treasury, Deductible
Gift Recipient Category – Community Sheds, 13 February 2020, p.
[2].
[137]. Australian
Neighbourhood House and Centres Association (ANHCA), Submission
to Treasury, undated, p. [4]; Mount Eliza Neighbourhood House, Submission
to Treasury, Submission
regarding DGR status for Men’s Sheds and Women’s Sheds, undated;
ANHCA, ‘Neighbourhood Houses and
Centres’, ANHCA website.
[138]. Queensland
Men’s Shed Association, Submission to Treasury, Submission
to The Treasury on the draft bill and explanatory memorandum for the new
deductible gift recipient (DGR) general category for Men’s Sheds and
Women’s Sheds prepared by the Queensland Men’s Shed Association Inc
(QMSA), 14 February 2020, p. [1]
[139]. Justice
Connect, Submission to Treasury, New
Deductible Gift Recipient (DGR) category for Men’s Sheds and
Women’s Shed, 13 February 2020, pp [1–2].
[140]. The
Men’s Table, Submission to Treasury, Submission:
New Deductible Gift Recipient (DGR) category for Men’s Sheds and
Women’s Sheds, undated, pp. [3–4].
[141]. Under subsection 995-1(1) of the ITAA 1997 registered
charity means an entity that is registered under the Australian
Charities and Not‑for‑profits Commission Act 2012 as
the type of entity mentioned in column 1 of item 1 of the table in
subsection 25‑5(5) of that Act—namely, a charity.
‘Charity’ is defined in section 5 of the Charities Act 2013.
For further information see: Australian Charities and Not-for-profits
Commission (ACNC), ‘Legal
meaning of charity’, ACNC website.
[142]. Item
4 of Schedule 3 of the Bill.
[143]. ITAA
1997, section 8-5, see section 30-15 for specific rules about the
deductibility of gifts and contributions.
[144]. That
is, donations of at least $2 made to the entity during this period will be tax
deductible.
[145]. Explanatory
Memorandum, op. cit., p. 7.
[146]. World
Bank, ‘What we do’,
‘What
is the difference between the World Bank Group and the IMF?’ and
‘Bretton
Woods Monetary Conference, July 1-22, 1944’, World Bank webpages.
[147]. World
Bank, ‘History’,
op. cit, and World Bank, ‘Member Countries’,
op. cit.
[148]. World
Bank, ‘What we do’,
op. cit.
[149]. World
Bank, ‘Members’, World Bank
website.
[150]. World
Bank, ‘International
Bank For Reconstruction And Development’, World Bank website.
[151]. International
Finance Corporation (IFC), ‘Overview’,
IFC website.
[152]. International
Development Association (IDA), ‘What is IDA’, IDA
website.
[153]. Multilateral
Investment Guarantee Agency (MIGA), ‘About us’, MIGA website.
[154]. International
Centre for Settlement of Investment Disputes (ICSID), ‘About’,
ICSID website.
[155]. Explanatory
Memorandum, op. cit., p. 59–60
[156]. Ibid.,
p. 60
[157]. Ibid.
[158]. Ibid.
[159]. Ibid.
[160]. Ibid.
[161]. International
Monetary Agreements Act 1947 (IMAA 1947), section 9.
[162]. Explanatory
Memorandum, op. cit., p. 60.
[163]. Ibid,
pp. 60–61.
[164]. The
Bill also seeks to remove the reference to the previous appropriation issued in
2010. Pursuant to section 19 of the Acts Interpretation
Act 1901 , the reference to the ‘Minister’ includes
the Treasurer and any other Minister in the Treasury portfolio who administers
the IMAA 1947.
[165]. Explanatory
Memorandum, op. cit., p. 60–61.
[166]. Explanatory
Memorandum, op. cit., p. 64.
[167]. International
Finance Corporation Act 1955 (IFCA 1955), sections 3, 4 and 5.
[168]. Explanatory
Memorandum, op. cit., p. 65.
[169]. Proposed
subsection 5A(2) of the IFCA 1955 proposes that the instrument
commences at the later of: the earliest day applicable under subsection 12(1)
if the Legislation
Act 2003 (dealing with commencement of legislative instruments);
or the start of the day immediately after the last day on which a resolution
referred to in subsection 42(1) of the Legislation Act (dealing with
disallowance) disallowing the instrument could be passed.
[170]. Explanatory
Memorandum, op. cit., p. 66.
[171]. Ibid.,
p. 66.
[172]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, op. cit., p. 30.
[173]. Ibid.
[174]. Ibid.
[175]. Explanatory
Memorandum, op. cit., p. 6.
[176]. JSCOT,
Capital
Increase WBG IBRD, op. cit.; JSCOT, Capital
Increase WBG IFC, op. cit.
[177]. Section
355-45 of Schedule 1 of the TAA 1953.
[178]. Section
355-50 of Schedule 1 of the TAA 1953.
[179]. Section
355-55 of Schedule 1 of the TAA 1953.
[180]. Section
355-65 of Schedule 1 of the TAA 1953.
[181]. Item
1 of Schedule 6 to the Bill which inserts new item 5AB
into the table in subsection 355-65(8) of Schedule 1 to the TAA 1953.
[182]. Explanatory
Memorandum, op. cit., p. 74
[183]. Proposed
table item 5AB of subsection 355-65(8) of Schedule 1 to the TAA
1953.
[184]. Explanatory
Memorandum, op. cit., p. 75
[185]. Item
2 of Schedule 6 to the Bill.
[186]. Explanatory
Memorandum, op. cit., p. 7.
For copyright reasons some linked items are only available to members of Parliament.
© Commonwealth of Australia
Creative Commons
With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.
In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.
To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.
Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.
Disclaimer: Bills Digests are prepared to support the work of the Australian Parliament. They are produced under time and resource constraints and aim to be available in time for debate in the Chambers. The views expressed in Bills Digests do not reflect an official position of the Australian Parliamentary Library, nor do they constitute professional legal opinion. Bills Digests reflect the relevant legislation as introduced and do not canvass subsequent amendments or developments. Other sources should be consulted to determine the official status of the Bill.
Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Enquiry Point for referral.