Bills Digest No.
68, 2020–21
PDF version [559KB]
Jaan Murphy and Cassie Davis
Law and Bills Digest Section
16
June 2021
Contents
Purpose of the Bill
Structure of the Bill
Committee consideration
Policy position of non-government
parties/independents
Position of major interest groups
Financial implications
Statement of Compatibility with Human
Rights
Background: deductible gift recipient
endorsement reforms
Key issues and provisions: deductible
gift recipients
Background: removing concessional
taxation offshore banking units
Key issues and provisions: offshore
banking units
Date introduced: 17
March 2021
House: House of
Representatives
Portfolio: Treasury
Commencement: The
first 1 January, 1 April, 1 July or 1 October to occur after Royal
Assent.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent,
they become Acts, which can be found at the Federal Register of Legislation
website.
All hyperlinks in this Bills Digest are correct as
at June 2021.
Purpose of
the Bill
The purpose of the Treasury
Laws Amendment (2021 Measures No. 2) Bill 2021 (the Bill) is to:
- amend
the Income Tax
Assessment Act 1997 (the ITAA 1997) to require a fund, authority
or institution to be a registered charity or an Australian government agency,
or be operated by a registered charity or an Australian government agency, to
be entitled to a deductible gift recipient (DGR) endorsement[1]
and
- amend
the ITAA 1997 and Income Tax
Assessment Act 1936 (the ITAA 1936) to:
- remove
the preferential 10 per cent effective concessional tax treatment and the withholding
tax exemption[2]
for offshore banking units (OBUs) from 2023–24, making OBUs subject to the
relevant corporate income tax (CIT) rate from that time[3]
- close
the OBU regime to any new entrants from the day after Royal Assent by removing
the Minister’s ability to make a determination or declare an entity to be an
OBU.[4]
Structure of
the Bill
The Bill has two Schedules. Schedule 1 deals with the
reforms to when entities are eligible for DGR status. Schedule 2 deals with the
removal of OBU tax concessions. As the Bill deals with two distinctly separate
taxation measures, they are examined separately below.
Committee
consideration
At the time of writing, the Bill had not been referred to
any committees for inquiry. In its report on 13 May 2021, the Senate Selection
of Bills Committee deferred consideration of the Bill until its next meeting.[5]
Senate
Standing Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills (the
Scrutiny Committee) expressed concern about the transitional rules proposed by
the Bill. In brief, those transitional rules allow existing DGRs at least 12
months after the application date to become a registered charity or operated by
a registered charity before the amendments in Schedule 1 affect their
entitlement to DGR endorsement.[6]
If an entity needs a longer period to satisfy the new requirements they may
apply to the Commissioner for an 'extended application date' – that is, a
longer period of time in which to become a registered charity or operated by a
registered charity.[7]
The Scrutiny Committee expressed concern that the Bill
enables the Minister, by legislative instrument, to prescribe the criteria and
matters that will determine if a request for an extended application date is
approved or not.[8]
The Scrutiny Committee noted:
… allowing criteria and matters for assessing an application
for an extended application date to be specified in a legislative instrument
provides the minister with a broad discretionary power to determine the scope
of which existing DGRs may benefit from an extended application date. It is
unclear to the committee why at least high-level guidance in relation to these
matters cannot be provided on the face of the bill … a legislative instrument,
made by the executive, is not subject to the full range of parliamentary
scrutiny inherent in bringing proposed changes in the form of an amending bill.[9]
As such, the Scrutiny Committee requested that the
Assistant Treasurer provide advice regarding:
-
why it is considered necessary and
appropriate to provide the Minister with a broad power to determine the
criteria and matters that the Commissioner must be satisfied of and have regard
to when assessing a request for an extended application date
-
why it is considered necessary and
appropriate to leave these matters to delegated legislation and
-
whether the bill can be amended to
include additional guidance regarding the relevant criteria and matters, and
the exercise of the power by the minister, on the face of the primary
legislation.[10]
In response, the Assistant Treasurer advised:
… I consider it is necessary and appropriate to leave the
criteria and matters to delegated legislation, to ensure they can remain
flexible and quickly respond to the needs of affected entities … the instrument
setting out the prescribed matters and criteria is a legislative instrument
that is subject to disallowance. Therefore, Parliament will still have the
opportunity to scrutinise any criteria and matters that the Commissioner must
be satisfied of and have regard to when assessing a request for an extended
application date. Additionally, the Legislation Act 2003 requires the
rule-maker to be satisfied that there has been appropriate consultation and
that a summary of that consultation is included in the explanatory statement to
the instrument … the scope of the power is confined such that it must relate to
criteria and matters that are about giving entities more time to comply with
the amendments, where reasonable.[11]
After considering the Minister’s response the Scrutiny Committee
noted it:
… remains concerned in relation to the broad discretionary
power granted to the minister, particularly given that the power to prescribe
criteria in subitem 16(7) is itself discretionary; that is, the minister ‘may’,
rather than ‘must’, prescribe criteria.[12]
The Scrutiny Committee requested an addendum to the Explanatory
Memorandum containing the information provided by the Assistant Treasurer be
tabled in the Parliament as soon as practicable, and otherwise left to the
Senate as a whole the appropriateness of the drafting of the discretionary
power to prescribe criteria and matters that will determine if a request for an
extended application date is approved or not and leaving such matters to
delegated legislation.[13]
Policy
position of non-government parties/independents
No comments on this Bill from non-government parties or
independents were apparent at the time of writing this Bills Digest regarding
the specific measures proposed by the Bill.
Position of
major interest groups
At the time of writing, it appears that major interest
groups have not commented on the Bill as presented to Parliament. However, Schedule
1 to the Bill is the same in substance as the Exposure Draft of the Schedule 1
amendments released by Treasury, on which submissions were received.[14]
In its submission on the Exposure Draft, the Law Council of
Australia (LCA) supported the increase in accountability that it considered
would result from requiring existing DGRs to become a registered charity
or operated by a registered charity, and thereby come under the
purview of the Australian Charities and Not-for-profits Commission (ACNC).[15]
However, the LCA suggested that the Commissioner should be given a ‘very
limited discretion’ to exempt an entity from the amendments and gave some
examples of circumstances in which it considered that this might be
appropriate, including where a declaration of trust or transfer of assets to a
charitable trust will result in significant loss of funds due to tax or duty
being imposed as a result of the restructure; or where a trust or
unincorporated association needs to apply to court or requires a legislative
change in order to make the required changes to be eligible.[16]
While considering a more comprehensive reform of the DGR
framework is desirable, Philanthropy Australia advised that it welcomed the
reforms as announced. However, Philanthropy Australia expressed concern that
the amendments did not align with the Government’s initial ‘announcement of 5
December 2017 and the description of the measure within MYEFO 2017–18’, which
stated that ‘all non-Government DGRs will be required to be registered
charities’. Philanthropy Australia noted that the Exposure Draft legislation
(and the Bill) would exempt ancillary funds and specifically listed DGRs from
this requirement and called for ‘[t]his inconsistency between the details of
the proposal as announced and the practical effects’ of the Bill to be
addressed.[17]
Arnold Bloch Leibler Lawyers and Advisers ‘acts for a
range of philanthropic families and foundations, not-for-profits and charities
[and] actively contribute[s] to law reform and policy in relation to charitable
tax concessions’.[18]
Arnold Bloch Leibler does not support measures to
require all DGRs to be registered as charities, unless it is introduced ‘with
the complimentary reform that DGR status be extended to all charities that are
registered with the ACNC’, as recommended by the Not-For-Profit
Sector Tax Concession Working Group in 2013.[19]
Arnold Bloch Leibler is also concerned that ‘requiring
all DGRs to become registered charities would increase rather than streamline
administrative burden’.[20]
More broadly, Arnold Bloch Leibler considered that the differing policy
objectives of charitable status and DGR endorsement have not been adequately
taken into account in formulating the legislation:
Charitable status is a recognition of the public benefit of
an organisation. DGR endorsement is intended to achieve the related but
distinct policy purpose of encouraging philanthropy. The government’s move to
require all DGRs to be registered as charities, should be based on a clear and
declared policy objective that DGR status should only be afforded to entities
that have a charitable purpose. It should then only be done after an analysis
of the financial impact such a move would have on philanthropic giving. To our
knowledge this has not occurred.[21]
Mills Oakley law firm, which assists clients with
governance issues and advises on Australian Taxation Office (ATO) and ACNC
endorsement, welcomed the proposed amendments, considering that they ‘will have
a positive and effective impact upon the current system of DGR registration’.[22]
Financial
implications
The Explanatory Memorandum notes that the amendments in
Schedule 1 dealing with DGR status will have negligible impact on revenue over
the forward estimates.[23]
In relation to the amendments in Schedule 2 dealing with OBUs, the Explanatory
Memorandum notes it will have the following impact (see Table 1) on the
underlying cash balance over the forward estimates period:
Table 1: financial impact of offshore banking unit reforms
Year |
2020-21 |
2021-22 |
2022-23 |
2023-34 |
2024-25 |
Cost ($m) |
0.0 |
0.0 |
-30.0 |
-70.0 |
-60.0 |
Source: Explanatory
Memorandum, Treasury Laws Amendment (2021 Measures No. 2) Bill 2021, p. 4.
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.[24]
Parliamentary
Joint Committee on Human Rights
The Parliamentary Joint Committee on Human Rights had no
comment in relation to the Bill.[25]
Background: deductible
gift recipient endorsement reforms
Deductible gift recipient (DGR) is a special tax status
that an organisation can seek from the Commissioner of the ATO. Once an
organisation is approved as a DGR it is entitled to receive gifts which are deductible
from the donor’s income tax. That is, a taxpayer will be entitled to a tax
deduction in respect of donations to a DGR of at least $2.[26]
DGRs are either:
- endorsed
by the ATO and fall within a general DGR category or
- are
named as a DGR in the tax Acts (specifically listed).[27]
Why require deductible
gift recipient to be registered charities?
Whilst currently most DGRs are registered charities, some
are not.[28]
Entities that are a registered charity with the ACNC must meet
various reporting and governance standards, depending on their size, as set out
in Table 2 below.
Table 2: reporting obligations of registered charities
Entity
|
Annual revenue
|
Reporting obligations
|
Small
|
<$250 000[29]
|
Must submit an Annual
Information Statement, which includes information on the charity
generally such as the identification of activities it undertakes, human
resources, and finances.
|
Medium
|
>$250 000 but <$1 million[30]
|
|
Large
|
>$1 million[32]
|
- Annual Information
Statement and
- Annual Financial
Report (which must be audited).[33]
|
Source: as per footnotes in table above.
In addition to the above reporting obligations, registered
charities must meet minimum governance
standards to be registered and remain registered with the ACNC.[34]
A summary of those governance standards is set out in Table 3 below.
Table 3: minimum governance standards applicable to registered charities
Standard
|
Summary
|
Standard 1: Purposes and not-for-profit nature
|
Registered charities must be not-for-profit and work
towards their charitable purpose. They must be able to demonstrate this and
provide information about their purposes to the public.
|
Standard 2: Accountability to members
|
Charities that have members must take reasonable steps to
be accountable to their members and provide them with adequate opportunity to
raise concerns about how the charity is governed.
|
Standard 3: Compliance with Australian laws
|
Charities must not commit a serious offence (such as
fraud) under any Australian law or breach a law that may result in a penalty
of 60 penalty units (currently $13,320[35])
or more.
|
Standard 4: Suitability of responsible persons
|
Charities must take reasonable steps to:
- be
satisfied that its responsible persons (such as board or committee members or
trustees) are not disqualified from managing a corporation under the Corporations Act 2001 or disqualified from
being a responsible person of a registered charity by the ACNC Commissioner
and
- remove
any responsible person who does not meet these requirements.
|
Standard 5: Duties of responsible persons
|
Charities must take reasonable steps to make sure that
responsible persons are subject to, understand and carry out the duties set
out in this standard (including to act with reasonable care and diligence; to
disclose conflicts of interest; and to ensure that the financial affairs of
the charity are managed responsibly).
|
Standard 6: Maintaining and enhancing public trust and
confidence in the Australian not-for-profit sector
|
A charity must take reasonable steps to become a
participating non-government institution if the charity is, or is likely to
be, identified as being involved in the abuse of a person either:
|
Source: Australian Charities
and Not-for-profits Commission Regulation 2013, Division 45; ACNC, ‘ACNC
Governance Standards’, ACNC website, n.d.
In contrast to the above, DGRs that are not a registered
charity are not necessarily subject to comparable reporting or governance
standards to those noted above.[36]
This can result in inconsistent governance and reporting requirements for those
DGRs.[37]
The Treasury noted in 2017 that a DGR is ‘subject to
minimal governance unless it is an ACNC regulated charity’.[38]
The Treasury also argued that making charity registration a prerequisite for
DGR status will ‘strengthen governance requirements and provide consistent,
clear administrative and regulatory requirements for all DGRs’.[39]
As such, by requiring general DGRs to be a registered
charity the Bill aims to improve the consistency of regulation,
governance and oversight of DGRs, while also reducing unnecessary compliance
costs by imposing a consistent set of governance requirements on DGRs (other
than ancillary funds or funds specifically listed in the ITAA 1997).[40]
Current
criteria for endorsement of DGR status by the ATO
There are now 51 DGR categories. Eligibility is based on the
organisation's purpose or the purpose of a fund, authority or institution it
operates.[41]
The legal requirements for an organisation or fund to be
endorsed as a DGR are set out in Division 30 of the Income Tax
Assessment Act 1997 (ITAA 1997). Generally, an organisation must
meet the following eligibility criteria to be registered as a DGR:
- it
must have an Australian Business Number (ABN)
- it
must fall within a DGR category, because either:
- the
organisation itself, as a whole, falls within a DGR category[42]
or
- part
of the organisation, being either a ‘fund’, ‘authority’ or ‘institution’, falls
within a DGR category[43]
- in
the case of most DGR categories – the organisation must also be a registered
charity (that is, it is registered with the ACNC)
- the
organisation or the part of it that that falls within a DGR category is ‘in
Australia’[44]
- it
must have acceptable rules for transferring surplus gifts and deductible
contributions on winding up or revocation of endorsement
- it
must maintain a gift fund if seeking endorsement for a part of it that falls
within a general DGR category (unless an exception applies).[45]
Currently most DGRs are registered charities.[46]
There is guidance on the legal meaning of charity,
and therefore the meaning of a registered charity for DGR
endorsement purposes on the ACNC website.[47]
Non-charity deductible
gift recipients
Whilst most entities that are DGRs are registered charities,
currently an entity is not in all cases required to be a registered
charity to be endorsed by the ATO as a DGR. For example, a body that is a
‘cultural organisation’ or ‘environmental organisation’ does not need to be a
charity.[48]
Who determines deductible gift
recipient status?
Whilst the ACNC is responsible for assessing whether an
organisation is a charity, the ATO ultimately determines DGR status. However, the
following DGR categories require an organisation to be endorsed by another
Department before the ATO can register it as a DGR:
- Cultural
organisations – Department of Infrastructure, Transport, Regional Development
and Communications
- Environmental
organisations – Department of Agriculture, Water and the Environment
- Harm
prevention charities – Department of Social Services
- Overseas
aid funds – Department
of Foreign Affairs and Trade.[49]
In relation to the above categories, harm prevention
charities and overseas aid funds must be a registered charity.[50]
No such requirement is currently imposed on cultural or environmental organisations
seeking DGR endorsement by the ATO.[51]
History of
the proposed reforms
An intention to link eligibility for DGR endorsement to
being a registered charity was flagged in 2012 with the passage of the Australian
Charities and Not-for-profits Commission Act 2012 (ACNC Act) (which
established the ACNC). The Explanatory Memorandum to the Australian Charities
and Not-for-profits Commission Bill 2012 noted:
In the long term, the role of the ACNC will expand to include
responsibility for the regulation of all NFP entities which access tax
concessions or other Australian government benefits, regardless of their legal
form.[52]
A key driver of the establishment of the ACNC was to
improve the governance, accountability and transparency of not-for-profit (NFP)
entities (and therefore, by implication, NFP entities with DGR status).[53]
2017
Treasury discussion paper
The Treasury released the Tax Deductible
Gift Recipient Reform Opportunities Discussion Paper on 15 June 2017
for consideration and comment. The Discussion Paper noted:
Around eight per cent of the current stock of 28,000 DGRs are
not registered charities or government entities. These organisations are not
necessarily subject to robust reporting and governance standards.
The four DGR registers, which are not administered by the
ATO, have separate reporting requirements. Not all organisations on the
environmental and cultural registers are charities, so organisations on the
same register can have different reporting requirements and governance
standards. This also means that there are organisations which report both to
the register and the ACNC.[54]
The Discussion Paper proposed that all DGRs (other than
government entities) be required to be registered as a charity with the ACNC.[55]
The Discussion Paper also proposed transferring the
assessment and registration of the four DGR registers, that is, cultural
organisations, environmental organisations, harm prevention charities and
overseas aid funds to the ATO.[56]
Government
commitment to reform
On 5 December 2017 (then) Minister for Revenue and Financial
Service, Kelly O’Dwyer announced
that the Government would reform the administration and oversight of DGRs.[57]
Reforms announced relevant to this Digest included:
-
all non-government DGRs will be automatically registered as a
charity with the ACNC from 1 July 2019
-
a 12-month transitional period to assist non-charity DGRs with
compliance
-
the integration of the DGR registers with the ACNC charity
register
-
retaining the Commissioner of Taxation’s discretion to exempt
organisations with DGR status from the requirement to register as a charity in
limited circumstances and
-
the abolition of certain public fund requirements.[58]
Treasury
consultation
In August 2018 the Treasury released a consultation paper
regarding the proposed reforms announced by the Government in December 2017.[59]
This was followed by the release of Exposure Draft
legislation and explanatory materials in October 2020.[60]
Key issues
and provisions: deductible gift recipients
Currently, the majority of the general DGR categories in
Subdivision 30-B of the ITAA 1997 require that the fund, authority or
institution be a registered charity, an Australian Government
agency or operated by a registered charity or an Australian Government agency
to be eligible to be endorsed as a DGR. However, there are 11 general DGR
categories that do not impose those requirements, namely:
- Health:
public fund for hospitals (item 1.1.3 in section 30‑20) and public fund for public ambulance
services (item 1.1.8 in section 30‑20)
- Education:
public fund for religious instruction in government schools (item 2.1.8 in
section 30‑25), Roman
Catholic public fund for religious instruction in government schools (item
2.1.9 in section 30‑25),
school building fund (item 2.1.10 in section 30‑25)
and public fund for rural school hostel building (item 2.1.11 in section 30‑25)
- Research:
approved research institute (item 3.1.1 in section 30‑40)
- Welfare
and rights: public fund for persons in necessitous circumstances (item 4.1.3 in
section 30‑45)
- Environment:
public fund on the Register of Environmental Organisations (item 6.1.1 in
section 30‑55)
- Cultural
organisations: public fund on the Register of Cultural Organisations (item
12.1.1 in section 30‑100)
and
- Fire
and emergency services: fire and emergency services fund (item 12A.1.3 in
section 30‑102).
All general deductible
gift recipients required to be registered charities
Part 1 of Schedule 1 of the Bill amends the ITAA
1997 for those 11 general DGR categories noted above so that a fund,
authority or institution seeking to rely (or relying) on any of these
categories for DGR endorsement must be:
- a
registered charity
- an
Australian government agency or
- operated
by a registered charity or an Australian government agency.
Items 10 and 11 also amend the definitions
of environmental organisation and cultural organisation such
that they must be a registered charity or an Australian Government
agency.
Importantly, charity registration is not required for
Australian Government agencies as government entities are excluded from being a
charity under the Charities
Act 2013.[61]
Certain
deductible gift recipient registers retained
As noted above, the 2017 Discussion Paper proposed
transferring the assessment and registration of the four DGR registers relating
to cultural organisations, environmental organisations, harm prevention charities
and overseas aid funds to the ATO.[62]
The Explanatory Memorandum notes that in relation to Schedule
1 the Bill ‘partially implements’ the proposed reforms discussed above.[63]
In that regard, the Bill does not transfer the four DGR registers to the ATO. They
will remain under the joint administration of the ATO and the relevant
departments as discussed above.[64]
However, the Department of Foreign Affairs and Trade notes that ‘the [Overseas
Aid Gift Deduction Scheme] OAGDS program is to be transferred to the ACNC and
the ATO in the future’.[65]
This suggests that further reforms related to the DGR
registers may be likely.
Transitional
provisions
The transitional rules in Part 2 of Schedule 1
apply to existing DGRs that are not a registered charity or
operated by a registered charity on the application date (three
months after the day the Bill receives Royal Assent).[66]
In effect, they give existing DGRs and existing DGR applicants an additional 12
months (and in some cases, four years) to comply with the requirement to become
a registered charity.[67]
Transitional
period for existing deductible gift recipients
Item 14 provides that the requirement to be a registered
charity or operated by a registered charity will apply to
existing DGRs on the earlier of the following:
- when
the DGR becomes a registered charity or operated by a registered charity or
- 12
months after the application date.[68]
Extended
transitional period
An existing DGR or an entity that has applied for DGR
status but has not had its application determined (DGR applicant) can apply on
an approved form to the Commissioner for an extended application date.[69]
As the extended application date is three years after the transitional
application date, if an application is approved by the Commissioner, an
existing DGR (or DGR applicant) that is not a registered charity
or operated by a registered charity will have four years to
either become a registered charity or operated by a registered
charity.[70]
After considering the application and any criteria
prescribed by the Minister, the Commissioner can issue a written determination
providing the existing DGR or DGR applicant an extended application date
(that is, an additional three years in which to become a registered
charity or operated by a registered charity).[71]
Such a determination is not a legislative instrument and is therefore not
disallowable.[72]
Importantly, the Commissioner cannot grant an extended application date:
- in
the absence of an application on an approved form or
- where
the application is made after the transitional application date.[73]
Where an existing DGR or DGR applicant has an application
for an extended application date refused by the Commissioner, it can
object to the decision.[74]
This allows for both internal review by the Commissioner, merit review by the Administrative
Appeals Tribunal, and a potential appeal to the Federal Court of Australia.[75]
Criteria for
assessing applications for an extended transitional period
The Minister can, by legislative instrument, prescribe the
criteria and matters that the Commissioner must be satisfied of and have regard
to when assessing an application for an extended application date by
an existing DGR. As such rules are legislative instruments, they will be
subject to parliamentary scrutiny and potential disallowance. The Government
argues:
This flexibility is necessary to ensure the relevant criteria
and matters remain fit for purpose, as it will allow the Government to respond
quickly to evolving industry practices and needs as required. Any such
legislative instrument would be subject to disallowance and parliamentary
scrutiny.[76]
Further, in response to concerns raised by the Scrutiny Committee,
the Minister noted:
The entities that are likely to require an extended
application date are generally those with complex structures and arrangements.
However, it may not be immediately clear to some of these entities whether they
need an extended application date, particularly given the relatively long
transitional period … and the nature of the entities (which are not-for-profit
organisations).
Therefore, I consider it is necessary and appropriate to
leave the criteria and matters to delegated legislation, to ensure they can
remain flexible and quickly respond to the needs of affected entities.[77]
As noted above, the Scrutiny Committee expressed concern
about the power of the Minister to prescribe, by legislative instrument, the
criteria and matters that will determine if a request for an extended
application date is approved or not. However, the Committee left to the Senate
as a whole consideration of the appropriateness of the drafting of the
discretionary power to prescribe criteria and matters that will determine if a
request for an extended application date is approved or not, and leaving such
matters to delegated legislation.[78]
Background: removing
concessional taxation offshore banking units
Offshore banking involves the provision of banking
services to non-resident individual or entities.[79]
An offshore banking unit (OBU) is a separate branch of an Australian licenced
bank, foreign exchange dealer or foreign bank that conducts offshore banking
activities.[80]
The OBU regime was originally introduced to assist Australian financial
services entities to compete with financial services providers located in low
tax jurisdictions in the Asia-Pacific region. Currently, OBUs are entitled to
interest withholding tax exemption and CIT concessions.[81]
History of offshore
banking units in Australia
In 1979, a committee was established to ‘inquire into and
report on the structure and methods of operation of the Australian financial
system’ including ‘banks and non-bank financial institutions, including in
relation to foreign exchange’.[82]
It was noted that, since the last inquiry into the Australian financial system
in 1936, ‘the international economic environment [had] altered greatly, and
world financial markets [had become] more closely integrated.’[83]
The Australian Financial System: Final Report of the
Committee of Inquiry (the Campbell Report) commented on the possibility of
establishing an offshore banking market in Australia, involving domestic
banking institutions and local units of foreign banks referred to as
‘authorised offshore banking units’.[84]
The Campbell Committee advised that ‘a ‘formal offshore market' would be
facilitated by some relaxation of the regulations around currency deposits,
noting that the current regulations prevented offshore banking units from
accepting foreign currency deposits.[85]
The Report of the Committee Established by the Premier
of New South Wales to Report on the Steps Necessary to Establish Offshore
Banking Activity in Australia with Particular Reference to Sydney (Whitlam Report)
was released in 1984. The Whitlam Report recommended the ‘establishment of
offshore banking units and new offshore banks as the vehicle for introducing
foreign banks to offshore banking activities’[86]
and federal tax exemptions.[87]
Consistent with those recommendations, changes to the Income Tax
Assessment Act 1936 (the 1936 Act) to enable withholding tax
exemptions for offshore banking units were introduced to Parliament on 9
December 1987, via the Taxation Laws Amendment Bill (No. 5) 1987 (enacted as
the Taxation Laws Amendment Act 1988).[88]
Amid the recession in 1992 and industry requests for concessions, Prime
Minister Paul Keating announced that:
… to help establish Offshore Banking Units (OBUs) in
Australia … the Government has decided that the taxable income derived from
pure offshore banking transactions by an authorised offshore banking unit in
Australia will be taxed at the reduced rate of 10 per cent.[89]
This change was implemented via the Taxation Laws Amendment Act (No. 4) 1992,
introduced on 25 June 1992.
OECD Forum
on Harmful Tax Practices
In 1998, the Organisation for Economic Co-operation and
Development (OECD) produced the Harmful Tax Competition: An Emerging Global
Issue report and identified ‘ring fencing’ practices as harmful. The OECD
advised:
There are good reasons for the international community to be
concerned where regimes are partially or fully isolated from the domestic
economy. Since the regime’s “ring fencing” effectively protects the sponsoring
country from the harmful effects of its own incentive regime, that regime will
have an adverse impact only on foreign tax bases. Thus, the country offering
the regime may bear little or none of the financial burden of its own preferential
tax legislation. Similarly, taxpayers within the regime may benefit from the
infrastructure of the country providing the preferential regime without bearing
the cost incurred to provide that infrastructure. Ring fencing may take several
forms.[90]
In the same year, the OECD established the Forum on
Harmful Tax Practices (FHTP). The FHTP conducts reviews of preferential tax
regimes in order to determine whether they could be harmful to the tax base of
other jurisdictions.[91]
In 2000 the FHTP identified OBUs in Australia as a ‘potentially harmful’
preferential tax regime and noted that:
… a preferential tax regime is identified as potentially
harmful if it has features that suggest that the regime has the potential to
constitute a harmful tax practice, even though there has not yet been an
overall assessment of all the relevant factors to determine whether regimes are
actually harmful.[92]
In 2004, the FHTP advised that it had determined
Australia’s OBU regime, and the similar Canadian International Banking Centre
regime, to be not harmful. It reported:
The Australian Offshore Banking Unit regime and the Canadian
International Banking Centre regime caused some concerns under the ring fencing
criterion. In its overall assessment, the Committee determined that these
potentially harmful regimes were nevertheless not actually harmful on the basis
that they do not appear to have created actual harmful effects. This
determination was made on the specific facts relating to the current limited
nature and reduced scope and size of the regimes. Of crucial importance to this
determination was the fact that the relevant countries apply very high standards
regarding transparency and exchange of information for tax purposes.[93]
After the Addressing Base Erosion and Profit Shifting
report was released in February 2013, OECD and G20 countries adopted an action
plan to address base erosion and profit shifting (BEPS). The plan ‘identified
15 actions along three key pillars: introducing coherence in the domestic rules
that affect cross-border activities, reinforcing substance requirements in the
existing international standards, and improving transparency as well as
certainty.’[94]
Importantly, Action 5 of the BEPS initiative focused on
harmful tax practices, including peer review and assessment of preferential tax
regimes that facilitate base erosion and profit shifting, and therefore have
the potential to unfairly impact the tax base of other jurisdictions, including
offshore banking.[95]
Recent
offshore banking unit reforms
In 2013, the Gillard Government announced reforms to the
corporate tax system, including ‘closing loopholes in the Offshore Banking Unit
regime to prevent banks shifting profits from domestic banking activities to
the Offshore Banking Unit (while continuing to allow genuine offshore banking
activities)’. It noted ‘[t]he Commissioner of Taxation has identified a range
of aggressive tax minimisation strategies, currently being exploited to take
advantage of design flaws, vulnerabilities and unexpected interactions in
Australia's corporate tax laws.’[96]
It was announced by the Abbott Government in 2014 that
‘following additional consultation with stakeholders and the Australian
Taxation Office’, the start date of these measures relating to OBUs would be
deferred.[97]
In 2015, the Treasury conducted a consultation process on
reforms to offshore banking units and released proposed amendments to the Income
Tax Assessment Act 1997 through the publication of an Exposure Draft on 12
March 2015.[98]
The Bill moving these amendments was introduced on 27 May 2015 and the
resulting Tax and Superannuation Laws Amendment (2015 Measures No. 1)
Act 2015 received Royal Assent on 25 June 2015.[99]
The amendments were partly based on the recommendations of a 2009 report, Australia
as a Financial Centre: Building on our Strengths — Report by the Australian
Financial Centre Forum (commonly known as the Johnson Report), which found
that ‘the combined effects of the current taxing arrangements were that
Australia was unable to take advantage of some potential financial
transactions, investment flows and new business opportunities’.[100]
The OECD
Forum on Harmful Tax Practices recent concerns
On 26 October 2018, Treasurer Josh Frydenberg announced
that the FHTP had ‘raised concerns during a review of [the OBU] regime,
including the concessional tax rate and the ring-fenced nature of the regime’,
meaning that the FHTP was concerned that Australia benefitted or suffered no
adverse effects from a regime that had the potential to negatively impact other
jurisdictions’ tax base. In response, the Government ‘committed to amend the
regime to address these concerns with legislation to be introduced as soon as
practicable and following consultation.’[101]
The concerns raised by the OECD do not appear to have been
made publicly available. It reported in February 2018 that Canada had abolished
its International Banking Centre regime,[102]
and the Harmful Tax Practices – 2018 Progress Report on Preferential Regimes
report identified Australia’s offshore banking unit regime as being ‘in the
process of being amended’ with ‘potentially harmful features [to be]
addressed’.[103]
In a submission to the Select Committee on Australia as a
Technology and Financial Centre, the Australian Financial Markets Association
(AFMA) noted that there is ‘no clarity from the OECD as to the specific
amendments to the regime that would be appropriate from an OECD perspective.’[104]
Key issues
and provisions: offshore banking units
Schedule 2 of the Bill amends the 1936 Act to:
- remove
the concessional tax treatment for OBUs
- remove
the interest withholding tax exemption and
- close
the regime to new entrants.
Current tax
concessions for OBUs
The 1936 Act currently provides that income from
eligible offshore banking activities (as defined) is effectively subject to a
tax rate of 10 per cent, rather than the general corporate income tax (CIT)
rate of 30 per cent.[105]
The 1936 Act also provides exemptions to withholding tax related to interest
paid.[106]
The Bill will remove those concession and exemptions.
Removal of
corporate income tax concession
The Bill will remove the current concessional CIT treatment
for OBUs in respect of offshore banking activities from the 2023–24 income year
onwards.[107]
This means the taxable income of an OBU on its offshore banking activities will
be subject to the relevant CIT rate.
Removal of
withholding tax exemption
The Bill will remove the withholding tax exemption for
interest payments (including interest consisting of gold paid) paid on or after
1 January 2024.[108]
This means for interest paid on or after 1 January 2024, OBUs will be subject
to withholding tax on eligible income (although tax treaties often operate so
as to reduce or eliminate withholding tax on such income).
Closing OBU
regime to new entrants
Currently section 128AE of the 1936 Act allows the
Minister to make a declaration or determination that a person or company is an
OBU. The Explanatory Memorandum notes:
Australia’s OBU regime has been effectively closed since
October 2018. No new OBU applications have been approved since that time.[109]
Item 14 provides that the Minister must not make a
declaration or determination that a person or company is an OBU after the day
the Bill receives Royal Assent. The effect of this is that any outstanding
applications made to the Minister before the amendments apply are not able to
be approved from that time and will, in effect, lapse. The Explanatory
Memorandum notes:
This is consistent with the intention that the OBU regime be
closed to new entrants, and that the applicable grandfathering arrangement be
limited to existing OBUs. To ensure that Australia addresses the OECD Forum for
Harmful Tax Practices’ concerns about the OBU regime, the Government does not
intend that any applications be granted by the Minister before the amendments
apply.[110]
[1]. DGRs
are organisations which can receive donations that are tax deductible. The
practical effect of this is that donors to that organisation can deduct the
amount of their donation from their taxable income when they lodge their tax
return.
[2]. The
interest withholding tax exemption is for 'offshore banking' activities, which
generally involve offshore persons, for example, non-residents, foreign
branches or other OBUs.
[3]. This
effectively provides a two-year grandfathering for existing OBUs. This measure
is intended to address the concerns raised by the OECD in 2018 that Australia’s
Offshore Banking Units concessional tax rate and its ‘ring-fenced’ nature (that
is, essentially, its limited access to domestic markets) was a ‘harmful
preferential tax regime’. This is discussed further below.
[4]. The
Government has stated that any pending applications for OBUs will not be
approved, as discussed later in this Digest.
[5]. Senate
Standing Committee for the Selection of Bills, Report,
5, 2021, The Senate, Canberra, 13 May 2021, [p. 4].
[6]. The
‘application date’ is three months after Royal Assent: item 12 of Schedule
1 to the Bill.
[7]. Schedule
1, Part 2, subitem 16(3).
[8]. Schedule
1, Part 2, subitem 16(7); Senate Standing Committee for the Scrutiny of
Bills, Scrutiny
digest, 6, 2021, 21 April 2021, pp. 34–35.
[9]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 6, 2021, 21 April 2021, p. 35.
[10]. Ibid.
[11]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 7, 2021, 12 May 2021, pp. 28–29.
[12]. Ibid., p. 29.
[13]. Ibid.,
pp. 29–30.
[14]. Treasury
Laws Amendment (Measures For a Later Sitting) Bill 2020: Requiring all DGRs to
be registered charities: Exposure Draft; The Treasury, ‘Requiring Deductible
Gift Recipients (DGRs) to register as charities’, Treasury website, n.d.
[15]. Law
Council of Australia (LCA), Submission
to the Treasury consultation: Requiring Deductible
Gift Recipients (DGRs) to Register as Charities, p. 1.
[16]. Ibid.,
pp. 1–2.
[17]. Philanthropy
Australia, Submission
to the Treasury consultation: Requiring Deductible Gift Recipients (DGRs) to
Register as Charities.
[18]. Arnold Bloch Leibler, Submission
to the Treasury consultation: Requiring Deductible Gift Recipients (DGRs) to
Register as Charities, p. 1.
[19]. Ibid.;
Not-For-Profit Sector Tax Concession Working Group, Fairer,
simpler and more effective tax concessions for the not-for-profit sector: final
report, Recommendation 6.1, Treasury, Canberra, May 2013, p. 26.
[20]. Arnold
Bloch Leibler, Submission, op. cit., p. 1.
[21]. Ibid.,
p. 2.
[22]. Mills
Oakley, Submission
to the Treasury consultation: Requiring Deductible Gift Recipients (DGRs) to
Register as Charities, pp. 1–2.
[23]. Explanatory
Memorandum, Treasury Laws Amendment (2021 Measures No. 2) Bill 2021, p. 3.
[24]. The
Statement of Compatibility with Human Rights can be found at pages 17–18 of the
Explanatory Memorandum to the Bill.
[25]. Parliamentary
Joint Committee on Human Rights, Human
rights scrutiny report, 4, 2021, 31 March 2021, p. 6.
[26]. 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; Australian Taxation Office (ATO),
‘Is
my organisation eligible for DGR endorsement?’, ATO website, last modified
19 June 2017.
[27]. ATO,
‘Is
my organisation eligible for DGR endorsement?’, op. cit.
[28]. The
Treasury, Tax
deductible gift recipient reform opportunities, Discussion paper,
Treasury, Canberra, 15 June 2017, p. 1: ‘There are around 28,000 organisations
endorsed as DGRs , of which around 18 per cent are not registered charities –
under 10 per cent are government entities (and therefore not eligible for
charity registration) and over 8 per cent could seek charity registration with
the ACNC.’
[29]. Australian
Charities and Not-for-profits Commission Act 2012 (ACNC Act),
section 205-25; ACNC, ‘Reporting
annually to the ACNC’, ACNC website, n.d.
[30]. ACNC
Act, section 205-25; ACNC, ‘Reporting
annually to the ACNC’, op. cit.
[31]. ACNC
Act, sections 60-10 and 60-20.
[32]. ACNC
Act, section 205-25; ACNC, ‘Reporting
annually to the ACNC’, op. cit.
[33]. ACNC
Act sections 60-10 and 60-25.
[34]. ACNC
Act, Division 45 generally.
[35]. Crimes Act 1914
(Cth); Notice of
Indexation of the Penalty Unit Amount, 14 May 2020.
[36]. Treasury,
Tax
deductible gift recipient reform opportunities, op. cit., pp. 3-6, 10.
[37]. Explanatory
Memorandum, Treasury Laws Amendment (2021 Measures No. 2) Bill 2021, p. 6.
[38]. The
Treasury, Tax
deductible gift recipient reform opportunities, op. cit., pp. 5 and 10.
[39]. The
Treasury, Deductible
Gift Recipient (DGR) reforms, Consultation paper, Treasury, Canberra,
August 2018, p. 2.
[40]. Explanatory
Memorandum, Treasury Laws Amendment (2021 Measures No. 2) Bill 2021, p. 6.
[41]. ATO,
‘Types
of DGRs’, ATO website, 3 November 2020; Treasury, Tax deductible
gift recipient reform opportunities, op. cit., p. 2.
[42]. If
an organisation as a whole falls within a DGR category, donors may claim gifts
and deductible contributions to the entity.
[43]. The
ATO notes that: ‘If a fund is legally owned by an organisation or an authority
or institution within an organisation, the organisation can be endorsed, but it
is endorsed only for the particular fund, authority or institution. Only
gifts and deductible contributions to the fund, authority or institution can be
deductible. If an organisation operates more than one fund, authority or
institution, it will need a separate endorsement for each one.’ : ATO, ‘How
to determine if you are eligible for DGR endorsement’, ATO website, 17
December 2018.
[44]. ATO, ‘Meeting
the 'In Australia' condition’, ATO website, 17 December 2018.
[45]. ITAA
1997, Subdivision 30-B generally; sections 30-15 and 30-125, section
995-1, defines a ‘registered charity’ by reference to the term ‘charity’ in column
1 of item 1 of the table in subsection 25-5(5) of the ACNC Act; see
also: ATO, ‘Application
for endorsement as a deductible gift recipient’, ATO website, 2 August
2017; ATO, ‘Endorsement
for the operation of a fund, authority or institution’, ATO website, 17
December 2018.
[46]. Treasury,
Tax
deductible gift recipient reform opportunities, op. cit., p. 1: ‘There
are around 28,000 organisations endorsed as DGRs, of which around 18 per cent
are not registered charities – under 10 per cent are government entities (and
therefore not eligible for charity registration) and over 8 per cent could seek
charity registration with the ACNC.’
[47]. This
is because section 995-1 of the ITAA 1997 defines a ‘registered charity’
by reference to the term ‘charity’ in column 1 of item 1 of the table in subsection
25-5(5) of the ACNC Act.
[48]. ITAA
1997, subdivisions 30-E (environmental organisations) and 30-F (cultural
organisations).
[49]. ITAA
1997, subdivisions 30-E (environmental organisations), 30-EA (harm
prevention charities), 30-F (cultural organisations) and subsection 30-80(1),
table item 9.1.2; section 30-85.
[50]. ITAA
1997, section 30-288 (harm prevention charities) and 30-80, 30-85 and 30-86
(overseas aid funds).
[51]. ITAA
1997, sections 30-260 to 30-275 (environmental organisations) and 30-300
(cultural organisations).
[52]. Explanatory
Memorandum, Australian Charities and Not-for-profits Commission Bill 2012,
p. 13.
[53]. Ibid.,
pp. 4, 8–9, 12–13, 18 and 31.
[54]. Treasury,
Tax
deductible gift recipient reform opportunities, op. cit., p. 5.
[55]. Ibid.
[56]. Ibid.,
p. 8.
[57]. K
O’Dwyer (Minister for Revenue and Financial Services), Reforming
administration of tax deductible gift recipients, media release, 5
December 2017.
[58]. Ibid.
[59]. Treasury,
Deductible
Gift Recipient (DGR) reforms, op. cit.
[60]. The
Treasury, ‘Requiring
Deductible Gift Recipients (DGRs) to register as charities’, Treasury
website, n.d.
[61]. Charities Act 2013,
section 5, definition of a charity.
[62]. Treasury,
Tax
deductible gift recipient reform opportunities, op. cit., p. 8.
[63]. Explanatory
Memorandum, Treasury Laws Amendment (2021 Measures No. 2) Bill 2021, p. 3.
[64]. This
is because the Bill makes no amendments to the sections which create the
relevant registers, namely sections 30-80, 30‑85 and 30-86 (overseas aid
funds), subsection 30-55(1), table item 6.1.1, sections 30-255 and 30-280
(environmental organisations), subsection 30-45(1), table item 4.1.4, sections
30-287, 30-289B (harm prevention charities), subsection 30‑100(1), table
item 12.1.1, sections 30-295, 300-305 (cultural organisations) and other
related provisions (for example, subsection 30-5(5)).
[65]. Department
of Foreign Affairs and Trade (DFAT), ‘Tax
deductibility’, DFAT website, n.d.
[66]. Part 2, Schedule 1, items 12, 13 and 14.
[67]. Part
2, Schedule 1, items 12 to 15.
[68]. Part
2, Schedule 1, item 14.
[69]. Part
2, Schedule 1, items 12, 14(2)(ii); 15(2)(iii), 16(3) to (5).
[70]. Part
2, Schedule 1, items 12, 16(1).
[71]. Part
2, Schedule 1, items 16(1) and (6) to (7).
[72]. Part
2, Schedule 1, item 16(2).
[73]. Part
2, Schedule 1, items 16(2) and (4).
[74]. Part
2, Schedule 1, item 16(8).
[75]. Taxation
Administration Act 1953, Part IVC generally.
[76]. Explanatory
Memorandum, Treasury Laws Amendment (2021 Measures No. 2) Bill 2021, p. 11.
[77]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 7, 2021, The Senate, Canberra, 12 May 2021, p. 28.
[78]. Schedule
1, Part 2, subitem 16(7); Senate Standing Committee for the Scrutiny of
Bills, Scrutiny
digest, 6, 2021, op. cit., pp. 34‑35; Senate Standing
Committee for the Scrutiny of Bills, Scrutiny
digest, 7, 2021, op. cit., pp. 29-30.
[79]. K
Sadiq, ‘Bring
OBUs onshore: assessing the concessions’, Journal of Australian Taxation,
1(2), September 1998, p. 124.
[80]. Section
128AE of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act)
sets out how an OBU is defined and the circumstances under which the Treasurer
can determine that a company is an OBU. Section 121D of the 1936 Act
defines what constitutes offshore banking activity.
[81]. Explanatory
Memorandum, Treasury Laws Amendment (2021 Measures No. 2) Bill 2021, p. 13.
[82]. Committee
of Inquiry into the Australian Financial System, Australian
financial system: final report of the Committee of Inquiry, (Campbell Report),
Parl. Paper 208/1981, Canberra, 1981, p. xxiii.
[83]. Ibid.,
p. xxv.
[84]. Ibid.,
p. 152.
[85]. Ibid.
[86]. New
South Wales, Offshore Banking Committee, Report of the committee established by
the Premier of New South Wales to report on the steps necessary to establish offshore
banking activity in Australia with particular reference to Sydney, (Whitlam Report),
Sydney, Government Printer, 1984, p. ii.
[87]. Ibid.,
p. iii.
[88]. Taxation
Laws Amendment Bill (No. 5) 1987; Explanatory
Memorandum, Taxation Laws Amendment Bill (No. 5) 1987.
[89]. P
Keating, One
Nation, Statement by the Prime Minister the Honourable P.J. Keating,
MP, Australian Government Publishing Service, Canberra, 26 February 1992, p.
77.
[90]. The
Organisation for Economic Co-operation and Development (OECD), Harmful
tax competition: an emerging global issue, OECD, Paris, 1998, p.
26.
[91]. OECD,
‘Action 5:
Harmful tax practices’, OECD website, n.d.
[92]. OECD,
Towards global tax
co-operation: report to the 2000 Ministerial Council meeting and
recommendations by the Committee on Fiscal Affairs: progress in identifying and
eliminating harmful tax practices, OECD, Paris, 2000, p. 12.
[93]. OECD,
The
OECD’s project on harmful tax practices: the 2004 progress report, Centre
for Tax Policy and Administration, Paris, 2004, p. 10.
[94]. OECD,
Harmful
tax practices – 2017 progress report on preferential regimes, OECD
Publishing, Paris, 2017, p. 3.
[95]. OECD,
‘Action 5:
Harmful tax practices’, OECD website, n.d.; OECD Harmful
tax practices – peer review results. Inclusive framework on BEPS: Action 5,
OECD, November 2020.
[96] W
Swan (Treasurer) and D Bradbury (Assistant Treasurer), Protecting
the corporate tax base from erosion and loopholes, media release,
14 May 2013.
[97] M
Cormann (Minister for Finance), More
progress in restoring integrity in the tax system, media release, 13
May 2014.
[98] Treasury,
‘Reforms
to Offshore Banking Units’, Treasury website, n.d.
[99]. Parliament
of Australia, ‘Tax
and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015 homepage’,
Australian Parliament website.
[100] Explanatory
Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 1)
Bill 2015, p. 108; Australian Financial Centre Forum, Australia
as a financial centre: building on our strengths - report by the Australian
Financial Centre Forum, The Forum, Canberra, November 2009.
[101]. J
Frydenberg (Treasurer), Amending
Australia’s Offshore Banking Unit Regime, media release, 26 October
2018.
[102]. OECD,
‘OECD
announces further developments in BEPS implementation’, OECD website.
[103]. OECD,
Harmful
Tax Practices - 2018 Progress Report on Preferential Regimes: Inclusive
Framework on BEPS: Action 5,
OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing,
Paris, 2018, p. 26.
[104] Australian
Financial Markets Association (AFMA), Supplementary
submission to the Senate Select Committee on Australia as a Technology and
Financial Centre, 22 December 2020, p. 3 (Supplementary submission no. 47.1).
[105]. Income Tax
Assessment Act 1936 (the 1936 Act), sections 121A and
121EG; Explanatory
Memorandum, Treasury Laws Amendment (2021 Measures No. 2) Bill 2021, p. 13.
[106]. 1936
Act, section 128GB.
[107]. Schedule
2, items 2 to 12. Item 13 establishes that the removal of the
concessions will apply from the 2023-24 income year onwards.
[108]. Schedule
2, item 15.
[109]. Explanatory
Memorandum, Treasury Laws Amendment (2021 Measures No. 2) Bill 2021, p. 15.
[110]. Ibid.,
p. 16.
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