Inquiry into the provisions of the
Tax and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015
Referral and conduct of the inquiry
On 13 May 2015, the Senate passed the following resolution:
To ensure appropriate consideration of time critical bills by
Senate committees, the provisions of all bills introduced into the House of
Representatives after 14 May 2015 and up to and including 4 June 2015 that
contain substantive provisions commencing on or before 1 July 2015 (together with
the provisions of any related bill), are referred to committees for inquiry and
report by 15 June 2015...
Accordingly, following its introduction into the House of
Representatives on 27 May 2015, the provisions of the Tax and Superannuation
Laws Amendment (2015 Measures No. 1) Bill 2015 were referred to the Senate
Economics Legislation Committee for inquiry and report.
The committee advertised the inquiry on its website and wrote to
relevant stakeholders and interested parties inviting submissions by 10 June
2015. The committee received seven submissions, which are listed in
Appendix 1. Given the short timeframe for this inquiry, the committee resolved that
it would rely on the submissions to prepare its report and not hold a public
The committee would like to acknowledge and convey its appreciation to
those organisations and individuals who, within a very short timeframe,
provided a submission to this inquiry.
Overview of the bill
This omnibus bill proposes to amend various taxation and superannuation
- end the first home saver accounts scheme (schedule 1 to the bill);
- abolish the dependent spouse tax offset and expand the dependant
(invalid and carer) tax offset by removing the exclusion in relation to spouses
previously covered by the dependent spouse tax offset (schedule 2);
- make several changes to the offshore banking unit regime
- exempt the Global Infrastructure Hub Ltd
from liability to pay income tax on ordinary income and statutory income
- update the list of specifically listed deductible gift recipients
- make a number of miscellaneous amendments, including style and
formatting changes, the repeal of redundant provisions, the correction of
anomalous outcomes and corrections to previous amending Acts (schedule 6); and
- implement changes to the investment manager regime (schedule 7).
Scope and structure of this report
Submissions received by the committee commented on schedules 1–3 and 7
to the bill. As the committee does not have any findings or recommendations to
make that specifically apply to schedules 4–6, the committee's report
describes and considers only the schedules commented on by submitters. The
explanatory memorandum that accompanied the bill sets out all of the proposed
amendments in detail.
This report examines schedules 1–3 and 7 in turn. The committee's
comments on individual schedules are at the end of each section. The
committee's overall conclusion can be found at the end of the report.
Schedule 1—First home saver accounts scheme
The first home saver accounts scheme was introduced in 2008 to assist
individuals to save for their first home. Under the scheme, individuals aged between
18 and 65 who had not previously owned a home in Australia are entitled to open
a first home saver account (FHSA), and could make contributions up to a cap
Concessions provided by the government to assist saving included direct
contributions (17 per cent of the first $6,000 contributed in a year) and tax
concessions that are similar to those provided to superannuation accounts.
Withdrawals from an FHSA could only occur if the account holder:
- met a minimum qualifying period (the four-year rule);
- acquired a home with another first home saver account holder who
is eligible to access their funds;
- chose to transfer the balance into their superannuation fund;
- turned 60 years of age; or
- met other specified circumstances.
The planned cessation of the FHSA scheme was announced in the 2014–15 Budget.
It is proposed that new accounts opened after the 2014–15 Budget night will not
be eligible for any concessions. For existing account holders, the accounts
will cease to be FHSAs from 1 July 2015, meaning they will no longer be subject
to regulatory restrictions on withdrawals, however, they will also no longer
receive government co‑contributions and the tax and social security
concessions will be removed.
The bill would make a number of amendments to various Acts to remove references
Although the FHSA scheme would cease from the 2015–16 financial year,
the bill proposes that entitlement to government contributions will cease to
arise from the 2014–15 financial year onwards.
In his second reading speech, the Assistant Treasurer made the following
observations about the low take-up rate for FHSAs and the limited success of
When first home saver accounts were introduced by the
previous government, they were expected to hold around $6.5 billion in total
combined savings after four years. At the beginning of last year, more than
five years after the scheme was introduced, fewer than 50,000 accounts were
open, and containing total combined savings of only $540 million. This is less
than 10 per cent of the previous government's prediction.
The Assistant Treasurer concluded:
...it is clear that the first home saver accounts have not
helped address rising housing costs in Australia. If we are to help young
Australian families realise the dream of owning their own home, then we need to
address the real issues faced by families looking to enter the property market.
The supply of housing is not keeping pace with recent growth
in demand. To improve housing supply, regulatory barriers relating to state and
local governments' planning, land use and housing infrastructure policies must
Over the 2014–15 forward estimates, the cessation of the scheme is
projected to save $113.3 million.
Stakeholder views on schedule 1
The committee received two submissions on the FHSA scheme. The Australian
Bankers' Association (ABA) noted that the banking sector initially welcomed the
creation of the FHSA scheme, however, the ABA explained that:
...there were some significant issues that impacted the banks'
ability to deliver these new products in a straightforward, low cost and timely
manner. Despite changes being made to FHSAs, consumer interest remained low.
The complex product rules, especially the four year qualifying rule, and the
availability of better savings products within the market limited consumer
interest in FHSAs.
The ABA submitted that as the FHSAs will be treated as ordinary deposit accounts
following the end of the FHSA scheme, customers will not be disadvantaged.
A submission from an individual with an FHSA expressed support for the
cessation of the scheme. The submitter noted that his ability to save for a
house was impeded by the low interest rates the accounts currently offer and
the inability to invest his savings in 'a more appropriate risk–reward asset
Similar evidence was received by the Economics References Committee during its
recently completed inquiry into affordable housing.
Committee comment on schedule 1
The low take-up rate for FHSAs indicates that the scheme has not been a
success. The abolition of the scheme is a sensible savings measure that the
Schedule 2—Dependent spouse tax offset
Schedule 2 to the bill would amend the Income Tax Assessment Act 1936
(ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) to:
- abolish the dependent spouse tax offset (DSTO);
- expand the dependant (invalid and carer) tax offset (DICTO) by
removing the exclusion in relation to spouses previously covered by the DSTO;
- remove an entitlement to the DSTO where it is made available as a
component of the zone tax offset (ZTO), overseas civilians tax offset (OCTO) or
overseas forces tax offset (OFTO), and replace that component with a component
made up of the DICTO;
- rewrite the notional tax offsets covering children, students and
sole parents that are available as components of other tax offsets.
The DSTO is a dependency tax offset that can be claimed by taxpayers
- have a dependent spouse born before 1 July 1952;
- are eligible for the ZTO, OFTO or OCTO—taxpayers eligible for
these offsets can access the DSTO regardless of the age of their spouse and can
receive a further entitlement of 50 per cent or 20 per cent of their DSTO
entitlement as a component of ZTO, OFTO or OCTO depending on where they reside.
The DSTO is an income tested offset that is based on the taxpayer's and
the spouse's adjusted taxable income. In 2013–14, the DSTO was worth up to $2,471.
Following the proposed abolition of the DSTO, a taxpayer may be entitled
to the DICTO for an income year if they contributed to the maintenance of an
eligible dependant during that year.
The DICTO is available to taxpayers who maintain a dependant who is unable to
work due to disability or carer obligations.
The abolition of the DSTO was announced in the 2014–15 Budget,
and is projected to save $320 million over the 2014–15 forward estimates.
In his second reading speech on the bill, the Assistant Treasurer made
the following observation in support of the proposed changes:
When the Dependent Spouse Tax Offset was introduced many
decades ago, its purpose was to provide a concession to taxpayers who
'maintained' a dependent spouse. It was introduced at a time when the welfare
system was in its infancy. With changes in our society and our economy, this
offset is obviously outdated.
Maintaining concessions that have outlived their purpose is
simply not sustainable—particularly in view of other assistance available
through the welfare system that is more targeted and appropriate and the need
to promote workforce participation as our population ages.
The bill also proposes to rewrite into the ITAA 1997 parts of the
dependency tax offsets in the ITAA 1936 that are still required. The
explanatory memorandum advised that this is because the 'provisions are now
extremely complex and difficult to understand and apply' due to the numerous
amendments made over the last 50 years.
Stakeholder views on schedule 2
The committee received one submission on the proposed abolition of the
DSTO. The submitter focused on the proposed removal of the entitlement to claim
for the DSTO as part of the ZTO. The submitter argued that the proposed
amendments conflict with other government policies that relate to northern
Australia as the proposed amendments 'would not encourage workers to remain or
move to remote zones'. The submitter concluded that this is 'a minor budgetary
revenue measure that will have a detrimental impact on many low paid workers in
Committee comment on schedule 2
The committee understands that some individuals will be affected by the abolition
of the DSTO. However, the committee considers that it is important to update
Australia's taxation laws to ensure that concessions are well-targeted and
appropriate. Importantly, other offsets in the taxation system such as the
DICTO will ensure that support continues to be provided to those who most need
Schedule 3—Offshore banking unit regime
Schedule 3 to the bill contains proposed amendments to the offshore
banking (OB) regime that seek to:
- implement recommendations of the 2009 report by the Australian
Financial Centre Forum, Australia as a Financial Centre: Building on our
Strengths (known as the Johnson Report after the chair of the forum, Mr
Mark Johnson AO); and
- address integrity concerns with the existing regime.
An offshore banking unit (OBU) is a notional division or business unit
of an Australian entity that conducts offshore banking activities. Concessional
tax treatment is provided in respect of eligible OB activities, provided
additional criteria are met.
The tax incentives are provided to 'attract and maintain highly mobile
financial sector activities within Australia'. Such activities include
financial intermediation between offshore lenders and offshore borrowers and
the provision of other financial services to offshore investors who are
investing outside Australia.
Under these taxation arrangements, assessable income from eligible
activities is effectively subject to a tax rate of 10 per cent. In addition, interest
payments made by OBUs when borrowing from offshore are not subject to interest
withholding tax when the borrowed funds are used to carry on eligible
activities under the regime.
The proposed amendments contained in schedule 3 to the bill would:
- limit the availability of the OBU concession in certain
circumstances where it could otherwise be used to convert an ineligible
activity into an eligible OB activity;
- codify the 'choice principle' to remove uncertainty for
- introduce a new method of allocating certain expenses between the
operations of a taxpayer's domestic banking unit and OBU;
- modernise the list of eligible OB activities; and
- treat internal financial dealings (for example, between an
entity's domestic banking unit and OBU) as if they were on an arm's length
Stakeholder views on schedule 3
In their joint submission, the Australian Financial Markets Association
(AFMA) and the ABA, commented on the changes to the list of eligible OB
activities. One of the additions to the list is leasing activities, which
covers activities undertaken as either a lessor or a lessee (or a sublessor or
a sublessee). The explanatory memorandum noted that this is intended to 'give
greater flexibility to OBUs in recognition of the fact that many leasing
arrangements have similar commercial features to existing OB activities such as
AFMA and the ABA noted that they are supportive of the proposal to
include leasing as an eligible activity; however, they questioned whether the
sale of an OBU leased asset would be part of the leasing activity and, hence, an
eligible OB activity. AFMA and the ABA provided the following explanation of
their concern in this regard:
While it is arguable that the broad definition of 'leasing
activity' includes the sale of the OBU leased asset, as this is routinely what
entities engaged in leasing businesses do, given the punitive consequences that
arise should an OBU conduct an ineligible activity, and particularly receive
non-OB money, our view is that clarity is appropriate.
AFMA and the ABA submitted that the bill should be amended to clarify
whether the sale of an OBU leased asset is part of the leasing activity. AFMA and
the ABA provided the following reasoning in support of their recommendation:
Our primary concern arising
from the lack of clarity is that it either effectively compels an OBU to hold
the asset at completion of the lease to perpetuity or risk falling foul of the
'purity test' in section 121EH of the 1936 Act. Section 121EH provides,
broadly, that where an OBU derives more than 10% of its income for the year
from the use of 'non-OB money' then the entire income of the OBU for the
particular income year is not eligible for the concession. 'Non-OB money' is
defined in section 121C as including money received by an OBU from conducting
an activity that is not an eligible-OB activity.
Hence, it follows that if the disposition of the OBU leased
asset is not an eligible OB activity then any sale proceeds will constitute
non-OB money and hence threaten the OBU's status for that income year.
In practice, this would mean that no leasing activity would
be undertaken in an OBU, thereby rendering the reforms in the current Bill as
AFMA and the ABA also raised a drafting concern regarding proposed new
section 121EDA. The following statement on this matter was provided in their
The current definition of 'assessable OB income' in section
121EE includes amounts either derived from OB activities or 'included in the
assessable income because of such activities' (section 121EE(2)(b)). The
proposed definition in section 121EDA, as it applies to ordinary income, only
relates to income derived from OB activities of the OBU and hence [the] 'because
of such activities' limb has been removed, except as it relates to 'statutory
AFMA and the ABA do not believe this change was intentional,
as it was not raised during consultation nor is the basis for the change
reflected in the Explanatory Memorandum. We recommend that proposed section 121EDA
be amended to refer to 'assessable' income as opposed to 'statutory' income.
Assessable OB income is currently defined at length in section 121EE(2)
of the ITAA 1936. However, in proposed new section 121EDA, the bill seeks to
provide a definition of OB income to accommodate the proposed introduction of a
new definition of a general OB deduction.
As a result, the bill would change the definition of assessable OB income so
that the definition refers to the concept of OB income that is defined in proposed
new section 121EDA.
As the proposed new definition of assessable OB income encompasses
'so much of the OBU's OB income...as is assessable income',
it may not be appropriate to include a reference to assessable income in the
definition of OB income itself.
The committee draws the government's attention to the issues raised by
AFMA and the ABA regarding leasing activities.
Schedule 7—Investment manager regime
The investment manager regime (IMR), contained in Subdivision 842-I of
the ITAA 1997, exempts from Australian income tax certain income derived by foreign
The introduction of an IMR was a recommendation of the Johnson Report.
The Johnson Report considered that the introduction of an IMR would remove
impediments created by Australia's tax system to certain cross-border
The proposed amendments contained in schedule 7 to the bill would implement
the third and final element of the IMR reforms and make some other changes to
the existing regime.
The IMR reforms are 'aimed at encouraging greater foreign investment into
Australia, and promoting Australia as a financial services centre...by removing
the uncertainties in the application of Australia's tax laws as they apply to
widely held foreign funds and foreign investors'.
Overview of the proposed amendments
The proposed amendments would replace the existing IMR with a new
- that extends the IMR concession to cover direct investments in
Australian assets that are of a portfolio nature;
- that removes the portfolio restriction in respect of investments
in foreign assets that are made through Australia; and
- with changed criteria that determines when a foreign fund is
and a simplified legislative mechanism for providing the IMR concession.
The stated object of the new IMR would be 'to encourage particular kinds
of investment made into or through Australia by some foreign residents that
have wide membership, or that use Australian fund managers'.
Under the proposed changes, income derived by an 'IMR entity', which
cannot be an 'Australian resident' or a 'resident trust for CGT purposes' as
defined by the income tax law, can qualify for the IMR concession. The IMR
- treats certain amounts of income that would otherwise be
assessable income as non-assessable non-exempt income;
- denies certain deductions; and
- disregards certain capital gains and capital losses.
Foreign entities would qualify for the IMR concession by investing:
- directly in Australia (direct investment concession); or
- via an Australian fund manager (indirect investment concession).
The direct investment concession would be available to foreign entities
that pool their investments in a widely held fund. Such entities would 'disregard
Australian income tax consequences that arise in respect of disposal gains and
losses from portfolio and passive investments into Australia to the extent that
the returns or gains are not attributable to Australian real property'.
The indirect investment concession would be available to foreign
entities that engage an independent Australian fund manager to invest into, or
through, Australia. Such entities would 'disregard Australian income tax
consequences arising as a result of engaging the Australian fund manager in
respect of gains and losses from those investments (including portfolio and
non-portfolio foreign investments and portfolio Australian investments) to the
extent that the returns or gains are not attributable to Australian real
There are two limbs to the IMR concession. The first limb is outlined in
proposed new subsection 842-215(1), and would apply in relation to IMR
This subsection is relevant for both the direct investment concession and the
indirect investment concession.
The second limb is outlined in proposed new subsection 842-215(2).
This subsection would provide further concessions that apply in relation
to specific tax consequences that arise or relate to an IMR financial
arrangement as a result of an independent Australian fund manager constituting
a permanent establishment of the IMR entity. The second limb is only relevant
for the indirect investment concession.
Stakeholder views on schedule 7
In its submission, Platinum Investment Management stated that it
'welcomes the IMR reforms' that the bill seeks to implement. Platinum
Investment Management explained that:
As a well-established Australian investment manager with more
than $29 billion under management, Platinum has seen first-hand the demand
from overseas investors for the services of world-class Australian managers.
The uncertainties in Australian tax law, however, have jeopardised and, if left
unaddressed, will continue to jeopardise, our ability to export our services
Notwithstanding its overall support for the IMR reforms, Platinum
Investment Management suggested that ambiguities in the proposed amendments
could 'give rise to interpretations that have the effect of undermining the
policy objective of the IMR reform'. The two matters that Platinum Investment
Management discussed related to the further concessions relating to permanent
establishments under proposed new subsection 842-215(2).
Under this proposed new subsection, income that 'relates to or arises
under' an IMR financial arrangement, and that would otherwise be the entity's
assessable income for the year, is treated as non-assessable non-exempt income
of the entity, to the extent that:
- the income is treated as having a source in Australia because it
is attributable to a permanent establishment of the entity in Australia (if the
entity is resident in a country that has entered into an international tax
agreement with Australia containing a business profits article);
or if this is not applicable
- the income is treated as having a source in Australia because
arm's length profits for a permanent establishment in Australia are taken to be
attributable to sources in Australia in accordance with subsection 815-230(1).
The first concern raised by Platinum Investment Management was whether a
fund resident in a treaty country, but to which the treaty does not apply, will
be eligible for the further concessions relating to permanent establishments if
it is managed by an independent Australian manager.
As shown above, proposed new subparagraphs 842-215(2)(a)(i) and (ii)
refer to international tax agreements and the ITAA 1997. Platinum Investment
Management argued that 'it is not always clear from subparagraphs (i) and (ii)
whether the applicable test is the relevant treaty or the Act'. Platinum
Investment Management considered it would be useful for clarification as to
- the reference to 'resident' in the opening sentence of
subparagraph (i) refers to residence under the relevant treaty definition;
- the reference to 'permanent establishment' in subparagraph (i) is
intended to refer to the definition under the relevant treaty or that contained
in the income tax law;
- a fund resident in a treaty country but to which the treaty does
not apply, and which is managed by an independent Australian manager, will have
the benefit of the concessions relating to permanent establishment under
paragraph 842-215(2)(a) (that is, whether the IMR entity can rely on subparagraph
To illustrate its concerns, Platinum Investment Management devised the
Ireland is a country with which Australia has entered into an
international tax treaty. Assuming that under the domestic laws of Ireland XYZ
Fund plc is considered 'resident in Ireland' but has tax exempt status, XYZ
Fund plc would not be considered a 'resident' of Ireland under the treaty.
Moreover, the treaty would not operate to treat XYZ Fund plc's income to have
an Australian source as the treaty does not apply to it. In such a case, it is
not clear from paragraph 842-215(2)(a) whether subparagraph (i) or (ii) or
neither would apply to XYZ Fund plc.
The second concern raised by Platinum Investment Management went to what
income is covered under proposed new paragraph 842-215(2)(a). That paragraph
refers to 'income that relates to or arises under the IMR financial
arrangement, and that would otherwise be the entity's assessable income for the
year'. Platinum Investment Management noted that the explanatory memorandum
provides some examples of the types of income that would qualify for the IMR concession;
however, the business suggested that it would be helpful for additional
examples to be provided. Platinum Investment Management submitted that it is
...clarification on the status of the following types of
income, all of which are common types of income that may arise from an IMR
entity's ordinary eligible investment activities:
- foreign exchange gains on normal
expense accruals which are not directly related to a specific IMR financial
arrangement (such as management fees, administration and custody fees,
- incidental sub-underwriting fees
which may not result in the IMR entity actually acquiring an IMR financial
- good value claims; and
- compensation amounts.
The other submitter that commented on schedule 7 was the Alternative
Investment Management Association (AIMA). The AIMA expressed its support for
the proposed amendments, however, it raised one issue regarding proposed new
Proposed section 842-235 outlines the rules for determining total
participation interests for the purposes of the 'widely held' test. Subsection
(9) would provide that, when excluding amounts equivalent to the fund manager's
remuneration to determine whether the non-resident entity is widely-held, the fund
manager must be an independent Australian fund manager in relation to the
However, the AIMA advised that:
When a non-resident entity wishes to rely upon the direct IMR
concession (section 842-215(3)), it will very likely not have a separate
independent Australian fund manager (since it would in that case likely be able
to fall within the indirect IMR concession (section 842-215(5)). We request
that further consideration be given to this point.
Committee comment on schedule 7
The committee notes that some stakeholders are seeking clarification of
certain terms and concepts in the proposed amendments. As the IMR seeks to
remove uncertainties in the application of Australia's taxation laws as they
apply to widely held foreign funds and certain foreign investors, it is
particularly important that the guidance provided is clear.
To ensure that the intent underpinning the IMR is achieved as
effectively as possible, the committee considers that there would be merit in a
revised explanatory memorandum being issued that provides further clarification
and examples to address the issues noted in this report.
The committee recommends that the government give consideration to
issuing a revised explanatory memorandum that provides further clarification of
concepts relevant to schedule 7.
This omnibus bill contains a number of important measures relating to
Australia's taxation laws. The measures that result in savings will assist the
government to repair the budget and fund other policy priorities. The committee
considers that the bill should be passed.
The committee has recommended that further guidance on some of the terms
and concepts in schedule 7 may be of assistance to the funds management
industry. The remaining issues outlined by submitters are technical in nature
rather than substantive. In the committee's view, these issues can be
effectively addressed by the government outside of the committee process.
Accordingly, the committee draws to the government's attention the evidence
received about the proposed changes to the offshore banking unit regime
contained in schedule 3 and the IMR reforms in schedule 7.
The committee recommends that, after the government gives due
consideration to recommendation 1, the bill be passed.
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