This Bills Digest replaces a preliminary Bills Digest published on 21 November 2023 to assist in early consideration of the Bill.

Glossary

Purpose of the Bill

The purpose of the Treasury Laws Amendment (Tax Accountability and Fairness) Bill 2023 (the Bill) is to amend Commonwealth legislation including the Tax Agent Services Act 2009 (TAS Act), Taxation Administration Act 1953 (TAA 1953) and the Petroleum Resource Rent Tax Assessment Act 1987 (PRRT Act).

Structure of the Bills Digest

As the matters covered by each of the Schedules are independent of each other, the relevant background, stakeholder comments (where available) and analysis of the provisions are set out under the relevant Schedule number. Further, references in this Digest to:

• provisions of an Act being amended by the Bill are referred to as sections and subsections and
• provisions in a Schedule of an Act being amended by the Bill are referred to as clauses and subclauses.

Committee consideration

Senate Economics Legislation Committee

At the time of writing this Digest, the Senate Selection of Bills Committee considered, but was unable to reach agreement about the Bill. However, amendments to the Report were adopted by the Senate resulting in the Bill being referred to the Senate Economics Legislation Committee with a reporting date of 18 April 2024.[1]

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bill (p. 32).

Position of major interest groups

At the time of writing, 15 submissions to the Senate Economics Legislation Committee inquiry into the Bill were publicly available. The positions of major interest groups in regard to the Bill examined elsewhere in this Digest are based on submissions to the Treasury consultations on the Exposure Drafts of the relevant Schedule, where the provisions are identical or substantially the same.

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.[2]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights had no comment on the Bill (p. 5).

Schedules 1 to 4: PwC ‘response’ measures

Both the titles of Schedules 1 to 4 of the Bill and the Government’s explanatory materials frame the proposed amendments in those Schedules as responses to the PwC tax leaks scandal. However, as detailed in this Digest, most of the measures contained in those schedules were either recommended or proposed before the details of the PwC scandal became known. That being the case, whilst the PwC scandal may be the catalyst for introducing the reforms at this time, it does not appear to have been the genesis of many of them.

Financial implications of Schedules 1 to 4

The table below sets out the estimated financial impact of the measures in Schedules 1 to 4 on the Commonwealth.

Table 1: Financial implications of Schedules 1 to 4

Source: Explanatory Memorandum, Treasury Laws Amendment (Tax Accountability and Fairness Bill 2023), 1–4.

Compliance cost impact of Schedules 1 to 4

The Explanatory Memorandum notes that the amendments in Schedules 1 to 4 of the Bill are not anticipated to result in any compliance cost impacts.[3]

Policy position of non-government parties/independents on Schedules 1 to 4

The Oppositionsought to amend the Bill to delete Schedule 5, which deals with proposed changes to the Petroleum Resource Rent Tax (PRRT).[4] The Australian Greens and Independent Member Dr Helen Haines, whilst both appearing to support the measures in Schedules 1 to 4 in principle, sought to have the House of Representatives consider the provisions of Schedules 1 to 4 of the Bill separately from those in Schedule 5 because they deal with unrelated matters.

Independent Member Zali Steggall welcomed the reforms in Schedules 1 to 4 and indicated her support for them. However, she opposed the Bill on the basis that Schedule 5 of the Bill is ‘an absolute disgrace’ because it ‘sneaks in reform on a very different issue’ from that dealt with by Schedules 1 to 4, whilst also indicating concern about ‘omnibus bills’ that combine ‘complex, disparate policy issues’.

Independent Member Dr Monique Ryan, expressing support in principle for the measures in Schedules 1 to 4, noted her concern about the consultation process for those reforms, and, in particular, the inclusion of Schedule 5, and indicated she would not support the Bill as a result.

Independent Member Zoe Daniel appeared to indicate support for some of the measures in Schedules 1 to 4 of the Bill, but expressed concern about the Bill combining ‘complex, disparate policy issues’, the lack of ‘broader protections for whistleblowers’ and stated that due to the inclusion of Schedule 5 of the Bill, she would not support the Bill as a whole.

Independent Member Allegra Spender expressed support for the measures in Schedules 1 to 4, but expressed concern that due to the inclusion of Schedule 5, the Bill ‘deals with two very important issues’ that are ‘completely unrelated’. Independent Member Kylea Tink likewise indicated support for the measures in Schedules 1 to 4, and concerns about the Bill combining those measures with Schedule 5, as did Independent Member Kate Chaney.

The Australian Greens Leader Adam Bandt argued in relation to Schedule 2 (about extending tax whistleblower protections) that ‘this Bill doesn’t do enough to protect the whistleblowers’.

At the time of writing this Bills Digest the position of other non-government parties and independents on the precise measures contained in Schedules 1 to 4 of the Bill could not be determined.

Schedule 1: Promoter penalty law reform

Background to Schedule 1

The tax promoter penalty laws[5] target promoters of tax avoidance and evasion schemes, rather than participants of such schemes.[6] The laws were introduced in 2006 as a response to mass‑marketed tax avoidance and evasion schemes prevalent in the 1990s.[7] The Explanatory Memorandum notes that over time, tax promoter activity has evolved and tax exploitation schemes ‘have become more bespoke and complex, often operating across jurisdictional boundaries’.[8]

Previous proposals to reform the tax promoter penalty regime

Since its commencement in 2006, and prior to the PwC scandal, various reforms to the tax promoter penalty laws have been proposed including extension to specifically apply to schemes that exploit certain corporate forms, seek to avoid payment of a tax liabilities during business collapses and better capture the ‘controlling minds’ behind schemes, including accountants and lawyers.[9]

Most recently, in June 2019 the Australian Labor Party (ALP), in its policy ‘Labor's plan for making multinationals pay their fair share’, advocated for increasing the penalties for breaches of the tax promoter regime. The amendments in Schedule 1 to the Bill reflect this policy.

Consultation

The Treasury conducted a consultation process regarding reform of promoter penalty laws, including Exposure Draft legislation, in September 2023. Ten submissions to the consultation process have been published.

Key issues and provisions arising from Schedule 1

Currently, under the tax promoter penalty laws an entity may be subject to a civil penalty (fine), injunction or enforceable undertaking if:

• it, or another entity, is a promoter of a tax exploitation scheme, or
• it implements a scheme that has been promoted on the basis of conformity with a product ruling in a way that is materially different from the way it is described in the ruling.[10]

The Bill expands the application of the tax promoter penalty laws by broadening the meanings of both promoter and tax exploitation scheme as discussed below.

Who is a promoter?

Currently, an entity (which includes an individual, a company, a partnership, an unincorporated association, a trust or a superannuation fund[11]) is a promoter of a tax exploitation scheme if:

• it markets a scheme or otherwise encourages the growth of a scheme or interest in it
• the entity or an ‘associate’ receives (directly or indirectly) consideration in respect of marketing or encouraging the scheme, and
• it is reasonable to conclude that the promoter has had a substantial role in respect of marketing or encouraging the scheme.[12]

The Bill amends the definition of promoter in paragraph 290‑60(1)(b) in Schedule 1 to the TAA 1953 to replace the term ‘consideration’ with ‘benefit’.[13] The Explanatory Memorandum notes that the use of the word ‘consideration’:

has restricted the Commissioner’s ability to effectively apply the promoter penalty laws in some cases due to the practical challenges in obtaining sufficient evidence that shows that the promoter or an associate of the promoter has received consideration in respect of marketing, or encouraging growth or interest in, the tax exploitation scheme.[14] [emphasis added]

Critically, this is because the concept of ‘consideration’:

• infers receipt of payment or financial reward in respect of such marketing or encouragement of schemes, which has been difficult to establish and
• while ‘indirect consideration’ includes in-kind payments and payments to third-party associates, the inference has been that the reward is quantifiable.[15]

The effect of this change is that an entity will be a promoter of a tax exploitation scheme if it, or an associate of it, directly or indirectly receives a benefit in respect of the marketing or encouragement of such a scheme, including anything already captured by the meaning of ‘consideration’. The Explanatory Memorandum states, by way of example, that increasing the client base of an entity is a benefit that will be captured by the changes,[16] and argues that the broader concept of benefit:

• ‘removes the requirement that the reward is quantifiable’[17]
• ‘allows the Commissioner to apply for an order where the promoter of a scheme has received benefits that are less obvious, intangible or disguised’[18] and

therefore will make it easier to enforce the laws in a wider range of circumstances.

What is a tax exploitation scheme?

Clause 290-65 in Schedule 1 of the TAA 1953 provides that a scheme is a tax exploitation scheme if, at the time the scheme is promoted, it is reasonable to conclude that an entity that entered into or carried out the scheme has a sole or dominant purpose of getting a ‘scheme benefit’, and it is not reasonably arguable that the benefit is available under the tax laws. This includes promoting schemes on the basis of their purported conformity with a product ruling, but which are implemented in a way that is materially different from that described in the relevant product ruling.[19] The provisions cover schemes involving taxes such as income tax, GST and FBT and any impugned conduct occurring either in or outside Australia.[20]

The Bill expands the meaning of a tax exploitation scheme by:

• applying to schemes captured by the Multinational Anti-Avoidance Law (MAAL) or Diverted profits tax (DPT) rules and
• expanding the meaning of product ruling.

Including a wider range of schemes

Scheme has been implemented

The Bill specifically provides that the meaning of a tax exploitation scheme includes schemes that breach, or would breach, the MAAL or DPT rules. A scheme will be a tax exploitation scheme where the scheme was carried out and:

• the MAAL or DPT rules apply to the scheme and
• it is reasonable to conclude that an entity that (alone or with others) entered into or carried out the scheme, or part of it, did so for a principal purpose of (or for more than one principal purpose that includes a purpose of) that entity or another entity getting a scheme benefit and
• it is not reasonably arguable that the scheme benefit is available at law.[21]

Scheme has not been implemented

A scheme will be a tax exploitation scheme where, despite the scheme not being implemented:

• it is reasonable to conclude that, had the scheme been entered into or carried out, the MAAL or DPT rules would apply to the scheme and
• it is reasonable to conclude that if an entity (alone or with others) had entered into or carried out the scheme, it would have done so for a principal purpose of (or for more than one principal purpose that includes a purpose of) that entity or another entity getting a scheme benefit and
• it is not reasonably arguable that the scheme benefit would be available at law if the scheme were implemented.[22]

In both instances a scheme benefit means the reduction of a tax-related liability arising from the scheme, or an increased amount the Commissioner must pay or credit to the entity arising from the scheme.[23]

Importantly, the expanded definition of a tax exploitation scheme does not apply to a scheme where, even though the conditions in proposed paragraphs 290-95(1A)(a) and (b) are present, it is reasonably arguable that a scheme benefit is, or would be, available at law.[24] The Explanatory Memorandum provides the following example of how the proposed inclusion of schemes captured by MAAL or DPT rules would operate:

A partner in a professional services firm promoted a scheme to a client which sought to raise finance for the client’s business expansion in a way that reduced the client’s tax liability that would not otherwise have been available at law. On a full examination of all of the factual circumstances and evidence around the scheme, it was reasonable to conclude that, if the scheme were implemented, the provisions of the DPT would have applied because a principal purpose of the scheme would have been to obtain a tax benefit. Given it was not reasonably arguable that the reduction in the client’s tax liability (the scheme benefit) would have been available at law if the scheme was implemented, the scheme constitutes a tax exploitation scheme.[25]

Expanding the range of product rulings captured by the promoter penalty laws

As noted above, currently the promoter penalty laws apply to schemes promoted on the basis of conformity with a product ruling that are implemented in a ‘materially different’ way from that outlined in the ruling.[26] The term ‘materially different’ is not defined.

A product ruling is defined as a public ruling that states that it is a product ruling.[27] As such, currently the promoter penalty laws only apply to a narrow set of product rulings produced by the ATO that are also public rulings, rather than applying to other ruling types that may better describe conduct and application of the law relevant to a scheme, such as class rulings.

Items 5, 6, 8 and 9 in Schedule 1 to the Bill replace references to product ruling with references to ‘public ruling, private ruling or oral ruling’,[28] within a broader concept of ‘ruling’ encompassing all those ruling types.[29] The effect of this is that the promoter penalty laws will apply to schemes that misrepresent their conformance with a wider range of ATO product rulings (private, public and oral rulings) than is currently the case. In this regard the Explanatory Memorandum argues:

• extending the promoter penalty regime to cover all public rulings will cover as many rulings as possible that may be relied upon by promoters for false endorsement of a scheme and
• extending the promoter penalty regime to cover private rulings ensures promoters are held accountable for promoting conformity of a scheme with one described in a private ruling (as available in an edited version or the private ruling itself) that is materially different.[30]

Increases to penalties for breaches of promoter penalty laws

Currently, under the promoter penalty laws the Commissioner of Taxation (Commissioner) can, in addition to pursing penalties, also seek injunctions, voluntary undertakings and court orders to restrain a breach of an undertaking.[31] In relation to penalties, proposed subclauses 290-50(4), (4A) and (4B) in Schedule 1 to the TAA 1953 (inserted by item 16) would increase the maximum penalty the Federal Court can impose as per the table below. In addition, the Bill imposes higher penalties for significant global entities (SGEs) which, in simple terms, is a global parent entity either with annual global income of $1 billion or more or that is subject to a Commissioner’s determination deeming it to have such annual global income.

Table 2: Increase to penalties for breaches of promoter penalty laws

Source: Explanatory Memorandum, 11, 13–14; TAA 1953, Schedule 1, clause 290-55.

Position of major interest groups on reforms to the tax promoter penalty regime

A number of stakeholders raised concerns about the use of the word ‘benefit’ in the definition of a promoter, the broad range of product rulings that will be captured by the laws, the meaning of ‘materially different’ and the proposed increases to penalties.

Issue: broad definition of ‘promoter’

A number of stakeholders raised concerns about the impact of the inclusion of the word ‘benefit’ in the definition of a promoter of a tax exploitation scheme. In its submission to Treasury in relation to this reform, the Tax Institute (p. 6) noted:

• this could capture advice provided by in-house advisers as part of their employment (for example, where the adviser receives a bonus or promotion, that result would be a ‘benefit’) and
• employees acting under the supervision and direction of senior executives or practitioners should not be subject to these provisions.

The Law Council of Australia (LCA) (p. 6) expressed concern that technical breaches, where there is no intention to promote a scheme, may be caught under the proposed changes as:

the dissemination of information by tax advisers about how a tax is applied is often a useful tool to help taxpayers understand the outcome of a particular court case and may imply that taxpayers should consider whether the outcome is applicable to their own case. If the decision is later reversed (or a tax avoidance scheme is subsequently found to have existed) the question arises whether the dissemination of the information, in the first instance, would be caught. Notably, marketing material may fall within the new definition of ‘benefit’.

Chartered Accountants Australia and New Zealand (CA ANZ) (p. 18) expressed similar concerns about ‘thought leadership content in the form of a webinar or article’ being captured as an increase in the client base as a result of such content could be covered by the concept of ‘benefit’ and recommended clarifying the meaning of ‘benefit’ or, alternatively, additional coverage in the Explanatory Memorandum.

Issue: broad application to ruling types

A number of stakeholders raised concerns about the breadth of ruling types proposed to be captured by the Bill. For example, The Tax Institute (p. 6) noted in relation to private rulings:

edited [private binding rulings] PBRs cannot be relied on by a taxpayer other than the taxpayer to whom the PBR applies. Key information regarding the scheme is removed from edited PBRs to ensure that the identity of the taxpayer is not disclosed, often resulting in only part of the scheme and relevant facts being described.

Ernst & Young (EY) expressed similar concerns (p. 4) and recommended the Bill be amended to state that the circumstances are tested against the edited private ruling as published and not against the actual private ruling, other than where the promoter was a rulee for that private ruling or an adviser who applied for and received a copy of the ruling. Deloitte (pp. 4–5) also raised the issue and made similar recommendations, as did CA ANZ (pp. 15–18) stating (p. 16):

tax advisers should be able to utilise the benefit of the technical arguments and positions affirmed in an edited private ruling without fear of the potential risk of the promoter penalty rules applying, or by needing to alleviate the risk, by having their client seek their own private ruling (at a cost) raising the same technical issues.

Issue: meaning of ‘materially different’

The Bill applies the promoter penalty laws to schemes promoted on the basis of conformity with the expanded range of product rulings that are implemented in a materially different way from that outlined in the ruling. CA ANZ raised concerns about whether a scheme is or is not materially different from that described in a ruling, noting it ‘is already an issue’ under the existing laws and the proposed amendments would heighten the need for a clear understanding of the term. In that regard, CA ANZ noted (p. 17):

• that the ATO views a material difference as arising ‘where the difference in implementation affects the tax outcomes for investors’ but
• from an accounting perspective, materiality relates to the significance of that difference, which can vary between entities.

Issue: proposed penalties

A number of stakeholders raised a variety of concerns about, and suggested amendments to, the proposed increases to penalties for breaches of the amended promoter penalty laws. The Tax Institute (p. 7) suggested that the calculation of aggregate turnover used to determine the maximum penalty applicable to SGEs:

should be based on the aggregated turnover of the relevant entity in the year in which the breach in fact occurred or began to occur, unless the entity has artificially reduced its aggregated turnover in that year, or the relevant data is not yet available to calculate the aggregated turnover. This would ensure that the potential penalty amount more accurately reflects the entity’s actual fiscal position at the time of the contravention of the rules which resulted in the liability to the penalty.   

The LCA suggested that whilst the increased penalties may deter non-compliance (p. 6):

higher sanctions may also induce other previously complying advisers to limit or temper their participation, thereby potentially compromising the independent advice sought. The Law Council acknowledges that the new 10 per cent of aggregated turnover penalty… is designed to deter entities from treating civil penalties as a mere cost of doing business. Yet, the penalty amount will be unrelated to the actual benefit received and may, therefore, appear disproportionate.

However, the LCA (p. 7) also noted:

Proposed subsection 290-50(4B) appears to provide that each partner in a partnership that is a significant global entity is potentially subject to penalties of as much as 10 per cent of the partnership’s turnover or 2.5 million penalty units. Given that large partnerships may have many hundreds or even thousands of partners, the proposed amendment is extraordinary considering that only one lot of such penalties would be imposed on a corporation under proposed subsection 290-50(4A). [emphasis added]

CA ANZ (p. 20) also expressed concern about the impact of the proposed penalties, stating:

CAs from small to medium practices argue that the current, harsh promoter penalty levels are more than adequate to dissuade and punish promoter behaviour in their market segment. They point out that the PwC matter involved a large firm, serving predominantly large and multinational clients.

CA ANZ urges the government to re-visit the proposed penalty increases and create a framework which better differentiates between adviser segments. “Small” firms should be treated the same as individuals (I.e., 5,000 penalty units or 3 times the total value of benefits).

E&Y (p. 3) noted that the proposed penalties ‘are not in line with the Corporations Act 2001’ and that the penalty calculated under the proposed changes ‘may be substantially greater than if the amendment had been aligned with the Corporations Act’. As such, E&Y recommended:

• if the intended policy of the proposed amendments is to align the 10% rule for promoter penalties with the 10% rule used for Corporations Act penalties, changes must be made to replicate the use of the Corporations Act definition of annual turnover.
• if the intended policy of the proposed amendments is as drafted to calculate potential penalties based on the more expansive aggregated turnover provisions of the ITAA 1997, then this should be recognised and clearly explained in the explanatory memorandum to the amending Bill and in other materials as relevant.

Deloitte (p. 2) recommended alignment of the proposed turn-over based penalties in the Bill with the Corporations Act, as well as aligning treatment of penalties for partners and body corporates under proposed subsection 290-50(4A) and (4B). The LCA expressed similar concerns.

Schedule 2: Extending tax whistleblower protections

Background to Schedule 2

‘Whistleblowing’ can be defined as a ‘disclosure by organisation members (former or current) of illegal, immoral or illegitimate practices under the control of their employers, to persons or organisations that may be able to effect action’.[34]

In turn, whilst various definitions exist, whistleblower protections are defined by the OECD (p. 18) as legal protections from discriminatory or disciplinary action for employees who disclose to the competent authorities, in good faith and on reasonable grounds, wrongdoing of whatever kind in the context of their workplace.

The OECD (p. 10) has also noted that whistleblower protections can extend to exemptions from breaches of secrecy or national security laws. In the Australian context, Commonwealth whistleblower protections involve protecting whistleblowers from civil, criminal or administrative liability, as provided for under the Public Interest Disclosure Act 2013 (PID Act), for example, provided various processes and criteria are met.[35]

A number of reviews have highlighted limitations in the abilities of Australia’s regulators to receive and share information from whistleblowers, which negatively affect the integrity of the taxation system as a whole. Schedule 2 of the Bill aims to address some of those limitations.

Previous proposals to reform the scope of tax-related whistleblower protections

Prior to the PwC scandal, various reforms to protections for tax-related whistleblower disclosures were proposed. This included:

• allowing the ATO to disclose information provided to it by a whistleblower ‘to Government agencies and people or entities necessary to investigate, without the consent of the whistleblower’[36] and
• extending whistleblower protection to disclosure of information to the TPB.[37]

Most recently, in June 2019 the ALP, in its policy ‘Labor's plan for making multinationals pay their fair share’, (p. 2) advocated for:

• providing protection for whistleblowers who report on entities evading tax to the ATO and
• allowing individuals who highlight tax evasion to collect a share of any penalty collected.

The provisions in Schedule 2 to the Bill can be viewed as indirectly advancing the first element of that policy: providing protection to whistleblowers, but not the second.

Role of the Tax Practitioners Board

Tax practitioners must be registered with the Tax Practitioners Board (TPB) under the Tax Agents Services Act 2009 (TAS Act) in order to provide tax agent services for a fee or other conduct connected with such services.[38] 

The ATO may refer registered tax agents to the TPB where there is evidence that they are in breach of obligations under the TAS Act.[39] The TPB can deregister a practitioner who is penalised for promoting a tax exploitation scheme.[40] However, currently, tax practitioners are unable to make whistleblower disclosures to the TPB, an issue identified as a weakness requiring rectification by the pre-PwC scandal reviews noted above.

Consultation

The Treasury conducted a consultation process regarding reforms to tax-related whistleblower protections, including Exposure Draft legislation, in September 2023. Eleven submissions to consultation process have been published.

Key issues and provisions arising from Schedule 2

In the context of tax laws, various secrecy provisions exist, breaches of which can attract criminal penalties. Currently, under the TAA 1953 a whistleblower qualifies for protection:

• if the disclosure of the information was made to the Commissioner to assist the Commissioner to perform their functions or duties under the taxation law[41]
• if the disclosure of the information was made to an eligible recipient (members of the entity’s audit team, registered or BAS tax agent, directors, other employees and certain other authorised persons) to assist the eligible recipient to perform functions or duties in relation to the tax affairs of the entity or an associate of the entity[42] or
• if the disclosure of the information was made to a legal practitioner for the purposes of obtaining legal advice or representation about disclosures made to the Commissioner or an eligible recipient.[43]

Where any of the above apply, the whistleblower is not subject to several liabilities in relation to the disclosure.[44]

Key issue: expanding tax-related whistleblower protection regime

The provisions in Schedule 2 to the Bill amend section 14ZZT and other provisions of the TAA 1953 to extend whistleblower protection to eligible whistleblowers who make disclosures to:

• the TPB[45]
• certain other entities who may support or assist the whistleblower (such as psychologists or medical practitioners)[46] and
• entities prescribed by future regulations (such as professional associations[47]).[48]

This means that where certain criteria are satisfied the Bill will provide whistleblowers with protection from civil, criminal or administrative liability related to disclosing sensitive tax information. In addition, the Bill includes amendments that:

• allow the TPB to use the disclosed information as necessary or convenient for performing its functions under section 60-15 of the TAS Act, which includes investigating breaches of that Act (and therefore more effectively regulate malicious practices by tax practitioners or scheme promoters that would be harmful to the public or undercut the Australian revenue system)[49]
• establish evidentiary burdens and procedures regarding claims for protection made under proposed section 14ZZX that ‘align with section 10 and section 23 of the PID Act 2013’.[50]

A whistleblower who has civil or criminal proceedings instituted against them bears the onus of substantiating their claim for protection by, for example, pointing to evidence that suggests a reasonable possibility the information disclosed may assist the Commissioner to perform their functions or duties under a taxation law in relation to the entity or an associate of it (proposed section 14ZZXA).

Position of major interest groups on proposed tax-related whistle-blower reforms

The proposed changes to tax-related whistle-blower protection laws were supported by stakeholders.[51] However, the following issues were raised:

• the benefit of having a single unified whistleblower protection law, rather than a ‘patchwork’ framework[52]
• clarifying which professional associations disclosures can be made to[53] and
• clarifying the legal implications of an employee of a professional association disclosing information received from a whistleblower to a regulatory body.[54]

Schedule 3: Tax Practitioners Board reform

Background to Schedule 3

The object of the TAS Act is to ensure that tax agent services are provided to the public in accordance with appropriate standards of professional and ethical conduct.[55]

Tax practitioners (tax agents and BAS agents, which can be individuals, partnerships or companies) in Australia are regulated by the TPB, which is established under the TAS Act. Tax practitioners must be registered with the TPB under the TAS Act in order to provide tax agent services for a fee or to engage in other conduct connected with providing such services.[56] Under the TAS Act and related regulations, the TPB:

• administers the system for registering tax practitioners
• investigates conduct that may breach the TAS Act and the Code of Professional Conduct and
• where there has been a breach, impose sanctions including orders, suspension or termination of registration.[57]

These powers enable the TPB to regulate the profession and ensure that tax practitioners are compliant with the legislative framework and adhere to appropriate standards of professional and ethical conduct.

Previous proposals to reform the TPB

Prior to the PwC scandal, various reforms to the operation of the TPB were proposed. These included:

• increasing the TPB’s sanction powers and applying them to both registered and unregistered tax practitioners[58]
• providing that investigations can commence and continue regardless of whether a registered tax practitioner has their registration terminated, chooses not to re-register, or is seeking to surrender their registration[59]
• removing the limitation on the TPB formally gathering information prior to commencing and notifying a tax practitioner that they are being investigated[60]
• removing the six-month timeframe to conduct an investigation[61]
• enabling the TPB to publish more detailed reasons for tax practitioner sanctions, including terminations on the TPB Register (which is publicly available) and removing the time limit on how long certain information remains on the TPB Register before being removed[62]
• expanding the details of tax practitioners that are included in the TPB Register
• creating a publicly available register of unregistered tax practitioners, including:
  • entities that receive a notice by the TPB to ‘cease and desist’ providing tax agent services for a fee and
  • publication of details relating to renewal application rejections (in certain circumstances, such as not being fit and proper).[63]

Schedule 3 of the Bill is largely consistent with above recommendations.

Consultation

The Treasury conducted a consultation process regarding TPB reforms, including Exposure Draft legislation, in September 2023. Ten submissions to the consultation process were published.

Key issues and provisions arising from Schedule 3

Currently, under the TAS Act:

• unregistered tax practitioners can only be listed on the register if their registration has been terminated for a reason other than a reason prescribed by the Tax Agent Services Regulations 2022 (TAS Regulations)[64]
• details of such unregistered tax practitioners can only be included on the Register for 12 months[65]
• there is a 6-month timeframe for the TPB to conduct investigations, unless this is extended[66] and
• the TPB can delegate decisions for which administrative review is available to committees that meet certain requirements.[67]

Expanding information on the TPB Register

Currently the TAS Act limits the ability to include unregistered entities on the TPB Register. Specifically, this includes entities who had had their registration terminated other than for a reason prescribed by the TAS Regulations. This limitation created a ‘loophole’ where an entity that breached the TAS Act in a way that justified termination could allow their registration to lapse and avoid being listed on the TPB Register, as the TAS Act did not provide for those issues to be addressed in regulations.

Proposed subsections 60-135(1) to (3) inserted by item 1 in Part 1 of Schedule 3 to the Bill allow regulations to be made that deal with when unregistered entities must, or must not, be entered into the TPB Register and if entered, how long they must remain listed. This will help avoid situations where an entity could allow their registration to lapse and avoid being listed on the TPB Register arising in the future.

Schedule 3 allows the TPB to publish information about the entity on the TPB Register, including for past investigations where the TPB decided to take no further action on or after 1 July 2022 while the tax practitioner was unregistered.[68]

Whilst not explored in detail in this Digest, the Exposure Draft regulations released by Treasury in September 2023 as part of its consultation process provided that if an entity is required to be entered onto the TPB Register then the following details must be listed:

• the name and contact details of the entity[69]
• the registration number, any relevant professional affiliation of the entity and the period the entity is registered[70]
• any condition to which the registration of the entity is subject[71] and
• various historical details including the names and registration numbers that the entity has used in the previous five years (if different from the current name and registration number).[72]

The Exposure Draft regulations also provide that if various orders are made by the TPB with respect to an entity (including suspensions and terminations of registration), or a renewal application is rejected on integrity grounds, the entity must be entered onto the TPB Register[73] and various information recorded, such as a summary of the content of the order and reasons for the order, suspension, termination or rejection of renewal application on integrity grounds.[74]

It should be noted that no such regulations can be made or tabled until after the Bill is passed and commences. In addition, any such regulations may be different in some aspects from the elements noted above in the Exposure Draft regulations.

Timeframe for conducting investigations

Currently there is a 6-month timeframe for the TPB to conduct investigations, unless this is extended. Item 3 in Part 2 of Schedule 3 extends this to 24 months, whilst retaining the ability to extend investigation time-periods. The Explanatory Memorandum (p. 32) notes:

• the extension of the time period in which to conclude investigations recognises the shortcomings of mandating a 6-month period: the 6-month period was insufficient for the TPB to be able to conduct detailed reviews of complex cases
• extending the investigation timeframe to 24 months allows the TPB to address underlying risks of a case and investigate a wider scope of issues raised by a potential breach and
• despite the extension of the timeframe in which to complete investigations, it is not intended that the vast majority of investigations should require the full 24 months in which to be completed.

Publishing results of investigations

Currently, the TAS Act limits the information that the TPB can elect to publish regarding the results of investigations. Proposed subparagraph 60-125(2)(b)(v) (inserted by item 5) and proposed subsection 60-125(2A) (inserted by item 8) would allow the TPB to publish specified information about an entity, such as its name and the findings of the investigation, on the Register, even if no other sanctions are imposed. The Explanatory Memorandum notes (p 33):

The ability to publish findings of an investigation on the Register has been added as scenarios may arise where there has been a breach of the TAS Act, but pursuing sanctions is not a reasonable course of action. In particular, this can occur where entities were registered at the time the investigation commenced, but had their registration expire without renewal before the conclusion of the investigation. In these circumstances, publishing findings of misconduct from investigations provides the TPB with an additional option to ensure the public is aware of the entity’s misconduct.

The effect of proposed paragraph 60-125(2)(b)(v) and proposed subsection 60-125(2A) and proposed regulation 25E as published in the Exposure Draft regulations released by Treasury in September 2023 as part of its consultation process mean that if the TPB decides to publish information on the Register on the findings of an investigation, that information will be published for five years and set out:

• the identity of the contravening entity
• the TPB’s findings and the reasons for that finding.[75]

Proposed paragraph 70-10(h) (inserted by item 10 of Schedule 3) provides that decisions by the TPB to publish findings of investigations on the TPB Register can be appealed to the Administrative Appeals Tribunal (AAT). The Explanatory Memorandum notes (p. 34):

This is consistent with the availability of administrative review of a TPB decision to pursue administrative sanction, following an investigation that finds there has been conduct breaching the TAS Act. Enabling merits review for a TPB decision allows those that are subject to investigations an avenue for appeal with an independent tribunal that can provide a determination on whether the correct decision was initially made.

Position of major interest groups on Schedule 3

Whilst broadly supportive of the measures contained in Schedule 3, some stakeholders expressed specific concerns. For example, the Tax Institute (p. 4) expressed concerns about details of sanctions remaining on the TPB Register once they had expired:

The Tax Institute is of the view that where details of a sanction are published on the register and that sanction has lapsed or otherwise been remediated, the register should be updated to reflect this. For example, if a sanction is imposed that requires a practitioner to undertake certain actions, once those actions have been completed, the register should be updated to reflect the steps taken by the practitioner to address the issue.

This approach treats registered tax agents and BAS agents more fairly as it recognises efforts made to remediate misconduct. It also ensures that the public have a more fulsome understanding of the issues and how they were addressed. This improves the overall integrity of the register and provides greater assurance to the public.

The Financial Advice Association Australia (FAAA) expressed concerns about publication of the results of investigation where no action was taken against the practitioner (p. 2):

…this should be for more material matters of misconduct and not merely administrative matters. We also have reservations about the legislation empowering the TPB through Item 12 to publish a finding when the TPB had previously made the decision to take no further action. This seems to be retrospective, although we note the right of appeal to the AAT exists. In these circumstances, we believe that this should only apply in the case of more serious matters.

CA ANZ (p. 26) expressed similar concerns, arguing that:

• the TPB should not treat all levels of breaches and orders as worthy of publication
• there should at least be an avenue for an agent to apply to have a training course sanction removed from the Register once the course is completed and 6 months have passed since it was completed
• the publication rule being applied to orders such as a training course risks undue damage to honest and compliant agents (reputation) and adversely impacts their ability to retain and attract new clients (competition) and staff (employment and talent) and
• there is also a risk of ‘peppering’ or overwhelming the Register with information on low-grade conduct for a disproportionate period of time, detracting from the more concerning and egregious conduct which consumers need to be warned about.

Schedule 4: information sharing

Background to Schedule 4

Under tax laws, various tax-related information is classified as protected information and cannot be disclosed unless an exception applies.[76] Importantly, currently there is no general principle that allows disclosure of protected information by the ATO or TPB to relevant professional disciplinary bodies when they have evidence of legal or ethical misconduct by members of the relevant body.[77] The Explanatory Memorandum (p. 41) argues:

The PwC tax leaks scandal exposed limitations on the power of the regulators to respond to misconduct by tax advisers and firms. It highlighted that current secrecy provisions prevent government agencies from communicating effectively with one another in order to maintain the integrity of the tax system, as well as the process by which Government consults intermediaries. In the PwC scandal the ATO became aware that PwC had breached an obligation of confidence to the Commonwealth and used that information to develop schemes to avoid the application of the proposed law. The ATO was not able to share the relevant information with Treasury.

Previous proposals to reform tax-related information sharing

Prior to the PwC scandal, the Black Economy Taskforce Final Report noted the barriers tax secrecy laws posed to combatting tax evasion and other illegal black economy related activities. Relevantly the Black Economy Taskforce Final Report recommended that tax practitioners ‘should formally be under obligation to report when they become aware of black economy or other illegal activities’ as in the UK,[78] and observed:

• ‘improved data and information sharing and improved analytics… would support the better identification of egregious tax practitioners’[79] and
• the existing disciplinary framework in the profession ‘should be more rigorously applied, including by better provision and use of ATO data (with changes made to the information sharing provisions as necessary) to allow deregistration and prosecution’[80] of tax practitioners engaged in professional misconduct or breaches of tax laws.

Consultation

The Treasury conducted a consultation process regarding tax-related information sharing reforms, including Exposure Draft legislation, in September 2023. Twelve submissions to the consultation process were published.

Key issues and provisions arising from Schedule 4

The amendments in Schedule 4 will:

• allow the ATO and TPB to share protected information with Treasury about misconduct arising out of breaches or suspected breaches of confidence by intermediaries engaging with the Commonwealth
• allow the ATO and TPB to share protected information with prescribed disciplinary bodies where they reasonably believe a person’s actions may constitute a breach of the prescribed disciplinary body’s code of conduct or professional standards and
• allow the Treasury to on-disclose protected information to the Treasurer or Finance Minister in relation to a breach or suspected breach, and any proposed measure or action directed at dealing with such a breach or suspected breach.

Sharing information related to misconduct arising from breaches of confidence

Obligations of confidence may be imposed by contractual obligation or by legislation (for example, provisions deeming information to be protected information). However, even in situations where there is no legislative or contractual obligation of confidence which expressly protects information, information may still be subject to an equitable duty of confidence, meaning the disclosure of that information by an entity would found an equitable action for breach of confidence. This will occur when:

• the information itself has a quality of confidence about it
• the information was imparted in circumstances importing an obligation of confidence and
• there was an unauthorised use of the information.[81]

Case law is somewhat uncertain as to whether the unauthorised use of the confidential information caused a detriment to the plaintiff (for example, the Commonwealth) is a necessary element of an equitable action for breach of confidence.[82]

Clause 355-65 in Schedule 1 of the TAA 1953 deals with exceptions to the rules against disclosure of information. Specifically, subclause 355-65(8) contains Table 7 which provides for records or disclosures relating to miscellaneous matters. Item 1 in Schedule 4 to the Bill inserts proposed table item 14 into Table 7 to allow taxation officers to share protected information with the Secretary of the Treasury Department where:

• there is a breach or suspected breach of an ‘obligation of confidence’ by an entity against the Commonwealth or a Commonwealth entity
• the obligation arose in connection with the entity providing advice, or otherwise providing services, to a Commonwealth entity either as an entity engaged by the Commonwealth entity for that purpose, or as an entity representing a taxpayer and
• the sharing of the protected information is for the purpose of enabling or assisting in the consideration, development or implementation of any measure, or the taking of any action, directed at dealing with the breach or suspected breach.

As the term obligation of confidence is not defined, it will have its ordinary meaning and hence will apply to contractual, legislative and equitable obligations of confidence. In relation to providing advice, the Explanatory Memorandum (p. 43) notes:

The advice provided by an entity may have been as a service provider or as a taxpayer representative and was provided by means other than by public consultation. This could include but is not limited to private consultations, working groups and roundtables, where individuals were required to sign non-disclosure agreements, privacy agreements, or other such agreements with any Commonwealth department, agency, and body to ensure integrity and confidentiality in the policy development process. The advice provided does not need to be provided for a fee. [emphasis added]

The Explanatory Memorandum also notes (41–42) that this change will allow the Commonwealth to pursue suspected breaches of confidence and act as a deterrent to future misconduct by intermediaries engaging with the Commonwealth, by ensuring Treasury has relevant information to respond to breaches or suspected breaches of confidence.

Sharing information with disciplinary bodies

Currently legislation does not, in general, permit disclosure of protected information to relevant professional disciplinary bodies when the ATO or TPB has evidence of legal or ethical misconduct by members of a relevant professional body, except in very limited circumstances. The Explanatory Memorandum (pp. 44–45) highlights concerns about the impact of those limitations, noting this:

• prevents professional associations or independent regulators from receiving information which could enable them to pursue disciplinary actions against their members where they were not otherwise aware of the behaviour and
• inhibits the proper operation of the self-regulatory model that exists in many professions.

In this regard, the Explanatory Memorandum reflects similar concerns to those expressed by the Black Economy Taskforce Final Report regarding the ability of current laws to effectively deal with misconduct by professionals, due in part to limitations on information sharing.

Item 1 in Schedule 4 to the Bill also inserts proposed table item 15 into Table 7 in subclause 355‑65(8) of Schedule 1 of the TAA 1953. Item 4 inserts proposed subsection 70-40(6) into the TAS Act in equivalent terms. These provisions will allow taxation officers and TPB official to share protected information related to acts or omissions by a person to a prescribed disciplinary body where:

• the taxation officer/ TPB official reasonably suspects that an act or omission may constitute a breach of the prescribed disciplinary body’s code of conduct or professional standards and
• the disclosure is for the purpose of enabling or assisting the prescribed disciplinary body to perform one or more of its functions.

The relevant professional disciplinary bodies will be prescribed in the regulations. Whilst at the time of writing no exposure draft regulations had been released to provide guidance as to the which professional bodies or associations are likely to be prescribed as professional disciplinary bodies in the regulations, it would appear reasonable to assume it would cover key professional associations already recognised under Part 2 and Schedules 1 and 2 of the Tax Agent Services Regulations 2022 such as CA ANZ, CPA Australia, the Institute of Public Accountants and the Tax Institute.

Sharing disclosed information with the Minister or Finance Minister

Currently, under the TAA 1953 and TAS Act someone who is not a taxation officer or TPB official is prohibited from disclosing protected information except in certain circumstances.[83] As this applies to protected information lawfully disclosed to the relevant taxation officer or TPB official, currently it is difficult to ‘on-disclose’ protected information.[84]

Item 2 in Part 1 of Schedule 4 to the Bill inserts proposed clause 355-181 into Schedule 1 to the TAA 1953 to allow the disclosure of protected information obtained by the Treasury (for example, having been disclosed to it by the ATO or TPB) to the Treasurer or Finance Minister for the purpose of the Treasury providing advice in relation to:

• a breach, or a suspected breach, of an obligation of confidence by an entity providing advice to the Commonwealth, either as service providers to the Commonwealth or representing taxpayers in their interactions with the Commonwealth, against the Commonwealth or a Commonwealth entity (within the meaning of the Public Governance, Performance and Accountability Act 2013) or
• any proposed measure or action directed at dealing with such a breach or suspected breach.

Proposed subsection 70-40(5) of the TAS Act (inserted by item 4) will enable the TPB to provide protected information to Treasury in similar circumstances, which Treasury will be able to disclose to the Treasurer and Finance Minister.[85]

The effect of these amendments is that the Treasury can on-disclose protected information obtained from the ATO or TPB to the Treasurer or Finance Minister in relation to a breach or suspected breach of an obligation of confidence, and any proposed measure or action directed at dealing with such a breach or suspected breach.

Preventing disclosure of information identifying taxpayers

Protected information can include information that would identify specific taxpayers.[86] As such, Schedule 4 includes amendments to safeguard the identity of a taxpayer not involved in any wrongdoing represented by an intermediary that is the focus of the disclosure—unless doing so would prevent action being taken against the intermediary.

The amendments provide that a taxation officer or TPB official cannot disclose the ABN, name, contact details or personal information (as defined in the Privacy Act 1988) of any entity other than the entity that is suspected of the misconduct, unless the Commissioner or the TPB (or individual acting on its behalf) is satisfied that the inclusion of the information is necessary:

• for the purposes of enabling or assisting in the consideration of the development or implementation of any measure, or the taking of any action, directed at dealing with the breach or suspected breach (in relation to sharing protected information with Treasury) or
• for the purposes of enabling a prescribed disciplinary body to perform one or more of its functions (in relation to sharing protected information with a prescribed disciplinary body).[87]

The Explanatory Memorandum (pp. 45–46) notes that whilst the disclosure of protected information to Treasury or to a prescribed professional disciplinary body:

may include the personal information of both the person involved in any breach of confidence as well as individual taxpayers, these safeguards and the limited circumstances in which this information can be on-disclosed ensures that any potential impact on a person’s privacy is limited.

Position of major interest groups

Whilst most major interest groups generally supported the changes around information sharing in Schedule 4, a number of concerns were raised.

CA ANZ (p. 33) argued that as the amendments provide that professional disciplinary bodies will be prescribed by regulations and no exposure draft regulations have been released ‘Parliament should not consider debating this Bill until such time as it can fully see the full regulatory picture’.

Further, CA ANZ (p. 33) questioned the desirability of the ATO referring matters to professional disciplinary bodies:

Given the highly contestable nature of the interpretation and application of many aspects of Australian taxation and superannuation laws, and the propensity for substantial disputes to arise between the ATO and clients of tax and BAS agents, it is undesirable from a policy perspective for the ATO to have the power (or entitlement) to report suspected breaches of CA ANZ's Code of conduct or professional standards by a member. As the ATO will have formed this suspicion or view in the course of their functions in administering the taxation laws, there is an unacceptable risk of unconscious bias and/or a perceived conflict of interest inherent in the power (entitlement).

CA ANZ is also concerned that this new exception could have a negative impact on our members' ability to robustly and fearlessly represent their clients' interests in disputed tax matters against the ATO. This outcome would not be good for the health and integrity of the tax system from a taxpayer or tax adviser perspective. Instead, CA ANZ believes that it would be more appropriate for the ATO to report all suspected unprofessional conduct or misconduct to the TPB, as the independent regulator of tax and BAS agents, who would then make the decision whether to report a suspected conduct breach by the member to the professional association.

In contrast, CPA Australia and IPA (p. 2) supported the ATO referring matters to professional disciplinary bodies, whilst arguing that extending whistleblower protections to professional disciplinary bodies would improve the timeliness and effectiveness of information sharing between the TPB and professional associations.

Deloitte (p. 2) noted, in relation to the ATO or TPB referring matters to professional disciplinary bodies, that the Bill does not address how an entity’s or person’s membership will be confirmed to remove the risk of disclosures to a body that has no jurisdiction over the entity or person.

The LCA (pp. 13–16) and Queensland Law Society (pp. 2–3) raised concerns about the appropriateness of certain aspects of the proposed changes, including interfering with legal profession disciplinary matters, which are dealt with under state and territory legislative schemes, as well as being an aspect of the inherent jurisdiction of Supreme Courts of each state and territory.

Schedule 5: Petroleum resource rent tax deductions cap

What is the PRRT?

The petroleum resource rent tax (PRRT) is complex[89] but can be broadly summarised as a cash‑flow tax that applies on a project-by-project basis to off-shore petroleum projects.[90]

The PRRT is a tax on profits derived from the sale of Australian petroleum products, designated as ‘marketable petroleum commodities’ (MPC). This includes: stabilised crude oil, sales gas, condensate, liquefied petroleum gas (LPG), ethane, shale oil, and any other product declared by regulation to be an MPC.[91]

Where an entity has a taxable (PRRT) profit in a year, it will pay tax at a rate of 40 per cent.[92] The taxable profit is the amount by which assessable receipts exceed deductible expenditure and transferable exploration expenditure.[93] PRRT is levied before income tax, and PRRT payments are deductible against company tax when determining taxable income under the Income Tax Assessment Act 1997 (ITAA 1997).[94]

Methodology for calculating the PRRT

The PRRT was established in 1988.[95] At that time, the development of petroleum resources was largely focused on oil rather than gas.[96] Subsequently, large scale LNG projects became more important than oil. In the late 1990s it was recognised that a transfer pricing methodology was needed to determine (in an integrated operation) the price at which the gas is ‘sold’ from one part of the entity that extracts it to another prior to it being processed and liquefied for export.[97]

In 1998 the Government commissioned Arthur Andersen to undertake an analysis to determine an appropriate methodology to calculate a transfer price for natural gas feedstock used in the conversion of gas to liquid. Part 1 of the report (which was unpublished) established the basis for three different methods: Comparable Uncontrolled Price (CUP); Advance Pricing Arrangement (APA); and Residual Pricing Method (RPM).[98]

Part 2 of the report concluded that the RPM was a viable approach for setting a feedstock gas transfer price in an integrated gas-to-liquids project for the purposes of calculating secondary tax liability (p. 5). In practice, the RPM is almost always used,[99] owing to an inability to determine a CUP and because the RPM is advantageous to taxpayers.[100]

The RPM that is used in the Gas Transfer Pricing (GTP) regime allocates 50 per cent of the price received for LNG to the upstream (PRRT project) and 50 per cent to the downstream (liquefaction plant). It does this by providing a return on capital to each component, an allowance for operating costs, and if there is any residual value, it is typically allocated equally between the two sides (pp. 11–15).

Callaghan Review

In recent years there has been criticism from academics, civil society groups and policy bodies that the PRRT has not raised sufficient revenue to compensate the public for the use of finite resources.[101] There are several reasons given for the PRRT’s declining revenue, including generous uplift rates[102] and lower commodity prices. However, some of the criticism has been directed at the RPM, which is considered by some non‑industry stakeholders to be fundamentally flawed.[103] On the other hand, the peak industry body considers the gas transfer pricing (GTP) mechanism is working well.[104]

The Petroleum Resource Rent Tax Review (Callaghan Review), which reported in April 2017, noted at page 118 that the use of deductions could be limited to 80 or 90 per cent of assessable PRRT receipts, with PRRT paid on the remaining amount. The Callaghan Review modelled an 80 per cent deduction cap. The results are set out in Figure 6.3 of the report at page 119.

The Callaghan Review recommended that there be an in-depth examination of GTP arrangements (p. 14). Subsequently Treasury conducted such a review (the GTP Review) which reported in May 2023.

Gas Transfer Pricing Review

The GTP Review examined the RPM, which assumes a 50:50 split of residual profit, or rent, between the ‘upstream’ and ‘downstream’ operations of an integrated LNG project.[105] The GTP Review Final Report repeatedly noted the arbitrariness of this split (for example on pages 15, 24 and 25). As only the upstream profit is liable for PRRT, Treasury argued that ‘a 50:50 residual profit split attributes too much rent to the downstream contribution’ (pages 8, 32), causing the PRRT to under-tax the economic rents associated with the upstream resource.

Treasury discussed replacing the RPM with either a ‘netback only’[106] method or a modified RPM. The netback only methodology would attribute all of the residual profits to the upstream, consistent with the view that the source of economic rents is in the underlying resource. Treasury pointed out (at page 30) that such a change could impact both existing and future projects and (at page 42) that ‘neither option is certain to substantially increase revenue from the offshore LNG industry in the medium term’.

The report then considered the option of a deductions cap, stating at page 43:

On balance and taking into account the role of a deductions cap in bringing forward PRRT, Treasury considers that setting the cap at 90 per cent of total PRRT assessable receipts is appropriate. A cap of this magnitude would equate to PRRT payable equivalent to 4 per cent of assessable PRRT receipts (tax paid on 10 per cent of revenues at the 40 per cent PRRT rate), which is relatively modest. A cap of 90 per cent largely retains the current structure and operation of the PRRT as a rent tax, while adapting the PRRT to include a minimum return for the recovery of the natural gas resources owned by the Australian community, regardless of the prevailing LNG prices.

Recommendation 1 of the Report stated: ‘Treasury considers that the existing GTP Regulation results in a structural undervaluation of gas at the PRRT taxing point for integrated LNG projects, particularly when resource prices are high’ (p. 4). Treasury then mentioned different options for addressing the problem, before making Recommendation 1c (at page 4) which states:

Limit deductible expenditure to the value of 90 per cent of PRRT assessable receipts in respect of each project in the relevant income year (applied after mandatory transfers of exploration expenditure). Unused denied deductions would be carried forward and uplifted at the Government long-term bond rate (LTBR).

In the 2023–24 Budget (in Budget Paper No. 2 at page 23) the Government announced that it would introduce a cap on deductible expenditure of 90 per cent of assessable receipts. The change, which would apply from 1 July 2023, is expected bring forward the date that LNG projects are expected to pay PRRT. According to Budget Paper No. 1 at page 180: ‘To date, not a single LNG project has paid any PRRT and many are not expected to pay significant amounts of PRRT until the 2030s.’

Consultation

Treasury issued a Consultation Paper on the Gas Transfer Pricing arrangements, which was open from 5 April to 14 June 2019. 21 submissions were received for this consultation, including 4 confidential submissions.

Treasury published Exposure Draft legislation and explanatory material which were open for consultation from 21 August to 15 September 2023. Five submissions were received for this consultation, including two confidential submissions.

Position of major interest groups

In response to the Treasury consultation on the Exposure Draft of this Bill, Australian Energy Producers (AEP), formerly the Australian Petroleum Production and Exploration Association (APPEA), commented generally that the changes to the PRRT, along with other significant interventions, have had a significant cumulative impact on the industry and the attractiveness of Australia as a destination for investment. It also commented that the Bill deals with only one aspect of the announcements contained in the 2023–24 Budget, the deductions cap.

Policy position of non-government parties/independents

The Opposition

Shadow Treasurer Angus Taylor moved amendments in the House of Representatives to omit Schedule 5 from the Bill, stating:

Our message to the government is clear and it's simple. Pull the PRRT schedule from this bill and start again. Engage with the coalition in good faith on this measure to support the future of our gas industry, to bring down emissions and power bills, to support our manufacturing businesses and to secure a critical revenue base as a result of this and other measures.[107]

Australian Greens

In July 2023, it was reported that the Australian Greens (the Greens) considered that the Government had watered down the options for taxing petroleum resource rents at the expense of voters.[108] The Greens’ view was based on previously confidential documents containing Treasury’s assessment of various options.

In August 2023, the Greens said they ‘will not be cowed by Labor's desperate attempts to pass their weak gas tax unamended, and will move amendments when the PRRT is introduced into Parliament’. [109] The Greens said they had gained crossbench support for an amendment to Labor's PRRT changes that would double the amount it would raise, as independently costed by the Parliamentary Budget Office (PBO). Under the proposal, the cap would limit deductible expenditure to the value of 80 per cent of each taxpayer's PRRT assessable receipts.

In debate of the Bill in the House of Representatives, Greens Leader Adam Bandt moved the following second reading amendment:

… acknowledging 15 gas companies signed non-disclosure agreements when preparing Schedule 5 of this bill for the Government, the House:

(1) notes the billions of dollars in climate damage that the gas industry has already inflicted through turbocharged bushfires, floods and a 23 per cent reduction in agricultural profits, representing $29,200 in losses per Australian farm; and

(2) acknowledges that the Australian Taxation Office has labelled the gas industry as ‘systemic non-payers of tax’; and

(3) notes that the Parliamentary Budget Office has costed the potential revenue from repairing the Petroleum Resource Rent Tax at $94.5 billion over the decade; and

(4) resolves that gas companies earning super profits from war should no longer avoid payment of super profits taxes; and

(5) calls on the Government to amend the bill to ensure a minimum doubling of revenue from the Government's proposed changes to the gas super profits tax.[110]

Mr Bandt stated:

This whole tax is incredibly weak and incredibly embarrassing. Labor knows that there are the numbers in the Senate, thanks to the Greens, to add a minimum of double the tax from this. We have enough senators; if Labor has the courage to come and vote with us, we can double the tax take from this and make the gas giants pay just a little bit more.[111] 

Independents

Independents in the House of Representatives do not support Schedule 5.

Zali Steggall, the Independent Member for Warringah, stated that the amendments implementing the PRRT Deductions Cap Bill are weak. Ms Steggall considered that the Bill ‘delivers revenue neutrality, merely bringing forward revenue rather than increasing it.’ Ms Steggall proposed strengthening the Bill by:

1. Amending the deductions cap from 90% to 80%, which she argued remains consistent with Treasury advice provided to government.

2. Removing the seven-year exemption to ensure Australians have access to their fair share of resource rent revenue sooner, to support the delivery of services.

These recommendations were reflected in amendments proposed to the Bill by Ms Steggall, which also called for the House to decline to give the Bill a second reading due to ‘the role of gas companies in influencing the drafting of the Bill’. Ms Steggall stated:

… schedule 5 of this bill is an absolute disgrace. … The PRRT is a tax that is meant to deliver to the Australian people money to our economy—it is rental payments for our gas resources—but it doesn't deliver much. The government would like a pat on the back for saying that they're delivering reform in this area, but what they are doing is the bare minimum and really only bringing forward revenue. It's so poorly designed that it effectively allows multinational companies reaping super profits from gas reserves to pay less than one per cent.

Schedule 5 of this bill caps deductions for LNG projects such that the LNG entity will be taken to have a taxable profit of 10 per cent of the assessable receipts derived in a year with tax being payable on this amount. The effect of the cap will be to bring forward PRRT collections for gas projects, but it won't bring in any more revenue to the government. It is a bait and switch. The PRRT, even with the government's proposed reforms in this omnibus bill, is the most lax resource rent tax system in the world—I repeat: the most lax resource rent tax system in the world—at a time of cost-of-living crisis and record profits in the gas industry…

We have one of the most generous tax regimes in relation to oil and gas companies. In contrast, Norway's resource tax system taxes 78 per cent of export profits, delivering a $2 trillion sovereign wealth fund to their economy, supporting healthcare, childcare and social measures, all without discouraging investment. You'll hear a lot of fearmongering about the effect, but the reality is that it's time for the open access, the free run, to end.

In 2023 it's estimated that oil and gas export taxes will deliver some A$145 billion to the Norwegian economy, the equivalent of a staggering $107,000 per family. In comparison, Australia is nowhere. The amendments to the PRRT introduced in this omnibus bill… bring forward $2.4 billion over the next four years, equating to some $600 million per year. This amount is trivial in comparison to the super profits that have been generated by gas companies in recent years. The government's rhetoric will seek to have Australians believe that this is good policy, and the coalition will make you think that somehow this is terribly unfair on the gas companies. The reality is that this is unfair on the Australian people.[112]

Allegra Spender, the Independent Member for Wentworth, moved an amendment to require the Minister to conduct a review of the operation of the amendments proposed in Schedule 5 to the Bill, to start by 1 July 2026 and report to the Minister by 1 January 2027. The review would be required to consider:

• the appropriate distribution of petroleum resource rents and the need to provide a fair return to the Australian community
• the appropriateness of the PRRT Act (as amended by Schedule 5) and associated regulations in light of recent, and potential future, developments in industries subject to that Act and
• the applicability of the review’s findings to resource export industries not subject to that Act.

The review could also consider other relevant matters and the review report would be required to be tabled within 3 months of receipt by the Minister.

In her second reading speech on the Bill, Ms Spender stated:

The PRRT is supposed to ensure that Australians get a fair return when their oil and gas resources are sold overseas, but it doesn't work well. In the past couple of years, Australian LNG exports have boomed, increasing from $71 billion to $93 billion in the last financial year alone, as gas prices skyrocketed following Russia's invasion of Ukraine. Climate Energy Finance estimate that the gross profits of LNG exporters exceeded $63.5 billion last year. Despite these record profits and despite gas exporters being able to extract these resources for free, the Australian people have seen little return. In the 2020-21 financial year, there were 33 projects eligible for the PRRT yet only six paid any tax. Even more shockingly, despite Australia being the second-largest LNG exporter in the world, the most recent set of budget papers noted that not a single LNG project has paid any PRRT and many are not expected to pay significant amounts of PRRT until the 2030s. It is clear the Australian people are not getting their fair share, and the system is ripe for reform.

Sadly, I believe that the government has missed an opportunity for significant reform with this bill. Whilst a few projects that would never have paid the PRRT will now do so, the main impact of this legislation is to bring forward some of the revenue a few years earlier, giving the budget bottom line a boost today at the cost, potentially, of taxpayers tomorrow. And it's not that much revenue. The reforms will bring in just $600 million a year over the forward estimates, despite gas companies bringing in an additional $20 billion in revenue in the last financial year alone. That doesn't sound like a fair return for taxpayers.

And it's a missed opportunity for significant reform, because more substantial changes were possible and had broad support. The government have rejected a proposal from the crossbench in the Senate to lower the deductions cap further to 80 per cent—a move that was backed by Treasury officials. This would have brought in a further $2.6 billion over the forward estimates. They have rejected a proposal to raise the PRRT rate from 40 to 50 per cent, which would divide the profits from selling Australian resources equally between the Australian people and gas exporters. Even before the introduction of the deductions cap, this would have brought in a further $660 million over the forward estimates.

They have rejected several proposals from Senator Pocock which would close the loopholes in the current regime by ending the carve-out given to Woodside, shortening the seven-year grace period before the deduction cap applies and no longer allowing expenses incurred many years in the past to be brought forward at a massively inflated rate. They have rejected more substantial changes to the structure of the tax that were put forward by the Callaghan and Treasury reviews, such as changing transfer pricing arrangements so that PRRT is calculated based on the real value of the resource, rather than the discounted rate that is currently used. All of these sensible approaches have been rejected, and, whilst this change is better than nothing, it is a missed opportunity for more significant reform.[113]

Kate Chaney, Independent Mmeber for Curtin, was also critical of the proposals in Schedule 5, describing them as ‘disappointingly meek’, ^[114] a position reinforced by Dr Monique Ryan, Independent Mmeber for Kooyong,[115] and Kylea Tink, Independent Member for North Sydney.[116]

Zoe Daniel, Independent Mmeber for Goldstein advised that she would be voting against the Bill and advised: 

In the lead-up to the budget, the Treasurer had three options in front of him on the PRRT. We discovered, courtesy of the Australian Financial Review, that he chose the option the gas producers wanted. What a surprise. Obviously it was the option that would cost them the least. The government estimates that its new approach will raise no more than $2.4 billion over the next four years—a drop in the bucket. Treasury presented the Treasurer with two other options, one of which would have effectively seen an 80 per cent deductions cap for the petroleum resource rent tax, as specified by the member for Warringah's amendment. The AFR calculated that, at current prices, that option would have brought in $21.9 billion in 2023-24 alone. Instead, as the paper put it back at budget time: The big gas producers can go back to what they do best—exporting huge amounts of Australian gas and printing money …[117]

Dr Helen Haines, Independent Member for Indi, also advised that she does not support the amendments proposed by Schedule 5: 

I will not be supporting this reform, because it simply does not go anywhere near far enough. The government states that this reform will increase government revenue in the short term by around $2.4 billion. Now, $2.4 billion shouldn't be sneezed at; no it shouldn't. But over the lifetime of these projects the government's proposed changes scarcely raise any additional revenue for Australians. Yes, you heard me right: these changes will hardly have any impact on the total tax revenue Australia receives from these projects. The deductions companies can't use in a given years due to the 90 per cent cap will just be rolled over to the next year and indexed and rolled over again and again until they can be used. This bill fails to reduce the generous compounded deductions projects can use to reduce or avoid PRRT, and it fails to deliver a better return for everyday Australians.[118] 

Financial implications

Schedule 5 to the Bill and the 2023–24 Budget measure (p. 23) Petroleum Resource Rent Tax – Government Response to the Review of the PRRT Gas Transfer Pricing arrangements are estimated to increase receipts by $2.4 billion over the 4 years to 2026–27.[119]

Table 3: Financial impact of Schedule 5 ($ billion)

Source: Explanatory Memorandum, 5.

Impact Analysis

Please refer to Chapter 8 of the Petroleum Resource Rent Tax: Review of Gas Transfer Pricing Arrangements Final Report (May 2023) (pp. 64–69).[120]

Compliance cost impact

According to the Explanatory Memorandum, compliance cost for this measure will be ‘minimal’.[121]

Key issues and provisions

The purpose of the amendments to the PRRT is to cap the availability of deductible expenditure incurred in relation to a petroleum project for a year of tax, and consequently bring forward tax payable.

The measures in the Bill (except for items 7 to 9 of Schedule 5, which relate to instalments of PRRT) apply in relation to assessable receipts derived by an entity in relation to a project, or a Greater Sunrise project, and in relation to a year of tax beginning on or after 1 July 2023, whether or not assessable receipts were also derived by an entity in relation to the project and an earlier year of tax.

Imposing the cap

Item 3 in Schedule 5 to the Bill inserts proposed subsections 22(3)–(5) into the PRRT Act. Proposed subsection 22(3) provides that an entity will have a deemed profit equal to 10 per cent of the entity’s assessable receipts derived in relation to the project in the year of tax (called the denied deduction amount), provided certain conditions are met, including that the entity:

• derives assessable petroleum receipts or assessable tolling receipts in relation to a project in a tax year
• produces sales gas[122]
• regularly or consistently enters into arrangements, as a result of which it is intended that the sales gas be wholly or primarily produced into liquefied natural gas and
• has no taxable profit in relation to the project and the tax year.

Under proposed subsection 22(4) an entity has an alternative taxable profit calculation if it has an interest in a Greater Sunrise project.[123] In that case, an alternative formula for working out the denied deduction amount using an apportionment percentage figure is used. Item 1 in Schedule 5 to the Bill repeals and replaces the definition of apportionment percentage figure in section 2 of the PRRT Act so that the amount is calculated in accordance with either subsection 2C(2) or 2C(3). Accordingly, item 2 inserts proposed subsection 2C(3). Section 2C deals with Greater Sunrise apportionments.

Exclusions from the cap

Proposed subsection 22(5) operates so that a project is excluded from the deductions cap if:

• the tax year is the first financial year in which assessable receipts are derived in relation to the project, or one of the subsequent 7 financial years
• the entity incurs resource tax expenditure or starting base expenditure in the year of tax or
• the entity has exhausted its deductible expenditure.

Once the entity is considered to have a taxable profit of 10 per cent derived in relation to the project and the year of tax, the denied deduction amount is uplifted by the long-term bond rate plus 1. Item 5 of Schedule 5 of the Bill inserts proposed subsection 35F into the PRRT Act. Under proposed subsection 35F(2), the entity is then considered to have incurred an ‘augmented denied deductible expenditure amount’ in relation to the project on the first day of the next financial year.

Also, under proposed subsection 35F(1), augmented denied deductible expenditure can be transferred under Division 5 of Part V of the PRRT Act. Division 5 relates to the transfer of entire entitlements and part entitlements to assessable receipts. Where entitlements to assessable receipts in relation to a petroleum project are transferred, the new participants are subject to the provisions of the PRRT Act.

Stakeholder comments

Denied deduction amount

AEP initially expressed concern that while the denied deduction amount will be 10 per cent of assessable receipts and this will be augmented by the Government long-term bond rate and carried forward, the drafting of section 35F(2) appeared to limit the carry forward deduction to the excess deduction. It acknowledged that the addition of the explanation of the term available excess had provided the necessary clarification.

Closing-down expenditure

The Explanatory Memorandum states that if a person incurs closing-down expenditure under section 39 of the PRRT Act, that person will typically not derive assessable petroleum receipts. Therefore, the deductions cap will generally not apply (p. 51).

The AEP submission disputes this, stating that a project may continue to derive assessable receipts whilst producing petroleum or derive other types of assessable receipts whilst being closed down. AEP therefore asked that the legislation be amended to exclude projects incurring closing-down expenditure, as defined under section 39, from the application of proposed subsections 22(3) or (4) (p. 2). This request is not reflected in the Bill.

Exclusion from the deductions cap

The AEP submission further commented:

The trigger for cap timing should be limited to the taxpayer deriving assessable petroleum receipts from sales gas to be liquified. Some projects may derive assessable petroleum receipts in respect of domestic gas before they derive assessable receipts in respect of sales gas to LNG. If the trigger for cap timing is any assessable petroleum receipts, such projects may be disadvantaged by being brought within the cap earlier than would otherwise be the case (p. 2).

The relevant provision (subsection 22(3)) remains unchanged from the Exposure Draft, that is if (a) a person derives assessable petroleum receipts or assessable tolling receipts in relation to a petroleum project in a year of income and (b) sales gas is or will be produced from some of the petroleum that is, or will be, recovered from the project, and the other relevant conditions are met, the entity is taken to have a taxable profit and the deduction cap applies.

Other provisions

Division 2 of Part VIII in the PRRT Act deals with collection of PRRT by instalments.[124]

Item 7 of Schedule 5 of the Bill, inserts proposed subsections 97(1BA) and 97(1BB) into the PRRT Act so that the instalment provisions apply to entities which anticipate a taxable profit because of the deductions cap.[125] The amount of tax that would be payable is worked out according to the formula set out in proposed paragraph 97(1BA)(b)—that is, current period receipts minus previous period receipts, the difference being multiplied by 0.1.

Stakeholder comments

While unaffected by the Bill, AEP considered the existing 21-day period is insufficient time to calculate and arrange an instalment payment, particularly where assessable petroleum receipts are calculated under the RPM (p. 2). AEP argued that the formula in subsection 45(2) of the Petroleum Resource Rent Tax Assessment Regulation 2015 should be simplified to streamline the calculation of assessable sales gas for an instalment period. Alternatively, AEP proposed that an additional 30 days be allowed for the calculation and payment of instalments. Similarly, it considered that the time allowed for the annual balancing payment and PRRT return is not sufficient (currently 60 days after the end of the PRRT year) and that 150 days is more realistic (p. 3).

Inpex Australia is a subsidiary of a Japanese-owned independent worldwide oil and gas explorer and producer. Inpex mainly supported AEP’s submission, while noting that the timing of payments under the instalment regime is problematic where the RPM is used by a project under the PRRT regulations.